eTrade 2004 Annual Report Download - page 21
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Table of Contents
Index to Financial Statements
Special Mention Loans . In certain situations, a borrower’s past credit history may cast doubt on the borrower’s ability to repay a loan,
whether or not the loan is delinquent. Such loans, classified as “special mention” loans, continue to accrue interest and remain as a component
of the loans receivable balance. These loans represented $71.8 million and $43.3 million of the total loan portfolio at December 31, 2004 and
2003, respectively, and are actively monitored.
Allowance for Loan Losses. As an investor in mortgage and consumer loans, we experience credit losses. We believe the risk of credit
loss is based on a variety of factors that include:
We use expected loss ratios to determine the appropriate level of allowance for loan losses by evaluating groups of loans having similar
attributes. These loss ratios are based on our historical charge-off experience, industry loss experience and current market and economic
conditions. Our internal policy requires that the allowance for loan losses should be at least equal to twelve months of projected losses for all
loan types. We believe this level is representative of probable losses inherent in the loan portfolio. The allowance set by management is subject
to review and approval by the Bank’s Board of Directors. Each month, management evaluates the adequacy of the allowance, based on our
assessment of the risk in our loan portfolio as a whole, considering the following factors:
•
type of loan;
•
creditworthiness of the borrower;
•
general economic conditions; and
•
the type and quality of the loan’s security, if any, and the loan-to-value ratio.
Based on the above factors, we regularly consider whether it is appropriate to increase the allowance to more than the twelve-month
minimum of probable loan losses. In determining the adequacy of the allowance, we validate the assumptions underlying the twelve-
month loss
projection by analyzing our actual loss experience, industry loss experience and changes in portfolio quality and also consider changes in
economic conditions and the potential impact on the loan portfolio’s performance. When loans are unseasoned and lack sufficient data to
project future losses, we apply appropriate industry charge-off and loss rates as a proxy for the Bank’s actual loss experience. However, as our
loan portfolios season and we have sufficient historical data to project future losses, industry loss experience is only used to validate our own
loss projections.
15
•
the composition and quality of the portfolio;
•
delinquency levels and trends;
•
expected losses for the next twelve months;
•
current and historical charge-off and loss experience;
•
current industry charge-off and loss experience;
•
the condition of the real estate market and geographic concentrations within the loan portfolio; and
•
current general economic and market conditions.