E*Trade posts Q1 loss

Source: E*Trade

E*Trade Financial Corporation (NASDAQ: ETFC) today announced results for its first quarter ended March 31, 2009, reporting a net loss of $233 million, or $0.41 per share, compared with a net loss of $276 million, or $0.50 per share, in the prior quarter and a net loss of $91 million, or $0.20 per share, a year ago.

The Company reported total DARTs of 194,000 in the first quarter, an eight percent year-over-year increase, although a 10 percent decrease from the record levels of the prior quarter. The Company added 63,000 net new brokerage accounts during the period. At quarter end, E*TRADE reported a record 4.5 million customer accounts, which included a record 2.7 million brokerage accounts. Customer net new assets were $3.5 billion during the quarter. Total customer cash and deposits increased $2.1 billion, in part due to the continued growth of the Complete Savings Account despite a 1.56 percentage point drop in annual percentage yield during the quarter. Margin receivables declined from $2.8 to $2.4 billion.

"E*TRADE's growth in net new brokerage accounts and customer assets was the result of a renewed focus on our core investor base, strong activity by existing customers across a full range of products, and a gain in market share versus traditional brokerage firms," said Donald H. Layton, Chairman and CEO, E*TRADE FINANCIAL Corporation. "Transaction volumes were also strong in the first quarter on continued volatility and late-quarter rising markets."

Commissions, fees and service charges, principal transactions, and other revenue for the first quarter were $202 million, which compared with $224 million in the fourth quarter. This reflects lower revenue from the decline in DARTs from last quarter's record levels, fewer trading days in the quarter and lower revenue from principal transactions, partially offset by an increase in average commission per trade.

The Company reported net interest income of $279 million, an increase from $274 million in the fourth quarter, as a result of maintaining the level of interest earning assets and a slight increase in the interest income spread to 234 basis points. Total operating expense declined by $27 million to $294 million from the prior quarter and declined by $60 million year over year.

The Company continued to make progress during the first quarter in reducing balance sheet risk, shrinking its bank loan portfolio by approximately $1 billion from last quarter, of which approximately $700 million was related to prepayment or scheduled principal reductions.

In the home equity portfolio, which represents the Company's greatest exposure to loan losses, special mention delinquencies (30-89 days) decreased 25 percent in the quarter, while "at risk" delinquencies (30-179 days) declined five percent. Total special mention delinquencies for the Company's loan portfolio, which also includes one- to four-family and consumer and other loans, declined by 10 percent in the quarter.

"We continue to believe that E*TRADE's loan portfolio is further advanced in the credit cycle than the broader industry," said Mr. Layton. "Our home equity portfolio is showing signs of improving performance, with declines in special mention delinquencies in each month of the quarter; however, continued deterioration in the one- to four-family and consumer and other portfolios necessitated further reserve building this quarter."

First quarter provision for loan losses decreased $59 million from the prior quarter to $454 million. Total allowance for loan losses increased $120 million to $1.2 billion, or five percent of gross loans receivable, as the Company increased its one- to four-family and consumer and other portfolio reserves. Total net charge-offs in the quarter were $334 million, an increase of $27 million from the prior quarter.

The Company reported Bank Tier-1 and risk-based capital ratios of 5.63 percent and 11.85 percent, respectively. The Bank had excess Tier-1 capital of $288 million and excess risk-based capital (i.e., above the level regulations define as well-capitalized) of $451 million as of March 31, 2009. The Company noted that subsequent to the end of the quarter, it injected an additional $150 million of capital into the Bank.

"Given the uncertainties of the current environment, we believe that it is necessary to further improve the Company's capital position," said Mr. Layton. "We have been increasing our efforts to reduce the size of the Bank's balance sheet and the associated risk, to deleverage the Parent company's capital structure, and also to generate additional capital to inject into the Bank." The Company noted that such efforts would involve public market issuance and/or private investors and would create significant dilution to current shareholders; deleveraging of the Parent would also substantially reduce its interest expense.

The Company also noted that its primary banking regulator, the Office of Thrift Supervision, has advised the Company to address these capital requirements in the near term, including both raising new capital for E*TRADE Bank and reducing the leverage of the Parent holding company. One alternative that the Company continues to pursue is the U.S. Treasury's TARP Capital Purchase Program which, if it is made available, would likely have additional conditions that would also produce significant dilution. The Company can not predict when or if its application will be acted upon.

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