Edgar Filing: E TRADE FINANCIAL CORP

Form 10-Q

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 June 30, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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)

135 East 57^th Street, New York, New York 10022

(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 Web site, 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 August 2, 2010, there were 220,722,632 shares of common stock outstanding.

E*TRADE FINANCIAL CORPORATION

FORM 10-Q QUARTERLY REPORT

For the Quarter Ended June 30, 2010

TABLE OF CONTENTS


PART I—FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)		3
Consolidated Statement of Income (Loss)		46
Consolidated Balance Sheet		47
Consolidated Statement of Comprehensive Income (Loss)		48
Consolidated Statement of Shareholders’ Equity		49
Consolidated Statement of Cash Flows		50
Notes to Consolidated Financial Statements (Unaudited)		52
Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies		52
Note 2—Facility Restructuring and Other Exit Activities		54
Note 3—Operating Interest Income and Operating Interest Expense		55
Note 4—Fair Value Disclosures		56
Note 5—Available-for-Sale and Held-to-Maturity Securities		64
Note 6—Loans, Net		68
Note 7—Accounting for Derivative Instruments and Hedging Activities		69
Note 8—Deposits		75
Note 9—Securities Sold Under Agreements to Repurchase and FHLB Advances and Other Borrowings		75
Note 10—Corporate Debt		76
Note 11—Income Taxes		76
Note 12—Shareholders’ Equity		77
Note 13—Earnings (Loss) per Share		78
Note 14—Regulatory Requirements		79
Note 15—Commitments, Contingencies and Other Regulatory Matters		80
Note 16—Segment Information		85
Note 17—Subsequent Event		90
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		3
Overview		3
Earnings Overview		7
Segment Results Review		16
Balance Sheet Overview		20
Liquidity and Capital Resources		24
Risk Management		28
Concentrations of Credit Risk		29
Summary of Critical Accounting Policies and Estimates		39
Glossary of Terms		39
Item 3. Quantitative and Qualitative Disclosures about Market Risk		44
Item 4. Controls and Procedures		90

PART II —OTHER INFORMATION
Item 1. Legal Proceedings		90
Item 1A. Risk Factors		94
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		94
Item 3. Defaults Upon Senior Securities		94
Item 5. Other Information		95
Item 6. Exhibits		95
Signatures		96

Unless otherwise indicated, references to “the Company,” “we,” “us,” “our” and “E*TRADE” mean E*TRADE Financial Corporation or 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.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements involving risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as “expect,” “may,” “anticipate,” “intend,” “plan” and similar expressions. Our actual results could differ materially from those discussed in these forward-looking statements, and we caution that we do not undertake to update these statements. Factors that could contribute to our actual results differing from any forward-looking statements include those discussed under Risk Factors, Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report. The cautionary statements made in this report should be read as being applicable to all forward-looking statements wherever they appear in this report. Important factors that may cause actual results to differ materially from any forward-looking statements are set forth in our 2009 Form 10-K filed with the Securities and Exchange Commission (“SEC”) under the heading Risk Factors.

We further caution that there may be risks associated with owning our securities other than those discussed in such filings.

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

This information is set forth immediately following Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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.

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 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

Strategy

Our core business is our trading and investing customer franchise. Our strategy is to profitably grow this business by focusing on two primary groups of customers: traders and long-term investors. We believe our trading customers, particularly our active traders, are the foundation of our brokerage business and we are focused on maintaining our competitive position with this customer group. Our long-term investing customer group is less developed when compared to our trading customers and represents our largest opportunity for future growth.

We believe our focus on certain key factors will enable us to execute our strategy of profitably growing our trading and investing business. These key factors include the development of innovative online trading and long-term investing products and services, a concerted effort to deliver superior customer service, creative and cost-effective marketing and sales, and expense discipline. In addition, we continue to invest significantly for long-term growth so that we remain competitive among the largest online brokers.

Our strategy also includes an intense focus on mitigating the credit losses inherent in our loan portfolio. In addition, we are focused on our overall capital structure as evidenced by the recapitalization transactions

executed in the second and third quarters of 2009. We believe these transactions significantly improved our capital structure and better positioned the Company for future growth.

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;

•

the weakness or strength of the residential real estate and credit markets;

•

the 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;

•

market demand and liquidity in the wholesale borrowings market, including securities sold under agreements to repurchase; 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:

•

continuing our success in the acquisition, growth and retention of trading customers;

•

our ability to generate meaningful growth in the long-term investing customer group;

•

our ability to assess and manage credit risk;

•

our ability to generate capital sufficient to meet our operating needs, particularly a level sufficient to offset loan losses;

•

our ability to assess and manage interest rate risk; and

•

disciplined expense control and improved operational efficiency.

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:


	As of or For the Three Months Ended June 30,						Variance		As of or For the Six Months Ended June 30,						Variance
	2010			2009			2010 vs. 2009		2010			2009			2010 vs. 2009
*Customer Activity Metrics:*⁽¹⁾
Daily average revenue trades (“DARTs”)		170,283			202,578		(16	)%		162,916			189,209		(14	)%
Average commission per trade	$	11.05		$	11.27		(2	)%	$	11.21		$	11.14		1	%
Margin receivables (dollars in billions)	$	4.8		$	3.1		55	%	$	4.8		$	3.1		55	%
End of period brokerage accounts		2,649,500			2,626,793		1	%		2,649,500			2,626,793		1	%
Net new brokerage accounts		17,523			51,598		*			19,421			110,987		*
Customer assets (dollars in billions)	$	143.8		$	127.5		13	%	$	143.8		$	127.5		13	%
Net new brokerage assets (dollars in billions)	$	2.1		$	2.3		*		$	4.3		$	4.6		*
Brokerage related cash (dollars in billions)	$	20.7		$	17.7		17	%	$	20.7		$	17.7		17	%

*Company Financial Metrics:*
Corporate cash (dollars in millions)	$	481.1		$	527.0		(9	)%	$	481.1		$	527.0		(9	)%
E*TRADE Bank excess risk-based capital (dollars in millions)	$	1,008.4		$	910.9		11	%	$	1,008.4		$	910.9		11	%
Special mention loan delinquencies (dollars in millions)	$	660.3		$	859.7		(23	)%	$	660.3		$	859.7		(23	)%
Allowance for loan losses (dollars in millions)	$	1,102.9		$	1,218.9		(10	)%	$	1,102.9		$	1,218.9		(10	)%
Enterprise net interest spread		2.89	%		2.91	%	(0.02	)%		2.93	%		2.63	%	0.30	%
Enterprise interest-earning assets (average in billions)	$	41.0		$	45.2		(9	)%	$	41.7		$	45.0		(7	)%

Percentage not meaningful.

⁽¹⁾

The prior periods presented have been updated to exclude international local brokerage activity.

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. As a result, this metric is impacted by the mix between our customer groups.

•

Margin receivables represent credit extended to customers and non-customers to finance their purchases of securities by borrowing against securities they currently own. Margin receivables are a key driver of net operating interest income.

•

End of period brokerage accounts and net new brokerage accounts are indicators of our ability to attract and retain trading and investing customers.

•

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 existing and new brokerage customers.

•

Customer cash and deposits, particularly our brokerage related cash, are an indicator of a deepening engagement with our customers and are a key driver of net operating interest income.

Company Financial Metrics

•

Corporate cash is an indicator of the liquidity at the parent company. It is also a source of cash that can be deployed in our regulated subsidiaries.

•

E*TRADE Bank excess risk-based capital is the excess capital that E*TRADE Bank has compared to the regulatory minimum to be considered well-capitalized and is an indicator of E*TRADE Bank’s ability to absorb future loan losses. It is also a potential source of additional corporate cash as this capital, if requested by us and approved by our regulators, could be sent as a dividend or otherwise distributed up to the parent company.

•

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 charge-off.

•

Allowance for loan losses is an estimate of the losses inherent in our loan portfolio as of the balance sheet date and is typically equal to the expected charge-offs in our loan portfolio over the next twelve months as well as the estimated charge-offs, including economic concessions to borrowers, over the estimated remaining life of loans modified in troubled debt restructurings.

•

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 Second Quarter of 2010

Enhancements to Our Trading and Investing Products and Services

•

An open applications programming interface (“Open API”) for third-party and independent software developers was made available to active traders. These customers can now have access to technical information and documentation, reference guides, and other resources to help network external applications and programs with our active trader platform.

Completion of 1-for-10 Reverse Stock Split

•

In June 2010, we completed a 1-for-10 reverse stock split. All prior periods presented have been adjusted to reflect the impact of this reverse stock split, including basic and diluted weighted-average shares and shares issued and outstanding.

Summary Financial Results (dollars in millions, except per share amounts)


	Three Months Ended June 30,					Variance		Six Months Ended June 30,						Variance
	2010		2009			2010 vs. 2009		2010			2009			2010 vs. 2009
Net operating interest income	$	302.0	$	339.6		(11	)%	$	622.4		$	618.2		1	%
Commissions	$	119.6	$	154.1		(22	)%	$	232.8		$	279.7		(17	)%
Fees and services charges	$	35.2	$	47.9		(27	)%	$	77.4		$	94.7		(18	)%
Principal transactions	$	28.7	$	22.7		26	%	$	54.9		$	40.3		36	%
Total net revenue	$	534.0	$	620.9		(14	)%	$	1,070.5		$	1,118.2		(4	)%
Provision for loan losses	$	165.7	$	404.5		(59	)%	$	433.6		$	858.5		(49	)%
Operating margin	$	92.7	$	(112.8	)	*		$	65.9		$	(363.4	)	*
Net income (loss)	$	35.1	$	(143.2	)	*		$	(12.8	)	$	(375.9	)	*
Diluted earnings (loss) per share	$	0.12	$	(2.16	)	*		$	(0.06	)	$	(6.11	)	*

Percentage not meaningful.

EARNINGS OVERVIEW

During the three and six months ended June 30, 2010, we generated net income of $35.1 million and incurred a net loss of $12.8 million, respectively. Our net income for the three months ended June 30, 2010 primarily resulted from income before income taxes of $203.3 million in our trading and investing segment, which was offset by $165.7 million in provision for loan losses reported in our balance sheet management segment. Our net loss for the six months ended June 30, 2010 was due primarily to income before income taxes of $389.1 million in our trading and investing segment, which was more than offset by $433.6 million in provision for loan losses reported in our balance sheet management segment. Although we expect provision for loan losses to continue at elevated levels in future periods, the level of provision for loan losses has declined for seven consecutive quarters. While we cannot state with certainty that this trend will continue, we believe it is a positive indicator that our loan portfolio has continued to improve.

The following sections describe in detail the changes in key operating factors and other changes and events that have affected our revenue, provision for loan losses, operating expense, other income (expense) and income tax expense (benefit).

Revenue

The components of net revenue and the resulting variances are as follows (dollars in millions):


	Three Months Ended June 30,						Variance					Six Months Ended June 30,						Variance
	Three Months Ended June 30,						2010 vs. 2009					Six Months Ended June 30,						2010 vs. 2009
	2010			2009			Amount			%		2010			2009			Amount			%
Net operating interest income	$	302.0		$	339.6		$	(37.6	)	(11	)%	$	622.4		$	618.2		$	4.2		1	%
Commissions		119.6			154.1			(34.5	)	(22	)%		232.8			279.7			(46.9	)	(17	)%
Fees and service charges		35.2			47.9			(12.7	)	(27	)%		77.4			94.7			(17.3	)	(18	)%
Principal transactions		28.7			22.7			6.0		26	%		54.9			40.3			14.6		36	%
Gains on loans and securities, net		48.9			73.2			(24.3	)	(33	)%		78.0			108.5			(30.5	)	(28	)%
Net impairment		(12.2	)		(29.7	)		17.5		*			(20.8	)		(48.5	)		27.7		*
Other revenues		11.8			13.1			(1.3	)	(10	)%		25.8			25.3			0.5		2	%

Total non-interest income		232.0			281.3			(49.3	)	(18	)%		448.1			500.0			(51.9	)	(10	)%

Total net revenue	$	534.0		$	620.9		$	(86.9	)	(14	)%	$	1,070.5		$	1,118.2		$	(47.7	)	(4	)%

Percentage not meaningful.

Total net revenue decreased 14% to $534.0 million and 4% to $1.1 billion for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. This was driven by lower commissions, fees and service charges and gains on loans and securities, net, which was slightly offset by a decrease in net impairment. Additionally, the decrease for the three months ended June 30, 2010 was driven by lower net operating interest income compared to the same period in 2009.

Net Operating Interest Income

Net operating interest income decreased 11% to $302.0 million and increased slightly to $622.4 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. Net operating interest income is earned primarily through investing customer cash and deposits in interest-earning assets, which include: margin receivables, real estate loans, mortgage-backed securities and investment securities. The decrease in net operating interest income for the three months ended June 30, 2010 was due primarily to decreases in our enterprise interest-earning assets, specifically loans and available-for-sale mortgage-backed securities. The slight increase for the six months ended June 30, 2010 was driven by lower yields on our enterprise interest-bearing liabilities, specifically deposits, which was mostly offset by a decrease in our enterprise interest-earning assets.

