E*Trade posts Q2 loss

Source: E*Trade Financial

E*Trade Financial Corporation (NASDAQ: ETFC) today announced results for its second quarter ended June 30, 2008, reporting a net loss of $94.6 million, or $0.19 per share, compared to a net loss of $91.2 million, or $0.20 per share, in the prior quarter and net income of $159.1 million, or $0.37 per share a year ago.

Second Quarter Results

  • Total Net Revenue of $532 million
  • $319 million in Provision for Loan Losses
  • Net Loss of $94.6 million, or $0.19 per share

2008 Turnaround Plan Progress

Customer Metrics

  • Total Customer Cash and Deposits of $33.7 billion
  • Total Daily Average Revenue Trades (DARTs) of 172,000
  • Opened 232,000 gross new accounts and produced 30,000 net new accounts
  • Net new customer asset flows of $900 million ($1.8 billion excluding the sale of Retirement Advisors of America)

Financial Progress

  • Reduced holding company debt by $95.8 million in the quarter via debt-for-equity exchanges. Year-to-date debt reduction of $155.8 million, including $120.8 million in debt-for-equity exchanges
  • Signed definitive agreements for non-core asset sales of over $660 million, with estimated pretax gains in excess of $400 million, to be realized upon closing
  • Ended the quarter with excess Bank risk-based capital (excess to the regulatory well-capitalized threshold) of approximately $620 million
  • Achieved goal of $50 million in annual run-rate expense reductions

* Total Retail Customers increased 22,000 from the prior quarter, up 90,000 from the previous year.
* Total Accounts increased 30,000 for the quarter and 196,000 from the previous year.
* Target segment accounts increased 14,000 versus the prior quarter, up 4,000 from the previous year.
* Total DARTs declined 5 percent quarter over quarter, but increased 7 percent over the year ago period.

"Our retail franchise is performing well and delivering strong, competitive customer results despite a challenging macroeconomic environment," said Donald H. Layton, Chairman and Chief Executive Officer, E*TRADE FINANCIAL Corporation.

"In the quarter we had positive asset flows, attracted new customers and increased our most profitable target segment accounts amid considerable market turbulence. This is truly a testament to the strength and appeal of the E*TRADE franchise."

The Company continued to make progress during the second quarter reducing risk and strengthening its balance sheet, reducing total assets by $1.4 billion. In addition, undrawn home equity lines have been reduced from over $7 billion last year to approximately $3.7 billion as of the end of June.

During the second quarter, the economy, financial markets and housing markets all experienced very negative trends, generally performing worse than expected or predicted. The Company was moderately impacted by these events. "While losses in our credit portfolio are somewhat higher than expected, they are still manageable in accordance with our previously-announced Turnaround Plan and our capital base remains strong, as may be seen by the continuing substantial level of excess risk based capital in our bank subsidiary," said Mr. Layton.

Loan delinquency growth, despite the difficult environment, continued to moderate. "While economic conditions are still challenging, we consider loan delinquency trends to be encouraging," continued Mr. Layton. Total delinquencies increased by 9 percent or $111 million during the quarter, representing the slowest increase in four quarters. Home equity loan delinquencies increased by 4 percent or $25 million during the quarter, down from an increase of 8 percent in the prior quarter.

Provision for loan losses increased by $85 million quarter over quarter, driven primarily by an increase in home equity-related charge-offs. Total allowance for loan losses increased to $636 million, as provision exceeded charge-offs by $70 million during the quarter. The Company increased its allowance for loan losses across all three categories of its loan portfolio.

As previously disclosed, the Company has a long-standing investment in preferred equity of Fannie Mae and Freddie Mac. As of June 30, 2008, these positions had a market value of $330 million. Subsequent to the close of the second quarter, these securities experienced record price declines and volatility. Based upon concerns about continuing market instability and potential government-led plans that could materially further impact the value of the securities, the majority of them were liquidated during July with a resulting pre-tax loss of $83 million, which is net of hedges and will be reflected in the Company's third quarter results. As of Monday, July 21, 2008, the remaining position, approximately $150 million, had a third-quarter-to-date market-value loss of approximately $40 million. The Company's strong bias is to continue to reduce this remaining exposure, as ownership of such securities is no longer in line with the Company's strategic objectives.

At the end of the second quarter, excess risk-based Bank capital totaled approximately $620 million. The Company expects to have such excess capital at the Bank of approximately $700 - $800 million by year-end.

In accordance with the Turnaround Plan, previously announced non-core asset sales are expected to generate over $700 million in net proceeds, including $660 million expected to close in the third quarter, surpassing management's previously stated goal of $500 million. This includes the sale of the Company's equity stake in IL&FS Investsmart as well as the sale of E*TRADE Canada.

Proceeds from these transactions will strengthen the Company's cash position, and may also be down streamed to the Bank as additional regulatory capital or used opportunistically to reduce existing corporate debt.

The Company continued to effect debt-for-equity exchanges, extinguishing $96 million in debt in the second quarter and $121 million since the beginning of the year. These exchanges represent $9 million in annualized coupon savings and continue to serve as a shareholder friendly way to reduce the overhang of debt at the holding company.

"While the current economic environment may impede our expectations to return to profitability from continuing operations this year, we are executing well on our Turnaround Plan and continue to make progress toward returning to profitability," stated Mr. Layton.

The Company's second quarter and six month results include a $24.1 million non-cash tax benefit in discontinued operations relating to the expected sale of its Canadian operations, resulting from the difference between the tax and financial reporting bases of the Company's Canadian operations. Generally accepted accounting principles call for the recognition of the tax effects of basis differences once a commitment is in place to sell a subsidiary and the subsidiary's results are presented as a "discontinued operation." The second quarter tax benefit is intended to equalize the tax and reporting bases in the Company's Canadian operations as of June 30, 2008.

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