eTrade 2009 Annual Report Download - page 77

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our
consolidated financial statements, which have been prepared in conformity with GAAP. Note 1—Organization,
Basis of Presentation and Summary of Significant Accounting Policies of Item 8. Financial Statements and
Supplementary Data contains a summary of our significant accounting policies, many of which require the use of
estimates and assumptions. We believe that of our significant accounting policies, the following are noteworthy
because they are based on estimates and assumptions that require complex, subjective judgments by
management, which can materially impact reported results. Changes in these estimates or assumptions could
materially impact our financial condition and results of operations
Allowance for Loan Losses
Description
The allowance for loan losses is management’s estimate of credit losses inherent in our loan portfolio as of
the balance sheet date. In determining the adequacy of the allowance, we perform periodic evaluations of the loan
portfolio and loss forecasting assumptions. As of December 31, 2009, our allowance for loan losses was $1.2
billion on $20.2 billion of total loans receivable designated as held-for-investment.
Judgments
The estimate of the allowance is based on a variety of quantitative and qualitative factors, including the
composition and quality of the portfolio; delinquency levels and trends; 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; the interest rate climate; the overall availability of housing
credit; and general economic conditions. The allowance for loan losses is typically equal to management’s
estimate of loan charge-offs in the twelve months following the balance sheet date as well as the estimated
charge-offs, including economic concessions to borrowers, over the estimated remaining life of loans modified in
TDRs. Determining the adequacy of the allowance is complex and requires judgment by management about the
effect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio, in light of the factors
then prevailing, may result in significant changes in the allowance for loan losses in future periods. We evaluate
the adequacy of the allowance for loan losses by loan type: one- to four-family, home equity and consumer and
other loan portfolios.
For loans that are not specifically identified for impairment, we established a general allowance that is
assessed in accordance with the loss contingencies accounting guidance. Our one- to four-family and home
equity loan portfolios are separated into risk segments based on key risk factors, which include but are not
limited to channel of loan origination, documentation type, loan product type and LTV ratio. Based upon the
segmentation, probable losses are determined with expected loss rates in each segment. The additional protection
provided by mortgage insurance has been factored into the expected loss on defaulted mortgage loans. The
expected recovery from the liquidation of foreclosed real estate and expected recoveries from loan sellers related
to contractual guarantees are also factored into the expected loss on defaulted mortgage loans. Our one- to four-
family and home equity loan portfolios represented 52% and 39%, respectively, of total loans receivable as of
December 31, 2009.
For the consumer and other loan portfolio, management establishes loss estimates for each consumer
portfolio based on credit characteristics and observation of the existing markets. The expected recoveries from
the sale of repossessed collateral are factored into the expected loss on defaulted consumer loans based on
current liquidation experience. Our consumer and other loan portfolio represented 9% of total loans receivable as
of December 31, 2009.
The general allowance for loan losses also included a specific qualitative component to account for
environmental factors that we believe will impact our level of credit losses. This qualitative component, which
74