eTrade 2007 Annual Report Download - page 10

ITEM 1A. RISK FACTORS
Risks Relating to the Nature and Operation of Our Business
We have incurred significant losses and cannot assure that we will be profitable
We incurred a net loss of $1.4 billion, or $3.40 per share, for the year ended December 31, 2007, due
primarily to losses in our home equity loan and asset-backed securities portfolios. We also experienced a
substantial diminution of customer assets and accounts as a result of the losses experienced in our institutional
business segment. It may require a substantial period of time to restore asset quality at the Bank, rebuild our
retail franchise and return to profitability.
We will continue to experience losses in our mortgage loan portfolio
At December 31, 2007, the principal balance of our home equity loan portfolio was $11.9 billion. During
2007, the allowance for loan losses in this portfolio increased by $427.5 million to $459.2 million, primarily due
to a rapid deterioration in performance in the second half of the year. As the crisis in the residential real estate
and credit markets continues, we expect to experience cumulative losses between $1.0 and $1.5 billion in our
home equity loan portfolio over the next three years. There can be no assurance that our provision for loan losses
will be adequate if the residential real estate and credit markets continue to deteriorate. We may be required
under such circumstances to further increase our provision for loan losses, which could have an adverse effect on
our regulatory capital position and our results of operations in future periods.
Losses of customers and assets will result in lower revenues in future periods
During November 2007, well-publicized concerns about the Bank’s holdings of asset-backed securities led
to widespread concerns about our continued viability. From the beginning of this crisis through December 31,
2007 when the situation had stabilized, customers withdrew approximately $5.6 billion of net cash and
approximately $12.2 billion of net assets from our bank and brokerage businesses. Many of the accounts that
were closed belonged to sophisticated and active customers with large cash and securities balances. Concerns
about our viability may recur, which could lead to destabilization and asset and customer attrition. In addition, as
a result of our recent losses of customers and assets, we expect the revenues generated by trading and lending
activity to be significantly reduced from the levels experienced in the first three quarters of 2007. There can be
no assurance that we will successfully rebuild our franchise by reclaiming customers and growing assets. If we
are not successful, our revenues and earnings in future periods will be lower than we have experienced
historically.
We have a large amount of debt
We incurred a substantial amount of new debt in connection with the Citadel transaction in which we issued
approximately $1.8 billion of springing lien notes. Following Citadel’s investment, our total long-term debt is
$3.0 billion and the expected annual interest cash outlay is approximately $365 million. Our ratio of debt (our
senior debt and term loans but excluding $445.6 million in mandatorily convertible notes) to equity (expressed as
a percentage) was 93% at December 31, 2007. The degree to which we are leveraged could have important
consequences, including (i) a substantial portion of our cash flow from operations will be dedicated to the
payment of principal and interest on our indebtedness, thereby reducing the funds available for other purposes;
(ii) our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other
corporate needs will be limited; and (iii) our substantial leverage may place us at a competitive disadvantage,
hinder our ability to adjust rapidly to changing market conditions and make us more vulnerable in the event of a
downturn in general economic conditions or our business. In addition, a significant reduction in revenues could
materially adversely affect our ability to satisfy our obligations under our debt securities.
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