E*TRADE FINANCIAL CORPORATION ANNOUNCES STRONGEST YEAR IN COMPANY HISTORY AND REPORTS Q4 2004 GAAP EARNINGS OF $0.26

E*TRADE FINANCIAL CORPORATION ANNOUNCES STRONGEST YEAR IN COMPANY HISTORY AND REPORTS Q4 2004 GAAP EARNINGS OF $0.26 Total Client Assets Top $100 Billion Mark - Generated full-year 2004 GAAP earnings of $1.01 per share on net income of $389.1 million - Reported fourth quarter GAAP earnings of $0.26 per share on net income of $98.4 million - Reported Total Daily Average Revenue Trades of 136,100 in Q4, an increase of 40 percent over Q304 and a decline of 3 percent year over year - Increased margin debt 10 percent to $2.2 billion at quarter end from $2.0 billion at the end of the third quarter and $1.8 billion a year ago or 27 percent - Improved bank spread to 220 basis points from 213 basis points in Q304 and 169 basis points in Q403 NEW YORK, Jan. 26 /PRNewswire-FirstCall/ -- E*TRADE FINANCIAL Corporation (NYSE:ET) today announced results for its fourth quarter ended December 31, 2004, reporting net income of $98.4 million, or $0.26 per diluted share, compared to net income of $107.5 million, or $0.27 per share, in the same quarter a year ago. The reported fourth quarter earnings per share include a $0.02 benefit from a lower corporate tax rate. Net revenue for the fourth quarter totaled $409.5 million, a 21 percent increase over the prior quarter and a 10 percent increase over the year ago period. For the year ending December 31, 2004, E*TRADE FINANCIAL reported earnings of $1.01 per share on net income of $389.1 million compared to $0.55 per share and net income of $203.0 million in 2003. Total assets/deposits in customer accounts reached a record level of $100.4 billion at year-end -- an increase of 20 percent sequentially and 21 percent year over year. "In 2004, we proved that you can increase profitability and earnings, while sharing the rewards of financial success with customers," said Mitchell H. Caplan, Chief Executive Officer, E*TRADE FINANCIAL Corporation. "Our record-breaking year continues to validate the strength of our model and underscores our commitment to passing on unique advantages to customers. In 2005, we intend to deliver continued value to our customers and shareholders by enhancing our customer segmentation and increasing integration." Other selected highlights from the fourth quarter of 2004: -- Added 61,000 net new brokerage accounts -- Generated a record-setting consolidated operating margin(1) of 31 percent -- Expanded E*TRADE FINANCIAL Center locations to include Palo Alto, CA and Washington, D.C. -- Repurchased approximately 4 million outstanding shares for $56 million at a weighted average price of $13.86 per share -- Announced an additional $200 million repurchase program in December Historical monthly metric data from January 2003 to December 2004 can be found on the E*TRADE FINANCIAL investor relations site at www.etrade.com. About E*TRADE FINANCIAL The E*TRADE FINANCIAL family of companies provide financial services including brokerage, banking and lending for retail, corporate and institutional customers. Securities products and services are offered by E*TRADE Securities LLC (Member NASD/SIPC). Bank and lending products and services are offered by E*TRADE Bank, a Federal savings bank, Member FDIC, or its subsidiaries. Important Notice E*TRADE FINANCIAL and the E*TRADE FINANCIAL logo are registered trademarks or trademarks of E*TRADE FINANCIAL Corporation. The statements contained in this news release that are forward-looking are based on current expectations that are subject to a number of uncertainties and risks, and actual results may differ materially. The uncertainties and risks include, but are not limited to, changes in market activity, anticipated increases in the rate of new customer acquisition, the conversion of new visitors