eTrade 2007 Annual Report Download - page 63

Among other security measures, we offer customers token based security. The tokens display a six digit
code that changes every sixty seconds. The number on the display and a password must be used together to
access the customers account. This system is an extremely effective tool for preventing unauthorized access to a
customer’s account.
Processing issues and external events may result in opportunity loss or actual losses depending on the
situation. These types of losses include issues resulting from inadequate staffing, equipment failures, significant
weather events or other related types of events. External events resulting in opportunity or actual losses could
include the failure of a competitor to meet its customers’ needs, Internet performance issues, legal, reputation,
public policy and strategic risks.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our
consolidated financial statements, which have been prepared in conformity with accounting principles generally
accepted in the United States of America. Note 1—Organization, Basis of Presentation and Summary of
Significant Accounting Policies to the consolidated financial statements contains a summary of our significant
accounting policies, many of which require the use of estimates and assumptions. We believe that of our
significant accounting policies, the following are noteworthy because they are based on estimates and
assumptions that require complex, subjective judgments by management, which can materially impact reported
results. Changes in these estimates or assumptions could materially impact our financial condition and results of
operation.
Allowances for Loan Losses
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 December 31, 2007, our allowance for loan losses was $508.2 million on $30.2 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 receivables.
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, 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 $50.8 million charge or credit to income, respectively.
60