eTrade 2011 Annual Report Download - page 108

Impaired Loans—A loan is impaired when it meets the definition of a TDR. Impaired loans exclude
smaller-balance homogeneous one- to four-family, home equity and consumer and other loans that have not been
modified as TDRs and are collectively evaluated for impairment.
TDRs—Modified loans in which economic concessions were granted to borrowers experiencing financial
difficulty are considered TDRs. Upon being classified as a TDR, such loan is categorized as an impaired loan and
impairment is measured on an individual basis. Once a loan is modified as a TDR, the loan is considered
impaired until maturity regardless of whether the borrower performs under the modified terms.
The Company utilizes its own modification programs in pursuing TDRs. The various types of economic
concessions that may be granted in a TDR or trial modification typically consist of interest rate reductions,
maturity date extensions, principal forgiveness or a combination of these concessions. The Company also
processed minor modifications on a number of loans through traditional collections actions taken in the normal
course of servicing delinquent accounts. These actions typically result in an insignificant delay in the timing of
payments; therefore, the Company does not consider such activities to be economic concessions to borrowers.
The Company uses specialized servicers that focus on loan modifications and pursue trial modifications for
loans that are more than 180 days delinquent. Trial modifications are classified immediately as TDRs and
continue to be reported as delinquent until the successful completion of the trial period, which is typically 90
days. The loan is then classified as current and becomes a permanent modification.
Both one- to four-family and home equity TDRs, including trial modifications, are accounted for as
nonaccrual loans at the time of modification and return to accrual status after six consecutive payments are made
in accordance with the modified terms. TDRs are classified as nonperforming until six consecutive payments
have been made. The Company currently does not have an active TDR program for consumer and other loans;
therefore, there are no reported TDRs for consumer and other loans.
Allowance for Loan Losses—The allowance for loan losses is management’s estimate of probable losses
inherent in the loan portfolio as of the balance sheet date. The Company’s segments are one- to four-family,
home equity and consumer and other loans. For loans that are not TDRs, the Company established a general
allowance. The estimate of the allowance for loan losses 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; the Company’s historical loss mitigation 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 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
loan type, loan acquisition channel, delinquency history, documentation type, LTV/CLTV ratio and borrowers’
credit scores. For home equity loans in the second lien position, the original balance of the first lien loan at
origination date and updated valuations on the property underlying the loan are used to calculate CLTV. Both
current CLTV and FICO scores are among the factors utilized to categorize the risk associated with loans and
assign a probability assumption of future default. Based upon the segmentation, the Company utilizes historical
performance data to forecast future delinquency and default for these risk segments. The Company’s consumer
and other loan portfolio is separated into risk segments by product and delinquency status. The Company utilizes
historical performance data and historical recovery rates on collateral liquidation to forecast future delinquency
and loss at the product level. The general allowance for loan losses is typically equal to management’s forecast of
loan losses in the twelve months following the balance sheet date. Management believes this level is
representative of probable losses inherent in the loan portfolio at the balance sheet date.
The general allowance for loan losses also included a qualitative component to account for a variety of
economic and operational factors that are not directly considered in the quantitative loss model but are factors the
Company believes may impact the level of credit losses. Examples of these economic and operational factors are
changes in the level of unemployment and the limited historical charge-off and loss experience on modified
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