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FORM 10-K
E TRADE FINANCIAL CORP
(Annual Report)
Filed 3/11/2004 For Period Ending 12/31/2003
Address 135 E. 57TH STREET
NEW YORK, New York 10022
Telephone 650-331-6000
CIK 0001015780
Industry Investment Services
Sector Financial
Fiscal Year 12/31

Table of contents

  • Page 1
    E TRADE FINANCIAL CORP FORM 10-K (Annual Report) Filed 3/11/2004 For Period Ending 12/31/2003 Address Telephone CIK Industry Sector Fiscal Year 135 E. 57TH STREET NEW YORK, New York 10022 650-331-6000 0001015780 Investment Services Financial 12/31

  • Page 2
    ... EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003. or 32 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . Commission file number 1-11921 E*TRADE Financial Corporation (Exact name of registrant as specified...

  • Page 3
    (incorporated into Part III hereof).

  • Page 4
    Table of Contents Index to Financial Statements E*TRADE FINANCIAL CORPORATION FORM 10-K ANNUAL REPORT For the Year ended December 31, 2003 TABLE OF CONTENTS Page PART I Item 1. Business Overview Brokerage Banking Competition Regulation Required Financial Data Properties Legal and Administrative ...

  • Page 5
    Note 6-Other Investments Note 7-Loans Receivable, Net Note 8-Property and Equipment, Net Note 9-Goodwill and Other Intangibles, Net i 66 68 70 71

  • Page 6
    ...Transactions Note 13-Deposits Note 14-Securities Sold Under Agreements to Repurchase and Other Borrowings by Bank Subsidiary Note 15-Convertible Subordinated Notes Note 16-Accounts Payable, Accrued and Other Liabilities Note 17-Income Taxes Note 18-Shareholders' Equity Note 19-Employee Benefit Plans...

  • Page 7
    ...and we have added Banking products and services, which complement our Brokerage business. During 2003, we lowered our cost of funds in the Bank by sweeping Brokerage customer money market balances into an FDIC-insured Sweep Deposit Account product, allowing the Bank to obtain lower cost of funds and...

  • Page 8
    ...; real-time market commentary and news; and stock option plan administration products and services. In 2003, we began offering customers the opportunity to move some of their money market fund investments into an E*TRADE Financial Sweep Deposit Account (an FDIC-insured bank account through E*TRADE...

  • Page 9
    ...banking products and services. We offer interest-earning checking accounts, money market and savings accounts, Sweep Deposit Accounts (where cash that will be invested through E*TRADE Securities is held pending investment) and certificates of deposit. We offer residential mortgage loans, home equity...

  • Page 10
    ...Index to Financial Statements electronic bill payment services and a host of other financial products. In addition, we compete with mutual fund companies that provide money market funds and cash management accounts. REGULATION Our business is subject to stringent regulation by U.S. Federal and state...

  • Page 11
    ...Average Yield/Cost Average Balance Interest-earning banking assets: Loans receivable, net(1) Interest-bearing deposits Mortgage-backed and related available-for-sale securities Available-for-sale investment securities Investment in FHLB stock Trading securities Total interest-earning banking assets...

  • Page 12
    ... average total banking assets 14.93% 4.97% 14.77% 5.36% 9.46 % 5.55 % (1) (2) (3) Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is recognized on a cash basis. Amount includes a taxable equivalent increase in interest income in 2003...

  • Page 13
    ...net Interest-bearing deposits Mortgage-backed and related available-for-sale securities Available-for-sale investment securities Investment in FHLB stock Trading securities Total interest-earning banking assets(1) Interest-bearing banking liabilities: Retail deposits Brokered certificates of deposit...

  • Page 14
    ... Index to Financial Statements Lending Activities The following table presents the balance and associated percentage of each major loan category in our portfolio (dollars in thousands): December 31, 2003 Real estate loans: One-to four-family: Fixed-rate Adjustable-rate Home equity lines of credit...

  • Page 15
    ...Index to Financial Statements The following table shows the distribution of those loans that mature in more than one year between fixed and adjustable interest rate loans at December 31, 2003 (in thousands): Interest Rate Type Fixed Adjustable Total Real estate loans: One-to four-family Home equity...

  • Page 16
    8

  • Page 17
    ... value, less estimated selling costs. We use appraisals and other appropriate valuation methods to estimate the fair value of these assets. If the net estimated fair value of the collateral is less than the loan balance, the difference is charged to the allowance for loan losses. We perform periodic...

  • Page 18
    ... of Contents Index to Financial Statements value less estimated selling costs. At December 31, 2003, the estimated fair value of REO and other repossessed assets totaled $2.5 million of one- to four-family real estate loans, $2.6 million of RV loans, $0.6 million of automobile loans and $1.0 million...

