eTrade 2007 Annual Report Download - page 34

Provision for Loan Losses
Provision for loan losses increased $595.1 million to $640.1 million for the year ended December 31, 2007
compared to the same period in 2006. The increase in the provision for loan losses was related primarily to
deterioration in the performance of our home equity loan portfolio in the second half of 2007. We believe this
deterioration was caused by several factors, which are described below. First, the combined impact of rising
mortgage rates and home price depreciation in key markets contributed to the declining performance of our home
equity loan portfolio. Second, concerns that began in the sub-prime mortgage loan market spread to the broader
credit markets beginning in the second half of 2007, resulting in a significant deterioration in the overall credit
markets. This deterioration led to a dramatic tightening of lending standards across the industry, and general
liquidity pressure for many mortgage lenders, some of whom ultimately ceased operations as a result. The factors
described above dramatically reduced the ability of borrowers to refinance their mortgage loans, specifically their
home equity loans, therefore drastically increasing the risk of loss once a loan becomes delinquent. During the
second half of 2007, we also observed a decline in the percentage of delinquent loans that cure prior to charge-off
or foreclosure once they have become delinquent. We attribute this change in behavior to the factors described
above, which have significantly limited borrowers’ alternatives to avoid defaulting on their loans. In addition,
because of the decline in value of the homes collateralizing our home equity loans, our ability to recover our
investment by foreclosing on the underlying properties has diminished as well.
We believe the provision for loan losses will continue at historically high levels in future periods as the
crisis in the residential real estate and credit markets continues to impact the performance of our loan portfolio.
Commission
Commission revenue increased 11% to $694.1 million for the year ended December 31, 2007, compared to
the same period in 2006, which was driven by an increase of $66.4 million, or 14%, in our retail commission
revenue. The primary factors that affect our retail 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 relative number of executed trades in these businesses impacts average commission per
trade. Each business also has different trade types (e.g. equities, options, fixed income, exchange-traded funds,
contract for difference 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. Institutional
commission revenue is also impacted by negotiated rates, which differ by customer. Our institutional customers
are provided 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. We expect our institutional commission
revenue to decline substantially in 2008 as we plan to exit a significant portion of our institutional brokerage
operations.
DARTs increased 17% to 187,022 for the year ended December 31, 2007 compared to the same period in
2006. Our U.S. DART volume increased 13% for the year ended December 31, 2007 compared to the same
period in 2006. Our international DARTs grew by 43% for the year ended December 31, 2007 compared to the
same period in 2006, driven entirely by organic growth. Our international operations continue to be a strong
growth contributor within our retail trading business, and we believe that over time they will become a
significant component of our entire business. In addition, option-related DARTs further increased as a percentage
of our total U.S. DARTs and now represent 16% of U.S. trading volume versus 13% a year ago.
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