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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended March 31, 2010

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission File Number 1-11921





E*TRADE
Financial Corporation

(Exact Name of Registrant as Specified in its Charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 94-2844166                             
|(State or Other Jurisdiction
of Incorporation or Organization) |  | (I.R.S. Employer
Identification Number)

135 East
57thStreet, New York, New York 10022

(Address of Principal Executive Offices and Zip Code)

(646) 521-4300

(Registrants Telephone Number, including Area Code)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past
90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                                                                       |  |                              |  |                     
|---------------------------------------------------------------------- |  | ---------------------------- |  | --------------------
|Large accelerated filer  x                                             |  |                              |  | Accelerated filer   ̈
|Non-accelerated filer   ̈ (Do not check if a smaller
reporting company) |  | Smaller reporting company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:

As of May 4, 2010, there were 2,200,350,995 shares of common stock outstanding.









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E*TRADE FINANCIAL CORPORATION

FORM 10-Q QUARTERLY REPORT

For the Quarter Ended March 31, 2010

TABLE OF CONTENTS



|                                                                                               |  |   
|---------------------------------------------------------------------------------------------- |  | --
|PART IFINANCIAL INFORMATION                                                                   |  |   
|Item 1. Consolidated Financial Statements (Unaudited)                                          |  | 3 
|Consolidated Statement of Loss                                                                 |  | 45
|Consolidated Balance Sheet                                                                     |  | 46
|Consolidated Statement of Comprehensive Loss                                                   |  | 47
|Consolidated Statement of Shareholders Equity                                                 |  | 48
|Consolidated Statement of Cash Flows                                                           |  | 49
|Notes to Consolidated Financial Statements (Unaudited)                                         |  | 51
|Note 1Organization, Basis of Presentation and Summary of Significant Accounting
Policies      |  | 51
|Note 2Facility Restructuring and Other Exit Activities                                        |  | 53
|Note 3Operating Interest Income and Operating Interest Expense                                |  | 54
|Note 4Fair Value Disclosures                                                                  |  | 55
|Note 5Available-for-Sale Mortgage-Backed and Investment Securities                            |  | 62
|Note 6Loans, Net                                                                              |  | 65
|Note 7Accounting for Derivative Instruments and Hedging Activities                            |  | 67
|Note 8Deposits                                                                                |  | 71
|Note 9Securities Sold Under Agreements to Repurchase and FHLB Advances and Other
Borrowings   |  | 72
|Note 10Corporate Debt                                                                         |  | 73
|Note 11Income Taxes                                                                           |  | 74
|Note 12Shareholders Equity                                                                   |  | 74
|Note 13Loss per Share                                                                         |  | 75
|Note 14Regulatory Requirements                                                                |  | 76
|Note 15Commitments, Contingencies and Other Regulatory Matters                                |  | 77
|Note 16Segment Information                                                                    |  | 81
|Note 17Subsequent Events                                                                      |  | 84
|Item 
2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 3 
|Overview                                                                                       |  | 3 
|Earnings Overview                                                                              |  | 6 
|Segment Results Review                                                                         |  | 15
|Balance Sheet Overview                                                                         |  | 19
|Liquidity and Capital Resources                                                                |  | 23
|Risk Management                                                                                |  | 27
|Concentration of Credit Risk                                                                   |  | 28
|Summary of Critical Accounting Policies and Estimates                                          |  | 37
|Glossary of Terms                                                                              |  | 38
|Item 3.   Quantitative and Qualitative Disclosures about Market
Risk                           |  | 43
|Item 4.   Controls and Procedures                                                              |  | 84
|                                                                                               | 
|PART II OTHER INFORMATION                                                                     |  |   
|Item 1.   Legal Proceedings                                                                    |  | 84
|Item 1A. Risk Factors                                                                          |  | 87
|Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds                          |  | 87
|Item 3.   Defaults Upon Senior Securities                                                      |  | 88
|Item 5.   Other Information                                                                    |  | 88
|Item 6.   Exhibits                                                                             |  | 88
|Signatures                                                                                     |  | 89





Unless otherwise
indicated, references to the Company, we, us, our and E*TRADE mean E*TRADE Financial Corporation or its subsidiaries.

E*TRADE, E*TRADE Financial, E*TRADE Bank, Equity Edge, OptionsLink and the Converging Arrows logo are registered trademarks of E*TRADE
Financial Corporation in the United States and in other countries.



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FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements involving risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. These statements may be identified by the use of words such as expect, may, anticipate, intend, plan and similar expressions. Our actual results
could differ materially from those discussed in these forward-looking statements, and we caution that we do not undertake to update these statements. Factors that could contribute to our actual results differing from any forward-looking statements
include those discussed under Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report. The cautionary statements made in this report should be read as being applicable to
all forward-looking statements wherever they appear in this report. Important factors that may cause actual results to differ materially from any forward-looking statements are set forth in our 2009 Form 10-K filed with the Securities and Exchange
Commission (SEC) under the heading Risk Factors.

We further caution that there may be risks associated with
owning our securities other than those discussed in such filings.

ITEM 1.    CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)

This information is set forth immediately following Item 3. Quantitative and
Qualitative Disclosures about Market Risk.

ITEM 2.    MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with
the consolidated financial statements and the related notes that appear elsewhere in this document.

GLOSSARY OF TERMS

In analyzing and discussing our business, we utilize certain metrics, ratios and other terms that are defined in the Glossary of Terms,
which is located at the end of Item 
2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

Strategy

Our core business is our trading and investing customer franchise. Our strategy is to profitably grow this business by focusing on two
primary groups of customers: traders and long-term investors. We believe our trading customers, particularly our active traders, are the foundation of our brokerage business and we are focused on maintaining our competitive position with this
customer group. Our long-term investing customer group is less developed when compared to our trading customers and represents our largest opportunity for future growth.

We believe our focus on certain key factors will enable us to execute our strategy of profitably growing our trading and investing
business. These key factors include the development of innovative online trading and long-term investing products and services, a concerted effort to deliver superior customer service, creative and cost-effective marketing and sales, and expense
discipline. In addition, we continue to invest significantly for long-term growth so that we remain competitive among the largest online brokers.

In addition to focusing on our customer franchise, our strategy includes an intense focus on addressing the balance sheet issues
primarily caused by the mortgage crisis. We are focused on improving our capital structure



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as well as mitigating the credit losses inherent in our loan portfolio. We believe the recapitalization transactions executed in the second and third quarters of 2009 significantly improved our
capital structure and better positioned the Company for future growth.

Key Factors Affecting Financial Performance

Our financial performance is affected by a number of factors outside of our control, including:



| |  |  | customer demand for financial products and services;
| | - |  | ----------------------------------------------------



| |  |  | the weakness or strength of the residential real estate and credit markets;
| | - |  | ---------------------------------------------------------------------------



| |  |  | the performance, volume and volatility of the equity and capital markets;
| | - |  | -------------------------------------------------------------------------



| |  |  | customer perception of the financial strength of our franchise;
| | - |  | ---------------------------------------------------------------



| |  |  | market demand and liquidity in the secondary market for mortgage loans and securities; and
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | market demand and liquidity in the wholesale borrowings market, including securities sold under agreements to repurchase.
| | - |  | -------------------------------------------------------------------------------------------------------------------------

In addition to the items noted above, our success in the future will depend upon, among other things:



| |  |  | continuing our success in the acquisition, growth and retention of trading customers;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | our ability to generate meaningful growth in the long-term investing customer group;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | our ability to assess and manage credit risk;
| | - |  | ---------------------------------------------



| |  |  | our ability to generate capital sufficient to meet our operating needs, particularly a level sufficient to offset loan losses;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to assess and manage interest rate risk; and
| | - |  | --------------------------------------------------------



| |  |  | disciplined expense control and improved operational efficiency.
| | - |  | ----------------------------------------------------------------

Management monitors a number of metrics in evaluating the Companys performance. The most significant of these are shown in the
table and discussed in the text below:



|                                                             |  |                                             |           |          |   |               |  |     |   
|------------------------------------------------------------ |  | ------------------------------------------- | --------- | -------- | - | ------------- |  | --- | --
|                                                             |  | As of or For
theThree Months EndedMarch 31, |           | Variance |  
|                                                             |  | 2010                                        |           | 2009     |   | 2010 vs. 2009 | 
|Customer Activity Metrics:                                   |  |                                             |           |          |   |               |  |     |   
|U.S. daily average revenue trades
(DARTs)(1)               |  |                                             | 155,310   |          |   | 175,403       |  | (11 | )%
|U.S. average commission per trade                            |  | $                                           | 11.38     |          | $ | 10.98         |  | 4   | % 
|End of period brokerage
accounts(2)                          |  |                                             | 2,631,977 |          |   | 2,575,195     |  | 2   | % 
|Net new brokerage
accounts(2)                                |  |                                             | 1,898     |          |   | 59,389        |  | *   |   
|U.S. customer assets (dollars in billions)                   |  | $                                           | 158.8     |          | $ | 108.5         |  | 46  | % 
|Net new brokerage assets (dollars in
billions)(2)            |  | $                                           | 2.2       |          | $ | 2.3           |  | *   |   
|Brokerage related cash (dollars in
billions)(2)              |  | $                                           | 21.8      |          | $ | 16.8          |  | 30  | % 
|                                                             |  |                                             |          
|Company Financial Metrics:                                   |  |                                             |           |          |   |               |  |     |   
|Corporate cash (dollars in millions)                         |  | $                                           | 418.4     |          | $ | 406.2         |  | 3   | % 
|E*TRADE Bank excess risk-based capital (dollars in millions) |  | $                                           | 945.6     |          | $ | 444.2         |  | 113 | % 
|Allowance for loan losses (dollars in millions)              |  | $                                           | 1,162.4   |          | $ | 1,200.8       |  | (3  | )%
|Enterprise net interest spread (basis points)                |  |                                             | 296       |          |   | 234           |  | 26  | % 
|Enterprise interest-earning assets (average in billions)     |  | $                                           | 42.4      |          | $ | 44.7          |  | (5  | )%



|* |  | Percentage not meaningful.
|- |  | --------------------------

|(1) |  | U.S. DARTs are defined as transactions executed on our domestic platforms.
|--- |  | --------------------------------------------------------------------------

|(2) |  | References to brokerage in these metrics refer to activity on our domestic platforms and do not include brokerage activity from our
international local brokerage accounts.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Customer Activity Metrics



| |  |  | DARTs are the predominant driver of commissions revenue from our customers.
| | - |  | ---------------------------------------------------------------------------



| |  |  | Average commission per trade is an indicator of changes in our customer mix, product mix and/or product pricing. As a result, this metric is impacted
by the mix between our customer groups.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | End of period brokerage accounts and net new brokerage accounts are indicators of our ability to attract and retain trading and investing customers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in customer assets are an indicator of the value of our relationship with the customer. An increase in customer assets generally indicates that
the use of our products and services by existing and new customers is expanding. Changes in this metric are also driven by changes in the valuations of our customers underlying securities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net new brokerage assets are total inflows to all new and existing brokerage accounts less total outflows from all closed and existing brokerage
accounts and are a general indicator of the use of our products and services by existing and new brokerage customers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Customer cash and deposits, particularly our brokerage related cash, are an indicator of a deepening engagement with our customers and are a key driver
of net operating interest income.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Company Financial Metrics



| |  |  | Corporate cash is an indicator of the liquidity at the parent company. It is also a source of cash that can be deployed in our regulated subsidiaries.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | E*TRADE Bank excess risk-based capital is the excess capital that E*TRADE Bank has compared to the regulatory minimum to be considered well-capitalized
and is an indicator of E*TRADE Banks ability to absorb future loan losses.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Allowance for loan losses is an estimate of the losses inherent in our loan portfolio as of the balance sheet date and is typically equal to the
expected charge-offs in our loan portfolio over the next twelve months as well as the estimated charge-offs, including economic concessions to borrowers, over the estimated remaining life of loans modified in troubled debt restructurings.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Enterprise interest-earning assets, in conjunction with our enterprise net interest spread, are indicators of our ability to generate net operating
interest income.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

Significant Events in the First Quarter of 2010

Enhancements to Our Trading and Investing Products and Services



| |  |  | We expanded our advice offering by introducing managed investment portfolios to long-term investors with an investment of $25,000 or more; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We launched CNBC Plus on our redesigned desktop trading software for active traders, providing them with customization capabilities, an expanded
feature set and more news and information;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We launched the E*TRADE Mobile Pro application for Apple iPad, expanding customer access to their E*TRADE accounts.
| | - |  | --------------------------------------------------------------------------------------------------------------------

Simplified Commission and Fee Structure



| |  |  | We announced several changes to the pricing structure in our brokerage business. We eliminated the $12.99 commission tier, account activity fees and a
per share commission applied to market trades larger than 2,000 shares. We believe these changes will simplify our overall pricing structure. The total impact of these pricing changes in 2010 is estimated to decrease our revenue by approximately
$50 million.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Completed the Sale of Approximately $1 Billion in Deposits



| |  |  | We sold approximately $1 billion of savings accounts to Discover Financial Services in March 2010. This transaction is in line with our overall
strategy of reducing our balance sheet and growing our brokerage business as the savings accounts sold were predominantly with customers not affiliated with an active brokerage account.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Summary Financial Results (dollars in millions, except per share amounts)



|                              |  |                              |       |   |          |   |        |               |  |     |   
|----------------------------- |  | ---------------------------- | ----- | - | -------- | - | ------ | ------------- |  | --- | --
|                              |  | Three Months Ended March 31, |       |   | Variance |  
|                              |  | 2010                         |       |   | 2009     |   |        | 2010 vs. 2009 | 
|Net operating interest income |  | $                            | 320.4 |   |          | $ | 278.7  |               |  | 15  | % 
|Commissions                   |  | $                            | 113.3 |   |          | $ | 125.6  |               |  | (10 | )%
|Fees and service charges      |  | $                            | 42.2  |   |          | $ | 46.7   |               |  | (10 | )%
|Principal transactions        |  | $                            | 26.2  |   |          | $ | 17.6   |               |  | 49  | % 
|Total net revenue             |  | $                            | 536.5 |   |          | $ | 497.3  |               |  | 8   | % 
|Provision for loan losses     |  | $                            | 268.0 |   |          | $ | 454.0  |               |  | (41 | )%
|Operating margin              |  | $                            | (26.8 | ) |          | $ | (250.6 | )             |  | 89  | % 
|Net loss                      |  | $                            | (47.8 | ) |          | $ | (232.7 | )             |  | 79  | % 
|Diluted net loss per share    |  | $                            | (0.02 | ) |          | $ | (0.41  | )             |  | 95  | % 

During the
three months ended March 31, 2010, we generated income before income taxes of $185.7 million in the trading and investing segment, which was more than offset by the provision for loan losses reported in our balance sheet management segment.
Although we expect provision for loan losses to continue at elevated levels in future periods, the level of provision for loan losses has declined for six consecutive quarters. While we cannot state with certainty that this trend will continue, we
believe it is a positive indicator that our loan portfolio has continued to stabilize.

EARNINGS OVERVIEW

We incurred a net loss of $47.8 million for the three months ended March 31, 2010, due principally to our provision for
loan losses of $268.0 million. Our provision for loan losses more than offset the strong performance of our trading and investing segment, which generated income before income taxes of $185.7 million for the three months ended March 31, 2010.



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The following sections describe in detail the changes in key operating factors and other
changes and events that have affected our revenue, provision for loan losses, operating expense, other income (expense) and income tax benefit.

Revenue

The
components of net revenue and the resulting variances are as follows (dollars in millions):



|                                   |  |                             |               |   |          |   |       |        |  |   |       |   |  |     |   
|---------------------------------- |  | --------------------------- | ------------- | - | -------- | - | ----- | ------ |  | - | ----- | - |  | --- | --
|                                   |  | Three Months EndedMarch 31, |               |   | Variance |  
|                                   |  |                             | 2010 vs. 2009 |  
|                                   |  | 2010                        |               |   | 2009     |   |       | Amount |  |   | %     |  
|Net operating interest income      |  | $                           | 320.4         |   |          | $ | 278.7 |        |  | $ | 41.7  |   |  | 15  | % 
|Commissions                        |  |                             | 113.3         |   |          |   | 125.6 |        |  |   | (12.3 | ) |  | (10 | )%
|Fees and service charges           |  |                             | 42.2          |   |          |   | 46.7  |        |  |   | (4.5  | ) |  | (10 | )%
|Principal transactions             |  |                             | 26.2          |   |          |   | 17.6  |        |  |   | 8.6   |   |  | 49  | % 
|Gains on loans and securities, net |  |                             | 29.0          |   |          |   | 35.3  |        |  |   | (6.3  | ) |  | (18 | )%
|Net impairment                     |  |                             | (8.6          | ) |          |   | (18.8 | )      |  |   | *     |   |  | *   |   
|Other revenues                     |  |                             | 14.0          |   |          |   | 12.2  |        |  |   | 1.8   |   |  | 15  | % 
|                                   |  |                             |               |   |          |   |       |        |  |   |       |   |  |     |   
|Total non-interest income          |  |                             | 216.1         |   |          |   | 218.6 |        |  |   | (2.5  | ) |  | (1  | )%
|                                   |  |                             |               |   |          |   |       |        |  |   |       |   |  |     |   
|Total net revenue                  |  | $                           | 536.5         |   |          | $ | 497.3 |        |  | $ | 39.2  |   |  | 8   | % 
|                                   |  |                             |               |   |          |   |       |        |  |   |       |   |  |     |   



|* |  | Percentage not meaningful.
|- |  | --------------------------

Total net revenue increased by 8% to $536.5 million for the three months ended March 31, 2010 compared to the same period in 2009.
This was driven by higher net operating interest income.

