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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
_____________________________
(Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
or
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .

Commission File Number 1-11921
 ____________________________
E*TRADE Financial Corporation
(Exact Name of Registrant as Specified in its Charter)
____________________________
Delaware
 
94-2844166
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification Number)
1271 Avenue of the Americas, 14th Floor, New York, New York 10020
(Address of principal executive offices and Zip Code)

(646) 521-4300
(Registrant’s telephone number, including area code)
 ____________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer   x
Accelerated filer
 
¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
As of October 31, 2015, there were 292,967,985 shares of common stock outstanding.



E*TRADE FINANCIAL CORPORATION
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended September 30, 2015
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
PART II
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


i


Unless otherwise indicated, references to "the Company," "we," "us," "our" and "E*TRADE" mean E*TRADE Financial Corporation and its subsidiaries.
E*TRADE, E*TRADE Financial, E*TRADE Bank, Equity Edge, OptionsLink and the Converging Arrows logo are registered trademarks of E*TRADE Financial Corporation in the United States and in other countries.

ii


PART I
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. These statements discuss, among other things, our future plans, objectives, outlook, strategies, expectations and intentions relating to our business and future financial and operating results and the assumptions that underlie these matters and include any statement that is not historical in nature. These statements may be identified by the use of words such as "assume," "expect," "believe," "may," "will," "should," "anticipate," "intend," "plan," "estimate," "continue" and similar expressions. We caution that actual results could differ materially from those discussed in these forward-looking statements. Important factors that could contribute to our actual results differing materially from any forward-looking statements include, but are not limited to, those discussed under Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q; and Part I. Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC, which are incorporated herein by reference. By their nature forward-looking statements are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Actual future results may vary materially from expectations expressed or implied in this report or any of our prior communications. The forward-looking statements contained in this report reflect our expectations only as of the date of this report. You should not place undue reliance on forward-looking statements, as we do not undertake to update or revise forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements were made, except as required by law.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document and with the Annual Report on Form 10-K for the year ended December 31, 2014.
GLOSSARY OF TERMS
In analyzing and discussing our business, we utilize certain metrics, ratios and other terms that are defined in the Glossary of Terms, which is located at the end of this item.
OVERVIEW
Strategy
Our business strategy is centered on two core objectives: accelerating the growth of our core brokerage business to improve market share, and strengthening our overall financial and franchise position.
Accelerate Growth of Core Brokerage Business
Capitalize on secular growth within the direct brokerage industry.
The direct brokerage industry is growing at a faster rate than the traditional brokerage industry. We are focused on capitalizing on this growth through ensuring our customers' trading and investing needs are met through our direct relationships.
Enhance digital and offline customer experience.
We are focused on maintaining our competitive position in trading, margin lending and cash management, while expanding our customer share of wallet in retirement, investing and savings. Through these offerings, we aim to continue acquiring new customers while also deepening the engagement of both new and existing customers.
Capitalize on value of corporate services business.
Our corporate services business is a strategically important driver of brokerage account growth for us. We are leveraging our industry-leading position to improve client acquisition, and are bolstering awareness among plan participants of our full suite of offerings.

1


Maximize value of customer deposits while improving balance sheet efficiency.
Our brokerage business generates a significant amount of stable, low-cost deposits, which we monetize through E*TRADE Bank by investing primarily in low-risk, agency mortgage-backed securities.
Strengthen Overall Financial and Franchise Position
Manage down legacy investments and mitigate credit losses.
We continue to manage down the size and risks associated with our legacy loan portfolio, while mitigating credit losses where possible.
Continue to execute on our capital plan.
Our capital plan was laid out in 2012 with a key goal of distributing capital from E*TRADE Bank to the parent company, with the key objective of reducing corporate debt which we completed in March 2015. We are now focused on deploying excess capital created through earnings and lower capital requirements at E*TRADE Bank, while continuing to demonstrate the sustainability of our enterprise risk management culture and capabilities.
Key Factors Affecting Financial Performance
Our financial performance is affected by a number of factors outside of our control, including:
customer demand for financial products and services;
weakness or strength of the residential real estate and credit markets;
performance, volume and volatility of the equity and capital markets;
customer perception of the financial strength of our franchise;
market demand and liquidity in the secondary market for mortgage loans and securities;
the level and volatility of interest rates;
our ability to move capital to our parent company from our subsidiaries subject to various regulatory approvals; and
changes to the rules and regulations governing the financial services industry.
In addition to the items noted above, our success in the future will depend upon, among other things, our ability to:
have continued success in the acquisition, growth and retention of brokerage customers;
generate meaningful growth in our retirement, investing and savings customer products;
demonstrate the sustainability of our enterprise risk management culture and capabilities;
mitigate credit costs;
manage to a lower Tier 1 leverage ratio at E*TRADE Bank, as stated in our capital plan;
generate capital sufficient to meet operating needs;
evaluate opportunities and deploy excess capital to maximize shareholder value;
assess and manage interest rate risk;
maintain expense control and improved operational efficiency; and
compete in a technology-intensive industry characterized by rapid innovation.

2


Management monitors a number of metrics in evaluating the Company’s performance. The most significant of these are shown in the table and discussed in the text below: 
 
Three Months Ended September 30,
Variance
 
Nine Months Ended September 30,
Variance
 
2015
 
2014
 
2015 vs. 2014
 
2015
 
2014
 
2015 vs. 2014
Customer Activity Metrics:
 
 
 
 
 
 
 
 
 
 
 
Daily average revenue trades ("DARTs")
155,985

 
153,494

 
2
 %
 
158,326

 
168,526

 
(6
)%
Average commission per trade
$
10.87

 
$
11.05

 
(2
)%
 
$
10.92

 
$
10.79

 
1
 %
Margin receivables (dollars in billions)
$
7.9

 
$
8.1

 
(2
)%
 
$
7.9

 
$
8.1

 
(2
)%
End of period brokerage accounts(1)
3,203,531

 
3,126,476

 
2
 %
 
3,203,531

 
3,126,476

 
2
 %
Net new brokerage accounts(1)
2,205

 
23,510

 
(91
)%
 
59,608

 
128,417

 
(54
)%
Annualized brokerage account attrition rate(1)
11.4
%
 
9.1
%
 
2
 %
 
10.0
%
 
8.5
%
 
2
 %
Customer assets (dollars in billions)
$
276.6

 
$
281.7

 
(2
)%
 
$
276.6

 
$
281.7

 
(2
)%
Net new brokerage assets (dollars in billions)
$
2.1

 
$
2.3

 
(9
)%
 
$
6.5

 
$
7.4

 
(12
)%
Brokerage related cash (dollars in billions)
$
40.2

 
$
40.4

 
 %
 
$
40.2

 
$
40.4

 
 %
Company Financial Metrics:
 
