E*Trade Financial Corp, a U.S. retail brokerage, said it is facing regulatory pressure to boost capital as it posted its seventh straight quarterly loss, and its shares fell 25 percent in after-hours trade.

The online brokerage, which has suffered significant credit losses in its mortgage lending business, said the Office of Thrift Supervision told the company to quickly raise new capital for its bank and reduce the leverage of its holding company.

The company said it may raise capital from public markets, private investors, or both, which would end up creating significant dilution for shareholders. Any dilution would be a negative for hedge fund Citadel, its largest debt and equity holder.

E-Trade shares dropped to $1.84 when the company reported results. It closed on the Nasdaq at $2.46.

The retail brokerage is still waiting to hear from the U.S. government on its six-month-old application for $800 million in relief funds under the Troubled Asset Relief Program, or TARP.

Donald Layton, who became CEO just over a year ago, said in an interview E*Trade's TARP application is still active, adding, the delay was unexpected.

More than 500 U.S. banks have already received funds under that program. It is unusual for the government to ask a TARP applicant to raise capital without offering relief.

It looks like regulators are pushing them, said Richard Repetto, analyst at Sandler O'Neill. Barclays Capital analyst Roger Freeman said the company appeared to be in a really tough spot.

E*Trade lost $232.7 million, or 41 cents per share, in the quarter ended March 31, compared with a loss of $91.2 million, or 20 cents per share, in the same period a year ago. Revenue was down 6 percent at $497.3 million.

On average, analysts expected the New York-based discount broker to lose 40 cents per share.

Before Tuesday's results, the shares had more than doubled since the beginning of the year, helped by signs of improvement in its home equity portfolio. Early-stage loan delinquencies were down 25 percent in the first quarter, compared to the previous quarter.

Overall, delinquent loans totaled $2.24 billion, up 13 percent from the previous quarter and up 80 percent from a year ago. The company had about $35 billion in loans and available-for-sale mortgage-backed and investment securities at the end of March.

The company set aside $454.0 million for loan loss provisions in the quarter, down from $513 million in the previous quarter. Layton said the company was on track to set aside smaller amounts in coming quarters for loan loss provisions, which account for its bad bets on mortgages.

Net charge-offs -- or loans on which E*Trade does not expect to be repaid -- were $334 million, up 9 percent from the previous quarter. Layton said it was likely charge-offs would peak in the current quarter.

HAUNTED BY MORTGAGES

E*Trade, a high flyer in the 1990s technology boom, entered the mortgage business with its 2000 acquisition of Internet bank Telebanc. The deal helped E*Trade weather the tech-market crash that followed, but returned to haunt it when the mortgage market cracked in 2007.

The company's shares, worth more than $20 two years ago, plunged as its mortgage portfolio soured. Citadel Investment Group bought an 18 percent stake and $3 billion in asset-backed securities during the 2007 crisis.

E*Trade management said it was working with Citadel as potential partner in generating capital.

E*Trade Bank's Tier 1 capital ratio, a measure of capital strength, was 5.63 percent at quarter's end, down from 6.29 percent in the previous quarter. In general, well-capitalized firms need a ratio of at least 6 percent to be considered well capitalized.

Meanwhile, E*Trade's trading volume, known as DARTS, slipped 10 percent from the previous record period to an average of 194,000 per day. The latest market bottom and a sharp bounce in stocks propelled trading in the latest quarter.

The company attracted $3.5 billion in net new assets in the quarter, suggesting its core brokerage business remains healthy. Total operating costs declined 17 percent.

Larger rivals Charles Schwab and TD Ameritrade reported quarterly results this month that boosted their shares, helped by strong trading revenues.

(Reporting by Jonathan Spicer, editing by Leslie Gevirtz and Matthew Lewis)

Merrill Lynch