Prepared by R.R. Donnelley Financial -- Form 10-K for the Fiscal Year Ended 12/31/2001
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001. |
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________.
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Commission file number 1-11921
E*TRADE Group, Inc.
(Exact name of registrant as
specified in its charter)
| Delaware |
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94-2844166 |
| (State or other jurisdiction |
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(I.R.S. Employer |
| of incorporation or organization) |
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Identification Number) |
4500 Bohannon Drive, Menlo Park, CA 94025
(Address of principal executive offices and zip code)
(650) 331-6000
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Common Stock—$0.01 par value
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
As of March 25,
2002, the aggregate market value of voting stock, comprised of the registrant’s common stock and shares exchangeable into common stock, held by nonaffiliates of the registrant was approximately $2,887,692,000 (based upon the closing price for
shares of the registrant’s common stock as reported by the New York Stock Exchange on that date). Shares of common stock held by each officer, director, and holder of 5% or more of the outstanding common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 25, 2002, there were 355,395,553 shares of common stock and 1,702,032 shares exchangeable into common stock outstanding. The Exchangeable Shares, which were issued by EGI Canada
Corporation in connection with the acquisition of VERSUS Technologies, Inc. (renamed E*TRADE Technologies Corporation effective January 2, 2001), are exchangeable at any time into common stock on a one-for-one basis and entitle holders to dividend,
voting, and other rights equivalent to holders of the registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement relating to the Company’s Annual Meeting of Shareowners to be held May 24, 2002, to be
filed hereafter (incorporated into Part III hereof).
E*TRADE GROUP, INC.
FORM 10-K ANNUAL REPORT
For the Fiscal Year ended December 31, 2001
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| PART II |
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| PART III |
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| PART IV |
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The page numbers in this Table of Contents reflect actual page numbers, not EDGAR page tag numbers.
Unless
otherwise indicated, references to “the Company,” “We,” and “E*TRADE” mean E*TRADE Group, Inc. and/or its subsidiaries. Prior to and including September 30, 2000, references to “Fiscal” mean the Company’s
year ended September 30 (e.g., “Fiscal 2000” represents the period from October 1, 1999 to September 30, 2000). Subsequent to September 30, 2000, references to “Fiscal” mean the Company’s year ended December 31 (e.g.,
“Fiscal 2001” represents the period from January 1, 2001 to December 31, 2001).
E*TRADE, the E*TRADE logo,
etrade.com, E*TRADE Bank, ClearStation, Equity Edge, Equity Resource, OptionsLink, ShareData, Stateless Architecture, Power E*TRADE, Destination E*TRADE, and TELE*MASTER are trademarks or registered trademarks of E*TRADE Group, Inc. or its
subsidiaries in the United States. Some of these and other trademarks are also registered outside the United States.
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PART I
E*TRADE Group, Inc., a diversified financial services
holding company, by and through its subsidiaries is a global provider of financial services to retail, corporate and institutional customers. Building on our foundation in online investing, we have expanded to provide retail customers with an
integrated and personalized suite of investing, banking, lending, planning and advice services primarily through online channels, under our new brand, “E*TRADE Financial.” (Throughout this document, when we use the term E*TRADE Financial,
we are referring to the brand under which we offer financial services to the customers of our brokerage, bank and other subsidiaries.) In the United States, we also offer corporate services, including employee stock plan administration, as well as
market-making services to brokerage firms. In addition, we provide global institutional customers with a range of securities brokerage products and services, including institutional trading. A key tenet of our strategy is to use our proprietary
technology and the Internet to deliver an integrated, personalized and value-added financial services experience to all of our customers. We execute against this strategy through the services provided by our wholly-owned subsidiaries, including, but
not limited to, E*TRADE Securities, Incorporated (“E*TRADE Securities”), a securities broker-dealer, TIR (Limited) Holdings (referred to herein as “E*TRADE Institutional”), a provider of global securities brokerage and other
related services to institutional clients, E*TRADE Financial Corporation (“ETFC”), a provider of financial services whose primary business is conducted by its subsidiary, E*TRADE Bank (the “Bank”). The Bank is a federally
chartered savings bank that provides credit products and deposit products insured by the Federal Deposit Insurance Corporation (“FDIC”) to customers nationwide. E*TRADE Group, Inc. was incorporated in California in 1982 and reincorporated
in Delaware in July 1996. Our principal corporate offices are located at 4500 Bohannon Drive, Menlo Park, CA 94025.
E*TRADE Securities was one of the early pioneers in online brokerage and investing services for the individual investor and has since expanded into a wide range of financial services and products. Over the last six years, we have made over
$5 billion in investments and targeted acquisitions to complement the investing products offered by E*TRADE Securities, with value-added services in banking, lending, planning and advice. Our new brand, “E*TRADE Financial,” introduced in
February 2002, reflects the broad range of financial services we offer customers. Our new web site and multi-touch point strategy integrates these services to make it easier for customers to manage their finances.
Below is a brief summary of the products and services we offer retail customers in investing, banking, lending, planning and advice.
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Investing: Our investing services include, but are not limited to, automated order placement and execution of market and limit equity orders;
streaming quotes and advanced trading platforms for active traders; personalized portfolio tracking, charting and quote applications; access to nearly 3,000 non-proprietary and proprietary mutual funds; bond trading and proprietary bond funds;
access to separate account money management, individual retirement account (“IRA”) and college savings plan products; real-time market commentary, quotes, news and professional research reports; and other information services.
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Banking: Our banking services include a range of FDIC-insured time deposit, savings and transactional products, including certificates of deposit,
money market and savings accounts, and interest-bearing checking accounts. Customers are able to transfer funds between their brokerage and bank accounts, pay bills online and get cash from any of the more than 11,000 E*TRADE Financial automated
teller machines (“ATMs”) across the United States. |
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Lending: Through our acquisition of LoansDirect Inc., now E*TRADE Mortgage Corporation (“E*TRADE Mortgage”), customers can also come to
E*TRADE Financial to get a first or second mortgage, refinance an existing mortgage, open a home equity line of credit (“HELOC”) or take out a home equity loan. |
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Planning and Advice: In addition to the regularly updated research, news and planning tools offered on our web site, customers can also gain
access to personalized investment advice through our all-electronic E*TRADE Financial Advisor, which is a service of E*TRADE Advisory Services, Inc., an investment adviser registered with the Securities and Exchange Commission (“SEC”).
E*TRADE Financial Advisor provides specific mutual fund recommendations based on an individual’s retirement and education goals, current holdings and assets, and risk tolerance. In addition, through our partnership with Ernst & Young,
customers have access to a network of personal financial planners should our customers seek additional assistance in planning their financial futures. |
We want our customers to have access to their financial information anytime, anywhere, and on any device. We provide service 24 hours a day, 7 days a week, by means of the Internet,
automated telephone service, direct modem access, Internet-enabled wireless devices and live telephone support. In addition, customers can visit any of five E*TRADE Financial Centers located in New York City, Boston, Beverly Hills, Denver and
San Francisco or our E*TRADE Financial Zones located in select SuperTarget® stores across the country.
Customers can also access their cash through our network of more than 11,000 automated teller machines.
On January 22, 2001, we
changed our fiscal year end from September 30 to December 31. During the three-month period ended December 31, 2000 (the “transition period”) and fiscal year 2001, we realized several important financial milestones, including the
following:
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We raised $325.0 million through the issuance of 6.75% convertible subordinated notes, retired $214.8 million of our 6% convertible subordinated notes through share
exchanges and cash repurchases with existing security holders, and repurchased 37.5 million shares of common stock at a weighted average price of $6.37 per share. |
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We continued to diversify our revenue streams, increasing non-transactional revenue from 46% of net revenues in the year ended September 30, 2000 to 68% of net revenues in the
fiscal year ended December 31, 2001. |
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We listed our stock on the New York Stock Exchange. |
In fiscal year 2001, we executed against a number of initiatives to further diversify our product and services offerings and revenue streams, realize efficiencies and synergies from operations and acquisitions, and
improve our global reach.
Product and Revenue Diversification
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We acquired and successfully integrated E*TRADE Mortgage Corporation into our Banking business. We also acquired Web Street, Inc. (“Web Street”), an online brokerage
firm, whose customers were integrated into that of E*TRADE Securities. Finally, we acquired Dempsey and Company LLC (“Dempsey”), a market-making and specialist firm, to complement our brokerage business and extend our vertical integration
within the brokerage industry. |
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We acquired PrivateAccounts, Inc. and renamed it E*TRADE Advisory Services, Inc. (“E*TRADE Advisory Services”). This acquisition allows us to offer separate account
management services for those investors who seek private management of their money. This service is called Personal Money Management. |
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We launched several other products, tools and services, including Power E*TRADE Pro, E*TRADE Financial Advisor and Stock Baskets. |
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We opened E*TRADE Financial Centers in New York City, Boston, Beverly Hills, Denver and San Francisco, in addition to opening eighteen E*TRADE Financial Zones in six
states, expanding our touchpoint strategy. |
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We launched financial news broadcast facilities in our New York City and San Francisco E*TRADE Financial Centers. |
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Efficiencies from Operations
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We announced and implemented a restructuring plan aimed at streamlining operations and enhancing profitability primarily by consolidating facilities in the United States and
Europe. We recognized facility and restructuring and other nonrecurring pre-tax charges of $202.8 million related to the consolidation of facilities worldwide, the elimination of obsolete or redundant software, severance payments to certain
associates and charges for other committed expenses and the re-negotiation and waiver of certain employment-related and other contractual obligations. |
Improved Global Reach
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We launched online brokerage services in Hong Kong, Israel and Germany. We increased our ownership in E*TRADE Germany AG, now E*TRADE Bank AG (“E*TRADE Germany”), to
100% in October 2000 to facilitate our expansion into Germany. |
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We completed our global “homepage,” the first step to one global site from which we can leverage the platform built in the United States to all our major global
businesses. |
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We launched the first phase of our institutional cross-border trading platform and integrated our institutional and retail back-office brokerage operations in the United
Kingdom. |
Our business model is designed to expand the range of value we provide to our customers and thereby
increase the value we receive from serving each customer. One of our major goals is to deepen our relationships with our retail household base by cross-selling them investing, banking, lending, planning and advice products. In furtherance of this
goal, our rebranding from E*TRADE to E*TRADE Financial is meant to convey to our existing and potential customers the array of services they can find on our web site.
In fiscal year 2001, we separated our financial services businesses into four categories: (1) Domestic Retail Brokerage, (2) Banking, (3) Global and Institutional, and (4) Wealth
Management and Other (formerly Asset Gathering and Other).
The Domestic Retail Brokerage business is primarily comprised of the
activities of our wholly-owned subsidiary, E*TRADE Securities, which offers domestic retail brokerage services by means of the Internet, automated telephone service, direct modem access, Internet-enabled wireless devices, live telephone support and
our E*TRADE Financial Centers and Zones. During fiscal 2001, we added the businesses of Web Street and Dempsey into the Domestic Retail Brokerage operations.
The Banking business is comprised primarily of the activities of the Bank, which offers a wide range of FDIC insured and other banking products, and the former Card Capture Services, Inc., now E*TRADE Access Inc.,
which operates a nationwide network of over 11,000 ATMs. During fiscal year 2001, we added the activities of E*TRADE Mortgage to the Banking segment.
The Global and Institutional business includes the activities of E*TRADE Institutional, VERSUS Technologies Corporation (renamed E*TRADE Technologies Corporation effective January 2, 2001 and referred to herein as
“E*TRADE Technologies”), and our international affiliates, which together provide services to our institutional and international retail customers. Through our network of affiliates, we have expanded internationally and have launched the
first phase of our cross-border trading platform, which allows retail customers in Sweden and Norway to buy U.S. equities online in real-time. A current focus of the Global and Institutional business is on the development and launch of an electronic
trading platform for institutional customers.
Our Wealth Management and Other business includes our mutual fund operations,
E*TRADE Business Solutions Group, Inc. (“BSG”), E*TRADE Advisory Services, Electronic Investing Corporation (“eInvesting”),
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and other services focused on corporate stock option programs, college savings plans, delivery of electronic advice and money management, tiered product offerings and activities generated from
our corporate operations. As the Wealth Management and Other operations of our business represent emerging activities that are not material to our consolidated results for segment reporting purposes, management has combined Wealth Management and
Other with the Domestic Retail Brokerage business to form one of three reportable segments. Banking and Global and Institutional comprise the other two reportable segments with respect to which management currently evaluates company performance.
For financial information by segment and geographic area for the year ended December 31, 2001, the three months ended December
31, 2000 and the fiscal years ended September 30, 2000 and September 30, 1999, see Note 27 to the Consolidated Financial Statements. No material part of our consolidated revenue is received from a single customer.
DOMESTIC RETAIL BROKERAGE
Business Overview
Our Domestic Retail Brokerage business is primarily comprised of the activities of E*TRADE Securities and Dempsey. As of
December 31, 2001, we had 3.4 million active brokerage accounts, up 15% from September 30, 2000, with assets held in customer brokerage accounts of $43.5 billion, down 27% from September 30, 2000. Our average daily transaction volume was
109,000 in fiscal year 2001, 35% less than the average daily transaction volume of 167,000 in fiscal 2000.
Products and Services
Our Domestic Retail Brokerage and related investment services are based upon proprietary transaction-enabling technology and are designed to
serve the needs of self-directed investors. Our services include fully-automated stock, option, fixed income and mutual fund order processing; innovative products such as Stock Baskets and Personal Money Management; online investment portfolio
tracking; and financial market news and information. We offer our services to customers through the Internet, desktop trading software, automated telephone service, Internet-enabled wireless devices, direct modem access and live telephone
representatives available 24 hours a day, 7 days a week. In addition, customers can access our services through our E*TRADE Financial Centers and Zones. Customers have access to current account information regardless of the gateway they use.
We continually strive to enhance the functionality of our services, as well as to offer new services that enhance our
customers’ online investing experiences. We expanded our services significantly during fiscal year 2001 with several new offerings, including: Stock Baskets, our ATM Check Card, Personal Money Management, Power E*TRADE MarketTrader and Power
E*TRADE Pro. In addition, we recently launched a significant upgrade to our web site, further enhancing our functionalities. Our existing services and product offerings are described below.
Stocks, Options, Fixed Income and Mutual Fund Investing
Customers can directly place orders to buy and sell Nasdaq and other exchange-listed securities, as well as equity and index options, bonds and mutual funds through our automated order processing system. Our trading window extends from 8:00
a.m. to 8:00 p.m. Eastern Time, supporting continuous 12-hour trading via Electronic Communications Networks (“ECNs”). We support a range of order types, including market orders, limit orders (good-until-canceled or day), stop orders and
short sales. System intelligence automatically checks the parameters of an order, together with the customer’s available cash balance and positions held, prior to executing an order. (For a discussion of our order processing, see “Order
Processing” under the Operations section below.)
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Brokerage customers receive electronic notification of order executions, electronic or printed transaction confirmations and detailed statements. We also arrange for the transmittal of proxy,
annual report and tender offer materials to customers.
Market Data and Financial Information
We receive a continuous direct feed of detailed quote data, market information and news. Customers can create their own personal lists of stocks and
options for quick access to current trading information. We provide customers with free streaming real-time quotes, including stocks, options, major market indices, most active issues, and largest gainers and losers for the major exchanges. Certain
qualifying customers receive free Nasdaq Level II quotes, institutional quality research and dynamically updating charts. Users are alerted when a stock hits the price, volume or price-to-earnings ratio that they set. Through our alliances, we also
provide access to breaking news, charts, market commentary and analysis and company financial information from over a dozen branded partners. As with after-hours trading, customers can access extended hours quotes, get breaking market news, and
place orders. This service is made available via our relationship with the Archipelago Electronic Communications Network.
Portfolio Tracking and Records Management
Customers have online access to a listing of their portfolio assets
held by us, including data on the date of purchase, cost basis, current price and current market value. The system automatically calculates unrealized profits and losses for each asset held. Detailed account balance and transaction information
includes cash and money market fund balances, buying power, net market portfolio value, dividends received, interest earned, deposits and withdrawals. Brokerage history includes all orders, executions, changes and cancellations. Tax records include
total short-term or long-term realized and/or unrealized gain/loss and commissions paid. Customers and registered members can also create watch lists to include most financial instruments they are interested in tracking—for example, assets held
at another brokerage firm. These watch lists can include stocks, options, bonds and many mutual funds. Customers can choose to receive and view official account statements and transaction confirmations online, providing added convenience.
Cash Management Services
Through our Account Express feature, consumers can open and fund new brokerage accounts in real-time via the Internet, streamlining the application process and minimizing paperwork for qualified customers. We continue
to receive customer payments through the mail, by wire transfer or the Internet, and credit these funds to customer accounts upon receipt. We also provide other cash management services to our customers. For example, uninvested funds in which the
balance is greater than $2,500 earn interest in a credit interest program or can be invested in any of nine money market mutual funds. In addition, we provide free checking services with no minimum balance requirement through a commercial bank and
are exploring the expansion of these services. We also offer electronic funds transfer via the Internet and an automatic deposit program to allow scheduled periodic transfers of funds into customers’ accounts. In 2001, we introduced the ATM
Check Card, which allows customers with brokerage accounts to access cash without fees from our approximately 11,000 E*TRADE ATMs nationwide.
Active Trader Products and Services
We continue to expand the products and services we
offer to customers who are active traders. The Power E*TRADE program, launched in 1998, offers commission discounts, premium services and various trading tools for active traders. Fiscal 2001 marked the launch of Power E*TRADE Pro and Power E*TRADE
MarketTrader, two new trading tools. Power E*TRADE MarketTrader offers customers access to Nasdaq Level II quotes and institutional quality research, fully integrated with order entry and position management. Power E*TRADE Pro offers direct access
through E*TRADE Securities to ECNs, allowing customers to self-direct orders to additional liquidity pools. Power E*TRADE Pro also features updating charts and multiple Level II windows in a fully-customized desktop software interface.
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Market-Making Activities
Market-making activities in listed and over-the-counter issues are conducted by Dempsey, a Chicago Stock Exchange (“CHX”) specialist. A specialist is a broker-dealer authorized
by an exchange to be a party through which all trading on the floor of the exchange is transacted. A specialist provides for a fair and orderly market for securities it is authorized to trade. The specialist must generally be ready to take the other
side of a transaction when other buyers or sellers are not available. Trading gains and losses result from these activities. While a significant portion of security trades originated by the clients of E*TRADE Securities are directed to Dempsey, a
large percentage of Dempsey’s trading volume comes from parties other than E*TRADE Securities. Dempsey is also a member of the Boston Stock Exchange, the Cincinnati Stock Exchange and Nasdaq. A wholly-owned Dempsey subsidiary, GVR, is a Nasdaq
market maker in the National Market System (“NMS”) and bulletin board securities. Dempsey is also a clearing member of the National Securities Clearing Corporation.
Customers and Markets
Current Domestic Retail Brokerage customers continue to be a key
target in our marketing communications. We plan to expand our customer base with the acquisition of online investors from competing brokerages, investors with traditional brokerage relationships, and investors who are just beginning to build their
financial future.
Our Domestic Retail Brokerage business plans to use the strength of its marketing partnerships, online and
other alliances and a sophisticated prospecting approach to identify, reach and convert new customers. The primary focus of these efforts will be on high-value investors, active traders, and investors who have a strong affinity with one of our
marketing partners.
Operations
Clearing
Clearing operations include the confirmation, receipt, settlement, custody and delivery functions
involved in securities transactions. Performing our own clearing operations allows E*TRADE Securities to retain customer free credit balances and securities for use in margin lending activities subject to SEC and National Association of Securities
Dealers Regulation, Inc. (“NASDR”) rules. E*TRADE Securities has an agreement with BETA Systems, through January 2006, for the provision of computer services to support order entry, order routing, securities processing, customer statement
preparation, tax reporting, regulatory reporting, and other services necessary to manage a brokerage clearing business.
As a
self-clearing brokerage, E*TRADE Securities typically holds customers’ securities in nominee name on deposit at one or more of the recognized securities industry depository trust companies to facilitate ready transferability. We collect
dividends and interest on securities held in nominee name and make the appropriate credits to customer accounts. We also facilitate exercise of subscription rights on securities held for our customers. We arrange for the transmittal of proxy, annual
report and tender offer materials to customers. E*TRADE Securities relies on certificate counts and microfilming procedures as deterrents to theft of securities and, as required by the NASDR and certain other regulatory authorities, carries fidelity
bonds covering loss or theft.
Lending and Borrowing Activities
Margin Lending. We make loans to customers that are collateralized by customer securities. Our margin lending is subject to the margin rules of the
Board of Governors of the Federal Reserve System (the “Federal Reserve”), NASDR margin requirements and our internal policies, which are more stringent than the Federal Reserve and NASDR requirements. In permitting customers to purchase
securities on margin, we take the risk of a market decline that could reduce the value of the collateral held by us below the customers’ indebtedness
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before the collateral can be sold, which could result in losses to us. Under applicable NASDR rules, in the event of a decline in the market value of the securities in a margin account, we are
generally obligated to require the customer to deposit additional securities or cash in his or her account so that, at all times, the customer’s equity in the account is at least 25% of the value of the securities in the account. Our current
internal requirement, however, is that the customer’s equity not fall below 30%. In the event a customer’s equity falls below 30%, the customer is required to increase the account’s equity to 35%.
Margin lending to customers constitutes the major portion of the basis on which our net capital requirements are determined under the SEC’s Net
Capital Rule. To the extent these activities expand, our net capital requirements will increase. See “Item 7. Risk factors—If we do not maintain the capital levels required by regulators, we may be fined or forced out of business” and
“Item 7. Risk factors—As a significant portion of our revenues come from online investing services, downturns or disruptions in the securities markets have harmed and could further significantly harm our business, including by reducing
transaction volumes and margin borrowing and increasing our dependence on our more active customers who receive lower prices.”
Securities Lending and Borrowing.
We borrow securities both to cover short sales and to complete customer
transactions in the event a customer fails to deliver securities by the required settlement date. We collateralize such borrowings by depositing cash or securities with the lender and receive a rebate (in the case of cash collateral) or pay a fee
calculated to yield a negotiated rate of return. When lending securities, we receive cash or securities and generally pay a rebate (in the case of cash collateral) to the other party in the transaction. Securities lending and borrowing transactions
are generally conducted pursuant to written and/or oral agreements with counterparties which require that the securities borrowed be “marked-to-market” on a daily basis and that excess collateral be refunded or that additional collateral
be furnished in the event of changes in the market value of the securities. The securities usually are “marked-to-market” on a daily basis through the facilities of the various national clearing organizations.
