eTrade 2010 Annual Report Download - page 125

Loans, net—For the held-for-investment one- to four-family, home equity and consumer and other loans
portfolio, fair value is estimated using a discounted cash flow model. Loans are differentiated based on their
individual portfolio characteristics, such as product classification, loan category, pricing features and remaining
maturity. Assumptions for expected losses, prepayments and discount rates are adjusted to reflect the individual
characteristics of the loans, such as credit risk, coupon, term, and payment characteristics, as well as the
secondary market conditions for these types of loans. There was limited or no observable market data for the
home equity and one- to four-family loan portfolios, which indicates that the market for these types of loans is
considered to be inactive. The decrease in these fair values when compared to the fair value for the year ended
December 31, 2009 was driven primarily by changes to the assumed discount and prepayment rates. Given the
limited market data, these fair value measurements cannot be determined with precision and changes in the
underlying assumptions used, including discount rates, could significantly affect the results of current or future
fair value estimates. In addition, the amount that would be realized in a forced liquidation, an actual sale or
immediate settlement could be significantly lower than both the carrying value and the estimated fair value of the
portfolio.
For loans held-for-sale that were originated through, but not yet purchased by a third party company, fair
value is estimated using third party commitments to purchase loans.
Deposits—For sweep deposits, complete savings deposits, other money market and savings deposits and
checking deposits, fair value is the amount payable on demand at the reporting date. For certificates of deposit
and brokered certificates of deposit, fair value is estimated by discounting future cash flows at the rates currently
offered for deposits of similar remaining maturities.
Securities sold under agreements to repurchase—Fair value is determined by discounting future cash flows
at the rate implied for other similar instruments with similar remaining maturities.
FHLB advances and other borrowings—For FHLB advances, fair value is estimated by discounting future
cash flows at the rates currently offered for borrowings of similar remaining maturities. For subordinated
debentures, fair value is estimated by discounting future cash flows at the rate implied by dealer pricing quotes.
For margin collateral, overnight and other short-term borrowings and collateralized borrowings, fair value
approximates carrying value.
Corporate debt—Fair value is estimated using dealer pricing quotes. The fair value of the non-interest-
bearing convertible debentures is directly correlated to the intrinsic value of the Company’s underlying stock. As
the price of the Company’s stock increases relative to the conversion price, the fair value of the convertible
debentures increases.
In the normal course of business, the Company makes various commitments to extend credit and incur
contingent liabilities that are not reflected in the consolidated balance sheet. Changes in the economy or interest
rates may influence the impact that these commitments and contingencies have on the Company in the future.
The Company does not estimate the fair value of those commitments. The Company has the right to cancel these
commitments in certain circumstances and has closed a significant amount of customer home equity lines of
credit in recent periods. As of December 31, 2010, the Company had $1.0 billion of unfunded commitments to
extend credit. Information related to such commitments and contingent liabilities is detailed in Note 22—
Commitments, Contingencies and Other Regulatory Matters.
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