  • Page 19
    ... using expected loss ratios, which are based on our historical charge-off experience, industry loss experience and current market and economic conditions. Our internal policy requires that the provision for loan losses is at least equal to twelve months of projected losses for all loan types. We...

  • Page 20
    ... lines of credit and second mortgage loans RV loans Automobile loans Marine loans Credit card loans Other loans Total recoveries Net charge-offs Allowance acquired through acquisitions(1) Provision for loan losses Allowance for loan losses, end of year Net charge-offs to average loans outstanding...

  • Page 21
    ... by Fannie Mae; • Federal Home Loan Mortgage Corporation ("Freddie Mac") participation certificates, guaranteed by Freddie Mac; and • securities issued by other non-agency organizations. We buy and hold mortgage-backed trading securities principally for the purpose of selling them in the near...

  • Page 22
    ...Fair Value Cost Basis 2001 Fair Value Mortgage-backed securities Investment securities: Asset-backed securities Publicly traded equity securities Corporate bonds Municipal bonds Obligations of U.S. government agencies Other investments Total investment securities Total available-for-sale securities...

  • Page 23
    ...table presents information about the Bank's deposits by category (dollars in thousands): Year Ended December 31, 2003 Percentage Average Balance for of Deposits the Year Money market Sweep deposit account Certificates of deposit Brokered certificates of deposit Demand accounts Passbook savings Total...

  • Page 24
    ...special direct investment and treasury, tax and loan borrowing programs. We use the proceeds from these transactions to meet our cash flow or asset/liability matching needs. The following table sets forth information regarding the weighted-average interest rates and the highest and average month-end...

  • Page 25
    ...own. Our Brokerage and Banking Segments lease additional facilities in the United States, Canada, Southeast Asia and Europe. We also lease facilities in New York City, Boston, Beverly Hills, Denver, La Jolla, Orlando and San Francisco where our E*TRADE Financial Centers are located. In 2003 and 2001...

  • Page 26
    ...may be material to the Company's operating results or cash flows for any particular period. The Company believes that its current reserves are adequate in view of its assessment of exposure at this time. In April 2002, a putative class action was filed in the Superior Court of California and for the...

  • Page 27
    ... Index to Financial Statements PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Price Range of Common Stock The following table shows the high and low sale prices of our common stock as reported by the NYSE for the periods indicated: High Low 2003: First Quarter...

  • Page 28
    ...30, 1999 Consolidated Balance Sheet Data: Cash and equivalents Brokerage receivables, net Mortgage-backed securities Loans, net Total assets Convertible subordinated notes and capital lease liability Mandatorily redeemable capital preferred securities Shareholders' equity (1) (2) $ 921,439 $ 2,297...

  • Page 29
    ...and we have added Banking products and services, which complement our Brokerage business. During 2003, we lowered our cost of funds in the Bank by sweeping Brokerage customer money market balances into an FDIC-insured Sweep Deposit Account product, allowing the Bank to obtain lower cost of funds and...

  • Page 30
    ... gains and losses on trading securities held by our Bank are recognized in gain on sales of loans held-for-sale and securities, net. Our brokerage operations hold trading securities for market-making purposes and record the net gains in revenues as principal transactions. Unrealized gains and losses...

  • Page 31
    ... for financial derivatives The Bank's principal assets are residential mortgages and mortgage-backed securities, which typically pay a fixed interest rate over an extended period of time. However, the principal sources of funds for the Bank are customer deposits and other short-term borrowings with...

  • Page 32
    ... to expected higher trading volumes at the Brokerage Segment, while fewer pre-payments, and a lower cost of funds contribute to a continuing increase in our net interest spread in the Banking Segment. In total, the Brokerage Segment reported $879.1 million of net revenues in 2003, compared to $862...

  • Page 33
    ..., independent research provided to our institutional customers and fees paid by our market makers to outside broker-dealers for orders received for execution. Selling and marketing expenses decreased 15% from $203.6 million in 2002 to $173.1 million in 2003 primarily due to the end of a significant...

  • Page 34
    ... of the spread between free credit balances and margin lending. Net brokerage revenues decreased 5% in 2002 from $911.4 million in 2001 because of lower average commission per brokerage revenue trade reflecting the implementation of a simplified $9.99 flat commission rate program for the most active...

  • Page 35
    ...2003 2002 2001 Total brokerage revenue trades(1) Brokerage daily average revenue trades ("DARTs")(1) Average commission per revenue trade Average (dollars in millions): Customer margin balances Customer money market fund balances Stock borrow balances Stock loan balances Customer credit balances...

