E*TRADE FINANCIAL Q1 2009 Earnings Call Transcript

E*TRADE FINANCIAL Corporation (ETFC)

Q1 2009 Earnings Call

April 28, 2009 5:00 pm ET

Executives

Don Layton - Chairman and CEO

Bruce Nolop - EVP and CFO

Analysts

Howard Chen - Credit Suisse

Mike Vinciquerra - BMO Capital Markets

Rich Repetto - Sandler O'Neill

Roger Freeman - Barclays Capital

Matt Snowling - FBR Capital Markets

Presentation

Operator

Welcome to the E*TRADE FINANCIAL Corporation first quarter 2009 business update call. (Operator Instructions)

I've been asked to begin this call with the following Safe Harbor statement. During this conference call, the company will be sharing with you certain projections or other forward-looking statements regarding future events or its future performance. E*TRADE FINANCIAL cautions you that certain factors, including risks and uncertainties referred to in the 10-Ks, 10-Qs and other reports it periodically files with the Securities and Exchange Commission, could cause the company's actual results to differ materially from those indicated by its projections or forward-looking statements.

This call will present information as of April 28, 2009. Please note that E*TRADE FINANCIAL disclaims any duty to update any forward-looking statements made in the presentation. During this call, E*TRADE FINANCIAL may also discuss some non-GAAP financial measures in talking about its performance. These measures will be reconciled to GAAP either during the course of this call or in the company's press release, which can be found on its Investor Relations website at investor.etrade.com.

This call is being recorded. Replays of this call will be available via phone, webcast and podcast beginning today at approximately 7:00 o'clock p.m. Eastern Time. The call is being webcast live at etrade.com. No other recordings or copies of this call are authorized or may be relied upon.

I'll now turn the call over to Don Layton, Chairman and Chief Executive Officer of E*TRADE FINANCIAL Corporation, who is joined with Bruce Nolop, Chief Financial Officer, and other members of the E*TRADE management team.

Mr. Layton, please go ahead.

Don Layton

Thank you all for joining us this evening. We appreciate the opportunity to provide you with a business update, particularly given the continued market volatility and difficult economic environment. Bruce, will take you through our financial results for the quarter, but first I want to speak on three topics with respect to the quarter's results; our customer franchise, our credit exposure, and our capital position. Following Bruce's remarks, I will return with forward-looking comments.

Let me begin with our customer franchise where we continue to compete aggressively and exceed performance expectations. The strength of the E*TRADE brand was on display in the first quarter, as our core trading and investment business proved to be resilient and growing as our customers fully participated in highly volatile markets.

In the first quarter, trading activity was higher than we originally forecasted, up 8% year-over-year and down only 10% from the record levels of the prior quarter. As stated in our annual report, our business strategy now is to focus on our core historic franchise, the investor customer through brokerage and investor related banking products.

In addition we have adopted a back to basics approach to managing the business, which means a disciplined and renewed focus on customer service, quality, and innovation in brokerage and investment products and services. This has produced excellent results in the first quarter.

We delivered robust growth and net new brokerage accounts and customer assets, as we continued to compete effectively, especially for those individuals underserved by traditional brokerage firms. Despite a lower level of advertising spend for the quarter, we added 63,000 net new brokerage accounts.

This increase was consistent with our strategic focus on investors who provide the greatest source of revenues and profits to E*TRADE. We also attracted $3.5 billion in net new customer assets, marking our fifth straight quarter of positive asset inflows.

In keeping with our 2009 business plan, we made substantial product and service improvements this quarter, introducing new initiatives focused on making the online investing experience easier and more effective. For example, we increased customer service phone support to 24 hours a day, 7 days a week. We began the rollout of online chat to provide prospective customers with assistance in opening accounts. This has led to an improvement in the rate of completed applications.

We introduced new tools that are designed to simplify the bond and fixed income mutual selection and investment process, and help customers make more informed fixed income investment decisions. This is particularly important development as we have seen a substantial uptick in customer interest in this asset class over the past year.

As our trading and investing growth metrics demonstrate. Focusing on our core customer franchise is the key to growing market share. As markets continue to be volatile consumers are increasingly attracted to self directed and online investing, where they can play a stronger role in the management of their own finances. This type of trading and investing customer represents the future of the company.

