eTrade 2012 Annual Report Download - page 116

During the first quarter of 2012, interagency supervisory guidance related to practices associated with loans
and lines of credit secured by junior liens on one- to four-family residential properties was issued. The guidance
indicated that if a senior lien is delinquent, it should be considered in determining the income recognition of the
junior lien. As of December 31, 2012, approximately $139 million of unpaid principal balance, or approximately
3.4% of performing second lien home equity loans, were on nonaccrual status as a result of the interagency
supervisory guidance.
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. TDRs also include loans that have been charged-off due to bankruptcy
notification even if the loan has not been modified under the Company’s programs. Upon being classified as a
TDR, such loan is categorized as an impaired loan and is considered impaired until maturity regardless of
whether the borrower performs under the terms of the loan.
Impairment on loan modifications is measured on an individual basis, generally using a discounted cash
flow model. When certain characteristics of the modified loan cast substantial doubt on the borrower’s ability to
repay the loan, the Company identifies the loan as collateral dependent and charges-off the amount of the
modified loan balance in excess of the estimated current value of the underlying property less estimated costs to
sell. Collateral dependent TDRs are identified based on the terms of the modification, which includes assigning a
higher level of risk to loans in which the LTV or CLTV is greater than 110%, a borrower’s credit score is less
than 600 and certain types of modifications, such as interest-only payments and terms longer than 30 years.
TDRs that are not identified as higher risk using this risk assessment process and for which impairment is
measured using a discounted cash flow model, continue to be evaluated in the event that they become higher risk
collateral dependent TDRs.
The Company utilizes its own modification programs in pursuing TDRs. The various types of economic
concessions that may be granted in a loan 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 and these minor loan
modifications are not classified as TDRs.
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.
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. 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
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