eTrade 2002 Annual Report Download - page 182

Table of Contents
Index to Financial Statements
sales of loans held-for-sale and other securities, net or gain on sales of originated mortgage loans based on whether the loan was purchased or
originated. The net change in the IRLCs and the related hedging instruments resulted in a net gain of $2.6 million for fiscal 2002 and $4.5
million for fiscal 2001.
Loans held-for-sale expose the Company to interest rate risk. The Company manages this risk for certain loans held-for-sale by selling
mortgages or mortgage-backed securities on a forward basis. The changes in fair value of the hedged loans and the related hedging instruments
are recorded in the consolidated statement of operations as gain on sales of originated loans. The net change in loans held-for-sale and the
related hedging instruments was not significant for either fiscal 2002 and fiscal 2001.
29. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Cash and equivalents, brokerage receivables, net and brokerage payables —Fair value is estimated to be carrying value.
Available - for-sale investment securities including mortgage-backed and trading securities —Fair value is estimated by using quoted market
prices for most securities. For illiquid securities, market prices are estimated by obtaining market price quotes on similar liquid securities and
adjusting the price to reflect differences between the two securities, such as credit risk, liquidity, term coupon, payment characteristics and other
information.
Loans receivable and loans held-for-sale, net— For certain residential mortgage loans, fair value is estimated using quoted market prices for
similar types of products. The fair value of certain other types of loans is estimated using quoted market prices for securities backed by similar
loans. The fair value for loans that could not be reasonably established using the previous two methods was estimated by discounting future
cash flows using current rates for similar loans. Management adjusts the discount rate to reflect the individual characteristics of the loan, such
as credit risk, coupon, term, payment characteristics and the liquidity of the secondary market for these types of loans. The fair value for certain
consumer loans was calculated using a discounted cash flow model incorporating prepayment and loss curves for the specific product type.
Loans were valued in buckets based on rate and term with the discount rate applied to each bucket derived from the swap curve. Loss and
prepayment curves were calculated using past performance of similar credit quality originations by the same company as a basis.
Deposits —For passbook savings, checking and money market accounts, fair value is estimated to be carrying value. For fixed maturity
certificates of deposit, fair value is estimated by discounting future cash flows at the currently offered rates for deposits of similar remaining
maturities.
Borrowings —For adjustable rate borrowings, fair value is estimated to be carrying value. For fixed rate borrowings, fair value is estimated by
discounting future cash flows at the currently offered rates for fixed-rate borrowings of similar remaining maturities.
Securities sold under agreements to repurchase —Fair value is estimated to be the carrying value as the rates on these borrowings reset
regularly.
Subordinated notes— Fair value is estimated using quoted market prices.
FHLB stock —Cost is considered to be a reasonable estimate of fair value because the FHLB has historically redeemed these securities at cost.
Financial derivatives and off-balance instruments —The fair value of financial derivatives and off-balance sheet instruments is the amount the
Company would pay or receive to terminate the agreement as determined from quoted market prices.
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