eTrade 2002 Annual Report Download - page 106

Table of Contents
Index to Financial Statements
Asset Securitization and Retained Interests —An asset securitization involves the transfer of financial assets to another entity in exchange for
cash and/or beneficial interests in the assets transferred. Asset transfers in which the Company surrenders control over the financial assets are
accounted for as sales to the extent that consideration other than beneficial interests in the transferred assets is received in the exchange in
accordance with SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities . The carrying
amount of the assets transferred, is allocated between the assets sold in these transactions and the retained beneficial interests based on their
relative fair values at the date of the transfer. For transactions managed by the Bank, gain or loss is included in gain on sales of loans
held-for-sale and securities, net for the difference between the allocated carrying amount of the asset sold and the net cash proceeds received.
Fair value is determined based on quoted market prices, if available. Generally quoted market prices are not available for beneficial interests;
therefore the Company estimates the fair value based on the present value of the associated expected future cash flows. In determining the
present value of the associated expected future cash flows, management is required to make estimates and assumptions. The key estimates and
assumptions include future default rates, credit losses, discount rates, prepayment speeds and collateral repayment rates.
Retained or purchased beneficial interests are accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities and EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets . Retained or purchased beneficial interests are classified as either available-for-sale or trading in accordance with
SFAS No.115. EITF 99-20 requires the prospective method for adjusting the yield used to recognize interest income when the estimates of
future cash flows on a security either increase or decrease. In addition EITF 99-20 requires the Company to test these securities for impairment
at each balance sheet date. If a 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, then an other-than-temporary impairment has occurred and the security is written down to fair value
with the resulting charge recorded in consolidated statement of operations as a decrease to gain on sales of loans held-for-sale and securities,
net. Asset transfers for which the Company does not surrender control over the financial assets would be accounted for as secured borrowings.
See Note 10.
Loans Held-for-Sale, net —Mortgages acquired by the Bank and loans originated by E*TRADE Mortgage which are intended for sale in the
secondary market are carried at the lower of cost or estimated fair value, as determined on an aggregate basis, based on quoted market price for
loans with similar characteristics. Net unrealized losses are recognized in a valuation allowance by charges to income. Premiums and discounts
on loans held-for-sale are deferred and recognized as part of loss or gain on sale and are not accreted or amortized.
Loans Receivable, net —Loans receivable consists of real estate and consumer loans that management has the intent and ability to hold for the
foreseeable future or until maturity. These loans are carried at amortized cost adjusted for charge-offs, net of allowance for loan losses, deferred
fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan fees and certain direct loan origination costs
are deferred and the net fee or cost is recognized into interest income using the interest method over the contractual life of the loans. Premiums
and discounts on purchased loans are amortized or accreted, into income using the interest method over the remaining period to contractual
maturity and adjusted for anticipated prepayments. Non-performing loans consist of loans for which interest is no longer being accrued and
troubled loans that have been restructured in order to increase the opportunity to collect amounts due on the loan. All loans at least ninety days
past due, as well as other loans considered uncollectible, are placed on non-accrual status and are considered non-performing. Interest
previously accrued but not collected on non-accrual loans is reversed against current income when a loan is placed on non-accrual status and is
considered non-performing. Accretion of deferred fees is discontinued for non-accrual loans. Payments received on non-accrual loans are
recognized as interest income when the loan is considered collectible and applied to principal when it is doubtful that full payment will be
collected. Real estate loans are generally charged off to the extent that the carrying value of the loan exceeds the estimated net realizable value
of the underlying collateral at 180 days past due. Consumer loans are charged off to the extent the carrying value of the loan exceeds the
estimated net realizable value of the underlying collateral when the loan becomes 120 days past due.
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2003. EDGAR Online, Inc.