Let me now turn to credit. We continue to believe E*TRADE's portfolio is further advanced through the credit cycle than the broader industry, based on the portfolios composition in seasoning along with the proactive steps we have taken to mitigate our risk exposure.

We began the process of reducing home equity lines in the first quarter of 2008. As a result, we have reduced our undrawn home equity lines from a peak of $7 billion to $2 billion, with the largest portion of that decrease occurring in the second quarter of last year. The lines that remain open have excellent credit profiles.

The improving performance we have seen in the home equity portfolio, which represents the company's greatest exposure to loan losses, demonstrates the relative advantage of our portfolio vintage and our proactive management approach. Special mention delinquencies are now 25% below year end levels and have declined for three consecutive months in a row.

Based on preliminary data this decline is continuing in April, which is almost over. Overall this trend should translate into reduced charge-off levels in the second half of the year.

We have seen encouraging signs in our one to four family portfolio as well. After increasing substantially in the fourth quarter in line with the deteriorating economy, special mention delinquencies have been essentially flat this year. However, we remain cautious about the future direction of this trend until we see more months of data.

The provision for loan losses decreased $59 million from last quarter to $454 million. Chargeoffs were $334 million, so the allowance for loan losses increased by $120 million strengthening the coverage ratios in both our one to four family, and consumer and other portfolios. We believe this increase is prudent because market conditions remain uncertain.

Before moving on from credit, I want to highlight the very active loan modification programs that we implemented this quarter for both our home equity and one to four borrowers. I should point out that E*TRADE's loan modification program goals are consistent with those of the Federal Government's Making Home Affordable program in which we fully expect to participate.

Our goal in this program is to target borrowers who demonstrate a willingness and capacity to meet their loan obligations and stay in their homes. To-date we have executed approximately $115million in loan modifications with approximately two-thirds in home equity.

The modifications impacted our financial statements in two key ways. First, delinquencies have been reduced. For home equity about 30% of our special mention delinquency decline was associated with modified loans. For one to four family loans, the impact on our delinquencies was minimal.

Second loan loss provision has been increased. The accounting for modified loans has required us not only to expense the economic value of the concessions to our borrowers, but also to increase the allowance, so that it represents chargeoffs expected for the full life of the modified loans rather than just four quarters.

These two factors together resulted in an increase in provision of approximately $20 million. As well, the allowance for modified loans now is equal to 74% of the outstanding balance for home equity loans and the allowance for one to four family loans is 23% of the outstanding balance. These numbers indicate very limited exposure to future write-downs.

This brings me to the final topic I wish to discuss with respect to the first quarter, our capital position. As you are well aware we generated substantial capital during 2008 and it is serving us well.

We began 2009 with $715 million in bank excesses risk based capital and $435 million in corporate cash, our two most important capital measures. By March 31, corporate cash remained relatively steady at $406 million and bank excess risk capital had declined to $451 million, which is just a bit lower than our target.

The net decline of excess risk based capital had the following components. First, loan loss provision of $454 million and second, offsetting it $181 million of bank pre-credit cost earnings. These two items account for basically the entire decline of $264 million.

In our capital plans, we then look for additional sources of capital to keep the bank financially strong. First, we look at the amount of regulatory capital, as we leave by the shrinkage of risk weighted loans.

Our portfolio continued to decline as expected and released $98 million in risk based capital this past quarter. We expect this general rate of asset reduction to continue over the balance of year.

Next we look to the risk weighted value of other that is non loan assets our balance sheet, primarily our CMO book. Unfortunately rating agency downgrades to this book required an increase in our risk rated capital of $106 million, offsetting the benefit of the loan reductions.

We do not expect the impact of downgrades in the next few quarters to be of this magnitude. However, given all the uncertainties in today's market environment a deviation from the norm in any single quarter should not be surprising.

Finally, we look at any special transactions such as asset sales or other transactions to supplement the capital bases needed. No special transactions were closed during the first quarter. For excess Tier-1 capital, we actually had a more severe decline to $288 million, which is unexpectedly low. Because Tier-1 capital measures are not risk sensitive we consider them less important than the risk rated ones, but we still need too at here to them as a regulatory matter.