 
 
 
 
 
 
 
 
 
 
Corporate cash (dollars in millions)
$
432

 
$
610

 
(29
)%
 
$
432

 
$
610

 
(29
)%
E*TRADE Financial Tier 1 leverage ratio(2)
8.5
%
 
7.7
%
 
0.8
 %
 
8.5
%
 
7.7
%
 
0.8
 %
E*TRADE Bank Tier 1 leverage ratio(2)(3)
9.2
%
 
10.4
%
 
(1.2
)%
 
9.2
%
 
10.4
%
 
(1.2
)%
Special mention loan delinquencies (dollars in millions)
$
113

 
$
159

 
(29
)%
 
$
113

 
$
159

 
(29
)%
Allowance for loan losses (dollars in millions)
$
376

 
$
401

 
(6
)%
 
$
376

 
$
401

 
(6
)%
Enterprise net interest spread
2.58
%
 
2.54
%
 
0.04
 %
 
2.57
%
 
2.52
%
 
0.05
 %
Enterprise interest-earning assets (average dollars in billions)
$
40.4

 
$
41.3

 
(2
)%
 
$
41.3

 
$
41.6

 
(1
)%
(1)
Net new brokerage accounts and end of period brokerage accounts were impacted by the shutdown of the Company’s global trading platform. The shutdown resulted in the closure of 16,818 and 20,143 accounts during the three and nine months ended September 30, 2015, respectively. Net new and end of period brokerage accounts during the nine months ended September 30, 2015 were also impacted by the closure of 3,484 accounts related to the escheatment of unclaimed property. Excluding the impact of these items, annualized brokerage account attrition rate was 9.3% and 9.0% for the three and nine months ended September 30, 2015, respectively.
(2)
Beginning in the first quarter of 2015, E*TRADE Financial and E*TRADE Bank calculate regulatory capital under the Basel III framework using the Standardized Approach, subject to transition provisions. Prior to the first quarter of 2015, the risk-based capital guidelines that applied to E*TRADE Bank were based upon the 1988 capital accords of the Basel Committee on Banking Supervision ("BCBS"), a committee of central banks and bank supervisors, as implemented by the U.S. Federal banking agencies, including the OCC, commonly known as Basel I. As a savings and loan holding company, E*TRADE Financial was not previously subject to specific statutory capital requirements. Therefore, E*TRADE Financial's Tier 1 leverage ratio as of September 30, 2014 was a non-GAAP measure and was calculated based on the Federal Reserve’s well-capitalized requirements then applicable to bank holding companies. See Liquidity and Capital Resources in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation of this non-GAAP measure to the comparable GAAP measure.
(3)
E*TRADE Clearing LLC ("E*TRADE Clearing") was moved out from under E*TRADE Bank in July 2015.
Customer Activity Metrics
DARTs are the predominant driver of commissions revenue from our customers.
Average commission per trade is an indicator of changes in our customer mix, product mix and/or product pricing.

3


Margin receivables represent credit extended to customers to finance their purchases of securities by borrowing against securities they own and are a key driver of net operating interest income.
End of period brokerage accounts, net new brokerage accounts and brokerage account attrition rate are indicators of our ability to attract and retain brokerage customers. The brokerage account attrition rate is calculated by dividing attriting brokerage accounts, which are gross new brokerage accounts less net new brokerage accounts, by total brokerage accounts at the previous period end. This rate is presented on an annualized basis.
Changes in customer assets are an indicator of the value of our relationship with the customer. An increase in customer assets generally indicates that the use of our products and services by existing and new customers is expanding. Changes in this metric are also driven by changes in the valuations of our customers’ underlying securities.
Net new brokerage assets are total inflows to all new and existing brokerage accounts less total outflows from all closed and existing brokerage accounts and are a general indicator of the use of our products and services by new and existing brokerage customers.
Brokerage related cash is an indicator of the level of engagement with our brokerage customers and is a key driver of net operating interest income as well as fees earned on customer assets held by third parties outside the Company.
Company Financial Metrics
Corporate cash is an indicator of the liquidity at the parent company. It is the primary source of capital above and beyond the capital deployed in our regulated subsidiaries. See Liquidity and Capital Resources in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation of this non-GAAP measure to the comparable GAAP measure.
Tier 1 leverage ratio is an indication of capital adequacy for E*TRADE Financial and E*TRADE Bank. Tier 1 leverage ratio is Tier 1 capital divided by adjusted average total assets for leverage capital purposes. Beginning in the first quarter of 2015, E*TRADE Financial and E*TRADE Bank calculate regulatory capital under the Basel III framework using the Standardized Approach, subject to transition provisions. Prior to Basel III becoming effective, E*TRADE Financial capital ratios were non-GAAP measures as the parent company was not yet held to regulatory capital requirements. See Liquidity and Capital Resources in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information, including the calculation of regulatory capital ratios and a reconciliation of previously non-GAAP capital ratios to the comparable GAAP measures.
Special mention loan delinquencies are loans 30-89 days past due and are an indicator of the expected trend for charge-offs in future periods as these loans have a greater propensity to migrate into nonaccrual status and ultimately be charged-off.
Allowance for loan losses is an estimate of probable losses inherent in the loan portfolio as of the balance sheet date, as well as the forecasted losses, including economic concessions to borrowers, over the estimated remaining life of loans modified as troubled debt restructurings ("TDR").
Enterprise interest-earning assets, in conjunction with our enterprise net interest spread, are indicators of our ability to generate net operating interest income.
Significant Events in the Third Quarter of 2015
Terminated $4.4 billion of Legacy Wholesale Funding Obligations
We terminated $4.4 billion of legacy wholesale funding obligations, including repurchase agreements and FHLB advances, in September 2015. In connection with the termination, we recorded a pre-tax charge of $413 million during the third quarter of 2015. We expect the termination of the legacy wholesale funding obligations to significantly reduce our funding costs, thereby improving our ability to generate net income.