to the site to customers, the activity of customers and assets held at the institution, seasonality, the development and enhancement of products and services, competitive pressures (including price competition), system failures, economic and political conditions, changes in consumer behavior and the introduction of competing products having technological and/or other advantages. Further information about these risks and uncertainties can be found in the information included in the annual reports previously filed by E*TRADE Group, Inc. or E*TRADE FINANCIAL Corporation with the SEC on Form 10-K (including information under the caption "Risk Factors") and quarterly reports on Form 10-Q. E*TRADE FINANCIAL Media Contact Pam Erickson E*TRADE FINANCIAL Corporation 617-296-6080 pam.erickson@etrade.com E*TRADE FINANCIAL Investor Relations Contact Adam Townsend E*TRADE FINANCIAL Corporation 703-236-8719 adam.townsend@etrade.com FINANCIAL STATEMENTS C o n s o l i d a t e d S t a t e m e n t s o f O p e r a t i o n s (in thousands, except per share amounts) (unaudited) Three Months Ended Dec. 31, Sept. 30, Dec. 31, 2004 2004 2003 Brokerage revenues: Commissions $94,148 $64,005 $97,915 Principal transactions 67,074 48,212 64,822 Other brokerage-related revenues 43,131 35,600 44,232 Brokerage interest income 49,531 42,871 38,308 Brokerage interest expense (6,475) (4,795) (3,473) Net brokerage revenues 247,409 185,893 241,804 Banking revenues: Banking interest income 273,658 250,141 202,996 Banking interest expense (134,364) (124,057) (119,056) Provision for loan losses (12,420) (9,145) (12,374) Gain on sales of originated loans 10,069 12,917 20,739 Gain on sales of loans held-for- sale and securities, net 15,792 13,108 28,287 Other banking-related revenues 9,377 8,280 8,874 Net banking revenues 162,112 151,244 129,466 Total net revenues 409,521 337,137 371,270 Expenses excluding interest: Compensation and benefits 95,562 87,264 98,361 Occupancy and equipment 19,954 19,176 20,162 Communications 18,559 18,465 21,568 Professional services 23,425 17,365 13,296 Commissions, clearance and floor brokerage 40,067 30,894 41,193 Advertising and market development 16,614 10,232 11,514 Servicing and other banking expenses 9,946 9,129 7,749 Fair value adjustments of financial derivatives 518 (696) (398) Depreciation and amortization 21,027 20,757 20,651 Amortization of other intangibles 6,932 6,271 9,779 Facility restructuring and other exit charges 2,799 (231) 8,855 Acquisition-related expenses 62 62 (997) Other 28,942 18,682 22,421 Total expenses excluding interest 284,407 237,370 274,154 Income before other income, income taxes and discontinued operations 125,114 99,767 97,116 Other income: Corporate interest income 1,937 1,698 1,569 Corporate interest expense (11,774) (11,873) (11,319) Gain on sale and impairment of investments 20,597 47,229 85,326 Loss on early extinguishment of debt -- (18,615) -- Equity in income of investments and venture funds 1,262 142 3,333 Total other income 12,022 18,581 78,909 Income before income taxes and discontinued operations 137,136 118,348 176,025 Income tax expense 38,623 38,464 67,141 Minority interest in subsidiaries 17 47 28 Income from continuing operations 98,496 79,837 108,856 Discontinued operations, net of tax: Loss from discontinued operations (74) (727) (1,401) Gain on disposal of discontinued operations -- 164 -- Net loss from discontinued operations (74) (563) (1,401) Net income $98,422 $79,274 $107,455 Basic income per share from continuing operations $0.27 $0.21 $0.30 Basic loss per share from discontinued operations (0.00) (0.00) (0.00) Basic net income per share $0.27 $0.21 $0.30 Diluted income per share from continuing operations $0.26 $0.21 $0.27 Diluted loss per share from discontinued operations (0.00) (0.00) (0.00) Diluted net income per share $0.26 $0.21 $0.27 Shares used in computation of per share data: Basic 367,603 369,103 362,944 Diluted (2) 381,061 380,557 421,121 C o n s o l i d a t e d S t a t e m e n t s o f O p e r a t i o n s (in thousands, except per share amounts) (unaudited) Three Months Ended Twelve Months Ended December 31, December 31, 2004 2003 2004 2003 Brokerage revenues: Commissions $94,148 $97,915 $349,539 $337,468 Principal transactions 67,074 64,822 252,162 229,846 Other brokerage-related revenues 43,131 44,232 163,686 177,682 Brokerage interest income 49,531 38,308 177,362 144,379 Brokerage interest expense (6,475) (3,473) (18,524) (10,305) Net brokerage revenues 247,409 241,804 924,225 879,070 Banking revenues: Banking interest income 273,658 202,996 968,411 748,527 Banking interest expense (134,364) (119,056) (491,931) (475,824) Provision for loan losses (12,420) (12,374) (38,121) (38,523) Gain on sales of originated loans 10,069 20,739 71,561 192,467 Gain on sales of loans held- for-sale and securities, net 15,792 28,287 57,853 97,261 Other banking-related revenues 9,377 8,874 35,988 35,821 Net banking revenues 162,112 129,466 603,761 559,729 Total net revenues 409,521 371,270 1,527,986 1,438,799 Expenses excluding interest: Compensation and benefits 95,562 98,361 382,184 393,271 Occupancy and equipment 19,954 20,162 78,244 85,462 Communications 18,559 21,568 74,559 82,215 Professional services 23,425 13,296 70,826 57,461 Commissions, clearance and floor brokerage 40,067 41,193 156,814 151,318 Advertising and market development 16,614 11,514 65,673 60,880 Servicing and other banking expenses 9,946 7,749 36,525 38,352 Fair value adjustments of financial derivatives 518 (398) (2,299) 15,338 Depreciation and amortization 21,027 20,651 82,853 89,506 Amortization of other intangibles 6,932 9,779 26,899 30,138 Facility restructuring and other exit charges 2,799 8,855 1,657 134,191 Acquisition-related expenses 62 (997) 248 1,859 Other 28,942 22,421 94,063 103,811 Total expenses excluding interest 284,407 274,154 1,068,246 1,243,802 Income before other income, income taxes and discontinued operations 125,114 97,116 459,740 194,997 Other income: Corporate interest income 1,937 1,569 6,692 6,550 Corporate interest expense (11,774) (11,319) (47,525) (45,592) Gain on sale and impairment of investments 20,597 85,326 128,103 147,967 Loss on early extinguishment of debt -- -- (22,972) -- Equity in income of investments and venture funds 1,262 3,333 4,468 9,132 Total other income 12,022 78,909 68,766 118,057 Income before income taxes and discontinued operations 137,136 176,025 528,506 313,054 Income tax expense 38,623 67,141 168,090 113,423 Minority interest in subsidiaries 17 28 893 (5,061) Income from continuing operations 98,496 108,856 359,523 204,692 Discontinued operations, net of tax: Loss from discontinued operations (74) (1,401) (1,855) (1,665) Gain on disposal of discontinued operations -- -- 31,408 -- Net income (loss) from discontinued operations (74) (1,401) 29,553 (1,665) Net income $98,422 $107,455 $389,076 $203,027 Basic income per share from continuing operations $0.27 $0.30 $0.98 $0.57 Basic income per share from discontinued operations (0.00) (0.00) 0.08 (0.00) Basic net income per share $0.27 $0.30 $1.06 $0.57 Diluted income per share from continuing operations $0.26 $0.27 $0.94 $0.55 Diluted income per share from discontinued operations (0.00) (0.00) 0.07 (0.00) Diluted net income per share $0.26 $0.27 $1.01 $0.55 Shares used in computation of per share data: Basic 367,603 362,944 366,586 358,320 Diluted (2) 381,061 421,121 405,389 367,361 C o n s o l i d a t e d B a l a n c e S h e e t s (dollars in thousands) (unaudited) December 31, September 30, December 31, 2004 2004 2003 ASSETS Cash and equivalents $939,906 $731,031 $921,364 Cash and investments required to be segregated under Federal or other