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 and has been prepared on the basis required by the SEC’s Industry Guide 3, “Statistical Disclosure by Bank Holding Companies” (dollars in millions):


	Three Months Ended June 30,
	2010						2009
	Average Balance		Operating Interest Inc./Exp.		Average Yield/ Cost		Average Balance		Operating Interest Inc./Exp.		Average Yield/ Cost
Enterprise interest-earning assets:
Loans⁽¹⁾	$	18,844.0	$	225.3	4.78	%	$	23,889.8	$	292.5	4.90	%
Margin receivables		4,479.4		50.0	4.47	%		2,771.7		31.4	4.55	%
Available-for-sale mortgage-backed securities		8,826.4		70.6	3.20	%		11,795.2		127.6	4.32	%
Available-for-sale investment securities		3,725.3		23.6	2.53	%		253.5		3.3	5.15	%
Held-to-maturity securities		135.1		1.3	3.74	%		—		—	—
Trading securities		1.4		0.0	5.68	%		23.6		0.5	8.47	%
Cash and equivalents⁽²⁾		4,317.7		2.5	0.23	%		5,790.9		4.7	0.33	%
Stock borrow and other		661.0		6.6	3.99	%		681.2		21.6	12.73	%

Total enterprise interest-earning assets		40,990.3		379.9	3.71	%		45,205.9		481.6	4.27	%

Non-operating interest-earning assets⁽³⁾		4,273.5						3,775.5

Total assets	$	45,263.8					$	48,981.4

Enterprise interest-bearing liabilities:
Retail deposits	$	24,118.0		14.7	0.24	%	$	27,061.9		50.6	0.75	%
Brokered certificates of deposit		116.1		1.5	5.18	%		214.3		2.9	5.39	%
Customer payables		4,660.2		1.7	0.14	%		4,503.4		2.1	0.19	%
Securities sold under agreements to repurchase		6,332.6		30.7	1.92	%		6,856.2		51.4	2.96	%
Federal Home Loan Bank (“FHLB”) advances and other borrowings		2,747.2		30.8	4.43	%		3,644.7		38.4	4.17	%
Stock loan and other		599.5		0.4	0.28	%		501.0		0.5	0.41	%

Total enterprise interest-bearing liabilities		38,573.6		79.8	0.82	%		42,781.5		145.9	1.36	%

Non-operating interest-bearing liabilities⁽⁴⁾		2,704.2						3,602.2

Total liabilities		41,277.8						46,383.7
Total shareholders’ equity		3,986.0						2,597.7

Total liabilities and shareholders’ equity	$	45,263.8					$	48,981.4

Excess of enterprise interest-earning assets over enterprise interest-bearing liabilities/Enterprise net interest income/Spread	$	2,416.7	$	300.1	2.89	%	$	2,424.4	$	335.7	2.91	%

Enterprise net interest margin (net yield on enterprise interest-earning assets)					2.93	%					2.97	%
Ratio of enterprise interest-earning assets to enterprise interest-bearing liabilities					106.27	%					105.67	%
Return on average:
Total assets					0.31	%					(1.17	)%
Total shareholders’ equity					3.52	%					(22.06	)%
Average equity to average total assets					8.81	%					5.30	%

Reconciliation from enterprise net interest income to net operating interest income (dollars in millions):


	Three Months Ended June 30,
	2010			2009
Enterprise net interest income⁽⁵⁾	$	300.1		$	335.7
Taxable equivalent interest adjustment		(0.3	)		(0.7	)
Customer cash held by third parties and other⁽⁶⁾		2.2			4.6

Net operating interest income	$	302.0		$	339.6

⁽¹⁾

Nonaccrual loans are included in the respective average loan balances. Income on such nonaccrual loans is recognized on a cash basis.

⁽²⁾

Includes segregated cash balances.

⁽³⁾

Non-operating 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.

⁽⁴⁾

Non-operating 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 income is taxable equivalent basis net operating interest income excluding corporate interest income and corporate interest expense, stock conduit interest income and expense and interest earned on customer cash held by third parties. Management believes this non-GAAP measure is useful to analysts and investors as it is a measure of the net operating interest income generated by our operations.

⁽⁶⁾

Includes interest earned on average customer assets of $3.1 billion and $2.8 billion for the three months ended June 30, 2010 and 2009, respectively, held by parties outside E*TRADE Financial, including third party money market funds and sweep deposit accounts at unaffiliated financial institutions.


	Six Months Ended June 30,
	2010						2009
	Average Balance		Operating Interest Inc./Exp.		Average Yield/ Cost		Average Balance		Operating Interest Inc./Exp.		Average Yield/ Cost
Enterprise interest-earning assets:
Loans⁽¹⁾	$	19,383.3	$	466.9	4.82	%	$	24,483.3	$	605.8	4.95	%
Margin receivables		4,247.9		94.7	4.49	%		2,761.4		58.3	4.26	%
Available-for-sale mortgage-backed securities		9,257.2		152.5	3.29	%		11,486.0		253.3	4.41	%
Available-for-sale investment securities		3,875.7		51.3	2.65	%		190.2		5.3	5.57	%
Held-to-maturity securities		67.9		1.3	3.71	%		—		—	—
Trading securities		1.7		0.1	6.14	%		29.5		1.2	7.93	%
Cash and equivalents⁽²⁾		4,168.1		4.8	0.23	%		5,368.0		10.5	0.39	%
Stock borrow and other		672.5		13.6	4.08	%		635.9		29.7	9.42	%

Total enterprise interest-earning assets		41,674.3		785.2	3.77	%		44,954.3		964.1	4.30	%

Non-operating interest-earning assets⁽³⁾		4,260.7						3,808.1

Total assets	$	45,935.0					$	48,762.4

Enterprise interest-bearing liabilities:
Retail deposits	$	24,467.8		33.1	0.27	%	$	26,720.7		144.1	1.09	%
Brokered certificates of deposit		118.0		3.0	5.11	%		253.8		6.4	5.13	%
Customer payables		4,917.3		3.6	0.15	%		4,141.0		4.9	0.24	%
Securities sold under agreements to repurchase		6,352.2		65.5	2.05	%		6,974.8		112.5	3.21	%
Federal Home Loan Bank (“FHLB”) advances and other borrowings		2,754.2		60.2	4.35	%		3,910.2		84.5	4.30	%
Stock loan and other		609.4		0.9	0.30	%		462.1		1.4	0.60	%

Total enterprise interest-bearing liabilities		39,218.9		166.3	0.84	%		42,462.6		353.8	1.67	%

Non-operating interest-bearing liabilities⁽⁴⁾		2,819.3						3,716.1

Total liabilities		42,038.2						46,178.7
Total shareholders’ equity		3,896.8						2,583.7

Total liabilities and shareholders’ equity	$	45,935.0					$	48,762.4

Excess of enterprise interest-earning assets over enterprise interest-bearing liabilities/Enterprise net interest income/Spread	$	2,455.4	$	618.9	2.93	%	$	2,491.7	$	610.3	2.63	%

Enterprise net interest margin (net yield on enterprise interest-earning assets)					2.97	%					2.72	%
Ratio of enterprise interest-earning assets to enterprise interest-bearing liabilities					106.26	%					105.87	%
Return on average:
Total assets					(0.06	)%					(1.54	)%
Total shareholders’ equity					(0.65	)%					(29.10	)%
Average equity to average total assets					8.48	%					5.30	%

Reconciliation from enterprise net interest income to net operating interest income (dollars in millions):


	Six Months Ended June 30,
	2010			2009
Enterprise net interest income⁽⁵⁾	$	618.9		$	610.3
Taxable equivalent interest adjustment		(0.6	)		(1.5	)
Customer cash held by third parties and other⁽⁶⁾		4.1			9.4

Net operating interest income	$	622.4		$	618.2

⁽¹⁾

Nonaccrual loans are included in the respective average loan balances. Income on such nonaccrual loans is recognized on a cash basis.

⁽²⁾

Includes segregated cash balances.

⁽³⁾

⁽⁴⁾

⁽⁵⁾

⁽⁶⁾

Includes interest earned on average customer assets of $3.1 billion and $2.8 billion for the six months ended June 30, 2010 and 2009, respectively, held by parties outside E*TRADE Financial, including third party money market funds and sweep deposit accounts at unaffiliated financial institutions.

Average enterprise interest-earning assets decreased 9% to $41.0 billion and 7% to $41.7 billion for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. This decrease was primarily a result of the decrease in our loans portfolio, available-for-sale mortgage-backed securities and cash and equivalents, partially offset by an increase in margin receivables and available-for-sale investment securities. Average loans decreased 21% to $18.8 billion and to $19.4 billion for both the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. For the foreseeable future, we plan to allow our loan portfolio to pay down. Average available-for-sale mortgage-backed securities decreased 25% to $8.8 billion and 19% to $9.3 billion for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. This decrease was primarily due to the sale of certain agency mortgage-backed securities and collateralized mortgage obligations (“CMOs”) in the third quarter of 2009 as part of our effort to reduce our interest rate risk exposure in this portfolio. Average cash and equivalents decreased 25% to $4.3 billion and 22% to $4.2 billion for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. These decreases were offset by an increase in average margin receivables and available-for-sale investment securities. Average margin receivables increased 62% to $4.5 billion and 54% to $4.2 billion for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. Average available-for-sale investment securities increased $3.5 billion to $3.7 billion and $3.7 billion to $3.9 billion for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009, related to purchases of agency debentures toward the end of 2009.

Average enterprise interest-bearing liabilities decreased 10% to $38.6 billion and 8% to $39.2 billion for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The decrease in average enterprise interest-bearing liabilities was primarily due to a decrease in retail deposits and FHLB advances and other borrowings. Average retail deposits decreased 11% to $24.1 billion and 8% to $24.5 billion for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The decrease in average deposits was a result of the sale of approximately $1 billion in savings accounts to Discover Financial Services in the first quarter of 2010. Average FHLB advances and other borrowings decreased 25% to $2.7 billion and 30% to $2.8 billion for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009.

Enterprise net interest spread decreased by 2 basis points to 2.89% and increased by 30 basis points to 2.93% for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The increase for the six months ended June 30, 2010 was largely driven by a decrease in the yields paid on our deposits and lower wholesale borrowing costs, partially offset by a decrease in higher yielding enterprise interest-earning assets.

Commissions

Commissions revenue decreased 22% to $119.6 million and 17% to $232.8 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The main factors that affect our commissions revenue are DARTs, average commission per trade and the number of trading days during the period. Average commission per trade is impacted by different trade types (e.g. equities, options, fixed income, stock plan, exchange-traded funds, mutual funds and cross border) that can have different commission rates. Accordingly, changes in the mix of trade types will impact average commission per trade.

Our DART volume decreased 16% to 170,283 and 14% to 162,916 for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. Option-related DARTs as a percentage of our total DARTs represented 16% and 12% of trading volume for the six months ended June 30, 2010 and 2009, respectively. Exchange-traded funds-related DARTs as a percentage of our total DARTs represented 10% and 16% of trading volume for the six months ended June 30, 2010 and 2009, respectively.

Average commission per trade decreased 2% to $11.05 and increased slightly to $11.21 for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The slight decrease in the

average commission per trade was due primarily to the elimination of the $12.99 commission tier and the per share commission applied to market trades larger than 2,000 shares during the three months ended June 30, 2010. For the six months ended June 30, 2010, this decrease was offset by an improvement in the product and customer mix when compared to the same period in 2009.

Fees and Service Charges

Fees and service charges decreased 27% to $35.2 million and 18% to $77.4 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The decreases were primarily due to the elimination of all account activity fees, which took effect in the second quarter of 2010.

Principal Transactions

Principal transactions increased 26% to $28.7 million and 36% to $54.9 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. Our principal transactions revenue is derived primarily from our market making business in which we act as a market-maker for our brokerage customers’ orders as well as orders from third party customers. The increase in principal transactions revenue was driven by an increase in the volume of orders from our third party customers.

Gains on Loans and Securities, Net

Gains on loans and securities, net were $48.9 million and $78.0 million for the three and six months ended June 30, 2010, respectively, as shown in the following table (dollars in millions):


	Three Months Ended June 30,					Variance					Six Months Ended June 30,						Variance
	Three Months Ended June 30,					2010 vs. 2009					Six Months Ended June 30,						2010 vs. 2009
	2010			2009		Amount			%		2010			2009			Amount			%
Gains on loans, net	$	7.0		$	0.1	$	6.9		*		$	6.2		$	0.1		$	6.1		*

Gains on available-for-sale securities, net		42.9			71.0		(28.1	)	(40	)%		72.3			108.8			(36.5	)	(34	)%
Gains (losses) on trading securities, net		(0.4	)		1.6		(2.0	)	*			0.3			(0.8	)		1.1		*
Hedge ineffectiveness		(0.6	)		0.5		(1.1	)	*			(0.8	)		0.4			(1.2	)	*

Gains on securities, net		41.9			73.1		(31.2	)	(43	)%		71.8			108.4			(36.6	)	(34	)%

Gains on loans and securities, net	$	48.9		$	73.2	$	(24.3	)	(33	)%	$	78.0		$	108.5		$	(30.5	)	(28	)%

Percentage not meaningful.

Net Impairment

We recognized $12.2 million and $20.8 million of net impairment during the three and six months ended June 30, 2010, respectively, on certain securities in our non-agency CMO portfolio due to continued deterioration in the expected credit performance of the underlying loans in the securities. The gross OTTI and the noncredit portion of OTTI, which was recorded through other comprehensive income (loss), are shown in the table below (dollars in millions):


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Other-than-temporary impairment (“OTTI”)	$	(15.1	)	$	(199.8	)	$	(29.6	)	$	(218.6	)
Less: noncredit portion of OTTI recognized in other comprehensive income (before tax)		2.9			170.1			8.8			170.1

Net impairment	$	(12.2	)	$	(29.7	)	$	(20.8	)	$	(48.5	)

Other Revenues

Other revenues decreased 10% to $11.8 million and increased 2% to $25.8 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The decrease for the three months ended June 30, 2010, was due to a decline in the income from the cash surrender value of our bank-owned life insurance. This decrease was more than offset for the six months ended June 30, 2010 due primarily to the gain on the sale of approximately $1 billion in savings accounts to Discover Financial Services in the first quarter of 2010.

Provision for Loan Losses

Provision for loan losses decreased 59% to $165.7 million and 49% to $433.6 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The decrease in our provision for loan losses was driven by lower levels of at-risk (30-179 days delinquent) loans in our one- to four-family and home equity loan portfolios. We believe the delinquencies in both of these portfolios were caused by several factors, including: home price depreciation in key markets; growing inventories of unsold homes; rising foreclosure rates; significant contraction in the availability of credit; and a general decline in economic growth. In addition, the combined impact of home price depreciation and the reduction of available credit made it increasingly difficult for borrowers to refinance existing loans. Although we expect these factors will cause the provision for loan losses to continue at elevated levels in future periods, the level of provision for loan losses has declined for seven consecutive quarters. While we cannot state with certainty that this trend will continue, we believe it is a positive indicator that our loan portfolio has continued to improve.

