eTrade 2002 Annual Report Download - page 178

Table of Contents
Index to Financial Statements
sales of loans held-for-sale and other securities, net, in the consolidated statements of operations. The Company recorded a $3.7million loss for
fiscal 2002 and a $2.8 million gain for fiscal 2001 and none for the three months ended December 31, 2000 for discontinued fair value hedges.
In addition, the Company recognized $5.1 million of hedge ineffectiveness expense in fair value adjustments of financial derivatives for fiscal
2002 related to these derecognized fair value hedges during the fair value hedge accounting period.
The following table summarizes information related to financial derivatives in fair value hedge relationships as of December 31, 2002 (dollars
in thousands):
Assets Hedged:
Derivative Instrument:
Notional Amountof
Derivative
Fair Value of Derivative Weighted
Average Pay
Rate
Weighted
Average Receive
Rate
Weighted
Average Strike
Rate
Weighted Average
Remaining Life(years)
Asset Liability Net
Loans:
Pay fixed interest rate swap $ 405,000 $ — $ (3,720 ) $ (3,720 )
2.30 % 1.38 % — % 1.71
Mortgage-Backed Securities:
Pay fixed interest rate swap 2,873,500 — (48,124 ) (48,124 )
4.09 % 1.37 % — % 8.06
Purchased interest rate
options—caps
350,000 8,362 — 8,362 N/A N/A 5.68 %
5.02
Purchased interest rate
options—floors
374,750 11,599 — 11,599 N/A N/A 4.50 %
6.19
Purchased options on
forward starting swaps
2,142,000 67,642 — 67,642 N/A N/A 5.23 %
10.09
Total MBS Securities 5,740,250 87,603 (48,124 ) 39,479 4.09 %
1.37 % 5.19 % 8.51
Investment Securities:
Pay fixed interest rate swap 256,000 — (12,749 ) (12,749 )
4.36 % 1.71 % — % 5.44
Total fair value hedges $ 6,401,250 $ 87,603 $ (64,593 ) $ 23,010 3.99 %
1.38 % 5.19 % 7.96
Cash Flow Hedges
The Company also uses interest rate swaps to hedge the variability of future cash flows associated with existing variable rate liabilities and
forecasted issuances of liabilities. In respect to the variable rate liabilities currently on the balance sheet, the Company uses interest rate swaps
to hedge the risk of changes in the benchmark rate (LIBOR), which impacts the amounts of future payments to be made on the variable rate
liabilities. In regards to the hedging of the forecasted issuance of liabilities, the Company utilizes interest rate swaps with a longer maturity than
the underlying liabilities. The use of an interest rate swap contract with a longer maturity than the underlying liabilities allows the Company to
hedge both the risk of changes in the benchmark (LIBOR) on the existing liabilities and the replacement of such liabilities upon maturity. 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.
The effective portion of the fair value changes in interest rate swap hedging instrument relating to cash flows associated with time deposits,
repurchase agreements and FHLB advances are reported in AOCI as unrealized gains or losses. The amounts are then included in interest
expense as a yield adjustment in the same periods in which the related interest on time deposits, repurchase agreements and FHLB advances
affect earnings. During the next 12 months, the Company expects to include a pre-tax amount of approximately $106.6million of net unrealized
losses presently reflected in AOCI in interest expense as a yield adjustment in the same periods in which the related interest on time deposits,
repurchase agreements and FHLB advances affect earnings. The Company expects to hedge the forecasted issuance of liabilities over a
maximum term of seven years.
2003. EDGAR Online, Inc.