Net Operating Interest Income

Net operating interest income increased 15% to $320.4 million for the three months ended March 31, 2010 compared to the same period
in 2009. Net operating interest income is earned primarily through investing customer cash and deposits in interest-earning assets, which include: margin receivables, real estate loans, mortgage-backed securities and investment securities. The
increase in net operating interest income was due primarily to lower yields on our enterprise interest-bearing liabilities, specifically deposits.



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The following table presents enterprise average balance sheet data and enterprise income and
expense data for our operations, as well as the related net interest spread, yields and rates and has been prepared on the basis required by the SECs Industry Guide 3, Statistical Disclosure by Bank Holding Companies
(dollars in millions):



|                                                                                                                                |  |                              |          |                            |      |                   |  |        |                |  |                            |          |                   |   |       |  |        |   
|------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | -------- | -------------------------- | ---- | ----------------- |  | ------ | -------------- |  | -------------------------- | -------- | ----------------- | - | ----- |  | ------ | --
|                                                                                                                                |  | Three Months Ended March 31, |         
|                                                                                                                                |  | 2010                         |          |                            | 2009 |                  
|                                                                                                                                |  | AverageBalance               |          | OperatingInterestInc./Exp. |      | AverageYield/Cost |  |        | AverageBalance |  | OperatingInterestInc./Exp. |          | AverageYield/Cost |  
|                                                                                                                                |  |                              |          |                            |      |                  
|Enterprise interest-earning assets:                                                                                             |  |                              |          |                            |      |                   |  |        |                |  |                            |          |                   |   |       |  |        |   
|Loans (1)                                                                                                                       |  | $                            | 19,928.5 |                            | $    | 241.6             |  | 4.85   | %              |  | $                          | 25,083.3 |                   | $ | 313.4 |  | 5.00   | % 
|Margin receivables                                                                                                              |  |                              | 4,022.2  |                            |      | 44.7              |  | 4.51   | %              |  |                            | 2,751.5  |                   |   | 26.9  |  | 3.97   | % 
|Available-for-sale mortgage-backed securities                                                                                   |  |                              | 9,692.7  |                            |      | 81.9              |  | 3.38   | %              |  |                            | 11,173.3 |                   |   | 125.8 |  | 4.50   | % 
|Available-for-sale investment securities                                                                                        |  |                              | 4,027.7  |                            |      | 27.7              |  | 2.75   | %              |  |                            | 126.3    |                   |   | 2.0   |  | 6.44   | % 
|Trading securities                                                                                                              |  |                              | 2.1      |                            |      | 0.0               |  | 6.43   | %              |  |                            | 35.5     |                   |   | 0.7   |  | 7.56   | % 
|Cash and cash equivalents(2)                                                                                                    |  |                              | 4,050.3  |                            |      | 2.4               |  | 0.24   | %              |  |                            | 4,937.6  |                   |   | 5.7   |  | 0.47   | % 
|Stock borrow and other                                                                                                          |  |                              | 685.4    |                            |      | 7.0               |  | 4.16   | %              |  |                            | 588.8    |                   |   | 8.1   |  | 5.58   | % 
|                                                                                                                                |  |                              |          |                            |      |                   |  |        |                |  |                            |          |                   |   |       |  |        |   
|Total enterprise interest-earning assets                                                                                        |  |                              | 42,408.9 |                            |      | 405.3             |  | 3.83   | %              |  |                            | 44,696.3 |                   |   | 482.6 |  | 4.32   | % 
|                                                                                                                                |  |                              |          |                            |      |                   |  |        |                |  |                            |          |                   |   |       |  |        |   
|Non-operating interest-earning
assets(3)                                                                                        |  |                              | 4,235.2  |                            |      |                   |  |        |                |  |                            | 3,895.5  |                   |   |       |  |        |   
|                                                                                                                                |  |                              |          |                            |      |                   |  |        |                |  |                            |          |                   |   |       |  |        |   
|Total assets                                                                                                                    |  | $                            | 46,644.1 |                            |      |                   |  |        |                |  | $                          | 48,591.8 |                   |   |       |  |        |   
|                                                                                                                                |  |                              |          |                            |      |                   |  |        |                |  |                            |          |                   |   |       |  |        |   
|Enterprise interest-bearing liabilities:                                                                                        |  |                              |          |                            |      |                   |  |        |                |  |                            |          |                   |   |       |  |        |   
|Retail deposits                                                                                                                 |  | $                            | 24,821.5 |                            |      | 18.5              |  | 0.30   | %              |  | $                          | 26,375.7 |                   |   | 93.4  |  | 1.44   | % 
|Brokered certificates of deposit                                                                                                |  |                              | 119.8    |                            |      | 1.5               |  | 5.04   | %              |  |                            | 293.7    |                   |   | 3.6   |  | 4.94   | % 
|Customer payables                                                                                                               |  |                              | 5,206.9  |                            |      | 1.9               |  | 0.15   | %              |  |                            | 3,771.9  |                   |   | 2.8   |  | 0.30   | % 
|Securities sold under agreements to repurchase                                                                                  |  |                              | 6,372.0  |                            |      | 34.8              |  | 2.18   | %              |  |                            | 7,094.8  |                   |   | 61.2  |  | 3.45   | % 
|Federal Home Loan Bank (FHLB) advances and other borrowings                                                                   |  |                              | 2,761.4  |                            |      | 29.4              |  | 4.26   | %              |  |                            | 4,178.6  |                   |   | 46.1  |  | 4.41   | % 
|Stock loan and other                                                                                                            |  |                              | 620.3    |                            |      | 0.5               |  | 0.32   | %              |  |                            | 422.6    |                   |   | 0.9   |  | 0.83   | % 
|                                                                                                                                |  |                              |          |                            |      |                   |  |        |                |  |                            |          |                   |   |       |  |        |   
|Total enterprise interest-bearing liabilities                                                                                   |  |                              | 39,901.9 |                            |      | 86.6              |  | 0.87   | %              |  |                            | 42,137.3 |                   |   | 208.0 |  | 1.98   | % 
|                                                                                                                                |  |                              |          |                            |      |                   |  |        |                |  |                            |          |                   |   |       |  |        |   
|Non-operating interest-bearing
liabilities(4)                                                                                   |  |                              | 2,934.5  |                            |      |                   |  |        |                |  |                            | 3,873.7  |                   |   |       |  |        |   
|                                                                                                                                |  |                              |          |                            |      |                   |  |        |                |  |                            |          |                   |   |       |  |        |   
|Total liabilities                                                                                                               |  |                              | 42,836.4 |                            |      |                   |  |        |                |  |                            | 46,011.0 |                   |   |       |  |        |   
|Total shareholders equity                                                                                                      |  |                              | 3,807.7  |                            |      |                   |  |        |                |  |                            | 2,580.8  |                   |   |       |  |        |   
|                                                                                                                                |  |                              |          |                            |      |                   |  |        |                |  |                            |          |                   |   |       |  |        |   
|Total liabilities and shareholders equity                                                                                      |  | $                            | 46,644.1 |                            |      |                   |  |        |                |  | $                          | 48,591.8 |                   |   |       |  |        |   
|                                                                                                                                |  |                              |          |                            |      |                   |  |        |                |  |                            |          |                   |   |       |  |        |   
|Excess of enterprise interest-earning assets over enterprise interest-bearing liabilities/Enterprise net interest
income/Spread |  | $                            | 2,507.0  |                            | $    | 318.7             |  | 2.96   | %              |  | $                          | 2,559.0  |                   | $ | 274.6 |  | 2.34   | % 
|                                                                                                                                |  |                              |          |                            |      |                   |  |        |                |  |                            |          |                   |   |       |  |        |   
|Enterprise net interest margin (net yield on enterprise interest-earning assets)                                                |  |                              |          |                            |      |                   |  | 3.01   | %              |  |                            |          |                   |   |       |  | 2.46   | % 
|Ratio of enterprise interest-earning assets to enterprise interest-bearing liabilities                                          |  |                              |          |                            |      |                   |  | 106.28 | %              |  |                            |          |                   |   |       |  | 106.07 | % 
|Return on average:                                                                                                              |  |                              |          |                            |      |                   |  |        |                |  |                            |          |                   |   |       |  |        |   
|Total assets                                                                                                                    |  |                              |          |                            |      |                   |  | (0.41  | )%             |  |                            |          |                   |   |       |  | (1.92  | )%
|Total shareholders equity                                                                                                      |  |                              |          |                            |      |                   |  | (5.03  | )%             |  |                            |          |                   |   |       |  | (36.06 | )%
|Average equity to average total assets                                                                                          |  |                              |          |                            |      |                   |  | 8.16   | %              |  |                            |          |                   |   |       |  | 5.31   | % 

Reconciliation from enterprise net interest income to net operating interest income (dollars in millions):



|                                                 |  |                            |       |   |      |   |       |  
|------------------------------------------------ |  | -------------------------- | ----- | - | ---- | - | ----- | -
|                                                 |  | Three MonthsEndedMarch
31, |      
|                                                 |  | 2010                       |       |   | 2009 |  
|Enterprise net interest income(5)                |  | $                          | 318.7 |   |      | $ | 274.6 |  
|Taxable equivalent interest adjustment           |  |                            | (0.3  | ) |      |   | (0.7  | )
|Customer cash held by third parties and
other(6) |  |                            | 2.0   |   |      |   | 4.8   |  
|                                                 |  |                            |       |   |      |   |       |  
|Net operating interest income                    |  | $                          | 320.4 |   |      | $ | 278.7 |  
|                                                 |  |                            |       |   |      |   |       |  



|(1) |  | Nonaccrual loans are included in the respective average loan balances. Income on such nonaccrual loans is recognized on a cash basis.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes segregated cash balances.
|--- |  | ----------------------------------

|(3) |  | Non-operating interest-earning assets consist of property and equipment, net, goodwill, other intangibles, net and other assets that do not generate
operating interest income. Some of these assets generate corporate interest income.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Non-operating interest-bearing liabilities consist of corporate debt, accounts payable, accrued and other liabilities that do not generate operating
interest expense. Some of these liabilities generate corporate interest expense.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Enterprise net interest income is taxable equivalent basis net operating
interest income excluding corporate interest income and corporate interest expense, stock conduit interest income and expense and interest earned on customer cash held by third parties. Management believes this non-GAAP measure is useful to analysts
and investors as it is a measure of the net operating interest income generated by our operations.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Includes interest earned on average customer assets of $3.1 billion and $2.8 billion for the three months ended March 31, 2010 and 2009,
respectively, held by parties outside E*TRADE Financial, including third party money market funds and sweep deposit accounts at unaffiliated financial institutions.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Average enterprise interest-earning assets decreased 5% to $42.4 billion for the three
months ended March 31, 2010 compared to the same period in 2009. This decrease was primarily the result of a decrease in our loans portfolio and available-for-sale mortgage-backed securities, offset by an increase in margin receivables and
available-for-sale investment securities. Average loans decreased 21% to $19.9 billion for the three months ended March 31, 2010 compared to the same period in 2009. For the foreseeable future, we plan to allow our loan portfolio to pay down.
Average available-for-sale mortgage-backed securities decreased 13% to $9.7 billion for the three months ended March 31, 2010 compared to the same period in 2009, primarily due to the sale of certain agency mortgage-backed securities and CMOs
in the third quarter of 2009 as part of our effort to reduce our interest rate risk exposure in this portfolio. These decreases were offset by an increase in average margin receivables and available-for-sale investment securities. Average margin
receivables increased 46% to $4.0 billion for the three months ended March 31, 2010 compared to the same period in 2009. Average available-for-sale investment securities increased by $3.9 billion to $4.0 billion for the three months ended
March 31, 2010 compared to the same period in 2009 related to purchases of agency debentures toward the end of 2009.

Average enterprise interest-bearing liabilities decreased 5% to $39.9 billion for the three months ended March 31, 2010 compared to
the same period in 2009. The decrease in average enterprise interest-bearing liabilities was due primarily to a decrease in retail deposits and FHLB advances and other borrowings, offset by an increase in average customer payables. Average retail
deposits decreased 6% to $24.8 billion for the three months ended March 31, 2010 compared to the same period in 2009. The decrease in average deposits was a result of the sale of approximately $1 billion in savings accounts to Discover
Financial Services in the first quarter of 2010. This transaction is in line with our overall strategy of reducing our balance sheet and growing our brokerage business as the savings accounts sold were predominantly with customers not affiliated
with an active brokerage account. Average FHLB advances and other borrowings decreased 34% to $2.8 billion for the three months ended March 31, 2010 compared to the same period in 2009 due to the early termination of certain FHLB advances in
the second and third quarters of 2009. These decreases were slightly offset by an increase in average customer payables of 38% to $5.2 billion for the three months ended March 31, 2010 compared to the same period in 2009.

Enterprise net interest spread increased by 62 basis points to 2.96% for the three months ended March 31, 2010 compared to the same
period in 2009. This increase was largely driven by a decrease in the yields paid on our deposits and lower wholesale borrowing costs, partially offset by a decrease in higher yielding enterprise interest-earning assets.

Commissions

Commissions
revenue decreased 10% to $113.3 million for the three months ended March 31, 2010 compared to the same period in 2009. The main factors that affect our commissions revenue are DARTs, average commission per trade and the number of trading days
during the period. Average commission per trade is impacted by different trade types (e.g. equities, options, fixed income, stock plan, exchange-traded funds, mutual funds and cross border) that can have different commission rates. Accordingly,
changes in the mix of trade types will impact average commission per trade.

Our U.S. DART volume decreased 11% to 155,310 for
the three months ended March 31, 2010 compared to the same period in 2009. Option-related DARTs as a percentage of our total U.S. DARTs represented 15% and 12% of U.S. trading volume for the periods ending March 31, 2010 and 2009,
respectively. Exchange-traded funds-related DARTs as a percentage of our total U.S. DARTs represented 9% and 18% of U.S. trading volume for the three months ended March 31, 2010 and 2009, respectively.

Average commission per trade increased 6% to $11.21 for the three months ended March 31, 2010 compared to the same period in 2009.
The increase in the average commission per trade was due primarily to an



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improvement in the product and customer mix when compared to the same period in 2009, which was partially offset by a decrease related to the elimination of the $12.99 commission tier and the per
share commission applied to market trades larger than 2,000 shares during the three months ended March 31, 2010.

Fees and Service
Charges

Fees and service charges decreased 10% to $42.2 million for the three months ended March 31, 2010 compared to
the same period in 2009. The decline was driven by a decrease in account service fees. We expect lower levels of fees and service charges in future periods as we eliminate all account activity fees beginning in the second quarter of 2010.

Principal Transactions

Principal transactions increased 49% to $26.2 million for the three months ended March 31, 2010 compared to the same period in 2009.
Our principal transactions revenue is derived primarily from our market making business in which we act as a market-maker for our own brokerage customers orders as well as orders from third party customers. The increase in principal
transactions revenue was due primarily to an increase in the volume of orders from our third party customers.

Gains on Loans and
Securities, Net

Gains on loans and securities, net were $29.0 million and $35.3 million for the three months ended
March 31, 2010 and 2009, respectively, as shown in the following table (dollars in millions):



|                                            |  |                             |               |   |          |   |      |        |  |   |      |   |  |     |   
|------------------------------------------- |  | --------------------------- | ------------- | - | -------- | - | ---- | ------ |  | - | ---- | - |  | --- | --
|                                            |  | Three Months EndedMarch 31, |               |   | Variance |  
|                                            |  |                             | 2010 vs. 2009 |  
|                                            |  | 2010                        |               |   | 2009     |   |      | Amount |  |   | %    |  
|Losses on loans, net                        |  | $                           | (0.9          | ) |          | $ |     |        |  | $ | (0.9 | ) |  | *   |   
|                                            |  |                             |               |   |          |   |      |        |  |   |      |   |  |     |   
|Gains on available-for-sale securities, net |  |                             | 29.4          |   |          |   | 37.8 |        |  |   | (8.4 | ) |  | (22 | )%
|Gains (losses) on trading securities, net   |  |                             | 0.7           |   |          |   | (2.4 | )      |  |   | 3.1  |   |  | *   |   
|Hedge ineffectiveness                       |  |                             | (0.2          | ) |          |   | (0.1 | )      |  |   | (0.1 | ) |  | 306 | % 
|                                            |  |                             |               |   |          |   |      |        |  |   |      |   |  |     |   
|Gains (losses) on securities, net           |  |                             | 29.9          |   |          |   | 35.3 |        |  |   | (5.4 | ) |  | (15 | )%
|                                            |  |                             |               |   |          |   |      |        |  |   |      |   |  |     |   
|Gains on loans and securities, net          |  | $                           | 29.0          |   |          | $ | 35.3 |        |  | $ | (6.3 | ) |  | (18 | )%
|                                            |  |                             |               |   |          |   |      |        |  |   |      |   |  |     |   



|* |  | Percentage not meaningful.
|- |  | --------------------------

Net Impairment

We recognized $8.6 million of net impairment during the three months ended March 31, 2010 on certain securities in
our non-agency collateralized mortgage obligation (CMO) portfolio due to continued deterioration in the expected credit performance of the underlying loans in the securities. The net impairment included gross other-than-temporary
impairment (OTTI) of $14.5 million for the three months ended March 31, 2010. Of the $14.5 million of gross OTTI for the three months ended March 31, 2010, $5.9 million related to the noncredit portion of OTTI and was recorded
through other comprehensive income.

