Loans Receivable, Net

6 Months Ended

Jun. 30, 2020

Loans and Leases Receivable Disclosure [Abstract]


NOTE 7—LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES

The Company adopted amended accounting guidance related to accounting for credit losses on January 1, 2020 and recognized an after-tax benefit related to mortgage loans of $84 million as an adjustment to opening retained earnings. The benefit primarily related to the increases in fair value of the underlying collateral for mortgage loans determined to be collateral-dependent compared to prior period charge-offs associated with these loans. This appreciation resulted in a net “negative allowance” associated with the mortgage loans.

Loans receivable decreased 5% to $1.5 billion during the six months ended June 30, 2020 driven by continued runoff in our mortgage loan portfolio offset by increases in securities-based lending. Loans receivable, net increased 1% to $1.6 billion during the six months ended June 30, 2020 due to increases in securities-based lending and the $114 million pre-tax benefit associated with the adoption of the amended guidance. This pre-tax benefit, offset by the provision expense and net recoveries, was the primary driver of the $82 million net "negative allowance" for credit losses at June 30, 2020. The "negative allowance" for credit losses represented 5.4% of total loans receivable as of June 30, 2020. The allowance for credit losses was $(17) million, or (1.1)% of total loans receivable, as of December 31, 2019.

The Company recognized a benefit for credit losses of $(1) million for the three months ended June 30, 2020 and a provision for credit losses of $5 million for the six months ended June 30, 2020. The timing and magnitude of the provision (benefit) for credit losses is affected by many factors that could result in variability. Changes in management's reasonable and supportable forecasts of estimated credit losses and collateral valuations, offset by actual charge-offs net of recoveries, will drive variability in provision (benefit) for credit losses in future periods.

The COVID-19 pandemic, and actions taken by governmental authorities to contain its financial and economic impact, resulted in significant market volatility during the first and second quarters of 2020. The Company's allowance for credit losses as of June 30, 2020 includes the estimated financial impacts of the pandemic on its expected credit losses, including expected losses on loans in forbearance due to COVID-19.

The following table presents loans receivable disaggregated by delinquency status (dollars in millions):


			Days Past Due
	Current		30-89		90-179		180+		Total		Unamortized Premiums, Net		Allowance for Credit Losses⁽¹⁾		Loans Receivable, Net
June 30, 2020:
One- to four-family	$	614	$	47	$	20	$	33	$	714	$	4	$	36	$	754
Home equity	509		17		9		15		550		—		46		596

Securities-based lending⁽²⁾	258		—		—		—		258		—		—		258
Total loans receivable	$	1,381	$	64	$	29	$	48	$	1,522	$	4	$	82	$	1,608

			Days Past Due
	Current		30-89		90-179		180+		Total		Unamortized Premiums, Net		Allowance for Loan Losses⁽¹⁾		Loans Receivable, Net
December 31, 2019:
One- to four-family	$	718	$	39	$	11	$	35	$	803	$	5	$	(6)	$	802
Home equity	590		21		7		17		635		—		(11)		624
Securities-based lending⁽²⁾	169		—		—		—		169		—		—		169
Total loans receivable	$	1,477	$	60	$	18	$	52	$	1,607	$	5	$	(17)	$	1,595

(1)The Company adopted amended accounting guidance related to accounting for credit losses on January 1, 2020. Prior year amounts related to the allowance for loan losses were not restated as the amended accounting guidance was adopted on a modified retrospective basis. See Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies for further details.

(2)E*TRADE Line of Credit is a securities-based lending product where customers can borrow against the market value of their securities pledged as collateral. The Company has no expectation of credit losses for these loans as they were fully collateralized by cash and securities with fair values in excess of borrowings at both June 30, 2020 and December 31, 2019, respectively. The unused credit line amount totaled $1.1 billion and $431 million as of June 30, 2020 and December 31, 2019, respectively, and were unconditionally cancellable by the Company.

The Company adopted the provisions of the CARES Act and related interagency guidance during the second quarter of 2020. Under the guidance, certain modifications granted to borrowers who are experiencing financial difficulties as a result of the COVID-19 pandemic are not considered TDRs. As the delinquency reporting was also updated to reflect the application of this guidance, these loans may not be reported as delinquent based on their contractual terms. Loans classified as TDRs prior to the pandemic do not qualify for relief under this guidance, and past due status for such loans was determined based on the contractual terms of the loan consistent with the Company's existing policies.

