Edgar Filing: E TRADE FINANCIAL CORP

3rd Quarter 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 September 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 E. 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 November 1, 2010, there were 220,817,337 shares of common stock outstanding.

E*TRADE FINANCIAL CORPORATION

FORM 10-Q QUARTERLY REPORT

For the Quarter Ended September 30, 2010

TABLE OF CONTENTS


PART I—FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)			3
Consolidated Statement of Income (Loss)			47
Consolidated Balance Sheet			48
Consolidated Statement of Comprehensive Income (Loss)			49
Consolidated Statement of Shareholders’ Equity			50
Consolidated Statement of Cash Flows			51
Notes to Consolidated Financial Statements (Unaudited)			53
Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies			53
Note 2—Facility Restructuring and Other Exit Activities			56
Note 3—Operating Interest Income and Operating Interest Expense			57
Note 4—Fair Value Disclosures			57
Note 5—Available-for-Sale and Held-to-Maturity Securities			66
Note 6—Loans, Net			70
Note 7—Accounting for Derivative Instruments and Hedging Activities			72
Note 8—Deposits			77
Note 9—Securities Sold Under Agreements to Repurchase and FHLB Advances and Other Borrowings			78
Note 10—Corporate Debt			79
Note 11—Income Taxes			80
Note 12—Shareholders’ Equity			80
Note 13—Earnings (Loss) per Share			81
Note 14—Regulatory Requirements			82
Note 15—Commitments, Contingencies and Other Regulatory Matters			83
Note 16—Segment Information			88
Note 17—Subsequent Event			93
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			21
Liquidity and Capital Resources			25
Risk Management			29
Concentrations of Credit Risk			31
Summary of Critical Accounting Policies and Estimates			40
Glossary of Terms			40
Item 3. Quantitative and Qualitative Disclosures about Market Risk			45
Item 4. Controls and Procedures			93

PART II—OTHER INFORMATION
Item 1. Legal Proceedings			93
Item 1A. Risk Factors			97
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			98
Item 3. Defaults Upon Senior Securities			98
Item 5. Other Information			98
Item 6. Exhibits			98
Signatures			99

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. Building on the strengths of this franchise, our growth strategy is focused on four areas: retail brokerage, corporate services and market making, wealth management, and banking.

First, our retail brokerage business is our foundation. We believe there are continued opportunities to expand our relationship sales, marketing, product, and service initiatives to grow our active trader and long-term investor customer bases.

Second, we are focused on growing our corporate services and market making businesses. Our corporate services business is a leading provider of software and services for managing equity compensation plans and is an important source of new retail brokerage accounts. Our market making business allows us to increase the economic benefit on the order flow from the retail brokerage as well as generate additional revenues from external customers.

Third, we plan to expand our wealth management offerings. Our vision is to provide online wealth management services that are enabled by innovative technology and supported by guidance from professionals when needed.

Fourth, we believe that our bank can play an important role in helping us optimize the value of the customer deposits that are generated by our retail brokerage business.

Our strategy also includes an intense focus on mitigating the credit losses in our legacy loan portfolio and maintaining disciplined expense management. In addition, we are focused on strengthening our 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 position 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;

•

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

•

performance, volume and volatility of the equity and capital markets;

•

customer perception of the financial strength of our franchise;

•

market demand and liquidity in the secondary market for mortgage loans and securities;

•

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

•

our ability to obtain regulatory approval to move capital from our bank to our parent company; 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 September 30,						Variance			As of or For the Nine Months Ended September 30,						Variance
	2010			2009			2010 vs. 2009			2010			2009			2010 vs. 2009
*Customer Activity Metrics:*⁽¹⁾
Daily average revenue trades (“DARTs”)		126,530			180,465			(30	)%		150,530			186,233			(19	)%
Average commission per trade	$	11.03		$	11.65			(5	)%	$	11.16		$	11.31			(1	)%
Margin receivables (dollars in billions)	$	4.6		$	3.3			39	%	$	4.6		$	3.3			39	%
End of period brokerage accounts		2,656,702			2,639,282			1	%		2,656,702			2,639,282			1	%
Net new brokerage accounts		7,202			12,489			*			26,623			123,476			*
Customer assets (dollars in billions)	$	159.4		$	145.6			9	%	$	159.4		$	145.6			9	%
Net new brokerage assets (dollars in billions)	$	1.4		$	1.1			*		$	5.7		$	5.7			*
Brokerage related cash (dollars in billions)	$	22.6		$	19.7			15	%	$	22.6		$	19.7			15	%

*Company Financial Metrics:*
Corporate cash (dollars in millions)	$	490.3		$	501.1			(2	)%	$	490.3		$	501.1			(2	)%
E*TRADE Bank excess risk-based capital (dollars in millions)	$	1,089.7		$	985.4			11	%	$	1,089.7		$	985.4			11	%
Special mention loan delinquencies (dollars in millions)	$	603.5		$	827.9			(27	)%	$	603.5		$	827.9			(27	)%
Allowance for loan losses (dollars in millions)	$	1,032.8		$	1,214.5			(15	)%	$	1,032.8		$	1,214.5			(15	)%
Enterprise net interest spread		2.95	%		2.82	%		0.13	%		2.94	%		2.69	%		0.25	%
Enterprise interest-earning assets (average in billions)	$	39.7		$	44.3			(10	)%	$	41.0		$	44.7			(8	)%

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 Third Quarter of 2010

Expanded Research and Trading Tools

•

We introduced new research and trade idea generation tools that we believe will help our customers identify investment opportunities and make informed decisions. These new tools include market commentary from Dreyfus and Minyanville’s Buzz & Banter, a business and finance site.

Market Recognition

•

Our corporate services business rated highest in overall satisfaction and loyalty among broker plan administrators for full and partial outsourced stock plan administration by GROUP FIVE, an independent consulting and research firm, in their 2010 Stock Plan Administration Benchmarking Study.

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


	Three Months Ended September 30,					Variance			Nine Months Ended September 30,						Variance
	2010		2009			2010 vs. 2009			2010			2009			2010 vs. 2009
Net operating interest income	$	298.9	$	321.4			(7	)%	$	921.4		$	939.6			(2	)%
Commissions	$	89.5	$	144.5			(38	)%	$	322.3		$	424.2			(24	)%
Fees and services charges	$	29.6	$	50.3			(41	)%	$	107.0		$	145.0			(26	)%
Principal transactions	$	21.5	$	24.9			(14	)%	$	76.4		$	65.2			17	%
Total net revenue	$	489.4	$	575.3			(15	)%	$	1,559.9		$	1,693.6			(8	)%
Provision for loan losses	$	152.0	$	347.2			(56	)%	$	585.6		$	1,205.7			(51	)%
Operating margin	$	70.5	$	(73.6	)		*		$	136.4		$	(437.1	)		*
Net income (loss)	$	8.4	$	(854.7	)		*		$	(4.4	)	$	(1,230.6	)		*
Diluted earnings (loss) per share	$	0.03	$	(6.74	)		*		$	(0.02	)	$	(14.73	)		*

Percentage not meaningful.

