eTrade 2005 Annual Report Download - page 49

Table of Contents
Other Revenues
Other revenues increased 6% to $94.4 million in 2005 compared to 2004. The increases are due to increased options transaction fees
and 12b-1 fees, offset by decreases in proprietary fund revenues relating to the closure of certain of our proprietary funds. Other
revenues include foreign exchange margin revenues, stock plan administration products revenues and other revenues ancillary to our
retail customer transactions.
Net Interest Income
Net interest income increased 37% to $871.1 million in 2005 compared to 2004. The increase in net interest income is primarily due to an
increase in interest-earning assets and margin loan balances. Net interest income represents interest earned on interest-earning assets
(primarily loans receivable and mortgage-backed and related available-for-sale securities), margin loans, stock borrow balances, cash
required to be segregated under regulatory guidelines and fees on customer assets invested in money market accounts, net of interest
paid on interest-bearing banking liabilities (primarily customer deposits, repurchase agreements, other borrowings and advances from
the FHLB), paid to customers on certain credit balances and to banks and other broker-dealers through our brokerage subsidiary’s
stock loan program. Net interest spread is the difference between the weighted-average yields earned on interest-earning banking
assets and the weighted-average rates paid on interest-bearing banking liabilities.
In recent years, we have managed our interest rate risk to achieve a minimum to moderate risk profile with limited exposure to earnings
volatility resulting from interest rate fluctuations. Our actions have created a balance sheet characterized by strong asset quality and
flexibility to take advantage of, where appropriate, changing interest rates and to adjust to changing market conditions. We anticipate
that interest rates will continue to rise in 2006 and that the overall impact of a rise in long-term interest rates will be beneficial to net
interest income. We expect a negative impact on net interest spread if the interest rate yield curve remains flat or inverts. We believe
growth in customer cash balances and customer margin balances will offset this risk of a decline in net interest spread.
Interest income and interest expense reflect income and expense on hedges that qualify for hedge accounting under Statement of
Financial Accounting Standards (“SFAS”) No.133,
Accounting for Derivative Instruments and Hedging Activities
. The following
table shows the income (expense) on hedges that are included in interest income and expense (dollars in thousands):
Variance
Year Ended December31,
2005 vs. 2004
2005
2004
2003
$ Amount
%
Interest income:
Interest income, gross
$
1,662,745
$
1,162,721
$
931,320
$
500,024
43
%
Hedge expense
(12,481
)
(17,124
)
(38,488
)
4,643
27
%
Interest income, net
1,650,264
1,145,597
892,832
504,667
44
%
Interest expense:
Interest expense, gross
(695,634
)
(313,988
)
(310,622
)
(381,646
)
(122
)
%
Hedge expense
(83,530
)
(196,467
)
(175,507
)
112,937
57
%
Interest expense, net
(779,164
)
(510,455
)
(486,129
)
(268,709
)
(53
)
%
Net interest income
$
871,100
$
635,142
$
406,703
$
235,958
37
%
Provision for Loan Losses
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2006. EDGAR Online, Inc.