Operating Expense

The components of operating expense and the resulting variances are as follows (dollars in millions):


	Three Months Ended June 30,					Variance					Six Months Ended June 30,				Variance
	Three Months Ended June 30,					2010 vs. 2009					Six Months Ended June 30,				2010 vs. 2009
	2010			2009		Amount			%		2010		2009		Amount			%
Compensation and benefits	$	80.9		$	90.0	$	(9.1	)	(10	)%	$	168.2	$	174.2	$	(6.0	)	(3	)%
Clearing and servicing		38.2			44.1		(5.9	)	(13	)%		77.3		86.7		(9.4	)	(11	)%
Advertising and market development		29.8			25.0		4.8		19	%		67.9		68.6		(0.7	)	(1	)%
FDIC insurance premiums		19.3			42.1		(22.8	)	(54	)%		38.6		54.8		(16.2	)	(30	)%
Communications		18.4			21.0		(2.6	)	(12	)%		38.9		42.6		(3.7	)	(9	)%
Professional services		19.5			21.5		(2.0	)	(9	)%		39.8		41.1		(1.3	)	(3	)%
Occupancy and equipment		17.6			20.0		(2.4	)	(12	)%		35.8		39.5		(3.7	)	(9	)%
Depreciation and amortization		22.0			21.2		0.8		4	%		42.6		41.5		1.1		3	%
Amortization of other intangibles		7.1			7.4		(0.3	)	(4	)%		14.3		14.9		(0.6	)	(4	)%
Facility restructuring and other exit activities		(1.8	)		4.4		(6.2	)	*			1.5		4.3		(2.8	)	(65	)%
Other operating expenses		24.7			32.5		(7.8	)	(24	)%		46.1		55.0		(8.9	)	(16	)%

Total operating expense	$	275.7		$	329.2	$	(53.5	)	(16	)%	$	571.0	$	623.2	$	(52.2	)	(8	)%

Percentage not meaningful.

Operating expense decreased 16% to $275.7 million and 8% to $571.0 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The fluctuation was driven by a decrease in variable compensation, clearing and servicing expense and FDIC insurance premiums, compared to the same periods in 2009.

Compensation and Benefits

Compensation and benefits decreased 10% to $80.9 million and 3% to $168.2 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. These decreases resulted primarily from lower variable compensation expense when compared to the same periods in 2009.

Clearing and Servicing

Clearing and servicing expense decreased 13% to $38.2 million and 11% to $77.3 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. This decrease resulted primarily from lower trading volumes and lower loan balances compared to the same periods in 2009.

Advertising and Market Development

Advertising and market development expense increased 19% to $29.8 million and decreased 1% to $67.9 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. These fluctuations were due largely to the timing of our advertising expenditures during the comparable periods. We expect our advertising expenditures in 2010 to be modestly higher than our advertising expenditures in 2009.

FDIC Insurance Premiums

FDIC insurance premiums decreased 54% to $19.3 million and 30% to $38.6 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The decrease was primarily due to an industry wide special assessment that resulted in an additional $21.6 million in the second quarter of 2009. There were no similar assessments made during the three and six months ended June 30, 2010.

Other Operating Expenses

Other operating expenses decreased 24% to $24.7 million and 16% to $46.1 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. These decreases were due to a decrease in REO expenses as well as legal reserves during the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009.

Other Income (Expense)

Other income (expense) was an expense of $40.4 million and $79.5 million for the three and six months ended June 30, 2010, respectively, compared to an expense of $98.7 million and $192.1 million for the three and six months ended June 30, 2009, respectively, as shown in the following table (dollars in millions):


	Three Months Ended June 30,						Variance					Six Months Ended June 30,						Variance
	Three Months Ended June 30,						2010 vs. 2009					Six Months Ended June 30,						2010 vs. 2009
	2010			2009			Amount			%		2010			2009			Amount			%
Corporate interest income	$	0.1		$	0.2		$	(0.1	)	(68	)%	$	0.1		$	0.6		$	(0.5	)	(87	)%
Corporate interest expense		(41.2	)		(86.5	)		45.3		(52	)%		(82.2	)		(173.8	)		91.6		(53	)%
Gains (losses) on sales of investments, net		—			(1.6	)		1.6		(100	)%		0.1			(2.0	)		2.1		*
Losses on early extinguishment of debt		—			(10.4	)		10.4		(100	)%		—			(13.3	)		13.3		(100	)%
Equity in income (loss) of investments and venture funds		0.7			(0.4	)		1.1		*			2.5			(3.6	)		6.1		*

Total other income (expense)	$	(40.4	)	$	(98.7	)	$	58.3		(59	)%	$	(79.5	)	$	(192.1	)	$	112.6		(59	)%

Percentage not meaningful.

Total other income (expense) for the three and six months ended June 30, 2010 primarily consisted of corporate interest expense resulting from our interest-bearing corporate debt. Corporate interest expense decreased 52% to $41.2 million and 53% to $82.2 million for the three and six months ended June 30, 2010 compared to the same periods in 2009. This was due to the reduction in interest-bearing debt in connection with our Debt Exchange in the third quarter of 2009.

Income Tax Expense (Benefit)

Income tax expense (benefit) was an expense of $17.2 million and a benefit of $0.9 million during the three and six months ended June 30, 2010, respectively compared to benefits of $68.3 million and $179.6 million for the same periods in 2009. Our effective tax rates were 32.9% and (32.3)% for the three months ended June 30, 2010 and 2009, respectively and (6.6)% and (32.3)% for the for the six months ended June 30, 2010 and 2009, respectively.

Valuation Allowance

During the six months ended June 30, 2010 we did not provide for a valuation allowance against our federal deferred tax assets. We are required to establish a valuation allowance for deferred tax assets and record a charge to income if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. If we did conclude that a valuation allowance was required, the resulting loss would have a material adverse effect on our results of operations and financial condition.

We did not establish a valuation allowance against our federal deferred tax assets as of June 30, 2010 as we believe that it is more likely than not that all of these assets will be realized. Our evaluation focused on identifying significant, objective evidence that we will be able to realize our deferred tax assets in the future. We reviewed the estimated future taxable income for our trading and investing and balance sheet management segments separately and determined that our net operating losses since 2007 are due solely to the credit losses in our balance sheet management segment. We believe these losses were caused by the crisis in the residential real estate and credit markets which significantly impacted our asset-backed securities and home equity loan portfolios in 2007 and continued to generate credit losses in 2008, 2009 and 2010. We estimate that these credit losses will continue in future periods; however, we ceased purchasing asset-backed securities and home equity loans which we believe are the root cause of these losses. Therefore, while we do expect credit losses to continue in future periods, we do expect these amounts to decline when compared to our credit losses in the three-year period ending in 2010. Our trading and investing segment generated substantial taxable income for each of the last six years and we estimate that it will continue to generate taxable income in future periods at a level sufficient to generate taxable income for the Company as a whole. We consider this to be significant, objective evidence that we will be able to realize our deferred tax assets in the future.

A key component of our evaluation of the need for a valuation allowance was our level of corporate interest expense, which represents our most significant non-operating related expense. Our estimates of future taxable income included this expense, which reduces the amount of segment income available to utilize our federal deferred tax assets. Therefore, a decrease in this expense in future periods would increase the level of estimated taxable income available to utilize our federal deferred tax assets. As a result of the Debt Exchange, we reduced our annual cash interest payments by approximately $200 million. We believe this decline in cash interest payments significantly improves our ability to utilize our federal deferred tax assets in future periods when compared to evaluations in prior periods which did not include this decline in corporate interest payments.

Our analysis of the need for a valuation allowance recognizes that we are in a cumulative book taxable loss position as of the three-year period ended June 30, 2010, which is considered significant and objective evidence that we may not be able to realize some portion of our deferred tax assets in the future. However, we believe we are able to rely on our forecasts of future taxable income and overcome the uncertainty created by the cumulative loss position.

The crisis in the residential real estate and credit markets has created significant volatility in our results of operations. This volatility is isolated almost entirely to our balance sheet management segment. Our forecasts for this segment include assumptions regarding our estimate of future expected credit losses, which we believe to be the most variable component of our forecasts of future taxable income. We believe this variability could create a book loss in our overall results for an individual reporting period while not significantly impacting our overall estimate of taxable income over the period in which we expect to realize our deferred tax assets. Conversely, we believe our trading and investing segment will continue to produce a stable stream of income which we believe we can reliably estimate in both individual reporting periods as well as over the period in which we estimate we will realize our deferred tax assets.

In evaluating the need for a valuation allowance, we estimated future taxable income based on management approved forecasts. This process required significant judgment by management about matters that are by nature uncertain. If future events differ significantly from our current forecasts, a valuation allowance may need to be established, which would have a material adverse effect on our results of operations and our financial condition.

Tax Ownership Change

During the third quarter of 2009, we exchanged $1.7 billion principal amount of our interest-bearing debt for an equal principal amount of non-interest-bearing convertible debentures. Subsequent to the Debt Exchange, $592.3 million and $720.9 million debentures were converted into 57.2 million and 69.7 million shares of common stock during the third and fourth quarters of 2009, respectively. As a result of these conversions, we believe we experienced a tax ownership change during the third quarter of 2009.

As of the date of the ownership change, we estimate that we had federal net operating losses (“NOLs”) available to carry forward of approximately $1.4 billion. Section 382 of the Internal Revenue Code of 1986, as amended, imposes restrictions on the use of a corporation’s NOLs, certain recognized built-in losses and other carryovers after an “ownership change” occurs. Section 382 rules governing when a change in ownership occurs are complex and subject to interpretation; however, an ownership change generally occurs when there has been a cumulative change in the stock ownership of a corporation by certain “5% shareholders” of more than 50 percentage points over a rolling three-year period.

Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOLs. In general, the annual limitation is determined by multiplying the value of the corporation’s stock immediately before the ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Any unused portion of the annual limitation is available for use in future years until such NOLs are scheduled to expire (in general, our NOLs may be carried forward 20 years). In addition, the limitation may, under certain circumstances, be increased or decreased by built-in gains or losses, respectively, which may be present with respect to assets held at the time of the ownership change that are recognized in the five-year period (one-year for loans) after the ownership change. The use of NOLs arising after the date of an ownership change would not be affected unless a corporation experienced an additional ownership change in a future period.

We believe the tax ownership change will extend the period of time it will take to fully utilize our pre-ownership change NOLs, but will not limit the total amount of pre-ownership change NOLs we can utilize. Our updated estimate is that we will be subject to an overall annual limitation on the use of our pre-ownership change NOLs of approximately $194 million. Since the statutory carry forward period for our overall pre-ownership change NOLs, which are approximately $1.4 billion, is 20 years (the majority of which expire in 18 years), we believe we will be able to fully utilize these NOLs in future periods.

Our ability to utilize the pre-ownership change NOLs is dependent on our ability to generate sufficient taxable income over the duration of the carry forward periods and will not be impacted by our ability or inability to generate taxable income in an individual year.

SEGMENT RESULTS REVIEW

In the first quarter of 2010, we revised our segment financial reporting to reflect the manner in which our chief operating decision maker had begun assessing the Company’s performance and making resource allocation decisions. We no longer allocate costs associated with certain functions that are centrally managed to our operating segments. These costs are separately reported in a “Corporate/Other” category.

In addition, we now report FDIC insurance premiums expense in our balance sheet management segment. These expenses were previously reported in our trading and investing segment. Balance sheet management paid the trading and investing segment for the use of its deposits via a deposit transfer pricing arrangement and this payment included a reimbursement for the cost associated with FDIC insurance. This change did not impact the income (loss) before income taxes of either segment as the component of the deposit transfer pricing payment for FDIC insurance premiums expense was removed.

Our segment financial information from prior periods has been reclassified in accordance with the new segment financial reporting.

Trading and Investing

The following table summarizes trading and investing financial information and key metrics as of and for the three and six months ended June 30, 2010 and 2009 (dollars in millions, except for key metrics):


	Three Months Ended June 30,				Variance					Six Months Ended June 30,				Variance
	Three Months Ended June 30,				2010 vs. 2009					Six Months Ended June 30,				2010 vs. 2009
	2010		2009		Amount			%		2010		2009		Amount			%
Net operating interest income	$	192.4	$	166.9	$	25.5		15	%	$	386.1	$	316.0	$	70.1		22	%
Commissions		119.6		154.1		(34.5	)	(22	)%		232.8		279.7		(46.9	)	(17	)%
Fees and service charges		35.4		45.0		(9.6	)	(21	)%		76.7		90.1		(13.4	)	(15	)%
Principal transactions		28.7		22.7		6.0		26	%		54.9		40.3		14.6		36	%
Other revenues		9.7		9.6		0.1		1	%		21.1		18.5		2.6		14	%

Total net revenue		385.8		398.3		(12.5	)	(3	)%		771.6		744.6		27.0		4	%
Total operating expense		182.5		195.0		(12.5	)	(6	)%		382.5		401.3		(18.8	)	(5	)%

Trading and investing income before income taxes	$	203.3	$	203.3	$	0.0		0	%	$	389.1	$	343.3	$	45.8		13	%

Key Metrics:⁽¹⁾
DARTs		170,283		202,578		(32,295	)	(16	)%		162,916		189,209		(26,293	)	(14	)%
Average commission per trade	$	11.05	$	11.27	$	(0.22	)	(2	)%	$	11.21	$	11.14	$	0.07		1	%
Margin receivables (dollars in billions)	$	4.8	$	3.1	$	1.7		55	%	$	4.8	$	3.1	$	1.7		55	%
End of period brokerage accounts		2,649,500		2,626,793		22,707		1	%		2,649,500		2,626,793		22,707		1	%
Net new brokerage accounts		17,523		51,598		(34,075	)	*			19,421		110,987		(91,566	)	*
Customer assets (dollars in billions)	$	143.8	$	127.5	$	16.3		13	%	$	143.8	$	127.5	$	16.3		13	%
Net new brokerage assets (dollars in billions)	$	2.1	$	2.3	$	(0.2	)	*		$	4.3	$	4.6	$	(0.3	)	*
Brokerage related cash (dollars in billions)	$	20.7	$	17.7	$	3.0		17	%	$	20.7	$	17.7	$	3.0		17	%

Percentage not meaningful.