  • Page 36
    ... the value of net assets held by investors and reduced borrowings on margin by customers. Brokerage interest expense includes interest paid to customers on certain credit balances and interest paid to banks and interest paid to other broker-dealers through a brokerage subsidiary's stock loan program...

  • Page 37
    ... the Company earned from the sales of loans held-for-sale and securities for the periods indicated (dollars in thousands): Year Ended December 31, Percentage Change 2003 Versus 2002 2002 Versus 2001 2003 2002 2001 Gain on sales of loans held-for-sale, net Gain on sales of securities, net Total...

  • Page 38
    ... During 2003, the Bank purchased and originated $4.5 billion of consumer loans, including the acquisition of $1.2 billion of existing portfolios of automobile, credit card and home equity loans through the secondary market. Credit card loans typically have higher charge-off rates and loss severities...

  • Page 39
    ...and investment securities totaling $3.5 billion and the purchase of E*TRADE Consumer Finance for $1.9 billion. Equity and Debt Offerings and Retirements In 2003, our Board of Directors approved a $100.0 million repurchase program. The open-ended plan provides the flexibility to buy back common stock...

  • Page 40
    ... rate environment. Typically, time deposit accounts, transactional accounts and accounts that maintain a relatively high balance provide a relatively stable source of funding. In 2003, we began sweeping Brokerage customer money market fund balances to the Bank, which were previously held in money...

  • Page 41
    ... acquisition of Trading Relationships. Does not include demand deposit, money market or passbook savings accounts, as there are no maturities and/or scheduled contractual payments. Includes annual interest based on the contractual features of each transaction, using market rates at December 31, 2003...

  • Page 42
    ... in the securities markets could reduce transaction volumes and margin borrowing and increase our dependence on our more active customers who receive lower prices A significant portion of our revenues in recent years has been from online investing services, and although we continue to diversify...

  • Page 43
    ...charge-off our credit card loans. Risks associated with principal trading transactions could result in trading losses A majority of our specialist and market-making revenues at Dempsey are derived from trading by Dempsey as a principal. Dempsey may incur trading losses relating to the purchase, sale...

  • Page 44
    ... and securities, margin lending and execution and settlement of transactions. We are also subject to additional laws and rules as a result of our specialist and market maker operations in Dempsey. In addition, to the extent that, now or in the future, we solicit orders from our customers or make...

  • Page 45
    ... operations may include investing activities, marketing and the financing of customer account balances. Also, our ability to withdraw capital from brokerage subsidiaries could be restricted, which in turn could limit our ability to repay debt and redeem or purchase shares of our outstanding stock...

  • Page 46
    ... the future for working capital, capital expenditures, debt service requirements or other purposes; • limit our flexibility in planning for, or reacting to, changes in our business; and • make us more vulnerable in the event of a downturn in our business. The market price of our common stock may...

  • Page 47
    ...foreign currency exchange rates and equity security price risk. Interest Rate Sensitivity At December 31, 2003, we had variable-rate brokerage and corporate term loans outstanding of approximately $17.2 million and $23.7 million at December 31, 2002. The monthly interest payments on these term loans...

  • Page 48
    ... margins as expressed in U.S. dollars. To mitigate the short-term effect of changes in currency exchange rates on our non-U.S. dollar-based revenues and operating expenses, we evaluate the costs and benefits to hedging our material net non-U.S. dollar-based exposures by entering into foreign...

  • Page 49
    ... Contents Index to Financial Statements liability structure consists primarily of transactional deposit relationships, such as money market accounts, shorter-term certificates of deposit and wholesale collateralized borrowings from the FHLB and other entities. The derivative portfolio of the Bank is...

  • Page 50
    ...Transactions Note 13-Deposits Note 14-Securities Sold Under Agreements to Repurchase and Other Borrowings by Bank Subsidiary Note 15-Convertible Subordinated notes Note 16-Accounts Payable, Accrued and Other Liabilities Note 17-Income Taxes Note 18-Shareholders' Equity Note 19-Employee Benefit Plans...

  • Page 51
    ...sheets of E*TRADE Financial Corporation and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. These...

  • Page 52
    ... Home Loan Bank Stock Goodwill Other intangibles, net Other assets Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Brokerage payables Deposits Securities sold under agreements to repurchase Other borrowings by Bank subsidiary Derivative liabilities Convertible subordinated notes Accounts payable...

  • Page 53
    ... loans Gain on sales of loans held-for-sale and securities, net Other banking-related revenues Banking interest income Banking interest expense Provision for loan losses Net banking revenues Total net revenues Cost of services Operating expenses: Selling and marketing Technology development...

