E*TRADE: Higher Loan Loss Reserves & Capital-Raise Needs (ETFC)

E*TRADE FINANCIAL Corporation (NASDAQ: ETFC) has just reported a net loss of $233 million, or -$0.41 EPS, on revenue of $497 million.   E*TRADE has fewer analysts than before, but Thomson Reuters showed estimates at -$0.40 EPS.  While there are many positive developments, the real issues come down to the company’s increased allowance for loan loss reserves and the need for it to raise capital. That is trumping any of the good news.

• The company’s home equity portfolio is its largest exposure to loan losses, and the company said its special mention delinquencies (30 to 89 days) decreased by 25% in the quarter and its  “at risk” delinquencies (30 to 179 days) declined by 5%. Total special mention delinquencies for its loan portfolio (including 1 to 4 family and consumer and other loans) declined by 10% in the quarter.  E*TRADE’s “continued deterioration in the one- to four-family and consumer and other portfolios” accounted for the build in reserves.  Total allowance for loan losses increased $120 million to $1.2 billion, while the total net charge-offs in the quarter were up $27 million to $334 million.
• Most importantly, the Office of Thrift Supervision has advised E*TRADE to address capital requirements in the near term. The remedies include both raising new capital for E*TRADE Bank and reducing the leverage of the parent holding company.  E*TRADE said it “continues to pursue the U.S. Treasury’s TARP Capital Purchase Program” and if that is made available would likely have additional conditions that would also produce significant dilution.

E*TRADE also said that its provision for loan losses was $454 million.  The company’s DARTs, or daily average revenue trades, were 194,000 (up 8% from Q2-2008; down 10% sequentially) from a record brokerage account tally of 2.7 million accounts (net new brokerage accounts of 63,000) and a record customer accounts of 4.5 million (net new accounts of 56,000).

The brokerage’s total customer cash and deposits was $34.4 billion and the total net new customer assets were $3.5 billion.

E*TRADE shrank its bank loan portfolio by approximately $1 billion from last quarter, of which approximately $700 million was related to prepayment or scheduled principal reductions.  The company’s net interest income was $279 million, an increase from $274 million in the fourth quarter; while its total operating expense declined by $27 million to $294 million from the prior quarter and declined by $60 million year over year.

The bank’s Tier-1 ratio was 5.63% and its risk-based capital ratios was 11.85%.  Its bank excess risk-based capital of $451 million.  The corporate cash balance came in at $406 million and the bank’s cash was $3.9 billion, while its unused FHLB lines were $10.0 billion.

Shares closed up almost 5% at $2.46 after shares have recovered exponentially off of lows in recent weeks.  But there is pain in the after-hours session.  This stock is down over 25% at $1.83 in the after-hours session.

JON C. OGG