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E*TRADE FINANCIAL Corporation Announces Third Quarter 2008 Results

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Posted 21 October 2008 @ 08:05 pm ET

E*TRADE FINANCIAL Corporation (NASDAQ: ETFC) today announced results for its third quarter ended September 30, 2008, reporting a net loss of $50.5 million, or $0.09 per share ($0.60 loss per share from continuing operations), compared to a net loss of $94.6 million, or $0.19 per share, in the prior quarter and a net loss of $58.4 million, or $0.14 per share, a year ago.

Third quarter daily average revenue trades, usually seasonally low, were up 7% over last quarter, mainly due to the volatility of markets in September. Similarly, net new accounts were 41,000 and customer asset flows continued to be positive with $800 million of net inflows during the quarter. Margin loans, however, decreased as a result of declining markets and customer deleveraging.

"This quarter E*TRADE demonstrated both the strength of its customer franchise and the depth of its capital plan, even in the face of extraordinary market volatility and economic uncertainty," said Donald H. Layton, Chairman and Chief Executive Officer, E*TRADE FINANCIAL Corporation. "We absorbed significant credit costs while generating the capital and liquidity to maintain substantial cushions of both."

During the third quarter, the Company realized gains from previously announced non-core asset sales, resulting in net proceeds of approximately $660 million.

  • The sale of the Company's Canadian business to Scotiabank resulted in proceeds of approximately $515 million, and a pre-tax gain of $428 million.
  • The sale of the Company's equity stake in IL&FS Investsmart to HSBC resulted in proceeds of approximately $145 million, and a pre-tax gain of $22 million.
Provision for loan losses of $518 million increased by $199 million quarter over quarter, driven primarily by higher expectations for future charge-offs. Total allowance for loan losses increased $238 million to $874 million or 3.3% of gross loans receivable. The Company increased its allowance for loan losses across all three categories of its loan portfolio. "Upon completion of our previously announced special credit review in the third quarter, we have revised our forward-looking path of charge-offs in the Home Equity portfolio to be higher than we previously estimated," said Layton. The Company increased its three-year 2008-2010 cumulative loss assumption for home equity by approximately 20% from its previous $1.5 billion estimate.

As previously disclosed, during the third quarter, the Company completed the liquidation of its long-standing investment in preferred shares of Fannie Mae and Freddie Mac, realizing a total pre-tax loss of $154 million net of hedges on a June 30th investment value of $330 million.

The Company continued to make progress during the third quarter in reducing risk and strengthening its balance sheet, shrinking total loans by $1.2 billion or more than $6.0 billion from a year ago. In addition, undrawn home equity lines have been reduced from more than $7 billion last year to approximately $3 billion as of the end of September.

At the end of the third quarter the Company down-streamed $250 million of preferred equity to the Bank to help bolster the Bank's capital position. The Company reported excess risk-based capital at the Bank of approximately $516 million.

The Company estimates that provision expense has peaked in the third quarter and that charge-offs will begin to improve in 2009. While the Company continues to make progress toward returning to profitability, it does not expect to report a quarterly profit in the fourth quarter of 2008.

Emergency Economic Stabilization Act of 2008

  • With the recent FDIC increase in deposit insurance levels, the Company estimates total uninsured bank customer deposits to be $1.4 billion as of the end of the third quarter, down sharply from $4.3 billion for the second quarter. This change means that approximately 95% of bank customer deposits are covered by FDIC insurance.
  • The Company has determined that it is eligible for the government's Capital Purchase Program and will be following up with the appropriate governmental agencies.
Historical monthly metrics from September 2004 to September 2008 can be found on the E*TRADE FINANCIAL Investor Relations site at https://investor.etrade.com.

The Company will host a conference call to discuss results beginning at 5:00 p.m. (EDT) today. This conference call will be available to domestic participants by dialing 800-683-1525 and 973-872-3197 for international participants. The conference ID number is 67767152. A live audio webcast and replay of this conference call will also be accessible at https://investor.etrade.com.

About E*TRADE FINANCIAL

The E*TRADE FINANCIAL family of companies provides financial services including trading, investing and banking for retail and institutional customers. Securities products and services are offered by E*TRADE Securities LLC (Member FINRA/SIPC). Bank products and services are offered by E*TRADE Bank, a Federal savings bank, Member FDIC, or its subsidiaries.