  • Page 54
    Income (loss) per share: Basic Diluted Shares used in computation of per share data: Basic Diluted See accompanying notes to consolidated financial statements $ $ 0.57 0.55 $ $ (0.52) (0.52) $ $ (0.73) (0.73) 358,320 367,361 355,090 361,051 332,370 332,370 45

  • Page 55
    ... Index to Financial Statements E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Year Ended December 31, 2003 2002 2001 Net income (loss) Other comprehensive income (loss): Available-for-sale securities: Unrealized gains (losses...

  • Page 56
    ... Shares Amount Balance, December -$ 31, 2000 Net loss Other comprehensive loss Exercise of stock options, including tax benefit Employee stock purchase plan Release of unearned ESOP shares Repurchases of common stock Issuance of common stock in exchange for retirement of convertible subordinated...

  • Page 57
    EGI Canada Corporation to common stock (2,276) Other employee stock transactions Balance, December 31, 2001 (23) 2,276 23 73 (1,259) ( -$ - 1,826 $ 18 347,592 $ 3,476 $ 2,072,701 $ - $ (32,707) $ (28,110) $ (247,087 ) $ (197,377) $ 1,57 See accompanying notes to consolidated financial ...

  • Page 58
    ... Trust Issuance of common stock for purchase acquisitions and equity investments Conversion of Exchangeable Shares of EGI Canada Corporation to common stock Balance, December 31, 2002 Net income Other comprehensive income Exercise of stock options and warrants, including tax benefit Employee stock...

  • Page 59
    grants Cancellation of unvested restricted stock Issuance of restricted stock Amortization of deferred stock compensation, net of cancellations and retirements Conversion of Exchangeable Shares of EGI Canada Corporation to common stock Balance, December 31, 2003 954 (3,447) 1,733 (34) 17 (21,271) ...

  • Page 60
    ...restructuring costs and other exit charges Executive agreement and loan settlement Amortization of deferred stock compensation Deferred income taxes Gain on early extinguishment of debt Other Net effect of changes in brokerage-related assets and liabilities: Increase in cash and investments required...

  • Page 61
    ..., Beginning of year CASH AND EQUIVALENTS, End of year SUPPLEMENTAL DISCLOSURES: Cash paid for interest Cash paid for income taxes Non-cash investing and financing activities: Tax benefit on exercise of stock options and warrants Transfers from loans to other real estate owned and repossessed assets...

  • Page 62
    ... stock plan administration and options management tools; and E*TRADE Securities Limited, incorporated in the U.K., E*TRADE Securities Limited, incorporated in Hong Kong, and E*TRADE Canada Securities Corp., providers of brokerage services to both retail and institutional customers. Banking: E*TRADE...

  • Page 63
    ...a market value equal to or in excess of the principal amount loaned under Resale Agreements. These balances, held by our broker-dealer subsidiaries, are maintained in a special reserve bank account for the exclusive benefit of brokerage customers in accordance with Securities and Exchange Commission...

  • Page 64
    ... transfer. For transactions managed by the Bank, gain or loss is included in gain on sales of loans held-for-sale and securities, net for the difference between the allocated carrying amount of the asset sold and the net cash proceeds received. Fair value is determined based on quoted market prices...

  • Page 65
    ... are complete and management authorizes and commits to funding the project. The Company does not capitalize pilot projects and projects where it believes that future economic benefits are less than probable. Internally developed software costs include the cost of software tools and licenses used in...

  • Page 66
    ... gains. E*TRADE Securities receives commissions for providing certain institutional customers with market research and other information, which is a common industry practice. These commission revenues contributed less than 10% of the Company's net revenues for all periods presented. Direct costs...

  • Page 67
    ... servicing right, based on the relative fair values of the loans at the date of transfer. Nonrefundable fees and direct costs associated with the origination of mortgage loans are deferred and recognized when the related loans are sold. Gain on Sales of Loans Held-for-Sale and Securities, net -Gain...

  • Page 68
    ... per share amounts): Year Ended December 31, 2003 2002 2001 Net income (loss), as reported Add back: Stock-based employee compensation expense included in reported net income (loss), net of tax Deduct: Total stock-based employee compensation expense determined under fair value-based method for...

  • Page 69
    ... derivative recorded in AOCI within shareholders' equity, net of tax. Amounts are then included in interest expense as a yield adjustment in the same period the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the financial derivative is reported...

  • Page 70
    ...in gain on sales of loans held-for-sale and securities, net of $0.3 million, $3.7 million and $5.7 million, respectively. NOTE 3-BUSINESS COMBINATIONS During the past three years, the Company completed several business combinations that were accounted for under the purchase method of accounting. The...

  • Page 71
    Table of Contents Index to Financial Statements DRAFCO In October 2003, the Company completed the acquisition of all of the issued and outstanding capital stock of Deutsche Recreational Asset Funding Corporation ("DRAFCO"). This acquisition included the purchase of residual cash flow interests ...

