E*Trade swings to Q1 net profit

Source: E*Trade Financial

E*Trade Financial Corporation (NASDAQ:ETFC) today announced results for its first quarter ended March 31, 2011, reporting net income of $45 million, or $0.16 per share, compared with a net loss of $24 million, or $0.11 loss per share, in the prior quarter and a net loss of $48 million, or $0.25 loss per share, in the first quarter of 2010.

The company reported total net revenue of $537 million for the first quarter, compared with $518 million in the prior quarter and $537 million in the year-ago period.

"E*TRADE is off to a terrific start in 2011," said Steven Freiberg, Chief Executive Officer of E*TRADE Financial Corporation. "Our first quarter results benefited from strength in our brokerage franchise, growth in both interest and non-interest revenue, positive loan performance trends and ongoing expense management. We reported impressive sequential and year-over-year growth in DARTs, brokerage accounts and margin receivables, and net new brokerage assets of $3.9 billion were the highest we've ever recorded. With increased capacity to invest in the franchise, continued improvement in loan performance trends and a focus on expenses, E*TRADE is well positioned for growth."

E*TRADE reported DARTs of 177,000 during the quarter, an increase of 18 percent from the prior quarter and an increase of 14 percent versus the same quarter a year ago.

At quarter end, the company reported 4.3 million customer accounts, which included 2.7 million brokerage accounts. Net new brokerage accounts were 51,000 during the quarter compared with 28,000 in the prior quarter and 2,000 in the first quarter of 2010.

The company ended the quarter with $189 billion in total customer assets, compared with $176 billion in the prior quarter.

During the quarter, net new brokerage assets were positive $3.9 billion, the highest level on record by the company. Brokerage related cash increased by $1.4 billion to $25.9 billion during the period, while customers were net buyers of approximately $2.3 billion of securities. Average margin receivables increased 10 percent sequentially from $4.9 billion to $5.4 billion.

Net operating interest income for the first quarter was $310 million, reflecting a net interest spread of 2.84 percent on average interest-earning assets of $42.7 billion. The $5 million sequential increase in net operating interest income resulted from a $1.3 billion increase in average interest-earning assets, reflecting the increase in brokerage customer cash.

Commissions, fees and service charges, principal transactions, and other revenue in the first quarter were $201 million, compared with $181 million in the fourth quarter of 2010. This reflected the sequential increase in trading activity. Average commission per trade was $11.32, a slight decline sequentially from $11.37 in the fourth quarter.

Total net revenue in the quarter also included $26 million of net gains on loans and securities, including net impairment of $6 million.

Total operating expense declined two percent, or $7 million, to $298 million from the prior quarter, and included a seasonal increase in advertising spend and $4 million in restructuring expenses. Mr. Freiberg commented: "We are committed to managing expenses in line with 2010 levels, while, at the same time, investing in the franchise. Our advertising spend is driving meaningful results and our sales force, which we plan to grow by 35 percent this year, is focused on building and extending relationships with retail investors and with corporate clients of our equity compensation solutions business. We believe these initiatives will drive profitable growth and shareholder value."

The company's loan portfolio contracted by $0.9 billion from the prior quarter, including $0.7 billion related to prepayments or scheduled principal reductions. First quarter provision for loan losses decreased $78 million from the prior quarter to $116 million.

Net charge-offs in the quarter were $194 million, a decrease of $2 million from the prior quarter. The allowance for loan losses remained at $1.0 billion, or six percent of gross loans receivable, at quarter end.

For the company's entire loan portfolio, special mention delinquencies declined by 14 percent, and at-risk delinquencies declined by 11 percent in the quarter. As compared to the year-ago period, special mention delinquencies declined 34 percent and at-risk delinquencies declined 33 percent.

As of March 31, 2011, the company reported E*TRADE Bank Tier 1 capital ratios of 7.54 percent to total adjusted assets and 14.29 percent to risk-weighted assets. E*TRADE Bank had excess risk-based total capital (i.e., above the level regulators define as well-capitalized) of $1.3 billion at quarter end.

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