Important Notice

E*TRADE FINANCIAL, E*TRADE and the E*TRADE logo are trademarks or registered trademarks of E*TRADE FINANCIAL Corporation. The statements contained in this news release that are forward-looking are based on current expectations that are subject to a number of uncertainties and risks, and actual results may differ materially. The uncertainties and risks include, but are not limited to, changes in market activity, anticipated increases in the rate of new customer acquisition, the conversion of new visitors to the site to customers, the activity of customers and assets held at the institution, seasonality, macro trends of the economy in general and the residential real estate market, instability in the consumer credit markets and credit trends, rising mortgage interest rates, tighter mortgage lending guidelines across the industry, increased mortgage loan delinquency and default rates, portfolio growth, portfolio seasoning and resolution through collections, sales or charge-offs, the development and enhancement of products and services, competitive pressures (including price competition), system failures, economic and political conditions, changes in consumer behavior and the introduction of competing products having technological and/or other advantages. Further information about these risks and uncertainties can be found in the information included in the annual reports previously filed by E*TRADE FINANCIAL Corporation with the SEC on Form 10-K (including information under the caption "Risk Factors") and quarterly reports on Form 10-Q.

© 2008 E*TRADE FINANCIAL Corporation. All rights reserved.

FINANCIAL STATEMENTS

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statement of Income (Loss)

(In thousands, except per share amounts)
(Unaudited)
           
Three Months Ended Nine Months Ended
September 30, September 30,
  2008     2007     2008     2007  
 
Revenue:
Operating interest income $ 604,071 $ 938,979 $ 1,929,736 $ 2,654,364
Operating interest expense   (279,297 )   (527,537 )   (935,827 )   (1,449,694 )
Net operating interest income   324,774     411,442     993,909     1,204,670  
Commission 129,513 180,622 374,003 495,108
Fees and service charges 49,612 57,838 155,515 171,272
Principal transactions 20,664 20,734 59,546 77,743
Loss on loans and securities, net (159,799 ) (201,130 ) (184,073 ) (188,896 )
Other revenue   12,968     12,614     40,263     33,262  
Total non-interest income   52,958     70,678     445,254     588,489  
Total net revenue   377,732     482,120     1,439,163     1,793,159  
Provision for loan losses 517,800 186,536 1,070,792 237,767
Operating expense:
Compensation and benefits 83,644 110,092 302,854 335,476
Clearing and servicing 46,105 74,809 137,112 208,449
Advertising and market development 30,381 25,190 130,566 100,131
Communications 23,029 25,254 72,623 72,928
Professional services 16,862 19,252 66,256 64,903
Depreciation and amortization 20,569 21,618 62,607 60,045
Occupancy and equipment 20,470 21,143 62,666 63,369
Amortization of other intangibles 7,937 10,485 27,982 30,940
Facility restructuring and other exit activities 5,526 5,037 28,525 3,115
Other   41,367     42,599     77,575     144,709  
Total operating expense   295,890     355,479     968,766     1,084,065  
Income (loss) before other income (expense), income taxes and discontinued operations

 

(435,958 ) (59,895 ) (600,395 ) 471,327
Other income (expense):
Corporate interest income 1,387 1,018 5,619 3,724
Corporate interest expense (88,772 ) (37,365 ) (274,262 ) (113,022 )
Gain (loss) on sales of investments, net (213 ) (18 ) 307 37,005
Gain (loss) on early extinguishment of debt - (37 ) 10,084 (6 )
Equity in income (loss) of investments and venture funds   21,965     (741 )   25,070     6,514  
Total other income (expense)   (65,633 )   (37,143 )   (233,182 )   (65,785 )
Income (loss) before income taxes and discontinued operations

 

(501,591 ) (97,038 ) (833,577 ) 405,542
Income tax expense (benefit)   (180,802 )   (38,206 )   (300,418 )   136,192  
Net income (loss) from continuing operations (320,789 ) (58,832 ) (533,159 ) 269,350
Discontinued operations, net of tax:
Income from discontinued operations 2,178 384 28,796 741
Gain on disposal of discontinued operations   268,136     -     268,136    
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