eTrade 2009 Annual Report Download - page 81

that we do not to intend to sell and it is not more likely than not that we will be required to sell before recovery of
the security’s amortized cost basis, if we do not expect to recover the entire amortized cost basis of the securities,
we will separate OTTI into two components: 1) the amount related to credit loss, recognized in earnings; and 2)
the noncredit portion of OTTI, recognized through other comprehensive income (loss). For the year ended
December 31, 2009, we recognized $89.1 million of net impairment on certain securities in our non-agency CMO
portfolio.
Judgments
Our evaluation of whether we intend to sell an impaired available-for-sale debt security considers whether
management has decided to sell the security as of the balance sheet date. Our evaluation of whether it is more
likely than not that we will be required to sell an impaired available-for-sale debt security before recovery of the
security’s amortized cost basis considers the likelihood of sales that involve legal, regulatory or operational
requirements. For impaired available-for-sale debt securities that we do not to intend to sell and it is not more
likely than not that we will be required to sell before recovery of the security’s amortized cost basis, we use both
qualitative and quantitative valuation measures to evaluate whether we expect to recover the entire amortized
cost basis of the security. We consider all available information relevant to the collectability of the security,
including credit enhancements, security structure, vintage, credit ratings and other relevant collateral
characteristics.
Effects if Actual Results Differ
Determining if a security has other-than-temporary impairment is complex and requires judgment by
management about circumstances that are inherently uncertain. Subsequent evaluations of these securities, in
light of factors then prevailing, may result in additional OTTI in future periods. If all available-for-sale securities
with fair values lower than amortized cost as of December 31, 2009 were other-than-temporarily impaired and
the gross OTTI was recorded through earnings, we would record a pre-tax loss of $304.7 million.
Accounting for Derivative Instruments
Description
We enter into derivative transactions primarily to protect against interest rate risk on the value of certain
assets, liabilities and future cash flows. Accounting for derivatives differs significantly depending on whether a
derivative is designated as a hedge. In order to qualify for hedge accounting treatment, documentation must
indicate the intention to designate the derivative as a hedge of a specific asset or liability or a future cash flow.
Effectiveness of the hedge must be monitored over the life of the derivative.
The majority of derivative transactions outstanding as of December 31, 2009 were cash flow hedges. These
hedges, which include a combination of interest rate swaps, forward-starting swaps and purchased options,
including caps and floors, are used primarily to reduce the variability of future cash flows associated with
existing variable-rate liabilities and assets and forecasted issuances of liabilities. These cash flow hedge
relationships are treated as effective hedges as long as the future issuances of liabilities remain probable and the
hedges continue to meet the requirements of derivatives and hedging accounting guidance. Changes in the fair
value of derivatives that hedge cash flows associated with repurchase agreements, FHLB advances and home
equity lines of credit are reported in accumulated other comprehensive loss as unrealized gains or losses, for both
active and terminated hedges. As of December 31, 2009, we had an unrealized pre-tax loss reported in
accumulated other comprehensive loss of $450.3 million related to cash flow hedges.
Judgments
If the derivatives in these cash flow hedge relationships are determined to be effective hedges, the amounts
in accumulated other comprehensive loss are included in net operating interest income as a yield adjustment
during the same periods in which the related interest on the hedged item affects earnings. If hedge accounting is
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