The Company pledged $900 million and $1.2 billion of loans as collateral to the FHLB at June 30, 2020 and December 31, 2019, respectively.

Credit Quality and Concentrations of Credit Risk

The Company tracks and reviews factors to predict and monitor credit risk in its mortgage loan portfolio on an ongoing basis. Property values, FICO scores, and loan balances are updated quarterly. The Company has not originated a mortgage loan since 2008 when it exited direct retail lending, which was the last remaining origination channel after the Company’s exit from the wholesale mortgage lending channel in 2007.

The following tables present the distribution of the Company’s mortgage loan portfolios by credit quality indicator (dollars in millions):


	One- to Four-Family									Home Equity

	June 30,			December 31,			June 30,			December 31,
Current LTV/CLTV⁽¹⁾	2020			2019			2020			2019
<=80%	$	587		$	661		$	331		$	377
80%-100%	85			97			131			154
100%-120%	25			26			61			68
>120%	17			19			27			36
Total mortgage loans receivable	$	714		$	803		$	550		$	635
Average estimated current LTV/CLTV ⁽²⁾	61		%	61		%	76		%	76		%
Average LTV/CLTV at loan origination ⁽³⁾	70		%	70		%	82		%	82		%

(1)Current CLTV calculations for home equity loans are based on the maximum available line for HELOCs and outstanding principal balance for HEILs. 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. Current property value estimates are updated on a quarterly basis.

(2)The average estimated current LTV/CLTV ratio reflects the outstanding balance at the balance sheet date and the maximum available line for HELOCs, divided by the estimated current value of the underlying property.

(3)Average LTV/CLTV at loan origination calculations are based on LTV/CLTV at time of purchase for one- to four-family purchased loans, HEILs and the maximum available line for HELOCs.


	One- to Four-Family						Home Equity
	June 30,		December 31,		June 30,		December 31,
Current FICO	2020		2019		2020		2019
>=720	$	403	$	462	$	291	$	333
719 - 700	61		77		49		61
699 - 680	53		55		44		54
679 - 660	39		40		41		43
659 - 620	60		63		48		59
<620	98		106		77		85
Total mortgage loans receivable	$	714	$	803	$	550	$	635

One- to four-family loans include loans with an interest-only period, followed by an amortizing period. At June 30, 2020, 100% of these loans were amortizing. The home equity loan portfolio consists of HEILs and HELOCs. HEILs are primarily fully amortizing loans that do not offer the option of an interest-only payment. The majority of HELOCs had an interest only draw period at origination and converted to amortizing loans at the end of the draw period. At June 30, 2020, substantially all of the HELOC portfolio had converted from the interest-only draw period.

The weighted average age of our mortgage loans receivable was 14.2 years and 13.7 years at June 30, 2020 and December 31, 2019, respectively. Approximately 32% of the Company’s mortgage loans receivable were concentrated in California at both June 30, 2020 and December 31, 2019, respectively. Approximately 11% and 10% of the Company's mortgage loans receivable were concentrated in New York at June 30, 2020 and December 31, 2019. No other state had concentrations of mortgage loans that represented 10% or more of the Company’s mortgage loans receivable at June 30, 2020 or December 31, 2019.

At June 30, 2020, 27% and 18% of the Company’s past-due mortgage loans were concentrated in California and New York, respectively. No other state had concentrations of past-due mortgage loans that represented 10% or more of the Company's past-due mortgage loans. At June 30, 2020, 40% and 11% of the Company’s impaired mortgage loans were concentrated in California and New York, respectively. No other state had concentrations of impaired mortgage loans that represented 10% or more of the Company's impaired mortgage loans.

Nonperforming Loans

The Company classifies loans as nonperforming when they are no longer accruing interest. The following table presents nonperforming loans by loan portfolio (dollars in millions):



	June 30, 2020		December 31, 2019
One- to four-family	$	239	$	114
Home equity	104		54
Total nonperforming loans receivable	$	343	$	168

The Company adopted the provisions of the CARES Act and related interagency guidance during the second quarter of 2020. The Company classifies loans modified as a result of financial difficulties related to COVID-19 as nonperforming and places them on nonaccrual status at the date of the modification consistent with existing accounting policies. The increase in nonperforming loans receivable during the six months ended June 30, 2020 was primarily driven by these modifications and included $151 million of loans for which the modification qualified under the CARES Act and related interagency guidance. Subsequent cash receipts related to these loans will be recognized in interest income. Loans will be returned to accrual status when the payment deferral period has ended and the borrower resumes payments.

