eTrade 2012 Annual Report Download - page 84

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.
Effects if Actual Results Differ
The crisis in the residential real estate and credit markets has substantially increased the complexity and
uncertainty involved in estimating the losses inherent in the loan portfolio. In the current market it is difficult to
estimate how potential changes in the quantitative and qualitative factors might impact the allowance for loan
losses. If our underlying assumptions and judgments prove to be inaccurate, the allowance for loan losses could
be insufficient to cover actual losses. We may be required under such circumstances to further increase the
provision for loan losses, which could have an adverse effect on the regulatory capital position and results of
operations in future periods.
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.
Valuation of Goodwill and Other Intangible Assets
Description
Goodwill and other intangible assets are evaluated for impairment on at least an annual basis or when events
or changes indicate the carrying value may not be recoverable. Goodwill and other intangible assets net of
amortization were $1.9 billion and $0.3 billion, respectively, at December 31, 2012.
Judgments
Estimating the fair value of reporting units and the assets, liabilities and intangible assets of a reporting unit
is a subjective process that involves the use of estimates and judgments, particularly related to cash flows, the
appropriate discount rates and an applicable control premium. Management judgment is required to assess
whether the carrying value of the reporting unit can be supported by the fair value of the individual reporting
unit. There are various valuation methodologies, such as the market approach or discounted cash flow methods,
that may be used to estimate the fair value of reporting units. In applying these methodologies, we utilize a
number of factors, including actual operating results, future business plans, economic projections, and market
data.
Goodwill is allocated to reporting units, which are components of the business that are one level below
operating segments. Each reporting unit is tested for impairment individually during the annual evaluation. In
conducting the goodwill impairment test for 2012, we determined the fair value of our reporting units using both
a discounted cash flow analysis, a form of the income approach, and the publicly traded company method, a form
of the market approach, combined with a control premium. The discounted cash flow analysis required
management to make projections about future revenue and costs, discounting the cash flows to present value
using a risk-adjusted discount rate. The publicly traded company method consisted of identifying similar publicly
traded companies. Based on the results of step one of the goodwill impairment test, we determined that the fair
value of each of the reporting units, including goodwill, exceeded the carrying value for each reporting unit. As
such, none of the reporting units were impaired at December 31, 2012.
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