E*Trade Financial Corp.'s (ETFC) second-quarter loss widened on problems at its bank unit. The online broker said, however, its loan portfolio showed signs of improving delinquency trends.

E*Trade said the loan loss provision for its bank unit - the capital it must set aside for current and future losses - rose 27% from a year ago, to $405 million. The provision was lower by $49 million from the prior quarter. The New York company, which has been hit by heavy losses within its bank's mortgage portfolio, shrank its balance sheet by $1.3 billion from the first quarter.

In June, E*Trade unveiled a capital-raising plan. It has completed the equity portion, having raised more than $600 million in common stock. Of that amount, it injected $500 million into its bank during the second quarter.

The company still expects, by the end of the third quarter, to exchange $1.7 billion of its 8% senior notes due 2011 and 12.5% springing lien notes due 2017 for an equal principal amount of newly issued convertible debentures due 2019. The exchange requires shareholder and regulatory approval.

In an interview with Dow Jones, Chairman and Chief Executive Donald Layton said that, following the capital-raise, E*Trade is "satisfied with where we are." He added that under its own stress-test type scenario, E*Trade's bank is more than well-capitalized.

With the capital initiatives, E*Trade reported a bank tier 1 capital ratio of 6.79%, up from 5.63% in the first quarter, and above the 5% level to be well-capitalized in regulators' view.

E*Trade posted a net loss of $143 million, or 22 cents a share, compared with a net loss of $95 million, or 19 cents a share, a year earlier. Revenue rose 17%, to $621 million.

Analysts polled by Thomson Reuters had expected, on average, a loss of 31 cents a share on $101 million in revenue.

E*Trade is still awaiting approval of its application for an $800 million investment from the Treasury Department's Troubled Asset Relief Program. Layton said E*Trade's TARP application is "still active," but the company had no news to report.

Within its home equity portfolio, E*Trade's greatest exposure to loan losses, "special mention" delinquencies, or those of 30 to 89 days, fell 5% from a year ago and 12% over the first quarter. Delinquencies of 30 to 179 days also declined 19% from the previous quarter, but were flat year over year.

Charge-offs, or loans that E*Trade doesn't think it can collect, increased to 6.47%, up from 3.53% a year ago, and 5.32% in the first quarter. Layton said that while delinquencies at E*Trade peaked in December, he believes chargeoffs peaked in the second quarter "approximately two quarters later."

E*Trade's daily average revenue trades, or DARTs, a figure closely watched by analysts, rose 28% from a year ago. Peers Charles Schwab Corp. (SCHW) and TD Ameritrade Holding Corp. (AMTD) already reported higher-than-expected quarterly trading volumes as investors have harnessed options and exchange-traded funds to capitalize on market volatility.

Earlier Wednesday, Knight Capital Group Inc. (NITE) posted a 21% rise in second-quarter income, boosted, in part, by an increase in its global markets segment. That business includes quantitative equity trading and institutional sales and trading.

Shares of E*Trade closed up 5.4%, at $1.36, and was recently up 2.9%, at $1.40, in after-hours trading. The company's stock is down 66% over the past year.

-By Brett Philbin, Dow Jones Newswires; 212-416-2173; brett.philbin@dowjones.com