eTrade 2000 Annual Report Download - page 97

employment under certain defined circumstances, or change in the Company’ s control. Base salaries are subject to adjustments
according to the Company’ s financial performance. 21. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
CREDIT RISK AND CONCENTRATIONS OF CREDIT RISK
The Company is party to a variety of interest rate caps, floors and swaps to manage interest rate exposure. The Company enters into
interest rate swap agreements to assume fixed-rate interest payments in exchange for variable market-indexed interest payments. The
effect of these agreements is to lengthen short-term variable rate liabilities into longer-term fixed-rate liabilities or to shorten long-term
fixed rate assets into short-term variable rate assets. The interest rate swaps are specifically designated to specific liabilities or assets at
their acquisition. The net payments of these agreements are charged to interest expense or interest income, depending on whether the
agreement is designated to hedge a liability or an asset.
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Interest rate swap agreements are summarized as follows (dollars in thousands):
Years Ended September 30,
2000 1999
Weighted average fixed rate payments 6.87 % 6.18 %
Weighted average original term 4.3 yrs 4.0 yrs
Weighted average remaining term 3.5 yrs 3.4 yrs
Weighted average variable rate obligation 6.70 % 5.44 %
Notional amount $ 4,702,305 $ 1,448,000
The counterparties to the interest rate swap agreements described above are Bank of America, Salomon Smith Barney, Goldman
Sachs, Deutsche Bank, Lehman Brothers, and Nomura. Credit-related losses can occur in the event of non-performance by the
counterparties to the derivative financial instruments. The credit risk that results from interest rate swaps, interest rate floors and
interest rate caps is represented by the fair value of contracts that have positive value at the reporting date. As of September 30, 2000,
the credit risk associated with Bank of America, Salomon Smith Barney, and Goldman Sachs was $9.5 million, $6.1 million and $1.9
million, respectively. The interest rate swap agreements described above required the Company to pledge approximately $37.8 million
in securities as collateral.
The Company enters into interest rate cap and floor agreements to hedge outstanding mortgage loans, mortgage-backed securities,
FHLB advances and repurchase agreements. Under the terms of the interest rate cap agreements, the Company generally would receive
an amount equal to the difference between the applicable interest rate index and the strike rate for the cap or floor, multiplied by the
notional amount. Premiums paid for the caps and floors are amortized into expense based on the term of the agreement. The interest
rate agreements are summarized as follows (dollars in millions):
Notional
Balance
Maturity Date
Cap Strike Rate
5.0%-5.9% $ 300 October 2000
7.0%-7.9% $ 2,775 October 2001 – June
2005
Floor Strike Rate
5.0% $ 25 May 2001
The counterparties to the interest rate cap agreements described above are Deutsche Bank, Goldman Sachs, Salomon Smith Barney,
and Bank of America. As of September 30, 2000, the credit risk associated with the aforementioned counterparties was $12.0 million,
$6.8 million, $1.5 million and $1.4 million, respectively. The credit risk is attributable to the unamortized cap premium and any
amounts due from the counterparty as of September 30, 2000.
During the years ended September 30, 2000 and 1999, all derivative activities presented above relate to designated hedging
relationships. On September 30, 2000 certain hedging relationships were terminated and the resultant derivatives are reported at fair
market value as freestanding derivatives. Of these derivatives, $1.9 billion notional, were undesignated as of September 30, 2000.
The Company’ s customer securities activities are transacted on either a cash or margin basis. In margin transactions, the Company
extends credit to the customer, subject to various regulatory and internal margin requirements, collateralized by cash and securities in
2002. EDGAR Online, Inc.