eTrade 2012 Annual Report Download - page 136

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, 2012 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 as of the balance sheet date 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. Agency mortgage-backed securities and CMOs,
agency debentures and agency debt securities are guaranteed by U.S. government sponsored and federal
agencies. 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 or
unrecognized loss position as of the balance sheet date 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 or unrecognized loss position at December 31, 2012.
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, 2012:
December 31, 2012
Weighted
Average Range
Default rate(1) 4% 1% -24%
Loss severity 48% 30 % - 70 %
Prepayment rate 7% 2 % - 15 %
(1) Represents the expected default rate for the next twelve months.
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