eTrade 2010 Annual Report Download - page 108

and charge-off the amount of the loan balance in excess of the estimated current property value less costs to sell.
Credit cards are charged-off when collection is not probable or the loan has been delinquent for 180 days.
Closed-end consumer loans are charged-off when the loan has been delinquent for 120 days or when it is
determined that collection is not probable.
Modified loans in which economic concessions were granted to borrowers experiencing financial difficulty
are considered TDRs. TDRs are accounted for as nonaccrual loans at the time of modification and return to
accrual status after six consecutive payments are made in accordance with the modified terms.
Allowance for Loan Losses—The allowance for loan losses is management’s estimate of credit losses
inherent in the Company’s loan portfolio as of the balance sheet date.
For loans that are not TDRs, the Company established a general allowance that is assessed in accordance
with the loss contingencies accounting guidance. The estimate of the allowance for loan losses is based on a
variety of quantitative and qualitative factors, including the composition and quality of the portfolio; delinquency
levels and trends; current and historical charge-off and loss experience; current industry charge-off and loss
experience; our historical loss mitigation experience; the condition of the real estate market and geographic
concentrations within the loan portfolio; the interest rate climate; the overall availability of housing credit; and
general economic conditions. The Company’s one- to four-family and home equity loan portfolios are separated
into risk segments based on key risk factors, which include but are not limited to loan type, loan acquisition
channel, documentation type, LTV/CLTV ratio and borrowers’ credit scores. Based upon the segmentation,
probable losses are determined with expected loss rates in each segment. The additional protection provided by
mortgage insurance has been factored into the expected loss on defaulted mortgage loans. The expected recovery
from the liquidation of foreclosed real estate and expected recoveries from loan sellers related to contractual
guarantees are also factored into the expected loss on defaulted mortgage loans. For the consumer and other loan
portfolio, management establishes loss estimates for each consumer portfolio based on credit characteristics and
observation of the existing markets. The expected recoveries from the sale of repossessed collateral are factored
into the expected loss on defaulted consumer loans based on current liquidation experience. Loan losses are
charged and recoveries are credited to the allowance for loan losses.
The allowance for loan losses is typically equal to management’s estimate of loan charge-offs in the twelve
months following the balance sheet date. Management believes this level is representative of probable losses
inherent in the loan portfolio at the balance sheet date. The general allowance for loan losses also included a
specific qualitative component to account for a variety of economic and operational factors that are not directly
considered in the quantitative loss model but are factors the Company believes may impact the level of credit
losses. Examples of these economic and operational factors are the current level of unemployment and the
limited historical charge-off and loss experience on modified loans. As of December 31, 2010, this qualitative
component increased from 5% to 15% of the general allowance for loan losses, resulting in an increase of $58.1
million to $87.2 million, and was applied by loan portfolio segment. The increase in the qualitative component
was a result of a higher concentration of modified loans in the Company’s portfolio and the uncertainty of how
modified loans will perform over the long term.
For modified loans accounted for as TDRs, the Company establishes a specific allowance. The impairment
of a loan is measured using a discounted cash flow analysis. A specific allowance is established to the extent that
the recorded investment exceeds the discounted cash flows of a TDR with a corresponding charge to the
provision for loan losses. The specific allowance for these individually impaired loans represents the expected
loss over the remaining life of the loan, including the economic concession to the borrower.
Investment in FHLB stock—The Company is a member of, and owns capital stock in, the FHLB system. The
FHLB provides the Company with reserve credit capacity and authorizes advances based on the security of
pledged home mortgages and other assets—principally securities that are obligations of, or guaranteed by, the
U.S. Government—provided the Company meets certain creditworthiness standards. FHLB advances, included
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