regulations 724,026 716,643 1,644,605 Brokerage receivables, net 3,034,558 3,684,913 2,297,778 Trading securities 593,245 651,151 832,889 Available-for-sale mortgage-backed and investment securities 12,543,818 12,051,677 9,826,940 Other investments 46,269 41,431 49,272 Loans receivable, net 11,505,755 10,307,413 8,130,906 Loans held-for-sale, net 279,280 597,875 1,000,487 Property and equipment, net 302,291 287,111 287,097 Goodwill 395,043 408,187 392,845 Other intangibles, net 134,121 125,130 126,032 Other assets 555,175 734,162 539,001 Total assets $31,053,487 $30,336,724 $26,049,216 LIABILITIES AND SHAREHOLDERS' EQUITY Brokerage payables $3,618,902 $4,132,583 $3,696,225 Deposits 12,302,974 12,027,025 12,514,486 Securities sold under agreements to repurchase 9,896,872 9,044,660 5,283,609 Other borrowings by Bank subsidiary 1,760,732 1,617,072 1,203,554 Accounts payable, accrued and other liabilities 651,595 779,376 737,718 Convertible subordinated notes 185,165 185,165 695,330 Senior notes 400,452 400,000 -- Total liabilities 28,816,692 28,185,881 24,130,922 Shareholders' equity: Preferred stock, shares authorized: 1,000,000; issued and outstanding: none at December 31, 2004, September 30, 2004 and December 31, 2003 -- -- -- Shares exchangeable into common stock, $0.01 par value, shares authorized: 10,644,223; issued and outstanding: 1,302,801 at December 31, 2004, 1,326,125 at September 30, 2004 and 1,386,125 at December 31, 2003 13 13 14 Common stock, $0.01 par value, shares authorized: 600,000,000; issued and outstanding: 369,623,604 at December 31, 2004, 372,295,993 at September 30, 2004 and 366,636,406 at December 31, 2003 3,696 3,723 3,666 Additional paid-in-capital 2,234,093 2,270,445 2,247,930 Deferred stock compensation (18,419) (16,889) (12,874) Retained earnings (deficit) 158,611 60,189 (230,465) Accumulated other comprehensive loss (141,199) (166,638) (89,977) Total shareholders' equity 2,236,795 2,150,843 1,918,294 Total liabilities and shareholders' equity $31,053,487 $30,336,724 $26,049,216 SEGMENT REPORTING Three Months Ended December 31, 2004 Elimi- Brokerage Banking nation(3) Total (in thousands) Net revenues: Commissions $94,148 $-- $-- $94,148 Principal transactions 67,074 -- -- 67,074 Interest income 49,531 273,658 -- 323,189 Interest expense (6,475) (134,364) -- (140,839) Gain on sales of originated loans -- 10,069 -- 10,069 Gain on sale of loans held-for- sale and securities, net -- 15,792 -- 15,792 Provision for loan losses -- (12,420) -- (12,420) Other revenues 57,925 9,377 (14,794) 52,508 Net revenues 262,203 162,112 (14,794) 409,521 Expenses excluding interest: Compensation and benefits 63,510 32,052 -- 95,562 Occupancy and equipment 12,864 7,090 -- 19,954 Communications 16,839 1,720 -- 18,559 Professional services 16,600 6,825 -- 23,425 Commissions, clearance and floor brokerage 40,060 7 -- 40,067 Advertising and market development 12,409 18,999 (14,794) 16,614 Servicing and other banking expenses -- 9,946 -- 9,946 Fair value adjustments of financial derivatives -- 518 -- 518 Depreciation and amortization 16,545 4,482 -- 21,027 Amortization of other intangibles 4,312 2,620 -- 6,932 Facility restructuring and other exit charges 1,320 1,479 -- 2,799 Acquisition-related expenses -- 62 -- 62 Other 19,216 9,726 -- 28,942 Total expenses excluding interest 203,675 95,526 (14,794) 284,407 Income before other corporate items $58,528 $66,586 $-- $125,114 Three Months Ended September 30, 2004 Elimi- Brokerage Banking nation(3) Total (in thousands) Net revenues: Commissions $64,005 $-- $-- $64,005 Principal transactions 48,212 -- -- 48,212 Interest income 42,871 250,141 -- 293,012 Interest expense (4,795) (124,057) -- (128,852) Gain on sales of originated loans -- 12,917 -- 12,917 Gain on sale of loans held-for- sale and securities, net -- 13,108 -- 13,108 Provision for