eTrade 2007 Annual Report Download - page 94

cost adjusted for charge-offs, net, 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 actual prepayments. The Company
classifies loans as nonperforming when full and timely collection of interest or principal becomes uncertain or
when they are 90 days past due. Interest previously accrued, but not collected, is reversed against current income
when a loan is placed on nonaccrual status and is considered nonperforming. Accretion of deferred fees is
discontinued for nonperforming loans. Payments received on nonperforming 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. One- to four-family loans are charged off to the extent that the carrying value of the loan exceeds
the estimated net realizable value of the underlying collateral at the time of foreclosure. Home equity loans are
charged-off at time of foreclosure or when the loan has been delinquent for 180 days. Credit cards are
charged-off when the loan has been delinquent for 180 days. Consumer loans are charged-off when the loan has
been delinquent for 120 days.
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, probable
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; the overall availability of housing credit; 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 specifically identified 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 with
finite lives each reporting period to determine whether events and circumstances warrant a revision to the
remaining period of amortization.
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