This summary is based on the first quarter fiscal 2008 earnings call conducted by E*Trade Financial Corporation (ETFC) on April 17, 2008.
President: Robert Burton
Chairman & CEO: Donald Layton
Chief Financial Officer: Robert Simmons
Key Investors Issues
- The net loss was 20 cents a share versus a net loss of $3.98 a share in the sequential quarter.
- The total net revenue for the quarter was $316 million.
- In the quarter, home equity delinquencies grew by $41 million over Q4 to $562 million.
First Quarter Fiscal 2008 Financial Highlights
The company reported a net loss of $91.2 million, or 20 cents per share, compared to a net loss of $1.7 billion, or $3.98 per share in the prior quarter and net income of $169.4 million or 39 cents per share a year ago.
The first quarter results included various noteworthy items related to actions taken in conjunction with the execution of the company''s Turnaround Plan and credit market-related losses. The combination of these items on a net basis negatively impacted the first quarter by approximately $35 million, or 5 cents per share, as described below:
- Provision expense of $234 million included an additional $9 million associated with a change in the timing of foreclosure and bankruptcy-related charge-offs
- Loss on loans and securities, net, of $9 million included $27 million of impairments on AAA-rated and AA-rated collateralized mortgage obligations
- Compensation and benefits of $129 million included $12 million in severance related expenses
- Facility restructuring and other exit activities were $10.5 million
- Other expense of $17.5 million included a $24 million gain on the sale of corporate aviation-related assets
The firm reported total net revenue of $316 million.
This included provision for loan losses of $234 million and a $9 million net loss on the sale of loans and securities. The company continues to provision in excess of charge-offs this quarter resulting in a reserve build of $58 million. Depending on delinquency trends at some point later in the year, the firm would expect provision equal to or slightly lower than charge-offs based on delinquency and loss severity trends. Clearly this will be meaningful to reducing the current headwind to revenue and earnings as a result of reserve building that the firm has seen in recent quarters.
E*Trade also reported a loss on sale of loans and securities of $9 million, which was the net result of two factors.
It was approximately $18 million on the sale of MBF securities consistent with the balance sheet deleveraging strategy and the $27 million impairment.
On the expense side, there were a few noteworthy items as well.
Compensation and benefit expense was elevated due to increased severance related expenses of approximately $12 million. The firm expects compensation and benefits to remain at elevated levels for the second quarter before dropping to a lower run rate level in the back half of the year.
Other expenses of $17.5 million were lower than expected primarily due to roughly $24 million in gains in the sale of corporate aviation related assets. Going forward, the management would expect this line to return to a more normalized run rate of around $35 million to $40 million. The results also included a $10.5 million restructuring charge related to the exit of the institutional business and facilities consolidation.
The first quarter was strong on the company’s twin priorities of returning to the core business to full competitive growth and to strengthen the balance sheet.
With respect to the core business, the firm entered the quarter with a customer base that had been stabilized by the late November cash infusion. During the first quarter, the firm was able to transition from stability to the first stages of growth. Specifically, the company added gross new accounts of 305,000 and ended the quarter with a record 4.8 million total accounts. In addition, the company added over 60,000 net new customers to the franchise this quarter; the most since the fourth quarter of 2005. It’s important to note the distinction between accounts and customers. The new customer metric represents brand new relationships to the company. This is very impressive given all the disruption a few months ago and a solid indication of the continued strength and appeal of the brand. E*Trade also saw growth late in the quarter in its 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.
On the customer asset front, the firm also saw some positive trends. While total customer assets declined in aggregate, proportionate to the market sell off, the new customer assets flows turned positive late in the quarter. On the whole, for the quarter, net new customer assets increased $300 million quarter-over-quarter after declining sharply last quarter. Total customer cash and deposit balances increased by $1.3 billion to approximately $35 billion.
The home equity portfolio is the largest portfolio in terms of earnings and capital impact as expected losses are large relative to the capital base.
Given the negative economic and market news during the quarter, investors justifiably assumed that the loss potential would trend higher not lower. With the first quarter behind now, the home equity portfolio is performing broadly in line with the firm’s existing expectations. There are two reasons why the management believes that this performance remains relatively good. This is a high FICO portfolio and the firm stopped making high CLTV purchases in early 2007, thus avoiding some of the worst vintages and giving the firm more seasoning at this point in time.