⁽¹⁾

The prior periods presented have been updated to exclude international local activity.

Our trading and investing segment generates revenue from brokerage and banking relationships with investors and from market-making activities. This segment generates five main sources of revenue: net operating interest income; commissions; fees and service charges; principal transactions; and other revenues. Other revenues include results from our employee stock option management software and services from our corporate customers, as we ultimately service customers through these corporate relationships.

Trading and investing income before income taxes remained flat at $203.3 million and increased 13% to $389.1 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. We continued to generate net new brokerage accounts, ending the quarter with 2.6 million accounts. Our brokerage related cash, which is one of our most profitable sources of funding, increased by $3.0 billion when compared to the same period in 2009. We believe these metrics are indicators of a brokerage business that is able to compete effectively in a volatile environment and we believe we are positioned for continued growth in our trading and investing segment.

Trading and investing net operating interest income increased 15% to $192.4 million and 22% to $386.1 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. This increase was driven primarily by a decrease in yields paid on our deposits and an increase in the average balance of our margin receivables during the comparable periods.

Trading and investing commissions revenue decreased 22% to $119.6 million and 17% to $232.8 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The decrease in commissions revenue was primarily the result of a decrease in DARTs of 16% to 170,283 and 14% to 162,916 for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. There was also a slight decrease in the average commission per trade due primarily to the elimination of the $12.99 commission tier and the per share commission applied to market trades larger than 2,000 shares during the three months ended June 30, 2010. For the six months ended June 30, 2010, the decrease in average commission per trade was offset by an improvement in the product and customer mix when compared to the same period in 2009.

Trading and investing fees and service charges decreased 21% to $35.4 million and 15% to $76.7 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. This decrease was driven primarily by our elimination of all account activity fees in the second quarter of 2010.

Trading and investing principal transactions increased 26% to $28.7 million and 36% to $54.9 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The increase in principal transactions revenue was driven by an increase in the volume of orders from our third party customers.

Trading and investing operating expense decreased 6% to $182.5 million and 5% to $382.5 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The decrease for the three and six months ended June 30, 2010 related primarily to a decrease in clearing and servicing expense and a decrease in communications expense, which were partially offset by an increase in advertising and market development expense.

As of June 30, 2010, we had approximately 2.6 million brokerage accounts, 1.0 million stock plan accounts and 0.6 million banking accounts. For the three months ended June 30, 2010 and 2009, our brokerage products contributed 68% and 80%, respectively, and our banking products, which include sweep products, contributed 32% and 20%, respectively, of total trading and investing net revenue. For the six months ended June 30, 2010 and 2009, our brokerage products contributed 68% and 79%, respectively, for both periods, and our banking products contributed 32% and 21%, respectively, of total trading and investing net revenue.

Balance Sheet Management

The following table summarizes balance sheet management financial information and key metrics as of and for the three and six months ended June 30, 2010 and 2009 (dollars in millions):


	Three Months Ended June 30,						Variance					Six Months Ended June 30,						Variance
	Three Months Ended June 30,						2010 vs. 2009					Six Months Ended June 30,						2010 vs. 2009
	2010			2009			Amount			%		2010			2009			Amount			%
Net operating interest income	$	109.6		$	172.6		$	(63.0	)	(37	)%	$	236.3		$	302.2		$	(65.9	)	(22	)%
Fees and service charges		(0.2	)		2.9			(3.1	)	*			0.8			4.6			(3.8	)	(83	)%
Gains on loans and securities, net		48.9			73.3			(24.4	)	(33	)%		78.0			108.5			(30.5	)	(28	)%
Net impairment		(12.2	)		(29.7	)		17.5		*			(20.8	)		(48.5	)		27.7		*
Other revenues		2.1			3.5			(1.4	)	(41	)%		4.7			6.8			(2.1	)	(31	)%

Total net revenue		148.2			222.6			(74.4	)	(33	)%		299.0			373.6			(74.6	)	(20	)%
Provision for loan losses		165.7			404.5			(238.8	)	(59	)%		433.6			858.5			(424.9	)	(49	)%
Total operating expense		53.2			79.7			(26.5	)	(33	)%		105.0			128.1			(23.1	)	(18	)%
Losses from early extinguishment of debt		—			10.4			(10.4	)	(100	)%		—			13.3			(13.3	)	(100	)%

Balance sheet management loss before income taxes	$	(70.7	)	$	(272.0	)	$	201.3		(74	)%	$	(239.6	)	$	(626.3	)	$	386.7		(62	)%

Key Metrics:
Special mention loan delinquencies	$	660.3		$	859.7		$	(199.4	)	(23	)%	$	660.3		$	859.7		$	(199.4	)	(23	)%
Allowance for loan losses	$	1,102.9		$	1,218.9		$	(116.0	)	(10	)%	$	1,102.9		$	1,218.9		$	(116.0	)	(10	)%
Allowance for loan losses as a % of gross loans receivable		6.09	%		5.27	%		*		0.82	%		6.09	%		5.27	%		*		0.82	%

Percentage not meaningful.

Our balance sheet management segment generates revenue from managing loans previously originated or purchased from third parties as well as our customer cash and deposit relationships to generate additional net operating interest income.

The balance sheet management segment reported a loss of $70.7 million and $239.6 million for the three and six months ended June 30, 2010, respectively. The losses in the segment are due primarily to the provision for loan losses of $165.7 million and $433.6 million for the three and six months ended June 30, 2010, respectively.

Gains on loans and securities, net were $48.9 million and $78.0 million for the three and six months ended June 30, 2010, respectively, compared to $73.3 million and $108.5 million for the same periods in 2009. The gains on loans and securities, net were due primarily to gains on the sales of certain agency mortgage-backed securities during the three and six months ended June 30, 2010.

We recognized $12.2 million and $20.8 million of net impairment during the three and six months ended June 30, 2010, respectively, on certain securities in our non-agency CMO portfolio due to continued deterioration in the expected credit performance of the underlying loans in the securities. The net impairment included gross OTTI of $15.1 million and $29.6 million for the three and six months ended June 30, 2010. Of the gross OTTI for the three and six months ended June 30, 2010, $2.9 million and $8.8 million, respectively, related to the noncredit portion of OTTI, which was recorded through other comprehensive income.

Total balance sheet management operating expense decreased 33% to $53.2 million and 18% to $105.0 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. The decrease in operating expense for the three and six months ended June 30, 2010 was due primarily to decreased FDIC insurance premiums as a result of an industry wide special assessment that resulted in an additional $21.6 million in the second quarter of 2009.

Corporate/Other

The following table summarizes corporate/other financial information for the three and six months ended June 30, 2010 and 2009 (dollars in millions):


	Three Months Ended June 30,						Variance					Six Months Ended June 30,						Variance
	Three Months Ended June 30,						2010 vs. 2009					Six Months Ended June 30,						2010 vs. 2009
	2010			2009			Amount			%		2010			2009			Amount			%
Total net revenue	$	(0.0	)	$	0.0		$	(0.0	)	*		$	(0.0	)	$	0.1		$	(0.1	)	*

Compensation and benefits		19.9			26.0			(6.1	)	(23	)%		41.0			46.0			(5.0	)	(11	)%
Communications		0.5			0.4			0.1		4	%		0.9			0.9			—		—
Professional services		7.0			11.8			(4.8	)	(40	)%		15.4			21.9			(6.5	)	(30	)%
Occupancy and equipment		0.7			1.4			(0.7	)	(48	)%		1.4			1.2			0.2		18	%
Depreciation and amortization		6.4			4.8			1.6		35	%		11.3			9.5			1.8		19	%
Facility restructuring and other exit activities		(1.8	)		4.4			(6.2	)	*			1.5			4.3			(2.8	)	(65	)%
Other operating expenses		7.3			5.7			1.6		28	%		12.1			10.1			2.0		20	%

Total operating expense		40.0			54.5			(14.5	)	(27	)%		83.6			93.9			(10.3	)	(11	)%

Operating loss		(40.0	)		(54.5	)		14.5		(27	)%		(83.6	)		(93.8	)		10.2		(11	)%
Total other income (expense)		(40.4	)		(88.3	)		47.9		(54	)%		(79.5	)		(178.7	)		99.2		(56	)%

Corporate/other loss before income taxes	$	(80.4	)	$	(142.8	)	$	62.4		(44	)%	$	(163.1	)	$	(272.5	)	$	109.4		(40	)%

Percentage not meaningful.

Our corporate/other category includes costs that are centrally managed, technology related costs incurred to support centrally managed functions, restructuring and other exit activities, corporate debt and corporate investments.

Our corporate/other loss before income taxes were losses of $80.4 million and $163.1 million for the three and six months ended June 30, 2010, compared to losses of $142.8 million and $272.5 million, respectively, for the same periods in 2009. The losses for the three and six months ended June 30, 2010 were due to total operating expenses of $40.0 million and $83.6 million, respectively, and corporate interest expense of $41.2 million and $82.2 million, respectively resulting from our interest-bearing corporate debt. Corporate interest expense decreased 52% to $41.2 million and 53% to $82.2 million for the three and six months ended June 30, 2010 due to the reduction in interest-bearing debt in connection with our Debt Exchange in the third quarter of 2009.

BALANCE SHEET OVERVIEW

The following table sets forth the significant components of our consolidated balance sheet (dollars in millions):


					Variance
	June 30, 2010		December 31, 2009		2010 vs. 2009
	June 30, 2010		December 31, 2009		Amount			%
Assets:
Cash and equivalents	$	3,093.1	$	3,483.2	$	(390.1	)	(11	)%
Cash and investments required to be segregated under federal or other regulations		145.5		1,545.3		(1,399.8	)	(91	)%
Securities⁽¹⁾		13,736.6		13,358.0		378.6		3	%
Margin receivables		4,777.7		3,827.2		950.5		25	%
Loans, net		17,024.0		19,174.9		(2,150.9	)	(11	)%
Investment in FHLB stock		184.0		183.9		0.1		0	%
Other⁽²⁾		5,386.2		5,794.0		(407.8	)	(7	)%

Total assets	$	44,347.1	$	47,366.5	$	(3,019.4	)	(6	)%

Liabilities and shareholders’ equity:
Deposits	$	23,768.4	$	25,597.7	$	(1,829.3	)	(7	)%
Wholesale borrowings⁽³⁾		9,002.0		9,188.8		(186.8	)	(2	)%
Customer payables		3,984.4		5,234.2		(1,249.8	)	(24	)%
Corporate debt		2,150.3		2,458.7		(308.4	)	(13	)%
Other liabilities		1,301.6		1,137.5		164.1		14	%

Total liabilities		40,206.7		43,616.9		(3,410.2	)	(8	)%
Shareholders’ equity		4,140.4		3,749.6		390.8		10	%

Total liabilities and shareholders’ equity	$	44,347.1	$	47,366.5	$	(3,019.4	)	(6	)%

⁽¹⁾

Includes balance sheet line items trading securities, available-for-sale mortgage-backed and investment securities and held-to-maturity securities.

⁽²⁾

Includes balance sheet line items property and equipment, net, goodwill, other intangibles, net and other assets.

⁽³⁾

Includes balance sheet line items securities sold under agreements to repurchase and FHLB advances and other borrowings.

Cash and Investments Required to be Segregated Under Federal or Other Regulations

The level of cash and investments required to be segregated under federal or other regulations, or segregated cash, is driven largely by the amount of customer payables we hold as a liability in excess of the amount of margin receivables we hold as an asset. This difference represents excess customer cash that we are required by our regulators to segregate in a cash account for the exclusive benefit of our brokerage customers.

Segregated cash declined by $1.4 billion during the first half of 2010. This decline was driven by both an increase in margin receivables and a decrease in customer payables. The increase in margin receivables of $950 million was due to organic growth during the first half of 2010. The decrease in our customer payables was primarily a result of the movement of $819 million in customer payables to sweep deposits during the second quarter of 2010.

Securities

Trading, available-for-sale and held-to-maturity securities are summarized as follows (dollars in millions):


					Variance
	June 30, 2010		December 31, 2009		2010 vs. 2009
	June 30, 2010		December 31, 2009		Amount			%
Trading securities	$	49.2	$	38.3	$	10.9		29	%

Available-for-sale securities:
Residential mortgage-backed securities:
Agency mortgage-backed securities and CMOs	$	8,932.2	$	8,966.9	$	(34.7	)	(0	)%
Non-agency CMOs and other		389.8		375.1		14.7		4	%

Total residential mortgage-backed securities		9,322.0		9,342.0		(20.0	)	(0	)%
Investment securities		3,583.9		3,977.7		(393.8	)	(10	)%

Total available-for-sale securities	$	12,905.9	$	13,319.7	$	(413.8	)	(3	)%

Held-to-maturity securities:	$	781.5	$	—	$	781.5		*

Total securities	$	13,736.6	$	13,358.0	$	378.6		3	%

Percentage not meaningful.

Securities represented 31% and 28% of total assets at June 30, 2010 and December 31, 2009, respectively. The increase in securities was due primarily to the purchase of $781.5 million agency mortgage-backed securities and CMOs classified as held-to-maturity securities. The increase in held-to-maturity securities was partially offset by a decrease in available-for-sale investment securities related to the sale of U.S. Treasury securities and agency debentures. We have classified these securities as held-to-maturity to better match the investment of our sweep deposits.

Loans, Net

Loans, net are summarized as follows (dollars in millions):


							Variance
	June 30, 2010			December 31, 2009			2010 vs. 2009
	June 30, 2010			December 31, 2009			Amount			%
Loans held-for-sale	$	3.4		$	7.9		$	(4.5	)	(57	)%
One- to four-family		9,233.6			10,567.1			(1,333.5	)	(13	)%
Home equity		7,084.8			7,769.7			(684.9	)	(9	)%
Consumer and other		1,656.4			1,841.3			(184.9	)	(10	)%
Unamortized premiums, net		148.7			171.6			(22.9	)	(13	)%
Allowance for loan losses		(1,102.9	)		(1,182.7	)		79.8		(7	)%

Total loans, net	$	17,024.0		$	19,174.9		$	(2,150.9	)	(11	)%

Loans, net decreased 11% to $17.0 billion at June 30, 2010 from $19.2 billion at December 31, 2009. This decline was due primarily to our strategy of reducing balance sheet risk by allowing our loan portfolio to pay down, which we plan to do for the foreseeable future. In addition, during the second quarter of 2010, we securitized or sold approximately $232 million of our one- to four-family loans through transactions with Fannie Mae, which resulted in a gain of $6.5 million. For the foreseeable future, we do not plan to securitize or sell any of our remaining one- to four-family loans in our held-for-investment portfolio.