loan losses -- (9,145) -- (9,145) Other revenues 48,541 8,280 (12,941) 43,880 Net revenues 198,834 151,244 (12,941) 337,137 Expenses excluding interest: Compensation and benefits 55,892 31,372 -- 87,264 Occupancy and equipment 12,604 6,572 -- 19,176 Communications 16,628 1,837 -- 18,465 Professional services 10,820 6,545 -- 17,365 Commissions, clearance and floor brokerage 30,890 4 -- 30,894 Advertising and market development 5,376 17,797 (12,941) 10,232 Servicing and other banking expenses -- 9,129 -- 9,129 Fair value adjustments of financial derivatives -- (696) -- (696) Depreciation and amortization 16,313 4,444 -- 20,757 Amortization of other intangibles 4,021 2,250 -- 6,271 Facility restructuring and other exit charges (227) (4) -- (231) Acquisition-related expenses -- 62 -- 62 Other 9,332 9,350 -- 18,682 Total expenses excluding interest 161,649 88,662 (12,941) 237,370 Income before other corporate items $37,185 $62,582 $-- $99,767 Three Months Ended December 31, 2003 Elimi- Brokerage Banking nation(3) Total (in thousands) Net revenues: Commissions $97,915 $-- $-- $97,915 Principal transactions 64,822 -- -- 64,822 Interest income 38,308 202,996 -- 241,304 Interest expense (3,473) (119,056) -- (122,529) Gain on sales of originated loans -- 20,739 -- 20,739 Gain on sale of loans held-for- sale and securities, net -- 28,287 -- 28,287 Provision for loan losses -- (12,374) -- (12,374) Other revenues 51,958 8,874 (7,726) 53,106 Net revenues 249,530 129,466 (7,726) 371,270 Expenses excluding interest: Compensation and benefits 62,802 35,559 -- 98,361 Occupancy and equipment 14,557 5,605 -- 20,162 Communications 20,176 1,392 -- 21,568 Professional services 6,704 6,592 -- 13,296 Commissions, clearance and floor brokerage 41,186 7 -- 41,193 Advertising and market development 4,594 14,646 (7,726) 11,514 Servicing and other banking expenses 207 7,542 -- 7,749 Fair value adjustments of financial derivatives -- (398) -- (398) Depreciation and amortization 15,521 5,130 -- 20,651 Amortization of other intangibles 6,910 2,869 -- 9,779 Facility restructuring and other exit charges 7,209 1,646 -- 8,855 Acquisition-related expenses 471 (1,468) -- (997) Other 14,968 7,453 -- 22,421 Total expenses excluding interest 195,305 86,575 (7,726) 274,154 Income before other corporate items $54,225 $42,891 $-- $97,116 KEY PERFORMANCE METRICS (4) Qtr Qtr ended ended 12/31/04 12/31/04 Qtr Qtr vs. Qtr Qtr vs. Qtr ended ended ended ended ended CORPORATE METRICS 12/31/04 9/30/04 9/30/04 12/31/03 12/31/03 Operating margin % (1) Consolidated 31 % 30 % 1 % 26 % 5 % Brokerage 22 % 19 % 3 % 22 % 0 % Bank 41 % 41 % 0 % 33 % 8 % Employees 3,320 3,325 0 % 3,455 (4)% Consultants and other 505 443 14 % 314 61 % Total headcount 3,825 3,768 2 % 3,769 1 % Revenue per headcount $107,064 $89,474 20 % $98,506 9 % Revenue per compensation and benefits dollar $4.29 $3.86 11 % $3.77 14 % Book value per share $6.03 $5.76 5 % $5.21 16 % Tangible book value per share $4.60 $4.33 6 % $3.73 23 % Cash & equivalents ($MM) $939.9 $731.0 29 % $921.4 2 % Free cash ($MM) $691.0 $713.0 (3)% $649.6 6 % Earnings before interest, taxes, depreciation & amortization ($MM) Net income from continuing operations $98.5 $79.8 23 % $108.9 (10)% Tax expense 38.6 38.5 0 % 67.1 (42)% Depreciation & amortization 28.0 27.0 3 % 30.4 (8)% Corporate interest expense 11.8 11.9 (1)% 11.3 4 % EBITDA $176.9 $157.2 13 % $217.7 (19)% Interest coverage 15.0 13.2 13 % 19.2 (22)% Active retail brokerage accounts 2,956,090 2,895,106 2 % 2,848,625 4 % Active banking accounts 626,673 632,328 (1)% 638,345 (2)% Total active accounts end of period 3,582,763 3,527,434 2 % 3,486,970 3 % Total customer households end of period 2,739,071 2,703,373 1 % 2,656,025 3 % Gross new accounts 203,809 166,868 N.M. 154,298 N.M. Inactive accounts (90,106) (103,090) N.M. (105,214) N.M. Customer