EARNINGS OVERVIEW

During the three and nine months ended September 30, 2010, we generated net income of $8.4 million and incurred a net loss of $4.4 million, respectively. Our net income for the three months ended September 30, 2010 primarily resulted from income before income taxes of $158.0 million in our trading and investing segment, which was mostly offset by $152.0 million in provision for loan losses reported in our balance sheet management segment. Our net loss for the nine months ended September 30, 2010 was due primarily to income before income taxes of $547.1 million in our trading and investing segment, which was more than offset by $585.6 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 eight 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 September 30,						Variance						Nine Months Ended September 30,						Variance
	Three Months Ended September 30,						2010 vs. 2009						Nine Months Ended September 30,						2010 vs. 2009
	2010			2009			Amount			%			2010			2009			Amount			%
Net operating interest income	$	298.9		$	321.4		$	(22.5	)		(7	)%	$	921.4		$	939.6		$	(18.2	)		(2	)%
Commissions		89.5			144.5			(55.0	)		(38	)%		322.3			424.2			(101.9	)		(24	)%
Fees and service charges		29.6			50.3			(20.7	)		(41	)%		107.0			145.0			(38.0	)		(26	)%
Principal transactions		21.5			24.9			(3.4	)		(14	)%		76.4			65.2			11.2			17	%
Gains on loans and securities, net		46.9			42.0			4.9			12	%		124.9			150.5			(25.6	)		(17	)%
Net impairment		(7.3	)		(19.2	)		11.9			*			(28.1	)		(67.6	)		39.5			*
Other revenues		10.3			11.4			(1.1	)		(10	)%		36.0			36.7			(0.7	)		(2	)%

Total non-interest income		190.5			253.9			(63.4	)		(25	)%		638.5			754.0			(115.5	)		(15	)%

Total net revenue	$	489.4		$	575.3		$	(85.9	)		(15	)%	$	1,559.9		$	1,693.6		$	(133.7	)		(8	)%

Percentage not meaningful.

Total net revenue decreased 15% to $489.4 million and 8% to $1.6 billion for the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. This was driven by lower operating interest income, commissions, and fees and service charges, which was slightly offset by a decrease in net impairment. Additionally, the decrease for the nine months ended September 30, 2010 was also driven by lower gains on loans and securities, net compared to the same period in 2009.

Net Operating Interest Income

Net operating interest income decreased 7% to $298.9 million and 2% to $921.4 million for the three and nine months ended September 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 and nine months ended September 30, 2010 was due primarily to decreases in our enterprise interest-earning assets, specifically loans and available-for-sale mortgage-backed securities.

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 September 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⁾	$	17,732.5	$	212.3		4.79	%	$	22,527.4	$	276.8		4.92	%
Margin receivables		4,723.2		52.7		4.43	%		3,197.9		37.8		4.69	%
Available-for-sale mortgage-backed securities		9,256.4		67.8		2.93	%		9,584.5		99.5		4.15	%
Available-for-sale investment securities		3,592.6		19.0		2.12	%		762.0		6.1		3.19	%
Held-to-maturity securities		1,708.5		14.6		3.42	%		—		—		—
Cash and equivalents⁽²⁾		2,033.9		1.1		0.21	%		7,511.3		4.9		0.26	%
Stock borrow and other		642.2		6.8		4.26	%		704.6		11.8		6.68	%

Total enterprise interest-earning assets		39,689.3		374.3		3.77	%		44,287.7		436.9		3.94	%

Non-operating interest-earning assets⁽³⁾		4,485.0							3,941.9

Total assets	$	44,174.3						$	48,229.6

Enterprise interest-bearing liabilities:
Retail deposits	$	23,563.4		12.0		0.20	%	$	26,329.3		35.5		0.53	%
Brokered certificates of deposit		115.1		1.5		5.17	%		138.5		1.8		5.25	%
Customer payables		4,125.0		1.6		0.16	%		5,070.6		2.1		0.17	%
Securities sold under agreements to repurchase		6,014.6		31.2		2.03	%		6,445.2		44.9		2.72	%
Federal Home Loan Bank (“FHLB”) advances and other borrowings		2,754.0		30.4		4.32	%		3,015.9		33.8		4.39	%
Stock loan and other		609.6		0.4		0.23	%		571.4		0.5		0.36	%

Total enterprise interest-bearing liabilities		37,181.7		77.1		0.82	%		41,570.9		118.6		1.12	%

Non-operating interest-bearing liabilities⁽⁴⁾		2,812.8							3,637.7

Total liabilities		39,994.5							45,208.6
Total shareholders’ equity		4,179.8							3,021.0

Total liabilities and shareholders’ equity	$	44,174.3						$	48,229.6

Excess of enterprise interest-earning assets over enterprise interest-bearing liabilities/Enterprise net interest income/Spread	$	2,507.6	$	297.2		2.95	%	$	2,716.8	$	318.3		2.82	%

Enterprise net interest margin (net yield on enterprise interest-earning assets)						3.00	%						2.87	%
Ratio of enterprise interest-earning assets to enterprise interest-bearing liabilities						106.74	%						106.54	%
Return on average:
Total assets						0.08	%						(7.09	)%
Total shareholders’ equity						0.80	%						(113.31	)%
Average equity to average total assets						9.46	%						6.26	%

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


	Three Months Ended September 30,
	2010			2009
Enterprise net interest income⁽⁵⁾	$	297.2		$	318.3
Taxable equivalent interest adjustment		(0.3	)		(0.3	)
Customer cash held by third parties and other⁽⁶⁾		2.0			3.4

Net operating interest income	$	298.9		$	321.4

⁽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, 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 $3.0 billion for both the three months ended September 30, 2010 and 2009 held by parties outside E*TRADE Financial, including third party money market funds and sweep deposit accounts at unaffiliated financial institutions.


	Nine Months Ended September 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⁾	$	18,827.0	$	679.2		4.81	%	$	23,824.1	$	882.7		4.94	%
Margin receivables		4,410.8		147.4		4.47	%		2,907.9		96.2		4.42	%
Available-for-sale mortgage-backed securities		9,256.9		220.2		3.17	%		10,845.2		352.8		4.34	%
Available-for-sale investment securities		3,780.3		70.4		2.48	%		382.9		11.4		3.96	%
Held-to-maturity securities		620.8		15.9		3.41	%		—		—		—
Cash and equivalents⁽²⁾		3,453.1		5.9		0.23	%		6,092.8		15.3		0.34	%
Stock borrow and other		663.7		20.5		4.12	%		678.9		42.6		8.38	%

Total enterprise interest-earning assets		41,012.6		1,159.5		3.77	%		44,731.8		1,401.0		4.18	%

