E*Trade Financial Corporation (NASDAQ: ETFC) today announced results for its first quarter ended March 31, 2008, reporting a net loss of $91.2 million, or $0.20 per share, compared to a net loss of $1.7 billion, or $3.98 per share, in the prior quarter and net income of $169.4 million, or $0.39 per share a year ago.
The first quarter results included various noteworthy items related to actions taken in conjunction with the execution of the Company's Turnaround Plan and credit market-related losses. The combination of these items on a net basis negatively impacted the first quarter by approximately $35 million, or $0.05 per share, as described below:
- Provision expense of $234 million included an additional $9 million associated with a change in the timing of foreclosure and bankruptcy-related charge-offs
- Loss on loans and securities, net, of $9 million included $27 million of impairments on AAA-rated and AA-rated collateralized mortgage obligations
- Compensation and benefits of $129 million included $12 million in severance related expenses
- Facility restructuring and other exit activities were $10.5 million
- Other expense of $17.5 million included a $24 million gain on the sale of corporate aviation-related assets
First quarter customer engagement trends showed further improvement over the prior quarter, demonstrating progress of the Company's Turnaround Plan. "While we entered January with some disruption to our customer base due to last year's challenges, we exited the quarter with increased stability and the beginnings of a return to growth," said Donald H. Layton, Chairman and Chief Executive Officer, E*TRADE FINANCIAL Corporation. "The growth in new customer relationships, even during a difficult environment, speaks to the continued strength and appeal of the E*TRADE brand."
- Net new customers increased 60,000 in the quarter, the largest increase since the fourth quarter of 2005.
- Total customer accounts grew 62,000 quarter over quarter to a record 4.8 million.
- Total Daily Average Revenue Trades declined 11 percent quarter over quarter, but increased 12 percent over the year ago period, reflecting market conditions as well as the residual impact of the fourth-quarter disruption.
- Total customer assets declined 11 percent quarter over quarter, along with weakness in the overall market; however, the Company did generate net new customer assets of $300 million - marking a return to growth.
Although the credit environment remained challenging in the first quarter, long-term loan performance trends remained within the range of management's previous expectations. "I am pleased to report that our home equity portfolio - which is the largest source of potential losses - is performing broadly in line with expectations. We are therefore affirming our three-year cumulative loss forecast of $1 billion to $1.5 billion," continued Mr. Layton. "Although the performance of our one- to four-family portfolio is somewhat outside of our anticipated range, the expected losses in dollar terms are comparatively low given our position in the underlying collateral."
The primary performance trends for each loan portfolio included:
- Total delinquent loans increased $41 million, 65 percent below the increase in the prior quarter. In addition, special mention loans (30-89 days delinquent) declined $14 million quarter over quarter, and have shown an absolute decline in two of the last three months.
- Net charge-offs totaled $149.4 million, including $21.7 million related to the change in charge-off policy associated with a change in the timing of foreclosure and bankruptcy-related charge-offs.
One- to Four-Family
- Total delinquent loans increased $177 million quarter over quarter to $655 million.
- Net charge-offs totaled $14.6 million, including $8.3 million related to the change in charge-off policy associated with a change in the timing of foreclosure and bankruptcy-related charge-offs.
- Total delinquent loans decreased $2 million quarter over quarter to $30 million. In addition, special mention loans and non-performing loans each declined by $1 million.
- Net charge-offs totaled $12 million.
Total allowance for loan losses increased to $566 million, as provision exceeded charge-offs by $58 million during the quarter. The Company increased its allowance for loan losses in all three categories of its loan portfolio.
The Company continued to make significant progress during the quarter to reduce risk and strengthen its balance sheet - efforts consistent with its previously announced plan. The plan to reduce risk includes shrinking the Bank balance sheet (down $3.5 billion in the quarter); reducing wholesale funding sources, including stock loan, (down $5 billion in the quarter); and lowering exposure to undrawn home equity lines (down $700 million in the quarter). The Company is taking action that will reduce undrawn home equity lines by an additional approximately $1.2 billion by the end of April.
The plan to strengthen the balance sheet consists of the following two components: increasing excess capital levels at the Bank and reducing holding company debt. In the first quarter, excess risk-based Bank capital increased from $435 million last quarter to approximately $695 million at quarter end. Consistent with its previously stated plan, the Company continues to expect excess capital at the Bank to approach $1 billion by the end of 2008. Management also expects to reduce holding company debt by at least $700 million this year through a combination of debt-for-equity exchanges and the conversion of its mandatory convertible notes in November. In addition, planned non-core asset sales, which are currently being implemented, are estimated to generate proceeds of over $500 million in 2008.
Management has also revised its view of the economic and market outlook since the fourth quarter earnings call in January, and assumes the now-consensus view that the U.S. has entered into a modest recession. As a result, the Company is announcing that it will undertake additional restructuring activities this year to further reduce operating expenses.
"We are clearly facing a cyclical downturn in the economy and markets, and because we will be a simpler company after the disposition of certain non-core assets, we need to reduce our overall expense base," stated Mr. Layton. "Our revised expense reduction program is designed to lower annual run-rate compensation-related expenses by 10 percent, approximately $50 million per year. We expect the majority of the plan to be implemented by the end of the second quarter."
Historical monthly metrics from January 2003 to March 2008 can be found on the E*TRADE FINANCIAL Investor Relations site.
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