  • Page 72
    ...,566 Using the purchase accounting method, the purchase price was allocated to the assets acquired and liabilities assumed in the E*TRADE Consumer Finance acquisition based on the estimated fair value on the purchase date. E*TRADE Professional In June 2002, the Company's Brokerage Segment acquired...

  • Page 73
    ...: Net settlement and deposits with clearing organizations Deposits paid for securities borrowed Securities failed to deliver Other Total brokerage receivables, net Payable to customers and non-customers Payable to brokers, dealers and clearing organizations: Deposits received for securities loaned...

  • Page 74
    ...mortgage-backed securities Investment securities: Debt securities: Asset-backed securities Corporate bonds Municipal bonds Other debt securities Total debt securities Publicly traded equity securities Retained interests from DRAFCO securitizations Total investment securities Total available-for-sale...

  • Page 75
    Total available-for-sale securities 63 $8,239,142 $ 31,286 $ (77,362) $ 8,193,066

  • Page 76
    .... The Company recorded a $2.2 million loss on the one impaired investment that had a carrying value of $4.4 million and a market value of $2.2 million. The consolidated statements of operations included this loss in gain on sales of loans held-for sale and securities, net. Publicly Traded Equity...

  • Page 77
    ...): Year Ended December 31, 2003 2002 2001 Mortgage-backed securities: Realized gains Realized losses Impairment charges(1) Net realized gains on mortgage-backed securities included in gain on sales of loans held-for-sale and securities, net Other bank investments: Realized gains Realized losses...

  • Page 78
    ...in thousands): Year Ended December 31, 2003 2002 2001 Joint Ventures: KAP Group E*TRADE Japan K.K. Soundview Technology Group, Inc. eAdvisor Other Net recognized in equity in income (loss) of investments Venture Capital Funds: E*TRADE eCommerce Fund I ArrowPath Fund II Other funds Net recognized in...

  • Page 79
    ... purchased from dealers in 2003. In 2003, E*TRADE Consumer Finance also recognized $4.5 million of fees from Thor Credit for management services it provides to the joint venture, including strategic oversight, accounting, credit administration, marketing and systems assistance. Venture Capital Funds...

  • Page 80
    ... of Contents Index to Financial Statements NOTE 7-LOANS RECEIVABLE, NET Loans receivable, net are summarized as follows (in thousands): December 31, 2003 Held-forInvestment Held-forSale Total Loans Real estate loans: One- to four-family Home equity lines of credit and second mortgage Multi-family...

  • Page 81
    68

  • Page 82
    ...Index to Financial Statements As detailed in Note 25, in addition to these loans receivable, net, the Company had commitments to originate, buy and sell loans at December 31, 2003 and 2002. Approximately 42% and 32% of the Bank's real estate loans were concentrated in California at December 31, 2003...

  • Page 83
    ... commitments to lend additional funds to any of these borrowers. Activity in the allowance for loan losses is summarized as follows (in thousands): Year Ended December 31, 2003 2002 2001 Allowance for loan losses, beginning of year Provision for loan losses Acquired through acquisitions Charge-offs...

  • Page 84
    ... Index to Financial Statements Capitalized internally developed software costs were $41.8 million for 2003, $34.0 million for 2002 and $27.5 million for 2001. Completed projects are carried at cost and are amortized on a straight-line basis over their estimated useful lives, generally four years...

  • Page 85
    ...Amount December 31, 2002 Accumulated Amortization Net Amount Specialist books Active accounts(1) ATM contracts Credit cards(1) Deposit intangibles(1) Proprietary agreements Customer list(1) Distribution Agency relationships Trader relationships(1) Other Total 3-30 7 5 15 3 7 7 9 6 4 6 $ 59,800 53...

  • Page 86
    ...361,051 332,370 332,370 December 31, 2003 2002 Receivables for Bank securities sold, collateral not delivered Prepaid expenses Net tax assets (see Note 17) Real estate owned and repossessed assets Secured related party and employee notes receivable Other Total other assets $ 46,514 50,151 84,544...

  • Page 87
    ... in credit, interest rate and prepayment risk. The investment in the preference shares is classified as a trading security in the Company's investment portfolio. Therefore, changes in the market value of these securities are recorded in gain on sales of loans held-for-sale and securities, net in...

  • Page 88
    ... of Contents Index to Financial Statements The fair values of ETGAM's CDO I and CDO II preference shares were based on calculated discounted expected future cash flows. These calculations were premised on weighted-average life, prepayment speed, discount rate and expected credit loss assumptions...