Order Processing
All
market orders for exchange-listed securities (subject to certain size limitations) are generally executed at the NBBO or better, at the time of receipt by the third market-making firm or exchange. The NBBO is a dynamically updated representation of
the combined highest bid and lowest offer quoted across all United States stock exchanges and market makers registered in a specific stock. Eligible orders are exposed to the marketplace for possible price improvement. Limit orders are executed
based on an indicated price and time priority. Nasdaq market orders, subject to certain size limitations, are generally executed at the Best Bid/Offer, Inside Market or better at the time of receipt by the market-maker. All transaction and portfolio
records are automatically updated to reflect trading activity. Buy and sell orders placed when the markets are closed are automatically submitted prior to the next day’s market opening unless the customer chooses to enter the order as an
extended-hours transaction via ECNs. Brokerage customers receive electronic notification of order executions, printed transaction confirmations and detailed statements. See “Item 7. Risk factors—If our ability to correctly process customer
transactions is slowed or interrupted, we could be subject to customer litigation and our reputation could be harmed.”
The
market for online investing services, particularly over the Internet, continues to rapidly evolve and is intensely competitive. We expect competition to continue to intensify in the future. See “Item 7. Risk factors—We face competition
from competitors, some of whom have significantly greater financial, technical, marketing and other resources, which could cause us to lower our prices or to lose a significant portion of our market share.”
In addition, the securities industry in the United States is subject to extensive regulation under both federal and state laws. See “Item 7. Risk
factors—If changes in government regulation, including banking and securities
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rules and regulations, favor our competition or restrict our business practices, our ability to attract and retain customers and our profitability may suffer” and “Item 7. Risk
factors—If we do not maintain the capital levels required by regulators, we may be fined or forced out of business.”
Access and Delivery of Services
Our services are widely accessible through multiple gateways, with automated
order placement available 24 hours a day, 7 days a week, by personal computer, touch-tone telephone, Internet-enabled wireless devices, and live telephone representatives.
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Personal Computer. Customers using personal computers can access our system through the Internet or direct modem access. Our web site combines an
easy-to-use graphical user interface with the trading capabilities that experienced investors demand. The web-based system also includes direct links to many investment-related resources. Alternatively, accessing our system by dialing directly
through a modem offers a method for connecting to the trading system independent of either the Internet or a proprietary online service. |
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Touch-tone Telephone. TELE*MASTER®, our interactive system, provides customers with a convenient way to access quotes, place orders and access portfolio information using their voice or a touch-tone telephone keypad. |
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Internet-enabled Wireless Devices. Customers can access our system via Internet-enabled wireless phones supporting the Handheld Device Markup
Language (HDML) or Palm VII with built-in modem or Palm V handheld computer equipped with an after-market wireless modem addition. Our Mobile E*TRADE Financial suite of products allows customers to access quotes, place orders, view portfolio and
account information and retrieve customized investment-related information wherever the customer’s wireless service provider offers data coverage. |
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E*TRADE Financial Centers and Zones. Customers can now access us in person at any one of our E*TRADE Financial Centers or Zones. E*TRADE
Financial Centers, open in New York City, San Francisco, Beverly Hills, Boston and Denver, offer in-person access to our team of licensed relationship specialists. Relationship specialists provide independent information and education on our
suite of products and services. This personalized level of service is designed to help individual households choose the means to accomplish their lifetime financial goals. Customers can make financial transactions in their E*TRADE Bank and E*TRADE
Securities brokerage accounts, as well as participate in educational seminars, browse through our library of financial information, use E*TRADE Financial ATMs, and access all the research and tools available on our web site. E*TRADE Financial Zones
are located in select SuperTarget® stores as part of an agreement between E*TRADE Financial and Target Corporation. Each E*TRADE Financial Zone is approximately 400 square feet, equipped with terminals that allow customers
to open accounts and access stock quotes, personal watch lists, market updates, trading capabilities, portfolio reviews, and financial research, news and commentary. E*TRADE Financial Relationship Specialists are also on-site to offer personalized
service. All E*TRADE Financial Zones are equipped with video monitors as well as E*TRADE Financial ATMs, which allow customers to conduct banking transactions with E*TRADE Bank. |
10
BANKING
Business Overview
The Company offers retail banking products and services through E*TRADE Bank and its
subsidiaries. The Bank is the nation’s largest Internet bank and offers a full suite of consumer banking products and services. The Bank delivers these products and services through non-traditional means—the Internet, telephone and
ATMs—and thus eliminates many of the costs associated with brick-and-mortar branches. We believe that our branchless orientation allows us to use technology to create cost efficiencies and offer superior customer value. Our value
proposition is fashioned around three basic tenets: price (higher rates and lower fees than traditional banks), convenience (worldwide delivery of integrated products and services through “anytime, anywhere, any device” access) and service
(redundant 24 x 7 customer service). We believe that our branchless structure and our unique value proposition are significant competitive advantages that distinguish the Bank from traditional banks.
Our ATM business, E*TRADE Access, Inc. (“E*TRADE Access”), which operates a nationwide ATM network of over 11,000 machines, is an important
component of our “high tech, high touch” strategy. Our ATM network enhances customer convenience and extends the reach of our financial services portal by providing easy access to our services. The deployment of the ATM network does not
require an investment in traditional brick-and-mortar branches. We are currently developing advanced functionality ATMs that will serve as a cost-effective delivery channel for cross-selling our products and services.
Over the next year, the Bank plans to continue to restructure its retail deposit base by increasing both the number and profitability of transactional
accounts. We believe that transactional accounts facilitate the development of E*TRADE Financial’s household strategy. The shift towards transactional accounts will be achieved through organic growth and, where appropriate, through bulk deposit
account acquisitions.
The Bank’s asset acquisition strategy continues to be conservative. In fiscal 2002, the Bank plans
to temper asset growth and continue to diversify into higher-yielding loan products to optimize profitability. We anticipate that the Bank’s asset portfolio will continue to include mortgage loans, automobile and other consumer loans,
mortgage-backed securities, and corporate debt, and will increasingly include commercial real estate and specialty finance loans. The Bank’s asset diversification strategy is designed to optimize income without significantly affecting the
Bank’s risk profile.
In February 2001, the Bank acquired E*TRADE Mortgage Corporation (“E*TRADE Mortgage”), now
a wholly-owned mortgage banking subsidiary of the Bank, which originates first and second lien residential mortgage loans and home equity loans and lines of credit in all 50 states. E*TRADE Mortgage will continue to focus on the retail origination
of single-family mortgage loans and to develop other consumer lending products that will be held in the Bank’s portfolio or sold in the secondary market.
In fiscal 2001, E*TRADE Mortgage generated over $5 billion in mortgages of which substantially all were resold to other institutions, generating origination fees. Over 20% of these loans were generated by
cross-selling to the E*TRADE Financial customer household base. While we anticipate a sharp decline in demand for consumer mortgages and refinancings in 2002 as interest rates rebound from historically low levels, we will continue to cross-sell and
originate specialty products like home equity loans and lines of credit. We anticipate that these products will generate recurring origination fee income and will either be placed in the Bank’s portfolio to augment interest rate spreads or will
be sold in the secondary market. At the same time, we anticipate the continued expansion of our correspondent program, which currently includes a network of 103 approved entities nationwide from which we purchase and to which we sell bulk packages
of mortgages and other consumer loans. Through this network, we secured over $5 billion in flow and bulk mortgage product in fiscal 2001. We believe that the correspondent program and E*TRADE Mortgage will continue to provide the Company with
diverse asset acquisition channels and generate recurring non-interest income through the sale of excess mortgage product.
11
Products and Services
We offer customers a variety of banking products. Our interest checking accounts are designed for customers who prefer to bank online. These accounts feature unlimited personal check writing, free check printing, free
Internet banking, online bill payment, SmartAlerts, access to a nationwide ATM network and an ATM/debit card. In fiscal 2002, customers will be able to integrate our checking accounts with Quicken and Microsoft Money, see real time bank activity and
view checks online. Our money market and savings accounts are designed for consumers who are seeking premium yields with immediate access to funds without term restrictions or early withdrawal penalties. Our standard certificates of deposit
(“CD” or “CDs”) are designed for consumers who want a fixed premium yield for terms ranging from three months to five years. For those consumers who seek an even higher premium yield CD, we offer seven-to-ten year callable CDs,
which are subject to redemption by us anytime after two years. Additionally, we offer a “Prime Link CD,” a fixed income product that is tied to the Prime Rate. With Prime Link CDs, the customer’s principal is guaranteed, and CD
interest rises as the Prime Rate increases. Through E*TRADE Mortgage, we offer consumers first and second lien residential mortgage loans and home equity loans and lines of credit. Customers can access E*TRADE Mortgage via telephone, email or
through a proprietary “web-chat” system.
Through a co-branding partnership with First USA, we offer credit card
services. We are evaluating opportunities to offer a proprietary credit card product. We will continue to analyze adding new products and lines of business through corporate acquisitions and partnerships. We are currently planning to provide
direct-to-consumer automobile loan origination in the first half of fiscal 2002.
Customers and Markets
Our branchless structure enables us to serve customers worldwide. The majority of the Bank’s current customers live in major urban centers in the
U.S. The Bank intends to continue to focus on these centers for future growth.
The Bank is transitioning its deposit base
toward a greater percentage of transactional accounts. This transition is expected to improve interest rate spreads. The Bank targets transactional customers living in major urban centers who are aged 35 to 54, technologically savvy and possess
investible assets of at least $100,000.
Cross-selling continues to be an important part of the Bank’s strategy. Over 36%
of the Bank’s deposit accounts and approximately 20% of all loans originated by E*TRADE Mortgage, have come from cross-selling to our customer base. The Bank’s leading customers have average Fair, Isaac and Company (“FICO”)
scores above 720, and are accordingly favorable candidates for our credit products.
Regulatory Oversight
E*TRADE Group, Inc. and ETFC are savings and loan holding companies, and E*TRADE Bank is a federally chartered savings bank. Accordingly, we are subject
to extensive regulation, supervision and examination by the OTS as our primary federal regulator. The Bank is also subject to regulation, supervision and examination by the FDIC. Further, as a financial services holding company, E*TRADE Group, Inc.
is subject to the SEC’s Industry Guide 3 reporting requirements. Certain disclosure of financial information required by Guide 3 with respect to our banking services is provided below as a part of our discussion of Banking operations.
Prior to its acquisition, ETFC reported its results of operations on a fiscal year ending December 31. Because we formally
reported on a fiscal year ending September 30, financial information contained in this document for fiscal 2000 and 1999 includes the results of ETFC for the twelve months ended September 30, 2000 and 1999. Fiscal 1998 and 1997 include the results
of ETFC for the twelve months ended December 31, 1998 and 1997, respectively. Accordingly, the reconciliation of activities in certain accounts presented herein for the year ended September 30, 1999 will begin with the October 1, 1998 balance,
whereas the
12
September 30, 1998 reconciliation will cover ETFC’s operating period from January 1, 1998 through December 31, 1998. This reconciliation causes certain amounts to be included in both
fiscal 1999 and 1998.
Lending Activities
General. As part of our Banking operations, we originate first-lien mortgages, home equity loans and HELOCs through E*TRADE Mortgage, and we purchase pools
of mortgage, automobile and recreational vehicle loans and mortgage-backed and related securities in the secondary market.
Loan Portfolio Composition. At December 31, 2001, our net loans receivable totaled $8.0 billion or 59.5% of total bank assets. As of the same date, $6.3 billion, or 79.1%, of the total gross loan portfolio
consisted of one- to four-family residential mortgage loans. Automobiles and recreational vehicles loans amounted to $1.6 billion or 20.5% of our total gross loans portfolio. Multi-family, commercial, mixed-use real estate home equity line of credit
and second mortgage loans and other loans amounted to $38.1 million, or 0.5%, of our total gross loan portfolio.
13
The following table presents information concerning our banking loan portfolio, in dollar
amounts and in percentages, by type of loan.
| |
|
December 31, 2001
|
|
|
%
|
|
|
September 30, 2000
|
|
|
%
|
|
|
September 30, 1999
|
|
|
%
|
|
|
September 30, 1998
|
|
|
%
|
|
|
September 30, 1997
|
|
|
%
|
|
| |
|
(dollars in thousands) |
|
| Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| One- to four-family fixed-rate |
|
$ |
3,672,512 |
|
|
45.95 |
% |
|
$ |
1,583,129 |
|
|
37.45 |
% |
|
$ |
1,391,254 |
|
|
63.69 |
% |
|
$ |
466,850 |
|
|
50.76 |
% |
|
$ |
211,287 |
|
|
38.11 |
% |
| One- to four-family adjustable-rate |
|
|
2,645,952 |
|
|
33.11 |
|
|
|
2,635,955 |
|
|
62.36 |
|
|
|
785,821 |
|
|
35.98 |
|
|
|
430,319 |
|
|
46.79 |
|
|
|
336,470 |
|
|
60.69 |
|
| Multi-family |
|
|
183 |
|
|
— |
|
|
|
203 |
|
|
0.01 |
|
|
|
1,330 |
|
|
0.06 |
|
|
|
3,223 |
|
|
0.35 |
|
|
|
1,447 |
|
|
0.26 |
|
| Commercial |
|
|
1,981 |
|
|
0.03 |
|
|
|
2,717 |
|
|
0.06 |
|
|
|
3,050 |
|
|
0.14 |
|
|
|
8,916 |
|
|
0.97 |
|
|
|
3,033 |
|
|
0.55 |
|
| Mixed-use |
|
|
635 |
|
|
0.01 |
|
|
|
503 |
|
|
0.01 |
|
|
|
945 |
|
|
0.04 |
|
|
|
929 |
|
|
0.10 |
|
|
|
856 |
|
|
0.15 |
|
| Land |
|
|
— |
|
|
— |
|
|
|
— |
|
|
0.00 |
|
|
|
279 |
|
|
0.01 |
|
|
|
316 |
|
|
0.03 |
|
|
|
463 |
|
|
0.08 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total real estate loans(1) |
|
|
6,321,263 |
|
|
79.10 |
|
|
|
4,222,507 |
|
|
99.89 |
|
|
|
2,182,679 |
|
|
99.92 |
|
|
|
910,553 |
|
|
99.00 |
|
|
|
553,556 |
|
|
99.84 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer and other loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Automobiles and recreational vehicles
loans |
|
|
1,635,050 |
|
|
20.46 |
|
|
|
224 |
|
|
0.01 |
|
|
|
430 |
|
|
0.02 |
|
|
|
2,758 |
|
|
0.30 |
|
|
|
305 |
|
|
0.06 |
|
| Home equity lines of credit and second mortgage loans |
|
|
23,059 |
|
|
0.29 |
|
|
|
4,042 |
|
|
0.10 |
|
|
|
1,024 |
|
|
0.05 |
|
|
|
5,895 |
|
|
0.64 |
|
|
|
564 |
|
|
0.10 |
|
| Other |
|
|
12,237 |
|
|
0.15 |
|
|
|
82 |
|
|
0.00 |
|
|
|
255 |
|
|
0.01 |
|
|
|
554 |
|
|
0.06 |
|
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total consumer and other loans |
|
|
1,670,346 |
|
|
20.90 |
|
|
|
4,348 |
|
|
0.11 |
|
|
|
1,709 |
|
|
0.08 |
|
|
|
9,207 |
|
|
1.00 |
|
|
|
869 |
|
|
0.16 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total loans |
|
|
7,991,609 |
|
|
100.00 |
% |
|
|
4,226,855 |
|
|
100.00 |
% |
|
|
2,184,388 |
|
|
100.00 |
% |
|
|
919,760 |
|
|
100.00 |
% |
|
|
554,425 |
|
|
100.00 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Discounts and deferred fees on loans |
|
|
38,722 |
|
|
|
|
|
|
(43,171 |
) |
|
|
|
|
|
(22,718 |
) |
|
|
|
|
|
(9,989 |
) |
|
|
|
|
|
(9,938 |
) |
|
|
|
| Allowance for loan losses |
|
|
(19,874 |
) |
|
|
|
|
|
(10,930 |
) |
|
|
|
|
|
(7,161 |
) |
|
|
|
|
|
(4,766 |
) |
|
|
|
|
|
(3,594 |
) |
|
|
|
| Other |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
(151 |
) |
|
|
|
|
|
(189 |
) |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
18,848 |
|
|
|
|
|
|
(54,101 |
) |
|
|
|
|
|
(29,879 |
) |
|
|
|
|
|
(14,906 |
) |
|
|
|
|
|
(13,721 |
) |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans receivable, net(1)(2) |
|
$ |
8,010,457 |
|
|
|
|
|
$ |
4,172,754 |
|
|
|
|
|
$ |
2,154,509 |
|
|
|
|
|
$ |
904,854 |
|
|
|
|
|
$ |
540,704 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes loans held for sale, principally one- to four-family real estate loans. These loans were $1,616,089 at December 31, 2001, $95,400 at September 30, 2000, $89,862 at
September 30, 1999, $117,928 at September 30, 1998, and $149,086 at September 30, 1997. |
(2) |
|
The largest concentrations of mortgage loans at December 31, 2001 are located in California (32.9% of the portfolio), New York (8.0% of the portfolio) and New Jersey (4.3% of
the portfolio). |
14
Maturity of Loan Portfolio. The following table shows, as of
December 31, 2001, the dollar amount of loans maturing in our portfolio in the time periods indicated. This information includes scheduled principal repayments, based on the loans’ contractual maturities. We report demand loans, loans with no
stated repayment schedule and no stated maturity, and overdrafts as due within one year. The table below does not include any estimate of prepayments. Prepayments may significantly shorten the average life of a loan and may cause our actual
repayment experience to differ from that shown below.
| |
|
Due in One Year or Less
|
|
Due in One to Five Years
|
|
Due After Five Years
|
|
Total
|
| |
|
(in thousands) |
| Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
| One- to four-family fixed-rate |
|
$ |
8,465 |
|
$ |
35,627 |
|
$ |
3,628,420 |
|
$ |
3,672,512 |
| One- to four-family adjustable-rate |
|
|
486 |
|
|
3,075 |
|
|
2,642,391 |
|
|
2,645,952 |
| Multi-family |
|
|
— |
|
|
— |
|
|
183 |
|
|
183 |
| Commercial |
|
|
— |
|
|
9 |
|
|
1,972 |
|
|
1,981 |
| Mixed-use |
|
|
87 |
|
|
39 |
|
|
509 |
|
|
635 |
| Consumer and other loans: |
|
|
|
|
|
|
|
|
|
|
|
|
| Home equity lines of credit and second mortgage
loans |
|
|
— |
|
|
70 |
|
|
22,989 |
|
|
23,059 |
| Automobiles and recreational vehicles loans |
|
|
13,253 |
|
|
1,243,345 |
|
|
378,452 |
|
|
1,635,050 |
| Other |
|
|
50 |
|
|
12,187 |
|
|
— |
|
|
12,237 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
22,341 |
|
$ |
1,294,352 |
|
$ |
6,674,916 |
|
$ |
7,991,609 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows, as of December 31, 2001, the dollar amount of our
loans that mature after December 31, 2001. We have allocated these loans between those with fixed interest rates and those with adjustable interest rates.
| |
|
Fixed Rates
|
|
Adjustable Rates
|
|
Total
|
| |
|
(in thousands) |
| Real estate loans: |
|
|
|
|
|
|
|
|
|
| One- to four-family |
|
$ |
3,672,512 |
|
$ |
2,645,952 |
|
$ |
6,318,464 |
| Multi-family |
|
|
— |
|
|
183 |
|
|
183 |
| Commercial |
|
|
1,130 |
|
|
851 |
|
|
1,981 |
| Mixed-use |
|
|
237 |
|
|
398 |
|
|
635 |
| Consumer and other loans: |
|
|
|
|
|
|
|
|
|
| Home equity lines of credit and second mortgage loans |
|
|
19,137 |
|
|
3,922 |
|
|
23,059 |
| Automobiles and recreational vehicles loans |
|
|
1,625,396 |
|
|
9,654 |
|
|
1,635,050 |
| Other |
|
|
— |
|
|
12,237 |
|
|
12,237 |
| |
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
5,318,412 |
|
$ |
2,673,197 |
|
$ |
7,991,609 |
| |
|
|
|
|
|
|
|
|
|
15
Purchase of Loans. The following table shows our loan purchases
during the periods indicated.
| |
|
Loan Purchases
|
| |
|
(in thousands) |
| Year Ended: |
|
|
|
| December 31, 2001 |
|
$ |
13,452,389 |
| September 30, 2000 |
|
$ |
2,658,927 |
| September 30, 1999 |
|
$ |
1,806,019 |
| September 30, 1998 |
|
$ |
518,000 |
| September 30, 1997 |
|
$ |
342,900 |
| Three Months Ended: |
|
|
|
| December 31, 2000 |
|
$ |
1,080,264 |
Additionally, during fiscal 1998, we acquired approximately $150.0 million in
loans from Direct Financial Corporation (“DFC”).
The following table shows our loan, purchase, sale, and repayment
activity during the periods indicated including loans acquired through business combinations.
| |
|
Year Ended December 31, 2001
|
|
|
Three Months Ended December 31, 2000
|
|
|
Year Ended September 30, 2000
|
|
|
Year Ended September 30, 1999
|
|
| |
|
(in thousands) |
|
| Loans receivable—net, at beginning of period |
|
$ |
5,039,602 |
|
|
$ |
4,172,754 |
|
|
$ |
2,154,509 |
|
|
$ |
793,189 |
|
| Loan purchases and originations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| One- to four-family variable-rate |
|
|
4,451,489 |
|
|
|
834,936 |
|
|
|
2,235,900 |
|
|
|
535,571 |
|
| One- to four-family fixed-rate |
|
|
6,988,688 |
|
|
|
161,681 |
|
|
|
423,027 |
|
|
|
1,270,168 |
|
| Multi-family |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
280 |
|
| Consumer and other loans |
|
|
2,012,212 |
|
|
|
83,647 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total loan purchases and originations |
|
|
13,452,389 |
|
|
|
1,080,264 |
|
|
|
2,658,927 |
|
|
|
1,806,019 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans sold |
|
|
(7,899,991 |
) |
|
|
(5,062 |
) |
|
|
(232,209 |
) |
|
|
(90,740 |
) |
| Loan repurchases |
|
|
1,189 |
|
|
|
— |
|
|
|
(417 |
) |
|
|
(878 |
) |
| Loan repayments |
|
|
(2,653,385 |
) |
|
|
(209,721 |
) |
|
|
(424,283 |
) |
|
|
(353,916 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total loans sold, repurchased and repaid |
|
|
(10,552,187 |
) |
|
|
(214,783 |
) |
|
|
(656,909 |
) |
|
|
(445,534 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net change in deferred discounts and loan fees |
|
|
74,010 |
|
|
|
2,982 |
|
|
|
20,252 |
|
|
|
2,379 |
|
| Net transfers to real estate owned |
|
|
(1,786 |
) |
|
|
(6 |
) |
|
|
(269 |
) |
|
|
(266 |
) |
| Net change in allowance for loan losses |
|
|
(7,309 |
) |
|
|
(1,635 |
) |
|
|
(3,769 |
) |
|
|
(2,446 |
) |
| Cost recovery/contra assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
197 |
|
| Other loan debits/HELOC advances |
|
|
5,738 |
|
|
|
26 |
|
|
|
13 |
|
|
|
971 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Increase in total loans receivable |
|
|
2,970,885 |
|
|
|
866,848 |
|
|
|
2,018,245 |
|
|
|
1,361,320 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans receivable—net, at end of period |
|
$ |
8,010,457 |
|
|
$ |
5,039,602 |
|
|
$ |
4,172,754 |
|
|
$ |
2,154,509 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our primary method of purchasing loans is through the secondary market, utilizing
our correspondent network. We purchase the loans in pools made up of multiple whole loans. In the fiscal year ended December 31, 2001, we purchased 1,649 pools with 15,346 loans. In the three months ended December 31, 2000, we purchased 231 pools
with 3,063 loans. In fiscal year ended September 30, 2000, we purchased 851 pools with 7,047 loans. In fiscal year ended September 30, 1999, we purchased 477 pools with 6,245 loans.
