eTrade 2004 Annual Report Download - page 35

Table of Contents
Index to Financial Statements
Expenses Excluding Interest
•
Net interest spread increased to 207 basis points in 2004 from 150 basis points in 2003 and 146 basis points in 2002. The increase in
net interest spread is primarily due to lower cost of funds. During 2004, our cost of funds were reduced by our sweeping brokerage
customer funds and free credits to the SDA, offering customers a competitive interest rate and, at the same time, reducing certain of
our higher-rate funds, such as certificates of deposit. The SDA balance has grown to $6.2 billion at December 31, 2004 from $4.3
billion at December 31, 2003.
•
Average interest-earning assets increased in 2004 and 2003 by 30% and 25%, respectively, from the prior comparable years. Our level
of average interest-earning assets depends on the relative volumes of our purchases and sales of mortgage-backed securities, available-
for
-
sale securities and home equity line of credit (
“
HELOC
”
)
portfolios.
Total expenses excluding interest decreased 13% to $1.1 billion in 2004 from $1.2 billion in 2003. This decrease was primarily a result of
our 2003 restructuring plan (the “2003 Restructuring Plan”) for which we recorded a charge of $112.6 million in 2003. The 2003 Restructuring
Plan, initiated in mid-2003, was focused on creating additional operating leverage by exiting unprofitable product offerings and consolidating
operations that included:
In 2004, we recognized further benefits of the 2003 Restructuring Plan, as costs, such as, occupancy and equipment and depreciation and
amortization decreased as compared to 2003. These decreases were offset by increases in commissions, clearance and floor brokerage that
resulted from an increase in our executed trades as market activity increased and an increase in professional services that resulted from our
back office conversion from BETA Systems to ADP Services and compliance with the Sarbanes Oxley Act.
Compensation and benefits include employee salary, bonus, sales and trading commissions, temporary employee services and other
related benefit costs. Over the past three years, compensation and benefits have remained relatively flat as a percentage of revenues. Of the
components, employee bonus is the most variable as the amounts are based on certain employee and Company targets being met. We have
accrued for employee and officer bonuses, which are paid out in the first quarter of the following year, in amounts of approximately
$62.0 million for 2004, $61.4 million for 2003 and $15.7 million for 2002. Of these, amounts to executive officers represented $15.6 million
for 2004, $14.1 million for 2003 and $4.0 million for 2002.
Advertising and market development
include production and placement of advertisements on television and in print, direct mail marketing
and promotions, website advertising and advertising agency fees. Advertising and market development increased approximately 8% to $65.7
million in 2004 from 2003, primarily as a result of increased advertising spend during the fourth quarter of 2004. The amount spent on
advertising is a function of
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closure of the E*TRADE FINANCIAL Center in New York. This Center encompassed approximately 31,000 square feet, was used by
customers to access the Company’s products and services and served as an introduction point for new customers to the Company’s
products and services. Although we continue to operate Centers to provide our retail customers personal access to our team of licensed
relationship specialists, we have done so on a significantly reduced scale at a significantly reduced operating cost. Our current Centers
are approximately 4,000 square feet, with annual operating costs of approximately $0.4 million;
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closure of 43 E*TRADE FINANCIAL Target Zones. We terminated the Zones in Target stores, in part because they were unprofitable
and we have focused on other methods of reaching our current and potential customers in a more efficient manner;
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consolidation within our Menlo Park and Rancho Cordova, California facilities. These facilities were used for corporate and
administrative functions and were exited as the we consolidated our employees into nearby offices and moved certain functions to our
offices in Virginia; and
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elimination of unprofitable products that included such offerings as stock baskets and electronic advisory services.