eTrade 2011 Annual Report Download - page 77

reduced activity in our modification programs, as well as uncertainty around certain loans modified under our
previous programs. Once the evaluation of the existing programs and practices is complete and any necessary
changes have been implemented, we will re-assess the overall qualitative reserve.
For modified loans accounted for as TDRs, we established a specific allowance. The specific allowance for
TDRs factors in the historical default rate of an individual loan before being modified as a TDR in the discounted
cash flow analysis in order to determine that specific loan’s expected impairment. For both of the one- to four-
family and home equity loan portfolio segments, each loan’s individual default experience is analyzed in addition
to the performance observed in similar seasoned TDRs in our overall TDR program when calculating the specific
allowance. A specific allowance is established to the extent that the recorded investment exceeds the discounted
cash flows of a TDR with a corresponding charge to provision for loan losses. The specific allowance for these
individually impaired loans represents the forecasted losses over the estimated remaining life of the loan,
including the economic concession to the borrower.
Effects if Actual Results Differ
The crisis in the residential real estate and credit markets has substantially increased the complexity and
uncertainty involved in estimating the losses inherent in the loan portfolio. In the current market it is difficult to
estimate how potential changes in the quantitative and qualitative factors might impact the allowance for loan
losses. If our underlying assumptions and judgments prove to be inaccurate, the allowance for loan losses could
be insufficient to cover actual losses. We may be required under such circumstances to further increase the
provision for loan losses, which could have an adverse effect on the regulatory capital position and our results of
operations in future periods.
Estimates of Effective Tax Rates, Deferred Taxes and Valuation Allowances
Description
In preparing the consolidated financial statements, we calculate income tax expense (benefit) based on our
interpretation of the tax laws in the various jurisdictions where we conduct business. This requires us to estimate
current tax obligations and the realizability of uncertain tax positions and to assess temporary differences between
the financial statement carrying amounts and the tax basis of assets and liabilities. These differences result in
deferred tax assets and liabilities, the net amount of which we show as other assets or other liabilities on the
consolidated balance sheet. We must also assess the likelihood that each of the deferred tax assets will be realized.
To the extent we believe that realization is not more likely than not, we establish a valuation allowance. When we
establish a valuation allowance or increase this allowance in a reporting period, we generally record a corresponding
tax expense in the consolidated statement of income (loss). Conversely, to the extent circumstances indicate that a
valuation allowance is no longer necessary, that portion of the valuation allowance is reversed, which generally
reduces overall income tax expense. At December 31, 2011 we had deferred tax assets of $1.6 billion, net of a
valuation allowance (on state, foreign country and charitable contribution deferred tax assets) of $73.5 million.
Judgments
Management must make significant judgments to determine the provision for income tax expense (benefit),
deferred tax assets and liabilities and any valuation allowance to be recorded against net deferred tax assets.
Changes in our estimate of these taxes occur periodically due to changes in the tax rates, changes in business
operations, implementation of tax planning strategies, the expiration of relevant statutes of limitations, resolution
with taxing authorities of uncertain tax positions and newly enacted statutory, judicial and regulatory guidance.
The most significant tax related judgment made by management was the determination of whether to
provide for a valuation allowance against net deferred tax assets. We are required to establish a valuation
allowance for deferred tax assets and record a charge to income if we determine, based on available evidence at
the time the determination is made, that it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
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