eTrade 2001 Annual Report Download - page 22

We recorded a net increase of $7.3 million in the allowance for loan losses from December 31, 2000 to December 31, 2001. The
increase resulted from the addition of $4.7 million acquired in an automobile loan purchase and an additional provision of $7.5
million, offset by net charge-offs of $4.9 million. As of December31, 2001, the total allowance for loan losses was $19.9million, of
which $2.1 million represented reserves established by management for probable losses on specific loans.
The general allowance is computed on loans without a specific allowance based on an assessment of loans not specifically reviewed.
Each month, this portfolio is stratified by asset type—one- to four-family, commercial, consumer, etc.—and a range of expected loss
ratios is applied to each type of loan. Expected loss ratios range between 8 basis points and 300 basis points depending upon asset
type, loan-to-value ratio and current market and economic conditions. The expected loss ratios are based on our historical loss
experience, adjusted to reflect industry loss experience as published by the OTS, current market and economic conditions and other
relevant information.
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Also considered in the allowance computation is the positive impact of loans acquired that have a seller or third party credit
enhancement. As of December 31, 2001, total loans receivable included eight pools of credit-enhanced one- to four-family mortgage
loans totaling $20.3 million, or 0.25%, of total gross loans outstanding. Allowances are not provided for loans in which the credit
enhancement amount exceeds the amount of allowances that would otherwise be required. We have purchased certain loans with an
expectation that not all contractual payments of the loan will be collected. Discounts attributable to credit issues are tracked separately
and are not included as a component of the allowance for loan losses.
The loan loss provision recorded for fiscal 2001 was based upon our assessment of the required allowances at December 31, 2001.
The increase in the loan loss provision as compared to fiscal 2000 is principally attributable to the level of charge-offs and the
significant growth in the portfolio. We believe that the combination of our loan loss allowance, net credit discount, and credit
enhancement on certain loan pools is adequate to cover probable losses inherent in our portfolio.
We believe that we have established our existing loss allowances in accordance with accounting principles generally accepted in the
United States of America. However, circumstances may change, and regulators may request us to increase our allowance for losses.
Such an increase could negatively affect our financial condition and earnings. The increase in the allowance for loan losses reflects the
significant increase in the loan portfolio, from $4.2 billion at September 30, 2000 to $8.0 billion at December 31, 2001, the fact that
the Bank purchases, rather than originates in house, the majority of its loans, and the addition of $1.6 billion of automobile and
recreational vehicle loans, which traditionally have a higher loss experience than residential mortgages. Even though our historic
charge-offs are relatively low, $5.6 million in fiscal year 2001, $12,000 for the three months ended December 31, 2000 and $253,000
in fiscal year 2000, we believe the allowances for loan losses, which were $19.9 million (0.25% of total loans) at December 31, 2001
and $10.9 million (0.26% of total loans) at September 30, 2000, were appropriate estimates of the probable losses inherent in the loan
portfolio.
The following table allocates the allowance for loan losses by loan category at the dates indicated. This allocation does not necessarily
restrict the use of the allowance to absorb losses in any other category. The table also shows the percentage of total loans that each
loan category represents.
December 31, 2001 September 30, 2000 September 30, 1999 September 30, 1998 September 30, 1997
2002. EDGAR Online, Inc.