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Table of Contents
Index to Financial Statements
Other-Than-Temporary Impairment of Investments
The following table shows the fair value and unrealized losses on investments, aggregated by investment category and the length of time
that individual securities have been in a continuous unrealized loss position at December 31, 2003 (in thousands):
The Company regularly analyzes certain available-for-sale investments for other-than-temporary impairment when the fair value of the
investment is lower than its book value. The Company’s methodology for determining impairment involves projecting cash flows relating to
each investment, using assumptions as to future prepayment speeds, losses and loss severities over the life of the underlying collateral pool.
Assumptions for future performance are derived from the actual performance to date, and the Company’s view on how the collateral will
perform in the future. In projecting future performance, the Company incorporates the views of industry analysts, rating agencies and the
management of the issuer, along with its own independent analysis of the issuer of the securities, the servicer, the economy and the relevant
sector as a whole. If the Company determines an impairment is other-than-temporary, it reduces the recorded book value of the investment by
the amount of the impairment and recognizes an unrealized loss on the investment. The Company does not, however, adjust the recorded book
value for declines in fair value that it believes are temporary.
Mortgage- and asset-backed securities that have both an unrealized loss and are rated below “AA”
by at least half of the agencies that rate
the securities are evaluated for impairment in accordance with EITF 99-
20. Accordingly, the Company recognizes impairment when the present
value of a security’s anticipated cash flows declines below the last periodic estimate. At December 31, 2003, the Company evaluated mortgage-
and asset-backed securities that had an aggregate fair value of $106.9 million, an aggregate cost of $122.8 million and an unrealized loss of
$16.0 million for other-than-temporary impairment. Based on its analysis, management concluded that the decline in fair value for all but one
of these securities was temporary. The Company recorded a $2.2 million loss on the one impaired investment that had a carrying value of $4.4
million and a market value of $2.2 million. The consolidated statements of operations included this loss in gain on sales of loans held-for sale
and securities, net.
Publicly Traded Equity Securities
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Mortgage
-
backed securities:
Backed by Federal agencies
$
4,936,947
$
137,227
$
205,167
$
6,584
$
5,142,114
$
143,811
Other
1,140,248
13,448
215,459
5,731
1,355,707
19,179
Asset
-
backed securities
239,808
3,387
63,585
12,154
303,393
15,541
Corporate bonds
429
39
104,755
6,581
105,184
6,620
Publicly traded equity securities
19,467
1,533
—
—
19,467
1,533
Other investments
78,730
6,581
1,644
9
80,374
6,590
Total temporarily impaired securities
$
6,415,629
$
162,215
$
590,610
$
31,059
$
7,006,239
$
193,274
At December 31, 2003, publicly traded equity securities included preferred stock of $136.3 million in Fannie Mae and $24.6 million in
Freddie Mac, common stock of $40.8 million, including $38.4 million in Softbank Investment Corporation (“SBI”) received in 2003 in
exchange for the Company’s investment in E*TRADE Japan K.K. and investments of $0.1 million at December 31, 2003 and 2002 in mutual
funds in which the Company is the sponsor. The Company recognized a $29.5 million gain for the fair value of the SBI shares received in
excess of its book value in E*TRADE Japan K.K. on June 2, 2003, the exchange date. Additionally, during 2003, the Company sold shares of
SBI resulting in a gain of $122.2 million. At December 31, 2003, the Company’s ownership in SBI was 9.07% and the fair value of its
investment in SBI was $216.8 million, including a gross unrealized gain of $178.4 million.
64