eTrade 2005 Annual Report Download - page 146

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result of increased bankruptcy filings as customers declared bankruptcy ahead of the new bankruptcy laws in October 2005. We do not
anticipate that the 2005 level of credit card charge-offs will continue. The increase in net charge-offs was also due to growth in loans
receivable and specific events affecting customer behavior during the period and not indicative of a decline in credit quality.
We classify loans as nonperforming when full and timely collection of interest or principal becomes uncertain or when they are 90 days
past due. The following is the relative breakout of nonperforming loans (in thousands):
December31,
2005
2004
First mortgage loans, secured by one-to four-family residences
$
18,067
$
11,029
HELOC and second mortgage
9,568
2,755
Credit card
2,858
2,999
RV
2,826
1,416
Other
1,335
1,756
Total nonperforming loans
$
34,654
$
19,955
If the Company’s nonperforming loans at December31, 2005, had been performing in accordance with their terms, the Company would
have recorded additional interest income of approximately $0.8 million, $1.0 million and $1.1 million in 2005, 2004 and 2003, respectively.
During 2005, we recognized $1.0 million in interest on loans that were in nonperforming status at December31, 2005. At December31,
2005 and 2004, there were no commitments to lend additional funds to any of these borrowers.
NOTE 8—ASSET SECURITIZATION
Collateralized Debt Obligations
On December1, 2005, the Company and an unrelated financial advisor transferred asset-backed securities to E*TRADE ABS CDO IV,
Ltd. (“CDO IV”.) The Company utilized a warehouse line to purchase the asset-backed securities that were sold to CDO IV. As of
December 31, 2005, 92% of the pool of underlying securities had been transferred into CDO IV. Additional purchases of asset-backed
securities were made in open market transactions and transferred to CDO IV in January and February 2006. In prior years, the Company
transferred asset-backed securities to E*TRADE ABS CDO III, Ltd. (“CDO III”), E*TRADE ABS CDO II, Ltd. (“CDO II”) and
E*TRADE ABS CDO I, Ltd. (“CDO I”.) Asset-backed securities were also transferred to CDO III by an unrelated financial advisor.
Concurrent with these transfers, the respective CDOs sold beneficial interests to independent investors in the form of senior and
subordinated notes and preference shares, collateralized by the asset-backed securities. Neither the CDOs themselves nor the
investors in the beneficial interests sold by the CDOs have recourse to the Company. CDO I, II and III are qualifying special purpose
entities as defined in SFAS No.140, and, as such, are not required to be consolidated in the Company’s consolidated financial
statements.
CDO IV is not a qualified special purpose entity but rather a special purpose entity, as the Company has been appointed by the CDO
to actively manage the collateral of the CDO. The transaction was accounted for as a sale in accordance with SFAS No.140. The CDO
IV transaction differs from the previous three CDO transactions in that it is a managed deal whereby the portfolio manager (E*TRADE
Global Asset Management (“ETGAM”)) is appointed to actively manage the collateral of the CDO as opposed to a static deal where
the collateral is fixed throughout the life of the CDO. Because CDO IV is a managed deal, it is a special purpose entity and not a
qualified special purpose entity.
The Company reviewed CDO IV to determine if consolidation was necessary under the requirements of FIN 46R. The calculation of the
CDO’s beneficial interests indicated that ETGAM was not the recipient of the
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2006. EDGAR Online, Inc.