eTrade 2006 Annual Report Download - page 108
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De-designated Fair Value Hedges
During the years ended December 31, 2006 and 2005, certain fair value hedges were de-designated;
therefore, hedge accounting was discontinued during those periods. The net gain or loss on the underlying
transactions being hedged is amortized to operating interest expense or operating interest income over the
original forecasted period at the time of de-designation. Changes in the fair value of these derivative instruments
after de-designation of fair value hedge accounting were recorded in the gain on sales of loans and securities, net
line item in the consolidated statement of income.
Cash Flow Hedges
Overview of Cash Flow Hedges
The Company uses a combination of interest rate swaps, forward-starting swaps and purchased options on
caps and floors to hedge the variability of future cash flows associated with existing variable-rate liabilities and
assets and forecasted issuances of liabilities. These cash flow hedge relationships are treated as effective hedges
as long as the future issuances of liabilities remain probable and the hedges continue to meet the requirements of
SFAS No. 133, as amended. The Company also enters into interest rate swaps to hedge changes in the future
variability of cash flows of certain investment securities resulting from changes in a benchmark interest rate.
Additionally, the Company enters into forward purchase and sale agreements, which are considered cash flow
hedges, when the terms of the commitments exactly match the terms of the securities purchased or sold.
Changes in the fair value of derivatives that hedge cash flows associated with repurchase agreements, FHLB
advances and HELOC are reported in accumulated other comprehensive income as unrealized gains or losses.
The amounts in accumulated other comprehensive income are then included in operating interest expense or
operating interest income as a yield adjustment during the same periods in which the related interest on the
fundings affect earnings. During the upcoming twelve months, the Company expects to include a pre-tax amount
of approximately $21.3 million of net unrealized gains that are currently reflected in accumulated other
comprehensive income in operating interest expense as a yield adjustment in the same periods in which the
related items affect earnings.
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