eTrade 2004 Annual Report Download - page 76

Table of Contents
Index to Financial Statements
During 2004 and 2003, the Bank realized losses from the sales of trading securities of $0.7 million and $21.5 million, respectively, and
recognized a $3.9 million gain in 2002. In addition, the Bank had unrealized trading asset appreciation of $2.5 million and $4.8 million in 2004
and 2003, respectively, and $0.9 million unrealized depreciation on these assets in 2002. The Company’
s brokerage operations realized gains of
$102.0 million, $102.8 million and $94.4 million in 2004, 2003 and 2002, respectively. During 2004 and 2003, the brokerage’s trading assets
did not appreciate or depreciate significantly. However, the trading assets held by our brokerage operations resulted in a $0.1 million
depreciation loss in 2002.
Available-for-Sale Mortgage-Backed and Investment Securities —The Company classified its debt, mortgage-backed securities and
marketable equity securities as either trading or available-for-sale. None of the Company’s mortgage-backed or investment securities were
classified as held-to-maturity at December 31, 2004 or 2003.
Available-for-sale securities consist of mortgage-backed securities, asset-backed securities, corporate bonds, municipal bonds, publicly
traded equity securities, retained interests from securitizations and other debt securities. Securities classified as available-for-sale are carried at
fair value, with the unrealized gains and losses reflected as a component of accumulated other comprehensive income (“AOCI”), net of tax.
Fair value is based on quoted market prices, when available. For illiquid securities, fair value is 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. Realized and unrealized gains or losses on available-for-sale securities, except for publicly
traded equity securities, are computed using the specific identification cost method. Amortization or accretion of premiums and discounts are
recognized in interest income using the interest method over the expected life of the security. Realized and unrealized gains or losses on
publicly traded equity securities are computed using the average cost method. Realized gains and losses and declines in fair value judged to be
other-than-temporary are included in gain on sales of loans held-for-sale and securities, net for the Company’s banking operations; other
amounts are included in gain (loss) on sale and impairment of investments. Interest earned is included in banking interest income for banking
operations or corporate interest income for corporate investments.
The Company reviews all securities with unrealized losses for other-than-
temporary impairment at each balance sheet date. The Company
considers market value of equity securities below the Company’s cost basis, for a period of greater than six months, an indication of other-than-
temporary impairment, unless there are other indicators that would cause us to consider an impairment sooner. The Company conducts a
detailed credit review of any security with potential for other-than-temporary impairment. In addition, the Company reviews any security in
which publicly available information indicates a significant credit concern with the issuer.
In addition, impairment of mortgage-backed and asset-backed securities is evaluated in accordance with the Consensus of the Emerging
Issues Task Force (“EITF”) 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets which requires a two-step test on certain mortgage-backed and asset-backed securities to determine if other-than-
temporary impairment has occurred. Specifically, impairment is recognized when the security’s fair value is less than its amortized cost and if
the current present value of estimated cash flows has decreased since the last periodic estimate. If the security fails both tests, other-than-
temporary impairment has occurred and the Company writes the security down to fair value.
Asset Securitization and Retained Interests —
An asset securitization involves the transfer of financial assets to another entity in exchange
for cash and/or beneficial interests in the assets transferred. Asset transfers in which the Company surrenders control over the financial assets
are accounted for as sales to the extent that consideration, other than beneficial interests in the transferred assets, is received in the exchange in
accordance with SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities . The carrying
amount of the assets transferred is allocated between the assets sold in these transactions and the retained beneficial interests, based on their
relative fair values at the date of the transfer. For transactions managed by the Bank, the Company records gain or loss for the difference
between the allocated carrying
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