4


E*TRADE Bank Issued a $114 million Dividend to the Parent Company
We received approval from our regulators for a $114 million dividend from E*TRADE Bank to the parent company, totaling $756 million in quarterly dividends from E*TRADE Bank to the parent company since the third quarter of 2013 and continuing to reflect significant progress in our capital plan. Subsequently, in connection with the termination of the legacy wholesale funding obligations, the parent company contributed $110 million of corporate cash to E*TRADE Bank in order to maintain targeted capital levels.
Move of Broker-Dealer from under E*TRADE Bank and Dividends Issued to the Parent Company
E*TRADE Clearing was moved out from under E*TRADE Bank in July 2015.
E*TRADE Securities issued a $30 million dividend to the parent company, totaling $515 million in dividends from E*TRADE Securities to the parent company since E*TRADE Securities was moved out from under E*TRADE Bank in February 2015.
Enhancements to Our Trading and Investing Products and Services
On our active trader platform, E*TRADE Pro, we made a series of significant enhancements to the options analyzer that enable traders to build multiple options strategies, run various scenarios based on expiration date and price point, more easily customize graphing features, and seamlessly send any strategy directly for trade execution.
We added considerable capabilities to our mobile applications, including an improved ability to view market data directly on the Apple Watch face, conditional orders and rolling options for our core smartphone apps, and enhanced tablet functionality.
EARNINGS OVERVIEW
We generated net income (loss) of $(153) million and $179 million, or $(0.53) and $0.61 per diluted share, on total net revenue of $73 million and $974 million for the three and nine months ended September 30, 2015, respectively. During the third quarter of 2015, we terminated $4.4 billion of legacy wholesale funding obligations. We expect this action to significantly reduce our funding costs, thereby improving our ability to generate net income. In connection with this termination, we recorded a pre-tax charge of $413 million on our consolidated statement of income (loss), including $43 million of losses on early extinguishment of debt, and $370 million of losses that were reclassified from accumulated comprehensive loss related to cash flow hedges and included in the gains (losses) on securities and other line item. Net operating interest income decreased 1% to $263 million and increased 1% to $801 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. Commissions, fees and service charges and other revenue increased 2% to $170 million and decreased 1% to $513 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. Provision (benefit) for loan losses was $(25) million and $(17) million for the three and nine months ended September 30, 2015, respectively, compared to $10 million and $26 million for the same periods in 2014. Total operating expenses increased 6% to $293 million and 6% to $902 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014.
The following sections describe in detail the changes in key operating factors and other changes and events that affected net revenue, provision (benefit) for loan losses, operating expense, other income (expense) and income tax expense (benefit).

5


Revenue
The components of revenue and the resulting variances are as follows (dollars in millions):
 
Three Months Ended September 30,
 
Variance
 
Nine Months Ended September 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Net operating interest income
$
263

 
$
265

 
$
(2
)
 
(1
)%
 
$
801

 
$
795

 
$
6

 
1
 %
Commissions
108

 
108

 

 
 %
 
325

 
341

 
(16
)
 
(5
)%
Fees and service charges
52

 
49

 
3

 
6
 %
 
159

 
148

 
11

 
7
 %
Principal transactions

 

 

 
*
 

 
10

 
(10
)
 
(100
)%
Gains (losses) on securities and other
(360
)
 
8

 
(368
)
 
*
 
(340
)
 
30

 
(370
)
 
*
Other revenues
10

 
10

 

 
 %
 
29

 
29

 

 
 %
Total non-interest income (loss)
(190
)
 
175

 
(365
)
 
*
 
173

 
558

 
(385
)
 
*
Total net revenue
$
73

 
$
440

 
$
(367
)
 
(83
)%
 
$
974

 
$
1,353

 
$
(379
)
 
(28
)%
 
*
Percentage not meaningful.
Net Operating Interest Income
Net operating interest income decreased 1% to $263 million and increased 1% to $801 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. Net operating interest income is earned primarily through investing deposits and customer payables in assets including: available-for-sale securities, held-to-maturity securities, margin receivables and real estate loans.
The following table presents enterprise average balance sheet data and enterprise income and expense data for our operations, as well as the related net interest spread, yields and rates prepared on the basis required by the SEC’s Industry Guide 3, "Statistical Disclosure by Bank Holding Companies" (dollars in millions): 
 

6


 
Three Months Ended September 30,
 
2015
 
2014
 
Average Balance
 
Operating Interest Inc./Exp.
 
Average Yield/Cost
 
Average Balance
 
Operating Interest Inc./Exp.
 
Average Yield/Cost
Enterprise interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans(1)
$
5,453

 
$
58

 
4.25
 %
 
$
6,871

 
$
70

 
4.05
%
Available-for-sale securities
12,584

 
57

 
1.83
 %
 
12,595

 
70

 
2.23
%
Held-to-maturity securities
11,879

 
85

 
2.84
 %
 
11,366

 
81

 
2.84
%
Margin receivables
7,984

 
70

 
3.51
 %
 
7,645

 
67

 
3.47
%
Cash and equivalents
1,720

 
1

 
0.19
 %
 
1,316

 

 
0.15
%
Segregated cash
318

 
1

 
0.18
 %
 
904

 

 
0.06
%
Securities borrowed and other
461

 
26

 
22.43
 %
 
649

 
28

 
16.89
%
Total enterprise interest-earning assets
40,399

 
298

 
2.93
 %
 
41,346

 
316

 
3.04
%
Non-operating interest-earning and non-interest earning assets(2)
4,306

 
 
 
 
 
4,523

 
 
 
 
Total assets
$
44,705

 
 
 
 
 
$
45,869

 
 
 
 
Enterprise interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
25,659

 
1

 
0.01
 %
 
$
25,068

 
2

 
0.03
%
Customer payables
6,348

 
2

 
0.07
 %
 
6,624

 
2

 
0.13
%
Securities sold under agreements to repurchase(3)
2,558

 
18

 
2.64
 %
 
3,753

 
30

 
3.07
%
FHLB advances and other borrowings(3)
1,024

 
12

 
4.89
 %
 
1,290

 
16

 
4.75
%
Securities loaned
1,749

 
1

 
0.32
 %
 
1,634

 

 
0.03
%
Total enterprise interest-bearing liabilities
37,338

 
34

 
0.35
 %
 
38,369

 
50

 
0.50
%
Non-operating interest-bearing and non-interest bearing liabilities(4)
1,596

 
 
 
 
 
2,270

 
 
 
 
Total liabilities
38,934

 
 
 
 
 
40,639

 
 
 
 
Total shareholders’ equity
5,771

 
 
 
 
 
5,230

 
 
 
 
Total liabilities and shareholders’ equity
$
44,705

 
 
 
 
 
$
45,869

 
 
 
 
Excess of enterprise interest-earning assets over enterprise interest-bearing liabilities/Enterprise net interest income/Spread(5)
$
3,061

 
$
264

 
2.58
 %
 
$
2,977

 
$
266

 
2.54
%
 
 
 
 
 
 
 
 
 
 
 
 
Enterprise net interest margin (net yield on enterprise interest-earning assets)
 
 
 
2.61
 %
 
 
 
 
 
2.57
%
Ratio of enterprise interest-earning assets to enterprise interest-bearing liabilities
 
 
 
108.20
 %
 
 
 
 
 
107.76
%
Return on average:(6)
 
 
 
 
 
 
 
 
 
 
 
     Total assets
 
 
 
 
(1.38
)%
 
 
 
 
 
0.75
%
     Total shareholders' equity
 
 
 
 
(10.66
)%
 
 
 
 
 
6.59
%
Average equity to average total assets
 
 
 
 
12.91
 %
 
 
 
 
 
11.40
%



7


 
Nine Months Ended September 30,
 
2015
 
2014
 
Average Balance
 
Operating Interest Inc./Exp.
 
