eTrade 2010 Annual Report Download - page 57

Shareholders’ equity increased 8% to $4.1 billion at December 31, 2010 from $3.7 billion at December 31,
2009. This increase was due primarily to the conversions of convertible debentures of $317.0 million for the year
ended December 31, 2010.
In the first quarter of 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 in an effort 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 seven 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 net 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 year ended December 31, 2010, E*TRADE Bank generated an additional $206 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.
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