closed accounts (58,374) (65,051) N.M. (74,660) N.M. Net new accounts 55,329 (1,273) N.M. (25,576) N.M. Net new households 35,698 3,516 N.M. (22,384) N.M. Total client assets in investing accounts ($B) $88.1 $71.4 23 % $70.8 24 % Total deposits in banking accounts ($B) 12.3 12.0 2 % 12.5 (2)% Total assets / deposits in customer accounts ($B) $100.4 $83.4 20 % $83.3 21 % Average assets per household $36,669 $30,860 19 % $31,376 17 % BROKERAGE METRICS Trading days 63.5 64.0 N.M. 62.5 N.M. Daily Average Revenue Trades (DARTs) Total Retail 89,604 62,771 43 % 91,972 (3)% - US 76,955 53,050 45 % 83,081 (7)% - International 12,649 9,721 30 % 8,891 42 % Professional 46,529 34,633 34 % 48,154 (3)% Total DARTs 136,133 97,404 40 % 140,126 (3)% Total revenue trades (MM) 8.6 6.2 39 % 8.8 (1)% Average commission per revenue trade $10.89 $10.27 6 % $11.18 (3)% Market Making Equity shares traded (MM) 75,717 65,037 16 % 26,190 189 % Average revenue capture per 1,000 equity shares $0.318 $0.234 36 % $0.912 (65)% % of Bulletin Board equity shares to total equity shares 93.9% 95.4% (2)% 82.9% 11 % End of period margin debt ($B) $2.24 $2.04 10 % $1.76 27 % Average margin debt ($B) $2.09 $2.04 2 % $1.64 27 % Active retail brokerage accounts 2,956,090 2,895,106 2 % 2,848,625 4 % Gross new brokerage accounts 161,737 105,870 N.M. 112,275 N.M. Inactive accounts (90,106) (103,090) N.M. (105,214) N.M. Customer closed accounts (10,647) (8,814) N.M. (13,336) N.M. Net new brokerage accounts 60,984 (6,034) N.M. (6,275) N.M. New client assets ($MM) $6,467 $2,717 138 % $3,266 98 % Client asset outflow from closed accounts ($MM) (595) (410) (45)% (400) (49)% Net new client assets ($MM) $5,873 $2,307 155 % $2,867 105 % Total Client Assets ($B) Security holdings $53.5 $45.8 17 % $43.9 22 % Cash (including money market funds) 5.9 4.7 26 % 6.2 (5)% Unexercised options (vested) 28.7 20.9 37 % 20.7 39 % Total client assets in investing accounts $88.1 $71.4 23 % $70.8 24 % Total client assets per active account $29,815 $24,662 21 % $24,861 20 % Unexercised options (unvested) ($B) $20.1 $13.9 44 % $14.9 34 % BANKING METRICS Gross new banking accounts 42,072 60,998 N.M. 42,023 N.M. Inactive accounts -- -- N.M. -- N.M. Customer closed accounts (47,727) (56,237) N.M. (61,324) N.M. Net new banking accounts (5,655) 4,761 N.M. (19,301) N.M. Direct mortgage originations ($B) $0.7 $0.6 8 % $0.9 (26)% Correspondent mortgage originations ($B) $1.0 $0.6 59 % $1.2 (22)% Consumer loan originations, incl HELOCs ($B) $0.5 $0.6 (7)% $0.7 (22)% Acquired consumer loans ($B) $1.0 $1.1 (10)% $0.7 39 % Mortgage pipeline (end of period) ($B) $0.2 $0.4 (41)% $0.3 (24)% Bank Asset Portfolio Detail ($MM) Cash & equivalents $82 $41 100 % $276 (70)% Trading securities 567 625 (9)% 821 (31)% Investment securities, available-for-sale 3,367 3,251 4 % 2,413 40 % Mortgage securities, available-for-sale 9,052 8,658 5 % 7,157 26 % Loans receivable, net including loans held-for- sale: - Mortgage and home equity loans, net 7,634 6,468 18 % 4,847 57 % - Consumer loans, net 4,151 4,437 (6)% 4,284 (3)% - Other -- -- N.M. 1 N.M. Other assets 700 710 (1)% 587 19 % Total assets $25,553 $24,190 6 % $20,386 25 % Bank Deposit Portfolio Detail ($MM) Transaction accounts $9,939 $9,448 5 % $8,988 11 % CDs 2,364 2,579 (8)% 3,527 (33)% Total $12,303 $12,027 2 % $12,514 (2)% Bank interest rate spread (basis points) 220 213 3 % 169 30 % Bank interest-earning assets, average ($MM) $24,780 $23,091 7 % $19,095 30 % Credit Quality and Reserve Metrics Net charge-offs as a % of average held-for-investment loans, net (annualized) 0.27 % 0.35 % (0.08)% 0.44 % (0.17)% Provision as a % of average held-for-investment loans, net (annualized) 0.44 % 0.37 % 0.07 % 0.65 % (0.21)% Allowance as a % of total ending gross held-for- investment loans 0.41 % 0.41 % 0.00 % 0.46 % (0.05)% Total non-performing