eTrade 2004 Annual Report Download - page 77

Table of Contents
Index to Financial Statements
amount of the asset sold and the net cash proceeds received. These gains or losses are recorded, as appropriate in either gain on sales of loans
held-for-sale and securities, net or in gain on sales of originated loans. Fair value is determined based on quoted market prices, if available.
Generally quoted market prices are not available for beneficial interests; therefore, the Company estimates the fair value based on the present
value of the associated expected future cash flows. In determining the present value of the associated expected future cash flows, management
is required to make estimates and assumptions. The key estimates and assumptions include future default rates, credit losses, discount rates,
prepayment speeds and collateral repayment rates. Retained beneficial interests are accounted for in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities
and EITF 99-20.
Loans Receivable, net —Loans receivable, net consists of real estate and consumer loans that management has the intent and ability to
hold for the foreseeable future or until maturity. These loans are carried at amortized cost adjusted for charge-offs, net allowance for loan
losses, deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan fees and certain direct loan
origination costs are deferred and the net fee or cost is recognized in interest income using the interest method over the contractual life of the
loans. Premiums and discounts on purchased loans are amortized or accreted into income using the interest method over the remaining period
to contractual maturity and adjusted for anticipated prepayments. Nonperforming loans consist of loans for which interest is no longer being
accrued and troubled loans that have been restructured in order to increase the opportunity to collect amounts due on the loan. All loans at least
90 days past due and other loans considered uncollectible are placed on nonaccrual status and are considered nonperforming. Interest
previously accrued, but not collected, on nonperforming loans is reversed against current income when a loan is placed on nonaccrual status
and is considered nonperforming. Accretion of deferred fees is discontinued for nonperforming loans. Payments received on nonperforming
loans are recognized as interest income when the loan is considered collectible and applied to principal when it is doubtful that full payment
will be collected. Real estate loans are generally charged off to the extent that the carrying value of the loan exceeds the estimated net
realizable value of the underlying collateral at 180 days past due. Consumer loans are charged off to the extent the carrying value of the loan
exceeds the estimated net realizable value of the underlying collateral when the loan becomes 120 days past due.
Allowance for Loan Losses —The allowance for loan losses is maintained at a level that management believes is at least equal to the
probable losses inherent in the Bank’s held-for-investment loan portfolio. Loan losses are charged and recoveries are credited to the allowance
for loan losses. In determining the level of the allowance, the Company evaluates its real estate and consumer loans using expected loss ratios.
The expected loss ratios are determined based on historical charge-off experience, industry loss experience and current market and economic
conditions. Management evaluates these factors each month and adjusts the allowance for loan losses, as necessary. Inherently, the
determination of the allowance for losses is subjective, as such management must make significant estimates, including the amounts and timing
of losses and current market and economic conditions.
Loans Held-for-Sale, net —Loans held-for-sale, net consists of mortgages acquired by the Bank and loans originated by both E*TRADE
Consumer Finance and E*TRADE Mortgage that are intended for sale in the secondary market. These loans are carried at the lower of cost or
estimated fair value, as determined on an aggregate basis, based on quoted market price for loans with similar characteristics. Net unrealized
losses are recognized in a valuation allowance by charges to income. Premiums and discounts on loans held-for-sale are deferred and
recognized as part of loss or gain on sale and are not accreted or amortized.
Property and Equipment, net —Property and equipment are carried at cost and depreciated on a straight-line basis over their estimated
useful lives, generally three to ten years. Leasehold improvements are stated at cost and are amortized over the lesser of their estimated useful
lives or lease terms. Buildings are depreciated over forty years. Land is carried at cost.
In accordance with Statement of Position (“SOP”) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
, the cost of internally developed software is capitalized and included in
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