Interestingly the growth rather than shrinkage of the Tier-1 total assets of E*TRADE Bank, would not normally be considered a problem because that asset growth is mainly in cash. We ended the quarter with $3.9 billion of cash in the bank, which is about $2 billion more than we normally would target. Therefore without this higher cash balance, the excess Tier-1 capital would have been approximately $100 million higher or $388 million.

Please note that this cash increase was driven by the growth in our signature complete savings account, known as CSA, which increased by $1.7 billion during the quarter despite the annual percentage yield being reduced from 3.01% at the beginning of the quarter to 1.45% at the end of the quarter.

This speaks of the strength our brand and our online technology and our bank's liquidity. We will be examining various alternatives to reduce the approximately $2 billion of excess bank cash we are carrying, thus improving the Tier-1 ratio. For example, we have already reduced the CSA APY or annual percentage yield to 1.20% in April. Our target Tier-1 ratio is 6.00%, one percentage point higher than the regulatory minimum to well capitalized.

I will return after Bruce's remarks to talk about forward-looking items, including some specific comments about our plans to generate capital and present good ratios to our customers and shareholders. With that I'll turn the call over to Bruce.

Bruce Nolop

Thank you, Don. During the quarter we generated a net loss of $233 million or $0.41 per share on net revenue of $497 million. The loss was due primarily to the loan loss provision of $454 million.

Also it is important to note that we do not mark our debt to market in accordance with FAS-159. If we had done so, we would had have shown additional pretax income of $500 million, which would have made us profitable. We believe the accounting treatment we have chosen is the appropriate way to represent the ongoing earnings power.

Commissions, fees, and service charges, principal transactions, and other revenue were down slightly from last quarter. This decline is in line with lower customer trading volumes as well as fewer trading days in the quarter. The modest decline in revenue was partially offset a more advantageous mix that generated an increase in average commission per trade.

Our first quarter revenue also included net interest income of $279 million, which was up slightly from $274 million in the fourth quarter. This change was due to maintaining a consistent level of interest earnings assets and a slight increase in the interest income spread to 234 basis points.

As Don noted, we reduced the annual percentage yield on the complete savings account by 1.56 percentage points this quarter, which was reflected in a lower average cost of funding and higher net interest income. In total, our CSA deposits grew by $1.7 billion during the quarter with approximately two-thirds of these deposits coming from brokerage customers.

Margin receivables declined from $2.8 billion to $2.4 billion in the quarter. We attribute the decline in margin receivables to deleveraging among brokerage customers and do not expect a rapid recovery in this metric going forward.

The company further reduced expenses in the quarter, lowering our operating expenses by $27 million from the prior quarter and $60 million from the first quarter of 2008. We continue to see benefits from the headcount reductions in the past year. The increase in compensation and benefits this quarter from the prior quarter was entirely related to the timing of incentive compensation accruals, with the base compensation and benefits actually being down $2.5 million.

We also made good progress in extracting savings by renegotiating arrangements with our vendors. Additionally we saw a reduction in professional services this quarter, driven by lower consulting costs and legal fees.

The other expense category declined by $9 million to $35 million, as a result of a reduction in bad debt expense and in legal reserves. Partially offset by an increase in the bank's assessment for federal deposit insurance. Overall we estimate that the bank's FDIC assessment could triple in 2009 with the majority of the increase to be realized in the second quarter due to a $26 million one-time special assessment fee.

A $23 million increase in the FDIC base assessment rate will be spread over the second, third, and fourth quarters. We don't like the fact that this insurance cost is increasing, but we recognize that the increase in FDIC coverage, which covers about 95% of our customer deposits has helped us to maintain our financial strength.

Our biggest expenses in the first quarter are loan loss provisions reflected a $120 million increase to our allowance, which brought our total allowance to $1.2 billion as of March 31. This allowance is equal to 4.9% of the gross loans receivable and compares with a ratio of 2.0% a year ago.

The growth in chargeoffs this quarter is attributable to the increase in delinquencies in the second half of last year. That increase in delinquencies will also result in higher chargeoffs in the second quarter of this year. Total special mention delinquencies, which we consider to be the leading indicator of future losses, were down 10% from year end. We expect that this improvement in delinquencies will result in lower chargeoffs in the second half of the year.

