eTrade 2003 Annual Report Download - page 43

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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 automobile, marine
and recreational vehicle 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 loan loss allowance would be required. The increased level of provision for loan losses recorded to meet
additional loan loss allowance 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
of recovery. In the event our portfolio of consumer finance receivables experience higher delinquencies, foreclosures, repossessions or losses
than anticipated, our results of operations or financial condition could be adversely affected.
We are exposed to risk in our credit card portfolio
In 2003, the Bank acquired credit card loans to further diversify its loan portfolio. Like other credit card lenders, we face the risk that we
will not be able to collect on credit card accounts because accountholders may not repay their unsecured credit card loans. Consumers who
miss payments on their credit cards often fail to repay them, and consumers who file for protection under the bankruptcy laws generally do not
repay their credit card obligations. Therefore, the rate of missed payments, or “delinquencies” on our credit card portfolio and the rate at which
consumers may be expected to file for bankruptcy can be used to predict the future rate at which we will 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 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, Dempsey may have large positions in securities of a single issuer or issuers engaged in a specific
industry. Dempsey also operates a proprietary trading desk separately from its specialist and market maker operations, which may also incur
trading losses.
Certain portions of our E*TRADE Professional business are also involved in proprietary trading, in which the firm provides capital that
becomes traded by employees and others. Similar to Dempsey’
s business, the proprietary trading positions of E*TRADE Professional may also
incur trading losses.
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 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 Dempsey.
Alternative trading systems that have developed over the past few years could also reduce the levels of trading of exchange-listed
securities through specialists and the levels of over-the-
counter trading through market makers. In addition, electronic communication networks
have emerged as an alternative forum to which broker-
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