We have not originated any non-mortgage consumer loans during the fiscal year ended December 31, 2001, three months ended December 31, 2000, or fiscal years ended September 30, 2000 and
1999. Prior to fiscal 1998 we originated consumer loans as an accommodation to our customers or purchased such loans as part of larger
16
loan packages. To service our loan portfolio, we enter into loan servicing contracts with multiple third party servicers.
CRA Lending Activities. The Bank participates in various community development programs in an effort to meet its responsibilities under the Community
Reinvestment Act (“CRA”). We invest in loans or other investments secured by affordable housing for low- or moderate-income individuals and have committed to invest $3.0 million in the CRA Fund of the Special Business Investment
Corporation (“SBIC’s”), L.P. a portfolio of investments in small business investment companies that meet the investment test of the CRA.
In addition, we have committed to fund $2.5 million over two years to Operation Hope, Inc., a non-profit community service organization, to develop a financial literacy program for underserved youth in Arlington
County, Virginia and Washington, D.C. and build and operate an inner-city cyber café in Washington, D.C. to deliver financial services and education to the underserved communities of Washington, D.C. We also provide loan servicing for Habitat
for Humanity of Northern Virginia, Inc., a non-profit organization whose purpose is to create affordable housing for those in need.
In connection with the regulatory approval for the acquisition of E*TRADE Mortgage, E*TRADE Bank was notified that it is no longer eligible for designation as a wholesale savings association for CRA purposes. The Bank is currently
fulfilling its CRA obligations under the lending, investment, and service tests for “large savings associations,” as defined by the CRA.
Delinquent, Non-performing and Other Problem Assets
General. We continually monitor our loan portfolio so that we will be able to anticipate and address potential and actual delinquencies. Based on the length of the delinquency period, we reclassify these assets
as non-performing and, if necessary, take possession of the underlying collateral. Once the Bank takes possession of the underlying collateral, the property is classified on our balance sheet as Other assets.
Non-performing Assets. Non-performing assets consist of loans for which interest is no longer being accrued. Interest
previously accrued but not collected on non-accrual loans is reversed against current income when a loan is placed on non-accrual status. Accretion of deferred fees is discontinued for non-accrual loans. All loans at least 90 days past due, as well
as other loans considered uncollectible, are placed on non-accrual status. Payments received on non-accrual loans are applied to principal when it is doubtful that full payment will be collected.
Real Estate Owned and Repossessed Assets. We initially record Real Estate Owned (“REO”) at estimated fair value less selling costs at
acquisition. Fair value is determined by appraisal or other appropriate valuation method. Losses estimated at the time of acquisition are charged to the allowance for loan losses. Management performs periodic valuations and establishes a valuation
allowance for REO and repossessed assets through a charge to income if the carrying value of a property exceeds its estimated fair value less estimated selling costs.
As of December 31, 2001, all of our REO consisted of one- to four-family real estate loans.
17
The following table presents information about our non-accrual loans and other repossessed
assets at the dates indicated.
| |
|
December 31, 2001
|
|
|
September 30, 2000
|
|
|
September 30, 1999
|
|
|
September 30, 1998
|
|
|
September 30, 1997
|
|
| |
|
(in thousands) |
|
| Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| One- to four-family |
|
$ |
20,595 |
|
|
$ |
11,391 |
|
|
$ |
7,595 |
|
|
$ |
7,727 |
|
|
$ |
10,359 |
|
| Commercial |
|
|
— |
|
|
|
657 |
|
|
|
664 |
|
|
|
372 |
|
|
|
568 |
|
| Land |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
316 |
|
|
|
— |
|
| Automobiles and recreational vehicles |
|
|
91 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Home equity lines of credit and second mortgage loans |
|
|
— |
|
|
|
— |
|
|
|
21 |
|
|
|
255 |
|
|
|
— |
|
| Other |
|
|
— |
|
|
|
— |
|
|
|
60 |
|
|
|
205 |
|
|
|
— |
|
| TDRs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
425 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total non-performing loans, net |
|
|
20,686 |
|
|
|
12,048 |
|
|
|
8,340 |
|
|
|
8,875 |
|
|
|
11,352 |
|
| Total REO and other repossessed assets, net |
|
|
3,328 |
|
|
|
850 |
|
|
|
539 |
|
|
|
1,460 |
|
|
|
681 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total non-performing assets, net |
|
$ |
24,014 |
|
|
$ |
12,898 |
|
|
$ |
8,879 |
|
|
$ |
10,335 |
|
|
$ |
12,033 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total non-performing assets, net, as a percentage of total bank assets |
|
|
0.18 |
% |
|
|
0.14 |
% |
|
|
0.21 |
% |
|
|
0.45 |
% |
|
|
1.09 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total loss allowance as a percentage of total non-performing loans, net |
|
|
96.07 |
% |
|
|
90.72 |
% |
|
|
85.86 |
% |
|
|
53.70 |
% |
|
|
31.66 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2001, our non-performing assets increased by $11.1 million, or 86%,
to $24.0 million at December 31, 2001 from $12.9 million at September 30, 2000. This increase was attributable primarily to a significant increase in the volume of outstanding one- to four-family real estate loans and the Bank’s decision to
shift a portion of its assets into higher-yielding asset classes that have higher risk characteristics. As a matter of policy, we actively monitor our non-performing assets.
If our non-accruing loans as of December 31, 2001 had been performing in accordance with their terms, we would have recorded additional interest income of approximately $1.3 million in
the fiscal year ended December 31, 2001.
Special Mention Loans. In certain situations, a
borrower’s past credit history may cast doubt on the borrower’s ability to repay under the loan’s contractual terms, whether or not the loan is delinquent. Such loans, classified as “special mention” loans, continue to
accrue interest and remain as a component of the loans receivable balance. These loans represented $22.5 million of the total loan portfolio at December 31, 2001, and are actively monitored.
18
Allowance for Loan Losses. As an investor in mortgage loans and
other types of consumer loans, we recognize that we will experience occasional credit losses. We believe the risk of credit loss varies with, among other things, the following:
| |
• |
|
creditworthiness of the borrower over the term of the loan; |
| |
• |
|
general economic conditions; and |
| |
• |
|
in the case of a secured loan, the quality of the security for the loan and the loan-to-value ratio. |
Our policy is to maintain an adequate allowance for loan losses based on, among other things, the following:
| |
• |
|
our historical loan loss experience; |
| |
• |
|
regular reviews of delinquencies and loan portfolio quality; |
| |
• |
|
the industry’s historical loan loss experience for similar asset types; and |
| |
• |
|
evaluation of economic conditions. |
We increase our allowance for loan losses when we estimate that losses have been incurred by charging provisions for probable loan losses against income. Charge-offs reduce the allowance when losses are confirmed.
In establishing the allowance for loan losses, we record specific allowances for probable losses that we have identified for commercial and certain
large dollar real estate and consumer loans specifically reviewed for impairment by management. Additionally, we provide a general allowance for estimated expected losses for real estate and consumer loans not specifically reviewed. The allowances
established by management are subject to review and approval by the Bank’s board of directors. Each month, we review the allowance for adequacy, based on our assessment of the risk in our loan portfolio as a whole, considering the following
factors:
| |
• |
|
the composition and quality of the portfolio; |
| |
• |
|
current charge-off and loss experience; |
| |
• |
|
current industry charge-off and loss experience; |
| |
• |
|
the state of the real estate market; and |
| |
• |
|
current general economic and market conditions. |
We recorded a net increase of $7.3 million in the allowance for loan losses from December 31, 2000 to December 31, 2001. The increase resulted from the addition of $4.7 million acquired in an automobile loan purchase
and an additional provision of $7.5 million, offset by net charge-offs of $4.9 million. As of December 31, 2001, the total allowance for loan losses was $19.9 million, of which $2.1 million represented reserves established by management
for probable losses on specific loans.
The general allowance is computed on loans without a specific allowance based on an
assessment of loans not specifically reviewed. Each month, this portfolio is stratified by asset type—one- to four-family, commercial, consumer, etc.—and a range of expected loss ratios is applied to each type of loan. Expected loss ratios
range between 8 basis points and 300 basis points depending upon asset type, loan-to-value ratio and current market and economic conditions. The expected loss ratios are based on our historical loss experience, adjusted to reflect industry loss
experience as published by the OTS, current market and economic conditions and other relevant information.
19
Also considered in the allowance computation is the positive impact of loans acquired that have
a seller or third party credit enhancement. As of December 31, 2001, total loans receivable included eight pools of credit-enhanced one- to four-family mortgage loans totaling $20.3 million, or 0.25%, of total gross loans outstanding. Allowances are
not provided for loans in which the credit enhancement amount exceeds the amount of allowances that would otherwise be required. We have purchased certain loans with an expectation that not all contractual payments of the loan will be collected.
Discounts attributable to credit issues are tracked separately and are not included as a component of the allowance for loan losses.
The loan loss provision recorded for fiscal 2001 was based upon our assessment of the required allowances at December 31, 2001. The increase in the loan loss provision as compared to fiscal 2000 is principally attributable to the level of
charge-offs and the significant growth in the portfolio. We believe that the combination of our loan loss allowance, net credit discount, and credit enhancement on certain loan pools is adequate to cover probable losses inherent in our portfolio.
We believe that we have established our existing loss allowances in accordance with accounting principles generally accepted in
the United States of America. However, circumstances may change, and regulators may request us to increase our allowance for losses. Such an increase could negatively affect our financial condition and earnings. The increase in the allowance for
loan losses reflects the significant increase in the loan portfolio, from $4.2 billion at September 30, 2000 to $8.0 billion at December 31, 2001, the fact that the Bank purchases, rather than originates in house, the majority of its loans, and the
addition of $1.6 billion of automobile and recreational vehicle loans, which traditionally have a higher loss experience than residential mortgages. Even though our historic charge-offs are relatively low, $5.6 million in fiscal year 2001, $12,000
for the three months ended December 31, 2000 and $253,000 in fiscal year 2000, we believe the allowances for loan losses, which were $19.9 million (0.25% of total loans) at December 31, 2001 and $10.9 million (0.26% of total loans) at September 30,
2000, were appropriate estimates of the probable losses inherent in the loan portfolio.
The following table allocates the
allowance for loan losses by loan category at the dates indicated. This allocation does not necessarily restrict the use of the allowance to absorb losses in any other category. The table also shows the percentage of total loans that each loan
category represents.
| |
|
December 31, 2001
|
|
|
September 30, 2000
|
|
|
September 30, 1999
|
|
|
September 30, 1998
|
|
|
September 30, 1997
|
|
| |
|
Amount
|
|
Percent of Loans in Each Category to Total Loans
|
|
|
Amount
|
|
Percent of Loans In Each Category to Total Loans
|
|
|
Amount
|
|
Percent of Loans in Each Category to Total Loans
|
|
|
Amount
|
|
Percent of Loans in Each Category to Total Loans
|
|
|
Amount
|
|
Percent of Loans in Each Category to Total Loans
|
|
| |
|
(dollars in thousands) |
|
| Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| One- to four-family |
|
$ |
6,960 |
|
79.06 |
% |
|
$ |
10,554 |
|
99.81 |
% |
|
$ |
7,055 |
|
99.67 |
% |
|
$ |
4,089 |
|
97.55 |
% |
|
$ |
3,271 |
|
98.80 |
% |
| Automobiles and recreational vehicles |
|
|
12,757 |
|
20.46 |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
| Multi-family |
|
|
3 |
|
— |
|
|
|
3 |
|
0.01 |
|
|
|
23 |
|
0.06 |
|
|
|
32 |
|
0.35 |
|
|
|
15 |
|
0.26 |
|
| Commercial |
|
|
30 |
|
0.03 |
|
|
|
336 |
|
0.06 |
|
|
|
53 |
|
0.14 |
|
|
|
520 |
|
0.97 |
|
|
|
286 |
|
0.55 |
|
| Mixed-use |
|
|
9 |
|
0.01 |
|
|
|
8 |
|
0.01 |
|
|
|
17 |
|
0.04 |
|
|
|
9 |
|
0.10 |
|
|
|
9 |
|
0.15 |
|
| Land |
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
— |
|
0.01 |
|
|
|
6 |
|
0.03 |
|
|
|
8 |
|
0.08 |
|
| Home equity lines of credit and second mortgage loans |
|
|
115 |
|
0.29 |
|
|
|
29 |
|
0.10 |
|
|
|
9 |
|
0.05 |
|
|
|
57 |
|
0.64 |
|
|
|
5 |
|
0.16 |
|
| Other consumer |
|
|
— |
|
0.15 |
|
|
|
— |
|
0.01 |
|
|
|
4 |
|
0.03 |
|
|
|
53 |
|
0.36 |
|
|
|
— |
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total allowance for loan
losses |
|
$ |
19,874 |
|
100.00 |
% |
|
$ |
10,930 |
|
100.00 |
% |
|
$ |
7,161 |
|
100.00 |
% |
|
$ |
4,766 |
|
100.00 |
% |
|
$ |
3,594 |
|
100.00 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above amounts include specific reserves related to non-performing loans
totaling $2.1 million at December 31, 2001, $391,000 at September 30, 2000, $406,000 at September 30, 1999, $449,000 at September 30, 1998 and $510,000 at September 30, 1997.
20
The following table shows the activity in our allowance for loan losses during the periods
indicated.
| |
|
For the periods ended,
|
|
| |
|
December 31, 2001
|
|
|
December 31, 2000
|
|
|
September 30, 2000
|
|
|
September 30, 1999
|
|
|
September 30, 1998
|
|
|
September 30, 1997
|
|
| |
|
(in thousands) |
|
| Allowance for loan losses at beginning of period |
|
$ |
12,565 |
|
|
$ |
10,930 |
|
|
$ |
7,161 |
|
|
$ |
4,715 |
|
|
$ |
3,594 |
|
|
$ |
2,957 |
|
| Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate loans |
|
|
(94 |
) |
|
|
(12 |
) |
|
|
(240 |
) |
|
|
(400 |
) |
|
|
(463 |
) |
|
|
(304 |
) |
| Other consumer loans |
|
|
(79 |
) |
|
|
— |
|
|
|
(13 |
) |
|
|
(56 |
) |
|
|
(76 |
) |
|
|
— |
|
| Automobiles and recreational vehicles loans |
|
|
(5,395 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other loans |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
(17 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total charge-offs |
|
|
(5,568 |
) |
|
|
(12 |
) |
|
|
(253 |
) |
|
|
(458 |
) |
|
|
(556 |
) |
|
|
(304 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate loans |
|
|
29 |
|
|
|
— |
|
|
|
19 |
|
|
|
38 |
|
|
|
13 |
|
|
|
13 |
|
| Other consumer loans |
|
|
4 |
|
|
|
— |
|
|
|
— |
|
|
|
79 |
|
|
|
81 |
|
|
|
7 |
|
| Automobiles and recreational vehicles loans |
|
|
669 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Other loans |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
5 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total recoveries |
|
|
702 |
|
|
|
— |
|
|
|
19 |
|
|
|
121 |
|
|
|
99 |
|
|
|
20 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net charge-offs |
|
|
(4,866 |
) |
|
|
(12 |
) |
|
|
(234 |
) |
|
|
(337 |
) |
|
|
(457 |
) |
|
|
(284 |
) |
| Loan loss allowance acquired in acquisition (1) |
|
|
4,699 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
724 |
|
|
|
— |
|
| Additions charged to
operations |
|
|
7,476 |
|
|
|
1,647 |
|
|
|
4,003 |
|
|
|
2,783 |
|
|
|
905 |
|
|
|
921 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allowance for loan losses at end of period |
|
$ |
19,874 |
|
|
$ |
12,565 |
|
|
$ |
10,930 |
|
|
$ |
7,161 |
|
|
$ |
4,766 |
|
|
$ |
3,594 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net charge-offs to average loans outstanding |
|
|
0.07 |
% |
|
|
0.00 |
% |
|
|
0.01 |
% |
|
|
0.03 |
% |
|
|
0.07 |
% |
|
|
0.06 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Acquisition of automobile portfolio in fiscal 2001 and acquisition of DFC in fiscal 1998. |
Mortgage-Backed Securities
We maintain a significant
portfolio of mortgage-backed securities, primarily in the following forms:
| |
• |
|
privately insured mortgage pass-through securities; |
| |
• |
|
Government National Mortgage Association (“Ginnie Mae”) participation certificates; |
| |
• |
|
Federal National Mortgage Association (“Fannie Mae”) participation certificates; |
| |
• |
|
Federal Home Loan Mortgage Corporation (“Freddie Mac”) participation certificates; and |
| |
• |
|
securities issued by other non-agency organizations. |
Principal and interest on Ginnie Mae certificates are guaranteed by the full faith and credit of the United States government. Fannie Mae and Freddie Mac certificates are each guaranteed by
their respective agencies. Mortgage-backed securities generally entitle us to receive a pro rata portion of the cash flows from an identified pool of mortgages. We also invest in collateralized mortgage obligations (“CMOs”). CMOs are
securities issued by special purpose entities generally collateralized by pools of mortgage-backed securities. The cash flows from these pools are segmented and paid in accordance with a predetermined priority to various classes of securities issued
by the entity. Our CMOs are senior tranches collateralized by federal agency securities or whole loans.
21
Over 95% of our CMO portfolio is comprised of securities with a triple “A” rating. Although our CMO portfolio has maturity periods similar to our mortgage-backed pass-through
securities, the nature of the CMO bonds acquired, primarily sequential pay bonds, provides for more predictable cash flows than the mortgage-backed securities. This reduces the duration risk, extension risk and price volatility of the CMO
compared to mortgage-backed pass-through securities and thus allows us to target liabilities with shorter durations.
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities, we classify our mortgage-backed securities in one of three
categories: held-to-maturity, available-for-sale or trading. During the year ended December 31, 2001, three months ended December 31, 2000, and the fiscal years ended September 30, 2000 and September 30, 1999, we held no mortgage-backed
securities classified as held-to-maturity.
The following table shows the activity in our available-for-sale mortgage-backed
securities portfolio during the periods indicated.
| |
|
December 31, 2001
|
|
|
December 31, 2000
|
|
|
September 30, 2000
|
|
|
September 30, 1999
|
|
| |
|
(in thousands) |
|
| Mortgage-backed securities at beginning of period |
|
$ |
5,058,919 |
|
|
$ |
4,188,553 |
|
|
$ |
1,426,053 |
|
|
$ |
798,860 |
|
| Purchases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CMOs |
|
|
3,420,669 |
|
|
|
3,891,680 |
|
|
|
3,579,379 |
|
|
|
1,159,652 |
|
| Fannie Mae |
|
|
2,778,515 |
|
|
|
1,195 |
|
|
|
590,236 |
|
|
|
92,378 |
|
| Ginnie Mae |
|
|
— |
|
|
|
— |
|
|
|
8,891 |
|
|
|
— |
|
| Freddie Mac |
|
|
104,439 |
|
|
|
24,586 |
|
|
|
173,732 |
|
|
|
— |
|
| Other |
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Sales(1) |
|
|
(6,198,758 |
) |
|
|
(2,740,943 |
) |
|
|
(1,140,935 |
) |
|
|
(285,414 |
) |
| Repayments and amortization and accretion |
|
|
(1,574,835 |
) |
|
|
(326,213 |
) |
|
|
(463,985 |
) |
|
|
(332,092 |
) |
| Transfer to trading |
|
|
27,357 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Mark-to-market adjustments and other |
|
|
(59,702 |
) |
|
|
20,061 |
|
|
|
15,182 |
|
|
|
(7,331 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mortgage-backed securities at end of period |
|
$ |
3,556,619 |
|
|
$ |
5,058,919 |
|
|
$ |
4,188,553 |
|
|
$ |
1,426,053 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes mortgage-backed securities on which call options have been exercised. |
The Bank buys and holds trading securities principally for the purpose of selling them in the near term. The Bank carries these securities at market value with unrealized gains and
losses recognized in income. The amount of trading securities the Bank held was $70.9 million at December 31, 2001, $171.9 million at December 31, 2000, $3.4 million at September 30, 2000 and $38.3 million at September 30, 1999. The Bank also
recognized realized gains from the sale of trading assets of $20.3 million for the fiscal year ended December 31, 2001, $2.1 million for the three months ended December 31, 2000, $750,000 for the fiscal year ended September 30, 2000 and
$1.4 million for the fiscal year ended September 30, 1999. In addition, the Bank had unrealized appreciation (depreciation) of trading assets of $(11.0) million for the fiscal year ended December 31, 2001, $(0.1) million for the three months ended
December 31, 2000, $195,000 for the fiscal year ended September 30, 2000 and $(1.3) million for the fiscal year ended September 30, 1999.