Non-operating interest-earning assets⁽³⁾		4,334.6							3,850.9

Total assets	$	45,347.2						$	48,582.7

Enterprise interest-bearing liabilities:
Retail deposits	$	24,163.1		45.1		0.25	%	$	26,588.8		179.5		0.90	%
Brokered certificates of deposit		117.0		4.5		5.13	%		214.9		8.3		5.16	%
Customer payables		4,655.7		5.2		0.15	%		4,455.2		7.0		0.21	%
Securities sold under agreements to repurchase		6,238.4		96.7		2.04	%		6,796.3		157.4		3.05	%
Federal Home Loan Bank (“FHLB”) advances and other borrowings		2,754.2		90.6		4.34	%		3,608.8		118.3		4.32	%
Stock loan and other		610.5		1.3		0.28	%		499.2		1.9		0.51	%

Total enterprise interest-bearing liabilities		38,538.9		243.4		0.83	%		42,163.2		472.4		1.49	%

Non-operating interest-bearing liabilities⁽⁴⁾		2,817.1							3,690.0

Total liabilities		41,356.0							45,853.2
Total shareholders’ equity		3,991.2							2,729.5

Total liabilities and shareholders’ equity	$	45,347.2						$	48,582.7

Excess of enterprise interest-earning assets over enterprise interest-bearing liabilities/Enterprise net interest income/Spread	$	2,473.7	$	916.1		2.94	%	$	2,568.6	$	928.6		2.69	%

Enterprise net interest margin (net yield on enterprise interest-earning assets)						2.98	%						2.77	%
Ratio of enterprise interest-earning assets to enterprise interest-bearing liabilities						106.42	%						106.09	%
Return on average:
Total assets						(0.01	)%						(3.38	)%
Total shareholders’ equity						(0.15	)%						(60.14	)%
Average equity to average total assets						8.80	%						5.62	%

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


	Nine Months Ended September 30,
	2010			2009
Enterprise net interest income⁽⁵⁾	$	916.1		$	928.6
Taxable equivalent interest adjustment		(0.8	)		(1.8	)
Customer cash held by third parties and other⁽⁶⁾		6.1			12.8

Net operating interest income	$	921.4		$	939.6

⁽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⁾

⁽⁴⁾

⁽⁵⁾

⁽⁶⁾

Includes interest earned on average customer assets of $3.1 billion and $2.9 billion for the nine months ended September 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 10% to $39.7 billion and 8% to $41.0 billion for the three and nine months ended September 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, available-for-sale investment securities and held-to-maturity securities.

Average enterprise interest-bearing liabilities decreased 11% to $37.2 billion and 9% to $38.5 billion for the three and nine months ended September 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.

Enterprise net interest spread increased by 13 basis points to 2.95% and by 25 basis points to 2.94% for the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The increase for the three and nine months ended September 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 38% to $89.5 million and 24% to $322.3 million for the three and nine months ended September 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 30% to 126,530 and 19% to 150,530 for the three and nine months ended September 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 nine months ended September 30, 2010 and 2009, respectively. Exchange-traded funds-related DARTs as a percentage of our total DARTs represented 10% and 14% of trading volume for the nine months ended September 30, 2010 and 2009, respectively.

Average commission per trade decreased 5% to $11.03 and 1% to $11.16 for the three and nine months ended September 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, which became effective in the second quarter of 2010. For the nine months ended September 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 41% to $29.6 million and 26% to $107.0 million for the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decreases were primarily due to lower order flow revenue and the elimination of all account activity fees, which became effective in the second quarter of 2010.

Principal Transactions

Principal transactions decreased 14% to $21.5 million and increased 17% to $76.4 million for the three and nine months ended September 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 decrease in principal transactions revenue for the three months ended September 30, 2010 was primarily due to decrease in our average revenue earned per share traded when compared to the same period in 2009. The increase in principal transactions revenue for the nine months ended September 30, 2010 was driven by an increase in the volume of orders from our third party customers which was partially offset by a decrease in our average revenue earned per share traded when compared to the same period in 2009.

Gains on Loans and Securities, Net

Gains on loans and securities, net were $46.9 million and $124.9 million for the three and nine months ended September 30, 2010, respectively, as shown in the following table (dollars in millions):


	Three Months Ended September 30,						Variance						Nine Months Ended September 30,						Variance
	Three Months Ended September 30,						2010 vs. 2009						Nine Months Ended September 30,						2010 vs. 2009
	2010			2009			Amount			%			2010			2009			Amount			%
Gains on loans, net	$	0.1		$	(12.6	)	$	12.7			*		$	6.3		$	(12.5	)	$	18.8			*

Gains on available-for-sale securities, net		47.1			48.3			(1.2	)		(3	)%		119.4			157.1			(37.7	)		(24	)%
Gains (losses) on trading securities, net		(0.1	)		6.2			(6.3	)		*			0.2			5.4			(5.2	)		(96	)%
Hedge ineffectiveness		(0.2	)		0.1			(0.3	)		*			(1.0	)		0.5			(1.5	)		*

Gains on securities, net		46.8			54.6			(7.8	)		(14	)%		118.6			163.0			(44.4	)		(27	)%

Gains on loans and securities, net	$	46.9		$	42.0		$	4.9			12	%	$	124.9		$	150.5		$	(25.6	)		(17	)%

Percentage not meaningful.

Net Impairment

We recognized $7.3 million and $28.1 million of net impairment during the three and nine months ended September 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 or had been previously recorded through other comprehensive income (loss), are shown in the table below (dollars in millions):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Other-than-temporary impairment (“OTTI”)	$	(1.2	)	$	(9.3	)	$	(30.9	)	$	(227.8	)
Less: noncredit portion of OTTI recognized in (out of) other comprehensive income (before tax)		(6.1	)		(9.9	)		2.8			160.2

Net impairment	$	(7.3	)	$	(19.2	)	$	(28.1	)	$	(67.6	)

Other Revenues

Other revenues decreased 10% to $10.3 million and 2% to $36.0 million for the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decrease for the three and nine months ended September 30, 2010, was due to a decline in the income from the cash surrender value of our bank-owned life insurance. This decrease was partially offset for the nine months ended September 30, 2010 by 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 56% to $152.0 million and 51% to $585.6 million for the three and nine months ended September 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: significant continued home price depreciation; weak demand for homes and high inventories of unsold homes; significant contraction in the availability of credit; and a general decline in economic growth along with higher levels of unemployment. 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 eight 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 September 30,				Variance						Nine Months Ended September 30,				Variance
	Three Months Ended September 30,				2010 vs. 2009						Nine Months Ended September 30,				2010 vs. 2009
	2010		2009		Amount			%			2010		2009		Amount			%
Compensation and benefits	$	75.8	$	98.0	$	(22.2	)		(23	)%	$	243.9	$	272.2	$	(28.3	)		(10	)%
Clearing and servicing		33.8		43.2		(9.4	)		(22	)%		111.1		130.0		(18.9	)		(15	)%
Advertising and market development		25.6		19.5		6.1			32	%		93.5		88.0		5.5			6	%
FDIC insurance premiums		19.8		20.0		(0.2	)		(1	)%		58.3		74.8		(16.5	)		(22	)%
Communications		17.5		20.5		(3.0	)		(15	)%		56.4		63.1		(6.7	)		(11	)%
Professional services		16.1		20.6		(4.5	)		(22	)%		55.9		61.7		(5.8	)		(9	)%
Occupancy and equipment		17.9		19.6		(1.7	)		(9	)%		53.7		59.1		(5.4	)		(9	)%
Depreciation and amortization		23.2		21.1		2.1			10	%		65.9		62.6		3.3			5	%
Amortization of other intangibles		7.1		7.4		(0.3	)		(4	)%		21.4		22.3		(0.9	)		(4	)%
Facility restructuring and other exit activities		2.9		2.5		0.4			18	%		4.5		6.8		(2.3	)		(35	)%
Other operating expenses		27.2		29.3		(2.1	)		(7	)%		73.3		84.3		(11.0	)		(13	)%