loans, net, as a % of total gross held-for-investment loans 0.17 % 0.17 % 0.00 % 0.30 % (0.13)% Total loan loss allowance as a % of total non-performing loans, net 239 % 240 % (1)% 154 % 85 % Tier 1 Capital Ratio (5) 5.83 % 5.94 % (0.11)% 5.92 % (0.09)% Risk Weighted Capital Ratio (5) 11.10 % 11.24 % (0.14)% 11.30 % (0.20)% ACTIVITY IN ALLOWANCE FOR LOAN LOSSES Three Months Ending December 31, 2004 Mortgage Consumer Total (in thousands) Allowance for loan losses, ending 9/30/04 $13,039 $29,855 $42,894 Provision for loan losses 5,811 6,609 12,420 Charge-offs, net (855) (6,778) (7,633) Allowance for loan losses, ending 12/31/04 $17,995 $29,686 $47,681 BANK AVERAGE BALANCE DATA Three Months Ended December 31, 2004 Interest Average Average Income/ Annualized Balance Expense Yield/Cost (in thousands) Interest-earning banking assets: Loans receivable, net $11,678,476 $143,885 4.93% Interest-bearing deposits 40,510 198 1.94% Mortgage-backed and related available-for-sale securities 9,031,367 89,563 3.97% Available-for-sale investment securities 3,347,929 36,904 4.41% Investment in FHLB stock 99,802 932 3.71% Trading securities 581,458 4,546 3.13% Total interest-earning banking assets (6) 24,779,542 $276,028 4.45% Non-interest-earning banking assets 497,512 Total banking assets $25,277,054 Interest-bearing banking liabilities: Retail deposits $11,834,734 $40,663 1.37% Brokered certificates of deposit 325,269 2,176 2.66% FHLB advances 1,664,272 16,457 3.87% Other borrowings 9,905,559 75,068 2.97% Total interest-bearing banking liabilities 23,729,834 $134,364 2.25% Non-interest bearing banking liabilities 389,355 Total banking liabilities 24,119,189 Total banking shareholder's equity 1,157,865 Total banking liabilities and shareholder's equity $25,277,054 Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income $1,049,708 Net interest spread $141,664 2.20% Three Months Ended December 31, 2003 Interest Average Average Income/ Annualized Balance Expense Yield/Cost (in thousands) Interest-earning banking assets: Loans receivable, net $8,608,426 $101,423 4.71% Interest-bearing deposits 166,573 1,047 2.49% Mortgage-backed and related available-for-sale securities 7,151,508 70,315 3.93% Available-for-sale investment securities 2,303,438 24,247 4.21% Investment in FHLB stock 79,236 693 3.47% Trading securities 786,006 5,995 3.05% Total interest-earning banking assets (6) 19,095,187 $203,720 4.27% Non-interest-earning banking assets 761,853 Total banking assets $19,857,040 Interest-bearing banking liabilities: Retail deposits $11,331,066 $58,496 2.05% Brokered certificates of deposit 243,210 1,742 2.84% FHLB advances 927,761 11,593 4.89% Other borrowings 5,798,868 47,225 3.19% Total interest-bearing banking liabilities 18,300,905 $119,056 2.58% Non-interest bearing banking liabilities 596,475 Total banking liabilities 18,897,380 Total banking shareholder's equity 959,660 Total banking liabilities and shareholder's equity $19,857,040 Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income $794,282 Net interest spread $84,664 1.69% SUPPLEMENTAL INFORMATION AND ENDNOTES Explanation of Non-GAAP Measures and Certain Metrics In order to better assess the Company's financial operating results, management believes consolidated operating margins, free cash, EBITDA and interest coverage are appropriate measures of evaluating the operating and liquidity performance of the Company. We believe that the elimination of certain items from these measures is helpful to analysts and investors who may wish to use some or all of this information to analyze our current performance, prospects and valuation. Our management uses non-GAAP information internally to evaluate our operating performance and in formulating our budget for future periods. Consolidated Operating Margin Consolidated operating margin is defined as