Average Yield/Cost
 
Average Balance
 
Operating Interest Inc./Exp.
 
Average Yield/Cost
Enterprise interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans(1)
$
5,838

 
$
177

 
4.04
%
 
$
7,556

 
$
231

 
4.07
%
Available-for-sale securities
12,838

 
189

 
1.97
%
 
12,940

 
221

 
2.28
%
Held-to-maturity securities
12,173

 
259

 
2.83
%
 
11,075

 
240

 
2.88
%
Margin receivables
7,997

 
208

 
3.48
%
 
7,307

 
194

 
3.56
%
Cash and equivalents
1,513

 
2

 
0.19
%
 
1,258

 
1

 
0.15
%
Segregated cash
335

 
1

 
0.14
%
 
847

 
1

 
0.09
%
Securities borrowed and other
575

 
88

 
20.48
%
 
633

 
66

 
13.84
%
Total enterprise interest-earning assets
41,269

 
924

 
2.99
%
 
41,616

 
954

 
3.06
%
Non-operating interest-earning and non-interest earning assets(2)
4,707

 
 
 
 
 
4,331

 
 
 
 
Total assets
$
45,976

 
 
 
 
 
$
45,947

 


 
 
Enterprise interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
25,667

 
4

 
0.02
%
 
$
25,331

 
6

 
0.03
%
Customer payables
6,438

 
4

 
0.08
%
 
6,416

 
7

 
0.15
%
Securities sold under agreements to repurchase(3)
3,305

 
69

 
2.74
%
 
4,071

 
95

 
3.07
%
FHLB advances and other borrowings(3)
1,209

 
43

 
4.72
%
 
1,285

 
50

 
5.09
%
Securities loaned
1,779

 
2

 
0.18
%
 
1,457

 

 
0.03
%
Total enterprise interest-bearing liabilities
38,398

 
122

 
0.42
%
 
38,560

 
158

 
0.54
%
Non-operating interest-bearing and non-interest bearing liabilities(4)
1,977

 
 
 
 
 
2,285

 
 
 
 
Total liabilities
40,375

 
 
 
 
 
40,845

 
 
 
 
Total shareholders’ equity
5,601

 
 
 
 
 
5,102

 
 
 
 
Total liabilities and shareholders’ equity
$
45,976

 
 
 
 
 
$
45,947

 
 
 
 
Excess of enterprise interest-earning assets over enterprise interest-bearing liabilities/Enterprise net interest income/Spread(5)
$
2,871

 
$
802

 
2.57
%
 
$
3,056

 
$
796

 
2.52
%
 
 
 
 
 
 
 
 
 
 
 
 
Enterprise net interest margin (net yield on enterprise interest-earning assets)
 
 
 
2.59
%
 
 
 
 
 
2.55
%
Ratio of enterprise interest-earning assets to enterprise interest-bearing liabilities
 
 
 
107.48
%
 
 
 
 
 
107.93
%
Return on average:(6)
 
 
 
 
 
 
 
 
 
 
 
     Total assets
 
 
 
 
0.52
%
 
 
 
 
 
0.73
%
     Total shareholders' equity
 
 
 
 
4.25
%
 
 
 
 
 
6.58
%
Average equity to average total assets
 
 
 
 
12.18
%
 
 
 
 
 
11.10
%

(1)
Nonaccrual loans are included in the average loan balances. Interest payments received on nonaccrual loans are recognized on a cash basis in operating interest income until it is doubtful that full payment will be collected, at which point payments are applied to principal.
(2)
Non-operating interest-earning and non-interest earning assets consist of property and equipment, net, goodwill, other intangibles, net and other assets that do not generate operating interest income. Some of these assets generate corporate interest income.
(3)
In September 2015, we terminated $4.4 billion of legacy wholesale funding obligations and recorded a pre-tax charge of $413 million on our consolidated statement of income (loss).
(4)
Non-operating interest-bearing and non-interest bearing liabilities consist of corporate debt and other liabilities that do not generate operating interest expense. Some of these liabilities generate corporate interest expense.
(5)
Enterprise net interest spread represents the taxable equivalent rate earned on average enterprise interest-earning assets less the rate paid on average enterprise interest-bearing liabilities, excluding corporate interest-earning assets and liabilities. The taxable equivalent adjustment to reconcile to net operating interest income was $1 million for both the three and nine months ended September 30, 2015 and 2014, respectively.
(6)
Return on average ratios are calculated using net income divided by average total assets or average total shareholders' equity. Net income (loss) for the three and nine months ended September 30, 2015 includes the impact of the termination of legacy wholesale funding obligations.

