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Beware Banks' Unfunded TARP Talk

When E*Trade announced its fourth quarter earnings results after the market close on Tuesday, the company said its application to the Treasury was "under active review," but no longer expressed confidence in ultimate approval.

"Given the changeover in administrations, at this time we cannot predict the timing of a determination on the application," CEO Donald Layton said during the company's conference call.

For the fourth quarter, E*Trade continued to experience a decline in asset quality. Nonperforming loans (those past due 90 days or more) comprised 3.69% of total loans as of Dec. 31, up from 3.02% in September and 2.32% at the end of 2007. Net charge-offs for the fourth quarter totaled $306 million, for an annualized ratio of net charge-offs to average loans of 4.72%. The company's provision for loan losses for the fourth quarter was $513 million, down slightly from $518 million in the third quarter. The quarter-end ratio of loan loss reserves to total loans was 4.23%, not too far behind the annualized charge-off pace.

E*Trade said in the press release that main subsidiary E*Trade Bank had $716 million in risk-based capital in excess of that required to be considered well-capitalized under regulatory guidelines. The bank's tier-1 and risk-based capital ratios were 6.29% and 12.96%.

E*Trade's level of loan loss reserves measured up decently compared to its pace of fourth quarter charge-offs, especially when compared with many other holding companies that recently reported reserve ratios that were way behind the annualized pace of charge-offs.

Regardless, there is a lot riding on the company's application for TARP money, and the company's previous announcements can lead to nasty consequences if the application is ultimately denied.


BankAtlantic of Fort Lauderdale, Fla., is awaiting word of its TARP application as it faces a litany of challenges.
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