  • Page 89
    ...average expected credit losses Impact of 10% adverse change Impact of 20% adverse change Actual credit losses Since trust inception(1) Since acquisition on October 20, 2003 For the three months ended December 31, 2003: Actual interest payments received Actual principal payments received For the year...

  • Page 90
    ... August 2003. Other In the normal course of business, the Company's broker-dealer subsidiaries make margin loans to its directors and employees, these loans are made on the same terms and conditions as with other non-affiliated customers. The Company has entered into management retention agreements...

  • Page 91
    ... 2002 Percent December 31, 2003 December 31, 2002 Money market accounts Sweep deposit accounts Certificates of deposit Brokered certificates of deposit Passbook savings accounts Checking accounts: Interest-bearing Non-interest-bearing Total Deposits, classified by rates are as follows (in thousands...

  • Page 92
    ... Statements Interest expense on deposits in the past three years is summarized as follows (in thousands): Year Ended December 31, 2003 2002 2001 Money market accounts Sweep deposit accounts Certificates of deposit Brokered certificates of deposit Passbook savings accounts Checking accounts Total...

  • Page 93
    ... Reserve Bank's special direct investment and treasury, tax and loan programs. The Company pledged $801.8 million of securities and mortgage loans to secure these borrowings. Information about borrowings under fixed- and variable- rate coupon repurchase agreements and other short-term borrowings is...

  • Page 94
    ...in thousands): December 31, 2003 2002 Payables for Bank securities purchased, collateral not received Accrued expenses Taxes payable Restructuring accrual (see Note 20) Accounts payable Other short-term borrowing arrangements Capital lease obligations Other Total accounts payable, accrued and other...

  • Page 95
    ...securities to other third-party brokers at a fixed price. Other Short-Term Borrowing Arrangements The principal source of financing for E*TRADE Clearing's margin lending activity is cash balances in customers' accounts and financing obtained from other broker-dealers through E*TRADE Clearing's stock...

  • Page 96
    ... December 31, 2003 2002 Deferred tax assets: Reserves and allowances Net unrealized gain on equity investments and Bank assets held-for-sale Net operating loss carry-forwards Depreciation and amortization Deferred compensation Capitalized technology development Tax credits Restructuring reserve and...

  • Page 97
    .... Of this total, 20.0 million shares were purchased at a price of $7.28 per share, which represented a discount from the market price on the day of sale. Deferred Stock Compensation During 2003, the Company issued 1.7 million shares of restricted stock to executive officers, thereby increasing...

  • Page 98
    ... provide for grants of options to purchase shares of common stock to employees, officers and directors. Except as discussed below, exercise prices are equal to the fair market value of the shares on the grant date. The Company has also assumed option plans as a result of acquisitions in the past. No...

  • Page 99
    ... of this, the Company recorded compensation expense for in-the money options of $46,000 in 2003. A summary of stock option activity follows (shares in thousands): Number of Shares WeightedAverage Exercise Price Outstanding at December 31, 2000: Granted Exercised Canceled Outstanding at December 31...

  • Page 100
    ...: Year Ended December 31, 2003 2002 2001 Dividend yield Expected volatility Risk-free interest rate Expected life of option following vesting (in months) - 66% 3% 19 - 71% 4% 36 - 74% 5% 32 Under SFAS No. 123, the fair value of stock-based awards to employees is calculated using option pricing...

  • Page 101
    ...lines and the early termination of certain contracts, such as the revenue sharing agreements associated with 43 E*TRADE Zones located in Target stores. In calculating these charges, the Company used the negotiated contract termination fees or the net book value of assets less the amount of estimated...

  • Page 102
    ...in subsidiaries, net of tax for 2003. Other charges include termination of consulting agreements, severance, cancellation penalties on services no longer required and restructuring of the Company's Hong Kong brokerage operations. 2001 Facility Restructuring Plan In August 2001, the Company announced...

  • Page 103
    ... Index to Financial Statements Asset Write-Off The 2001 original facility restructuring charge included $52.5 million related to the write-off of capitalized software, hardware and other fixed assets. In calculating the asset write-off charge, the Company used the net book value of assets less...

  • Page 104
    ... operations from the buyer valued at $5.1 million. The Company recorded these future services in other assets and will amortize the value of these services over the anticipated period during which it expects to receive the actual services. The Company recognized a gain of $3.9 million from the sale...

  • Page 105
    ...Cumulative effect of accounting change, net of tax Net income (loss) Total weighted-average shares outstanding Effect of dilutive securities: Weighted-average options and restricted stock issued to employees Weighted-average warrants and contingent shares outstanding Total weighted-average basic and...

  • Page 106
    ...method, a broker-dealer may not repay subordinated borrowings, pay cash dividends or make any unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar amount requirement. The...