Total at risk delinquencies were up 9% during the quarter as a result of the increase in late 2008 delinquencies rolling forward. The movement during the quarter included for one to four family portfolio at risk delinquencies were up 20%. And this compares with a 67% increase in our loan loss allowance for this category. For the home equity portfolio, the at risk delinquencies were down 5% and the loan loss allowance decreased by 2%.

For the consumer and other portfolio, the at risk delinquencies were up and the loan loss allowance increased by 19%. I should note that the increase in delinquencies and loan loss allowance in this category was almost wholly attributable to the performance of one legacy commercial loan.

In the first quarter the allowance for loan losses as a percentage of nonperforming loans or the coverage ratio ended the quarter at 92%, excluding the loans that have been written down to their expected recovery value, the coverage ratio is 149%.

To summarize, special mention delinquencies declined across the portfolio. Total at risk delinquencies were somewhat mixed with a decrease in the home equity portfolio and an increase in the one to four family, and consumer, and other portfolios. We substantially increased the one to four family, and consumer, and other reserves and slightly reduced the reserves for home equity loans.

As Don noted the bank ended the quarter with $451 million in excess risk based capital and $288 million in excess Tier-1 capital over the well capitalized threshold. In terms of liquidity we had $406 million of corporate cash at quarter end. The bank had $3.9 billion of cash. And we had unused federal home loan bank credit lines of $10 billion.

Finally, I would like to take you through some changes we've made to our financial reporting and key performance metrics. We have renamed our business segments; Trading and Investing and Balance Sheet Management.

The Trading and Investing segment includes all customer facing businesses, including the former retail segment and now includes our market making activities. The Balance Sheet Management segment includes the activities from our former institutional segment other than market making.

We will post restated annual and quarterly segment results on our investor relations website. Our changes to key performance metrics are aimed at increasing transparency and better aligning the metrics we disclosed with our strategic focus on engaging our core investor customers.

These changes include providing the number of brokerage customers at E*TRADE, which builds on our efforts to provide additional insight into the number of brokerage accounts and revising consolidated net revenue per customer to total trading and investing segment income divided by the number of brokerage customers. We are also eliminating certain other metrics that have not proven to be meaningful indicators of business performance especially in a volatile market environment.

I will now turn the call back over to Don for his closing comments.

Don Layton

Thank you, Bruce. Let me wrap up with some forward-looking comments in the same order as my introductory ones. First the customer franchise, then there is credit exposure and last our capital position.

The customer franchise comes first. We are really pleased at how well it is performing. We are clearly getting our fair share of volumes and revenues versus our online competitors and gaining share against the traditional brokerages.

Our focus in the core investor customer and the basics of this business is really paying off. However, despite high volumes in the first quarter and so far in April, we continue to be conservative in our operating outlook for the rest of 2009. We think it is important to be positioned for a cautious outlook and if there is a surprise, it will then be on the up side. So we will continue to focus in the core business and also focus strongly on expense productivity.

Second topic is credit exposure. We clearly are seeing the first signs of positive trends in our loan portfolio. Although we understand all the uncertainties associated with today's economic environment where the word unprecedented is used so often. For home equity our more seasoned vintages, combined with our aggressive reduction in open lines have led to a decline in special mention delinquencies.

This supports our thesis that we are more advanced through the credit cycle than the mainstream lender. We therefore are expecting declining chargeoffs in the second half of the year. For one to four family loans we seem to be going flat on early stage delinquencies, a very different pattern than the large increase in the fourth quarter of 2008. But we are concerned about high severity figures and thus raised our allowance for this portfolio.

Third, our capital position. We are engaged in a wide variety of capital planning and generation efforts as stated to you previously, the management team here is committed to replacing the capital that has lost the credit positions and to keeping our position strong. We focus mainly on the banks excess risk rated capital and the corporate cash figure and secondarily on the banks Tier-1 ratio.

As of March 31, we're behind where I would like us to be. We are looking at a significant range of alternatives to generate capital, large and small. The specific focus of these efforts includes; number one, reduce the size of the assets of E*TRADE Bank, especially the cash assets to improve our Tier-1 ratio.