22
The following table shows the Bank’s scheduled maturities, carrying values, and current
yields for our portfolio of mortgage-backed securities, both available-for-sale and trading, at December 31, 2001.
| |
|
After One But Within Five Years
|
|
|
After Five But Within Ten Years
|
|
|
After Ten Years
|
|
|
Totals
|
|
| |
|
Balance Due
|
|
Weighted Yield
|
|
|
Balance Due
|
|
Weighted Yield
|
|
|
Balance
Due
|
|
Weighted Yield
|
|
|
Balance
Due
|
|
Weighted Yield
|
|
| |
|
(in thousands) |
|
| Private issuer and other |
|
$ |
— |
|
— |
% |
|
$ |
— |
|
— |
% |
|
$ |
16,296 |
|
7.66 |
% |
|
$ |
16,296 |
|
7.66 |
% |
| Collateralized mortgage obligations |
|
|
— |
|
— |
|
|
|
1,389 |
|
6.92 |
|
|
|
1,930,739 |
|
6.73 |
|
|
|
1,932,128 |
|
6.72 |
|
| U.S. Government sponsored enterprises |
|
|
37 |
|
7.00 |
|
|
|
15 |
|
9.64 |
|
|
|
1,678,629 |
|
6.25 |
|
|
|
1,678,681 |
|
6.25 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
37 |
|
7.00 |
% |
|
$ |
1,404 |
|
6.51 |
% |
|
$ |
3,625,664 |
|
7.02 |
% |
|
$ |
3,627,105 |
|
6.51 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities
The following table shows the cost basis and fair value of our banking-related investment portfolio other than mortgage-backed securities at the dates
indicated. The following table does not include investment securities we hold arising from our non-banking business segments. Consolidated information on all investment securities we hold is presented in “Item 8. Consolidated Financial
Statements and Supplementary Data.”
| |
|
December 31, 2001
|
|
September 30, 2000
|
|
September 30, 1999
|
| |
|
Cost Basis
|
|
Fair Value
|
|
Cost Basis
|
|
Fair Value
|
|
Cost Basis
|
|
Fair Value
|
| |
|
(in thousands) |
| Available-for-sale investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Municipal bonds |
|
$ |
67,104 |
|
$ |
66,959 |
|
$ |
15,005 |
|
$ |
13,946 |
|
$ |
15,605 |
|
$ |
14,390 |
| Corporate bonds |
|
|
884,246 |
|
|
871,510 |
|
|
272,431 |
|
|
265,066 |
|
|
130,166 |
|
|
122,559 |
| Obligations of U.S. government agencies |
|
|
13,297 |
|
|
11,874 |
|
|
13,291 |
|
|
12,898 |
|
|
18,264 |
|
|
18,018 |
| Asset-backed |
|
|
386 |
|
|
386 |
|
|
23,661 |
|
|
23,660 |
|
|
915 |
|
|
921 |
| Preferred stock in Freddie Mac |
|
|
— |
|
|
— |
|
|
5,000 |
|
|
4,356 |
|
|
5,000 |
|
|
4,950 |
| Other corporate stock |
|
|
8,000 |
|
|
7,189 |
|
|
4,438 |
|
|
4,363 |
|
|
3,980 |
|
|
3,980 |
| Other investments |
|
|
21,282 |
|
|
21,218 |
|
|
12,318 |
|
|
12,035 |
|
|
13,967 |
|
|
13,804 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
994,315 |
|
$ |
979,136 |
|
$ |
346,144 |
|
$ |
336,324 |
|
$ |
187,897 |
|
$ |
178,622 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the available-for-sale investment securities listed above, we have
an investment in the stock of the Federal Home Loan Bank (“FHLB”). The stock is recorded in Other assets at cost, which approximates fair value. The balance of FHLB stock was $56.5 million at December 31, 2001 and $83.3 million at
September 30, 2000.
The following table shows the scheduled maturities, carrying values, and current yields for our
banking-related investment portfolio of debt securities at December 31, 2001.
| |
|
Within One Year
|
|
|
After One But Within Five Years
|
|
|
After Five But Within Ten Years
|
|
|
After Ten Years
|
|
|
Totals
|
|
| |
|
Balance Due
|
|
Weighted Average Yield
|
|
|
Balance Due
|
|
Weighted Average Yield
|
|
|
Balance Due
|
|
Weighted Average Yield
|
|
|
Balance Due
|
|
Weighted Average Yield
|
|
|
Balance Due
|
|
Weighted Average Yield
|
|
| |
|
(in thousands) |
|
| Municipal bonds(1) |
|
$ |
— |
|
— |
% |
|
$ |
238 |
|
4.47 |
% |
|
$ |
1,844 |
|
5.08 |
% |
|
$ |
64,877 |
|
3.81 |
% |
|
$ |
66,959 |
|
3.84 |
% |
| Corporate debt |
|
|
151,454 |
|
4.93 |
% |
|
|
393,259 |
|
6.88 |
% |
|
|
200,629 |
|
7.02 |
% |
|
|
126,168 |
|
4.21 |
% |
|
|
871,510 |
|
6.29 |
% |
| Obligations of U.S. government agencies |
|
|
— |
|
— |
% |
|
|
— |
|
— |
% |
|
|
— |
|
— |
% |
|
|
11,874 |
|
6.24 |
% |
|
|
11,874 |
|
6.24 |
% |
| Asset-backed |
|
|
213 |
|
9.40 |
% |
|
|
— |
|
— |
% |
|
|
— |
|
— |
% |
|
|
173 |
|
4.88 |
% |
|
|
386 |
|
7.35 |
% |
| Other investments |
|
|
6,410 |
|
5.45 |
% |
|
|
— |
|
— |
% |
|
|
13,719 |
|
8.77 |
% |
|
|
1,089 |
|
5.00 |
% |
|
|
21,218 |
|
6.16 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
158,077 |
|
|
|
|
$ |
393,497 |
|
|
|
|
$ |
216,192 |
|
|
|
|
$ |
204,181 |
|
|
|
|
$ |
971,947 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Yields on tax-exempt obligations are computed on a tax equivalent basis. |
23
Deposits and Other Sources of Funds
The following table presents information about the various categories of the Bank’s deposits for the periods indicated.
| |
|
Average Balance for the Year Ended December 31, 2001
|
|
Percentage of Deposits
|
|
|
Average Rate
|
|
|
Average Balance for the Year Ended September 30, 2000
|
|
Percentage of Deposits
|
|
|
Average Rate
|
|
|
Average Balance for the Year Ended September 30, 1999
|
|
Percentage of Deposits
|
|
|
Average Rate
|
|
| |
|
(in thousands) |
|
| Passbook |
|
$ |
375 |
|
0.01 |
% |
|
2.99 |
% |
|
$ |
498 |
|
0.02 |
% |
|
2.48 |
% |
|
$ |
563 |
|
0.04 |
% |
|
3.00 |
% |
| Money market |
|
|
1,644,951 |
|
22.61 |
|
|
2.78 |
% |
|
|
178,174 |
|
5.27 |
|
|
4.84 |
% |
|
|
238,031 |
|
16.19 |
|
|
4.80 |
% |
| Demand accounts |
|
|
183,530 |
|
2.52 |
|
|
1.44 |
% |
|
|
236,316 |
|
6.99 |
|
|
3.68 |
% |
|
|
22,655 |
|
1.54 |
|
|
3.86 |
% |
| Certificates of deposit |
|
|
5,417,310 |
|
74.46 |
|
|
5.28 |
% |
|
|
2,876,229 |
|
85.10 |
|
|
6.32 |
% |
|
|
1,142,326 |
|
77.67 |
|
|
5.88 |
% |
| Brokered callable certificates of deposit |
|
|
29,236 |
|
0.40 |
|
|
6.86 |
% |
|
|
88,601 |
|
2.62 |
|
|
6.43 |
% |
|
|
67,085 |
|
4.56 |
|
|
6.62 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
7,275,402 |
|
100.00 |
% |
|
|
|
|
$ |
3,379,818 |
|
100.00 |
% |
|
|
|
|
$ |
1,470,660 |
|
100.00 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table classifies our deposit accounts by rate at the dates
indicated.
| |
|
December 31, 2001
|
|
September 30, 2000
|
| |
|
(in thousands) |
| 0–1.99% |
|
$ |
247,755 |
|
$ |
139,262 |
| 2–3.99% |
|
|
3,692,242 |
|
|
711 |
| 4–5.99% |
|
|
2,219,535 |
|
|
687,983 |
| 6–7.99% |
|
|
1,923,269 |
|
|
3,868,892 |
| 8–9.99% |
|
|
57 |
|
|
24,941 |
| 10–11.99% |
|
|
1 |
|
|
3 |
| 12–20.00% |
|
|
— |
|
|
9 |
| |
|
|
|
|
|
|
| |
|
$ |
8,082,859 |
|
$ |
4,721,801 |
| |
|
|
|
|
|
|
The following table classifies the amount of our large certificates of deposit,
i.e., in amounts of $100,000 or more, by time remaining until maturity, as of December 31, 2001.
| |
|
Certificates of Deposit
|
| |
|
(in thousands) |
| Three months or less |
|
$ |
254,696 |
| Three through six months |
|
|
204,979 |
| Six through twelve months |
|
|
335,282 |
| Over twelve months |
|
|
163,781 |
| |
|
|
|
| Total |
|
$ |
958,738 |
| |
|
|
|
Borrowings
Although deposits are our primary source of funds, we also borrow from the FHLB and sell securities under repurchase agreements to acquire additional funding. We are a member of the FHLB
system, which, among other things, functions in a reserve credit capacity for savings institutions. This membership requires us to own capital stock in the FHLB. It also authorizes us to apply for advances on the security of FHLB stock and various
home mortgages and other assets—principally securities that are obligations of, or guaranteed by, the United States government—provided that we meet certain creditworthiness standards.
24
As of December 31, 2001, our outstanding advances from the FHLB totaled $906.3 million at
interest rates ranging from 1.9% to 6.9% and at a weighted average rate of 2.7%.
We also borrow funds by selling securities to
nationally recognized investment banking firms under agreements to repurchase the same securities. The investment banking firms hold the securities in custody. We treat repurchase agreements as borrowings and secure them with designated fixed- and
variable-rate securities. We also participate in the Federal Reserve Bank’s special direct investment and treasury, tax and loan borrowing programs. We use the proceeds of these transactions to meet our cash flow or asset/liability matching
needs.
The following table presents information regarding repurchase agreements for the dates indicated.
| |
|
December 31, 2001
|
|
|
September 30, 2000
|
|
|
September 30, 1999
|
|
| |
|
(in thousands) |
|
| Weighted average balance during the year |
|
$ |
3,180,272 |
|
|
$ |
1,471,435 |
|
|
$ |
555,552 |
|
| Weighted average interest rate during the year |
|
|
5.94 |
% |
|
|
6.39 |
% |
|
|
5.32 |
% |
| Maximum month-end balance during the year |
|
$ |
4,162,231 |
|
|
$ |
2,173,410 |
|
|
$ |
790,474 |
|
| Mortgage-backed securities underlying the agreements as of the end of the year: |
|
|
|
|
|
|
|
|
|
|
|
|
| Carrying value, including accrued interest |
|
$ |
1,815,738 |
|
|
$ |
1,303,517 |
|
|
$ |
863,598 |
|
| Estimated market value |
|
$ |
1,807,115 |
|
|
$ |
1,289,313 |
|
|
$ |
832,397 |
|
| Other securities underlying the agreements as of the end of the year: |
|
|
|
|
|
|
|
|
|
|
|
|
| Carrying value, including accrued interest |
|
$ |
1,185,707 |
|
|
$ |
648,433 |
|
|
$ |
— |
|
| Estimated market value |
|
$ |
1,179,834 |
|
|
$ |
644,317 |
|
|
$ |
— |
|
The following table sets forth information regarding the weighted average
interest rates and the highest and average month end balances of our borrowings.
| Category
|
|
Ending Balance
|
|
Monthly Weighted Average Rate
|
|
|
Maximum Amount At Month-End
|
|
Yearly Weighted Average Balance
|
|
Yearly Weighted Average Rate
|
|
| |
|
(in thousands) |
|
| At or for the year ended December 31, 2001: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Advances from the FHLB |
|
$ |
906,300 |
|
5.19 |
% |
|
$ |
1,737,000 |
|
$ |
1,223,724 |
|
6.32 |
% |
| Securities sold under agreement to repurchase and other short-term borrowings |
|
$ |
3,264,140 |
|
4.44 |
% |
|
$ |
4,162,231 |
|
$ |
3,180,272 |
|
5.94 |
% |
| At or for the year ended December 31, 2000: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Advances from the FHLB |
|
$ |
1,737,000 |
|
6.74 |
% |
|
$ |
2,319,000 |
|
$ |
1,512,940 |
|
6.48 |
% |
| Securities sold under agreement to repurchase and other short-term borrowings |
|
$ |
2,895,564 |
|
6.57 |
% |
|
$ |
3,184,631 |
|
$ |
1,995,138 |
|
6.61 |
% |
| At or for the year ended September 30, 2000: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Advances from the FHLB |
|
$ |
1,637,000 |
|
6.47 |
% |
|
$ |
2,074,500 |
|
$ |
1,225,783 |
|
6.17 |
% |
| Securities sold under agreement to repurchase and other short-term borrowings |
|
$ |
1,894,000 |
|
6.71 |
% |
|
$ |
2,173,410 |
|
$ |
1,471,435 |
|
6.39 |
% |
| At or for the year ended September 30, 1999: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Advances from the FHLB |
|
$ |
477,000 |
|
5.55 |
% |
|
$ |
852,000 |
|
$ |
473,849 |
|
5.25 |
% |
| Securities sold under agreement to repurchase and other short-term borrowings |
|
$ |
790,474 |
|
5.47 |
% |
|
$ |
790,474 |
|
$ |
555,552 |
|
5.32 |
% |
25
GLOBAL AND INSTITUTIONAL
Business Overview
Our Global and Institutional business segment is comprised principally
of the business activities of our international subsidiaries which offer foreign investors online retail brokerage services, and the business activities of E*TRADE Institutional and E*TRADE Technologies, which offer financial services to
institutional investors.
Our local operations in both the retail and institutional businesses are critical to our global
strategy. During fiscal year 2001, we continued our global expansion strategy that leverages our internationally recognized brand name, web site design, and proprietary Stateless ArchitectureSM technology platform. We launched branded retail brokerage web sites in Hong Kong, Israel and Germany. E*TRADE Israel Electronic Commerce (1997) Ltd.
(“E*TRADE Israel”), in which we have a minority stake, launched in May 2001 with an offering of U.S. equity trading through our global platform to the local population. The launch of E*TRADE Germany during the fourth quarter of fiscal 2001
brought us to the largest European market. This launch followed the acquisition of all minority holdings in E*TRADE Germany in the first quarter of 2001.
We have continued our global expansion in the retail market with the acquisition of a minority stake in E*TRADE Australia Limited (“E*TRADE Australia”) in January 2002. Through December 31, 2001, and prior
to acquiring a 7.5% equity ownership stake in E*TRADE Australia, we maintained a trademark licensing arrangement with E*TRADE Australia which generated royalty and licensing revenues and committed us to certain technology and maintenance development
obligations. As part of acquiring an ownership stake in E*TRADE Australia, we transferred our technology maintenance and development obligation to E*TRADE Australia and extended E*TRADE Australia a royalty-free trademark license.
Our international web sites are operated by the following entities: E*TRADE Australia (which also serves New Zealand), E*TRADE Technologies,
E*TRADE Bank Danmark A/S (Denmark), E*TRADE Germany AG, E*TRADE Securities Limited (Hong Kong), E*TRADE Israel, E*TRADE Japan K.K., E*TRADE Korea Co. Ltd., E*TRADE Norge ASA (Norway), E*TRADE Sverige AB (Sweden) and E*TRADE UK (Holdings) Limited
(United Kingdom). Moreover, E*TRADE Financial has institutional offices in eight countries with trading capabilities in 38 markets.
International
Consolidation
We see considerable consolidation opportunities in the international retail sector during 2002. We intend to
actively pursue such opportunities. We have already begun this process with the acquisition in the fourth quarter of 2001 of accounts in Hong Kong from 2Cube, an online retail brokerage joint venture between JP Morgan Chase & Co. and
Pacific Century Cyberworks, Ltd. We will also look to additional internal consolidation within our existing European operations to obtain maximum efficiencies and scalabilities. This will include the consolidation of our UK retail and
institutional operations in a new facility during the second quarter of 2002 and the integration of the retail operations in Norway and Sweden.
Products and Services
Our global retail subsidiaries offer a variety of products and services including online
stock and options trading in local markets, as well as comprehensive market information provided by Reuters, Big Charts and local news vendors. Trading in U.S. equity markets is currently available in Norway, Sweden and Israel through our Global
platform and in Germany, Hong Kong and Denmark through an introducing broker arrangement. In some cases, affiliates offer mutual funds, access to IPOs, and banking capabilities. During fiscal 2002, we intend to continue to improve the products and
services we offer to customers through our international affiliates. In fiscal year 2001, we secured banking licenses in both Germany and Denmark. One of our primary focuses will be to continue to roll out cross-border trading, enabling foreign
retail investors to access U.S. equities affordably, online and in real-time and to introduce our customers to the financial products available in the U.S.
26
During fiscal year 2001, we completed the development of a web-based platform that will provide
institutional customers with online trading and administration solutions. We began the roll-out of certain administrative solutions such as access to customer statements during the third quarter of fiscal 2001. Our platform provides institutional
customers with direct access to international exchanges and basket trading. Moreover, the platform offers our institutional customers real-time, online access to statements and electronic settlement capabilities. This platform was developed by
integrating the current E*TRADE Institutional product offering with the technology resources of E*TRADE Technologies.
Customers and Markets
As the sophistication of investors around the globe grows, we intend to provide our investors with the content and tools to
enable trading in multiple markets and multiple products from a single-access electronic gateway. On the retail side, our focus during 2002 will be to provide our international customers with access to a greater range of products, including U.S.
dollar denominated bank products, as well as U.S. margin and trading accounts currently available only to U.S. customers. For our institutional customers, we have developed a fully-electronic network to allow more efficient access to global
exchanges (as discussed above in Products and Services) and are in the process of completing the roll-out of the full suite of tools to our institutional customers.
Operations
Clearing
During fiscal year 2001, we successfully transferred our U.S. institutional equity clearing operations from an outsourced model to a self-clearing model
within the Domestic Retail Brokerage business. E*TRADE Institutional clears all U.S. trading through E*TRADE Securities. In 2002, we intend to continue shifting clearing operations from an outsourced model to a self-clearing model, further utilizing
our Domestic Retail Brokerage business and improving cost efficiencies. With the exception of institutional operations in the U.S., Japan, Hong Kong, Singapore and Thailand, we currently out-source the clearing of transactions to third parties
around the world. (Refer to Item 1. Business—Domestic Retail Brokerage for a general description of clearing operations.)
Lending and Borrowing Activities
Margin Lending. As in our Domestic Retail
Brokerage operations, we make loans to customers collateralized by customer securities in other markets around the world. In the U.S., margin lending by E*TRADE Securities is subject to the margin rules of the Board of Governors of the Federal
Reserve System, NASDR margin requirements and our own internal policies, which are more stringent than the Federal Reserve and NASDR requirements. In overseas markets, the rules regarding margin lending vary significantly and are generally not as
well defined as the rules within the U.S. We have adopted internal rules similar to those followed in the U.S. where those rules are more stringent than local rules. By permitting customers to purchase securities on margin, we take the risk of a
market decline that could reduce the value of the collateral held by us to below the customers’ indebtedness before the collateral can be sold, which could result in losses to us. Under applicable overseas regulatory rules, in the event of a
decline in the market value of the securities in a margin account, we are generally obligated to require the customer to deposit additional securities or cash in the account so that at all times the customer’s equity in the account is at least
a fixed percentage (25% in compliance with NASDR regulations) of the value of the securities in the account. Our current internal requirement, however, is that the customer’s equity not fall below 30%, which is 5% higher than the NASDR
regulatory minimum. In the event that a customer’s equity falls below such percentage, the customer will be required to increase the account’s equity to a percentage at least five percentage points higher. Margin lending to customers
constitutes the major portion of the basis on which our net capital requirements are determined. To the extent these activities expand, our net capital requirements around the world will increase. See “Item 7. Risk factors—If we do not
maintain the capital levels required by regulators, we may be fined or forced out of business” and “Item 7. Risk factors—As a significant portion of our revenues come from online investing services, downturns in the
27
securities markets have harmed and could further significantly harm our business, including by reducing transaction volumes and margin borrowing and increasing our dependence on our more active
customers who receive lower prices.”
Order Processing
In most international markets, there are specific or implicit rules to ensure that customers obtain the best price under prevailing market conditions.
There are many factors that are taken into account when assessing best price, such as order size and liquidity of the stock. In each location, we have established the necessary order- routing and management systems. During fiscal year 2001, we
successfully integrated the technology expertise of E*TRADE Technologies with E*TRADE Institutional’s trading desks, providing these desks with the capability to further enhance this process. See “Item 7. Risk factors—If our ability
to correctly process customer transactions is slowed or interrupted, we could be subject to customer litigation and our reputation could be harmed.”
The market for online investing services in the U.S. and overseas, particularly over the Internet, is rapidly evolving and intensely competitive. We expect competition to continue to intensify in the future. See
“Item 7. Risk factors—We face competition from competitors, some of whom have significantly greater financial, technical, marketing and other resources, which could cause us to lower our prices or to lose a significant portion of our
market share.”
In addition, the securities industry in the U.S. and overseas is subject to extensive regulation. See
“Item 7. Risk factors—If changes in government regulation, including banking and securities rules and regulations, favor our competition or restrict our business practices, our ability to attract and retain customers and our profitability
may suffer” and “Item 7. Risk factors—If we do not maintain the capital levels required by regulators, we may be fined or forced out of business.”
WEALTH MANAGEMENT AND OTHER
Business Overview
Mutual Funds
In November 1997, we
established a Mutual Fund Center which now features nearly 3,000 mutual funds, approximately 1,250 of which are available without transaction fees or loads. The center also offers several services free of charge, such as a state-of-the-art
proprietary screening tool, and a wide spectrum of research, including risk measures, portfolio information, historical charts and online prospectuses. Mutual fund orders received by 4:00 p.m. EST result in purchases at the net asset value of the
fund as of the day of order. We have seven mutual funds for which E*TRADE Asset Management, Inc. acts as manager: four domestic stock index funds, one international stock index fund, an actively managed bond fund and a money market fund. The mutual
fund business derives revenues through management and administrative fees from our proprietary funds, distribution and shareholder servicing arrangements with third-party funds sold through the mutual fund supermarket including 12b-1 fees, sales
commissions paid by third-party load funds and transactions fees charged to investors on funds without fee-sharing agreements.
E*TRADE Business Solutions Group, Inc. (“BSG”)
BSG was formed by a combination
of two acquired companies. The first was the acquisition in the first quarter of fiscal 1998 of OptionsLink, a division of Hambrecht & Quist LLC, an all-electronic web-based and interactive voice-response inquiry and order entry system for
employee stock option and employee stock purchase plan services for corporate stock plan participants. The second was the acquisition in July 1998 of ShareData, Inc. (“ShareData”). ShareData was a privately-held supplier of stock plan
knowledge-based software and full service stock plan administration services for private and public companies. The combination of these two technologies enables BSG to provide a full spectrum of integrated electronic stock plan management
28
services, including plan administration, compliance, employee communication, and online transaction capabilities. BSG provides products and services to over 3,000 corporations. Currently,
initiatives to increase the scope of the BSG relationships include cross-selling various E*TRADE Financial products and services such as employee banking services provided by the Bank and ATM services provided by placing ATMs at company locations
where we have existing relationships. BSG distributes its product and services to corporations through a nationwide direct sales force and third-party partnerships.
