E*Trade narrows Q2 loss

Source: E*Trade Financial

E*Trade Financial Corporation (NASDAQ: ETFC) today announced results for its second quarter ended June 30, 2009, reporting a net loss of $143 million, or $0.22 per share, compared with a net loss of $233 million, or $0.41 per share, in the prior quarter and a net loss of $95 million, or $0.19 per share, a year ago.

"This quarter marked several important milestones for the Company," said Donald H. Layton, Chairman and CEO, E*TRADE FINANCIAL Corporation. "Our core franchise generated excellent volumes and profit, our credit provision continued to moderate quarter over quarter, and we completed most of the key components of a major recapitalization of the Company."

"Our online brokerage business is thriving," continued Mr. Layton. "Volumes are up versus last quarter, our average commission per trade is higher, and interest spreads are much improved as our balance sheet continues its managed shrinkage. We also saw an increase in margin receivables as customer buying power and confidence improved."

The Company reported record total DARTs of 221,000 in the second quarter, a 14 percent sequential quarterly increase and a 28 percent increase versus the year ago quarter. The Company also added 54,000 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.

Commissions, fees and service charges, principal transactions, and other revenue for the second quarter were $238 million, an increase of 18 percent versus the first quarter. This reflects higher revenue from the increase in customer activity, including the record DARTs and a higher average commission per trade of $11.05 due to transaction mix.

The Company reported net interest income of $340 million, an increase from $279 million in the first quarter, as a result of a 57 basis point expansion in the interest income spread. The greater interest income spread resulted from a variety of factors, the largest of which was a 50 basis point reduction in annual percentage yield on the Complete Savings Account (CSA) during the quarter.

Total operating expense increased by $35 million to $329 million from the prior quarter, as a result of a $29 million increase in FDIC insurance fees (including a $22 million one-time special assessment) and a $10 million increase in reserves for legal matters. The higher volume-related costs due to record trading activity were thus more than offset by the impact of ongoing expense productivity programs.

The Company continued to make progress during the second quarter in reducing balance sheet risk as its loan portfolio continued its run-off, shrinking by approximately $1.3 billion from last quarter, of which approximately $900 million was related to prepayments or scheduled principal reductions. To accommodate this planned long-term reduction in assets, the Company is also similarly reducing its liabilities. As a result, total customer cash and deposits were reduced by $700 million to $33.7 billion. This was composed of a $1 billion increase in brokerage cash, offset by a $1.7 billion reduction in CSA and other bank deposits. Margin receivables increased from $2.4 billion to $3.1 billion.

"For the second consecutive quarter, our loan portfolio has shown improving delinquency trends," said Mr. Layton. "The decline in special mention and at-risk delinquencies has led to another quarterly reduction in provision expense. Later this year we expect the quarterly provision to drop below the amount of quarterly charge-offs, which we believe have peaked this quarter."

In the home equity portfolio, which represents the Company's greatest exposure to loan losses, special mention delinquencies (30-89 days) decreased 12 percent in the quarter, while at-risk delinquencies (30-179 days) declined 19 percent. Total special mention delinquencies for the Company's entire bank loan portfolio, which also includes one- to four-family and consumer and other loans, declined by eight percent in the quarter.

Second quarter provision for loan losses decreased $49 million from the prior quarter to $405 million. Total allowance for loan losses essentially was flat at $1.2 billion, or five percent of gross loans receivable. Total net charge-offs in the quarter were $386 million, an increase of $53 million from the prior quarter.

"During the quarter, the Company made very substantial progress in executing its comprehensive capital plan, and we are thrilled with the results," said Mr. Layton. "The additional net cash equity strengthens the Bank's capital position considerably. And, assuming completion, our pending debt exchange will significantly reduce the Parent company's debt service burden."

In June, the Company successfully raised more than $600 million of common equity, which is being used to inject capital into E*TRADE Bank as well as to enhance the Parent company's liquidity. In total, the Company injected $500 million in equity into the Bank during the second quarter. As a result, the Company reported Bank Tier 1 capital ratios of 6.79 percent to total adjusted assets and 12.65 percent to risk-weighted assets. The Bank had excess risk-based capital (i.e., above the level regulators define as well-capitalized) of $916 million as of June 30, 2009.

In addition, the Company expects to exchange approximately $1.7 billion of its 8% Senior Notes due 2011 and 12.5% Springing Lien Notes due 2017 for an equal principal amount of newly-issued Convertible Debentures due 2019 by the end of the third quarter, pending shareholder and regulatory approval. The debentures will not bear interest (whether in cash or in-kind) nor will the principal amount increase over time in lieu of interest. Upon completion, this exchange will reduce the run rate of the Parent company's annual interest expense by over $200 million, to approximately $170 million per annum. The Company will hold a Special Meeting of Shareholders on August 19, 2009, to seek approval for the exchange.

Historical monthly metrics from January 2006 to June 2009 can be found on the E*TRADE FINANCIAL Investor Relations website.

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