eTrade 2010 Annual Report Download - page 74

December 31, 2009 AAA AA A BBB
Below
Investment
Grade and
Non-Rated Total
Agency mortgage-backed securities and CMOs $ 8,946.0 $ — $ — $ — $ — $ 8,946.0
Agency debentures 3,928.9 — — — — 3,928.9
Non-agency CMOs 43.6 60.2 129.6 17.2 339.6 590.2
Municipal bonds, corporate bonds and FHLB
stock 214.4 9.5 7.9 — 19.9 251.7
Total $13,132.9 $69.7 $137.5 $17.2 $359.5 $13,716.8
While the vast majority of this portfolio is AAA-rated, we concluded during the year ended December 31,
2010 that approximately $387.3 million of the non-agency CMOs in this portfolio were other-than-temporarily
impaired. As a result of the deterioration in the expected credit performance of the underlying loans in the
securities, they were written down by recording $37.7 million of net impairment during the year ended
December 31, 2010. Further declines in the performance of our non-agency CMO portfolio could result in
additional impairments in future periods.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our
consolidated financial statements, which have been prepared in conformity with GAAP. Note 1–Organization,
Basis of Presentation and Summary of Significant Accounting Policies of Item 8. Financial Statements and
Supplementary Data contains a summary of our significant accounting policies, many of which require the use of
estimates and assumptions. We believe that of our significant accounting policies, the following are noteworthy
because they are based on estimates and assumptions that require complex and subjective judgments by
management. Changes in these estimates or assumptions could materially impact our financial condition and
results of operations.
Allowance for Loan Losses
Description
The allowance for loan losses is management’s estimate of credit losses inherent in our loan portfolio as of
the balance sheet date. In determining the adequacy of the allowance, we perform periodic evaluations of the loan
portfolio and loss forecasting assumptions. As of December 31, 2010, our allowance for loan losses was $1.0
billion on $16.0 billion of total loans receivable designated as held-for-investment.
Judgments
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 allowance
for loan losses is typically equal to management’s estimate of loan charge-offs in the twelve months following
the balance sheet date as well as the estimated charge-offs, including economic concessions to borrowers, over
the estimated remaining life of loans modified in TDRs. The general allowance for loan losses also includes a
specific qualitative component to account for a variety of economic and operational factors, including the
uncertainty of how modified loans will perform over the long term, which we believe may impact our level of
credit losses. Determining the adequacy of the allowance is complex and requires judgment by management
about the effect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio, in light of
the factors then prevailing, may result in significant changes in the allowance for loan losses in future periods.
We evaluate the adequacy of the allowance for loan losses by loan portfolio segment: one- to four-family, home
equity and consumer and other loan portfolios.
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