Deposits

Deposits are summarized as follows (dollars in millions):


					Variance
	June 30, 2010		December 31, 2009		2010 vs. 2009
	June 30, 2010		December 31, 2009		Amount			%
Sweep deposit accounts	$	13,788.4	$	12,551.5	$	1,236.9		10	%
Complete savings accounts		7,222.9		9,704.0		(2,481.1	)	(26	)%
Other money market and savings accounts		1,092.8		1,183.4		(90.6	)	(8	)%
Certificates of deposits		786.9		1,215.8		(428.9	)	(35	)%
Checking accounts		762.0		813.7		(51.7	)	(6	)%
Brokered certificates of deposit		115.4		129.3		(13.9	)	(11	)%

Total deposits	$	23,768.4	$	25,597.7	$	(1,829.3	)	(7	)%

Deposits represented 59% of total liabilities at both June 30, 2010 and December 31, 2009. At June 30, 2010, 95% of our customer deposits were covered by FDIC insurance. Deposits generally provide us the benefit of lower interest costs compared with wholesale funding alternatives. The decrease in deposits of $1.8 billion during the quarter was due primarily to a decrease of $2.5 billion in complete savings accounts, partially offset by an increase of $1.2 billion in sweep deposit accounts. The decrease in complete savings accounts included the impact of the sale of approximately $1 billion of savings accounts to Discover Financial Services, which occurred in March 2010. The savings accounts sold were predominantly with customers not affiliated with an active brokerage account. The increase in sweep deposit accounts was driven primarily by the movement of $819 million in customer payables to sweep deposits during the second quarter of 2010.

The deposits balance is a component of the total customer cash and deposits balance reported as a customer activity metric of $30.6 billion and $33.8 billion at June 30, 2010 and December 31, 2009, respectively. The total customer cash and deposits balance is summarized as follows (dollars in millions):


							Variance
	June 30, 2010			December 31, 2009			2010 vs. 2009
	June 30, 2010			December 31, 2009			Amount			%
Deposits	$	23,768.4		$	25,597.7		$	(1,829.3	)	(7	)%
Less: brokered certificates of deposit		(115.4	)		(129.3	)		13.9		(11	)%

Retail deposits		23,653.0			25,468.4			(1,815.4	)	(7	)%
Customer payables		3,984.4			5,234.2			(1,249.8	)	(24	)%
Customer cash balances held by third parties and other		2,967.3			3,132.8			(165.5	)	(5	)%

Total customer cash and deposits	$	30,604.7		$	33,835.4		$	(3,230.7	)	(10	)%

Wholesale Borrowings

Wholesale borrowings, which consist of securities sold under agreements to repurchase and FHLB advances and other borrowings are summarized as follows (dollars in millions):


					Variance
	June 30, 2010		December 31, 2009		2010 vs. 2009
	June 30, 2010		December 31, 2009		Amount			%
Securities sold under agreements to repurchase	$	6,251.2	$	6,441.9	$	(190.7	)	(3	)%

FHLB advances	$	2,303.6	$	2,303.6	$	—		0	%
Subordinated debentures		427.5		427.4		0.1		0	%
Other		19.7		15.9		3.8		24	%

Total FHLB advances and other borrowings	$	2,750.8	$	2,746.9	$	3.9		0	%

Total wholesale borrowings	$	9,002.0	$	9,188.8	$	(186.8	)	(2	)%

Wholesale borrowings represented 22% and 21% of total liabilities at June 30, 2010 and December 31, 2009, respectively. FHLB advances coupled with securities sold under agreements to repurchase are the primary wholesale funding sources of the Bank. As a result, we expect these balances to fluctuate over time as our deposits and our interest-earning assets fluctuate.

Corporate Debt

Corporate debt by type is shown as follows (dollars in millions):


	Face Value		Discount			Fair Value Adjustment		Net
June 30, 2010
Interest-bearing notes:
Senior notes:
8% Notes, due 2011	$	3.6	$	—		$	—	$	3.6
7³/8 % Notes, due 2013		414.7		(3.0	)		19.2		430.9
7⁷/8 % Notes, due 2015		243.2		(1.6	)		10.2		251.8

Total senior notes		661.5		(4.6	)		29.4		686.3
12¹/2 % Springing lien notes, due 2017		930.2		(183.9	)		7.8		754.1

Total interest-bearing notes		1,591.7		(188.5	)		37.2		1,440.4
Non-interest-bearing debt:
0% Convertible debentures, due 2019		709.9		—			—		709.9

Total corporate debt	$	2,301.6	$	(188.5	)	$	37.2	$	2,150.3


	Face Value		Discount			Fair Value Adjustment		Net
December 31, 2009
Interest-bearing notes:
Senior notes:
8% Notes, due 2011	$	3.6	$	—		$	—	$	3.6
7³/8 % Notes, due 2013		414.7		(3.4	)		21.5		432.8
7⁷/8 % Notes, due 2015		243.2		(1.8	)		11.2		252.6

Total senior notes		661.5		(5.2	)		32.7		689.0
12¹/2 % Springing lien notes, due 2017		930.2		(189.8	)		8.4		748.8

Total interest-bearing notes		1,591.7		(195.0	)		41.1		1,437.8
Non-interest-bearing debt:
0% Convertible debentures, due 2019		1,020.9		—			—		1,020.9

Total corporate debt	$	2,612.6	$	(195.0	)	$	41.1	$	2,458.7

As of August 2, 2010, a cumulative total of $1.0 billion of our convertible debentures were converted, including $250.2 million in the second quarter of 2010 and $5.0 million during the third quarter of 2010 through August 2, 2010. Our total common shares outstanding were 221 million and the remaining face value of the convertible debt was approximately $705 million as of August 2, 2010.

Shareholders’ Equity

The activity in shareholders’ equity during the six months ended June 30, 2010 is summarized as follows (dollars in millions):


	Common Stock/ Additional Paid-In Capital		Accumulated Deficit/Other Comprehensive Loss			Total

Beginning balance, December 31, 2009	$	6,277.1	$	(2,527.5	)	$	3,749.6
Net loss		—		(12.8	)		(12.8	)
Conversions of convertible debentures		311.0		—			311.0
Claims settlement under Section 16(b)		35.0		—			35.0
Net change from available-for-sale securities		—		146.7			146.7
Net change from cash flow hedging instruments		—		(87.3	)		(87.3	)
Other⁽¹⁾		6.4		(8.2	)		(1.8	)

Ending balance, June 30, 2010	$	6,629.5	$	(2,489.1	)	$	4,140.4

⁽¹⁾

Other includes employee stock compensation accounting and changes in accumulated other comprehensive loss from foreign currency translation.

In January 2010, a security holder paid the Company $35 million to settle a claim under Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) requires certain persons and entities whose securities trading activities result in “short swing” profits to repay such profits to the issuer of the security. Section 16(b) liability does not require that the security holder trade while in possession of material non-public information. This payment was recorded as an increase to shareholders’ equity in the first quarter of 2010.

In the second quarter of 2010, the stockholders approved a 1-for-10 reverse stock split and a corresponding decrease to the Company’s authorized shares of common stock to a total of 400 million shares. The reverse stock split became effective in early June 2010. All prior periods presented have been adjusted to reflect the reverse stock split.

LIQUIDITY AND CAPITAL RESOURCES

We have established liquidity and capital policies to support the successful execution of our business strategies, while ensuring ongoing and sufficient liquidity through the business cycle. These policies are especially important during periods of stress in the financial markets, which have been ongoing since the fourth quarter of 2007 and could continue for some time.

We believe liquidity is of critical importance to the Company and especially important within E*TRADE Bank. The objective of our policies is to ensure that we can meet our corporate and banking liquidity needs under both normal operating conditions and under periods of stress in the financial markets. Our corporate liquidity needs are primarily driven by the amount of principal and interest due on our corporate debt as well as any capital needs at E*TRADE Bank. Our banking liquidity needs are driven primarily by the level and volatility of our customer deposits. Management maintains an extensive set of liquidity sources and monitors certain business trends and market metrics closely to ensure we have sufficient liquidity and to avoid dependence on other more expensive sources of funding. Management believes the following sources of liquidity are of critical importance in maintaining ample funding for liquidity needs: Corporate cash, Bank cash, deposits and unused FHLB

borrowing capacity. Management believes that within deposits, sweep deposits are of particular importance as they are the most stable source of liquidity for E*TRADE Bank when compared to non-sweep deposits. Overall, management believes that these liquidity sources, which we expect to fluctuate in any given period, are more than sufficient to meet our needs for the foreseeable future.

Capital is generated primarily through our business operations and our capital market activities. Our trading and investing segment has been profitable and a generator of capital for the past six years and we expect that trend to continue. In recent periods, our provision for loan losses, which is reported in the balance sheet management segment, has more than offset the capital generated by both of our segments in recent periods. While we cannot state this with certainty, we believe that this trend will reverse in the foreseeable future and our business operations will again be a consistent generator of capital. The primary business operations of both our trading and investing and balance sheet management segments are contained within the Bank; therefore, we believe a key indicator of the capital generated or used in our business operations is the level of regulatory capital in the Bank. During the first half of 2010, the Bank generated an additional $109 million of risk-based capital in excess of the level our regulators define as well-capitalized. While we do not expect the Bank to generate risk-based capital in every quarter, we believe this is a positive indicator that the regulatory capital in the Bank is sufficient to meet its operating needs.

Financial Regulatory Reform Legislation

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010 and includes comprehensive changes to the financial services industry. While we believe the majority of the changes will have no material impact on our business, the implementation of holding company capital requirements is relevant to us as the parent company is not currently subject to capital requirements. We fully expect that our holding company capital ratios will exceed the “well capitalized” minimums well in advance of the requirements and we have no plans to raise additional capital as a result of this new law. Our confidence in our ability to meet these requirements is reinforced by: our trajectory toward sustainable profitability; anticipated additional conversions of our convertible debt; and the utilization of our deferred tax asset as we deliver profitable results.

Consolidated Cash and Equivalents

The consolidated cash and equivalents balance decreased by $0.4 billion to $3.1 billion for the six months ended June 30, 2010. The majority of this balance is cash held in regulated subsidiaries, primarily the Bank, outlined as follows (dollars in millions):


	June 30, 2010		December 31, 2009			Variance
	June 30, 2010		December 31, 2009			2010 vs. 2009
Corporate cash	$	481.1	$	393.2		$	87.9
Bank cash		2,545.7		2,863.2			(317.5	)
International brokerage and other cash		66.3		275.8			(209.5	)
Less:
Cash reported in other assets⁽¹⁾		—		(49.0	)		49.0

Total consolidated cash	$	3,093.1	$	3,483.2		$	(390.1	)

⁽¹⁾

Cash reported in other assets consisted of cash that we invested in The Reserve Primary Fund and was included as a receivable in the other assets line item. In the first quarter of 2010, we received a distribution from The Reserve Primary Fund in an amount that was greater than what we originally estimated we would receive and had established as a receivable.

Corporate cash is the primary source of liquidity at the parent company and is available to invest in our regulated subsidiaries. We define corporate cash as cash held at the parent company as well as cash held in certain subsidiaries that can distribute cash to the parent company without any regulatory approval. The cash held in our regulated subsidiaries serves as a source of liquidity for those subsidiaries and is not a primary source of capital for the parent company.

Cash and Equivalents Held in the Reserve Fund

On January 29, 2010, we received a distribution from The Reserve Primary Fund in the amount of $49.8 million. This distribution resulted in a gain of $0.8 million in the first quarter of 2010 as the pro-rata distribution was greater than what we originally estimated we would receive. This gain was recorded in the gains on loans and securities, net and gains (losses) on sales of investments, net on the consolidated statement of income (loss). On July 17, 2010, we received another distribution from The Reserve Primary Fund in the amount of $3.1 million, which will be recorded as a gain in the third quarter of 2010. Following this distribution, the remaining balance due to us from the fund is $7.3 million. Given the losses incurred by the fund and the fund’s plan for distribution, we are uncertain of the amount of this remaining balance, if any, that we will receive in future distributions. If we do receive any additional distributions, they will be recorded as a gain as we fully reserved the remaining amounts due from the fund in prior periods.

Liquidity Available from Subsidiaries

Liquidity available to the Company from its subsidiaries is limited by regulatory requirements. In addition, E*TRADE Bank may not pay dividends to the parent company without approval from the OTS and any loans by E*TRADE Bank to the parent company and its other non-bank subsidiaries are subject to various quantitative, arm’s length, collateralization and other requirements.

We maintain capital in excess of regulatory minimums at our regulated subsidiaries, the most significant of which is E*TRADE Bank. As of June 30, 2010, we held $1.0 billion of risk-based total capital at E*TRADE Bank in excess of the regulatory minimum level required to be considered “well capitalized.” In the current credit environment, we plan to maintain excess risk-based total capital at E*TRADE Bank in order to enhance our ability to absorb credit losses while still maintaining “well capitalized” status. However, events beyond management’s control, such as a continued deterioration in residential real estate and credit markets, could adversely affect future earnings and E*TRADE Bank’s ability to meet its future capital requirements.

The Company’s broker-dealer subsidiaries are subject to capital requirements determined by their respective regulators. At June 30, 2010 and December 31, 2009, all of our brokerage subsidiaries met their minimum net capital requirements. Our broker-dealer subsidiaries had excess net capital of $593.9 million⁽¹⁾ at June 30, 2010, an increase of $35.6 million from December 31, 2009. While we cannot assure that we would obtain regulatory approval in the future to withdraw any of this excess net capital, $431.8 million is available for dividend while still maintaining a capital level above regulatory “early warning” guidelines.

