eTrade 2006 Annual Report Download - page 43

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Our institutional segment generates earnings from balance sheet management activities, market-making and
global execution and settlement services. Balance sheet management activities include purchasing loan
receivables from the retail segment as well as third parties, and leveraging these loans and retail customer cash
and deposit relationships to generate additional net operating interest income. Retail trading order flow is
leveraged by the institutional segment to generate additional revenue for the Company.
Net operating interest income after provision for loan losses increased 27% to $471.5 million for 2006
compared to 2005. This increase was primarily a result of growth in interest-earning assets, which are funded
primarily by retail customer cash and deposit balances. These customer balances were kept on-balance sheet as a
low-cost source of funding and then utilized by the institutional segment either to purchase interest-earning assets
or pay down wholesale liabilities.
Institutional commissions increased 22% to $145.4 million for 2006 compared to 2005. This increase was
due to a more favorable trading environment and the continued leveraging of our integrated institutional model
with higher retail order flow. We provide institutional customers with global execution and settlement services,
as well as worldwide access to research provided by third parties, in exchange for commissions based on
negotiated rates, which differ by customer.
The increase in net operating interest income after provision for loan losses and commission revenue was
offset by a planned decrease in gain on sales of loans and securities, net of approximately $15.9 million for 2006
compared to 2005. We evaluate our portfolio of securities available-for-sale in light of changing market
conditions and where appropriate, take steps intended to optimize our overall economic position. During 2006,
we determined that we would not sell securities at similar levels as 2005 because we focused on growing our
balance sheet.
Total institutional segment expense increased 2% to $471.9 million for 2006 compared to 2005 and was
predominantly volume-related. Compensation and benefits expense increased due to increases in variable- and
performance-based compensation and expensing of stock options. Clearing and servicing expense increased due
to increased overall trading volumes and the increase in our loan portfolio.
2005 Compared to 2004
The 2% increase in institutional segment income in 2005 compared to 2004 was attributable to a
$74.0 million increase in net revenue offset by a $71.1 million increase in expenses. The increase in net revenue
resulted from higher net operating interest income due to higher average balances of enterprise interest-earning
assets. The increase in the net operating interest income was partially driven by a shift from lower yielding
securities to higher yielding loans. The increase in expenses was driven by an increase in intangible amortization
due to the impairment of our OTC Specialist Book, compensation and benefits expense due to the adoption of
SFAS 123(R) and commissions due to an increase in overall trading volumes and higher servicing expenses
related to an increase in loans serviced.
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