We had net impairment of $18.8 million for the three months ended March 31, 2009,
which represented the total decline in the fair value of impaired securities in accordance with the OTTI accounting guidance that was in effect prior to April 1, 2009.



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Other Revenues

Other revenues increased 15% to $14.0 million for the three months ended March 31, 2010 compared to the same period in 2009. This
increase was due primarily to the gain on the sale of approximately $1 billion in savings accounts to Discover Financial Services in the first quarter of 2010. This transaction is in line with our overall strategy of reducing our balance sheet and
growing our brokerage business as the savings accounts sold were predominantly with customers not affiliated with an active brokerage account.

Provision for Loan Losses

Provision for loan losses decreased $186.0 million to $268.0 million for the three months ended March 31, 2010 compared to the same
period in 2009. The decrease in our provision for loan losses was driven by lower levels of at-risk (30-179 days delinquent) loans in our one- to four-family and home equity loan portfolios. We believe the delinquencies in both of these portfolios
were caused by several factors, including: home price depreciation in key markets; growing inventories of unsold homes; rising foreclosure rates; significant contraction in the availability of credit; and a general decline in economic growth. In
addition, the combined impact of home price depreciation and the reduction of available credit made it increasingly difficult for borrowers to refinance existing loans. Although we expect these factors will cause the provision for loan losses to
continue at elevated levels in future periods, the level of provision for loan losses has declined for six consecutive quarters. While we cannot state with certainty that this trend will continue, we believe it is a positive indicator that our loan
portfolio has continued to stabilize.

Operating Expense

The components of operating expense and the resulting variances are as follows (dollars in millions):



|                                                 |  |                             |               |      |          |       |        |  |   |      |   |  |     |   
|------------------------------------------------ |  | --------------------------- | ------------- | ---- | -------- | ----- | ------ |  | - | ---- | - |  | --- | --
|                                                 |  | Three Months EndedMarch 31, |               |      | Variance |      
|                                                 |  |                             | 2010 vs. 2009 |     
|                                                 |  | 2010                        |               | 2009 |          |       | Amount |  |   | %    |  
|Compensation and benefits                        |  | $                           | 87.2          |      | $        | 84.2  |        |  | $ | 3.0  |   |  | 4   | % 
|Clearing and servicing                           |  |                             | 39.2          |      |          | 42.7  |        |  |   | (3.5 | ) |  | (8  | )%
|Advertising and market development               |  |                             | 38.1          |      |          | 43.6  |        |  |   | (5.5 | ) |  | (13 | )%
|FDIC insurance premiums                          |  |                             | 19.3          |      |          | 12.7  |        |  |   | 6.6  |   |  | 52  | % 
|Communications                                   |  |                             | 20.5          |      |          | 21.6  |        |  |   | (1.1 | ) |  | (5  | )%
|Professional services                            |  |                             | 20.3          |      |          | 19.6  |        |  |   | 0.7  |   |  | 3   | % 
|Occupancy and equipment                          |  |                             | 18.2          |      |          | 19.5  |        |  |   | (1.3 | ) |  | (7  | )%
|Depreciation and amortization                    |  |                             | 20.6          |      |          | 20.3  |        |  |   | 0.3  |   |  | 2   | % 
|Amortization of other intangibles                |  |                             | 7.1           |      |          | 7.4   |        |  |   | (0.3 | ) |  | (4  | )%
|Facility restructuring and other exit activities |  |                             | 3.4           |      |          | (0.1  | )      |  |   | 3.5  |   |  | *   |   
|Other operating expenses                         |  |                             | 21.4          |      |          | 22.5  |        |  |   | (1.1 | ) |  | (5  | )%
|                                                 |  |                             |               |      |          |       |        |  |   |      |   |  |     |   
|Total operating expense                          |  | $                           | 295.3         |      | $        | 294.0 |        |  | $ | 1.3  |   |  | 0   | % 
|                                                 |  |                             |               |      |          |       |        |  |   |      |   |  |     |   



|* |  | Percentage not meaningful.
|- |  | --------------------------

Operating expense increased $1.3 million for the three months ended March 31, 2010 compared to the same period in 2009. This was
driven primarily by an increase in FDIC insurance premiums expense, offset by a decrease in advertising and market development expense.



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Compensation and Benefits

Compensation and benefits expense increased 4% to $87.2 million for the three months ended March 31, 2010 compared to the same period
in 2009. This increase resulted primarily from higher variable compensation compared to the three months ended March 31, 2009.

Clearing and Servicing

Clearing and servicing expense decreased 8% to $39.2 million for the three months ended March 31, 2010 compared to the same period in
2009. This decrease resulted primarily from lower trading volumes and lower loan balances compared to the three months ended March 31, 2009.

Advertising and Market Development

Advertising and market development expense decreased 13% to $38.1 million for the three months ended March 31, 2010 compared to the
same period in 2009. This decrease was due largely to the timing of our advertising expenditures in the first quarter of 2010 as we expect our advertising expenditures for 2010 to be similar to our advertising expenditures in 2009.

FDIC Insurance Premiums

FDIC insurance premiums increased 52% to $19.3 million for the three months ended March 31, 2010 compared to the same period in 2009.
This was due to an increase in the ongoing FDIC insurance rates.

Facility Restructuring and Other Exit Activities

Facility restructuring and other exit activities were $3.4 million for the three months ended March 31, 2010. These costs were due
primarily to the restructuring of our international brokerage business. While we do expect to record additional costs in the remaining periods of 2010, we believe the majority of the costs associated with this restructuring have already been
incurred.

Other Income (Expense)

Other income (expense) was an expense of $39.1 million for the three months ended March 31, 2010 compared to an expense of $93.5
million for the three months ended March 31, 2009, as shown in the following table (dollars in millions):



|                                                         |  |                             |               |   |          |   |       |        |  |   |      |   |  |     |   
|-------------------------------------------------------- |  | --------------------------- | ------------- | - | -------- | - | ----- | ------ |  | - | ---- | - |  | --- | --
|                                                         |  | Three MonthsEnded March 31, |               |   | Variance |  
|                                                         |  |                             | 2010 vs. 2009 |  
|                                                         |  | 2010                        |               |   | 2009     |   |       | Amount |  |   | %    |  
|Other income (expense):                                  |  |                             |               |   |          |   |       |        |  |   |      |   |  |     |   
|Corporate interest income                                |  | $                           | 0.0           |   |          | $ | 0.4   |        |  | $ | (0.4 | ) |  | (95 | )%
|Corporate interest expense                               |  |                             | (41.0         | ) |          |   | (87.3 | )      |  |   | 46.3 |   |  | (53 | )%
|Gains (losses) on sales of investments, net              |  |                             | 0.1           |   |          |   | (0.5  | )      |  |   | 0.6  |   |  | *   |   
|Losses on early extinguishment of debt                   |  |                             |              |   |          |   | (3.0  | )      |  |   | 3.0  |   |  | *   |   
|Equity in income (loss) of investments and venture funds |  |                             | 1.8           |   |          |   | (3.1  | )      |  |   | 4.9  |   |  | *   |   
|                                                         |  |                             |               |   |          |   |       |        |  |   |      |   |  |     |   
|Total other income (expense)                             |  | $                           | (39.1         | ) |          | $ | (93.5 | )      |  | $ | 54.4 |   |  | (58 | )%
|                                                         |  |                             |               |   |          |   |       |        |  |   |      |   |  |     |   



|* |  | Percentage not meaningful.
|- |  | --------------------------

Total other income (expense) for the three months ended March 31, 2010 primarily consisted of corporate interest expense resulting
from our interest-bearing corporate debt. Corporate interest expense decreased 53% to



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$41.0 million for the three months ended March 31, 2010 compared to the same period in 2009. This was due to the reduction in interest-bearing debt in connection with our exchange Debt
Exchange in the third quarter of 2009.

Income Tax Benefit

Income tax benefit was $18.1 million during the three months ended March 31, 2010 compared to $111.4 million for the same period in
2009. Our effective tax rates for the three months ended March 31, 2010 and 2009 were (27.4)% and (32.4)%, respectively.

Valuation
Allowance

During the three months ended March 31, 2010 we did not provide for a valuation allowance against our
federal deferred tax assets. We are required to establish a valuation allowance for deferred tax assets and record a charge to income if we determine, based on available evidence at the time the determination is made, that it is more likely than not
that some portion or all of the deferred tax assets will not be realized. If we did conclude that a valuation allowance was required, the resulting loss would have a material adverse effect on our results of operations and financial condition.

We did not establish a valuation allowance against our federal deferred tax assets as of March 31, 2010 as we believe
that it is more likely than not that all of these assets will be realized. Our evaluation focused on identifying significant, objective evidence that we will be able to realize our deferred tax assets in the future. We reviewed the estimated future
taxable income for our trading and investing and balance sheet management segments separately and determined that our net operating losses since 2007 are due solely to the credit losses in our balance sheet management segment. We believe these
losses were caused by the crisis in the residential real estate and credit markets which significantly impacted our asset-backed securities and home equity loan portfolios in 2007 and continued to generate credit losses in 2008 and 2009. We estimate
that these credit losses will continue in future periods; however, we ceased purchasing asset-backed securities and home equity loans which we believe are the root cause of these losses. Therefore, while we do expect credit losses to continue in
future periods, we do expect these amounts to decline when compared to our credit losses in the three-year period ending in 2010. Our trading and investing segment generated substantial taxable income for each of the last six years and we estimate
that it will continue to generate taxable income in future periods at a level sufficient to generate taxable income for the Company as a whole. We consider this to be significant, objective evidence that we will be able to realize our deferred tax
assets in the future.

A key component of our evaluation of the need for a valuation allowance was our level of corporate
interest expense, which represents our most significant non-operating related expense. Our estimates of future taxable income included this expense, which reduces the amount of segment income available to utilize our federal deferred tax assets.
Therefore, a decrease in this expense in future periods would increase the level of estimated taxable income available to utilize our federal deferred tax assets. As a result of the Debt Exchange, we reduced our annual cash interest payments by
approximately $200 million. We believe this decline in cash interest payments significantly improves our ability to utilize our federal deferred tax assets in future periods when compared to evaluations in prior periods which did not include this
decline in corporate interest payments.

Our analysis of the need for a valuation allowance recognizes that we are in a
cumulative book taxable loss position as of the three-year period ended March 31, 2010, which is considered significant and objective evidence that we may not be able to realize some portion of our deferred tax assets in the future. However, we
believe we are able to rely on our forecasts of future taxable income and overcome the uncertainty created by the cumulative loss position.

The crisis in the residential real estate and credit markets has created significant volatility in our results of operations. This
volatility is isolated almost entirely to our balance sheet management segment. Our forecasts for



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this segment include assumptions regarding our estimate of future expected credit losses, which we believe to be the most variable component of our forecasts of future taxable income. We believe
this variability could create a book loss in our overall results for an individual reporting period while not significantly impacting our overall estimate of taxable income over the period in which we expect to realize our deferred tax assets.
Conversely, we believe our trading and investing segment will continue to produce a stable stream of income which we believe we can reliably estimate in both individual reporting periods as well as over the period in which we estimate we will
realize our deferred tax assets.

In evaluating the need for a valuation allowance, we estimated future taxable income based
on management approved forecasts. This process required significant judgment by management about matters that are by nature uncertain. If future events differ significantly from our current forecasts, a valuation allowance may need to be
established, which would have a material adverse effect on our results of operations and our financial condition.

Tax Ownership Change

During the third quarter of 2009, we exchanged $1.7 billion principal amount of our interest-bearing debt for an equal
principal amount of non-interest-bearing convertible debentures. Subsequent to the Debt Exchange, $592.3 million and $720.9 million debentures were converted into 572.2 million and 696.6 million shares of common stock during the third and
fourth quarters of 2009, respectively. As a result of these conversions, we believe we experienced a tax ownership change during the third quarter of 2009.

As of the date of the ownership change, we estimate that we had federal net operating losses (NOLs) available to carry
forward of approximately $1.4 billion. Section 382 of the Internal Revenue Code of 1986, as amended, imposes restrictions on the use of a corporations NOLs, certain recognized built-in losses and other carryovers after an ownership
change occurs. Section 382 rules governing when a change in ownership occurs are complex and subject to interpretation; however, an ownership change generally occurs when there has been a cumulative change in the stock ownership of a
corporation by certain 5% shareholders of more than 50 percentage points over a rolling three-year period.

Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with
pre-ownership change NOLs. In general, the annual limitation is determined by multiplying the value of the corporations stock immediately before the ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate.
Any unused portion of the annual limitation is available for use in future years until such NOLs are scheduled to expire (in general, our NOLs may be carried forward 20 years). In addition, the limitation may, under certain circumstances, be
increased or decreased by built-in gains or losses, respectively, which may be present with respect to assets held at the time of the ownership change that are recognized in the five-year period (one-year for loans) after the ownership change. The
use of NOLs arising after the date of an ownership change would not be affected unless a corporation experienced an additional ownership change in a future period.

We believe the tax ownership change will extend the period of time it will take to fully utilize our pre-ownership change NOLs, but will
not limit the total amount of pre-ownership change NOLs we can utilize. Our updated estimate is that we will be subject to an overall annual limitation on the use of our pre-ownership change NOLs of approximately $194 million. Since the statutory
carry forward period for our overall pre-ownership change NOLs, which are approximately $1.4 billion, is 20 years (the majority of which expire in 18 years), we believe we will be able to fully utilize these NOLs in future periods.

Our ability to utilize the pre-ownership change NOLs is dependent on our ability to generate sufficient taxable income over the duration
of the carry forward periods and will not be impacted by our ability or inability to generate taxable income in an individual year.



14



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##### Table of Contents

SEGMENT RESULTS REVIEW

In the first quarter of 2010, we revised our segment financial reporting to reflect the manner in which our chief operating decision maker
had begun assessing the Companys performance and making resource allocation decisions. We no longer allocate costs associated with certain functions that are centrally managed to our operating segments. These costs are separately reported in a
Corporate/Other category.

In addition, we now report FDIC insurance premiums expense in our balance sheet
management segment. These expenses were previously reported in our trading and investing segment. Balance sheet management pays the trading and investing segment for the use of its deposits via the deposit transfer pricing arrangement, including a
reimbursement for the cost associated with FDIC insurance. This change did not impact the income (loss) before income taxes of either segment as the component of the deposit transfer pricing payment for FDIC insurance premiums expense was removed.

Our segment financial information from prior periods has been reclassified in accordance with the new segment financial
reporting.

Trading and Investing

The following table summarizes trading and investing financial information and key metrics as of and for the three months ended
March 31, 2010 and 2009 (dollars in millions, except for key metrics):



|                                                  |  |                             |               |          |   |           |  |   |         |   |  |     |   
|------------------------------------------------- |  | --------------------------- | ------------- | -------- | - | --------- |  | - | ------- | - |  | --- | --
|                                                  |  | Three Months EndedMarch 31, |               | Variance |  
|                                                  |  |                             | 2010 vs. 2009 |         
|                                                  |  | 2010                        |               | 2009     |   | Amount    |  |   | %       |  
|Net operating interest income                     |  | $                           | 193.6         |          | $ | 149.1     |  | $ | 44.5    |   |  | 30  | % 
|Commissions                                       |  |                             | 113.3         |          |   | 125.6     |  |   | (12.3   | ) |  | (10 | )%
|Fees and service charges                          |  |                             | 41.2          |          |   | 45.1      |  |   | (3.9    | ) |  | (8  | )%
|Principal transactions                            |  |                             | 26.2          |          |   | 17.6      |  |   | 8.6     |   |  | 49  | % 
|Other revenues                                    |  |                             | 11.4          |          |   | 8.9       |  |   | 2.5     |   |  | 28  | % 
|                                                  |  |                             |               |          |   |           |  |   |         |   |  |     |   
|Total net revenue                                 |  |                             | 385.7         |          |   | 346.3     |  |   | 39.4    |   |  | 11  | % 
|Total operating expense                           |  |                             | 200.0         |          |   | 206.3     |  |   | (6.3    | ) |  | (3  | )%
|                                                  |  |                             |               |          |   |           |  |   |         |   |  |     |   
|Trading and investing income before income taxes  |  | $                           | 185.7         |          | $ | 140.0     |  | $ | 45.7    |   |  | 33  | % 
|                                                  |  |                             |               |          |   |           |  |   |         |   |  |     |   
|Key Metrics:                                      |  |                             |               |          |   |           |  |   |         |   |  |     |   
|U.S.
DARTs(1)                                     |  |                             | 155,310       |          |   | 175,403   |  |   | (20,093 | ) |  | (11 | )%
|U.S. average commission per trade                 |  | $                           | 11.38         |          | $ | 10.98     |  | $ | 0.40    |   |  | 4   | % 
|End of period brokerage
accounts(2)               |  |                             | 2,631,977     |          |   | 2,575,195 |  |   | 56,782  |   |  | 2   | % 
|Net new brokerage
accounts(2)                     |  |                             | 1,898         |          |   | 59,389    |  |   | (57,491 | ) |  | *   |   
|U.S. customer assets (dollars in billions)        |  | $                           | 158.8         |          | $ | 108.5     |  | $ | 50.3    |   |  | 46  | % 
|Net new brokerage assets (dollars in
billions)(2) |  | $                           | 2.2           |          | $ | 2.3       |  | $ | (0.1    | ) |  | *   |   
|Brokerage related cash (dollars in
billions)(2)   |  | $                           | 21.8          |          | $ | 16.8      |  | $ | 5.0     |   |  | 30  | % 



|* |  | Percentage not meaningful.
|- |  | --------------------------

|(1) |  | U.S. DARTs are defined as transactions executed on our domestic platforms.
|--- |  | --------------------------------------------------------------------------

|(2) |  | References to brokerage in these metrics refer to activity on our domestic platforms and do not include brokerage activity from our
international local brokerage accounts.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our trading and investing segment generates revenue from brokerage
and banking relationships with investors and from market-making activities. This segment generates five main sources of revenue: net operating interest income; commissions; fees and service charges; principal transactions; and other revenues. Other
revenues include results from our employee stock option management software and services from our corporate customers, as we ultimately service retail investors through these corporate relationships.



