eTrade 2003 Annual Report Download - page 114

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Table of Contents
Index to Financial Statements
NOTE 27—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 because 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 which is equal to the carrying
value.
Commitments to purchase and originate loans —The fair value is estimated by calculating the net present value of the anticipated cash
flows associated with IRLCs.
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