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E*Trade Posts Deep Loss on Charge

E*Trade posted a deep third-quarter loss due to a charge related to its debt swap in August, but, excluding this item, the online broker edged Wall Street's loss view.

(Updated with details from E*Trade's conference call)



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reported a whopping third-quarter loss late Tuesday, primarily stemming from a charge the online broker took related to its debt swap this past summer.

The company lost $832 million, or 66 cents a share, for the three months ended Sept. 30, much wider than a loss of $143 million, or 22 cents a share, in its fiscal second quarter ended in June, and a loss of $50 million, or 9 cents a share, in the year-ago equivalent quarter.

The latest results included a $968 million pre-tax non-cash charge for debt extinguishment in relation the $1.74 billion debt exchange the company completed in August. After taxes, the impact of the charge was $773 million, or 61 cents per share.

Excluding this item, E*Trade posted a loss of $59 million, or 5 cents a share, in the latest quarter, edging the average analysts' estimate for a loss of 6 cents a share.

The debt exchange also resulted in a $708 million increase in paid-in-capital. The net effect of the exchange to book equity was a reduction of $65 million, E*Trade said.

"During the quarter we successfully completed a comprehensive recapitalization, substantially improving the company's financial position," outgoing Chairman and CEO Donald H. Layton said in a statement. "Our online brokerage business continues to perform strongly: brokerage accounts grew solidly, our average commission per trade is higher, and our interest rate spread remains strong despite very low market rates. While DARTs were down seasonally from the second quarter, year-over-year they were up seven percent and year-to-date, we have recorded our highest DART level for the first nine months of any year."

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E*Trade reported total daily revenue trades, or DARTs, of 196,000 for the third quarter, down 11% from a record second-quarter performance, and up 7% vs. the year-ago quarter.

Loan quality is of paramount concern for analysts and investors as the company is struggling with a deteriorating mortgage and home equity portfolio. E*Trade took a provision for loan losses of $347 million in the quarter, down 14% from the second quarter and 33% from the year-earlier period. Total net charge-offs in the quarter were $352 million, a decrease of $35 million from the prior quarter, it said.

E*Trade's total net revenue was 575.3 million in the quarter vs. $377.7 million in the year-earlier quarter.

So-called 'special mention' delinquencies (loans at least 30-89 days late in payment) declined by 4%, while total 'at-risk' delinquencies (30-179 days late in payment) fell by 10% in the quarter, E*Trade said. Within home equity loans, which represent the company's greatest exposure to loan losses, 'special mention' delinquencies rose 1% in the quarter, while 'at-risk' delinquencies fell 10%. .

As of Sept. 30, E*Trade's bank subsidiary had a Tier-1 capital ratios of 6.72% to total adjusted assets and 13.15% percent to risk-weighted assets.

E*Trade announced in September that CEO Layton would be stepping down at the end of the year when his contract expires. The company has yet to name a successor.

As expected, Layton was asked on the company's earnings conference call about the search for a new chief executive.

Layton for the most part declined to comment but did say that given the current marketplace with the displacement of many potential CEOs "the supply of potential candidates is larger than normal."

The new CEO's first priority "should be the actual franchise business

rather than the balance sheet and credit because the things are so well at hand," Layton added later on. "Obviously my life the past two years has been quite the opposite."

Shares closed down 2.5% to $1.56. The stock was sliding another 4.3% in after-hours trading.

--Written by Laurie Kulikowski in New York.