  • Page 107
    ... of Contents Index to Financial Statements framework for prompt corrective action, the Bank must maintain minimum Total and Tier I Capital to risk-weighted assets and Tier I Capital to adjusted total assets as set forth in the following table. As indicated in the table, at December 31, 2003 and 2002...

  • Page 108
    ...may be material to the Company's operating results or cash flows for any particular period. The Company believes that its current reserves are adequate in view of its assessment of exposure at this time. In April 2002, a putative class action was filed in the Superior Court of California and for the...

  • Page 109
    ... completed during the last three years, the Company is obligated to make certain additional payments in cash and/or stock in the event certain milestones are achieved by the acquired entities. See Note 3 for further information. E*TRADE Bank provides guarantees to investors purchasing mortgage loans...

  • Page 110
    ... these guarantees. NOTE 26- ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES The Company enters into derivative transactions to protect against the risk of market price or interest rate movements on the value of certain assets and future cash flows. The Company is also required...

  • Page 111
    ...match the terms of the securities purchased or sold. The change in fair value for derivatives that hedge cash flows associated with time deposits, repurchase agreements, FHLB advances, dollar rolls and other borrowings and investment securities are reported in AOCI as unrealized gains or losses. The...

  • Page 112
    ... 2003 (dollars in thousands): Fair Value of Derivative Pay Rate Asset Liability Net Weighted-Average Remaining Receive Rate Strike Rate Life (Years) Notional Amount of Derivative At December 31, 2003: Pay fixed interest rate swaps: Time deposits Repurchase agreements Federal Home Loan Bank Advances...

  • Page 113
    ... in the fair value of these closed loans are included in the consolidated statements of operations as gain on sales of loans held-for-sale and securities, net or gain on sales of originated loans based on whether the loan was purchased or originated. Credit risk is managed by limiting activity to...

  • Page 114
    ...savings, checking and money market accounts, fair value is estimated to be carrying value. For fixed maturity certificates of deposit, fair value is estimated by discounting future cash flows at the currently offered rates for deposits of similar remaining maturities. Borrowings -For adjustable-rate...

  • Page 115
    ... 31, 2003 Carrying Value December 31, 2002 Carrying Value Fair Value Fair Value Assets: Loans receivable and loans held-for-sale, net Equity method and other investments Liabilities: Deposits Securities sold under agreements to repurchase Other borrowings by Bank subsidiary Subordinated notes...

  • Page 116
    ...): Year Ended December 2003 Eliminations (1) Brokerage Banking Total Net revenues: Commissions Principal transactions Interest income Interest expense Gain on sales of originated loans Gain on sales of loans held-for-sale and securities, net Provision for loan losses Other revenues Net revenues...

  • Page 117
    ... Index to Financial Statements Year Ended December 31, 2002 Brokerage Banking Total Net revenues: Commissions Principal transactions Interest income Interest expense Gain on sales of originated loans Gain on sales of loans held-for-sale and securities, net Provision for loan losses Other revenues...

  • Page 118
    104

  • Page 119
    ... FINANCIAL INFORMATION (PARENT COMPANY ONLY) The following presents the Parent's condensed balance sheets, statements of operations and cash flows: BALANCE SHEETS (in thousands) December 31, 2003 2002 ASSETS Cash and equivalents Property and equipment, net Investments Equity in net assets of bank...

  • Page 120
    ... Statements STATEMENTS OF OPERATIONS (in thousands) Year Ended December 31, 2003 2002 2001 Revenues: Management fees from subsidiaries Other Net revenues Cost of services Operating expenses: Selling and marketing Technology development General and administrative Amortization of goodwill Acquisition...

  • Page 121
    ... exit charges Cumulative effect of accounting change Gain on early extinguishment of debt Other Other changes, net: Other assets and liabilities, net Increase (decrease) in restructuring liabilities Net cash (used in) provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of...

  • Page 122
    ... new format for the periods indicated (in thousands): Year Ended December 31, 2003 2002 Compensation and benefits Occupancy and equipment Communications Professional services Commissions, clearing and floor brokerage Advertising and market development Servicing and other banking expenses Fair value...

  • Page 123
    ... (dollars in thousands): Floating Rate Cumulative Preferred Securities Maturity Trustee Name Shares Issued Liquidation Value Annual Dividend Rate ETB Capital Trust XV ETB Capital Trust XIV 2034 2034 10,000 5,000 $ 10,000 $ 5,000 2.85% above 3-month average LIBOR 2.90% above 3-month average...