Total operating expense	$	266.9	$	301.7	$	(34.8	)		(12	)%	$	837.9	$	924.9	$	(87.0	)		(9	)%

Operating expense decreased 12% to $266.9 million and 9% to $837.9 million for the three and nine months ended September 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 23% to $75.8 million and 10% to $243.9 million for the three and nine months ended September 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 22% to $33.8 million and 15% to $111.1 million for the three and nine months ended September 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 32% to $25.6 million and 6% to $93.5 million for the three and nine months ended September 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 1% to $19.8 million and 22% to $58.3 million for the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decrease was due primarily to an industry wide special assessment that resulted in an additional $21.6 million of expense in the second quarter of 2009. There were no similar assessments made during the three and nine months ended September 30, 2010.

Professional Services

Professional services decreased 22% to $16.1 million and 9% to $55.9 million for the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decrease in the third quarter of 2010 was due primarily to a $6.0 million credit in connection with a legal settlement.

Other Operating Expenses

Other operating expenses decreased 7% to $27.2 million and 13% to $73.3 million for the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. These decreases were due to a decrease in legal reserves during the three and nine months ended September 30, 2010, as well as a decrease in REO expense for the nine months ended September 30, 2010 when compared to the same periods in 2009.

Other Income (Expense)

Other income (expense) was an expense of $35.0 million and $114.5 million for the three and nine months ended September 30, 2010, respectively, compared to an expense of $1.1 billion and $1.3 billion for the three and nine months ended September 30, 2009, respectively, as shown in the following table (dollars in millions):


	Three Months Ended September 30,						Variance					Nine Months Ended September 30,						Variance
	Three Months Ended September 30,						2010 vs. 2009					Nine Months Ended September 30,						2010 vs. 2009
	2010			2009			Amount		%			2010			2009			Amount		%
Corporate interest income	$	6.1		$	0.2		$	5.9		*		$	6.1		$	0.8		$	5.3		*
Corporate interest expense		(41.8	)		(69.0	)		27.2		(39	)%		(124.0	)		(242.8	)		118.8		(49	)%
Gains (losses) on sales of investments, net		1.7			—			1.7		*			1.8			(2.0	)		3.8		*
Losses on early extinguishment of debt		—			(1,005.5	)		1,005.5		(100	)%		—			(1,018.8	)		1,018.8		(100	)%
Equity in income (loss) of investments and venture funds		(1.0	)		(3.4	)		2.4		(73	)%		1.6			(7.0	)		8.6		*

Total other income (expense)	$	(35.0	)	$	(1,077.7	)	$	1,042.7		(97	)%	$	(114.5	)	$	(1,269.8	)	$	1,155.3		(91	)%

Percentage not meaningful.

Total other income (expense) for the three and nine months ended September 30, 2010 primarily consisted of corporate interest expense resulting from our interest-bearing corporate debt. Corporate interest expense decreased 39% to $41.8 million and 49% to $124.0 million for the three and nine months ended September 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. The losses on early extinguishment of debt for the three and

nine months ended September 30, 2009 were related primarily to the Debt Exchange. The loss on the Debt Exchange resulted from the de-recognition of the debt that was exchanged and the corresponding recognition of the newly-issued non-interest-bearing convertible debentures at fair value. Corporate interest income increased to $6.1 million for the three and nine months ended September 30, 2010 when compared to the same periods in 2009 due to a benefit of $6.0 million during the third quarter of 2010 in connection with a legal settlement.

Income Tax Expense (Benefit)

Income tax expense was $27.1 million and $26.2 million during the three and nine months ended September 30, 2010, respectively, compared to income tax benefits of $296.7 million and $476.3 million for the same periods in 2009. Our effective tax rates were 76.4% and 119.9% for the three and nine months ended September 30, 2010, respectively and (25.8)% and (27.9)% for the three and nine months ended September 30, 2009, respectively. The effective tax rates for the three and nine months ended September 30, 2010 were higher than the comparable periods in 2009 for two reasons: 1) our pre-tax income included items not deductible for tax purposes, predominantly about one-third of the interest expense on the 12¹/2% springing lien notes; and 2) our reported pre-tax income is relatively close to breakeven for the three and nine months ended September 30, 2010. As a result, our income subject to taxation is higher, resulting in an unusually high effective tax rate for the three and nine months ended September 30, 2010. We expect our effective tax rate to continue to be volatile in periods where our pre-tax income or loss is relatively close to breakeven.

Valuation Allowance

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 September 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 September 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.

We have maintained a valuation allowance for certain of our state deferred tax assets as it is more likely than not that they will not be realized. At December 31, 2009, we had a deferred tax asset of approximately $83.0 million that related to our state net operating loss carryforwards with a valuation allowance of $71.7 million against such deferred tax asset. We have reclassified approximately $53.5 million of this valuation allowance as unrecognized tax benefit during the nine-months ended September 30, 2010. The majority of the reclassified unrecognized tax benefit relates to the application of Internal Revenue Code Section 382 to state net operating losses.

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 nine months ended September 30, 2010 and 2009 (dollars in millions, except for key metrics):


	Three Months Ended September 30,				Variance						Nine Months Ended September 30,				Variance
	Three Months Ended September 30,				2010 vs. 2009						Nine Months Ended September 30,				2010 vs. 2009
	2010		2009		Amount			%			2010		2009		Amount			%
Net operating interest income	$	187.9	$	186.9	$	1.0			1	%	$	574.0	$	502.9	$	71.1			14	%
Commissions		89.5		144.5		(55.0	)		(38	)%		322.3		424.2		(101.9	)		(24	)%
Fees and service charges		29.0		49.7		(20.7	)		(42	)%		105.6		139.8		(34.2	)		(24	)%
Principal transactions		21.5		24.9		(3.4	)		(14	)%		76.4		65.2		11.2			17	%
Other revenues		8.3		8.4		(0.1	)		(2	)%		29.4		27.0		2.4			9	%

Total net revenue		336.2		414.4		(78.2	)		(19	)%		1,107.7		1,159.1		(51.4	)		(4	)%
Total operating expense		178.2		188.1		(9.9	)		(5	)%		560.6		589.4		(28.8	)		(5	)%

Trading and investing income before income taxes	$	158.0	$	226.3	$	(68.3	)		(30	)%	$	547.1	$	569.7	$	(22.6	)		(4	)%