Interest income recognized on nonaccrual loans was not material for the three or six months ended June 30, 2020. There were no nonaccrual loans for which the Company had not recognized an allowance for credit losses at June 30, 2020. There were no loans that were 90 days or more past due, but were not on nonaccrual status at June 30, 2020.

At June 30, 2020 and December 31, 2019, the Company held $10 million and $13 million of real estate owned that was acquired through foreclosure or through a deed in lieu of foreclosure or similar legal agreement. The Company held $30 million and $32 million of loans for which formal foreclosure proceedings were in process at June 30, 2020 and December 31, 2019, respectively.

Collateral-Dependent Loans

The Company's collateral-dependent loans were a significant driver of the net benefit recognized upon CECL adoption. The benefit primarily related to the appreciation in fair value of the underlying collateral as compared to prior period charge-offs associated with these loans. The fair value of the underlying collateral, less estimated selling costs, are based on the most recent "as is" property valuation data available, which may include appraisals, broker price opinions, automated valuation models or updated values using home price indices, all of which are categorized within Level 3 of the fair value hierarchy. See Note 4—Fair Value Disclosures for further details.

The following table presents credit quality characteristics of the collateral-dependent loan population (dollars in millions):


	June 30, 2020
	One- to Four-Family			Home Equity
Unpaid principal balance	$	188		$	148
Recorded investment	$	141		$	55
Negative allowance for credit losses	$	37		$	63
Average estimated current LTV/CLTV	71		%	76		%
Average loan amount (dollars in thousands)	$	364		$	63

Approximately 35% and 15% of the Company's collateral-dependent loans were concentrated in California and New York, respectively at June 30, 2020. No other state had concentrations of mortgage loans that represented 10% or more of the Company's collateral-dependent loans. All of these loans were amortizing at June 30, 2020.

Allowance for Credit Losses

The allowance for credit losses is management’s estimate of expected credit losses over the life of the loan portfolio at 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. The allowance for credit losses on mortgage loans evaluated collectively includes a qualitative component to account for a variety of factors that present additional uncertainty that may not be fully considered in the quantitative loss model but are factors we believe may impact the level of credit losses. Expected recoveries of amounts previously charged-off and expected to be charged-off are included in the allowance and do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The Company recognizes a credit loss expense in the amount necessary to adjust the allowance for credit losses for management’s current estimate of expected credit losses on mortgage loans receivable.

The following table presents a roll forward by loan portfolio of the allowance for credit losses (dollars in millions):


	Three Months Ended June 30, 2020
	One- to Four-Family		Home Equity		Total⁽¹⁾
Allowance for credit losses, beginning of period	$	35	$	51	$	86
(Provision) benefit for credit losses	1		—		1
Charge-offs⁽²⁾	—		—		—
Recoveries⁽²⁾	—		(5)		(5)
Net charge-offs (recoveries)	—		(5)		(5)
Allowance for credit losses, end of period	$	36	$	46	$	82


	Three Months Ended June 30, 2019
	One- to Four-Family		Home Equity		Consumer		Total⁽¹⁾
Allowance for loan losses, beginning of period⁽³⁾	$	(9)	$	(21)	$	(2)	$	(32)
(Provision) benefit for loan losses	1		8		(1)		8
Charge-offs⁽²⁾	—		—		1		1
Recoveries⁽²⁾	(1)		(6)		—		(7)
Net charge-offs (recoveries)	(1)		(6)		1		(6)
Allowance for loan losses, end of period	$	(9)	$	(19)	$	(2)	$	(30)

(1)Securities-based lending loans were fully collateralized by cash and securities with fair values in excess of borrowings for the three months ended June 30, 2020 and 2019, respectively, and were unconditionally cancellable by the Company.

(2)Includes benefits resulting from recoveries of partial charge-offs due to principal paydowns or payoffs for the periods presented. The benefits included in the charge-offs line item exceeded other charge-offs for both one-to-four family and home equity loans during the three months ended June 30, 2020 and 2019, respectively.

(3)The Company adopted amended accounting guidance related to accounting for credit losses on January 1, 2020. Prior year amounts related to the allowance for loan losses were not restated as the amended accounting guidance was adopted on a modified retrospective basis. See Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies for further details.