income before other income, income taxes and discontinued operations divided by net revenues. Operating margin for Brokerage and Bank is based on segment results. Our consolidated statements of operations contain a reconciliation of income before other income, income taxes and discontinued operations to net income. Free Cash, EBITDA and Interest Coverage Free cash as reported by the Company represents cash held at Parent and non-Bank or Brokerage subsidiaries less discretionary reserves and excess capital at Bank and Brokerage after regulatory capital requirements and the Company's own regulatory capital guidelines. The Company believes that free cash is a useful measure of the Company's liquidity as it excludes cash reflected on the balance sheet that may not be freely available to the Company. Additionally, management utilizes EBITDA and interest coverage to measure business performance. EBITDA is defined as net income (loss) from continuing operations before corporate interest expense, taxes and depreciation & amortization. Interest coverage is defined as EBITDA divided by corporate interest expense. It is important to note these metrics and other non-GAAP measures may involve judgment by management and should be considered in addition to, not as a substitute for, or superior to, net income, consolidated statements of cash flows, or other measures of financial performance prepared in accordance with GAAP. For complete information on the items excluded from these non-GAAP measures, please see our financial statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition" that will be included in the periodic report we expect to file with the SEC with respect to the financial periods discussed herein. (1) Consolidated operating margin is defined as income before other income, income taxes and discontinued operations divided by net revenues. Operating margin for Brokerage and Bank is based on segment results. (2) For the three months ended December 31, 2003 and for the twelve months ended December 31, 2004, diluted earnings per share is calculated using the 'if converted' method, which includes the additional dilutive impact assuming conversion of the Company's subordinated convertible debt. Under the 'if converted' method the per share numerator excludes the interest expense and related amortization of offering costs from the convertible debt, net of tax, of $7.2 million for the three months ended December 31, 2003, and $19.9 million for the twelve months ended December 31, 2004. The denominator includes the shares issuable from the assumed conversion of the convertible debt of 45.4 million for the three months ended December 31, 2003 and 25.8 million for the twelve months ended December 31, 2004. For all other periods presented the 'if converted' method is not used as its effect would be anti- dilutive. (3) Eliminates intercompany payment made by Bank to Brokerage related to Sweep Deposit Account (SDA) relationships, swept daily from Brokerage to Bank, which began in the third quarter of 2003. Under this relationship, Bank pays Brokerage a negotiated rate that approximates market on the average SDA balance. Bank reflects this payment as advertising and market development expense and Brokerage reflects this payment as other revenues. (4) Amounts and percentages may not calculate due to rounding. (5) Q404 estimate. (6) Amounts include a taxable equivalent increase in interest income of $2.4 million and $0.7 million for the three months ended December 31, 2004 and 2003, respectively. Source: E*TRADE FINANCIAL Corporation CONTACT: media, Pam Erickson, +1-617-296-6080, or pam.erickson@etrade.com, or investor relations, Adam Townsend, +1-703-236-8719, or adam.townsend@etrade.com, both of E*TRADE FINANCIAL Corporation Web site: http://www.etrade.com/ ------- Profile: International Entertainment