Two, generate cash capital to inject into E*TRADE Bank. For at least another quarter or two we are likely to have provisions in excess of the natural capital generation that occurs from pre-credit cost earnings plus risk rated asset reduction, which together we estimate roughly will be $200 million to $250 million per quarter. Therefore to replenish the bank's capital cushion, we will need to pursue financing alternatives, including equity issuances through public or private transactions as well as asset sales or other special transactions. We are also continuing to pursue TARP financing.

Number three, reduce the high debt burden and leverage of the parent company. We began to work at this last year via deferred equity exchanges. We will need to do substantially more, although because of the pay in kind feature on most of the debt, we have some flexibility on timing to do so.

Our initial and rough target is to reduce interest expense now running at about $350 million per year to about $150 million per year. As we consider these capital generating options, we are working closely with the largest bonds and equity holder Citadel Investment Group as a potential partner.

We are executing on our capital plans while in constant dialogue with our primary banking regulator the Office of Thrift Supervision. They have advised us we should proceed with our capital plans both with respect to the bank and to the parent quickly.

Executing, upon these capital requirements just as demonstrated last year, we are very conscious that some alternatives are more shareholder efficient than others. We will continue to have this priority going forward although the amounts required will undoubtedly generate substantial dilution.

Before we open the call to questions please note that we've said everything we can say regarding our interactions with our regulators and our application to the US treasury for TARP Capital Purchase program.

We have been advised to maintain a high degree of confidentiality in dealing with the government with laws and regulations supporting the need for confidentiality with respect to some topics, and thank you in advance for respecting this requirement. With that operator you may open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Howard Chen with Credit Suisse.

Howard Chen - Credit Suisse

Thanks for taking my question. Don, first question, what level of capital are you comfortable with and what specific capital on leverage levels are you targeting to get everyone comfortable?

Don Layton

We are willing to talk about certain targets we have, which we run by internally and it's buried in the text. I'll repeat them. We are looking for the bank to have excess risk weighted assets of $500 million. We think that's a good cushion. We're looking Tier-1 bank ratio target of 6% at least. And parent cash we'd like to have the cash to have interest expense, cash interest expense needs and other net needs for the next 12 to 24 months on hand at all times.

Howard Chen - Credit Suisse

Okay, and then my follow-up. Are you anticipating any potential deposit declines given the yield adjustments you spoke to and if so, maybe more broadly could you talk about your strategy for growth or composition of the liability side of the balance sheet?

Don Layton

Yes. First of all, I hope everyone knows the reality is that E*TRADE was among the higher payers for general savings products last year when there was a great deal of stress in the markets, and when we left the year at 3.01% that was among the higher rates among the major competitors.

Our liquidity position and posture is so good, we ended the quarter with 1.45%, which is no longer a premium rate it's at the normal competitive rate. Despite that, actually, our customer deposits excluding suite deposits actually went up, showing strength of our brand.

Basically, we are looking at the entire liability side of the balance sheet at this point, which includes our customer deposits, as well as the repo book and as well as the home loan bank book for different ways to reduce our liability side. We're examining many and will take action, but we have nothing specific to announce today other than the mention that we already reduced the CSA rate during the month of April to 1.20%.

Howard Chen - Credit Suisse

Okay. Thanks, and then final one from me Don. On the collateralized mortgage obligations, could you please let us know where that exposure is marked? What the unrealized loss position was as of March 31. And if there was any impact broadly from the newest FASB rules.

Don Layton

I'm going to ask one of my colleagues to give us the number for that. He's just looking up the number. Impairments during the quarter to the CMO portfolio were $18 million. They are part of a line item where we had actually had the securities gain. So you can't see it, because it's netted in there. We actually had a positive net.

Unidentified Company Representative

As of the end of the first quarter, the CMO book totaled $837 million of which $516 million was AAA, $83million was between AA and BBB and $237 million was below investment grade.

Howard Chen - Credit Suisse

Okay, and then just the impact of FASB rules…

Unidentified Company Representative

The mark to market at March 31st was a loss of about $300 million.

Bruce Nolop

Right. Okay? All right.

Howard Chen - Credit Suisse

Then impact from new FASB rules, just that last part?

Bruce Nolop

We have taken nothing in the first quarter. We expect it to be a small amount in the second quarter.