Stock Baskets
The Stock Baskets platform allows our
brokerage customers to purchase and trade entire portfolios of individual securities simply and easily in dollar, rather than share, denominations. With a minimum investment of $5,000 for non-retirement accounts and $2,000 for IRAs, investors can
research and build their own personalized basket of individual securities, or they can purchase from among 21 off-the-shelf baskets which have been compiled by professionals at Standards & Poor’s, a Wall Street research house known for its
independence and objectivity. In addition, investors have the ability to further customize these off-the-shelf baskets to meet specific investment goals.
Bond Center
The Bond Center is the platform through which our customers access a variety
of fixed income products. The Bond Center provides our customers the ability to diversify their holdings by investing in fixed income securities. Supported by 35 dealers and liquidity providers, the Bond Center enhances the value and delivery of
fixed income products to our customers. We were one of the recognized pioneers in online fixed income trading, having launched the Bond Center over three years ago. During fiscal 2001, we made significant enhancements to the Bond Center that will
fully allow us to realize the competitive value the Bond Center provides. Among these enhancements was the integration of a trading desk at our Arlington, Virginia location with the Bond Center. This enhancement alone significantly increased the
value, execution and efficiency of the Bond Center.
Personal Money Management
During the three months ended December 31, 2000, we acquired PrivateAccounts, Inc., now E*TRADE Advisory Services, a platform which aggregates the
services of individual money managers and investment advisers. This service provides customers with the ability to research and review managers performance and investment styles online. We branded this advisory service as Personal Money Management
(“PMM”). During December 2001, the operations of the PMM group, previously located in Minneapolis, Minnesota, were transitioned to our Arlington, Virginia location.
Corporate Operations
Included in the Wealth Management
and Other segment are the activities generated by our corporate operations. Corporate activities include management of investments held by the Company, participation in two venture capital funds (E*TRADE eCommerce Fund I and ArrowPath Fund II
(formerly E*TRADE eCommerce Fund II)), and management of corporate borrowing activities. Corporate operations also include technology development, systems maintenance and operations, and general and administrative costs all of which benefit the
Company as a whole.
Growth Strategy
The formation of the Wealth Management business has enhanced our ability to focus on several key objectives, including targeting a more affluent customer base through new programs, increasing the investment levels of
existing customers, and expanding the channels of distribution through which we provide services. We intend to continue to introduce new products and services to achieve these objectives, including focusing on retirement planning, college savings
plans, the delivery of electronic advice, and tiered product offerings.
29
Our business strategy includes expanding our product mix to include targeted and high value
products and services which will provide our customers with a more personalized and integrated solution to meet their individual financial objectives. In the mutual fund and investment product business, we are executing on this strategy by
continuing to enhance and market the mutual fund supermarket, while rolling out additional proprietary funds. Following our joint venture with Ernst and Young, LLP in September 2000, we began developing an electronic advice product that will provide
customers with personalized financial advice based on their specific financial goals. It will also provide recommendations on mutual funds that may help customers achieve their objectives. Additionally, as we roll out investment products from our
acquisitions of eInvesting and E*TRADE Advisory Services, we will be able to provide new and differentiated products to our customers. Some of the new products will also be offered to financial advisors as we target the intermediary channel.
BSG intends to continue to enhance its services to help U.S. multi-national corporations manage their overseas employees. BSG
will continue to focus on a Business-to-Business-to-Consumer strategy by providing products and services to corporations that facilitate their employees’ end-use of the products and services at E*TRADE Financial. We will also focus on
cross-selling additional products to existing and new corporate customers, and in turn, their employees.
Through our high net
worth initiatives, we intend to provide different levels of products and services to different tiers of customers, thereby encouraging customers to consolidate their assets at E*TRADE Financial in order to receive premium services.
See “Item 7. Risk factors—If we are unable to quickly introduce new products and services that satisfy changing customer needs, we
could lose customers and have difficulty attracting new customers.”
Customers and Markets
The Wealth Management business targets many of the same customers and markets as our Domestic Retail Brokerage, Banking, and Global and Institutional
businesses. In addition, through our high net-worth initiatives, we are executing upon our strategy to increase our customer and asset base, specifically targeting more established online investors by providing additional value to those customers
who seek a breadth of product offerings.
BSG provides products and services directly to publicly traded and privately held
companies to facilitate the management and reporting of employee stock purchase and stock option plans and provides transactional services to corporations and their employees. BSG’s clients range in size from small private clients to large
public companies across a variety of industries.
Operations
To the extent that products and services within the Wealth Management business are extensions of our Domestic Retail Brokerage, Banking, and Global and Institutional businesses, revenue
streams and operations replicate those business lines. However, there are some aspects of the business unique to the Wealth Management group.
The mutual fund business derives revenues through a number of channels, including management fees from our proprietary funds, fee-sharing arrangements with third-party funds sold through the mutual fund supermarket,
certain administrative fees charged by funds, sales commissions paid by third-party load funds and transactions fees charged to investors on funds without fee-sharing agreements.
E*TRADE Asset Management, Inc. (“E*TRADE Asset Management”), a subsidiary of E*TRADE Group, Inc., is the investment advisor of all of our proprietary funds. Barclay’s
Global Fund Advisors is the investment sub-advisor of three of these funds. The other funds are structured wherein the specific fund invests all of its
30
assets into a portfolio advised by Barclay’s Global Fund Advisors. This portfolio always has the same investment objective as the E*TRADE fund, commonly called a “master/feeder”
structure.
BSG generates revenue through a number of sources including:
| |
• |
|
Equity Edge®— Stock plan
administration software marketed to corporate clients from which we derive licensing and maintenance fees. Associated services include consulting, product support, product training and educational seminars. |
| |
• |
|
OptionsLink®—A platform many of
our corporate clients provide to their employees to manage their equity compensation grants and holdings, conduct equity compensation-related stock and options transactions, and invest online when and how it is convenient for them.
|
| |
• |
|
Equity Resource®—A complete,
fully integrated stock plan administration outsourcing solution. |
| |
• |
|
Emerging Companies Program—A combination of services that takes small, pre-IPO companies into the future with administrative assistance and stock plan account
management up to and through a public offering. |
| |
• |
|
Executive Services—A suite of financial tools and services tailored to fit the needs of corporate officers and other high-net-worth individuals. E*TRADE
Financial’s Executive Services offers an array of services tailored to the needs of these individuals. |
Many of our new initiatives, including the eInvesting products, have not been fully introduced into the marketplace and thus, any related revenues are not currently significant to our consolidated results. See “Item 7. Risk
factors—If we are unable to quickly introduce new products and services that satisfy changing customer needs, we could lose customers and have difficulty attracting new customers.”
MARKETING
Our marketing strategy
is based on an integrated marketing model that employs a mix of communications media. The goals of our marketing programs are to strengthen our brand name recognition, build awareness of our diversified financial services offerings, attract new
customers and increase the value of existing customers. We pursue these goals through advertising, marketing on the E*TRADE Financial web site and other online marketing opportunities, direct one-on-one marketing, affinity marketing programs, public
relations and co-marketing programs. All communications with the public by our U.S. broker-dealer subsidiaries, including E*TRADE Securities, are regulated by the NASDR.
New Brand, “E*TRADE Financial”
In February 2002, we launched our new brand,
“E*TRADE Financial,” which reflects the diversity of the products and services we offer, including investing, banking, lending, planning and advice.
Advertising and Customer Acquisition
Our advertising builds awareness of and preference for E*TRADE,
positioning us as a better way to handle a wide range of personal financial transactions. We integrate our brand campaigns across many channels including television (both network and cable), print media, radio, the Internet, E*TRADE Financial Zones
in select SuperTarget® stores, E*TRADE Financial Centers, targeted special events and educational seminars. Our
advertising directs prospective customers to call a 1-800 number or go to www.etrade.com for more information. Through the E*TRADE Financial web site, for instance, prospective customers can get detailed information about our products
and services, use an interactive demonstration, request additional information and complete an account application online. Utilizing our customer database, we deliver targeted acquisition offers such as trade rebates or cash incentives to prospects
seeking information on banking, mortgage, IRAs and other products.
31
Our direct marketing team leverages a database-marketing approach that enables improvement in
response rates and return on investment. Our direct marketing programs employ a modeling process to identify target prospects with the highest revenue potential. Active traders and high net worth prospects most likely to respond to direct offers
receive timely, relevant marketing messages via direct mail, email, outbound calling, investor shows and seminars. In fiscal year 2001, we built a proprietary prospect database in order to more effectively manage communication to these high value
potential customers.
Customer Development
Our customer development effort begins with understanding our customers and their financial needs. Our customer relationship management platform allows us to recognize these needs and present the right solutions to
the right customers at the right time. Customer offers are delivered through multiple touch points including monthly statements, direct mail, email, telephone, retail locations and our web site.
Public Relations
Our external corporate
communications team is chartered with protecting, promoting and strengthening our corporate reputation and brand. Through proactive outreach to local and national broadcast and print media, the team communicates our value proposition and corporate
strategy to a broad consumer audience. As a result, we have received extensive coverage from major media outlets and publications, including Business Week, The New York Times, The Wall Street Journal, CNN, CNBC and many more. The team is
responsible for the strategic placement of executive speaking opportunities.
TECHNOLOGY
Investment
We have made significant investments
in technology over the last three years. Investments have been made in all areas including development, systems operations, and our data center facilities. As our business has diversified, we have made the necessary technological investments to
continue our leadership in the online financial services business, especially in our institutional and banking technologies. In fiscal 2001, we also took advantage of new vendor technologies, more efficient systems processing, and a consolidation of
our various operating facilities to achieve significant savings. Reducing our use of contract technology labor through conversions to full-time Associates and attrition has also yielded savings without reducing our key technology investments or
service levels to our customers. We have also gained significant efficiencies through expanded use of our state-of-the-art data center in Alpharetta, Georgia. Technology development expenses were $88.7 million in the fiscal year ended December
31, 2001, $29.2 million in the three months ended December 31, 2000, $142.9 million in the fiscal year ended September 30, 2000 and $79.9 million in the fiscal year ended September 30, 1999. In addition, we capitalized internally developed
software costs of $27.5 million in the fiscal year ended December 31, 2001, $20.1 million in the three months ended December 31, 2000, $61.5 million in the fiscal year ended September 30, 2000 and $12.8 million in the fiscal year ended
September 30, 1999.
During 2001, we completed migration of our Rancho Cordova, ClearStation, and banking data centers to
our regional operations center in Alpharetta, Georgia. This facility is actually two separate centers, with redundant system backup for all critical facility components. The state-of-the-art data center facility has 50,000 square feet of raised
floor and allows us exceptional levels of redundancy and expansion capacity.
32
U.S. Domestic Retail Technology
Transaction-Enabling Technology
Our proprietary,
transaction-enabling technology engine automates traditionally labor-intensive transactions. Because it was custom-tailored for electronic marketplace use, our engine provides customers with efficient service and has the added advantage of being
scalable and adaptable as usage increases and service offerings are expanded. Beyond these features, the multi-tiered design of our engine and related software allows for rapid expansion of network and computing capacity without interrupting service
or requiring replacement of existing hardware or software.
Our transaction-enabling technology engine includes a wide variety
of functions and services that allow customers to open and monitor investment accounts and to place orders for equity, option, mutual fund and fixed income transactions. Our core technology is based on our proprietary Stateless
Architecture®. The architecture provides the key drivers of our techno-business strategy (i.e., reliability, scalability, reusability and security). The primary components include a graphical user interface, the session manager, the
transaction process monitor, the data manager and the transaction processor. See “Item 7. Risk factors—If our ability to correctly process customer transactions is slowed or interrupted, we could be subject to customer litigation and our
reputation could be harmed” and “Item 7. Risk factors—If we fail to protect our intellectual property rights or face a claim of intellectual property infringement by a third party, we could lose our intellectual property rights, be
liable for significant damages, or incur significant costs and expenses regardless of the merits of the claims against us.”
Banking Technology
Our core banking system is a Unix-based, client server and relational database product operating in a high availability
environment. This system manages our core banking interfaces with the Federal Reserve Bank for automated clearing house processing, a third party ATM/Debit card processor for real-time communication, and the voice response unit system, which enables
customers to access their accounts via the telephone. The system also supports an interface for customer account access through Yahoo!, interfaces to the Internet banking platform and with an online bill-pay provider. Banking operations are also
supported by a number of custom applications that allow for efficient customer fulfillment, service and reporting.
The
Bank’s web environment is based on an NT operating system, supports online applications processes, and provides Web applications and tools such as the ATM locator, alerts and rate calculators. The Bank’s Internet banking platform is
currently provided by a third party provider, which also hosts the Bank’s Internet applications on its site in Georgia. The Bank’s web site is an NT based application that provides the user interface and functionality to support all
Internet-based banking operations including bill payment, account transfers, transaction reporting and account statements. As part of our restructuring plan, we intend to complete a migration from the current hosted S1 system to an
“in-house” platform in 2002, which will provide us with greater enhancement flexibility as we expand our banking product.
Institutional
Technology
Following the acquisitions of E*TRADE Institutional and E*TRADE Technologies, we have developed a proprietary
global order management system “VENOM” and order routing system “RoutEx.” VENOM is a Unix- based client server application, that allows us to route orders between the various global trading desks. RoutEx is a Unix-based, FIX
compliant application that routes to a rapidly expanding number of global exchanges, Electronic Communication Networks (“ECNs”) and market makers. Customers also have the ability to use their own trading systems and send orders to RoutEx
via the FIX protocol, taking advantage of our numerous memberships in exchanges.
In addition, in 2001, we enhanced the
ClickTraderSM and Portfolio TraderSM applications. These applications facilitate the monitoring of real-time market data and the origination of orders into the Venom and RoutEx
33
market center destinations. We also introduced www.institutional.etrade.com to serve the institutional customer base with account information, trade data and settlement instructions in addition
to other relevant market content.
Global Technology
During the past two years, we evolved our domestic Stateless Architecture®
into a high availability, highly scalable architecture for international use. Labeled IIP, for International Investment Product (patent pending), the U.S. architecture was modified to provide for multi-currency and multi-language support. Prior to a
launch in a new country, IIP is customized for local regulatory, cultural and language services. In addition, services common in the target country are identified and engineered into the IIP platform. During fiscal year 2001, we successfully
launched E*TRADE Germany using this technology.
Transaction execution, clearing and settlement, and customer books and records
maintenance, are functions provided by the back-office systems within each country. Transaction orders are passed from the front-end systems via global networks to the respective country back-office systems for execution and processing.
Security
A significant
risk to online commerce and communication is the insecure transmission of confidential information over public networks. See “Item 7. Risk factors—The security of our computers could be breached or confidential customer information
transmitted over public networks could be breached or misused, which could deter customers from using our services and significantly damage our reputation.”
We use a combination of proprietary and industry standard security measures throughout our global technology operations and networks to protect customers’ accounts. Customers are
assigned unique account numbers, user identifications and trading passwords that must be used each time they log on to the system. We rely on encryption and authentication technology, including public key cryptography technology licensed from RSA
Data Security, Inc. and secure sockets layer technology, to provide the security and authentication necessary to effect the secure exchange and storage of information. Touch-tone telephone transactions are secured through a personal identification
number, the same technology used in automated teller machines. A second level of password protection is used prior to order placement. We also have an agreement to provide digital certification and authentication services for electronic commerce
through our alliance with VeriSign, Inc. In addition, we utilize intrusion detection systems to be alerted to unauthorized access, centralized and automated access control management to limit access to customer data, firewalls and other network
device controls, cryptographic access authentication by employees, and audit and logging to monitor systems and conforming with policies.
CUSTOMER SERVICE
Consumers in all industries continue to demand simplified and personalized experiences. During
fiscal year 2001, our Customer Service department responded to this demand by beginning customer driven solutions, carefully designed and implemented to achieve our goal of personalization, customer retention, loyalty and increased customer value.
As an organization servicing multiple business units, each with unique customer goals and customer insight, we have learned that customer loyalty and long term relationships can combat price erosion.
In fiscal year 2001, we were able to effectively and efficiently leverage client relationships and deliver measurable improvements. We have improved the
customer experience as measured by the SatMetrix survey for fiscal year 2001 as compared to fiscal year 2000. Improvements include:
| |
• |
|
a 5% increase in overall customer satisfaction |
34
| |
• |
|
a 5% increase in customer loyalty |
| |
• |
|
a 6% increase in customer service satisfaction |
| |
• |
|
a 2% increase in transactional satisfaction (new accounts, fund and account transfer) |
In February 2002, we launched our revamped web site designed to deliver a holistic financial services experience through the integration and personalization of financial products and
services. The new E*TRADE Financial web site combines personalized messaging and guidance throughout the site, along with a series of interactive media components to deliver knowledge and information to customers. We will use technology in our
continuing efforts to improve the customer experience. Among other efforts, we launched Service Now, our one-on-one live customer service offering. Power E*TRADE customers, our most active traders, can click on the Service Now icon on our web site
and instantly connect to a customer service associate.
COMPETITION
Major Competitors
The market for electronic financial services over the
Internet continues to rapidly evolve and is intensely competitive. We expect competition to continue to intensify in the future. As we continue to diversify our services beyond online domestic retail brokerage offerings to include banking, global
cross-border trading, mutual fund offerings, market-making, mortgage lending and institutional investing, financial advice and insurance, the number of competitors in these varied market places will also increase. We face direct competition from
full commission brokerage firms, discount brokerage firms, online brokerage firms, and both pure-play Internet banks as well as traditional “brick & mortar” commercial banks and savings banks providing touch-tone telephone, online
banking services and/or electric pay/bill presentment services. In addition, we compete with mutual fund companies, which provide money market funds and cash management accounts. As we continue our global expansion, there will be regional
competition from specialists with a pan-regional focus in Europe and Asia. See “Item 7. Risk factors—We face competition from competitors, some of whom have significantly greater financial, technical, marketing and other resources, which
could cause us to lower our prices or to lose a significant portion of our market share.” and “Item 7. Risk factors—If our international efforts are not successful, our business growth will be harmed and our resources will not have
been used efficiently.”
REGULATION
Our business is subject to stringent regulation by U.S. Federal and state regulatory agencies and securities exchanges and by various non-U.S. governmental agencies or regulatory bodies, securities exchanges, and
central banks, each of which has been charged with the protection of the financial markets and the protection of the interests of those participating in those markets. These regulatory agencies in the United States include, among others, the SEC,
the NASDR, the New York Stock Exchange, the FDIC, the Municipal Securities Rulemaking Board, and the OTS. In other areas of the world, these regulators include the Securities and Futures Association, the Securities and Futures Authority, the Bermuda
Monetary Authority, and the Office of Superintendent of Financial Institutions in Canada, among many others. Additional legislation and regulations and changes in rules may directly affect our manner of operation and profitability.
E*TRADE Securities, Dempsey and certain of our other subsidiaries are registered as broker-dealers with the SEC and as such are subject to
regulation by the SEC and by self-regulatory organizations, such as the NASDR and the securities exchanges of which each is a member. E*TRADE Advisory Services, E*TRADE Asset Management and E*TRADE Global Asset Management, Inc. (“E*TRADE Global
Asset Management”) are registered as investment advisers with the SEC.
35
Similarly, E*TRADE Group and ETFC, as savings and loan holding companies, and E*TRADE Bank, as
a federally chartered savings bank, are subject to extensive regulation, supervision and examination by the OTS, and also, in the case of the Bank, the FDIC. Such regulation covers all aspects of the Banking business, including lending practices,
safeguarding deposits, capital structure, transactions with affiliates, and conduct and qualifications of personnel.
The SEC,
NASDR, OTS and various other regulatory agencies have stringent rules with respect to the maintenance of specific levels of net capital by securities broker-dealers and regulatory capital by banks. For example, our U.S. broker-dealer entities are
subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (the “Exchange Act”), which is designed to regulate the general financial condition and liquidity of a broker-dealer. Net capital is the net worth of a broker or dealer
(assets minus liabilities), less deductions for certain types of assets. If a firm fails to maintain the required net capital it may be subject to suspension or revocation of its registration by the SEC and suspension or expulsion by the NASDR. Such
failures could ultimately lead to the firm’s liquidation.
Similarly, banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct
material effect on a bank’s operations and financial statements. For more information about capital requirement and other risks relating to the regulation of our business, see “Item 8. Consolidated Financial Statements and Supplementary
Data” and all risks disclosed in “Item 7. Risk factors—Risks Relating to the Regulation of Our Business.”
ASSOCIATES
At December 31, 2001, we had 3,495 associates. (We refer to our employees as “associates”
both within the Company and throughout this document.) None of our associates are subject to collective bargaining agreements or represented by a union. We consider our relations with our associates to be good. See “Item 7. Risk factors—An
inability to retain and hire skilled personnel and senior management could seriously harm our ability to maintain and grow our business.”
Our principal locations, most of which are leased by us,
are as follows:
| Location
|
|
Business Segment Use
|
|
Approximate size
(in square feet)
|
| Menlo Park, California |
|
Corporate Headquarters and Domestic Retail Brokerage |
|
132,000 |
| |
| Rancho Cordova, California |
|
Administration and Domestic Retail Brokerage and Banking |
|
273,000 |
| |
| Chicago, Illinois |
|
Domestic Retail Brokerage |
|
200,000 |
| |
| Alpharetta, Georgia |
|
Administration and Domestic Retail Brokerage and Banking |
|
165,000 |
| |
| Arlington, Virginia |
|
Banking |
|
161,000 |
| |
| New York, New York |
|
Global and Institutional |
|
44,000 |
Our Domestic Retail Brokerage business leases a number of additional facilities
in the United States. Our Global and Institutional business leases additional facilities in Canada, Southeast Asia and Europe. Our Banking business leases additional facilities in the United States. Our Wealth Management and Other business leases
36
additional facilities in the United States. In addition, we lease facilities in New York City, Boston, Beverly Hills, Denver and San Francisco where our E*TRADE Financial Centers are located.
These leases expire at various dates through 2013.
In fiscal 2001, we restructured many of our existing facilities and have
consolidated some sites allowing for additional space to be available for sublease. These additional facilities are not included above. See Note 3 in the Notes to the Consolidated Financial Statements for a discussion of the restructuring.
We believe that our facilities are adequate for current needs and that additional or substitute space will be available as
needed to accommodate any future expansion of our operations.
On November 21, 1997, a putative
class action was filed in the Superior Court of California, County of Santa Clara, by Larry R. Cooper. The action alleges, among other things, that our advertising regarding our commission rates and ability to execute transactions through our online
brokerage service was false and deceptive. The action seeks injunctive relief, and unspecified compensatory damages, punitive damages, and attorney’s fees. On June 1, 1999, the Court entered an order denying plaintiffs’ motion for class
certification. On January 25, 2000, the Court ordered plaintiff to submit all claims seeking monetary relief to arbitration and stayed all other claims pending the outcome of arbitration. In July 2001, Plaintiff filed an arbitration claim with the
National Association of Securities Dealers, Inc., and in October 2001, we submitted our answer. At this time, we are unable to predict the ultimate outcome of these proceedings.
