eTrade 2005 Annual Report Download - page 81

Table of Contents
Allowances for Loan Losses and Uncollectible Margin Loans
Description
The allowance for loan losses is management’s estimate of credit losses inherent in our loan portfolio as of the balance sheet date. At
December31, 2005, our allowance for loan losses was $63.3 million on $19.5 billion of loans designated as held-for-investment. In
addition to our banking loans, we extend credit to brokerage customers in the form of margin loans. At December31, 2005, margin
accounts had approximately $5.7 billion in outstanding margin loans for which we provided an allowance for uncollectible margin loans
of $8.8 million.
Judgments
The estimate of the allowance is based on a variety of factors, including the composition and quality of the portfolio, delinquency
levels and trends, expected losses for the next twelve months, current and historical charge-off and loss experience, current industry
charge-off and loss experience, the condition of the real estate market and geographic concentrations within the loan portfolio, the
interest rate climate as it affects adjustable-rate loans and general economic conditions. Determining the adequacy of the allowance is
complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the
loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan losses in future periods.
Effects if Actual Results Differ
Although we have considerable experience in performing these reviews, if management’s underlying assumptions prove to be
inaccurate or significant unanticipated changes to the national or regional economies occur, the allowance for loan losses could be
insufficient to cover actual losses. If our estimates understate probable losses inherent in the portfolio, this would result in additional
expense. A 10% increase or decrease in the allowances would result in a $7.2 million charge or credit to income, respectively.
Classification and Valuation of Certain Investments
Description
We generally classify our investments in debt instruments (including corporate, government and municipal bonds), mortgage-backed
securities, asset-backed securities and marketable equity securities as either available-for-sale or trading. We have not classified any
investments as held-to-maturity. The classification of an investment determines its accounting treatment. Both unrealized and realized
gains and losses on trading securities held by our banking subsidiaries are recognized in gain on sales of loans and securities, net.
Securities held by our brokerage subsidiaries are for market-making purposes and gains and losses are recorded as principal
transactions revenue. Unrealized gains and losses on available-for-sale securities are included in accumulated other comprehensive
income. Declines in fair value that we believe to be other-than-temporary are included in gain on sales of loans and securities, net for
our banking investments and gain on sale and impairment of investments for our brokerage (other than those held for market-making
purposes) and corporate investments. We have investments in certain publicly-traded and privately-held companies, which we
evaluate for other-than-temporary declines in market value. During 2005, 2004 and 2003, we recognized $40.3 million, $18.4million and
$10.2 million, respectively, of losses from other-than-temporary declines in market value related to our investments.
Judgments
When possible, the fair value of securities is determined by obtaining quoted market prices. For illiquid securities, fair value is
estimated by obtaining market price quotes on similar liquid securities and adjusting the price to reflect differences. For securities
where market quotes and similar securities are not available, we use discounted cash flows. We also make estimates about the fair
value of investments and the timing for recognizing
50

2006. EDGAR Online, Inc.