eTrade 2012 Annual Report Download - page 124

date. The fair value measurement accounting guidance describes the following three levels used to classify fair
value measurements:
• Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that are
accessible by the Company.
• Level 2—Quoted prices in markets that are not active or for which all significant inputs are observable,
either directly or indirectly.
• Level 3—Unobservable inputs that are significant to the fair value of the assets or liabilities.
The availability of observable inputs can vary and in certain cases, the inputs used to measure fair value
may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is
based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of
the significance of a particular input to a fair value measurement requires judgment and consideration of factors
specific to the asset or liability.
Recurring Fair Value Measurement Techniques
U.S. Treasury Securities and Agency Debentures
The fair value measurements of U.S. Treasury securities were classified as Level 1 of the fair value
hierarchy as they were based on quoted market prices in active markets. The fair value measurements of agency
debentures were classified as Level 2 of the fair value hierarchy as they were based on quoted market prices
observable in the marketplace.
Residential Mortgage-backed Securities
The Company’s residential mortgage-backed securities portfolio was comprised of agency mortgage-backed
securities and CMOs, which represented the majority of the portfolio, and non-agency CMOs. Agency
mortgage-backed securities and CMOs are guaranteed by U.S. government sponsored and federal agencies. The
majority of the Company’s non-agency CMOs were backed by first lien mortgages and were below investment
grade or non-rated as of December 31, 2012. The weighted average coupon rates for the residential
mortgage-backed securities as of December 31, 2012 are shown in the following table:
Weighted Average
Coupon Rate
Agency mortgage-backed securities 3.18 %
Agency CMOs 3.43 %
Non-agency CMOs 3.18 %
The fair value of agency mortgage-backed securities was determined using a market approach with quoted
market prices, recent market transactions and spread data for similar instruments. The fair value of agency CMOs
was determined using market and income approaches with the Company’s own trading activities for identical or
similar instruments. Agency mortgage-backed securities and CMOs were categorized in Level 2 of the fair value
hierarchy.
Non-agency CMOs were valued using market and income approaches with market observable data,
including recent market transactions when available. The Company also utilized a pricing service to corroborate
the market observability of the Company’s inputs used in the fair value measurements. The valuations of
non-agency CMOs reflect the Company’s best estimate of what market participants would consider in pricing the
financial instruments.
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