eTrade 2006 Annual Report Download - page 112
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NOTE 10—SERVICING RIGHTS
Included in other assets in the consolidated balance sheet are servicing assets which are recognized when the
Company sells a loan and retains the related servicing rights. The servicing right is initially recorded at its
allocated cost basis based on the relative fair value of the loan sold and the servicing retained at the date of the
sale in accordance with SFAS No. 140. The fair value of the servicing retained is estimated based on market
quotes for similar servicing assets. Servicing assets are amortized in proportion to and over the period of
estimated net servicing income. The Company measures impairment by stratifying the servicing assets, based on
the characteristics of the underlying loans and by interest rates. Impairment is recognized through a valuation
allowance for each stratum. The valuation allowance is adjusted to reflect the excess of the servicing assets’ cost
basis for a given stratum over its fair value. Any fair value in excess of the cost basis of servicing assets for a
given stratum is not recognized. The Company estimates the fair value of each stratum based on an industry
standard present value of cash flows model. The Company recognizes both amortization of servicing rights and
impairment charges in service charges and fees in the consolidated statement of income.
The following table shows the net amortized cost of the Company’s servicing rights (dollars in thousands):
Year Ended December 31,
2006 2005
Servicing assets:
Balance beginning of period $17,300 $29,659
Purchases (sales)(1) — (4,118)
Amortization of servicing rights (3,857) (8,241)
Balance end of period 13,443 17,300
Valuation allowance for impairment:
Balance beginning of period (6,274) (8,146)
Valuation adjustment(1) 1,318 1,872
Balance end of period (4,956) (6,274)
Servicing rights, end of period $ 8,487 $11,026
(1) Reflects sale of the Consumer Finance Corporation business in October 2005. The origination and servicing of recreational vehicle and
marine loans were provided by this business.
The most important assumptions used in determining the estimated fair value are anticipated loan
prepayments and discount rates. The Company uses market-based assumptions and confirms the reasonableness
of the Company’s valuation model through management’s quarterly review, analyses of market quotes and
independent broker valuations of the fair value of the servicing rights.
The following summarizes the estimated fair values of the Company’s servicing assets and significant
assumptions (dollars in thousands):
December 31,
2006 2005
Mortgage servicing assets:
Fair value $9,713 $11,930
Constant prepayment rate 21% 19%
Discount rate 6% 4%
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