eTrade 2012 Annual Report Download - page 126

management, and the Company corroborated the fair value measurements with counterparty valuations. The
Company’s derivative instruments were categorized in Level 2 of the fair value hierarchy. The consideration of
credit risk, the Company’s or the counterparty’s, did not result in an adjustment to the valuation of its derivative
instruments in the periods presented.
Securities Owned and Securities Sold, Not Yet Purchased
Securities transactions entered into by broker-dealer subsidiaries are included in trading securities and
securities sold, not yet purchased in the Company’s fair value disclosures. For equity securities, the Company’s
definition of actively traded is based on average daily volume and other market trading statistics. The fair value
of securities owned and securities sold, not yet purchased was determined using listed or quoted market prices
and the majority were categorized in Level 1 of the fair value hierarchy.
Nonrecurring Fair Value Measurement Techniques
Loans Receivable and REO
The Company records certain other assets at fair value on a nonrecurring basis: 1) one- to four-family and
home equity loans in which the amount of the loan balance in excess of the estimated current value of the
underlying property less estimated costs to sell has been charged-off; and 2) real estate acquired through physical
possession of property or upon foreclosure that is carried at the lower of the property’s carrying value or fair
value, less estimated selling costs.
Loans that have been delinquent for 180 days or in bankruptcy are charged-off based on the estimated
current value of the underlying property less estimated selling costs and are classified as nonperforming loans.
These loans continue to be reported as nonperforming unless they subsequently meet the requirements for being
reported as performing loans. TDRs that are charged-off based on the estimated current value of the underlying
property less estimated selling costs are classified as nonperforming loans at the time of modification and return
to accrual status after six consecutive payments are made in accordance with the modified terms. Property
valuations for these one- to four-family and home equity loans are based on the most recent “as is” property
valuation data available, which may include appraisals, broker price opinions, prices for similar properties,
automated valuation models or home price indices. Subsequent to the recording of an initial fair value
measurement, these loans continue to be measured at fair value on a nonrecurring basis, utilizing the estimated
value of the underlying property less estimated selling costs. These property valuations are updated on a monthly,
quarterly or semi-annual basis depending on the type of valuation initially used. If the value of the underlying
property has declined, an additional charge-off is recorded. If the value of the underlying property has increased,
previously charged-off amounts are not reversed. If the valuation data obtained is significantly different from the
valuation previously received, the Company orders additional property valuation data to corroborate or update
the valuation.
Property valuations for real estate acquired through physical possession of property or upon foreclosure are
based on the lowest value of the most recent property valuation data available, which may include appraisals,
listing prices or approved offer prices. Nonrecurring fair value measurements on one- to four-family and home
equity loans and real estate owned 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.
Real estate owned and loans receivable that have been subject to fair value measurement requirements are
evaluated on a quarterly basis in accordance with policies and procedures that were designed to be in compliance
with guidance from the Company’s regulators. These policies and procedures govern the frequency of the review,
the use of acceptable valuation methods, and the consideration of estimated selling costs.
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