eTrade 2012 Annual Report Download - page 43

Net Impairment
We recognized $16.9 million and $14.9 million of net impairment during the years ended December 31,
2012 and 2011, respectively, on certain securities in our non-agency CMO portfolio due to continued
deterioration in the expected credit performance of the underlying loans in those specific securities. The gross
other-than-temporary impairment (“OTTI”) and the noncredit portion of OTTI, which was or had been
previously recorded through other comprehensive income (loss), are shown in the table below (dollars in
millions):
Year Ended
December 31,
2012 2011
Other-than-temporary impairment (“OTTI”) $ (19.8) $ (9.2)
Less: noncredit portion of OTTI recognized into (out of) other comprehensive
income (loss) (before tax) 2.9 (5.7)
Net impairment $(16.9) $(14.9)
Provision for Loan Losses
Provision for loan losses decreased 20% to $354.6 million for the year ended December 31, 2012 compared
to 2011. The decrease in provision for loan losses was driven primarily by improving credit trends, as evidenced
by the lower levels of delinquent loans in the one- to four-family and home equity loan portfolios, and loan
portfolio run-off. The decrease was partially offset by $50 million in charge-offs associated with newly identified
bankruptcy filings during the third quarter of 2012, with approximately 80% related to prior years. We utilize
third party loan servicers to obtain bankruptcy data on our borrowers and during the third quarter of 2012, we
identified an increase in bankruptcies reported by one specific servicer. In researching this increase, we
discovered that the servicer had not been reporting historical bankruptcy data on a timely basis. As a result, we
implemented an enhanced procedure around all servicer reporting to corroborate bankruptcy reporting with
independent third party data. Through this additional process, approximately $90 million of loans were identified
in which servicers failed to report the bankruptcy filing to us, approximately 90% of which were current at the
end of the third quarter of 2012. As a result, these loans were written down to the estimated current value of the
underlying property less estimated selling costs, or approximately $40 million, during the third quarter of 2012.
These charge-offs resulted in an increase to provision for loan losses of $50 million for the year ended
December 31, 2012.
The provision for loan losses has declined four consecutive years, down 78% from its peak of $1.6 billion
for the year ended December 31, 2008. We expect provision for loan losses to continue to decline over the long
term, although it is subject to variability in any given quarter.
40