15



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##### Table of Contents

Trading and investing income before income taxes increased 33% to $185.7 million for the
three months ended March 31, 2010 compared to the same period in 2009. We continued to generate net new brokerage accounts, ending the first quarter with 2.6 million accounts. Our brokerage related cash, which is one of our most profitable
sources of funding, increased by $5.0 billion when compared to the same period in 2009. We believe these metrics are indicators of a brokerage business that is able to compete effectively in a volatile environment and we believe we are positioned
for continued growth in our trading and investing segment.

Trading and investing net operating interest income increased 30%
to $193.6 million for the three months ended March 31, 2010 compared to the same period in 2009. This was due primarily to a decrease in the yields paid on our deposits and an increase in the average balance of our margin receivables during the
comparable periods.

Trading and investing commissions revenue decreased 10% to $113.3 million for the three months ended
March 31, 2010 compared to the same period in 2009. The decrease in commissions revenue was primarily the result of a decrease in U.S. DARTs of 11% to 155,310 for the three months ended March 31, 2010 compared to the same period in 2009.
This decrease was slightly offset by an increase in the average commission per trade of 6% to $11.21 for the three months ended March 31, 2010 compared to the same period in 2009.

Trading and investing fees and service charges decreased 8% to $41.2 million for the three months ended March 31, 2010 compared to
the same period in 2009. The decline was driven by a decrease in account service fees. We expect lower levels of fees and service charges in future periods as we eliminate all account activity fees in the second quarter of 2010.

Trading and investing principal transactions increased 49% to $26.2 million for the three months ended March 31, 2010 compared to
the same period in 2009. Our principal transactions revenue is derived primarily from our market making business in which we act as a market-maker for our own brokerage customers orders as well as orders from third party customers. The
increase in principal transactions revenue was due primarily to an increase in the volume of orders from our third party customers.

Trading and investing operating expense decreased 3% to $200.0 million for three months ended March 31, 2010 compared to the same
period in 2009. This related primarily to a decrease in advertising and market development expense during the period. This decrease was due largely to the timing of our advertising expenditures in the first quarter of 2010 as we expect our
advertising expenditures for 2010 to be similar to our advertising expenditures in 2009.

As of March 31, 2010, we had
approximately 2.6 million brokerage accounts (excluding 0.1 million international local accounts), 1.0 million stock plan accounts and 0.6 million banking accounts. For the three months ended March 31, 2010 and 2009, our
brokerage products contributed 68% and 77%, respectively, and our banking products, which include sweep products, contributed 32% and 23%, respectively, of total trading and investing net revenue.



16



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##### Table of Contents

Balance Sheet Management

The following table summarizes balance sheet management financial information and key metrics as of and for the three months ended
March 31, 2010 and 2009 (dollars in millions, except for key metrics):



|                                                           |  |                             |               |   |          |   |         |        |  |   |        |   |  |      |   
|---------------------------------------------------------- |  | --------------------------- | ------------- | - | -------- | - | ------- | ------ |  | - | ------ | - |  | ---- | --
|                                                           |  | Three Months EndedMarch 31, |               |   | Variance |  
|                                                           |  |                             | 2010 vs. 2009 |  
|                                                           |  | 2010                        |               |   | 2009     |   |         | Amount |  |   | %      |  
|Net operating interest income                              |  | $                           | 126.7         |   |          | $ | 129.5   |        |  | $ | (2.8   | ) |  | (2   | )%
|Fees and service charges                                   |  |                             | 1.0           |   |          |   | 1.7     |        |  |   | (0.7   | ) |  | (40  | )%
|Gains on loans and securities, net                         |  |                             | 29.0          |   |          |   | 35.3    |        |  |   | (6.3   | ) |  | (18  | )%
|Net impairment                                             |  |                             | (8.6          | ) |          |   | (18.8   | )      |  |   | *      |   |  | *    |   
|Other revenues                                             |  |                             | 2.6           |   |          |   | 3.3     |        |  |   | (0.7   | ) |  | (21  | )%
|                                                           |  |                             |               |   |          |   |         |        |  |   |        |   |  |      |   
|Total net revenue                                          |  |                             | 150.7         |   |          |   | 151.0   |        |  |   | (0.3   | ) |  | (0   | )%
|Provision for loan losses                                  |  |                             | 268.0         |   |          |   | 454.0   |        |  |   | (186.0 | ) |  | (41  | )%
|Total operating expense                                    |  |                             | 51.7          |   |          |   | 48.3    |        |  |   | 3.4    |   |  | 7    | % 
|Losses from early extinguishment of debt                   |  |                             |              |   |          |   | 3.0     |        |  |   | (3.0   | ) |  | *    |   
|                                                           |  |                             |               |   |          |   |         |        |  |   |        |   |  |      |   
|Balance sheet management loss before income taxes          |  | $                           | (169.0        | ) |          | $ | (354.3  | )      |  | $ | 185.3  |   |  | (52  | )%
|                                                           |  |                             |               |   |          |   |         |        |  |   |        |   |  |      |   
|Key Metrics:                                               |  |                             |               |   |          |   |         |        |  |   |        |   |  |      |   
|Allowance for loan losses (dollars in millions)            |  | $                           | 1,162.4       |   |          | $ | 1,200.8 |        |  | $ | (38.4  | ) |  | (3   | )%
|Allowance for loan losses as a % of gross loans receivable |  |                             | 6.09          | % |          |   | 4.91    | %      |  |   | *      |   |  | 1.18 | % 



|* |  | Percentage not meaningful.
|- |  | --------------------------

Our
balance sheet management segment generates revenue from managing loans previously originated or purchased from third parties as well as our customer cash and deposit relationships to generate additional net operating interest income.

The balance sheet management segment reported a loss of $169.0 million for the three months ended March 31, 2010. The losses in the
segment are due primarily to the provision for loan losses of $268.0 million for the three months ended March 31, 2010.

Gains on loans and securities, net were $29.0 million for the three months ended March 31, 2010 compared to $35.3 million for the
same period in 2009. The gains on loans and securities, net were due primarily to gains on the sales of certain agency mortgage-backed securities during the three months ended March 31, 2010 and 2009.

We recognized $8.6 million net impairment during the three months ended March 31, 2010 on certain securities in our non-agency CMO
portfolio due to continued deterioration in the expected credit performance of the underlying loans in the securities. The net impairment included gross OTTI of $14.5 million for the three months ended March 31, 2010. Of the $14.5 million of
gross OTTI for the three months ended March 31, 2010, $5.9 million related to the noncredit portion of OTTI and was recorded through other comprehensive income. We had net impairment of $18.8 million for the three months ended March 31,
2009, which represented the total decline in the fair value of impaired securities in accordance with the OTTI accounting guidance that was in effect prior to April 1, 2009.

Provision for loan losses decreased $186.0 million to $268.0 million for the three months ended March 31, 2010 compared to the same
period in 2009. The decrease in the provision for loan losses was driven by lower levels of at-risk (30-179 days delinquent) loans in our one- to four-family and home equity loan portfolios.

Total balance sheet management operating expense increased 7% to $51.7 million for the three months ended March 31, 2010 compared to
the same period in 2009 and was due primarily to increased FDIC insurance premiums due to an increase in ongoing FDIC insurance rates.



17



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##### Table of Contents

Corporate/Other

The following table summarizes corporate/other financial information for the three months ended March 31, 2010 and 2009 (dollars in
millions):



|                                                 |  |                             |               |   |          |   |        |        |  |   |      |   |  |     |   
|------------------------------------------------ |  | --------------------------- | ------------- | - | -------- | - | ------ | ------ |  | - | ---- | - |  | --- | --
|                                                 |  | Three MonthsEnded March 31, |               |   | Variance |  
|                                                 |  |                             | 2010 vs. 2009 |  
|                                                 |  | 2010                        |               |   | 2009     |   |        | Amount |  |   | %    |  
|Total net revenue                                |  | $                           | 0.0           |   |          | $ | 0.1    |        |  | $ | (0.1 | ) |  | *   |   
|                                                 |  |                             |               |   |          |   |        |        |  |   |      |   |  |     |   
|Compensation and benefits                        |  |                             | 21.1          |   |          |   | 20.0   |        |  |   | 1.1  |   |  | 6   | % 
|Communications                                   |  |                             | 0.5           |   |          |   | 0.5    |        |  |   | 0.0  |   |  | 4   | % 
|Professional services                            |  |                             | 8.3           |   |          |   | 10.1   |        |  |   | (1.8 | ) |  | (18 | )%
|Occupancy and equipment                          |  |                             | 0.6           |   |          |   | (0.3   | )      |  |   | 0.9  |   |  | *   |   
|Depreciation and amortization                    |  |                             | 4.9           |   |          |   | 4.7    |        |  |   | 0.2  |   |  | 4   | % 
|Facility restructuring and other exit activities |  |                             | 3.4           |   |          |   | (0.1   | )      |  |   | 3.5  |   |  | *   |   
|Other operating expenses                         |  |                             | 4.8           |   |          |   | 4.4    |        |  |   | 0.4  |   |  | 10  | % 
|                                                 |  |                             |               |   |          |   |        |        |  |   |      |   |  |     |   
|Total operating expense                          |  |                             | 43.6          |   |          |   | 39.3   |        |  |   | 4.3  |   |  | 11  | % 
|                                                 |  |                             |               |   |          |   |        |        |  |   |      |   |  |     |   
|Operating loss                                   |  |                             | (43.6         | ) |          |   | (39.2  | )      |  |   | (4.4 | ) |  | 11  | % 
|Total other income (expense)                     |  |                             | (39.1         | ) |          |   | (90.5  | )      |  |   | 51.4 |   |  | (57 | )%
|                                                 |  |                             |               |   |          |   |        |        |  |   |      |   |  |     |   
|Corporate/other loss before income taxes         |  | $                           | (82.7         | ) |          | $ | (129.7 | )      |  | $ | 47.0 |   |  | (36 | )%
|                                                 |  |                             |               |   |          |   |        |        |  |   |      |   |  |     |   



|* |  | Percentage not meaningful.
|- |  | --------------------------

Our
corporate/other category includes costs that are centrally managed, technology related costs incurred to support centrally managed functions, restructuring and other exit activities, corporate debt and corporate investments.

Our corporate/other loss before income taxes was a loss of $82.7 million for the three months ended March 31, 2010. The losses were
due primarily to total operating expenses of $43.6 million and corporate interest expense of $41.0 million resulting from our interest-bearing corporate debt. Our corporate/other total operating expenses increased 11% to $43.6 million for the three
months ended March 31, 2010 compared to the same period in 2009. This increase was due primarily to an increase in facility restructuring and other exit activities of $3.5 million due primarily to the restructuring of our international
brokerage business.



18



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##### Table of Contents

BALANCE SHEET OVERVIEW

The following table sets forth the significant components of our consolidated balance sheet (dollars in millions):



|                                                                                  |  |               |               |                  |   |          |  |   |        |   |  |     |   
|--------------------------------------------------------------------------------- |  | ------------- | ------------- | ---------------- | - | -------- |  | - | ------ | - |  | --- | --
|                                                                                  |  | March 31,2010 |               | December 31,2009 |   | Variance | 
|                                                                                  |  |               | 2010 vs. 2009 |                 
|                                                                                  |  |               | Amount        |                  |   | %        | 
|Assets:                                                                           |  |               |               |                  |   |          |  |   |        |   |  |     |   
|Cash and equivalents                                                              |  | $             | 3,068.4       |                  | $ | 3,483.2  |  | $ | (414.8 | ) |  | (12 | )%
|Cash and investments required to be segregated under federal or other regulations |  |               | 2,087.6       |                  |   | 1,545.3  |  |   | 542.3  |   |  | 35  | % 
|Trading securities                                                                |  |               | 47.0          |                  |   | 38.3     |  |   | 8.7    |   |  | 23  | % 
|Available-for-sale mortgage-backed and investment securities                      |  |               | 13,278.4      |                  |   | 13,319.7 |  |   | (41.3  | ) |  | 0   | % 
|Margin receivables                                                                |  |               | 3,986.7       |                  |   | 3,827.2  |  |   | 159.5  |   |  | 4   | % 
|Loans, net                                                                        |  |               | 18,188.0      |                  |   | 19,174.9 |  |   | (986.9 | ) |  | (5  | )%
|Investment in FHLB stock                                                          |  |               | 183.9         |                  |   | 183.9    |  |   | 0.0    |   |  | 0   | % 
|Other(1)                                                                          |  |               | 5,838.7       |                  |   | 5,794.0  |  |   | 44.7   |   |  | 1   | % 
|                                                                                  |  |               |               |                  |   |          |  |   |        |   |  |     |   
|Total assets                                                                      |  | $             | 46,678.7      |                  | $ | 47,366.5 |  | $ | (687.8 | ) |  | (1  | )%
|                                                                                  |  |               |               |                  |   |          |  |   |        |   |  |     |   
|Liabilities and shareholders equity:                                             |  |               |               |                  |   |          |  |   |        |   |  |     |   
|Deposits                                                                          |  | $             | 24,632.9      |                  | $ | 25,597.7 |  | $ | (964.8 | ) |  | (4  | )%
|Wholesale
borrowings(2)                                                           |  |               | 9,133.7       |                  |   | 9,188.8  |  |   | (55.1  | ) |  | (1  | )%
|Customer payables                                                                 |  |               | 5,620.1       |                  |   | 5,234.2  |  |   | 385.9  |   |  | 7   | % 
|Corporate debt                                                                    |  |               | 2,400.4       |                  |   | 2,458.7  |  |   | (58.3  | ) |  | (2  | )%
|Accounts payable, accrued and other liabilities                                   |  |               | 1,075.2       |                  |   | 1,137.5  |  |   | (62.3  | ) |  | (5  | )%
|                                                                                  |  |               |               |                  |   |          |  |   |        |   |  |     |   
|Total liabilities                                                                 |  |               | 42,862.3      |                  |   | 43,616.9 |  |   | (754.6 | ) |  | (2  | )%
|Shareholders equity                                                              |  |               | 3,816.4       |                  |   | 3,749.6  |  |   | 66.8   |   |  | 2   | % 
|                                                                                  |  |               |               |                  |   |          |  |   |        |   |  |     |   
|Total liabilities and shareholders equity                                        |  | $             | 46,678.7      |                  | $ | 47,366.5 |  | $ | (687.8 | ) |  | (1  | )%
|                                                                                  |  |               |               |                  |   |          |  |   |        |   |  |     |   



|(1) |  | Includes balance sheet line items property and equipment, net, goodwill,
other intangibles, net and other assets.
|--- |  | -----------------------------------------------------------------------------------------------------------------

|(2) |  | Includes balance sheet line items securities sold under agreements to
repurchase and FHLB advances and other borrowings.
|--- |  | ------------------------------------------------------------------------------------------------------------------------

The slight decrease in total assets was attributable
primarily to a decrease of $1.0 billion in loans, net. The decrease in loans, net was due to our strategy of reducing balance sheet risk by allowing our loan portfolio to pay down, which we plan to do for the foreseeable future.

The slight decrease in total liabilities was attributable primarily to the decrease of $1.0 billion in deposits. The decrease in deposits
was a result of the sale of approximately $1 billion of savings accounts to Discover Financial Services in the first quarter of 2010.



