eTrade 2006 Annual Report Download - page 87

with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities and EITF 99-20 and are
included in the available-for-sale mortgage-backed and investment securities in the consolidated balance sheet.
Loans Held-for-Sale—Loans held-for-sale consist of mortgages acquired and loans originated by the
Company 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 gain (loss) on sales of loans
held-for-sale and are not accreted or amortized.
Brokerage Receivables, Net and Payables—Brokerage receivables, net represent credit extended to
customers to finance their purchases of securities by borrowing against securities they currently own, as well as
commission receivables from customers upon settlement of their trades. Receivables from non-customers
represent credit extended to principal officers and directors of the Company to finance their purchase of
securities by borrowing against securities owned by them. Brokerage receivables are recorded net of allowance
for doubtful accounts. Securities owned by customers and non-customers are held as collateral for amounts due
on brokerage receivables, the value of which is not reflected in the consolidated balance sheet. In many cases, the
Company is permitted to sell or repledge these securities held as collateral and use the securities to enter into
securities lending transactions, to collateralize borrowings or for delivery to counterparties to cover customer
short positions. Receivables from brokers, dealers and clearing organizations result from the Company’s stock
borrowing activities.
Brokerage payables include payables to customers, non-customers, brokers, dealers and clearing
organizations. Brokerage payables to customers and non-customers represent credit balances in customer
accounts arising from deposits of funds and sales of securities, also referred to as free credit balances, and other
funds pending completion of securities transactions. The Company pays interest on certain free credit balances.
Payables to brokers, dealers and clearing organizations also result from the Company’s stock lending activities.
Deposits paid for securities borrowed and deposits received for securities loaned are recorded at the amount
of cash collateral advanced or received, which are included in brokerage receivables, net and brokerage payables,
respectively, on the consolidated balance sheet. Deposits paid for securities borrowed transactions require the
Company to deposit cash with the counterparty. This cash is included in cash and investments required to be
segregated under federal or other regulations. With respect to deposits received for securities loaned, the
Company receives collateral in the form of cash in an amount generally in excess of the market value of the
securities loaned. Interest income and interest expense are recorded on an accrual basis. The Company monitors
the market value of the securities borrowed and loaned on a daily basis, with additional collateral obtained or
refunded, as necessary.
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 actual prepayments. The Company
classifies loans as nonperforming when full and timely collection of interest or principal becomes uncertain or
when they are 90 days past due. Interest previously accrued, but not collected, 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 the time of repossession. HELOCs are
84