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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004.or‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 FOR THE TRANSITION PERIOD FROMTO.Commission file number 1-11921E*TRADE Financial Corporation(Exact name of registrant as specified in its charter)Delaware94-2844166(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification Number)135 East 57th Street, New York, New York 10022(Address of principal executive offices and zip code)(646) 521-4300(Registrant’s telephone number, including area code)Securities Registered Pursuant to Section 12(b) of the Act:Title of each classCommon Stock— 0.01 par valueSecurities Registered Pursuant to Section 12(g) of the Act:NoneIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ÈIndicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct). Yes È No ‘At June 30, 2004, the aggregate market value of voting stock, comprised of the registrant’s common stock andshares exchangeable into common stock, held by nonaffiliates of the registrant was approximately 4.1 billion (basedupon the closing price for shares of the registrant’s common stock as reported by the New York Stock Exchange onthat date). Shares of common stock held by each officer, director and holder of 5% or more of the outstanding commonstock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status isnot necessarily a conclusive determination for other purposes.At February 28, 2005, there were 369,337,130 shares of common stock and 1,302,801 shares exchangeable intocommon stock outstanding (the “Exchangeable Shares”). The Exchangeable Shares, which were issued by EGI CanadaCorporation in connection with the acquisition of VERSUS Technologies, Inc. (renamed E*TRADE TechnologiesCorporation effective January 2, 2001), are exchangeable at any time into common stock on a one-for-one basis andentitle holders to dividend, voting and other rights equivalent to holders of the registrant’s common stock.DOCUMENTS INCORPORATED BY REFERENCEDefinitive Proxy Statement relating to the Company’s Annual Meeting of Shareholders to be held May 26, 2005,to be filed hereafter (incorporated into Part III hereof).
E*TRADE FINANCIAL CORPORATIONFORM 10-K ANNUAL REPORTFor the Year ended December 31, 2004PART IItem 1.Item 2.Item 3.Item 4.1Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .International Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Required Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .PART IIItem 5.Item 6.Item 7.Item 7A.Item 8.1135777920202223Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases ofEquity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . .Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Summary of Critical Accounting Policies and Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Corporate Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Brokerage Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Banking Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Management Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Consolidated Statements of Comprehensive Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Consolidated Statements of Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 1—Organization and Basis of Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 2—Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 3—Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 4—Business Combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 5—Brokerage Receivables, Net and Brokerage Payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 6—Available-for-Sale Mortgage-Backed and Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . .Note 7—Other Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 8—Loans Receivable, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7678798284
Item 9.Item 9A.Item 9B.Note 9—Servicing Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 10—Property and Equipment, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 11—Goodwill and Other Intangibles, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 12—Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 13—Asset Securitization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 14—Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 15—Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 16—Securities Sold Under Agreements to Repurchase and Other Borrowings by Bank Subsidiary . .Note 17—Senior Notes and Convertible Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 18—Accounts Payable, Accrued and Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 19—Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 20—Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 21—Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 22—Facility Restructuring and Other Exit Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 23—Income (Loss) Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 24—Regulatory Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 25—Lease Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 26—Commitments, Contingencies and Other Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . .Note 27—Accounting for Derivative Financial Instruments and Hedging Activities . . . . . . . . . . . . . . . .Note 28—Fair Value Disclosure of Financial Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 29—Segment and Geographic Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 30—Condensed Financial Information (Parent Company Only) . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 31—Subsequent Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note 32—Quarterly Data (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . .Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0121125128128129129129PART III129PART IV129Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129130135Unless otherwise indicated, references to “the Company,” “We”, “Our” and “E*TRADE” meanE*TRADE Financial Corporation and/or its subsidiaries.E*TRADE, E*TRADE FINANCIAL, E*TRADE Bank, ClearStation, Equity Edge, Equity Resource,OptionsLink and the converging arrows logo, are registered trademarks of E*TRADE Financial Corporation inthe United States and in other countries.ii
