eTrade 2004 Annual Report Download - page 52

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Table of Contents
Index to Financial Statements
The Bank’s diversification of its asset portfolio may increase the level of charge-offs
As the Bank diversifies its asset portfolio through purchases and originations of higher-yielding asset classes, such as RV and marine
loans and credit card portfolios, we will have to manage assets that carry a higher risk of default than our mortgage portfolio. Consequently, the
level of charge-offs associated with these assets may be higher than previously experienced. In addition, if the overall economy weakens, we
could experience higher levels of charge-offs. If expectations of future charge-offs increase, a corresponding increase in the amount of our
allowance for loan loss would be required. The increased level of provision for loan losses recorded to meet additional allowance for loan loss
requirements could adversely affect our financial results, if those higher yields do not cover the provision for loan losses.
An increase in our delinquency rate could adversely affect our results of operations
Our underwriting criteria or collection methods may not afford adequate protection against the risks inherent in the loans comprising our
consumer loan portfolio. In the event of a default, the collateral value of the financed item may not cover the outstanding loan balance and costs
of recovery. In the event our portfolio of consumer finance receivables experiences higher delinquencies, foreclosures, repossessions or losses
than anticipated, our results of operations or financial condition could be adversely affected.
Risks associated with principal trading transactions could result in trading losses
A majority of our specialist and market-making revenues at ETCM-ES are derived from trading by ETCM-ES as a principal. ETCM-ES
may incur trading losses relating to the purchase, sale or short sale of securities for its own account, as well as trading losses in its specialist
stocks and market maker stocks. From time to time, ETCM-ES may have large positions in securities of a single issuer or issuers engaged in a
specific industry. ETCM-ES also operates a proprietary trading desk separately from its specialist and market maker operations, which may
also incur trading losses.
Certain portions of our professional business are also involved in proprietary trading, in which the firm provides capital that is used for
trading by employees and others. As with ETCM-ES’s business, the proprietary trading positions of E*TRADE Professional may also result in
trading losses.
Reduced grants by companies of employee stock options could adversely affect our results of operations
E*TRADE Financial Corporate Services is a provider of stock plan administration and options management tools. The FASB has issued
new rules that will require companies to value and expense stock options they grant to their employees and employee stock purchase plan
transactions in which the terms are more favorable to those available to all holders of the same class of shares beginning in mid-
2005. This may
result in companies granting fewer employee options and modifying their existing employee stock purchase plans, potentially reducing the
amount of products and services we provide these companies and compelling us to incur additional costs so that our tools comply with the new
FASB statement. Additionally, we may see a reduction in commission revenues as fewer options would be available for exercise and sale by
the employees of these companies.
Reduced spreads in securities pricing, levels of trading activity and trading through market makers and/or specialists could harm our
specialist and market maker business
The increase in computer generated buy/sell programs in the marketplace has continued to tighten spreads, resulting in reduced revenue
capture per share by the specialist and market-making community and reduced payment for order flow revenues for us. Similarly, a reduction
in the volume and/or volatility of trading activity could also reduce spreads that specialists and market makers receive, also adversely affecting
revenues generated by ETCM-ES.
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