eTrade 2012 Annual Report Download - page 117

estate market and geographic concentrations within the loan portfolio; the interest rate climate; the overall
availability of housing credit; and general economic conditions. The 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, delinquency history, documentation type, LTV/CLTV ratio and borrowers’ credit scores. For home equity
loans in the second lien position, the original balance of the first lien loan at origination date and updated
valuations on the property underlying the loan are used to calculate CLTV. Both current CLTV and FICO scores
are among the factors utilized to categorize the risk associated with loans and assign a probability assumption of
future default. Based upon the segmentation, the Company utilizes historical performance data to develop the
forecast of delinquency and default for these risk segments. The Company’s consumer and other loan portfolio is
separated into risk segments by product and delinquency status. The Company utilizes historical performance
data and historical recovery rates on collateral liquidation to forecast delinquency and loss at the product level.
The general allowance for loan losses is typically equal to management’s forecast of loan losses in the twelve
months following the balance sheet date.
The general allowance for loan losses also included a qualitative component to account for a variety of
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 factors are: external factors, such as changes in the macro-
economic, legal and regulatory environment; internal factors, such as procedural changes and reliance on third
parties; and portfolio specific factors, such as the impact of payment resets and historical loan modification
activity, which impacts the historical performance data used to forecast delinquency and default in the general
allowance for loan losses.
The total qualitative component was $44 million and $124 million as of December 31, 2012 and 2011,
respectively. The qualitative component for the one- to four-family and home equity loan portfolios was 17% and
35% of the general allowance for loan losses at December 31, 2012 and 2011, respectively. The decrease in the
qualitative component in these loan portfolios from December 31, 2011 to December 31, 2012 reflects the
completion of the Company’s evaluation of certain programs and practices that were designed in accordance with
guidance from the Company’s former regulator, the OTS. This evaluation was initiated in connection with the
transition from the OTS to the OCC. As a result of the evaluation, loan modification policies and procedures
were aligned with the guidance from the OCC. The qualitative component was increased to 35% during the
fourth quarter of 2011 to reflect additional estimated losses due to this evaluation. The review resulted in a
significant increase in charge-offs during the year ended December 31, 2012 and a corresponding decrease in the
qualitative component. The qualitative component for the consumer and other loan portfolio was 17% and 15%
of the general allowance at December 31, 2012 and 2011, respectively.
For modified loans accounted for as TDRs that are valued using the discounted cash flow model, 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. Specifically, a loan that has a more severe delinquency history prior to
modification will have a higher future default rate in the discounted cash flow analysis than a loan that was not as
severely delinquent. For both of the one- to four-family and home equity loan portfolio segments, the pre-
modification delinquency status, the borrower’s current credit score and other credit bureau attributes, in addition
to each loan’s individual default experience and credit characteristics, are incorporated into the calculation of 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
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