8


The fluctuation in enterprise interest-earning assets is driven primarily by changes in enterprise interest-bearing liabilities, specifically deposits and customer payables. Average enterprise interest-earning assets decreased 2% to $40.4 billion and 1% to $41.3 billion for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. The decrease for the three and nine months ended September 30, 2015 was primarily due to decreases in loans, partially offset by increases in held-to-maturity securities and margin receivables.
Average enterprise interest-bearing liabilities decreased 3% to $37.3 billion and slightly decreased to $38.4 billion for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. The decrease for the three and nine months ended September 30, 2015 was primarily due to the termination of $4.4 billion of legacy wholesale funding obligations during the third quarter of 2015, partially offset by increases in deposits.
At September 30, 2015, $13.8 billion of our customers' assets were held at third party institutions. Approximately 70% of these off-balance sheet assets resulted from our deleveraging efforts completed in prior periods. We estimate the impact of our deleveraging efforts on net operating interest income at September 30, 2015 to be approximately 110 basis points based on the estimated current re-investment rates on these assets, less approximately 8 basis points of cost associated with holding these assets on our balance sheet, primarily FDIC insurance premiums. We maintain the ability to transfer the majority of these customer assets to our balance sheet with notification to the third party institutions and customer consent, as appropriate. During the fourth quarter of 2015 and in early 2016, we intend to transfer a portion of customer assets held by third parties to our balance sheet and expect to reach our targeted consolidated balance sheet size in early 2016.
Enterprise net interest spread increased by 4 basis points to 2.58% and 5 basis points to 2.57% for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. Enterprise net interest spread is driven by changes in average balances and average interest rates earned or paid on those balances. During the three and nine months ended September 30, 2015, the increase in enterprise net interest spread was primarily due to lower borrowing costs driven by the termination of $4.4 billion of legacy wholesale funding obligations during the third quarter of 2015. In addition, for the nine months ended September 30, 2015, revenue earned from our securities lending activities also increased. These increases were partially offset by the continued run-off of our legacy loan portfolio along with lower rates earned on investment securities. Enterprise net interest spread may further fluctuate based on the size and mix of the balance sheet, as well as the impact from the interest rate environment.
Commissions
Commissions revenue remained unchanged at $108 million and decreased 5% to $325 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. The main factors that affect commissions are DARTs, average commission per trade and the number of trading days.
DART volume increased 2% to 155,985 and decreased 6% to 158,326 for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. Option-related DARTs as a percentage of total DARTs represented 23% of trading volume for both the three and nine months ended September 30, 2015, compared to 23% and 22% for the same periods in 2014. DARTs via mobile applications as a percentage of total DARTs represented 15% and 14% of trading volume for the three and nine months ended September 30, 2015, respectively, compared to 11% for both periods in 2014.
Average commission per trade decreased 2% to $10.87 and increased 1% to $10.92 for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. Average commission per trade is impacted by customer mix and the different commission rates on various trade types (e.g. equities, options, fixed income, stock plan, exchange-traded funds, mutual funds, forex and cross border).

9


Fees and Service Charges
Fees and service charges increased 6% to $52 million and 7% to $159 million for the three and nine months ended September 30, 2015 respectively, compared to the same periods in 2014. The table below shows the components of fees and service charges and the resulting variances (dollars in millions):
 
 
Three Months Ended September 30,
 
Variance
 
Nine Months Ended September 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Order flow revenue
$
21

 
$
22

 
$
(1
)
 
(5
)%
 
$
65

 
$
69

 
$
(4
)
 
(6
)%
Mutual fund service fees
7

 
6

 
1

 
17
 %
 
19

 
17

 
2

 
12
 %
Advisor management fees
6

 
6

 

 
 %
 
20

 
17

 
3

 
18
 %
Foreign exchange revenue
3

 
4

 
(1
)
 
(25
)%
 
12

 
12

 

 
 %
Reorganization fees
3

 
1

 
2

 
200
 %
 
8

 
5

 
3

 
60
 %
Money market funds and sweep deposits revenue(1)
7

 
4

 
3

 
75
 %
 
18

 
10

 
8

 
80
 %
Other fees and service charges
5

 
6

 
(1
)
 
(17
)%
 
17

 
18

 
(1
)
 
(6
)%
Total fees and service charges
$
52

 
$
49

 
$
3

 
6
 %
 
$
159

 
$
148

 
$
11

 
7
 %
 
(1)
Includes revenue earned on average customer assets held by third parties outside the Company, including money market funds and sweep deposit accounts at unaffiliated financial institutions. Fees earned on these customer assets are based on the federal funds rate or LIBOR plus a negotiated spread or other contractual arrangement with the third party institutions.
The increases in fees and services charges for the three and nine months ended September 30, 2015, compared to the same periods in 2014, were primarily driven by increased money market funds and sweep deposits revenue. This increase was driven primarily by the increased rate earned on sweep deposits and the increased rate earned and balance of customer assets in money market funds.
Principal Transactions
There was no principal transactions revenue for the nine months ended September 30, 2015, compared to $10 million for the same period in 2014. Principal transactions were derived from our market making business in which we acted as a market-maker for our brokerage customers’ orders as well as orders from third party customers. On February 10, 2014, we completed the sale of the market making business and no longer generate principal transactions revenue.
Gains (Losses) on Securities and Other
The table below shows the components of gains (losses) on securities and other and the resulting variances (dollars in millions):
 
Three Months Ended September 30,
 
Variance
 
Nine Months Ended September 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Reclassification of deferred losses on cash flow hedges
$
(370
)
 
$

 
$
(370
)
 
*
 
$
(370
)
 
$

 
$
(370
)
 
*
Hedge ineffectiveness
(2
)
 
(1
)
 
(1
)
 
100
 %
 

 
(8
)
 
8

 
(100
)%
Gains on available-for-sale securities, net
11

 
12

 
(1
)
 
(8
)%
 
29

 
34

 
(5
)
 
(15
)%
Gains (losses) on loans, net
1

 
(3
)
 
4

 
(133
)%
 
1

 
4

 
(3
)
 
(75
)%
Gains (losses) on securities and other
$
(360
)
 
$
8

 
$
(368
)
 
*
 
$
(340
)
 
$
30

 
$
(370
)
 
*
*
Percentage not meaningful.

10


Gains (losses) on securities and other was $(360) million and $(340) million for the three and nine months ended September 30, 2015, respectively, compared to $8 million and $30 million for the same periods in 2014. The gains (losses) on securities and other for the three and nine months ended September 30, 2015 included $370 million of losses reclassified from accumulated comprehensive loss related to cash flow hedges as a result of the termination of $4.4 billion legacy wholesale funding obligations during the third quarter of 2015. Gains (losses) on securities and other for the nine months ended September 30, 2014 included a gain of $7 million on the sale of one- to four-family loans modified as TDRs and a $6 million gain recognized on the sale of our remaining $17 million in amortized cost of available-for-sale non-agency CMOs.
Provision (Benefit) for Loan Losses
Provision (benefit) for loan losses was $(25) million and $(17) million for the three and nine months ended September 30, 2015, respectively, compared to $10 million and $26 million for the same periods in 2014. The benefit for loan losses reflected continued improvement in economic conditions, charge-off recoveries and loan portfolio run-off, offset by the impact of enhancements to our modeling practices for the allowance for loan losses during the nine months ended September 30, 2015. The timing and magnitude of the provision (benefit) for loan losses is affected by many factors and we anticipate variability, particularly as mortgage loans reach the end of their interest-only period. For additional information on management's estimate of the allowance for loan losses, see Summary of Critical Accounting Policies and Estimates in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Operating Expense
The components of operating expense and the resulting variances are as follows (dollars in millions):
 
 
Three Months Ended September 30,
 
Variance
 
Nine Months Ended September 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Compensation and benefits
$
123