On March 1, 1999, a putative class action was filed in the Court of Common Pleas, Cuyahoga County, Ohio, by Truc Q. Hoang. The action alleges, among other things, that plaintiff
experienced problems accessing her account and placing orders and seeks injunctive relief and unspecified damages for breach of contract, breach of fiduciary duty, unjust enrichment, fraud, unfair and deceptive trade practices, negligence and
intentional torts. On September 1, 1999, the Court of Common Pleas denied our motion to compel arbitration and we appealed. On March 16, 2000, the Court of Appeals reversed and remanded this case to the Court of Common Pleas ruling that our motion
to compel arbitration could not be decided until the Court of Common Pleas first determined whether this case should be certified as a class action. On September 29, 2000, Plaintiff filed her First Amended Complaint limiting the class of potential
plaintiffs to customers who are Ohio residents, and we filed an Answer denying Plaintiff’s claims. Subsequently, the Court scheduled the hearing of Plaintiff’s Motion for Class Certification for April 23, 2002, and set this case for trial
on November 12, 2002. At this time, we are unable to predict the ultimate outcome of this proceeding.
On March 11, 1999, a
putative class action was filed in the Superior Court of California, County of Santa Clara, by Elie Wurtman. The action alleges, among other things, that Plaintiff experienced problems accessing his account and placing orders and seeks injunctive
relief and unspecified damages for negligence and violations of the Consumer Legal Remedies Act and California Unfair Business Practices Act. After the Court of Appeal affirmed the Superior Court’s previous ruling denying our Motion to Compel
Arbitration, we demurred to Plaintiff’s Amended Complaint. Thereafter, Plaintiff filed his First Amended Complaint on or about March 21, 2001, and we filed an Answer on April 3, 2001, denying Plaintiff’s claims. At this time, we are unable
to predict the ultimate outcome of this proceeding.
In the ordinary course of our business, we engaged in certain stock loan
transactions with MJK Clearing, Inc., referred to in this Form 10-K as MJK, involving the lending of Nasdaq-listed common stock of GenesisIntermedia, Inc. referred to in this Form 10-K as GENI and other securities from MJK to us. Subsequently, we
relent the GENI and/or other securities received from MJK to three other broker dealers, Wedbush Morgan Securities, referred to in this Form 10-K as Wedbush, Nomura Securities, Inc., referred to in this Form 10-K as Nomura, and Fiserv Securities,
Inc., referred to in this Form 10-K as Fiserv. On September 25, 2001, Nasdaq halted trading in the stock of GENI, which had last traded at a price of $5.90 before the halt. As a
37
result, MJK was unable to meet its collateral requirements on the GENI and other securities with certain counterparties to those transactions. MJK was ordered to cease operations by the SEC
because they failed to meet regulatory capital requirements, and was placed into SIPC liquidation in the District of Minnesota. These events have led to disputes among several of the participants in the stock loan transactions involving the stock of
GENI and other securities lent by MJK regarding which entities should bear the losses resulting from MJK’s insolvency. We are confident that E*TRADE Securities has sufficient capital in excess of regulatory requirements to cover any potential
exposure arising from these matters. Wedbush, Nomura, and Fiserv have commenced separate legal actions against us. On or about October 1, 2001, Wedbush filed an action in the Superior Court of the State of California, Los Angeles County, Case No.
BC258931. On or about October 21, 2001, Nomura filed an action against us in the United States District Court for the Southern District of New York, Case No. 01-CV-9270 (AGS). In addition, on or about October 4, 2001, Fiserv filed an action against
us in the United States District Court for the Eastern District of Pennsylvania, Case No. CTV-01-5045. These actions seek various forms of equitable relief and seek repayment of a total of approximately $60.0 million dollars received by us in
connection with the GENI and other stock loan transactions. We take the position that the plaintiffs must look to MJK as the debtor for repayment, and that we have defenses in each of these actions and will vigorously defend ourselves in all
matters. To date, we have successfully defeated all actions for interim relief or have entered into consent orders essentially maintaining the status quo between the parties until the matter can be judicially resolved. Because the litigation is in
its early stages, we are unable to predict the ultimate outcome or the amount of any potential losses.
By a Complaint dated
December 28, 2001, Thomas Barry, a shareholder, filed a shareholder derivative action on his own behalf and purportedly on behalf of E*TRADE Group, Inc. itself as a Nominal Defendant, against Christos M. Cotsakos, the Company’s Chairman of the
Board and Chief Executive Officer, and each current member of the Company’s Board of Directors, as individuals, in the Superior Court of the State of California, County of San Mateo. Before defendants were obligated to answer this complaint,
Mr. Barry filed a “First Amended Shareholder Derivative Complaint” on or about February 26, 2002, for breach of fiduciary duties, waste of corporate assets, abuse of control, and gross mismanagement for acts including, but not limited to,
the Board’s cancellation and settlement of a $15.0 million loan to Mr. Cotsakos in exchange for his waiver of certain monetary and other rights under his employment agreement; the Board’s agreeing as part and parcel of the cancellation and
settlement of the foregoing loan to make an additional payment to Mr. Cotsakos of $15.2 million to compensate him for tax liabilities resulting from the cancellation and settlement of the foregoing loan; the Board’s approval of other loans
to officers and directors, including a $15.0 million loan to founder and director William Porter; and the Company’s alleged failure to make full and adequate disclosures about such events in the Company’s previous regulatory filings. Mr.
Barry seeks damages allegedly sustained by the Company as a result of defendants’ alleged acts, as well as his attorney’s fees and costs, against all defendants except the Company. At this time, we are unable to predict the ultimate
outcome of this proceeding.
We believe the foregoing claims against the Company are without merit and intend to defend against
them vigorously. An unfavorable outcome in any matters which are not covered by insurance could have a material adverse effect on our business, financial condition and results of operations. In addition, even if the ultimate outcomes are resolved in
our favor, the defense of such litigation could entail considerable cost and the diversion of the efforts of management, either of which could have a material adverse effect on our results of operation.
From time to time, we and our subsidiaries have been threatened with or named as a defendant in other lawsuits, arbitrations and claims by customers and
others. In addition, our subsidiaries are regulated by the SEC, NASDR, OTS, and various state regulators and are subject to periodic regulatory audits and examinations. Any such lawsuits, arbitrations, claims, audits, examinations, or related
actions could result in monetary losses or disciplinary actions that could have a material adverse effect on our business, financial condition and operations.
We maintain insurance coverage in such amounts and with such coverages, deductibles and policy limits as management believes are reasonable and prudent. The principal insurance coverage we maintain covers
comprehensive general liability, commercial property damage, hardware/software damage, directors and officers,
38
certain criminal acts against the company, and errors and omissions. We believe that such insurance coverage is adequate for the purpose of our business. Our ability to maintain this level of
insurance coverage in the future, however, is subject to the availability of affordable insurance in the market place, and world events, including the terrorists’ attacks of September 11, 2001 may impair our ability to obtain insurance in the
future.
Reference is made to the information reported in prior filings with the Securities and Exchange Commission under Item
3. Legal and Administrative Proceedings in our Annual Report on Form 10-K, as amended, for the year ended September 30, 2000, and under Part II, Item 1. Legal and Administrative Proceedings in our Transition Report on Form 10-QT for the quarter
ended December 31, 2000, our Report on Form 10-Q for the quarter ended March 31, 2001, our report on Form 10-Q for the quarter ended June 30, 2001, and our Report on Form 10-Q for the quarter ended September 30, 2001.
None.
39
PART II
Price Range of Common
Stock
From the date of our initial public offering through January 2001, our common stock was listed on the Nasdaq National
Market System. In February 2001, we listed our shares on the New York Stock Exchange. The following table shows the high and low sale prices of our common stock as reported by the Nasdaq National Market or the New York Stock Exchange, as applicable
for the periods indicated.
| |
|
High
|
|
Low
|
| Fiscal 2000: |
|
|
|
|
|
|
| First Quarter |
|
$ |
39.19 |
|
$ |
22.19 |
| Second Quarter |
|
$ |
32.63 |
|
$ |
19.94 |
| Third Quarter |
|
$ |
27.44 |
|
$ |
13.94 |
| Fourth Quarter |
|
$ |
19.75 |
|
$ |
13.94 |
| |
| Transition Period: |
|
|
|
|
|
|
| Three Months Ended December 31, 2000 |
|
$ |
16.50 |
|
$ |
6.66 |
| |
| Fiscal 2001: |
|
|
|
|
|
|
| First Quarter |
|
$ |
15.38 |
|
$ |
6.35 |
| Second Quarter |
|
$ |
10.20 |
|
$ |
5.32 |
| Third Quarter |
|
$ |
6.82 |
|
$ |
4.07 |
| Fourth Quarter |
|
$ |
11.10 |
|
$ |
5.59 |
The closing sale price of the Company’s common stock as reported on the New
York Stock Exchange on March 25, 2002 was $9.27 per share. As of that date there were 2,507 holders of record of the Company’s common stock.
Dividends
The Company has never declared or paid cash dividends on its capital stock. TIR (Holdings) Limited
(now, “E*TRADE Institutional”), which was acquired in August 1999, and accounted for as a pooling of interests, issued 3,000,000 eight percent (8%) cumulative redeemable preference shares, $1 par, in April 1996, and paid dividends totaling
$222,000 in fiscal 1999. The Company currently intends to retain all of its earnings, if any, for use in its business and does not anticipate paying any cash dividends in the foreseeable future. The payment of any future dividends will be at the
discretion of the Company’s board of directors and will depend upon a number of factors, including future earnings, the success of the Company’s business activities, regulatory capital requirements, the general financial condition and
future prospects of the Company, general business conditions and such other factors as the board of directors may deem relevant.
40
Recent Sales of Unregistered Securities
The following table summarizes transactions during the year in which various holders of our 6% convertible notes exchanges such securities for shares of our common stock pursuant to the
exemption from registration provided in Section 3(a)(9) of the Securities Act of 1933 (in thousands):
| Month
|
|
Aggregate Principal Amount Exchanged
|
|
Common Shares Issued
|
| June 2001 |
|
$ |
30,000 |
|
2,740 |
| July 2001 |
|
|
20,000 |
|
2,050 |
| August 2001 |
|
|
30,000 |
|
3,185 |
| September 2001 |
|
|
10,000 |
|
1,205 |
| October 2001 |
|
|
74,800 |
|
7,669 |
| November 2001 |
|
|
19,000 |
|
1,811 |
| December 2001 |
|
|
5,950 |
|
518 |
| |
|
|
|
|
|
| |
|
$ |
189,750 |
|
19,178 |
| |
|
|
|
|
|
On February 1, 2001, the Company authorized the issuance of 2,997,951 shares of
unregistered common stock in connection with the acquisition of LoansDirect, Inc. (now E*TRADE Mortgage) as consideration for all the issued and outstanding capital stock of LoansDirect. No underwriters were involved, and there were no underwriting
discounts or commissions. The securities were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a transaction not involving a
public offering. On March 20, 2001, the Company filed a registration statement with the Securities and Exchange Commission for the resale of these 2,997,951 shares. The registration statement was declared effective on June 15, 2001.
On February 22, 2001, the Company authorized the issuance of 191,250 shares of unregistered common stock in connection with its acquisition
of Confluent, Inc. pursuant to the Agreement and Plan of Reorganization dated September 20, 1999. No underwriters were involved, and there were no underwriting discounts or commissions. The securities were issued in reliance upon the exemption from
registration provided under Section 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a transaction not involving a public offering. The shares were not registered for resale.
On March 12, 2001, the Company authorized the issuance of 1,416,586 shares of unregistered common stock in connection with the acquisition of E*TRADE
Germany AG, as part of the consideration for all of the capital shares of E*TRADE Germany AG. No underwriters were involved, and there were no underwriting discounts or commissions. The securities were issued in reliance upon the exemption from
registration provided under Section 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a transaction not involving a public offering. On March 16, 2001, the Company filed a registration statement with the
Securities and Exchange Commission for the resale of these 1,416,586 shares. The registration statement was declared effective on June 15, 2001.
On March 12, 2001, the Company authorized the issuance of an aggregate of 618,057 shares of unregistered common stock in connection with the acquisition of PrivateAccounts, Inc. (renamed E*TRADE Advisory Services Inc.
on January 2, 2001). The shares were deposited into escrow pursuant to the terms of the merger agreement as a portion of the consideration for the merger. No underwriters were involved, and there were no underwriting discounts or commissions. The
securities were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a transaction not involving a public offering. On March 20,
2001, the Bank of New York as escrow agent authorized the release from escrow of 478,500 of the shares of common stock. On June 22, 2001,
41
the Company filed a registration statement with the Securities and Exchange Commission for the resale of these 478,500 shares. In addition, the registration statement included the registration of
134,820 shares issued upon the exercise of certain warrants assumed in connection with the acquisition of E*TRADE Financial Corporation. No underwriters were involved, and there were no underwriting discounts or commissions. The warrants were
originally issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act based on the fact that warrants were sold by the original issuer in a sale not involving a public offering. On July 23, 2001, the
Company authorized the issuance of an additional 556,757 shares of unregistered common stock in connection with the acquisition of Private Accounts. In addition, 139,557 shares were released from escrow pursuant to the terms of the merger agreement.
The shares were issued pursuant to the terms of the merger agreement as a portion of the consideration for the merger. No underwriters were involved, and there were no underwriting discounts or commissions. The securities were issued in reliance
upon the exemption from registration provided under Section 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a transaction not involving a public offering. On December 6, 2001, the Company filed an
amendment to its S-3 registration statement originally filed June 22, 2001 for the registration of 1,254,180 shares of common stock issued in the PrivateAccounts transactions described above, and 134,820 shares or common stock issued in connection
with the exercise of E*TRADE Financial Corporation warrants, as described above. The registration statement was declared effective on January 7, 2002.
On March 14, 2001, the Company authorized the issuance of an aggregate of 78,928 shares of unregistered common stock in connection with the acquisition of E*TRADE Nordic AB, referred to in this Form 10-K as E*TRADE
Nordic as consideration for the purchase pursuant to a forward agreement of shares of E*TRADE Nordic held by E*TRADE Nordic shareholders upon the exercise of E*TRADE Nordic stock options held by them. No underwriters were involved and there were no
underwriting discounts or commissions. The securities were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a transaction not
involving a public offering. On April 23, 2001, the Company filed an amended registration statement with the Securities and Exchange Commission for the resale of these 78,928 shares. The registration statement was declared effective on June 15,
2001.
In May 2001, the Company consummated the sale of its 6.75% convertible subordinated notes due 2008, referred to herein as
the Notes, in the aggregate principal amount of $325 million. J.P. Morgan Securities Inc. was the initial purchaser. The Notes are convertible, in whole or in part, at any time prior to maturity, at the option of the holders, unless previously
redeemed or repurchased, into shares of the Company’s common stock at a conversion price of $10.925 per share, a 25% premium to the closing price of the common stock on the date of pricing. The Notes are non-callable until May 2004 and
thereafter are callable at par, plus accrued interest plus a premium. The Notes were issued under an Indenture, dated May 29, 2001, between the Company and The Bank of New York, as Trustee. The Notes were issued to a limited number of purchasers in
a private placement exempt from registration under Rule 144A under the Securities Act. The net proceeds to the Company were approximately $314.5 million, which will be used for general corporate purposes, including capital expenditures and to meet
working capital needs. The Notes were not to be offered or sold in the United States absent registration with the SEC or the availability of an applicable exemption from such registration requirements. On June 28, 2001, the Company filed a
registration statement with the SEC for the resale by holders of the Notes and the common stock issuable upon conversion of the Notes. The registration statement was declared effective on September 24, 2001.
On July 5, 2001, the Company adopted a stockholder rights plan. Under the rights plan, the Company issued a dividend of one right for each share of
common stock of the Company held by stockholders of record at the close of business on July 17, 2001. Each right initially entitles the holder to purchase from the Company one one-thousandth of a share of a new series of participating preferred
stock of the Company at an initial purchase price of $50. The rights will become exercisable and will detach from the Company’s common stock only upon the occurrence of certain events. Upon the occurrence of these events, unless redeemed for
$.01 per right, the rights will become exercisable by holders, other than rights held by a potential unsolicited third party acquiror, for shares of common stock of the Company or for shares of the third party acquiror having a value of twice the
42
right’s then-current purchase price. The rights will expire on July 9, 2011. See Current Report on Form 8-K filed on July 10, 2001.
On July 15, 2001, the Company authorized the issuance of an aggregate of 1,407,499 shares of unregistered common stock in connection with the acquisition of E*TRADE Germany AG (renamed
E*TRADE Bank AG on May 17, 2001). No underwriters were involved, and there were no underwriting discounts or commissions. The securities were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act
based on the fact that the common stock was sold by the issuer in a transaction not involving a public offering. On December 4, 2001, the Company filed a registration statement with the Securities and Exchange Commission for the resale of these
shares. The registration statement was declared effective on January 7, 2002.
On October 1, 2001, the Company authorized the
issuance of an aggregate of 254,272 additional shares of unregistered common stock in connection with the acquisition of Electronic Investing Corporation. No underwriters were involved, and there were no underwriting discounts or commissions. The
securities were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a transaction not involving a public offering. On December 7,
2001, the Company filed a registration statement with the Securities and Exchange Commission for the resale of 68,818 of these shares. The registration statement was declared effective on February 5, 2002.
On October 1, 2001, the Company issued 28,929,498 shares of unregistered common stock in connection with the acquisition of Dempsey & Co. LLC
(“Dempsey”), which together with cash in the amount of $20.0 million constituted the consideration for all of the issued and outstanding capital stock of Dempsey. No underwriters were involved, and there were no underwriting discounts or
commissions. The securities were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a transaction not involving a public
offering. On December 7, 2001, the Company filed a registration statement with the Securities and Exchange Commission for the resale of 26,036,553 of these shares. The registration statement was declared effective on January 8, 2002.
43
| |
|
Year Ended December 31, 2001
|
|
|
Three Months Ended December 31, 2000(1)
|
|
For the Year Ended September 30,
|
| |
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
|
1997
|
| |
|
(in thousands, except per share amounts) |
| Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross revenues |
|
$ |
2,062,115 |
|
|
$ |
569,032 |
|
$ |
1,973,183 |
|
|
$ |
889,683 |
|
|
$ |
482,244 |
|
|
$ |
316,132 |
| Net revenues |
|
$ |
1,275,364 |
|
|
$ |
333,766 |
|
$ |
1,368,318 |
|
|
$ |
671,448 |
|
|
$ |
361,005 |
|
|
$ |
254,022 |
| Facility restructuring and other nonrecurring charges(2) |
|
$ |
(202,765 |
) |
|
$ |
— |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
| Operating income (loss) |
|
$ |
(185,958 |
) |
|
$ |
6,909 |
|
$ |
(80,326 |
) |
|
$ |
(149,193 |
) |
|
$ |
(7,661 |
) |
|
$ |
28,979 |
| Gain (loss) on sale of investments |
|
$ |
(49,812 |
) |
|
$ |
3,582 |
|
$ |
211,149 |
|
|
$ |
54,093 |
|
|
$ |
— |
|
|
$ |
— |
| Income (loss) before cumulative effect of accounting change and extraordinary items(3) |
|
$ |
(270,801 |
) |
|
$ |
1,436 |
|
$ |
19,152 |
|
|
$ |
(54,315 |
) |
|
$ |
(402 |
) |
|
$ |
18,311 |
| Net income (loss) |
|
$ |
(241,532 |
) |
|
$ |
1,353 |
|
$ |
19,152 |
|
|
$ |
(56,769 |
) |
|
$ |
(402 |
) |
|
$ |
18,311 |
| Income (loss) per share before cumulative effect of accounting change and extraordinary items(3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ |
(0.81 |
) |
|
$ |
0.00 |
|
$ |
0.06 |
|
|
$ |
(0.20 |
) |
|
$ |
0.00 |
|
|
$ |
0.12 |
| Diluted |
|
$ |
(0.81 |
) |
|
$ |
0.00 |
|
$ |
0.06 |
|
|
$ |
(0.20 |
) |
|
$ |
0.00 |
|
|
$ |
0.11 |
| Income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ |
(0.73 |
) |
|
$ |
0.00 |
|
$ |
0.06 |
|
|
$ |
(0.21 |
) |
|
$ |
(0.01 |
) |
|
$ |
0.12 |
| Diluted |
|
$ |
(0.73 |
) |
|
$ |
0.00 |
|
$ |
0.06 |
|
|
$ |
(0.21 |
) |
|
$ |
(0.01 |
) |
|
$ |
0.11 |
| Shares used in computation of per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
|
332,370 |
|
|
|
311,413 |
|
|
301,926 |
|
|
|
272,832 |
|
|
|
195,051 |
|
|
|
147,168 |
| Diluted |
|
|
332,370 |
|
|
|
321,430 |
|
|
319,336 |
|
|
|
272,832 |
|
|
|
195,051 |
|
|
|
167,818 |
| |
|
December 31, 2001
|
|
At September 30,
|
| |
|
|
2000
|
|
1999
|
|
1998
|
|
1997
|
| |
|
(in thousands) |
| Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and equivalents |
|
$ |
836,201 |
|
$ |
433,377 |
|
$ |
267,073 |
|
$ |
76,409 |
|
$ |
144,752 |
| Brokerage receivables—net |
|
$ |
2,139,153 |
|
$ |
6,542,508 |
|
$ |
2,982,076 |
|
$ |
1,451,468 |
|
$ |
877,004 |
| Mortgage-backed securities |
|
$ |
3,556,619 |
|
$ |
4,188,553 |
|
$ |
1,426,053 |
|
$ |
1,012,163 |
|
$ |
319,203 |
| Loans |
|
$ |
8,010,457 |
|
$ |
4,172,754 |
|
$ |
2,154,509 |
|
$ |
904,854 |
|
$ |
540,704 |
| Total assets |
|
$ |
18,172,414 |
|
$ |
17,317,437 |
|
$ |
8,032,174 |
|
$ |
4,448,140 |
|
$ |
2,295,804 |
| Convertible subordinated notes and capital lease liability |
|
$ |
778,459 |
|
$ |
676,903 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
| Mandatorily redeemable preferred securities |
|
$ |
69,503 |
|
$ |
30,647 |
|
$ |
30,584 |
|
$ |
38,385 |
|
$ |
42,186 |
| Shareowners’ equity |
|
$ |
1,570,914 |
|
$ |
1,856,833 |
|
$ |
1,451,795 |
|
$ |
853,059 |
|
$ |
354,550 |
(1) |
|
On January 22, 2001, the Company changed its fiscal year end from September 30 to December 31; accordingly, results have been separately disclosed for the three-month
transition period ended December 31, 2000. |
(2) |
|
In fiscal year 2001, the Company announced a restructuring plan. See Note 3 to the Consolidated Financial Statements for a discussion of the restructuring.
|
(3) |
|
In the year ended December 31, 2001, the Company recorded an extraordinary gain on the early extinguishment of the Company’s 6% convertible subordinated notes in share
exchanges and repurchases.
|
44
| |
offset by extraordinary losses on the early redemption of adjustable and fixed rate advances from the Federal Home Loan Bank of Atlanta (“FHLB”). In the three months ended December 31,
2000, a cumulative effect of a change in accounting principle resulted from the implementation by E*TRADE Group of Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging
Activities, which requires that all derivatives be recorded on the balance sheet at fair value, with the initial application reported as the cumulative effect of a change in accounting principle. In fiscal year 2000, the cumulative effect of
change in accounting principle resulted from the implementation by E*TRADE Financial Corporation (“ETFC”) of Statement of Position 98-5, Reporting on the Cost of Start-Up Activities, which requires that the cost of start-up
activities be expensed as incurred rather than capitalized, with the initial application reported as the cumulative effect of a change in accounting principle. In fiscal year 1999, ETFC redeemed all of its outstanding debt. ETFC wrote off both the
related premium and the remaining discount as an extraordinary loss on the early extinguishment of debt, totaling approximately $2.0 million, net of tax. |
The selected consolidated financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations”, and “Item 8. Consolidated Financial Statements and Supplementary Data.”