19



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##### Table of Contents

Available-for-Sale Mortgage-Backed and Investment Securities

Available-for-sale securities are summarized as follows (dollars in millions):



|                                             |  |               |               |                  |   |          |  |   |        |   |  |    |   
|-------------------------------------------- |  | ------------- | ------------- | ---------------- | - | -------- |  | - | ------ | - |  | -- | --
|                                             |  | March 31,2010 |               | December 31,2009 |   | Variance | 
|                                             |  |               | 2010 vs. 2009 |                 
|                                             |  |               | Amount        |                  |   | %        | 
|Residential mortgage-backed securities:      |  |               |               |                  |   |          |  |   |        |   |  |    |   
|Agency mortgage-backed securities and CMOs   |  | $             | 8,449.8       |                  | $ | 8,966.9  |  | $ | (517.1 | ) |  | (6 | )%
|Non-agency CMOs and other                    |  |               | 371.6         |                  |   | 375.1    |  |   | (3.5   | ) |  | (1 | )%
|                                             |  |               |               |                  |   |          |  |   |        |   |  |    |   
|Total residential mortgage-backed securities |  |               | 8,821.4       |                  |   | 9,342.0  |  |   | (520.6 | ) |  | (6 | )%
|Investment securities                        |  |               | 4,457.0       |                  |   | 3,977.7  |  |   | 479.3  |   |  | 12 | % 
|                                             |  |               |               |                  |   |          |  |   |        |   |  |    |   
|Total available-for-sale securities          |  | $             | 13,278.4      |                  | $ | 13,319.7 |  | $ | (41.3  | ) |  | (0 | )%
|                                             |  |               |               |                  |   |          |  |   |        |   |  |    |   

Available-for-sale securities represented 28% of total assets at both March 31, 2010 and
December 31, 2009. The slight decrease of available-for-sale securities was due primarily to the sale of certain agency mortgage-backed securities and CMOs, offset by an increase in investment securities related to the purchase of U.S.
Treasury securities and other agency debt securities.

Loans, Net

Loans, net are summarized as follows (dollars in millions):



|                          |  |                |               |   |                  |   |          |          |  |   |        |   |  |    |   
|------------------------- |  | -------------- | ------------- | - | ---------------- | - | -------- | -------- |  | - | ------ | - |  | -- | --
|                          |  | March 
31,2010 |               |   | December 31,2009 |   |          | Variance | 
|                          |  |                | 2010 vs. 2009 |  
|                          |  |                | Amount        |   |                  | % |         
|Loans held-for-sale       |  | $              | 255.1         |   |                  | $ | 7.9      |          |  | $ | 247.2  |   |  | *  |   
|One- to four-family       |  |                | 9,752.6       |   |                  |   | 10,567.1 |          |  |   | (814.5 | ) |  | (8 | )%
|Home equity               |  |                | 7,422.3       |   |                  |   | 7,769.7  |          |  |   | (347.4 | ) |  | (4 | )%
|Consumer and other        |  |                | 1,762.0       |   |                  |   | 1,841.3  |          |  |   | (79.3  | ) |  | (4 | )%
|Unamortized premiums, net |  |                | 158.4         |   |                  |   | 171.6    |          |  |   | (13.2  | ) |  | (8 | )%
|Allowance for loan losses |  |                | (1,162.4      | ) |                  |   | (1,182.7 | )        |  |   | 20.3   |   |  | (2 | )%
|                          |  |                |               |   |                  |   |          |          |  |   |        |   |  |    |   
|Total loans, net          |  | $              | 18,188.0      |   |                  | $ | 19,174.9 |          |  | $ | (986.9 | ) |  | (5 | )%
|                          |  |                |               |   |                  |   |          |          |  |   |        |   |  |    |   



|* |  | Percentage not meaningful.
|- |  | --------------------------

Loans, net decreased 5% to $18.2 billion at March 31, 2010 from $19.2 billion at December 31, 2009. This decline was due
primarily to our strategy of reducing balance sheet risk by allowing our loan portfolio to pay down, which we plan to do for the foreseeable future.

The increase in loans held-for-sale was due to approximately $250 million of one- to four-family loans that were reclassified from loans
held-for-investment to loans held-for-sale at March 31, 2010. We plan to securitize these loans with Fannie Mae during the second quarter of 2010. For the foreseeable future, we do not plan to securitize or sell any of our remaining one- to
four-family loans in our held-for-investment portfolio.



20



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##### Table of Contents

Deposits

Deposits are summarized as follows (dollars in millions):



|                                        |  |               |               |                  |   |          |  |   |          |   |  |     |   
|--------------------------------------- |  | ------------- | ------------- | ---------------- | - | -------- |  | - | -------- | - |  | --- | --
|                                        |  | March 31,2010 |               | December 31,2009 |   | Variance | 
|                                        |  |               | 2010 vs. 2009 |                 
|                                        |  |               | Amount        |                  |   | %        | 
|Sweep deposit accounts                  |  | $             | 13,395.3      |                  | $ | 12,551.5 |  | $ | 843.8    |   |  | 7   | % 
|Complete savings accounts               |  |               | 8,047.7       |                  |   | 9,704.0  |  |   | (1,656.3 | ) |  | (17 | )%
|Other money market and savings accounts |  |               | 1,165.7       |                  |   | 1,183.4  |  |   | (17.7    | ) |  | (1  | )%
|Certificates of deposit                 |  |               | 1,060.3       |                  |   | 1,215.8  |  |   | (155.5   | ) |  | (13 | )%
|Checking accounts                       |  |               | 846.6         |                  |   | 813.7    |  |   | 32.9     |   |  | 4   | % 
|Brokered certificates of deposit        |  |               | 117.3         |                  |   | 129.3    |  |   | (12.0    | ) |  | (9  | )%
|                                        |  |               |               |                  |   |          |  |   |          |   |  |     |   
|Total deposits                          |  | $             | 24,632.9      |                  | $ | 25,597.7 |  | $ | (964.8   | ) |  | (4  | )%
|                                        |  |               |               |                  |   |          |  |   |          |   |  |     |   

Deposits represented 57% and 59% of total liabilities at March 31, 2010 and December 31,
2009, respectively. Deposits generally provide us the benefit of lower interest costs compared with wholesale funding alternatives. The decrease in deposits of $1.0 billion during the quarter was due primarily to a decrease of $1.7 billion in
complete savings accounts, partially offset by an increase of $0.8 billion in sweep deposit accounts. At March 31, 2010, 94% of our customer deposits were covered by FDIC insurance.

We sold approximately $1 billion of savings accounts to Discover Financial Services in March 2010. This transaction is in line with our
overall strategy of reducing our balance sheet and growing our brokerage business as the savings accounts sold were predominantly with customers not affiliated with an active brokerage account.

The deposits balance is a component of the total customer cash and deposits balance reported as a customer activity metric of $33.3
billion and $33.8 billion at March 31, 2010 and December 31, 2009, respectively. The total customer cash and deposits balance is summarized as follows (dollars in millions):



|                                                       |  |               |               |   |                  |   |          |          |  |   |        |   |  |    |   
|------------------------------------------------------ |  | ------------- | ------------- | - | ---------------- | - | -------- | -------- |  | - | ------ | - |  | -- | --
|                                                       |  | March 31,2010 |               |   | December 31,2009 |   |          | Variance | 
|                                                       |  |               | 2010 vs. 2009 |  
|                                                       |  |               | Amount        |   |                  | % |         
|Deposits                                               |  | $             | 24,632.9      |   |                  | $ | 25,597.7 |          |  | $ | (964.8 | ) |  | (4 | )%
|Less: brokered certificates of deposit                 |  |               | (117.3        | ) |                  |   | (129.3   | )        |  |   | 12.0   |   |  | (9 | )%
|                                                       |  |               |               |   |                  |   |          |          |  |   |        |   |  |    |   
|Retail deposits                                        |  |               | 24,515.6      |   |                  |   | 25,468.4 |          |  |   | (952.8 | ) |  | (4 | )%
|Customer payables                                      |  |               | 5,620.1       |   |                  |   | 5,234.2  |          |  |   | 385.9  |   |  | 7  | % 
|Customer cash balances held by third parties and other |  |               | 3,149.7       |   |                  |   | 3,132.8  |          |  |   | 16.9   |   |  | 1  | % 
|                                                       |  |               |               |   |                  |   |          |          |  |   |        |   |  |    |   
|Total customer cash and deposits                       |  | $             | 33,285.4      |   |                  | $ | 33,835.4 |          |  | $ | (550.0 | ) |  | (2 | )%
|                                                       |  |               |               |   |                  |   |          |          |  |   |        |   |  |    |   



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##### Table of Contents

Wholesale Borrowings

Wholesale borrowings, which consist of securities sold under agreements to repurchase and FHLB advances and other borrowings are
summarized as follows (dollars in millions):



|                                               |  |               |               |                  |   |          |  |   |       |   |  |    |   
|---------------------------------------------- |  | ------------- | ------------- | ---------------- | - | -------- |  | - | ----- | - |  | -- | --
|                                               |  | March 31,2010 |               | December 31,2009 |   | Variance | 
|                                               |  |               | 2010 vs. 2009 |                 
|                                               |  |               | Amount        |                  |   | %        | 
|Securities sold under agreements to repurchase |  | $             | 6,385.3       |                  | $ | 6,441.9  |  | $ | (56.6 | ) |  | (1 | )%
|                                               |  |               |               |                  |   |          |  |   |       |   |  |    |   
|FHLB advances                                  |  | $             | 2,303.6       |                  | $ | 2,303.6  |  | $ |      |   |  |   | % 
|Subordinated debentures                        |  |               | 427.4         |                  |   | 427.4    |  |   | 0.0   |   |  | 0  | % 
|Other                                          |  |               | 17.4          |                  |   | 15.9     |  |   | 1.5   |   |  | 9  | % 
|                                               |  |               |               |                  |   |          |  |   |       |   |  |    |   
|Total FHLB advances and other borrowings       |  | $             | 2,748.4       |                  | $ | 2,746.9  |  | $ | 1.5   |   |  | 0  | % 
|                                               |  |               |               |                  |   |          |  |   |       |   |  |    |   
|Total wholesale borrowings                     |  | $             | 9,133.7       |                  | $ | 9,188.8  |  | $ | (55.1 | ) |  | (1 | )%
|                                               |  |               |               |                  |   |          |  |   |       |   |  |    |   

Wholesale borrowings represented 21% of total liabilities at both March 31, 2010 and
December 31, 2009. FHLB advances coupled with securities sold under agreements to repurchase are the primary wholesale funding sources of the Bank. As a result, we expect these balances to fluctuate over time as our deposits and our
interest-earning assets fluctuate.

Corporate Debt

Corporate debt by type is shown as follows (dollars in millions):



|                                      |  |            |         |          |   |        |                      |  |     |      |  |   |        
|------------------------------------- |  | ---------- | ------- | -------- | - | ------ | -------------------- |  | --- | ---- |  | - | -------
|                                      |  | Face Value |         | Discount |   |        | Fair ValueAdjustment |  | Net
|March 31, 2010                        |  |            |         |          |   |        |                      |  |     |      |  |   |        
|Interest-bearing notes:               |  |            |         |          |   |        |                      |  |     |      |  |   |        
|Senior notes:                         |  |            |         |          |   |        |                      |  |     |      |  |   |        
|8% Notes, due 2011                    |  | $          | 3.6     |          | $ |       |                      |  | $   |     |  | $ | 3.6    
|73/8% Notes, due 2013                 |  |            | 414.7   |          |   | (3.2   | )                    |  |     | 21.6 |  |   | 433.1  
|77/8% Notes, due 2015                 |  |            | 243.2   |          |   | (1.7   | )                    |  |     | 10.7 |  |   | 252.2  
|                                      |  |            |         |          |   |        |                      |  |     |      |  |   |        
|Total senior notes                    |  |            | 661.5   |          |   | (4.9   | )                    |  |     | 32.3 |  |   | 688.9  
|121/2% Springing lien notes, due 2017 |  |            | 930.2   |          |   | (187.0 | )                    |  |     | 8.1  |  |   | 751.3  
|                                      |  |            |         |          |   |        |                      |  |     |      |  |   |        
|Total interest-bearing notes          |  |            | 1,591.7 |          |   | (191.9 | )                    |  |     | 40.4 |  |   | 1,440.2
|Non-interest-bearing debt:            |  |            |         |          |   |        |                      |  |     |      |  |   |        
|0% Convertible debentures, due 2019   |  |            | 960.2   |          |   |       |                      |  |     |     |  |   | 960.2  
|                                      |  |            |         |          |   |        |                      |  |     |      |  |   |        
|Total corporate debt                  |  | $          | 2,551.9 |          | $ | (191.9 | )                    |  | $   | 40.4 |  | $ | 2,400.4
|                                      |  |            |         |          |   |        |                      |  |     |      |  |   |        
|                                      |  |            |         |         
|                                      |  | Face Value |         | Discount |   |        | Fair ValueAdjustment |  | Net
|December 31, 2009                     |  |            |         |          |   |        |                      |  |     |      |  |   |        
|Interest-bearing notes:               |  |            |         |          |   |        |                      |  |     |      |  |   |        
|Senior notes:                         |  |            |         |          |   |        |                      |  |     |      |  |   |        
|8% Notes, due 2011                    |  | $          | 3.6     |          | $ |       |                      |  | $   |     |  | $ | 3.6    
|73/8% Notes, due 2013                 |  |            | 414.7   |          |   | (3.4   | )                    |  |     | 21.5 |  |   | 432.8  
|77/8% Notes, due 2015                 |  |            | 243.2   |          |   | (1.8   | )                    |  |     | 11.2 |  |   | 252.6  
|                                      |  |            |         |          |   |        |                      |  |     |      |  |   |        
|Total senior notes                    |  |            | 661.5   |          |   | (5.2   | )                    |  |     | 32.7 |  |   | 689.0  
|121/2% Springing lien notes, due 2017 |  |            | 930.2   |          |   | (189.8 | )                    |  |     | 8.4  |  |   | 748.8  
|                                      |  |            |         |          |   |        |                      |  |     |      |  |   |        
|Total interest-bearing notes          |  |            | 1,591.7 |          |   | (195.0 | )                    |  |     | 41.1 |  |   | 1,437.8
|Non-interest-bearing debt:            |  |            |         |          |   |        |                      |  |     |      |  |   |        
|0% Convertible debentures, due 2019   |  |            | 1,020.9 |          |   |       |                      |  |     |     |  |   | 1,020.9
|                                      |  |            |         |          |   |        |                      |  |     |      |  |   |        
|Total corporate debt                  |  | $          | 2,612.6 |          | $ | (195.0 | )                    |  | $   | 41.1 |  | $ | 2,458.7
|                                      |  |            |         |          |   |        |                      |  |     |      |  |   |        



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##### Table of Contents

As of May 4, 2010, a cumulative total of $1.0 billion of our convertible debentures
were converted and our total common shares outstanding were 2.2 billion. The remaining face value of the convertible debt as of May 4, 2010 was approximately $711.4 million.

Shareholders Equity

The activity in shareholders equity during the three months ended March 31, 2010 is summarized as follows (dollars in
millions):



|                                              |  |                                        |         |                                            |   |          |       |  |   |         |  
|--------------------------------------------- |  | -------------------------------------- | ------- | ------------------------------------------ | - | -------- | ----- |  | - | ------- | -
|                                              |  | Common Stock/Additional Paid-InCapital |         | AccumulatedDeficit/OtherComprehensive Loss |   |          | Total | 
|Beginning balance, December 31, 2009          |  | $                                      | 6,277.1 |                                            | $ | (2,527.5 | )     |  | $ | 3,749.6 |  
|Net loss                                      |  |                                        |        |                                            |   | (47.8    | )     |  |   | (47.8   | )
|Conversions of convertible debentures         |  |                                        | 60.8    |                                            |   |         |       |  |   | 60.8    |  
|Claims settlement under Section 16(b)         |  |                                        | 35.0    |                                            |   |         |       |  |   | 35.0    |  
|Net change from available-for-sale securities |  |                                        |        |                                            |   | 41.2     |       |  |   | 41.2    |  
|Net change from cash flow hedging instruments |  |                                        |        |                                            |   | (22.5    | )     |  |   | (22.5   | )
|Other(1)                                      |  |                                        | 2.2     |                                            |   | (2.1     | )     |  |   | 0.1     |  
|                                              |  |                                        |         |                                            |   |          |       |  |   |         |  
|Ending balance, March 31, 2010                |  | $                                      | 6,375.1 |                                            | $ | (2,558.7 | )     |  | $ | 3,816.4 |  
|                                              |  |                                        |         |                                            |   |          |       |  |   |         |  



|(1) |  | Other includes employee stock compensation accounting and changes in
accumulated other comprehensive loss from foreign currency translation.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------

In January 2010, a security holder
paid the Company $35 million to settle a claim under Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) requires certain persons and entities whose securities trading activities result in short swing
profits to repay such profits to the issuer of the security. Section 16(b) liability does not require that the security holder trade while in possession of material non-public information. This payment was recorded as an increase to
shareholders equity in the first quarter of 2010.

In the first quarter of 2010, the Company announced that it would
seek the approval of its stockholders for a 1-for-10 reverse stock split and a corresponding decrease to the Companys authorized shares of common stock to a total of 400 million shares. If approved by the stockholders at the
Companys 2010 Annual Meeting, which is scheduled to be held on May 13, 2010, the reverse stock split should become effective in early June 2010.

LIQUIDITY AND CAPITAL RESOURCES

We have established liquidity and capital policies to support the successful execution of our business strategies, while ensuring ongoing
and sufficient liquidity through the business cycle. These policies are especially important during periods of stress in the financial markets, which have been ongoing since the fourth quarter of 2007 and could continue for some time.

