eTrade 2011 Annual Report Download - page 76

Allowance for Loan Losses
Description
The allowance for loan losses is management’s estimate of probable losses inherent in the 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, 2011, the allowance for loan losses was
$822.8 million on $13.1 billion of total loans receivable designated as held-for-investment.
Judgments
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 portfolio segment: one- to four-family, home equity and
consumer and other loan portfolios. 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; our 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 allowance for loan
losses is typically equal to management’s forecast of loan losses in the twelve months following the balance
sheet date as well as the forecasted losses, including economic concessions to borrowers, over the estimated
remaining life of loans modified as TDRs.
For loans that are not TDRs, we established a general allowance. 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 mortgage
loans and assign a probability assumption of future default. We utilize historical mortgage loan performance data
to calibrate the forecast of future delinquency and default for these risk segments. The consumer and other loan
portfolio is separated into risk segments by product and delinquency status. We utilize historical performance
data and historical recovery rates on collateral liquidation to forecast future delinquency and loss at the product
level. The one- to four-family and home equity loan portfolios represented 51% and 41%, respectively, of total
loans receivable as of December 31, 2011. The consumer and other loan portfolio represented 8% of total loans
receivable as of December 31, 2011.
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 we
believe 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 loans. The
qualitative component for the consumer and other loan portfolio was 15% of the general allowance for loan
losses at December 31, 2011 and 2010. The qualitative component for the one- to four-family and home equity
loan portfolios increased from 15% of the general allowance for loan losses at December 31, 2010 to 35% at
December 31, 2011. The total qualitative factor was $124 million as of December 31, 2011. As the OCC
conducts its first cycle of examinations since succeeding to the OTS as our bank’s primary federal banking
supervisor, its views of our loan-related programs and practices that were designed in accordance with guidance
from the OTS may differ from the views previously taken by the OTS and may result in our making changes to
such programs and practices. As part of this regulatory transition, we are evaluating programs and practices that
were designed in accordance with guidance from the OTS. We are working to align certain policies and
procedures to the guidance from the OCC and have suspended certain modification programs that will require
changes. We increased the qualitative reserve in 2011 to reflect additional estimated losses during the period of
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