Other Sources of Liquidity

We also maintain $375 million in uncommitted financing to meet margin lending needs. At June 30, 2010, there were no outstanding balances and the full $375 million was available.

We rely on borrowed funds, such as FHLB advances and securities sold under agreements to repurchase, to provide liquidity for the Bank. Our ability to borrow these funds is dependent upon the continued availability of funding in the wholesale borrowings market. At June 30, 2010, the Bank had approximately $4.2 billion in

⁽¹⁾

The excess net capital of the broker-dealer subsidiaries at June 30, 2010 included $394.9 million and $127.8 million of excess net capital at E*TRADE Clearing LLC and E*TRADE Securities LLC, respectively, which are subsidiaries of E*TRADE Bank and are also included in the excess risk-based capital of E*TRADE Bank.

additional collateralized borrowing capacity with the FHLB. We also have the ability to generate liquidity in the form of additional deposits by raising the yield on our customer deposit accounts.

We had the option to make the interest payments on our 12¹/2% Notes in the form of either cash or additional 12¹/2% Notes through May 2010. During the second quarter of 2008, we elected to make our first interest payment of approximately $121 million in cash. During 2008 and 2009, we elected to make our second, third and fourth interest payments of $121 million, $129 million and $55 million, respectively, in the form of additional 12¹/2% Notes. Our fifth interest payment, which was due in the second quarter of 2010, was the last payment for which we had the option to pay in the form of either cash or additional 12¹/2% Notes and we elected to make this interest payment in the form of cash. We are required to pay the November 2010 payment and all remaining interest payments in cash. Based on the balance of the 12¹/2% Notes as of June 30, 2010, the interest payments are approximately $116 million per annum.

Corporate Debt

Our current senior debt ratings are B3 by Moody’s Investor Service, CCC+ by Standard & Poor’s and B (high) by Dominion Bond Rating Service (“DBRS”). The Company’s long-term deposit ratings are Ba3 by Moody’s Investor Service, B by Standard & Poor’s and BB by DBRS. A significant change in these ratings may impact the rate and availability of future borrowings.

Off-Balance Sheet Arrangements

We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet the needs of our customers and to reduce our own exposure to interest rate risk. These arrangements include firm commitments to extend credit and letters of credit. Additionally, we enter into guarantees and other similar arrangements as part of transactions in the ordinary course of business. For additional information on each of these arrangements, see Item 1. Consolidated Financial Statements (Unaudited).

Tangible Common Equity

We believe that tangible common equity to tangible assets ratio is a measure of our capital strength and is additional useful information that supplements the regulatory capital ratios of E*TRADE Bank. The following table shows the calculation of our tangible common equity to tangible assets ratio (dollars in millions):


	June 30, 2010			December 31, 2009			Variance
	June 30, 2010			December 31, 2009			2010 vs. 2009
Total assets	$	44,347.1		$	47,366.5		(6	)%
Less: Goodwill and other intangibles, net		(2,270.9	)		(2,308.7	)	(2	)%
Add: Deferred tax liability related to goodwill		199.4			176.9		13	%

Tangible assets⁽¹⁾	$	42,275.6		$	45,234.7		(7	)%

Shareholders’ equity	$	4,140.4		$	3,749.6		10	%
Less: Goodwill and other intangibles, net		(2,270.9	)		(2,308.7	)	(2	)%
Add: Deferred tax liability related to goodwill		199.4			176.9		13	%

Tangible common equity⁽²⁾	$	2,068.9		$	1,617.8		28	%

Tangible common equity to tangible assets⁽³⁾		4.89	%		3.58	%	1.31	%

⁽¹⁾

Tangible assets is calculated as total assets less goodwill (net of related deferred tax liability) and other intangible assets and is a non-GAAP measure.

⁽²⁾

Tangible common equity is calculated as shareholders’ equity less goodwill (net of related deferred tax liability) and other intangible assets and is a non-GAAP measure.

⁽³⁾

Tangible common equity to tangible assets is a non-GAAP measure, the components of which are defined above.

RISK MANAGEMENT

As a financial services company, we are exposed to risks in every component of our business. The identification and management of existing and potential risks are the keys to effective risk management. Our risk management framework, principles and practices support decision-making, improve the success rate for new initiatives and strengthen the organization. Our goal is to balance risks and rewards through effective risk management. Risks cannot be completely eliminated; however, we do believe risks can be identified and managed within the Company’s risk tolerance.

Our businesses expose us to the following four major categories of risk that often overlap:

•

Credit Risk—Credit risk is the risk of loss resulting from adverse changes in the ability or willingness of a borrower or counterparty to meet the agreed-upon terms of their financial obligations.

•

Liquidity Risk—Liquidity risk is the risk of loss resulting from the inability to meet current and future cash flow and collateral needs.

•

Interest Rate Risk—Interest rate risk is the risk of loss from adverse changes in interest rates, which could cause fluctuations in our long-term earnings or in the value of the Company’s net assets.

•

Operational Risk—Operational risk is the risk of loss resulting from fraud, inadequate controls or the failure of the internal controls process, third party vendor issues, processing issues and external events.

For additional information on liquidity risk, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources. For additional information about our interest rate risk, see Item 3. Quantitative and Qualitative Disclosures about Market Risk. Operational risk and the management of risk are more fully described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Current Report on Form 8-K filed on May 5, 2010. We are also subject to other risks that could impact our business, financial condition, results of operations or cash flows in future periods. See Part II-Item 1A. Risk Factors.

Credit Risk Management

Our primary sources of credit risk are our loan and securities portfolios, where risk results from extending credit to customers and purchasing securities, respectively. The degree of credit risk associated with our loans and securities varies based on many factors including the size of the transaction, the credit characteristics of the borrower, features of the loan product or security, the contractual terms of the related documents and the availability and quality of collateral. Credit risk is one of the most common risks in financial services and is one of our most significant risks.

Credit risk is monitored by our Credit Risk Committee. The Credit Risk Committee uses detailed tracking and analysis to measure credit performance and reviews and modifies credit policies as appropriate.

Loss Mitigation

We have a credit management team that focuses on the mitigation of potential losses in the loan portfolio. Through a variety of strategies, including voluntary line closures, automatically freezing lines on all delinquent accounts, and freezing lines on loans with materially reduced home equity, we have reduced our exposure to open home equity lines from a high of over $7 billion in 2007 to $0.7 billion as of June 30, 2010.

We also have an active loan modification program that focuses on the mitigation of potential losses in the loan portfolio. We consider modifications in which we made an economic concession to a borrower experiencing financial difficulty a troubled debt restructuring (“TDR”). During the three and six months ended June 30, 2010, we modified $206.9 million and $380.9 million, respectively, of loans in which the modification was considered a TDR. We also modified a number of loans through traditional collections actions taken in the normal course of

servicing delinquent accounts. These actions typically result in an insignificant delay in the timing of payments; therefore, the Company does not consider such activities to be economic concessions to the borrowers.

The team has several other initiatives either in progress or in development which are focused on mitigating losses in our loan portfolio. Those initiatives include improving collection efforts and practices of our servicers as well as increasing our loss recovery efforts to minimize the level of loss on a loan that goes to charge-off.

In addition, we continue to review our mortgage loan portfolio in order to identify loans to be repurchased by the originator. Our review is primarily focused on identifying loans with violations of transaction representations and warranties or material misrepresentation on the part of the seller. Any loans identified with these deficiencies are submitted to the original seller for repurchase. Approximately $16.1 million and $74.4 million of loans were repurchased by the original sellers for the six months ended June 30, 2010 and the year ended December 31, 2009, respectively.

In addition to the loans that were repurchased during the second quarter of 2010, we also agreed to a settlement with a particular originator specific to the home equity loans sold to us by this originator. They proposed a one-time payment to us of $20 million to satisfy in full all pending and future repurchase requests. We accepted this offer as we believe the economics of this settlement were to our advantage. This payment will be applied to the allowance for loan losses in the periods we expect charge-offs to occur on the loans covered by this settlement. During the second quarter of 2010, we applied $15 million of the settlement to the allowance for loan losses, resulting in a corresponding reduction to our net charge-offs as well as our provision for loan losses. We expect the remaining $5 million to be applied to the allowance for loan losses in the second half of 2010.

Underwriting Standards—Originated Loans

We provide access to real estate loans for our customers through a third party company. This product is being offered as a convenience to our customers and is not one of our primary product offerings. We structured this arrangement to minimize our assumption of any of the typical risks commonly associated with mortgage lending. The third party company providing this product performs all processing and underwriting of these loans. Shortly after closing, the third party company purchases the loans from us and is responsible for the credit risk associated with these loans. We originated $33.1 million and $61.8 million in loans during the three and six months ended June 30, 2010 and we had commitments to originate mortgage loans of $46.1 million at June 30, 2010.

CONCENTRATIONS OF CREDIT RISK

Loans

We track and review many factors to predict and monitor credit risk in our loan portfolio, which is primarily made up of loans secured by residential real estate. These factors, which are documented at the time of origination, include: borrowers’ debt-to-income ratio, borrowers’ credit scores, housing prices, documentation type, occupancy type and loan type. We also review estimated current loan-to-value (“LTV”) ratios when monitoring credit risk in our loan portfolios. In economic conditions in which housing prices generally appreciate, we believe that loan type, LTV ratios and credit scores are the key factors in determining future loan performance. In a housing market with declining home prices and less credit available for refinance, we believe the LTV ratio becomes a more important factor in predicting and monitoring credit risk.

We believe certain categories of loans inherently have a higher level of credit risk due to characteristics of the borrower and/or features of the loan. Two of these categories are sub-prime and option adjustable rate mortgage (“ARM”) loans. As a general matter, we did not originate or purchase these loans to hold on our balance sheet; however, in the normal course of purchasing large pools of real estate loans, we invariably ended up acquiring a de minimis amount of sub-prime loans. As of June 30, 2010, we held no option ARM loans.

As noted above, we believe loan type, LTV ratios and borrowers’ credit scores are key determinants of future loan performance. Our home equity loan portfolio is primarily second lien loans⁽¹⁾ on residential real estate properties, which have a higher level of credit risk than first lien mortgage loans. We believe home equity loans with a combined loan-to-value (“CLTV”) of 90% or higher or a Fair Isaac Credit Organization (“FICO”) score below 700 are the loans with the highest levels of credit risk in our portfolios.

The breakdowns by current LTV/CLTV and FICO score of our two main loan portfolios, one-to four-family and home equity, are as follows (dollars in millions):


	One- to Four-Family						Home Equity
Current LTV/CLTV⁽¹⁾	June 30, 2010			December 31, 2009			June 30, 2010			December 31, 2009
<=70%	$	1,644.2		$	2,095.3		$	1,246.0		$	1,379.6
70% - 80%		1,023.4			1,148.2			475.0			507.6
80% - 90%		1,322.5			1,464.2			646.1			705.6
90% - 100%		1,353.3			1,500.9			827.5			885.9
>100%		3,890.2			4,358.5			3,890.2			4,291.0

Total	$	9,233.6		$	10,567.1		$	7,084.8		$	7,769.7

Average estimated current LTV/CLTV⁽²⁾		98.8	%		97.3	%		106.0	%		106.0	%
Average LTV/CLTV at loan origination⁽³⁾		70.5	%		70.1	%		79.3	%		79.5	%

⁽¹⁾

Current CLTV calculations for home equity loans are based on the maximum available line for home equity lines of credit and outstanding principal balance for home equity installment loans. Current property values are updated on a quarterly basis using the most recent property value data available to us. For properties in which we did not have an updated valuation, we utilized home price indices to estimate the current property value.

⁽²⁾

The average estimated current LTV ratio reflects the outstanding balance at the balance sheet date, divided by the estimated current property value.

⁽³⁾

Average LTV/CLTV at loan origination calculations are based on LTV/CLTV at time of purchase for one- to four-family purchased loans and undrawn balances for home equity loans.


	One- to Four-Family				Home Equity
Current FICO⁽¹⁾	June 30, 2010		December 31, 2009		June 30, 2010		December 31, 2009
>=720		$5,228.5	$	6,313.2	$	3,731.7	$	4,154.4
719 - 700		721.7		870.1		631.0		782.6
699 - 680		599.5		698.0		499.2		622.9
679 - 660		446.4		492.8		398.0		472.6
659 - 620		675.8		647.9		544.0		584.8
<620		1,561.7		1,545.1		1,280.9		1,152.4

Total	$	9,233.6	$	10,567.1	$	7,084.8	$	7,769.7

⁽¹⁾

FICO scores are updated on a quarterly basis; however, as of June 30, 2010 and December 31, 2009, there were some loans for which the updated FICO scores were not available. The current FICO distribution as of June 30, 2010 included original FICO scores for approximately $248 million and $322 million of one- to four-family and home equity loans, respectively. The current FICO distribution as of December 31, 2009 included original FICO scores for approximately $365 million and $847 million of one- to four-family and home equity loans, respectively.

⁽¹⁾

Approximately 13% of the home equity portfolio was in the first lien position as of June 30, 2010.

In addition to the factors described above, we monitor credit trends in loans by acquisition channel, vintage and geographic location, which are summarized below as of June 30, 2010 and December 31, 2009 (dollars in millions):


	One- to Four-Family				Home Equity
Acquisition Channel	June 30, 2010		December 31, 2009		June 30, 2010		December 31, 2009
Purchased from a third party	$	7,549.1	$	8,660.2	$	6,194.7	$	6,803.9
Originated by the Company		1,684.5		1,906.9		890.1		965.8

Total real estate loans	$	9,233.6	$	10,567.1	$	7,084.8	$	7,769.7


	One- to Four-Family				Home Equity
Vintage Year	June 30, 2010		December 31, 2009		June 30, 2010		December 31, 2009
2003 and prior	$	340.5	$	438.4	$	451.5	$	550.1
2004		830.6		1,034.9		650.3		715.4
2005		1,960.1		2,219.1		1,771.3		1,898.5
2006		3,509.2		3,944.2		3,312.3		3,626.4
2007		2,572.0		2,904.2		885.5		963.8
2008		21.2		26.3		13.9		15.5

Total real estate loans	$	9,233.6	$	10,567.1	$	7,084.8	$	7,769.7


	One- to Four-Family				Home Equity
Geographic Location	June 30, 2010		December 31, 2009		June 30, 2010		December 31, 2009
California	$	4,240.3	$	4,829.6	$	2,249.9	$	2,472.8
New York		699.1		800.9		503.3		533.8
Florida		633.4		717.8		497.5		561.9
Virginia		383.0		438.6		304.1		327.9
Other states		3,277.8		3,780.2		3,530.0		3,873.3

Total real estate loans	$	9,233.6	$	10,567.1	$	7,084.8	$	7,769.7

Approximately 40% of the Company’s real estate loans were concentrated in California at both June 30, 2010 and December 31, 2009. No other state had concentrations of real estate loans that represented 10% or more of the Company’s real estate portfolio.