 
$
108

 
$
15

 
14
 %
 
$
354

 
$
305

 
$
49

 
16
 %
Advertising and market development
23

 
21

 
2

 
10
 %
 
89

 
88

 
1

 
1
 %
Clearing and servicing
23

 
21

 
2

 
10
 %
 
72

 
72

 

 
 %
FDIC insurance premiums
7

 
18

 
(11
)
 
(61
)%
 
36

 
61

 
(25
)
 
(41
)%
Professional services
24

 
27

 
(3
)
 
(11
)%
 
77

 
79

 
(2
)
 
(3
)%
Occupancy and equipment
21

 
22

 
(1
)
 
(5
)%
 
64

 
59

 
5

 
8
 %
Communications
24

 
17

 
7

 
41
 %
 
62

 
53

 
9

 
17
 %
Depreciation and amortization
21

 
19

 
2

 
11
 %
 
61

 
60

 
1

 
2
 %
Amortization of other intangibles
5

 
5

 

 
 %
 
15

 
16

 
(1
)
 
(6
)%
Restructuring and other exit activities
2

 
2

 

 
 %
 
8

 
6

 
2

 
33
 %
Other operating expenses
20

 
17

 
3

 
18
 %
 
64

 
52

 
12

 
23
 %
Total operating expense
$
293

 
$
277

 
$
16

 
6
 %
 
$
902

 
$
851

 
$
51

 
6
 %
Compensation and Benefits
Compensation and benefits increased 14% to $123 million and 16% to $354 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. The increases were primarily due to increased salaries expense driven by higher headcount and increased incentive compensation, compared to the same periods in 2014. The increases during the nine months ended September 30, 2015 also included $6 million of executive severance costs recorded in the second quarter of 2015.
FDIC Insurance Premiums
FDIC insurance premiums decreased 61% to $7 million and 41% to $36 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. The decreases were primarily driven by reduced rate assessments due to continued improvement and quality of our balance sheet, improving capital

11


ratios and overall risk profile, compared to the same periods in 2014.  These drivers and the resulting decreases in FDIC insurance premiums are indications of the important progress made on our capital plan.
Other Operating Expenses
Other operating expenses increased 18% to $20 million and 23% to $64 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. The increases during the nine months ended September 30, 2015 were primarily driven by a $9 million expense related to a third party contract amendment executed during the second quarter of 2015.
Other Income (Expense)
Other income (expense) was a net expense of $51 million and $155 million for the three and nine months ended September 30, 2015, respectively, as shown in the following table (dollars in millions):
 
 
Three Months Ended September 30,
 
Variance
 
Nine Months Ended September 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Corporate interest expense
$
(14
)
 
$
(29
)
 
$
15

 
(52
)%
 
$
(50
)
 
$
(86
)
 
$
36

 
(42
)%
Losses on early extinguishment of debt
(39
)
 

 
(39
)
 
*
 
(112
)
 
(12
)
 
(100
)
 
833
 %
Other
2

 
1

 
1

 
100
 %
 
7

 
3

 
4

 
133
 %
Total other income (expense)
$
(51
)
 
$
(28
)
 
$
(23
)
 
82
 %
 
$
(155
)
 
$
(95
)
 
$
(60
)
 
63
 %
*
Percentage not meaningful.
Losses on early extinguishment of debt were $39 million and $112 million for the three and nine months ended September 30, 2015, respectively. During the third quarter of 2015 we terminated $4.4 billion of legacy wholesale funding obligations which resulted in a pre-tax charge of $43 million in the losses on early extinguishment of debt line item. We also repurchased $14 million of trust preferred securities in advance of maturity during the third quarter of 2015 and recorded a gain on early extinguishment of debt of $4 million.
Additionally, during the nine months ended September 30, 2015, we issued $460 million of 4 5/8% Senior Notes and we used the net proceeds, together with $432 million of existing corporate cash, to redeem $800 million of 6 3/8% Senior Notes which resulted in a $73 million loss on early extinguishment of debt. During the nine months ended September 30, 2014 we recorded $12 million loss on early extinguishment of debt as a result of the early extinguishment of $100 million in repurchase agreements.
Total other income (expense) also includes corporate interest expense of $14 million and $50 million for three and nine months ended September 30, 2015, respectively, compared to $29 million and $86 million for the same periods in 2014. The decrease in corporate interest expense was driven by $740 million in cumulative corporate debt reductions since the first quarter of 2014 which reduced our annual debt service cost from approximately $110 million as of September 30, 2014 to $50 million as of September 30, 2015.
Income Tax Expense (Benefit)
Income tax benefit was $93 million and $245 million for the three and nine months ended September 30, 2015, respectively, compared to income tax expense of $39 million and $129 million for the same periods in 2014. The effective tax rate was 38% and 372% for the three and nine months ended September 30, 2015, respectively, compared to 31% and 34% for the same periods in 2014.
In May 2015, we settled the IRS examination of our 2007, 2009 and 2010 federal tax returns resulting in the recognition of a $220 million income tax benefit in the second quarter of 2015. The income tax benefit resulted from the release of related reserves for uncertain tax positions, the majority of which increased our deferred tax assets. See Balance Sheet Overview in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion on deferred tax assets at September 30, 2015. During the third quarter of 2009, we incurred a loss on the exchange of $1.7 billion interest-bearing corporate debt for non-interest-bearing convertible debentures. The uncertain tax positions were primarily related to whether certain components of that loss were

12


considered deductible or non-deductible for tax purposes. Excluding the impact of the settled IRS examination, the effective tax rate would have been 38% and 37% for the three and nine months ended September 30, 2015, respectively, calculated in the following table (dollars in millions):
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
 
Pre-tax Loss
 
Tax Benefit
 
Tax Rate
 
Pre-tax Loss
 
Tax Benefit
 
Tax Rate
Income taxes and tax rate before impact of settled IRS examination
$
(246
)

$
(93
)
 
38
%
 
$
(66
)
 
$
(25
)
 
37
%
Impact of settled IRS examination

 

 
%
 

 
(220
)
 
334
%
Income taxes and tax rate as reported
$
(246
)
 
$
(93
)
 
38
%
 
$
(66
)
 
$
(245
)
 
372
%
SEGMENT RESULTS REVIEW
We report operating results in two segments: 1) trading and investing; and 2) balance sheet management. Trading and investing includes retail brokerage products and services; investor-focused banking products; and corporate services. Balance sheet management includes the management of asset allocation; loans previously originated by the Company or purchased from third parties; deposits and customer payables; and credit, liquidity and interest rate risk for the Company as described in the Risk Management section in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Costs associated with certain functions that are centrally-managed are separately reported in a corporate/other category. For more information on our segments, see Note 15—Segment Information in Item 1. Consolidated Financial Statements (Unaudited).

