eTrade 2000 Annual Report Download - page 73

Completed projects are transferred to property and equipment at cost and are amortized on a straight-line basis over their estimated
useful lives, generally two to three years. Amortization expense was $7.8 million, $7.1 million and $1.7 million in fiscal 2000, 1999
and 1998, respectively.
Stock-Based Compensation— The Company accounts for associate stock-based compensation using the intrinsic value method of
accounting prescribed in Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees . The
Company provides pro forma disclosures of net income (loss) and income (loss) per share as required under Statement of Financial
Accounting Standard (“SFAS”) No. 123, Accounting for Stock-Based Compensation .
Changes in Accounting Principle— In April 1998, the American Institute of Certified Public Accountants issued SOP 98-5, Reporting
on the Cost of Start-up Activities . The statement requires that the cost of start-up activities be expensed as incurred rather than
capitalized, with initial application reported as the cumulative effect of a change in accounting principle, as described in APB No. 20 ,
Accounting Changes. ETFC implemented SOP 98-5 in fiscal 1999 and, as a result, recognized $469,000 of previously capitalized
start-up costs, net of tax, as a cumulative effect of a change in accounting principle. These costs related primarily to the establishment
of TeleBanc Insurance Services.
Earnings Per Share— Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average common shares
outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock.
Cash Equivalents— For purposes of reporting cash flows, the Company considers all highly liquid investments with original
maturities of three months or less (except for amounts required to be segregated under Federal or other regulations) to be cash
equivalents. Cash and equivalents are composed of interest-bearing and non-interest-bearing deposits, certificates of deposit,
commercial paper, funds due from banks, and Federal funds.
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Cash and Investments Required to be Segregated Under Federal or Other Regulations— Cash and investments required to be
segregated under Federal or other regulations consist primarily of government backed securities purchased under agreements to resell
(“Resale Agreements”). Resale Agreements are accounted for as collateralized financing transactions and are recorded at their
contractual amounts, which approximate fair value. Included in cash and investments required to be segregated under Federal or other
regulations is $2.5 million and $1.0 million at September 30, 2000 and 1999, respectively, which the Company is required to maintain
in an overnight balance in its account with the Federal Reserve Bank of Richmond.
Loans Receivable - Net —Loans receivable-net consist of mortgages that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off. These loans are carried at amortized cost adjusted for charge-offs, the allowance for
loan losses, any deferred fees or costs on purchased or originated loans and unamortized premiums or discounts on purchased loans.
Also included in loans receivable-net are loans receivable held for sale. Loans receivable held for sale are mortgages acquired by the
Company and intended for sale in the secondary market and are carried at lower of cost or estimated market value in the aggregate.
The market value of these mortgage loans is determined by obtaining market quotes for loans with similar characteristics.
Certain loans have been purchased by the Company with an expectation that not all contractual payments of the loan will be collected.
Discounts attributable to credit issues are tracked separately, netted against the loan balance, and are not included as a component of
allowance for loan losses. Discounts are accreted on a level yield basis only to the extent they are expected to be realized.
According to SFAS No. 114, Accounting by Creditors for Impairment of a Loan , a loan is considered impaired when, based upon
current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The term “all amounts due” includes both the contractual interest and principal payments of a loan as
scheduled in the loan agreement. The Company has determined that once a loan becomes ninety or more days past due, collection of
all amounts due is no longer probable; therefore, the loan is considered impaired. The amount of impairment is measured based upon
the fair value of the underlying collateral and is reflected through the creation of a valuation allowance.
The loan portfolio is reviewed by the Company’ s management to set provisions for estimated losses on loans, which are charged to
earnings in the current period. The allowance for loan losses represents management’ s estimate of losses that have occurred as of the
respective reporting date. In determining the level of the allowance, the Company has established both specific and general
allowances. The amount of specific reserves is determined through a loan-by-loan analysis of non-performing loans and larger dollar
non-single-family mortgage loans. The general allowance is computed based on an assessment of performing loans and is evaluated
collectively. Each month, the performing loan portfolio is stratified by asset type (one- to four-family, commercial, consumer, etc.) and
a range of expected loss ratios is applied to each type of loan. Expected loss ratios range between 0.15% and 3.0% depending upon
2002. EDGAR Online, Inc.