	Six Months Ended June 30, 2020
	One- to Four-Family		Home Equity		Total⁽¹⁾
Allowance for loan losses, beginning of period⁽²⁾	$	(6)	$	(11)	$	(17)
Impact of CECL adoption⁽²⁾⁽³⁾	43		71		114
(Provision) benefit for loan losses	—		(5)		(5)
Charge-offs⁽⁴⁾	—		—		—
Recoveries⁽⁴⁾	(1)		(9)		(10)
Net charge-offs (recoveries)	(1)		(9)		(10)
Allowance for credit losses, end of period⁽³⁾	$	36	$	46	$	82


	Six Months Ended June 30, 2019
	One- to Four-Family		Home Equity		Consumer		Total⁽¹⁾
Allowance for loan losses, beginning of period⁽²⁾	$	(9)	$	(26)	$	(2)	$	(37)
(Provision) benefit for loan losses	3		18		(1)		20
Charge-offs⁽⁴⁾	—		—		2		2
Recoveries⁽⁴⁾	(3)		(11)		(1)		(15)
Net charge-offs (recoveries)	(3)		(11)		1		(13)
Allowance for loan losses, end of period	$	(9)	$	(19)	$	(2)	$	(30)

(1)Securities-based lending loans were fully collateralized by cash and securities with fair values in excess of borrowings for the six months ended June 30, 2020 and 2019, respectively, and were unconditionally cancellable by the Company.

(2)The Company adopted amended accounting guidance related to accounting for credit losses on January 1, 2020. Prior year amounts related to the allowance for loan losses were not restated as the amended accounting guidance was adopted on a modified retrospective basis. At January 1, 2020, the Company had a net "negative allowance" for credit losses of $37 million for its one-to-four-family portfolio and a net "negative allowance" of $60 million for its home equity portfolio. See Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies for further details.

(3)The benefit recognized as a "negative allowance" at adoption is primarily related to the increases in fair value of the underlying collateral for mortgage loans determined to be collateral-dependent compared to prior period charge-offs associated with these loans. This fair value appreciation resulted in a benefit of $39 million for the one- to four-family portfolio and a benefit of $70 million for the home equity portfolio at adoption.

(4)Includes benefits resulting from recoveries of partial charge-offs due to principal paydowns or payoffs for the periods presented. The benefits included in the charge-offs line item exceeded other charge-offs for both one-to-four family and home equity loans during the six months ended June 30, 2020 and 2019, respectively.

Troubled Debt Restructurings

The Company considers a loan to be impaired when it meets the definition of a TDR. Delinquency status is the primary measure the Company uses to evaluate the performance of loans modified as TDRs. The Company classifies loans as nonperforming when they are no longer accruing interest. The recorded investment in loans modified as TDRs includes the charge-offs related to certain loans that were written down to the estimated current value of the underlying property less estimated selling costs.

The Company had $259 million of recorded investment in loans that had been modified as TDRs at June 30, 2020, including $158 million of one-to-four family loans and $101 million of home equity loans,

respectively. This compared to $280 million of recorded investment in TDRs at December 31, 2019, including $168 million of one-to-four family loans and $112 million of home equity loans, respectively.

The following table presents the number of loans and post-modification balances immediately after being modified by major class (dollars in millions):


	Three Months Ended
		Interest Rate Reduction
	Number of Loans	Re-age/ Extension/ Interest Capitalization		Other⁽¹⁾		Total
June 30, 2020:
One- to four-family	6	$	1	$	1	$	2
Home equity	1	—		—		—
Total	7	$	1	$	1	$	2

June 30, 2019:
One- to four-family	7	$	1	$	2	$	3
Home equity	9	—		—		—
Total	16	$	1	$	2	$	3

	Six Months Ended
		Interest Rate Reduction
	Number of Loans	Re-age/ Extension/ Interest Capitalization		Other⁽¹⁾		Total
June 30, 2020:
One- to four-family	10	$	3	$	1	$	4
Home equity	9	1		—		1
Total	19	$	4	$	1	$	5

June 30, 2019:
One- to four-family	16	$	2	$	3	$	5
Home equity	20	1		—		1
Total	36	$	3	$	3	$	6

(1)Amounts represent loans whose terms were modified in a manner that did not result in an interest rate reduction, including re-aged loans, extensions, and loans with capitalized interest.

E TRADE FINANCIAL CORP 10-Q