13


Trading and Investing
The following table summarizes trading and investing financial information and key customer activity metrics as of and for the three and nine months ended September 30, 2015 and 2014 (dollars in millions, except for key metrics): 
 
Three Months Ended September 30,
 
Variance
 
Nine Months Ended September 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Net operating interest income
$
174

 
$
161

 
$
13

 
8
 %
 
$
517

 
$
449

 
$
68

 
15
 %
Commissions
108

 
108

 

 
 %
 
325

 
341

 
(16
)
 
(5
)%
Fees and service charges
51

 
49

 
2

 
4
 %
 
158

 
147

 
11

 
7
 %
Principal transactions

 

 

 
*
 

 
10

 
(10
)
 
(100
)%
Other revenues
9

 
9

 

 
 %
 
25

 
25

 

 
 %
Total net revenue
342

 
327

 
15

 
5
 %
 
1,025

 
972

 
53

 
5
 %
Total operating expense
197

 
183

 
14

 
8
 %
 
614

 
574

 
40

 
7
 %
Trading and investing income
$
145

 
$
144

 
$
1

 
1
 %
 
$
411

 
$
398

 
$
13

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Key Customer Activity Metrics:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DARTs
155,985

 
153,494

 
2,491

 
2
 %
 
158,326

 
168,526

 
(10,200
)
 
(6
)%
Average commission per trade
$
10.87

 
$
11.05

 
$
(0.18
)
 
(2
)%
 
$
10.92

 
$
10.79

 
$
0.13

 
1
 %
Margin receivables (dollars in billions)
$
7.9

 
$
8.1

 
$
(0.2
)
 
(2
)%
 
$
7.9

 
$
8.1

 
$
(0.2
)
 
(2
)%
End of period brokerage accounts(1)
3,203,531

 
3,126,476

 
77,055

 
2
 %
 
3,203,531

 
3,126,476

 
77,055

 
2
 %
Net new brokerage accounts(1)
2,205

 
23,510

 
(21,305
)
 
(91
)%
 
59,608

 
128,417

 
(68,809
)
 
(54
)%
Annualized brokerage account attrition rate(1)
11.4
%
 
9.1
%
 
2.3
%
 
*
 
10.0
%
 
8.5
%
 
1.5
%
 
*
Customer assets (dollars in billions)
$
276.6

 
$
281.7

 
$
(5.1
)
 
(2
)%
 
$
276.6

 
$
281.7

 
$
(5.1
)
 
(2
)%
Net new brokerage assets (dollars in billions)
$
2.1

 
$
2.3

 
$
(0.2
)
 
(9
)%
 
$
6.5

 
$
7.4

 
$
(0.9
)
 
(12
)%
Brokerage related cash (dollars in billions)
$
40.2

 
$
40.4

 
$
(0.2
)
 
 %
 
$
40.2

 
$
40.4

 
$
(0.2
)
 
 %
*
Percentage not meaningful.
(1)
Net new brokerage accounts and end of period brokerage accounts were impacted by the shutdown of the Company’s global trading platform. The shutdown resulted in the closure of 16,818 and 20,143 accounts during the three and nine months ended September 30, 2015, respectively. Net new and end of period brokerage accounts during the nine months ended September 30, 2015 were also impacted by the closure of 3,484 accounts related to the escheatment of unclaimed property. Excluding the impact of these items, annualized brokerage account attrition rate was 9.3% and 9.0% for the three and nine months ended September 30, 2015, respectively.
The trading and investing segment offers products and services to individual retail investors, generating revenue from these customer relationships and from corporate services activities. This segment currently generates four main sources of revenue: net operating interest income; commissions; fees and service charges; and other revenues. Net operating interest income is generated primarily from margin receivables and from a deposit transfer pricing arrangement with the balance sheet management segment. The balance sheet management segment utilizes deposits and customer payables and compensates the trading and investing segment via a market-based transfer pricing arrangement. This compensation is reflected in segment results as operating interest income for the trading and investing segment and operating interest expense for the balance sheet management segment, and is eliminated in consolidation. Other revenues include results from providing software and services for managing equity compensation plans from corporate customers, as we ultimately service retail investors through these corporate relationships. For the

14


three months ended September 30, 2015 and 2014, our brokerage products contributed 77% and 79%, respectively, and our banking products contributed 23% and 21%, respectively, of total trading and investing net revenue. For the nine months ended September 30, 2015 and 2014, our brokerage products contributed 79% and 80%, respectively, and our banking products contributed 21% and 20%, respectively, of total trading and investing net revenue.
Trading and investing income increased 1% to $145 million for the three months ended September 30, 2015, compared to the same period in 2014 primarily driven by increased net operating interest income and fees and service charges, partially offset by increased operating expense. Trading and investing income increased 3% to $411 million for the nine months ended September 30, 2015, compared to the same period in 2014, primarily driven by increased net operating interest income and fees and service charges, partially offset by decreased commissions revenue and increased operating expense.
Trading and investing net operating interest income increased 8% to $174 million and 15% to $517 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. The increase for the three months ended September 30, 2015 was driven by increased interest income from the deposit transfer pricing arrangement with the balance sheet management segment when compared to the same period in 2014. The increase for the nine months ended September 30, 2015 was primarily driven by increased interest income on margin receivables, increased revenue earned on securities lending activities along with increased interest income from the deposit transfer pricing arrangement with the balance sheet management segment, when compared to the same period in 2014.
Trading and investing commissions revenue remained unchanged at $108 million and decreased 5% to $325 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. Commissions revenue during the three months ended September 30, 2015 remained unchanged as the increase in DARTs was offset by a decrease in average commission per trade compared to the same period in 2014. Commissions revenue decreased during the nine months ended September 30, 2015 primarily due to a decrease in DARTs of 6% to 158,326 during the nine months ended September 30, 2015, compared to the same period in 2014.
Trading and investing fees and service charges increased 4% to $51 million and 7% to $158 million for the three and nine months ended September 30, 2015, compared to the same periods in 2014. The increase in fees and services charges was driven primarily by increased money market funds and sweep deposits revenue and increased advisor management fees revenue, offset by decreased order flow revenue. The increase in sweep deposits and money market funds revenue was driven primarily by the increase rate earned on sweep deposits and the increased rate earned and balance of customer assets in money market funds, which averaged $7.5 billion over the nine months ended September 30, 2015, compared to an average of $6.4 billion for the same period in 2014. The increase in advisor management fees was driven by an increase in assets in managed accounts within our retirement, investing and savings products, which averaged $3.2 billion over the nine months ended September 30, 2015, compared to an average of $2.8 billion for the same period in 2014.
There was no principal transactions revenue for the nine months ended September 30, 2015, compared to $10 million for the same period in 2014. Principal transactions were derived from our market making business in which we acted as a market-maker for our brokerage customers’ orders as well as orders from third party customers. On February 10, 2014, we completed the sale of the market making business and no longer generate principal transactions revenue.
Trading and investing operating expense increased 8% to $197 million and 7% to $614 million for the three and nine months ended September 30, 2015, compared to the same periods in 2014. The increases for the three and nine months were primarily driven by increased compensation and benefits expenses, driven by higher headcount and increased incentive compensation, and increased communications expense, partially offset by decreases in fees paid for professional services, compared to the same periods in 2014. In addition, the increase for the nine months ended September 30, 2015 was also driven by a $9 million expense related to a third party contract amendment executed during the second quarter of 2015.
As of September 30, 2015, we had approximately 3.2 million brokerage accounts, 1.4 million stock plan accounts and 0.3 million banking accounts.     

