eTrade 2007 Annual Report Download - page 92

required to be segregated under Federal or other regulations to be cash equivalents. Cash and equivalents are
composed of interest-bearing and non-interest-bearing deposits, certificates of deposit, commercial paper, funds
due from banks and Federal funds. Cash and equivalents included $54.2 million and $4.9 million at
December 31, 2007 and 2006, respectively, of overnight cash deposits that the Company is required to maintain
with the Federal Reserve Bank.
Cash and Investments Required to be Segregated Under Federal or Other Regulations—Cash and
investments required to be segregated under Federal or other regulations consist primarily of interest-bearing
cash accounts. Certain cash balances, related to collateralized financing transactions by our brokerage
subsidiaries, are required to be segregated for the exclusive benefit of our brokerage customers.
Trading Securities—Certain trading securities and financial derivative instruments, that are not designated
for hedge accounting, are bought and held principally for the purpose of selling them in the near term and are
carried at estimated fair value based on quoted market prices. Realized and unrealized gains and losses on
securities classified as trading held by the Bank are included in the gain (loss) of loans and securities, net line
item and are derived using the specific identification cost method. Realized and unrealized gains and losses on
trading securities held by broker-dealers are recorded in the principal transactions line item and are also derived
by the specific identification method.
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, 2007
or 2006.
Available-for-sale securities consist of mortgage-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 quotes 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. Realized and unrealized gains or losses on publicly traded equity securities
are computed using the average cost method. Amortization or accretion of premiums and discounts are
recognized in interest income using the interest method over the life of the security. Realized gains and losses
and declines in fair value judged to be other-than-temporary are included in gain (loss) on loans and securities,
net; other amounts relating to corporate investments are included in gain on sales of investments, net line item in
the consolidated statement of income (loss). Interest earned is included in operating interest income for banking,
lending and balance sheet management operations or corporate interest income for corporate investments.
The Company regularly analyzes certain available-for-sale investments for other-than-temporary
impairment when the fair value of the investment is lower than its book value. The Company’s methodology for
determining impairment involves projecting cash flows relating to each investment and using assumptions as to
future prepayment speeds, losses and loss severities over the life of the underlying collateral pool. Assumptions
about future performance are derived from actual performance to date and the Company’s view on how the
collateral will perform in the future. In projecting future performance, the Company incorporates the views of
industry analysts, rating agencies and the management of the issuer, along with its own independent analysis of
the issuer of the securities, the servicer, the economy and the relevant sector as a whole. If the Company
determines impairment is other-than-temporary, it reduces the recorded book value of the investment by the
amount of the impairment and recognizes a realized loss on the investment. The Company does not, however,
adjust the recorded book value for declines in fair value that it believes are temporary. Management continues to
monitor and evaluate these securities closely for impairment that is other-than-temporary.
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