eTrade 2006 Annual Report Download - page 55

Allowances for Loan Losses and Uncollectible Margin Receivables
Description
The allowance for loan losses is management’s estimate of credit losses inherent in our loan portfolio as of
the balance sheet date. At December 31, 2006, our allowance for loan losses was $67.6 million on $26.4 billion
of loans designated as held-for-investment. In addition to our banking loans, we extend credit to brokerage
customers in the form of margin receivables. At December 31, 2006, margin accounts had approximately
$6.9 billion in outstanding margin receivables for which we provided an allowance for uncollectible margin
receivables of $19.9 million.
Judgments
The estimate of the allowance is based on a variety of factors, including the composition and quality of the
portfolio, delinquency levels and trends, expected losses for the next twelve months, current and historical
charge-off and loss experience, current industry charge-off and loss experience, the condition of the real estate
market and geographic concentrations within the loan portfolio, the interest rate climate as it affects adjustable-
rate loans and general economic conditions. Determining the adequacy of the allowance is complex and requires
judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the
loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan
losses in future periods.
Effects if Actual Results Differ
Although we have considerable experience in performing these reviews, if management’s underlying
assumptions prove to be inaccurate or if significant unanticipated changes to the national or regional economies
occur, the allowance for loan losses could be insufficient to cover actual losses. If our estimates understate
probable losses inherent in the portfolio, this would result in additional expense. A 10% increase or decrease in
the allowances would result in a $6.8 million charge or credit to income, respectively.
Classification and Valuation of Certain Investments
Description
We generally classify our investments in debt instruments (including corporate, government and municipal
bonds), mortgage-backed securities, asset-backed securities and marketable equity securities as either
available-for-sale or trading. We have not classified any investments as held-to-maturity. The classification of an
investment determines its accounting treatment. Both unrealized and realized gains and losses on trading
securities held by our banking subsidiaries are recognized in gain on sales of loans and securities, net. Securities
held by our brokerage subsidiaries are for market-making purposes and gains and losses are recorded as principal
transactions revenue. Unrealized gains and losses on available-for-sale securities are included in accumulated
other comprehensive income. Declines in fair value that we believe to be other-than-temporary are included in
gain on sales of loans and securities, net for our banking investments and gain on sales and impairment of
investments for our brokerage (other than those held for market-making purposes) and corporate investments.
We have investments in certain publicly-traded and privately-held companies, which we evaluate for other-than-
temporary declines in market value. For the years ended December 31, 2006, 2005 and 2004, we recognized
$2.8 million, $40.3 million and $18.4 million, respectively, of losses from other-than-temporary declines in
market value related to our investments.
Judgments
When possible, the fair value of securities is determined by obtaining quoted market prices. For illiquid
securities, fair value is estimated by obtaining market price quotes on similar liquid securities and adjusting the
price to reflect differences. For securities where market quotes and similar securities are not available, we use
discounted cash flows. We also make estimates about the fair value of investments and the timing for recognizing
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