15


Balance Sheet Management
The following table summarizes balance sheet management financial information and key financial metrics as of and for the three and nine months ended September 30, 2015 and 2014 (dollars in millions):
 
Three Months Ended September 30,
 
Variance
 
Nine Months Ended September 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Net operating interest income
$
89

 
$
104

 
$
(15
)
 
(14
)%
 
$
283

 
$
346

 
$
(63
)
 
(18
)%
Fees and service charges
1

 

 
1

 
*
 
1

 
1

 

 
 %
Gains (losses) on securities and other
(360
)
 
8

 
(368
)
 
*
 
(340
)
 
30

 
(370
)
 
*
Other revenues
1

 
1

 

 
 %
 
4

 
4

 

 
 %
Total net revenue
(269
)
 
113

 
(382
)
 
*
 
(52
)
 
381

 
(433
)
 
*
Provision (benefit) for loan losses
(25
)
 
10

 
(35
)
 
(350
)%
 
(17
)
 
26

 
(43
)
 
(165
)%
Total operating expense
23

 
36

 
(13
)
 
(36
)%
 
85

 
113

 
(28
)
 
(25
)%
Balance sheet management income (loss)
$
(267
)
 
$
67

 
$
(334
)
 
*
 
$
(120
)
 
$
242

 
$
(362
)
 
*
Key Financial Metrics:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Special mention loan delinquencies
$
113

 
$
159

 
$
(46
)
 
(29
)%
 
$
113

 
$
159

 
$
(46
)
 
(29
)%
Allowance for loan losses
$
376

 
$
401

 
$
(25
)
 
(6
)%
 
$
376

 
$
401

 
$
(25
)
 
(6
)%
*
Percentage not meaningful.
The balance sheet management segment primarily generates revenue through net operating interest income. Net operating interest income is generated from interest earned on investments in securities and the loan portfolio, net of interest paid on wholesale borrowings and on a deposit transfer pricing arrangement with the trading and investing segment. The balance sheet management segment utilizes deposits and customer payables to invest in available-for-sale and held-to-maturity securities, and compensates the trading and investing segment via a market-based transfer pricing arrangement. This compensation is reflected in segment results as operating interest income for the trading and investing segment and operating interest expense for the balance sheet management segment and is eliminated in consolidation.
The balance sheet management segment income (loss) was $(267) million and $(120) million for the three and nine months ended September 30, 2015, respectively, compared to $67 million and $242 million for the same periods in 2014. The segment losses during the three and nine months ended September 30, 2015 were primarily driven by the termination of $4.4 billion of legacy wholesale funding obligations during the third quarter of 2015.
The balance sheet management net operating interest income decreased 14% to $89 million and 18% to $283 million for the three and nine months ended September 30, 2015, compared to the same periods in 2014. The decrease for the three and nine months ended September 30, 2015 was driven by the decrease in the interest earned on the loan portfolio as average loan balances decreased, partially offset by the growth in average balances of our held-to-maturity securities portfolio.
Gains (losses) on securities and other were losses of $(360) million and $(340) million for the three and nine months ended September 30, 2015, respectively, compared to gains of $8 million and $30 million for the same periods in 2014. The gains (losses) on securities and other for the three and nine months ended September 30, 2015 included the reclassification of $370 million of losses on cash flow hedges from accumulated comprehensive loss into earnings as a result of the termination of $4.4 billion legacy wholesale funding obligations during the third quarter of 2015. Gains (losses) on securities and other for the nine months ended September 30, 2014 included $7 million of gain on the sale of one- to four-family loans modified as TDRs during the second quarter of 2014, and $6 million of gain recognized on the sale of our remaining $17 million in amortized cost of available-for-sale non-agency CMOs in the first quarter of 2014.
Provision (benefit) for loan losses was $(25) million and $(17) million for the three and nine months ended September 30, 2015, respectively, compared to $10 million and $26 million for the same periods in 2014. The benefit

16


for loan losses reflected continued improvement in economic conditions, charge-off recoveries and loan portfolio run-off, offset by the impact of enhancements to our modeling practices for the allowance for loan losses during the nine months ended September 30, 2015. The timing and magnitude of the provision (benefit) for loan losses is affected by many factors and we anticipate variability, particularly as mortgage loans reach the end of their interest-only period. For additional information on management's estimate of the allowance for loan losses, see Summary of Critical Accounting Policies and Estimates in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Total balance sheet management operating expense decreased 36% to $23 million and 25% to $85 million for the three and nine months ended September 30, 2015, compared to the same periods in 2014. The decrease in operating expense for the three and nine months ended September 30, 2015 resulted primarily from lower FDIC insurance premiums and reduced servicing expenses due to lower loan balances compared to the same periods in 2014.
Corporate/Other
The following table summarizes corporate/other financial information for the three and nine months ended September 30, 2015, and 2014 (dollars in millions):
 
 
Three Months Ended September 30,
 
Variance
 
Nine Months Ended September 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Total net revenue
$

 
$

 
$

 
*
 
$
1

 
$

 
$
1

 
*
Compensation and benefits
40

 
32

 
8

 
25
%
 
111

 
83

 
28

 
34
%
Professional services
13

 
10

 
3

 
30
%
 
38

 
34

 
4

 
12
%
Occupancy and equipment
4

 
4

 

 
%
 
11

 
11

 

 
%
Communications
1

 

 
1

 
*
 
2

 
1

 
1

 
100
%
Depreciation and amortization
5

 
4

 
1

 
25
%
 
14

 
13

 
1

 
8
%
Restructuring and other exit activities
2

 
2

 

 
%
 
8

 
6

 
2