eTrade 2012 Annual Report Download - page 12

ITEM 1A. RISK FACTORS
The following factors which could materially affect our business, financial condition and results of
operations should be carefully considered in addition to the other information set forth in this report. Although
the risks described below are those that management believes are the most significant, these are not the only risks
facing our Company. Additional risks and uncertainties not currently known to us or that we currently do not
deem to be material may also materially affect our business, financial condition and results of operations.
Risks Relating to the Nature and Operation of Our Business
We have incurred significant losses in recent years and cannot assure that we will be profitable in the future.
We incurred net losses of $112.6 million and $28.5 million for the years ended December 31, 2012 and
2010, respectively. The loss in 2010 was due primarily to the credit losses in the loan portfolio and, in 2012, the
loss was due primarily to a $256.9 million loss on the early extinguishment of all the 12
1
⁄ 2 % springing lien notes
due November 2017 (“12
1
⁄ 2 % Springing lien notes”) and 7
7
⁄ 8 % senior notes due December 2015 (“7
7
⁄ 8 %
Notes”). Although we have taken a significant number of steps to reduce our credit exposure and reported net
income of $156.7 million for the year ended December 31, 2011, we likely will continue to suffer credit losses in
2013. In late 2007, we experienced a substantial diminution of customer assets and accounts as a result of
customer concerns regarding our credit related exposures. While we were able to stabilize our retail franchise
during the ensuing period, it could take additional time to fully mitigate the credit issues in our loan portfolio,
which could result in a continued net loss position.
We will continue to experience losses in our mortgage loan portfolio.
At December 31, 2012, the principal balance of our home equity loan portfolio was $4.2 billion and the
allowance for loan losses for this portfolio was $257.3 million. At December 31, 2012, the principal balance of
our one- to four-family loan portfolio was $5.4 billion and the allowance for loan losses for this portfolio was
$183.9 million. Although the provision for loan losses has improved in recent periods, performance is subject to
variability in any given quarter and we cannot state with certainty that the declining loan loss trend will continue.
In addition, a significant portion of our mortgage loan portfolio is secured by properties worth less than the
outstanding balance of loans secured by such properties. There can be no assurance that our allowance for loan
losses will be adequate if the residential real estate and credit markets deteriorate beyond our expectations.
During the normal course of conducting examinations, our banking regulators, the OCC and Federal Reserve,
continue to review our business and practices. This process is dynamic and ongoing and we cannot be certain that
additional changes or actions will not result from their continuing review. We may be required under such
circumstances to further increase the allowance for loan losses, which could have an adverse effect on our
regulatory capital position and our results of operations in future periods.
The carrying value of the home equity and one- to four-family loan portfolios was $4.0 billion and
$5.3 billion, respectively, at December 31, 2012. The home equity and one- to four-family loan portfolios are
held on the consolidated balance sheet at carrying value because they are classified as held for investment, which
indicates that we have the intent and ability to hold them for the foreseeable future or until maturity. The fair
value of our home equity and one- to four-family loan portfolios was estimated to be $3.6 billion and
$4.6 billion, respectively, at December 31, 2012, in accordance with the fair value measurements accounting
guidance, as disclosed in Note 3—Fair Value Disclosures of Item 8. Financial Statements and Supplementary
Data. The fair value of the home equity and one- to four-family loan portfolios was estimated using a modeling
technique that discounted future cash flows based on estimated principal and interest payments over the life of
the loans, including expected losses and prepayments. There was limited or no observable market data for the
home equity and one- to four-family loan portfolios. Given the limited market data, the fair value measurements
cannot be determined with precision and the amount that would be realized in a forced liquidation, an actual sale
or immediate settlement could be significantly lower than both the carrying value and the estimated fair value of
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