eTrade 2009 Annual Report Download - page 131

Effective April 1, 2009, the Company adopted the amended guidance for the recognition and presentation of
OTTI for debt securities. 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 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 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 does not believe that any individual unrealized loss in the available-for-sale portfolio as of
December 31, 2009 represents a credit related impairment. The majority of the unrealized losses on mortgage-
backed securities are attributable to changes in interest rates and a re-pricing of risk in the market. All agency
mortgage-backed securities and CMOs and agency debentures are AAA-rated. 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 loss position 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 loss position at December 31, 2009.
The majority of the Company’s available-for-sale 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, 2009:
December 31, 2009
Weighted Average Range
Default rate(1) 9% 2% – 45%
Loss severity 46% 40% –65%
Prepayment rate 12% 8% – 45%
(1) Represents the expected default rate for the next twelve months.
The following table presents a roll-forward of the credit loss component of the amortized cost of debt
securities, which has noncredit loss recognized in other comprehensive income (loss) and has credit loss
recognized in earnings for the nine months ended December 31, 2009 (dollars in thousands):
Nine Months
Ended December 31,
2009(1)
Credit loss balance, beginning of period $ 80,060
Additions:
Initial credit impairment 11,780
Subsequent credit impairment 58,532
Credit loss balance, end of period $150,372
(1) The Company adopted the amended guidance for the recognition and presentation of OTTI for debt securities on April 1, 2009.
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