We believe liquidity is of critical importance to the Company and especially important within E*TRADE Bank. The objective of our policies
is to ensure that we can meet our corporate and banking liquidity needs under both normal operating conditions and under periods of stress in the financial markets. Our corporate liquidity needs are primarily driven by the amount of principal and
interest due on our corporate debt as well as any capital needs at E*TRADE Bank. Our banking liquidity needs are driven primarily by the level and volatility of our customer deposits. Management maintains an extensive set of liquidity sources and
monitors certain business trends and market metrics closely to ensure we have sufficient liquidity and to avoid dependence on other more expensive sources of funding. Management believes the following sources of liquidity are of critical importance
in maintaining ample funding for liquidity needs: Corporate cash, Bank cash, deposits and unused FHLB borrowing capacity. Management believes that within deposits, sweep deposits are of particular importance as they are the most stable source of
liquidity for E*TRADE Bank when compared to non-sweep deposits. Overall,



23



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##### Table of Contents

management believes that these liquidity sources, which we expect to fluctuate in any given period, are more than sufficient to meet our needs for the foreseeable future.

Capital is generated primarily through our business operations and our capital market activities. Our trading and investing segment has
been profitable and a generator of capital for the past six years and we expect that trend to continue. However, our provision for loan losses, which is reported in the balance sheet management segment, has more than offset the capital generated by
both of our segments in recent periods. While we cannot state this with certainty, we believe that this trend will reverse at some point in the foreseeable future and our business operations will again be a net generator of capital. The primary
business operations of both our trading and investing and balance sheet management segments are contained within the Bank; therefore, we believe a key indicator of the capital generated or used in our business operations is the level of regulatory
capital in the Bank. During the first quarter of 2010, the Bank generated an additional $48 million of risk-based capital in excess of the level our regulators define as well-capitalized. While we do not expect the Bank to generate risk-based
capital in every quarter of 2010, we do expect the Bank to generate risk-based capital for the full year in 2010.

Corporate Cash

Corporate cash is the primary source of liquidity at the parent company and is available to invest in our regulated
subsidiaries. We define corporate cash as cash held at the parent company as well as cash held in certain subsidiaries that can distribute cash to the parent company without any regulatory approval. The components of corporate cash as of
March 31, 2010 and December 31, 2009 are as follows (dollars in millions):



|                     |  |               |       |                  |   |          |  |   |      |  
|-------------------- |  | ------------- | ----- | ---------------- | - | -------- |  | - | ---- | -
|                     |  | March 31,2010 |       | December 31,2009 |   | Variance | 
|                     |  |               |       | 2010 vs. 2009    |  
|Parent company cash  |  | $             | 418.0 |                  | $ | 388.7    |  | $ | 29.3 |  
|Other
cash(1)        |  |               | 0.4   |                  |   | 4.5      |  |   | (4.1 | )
|                     |  |               |       |                  |   |          |  |   |      |  
|Total corporate cash |  | $             | 418.4 |                  | $ | 393.2    |  | $ | 25.2 |  
|                     |  |               |       |                  |   |          |  |   |      |  



|(1) |  | Other cash consists of corporate subsidiaries that can distribute cash to
the parent company without any regulatory approval.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

Consolidated Cash and Equivalents

The consolidated cash and equivalents balance decreased by $0.4 billion to $3.1 billion for the three months ended March 31, 2010.
The majority of this balance is cash held in regulated subsidiaries, primarily the Bank, outlined as follows (dollars in millions):



|                                       |  |               |         |                  |   |         |          |  |   |        |  
|-------------------------------------- |  | ------------- | ------- | ---------------- | - | ------- | -------- |  | - | ------ | -
|                                       |  | March 31,2010 |         | December 31,2009 |   |         | Variance | 
|                                       |  |               |         | 2010 vs. 2009    |  
|Corporate cash                         |  | $             | 418.4   |                  | $ | 393.2   |          |  | $ | 25.2   |  
|Bank cash                              |  |               | 2,403.3 |                  |   | 2,863.2 |          |  |   | (459.9 | )
|International brokerage and other cash |  |               | 246.7   |                  |   | 275.8   |          |  |   | (29.1  | )
|Less:                                  |  |               |         |                  |   |         |          |  |   |        |  
|Cash reported in other
assets(1)       |  |               |        |                  |   | (49.0   | )        |  |   | 49.0   |  
|                                       |  |               |         |                  |   |         |          |  |   |        |  
|Total consolidated cash                |  | $             | 3,068.4 |                  | $ | 3,483.2 |          |  | $ | (414.8 | )
|                                       |  |               |         |                  |   |         |          |  |   |        |  



|(1) |  | Cash reported in other assets consisted of cash that we invested in The Reserve Funds Primary Fund and was included as a receivable in the other
assets line item. We received the final distribution from the Primary Fund during the first quarter of 2010.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The cash held in our regulated subsidiaries serves as a source of liquidity for those subsidiaries and is not a primary source of capital
for the parent company.



24



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##### Table of Contents

Cash and Equivalents Held in the Reserve Fund

On January 29, 2010, we received a final distribution from The Reserve Fund for $49.8 million. This distribution resulted in a gain
of $0.8 million in the first quarter of 2010 as the pro-rata final distribution was greater than what we originally estimated we would receive. This gain was recorded in the gains on loans and securities, net and gains (losses) on sales of
investments, net on the consolidated statement of loss.

Liquidity Available from Subsidiaries

Liquidity available to the Company from its subsidiaries is limited by regulatory requirements. In addition, E*TRADE Bank may not pay
dividends to the parent company without approval from the OTS and any loans by E*TRADE Bank to the parent company and its other non-bank subsidiaries are subject to various quantitative, arms length, collateralization and other requirements.

We maintain capital in excess of regulatory minimums at our regulated subsidiaries, the most significant of which is E*TRADE
Bank. As of March 31, 2010, we held $945.6 million of risk-based total capital at E*TRADE Bank in excess of the regulatory minimum level required to be considered well capitalized. In the current credit environment, we plan to
maintain excess risk-based total capital at E*TRADE Bank in order to enhance our ability to absorb credit losses while still maintaining well capitalized status. However, events beyond managements control, such as a continued
deterioration in residential real estate and credit markets, could adversely affect future earnings and E*TRADE Banks ability to meet its future capital requirements.

The Companys broker-dealer subsidiaries are subject to capital requirements determined by their respective
regulators. At March 31, 2010 and December 31, 2009, all of our significant brokerage subsidiaries met their minimum net capital requirements. Our broker-dealer subsidiaries had excess net capital of $563.6
million(1)at March 31, 2010, an increase of $5.3
million from December 31, 2009. While we cannot assure that we would obtain regulatory approval in the future to withdraw any of this excess net capital, $427.7 million is available for dividend while still maintaining a capital level above
regulatory early warning guidelines.

Other Sources of Liquidity

We also maintain $375 million in uncommitted financing to meet margin lending needs. At March 31, 2010, there were no outstanding
balances and the full $375 million was available.

We rely on borrowed funds, such as FHLB advances and securities sold
under agreements to repurchase, to provide liquidity for the Bank. Our ability to borrow these funds is dependent upon the continued availability of funding in the wholesale borrowings market. At March 31, 2010, the Bank had approximately $4.8
billion in additional collateralized borrowing capacity with the FHLB. We also have the ability to generate liquidity in the form of additional deposits by raising the yield on our customer deposit accounts.

We have the option to make the interest payments on our
121/2% Notes in the form of either cash or
additional 121/2% Notes through May 2010. During
the second quarter of 2008, we elected to make our first interest payment of approximately $121 million in cash. During 2008 and 2009, we elected to make our second, third and fourth interest payments of $121 million, $129 million and $55 million,
respectively, in the form of additional 121/2%
Notes. Based on the balance of the 121/2% Notes as
of March 31, 2010, the interest payments are approximately $116 million per annum. The May 2010 interest payment is the last payment for which we have the option to pay in the form of either cash or additional
121/2% Notes. While we plan to make this interest
payment in the form of cash, we will consider it more specifically as we approach the interest payment date. We are required to pay the November 2010 payment and all remaining interest payments in cash.



|(1) |  | The excess net capital of the broker-dealer subsidiaries at March 31, 2010 included $394.1 million and $102.7 million of excess net capital at E*TRADE Clearing LLC
and E*TRADE Securities LLC, respectively, which are subsidiaries of E*TRADE Bank and are also included in the excess risk-based capital of E*TRADE Bank.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25



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##### Table of Contents

Corporate Debt

Our current senior debt ratings are B3 by Moodys Investor Service, CCC+ by Standard & Poors and B (high) by Dominion
Bond Rating Service (DBRS). The Companys long-term deposit ratings are Ba3 by Moodys Investor Service, B by Standard & Poors and BB by DBRS. A significant change in these ratings may impact the rate and
availability of future borrowings.

Off-Balance Sheet Arrangements

We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet the needs of our customers and
to reduce our own exposure to interest rate risk. These arrangements include firm commitments to extend credit and letters of credit. Additionally, we enter into guarantees and other similar arrangements as part of transactions in the ordinary
course of business. For additional information on each of these arrangements, see Item 1. Consolidated Financial Statements (Unaudited).

Tangible Common Equity

We believe that tangible common equity to tangible common assets ratio is a measure of our capital strength and is additional useful
information that supplements the regulatory capital ratios of E*TRADE Bank. The following table shows the calculation of our tangible common equity to tangible common assets ratio (dollars in millions):



|                                                |  |               |          |               |                  |   |          |          |  |      |   
|----------------------------------------------- |  | ------------- | -------- | ------------- | ---------------- | - | -------- | -------- |  | ---- | --
|                                                |  | March 31,2010 |          |               | December 31,2009 |   |          | Variance | 
|                                                |  |               |          | 2010 vs. 2009 |                 
|Total assets                                    |  | $             | 46,678.7 |               |                  | $ | 47,366.5 |          |  | (1   | )%
|Less: Goodwill and other intangibles, net       |  |               | (2,301.6 | )             |                  |   | (2,308.7 | )        |  | 0    | % 
|Add: Deferred tax liability related to goodwill |  |               | 188.8    |               |                  |   | 176.9    |          |  | 7    | % 
|                                                |  |               |          |               |                  |   |          |          |  |      |   
|Tangible
assets(1)                              |  | $             | 44,565.9 |               |                  | $ | 45,234.7 |          |  | (1   | )%
|                                                |  |               |          |               |                  |   |          |          |  |      |   
|Shareholders equity                            |  | $             | 3,816.4  |               |                  | $ | 3,749.6  |          |  | 2    | % 
|Less: Goodwill and other intangibles, net       |  |               | (2,301.6 | )             |                  |   | (2,308.7 | )        |  | 0    | % 
|Add: Deferred tax liability related to goodwill |  |               | 188.8    |               |                  |   | 176.9    |          |  | 7    | % 
|                                                |  |               |          |               |                  |   |          |          |  |      |   
|Tangible common
equity(2)                       |  | $             | 1,703.6  |               |                  | $ | 1,617.8  |          |  | 5    | % 
|                                                |  |               |          |               |                  |   |          |          |  |      |   
|Tangible common equity to tangible
assets(3)    |  |               | 3.82     | %             |                  |   | 3.58     | %        |  | 0.24 | % 



|(1) |  | Tangible assets is calculated as total assets less goodwill (net of related
deferred tax liability) and other intangible assets and is a non-GAAP measure.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Tangible common equity is calculated as shareholders equity less goodwill (net of related deferred tax liability) and other intangible assets and
is a non-GAAP measure.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Tangible common equity to tangible assets is a non-GAAP measure, the components of which are defined above.
|--- |  | -----------------------------------------------------------------------------------------------------------



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##### Table of Contents

RISK MANAGEMENT

As a financial services company, we are exposed to risks in every component of our business. The identification and management of existing
and potential risks are the keys to effective risk management. Our risk management framework, principles and practices support decision-making, improve the success rate for new initiatives and strengthen the organization. Our goal is to balance
risks and rewards through effective risk management. Risks cannot be completely eliminated; however, we do believe risks can be identified and managed within the Companys risk tolerance.

Our businesses expose us to the following four major categories of risk that often overlap:



| |  |  | Credit RiskCredit risk is the risk of loss resulting from adverse changes in the ability or willingness of a borrower or counterparty to
meet the agreed-upon terms of their financial obligations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Liquidity RiskLiquidity risk is the risk of loss resulting from the inability to meet current and future cash flow and collateral needs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest Rate RiskInterest rate risk is the risk of loss from adverse changes in interest rates, which could cause fluctuations in our
long-term earnings or in the value of the Companys net assets.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Operational RiskOperational risk is the risk of loss resulting from fraud, inadequate controls or the failure of the internal controls
process, third party vendor issues, processing issues and external events.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For additional information on
liquidity risk, see Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources. For additional information about our interest rate risk, see Item 3. Quantitative
and Qualitative Disclosures about Market Risk. Operational risk and the management of risk are more fully described in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on
Form 10-K for the year ended December 31, 2009, as amended by a Current Report on Form 8-K filed concurrently on May 5, 2010. We are also subject to other risks that could impact our business, financial condition, results of operations or
cash flows in future periods. See Part II-Item 1A. Risk Factors.

Credit Risk Management

Our primary sources of credit risk are our loan and securities portfolios, where risk results from extending credit to customers and
purchasing securities, respectively. The degree of credit risk associated with our loans and securities varies based on many factors including the size of the transaction, the credit characteristics of the borrower, features of the loan product or
security, the contractual terms of the related documents and the availability and quality of collateral. Credit risk is one of the most common risks in financial services and is one of our most significant risks.

Credit risk is monitored by our Credit Risk Committee. The Credit Risk Committee uses detailed tracking and analysis to measure credit
performance and reviews and modifies credit policies as appropriate.

Loss Mitigation

We have a credit management team that focuses on the mitigation of potential losses in the loan portfolio. Through a variety of
strategies, including voluntary line closures, automatically freezing lines on all delinquent accounts, and freezing lines on loans with materially reduced home equity, we have reduced our exposure to open home equity lines from a high of over $7
billion in 2007 to $0.8 billion as of March 31, 2010.

We also have an active loan modification program that focuses on
the mitigation of potential losses in the loan portfolio. We consider modifications in which we made an economic concession to a borrower experiencing financial difficulty a troubled debt restructuring (TDR). As of March 31, 2010,
we had modified $710.9 million of loans in which the modification was considered a TDR. We also modified a number of loans through



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traditional collections actions taken in the normal course of servicing delinquent accounts. These actions typically result in an insignificant delay in the timing of payments; therefore, the
Company does not consider such activities to be economic concessions to the borrowers.

The team has several other initiatives
either in progress or in development which are focused on mitigating losses in our loan portfolio. Those initiatives include improving collection efforts and practices of our servicers as well as increasing our loss recovery efforts to minimize the
level of loss on a loan that goes to charge-off.

In addition, we continue to review our mortgage loan portfolio in order to
identify loans to be repurchased by the originator. Our review is primarily focused on identifying loans with violations of transaction representations and warranties or material misrepresentation on the part of the seller. Any loans identified with
these deficiencies are submitted to the original seller for repurchase. Approximately $7.0 million and $74.4 million of loans were repurchased by the original sellers for the three months ended March 31, 2010 and the year ended
December 31, 2009, respectively.

Underwriting StandardsOriginated Loans

We provide access to real estate loans for our customers through a third party company. This product is being offered as a convenience to
our customers and is not one of our primary product offerings. We structured this arrangement to minimize our assumption of any of the typical risks commonly associated with mortgage lending. The third party company providing this product performs
all processing and underwriting of these loans. Shortly after closing, the third party company purchases the loans from us and is responsible for the credit risk associated with these loans. We originated $28.7 million in loans during the three
months ended March 31, 2010 and we had commitments to originate mortgage loans of $36.7 million at March 
31, 2010.

CONCENTRATIONS OF CREDIT RISK

Loans

We track
and review many factors to predict and monitor credit risk in our loan portfolio, which is primarily made up of loans secured by residential real estate. These factors, which are documented at the time of origination, include: borrowers
debt-to-income ratio, borrowers credit scores, housing prices, documentation type, occupancy type and loan type. We also review estimated current loan-to-value (LTV) ratios when monitoring credit risk in our loan portfolios. In
economic conditions in which housing prices generally appreciate, we believe that loan type, LTV ratios and credit scores are the key factors in determining future loan performance. In the current housing market with declining home prices and less
credit available for refinance, we believe the LTV ratio becomes a more important factor in predicting and monitoring credit risk.

We believe certain categories of loans inherently have a higher level of credit risk due to characteristics of the borrower and/or
features of the loan. Two of these categories are sub-prime and option adjustable rate mortgages (ARM) loans. As a general matter, we did not originate or purchase these loans to hold on our balance sheet; however, in the normal course
of purchasing large pools of real estate loans, we invariably ended up acquiring a de minimis amount of sub-prime loans. As of March 31, 2010, we held no option ARM loans.

