eTrade 2003 Annual Report Download - page 38

Table of Contents
Index to Financial Statements
including the Bank’s asset diversification strategy. The effect of these spread-widening initiatives was partially offset by continued downward
pressure from increased prepayment and sale activity with respect to our mortgage products.
Allowance for loan losses is an accounting estimate of credit losses inherent in the Bank’s loan portfolio. Consistent with our existing
policy, management believes the allowance for loan losses balance at December 31, 2003 is at least equal to the probable losses inherent in the
loan portfolio for the next twelve months. The allowance for loan losses allocated to consumer loans rose from $23.5 million at December 31,
2002 to $32.2 million at December 31, 2003 primarily due to growth in the Company’s consumer loan portfolio. During 2003, the Bank
purchased and originated $4.5 billion of consumer loans, including the acquisition of $1.2 billion of existing portfolios of automobile, credit
card and home equity loans through the secondary market. Credit card loans typically have higher charge-
off rates and loss severities than other
types of consumer loans. As a result, the ratio of the allowance for consumer loan losses to consumer loans held-for-investment increased from
0.68% at December 31, 2002 to 0.75% at December 31, 2003.
The following table presents the allowance for loan losses by major loan category. This allocation does not necessarily prevent the
Company from shifting the allowance for loan losses between categories to better align the allowance for loan losses with the actual
performance of the portfolio (dollars in thousands):
The increase in the allowance for loan losses allocated to real estate loans at December 31, 2003 was due, in part to the increase in the
balance of real estate loans held-for-investment during 2003. The allowance allocated to real estate loans at December 31, 2002, reflects
management’s assumption that losses within that portfolio would increase as the portfolio aged, as well as management’s expectation of higher
losses based on an overall weaker economic outlook and indications of potential weakness in real estate values. During 2003, indications of
economic improvement and stability in the real estate market contributed to adjustments in management’s estimates regarding probable losses
inherent in the Bank’s real estate loan portfolio.
Provision for loan losses was $38.5 million for 2003, $14.7 million for 2002 and $7.5 million for 2001. As part of the previously
described asset diversification strategy, which included the acquisition of E*TRADE Consumer Finance and the acquisition of credit card
receivables during the second and third quarters of 2003, provision for loan losses for consumer loans at December 31, 2003 was 189% higher
than the prior year. The Company’s provision for consumer loans consist primarily of loans secured by automobiles, recreational vehicles and
marine assets which generally have higher delinquencies and charge-offs than mortgages. The increase in the level of consumer loans drove a
corresponding net increase in provision for loan losses during the year ended December 31, 2003. These increases were partially offset by a
$2.0 million reduction in the provision for loan losses related to our sale of substantially all of our keyboard loans during the third quarter of
2003.
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Consumer(1) Real Estate and Home Equity(2) Total
Allowance
Allowances as % of
consumer
loans held-for-
investment
Allowance
Allowances as % of
real estate
loans held-for-
investment
Allowance
Allowances as % of
total loans held-
for-investment
December 31, 2003
$
32,185
0.75
%
$
5,662
0.15
%
$
37,847
0.46
%
December 31, 2002
$
23,472
0.68
%
$
4,194
0.21
%
$
27,666
0.50
%
(1) Primarily RV, automobile, marine and credit card loans.
(2) Primarily one-to-four family mortgage loans and home equity lines of credit.