eTrade 2002 Annual Report Download - page 105

Table of Contents
Index to Financial Statements
securities purchased under agreements to resell (“Resale Agreements”). Resale Agreements are accounted for as collateralized financing
transactions and are recorded at their contractual amounts, which approximate fair value. The Company obtains possession of collateral with a
market value equal to or in excess of the principal amount loaned and accrued under Resale Agreements. The Company had Resale Agreements
of $1,273 million and $30.3million in certificates of deposit at December 31, 2002 and $633.7 million at December 31, 2001. Balances held by
our broker-dealer subsidiaries are maintained in a special reserve bank account for the exclusive benefit of brokerage customers under SEC
Rule 15c 3-3.
Mortgage-Backed Securities, Available-for-Sale and Investments —The Company has classified its debt, mortgage-backed securities and
marketable equity securities as either trading or available-for-sale. The Company held no mortgage-backed or investment securities classified as
held-to-maturity at December 31, 2002 or December 31, 2001.
Trading securities and financial derivative instruments that do not qualify for hedge accounting are bought and held principally for the purpose
of selling them in the near term and are carried at estimated fair value. Realized and unrealized gains and losses on securities classified as
trading and held by the Bank are included in gain on sales of loans held-for-sale and securities, net and are derived using the specific
identification cost method. Realized and unrealized gains and losses on securities classified as trading and held by Dempsey are included in
other brokerage related revenues and are derived using the specific identification cost method.
Available-for-sale securities consist of mortgage-backed securities, asset-backed securities, corporate bonds, municipal bonds, publicly-traded
equity securities, U.S. Government agency obligations, commercial paper and money market funds. Securities classified as available-for-sale
are carried at estimated fair value, with the unrealized gains and losses reflected as a component of accumulated other comprehensive income
(“AOCI”), net of tax. Fair value is based on quoted market prices. For illiquid securities, market prices are estimated by obtaining market price
quotes on similar liquid securities and adjusting the price to reflect differences between the two securities, such as credit risk, liquidity, term,
coupon, payment characteristics and other information. Realized and unrealized gains or losses on available-for-sale securities except for
publicly-traded equity securities are computed using the specific identification cost method. Amortization or accretion of premiums and
discounts are recognized in interest income using the interest method over the expected life of the security. Realized and unrealized gains or
losses on publicly-traded equity securities are computed using the average cost method. Realized gains and losses and declines in fair value
judged to be other-than-temporary are included in gain on sales of loans held-for-sale and securities, net for the Company’ s banking operations;
other amounts are included in non-operating income (expense). Interest earned is included in banking interest income for banking operations or
corporate interest income for corporate investments.
The Company reviews all significant securities for other-than-temporary impairment at each balance sheet date. For equity securities, the
Company recognizes such declines when the market value of a company’ s stock remains below the Company’ s cost for a period of six months,
unless recognized sooner based on other indicators. The Company conducts a detailed credit review of any debt, mortgage-backed or
asset-backed security with potential for other-than-temporary impairment. In addition, the Company reviews any security in which publicity
available information indicates a significant credit concern with the issuer.
Impairment of interest-only securities are recognized when the security’ s fair value is less than its amortized cost and if the current present
value of estimated cash flows have decreased since the last periodic estimate. The Company assesses interest-only securities for impairment at
each balance sheet date. The Company estimates the future cash flows and obtains and independent fair value for each interest-only security
classified as available-for-sale. In accordance with the Consensus of the Emerging Issues Task Force (“EITF”) 99-20, Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets the Company performs a two-step test
to determine if other-than-temporary impairment has occurred. If the interest-only security fails both tests, other-than-temporary impairment has
occurred and the Company writes the security down to fair value through the income statement.
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2003. EDGAR Online, Inc.