eTrade 2012 Annual Report Download - page 132

The fair value measurement techniques for financial instruments not carried at fair value on the consolidated
balance sheet at December 31, 2012 and 2011 are summarized as follows:
Cash and equivalents, cash required to be segregated under federal or other regulations, margin
receivables and customer payables—Fair value is estimated to be carrying value.
Investment in FHLB stock—FHLB stock is carried at cost, which is considered to be a reasonable estimate
of fair value.
Held-to-maturity securities—The held-to-maturity securities portfolio included agency mortgage-backed
securities and CMOs, agency debentures, and agency debt securities. The fair value of agency mortgage-backed
securities is determined using market and income approaches with quoted market prices, recent market
transactions and spread data for similar instruments. The fair value of agency CMOs and agency debt securities is
determined using market and income approaches with the Company’s own trading activities for identical or
similar instruments. The fair value of agency debentures is based on quoted market prices that were derived from
assumptions observable in the marketplace.
Loans receivable, net—Fair value is estimated using a discounted cash flow model. Loans are differentiated
based on their individual portfolio characteristics, such as product classification, loan category, pricing features
and remaining maturity. Assumptions for expected losses, prepayments and discount rates are adjusted to reflect
the individual characteristics of the loans, such as credit risk, coupon, term, and payment characteristics, as well
as the secondary market conditions for these types of loans. There was limited or no observable market data for
the home equity and one- to four-family loan portfolios, which indicates that the market for these types of loans
is considered to be inactive. Given the limited market data, these fair value measurements cannot be determined
with precision and changes in the underlying assumptions used, including discount rates, could significantly
affect the results of current or future fair value estimates. In addition, the amount that would be realized in a
forced liquidation, an actual sale or immediate settlement could be significantly lower than both the carrying
value and the estimated fair value of the portfolio.
Deposits—Fair value is the amount payable on demand at the reporting date for sweep deposits, complete
savings deposits, other money market and savings deposits and checking deposits. For certificates of deposit and
brokered certificates of deposit, fair value is estimated by discounting future cash flows using discount factors
derived from current observable rates implied for other similar instruments with similar remaining maturities.
Securities sold under agreements to repurchase—Fair value is determined by discounting future cash flows
using discount factors derived from current observable rates implied for other similar instruments with similar
remaining maturities.
FHLB advances and other borrowings—Fair value for FHLB advances is estimated by discounting future
cash flows using discount factors derived from current observable rates implied for similar instruments with
similar remaining maturities. For subordinated debentures, fair value is estimated by discounting future cash
flows at the rate implied by dealer pricing quotes. For margin collateral, overnight and other short-term
borrowings, fair value approximates carrying value.
Corporate debt—Fair value is estimated using dealer pricing quotes. The fair value of the non-interest-
bearing convertible debentures is directly correlated to the intrinsic value of the Company’s underlying stock. As
the price of the Company’s stock increases relative to the conversion price, the fair value of the convertible
debentures increases.
Fair Value of Commitments and Contingencies
In the normal course of business, the Company makes various commitments to extend credit and incur
contingent liabilities that are not reflected in the consolidated balance sheet. Changes in the economy or interest
rates may influence the impact that these commitments and contingencies have on the Company in the future.
The Company does not estimate the fair value of those commitments. The Company has the right to cancel these
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