As noted above, we believe loan type, LTV ratios and borrowers credit scores are key determinants of future loan performance. Our
home equity loan portfolio is primarily second lien
loans(1)on residential real estate properties, which have
a higher level of credit risk than first lien mortgage loans. We believe home equity loans with a combined loan-to-value (CLTV) of 90% or higher or a Fair Isaac Credit Organization (FICO) score below 700 are the loans with
the highest levels of credit risk in our portfolios.



|(1) |  | Approximately 13% of the home equity portfolio is in the first lien position.
|--- |  | -----------------------------------------------------------------------------



28



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The breakdowns by current LTV/CLTV and FICO score of our two main loan portfolios, one-to
four-family and home equity, are as follows (dollars in millions):



|                                        |  |                     |         |   |                  |   |          |               |  |   |                  |   |  |   |         |  
|--------------------------------------- |  | ------------------- | ------- | - | ---------------- | - | -------- | ------------- |  | - | ---------------- | - |  | - | ------- | -
|                                        |  | One- to Four-Family |         |   | Home Equity      |  
|Current
LTV/CLTV(1)                     |  | March 31,2010       |         |   | December 31,2009 |   |          | March 31,2010 |  |   | December 31,2009 |  
|<=70%                                   |  | $                   | 1,769.8 |   |                  | $ | 2,095.3  |               |  | $ | 1,358.0          |   |  | $ | 1,379.6 |  
|70% - 80%                               |  |                     | 1,087.8 |   |                  |   | 1,148.2  |               |  |   | 477.5            |   |  |   | 507.6   |  
|80% - 90%                               |  |                     | 1,368.4 |   |                  |   | 1,464.2  |               |  |   | 670.3            |   |  |   | 705.6   |  
|90% - 100%                              |  |                     | 1,399.4 |   |                  |   | 1,500.9  |               |  |   | 846.6            |   |  |   | 885.9   |  
|>100%                                   |  |                     | 4,127.2 |   |                  |   | 4,358.5  |               |  |   | 4,069.9          |   |  |   | 4,291.0 |  
|                                        |  |                     |         |   |                  |   |          |               |  |   |                  |   |  |   |         |  
|Total                                   |  | $                   | 9,752.6 |   |                  | $ | 10,567.1 |               |  | $ | 7,422.3          |   |  | $ | 7,769.7 |  
|                                        |  |                     |         |   |                  |   |          |               |  |   |                  |   |  |   |         |  
|Average estimated current
LTV/CLTV(2)   |  |                     | 98.4    | % |                  |   | 97.3     | %             |  |   | 105.3            | % |  |   | 106.0   | %
|Average LTV/CLTV at loan
origination(3) |  |                     | 70.4    | % |                  |   | 70.1     | %             |  |   | 80.1             | % |  |   | 79.5    | %



|(1) |  | Current CLTV calculations for home equity loans are based on the maximum available line for home equity lines of credit and outstanding principal
balance for home equity installment loans. Current property values are updated on a quarterly basis using the most recent property value data available to us. For properties in which we did not have an updated valuation, we utilized home price
indices to estimate the current property value.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The average estimated current LTV ratio reflects the outstanding balance at the balance sheet date, divided by the estimated current property value.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Average LTV/CLTV at loan origination calculations are based on LTV/CLTV at time of purchase for one- to four-family purchased loans and undrawn
balances for home equity loans.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                |  |                     |         |                  |   |               |  |                  |         |  |   |        
|--------------- |  | ------------------- | ------- | ---------------- | - | ------------- |  | ---------------- | ------- |  | - | -------
|                |  | One- to Four-Family |         | Home Equity     
|Current FICO(1) |  | March 31,2010       |         | December 31,2009 |   | March 31,2010 |  | December 31,2009
|>=720           |  | $                   | 5,536.2 |                  | $ | 6,313.2       |  | $                | 3,858.2 |  | $ | 4,154.4
|719 - 700       |  |                     | 815.2   |                  |   | 870.1         |  |                  | 688.3   |  |   | 782.6  
|699 - 680       |  |                     | 628.1   |                  |   | 698.0         |  |                  | 554.4   |  |   | 622.9  
|679 - 660       |  |                     | 491.4   |                  |   | 492.8         |  |                  | 425.6   |  |   | 472.6  
|659 - 620       |  |                     | 700.6   |                  |   | 647.9         |  |                  | 569.1   |  |   | 584.8  
|<620            |  |                     | 1,581.1 |                  |   | 1,545.1       |  |                  | 1,326.7 |  |   | 1,152.4
|                |  |                     |         |                  |   |               |  |                  |         |  |   |        
|Total           |  | $                   | 9,752.6 |                  | $ | 10,567.1      |  | $                | 7,422.3 |  | $ | 7,769.7
|                |  |                     |         |                  |   |               |  |                  |         |  |   |        



|(1) |  | FICO scores are updated on a quarterly basis; however, as of March 31, 2010 and December 31, 2009, there were some loans for which the
updated FICO scores were not available. The current FICO distribution as of March 31, 2010 included original FICO scores for approximately $379 million and $475 million of one- to four-family and home equity loans, respectively. The current
FICO distribution as of December 31, 2009 included original FICO scores for approximately $365 million and $847 million of one- to four-family and home equity loans, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition to the factors described above, we monitor credit trends in loans by acquisition channel, vintage and geographic location,
which are summarized below as of March 31, 2010 and December 31, 2009 (dollars in millions):



|                             |  |                     |         |                  |   |               |  |                  |         |  |   |        
|---------------------------- |  | ------------------- | ------- | ---------------- | - | ------------- |  | ---------------- | ------- |  | - | -------
|                             |  | One- to Four-Family |         | Home Equity     
|Acquisition Channel          |  | March 31,2010       |         | December 31,2009 |   | March 31,2010 |  | December 31,2009
|Purchased from a third party |  | $                   | 7,981.5 |                  | $ | 8,660.2       |  | $                | 6,494.3 |  | $ | 6,803.9
|Originated by the Company    |  |                     | 1,771.1 |                  |   | 1,906.9       |  |                  | 928.0   |  |   | 965.8  
|                             |  |                     |         |                  |   |               |  |                  |         |  |   |        
|Total real estate loans      |  | $                   | 9,752.6 |                  | $ | 10,567.1      |  | $                | 7,422.3 |  | $ | 7,769.7
|                             |  |                     |         |                  |   |               |  |                  |         |  |   |        



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|                        |  |                     |         |                  |   |               |  |                  |         |  |   |        
|----------------------- |  | ------------------- | ------- | ---------------- | - | ------------- |  | ---------------- | ------- |  | - | -------
|                        |  | One- to Four-Family |         | Home Equity     
|Vintage Year            |  | March 31,2010       |         | December 31,2009 |   | March 31,2010 |  | December 31,2009
|2003 and prior          |  | $                   | 363.0   |                  | $ | 438.4         |  | $                | 519.9   |  | $ | 550.1  
|2004                    |  |                     | 869.7   |                  |   | 1,034.9       |  |                  | 682.9   |  |   | 715.4  
|2005                    |  |                     | 2,057.1 |                  |   | 2,219.1       |  |                  | 1,831.2 |  |   | 1,898.5
|2006                    |  |                     | 3,713.6 |                  |   | 3,944.2       |  |                  | 3,450.0 |  |   | 3,626.4
|2007                    |  |                     | 2,727.2 |                  |   | 2,904.2       |  |                  | 923.0   |  |   | 963.8  
|2008                    |  |                     | 22.0    |                  |   | 26.3          |  |                  | 15.3    |  |   | 15.5   
|                        |  |                     |         |                  |   |               |  |                  |         |  |   |        
|Total real estate loans |  | $                   | 9,752.6 |                  | $ | 10,567.1      |  | $                | 7,422.3 |  | $ | 7,769.7
|                        |  |                     |         |                  |   |               |  |                  |         |  |   |        



|                        |  |                     |         |                  |   |               |  |                  |         |  |   |        
|----------------------- |  | ------------------- | ------- | ---------------- | - | ------------- |  | ---------------- | ------- |  | - | -------
|                        |  | One- to Four-Family |         | Home Equity     
|Geographic Location     |  | March 31,2010       |         | December 31,2009 |   | March 31,2010 |  | December 31,2009
|California              |  | $                   | 4,468.9 |                  | $ | 4,829.6       |  | $                | 2,359.2 |  | $ | 2,472.8
|New York                |  |                     | 729.5   |                  |   | 800.9         |  |                  | 516.4   |  |   | 533.8  
|Florida                 |  |                     | 675.2   |                  |   | 717.8         |  |                  | 530.8   |  |   | 561.9  
|Virginia                |  |                     | 398.7   |                  |   | 438.6         |  |                  | 316.7   |  |   | 327.9  
|Other states            |  |                     | 3,480.3 |                  |   | 3,780.2       |  |                  | 3,699.2 |  |   | 3,873.3
|                        |  |                     |         |                  |   |               |  |                  |         |  |   |        
|Total real estate loans |  | $                   | 9,752.6 |                  | $ | 10,567.1      |  | $                | 7,422.3 |  | $ | 7,769.7
|                        |  |                     |         |                  |   |               |  |                  |         |  |   |        

Approximately 40% of the Companys real estate
loans were concentrated in California at both March 31, 2010 and December 31, 2009. No other state had concentrations of real estate loans that represented 10% or more of the Companys real estate portfolio.

Allowance for Loan Losses

The allowance for loan losses is managements estimate of credit losses inherent in our loan portfolio as of the balance sheet date.
The estimate of the allowance for loan losses is based on a variety of quantitative and qualitative factors, including the composition and quality of the portfolio; delinquency levels and trends; current and historical charge-off and loss
experience; current industry charge-off and loss experience; our historical loss mitigation experience; the condition of the real estate market and geographic concentrations within the loan portfolio; the interest rate climate; the overall
availability of housing credit; and general economic conditions. The allowance for loan losses is typically equal to managements estimate of loan charge-offs in the twelve months following the balance sheet date as well as the estimated
charge-offs, including economic concessions to borrowers, over the estimated remaining life of loans modified in TDRs. Determining the adequacy of the allowance is complex and requires judgment by management about the effect of matters that are
inherently uncertain. Subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan losses in future periods. We believe our allowance for loan losses at
March 31, 2010 is representative of probable losses inherent in the loan portfolio at the balance sheet date.

The
general allowance for loan losses also included a specific qualitative component to account for environmental factors that we believe will impact our level of credit losses. This qualitative component, which was applied by loan type, reflects our
estimate of credit losses inherent in the loan portfolio due to environmental factors which are not directly considered in our quantitative loss model but are factors we believe will have an impact on credit losses (e.g. the current level of
unemployment).

In determining the allowance for loan losses, we allocate a portion of the allowance to various loan products
based on an analysis of individual loans and pools of loans. However, the entire allowance is available to absorb credit losses inherent in the total loan portfolio as of the balance sheet date.



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The following table presents the allowance for loan losses by major loan category (dollars
in millions):



|                  |  |                     |       |                                      |             |   |           |                    |                                      |  |       |           |  |                                      |      |  |           |   |                                      |   |         |  |      |  
|----------------- |  | ------------------- | ----- | ------------------------------------ | ----------- | - | --------- | ------------------ | ------------------------------------ |  | ----- | --------- |  | ------------------------------------ | ---- |  | --------- | - | ------------------------------------ | - | ------- |  | ---- | -
|                  |  | One- to Four-Family |       |                                      | Home Equity |   |           | Consumer and Other |                                      |  | Total |          
|                  |  | Allowance           |       | Allowanceas a %of
LoansReceivable(1) |             |   | Allowance |                    | Allowanceas a %of
LoansReceivable(1) |  |       | Allowance |  | Allowanceas a %of
LoansReceivable(1) |      |  | Allowance |   | Allowanceas a %of
LoansReceivable(1) |  
|March 31, 2010    |  | $                   | 433.9 |                                      | 4.43        | % |           | $                  | 657.2                                |  | 8.73  | %         |  | $                                    | 71.3 |  | 4.00      | % |                                      | $ | 1,162.4 |  | 6.09 | %
|December 31, 2009 |  | $                   | 489.9 |                                      | 4.62        | % |           | $                  | 620.0                                |  | 7.87  | %         |  | $                                    | 72.8 |  | 3.90      | % |                                      | $ | 1,182.7 |  | 5.81 | %



|(1) |  | Allowance as a percentage of loans receivable is calculated based on the gross loans receivable for each respective category.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

During the three months ended March 31, 2010, the allowance for loan losses decreased by $20.3 million
from the level at December 31, 2009. This decrease was driven primarily by the decrease in the allowance allocated to the one- to four-family loan portfolio, which began to deteriorate during 2008, offset by an increase in the allowance
allocated to the home equity loan portfolio, which began to deteriorate during the second half of 2007. We believe the deterioration in both of these portfolios was caused by several factors, including: home price depreciation in key markets;
growing inventories of unsold homes; rising foreclosure rates; sustained contraction in the availability of credit; and a general decline in economic growth. In addition, the combined impact of home price depreciation and the reduction of available
credit made it increasingly difficult for borrowers to refinance existing loans. Although we expect these factors will cause the provision for loan losses to continue at elevated levels in future periods, the level of provision for loan losses has
declined for six consecutive quarters. While we cannot state with certainty that this trend will continue, we believe it is a positive indicator that our loan portfolio has continued to stabilize.

Included in our allowance for loan losses at March 31, 2010 was a specific allowance of $231.0 million that was established for
TDRs. The specific allowance for these individually impaired loans represents the expected loss, including the economic concession to the borrower, over the remaining life of the loan. The following table shows the TDRs and specific valuation
allowance by loan portfolio as of March 31, 2010 and December 31, 2009 (dollars in millions):



|                    |  |                           |       |                            |   |                                                |  |    |  
|------------------- |  | ------------------------- | ----- | -------------------------- | - | ---------------------------------------------- |  | -- | -
|                    |  | RecordedInvestmentin TDRs |       | SpecificValuationAllowance |   | Specific ValuationAllowance as a %of TDR Loans | 
|March 31, 2010      |  |                           |       |                            |  
|One- to four-family |  | $                         | 283.5 |                            | $ | 34.5                                           |  | 12 | %
|Home equity         |  |                           | 427.4 |                            |   | 196.5                                          |  | 46 | %
|                    |  |                           |       |                            |   |                                                |  |    |  
|Total               |  | $                         | 710.9 |                            | $ | 231.0                                          |  | 32 | %
|                    |  |                           |       |                            |   |                                                |  |    |  
|December 31, 2009   |  |                           |       |                            |  
|One- to four-family |  | $                         | 207.6 |                            | $ | 26.9                                           |  | 13 | %
|Home equity         |  |                           | 371.3 |                            |   | 166.7                                          |  | 45 | %
|                    |  |                           |       |                            |   |                                                |  |    |  
|Total               |  | $                         | 578.9 |                            | $ | 193.6                                          |  | 33 | %
|                    |  |                           |       |                            |   |                                                |  |    |  

The recorded investment in TDRs includes the charge-offs related to certain loans that were
written down to the estimated current property value less costs to sell. These charge-offs were recorded primarily on loans that were delinquent in excess of 180 days prior to the loan modification. The total expected loss on TDRs, which includes
both previously recorded charge-offs and the specific valuation allowance, as a percentage of TDRs, was 21% and 49% for our one- to four-family and home equity loan portfolios, respectively, as of March 31, 2010.



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The following table shows the TDRs by delinquency category as of March 31, 2010 and
December 31, 2009 (dollars in millions):



|                    |  |             |       |                          |   |                        |  |                                |      |  |   |      
|------------------- |  | ----------- | ----- | ------------------------ | - | ---------------------- |  | ------------------------------ | ---- |  | - | -----
|                    |  | TDRsCurrent |       | TDRs30-89 DaysDelinquent |   | TDRs90+ DaysDelinquent |  | TotalRecordedInvestment inTDRs
|March 31, 2010      |  |             |       |                          |   |                       
|One- to four-family |  | $           | 170.2 |                          | $ | 54.9                   |  | $                              | 58.4 |  | $ | 283.5
|Home equity         |  |             | 335.4 |                          |   | 56.8                   |  |                                | 35.2 |  |   | 427.4
|                    |  |             |       |                          |   |                        |  |                                |      |  |   |      
|Total               |  | $           | 505.6 |                          | $ | 111.7                  |  | $                              | 93.6 |  | $ | 710.9
|                    |  |             |       |                          |   |                        |  |                                |      |  |   |      
|December 31, 2009   |  |             |       |                          |   |                       
|One- to four-family |  | $           | 128.5 |                          | $ | 34.6                   |  | $                              | 44.5 |  | $ | 207.6
|Home equity         |  |             | 304.1 |                          |   | 41.5                   |  |                                | 25.7 |  |   | 371.3
|                    |  |             |       |                          |   |                        |  |                                |      |  |   |      
|Total               |  | $           | 432.6 |                          | $ | 76.1                   |  | $                              | 70.2 |  | $ | 578.9
|                    |  |             |       |                          |   |                        |  |                                |      |  |   |      

The following table provides an analysis of the net
charge-offs for the three months ended March 31, 2010 and 2009 (dollars in millions):



|                                  |  |             |        |   |            |   |                 |  |   |                               |   |  |      |  
|--------------------------------- |  | ----------- | ------ | - | ---------- | - | --------------- |  | - | ----------------------------- | - |  | ---- | -
|                                  |  | Charge-offs |        |   | Recoveries |   | Net Charge-offs |  |   | % ofAverage Loans(Annualized) |  
|Three months ended March 31, 2010 |  |             |        |   |            |   |                 |  |  
|One- to four-family               |  | $           | (102.6 | ) |            | $ |                |  | $ | (102.6                        | ) |  | 4.00 | %
|Home equity                       |  |             | (176.7 | ) |            |   | 6.5             |  |   | (170.2                        | ) |  | 8.69 | %
|Consumer and other                |  |             | (23.1  | ) |            |   | 7.6             |  |   | (15.5                         | ) |  | 3.39 | %
|                                  |  |             |        |   |            |   |                 |  |   |                               |   |  |      |  
|Total                             |  | $           | (302.4 | ) |            | $ | 14.1            |  | $ | (288.3                        | ) |  | 5.79 | %
|                                  |  |             |        |   |            |   |                 |  |   |                               |   |  |      |  
|Three months ended March 31, 2009 |  |             |        |   |            |   |                 |  |  
|One- to four-family               |  | $           | (67.0  | ) |            | $ |                |  | $ | (67.0                         | ) |  | 2.10 | %
|Home equity                       |  |             | (247.8 | ) |            |   | 2.5             |  |   | (245.3                        | ) |  | 9.79 | %
|Consumer and other                |  |             | (28.2  | ) |            |   | 6.7             |  |   | (21.5                         | ) |  | 3.77 | %
|                                  |  |             |        |   |            |   |                 |  |   |                               |   |  |      |  
|Total                             |  | $           | (343.0 | ) |            | $ | 9.2             |  | $ | (333.8                        | ) |  | 5.32 | %
|                                  |  |             |        |   |            |   |                 |  |   |                               |   |  |      |  

Loan losses are recognized when it is probable that a loss will be incurred. Our policy for both
one- to four-family and home equity loans is to assess the value of the property when the loan has been delinquent for 180 days or is in bankruptcy, regardless of whether or not the property is in foreclosure, and charge-off the amount of the loan
balance in excess of the estimated current property value less costs to sell. Our policy is to charge-off credit cards when collection is not probable or the loan has been delinquent for 180 days and to charge-off closed-end consumer loans when the
loan is 120 days delinquent or when we determine that collection is not probable.



