eTrade 2009 Annual Report Download - page 52

We recognized $89.1 million net impairment during the year ended December 31, 2009 on certain securities
in our non-agency CMO portfolio due to continued deterioration in the expected credit performance of the
underlying loans in the securities. The net impairment included gross OTTI of $232.1 million for the year ended
December 31, 2009. Of the $232.1 million of gross OTTI for the year ended December 31, 2009, $143.0 million
related to the noncredit portion of OTTI, which was recorded through other comprehensive income (loss). We
had net impairment of $95.0 million for the year ended December 31, 2008, which represented the total decline
in the fair value of impaired securities in accordance with the OTTI accounting guidance that was in effect prior
to April 1, 2009.
Provision for loan losses decreased $85.6 million to $1.5 billion for the year ended December 31, 2009
compared to 2008. The provision for loan losses for the year ended December 31, 2009 was due primarily to the
high levels of delinquent loans in our one- to four-family and home equity loan portfolios. We believe the
delinquencies in both of these portfolios were caused by several factors, including: home price depreciation in
key markets; growing inventories of unsold homes; rising foreclosure rates; significant contraction in the
availability of credit; and a general decline in economic growth. In addition, the combined impact of home price
depreciation and the reduction of available credit made it increasingly difficult for borrowers to refinance
existing loans. Although we expect these factors will cause the provision for loan losses to continue at elevated
levels in future periods, the level of provision for loan losses has declined for five consecutive quarters. While we
cannot state with certainty that this trend will continue, we believe it is a positive indicator that our loan portfolio
has continued to stabilize.
Total balance sheet management segment expense decreased slightly to $251.9 million for the year ended
December 31, 2009 compared to 2008. The slight decrease for the year ended December 31, 2009 was due
primarily to lower facility restructuring expense, lower expenses on servicing loans and lower salary expense,
offset by an increase in expenses related to corporate overhead expenses, the majority of which are allocated to
the balance sheet management segment, and an increase in expenses related to real estate owned (“REO”) and
other repossessed assets.
2008 Compared to 2007
Our balance sheet management segment incurred a loss of $1.6 billion for the year ended December 31,
2008. The loss was driven primarily by an increase in our provision for loan losses for our loan portfolio of
$943.6 million to $1.6 billion for the year ended December 31, 2008 compared to 2007.
Net operating interest income decreased 30% to $437.6 million for the year ended December 31, 2008
compared to 2007. The decrease in net operating interest income was due primarily to the decrease in average
enterprise interest-earning assets of 16% to $46.9 billion as of December 31, 2008 compared to 2007.
Balance sheet management commissions revenue decreased to $0.8 million for the year ended December 31,
2008 compared to 2007. The decrease was a result of the exit of our institutional brokerage operations.
Fees and service charges revenue decreased 61% to $8.4 million for the year ended December 31, 2008
compared to 2007. The decrease is primarily the result of a decrease in CDO management fees, which are no
longer a revenue stream due to the sale of our collateral management agreements during the first quarter of 2008.
The total loss on loans and securities, net during year ended December 31, 2008 was due principally to
losses on our preferred stock in Fannie Mae and Freddie Mac, which experienced record price declines and
volatility during the third quarter of 2008. Based upon our concerns about continuing market instability, all of
our positions were liquidated during the third quarter of 2008, resulting in a pre-tax loss of $153.8 million, net of
hedges, that was recognized in loss on trading securities, net.
In addition, we recognized $95.0 million of impairment on certain securities in our CMO portfolio during
the year ended December 31, 2008, which was a result of the deterioration in the expected credit performance of
the underlying loans in the securities. Further declines in the performance of our CMO portfolio could result in
additional impairments in future periods.
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