Forward-Looking Statements
Statements made in this document, other than statements of historical
information, are forward looking statements that are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. These forward looking statements may sometimes be identified by words such as “expect”,
“may”, “looking forward”, “we plan”, “we believe”, “are planned”, “could have”, “could be”, and “currently anticipate”. Although we believe these statements, as well as
other oral and written forward-looking statements made by or on behalf of E*TRADE Group, Inc. from time to time, to be true and reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. Actual results,
performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from our forward looking statements are set
forth in our other filings with the Securities and Exchange Commission and in this document under the heading “Risk Factors”, beginning on page 70 and in this section captioned “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”. We caution that the risks and factors discussed below and in such filings are not exclusive. We do not undertake to update any forward looking statement that may be made from time to time by or on behalf of
E*TRADE Financial.
Overview
E*TRADE Group, Inc. (“E*TRADE Group,” the “Company,” or “we”), a financial services holding company, is a provider of personalized online financial services offering value-added investing, banking, lending,
planning and advice to our customers through services provided by our wholly-owned subsidiaries, including but not limited to, E*TRADE Securities, Incorporated (“E*TRADE Securities”), a securities broker-dealer, E*TRADE Institutional, a
provider of global securities brokerage and other related services to institutional clients, ETFC, a provider of financial services whose primary business is conducted by its subsidiary, E*TRADE Bank (the “Bank”), a federally chartered
savings bank that provides deposit accounts insured by the Federal Deposit Insurance Corporation (“FDIC”) to customers nationwide. Our business is discussed in greater detail in this Form 10-K in “Item 1. Business.”
On January 22, 2001, our fiscal year end was changed from September 30 to December 31. During the three months ended December 31, 2000
and the fiscal year ended December 31, 2001, we expanded and diversified our business through several strategic acquisitions. Through our acquisition in February 2001 of
45
LoansDirect, Inc., which merged into and was renamed E*TRADE Mortgage Corporation effective June 15, 2001 (“E*TRADE Mortgage”), we began offering mortgage loans. Through our
acquisitions of Web Street, Inc. (“Web Street”) and Dempsey and Company, LLC (“Dempsey”), we expanded our Domestic Retail Brokerage business by offering market-making services and increasing our account base. In October 2000, we
also enhanced our wealth management business through the acquisition of PrivateAccounts, renamed E*TRADE Advisory Services, a platform which aggregates the services of individual money managers and investment advisers and launched Stock Baskets,
which enables our customers to set up dollar denominated, personalized portfolios via the Internet. All of our acquisitions from October 2000 through the end of 2001 have been accounted for under the purchase method and, accordingly, the operating
results of these entities have been combined with those of the Company since the dates of acquisition.
Summary of Critical Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated
financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Because we operate in the financial services industry, we follow certain accounting guidance used by the brokerage and banking
industries. One of the more significant impacts of these rules is that interest income and expense from our lending and banking activities, as well as gains and losses from sales of loans and bank investments, are included in net revenues, whereas
corporate interest income and expense, as well as gains and losses on corporate investments, are reported as non-operating income or expense. In addition, our consolidated balance sheet is not separated into current and noncurrent assets and
liabilities. Also, certain financial assets, such as mortgage-backed and investment securities are carried at fair market value in our consolidated balance sheet, while other assets, such as loans receivable, are carried at historic values.
Note 2 to the Consolidated Financial Statements contains a summary of the significant accounting policies that we use. Many of
these accounting policies require the use of estimates. The preparation of these statements requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods
presented and actual results could differ from our estimates. Critical accounting estimates, which are both important to the portrayal of our financial condition and which require complex, subjective judgments, are as follows:
| |
• |
|
Accrued restructuring costs; |
| |
• |
|
Determination of the allowance for loan losses; |
| |
• |
|
The classification and carrying value of investments; |
| |
• |
|
Accounting for financial derivatives; |
| |
• |
|
Recognition of deferred tax assets; and |
| |
• |
|
The valuation of goodwill. |
Accrued restructuring costs
On August 29, 2001, we announced a restructuring plan aimed at streamlining
operations and enhancing profitability by consolidating facilities in the United States and Europe. The restructuring resulted in a pre-tax charge of $202.8 million in fiscal 2001, and is more fully described under the caption “Facility
Restructuring and Other Nonrecurring Charges”. This charge included the write-off of assets totaling approximately $96.8 million, while the remainder represents cash obligations. As of December 31, 2001, our estimated future cash obligations
were $89.5 million. This includes rental payments due for certain facilities no longer to be used by the Company totaling $170.4 million, offset by our best estimate of the future sublease income we expect to receive.
In calculating the charge related to our facilities consolidation, certain estimates were made including time to vacate facilities, sublease terms upon
the negotiation of future leases, broker commissions, tenant
46
improvements and operating costs. In developing our estimates, we obtained information from third party leasing agents to calculate anticipated third party sublease income. In calculating the
undiscounted value of ongoing lease commitments for facilities expected to be vacated or unused, we considered ongoing facility needs and the time required to vacate facilities and execute on our restructuring plan. Market conditions will affect our
ability to sublease facilities on terms consistent with our estimates. Our ability to vacate premises and sublease facilities ahead of schedule, or the negotiation of lease terms resulting in higher or lower sublease income than estimated, will
affect our accrual and the related restructuring charge. Differences between estimates of related broker commissions, tenant improvements and operating costs may increase or decrease the accrual upon final negotiation. We recorded a reduction in our
initial facility consolidation charge of $3.3 million in the fourth quarter of 2001 primarily because we were able to utilize a larger portion of our furniture and fixtures than originally estimated.
Determination of the allowance for loan losses
Through the Bank, we originate and purchase mortgage and consumer loans that we have the intent and ability to hold for the foreseeable future or until maturity or pay-off. We may not collect all contractual principal
and interest on some of these loans that we have originated or purchased. To the extent these uncollectible loans are not adequately reserved for, we may incur additional charges to loan losses in the consolidated financial statements. The allowance
for loan losses is maintained at a level management considers to be adequate to absorb loan losses inherent in the portfolio.
In determining the level of the allowance the company has established both specific and general allowances. The amount of the specific allowance is determined through a loan-by-loan analysis of certain large dollar real estate and consumer
loans. Loans not specifically reviewed by management are evaluated using expected loss ratios. The expected loss ratios are determined based on historical charge-off experience, industry loss experience and current market and economic conditions. At
December 31, 2001, our loan loss allowance was $19.9 million on total loans of $7,992 million.
The purpose of the allowance for
loan losses is to provide for losses that are probable to have occurred as of the balance sheet date, and not to predict future losses in the loan portfolio. The determination of the allowance for loan losses is inherently subjective, as it requires
management to make significant estimates, including the amounts and timing of losses and current market and economic conditions. These estimates are susceptible to change. Accordingly, a continued decline in the national economy or the economies in
the areas in which the Bank’s loans are concentrated could result in an increase in loan delinquencies or foreclosures, resulting in the need for additional loan loss allowances in future periods. In addition, the regulatory agencies that
supervise the Bank periodically reviews the Bank’s allowance for loan losses. This review, which is an integral part of their examination process, may result in additions or deductions to the allowance for loan losses based on judgments with
regard to available information provided at the time of their examinations.
In addition to our banking loans described above,
we also extend credit to our brokerage customers in the form of margin loans. At December 31, 2001, margin accounts were approximately $1,537 million and we had provided an allowance for uncollectible amounts of $3.6 million, which was based on
historical experience as well as a review of individual customer accounts.
The classification and carrying value of
investments
We generally classify our investment in debt instruments (including corporate, government and municipal bonds),
mortgage-backed securities and marketable equity securities as either available-for-sale or trading. We have not classified any investments as held-to-maturity. The fair value of these securities are determined by obtaining quoted market prices.
Unrealized gains and losses on available-for-sale securities are included in other comprehensive income and excluded from our earnings. Realized gains and losses and declines in fair value judged to be other than temporary are included in earnings.
47
We have investments in several publicly-traded and privately-held companies. Generally accepted
accounting principles require that we evaluate our corporate holdings of these companies for declines in market value that may be other than temporary. Our policy is to recognize such declines when the market value of a company’s stock is less
than our cost for a period of six-months, unless there are other indicators that such declines should be recognized sooner. During fiscal 2001, we recognized losses of $43.5 million from declines in market value which we determined to be other than
temporary related to investments in publicly-traded companies, mutual funds in which we are the sponsor, and other joint venture investments. See Note 8 to the Consolidated Financial Statements for further information. As of December 31, 2001,
certain of the publicly-traded equity securities which we held had unrecognized losses of $1.1 million, which we believed to be temporary and so this decline was not included in the computation of our earnings.
Our investments include direct and indirect investments in privately-held companies. We have made significant investments in venture capital funds,
which invest in privately-held companies. In addition to the potential for financial returns, our venture activities increase our knowledge of emerging markets and technologies. Certain officers of our company manage two of the venture funds.
Generally accepted accounting principles require venture capital funds to adjust their investments in publicly-traded and privately-held companies to current market value each period. Because we account for our investment in these funds on the
equity method, our earnings are impacted each period by our allocated portion of these market value changes. The determination of market value for privately-held companies requires significant judgment on the part of the fund managers. The general
practice in the venture capital industry, which is followed by the funds managed by our officers, is to only record an increase in fair value when it is demonstrated through a third-party transaction, such as sales of stock to an unrelated investor.
Decreases in fair value are generally recognized upon a similar event, or sooner if general market conditions or company-specific events indicate there has been a decline in value. During fiscal 2001, we recorded losses of $34.7 million on our
venture fund investments.
Accounting for financial derivatives
The Bank uses various financial derivatives in managing the risks inherent in its business. One of the most significant risks arises because the principal investments of the Bank
are residential mortgages and other mortgage-backed securities, which often pay a fixed interest rate over a long time horizon, whereas the principal source of funds to make these investments are customer deposits and short-term borrowings whose
interest rates are fixed for a much shorter period of time, if at all. In order to manage this differential, the Bank has purchased interest rate derivatives, including interest rate swaps, caps, and floors.
Under generally accepted accounting principles, all derivatives must be reflected in the balance sheet at their fair market value each period; this fair
market value reflects the gain or loss implicit in the derivative. The income statement accounting for derivatives differs significantly depending on whether or not a derivative is designated as a “hedge.” In order to qualify as a hedge,
management must designate a derivative as a hedge of a specific balance sheet item or future expected cash flow at the time it is purchased, as well as continue to demonstrate that the instrument functions as an effective hedge of that item.
Management has designated substantially all of the derivatives it held as of December 31, 2001 as hedges. By doing so, the balance sheet items that are hedged are adjusted to market as well as the derivative itself, resulting in a net offset to the
extent that the hedge is effective, gains and losses on cash flow hedges are recognized only as a component of other comprehensive income, and excluded from earning. More information concerning our derivatives is contained in Item 7A,
“Quantitative and Qualitative Disclosures about Market Risk” and in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. At December 31, 2001, as a result of interest rate changes our balance sheet hedges were
in an aggregate loss position of $253.3 million, and our cash flow hedges had an aggregate gain of $119.6 million.
Recognition of deferred tax assets
We have recognized for financial statement purposes the tax benefits
connected with losses related to our domestic operations. This recognition assumes that we will be able to generate sufficient future taxable income
48
so that the carryforwards of these losses will be realized. The factors that we consider in assessing the likelihood of realization include our forecast of future taxable income and available tax
planning strategies that could be implemented to realize the deferred tax asset. At December 31, 2001, we had recorded net deferred tax assets of $165.5 million. Should we determine that we will not be able to realize all or part of this deferred
tax asset in the future, a valuation reserve against the asset would be charged to income tax expense in that period.
We have
also incurred losses in certain foreign countries and from certain capital transactions. We have not recorded the potential tax benefit of these losses, because we believe it is less certain that we will be able to generate income in these
countries, or future domestic capital gains, sufficient to realize the carryforward benefits of these losses. At December 31, 2001, potential tax benefits of $69.4 million from these losses have been fully reserved.
Valuation of goodwill
Goodwill represents the excess of purchase price over the fair value of net assets acquired resulting from acquisitions made by us. We have historically amortized goodwill using the straight-line method based on an estimated useful life of
five to twenty years. In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. We adopted SFAS No. 142 effective January 1, 2002. Upon adoption of SFAS No.
142, we stopped the amortization of goodwill with an estimated net carrying value of approximately $417.6 million at December 31, 2001. Currently, we are evaluating goodwill under the SFAS No. 142’s transitional impairment test and expect
to record an impairment charge of approximately $300.0 million to $350.0 million, primarily attributed to the goodwill from our international acquisitions. The evaluation is based on our forecast of operating results for each of the reporting units
which have recorded goodwill, as well as estimates of the fair values of the tangible and intangible assets of these units. Transitional impairment loss will be recognized as the effect of a change in accounting principle in the first quarter of
fiscal year 2002.
Significant Related Party Transactions
In connection with the renegotiation of our employment contract with our Chairman of the Board and Chief Executive Officer and as part of other contractual renegotiations undertaken by
the Company, in August 2001 we cancelled a $15.0 million note receivable and agreed to reimburse $15.2 million dollars in related taxes in return for the elimination of certain benefits contained in our Chief Executive Officer’s employment
agreement. This action had the effect of eliminating the Company’s contractual obligations to cancel the note and reimburse related taxes in the event of a change of control of the Company. The total of $30.2 million is reflected as
executive loan settlement in the consolidated statement of operations.
Other related party transactions are described in Note
11 to our Consolidated Financial Statements.
Transition Period
As noted above, on January 22, 2001, our fiscal year end was changed from September 30 to December 31. Results for the three month transition period ended December 31, 2000 were filed in
our transition report on Form 10-QT filed with the SEC on February 14, 2001. During the three month period ended December 31, 2000, we completed the following significant activities, which are described in further detail in our transition report on
Form 10-QT:
| |
• |
|
We completed our acquisition of privately-held E*TRADE Advisory Services, a Minneapolis-based developer of online separately managed accounts. We issued 618,057 shares of
common stock valued at approximately $8.7 million in exchange for all of the outstanding shares of E*TRADE Advisory Services in the three month period ended December 31, 2000. The acquisition of E*TRADE Advisory Services did not materially affect
the results of operations during this period. |
49
| |
• |
|
We acquired an additional 40% ownership interest in E*TRADE Germany in October 2000, increasing our investment to 100%, for approximately 24.0 million Euros (approximately
$20.2 million as of December 31, 2000) comprised of cash and common shares. The acquisition of the remaining ownership percentage of E*TRADE Germany did not materially affect the results of operations during the transition period.
|
| |
• |
|
In November 2000, we sold our ownership interest in E*TRADE @ Net Bourse S.A. for approximately 80.5 million Euros (approximately $68.0 million). No gain or loss resulted from
this transaction. |
| |
• |
|
On October 16, 2000, Wit Soundview Group, Inc. (“Wit”) completed the acquisition of E*OFFERING Corp. (“E*OFFERING”), a full service, Internet-based
investment bank in which we held a 23.6% equity interest. Under the terms of the agreement, we received common shares and warrants to purchase shares of Wit common stock, as well as the right to elect one representative to Wit’s Board of
Directors. Concurrent with this agreement, we entered into certain other collateral arrangements whereby we acquired Wit’s retail brokerage business and received shares of Wit common stock and a warrant to purchase shares of Wit common stock as
consideration of our entering into a strategic alliance agreement with Wit. This agreement was subsequently terminated in fiscal 2001. See Note 8 to the Consolidated Financial Statements. |
| |
• |
|
On October 1, 2000, we adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities. In addition to the fair value adjustment for warrants recognized
in conjunction with the Wit transaction of $6.3 million, we recognized non-operating losses of $1.7 million (pre-tax) reflecting the ineffective portions of changes in the fair value of cash flow and fair value hedges.
|
| |
• |
|
In December 2000, we instituted a $15 per quarter maintenance fee for low-balance, inactive accounts, which is reflected in other revenues. |
50
Results of Operations
Year Ended December 31, 2001, Compared to Year Ended September 30, 2000, Compared to Year Ended September 30, 1999
Key Performance Indicators
The following tables set forth several key performance
indicators used by management to measure our performance and in explaining the results of our operations for the comparative three years ended December 31, 2001, September 30, 2000 and September 30, 1999:
| |
|
|
|
|
|
|
|
Percentage Change
|
| |
|
December 31, 2001
|
|
September 30, 2000
|
|
September 30, 1999
|
|
2001 versus 2000
|
|
2000 versus 1999
|
| Net new domestic brokerage
accounts |
|
|
285,646 |
|
|
1,401,312 |
|
|
1,006,755 |
|
(80)% |
|
39 % |
| Net new banking accounts |
|
|
128,296 |
|
|
190,671 |
|
|
50,383 |
|
(33)% |
|
278 % |
| Net new global and institutional
accounts |
|
|
29,903 |
|
|
58,657 |
|
|
9,804 |
|
(49)% |
|
498 % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total net new accounts |
|
|
443,845 |
|
|
1,650,640 |
|
|
1,066,942 |
|
(73)% |
|
55 % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost per net new account |
|
$ |
281 |
|
$ |
263 |
|
$ |
245 |
|
7 % |
|
7 % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total domestic brokerage
transactions(1) |
|
|
27,125,028 |
|
|
42,315,785 |
|
|
17,257,878 |
|
(36)% |
|
145 % |
| Daily average domestic brokerage transactions |
|
|
109,000 |
|
|
167,256 |
|
|
68,484 |
|
(35)% |
|
144 % |
| Average commission per domestic brokerage transaction |
|
$ |
13.16 |
|
$ |
15.52 |
|
$ |
18.35 |
|
(15)% |
|
(15)% |
| Rebate income per domestic brokerage transaction |
|
$ |
1.85 |
|
$ |
1.95 |
|
$ |
2.27 |
|
(5)% |
|
(14)% |
| Active domestic brokerage accounts |
|
|
3,398,014 |
|
|
2,951,946 |
|
|
1,550,634 |
|
15 % |
|
90 % |
| Active banking accounts |
|
|
490,913 |
|
|
288,073 |
|
|
97,402 |
|
70 % |
|
196 % |
| Active global and institutional
accounts |
|
|
113,927 |
|
|
75,416 |
|
|
16,759 |
|
51 % |
|
350 % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total active accounts at period
end |
|
|
4,002,854 |
|
|
3,315,435 |
|
|
1,664,795 |
|
21 % |
|
99 % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total customer households at period
end |
|
|
3,005,021 |
|
|
Not Available |
|
|
Not Available |
|
Not Available |
|
Not Available |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average assets per household |
|
$ |
17,586 |
|
|
Not Available |
|
|
Not Available |
|
Not Available |
|
Not Available |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
(dollars in thousands) |
| Total assets in domestic brokerage accounts |
|
$ |
43,490,869 |
|
$ |
59,901,277 |
|
$ |
28,445,369 |
|
(27)% |
|
111 % |
| Total deposits in banking accounts |
|
|
8,082,859 |
|
|
4,630,068 |
|
|
2,095,584 |
|
75 % |
|
121 % |
| Total assets in global and institutional accounts |
|
|
1,273,328 |
|
|
1,348,672 |
|
|
306,556 |
|
(6)% |
|
340 % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets/deposits in customer accounts at period end |
|
$ |
52,847,056 |
|
$ |
65,880,017 |
|
$ |
30,847,509 |
|
(20)% |
|
114 % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In fiscal year 2001, four fewer trading days are included as a result of the market closure following the events of September 11, 2001. |
51
For purposes of the tables above:
| |
• |
|
A domestic or global brokerage account is included as an active account if the account has a positive asset balance, or if a trade has been made in the account in the past six
months or if the account was opened in connection with a corporate employee stock benefit program. Customers may have separate or multiple accounts for each relationship they maintain with us, including separate or multiple brokerage and banking
accounts. |
| |
• |
|
A bank account is included as an active account if a customer has made an initial deposit and the account is not considered abandoned or dormant under applicable Federal and
State laws, and the account has not been closed. |
| |
• |
|
Net new accounts is equal to the number of accounts opened during the applicable period that qualify as active accounts less the number of accounts deactivated due to customer
attrition or because the account no longer met the definition of an active account during the reported period. |
| |
• |
|
A household is a collection of active accounts, as defined above, which have a matching address and last name. |
The following table sets forth the components of both gross and net revenues and percentage change information related to certain items on our
Consolidated Statements of Operations for the periods indicated (dollars in thousands):
| |
|
Years Ended
|
|
Percentage Change
|
|
| |
|
December 31, 2001
|
|
September 30, 2000
|
|
September 30, 1999
|
|
2001 Versus 2000
|
|
|
2000 Versus 1999
|
|
| Transaction Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commissions |
|
$ |
354,478 |
|
$ |
656,725 |
|
$ |
316,656 |
|
(46 |
)% |
|
107 |
% |
| Order flow |
|
|
52,683 |
|
|
82,353 |
|
|
39,174 |
|
(36 |
)% |
|
110 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total transaction revenues |
|
|
407,161 |
|
|
739,078 |
|
|
355,830 |
|
(45 |
)% |
|
108 |
% |
| Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Brokerage-related |
|
|
305,581 |
|
|
463,590 |
|
|
176,479 |
|
(34 |
)% |
|
163 |
% |
| Banking-related |
|
|
854,290 |
|
|
496,768 |
|
|
192,595 |
|
72 |
% |
|
158 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total interest income |
|
|
1,159,871 |
|
|
960,358 |
|
|
369,074 |
|
21 |
% |
|
160 |
% |
| Global and institutional |
|
|
152,822 |
|
|
166,061 |
|
|
124,233 |
|
(8 |
)% |
|
34 |
% |
| Gains on sales of originated loans |
|
|
95,478 |
|
|
— |
|
|
— |
|
100 |
% |
|
— |
% |
| Gains on sales on Bank loans held-for-sale and other securities, net |
|
|
75,836 |
|
|
8,491 |
|
|
6,255 |
|
793 |
% |
|
36 |
% |
| Other |
|
|
170,947 |
|
|
99,195 |
|
|
34,291 |
|
72 |
% |
|
189 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross revenues |
|
|
2,062,115 |
|
|
1,973,183 |
|
|
889,683 |
|
5 |
% |
|
122 |
% |
| Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Brokerage-related |
|
|
86,489 |
|
|
222,552 |
|
|
72,789 |
|
(61 |
)% |
|
206 |
% |
| Banking-related |
|
|
692,786 |
|
|
378,310 |
|
|
142,663 |
|
83 |
% |
|
165 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total interest expense |
|
|
779,275 |
|
|
600,862 |
|
|
215,452 |
|
30 |
% |
|
179 |
% |
| Provision for loan losses |
|
|
7,476 |
|
|
4,003 |
|
|
2,783 |
|
87 |
% |
|
44 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net revenues |
|
$ |
1,275,364 |
|
$ |
1,368,318 |
|
$ |
671,448 |
|
(7 |
)% |
|
104 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
Revenues
Net revenues decreased 7% from fiscal 2000 to fiscal 2001 and increased 104% from fiscal 1999 to fiscal 2000. The decrease in our net revenues in fiscal 2001 is mainly due to decreases in our brokerage-related activities, including a
decrease in transaction revenues and interest income which have been affected by the market volatility, combined with a narrowing of interest spreads reflective of the interest rate environment in the comparative periods. The sharp decline in the
value of publicly traded securities has impacted the total assets in our domestic brokerage accounts, which declined 27% from September 30, 2000 to December 31, 2001 and increased 111% from September 30, 1999 to September 30, 2000. The increase in
net revenues in fiscal 2000 reflected the growth in our diversified revenue streams, which included integrating our Banking operations acquired January 2000, improvements in our cross-selling ability across business segments, and sustained growth in
customer transaction volumes, net new active bank and brokerage customer accounts and total assets/deposits in customer accounts during a period of unprecedented growth in the Nasdaq composite index. The Nasdaq composite index reached a record high
in March 2000, and then dramatically declined through the three months ended December 31, 2000, the transition period. The decline in the Nasdaq composite index continued at a slower rate through fiscal 2001, and fluctuated near Q1 fiscal year 1999
levels.
