eTrade 2007 Annual Report Download - page 38

Total other income (expense) for the year ended December 31, 2007 primarily consisted of corporate
interest expense resulting from the senior notes and mandatory convertible notes issued by the Company. We
expect corporate interest expense to increase significantly in 2008 in connection with the $1.8 billion of 12
1
⁄ 2 %
springing lien notes issued to Citadel. During 2007, we sold our investments in E*TRADE Australia and
E*TRADE Korea, which resulted in $37.0 million in gain on sales of investments, net. During 2006, we sold
shares of our investments in SBI and International Securities Exchange Holdings, Inc. (“ISE”) resulting in gains
of $71.7 million.
Income Tax Expense (Benefit)
The income tax benefit from continuing operations was $736.0 million for the year ended December 31,
2007 compared to an income tax expense of $302.0 million for the same period in 2006. Our effective tax rate for
2007 was (33.8)% compared to 32.5% for 2006. For additional information, see Note 17—Income Taxes to the
consolidated financial statements.
The Company expects the 2008 effective tax rate to increase compared to the tax rates for 2006 and 2007.
The two principal reasons for the increased effective tax rate in 2008 are the non-deductibility of a portion of the
interest expense on the 12
1
⁄ 2 % springing lien notes as well as a reduction in the amount of tax-exempt interest
earned on state and local fixed income securities. Specifically, we expect the 2008 effective tax rate to be based
on a pro-forma effective tax rate of approximately 37-38% plus an additional fixed amount of income tax
expense of between $15 and $20 million.
2006 Compared to 2005
Net income from continuing operations increased 40% to $626.8 million for the year ended
December 31, 2006 compared to 2005. 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 41% in 2006 from 38% when compared to prior year.
Revenue
Net Operating Interest Income After Provision for Loan Losses
Net operating interest income after provision for loan losses increased 66% to $1.4 billion for 2006
compared to 2005. 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 8% to 64% for
2006 compared to 2005. Average retail deposits and customer payables as a percentage of average enterprise
interest-bearing liabilities increased 9% to 62% 2006 compared to 2005.
Provision for Loan Losses
Provision for loan losses decreased 17% to $45.0 million for 2006 compared to 2005. The decrease in the
provision for loan losses was related primarily to a lower provision for our consumer loan portfolio in connection
with the decline in the overall size of the consumer loan portfolio.
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