eTrade 2011 Annual Report Download - page 109

loans. The qualitative component for the consumer and other loan portfolio was 15% of the general allowance at
December 31, 2011 and 2010. The qualitative component for the one- to four-family and home equity loan
portfolios increased from 15% of the general allowance for loan losses at December 31, 2010 to 35% at
December 31, 2011. The total qualitative factor was $124 million as of December 31, 2011. As the Company
transitions from the OTS to the OCC, it is evaluating programs and practices that were designed in accordance with
guidance from the OTS. The Company is working to align certain policies and procedures to the guidance from the
OCC and has suspended certain modification programs that will require changes. The Company increased the
qualitative reserve in 2011 to reflect additional estimated losses during the period of reduced activity in our
modification programs, as well as uncertainty around certain loans modified under our previous programs.
For modified loans accounted for as TDRs, the Company established a specific allowance. The specific
allowance for TDRs factors in the historical default rate of an individual loan before being modified as a TDR in
the discounted cash flow analysis in order to determine that specific loan’s expected impairment. For both of the
one- to four-family and home equity loan portfolio segments, each loan’s individual default experience is
analyzed in addition to the performance observed in similar seasoned TDRs in the Company’s overall TDR
program when calculating the specific allowance. 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 provision for
loan losses. The specific allowance for these individually impaired loans represents the forecasted losses over the
estimated 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 in
the FHLB advances and other borrowings line item, is a wholesale funding source of E*TRADE Bank. As a
condition of its membership in the FHLB, the Company is required to maintain a FHLB stock investment. The
Company accounts for its investment in FHLB stock as a cost method investment.
Property and Equipment, Net—Property and equipment are carried at cost and depreciated on a straight-line
basis over their estimated useful lives, generally three to seven years. Leasehold improvements are amortized
over the lesser of their estimated useful lives or lease terms. Buildings are depreciated over the lesser of their
estimated useful lives or forty years. Land is carried at cost. An impairment loss is recognized only if the
carrying amount of the long-lived asset is not recoverable and exceeds its fair value.
The costs of internally developed software that qualify for capitalization are included in the property and
equipment, net line item. For qualifying internal-use software costs, capitalization begins when the conceptual
formulation, design and testing of possible software project alternatives are complete and management authorizes
and commits to funding the project. The Company does not capitalize pilot projects and projects where it
believes that future economic benefits are less than probable. Technology development costs incurred in the
development and enhancement of software used in connection with services provided by the Company that do
not otherwise qualify for capitalization treatment are expensed as incurred.
Goodwill and Other Intangibles, Net—Goodwill and other intangibles, net represents the excess of the
purchase price over the fair value of net tangible assets acquired through the Company’s business combinations.
The Company tests goodwill and other intangible assets for impairment on at least an annual basis or when
events or changes indicate the carrying value of an asset may not be recoverable. The Company evaluates the
remaining useful lives of intangible assets with finite lives each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of amortization.
Real Estate Owned and Repossessed Assets—Included in the other assets line item in the consolidated
balance sheet is real estate acquired through foreclosure and repossessed consumer assets. Real estate properties
acquired through foreclosures, commonly referred to as REO, and repossessed assets are carried at the lower of
carrying value or fair value, less estimated selling costs.
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