Key Metrics:⁽¹⁾
DARTs		126,530		180,465		(53,935	)		(30	)%		150,530		186,233		(35,703	)		(19	)%
Average commission per trade	$	11.03	$	11.65	$	(0.62	)		(5	)%	$	11.16	$	11.31	$	(0.15	)		(1	)%
Margin receivables (dollars in billions)	$	4.6	$	3.3	$	1.3			39	%	$	4.6	$	3.3	$	1.3			39	%
End of period brokerage accounts		2,656,702		2,639,282		17,420			1	%		2,656,702		2,639,282		17,420			1	%
Net new brokerage accounts		7,202		12,489		(5,287	)		*			26,623		123,476		(96,853	)		*
Customer assets (dollars in billions)	$	159.4	$	145.6	$	13.8			9	%	$	159.4	$	145.6	$	13.8			9	%
Net new brokerage assets (dollars in billions)	$	1.4	$	1.1	$	0.3			*		$	5.7	$	5.7	$	—			*
Brokerage related cash (dollars in billions)	$	22.6	$	19.7	$	2.9			15	%	$	22.6	$	19.7	$	2.9			15	%

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 decreased 30% to $158.0 million and 4% to $547.1 million for the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. We continued to generate net new brokerage accounts, ending the quarter with 2.7 million accounts. Our brokerage related cash, which is one of our most profitable sources of funding, increased by $2.9 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 remained flat at $187.9 million and increased 14% to $574.1 million for the three and nine months ended September 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 38% to $89.5 million and 24% to $322.3 million for the three and nine months ended September 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 30% to 126,530 and 19% to 150,530 for the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. There was also a 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, which became effective in the second quarter of 2010. For the nine months ended September 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 42% to $29.0 million and 24% to $105.6 million for the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decreases were primarily due to lower order flow revenue and the elimination of all account activity fees, which became effective in the second quarter of 2010.

Trading and investing principal transactions decreased 14% to $21.5 million and increased 17% to $76.4 million for the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decrease for the three months ended September 30, 2010 in principal transactions revenue was driven by a decrease in our average revenue earned per share traded when compared to the same period in 2009. The increase in principal transactions revenue for the nine months ended September 30, 2010 was driven by an increase in the volume of orders from our third party customers which was partially offset by a decrease in our average revenue earned per share traded when compared to the same period in 2009.

Trading and investing operating expense decreased 5% to $178.2 million and 5% to $560.6 million for the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decrease for the three and nine months ended September 30, 2010 related primarily to a decrease in compensation and benefits, clearing and servicing, and communications expenses, which were partially offset by an increase in advertising and market development expense.

As of September 30, 2010, we had approximately 2.7 million brokerage accounts, 1.0 million stock plan accounts and 0.5 million banking accounts. For the three months ended September 30, 2010 and 2009, our brokerage products contributed 65% and 76%, respectively, and our banking products, which include sweep products, contributed 35% and 24%, respectively, of total trading and investing net revenue. For the nine months ended September 30, 2010 and 2009, our brokerage products contributed 67% and 78%, respectively, for both periods, and our banking products contributed 33% and 22%, 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 nine months ended September 30, 2010 and 2009 (dollars in millions):


	Three Months Ended September 30,						Variance						Nine Months Ended September 30,						Variance
	Three Months Ended September 30,						2010 vs. 2009						Nine Months Ended September 30,						2010 vs. 2009
	2010			2009			Amount			%			2010			2009			Amount			%
Net operating interest income	$	111.0		$	134.5		$	(23.5	)		(17	)%	$	347.3		$	436.7		$	(89.4	)		(20	)%
Fees and service charges		0.6			0.6			—			*			1.4			5.2			(3.8	)		(73	)%
Gains on loans and securities, net		46.9			42.0			4.9			12	%		124.9			150.5			(25.6	)		(17	)%
Net impairment		(7.3	)		(19.2	)		11.9			*			(28.1	)		(67.6	)		39.5			*
Other revenues		2.0			2.9			(0.9	)		(31	)%		6.7			9.7			(3.0	)		(31	)%

Total net revenue		153.2			160.8			(7.6	)		(5	)%		452.2			534.5			(82.3	)		(15	)%
Provision for loan losses		152.0			347.2			(195.2	)		(56	)%		585.6			1,205.7			(620.1	)		(51	)%
Total operating expense		54.3			58.3			(4.0	)		(7	)%		159.3			186.5			(27.2	)		(15	)%
Losses from early extinguishment of debt		—			37.2			(37.2	)		(100	)%		—			50.6			(50.6	)		(100	)%

Balance sheet management loss before income taxes	$	(53.1	)	$	(281.9	)	$	228.8			(81	)%	$	(292.7	)	$	(908.3	)	$	615.6			(68	)%

Key Metrics:
Special mention loan delinquencies	$	603.5		$	827.9		$	(224.4	)		(27	)%	$	603.5		$	827.9		$	(224.4	)		(27	)%
Allowance for loan losses	$	1,032.8		$	1,214.5		$	(181.7	)		(15	)%	$	1,032.8		$	1,214.5		$	(181.7	)		(15	)%
Allowance for loan losses as a % of gross loans receivable		6.03	%		5.66	%		*			0.37	%		6.03	%		5.66	%		*			0.37	%

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 $53.1 million and $292.7 million for the three and nine months ended September 30, 2010, respectively. The losses in the segment are due primarily to the provision for loan losses of $152.0 million and $585.6 million for the three and nine months ended September 30, 2010, respectively.

Gains on loans and securities, net were $46.9 million and $124.9 million for the three and nine months ended September 30, 2010, respectively, compared to $42.0 million and $150.5 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 nine months ended September 30, 2010.

We recognized $7.3 million and $28.1 million of net impairment during the three and nine months ended September 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 $1.2 million and $30.9 million for the three and nine months ended September 30, 2010. Of the gross OTTI for the three and nine months ended September 30, 2010, $(6.1) million and $2.8 million, respectively, related to the noncredit portion of OTTI, which was or had been previously recorded through other comprehensive income.

Total balance sheet management operating expense decreased 7% to $54.3 million and 15% to $159.3 million for the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decrease in operating expense for the three and nine months ended September 30, 2010 was due primarily to decreased clearing and servicing and other operating expenses. Additionally, the decrease in operating expense for the nine months ended September 30, 2010 was also due to a decrease in FDIC insurance premiums as a result of an industry wide assessment that resulted in an additional $21.6 million of expense in the second quarter of 2009. There were no similar assessments made during the three and nine months ended September 30, 2010.