Allowance for Loan Losses

The allowance for loan losses is management’s estimate of credit losses inherent in our loan portfolio as of the balance sheet date. The estimate of the allowance for loan losses is based on a variety of quantitative and qualitative factors, including the composition and quality of the portfolio; delinquency levels and trends; current and historical charge-off and loss experience; current industry charge-off and loss experience; our historical loss mitigation experience; the condition of the real estate market and geographic concentrations within the loan portfolio; the interest rate climate; the overall availability of housing credit; and general economic conditions. The allowance for loan losses is typically equal to management’s estimate of loan charge-offs in the twelve months following the balance sheet date as well as the estimated charge-offs, including economic concessions to borrowers, over the estimated remaining life of loans modified in TDRs. Determining the adequacy of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan losses in future periods. We believe our allowance for loan losses at June 30, 2010 is representative of probable losses inherent in the loan portfolio at the balance sheet date.

The general allowance for loan losses also included a specific qualitative component to account for environmental factors that we believe will impact our level of credit losses. This qualitative component, which was applied by loan type, reflects our estimate of credit losses inherent in the loan portfolio due to environmental factors which are not directly considered in our quantitative loss model but are factors we believe will have an impact on credit losses (e.g. the current level of unemployment).

In determining the allowance for loan losses, we allocate a portion of the allowance to various loan products based on an analysis of individual loans and pools of loans. However, the entire allowance is available to absorb credit losses inherent in the total loan portfolio as of the balance sheet date.

The following table presents the allowance for loan losses by major loan category (dollars in millions):


	One- to Four-Family				Home Equity				Consumer and Other				Total
	Allowance		Allowance as a % of Loans Receivable⁽¹⁾		Allowance		Allowance as a % of Loans Receivable⁽¹⁾		Allowance		Allowance as a % of Loans Receivable⁽¹⁾		Allowance		Allowance as a % of Loans Receivable⁽¹⁾
June 30, 2010	$	433.6	4.68	%	$	602.9	8.40	%	$	66.4	3.96	%	$	1,102.9	6.09	%
December 31, 2009	$	489.9	4.62	%	$	620.0	7.87	%	$	72.8	3.90	%	$	1,182.7	5.81	%

⁽¹⁾

Allowance as a percentage of loans receivable is calculated based on the gross loans receivable for each respective category.

During the six months ended June 30, 2010, the allowance for loan losses decreased by $79.8 million from the level at December 31, 2009. This decrease was driven primarily by lower levels of at-risk (30-179 days delinquent) loans in our one- to four-family and home equity loan portfolios. We believe the delinquencies in both of these portfolios was caused by several factors, including: home price depreciation in key markets; growing inventories of unsold homes; rising foreclosure rates; sustained contraction in the availability of credit; and a general decline in economic growth. In addition, the combined impact of home price depreciation and the reduction of available credit made it increasingly difficult for borrowers to refinance existing loans. Although we expect these factors will cause the provision for loan losses to continue at elevated levels in future periods, the level of provision for loan losses has declined for seven consecutive quarters. While we cannot state with certainty that this trend will continue, we believe it is a positive indicator that our loan portfolio has continued to improve.

Troubled Debt Restructurings

Included in our allowance for loan losses was a specific allowance of $305.2 million and $193.6 million that was established for TDRs at June 30, 2010 and December 31, 2009, respectively. The specific allowance for these individually impaired loans represents the expected loss, including the economic concession to the borrower, over the remaining life of the loan. The following table shows the TDRs and specific valuation allowance by loan portfolio as of June 30, 2010 and December 31, 2009 (dollars in millions):


	Recorded Investment in TDRs		Specific Valuation Allowance		Specific Valuation Allowance as a % of TDR Loans		Total Expected Losses
June 30, 2010
One- to four-family	$	395.3	$	67.0	17	%	27	%
Home equity		477.6		238.2	50	%	54	%

Total	$	872.9	$	305.2	35	%	41	%

December 31, 2009
One- to four-family	$	207.6	$	26.9	13	%	21	%
Home equity		371.3		166.7	45	%	48	%

Total	$	578.9	$	193.6	33	%	38	%

The recorded investment in TDRs includes the charge-offs related to certain loans that were written down to the estimated current property value less costs to sell. These charge-offs were recorded primarily on loans that were delinquent in excess of 180 days prior to the loan modification. The total expected loss on TDRs includes both the previously recorded charge-offs and the specific valuation allowance.

The following table shows the TDRs by delinquency category as of June 30, 2010 and December 31, 2009 (dollars in millions):


	TDRs Current		TDRs 30-89 Days Delinquent		TDRs 90-179 Days Delinquent		TDRs 180+ Days Delinquent		Total Recorded Investment in TDRs
June 30, 2010
One- to four-family	$	290.5	$	41.6	$	20.7	$	42.5	$	395.3
Home equity		381.3		56.2		37.5		2.6		477.6

Total	$	671.8	$	97.8	$	58.2	$	45.1	$	872.9

December 31, 2009
One- to four-family	$	128.5	$	34.6	$	26.5	$	18.0	$	207.6
Home equity		304.1		41.5		25.7		—		371.3

Total	$	432.6	$	76.1	$	52.2	$	18.0	$	578.9

Net Charge-offs

The following table provides an analysis of the net charge-offs for the three and six months ended June 30, 2010 and 2009 (dollars in millions):


	Charge-offs			Recoveries		Net Charge-offs			% of Average Loans (Annualized)
Three Months Ended June 30, 2010
One- to four-family	$	(69.6	)	$	—	$	(69.6	)	2.95	%
Home equity		(150.7	)		7.5		(143.2	)	7.64	%
Consumer and other		(19.6	)		7.3		(12.3	)	2.83	%

Total	$	(239.9	)	$	14.8	$	(225.1	)	4.82	%

Three Months Ended June 30, 2009
One- to four-family	$	(77.1	)	$	—	$	(77.1	)	2.53	%
Home equity		(290.0	)		3.3		(286.7	)	12.04	%
Consumer and other		(31.5	)		8.9		(22.6	)	4.20	%

Total	$	(398.6	)	$	12.2	$	(386.4	)	6.47	%

Six Months Ended June 30, 2010
One- to four-family	$	(172.2	)	$	—	$	(172.2	)	3.50	%
Home equity		(327.4	)		14.0		(313.4	)	8.18	%
Consumer and other		(42.7	)		14.9		(27.8	)	3.12	%

Total	$	(542.3	)	$	28.9	$	(513.4	)	5.32	%

Six Months Ended June 30, 2009
One- to four-family	$	(144.1	)	$	—	$	(144.1	)	2.31	%
Home equity		(537.8	)		5.8		(532.0	)	10.88	%
Consumer and other		(59.7	)		15.6		(44.1	)	3.98	%

Total	$	(741.6	)	$	21.4	$	(720.2	)	5.88	%

Loan losses are recognized when it is probable that a loss will be incurred. Our policy for both one- to four-family and home equity loans is to assess the value of the property when the loan has been delinquent for 180 days or is in bankruptcy, regardless of whether or not the property is in foreclosure, and charge-off the amount of the loan balance in excess of the estimated current property value less costs to sell. Our policy is to charge-off credit cards when collection is not probable or the loan has been delinquent for 180 days and to charge-off closed-end consumer loans when the loan is 120 days delinquent or when we determine that collection is not probable.

Net charge-offs for the three and six months ended June 30, 2010 compared to the same periods in 2009 decreased by $161.3 million and $206.8 million, respectively. Net charge-offs declined for the fourth consecutive quarter and are now 42% below their peak of $386.4 million in the second quarter of 2009. The overall decrease was due primarily to lower net charge-offs on our home equity loans. We believe net charge-offs will decline in future periods when compared to the level of charge-offs in the three months ended June 30, 2010 as a result of our decline in special mention delinquencies, which is discussed below. The following graph illustrates the net charge-offs by quarter:

LOGO

Nonperforming Assets

We classify loans as nonperforming when they are 90 days past due. The following table shows the comparative data for nonperforming loans and assets (dollars in millions):


	June 30, 2010			December 31, 2009
One- to four-family	$	1,171.8		$	1,229.7
Home equity		212.5			250.6
Consumer and other		5.5			6.7

Total nonperforming loans		1,389.8			1,487.0
Real estate owned (“REO”) and other repossessed assets, net		121.4			115.7

Total nonperforming assets, net	$	1,511.2		$	1,602.7

Nonperforming loans receivable as a percentage of gross loans receivable		7.67	%		7.31	%
One- to four-family allowance for loan losses as a percentage of one- to four-family nonperforming loans		37.01	%		39.84	%
Home equity allowance for loan losses as a percentage of home equity nonperforming loans		283.74	%		247.46	%
Consumer and other allowance for loan losses as a percentage of consumer and other nonperforming loans		1195.86	%		1082.29	%
Total allowance for loan losses as a percentage of total nonperforming loans		79.36	%		79.54	%

During the six months ended June 30, 2010, our nonperforming assets, net decreased $91.5 million to $1.5 billion when compared to December 31, 2009. This was attributed primarily to a decrease in nonperforming one- to four-family loans of $57.9 million and home equity loans of $38.1 million for the six months ended June 30, 2010 when compared to December 31, 2009.

The following graph illustrates the nonperforming loans by quarter:

LOGO

The allowance as a percentage of total nonperforming loans receivable, net decreased slightly from 79.54% at December 31, 2009 to 79.36% at June 30, 2010. This slight decrease was driven by a decrease in both our one- to four-family and home equity allowance, which was mostly offset by a decrease in both our one-to four-family and home equity nonperforming loans. The balance of nonperforming loans includes loans delinquent 90 to 179 days as well as loans delinquent 180 days and greater. We believe the distinction between these two periods is important as loans delinquent 180 days and greater have been written down to their expected recovery value, whereas loans delinquent 90 to 179 days have not (unless they are in process of bankruptcy). We believe loans delinquent 90 to 179 days is an important measure because these loans are expected to drive the vast majority of future charge-offs. Additional charge-offs on loans delinquent 180 days are possible if home prices decline beyond our current expectations, but we do not anticipate these charge-offs to be significant, particularly when compared to the expected charge-offs on loans delinquent 90 to 179 days. We expect the balances of one- to four-family loans delinquent 180 days and greater to remain at historically high levels in the future due to the extensive amount of time it takes to foreclose on a property in the current real estate market.

The following table shows the comparative data for loans delinquent 90 to 179 days (dollars in millions):


	June 30, 2010			December 31, 2009
One- to four-family	$	290.5		$	386.8
Home equity		154.4			194.6
Consumer and other loans		4.9			6.1

Total loans delinquent 90-179 days	$	449.8		$	587.5

Loans delinquent 90-179 days as a percentage of gross loans receivable		2.48	%		2.89	%

The following graph shows the loans delinquent 90 to 179 days for each of our major loan categories:

LOGO

In addition to nonperforming assets, we monitor loans where a borrower’s past credit history casts doubt on their ability to repay a loan (“special mention” loans). We classify loans as special mention when they are between 30 and 89 days past due. The following table shows the comparative data for special mention loans (dollars in millions):


	June 30, 2010			December 31, 2009
One- to four-family	$	437.6		$	527.9
Home equity		197.2			246.2
Consumer and other loans		25.5			30.4

Total special mention loans	$	660.3		$	804.5

Special mention loans receivable as a percentage of gross loans receivable		3.64	%		3.95	%

The trend in special mention loan balances are generally indicative of the expected trend for charge-offs in future periods, as these loans have a greater propensity to migrate into nonaccrual status and ultimately charge-off. One- to four-family loans are generally secured in a first lien position by real estate assets, reducing the potential loss when compared to an unsecured loan. Our home equity loans are generally secured by real estate assets; however, the majority of these loans are secured in a second lien position, which substantially increases the potential loss when compared to a first lien position.

During the six months ended June 30, 2010, special mention loans decreased by $144.2 million to $660.3 million and are down 36% from their peak of $1.0 billion in the fourth quarter of 2008. This decrease was largely due to a decrease in both one- to four-family and home equity special mention loans. The decrease in special mention loans includes the impact of our loan modification programs in which borrowers who were 30 to 89 days past due were made current⁽¹⁾. While our level of special mention loans can fluctuate significantly in any given period, we believe the continued decrease we observed in recent quarters is an encouraging sign regarding the future credit performance of this portfolio.

⁽¹⁾

Loans modified as TDRs are accounted for as nonaccrual loans at the time of modification and return to accrual status after six consecutive payments are made in accordance with the modified terms.