PART IITEM 1.BUSINESSOVERVIEWE*TRADE Financial Corporation is a global company, offering a wide range of financial solutions to theself-directed consumer under the brand “E*TRADE FINANCIAL.” We use technology to provide differentiatedtrading, investing, banking and lending products, primarily through the Internet and other electronic media.Because we offer and deliver our products in this manner, our customer base is geographically dispersed and wehave a lower operating cost structure than many traditional “brick and mortar” financial services companies. Thislower operating cost structure allows us to provide financial solutions to our customers at a lower price/rate thantraditional financial services companies. During the past three years, we have focused on broadening our productofferings to expand relationships with customers and to integrate our products and their supporting technologiesto improve profitability.We serve retail, institutional and corporate customers. In 2004, we derived approximately 60% of ourrevenues from our retail customers, of which less than 5% was from our corporate customers, and approximately40% of our revenues from our institutional customers. Retail customers are offered a wide range of trading,investing, banking and lending products. We maintain E*TRADE FINANCIAL Centers in New York City, SanFrancisco, California; Alpharetta, Georgia; Beverly Hills, California; Boston, Massachusetts; Chicago, Illinois;Costa Mesa, California; Denver, Colorado; La Jolla, California; Orlando, Florida; Palo Alto, California;Scottsdale, Arizona; and Washington, DC that offer our retail customers personal access to our team of licensedrelationship specialists. We offer, either alone or with our partners, branded retail brokerage websites in the U.S.,Australia, Canada, Denmark, Germany, Hong Kong, Iceland, Japan, Korea, Sweden and the United Kingdom.Institutional customers are offered access to a broad range of brokerage products and services, includingexecution services, direct market access to exchanges through a web-based platform, cross-border trading andthird party independent research. Corporate clients use our employee stock plan administration and optionsmanagement tools. These corporate client accounts provide us an opportunity to reach their employees and offerthem the products and services that are offered to our retail customers.Our corporate offices are located at 135 East 57th Street, New York, New York 10022. We maintainsignificant domestic corporate and operational offices in Arlington, Virginia; Menlo Park, California; Irvine,California; Chicago, Illinois; Rancho Cordova, California; and Alpharetta, Georgia. Although not as significant,we maintain international offices in London, United Kingdom; Stockholm, Sweden; Copenhagen, Denmark;Berlin, Germany; Tokyo, Japan; and Hong Kong. The Company was incorporated in California in 1982 andreincorporated in Delaware in July 1996. We have approximately 3,300 employees.Our financial results are presented as two segments, brokerage and banking, which have differentcharacteristics. The brokerage segment generates revenues primarily from customer trading, market-makingactivities, proprietary trading, margin lending and brokerage-related fees. The banking segment generatesrevenues primarily from its diversified interest-earning assets (banking assets held which earn interest income),gains on sales of loans and banking-related service charges and fees from asset management. During 2004,exclusive of intersegment revenues, the brokerage segment generated approximately 60% and the bankingsegment generated 40% of the Company’s consolidated net revenues.Our significant brokerage and banking subsidiaries are as follows:Brokerage: E*TRADE Brokerage Holdings, the parent company of the following subsidiaries: E*TRADE Securities LLC (“E*TRADE Securities”), a registered broker-dealer and provider ofbrokerage services to both retail and institutional customers;1
E*TRADE Clearing LLC (“E*TRADE Clearing”), the clearing firm for E*TRADE Securities,E*TRADE Professional Securities, E*TRADE Professional Trading, E*TRADE Capital Markets,E*TRADE Capital Markets-Execution Services and others; E*TRADE Institutional Holdings, Inc., the parent company of: E*TRADE Capital Markets-Execution Services (“ETCM-ES”), formerly Dempsey & CompanyLLC. ETCM-ES is a registered broker-dealer, specialist and market-making firm. ETCM-ES, inturn, is the parent company of: E*TRADE Capital Markets, LLC (“E*TRADE Capital Markets”), formerly GVR & Company,LLC. E*TRADE Capital Markets is a registered broker-dealer, a market-making firm and alsoacts as agent for our institutional customers. ETP Holdings, Inc., the parent company of: E*TRADE Professional Trading, LLC, a registered broker-dealer; and E*TRADE Professional Securities, LLC, a registered broker-dealer. E*TRADE Financial Corporate Services, Inc. (“E*TRADE Financial Corporate Services”), a provider ofstock plan administration and options management tools to corporate customers.Banking: E*TRADE Re, LLC, the parent company of ETB Holdings, Inc. (“ETBH”) and also a provider ofmortgage reinsurance. ETBH’s subsidiaries include: E*TRADE Bank (the “Bank”), a Federally chartered savings bank that provides deposit accountsinsured by the Federal Deposit Insurance Corporation (“FDIC”) and consumer lending products toretail customers nationwide. The Bank is also the parent company of: E*TRADE Consumer Finance Corporation (“E*TRADE Consumer Finance”), a recreationalvehicle, marine and other consumer loan originator and servicer; and E*TRADE Mortgage Corporation (“E*TRADE Mortgage”), a direct-to-consumer mortgageloan originator. E*TRADE Mortgage is also the parent company of: E*TRADE Settlement Services, Inc. (“ETSS”), which provides full appraisal, closing andtitle services for mortgage loans. ETSS is the parent company of: Lending Link LLC, which acts as a title agency and provides key operational supportfor home equity loans. E*TRADE Global Asset Management, Inc. (“ETGAM”), a registered broker-dealer and investmentadvisor that manages asset portfolios for the brokerage and banking segments, as we
united states securities and exchange commission washington, d.c. 20549 form 10-k (mark one) È annual report pursuant to section 13 or 15(d) of the securities exchange
