eTrade 2003 Annual Report Download - page 65

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Table of Contents
Index to Financial Statements
Loans Receivable, net —Loans receivable, net 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 in 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. Nonperforming 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
90 days past due and other loans considered uncollectible are placed on nonaccrual status and are considered nonperforming. Interest
previously accrued, but not collected, on nonaccrual loans is reversed against current income when a loan is placed on nonaccrual status and is
considered nonperforming. Accretion of deferred fees is discontinued for nonaccrual loans. Payments received on nonaccrual 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.
Allowance for Loan Losses —The allowance for loan losses is maintained at a level that management believes is at least equal to the
probable losses inherent in the Bank’s held for-investment loan portfolio. Loan losses are charged and recoveries are credited to the allowance
for loan losses. 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 loans. Real estate and consumer 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. Management evaluates these factors each month
and adjusts the allowance for loan losses, as necessary. Inherently, the determination of the allowance for losses is subjective, as such
management must make significant estimates, including the amounts and timing of losses and current market and economic conditions.
Loans Held-for-Sale, net —Mortgages acquired by the Bank and loans originated by both E*TRADE Consumer Finance and E*TRADE
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.
Property and Equipment, net —Property and equipment are carried at cost and depreciated on a straight-line basis over their estimated
useful lives, generally three to ten years. Leasehold improvements are stated at cost and are amortized over the lesser of their estimated useful
lives or lease terms. Buildings are depreciated over forty years. Land is carried at cost.
In accordance with Statement of Position (“SOP”) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
, the cost of internally developed software is capitalized and included in property and equipment at the point at which the
conceptual formulation, design and testing of possible software project alternatives are complete and management authorizes and commits to
funding the project. The Company does not capitalize pilot projects and projects where it believes that future economic benefits are less than
probable. Internally developed software costs include the cost of software tools and licenses used in the development of the Company’s
systems, as well as payroll and consulting costs.
Investment in Federal Home Loan Bank (“FHLB”) Stock —Investment in FHLB stock is carried at its amortized cost, which
approximates fair value.
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