  • Page 124
    ... to "E*TRADE Financial Corporation." On October 22, 2003, the Company filed a Current Report on Form 8-K to report that on October 20, 2003, it had consummated its previously announced acquisition of all of the issued and outstanding capital stock of Deutsche Recreational Asset Funding Corporation...

  • Page 125
    ... Company's Registration Statement on Form S-3, Registration Statement No. 333-64102). Rights Agreement dated at July 9, 2001 between E*TRADE Financial Corporation and American Stock Transfer and Trust Company, as Rights Agent (Incorporated by reference to Exhibit 99.2 to the Company's Current Report...

  • Page 126
    ... Statement on Form S-1, Registration Statement No. 333-05525.) Menlo Oaks Corporate Center Standard Business Lease by and between Menlo Oaks Partners, L.P. and E*TRADE Financial Corporation, dated August 18, 1998 (Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10K...

  • Page 127
    ... on April 17, 2000). E*TRADE Ventures II, LLC, Limited Liability Company Operating Agreement. (Incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K filed November 9, 2000). E*TRADE eCommerce Fund II, L.P., Limited Partnership Agreement (Incorporated by reference to...

  • Page 128
    Table of Contents Index to Financial Statements Exhibit Number Description 10.44 10.45 10.46 10.47 10.48 10.49 10.50 10.51 10.52 10.53 10.54 10.55 10.56 10.57 10.58 Form of Note Secured by Stock Pledge Agreement by and between the Company and Jerry Gramaglia dated December 20...

  • Page 129
    ...2003, between E*TRADE Group, Inc. and ADP Financial Information Services, Inc. (Incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q filed August 8, 2003). E*TRADE FINANCIAL Sweep Deposit Account Brokerage and Servicing Agreement, dated September 12, 2003, by and between E*TRADE Bank...

  • Page 130
    ... Contents Index to Financial Statements SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 11, 2004 E*TRADE F INANCIAL...

  • Page 131
    ... Time Sharing Agreement dated September 1, 2000 (the " Time Sharing Agreement "), which granted him compensation for services performed as Chairman of the Board and Chief Executive Officer, including cash and stock options, and provided him with certain other benefit arrangements relating to his use...

  • Page 132
    Whereas, Cotsakos has acknowledged that E*TRADE may, upon completion of a calculation of the fair market value of the cost of Cotsakos' personal flights on E*TRADE's company aircraft between 2000 and 2003, be required under Section 61 of the United States Internal Revenue Code (the " Code ") and the...

  • Page 133
    ..., 2003. Cotsakos' representative will deliver to E*TRADE a certified check in the amount of $1,623,695.63 (the net amount of the payments required by paragraphs 1 and 2(a), less $3,000,000) payable by Cotsakos to E*TRADE Financial Corporation, along with a copy of this Settlement Agreement executed...

  • Page 134
    ... Agreement; and any and all claims which Cotsakos has or may have against E*TRADE relating in any way to the May 2002 Waiver, including specifically any claim for payment of, or vesting in, any benefit or equity grant waived, or any claim that the compensation and benefits waived, or the value...

  • Page 135
    ...E*TRADE will use its reasonable efforts to maintain the confidentiality of this Settlement Agreement. The Parties acknowledge that E*TRADE is subject to the rules and regulations of the Securities and Exchange Commission (" SEC ") and therefore may be required to disclose some or all of the terms of...

  • Page 136
    ... M. Cotsakos E*TRADE FINANCIAL CORPORATION By: /s/ M ITCHELL C APLAN Name: Mitchell Caplan Title: Chief Executive Officer 6 Exhibit 12.1 STATEMENT OF COMPUTATION OF RATIO EARNINGS TO FIXED CHARGES Year Ended December 31, 2003 2002 2001 Three Months Ended December 31, 2000 Year Ended September 30...

  • Page 137
    ...VIII ETFC Capital Trust IX ETFC Capital Trust X E*TRADE Bank TFBC Holdings Highland REIT Highland Holdings E*TRADE Consumer Finance Corporation Thor Credit Corporation Deutsche Recreational Asset Funding Corporation E*TRADE Access, Inc. ATM Ventures, LLC CCS Canada, Inc. E*TRADE Mortgage Corporation...

  • Page 138
    ... and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets , appearing in and incorporated by reference in this Annual Report on Form 10-K of E*TRADE Financial Corporation for the year ended December 31, 2003. Filed on Form...

  • Page 139
    ....2 I, Robert J. Simmons, certify that: I have reviewed this annual report on Form 10-K of E*TRADE Financial Corporation; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the...

  • Page 140
    ...the Exchange Act; and the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of E*TRADE Financial Corporation. /s/ M ITCHELL H. C APLAN Name: Mitchell H. Caplan Chief Executive Officer /s/ R OBERT J. S IMMONS Name...