eTrade 2001 Annual Report Download - page 83

In addition, we have recently consolidated certain of our computer systems to provide for operational efficiencies. This consolidation
has reduced the redundancies that were inherent in our systems to lessen or avoid
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the effects of interruptions in certain of our systems. If our systems or any other systems in the transaction process slow down or fail
even for a short time, our customers could suffer delays in transaction processing, which could cause substantial customer losses and
may subject us to claims for these losses or to litigation. The NASDR defines a “system failure” as a shutdown of our mission critical
systems (defined as those necessary for the acceptance and execution of online securities orders) which causes the customers’ use of
these systems to equal or exceed system capacity during regular market hours, or a shutdown of any system application necessary for
the acceptance and execution of online securities orders for a period of 15 continuous minutes that affects 25% or more of the
customers on the system from effecting securities transactions during regular market hours. We have experienced systems failures and
degradation in the past. Systems failures and degradations could occur with respect to U.S. markets or foreign markets where we must
implement new transaction processing infrastructures.
If we are unsuccessful in managing the effects of changes in interest rates, our financial condition and results of operations
could suffer
The results of operations for the Bank depend in large part upon the level of its net interest income, that is, the difference between
interest income from interest-earning assets, such as loans and mortgage-backed securities, and interest expense on interest-bearing
liabilities, such as deposits and borrowings. Changes in market interest rates (and the yield curve) could reduce the value of the Bank’ s
financial assets and thereby reduce net interest income. Fixed-rate investments, mortgage-backed and related securities and mortgage
loans generally decline in value as interest rates rise. Many factors affect interest rates, including governmental monetary policies and
domestic and international economic and political conditions. Currently, the Bank’ s net interest income would be harmed by material
fluctuations in interest rates.
The Bank attempts to mitigate this interest rate risk by using derivative contracts that are designed to offset, in whole or in part, the
variability in value or cash flow of various assets or liabilities caused by changes in interest rates. There can be no assurances that
these derivative contracts move either directionally or proportionately as intended. SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities , which we adopted on October 1, 2000, requires that the hedge ineffectiveness, or the difference
between the changes in value of the hedged item versus the change in value of the hedging instruments, be recognized in earnings as of
the reporting date. Our financial results may prove to be more volatile due to this reporting requirement. See Note 24 to the
Consolidated Financial Statements.
The Bank’s diversification of its asset portfolio to include higher-yielding investments which carry a higher inherent risk of
default in its portfolio may increase the risk of charge-offs which could reduce our profitability
As the Bank diversifies its asset portfolio through purchases of new higher-yielding asset classes, such as auto loans and recreational
vehicle loans, we will have to manage assets that carry a higher inherent risk of default than experienced with our existing portfolio.
Consequently, the level of charge-offs associated with these assets may be higher than previously experienced. If expectations of future
charge-offs increase, a simultaneous increase in the amount of our loan loss allowance would be required. The increased level of
provision for loan losses recorded to meet additional loan loss allowance requirements could adversely impact our financial results if
those higher yields do not cover the provision for loan losses.
We rely on a number of third parties to process our transactions or provide information, products or services to our
customers and their inability to meet our needs and those of our customers could impair our ability to acquire new customers
and otherwise grow our business
2002. EDGAR Online, Inc.