eTrade 2002 Annual Report Download - page 52

Table of Contents
Index to Financial Statements
Gain on sales of loans held-for-sale and securities, net consists primarily of gain on sales of available-for-sale mortgage-backed securities,
loans held-for-sale, trading activity, impairment of Bank securities and gains and losses related to market value adjustments and sales of
derivative financial instruments not in effective SFAS No.133 hedging relationships. Gain on sales of loans held-for-sale and securities, net
increased 11% from fiscal 2001 to fiscal 2002 and 793% from fiscal 2000 to fiscal 2001. These increases were primarily related to gain on
sales of loans held-for-sale and mortgage-backed securities which increased $32.4 million from fiscal 2001 to fiscal 2002 and $69.6 million
from fiscal 2000 to fiscal 2001. Offsetting these increases were recognized losses and impairment charges associated with our interest-only
securities of $32.9 million in fiscal 2002 and $13.5million in fiscal 2001 related to an investment security. Losses on derivative financial
instrument sales decreased to $3.7million for fiscal 2002, from $4.3 million for fiscal 2001. For fiscal 2000, losses on derivative financial
instruments were $0.8 million.
Other banking-related is comprised primarily of ATM transaction fees and other fees imposed on deposit accounts. Other banking-related
revenues increased 20% from fiscal 2001 to fiscal 2002 and 120% from fiscal 2000 to fiscal 2001. These increases are due to higher ATM
transaction surcharge volume, and the increase in fiscal 2001 also reflects the acquisition of E*TRADE Access in May 2000.
Interest income from banking-related activities reflects interest earned on assets, consisting primarily of loans receivable and mortgage-backed
securities. Banking interest income decreased 11% from fiscal 2001 to fiscal 2002 and increased 72% from fiscal 2000 to fiscal 2001.
Fluctuation in banking interest income represents changes in average yield based on the decline in market interest rates, partially offset by
increases in average interest-earning banking asset balances and increases in higher yielding interest-earning assets such as the increase in the
automobile loan portfolio. Average interest-earning banking assets increased 11% from fiscal 2001 to fiscal 2002 and 92% from fiscal 2000 to
fiscal 2001. The average yield on interest-earning banking assets decreased to 5.58% for fiscal 2002 from 6.93% for fiscal 2001, which
decreased from 7.73% in fiscal 2000.
I nterest expense from banking-related activities is incurred through interest-bearing banking liabilities that include customer deposits, advances
from the Federal Home Loan Bank (“FHLB”) and other borrowings. Banking interest expense decreased 21% from fiscal 2001 to fiscal 2002
and increased 83% from fiscal 2000 to fiscal 2001. Fluctuations in banking interest expense reflect changes in the average cost of borrowings
and changes in the average interest-bearing banking liability balances. Average interest-bearing banking liability balances increased 14% from
fiscal 2001 to fiscal 2002 and 93% from fiscal 2000 to fiscal 2001. Offsetting the effect of increasing interest-bearing banking liability balances
in fiscal 2002 and fiscal 2001, the average cost of borrowings decreased to 4.14% in fiscal 2002 from 5.97% in fiscal 2001 which decreased
from 6.29% in fiscal 2000.
Net interest spread increased from 0.96% for fiscal 2001 to 1.44% for fiscal 2002. This increase is the result of several initiatives put in place to
improve overall spreads, such as the Bank’ s asset diversification strategy and the Bank’ s lower cost of funding caused by a shift in the structure
of our deposit base from time deposits to transactional accounts that carry a lower cost of funds than certificates of deposits. In addition,
decreases in wholesale funding rates also contributed to the decrease in the Bank’ s overall funding costs. Net interest spread decreased from
1.44% for fiscal 2000 to 0.96% for fiscal 2001. The decrease is the result of decreased yields on assets partially due to pre-payments of higher
yielding mortgages and purchases of lower yielding securities, the effects from which were not fully offset by the impact of decreasing interest
rates on our wholesale borrowings and consumer deposits.
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