Corporate/Other

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


	Three Months Ended September 30,						Variance						Nine Months Ended September 30,						Variance
	Three Months Ended September 30,						2010 vs. 2009						Nine Months Ended September 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		17.7			30.9			(13.2	)		(43	)%		58.7			76.9			(18.2	)		(24	)%
Communications		0.4			0.5			(0.1	)		(19	)%		1.3			1.4			(0.1	)		(7	)%
Professional services		2.3			11.8			(9.5	)		(80	)%		17.7			33.7			(16.0	)		(48	)%
Occupancy and equipment		0.8			0.8			—			(2	)%		2.2			2.0			0.2			10	%
Depreciation and amortization		4.9			4.9			—			0	%		16.2			14.3			1.9			13	%
Facility restructuring and other exit activities		2.9			2.5			0.4			18	%		4.5			6.8			(2.3	)		(35	)%
Other operating expenses		5.3			3.9			1.4			36	%		17.4			14.0			3.4			25	%

Total operating expense		34.3			55.3			(21.0	)		(38	)%		118.0			149.1			(31.1	)		(21	)%

Operating loss		(34.3	)		(55.3	)		21.0			(38	)%		(118.0	)		(149.0	)		31.0			(21	)%
Total other income (expense)		(35.0	)		(1,040.5	)		1,005.5			(97	)%		(114.5	)		(1,219.3	)		1,104.8			(91	)%

Corporate/other loss before income taxes	$	(69.3	)	$	(1,095.8	)	$	1,026.5			(94	)%	$	(232.5	)	$	(1,368.3	)	$	1,135.8			(83	)%

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 $69.3 million and $232.5 million for the three and nine months ended September 30, 2010, compared to losses of $1.1 billion and $1.4 billion, respectively, for the same periods in 2009. The losses for the three and nine months ended September 30, 2010 were due to total operating expenses of $34.3 million and $118.0 million, respectively, and corporate interest expense of $41.8 million and $124.0 million, respectively resulting from our interest-bearing corporate debt. Corporate interest expense decreased 39% to $41.8 million and 49% to $124.0 million for the three and nine months ended September 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
	September 30, 2010		December 31, 2009		2010 vs. 2009
	September 30, 2010		December 31, 2009		Amount			%
Assets:
Cash and equivalents	$	3,130.4	$	3,483.2	$	(352.8	)		(10	)%
Cash and investments required to be segregated under federal or other regulations		636.4		1,545.3		(908.9	)		(59	)%
Securities⁽¹⁾		15,277.0		13,358.0		1,919.0			14	%
Margin receivables		4,559.9		3,827.2		732.7			19	%
Loans, net		16,108.6		19,174.9		(3,066.3	)		(16	)%
Investment in FHLB stock		170.8		183.9		(13.1	)		(7	)%
Other⁽²⁾		5,385.5		5,794.0		(408.5	)		(7	)%

Total assets	$	45,268.6	$	47,366.5	$	(2,097.9	)		(4	)%

Liabilities and shareholders’ equity:
Deposits	$	24,167.5	$	25,597.7	$	(1,430.2	)		(6	)%
Wholesale borrowings⁽³⁾		8,664.0		9,188.8		(524.8	)		(6	)%
Customer payables		4,629.2		5,234.2		(605.0	)		(12	)%
Corporate debt		2,145.3		2,458.7		(313.4	)		(13	)%
Other liabilities		1,498.1		1,137.5		360.6			32	%

Total liabilities		41,104.1		43,616.9		(2,512.8	)		(6	)%
Shareholders’ equity		4,164.5		3,749.6		414.9			11	%

Total liabilities and shareholders’ equity	$	45,268.6	$	47,366.5	$	(2,097.9	)		(4	)%

⁽¹⁾

Includes balance sheet line items trading, available-for-sale 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 $0.9 billion during the nine months ended September 30, 2010. This decline was driven by both an increase in margin receivables and a decrease in customer payables. The increase in margin receivables of $0.7 billion was due to organic growth during the nine months ended September 30, 2010. The decrease in our customer payables was primarily a result of the movement of $0.8 billion 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
	September 30, 2010		December 31, 2009		2010 vs. 2009
	September 30, 2010		December 31, 2009		Amount			%
Trading securities	$	60.9	$	38.3	$	22.6			59	%

Available-for-sale securities:
Residential mortgage-backed securities:
Agency mortgage-backed securities and CMOs	$	9,363.5	$	8,966.9	$	396.6			4	%
Non-agency CMOs and other		392.1		375.1		17.0			5	%

Total residential mortgage-backed securities		9,755.6		9,342.0		413.6			4	%
Investment securities		2,932.3		3,977.7		(1,045.4	)		(26	)%

Total available-for-sale securities	$	12,687.9	$	13,319.7	$	(631.8	)		(5	)%

Held-to-maturity securities:
Residential mortgage-backed securities:
Agency mortgage-backed securities and CMOs	$	1,894.8	$	—	$	1,894.8			*
Investment securities		633.4		—		633.4			*

Total held-to-maturity securities	$	2,528.2	$	—	$	2,528.2			*

Total securities	$	15,277.0	$	13,358.0	$	1,919.0			14	%

Percentage not meaningful.

Securities represented 34% and 28% of total assets at September 30, 2010 and December 31, 2009, respectively. The increase in securities was due primarily to the purchase of $2.5 billion agency mortgage-backed securities and CMOs and agency investment securities classified as held-to-maturity securities. We classified these securities as held-to-maturity to better match the investment of our sweep deposits. The increase in held-to-maturity securities was partially offset by a decrease in available-for-sale investment securities related to the sale or call of agency debentures.

Loans, Net

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


							Variance
	September 30, 2010			December 31, 2009			2010 vs. 2009
	September 30, 2010			December 31, 2009			Amount			%
Loans held-for-sale	$	6.4		$	7.9		$	(1.5	)		(19	)%
One- to four-family		8,690.7			10,567.1			(1,876.4	)		(18	)%
Home equity		6,745.9			7,769.7			(1,023.8	)		(13	)%
Consumer and other		1,560.5			1,841.3			(280.8	)		(15	)%
Unamortized premiums, net		137.9			171.6			(33.7	)		(20	)%
Allowance for loan losses		(1,032.8	)		(1,182.7	)		149.9			(13	)%

Total loans, net	$	16,108.6		$	19,174.9		$	(3,066.3	)		(16	)%

Loans, net decreased 16% to $16.1 billion at September 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
	September 30, 2010		December 31, 2009		2010 vs. 2009
	September 30, 2010		December 31, 2009		Amount			%
Sweep deposit accounts	$	14,825.5	$	12,551.5	$	2,274.0			18	%
Complete savings accounts		6,864.0		9,704.0		(2,840.0	)		(29	)%
Other money market and savings accounts		1,080.9		1,183.4		(102.5	)		(9	)%
Checking accounts		745.7		813.7		(68.0	)		(8	)%
Certificates of deposits		536.6		1,215.8		(679.2	)		(56	)%
Brokered certificates of deposit		114.8		129.3		(14.5	)		(11	)%

Total deposits	$	24,167.5	$	25,597.7	$	(1,430.2	)		(6	)%

Deposits represented 59% of total liabilities at both September 30, 2010 and December 31, 2009. At September 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 $1.4 billion during the nine months ended September 30, 2010 was due primarily to a decrease of $2.8 billion in complete savings accounts, partially offset by an increase of $2.3 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 $0.8 billion 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 $31.9 billion and $33.8 billion at September 30, 2010 and December 31, 2009, respectively. The total customer cash and deposits balance is summarized as follows (dollars in millions):


