Updated from 5:44 p.m. EDT

E*Trade

(ETFC) - Get Report

swung to a wider-than-expected second-quarter loss on Tuesday and indicated that its plan to return to profitability is being stymied by the challenging economy.

The financial services provider reported a net loss of $94.6 million, or 19 cents per share, as loan delinquencies rose and it increased its provision for future losses. That compares with a profit of $159.1 million, or 37 cents per share a year earlier. Analysts had expected a loss of 14 cents per share, on average, according to Thomson Reuters.

E*Trade also cast a worrisome shadow on third-quarter results, saying it was forced to liquidate a majority of its preferred stock holdings in

Fannie Mae

and

Freddie Mac

, resulting in a pre-tax loss of $83 million. The government-backed mortgage giants experienced a dramatic sell-off as investors worried about their ability to survive the housing crisis.

As of Monday, E*Trade's holdings had lost about $40 million in market value over the third quarter. The company held a remaining position of about $150 million, down from $330 million at June 30, and plans to reduce its remaining exposure.

E*Trade shares were falling more than 12% to $3.55 in recent after-hours trading.

Loan delinquencies increased by 9% over the previous quarter, although the rate of increase has slowed. E*Trade boosted its provision for loan losses by $85 million due to an increase in home-equity charge-offs. Its total allowance for loan losses now stands at $636 million.

Chairman and CEO Donald Layton said the current economic climate "may impede our expectations to return to profitability from continuing operations this year."

While Layton acknowledged that the company's credit losses were "somewhat higher than expected," he said they are "still manageable" and characterized the deceleration of loan delinquencies as "encouraging."

Despite the loss, E*Trade posted 90,000 more customers and 196,000 more accounts than it had in the year-ago period and $900 million in new asset inflows.

The company has not posted a profit in four quarters and is undergoing a turnaround plan. It worked to reduce risky assets by $1.4 billion during the quarter, and cut undrawn home equity lines to about $3.7 billion from over $7 billion last year. It also expects to generate over $700 million in net proceeds by selling non-core assets. Most of those sales will close during the current quarter.

E*Trade's loss compares with profit growth at two of its top competitors,

TD Ameritrade

(AMTD) - Get Report

and

Charles Schwab

(SCHW) - Get Report

, during the same quarter.