eTrade 2001 Annual Report Download - page 53

Through the Bank, we originate and purchase mortgage and consumer loans that we have the intent and ability to hold for the
foreseeable future or until maturity or pay-off. We may not collect all contractual principal and interest on some of these loans that we
have originated or purchased. To the extent these uncollectible loans are not adequately reserved for, we may incur additional charges
to loan losses in the consolidated financial statements. The allowance for loan losses is maintained at a level management considers to
be adequate to absorb loan losses inherent in the portfolio.
In determining the level of the allowance the company has established both specific and general allowances. The amount of the
specific allowance is determined through a loan-by-loan analysis of certain large dollar real estate and consumer loans. Loans not
specifically reviewed by management are evaluated using expected loss ratios. The expected loss ratios are determined based on
historical charge-off experience, industry loss experience and current market and economic conditions. At December 31, 2001, our
loan loss allowance was $19.9 million on total loans of $7,992 million.
The purpose of the allowance for loan losses is to provide for losses that are probable to have occurred as of the balance sheet date,
and not to predict future losses in the loan portfolio. The determination of the allowance for loan losses is inherently subjective, as it
requires management to make significant estimates, including the amounts and timing of losses and current market and economic
conditions. These estimates are susceptible to change. Accordingly, a continued decline in the national economy or the economies in
the areas in which the Bank’ s loans are concentrated could result in an increase in loan delinquencies or foreclosures, resulting in the
need for additional loan loss allowances in future periods. In addition, the regulatory agencies that supervise the Bank periodically
reviews the Bank’ s allowance for loan losses. This review, which is an integral part of their examination process, may result in
additions or deductions to the allowance for loan losses based on judgments with regard to available information provided at the time
of their examinations.
In addition to our banking loans described above, we also extend credit to our brokerage customers in the form of margin loans. At
December 31, 2001, margin accounts were approximately $1,537 million and we had provided an allowance for uncollectible amounts
of $3.6 million, which was based on historical experience as well as a review of individual customer accounts.
The classification and carrying value of investments
We generally classify our investment in debt instruments (including corporate, government and municipal bonds), mortgage-backed
securities and marketable equity securities as either available-for-sale or trading. We have not classified any investments as
held-to-maturity. The fair value of these securities are determined by obtaining quoted market prices. Unrealized gains and losses on
available-for-sale securities are included in other comprehensive income and excluded from our earnings. Realized gains and losses
and declines in fair value judged to be other than temporary are included in earnings.
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We have investments in several publicly-traded and privately-held companies. Generally accepted accounting principles require that
we evaluate our corporate holdings of these companies for declines in market value that may be other than temporary. Our policy is to
recognize such declines when the market value of a company’ s stock is less than our cost for a period of six-months, unless there are
other indicators that such declines should be recognized sooner. During fiscal 2001, we recognized losses of $43.5 million from
declines in market value which we determined to be other than temporary related to investments in publicly-traded companies, mutual
funds in which we are the sponsor, and other joint venture investments. See Note 8 to the Consolidated Financial Statements for further
information. As of December 31, 2001, certain of the publicly-traded equity securities which we held had unrecognized losses of $1.1
million, which we believed to be temporary and so this decline was not included in the computation of our earnings.
2002. EDGAR Online, Inc.