Operator

Our next question comes from the line of Mike Vinciquerra with BMO Capital Markets.

Mike Vinciquerra - BMO Capital Markets

Thank you. Don, back to your point on reducing the size of the balance sheet, I'm just looking at the composition of your assets on the interest earning side and BS since we are up about a billion dollars quarter end to quarter end, and I'm just curious why that actually went up instead of say paying down the repo that FHLB advances to reduce your cash side of the balance sheet.

Don Layton

The repo and home loan bank books have associated with them repayment costs. Let me use the home loan bank as the easiest example. Instead of just repaying, which obviously we do if they were cost less, the home loan bank book consists of fixed term fixed rate advances, all done in the past when rates are higher, and we would owe them an economic prepayment penalty which makes them, and what I referred to is sticky, so it's a little bit hard to prepay.

There's a similar concept in the repo book. So, we are examining alternatives, but that's what makes it a little hard to do.

Mike Vinciquerra - BMO Capital Markets

So, you essentially chose to put some of that excess cash you had into MBS, because you weren't able to pay down the longer-term debt?

Bruce Nolop

Right. We are liability bound if you will i.e., our adjusting liquidity is marketable securities and cash investments. The opposite of a purchase funds bank.

Operator

Your next question comes from the line of Rich Repetto with Sandler O'Neill.

Rich Repetto - Sandler O'Neill

I guess the first question is when you went to the capital position, I think, I just missed this, but there was $150 million down streamed besides the provisioned pretax bank earnings. So, the $150 million downstream, that was eaten up or eaten into by was it the risk based downgrades…?

Don Layton

No. The $150 million was subsequent to the end of the quarter. So, all those other capital ratios I gave you are before the $150 million got moved down. Obviously, the ratios are higher now.

Rich Repetto - Sandler O'Neill

Okay. Then I guess my follow-up question would be just you've laid out in the release about raising more capital and the need to do that. You also talked about this still the capital uses. I think you mentioned $200 million to $250 million per quarter. I guess I am trying to get around to how much capital do you need to raise?

Don Layton

Basically, I'll give you sort of the rules we are using and you can do your own estimate based on your estimate of what future events will be. The bank capital and I'll focus on risk rated as what we consider the most important. Basically, if provision is less than the organic capital growth, which is that $200 million, 250 million estimate which comes from earnings in the business and the reduction in risk weighted assets which we think on average will be some number. If the provision is less then the bank has capital ratios that naturally go up and it doesn't need anything from the parent any more.

So, the provisions are generally higher than the range of $200 million to $250 million over time each quarter more capital needs to be injected into the bank. This is math I started explaining about the third quarter of last year.

Because the economy went into a larger downturn in the fourth quarter, extending the period before we have seen this downturn in our substandard delinquencies, the number we need to replace and reinstall our capital buffers if you will, our cushions, which we had nice ones at the end of the yore based upon our large capital raising last year mainly the subsidiary sales.

So, that's what we are dealing with. We want to have our capital cushion the risk rated to be back at 500. It was only a little bit less than that at the end of the first quarter, I believe, it's 410 and so that will drive the need for cash capital. That is separate from the need to shrink the balance sheet in the bank from Tier-1 and that is separate from the need to take the parent which has loads of capital but it's in the form of debt rather than equity and we need to get it converted.

Operator

Our next question comes from the line of Roger Freeman with Barclays Capital.

Roger Freeman - Barclays Capital

Hi, good evening. I wanted to come back to some commentary I think you made last quarter about discussions with the regulators basically suggesting that if you were to get TARP, you would be willing to go into more of a lending mode again.

As I look at how you renamed your segments, balance sheet management which is also the bank, I mean that to me that's another word for workout which is about as far from sort of lending as I can think. So, I guess does that make your -- I don't want to talk about TARP, but that just seems to me like it makes your case a little more difficult.

Bruce Nolop

No. I think you are reading the wrong thing at the balance sheet management. That is a classic bank treasury function. All the customer assets and liabilities are transfer priced at market prices into the balance sheet management area and then with limits as to liquidity and interest rate risk, they then look to lay off the risk and manage the funds.

