E*Trade Shows Improvement

(Update includes corrected Citadel exchange offer, Thursday share prices.)

E*Trade Financial ( ETFC) shares were rising modestly Thursday, a day after the troubled online brokerage beat analysts' estimates and showed improvement from the first quarter, but still fared worse than it did the same time last year.

The New York company reported a loss of $143 million, or 22 cents a share. That's slightly better than its first-quarter results in which it posted a loss of $233 million, or 41 cents a share, but worse than the year-earlier quarter in which E*Trade had a loss of $95 million, or 19 cents a share. Net revenue totaled $621 million.

Analysts on average expected the company to record a loss of 31 cents a share. The stock recently was rising 4 cents, or 2.9%, to $1.40.

The company said its bank subsidiary had a Tier 1 capital level of 6.79% to total adjusted assets and 12.65% to risk-weighted assets.

"This quarter marked several important milestones for the company," Chairman and CEO Don Layton said in a release. "Our core franchise generated excellent volumes and profit, our credit provision continued to moderate quarter over quarter, and we completed most of the key components of a major recapitalization of the company."

The brokerage firm has been on shaky ground this year.

E*Trade, in conjunction with its first-quarter earnings release in April, said that in light of the continuing losses in E*Trade Bank's roughly $22 billion loan portfolio, the Office of Thrift Supervision, its primary banking regulator, told the company to raise capital quickly.

The company put in place a capital restructuring plan that included raising common equity from the public markets and is currently undergoing debt exchange program. Analysts had speculated this spring that parts or all of the company could be sold. E*Trade plans to hold a special shareholder meeting on Aug. 19 to seek approval for the exchange.

E*Trade said in June that it raised more than $600 million in common equity last quarter, hopefully shoring up its shaky financial position. The company injected $500 million in equity into the bank subsidiary during the second quarter.

Citadel Investment Group, E*Trade's largest stock and bondholder, bought additional common shares in the company, bringing its stake to 17%. It has also agreed to exchange as much as $1.23 billion of the debt it holds on E*Trade.

E*Trade said Wednesday that it continued to make progress during the quarter in reducing balance sheet risk.

The company also had improved delinquency trends for the second consecutive quarter. E*Trade lowered its provision for loan losses by $49 million to $405 million. The company's total allowance for loan losses essentially was flat at $1.2 billion, or 5% of gross loans receivable. Total net charge-offs in the quarter were $386 million, an increase of $53 million from the prior quarter, it said.

In the home equity portfolio, which represents the company's greatest exposure to loan losses, special mention delinquencies (30-89 days) decreased 12%, while at-risk delinquencies (30-179 days) declined 19%. Total special mention delinquencies for the company's entire bank loan portfolio, which also includes one- to four-family and consumer and other loans, declined by 8% in the quarter.

"The decline in special mention and at-risk delinquencies has led to another quarterly reduction in provision expense," Layton said. "Later this year we expect the quarterly provision to drop below the amount of quarterly charge-offs, which we believe have peaked this quarter."

Shares closed up 5.4% to $1.36 Wednesday. In after-hours trading, the stock was up 2.9% to $1.40 a share.

Rival TD Ameritrade ( AMTD) said on Tuesday that third-quarter profit slid 17% to $170.5 million, or 30 cents a share, from $204.4 million, or 34 cents, in the year-ago period.

Charles Schwab (SCHW) also said last week that profit fell 31% to $205 million, or 18 cents a share.

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