eTrade 2010 Annual Report Download - page 123

Property valuations are based on the most recent property value data available, which may include
appraisals, prices for identical or similar properties, broker price opinions or home price indices. These fair value
measurements were classified as Level 3 of the fair value hierarchy as the majority of the valuations included
Level 3 inputs that were significant to the estimate of fair value.
The following table presents the losses associated with the assets measured at fair value on a nonrecurring
basis during the years ended December 31, 2010, 2009 and 2008 (dollars in thousands):
Year Ended December 31,
2010 2009 2008
One- to four-family(1) $291,351 N/A N/A
Home equity(1) 152,386 N/A N/A
Total losses on loans receivable measured at fair value $443,737 $556,685 $224,463
REO(2) $ 41,203 $ 56,460 N/A
(1) Certain disclosures are not presented for periods prior to the adoption date as the amended fair value measurement guidance for certain
items was not adopted by the Company until January 1, 2010.
(2) Certain disclosures are not presented for periods prior to the adoption date as the amended fair value measurement guidance for
nonfinancial assets was not adopted by the Company until January 1, 2009.
Debt Exchange
In the third quarter of 2009, the Company exchanged $1.7 billion aggregate principal amount of its 12
1
⁄ 2 %
Notes and 8% Notes for an equal principal amount of newly-issued non-interest-bearing convertible debentures.
The Debt Exchange was accounted for as a debt extinguishment at fair value with the resulting loss recognized in
the consolidated statement of loss. The Company’s methodology for determining the fair value of the
non-interest-bearing convertible debentures was based on the following three factors: 1) intrinsic value of the
underlying stock; 2) value of the 10-year put option; and 3) liquidity discount.
The most significant factor in the valuation of the non-interest-bearing convertible debentures was the
intrinsic value of the underlying stock, which represented the value of the underlying shares of the Company’s
stock at the date of exchange. The fair value of the non-interest-bearing convertible debentures was greater than
the face amount of the corporate debt that was exchanged primarily due to the significant increase in the
Company’s stock price from June 22, 2009, the date on which the conversion price was established, to
August 25, 2009, the date on which the Debt Exchange was consummated. The other inputs to the valuation of
the non-interest-bearing convertible debentures included the value of the 10-year put option and a liquidity
discount. The value of the 10-year put option represented the value associated with creditors’ option to receive
cash equal to the face value of the non-interest-bearing convertible debentures at the end of 10 years in lieu of
converting the non-interest-bearing convertible debentures into common stock. The liquidity discount
represented the Company’s consideration that the non-interest-bearing convertible debentures are not as liquid as
the Company’s stock or might not be readily tradable once issued and that future conversions would be subject to
certain limitations.
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