Every bank has this function, usually for its bank treasure or some phrase like that. It is not work at area, although it does own, because they were professional investments overwhelmingly, the mortgage loans so it is true that the losses are in their part of the P&L, but even five years from now when those losses are just a bad memory, you will still have the balance sheet management segment doing classic back treasury activity with liquidity and marketable investment securities and things like that.

Roger Freeman - Barclays Capital

Okay. Then I guess the only other thing is you seem to be the only institution I can think of that's been told to raise capital and given no. In doing so even Colonial was told to raise capital, but they would get TARP alongside that. I'm assuming that since you haven't announced that, that's not part of the deal. It looks like you're put in a really tough spot there.

Don Layton

I can't speak for other banks. TARP to us would be nice, but we think we are in a fine position to raise capital without them.

Operator

Your final question comes from the line of Matt Snowling with FBR Capital Markets.

Matt Snowling - FBR Capital Markets

Can you discuss the timeline of regulators activity to raise that capital?

Don Layton

The only thing we are going to say is stick by our statement that they wish us to do so quickly.

Matt Snowling - FBR Capital Markets

Okay. Then maybe can you at least give us what your risk weighted assets were as of the end of the quarter in regulatory capital level?

Don Layton

Bruce, do you have that?

Bruce Nolop

We're going to look at risk-weighted assets probably just to the bank which is what we look at.

Unidentified Company Representative

Total would be $2.9 million and total capital to the risk weighted assets, is that the number you're looking for where Don is quoting that the excess of $451 million.

Matt Snowling - FBR Capital Markets

That's before the $150 million?

Unidentified Company Representative

Correct. Those are the March 31 numbers and the 150 was done initial.

Matt Snowling - FBR Capital Markets

Then I guess we get back into risk weighted assets.

Bruce Nolop

Yes. You could obviously divide by the percentage.

Unidentified Company Representative

He wanted the assets.

Bruce Nolop

The minimum 10% to 10 times that.

Operator

That concludes the question and answer portion of today's call. I will now turn the call back to Don Layton for some closing comments.

Don Layton

Thank you. I want to repeat basically the three key points that I think describe what's going on here at E*TRADE. The business, the customer franchise is pretty much hitting on all eight cylinders competing fully, getting its fair share against the other online brokerages and winning share against the traditional ones. We think it's doing wonderfully and it's got a great future ahead.

Number two, credit, I'm not sure where the only larger and substantial institution that's seeing a downturn in provisions and significant turns in credit, but if we're not, we're close to being one of the only ones. Particularly note the 25% decline in delinquencies, the 38-39 day delinquencies and home equity loans that for three months is a big number. It's not a per annum rate. It's the straight rate.

So, we are seeing credit and I hope everyone appreciates then that the range of expectations of credit losses which people can have where highly uncertain should be narrowing down as you can see the pattern and the turn in addition first mortgages of course have gone basically flat, a little more uncertain there, but flat and still a very good result after the fourth quarter. In other words, there is some notion of light at the end of the tunnel here with all the uncertainties there are.

Third, capital, in reality, I don't think we are saying anything other than the math and the things we talked about before. We clearly need to reduce the leverage of the parent which we started doing a year ago. We clearly need to have good capital cushions at the bank.

We loaded up a lot in 2008, but the economy doing so much worse where people are talking about depression and such in the fourth quarter put us in a place where we need to replenish the cushions to a certain degree. We have given your our targets so you can get a notion of what we would be aiming at. That's the basic story here, and thank you for listening. Good evening.

Operator

We thank you for your participation in today's E*TRADE Financial Corporation first quarter 2009 business update conference call, and ask that you please disconnect your lines as well as your webcast browser. Thank you.

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Comments

[Moon Kil Woong:]

It is a pity they ever strayed from their core business which is fine and profitable. I wish them the best of luck in rectifying their mortgage woes. At least they seem to be agressively charging off and purging themselves of this ugly mess.

Apr 29 01:59 PM

[Lee Eugene ...:]

I agree with Moon on this one. Look at TD Ameritrade that just stuck to boring, profitable, and isn't a dollar stock. I have been trying to figure out a fair value, but just can't touch it with the crap still on the books. Perhaps next year. .

Apr 29 05:29 PM

[iNVestorUnrest:]

etrade is too cheap. it's worth $1

Apr 29 10:29 PM