Transaction Revenues
Transaction revenues consist of commission revenues from Domestic Retail Brokerage transactions and payments for order flow. Transaction revenues decreased 45% from fiscal 2000 to fiscal 2001 and increased 108% from
fiscal 1999 to fiscal 2000. The decrease in transaction revenue in fiscal 2001 is primarily due to the stock market downturn experienced since a record high achieved in March 2000. Also contributing to the decrease in transaction revenues is the
impact of the market being closed for four trading days in September 2001 following the terrorist attacks on September 11, 2001.
Transaction revenue growth in fiscal 2000 reflected an increase in the level of online trading volumes in U.S. financial markets through the second quarter of fiscal 2000. Contributing to the growth in transaction revenues were (1)
sustained growth in new customer accounts coupled with our Power E*TRADE program (which extends special incentives to participating, highly active customers who remained active), despite declining volumes in the market during the third and fourth
quarters of fiscal 2000, and (2) the implementation of our Customer Relationship Management (“CRM”) technology, which has enabled us to identify and attract higher quality accounts.
Volatile market conditions in the latter half of fiscal 2000, followed by a general market decline through fiscal 2001 and coupled with our focus on revenue diversification
beginning in fiscal 2000, have resulted in a reduction in transaction revenues as a percentage of net revenues. Transaction revenues as a percentage of net revenues have decreased to 32% in fiscal 2001 from 54% in fiscal 2000, which remained flat
from 53% in fiscal 1999.
Commission revenues, which are earned as customers execute domestic securities transactions,
decreased 46% from fiscal 2000 to fiscal 2001 and increased 107% from fiscal 1999 to fiscal 2000. Commission revenues are primarily affected by total domestic brokerage transactions, which decreased 36% from fiscal 2000 to fiscal 2001. This decrease
reflects the sustained economic downturn experienced through fiscal 2001 as unfavorable economic news impacted investor trading. The increase in commission revenue in fiscal 2000 reflects the unprecedented growth in the market through the second
quarter of fiscal 2000, which was somewhat offset by a decline in the latter part of that year. Active domestic brokerage accounts increased 15% from fiscal 2000 to fiscal 2001 compared to a 90% increase from fiscal 1999 to fiscal 2000. Daily
average domestic brokerage transactions decreased 32% from fiscal 2000 to fiscal 2001 compared to an increase of 144% from fiscal 1999 to fiscal 2000. The average commission per domestic transaction decreased to $13.16 in fiscal 2001 from $15.52 in
fiscal 2000, which decreased from $18.35 in fiscal 1999. The decline in average commission per domestic transaction is a result of promotional activities, changes in the mix of revenue generating transactions and the August 1999 implementation of
the Power E*TRADE program, a component of which includes reduced
53
commissions for active traders. Commission revenues as a percentage of net revenues are expected to decrease as we continue to diversify revenue streams and execute on cross-selling initiatives
across business lines.
Revenue from order flow is comprised of rebate income from various market makers and market centers that
process our transactions. We use many market makers including Dempsey, a market-making specialist firm which we acquired October 1, 2001, and other broker-dealers to execute our customers’ orders and, in recent years, have derived a significant
portion of our transaction revenues from these broker-dealers. Rebate income from transactions processed through Dempsey subsequent to October 1, 2001 is eliminated in our consolidation. The practice of receiving payment for order flow is widespread
in the securities industry. Under applicable SEC regulations, receipt of these payments requires disclosure of such payments by us to our customers. Payments for order flow decreased 36% from fiscal 2000 to fiscal 2001 and increased 110% from fiscal
1999 to fiscal 2000. This decrease primarily reflects the 36% decrease in domestic brokerage transactions processed from fiscal 2000 to fiscal 2001 and the 145% increase in domestic brokerage transactions processed from fiscal 1999 to
fiscal 2000.
Further impacting revenues from order flow, in January 2001, the listed marketplace implemented the move from
fractional-based trading to decimal-based trading, commonly referred to as decimalization. The Nasdaq initiated decimalization in March 2001. The implementation of decimalization, which resulted in reduced market-maker and market center spreads, has
decreased the order flow payments they are willing to make. Further, with the acquisition of Dempsey in October 2001, revenue from order flow decreased in the fourth quarter to the extent we directed order flow to Dempsey. Other revenues have
increased from the date of acquisition reflecting principal market-making revenues earned by Dempsey of $25.9 million, offsetting the decrease in order flow revenues. The decrease in order flow revenue associated with equity transactions has been
partially offset by the receipt of option order flow beginning in October 2000. We cannot be certain that rebates per transaction will continue at the same levels in future periods. However, at this time, we are unable to quantify the future impact
on net revenues. Further, there can be no assurance that we will be able to continue our present relationships and terms for such payments for order flow. Also, there can be no assurance that payments for order flow will continue to be permitted by
the SEC, the National Association of Securities Dealers Regulation, Inc. (“NASDR”) or other regulatory agencies, courts or governmental units. Loss of any or all of these revenues could harm our business. See “Item 2. Risk
Factors—Restrictions on the ability of, or decreased willingness of, third parties to make payments for order flow or potential payments by us to third parties for handling orders could reduce our profitability.”
Interest Income and Expense
Interest income from brokerage-related activities is comprised of interest earned by our brokerage subsidiaries on credit extended to customers to finance their purchases of securities on margin, interest received from other broker-dealers
through our brokerage subsidiaries’ stock borrow programs and fees on customer assets invested in money market accounts. Interest expense from brokerage-related activities is comprised of interest paid to customers on certain credit balances,
interest paid to banks and interest paid to other broker-dealers through our brokerage subsidiaries’ stock loan programs. Interest income from banking-related activities reflects interest earned on assets, primarily loans receivable and
mortgage-backed and investment securities. Interest expense from banking-related activities is comprised of interest-bearing banking liabilities that include customer deposits, advances from the Federal Home Loan Bank of Atlanta (“FHLB”)
and other borrowings.
Brokerage interest income decreased 34% from fiscal 2000 to fiscal 2001 and increased 163% from
fiscal 1999 to fiscal 2000. The decrease in brokerage interest income in fiscal 2001 primarily reflects the overall decrease in average customer margin balances. Assets in domestic brokerage accounts totaled $43.5 billion in fiscal 2001, a
decrease of 27% from $59.9 billion in fiscal 2000, which was an increase of 111% from $28.4 billion in fiscal 1999. The decrease in brokerage interest expense in fiscal 2001 is mainly due to the overall decrease in average stock loan balances.
The increase in brokerage interest expense in fiscal 2000 is mainly due to an increase in the average stock loan balance and an increase in the average customer credit balance.
54
The following table sets forth the changes in average customer margin balances, average
customer money market fund balances, average stock borrow balances, average stock loan balances and average customer credit balances for the years indicated (dollars in millions):
| |
|
December 31, 2001
|
|
September 30, 2000
|
|
September 30, 1999
|
|
2001 Versus 2000
|
|
|
2000 Versus 1999
|
|
| Average customer margin balances |
|
$ |
2,053 |
|
$ |
4,379 |
|
$ |
1,853 |
|
(53 |
)% |
|
136 |
% |
| Average customer money market fund balances |
|
$ |
8,525 |
|
$ |
6,793 |
|
$ |
3,207 |
|
25 |
% |
|
112 |
% |
| Average stock borrow balances |
|
$ |
1,270 |
|
$ |
730 |
|
$ |
343 |
|
74 |
% |
|
113 |
% |
| Average stock loan balances |
|
$ |
1,761 |
|
$ |
3,597 |
|
$ |
1,406 |
|
(51 |
)% |
|
156 |
% |
| Average customer credit balances |
|
$ |
1,440 |
|
$ |
1,397 |
|
$ |
493 |
|
3 |
% |
|
183 |
% |
Banking interest income increased 72% from fiscal 2000 to fiscal 2001 and 158%
from fiscal 1999 to fiscal 2000. Increases in banking interest income reflect an increase in the average interest-earning banking asset balances, fluctuations in average interest yields, increases in active banking accounts, fluctuations in net new
banking accounts and increases in total deposits in banking accounts. Average interest-earning banking assets increased 92% from fiscal 2000 to fiscal 2001 and 134% from fiscal 1999 to fiscal 2000. The average yields on interest-earning banking
assets decreased to 6.93% in fiscal 2001 from 7.73% in fiscal 2000, which increased from 7.01% in fiscal 1999. Active banking accounts increased 70% from fiscal 2000 to fiscal 2001 and 196% from fiscal 1999 to fiscal 2000. Net new banking accounts
decreased 33% from fiscal 2000 to fiscal 2001 and increased 278% from fiscal 1999 to fiscal 2000. Total deposits in banking accounts increased 75% from fiscal 2000 to fiscal 2001 and 121% from fiscal 1999 to 2000. Banking interest expense increased
83% from fiscal 2000 to fiscal 2001 and 165% from fiscal 1999 to fiscal 2000. The increase in banking interest expense in fiscal 2001 reflects an increase in the average interest-bearing banking liabilities offset by a decrease in the average cost
of the borrowings. The increase in banking interest expense in fiscal 2000 reflects an increase in the average interest-bearing banking liabilities coupled with an increase in the average cost of the borrowings. Average interest-bearing banking
liabilities increased 93% from fiscal 2000 to fiscal 2001 and 140% from fiscal 1999 to fiscal 2000. The average cost decreased to 5.97% in fiscal 2001 from 6.29% in fiscal 2000, which increased from 5.69% in fiscal 1999.
55
The following table presents average balance data and income and expense data for our Banking
operations and the related interest yields and rates for the fiscal year ended December 31, 2001, September 30, 2000 and September 30, 1999. The table also presents information with respect to net interest margin, an indicator of profitability.
Another indicator of profitability is net interest spread, which is the difference between the weighted average yield earned on interest-earning banking assets and the weighted average rate paid on interest-bearing banking liabilities.
| |
|
Year Ended December 31, 2001
|
|
|
Year Ended September 30, 2000
|
|
|
Year Ended September 30, 1999
|
|
| |
|
Average Balance
|
|
Interest Inc./Exp.
|
|
Average Yield/Cost
|
|
|
Average Balance
|
|
Interest Inc./Exp.
|
|
Average Yield/Cost
|
|
|
Average Balance
|
|
Interest Inc./Exp.
|
|
Average Yield/Cost
|
|
| |
|
(dollars in thousands) |
|
| Interest-earning banking assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans receivable, net |
|
$ |
6,701,905 |
|
$ |
492,620 |
|
7.35 |
% |
|
$ |
3,165,908 |
|
$ |
252,982 |
|
7.99 |
% |
|
$ |
1,288,221 |
|
$ |
97,427 |
|
7.56 |
% |
| Interest bearing deposits |
|
|
145,077 |
|
|
4,263 |
|
2.94 |
% |
|
|
59,708 |
|
|
3,466 |
|
5.81 |
% |
|
|
27,624 |
|
|
1,307 |
|
4.73 |
% |
| Mortgage-backed and related available for sale securities |
|
|
4,164,081 |
|
|
272,086 |
|
6.53 |
% |
|
|
2,884,474 |
|
|
217,448 |
|
7.54 |
% |
|
|
1,184,003 |
|
|
77,493 |
|
6.55 |
% |
| Available-for-sale investment securities |
|
|
1,175,669 |
|
|
77,116 |
|
6.60 |
% |
|
|
228,007 |
|
|
16,125 |
|
7.15 |
% |
|
|
211,342 |
|
|
13,233 |
|
6.43 |
% |
| Investment in FHLB |
|
|
65,988 |
|
|
4,224 |
|
6.40 |
% |
|
|
62,511 |
|
|
4,847 |
|
7.75 |
% |
|
|
25,001 |
|
|
1,876 |
|
7.50 |
% |
| Trading securities |
|
|
84,759 |
|
|
3,981 |
|
4.70 |
% |
|
|
26,210 |
|
|
1,900 |
|
7.25 |
% |
|
|
15,001 |
|
|
1,104 |
|
7.36 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total interest-earning banking assets |
|
|
12,337,479 |
|
$ |
854,290 |
|
6.93 |
% |
|
|
6,426,818 |
|
$ |
496,768 |
|
7.73 |
% |
|
|
2,751,192 |
|
$ |
192,440 |
|
7.01 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Non-interest-earning banking assets |
|
|
529,233 |
|
|
|
|
|
|
|
|
206,554 |
|
|
|
|
|
|
|
|
107,025 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total banking assets |
|
$ |
12,866,712 |
|
|
|
|
|
|
|
$ |
6,633,372 |
|
|
|
|
|
|
|
$ |
2,858,217 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-bearing banking liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Retail deposits |
|
|
7,166,789 |
|
$ |
421,064 |
|
5.88 |
% |
|
$ |
3,228,692 |
|
$ |
197,748 |
|
6.12 |
% |
|
$ |
1,390,957 |
|
$ |
79,404 |
|
5.71 |
% |
| Brokered callable certificates of deposit |
|
|
29,236 |
|
|
1,810 |
|
6.19 |
% |
|
|
88,601 |
|
|
5,825 |
|
6.56 |
% |
|
|
67,071 |
|
|
4,449 |
|
6.63 |
% |
| FHLB advances |
|
|
1,223,724 |
|
|
78,439 |
|
6.32 |
% |
|
|
1,225,783 |
|
|
78,171 |
|
6.27 |
% |
|
|
473,849 |
|
|
25,809 |
|
5.37 |
% |
| Other borrowings |
|
|
3,180,272 |
|
|
191,473 |
|
5.94 |
% |
|
|
1,471,435 |
|
|
96,566 |
|
6.46 |
% |
|
|
549,090 |
|
|
30,184 |
|
5.42 |
% |
| Subordinated debt, net |
|
|
— |
|
|
— |
|
— |
|
|
|
— |
|
|
— |
|
— |
|
|
|
19,911 |
|
|
2,359 |
|
11.85 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total interest-bearing banking liabilities |
|
|
11,600,021 |
|
$ |
692,786 |
|
5.97 |
% |
|
|
6,014,511 |
|
$ |
378,310 |
|
6.29 |
% |
|
|
2,500,878 |
|
$ |
142,205 |
|
5.69 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Non-interest-bearing banking liabilities |
|
|
552,513 |
|
|
|
|
|
|
|
|
115,280 |
|
|
|
|
|
|
|
|
28,256 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total banking liabilities |
|
|
12,152,534 |
|
|
|
|
|
|
|
|
6,129,791 |
|
|
|
|
|
|
|
|
2,529,134 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total banking securities |
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
33,847 |
|
|
|
|
|
|
| Total banking shareowners’ equity |
|
|
714,178 |
|
|
|
|
|
|
|
|
503,581 |
|
|
|
|
|
|
|
|
295,236 |
|
|
|
|
|
|
| Total banking liabilities and shareowner’s equity |
|
$ |
12,866,712 |
|
|
|
|
|
|
|
$ |
6,633,372 |
|
|
|
|
|
|
|
$ |
2,858,217 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income |
|
$ |
737,458 |
|
$ |
161,504 |
|
|
|
|
$ |
412,307 |
|
$ |
118,458 |
|
|
|
|
$ |
250,314 |
|
$ |
50,235 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest spread |
|
|
|
|
|
|
|
0.96 |
% |
|
|
|
|
|
|
|
1.44 |
% |
|
|
|
|
|
|
|
1.32 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest margin (net yield on interest-earning banking
assets) |
|
|
|
|
|
|
|
1.31 |
% |
|
|
|
|
|
|
|
1.85 |
% |
|
|
|
|
|
|
|
1.83 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ratio of interest-earning banking assets to interest-bearing banking liabilities |
|
|
|
|
|
|
|
106.36 |
% |
|
|
|
|
|
|
|
106.86 |
% |
|
|
|
|
|
|
|
110.01 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Return on average total banking assets |
|
|
|
|
|
|
|
0.53 |
% |
|
|
|
|
|
|
|
(0.08 |
)% |
|
|
|
|
|
|
|
0.09 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Return on average net banking assets |
|
|
|
|
|
|
|
9.46 |
% |
|
|
|
|
|
|
|
(1.10 |
)% |
|
|
|
|
|
|
|
0.79 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity to total banking assets |
|
|
|
|
|
|
|
5.55 |
% |
|
|
|
|
|
|
|
7.59 |
% |
|
|
|
|
|
|
|
10.33 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
• |
|
Ratios calculated by excluding Employee Stock Ownership Plan, merger related and restructuring costs of $11.7 million (net of tax) and $20.4 million in the fiscal year
ended December 31, 2001 and the fiscal year ended September 30, 2000. |
56
The following table allocates the period-to-period changes in our various categories of
banking-related interest and expense between changes due to (1) changes in asset/liability volume, calculated by multiplying the change in average asset/liability volume of the related interest-earning banking asset or interest-bearing banking
liability category by the prior year’s interest rate, and (2) changes in interest rate, calculated by multiplying changes in interest rate by the prior year’s asset/liability volume. Changes due to changes in rate-volume, which is
calculated as the change in interest rate multiplied by changes in volume, have been allocated proportionately between changes in asset/liability volume and changes in interest rate.
| |
|
Fiscal 2001 Versus Fiscal 2000 |
|
|
Fiscal 2000 Versus Fiscal 1999 |
|
| |
|
Increase (Decrease) Due To
|
|
|
Increase (Decrease) Due To
|
|
| |
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
| |
|
(in thousands) |
|
| Interest earning banking assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans receivable, net |
|
$ |
261,427 |
|
|
$ |
(21,789 |
) |
|
$ |
239,638 |
|
|
$ |
142,007 |
|
|
$ |
13,549 |
|
|
$ |
155,556 |
|
| Interest bearing deposits |
|
|
3,137 |
|
|
|
(2,340 |
) |
|
|
797 |
|
|
|
1,518 |
|
|
|
641 |
|
|
|
2,159 |
|
| Mortgage-backed and related available-for-sale securities |
|
|
86,580 |
|
|
|
(31,942 |
) |
|
|
54,638 |
|
|
|
111,297 |
|
|
|
28,658 |
|
|
|
139,955 |
|
| Available-for-sale investment securities |
|
|
62,244 |
|
|
|
(1,253 |
) |
|
|
60,991 |
|
|
|
1,045 |
|
|
|
1,848 |
|
|
|
2,893 |
|
| Investment in FHLB stock |
|
|
258 |
|
|
|
(881 |
) |
|
|
(623 |
) |
|
|
2,814 |
|
|
|
157 |
|
|
|
2,971 |
|
| Trading securities |
|
|
2,954 |
|
|
|
(873 |
) |
|
|
2,081 |
|
|
|
825 |
|
|
|
(30 |
) |
|
|
795 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total interest-earning banking assets |
|
|
416,600 |
|
|
|
(59,078 |
) |
|
|
357,522 |
|
|
|
259,506 |
|
|
|
44,823 |
|
|
|
304,329 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-bearing banking liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Retail deposits |
|
|
222,382 |
|
|
|
934 |
|
|
|
222,316 |
|
|
|
106,509 |
|
|
|
11,836 |
|
|
|
118,345 |
|
| Brokered callable certificates of deposit |
|
|
(3,653 |
) |
|
|
(362 |
) |
|
|
(4,015 |
) |
|
|
1,428 |
|
|
|
(52 |
) |
|
|
1,376 |
|
| FHLB advances |
|
|
(131 |
) |
|
|
399 |
|
|
|
268 |
|
|
|
40,954 |
|
|
|
11,408 |
|
|
|
52,362 |
|
| Other borrowings |
|
|
103,498 |
|
|
|
(8,591 |
) |
|
|
94,907 |
|
|
|
50,703 |
|
|
|
15,679 |
|
|
|
66,382 |
|
| Subordinated debt, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,359 |
) |
|
|
— |
|
|
|
(2,359 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total interest-bearing banking liabilities |
|
|
322,096 |
|
|
|
(7,620 |
) |
|
|
314,476 |
|
|
|
197,235 |
|
|
|
38,871 |
|
|
|
236,106 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in net interest income |
|
$ |
94,504 |
|
|