eTrade 2011 Annual Report Download - page 127

The Company does not believe that any individual unrealized loss in the available-for-sale or unrecognized
loss in the held-to-maturity portfolio as of December 31, 2011 represents a credit loss. The credit loss component
is the difference between the security’s amortized cost basis and the present value of its expected future cash
flows, and is recognized in earnings. The noncredit loss component is the difference between the present value of
its expected future cash flows and the fair value and is recognized through other comprehensive income (loss).
The Company assessed whether it intends to sell, or whether it is more likely than not that the Company will be
required to sell a security before recovery of its amortized cost basis. For debt securities that are considered
other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell
prior to recovery of its amortized cost basis, the Company determines the amount of the impairment that is
related to credit and the amount due to all other factors.
The majority of the unrealized or unrecognized losses on mortgage-backed securities are attributable to
changes in interest rates and a re-pricing of risk in the market. The majority of agency mortgage-backed
securities and CMOs, other agency debt securities and agency debentures are AAA-rated. Municipal bonds and
corporate bonds are evaluated by reviewing the credit-worthiness of the issuer and general market conditions.
The Company does not intend to sell the securities in an unrealized loss position and it is not more likely than not
that the Company will be required to sell the debt securities before the anticipated recovery of its remaining
amortized cost of the securities in an unrealized loss position at December 31, 2011.
The majority of the Company’s available-for-sale and held-to-maturity portfolio consists of residential
mortgage-backed securities. For residential mortgage-backed securities, the Company calculates the credit portion
of OTTI by comparing the present value of the expected future cash flows with the amortized cost basis of the
security. The expected future cash flows are determined using the remaining contractual cash flows adjusted for
future credit losses. The estimate of expected future credit losses includes the following assumptions: 1) expected
default rates based on current delinquency trends, foreclosure statistics of the underlying mortgages and loan
documentation type; 2) expected loss severity based on the underlying loan characteristics, including loan-to-value,
origination vintage and geography; and 3) expected loan prepayments and principal reduction based on current
experience and existing market conditions that may impact the future rate of prepayments. The expected cash flows
of the security are then discounted at the interest rate used to recognize interest income on the security to arrive at
the present value amount. The following table presents a summary of the significant inputs considered for securities
that were other-than-temporarily impaired as of December 31, 2011:
December 31, 2011
Weighted
Average Range
Default rate(1) 6% 2% -21%
Loss severity 51 % 40 % - 65 %
Prepayment rate 6 % 2 % - 15 %
(1) Represents the expected default rate for the next twelve months.
The following table presents a roll-forward of the credit loss component of the amortized cost of debt
securities that have noncredit loss recognized in other comprehensive income (loss) and credit loss recognized in
earnings for the periods presented (dollars in thousands):
Year Ended December 31,
2011 2010 2009 (1)
Credit loss balance, beginning of period $188,038 $150,372 $ 80,060
Additions:
Initial credit impairment 61 1,642 11,780
Subsequent credit impairment 14,846 36,024 58,532
Credit loss balance, end of period $202,945 $188,038 $150,372
(1) The Company adopted the amended guidance for the recognition and presentation of OTTI for debt securities on April 1, 2009.
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