							Variance
	September 30, 2010			December 31, 2009			2010 vs. 2009
	September 30, 2010			December 31, 2009			Amount			%
Deposits	$	24,167.5		$	25,597.7		$	(1,430.2	)		(6	)%
Less: brokered certificates of deposit		(114.8	)		(129.3	)		14.5			(11	)%

Retail deposits		24,052.7			25,468.4			(1,415.7	)		(6	)%
Customer payables		4,629.2			5,234.2			(605.0	)		(12	)%
Customer cash balances held by third parties and other		3,181.0			3,132.8			48.2			2	%

Total customer cash and deposits	$	31,862.9		$	33,835.4		$	(1,972.5	)		(6	)%

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
	September 30, 2010		December 31, 2009		2010 vs. 2009
	September 30, 2010		December 31, 2009		Amount			%
Securities sold under agreements to repurchase	$	5,907.9	$	6,441.9	$	(534.0	)		(8	)%

FHLB advances	$	2,303.6	$	2,303.6	$	—			0	%
Subordinated debentures		427.5		427.4		0.1			0	%
Other		25.0		15.9		9.1			57	%

Total FHLB advances and other borrowings	$	2,756.1	$	2,746.9	$	9.2			0	%

Total wholesale borrowings	$	8,664.0	$	9,188.8	$	(524.8	)		(6	)%

Wholesale borrowings represented 21% of total liabilities at both September 30, 2010 and December 31, 2009. Securities sold under agreements to repurchase and FHLB advances 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
September 30, 2010
Interest-bearing notes:
Senior notes:
8% Notes, due 2011	$	3.6	$	—		$	—	$	3.6
7³/8% Notes, due 2013		414.7		(2.7	)		16.5		428.5
7⁷/8% Notes, due 2015		243.2		(1.6	)		9.8		251.4

Total senior notes		661.5		(4.3	)		26.3		683.5
12¹/2% Springing lien notes, due 2017		930.2		(180.8	)		7.6		757.0

Total interest-bearing notes		1,591.7		(185.1	)		33.9		1,440.5
Non-interest-bearing debt:
0% Convertible debentures, due 2019		704.8		—			—		704.8

Total corporate debt	$	2,296.5	$	(185.1	)	$	33.9	$	2,145.3


	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 November 1, 2010, a cumulative total of $1.0 billion of our convertible debentures had been converted, including $5.1 million in the third quarter of 2010 and $0.9 million during the fourth quarter of 2010 through November 1, 2010. Our total common shares outstanding were 221 million and the remaining face value of the convertible debt was approximately $704 million as of November 1, 2010.

Shareholders’ Equity

The activity in shareholders’ equity during the nine months ended September 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		—		(4.4	)		(4.4	)
Conversions of convertible debentures		316.1		—			316.1
Claims settlement under Section 16(b)		35.0		—			35.0
Net change from available-for-sale securities		—		169.7			169.7
Net change from cash flow hedging instruments		—		(107.8	)		(107.8	)
Other⁽¹⁾		10.3		(4.0	)		6.3

Ending balance, September 30, 2010	$	6,638.5	$	(2,474.0	)	$	4,164.5

⁽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. 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 E*TRADE Bank; therefore, we believe a key indicator of the capital generated or used in our business operations is the level of regulatory capital in E*TRADE Bank. During the nine months ended September 30, 2010, E*TRADE Bank generated an additional $191 million of risk-based capital in excess of the level our regulators define as well-capitalized. While we do not expect E*TRADE Bank to generate risk-based capital in every quarter, we believe this is a positive indicator that the regulatory capital in E*TRADE Bank is sufficient to meet its operating needs.

Financial Regulatory Reform Legislation and Basel III Accords

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law on July 21, 2010 and includes comprehensive changes to the financial services industry. Under the Dodd-Frank Act, our primary regulator, the OTS, will be abolished and its functions and personnel distributed among the Office of the Comptroller of the Currency (the “OCC”), FDIC and the Federal Reserve. Although the Dodd-Frank Act maintains the federal thrift charter, it eliminates certain benefits of the charter and imposes new penalties for failure to comply with the qualified thrift lender test. The Dodd-Frank Act also requires all companies, including savings and loan holding companies that directly or indirectly control an insured depository institution to serve as a source of strength for the institution.

We believe the majority of the changes in the Dodd-Frank Act will have no material impact on our business. However, we believe 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.

The current risk-based capital guidelines that apply to E*TRADE Bank are based upon the 1988 capital accord of the International Basel Committee on Banking Supervision (“BCBS”), a committee of central banks and bank supervisors, as implemented by the U.S. federal banking agencies; including the OTS. On September 12, 2010, the Group of Governors and Heads of Supervision (“GHOS”), the oversight body of the BCBS, announced agreement on the calibration and phase-in arrangements for a strengthened set of capital requirements, known as the Basel III Accords. The final package of Basel III Accords will be submitted to the Seoul G20 Leaders Summit in November 2010 for endorsement by G20 leaders and then will be subject to individual adoption by member nations, including the U.S. beginning January 1, 2013. The GHOS agreement is intended to strengthen the prudential standards for large and internationally active banks and is not directly applicable to us; however, it may impact how the U.S. regulators implement the Dodd-Frank Act for other banking institutions, including the possibility of higher capital requirements. The full impact of the GHOS agreement on the regulatory requirements to which we will be subject is unclear, and will remain unknown for at least some time until implementing capital regulations are proposed and adopted. We will continue to monitor the ongoing rule-making process to assess both the timing and the impact of the Dodd-Frank Act and Basel III Accords on our business.

Consolidated Cash and Equivalents

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


	September 30, 2010		December 31, 2009			Variance
	September 30, 2010		December 31, 2009			2010 vs. 2009
Corporate cash	$	490.3	$	393.2		$	97.1
Bank cash		2,581.8		2,863.2			(281.4	)
International brokerage and other cash		58.3		275.8			(217.5	)
Less:
Cash reported in other assets⁽¹⁾		—		(49.0	)		49.0

Total consolidated cash	$	3,130.4	$	3,483.2		$	(352.8	)

⁽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 line items 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 was 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 September 30, 2010, we held $1.1 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 September 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 $623.6 million⁽¹⁾ at September 30, 2010, an increase of $65.3 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, $468.8 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 September 30, 2010, there were no outstanding balances and the full $375 million was available.

We rely on borrowed funds, such as securities sold under agreements to repurchase and FHLB advances, to provide liquidity for E*TRADE Bank. Our ability to borrow these funds is dependent upon the continued availability of funding in the wholesale borrowings market. At September 30, 2010, E*TRADE Bank had approximately $4.0 billion in 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 12 ¹/2% 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 September 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).

⁽¹⁾

The excess net capital of the broker-dealer subsidiaries at September 30, 2010 included $416.3 million and $132.5 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.

