eTrade 2008 Annual Report Download - page 101

number of securities that were rated below “AA” at the time of purchase and are subject to Emerging Issues Task
Force (“EITF”) 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial
Interests in Securitized Financial Assets (“EITF 99-20”).
Margin Receivables—Margin receivables represent credit extended to customers and non-customers to
finance their purchases of securities by borrowing against securities they currently own. Receivables from
non-customers represent credit extended to principal officers and directors of the Company to finance their
purchase of securities by borrowing against securities owned by them. Margin receivables to the Company’s
principal officers totaled less than $0.1 million for both December 31, 2008 and 2007. Securities owned by
customers and non-customers are held as collateral for amounts due on the margin receivables, the value of
which is not reflected in the consolidated balance sheet. In many cases, the Company is permitted to sell or
re-pledge these securities held as collateral and use the securities to enter into securities lending transactions, to
collateralize borrowings or for delivery to counterparties to cover customer short positions. At December 31,
2008, the fair value of securities that the Company received as collateral in connection with margin receivables
and stock borrowing activities, where the Company is permitted to sell or re-pledge the securities, was
approximately $3.8 billion. Of this amount, $1.0 billion had been pledged or sold at December 31, 2008 in
connection with securities loans, bank borrowings and deposits with clearing organizations.
Loans, Net—Loans, net consists of loans that are held-for-sale and real estate and consumer loans that
management has the intent and ability to hold for the foreseeable future or until maturity, also known as loans
held for investment. Loans that are held for investment are carried at amortized 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 operating 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. The
Company’s policy for one- to four-family loan charge-offs prior to January 1, 2008 was to charge-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. For home equity loans, the Company’s policy prior to January 1, 2008 was to charge-off
at time of foreclosure or when the loan has been delinquent for 180 days. As of January 1, 2008, the Company
adjusted its charge-off policy mainly for loans in the process of foreclosure. The updated policy for both one- to
four-family and home equity loans is to assess the value of the property when the loans has been delinquent for
180 days or it is in bankruptcy, regardless of whether or not the property is in foreclosure, and charge-off the
amount of the loan balance in excess of the estimated current property value. Credit cards are charged-off when
collection is not probable or the loan has been delinquent for 180 days. Consumer loans are charged-off when the
loan has been delinquent for 120 days or when it is determined that collection is not probable.
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
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