eTrade 2011 Annual Report Download - page 107

net of tax. Realized and unrealized gains or losses on available-for-sale debt securities are computed using the
specific identification method. Interest earned on available-for-sale debt securities is included in operating interest
income. Amortization or accretion of premiums and discounts are also recognized in operating interest income
using the effective interest method over the life of the security. Realized gains and losses on available-for-sale debt
securities, other than OTTI, are included in the gains on loans and securities, net line item. Available-for-sale
securities that have an unrealized loss (impaired securities) are evaluated for OTTI at each balance sheet date.
Held-to-Maturity Securities—Held-to-maturity securities consist of debt securities, primarily residential
mortgage-backed securities. Held-to-maturity securities are carried at amortized cost based on the Company’s
positive intent and ability to hold these securities to maturity. Interest earned on held-to-maturity debt securities
is included in operating interest income. Amortization or accretion of premiums and discounts are also
recognized in operating interest income using the effective interest method over the life of the security.
Held-to-maturity securities that have an unrecognized loss (impaired securities) are evaluated for OTTI at each
balance sheet date in a manner consistent with available-for-sale debt securities.
Margin Receivables—Margin receivables represent credit extended to customers to finance their purchases
of securities by borrowing against securities the customers own. Securities owned by customers are held as
collateral for amounts due on the margin receivables, the value of which is not reflected in the consolidated
balance sheet. In many cases, the Company is permitted to sell or re-pledge 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. The fair value of securities that the Company received as
collateral in connection with margin receivables and securities borrowing activities, where the Company is
permitted to sell or re-pledge the securities, was approximately $6.8 billion and $7.1 billion as of December 31,
2011 and 2010, respectively. Of this amount, $1.3 billion and $1.2 billion had been pledged or sold in connection
with securities loans, bank borrowings and deposits with clearing organizations as of December 31, 2011 and
2010, respectively.
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, also known as loans held for
investment. Loans held for investment are carried at amortized cost adjusted for net charge-offs, allowance for
loan losses, deferred fees or costs on originated loans and unamortized premiums or discounts on purchased
loans. Deferred fees or costs on originated loans and premiums or discounts on purchased loans are recognized in
operating interest income using the effective interest method over the contractual life of the loans and are
adjusted for actual prepayments. The Company’s classes of loans are one- to four-family, home equity and
consumer and other loans.
Nonperforming Loans—The Company classifies loans as nonperforming when they are no longer accruing
interest, which includes loans that are 90 days past due and TDRs that are on nonaccrual status for all classes of
loans. Interest previously accrued, but not collected, is reversed against current income when a loan is placed on
nonaccrual status. Interest payments received on nonperforming loans are recognized on a cash basis in operating
interest income until it is doubtful that full payment will be collected, at which point payments are applied to
principal. The recognition of deferred fees or costs on originated loans and premiums or discounts on purchased
loans in operating interest income is discontinued for nonperforming loans. Nonperforming loans, excluding
loans that were modified as a TDR, return to accrual status when the loan becomes less than 90 days past due.
Loan losses are recognized when it is probable that a loss has been incurred. The Company’s charge-off
policy for both one- to four-family and home equity loans is to assess the value of the property when the loan has
been delinquent for 180 days or it is in bankruptcy, regardless of whether or not the property is in foreclosure,
and charge-off the amount of the loan balance in excess of the estimated current value of the underlying property
less estimated costs to sell. Closed-end consumer loans are charged-off when the loan has been delinquent for
120 days or when it is determined that collection is not probable.
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