Tangible Common Equity

We believe that the 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):


	September 30, 2010			December 31, 2009			Variance
	September 30, 2010			December 31, 2009			2010 vs. 2009
Total assets	$	45,268.6		$	47,366.5			(4	)%
Less: Goodwill and other intangibles, net		(2,272.4	)		(2,308.7	)		(2	)%
Add: Deferred tax liability related to goodwill		211.7			176.9			20	%

Tangible assets⁽¹⁾	$	43,207.9		$	45,234.7			(4	)%

Shareholders’ equity	$	4,164.5		$	3,749.6			11	%
Less: Goodwill and other intangibles, net		(2,272.4	)		(2,308.7	)		(2	)%
Add: Deferred tax liability related to goodwill		211.7			176.9			20	%

Tangible common equity⁽²⁾	$	2,103.8		$	1,617.8			30	%

Tangible common equity to tangible assets⁽³⁾		4.87	%		3.58	%		1.29	%

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

•

Interest Rate Risk—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—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 $0.6 billion as of September 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 nine months ended September 30, 2010, we modified $144.2 million and $525.1 million, respectively, of loans in which the modification was considered a TDR. We also processed minor modifications on 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 $21.0 million and $74.4 million of loans were repurchased by the original sellers for the nine months ended September 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 was 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 and third quarter of 2010, we applied $15 million and $1 million, respectively, 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 $4 million to be applied to the allowance for loan losses in the fourth quarter 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 $39.6 million and $101.4 million in loans during the three and nine months ended September 30, 2010 and we had commitments to originate mortgage loans of $57.7 million at September 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 September 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⁾	September 30, 2010			December 31, 2009			September 30, 2010			December 31, 2009
<=70%	$	1,572.8		$	2,095.3		$	1,174.8		$	1,379.6
70% - 80%		949.0			1,148.2			444.6			507.6
80% - 90%		1,254.5			1,464.2			615.6			705.6
90% - 100%		1,229.0			1,500.9			775.8			885.9
>100%		3,685.4			4,358.5			3,735.1			4,291.0

Total	$	8,690.7		$	10,567.1		$	6,745.9		$	7,769.7

Average estimated current LTV/CLTV⁽²⁾		99.0	%		97.3	%		106.6	%		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.

⁽¹⁾

Approximately 14% of the home equity portfolio was in the first lien position as of September 30, 2010.


	One- to Four-Family				Home Equity
Current FICO⁽¹⁾	September 30, 2010		December 31, 2009		September 30, 2010		December 31, 2009
>=720	$	4,851.3	$	6,313.2	$	3,515.6	$	4,154.4
719 - 700		706.0		870.1		636.9		782.6
699 - 680		621.2		698.0		506.4		622.9
679 - 660		455.6		492.8		392.9		472.6
659 - 620		668.8		647.9		520.4		584.8
<620		1,387.8		1,545.1		1,173.7		1,152.4

Total	$	8,690.7	$	10,567.1	$	6,745.9	$	7,769.7

⁽¹⁾

FICO scores are updated on a quarterly basis; however, as of September 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 September 30, 2010 included original FICO scores for approximately $324 million and $370 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.

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 September 30, 2010 and December 31, 2009 (dollars in millions):


	One- to Four-Family				Home Equity
Acquisition Channel	September 30, 2010		December 31, 2009		September 30, 2010		December 31, 2009
Purchased from a third party	$	7,110.0	$	8,660.2	$	5,897.6	$	6,803.9
Originated by the Company		1,580.7		1,906.9		848.3		965.8

Total real estate loans	$	8,690.7	$	10,567.1	$	6,745.9	$	7,769.7


	One- to Four-Family				Home Equity
Vintage Year	September 30, 2010		December 31, 2009		September 30, 2010		December 31, 2009
2003 and prior	$	323.3	$	438.4	$	422.0	$	550.1
2004		829.2		1,034.9		618.7		715.4
2005		1,818.4		2,219.1		1,693.1		1,898.5
2006		3,285.2		3,944.2		3,152.3		3,626.4
2007		2,417.0		2,904.2		846.9		963.8
2008		17.6		26.3		12.9		15.5

Total real estate loans	$	8,690.7	$	10,567.1	$	6,745.9	$	7,769.7


	One- to Four-Family				Home Equity
Geographic Location	September 30, 2010		December 31, 2009		September 30, 2010		December 31, 2009
California	$	3,989.7	$	4,829.6	$	2,143.2	$	2,472.8
New York		659.3		800.9		478.8		533.8
Florida		599.4		717.8		481.2		561.9
Virginia		357.5		438.6		289.4		327.9
Other states		3,084.8		3,780.2		3,353.3		3,873.3

Total real estate loans	$	8,690.7	$	10,567.1	$	6,745.9	$	7,769.7

Approximately 40% of the Company’s real estate loans were concentrated in California at both September 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 September 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 general 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 general allowance is available to absorb credit losses inherent in the total loan portfolio as of the balance sheet date.

The following table presents the total 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⁾
September 30, 2010	$	397.1		4.55	%	$	571.4		8.36	%	$	64.3		4.07	%	$	1,032.8		6.03	%
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 nine months ended September 30, 2010, the allowance for loan losses decreased by $149.9 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 were caused by several factors, including: significant continued home price depreciation; weak demand for homes and high inventories of unsold homes; significant contraction in the availability of credit; and a general decline in economic growth along with higher levels of unemployment. 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 eight 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 $334.7 million and $193.6 million that was established for TDRs at September 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 well as the percentage of total expected losses as of September 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
September 30, 2010
One- to four-family	$	474.7	$	71.2		15	%		26	%
Home equity		478.7		263.5		55	%		58	%

Total	$	953.4	$	334.7		35	%		42	%

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 on loans that were delinquent in excess of 180 days or in bankruptcy 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 September 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
September 30, 2010
One- to four-family	$	361.3	$	45.4	$	22.9	$	45.1	$	474.7
Home equity		379.4		61.5		35.9		1.9		478.7

Total	$	740.7	$	106.9	$	58.8	$	47.0	$	953.4

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 nine months ended September 30, 2010 and 2009 (dollars in millions):


	Charge-offs			Recoveries		Net Charge-offs			% of Average Loans (Annualized)
Three Months Ended September 30, 2010
One- to four-family	$	(67.1	)	$	—	$	(67.1	)		3.00	%
Home equity		(148.1	)		6.5		(141.6	)		7.92	%
Consumer and other		(19.2	)		5.8		(13.4	)		3.27	%

Total	$	(234.4	)	$	12.3	$	(222.1	)		5.01	%

Three Months Ended September 30, 2009
One- to four-family	$	(110.3	)	$	—	$	(110.3	)		3.84	%
Home equity		(227.9	)		4.4		(223.5	)		9.93	%
Consumer and other		(26.8	)		9.0		(17.8	)		3.50	%

Total	$	(365.0	)	$	13.4	$	(351.6	)		6.25	%

Nine Months Ended September 30, 2010
One- to four-family	$	(239.3	)	$	—	$	(239.3	)		3.34	%
Home equity

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