eTrade 2012 Annual Report Download - page 80

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, which also
decreased the loans receivable balance. This decrease was partially offset by the additional second lien home
equity loans placed on nonaccrual status during the second quarter of 2012.
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. The vast majority of our home equity loans were purchased in the secondary market; therefore, we
hold both the first and second lien positions in less than 1% of the home equity loan portfolio. We do not directly
service our loans and as a result, rely on third party vendors and servicers to provide information on the home
equity portfolio, including data on the first lien positions related to second lien home equity loans. During the
second quarter of 2012, we engaged additional third parties in order to receive expanded information on the lien
senior to the borrower’s junior lien, including delinquency and modification status. As a result, approximately
$180 million of unpaid principal balance, or approximately 4% of performing second lien home equity loans,
were placed on nonaccrual status as a result of the interagency supervisory guidance during the second quarter of
2012.
During the year ended December 31, 2012, we recognized $22.1 million of operating interest income on
loans that were nonperforming at December 31, 2012. If our nonperforming loans at December 31, 2012 had
been performing in accordance with their terms, we would have recorded additional operating interest income of
approximately $30.0 million for the year ended December 31, 2012. At December 31, 2012 there were no
commitments to lend additional funds to any of these borrowers.
Delinquent Loans
We believe the distinction between loans delinquent 90 to 179 days and loans delinquent 180 days and
greater is important as loans delinquent 180 days and greater have been written down to their expected recovery
value, whereas loans delinquent 90 to 179 days have not (unless they are in process of bankruptcy or are
modifications that have substantial doubt as to the borrower’s ability to repay the loan). We believe loans
delinquent 90 to 179 days are an important measure because these loans are expected to drive the vast majority of
future charge-offs. Additional charge-offs on loans delinquent 180 days and greater are possible if home prices
decline beyond current expectations, but we do not anticipate these charge-offs to be significant, particularly
when compared to the expected charge-offs on loans delinquent 90 to 179 days. We expect the balances of one-
to four-family loans delinquent 180 days and greater to decline over time; however, we expect the balances to
remain at high levels in the near term due to the extensive amount of time it takes to foreclose on a property in
the current real estate market. The following table shows the comparative data for loans delinquent 90 to 179
days (dollars in millions):
December 31,
2012 2011
One- to four-family $ 94.7 $136.2
Home equity 64.2 99.7
Consumer and other loans 6.2 4.1
Total loans delinquent 90-179 days(1) $165.1 $240.0
Loans delinquent 90-179 days as a percentage of gross loans receivable 1.56% 1.82%
(1) The decrease in loans delinquent 90-179 days includes the impact of loan modification programs in which borrowers who were 90-179
days past due were made current. Loans modified as TDRs 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.
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