eTrade 2006 Annual Report Download - page 32

Despite the flat to inverted yield curve during the period, enterprise net interest spread increased by 36 basis
points to 2.85% in 2006, compared to 2005. This increase was primarily the result of our ability to grow low-cost
deposits and free credits during these periods, which in turn funded our growth in loans, net and margin
receivables.
Average enterprise interest-earning assets increased 40% to $45.4 billion for 2006, compared to 2005.
Average loans, net and margin receivables grew 60% to $28.9 billion for 2006 compared to 2005. Average loans,
net increased as a result of our focus on growing mortgage loan products. The margin receivable portfolio grew,
in part, as a result of our acquisitions of Harrisdirect and BrownCo, as well as organic growth.
Average enterprise interest-bearing liabilities increased 40% to $42.8 billion for 2006 compared to 2005.
The increase in average enterprise interest-bearing liabilities was primarily in low-cost customer cash and
deposits. Average retail deposits and free credits increased 64% to $26.7 billion for 2006 compared 2005.
Increases in average retail deposits and free credits were driven by our acquisitions of Harrisdirect and BrownCo
in the fourth quarter of 2005, as well as by organic growth.
Our interest rate risk is impacted by external factors such as the level and shape of the interest rate yield
curve, the impact of the competitive environment on our pricing and customer behavior. We utilize interest rate
derivatives to manage this risk. 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.
Operating interest income and operating interest expense reflect income and expense on hedges that qualify
for hedge accounting under SFAS No. 133, as amended, Accounting for Derivative Instruments and Hedging
Activities. The following table shows the income (expense) on hedges that are included in operating interest
income and expense (dollars in thousands):
Variance
Year Ended December 31, 2006 vs. 2005
2006 2005 Amount %
Operating interest income:
Operating interest income, gross $ 2,763,041 $1,662,745 $1,100,296 66 %
Hedge income (expense) 11,638 (12,481) 24,119 *
Operating interest income, net 2,774,679 1,650,264 1,124,415 68 %
Operating interest expense:
Operating interest expense, gross (1,361,170) (695,634) (665,536) 96 %
Hedge expense (13,477) (83,530) 70,053 (84)%
Operating interest expense, net (1,374,647) (779,164) (595,483) 76 %
Net operating interest income $ 1,400,032 $ 871,100 $ 528,932 61 %
* Percentage not meaningful.
Provision for Loan Losses
Provision for loan losses decreased 17% to $45.0 million for 2006 compared to 2005. The decrease in the
provision for loan losses was related primarily to a lower provision for our consumer loan portfolio in connection
with the decline in the overall size of the consumer loan portfolio. We expect our provision to increase, however,
as we grow our mortgage portfolio at a higher growth rate than the decline in the consumer loan portfolio.
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