This summary is based on the first quarter fiscal 2008 earnings call conducted by E*Trade Financial Corp. (ETFC) on April 17, 2008.
Management:
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President: Robert Burton–
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Chairman & CEO: Donald Layton
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CFO: Robert Simmons
Key Investors Issues
- Total net revenue decreased 51% to $316 million, including $234 million in provision for loan losses
- Net loss of $91.2 million, or 20 cents per share, was down from a profit of $169.4 million or 40 cents in 2007.
- Increased excess risk-based capital to $695 million and tier-1 ratio to 6.8%.
First Quarter Highlights
The company generated a net loss of $91 million or 20 cents a share down from a profit of $169.4 million or 40 cents in the prior year due to a 50% drop in revenue, and $234 million in provision for loan losses.
- Included in the loss are noteworthy items which in total reduced earnings by about $35 million or 5 cents per share.
- These items included $9 million in additional provision expense associated with an acceleration of charge-offs for loans in the process of foreclosure and bankruptcy and $27 million in securities impairments related to the private label CMO portfolio.
- They also include $12 million in severance related expenses and $24 million gain on the sale of corporate aviation related assets and $10.5 million in restructuring related charges.
Total revenue amounted to $316 million, down 51% from $644 million in 2007 due to difficult market conditions.
- The firm was able to transition from stability to the first stages of growth, adding gross new accounts of 305,000 and ended the quarter with 4.8 million total accounts.
- In addition, the firm added over 60,000 net new customers to the franchise, a solid indication of the continued strength and appeal of the brand.
- The firm also saw growth late in the quarter in the high value target segment account base which had been trending negative since November; further validation that the firm has turned the corner with respect to rebuilding customer confidence.
While total customer assets declined in aggregate, proportionate to the market sell off, new customer assets flows turned positive late in the quarter.
- Net new customer assets increased $300 million quarter-over-quarter after declining sharply last quarter and total customer cash and deposit balances increased by $1.3 billion to $35 billion.
- Given the broad market weakness, industry wide trading activity was a little softer and DART volume declined 11%.
The firm also reported a loss on sale of loans and securities of $9 million which was the net result of two factors; $18 million on the sale of MBF securities consistent with balance sheet deleveraging strategy and the $27 million impairment.
- Compensation and benefit expense was elevated due to increased severance related expenses of $12 million.
- Other expenses of $17.5 million were lower than expected primarily due to $24 million in gains in the sale of corporate aviation related assets, including a $10.5 million charge related to the exit of the institutional business and facilities consolidation.
Credit Performance:
- Total allowance for loan losses increased to $566 million, as provision exceeded charge-offs by $58 million during the quarter.
- The Company increased its allowance for loan losses in all three categories of its loan portfolio.
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The home equity portfolio is performing broadly in line with existing expectations due to a high FICO portfolio and the firm stopped making high CLTV purchases in early 2007 thus avoiding some of the worst vintages.
- The firm is therefore maintaining its three-year cumulative loan loss expectation of $1 billion to $1.5 billion.
Total delinquent loans increased $41 million, 65% below the increase in the prior quarter.
- In addition, special mention loans (30-89 days delinquent) declined $14 million quarter over quarter, and have shown an absolute decline in two of the last three months.
- Net charge-offs totaled $149.4 million, including $21.7 million related to the change in charge-off policy associated with a change in the timing of foreclosure and bankruptcy-related charge-offs.
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The one-to-four family first mortgage portfolio is performing worse than expected due to continued deterioration in home prices and therefore increased loss severity charge-offs have increased fairly rapidly although off a very small base.
- Total delinquent loans increased $177 million quarter over quarter to $655 million.
- Net charge-offs totaled $14.6 million, including $8.3 million related to the change in charge-off policy associated with a change in the timing of foreclosure and bankruptcy-related charge-offs.