The following graph illustrates the special mention loans by quarter:

Securities

We focus primarily on security type and credit rating to monitor credit risk in our securities portfolios. We believe our highest concentration of credit risk within this portfolio is the non-agency CMO portfolio. The table below details the amortized cost by average credit ratings and type of asset as of June 30, 2010 and December 31, 2009 (dollars in millions):


June 30, 2010	AAA		AA		A		BBB		Below Investment Grade and Non-Rated		Total
Agency mortgage-backed securities and CMOs	$	9,557.8	$	—	$	—	$	—	$	—	$	9,557.8
U.S. Treasury securities and agency debentures		3,297.5		—		—		—		—		3,297.5
Non-agency CMOs and other		41.5		55.6		118.9		7.8		313.0		536.8
Municipal bonds, corporate bonds and FHLB stock		214.5		—		17.4		—		19.9		251.8
Other agency debt securities		183.0		—		—		—		—		183.0

Total	$	13,294.3	$	55.6	$	136.3	$	7.8	$	332.9	$	13,826.9


December 31, 2009	AAA		AA		A		BBB		Below Investment Grade and Non-Rated		Total
Agency mortgage-backed securities and CMOs	$	8,946.0	$	—	$	—	$	—	$	—	$	8,946.0
Agency debentures		3,928.9		—		—		—		—		3,928.9
Non-agency CMOs and other		43.6		60.2		129.6		17.2		339.6		590.2
Municipal bonds, corporate bonds and FHLB stock		214.4		9.5		7.9		—		19.9		251.7

Total	$	13,132.9	$	69.7	$	137.5	$	17.2	$	359.5	$	13,716.8

While the vast majority of this portfolio is AAA-rated, we concluded during the three and six months ended June 30, 2010 that approximately $172.1 million and $346.4 million of the non-agency CMOs in this portfolio were other-than-temporarily impaired, respectively. As a result of the deterioration in the expected credit performance of the underlying loans in the securities, they were written down by recording $12.2 million and $20.8 million of net impairment during the three and six months ended June 30, 2010, respectively. Further declines in the performance of our non-agency CMO portfolio could result in additional impairments in future periods.

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial condition and results of operations requires us to make judgments and estimates that may have a significant impact upon the financial results of the Company. We believe that of our significant accounting policies, the following require estimates and assumptions that require complex, subjective judgments by management, which can materially impact reported results: allowance for loan losses; fair value measurements; classification and valuation of certain investments; accounting for derivative instruments; estimates of effective tax rates, deferred taxes and valuation allowances; valuation of goodwill and other intangibles; and valuation and expensing of share-based payments. These are more fully described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Current Report on Form 8-K filed May 5, 2010.

GLOSSARY OF TERMS

Active accounts—Accounts with a balance of $25 or more or a trade in the last six months.

Active customers—Customers that have an account with a balance of $25 or more or a trade in the last six months.

Active Trader—The customer group that includes those who execute 30 or more stock or option trades per quarter.

Adjusted total assets—E*TRADE Bank-only assets composed of total assets plus/(less) unrealized losses (gains) on available-for-sale securities, less deferred tax assets, goodwill and certain other intangible assets.

Agency—U.S. Government sponsored and federal agencies, such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporate and Government National Mortgage Association.

ALCO—Asset Liability Committee.

APIC—Additional paid-in capital.

ARM—Adjustable-rate mortgage.

Average commission per trade—Total trading and investing segment commissions revenue divided by total number of trades.

Average equity to average total assets—Average total shareholders’ equity divided by average total assets.

Bank—ETB Holdings, Inc. (“ETBH”), the entity that is our bank holding company and parent to E*TRADE Bank.

Basis point—One one-hundredth of a percentage point.

BOLI—Bank-Owned Life Insurance.

Cash flow hedge—A derivative instrument designated in a hedging relationship that mitigates exposure to variability in expected future cash flows attributable to a particular risk.

CDS—Credit default swap, which is a swap designed to transfer credit exposure between parties.

Charge-off—The result of removing a loan or portion of a loan from an entity’s balance sheet because the loan is considered to be uncollectible.

Citadel Investment—In 2007, we entered into an agreement to receive a $2.5 billion cash infusion from Citadel. In consideration for the cash infusion, Citadel received three primary items: substantially all of our asset-backed securities portfolio, 84.7 million shares of common stock in the Company and approximately $1.8 billion 12¹/2% Notes.

CLTV—Combined loan-to-value.

CDOs—Collateralized debt obligations.

CMOs—Collateralized mortgage obligations.

Corporate cash—Cash held at the parent company as well as cash held in certain subsidiaries that can distribute cash to the parent company without any regulatory approval.

Customer assets—Market value of all customer assets held by the Company including security holdings, customer cash and deposits and vested unexercised options.

Customer cash and deposits—Customer cash, deposits, customer payables and money market balances, including those held by third parties.

Daily average revenue trades (“DARTs”)—Total revenue trades in a period divided by the number of trading days during that period.

DBRS—Dominion Bond Rating Service.

Debt Exchange—In the third quarter of 2009, we exchanged $1.7 billion aggregate principal amount of our corporate debt, including $1.3 billion principal amount of our 12¹/2% Notes and $0.4 billion principal amount of our 8% Notes, for an equal principal amount of newly-issued non-interest-bearing convertible debentures.

Derivative—A financial instrument or other contract, the price of which is directly dependent upon the value of one or more underlying securities, interest rates or any agreed upon pricing index. Derivatives cover a wide assortment of financial contracts, including forward contracts, options and swaps.

Enterprise interest-bearing liabilities—Liabilities such as customer deposits, repurchase agreements and other borrowings, FHLB advances, certain customer credit balances and stock loan programs on which the Company pays interest; excludes customer money market balances held by third parties.

Enterprise interest-earning assets—Consists of the primary interest-earning assets of the Company and includes: loans, available-for-sale mortgage-backed and investment securities, held-to-maturity securities, margin receivables, trading securities, stock borrow balances and cash required to be segregated under regulatory guidelines that earn interest for the Company.

Enterprise net interest income—The taxable equivalent basis net operating interest income excluding corporate interest income and corporate interest expense and interest earned on customer cash held by third parties.

Enterprise net interest margin—The enterprise net operating interest income divided by total enterprise interest-earning assets.

Enterprise net interest spread—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 and customer cash held by third parties.

Exchange-traded funds—A fund that invests in a group of securities and trades like an individual stock on an exchange.

Fair value—The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair value hedge—A derivative instrument designated in a hedging relationship that mitigates exposure to changes in the fair value of a recognized asset or liability or a firm commitment.

Fannie Mae—Federal National Mortgage Association.

FASB—Financial Accounting Standards Board.

FDIC—Federal Deposit Insurance Corporation.

FHLB—Federal Home Loan Bank.

FICO—Fair Isaac Credit Organization.

FINRA—Financial Industry Regulatory Authority.

Fixed Charge Coverage Ratio—Net income (loss) before taxes, depreciation and amortization and corporate interest expense divided by corporate interest expense. This ratio indicates the Company’s ability to satisfy fixed financing expenses.

Freddie Mac—Federal Home Loan Mortgage Corporation.

Generally Accepted Accounting Principles (“GAAP”)—Accounting principles generally accepted in the United States of America.

Ginnie Mae—Government National Mortgage Association.

LIBOR—London Interbank Offered Rate. LIBOR is the interest rate at which banks borrow funds from other banks in the London wholesale money market (or interbank market).

Interest rate cap—An options contract that puts an upper limit on a floating exchange rate. The writer of the cap has to pay the holder of the cap the difference between the floating rate and the upper limit when that upper limit is breached. There is usually a premium paid by the buyer of such a contract.

Interest rate floor—An options contract that puts a lower limit on a floating exchange rate. The writer of the floor has to pay the holder of the floor the difference between the floating rate and the lower limit when that lower limit is breached. There is usually a premium paid by the buyer of such a contract.

Interest rate swaps—Contracts that are entered into primarily as an asset/liability management strategy to reduce interest rate risk. Interest rate swap contracts are exchanges of interest rate payments, such as fixed-rate payments for floating-rate payments, based on notional principal amounts.

Long term investor—The customer group that includes those who invest for the long term.

LTV—Loan-to-value.

NASDAQ—National Association of Securities Dealers Automated Quotations.

Net New Customer Asset Flows—The total inflows to all new and existing customer accounts less total outflows from all closed and existing customer accounts, excluding the effects of market movements in the value of customer assets.

Net Present Value of Equity (“NPVE”)—The present value of expected cash inflows from existing assets, minus the present value of expected cash outflows from existing liabilities, plus the expected cash inflows and outflows from existing derivatives and forward commitments. This calculation is performed for E*TRADE Bank.

NOLs—Net operating losses.

Nonperforming assets—Assets that do not earn income, including those originally acquired to earn income (nonperforming loans) and those not intended to earn income (REO). Loans are classified as nonperforming when full and timely collection of interest and principal becomes uncertain or when the loans are 90 days past due.

Notional amount—The specified dollar amount underlying a derivative on which the calculated payments are based.

NYSE—New York Stock Exchange.

Operating margin—Income (loss) before other income (expense), income tax benefit and discontinued operations.

Options—Contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to either purchase or sell the associated financial instrument at a set price during a period or at a specified date in the future.

Organic—Business related to new and existing customers as opposed to acquisitions.

OTS—Office of Thrift Supervision.

OTTI—Other-than-temporary impairment.

Principal transactions—Transactions that primarily consist of revenue from market-making activities.

QSPEs—Qualifying special-purpose entities.

Real estate owned (“REO”) and other repossessed assets—Ownership of real property by the Company, generally acquired as a result of foreclosure or repossession.

Recovery—Cash proceeds received on a loan that had been previously charged off.

Repurchase agreement—An agreement giving the seller of an asset the right or obligation to buy back the same or similar securities at a specified price on a given date. These agreements are generally collateralized by mortgage-backed or investment-grade securities.

Retail deposits—Balances of customer cash held at the Bank; excludes brokered certificates of deposit.

Return on average total assets—Annualized net income divided by average assets.

Return on average total shareholders’ equity—Annualized net income divided by average shareholders’ equity.

Risk-weighted assets—Primarily computed by the assignment of specific risk-weightings assigned by the OTS to assets and off-balance sheet instruments for capital adequacy calculations. This calculation is for E*TRADE Bank only.

SEC—U.S. Securities and Exchange Commission.

Special mention loans—Loans where a borrower’s past credit history casts doubt on their ability to repay a loan. Loans are classified as special mention when loans are between 30 and 89 days past due.

S&P—Standard & Poor’s.

Stock plan trades—Trades that originate from our corporate services business, which provides software and services to assist corporate customers in managing their equity compensation plans. The trades typically occur when an employee of a corporate customer exercises a stock option or sells restricted stock.

Sweep deposit accounts—Accounts with the functionality to transfer brokerage cash balances to and from a FDIC insured account at the banking subsidiaries.

Sub-prime—Defined as borrowers with FICO scores less than 620 at the time of origination.

Taxable equivalent interest adjustment—The operating interest income earned on certain assets is completely or partially exempt from federal and/or state income tax. These tax-exempt instruments typically yield lower returns than a taxable investment. To provide more meaningful comparison of yields and margins for all interest-earning assets, the interest income earned on tax exempt assets is increased to make it fully equivalent to interest income on other taxable investments. This adjustment is done for the analytic purposes in the net enterprise interest income/spread calculation and is not made on the consolidated statement loss, as that is not permitted under GAAP.

Tier 1 capital—Adjusted equity capital used in the calculation of capital adequacy ratios at E*TRADE Bank as required by the OTS. Tier 1 capital equals: total shareholders’ equity at E*TRADE Bank, plus/(less) unrealized losses (gains) on available-for-sale securities and cash flow hedges, less deferred tax assets, goodwill and certain other intangible assets.

Troubled Debt Restructuring (“TDR”)—A loan modification that involves granting an economic concession to a borrower who is experiencing financial difficulty.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion about our market risk disclosure includes forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of certain factors, including, but not limited to, those set forth in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009 and as updated in this report. Market risk is our exposure to changes in interest rates, foreign exchange rates and equity and commodity prices. Our exposure to interest rate risk is related primarily to interest-earning assets and interest-bearing liabilities.

Interest Rate Risk

The management of interest rate risk is essential to profitability. Interest rate risk is our exposure to changes in interest rates. In general, we manage our interest rate risk by balancing variable-rate and fixed-rate assets and liabilities and we utilize derivatives in a way that reduces our overall exposure to changes in interest rates. In recent years, we have managed our interest rate risk to achieve a minimum to moderate risk profile with limited exposure to earnings volatility resulting from interest rate fluctuations. Exposure to interest rate risk requires management to make complex assumptions regarding maturities, market interest rates and customer behavior. Changes in interest rates, including the following, could impact interest income and expense:

•

Interest-earning assets and interest-bearing liabilities may re-price at different times or by different amounts creating a mismatch.

•

The yield curve may flatten or change shape affecting the spread between short- and long-term rates. Widening or narrowing spreads could impact net interest income.

•

Market interest rates may influence prepayments resulting in maturity mismatches. In addition, prepayments could impact yields as premium and discounts amortize.

Exposure to market risk is dependent upon the distribution and composition of interest-earning assets, interest-bearing liabilities and derivatives. The differing risk characteristics of each product are managed to mitigate our exposure to interest rate fluctuations. At June 30, 2010, 90% of our total assets were enterprise interest-earning assets.

At June 30, 2010, approximately 60% of our total assets were residential real estate loans and available-for-sale and held-to-maturity mortgage-backed securities. The values of these assets are sensitive to changes in interest rates, as well as expected prepayment levels. As interest rates increase, fixed rate residential mortgages and mortgage-backed securities tend to exhibit lower prepayments. The inverse is true in a falling rate environment.

When real estate loans prepay, unamortized premiums are written off. Depending on the timing of the prepayment, the write-offs of unamortized premiums may result in lower than anticipated yields. The Asset Liability Committee (“ALCO”) reviews estimates of the impact of changing market rates on prepayments. This information is incorporated into our interest rate risk management strategy.

Our liability structure consists of two central sources of funding: deposits and wholesale borrowings. Cash provided to us through deposits is the primary source of our funding. Our key deposit products include sweep accounts, complete savings accounts and other money market and savings accounts. Our wholesale borrowings include securities sold under agreements to repurchase and FHLB advances. Customer payables, which represents customer cash contained within our broker-dealers, is an additional source of funding. In addition, the parent company has issued a significant amount of corporate debt.

Our deposit accounts and customer payables tend to be less rate-sensitive than wholesale borrowings. Agreements to repurchase securities re-price as interest rates change. Sweep accounts, complete savings accounts and other money market and savings accounts re-price at management’s discretion. FHLB advances and corporate debt generally have fixed rates.

Derivative Instruments

We use derivative instruments to help manage our interest rate risk. Interest rate swaps involve the exchange of fixed-rat