eTrade 2012 Annual Report Download - page 79

During the first quarter of 2012 we completed an evaluation of certain programs and practices that were
designed in accordance with guidance from our former regulator, the OTS. This evaluation was initiated in
connection with our transition from the OTS to the OCC, our new primary banking regulator. As a result of our
evaluation, loan modification policies and procedures were aligned with the guidance from the OCC. The review
resulted in a significant increase in charge-offs during the first quarter of 2012.
We utilize third party loan servicers to obtain bankruptcy data on our borrowers and during the third quarter
of 2012, we identified an increase in bankruptcies reported by one specific servicer. In researching this increase,
we discovered that the servicer had not been reporting historical bankruptcy data on a timely basis. As a result,
we implemented an enhanced procedure around all servicer reporting to corroborate bankruptcy reporting with
independent third party data. Through this additional process, approximately $90 million of loans were identified
in which servicers failed to report the bankruptcy filing to us, approximately 90% of which were current at the
end of the third quarter of 2012. As a result, these loans were written down to the estimated current value of the
underlying property less estimated selling costs, or approximately $40 million, during the third quarter of 2012.
These newly identified bankruptcy filings resulted in an increase to net charge-offs and provision for loan losses
of $50 million for the year ended December 31, 2012, with approximately 80% related to prior years.
Nonperforming Assets
We classify loans as nonperforming when they are no longer accruing interest, which includes loans that are
90 days and greater past due, TDRs that are on nonaccrual status for all classes of loans and certain junior liens
that have a delinquent senior lien. The following table shows the comparative data for nonperforming loans and
assets for the past five years (dollars in millions):
December 31,
2012 2011 2010 2009 2008
One- to four-family $ 639.1 $ 930.2 $ 1,256.2 $ 1,335.9 $ 593.1
Home equity 247.5 281.4 360.8 430.2 341.2
Consumer and other 6.4 4.5 5.5 6.7 7.8
Total nonperforming loans 893.0 1,216.1 1,622.5 1,772.8 942.1
REO and other repossessed assets, net 71.2 87.6 133.5 115.7 108.1
Total nonperforming assets, net $ 964.2 $ 1,303.7 $ 1,756.0 $ 1,888.5 $1,050.2
Nonperforming loans receivable as a percentage of
gross loans receivable 8.44% 9.24% 10.04% 8.71% 3.69%
One- to four-family allowance for loan losses as a
percentage of one- to four-family nonperforming
loans 28.77% 33.78% 31.01% 36.67% 31.22%
Home equity allowance for loan losses as a percentage
of home equity nonperforming loans 103.96% 164.64% 159.67% 144.15% 244.34%
Consumer and other allowance for loan losses as a
percentage of consumer and other nonperforming
loans 617.19% 1000.46% 1194.56% 1082.29% 790.72%
Total allowance for loan losses as a percentage of total
nonperforming loans 53.83% 67.66% 63.56% 66.73% 114.70%
During the year ended December 31, 2012, nonperforming assets, net decreased $339.5 million to $964.2
million when compared to December 31, 2011. This decrease was due to both improving credit trends and the
additional charge-offs recorded as a result of the completion of the evaluation of certain programs and practices
that were designed in accordance with guidance from our former regulator, the OTS. This evaluation was
initiated in connection with our transition from the OTS to the OCC, our new primary banking regulator. As a
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