eTrade 2002 Annual Report Download - page 44

Table of Contents
Index to Financial Statements
we make estimates based on various factors including borrower credit scores, debt-to-income ratios, loan-to-value ratios, geographic
concentrations and the cost and timing of collateral repossession and disposal. Estimates are periodically measured against actual loss
experience and industry loss data. Adjustments are made to future projections as assumptions are revised.
The determination of the allowance for loan losses requires management to make significant estimates with respect to the amounts and timing of
losses and market and economic conditions. Accordingly, a continued decline in the national economy or the local economies of the areas in
which the Bank’ s loans are concentrated could result in an increase in loan delinquencies, foreclosures or repossessions resulting in increased
charge-off amounts and the need for additional loan loss allowances in future periods. The Bank’ s investment in consumer loans continues to
increase with the addition of retail consumer loan origination platforms that were established or acquired during fiscal 2002. These loans
provide higher yields than single-family mortgage loans but typically experience higher charge-off rates. The impact of adverse economic
trends or events is generally more significant in consumer loan portfolios. In addition, the regulatory agencies that supervise the Bank
periodically review the Bank’ s allowance for loan losses. These reviews may also result in additions or deductions to the allowance for loan
losses.
In addition to our banking loans described above, we extend credit to brokerage customers in the form of margin loans. At December 31, 2002,
margin accounts had approximately $980 million in outstanding margin loans. We provided an allowance for uncollectible margin loans of $3.1
million based on historical experience as well as the review of certain individual customer accounts and the specific identification of
uncollectible amounts.
Classification and valuation of certain 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.
Classification of an investment determines how it is accounted for. Investment classifications are subject to on-going review and change. When
possible, the fair value of securities is determined by obtaining quoted market prices. We also make estimates about the fair value of
investments and the timing for recognizing losses based on market conditions and other factors. If our estimates change, we may recognize
additional losses. Both unrealized and realized gains and losses on trading securities, which are held by our Bank, are recognized in gain on
sales of loans held-for-sale and securities, net. Our brokerage operations hold trading securities for market-making purposes and record the net
gains as principal transactions revenues. Unrealized gains and losses on available-for-sale securities are included in accumulated other
comprehensive income. Realized gains and losses and declines in fair value which we believe to be other-than-temporary are included in gain
on sales of loans held-for-sale and securities, net for our banking investments and gain (loss) on investments for our non-banking investments.
At December 31, 2002, our investments in debt and mortgage-backed securities had unrealized losses of $76.6 million, which we believe to be
temporary based in part on our intent to hold these securities for the foreseeable future. Consequently, we have not included these unrealized
losses in the computation of our earnings.
We have investments in interest-only securities which totaled $11.9 million at December31, 2002. Impairment of interest-only securities is
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. For fiscal 2002, we recorded impairment losses of $16.6 million related to these interest-only securities. We
also recognized a $16.3 million loss on sale of interest-only securities during fiscal 2002.
As of December 31, 2002, we held, as part of our investment portfolio, $5.8 million of asset-backed securities issued by Metris Master Trust
2000-1 and $29.2 million issued by Conseco Financial Securitizations
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