eTrade 2006 Annual Report Download - page 88

charged-off when the loan becomes 180 days past due. Consumer loans are charged off to the extent that 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 management’s estimate of credit losses
inherent in the Company’s loan portfolio as of the balance sheet date. 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. In general, the
allowance for loan losses should be at least equal to twelve months of projected losses for all loan types.
Management believes this level is representative of probable losses inherent in the loan portfolio at the balance
sheet date. Loan losses are charged and recoveries are credited to the allowance for loan losses.
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 amortized over
the lesser of their estimated useful lives or lease terms. Buildings are depreciated over forty years. Land is carried
at cost. Technology development costs are charged to operations as incurred. Technology development costs
include costs incurred in the development and enhancement of software used in connection with services
provided by the Company that do not otherwise qualify for capitalization treatment as internally developed
software costs in accordance with Statement of Position (“SOP”) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use.
In accordance with SOP 98-1, 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.
Goodwill and Other Intangibles, Net—Goodwill and other intangibles, net represents the excess of the purchase
price over the fair value of net tangible assets acquired through the Company’s business combinations. The Company
tests goodwill and intangible assets with indefinite lives for impairment on at least an annual basis or when certain
events occur. The Company evaluates the remaining useful lives of other intangible assets each reporting period to
determine whether events and circumstances warrant a revision to the remaining period of amortization.
Servicing Rights—Servicing assets are recognized when the Company sells a loan and retains the related
servicing rights. The servicing rights are initially recorded at their allocated cost basis based on the relative fair
value of the loan sold and the servicing rights are retained at the date of the sale in accordance with SFAS
No. 140. The fair value of the servicing retained is estimated based on market quotes for similar servicing assets.
Servicing assets are amortized in proportion to and over the period of estimated net servicing income. The
Company measures impairment by stratifying the servicing assets based on the characteristics of the underlying
loans and by interest rates. Impairment is recognized through a valuation allowance for each stratum. The
valuation allowance is adjusted to reflect the excess of the servicing assets’ cost basis for a given stratum over its
fair value. Any fair value in excess of the cost basis of servicing assets for a given stratum is not recognized. The
Company estimates the fair value of each stratum based on an industry standard present value of cash flows
model. The Company recognizes both amortization of servicing rights and impairment charges in service charges
and fees in the consolidated statement of income. Servicing assets are included in the other assets line item in the
consolidated balance sheet.
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