eTrade 2011 Annual Report Download - page 36

Legal Settlements for the Auction Rate Securities and Freudenberg Matters
• We reached a settlement with the Colorado Division of Securities and the NASAA whereby E*TRADE
Securities LLC offered to purchase auction rate securities from eligible investors who purchased those
securities through E*TRADE Securities LLC. We recorded a reserve of $48 million in connection with
this settlement. We also entered into a memorandum of understanding to settle the Freudenberg Action,
which resulted in the recording of a net reserve of $10.8 million as of December 31, 2011.
EARNINGS OVERVIEW
2011 Compared to 2010
We generated net income of $156.7 million, or $0.54 per diluted share, on total net revenue of $2.0 billion
for the year ended December 31, 2011. Commissions, fees and service charges, principal transactions and other
revenue decreased 2% to $711.3 million for the year ended December 31, 2011 compared to 2010, which was
driven primarily by the elimination of all account activity fees, which took effect in the second quarter of 2010.
In addition, gains on loans and securities, net and net impairment decreased 18% to $105.3 million for the year
ended December 31, 2011 compared to 2010.
Provision for loan losses declined 43% to $440.6 million for the year ended December 31, 2011 compared
to 2010, driven by improving credit trends and loan portfolio run-off. Total operating expenses increased 8% to
$1.2 billion for the year ended December 31, 2011 compared to 2010. This increase was driven primarily by
increases in advertising and market development expense, FDIC insurance premiums and other operating
expenses during the year ended December 31, 2011.
The following sections describe in detail the changes in key operating factors and other changes and events
that affected net revenue, provision for loan losses, operating expense, other income (expense) and income tax
expense (benefit).
Revenue
The components of revenue and the resulting variances are as follows (dollars in millions):
Variance
Year Ended December 31, 2011 vs. 2010
2011 2010 Amount %
Net operating interest income $ 1,220.0 $1,226.3 $ (6.3) (1)%
Commissions 436.2 431.0 5.2 1%
Fees and service charges 130.4 142.4 (12.0) (8)%
Principal transactions 105.4 103.4 2.0 2%
Gains on loans and securities, net 120.2 166.2 (46.0) (28)%
Net impairment (14.9) (37.7) 22.8 (60)%
Other revenues 39.3 46.3 (7.0) (15)%
Total non-interest income 816.6 851.6 (35.0) (4)%
Total net revenue $ 2,036.6 $2,077.9 $(41.3) (2)%
Net Operating Interest Income
Net operating interest income decreased 1% to $1.2 billion for the year ended December 31, 2011 compared
to 2010. Net operating interest income is earned primarily through investing customer cash and deposits in
interest-earning assets, which include: margin receivables, real estate loans, available-for-sale securities and
held-to-maturity securities.
The following table presents enterprise average balance sheet data and enterprise income and expense data for
our operations, as well as the related net interest spread, yields and rates and has been prepared on the basis required
by the SEC’s Industry Guide 3, “Statistical Disclosure by Bank Holding Companies” (dollars in millions):
33