eTrade 2006 Annual Report Download - page 37

Discontinued Operations
Our net gain (loss) from discontinued operations was $2.0 million for 2006. During 2006 and 2005, our
discontinued operations included operating results from our professional agency business E*TRADE
Professional Trading, LLC and we recognized a gain of approximately $2.6 million, net of tax, in 2006. In 2005,
discontinued operations also included operating losses from our consumer loan origination business and our
proprietary trading business E*TRADE Professional Securities, LLC, both of which were sold or discontinued
during 2005.
2005 Compared to 2004
Net income from continuing operations increased 17% to $446.2 million for 2005 compared to 2004. We
experienced strong growth in customer cash and deposits as well as in DARTs. We also experienced growth in
customer margin balances. In addition, we were able to achieve this growth while increasing our operating
margin to 38% in 2005 from 33% in 2004. Growth in revenues also was attributed to improved interest rate
spread and net interest income from a larger balance sheet. The following sections describe in more detail the
changes in key operating factors, and other changes and events that have affected our consolidated net revenue,
expense excluding interest, other income (expense), income tax expense, discontinued operations and cumulative
effect of accounting change.
Revenue
Net Operating Interest Income After Provision for Loan Losses
Net operating interest income after provision for loan losses increased 37% to $871.1 million for 2005
compared to 2004. The increase in net operating interest income was due primarily to growth in enterprise
interest-earning assets coupled with an increase in enterprise net interest spread. The growth in enterprise
interest-earning assets was driven by increases in both loans, net and margin receivables. The increase in
enterprise net interest spread was driven by changes in our mix of lending and funding sources. Average loans,
net and margin receivables as a percentage of average enterprise interest-earning assets increased 10% to 56% for
2005 compared to 2004. Average retail deposits and free credits as a percentage of average enterprise interest-
bearing liabilities decreased 6% to 53% 2005 compared to 2004.
Provision for Loan Losses
Provision for loan losses increased 42% to $54.0 million for 2005 compared to 2004. The increase in the
provision for loan losses was related primarily to growth in the residential mortgage loan portfolio. In addition,
higher consumer loan related losses resulted from higher losses on recreational vehicle loans and higher credit
card bankruptcy activity as a significant number of customers filed for personal bankruptcy before the enactment
of the new bankruptcy laws in October 2005.
Commission
Commission revenue increased 6% to $458.8 million for 2005 compared to 2004. The primary factors that
affect our commission revenue are DARTs and average commission per trade, which is impacted by both trade
types and the mix between our domestic and international businesses. Each business has a different pricing
structure, unique to its customer base and local market practices, and as a result, a change in the executed trades
between these businesses impacts average commission per trade. Each business also has different trade types
(e.g. equities, options, fixed income and mutual funds) that can have different commission rates. As a result,
changes in the mix of trade types within either of these businesses may impact average commission per trade.
Retail commission revenue increased $10.8 million for 2005 compared 2004 due to higher volumes
(DARTs), offset by lower average commission per trade. Average commission per trade decreased 12% to
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