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Net charge-offs for the three months ended March 31, 2010 compared to the same period
in 2009 decreased by $45.5 million. The overall decrease was due primarily to lower net charge-offs on our home equity loans, offset by higher net charge-offs on our one- to four-family loans. We believe net charge-offs will decline in future
periods when compared to the level of charge-offs in the three months ended March 31, 2010 as a result of our decline in special mention delinquencies, which is discussed below. The following graph illustrates the net charge-offs by quarter:

LOGO

Nonperforming Assets

We classify loans as nonperforming when they are 90 days past due. The following table shows the comparative data for nonperforming loans
and assets (dollars in millions):



|                                                                                                         |  |               |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                         |  | March 31,2010 |         |   | December 31,2009 |  
|One- to four-family                                                                                      |  | $             | 1,220.3 |   |                  | $ | 1,229.7 |  
|Home equity                                                                                              |  |               | 225.8   |   |                  |   | 250.6   |  
|Consumer and other                                                                                       |  |               | 6.0     |   |                  |   | 6.7     |  
|                                                                                                         |  |               |         |   |                  |   |         |  
|Total nonperforming loans                                                                                |  |               | 1,452.1 |   |                  |   | 1,487.0 |  
|Real estate owned (REO) and other repossessed assets, net                                              |  |               | 131.9   |   |                  |   | 115.7   |  
|                                                                                                         |  |               |         |   |                  |   |         |  
|Total nonperforming assets, net                                                                          |  | $             | 1,584.0 |   |                  | $ | 1,602.7 |  
|                                                                                                         |  |               |         |   |                  |   |         |  
|Nonperforming loans receivable as a percentage of gross loans receivable                                 |  |               | 7.60    | % |                  |   | 7.31    | %
|One- to four-family allowance for loan losses as a percentage of one- to four-family nonperforming loans |  |               | 35.55   | % |                  |   | 39.84   | %
|Home equity allowance for loan losses as a percentage of home equity nonperforming loans                 |  |               | 290.97  | % |                  |   | 247.46  | %
|Consumer and other allowance for loan losses as a percentage of consumer and other nonperforming loans   |  |               | 1188.33 | % |                  |   | 1082.29 | %
|Total allowance for loan losses as a percentage of total nonperforming loans                             |  |               | 80.05   | % |                  |   | 79.54   | %

During the three months
ended March 31, 2010, our nonperforming assets, net decreased $18.7 million to $1.6 billion when compared to December 31, 2009. The decrease was attributed primarily to a decrease in



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nonperforming one- to four-family loans of $9.4 million and home equity loans of $24.8 million for the three months ended March 31, 2010 when compared to December 31, 2009. These
decreases were slightly offset by an increase of $16.2 million in REO and other repossessed assets, net for the three months ended March 31, 2010.

The following graph illustrates the nonperforming loans by quarter:

LOGO

The allowance as a percentage of total nonperforming loans receivable, net increased from 79.54% at
December 31, 2009 to 80.05% at March 31, 2010. This slight increase was driven by a decrease in both our one- to four-family and home equity nonperforming loans. The balance of nonperforming loans includes loans delinquent 90 to 179 days
as well as loans delinquent 180 days and greater. We believe the distinction between these two periods is important as loans delinquent 180 days and greater have been written down to their expected recovery value, whereas loans delinquent 90 to 179
days have not. We believe loans delinquent 90 to 179 days is an important measure because these loans are expected to drive the vast majority of future charge-offs. Additional charge-offs on loans delinquent 180 days are possible if home prices
decline beyond our current expectations, but we do not anticipate these charge-offs to be significant, particularly when compared to the expected charge-offs on loans delinquent 90 to 179 days. We expect the balances of one- to four-family loans
delinquent 180 days and greater to increase in the future due to the extensive amount of time it takes to foreclose on a property in the current real estate market.



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The following graph shows the loans delinquent 90 to 179 days for each of our major loan
categories:

LOGO

In addition to nonperforming assets, we monitor loans where a borrowers past credit history casts
doubt on their ability to repay a loan (special mention loans). We classify loans as special mention when they are between 30 and 89 days past due. The following table shows the comparative data for special mention loans (dollars in
millions):



|                                                                           |  |               |       |   |                  |   |       |  
|-------------------------------------------------------------------------- |  | ------------- | ----- | - | ---------------- | - | ----- | -
|                                                                           |  | March 31,2010 |       |   | December 31,2009 |  
|One- to four-family                                                        |  | $             | 526.6 |   |                  | $ | 527.9 |  
|Home equity                                                                |  |               | 214.0 |   |                  |   | 246.2 |  
|Consumer and other loans                                                   |  |               | 28.0  |   |                  |   | 30.4  |  
|                                                                           |  |               |       |   |                  |   |       |  
|Total special mention loans                                                |  | $             | 768.6 |   |                  | $ | 804.5 |  
|                                                                           |  |               |       |   |                  |   |       |  
|Special mention loans receivable as a percentage of gross loans receivable |  |               | 4.03  | % |                  |   | 3.95  | %

The trend in special
mention loan balances are generally indicative of the expected trend for charge-offs in future periods, as these loans have a greater propensity to migrate into nonaccrual status and ultimately charge-off. One- to four-family loans are generally
secured in a first lien position by real estate assets, reducing the potential loss when compared to an unsecured loan. Our home equity loans are generally secured by real estate assets; however, the majority of these loans are secured in a second
lien position, which substantially increases the potential loss when compared to a first lien position.

During the three
months ended March 31, 2010, special mention loans decreased by $35.9 million to $768.6 million. This decrease was largely due to a decrease in home equity special mention loans. The decrease in home equity special mention loans includes the
impact of our loan modification programs in which borrowers who were 30 to 89 days past due were made current(1). While our level of special mention loans can fluctuate significantly in any given period, we believe the continued decrease we observed in recent quarters is an encouraging sign regarding
the future credit performance of this portfolio.



|(1) |  | Loans modified as TDRs are accounted for as nonaccrual loans at the time of modification and return to accrual status after six consecutive payments are made in
accordance with the modified terms.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following graph illustrates the special mention loans by quarter:

LOGO

Securities

We focus primarily on security type and credit rating to monitor credit risk in our securities portfolios. We believe our highest
concentration of credit risk within this portfolio is the non-agency CMO portfolio. The table below details the amortized cost by average credit ratings and type of asset as of March 31, 2010 and December 31, 2009 (dollars in millions):



|                                                |  |     |          |    |   |      |  |     |       |                                   |   |       |  |   |       |  |   |         
|----------------------------------------------- |  | --- | -------- | -- | - | ---- |  | --- | ----- | --------------------------------- | - | ----- |  | - | ----- |  | - | --------
|March 31, 2010                                  |  | AAA |          | AA |   | A    |  | BBB |       | BelowInvestmentGrade andNon-Rated |   | Total
|Agency mortgage-backed securities and CMOs      |  | $   | 8,409.5  |    | $ |     |  | $   |      |                                   | $ |      |  | $ |      |  | $ | 8,409.5 
|U.S. Treasury securities and agency debentures  |  |     | 4,199.7  |    |   |     |  |     |      |                                   |   |      |  |   |      |  |   | 4,199.7 
|Non-agency CMOs and other                       |  |     | 42.0     |    |   | 57.7 |  |     | 122.5 |                                   |   | 9.3   |  |   | 332.8 |  |   | 564.3   
|Municipal bonds, corporate bonds and FHLB stock |  |     | 214.5    |    |   | 9.4  |  |     | 8.0   |                                   |   |      |  |   | 19.9  |  |   | 251.8   
|Other agency debt securities                    |  |     | 183.0    |    |   |     |  |     |      |                                   |   |      |  |   |      |  |   | 183.0   
|                                                |  |     |          |    |   |      |  |     |       |                                   |   |       |  |   |       |  |   |         
|Total                                           |  | $   | 13,048.7 |    | $ | 67.1 |  | $   | 130.5 |                                   | $ | 9.3   |  | $ | 352.7 |  | $ | 13,608.3
|                                                |  |     |          |    |   |      |  |     |       |                                   |   |       |  |   |       |  |   |         
|                                                |  |     |          |    |   |     
|December 31, 2009                               |  | AAA |          | AA |   | A    |  | BBB |       | BelowInvestmentGrade andNon-Rated |   | Total
|Agency mortgage-backed securities and CMOs      |  | $   | 8,946.0  |    | $ |     |  | $   |      |                                   | $ |      |  | $ |      |  | $ | 8,946.0 
|Agency debentures                               |  |     | 3,928.9  |    |   |     |  |     |      |                                   |   |      |  |   |      |  |   | 3,928.9 
|Non-agency CMOs and other                       |  |     | 43.6     |    |   | 60.2 |  |     | 129.6 |                                   |   | 17.2  |  |   | 339.6 |  |   | 590.2   
|Municipal bonds, corporate bonds and FHLB stock |  |     | 214.4    |    |   | 9.5  |  |     | 7.9   |                                   |   |      |  |   | 19.9  |  |   | 251.7   
|                                                |  |     |          |    |   |      |  |     |       |                                   |   |       |  |   |       |  |   |         
|Total                                           |  | $   | 13,132.9 |    | $ | 69.7 |  | $   | 137.5 |                                   | $ | 17.2  |  | $ | 359.5 |  | $ | 13,716.8
|                                                |  |     |          |    |   |      |  |     |       |                                   |   |       |  |   |       |  |   |         

While the vast majority of this portfolio is
AAA-rated, we concluded during the three months ended March 31, 2010 that approximately $263.1 million of the non-agency CMOs in this portfolio were other-than-temporarily impaired. As a result of the deterioration in the expected credit
performance of the underlying loans in the securities, they were written down by recording $8.6 million of net impairment during the first quarter of



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2010. Further declines in the performance of our non-agency CMO portfolio could result in additional impairments in future periods.

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial condition and results of operations requires us to make judgments and estimates that may have a
significant impact upon the financial results of the Company. We believe that of our significant accounting policies, the following require estimates and assumptions that require complex, subjective judgments by management, which can materially
impact reported results: allowance for loan losses; fair value measurements; classification and valuation of certain investments; accounting for derivative instruments; estimates of effective tax rates, deferred taxes and valuation allowances;
valuation of goodwill and other intangibles; and valuation and expensing of share-based payments. These are more fully described in Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on
Form 10-K for the year ended December 31, 2009, as amended by a Current Report on Form 8-K filed concurrently on May 5, 2010.



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GLOSSARY OF TERMS

Active accountsAccounts with a balance of $25 or more or a trade in the last six months.

Active customersCustomers that have an account with a balance of $25 or more or a trade in the last six months.

Active TraderThe customer group that includes those who execute 30 or more trades per quarter.

Adjusted total assetsE*TRADE Bank-only assets composed of total assets plus/(less) unrealized losses (gains) on
available-for-sale securities, less deferred tax assets, goodwill and certain other intangible assets.

AgencyU.S. Government sponsored and federal agencies, such as Federal National Mortgage Association, Federal Home Loan
Mortgage Corporate and Government National Mortgage Association.

ALCOAsset Liability Committee.

APICAdditional paid-in capital.

ARMAdjustable-rate mortgage.

Average commission per tradeTotal trading and investing segment commissions revenue divided by total number of trades.

Average equity to average total assetsAverage total shareholders equity divided by average total assets.

BankETB Holdings, Inc. (ETBH), the entity that is our bank holding company and parent to E*TRADE
Bank.

Basis pointOne one-hundredth of a percentage point.

BOLIBank-Owned Life Insurance.

Cash flow hedgeA derivative instrument designated in a hedging relationship that mitigates exposure to variability in
expected future cash flows attributable to a particular risk.

CDSCredit default swap, which is a swap designed
to transfer credit exposure between parties.

Charge-offThe result of removing a loan or portion of a loan from
an entitys balance sheet because the loan is considered to be uncollectible.

Citadel
InvestmentIn 2007, we entered into an agreement to receive a $2.5 billion cash infusion from Citadel. In consideration for the cash infusion, Citadel received three primary items: substantially all of our asset-backed securities portfolio,
84.7 million shares of common stock in the Company and approximately $1.8 billion
121/2% Notes.

CLTVCombined loan-to-value.

CDOsCollateralized debt obligations.

CMOsCollateralized mortgage obligations.

Corporate cashCash held at the parent company as well as cash held in certain subsidiaries that can distribute cash to the
parent company without any regulatory approval.



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Customer assetsMarket value of all customer assets held by the Company
including security holdings, customer cash and deposits and vested unexercised options.

Customer cash and
depositsCustomer cash, deposits, customer payables and money market balances, including those held by third parties.

Daily average revenue trades (DARTs)Total revenue trades in a period divided by the number of trading days
during that period.

DBRSDominion Bond Rating Service.

Debt ExchangeIn the third quarter of 2009, we exchanged $1.7 billion aggregate principal amount of our
corporate debt, including $1.3 billion principal amount of our
121/2% Notes and $0.4 billion principal amount of
our 8% Notes, for an equal principal amount of newly-issued non-interest-bearing convertible debentures.

DerivativeA financial instrument or other contract, the price of which is directly dependent upon the value of one or more
underlying securities, interest rates or any agreed upon pricing index. Derivatives cover a wide assortment of financial contracts, including forward contracts, options and swaps.

Enterprise interest-bearing liabilitiesLiabilities such as customer deposits, repurchase agreements and other borrowings,
FHLB advances, certain customer credit balances and stock loan programs on which the Company pays interest; excludes customer money market balances held by third parties.

Enterprise interest-earning assetsConsists of the primary interest-earning assets of the Company and includes: loans,
available-for-sale mortgage-backed and investment securities, margin receivables, trading securities, stock borrow balances and cash required to be segregated under regulatory guidelines that earn interest for the Company.

Enterprise net interest incomeThe taxable equivalent basis net operating interest income excluding corporate interest income
and corporate interest expense and interest earned on customer cash held by third parties.

Enterprise net interest
marginThe enterprise net operating interest income divided by total enterprise interest-earning assets.

Enterprise net interest spreadThe taxable equivalent rate earned on average enterprise interest-earning assets less the rate
paid on average enterprise interest-bearing liabilities, excluding corporate interest-earning assets and liabilities and customer cash held by third parties.

Exchange-traded fundsA fund that invests in a group of securities and trades like an individual stock on an exchange.

Fair valueThe price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.

Fair value hedgeA derivative instrument
designated in a hedging relationship that mitigates exposure to changes in the fair value of a recognized asset or liability or a firm commitment.

Fannie MaeFederal National Mortgage Association.

FASBFinancial Accounting Standards Board.

FDICFederal Deposit Insurance Corporation.



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FHLBFederal Home Loan Bank.

FICOFair Isaac Credit Organization.

FINRAFinancial Industry Regulatory Authority.

Fixed Charge Coverage RatioNet loss before taxes, depreciation and amortization and corporate interest expense divided by
corporate interest expense. This ratio indicates the Companys ability to satisfy fixed financing expenses.

Freddie
MacFederal Home Loan Mortgage Corporation.

Generally Accepted Accounting Principles
(GAAP)Accounting principles generally accepted in the United States of America.

Ginnie
MaeGovernment National Mortgage Association.

LIBORLondon Interbank Offered Rate. LIBOR is the interest
rate at which banks borrow funds from other banks in the London wholesale money market (or interbank market).

Interest
rate capAn options contract that puts an upper limit on a floating exchange rate. The writer of the cap has to pay the holder of the cap the difference between the floating rate and the upper limit when that upper limit is breached. There
is usually a premium paid by the buyer of such a contract.

Interest rate floorAn options contract that puts a
lower limit on a floating exchange rate. The writer of the floor has to pay the holder of the floor the difference between the floating rate and the lower limit when that lower limit is breached. There is usually a premium paid by the
buyer of such a contract.

Interest rate swapsContracts that are entered into primarily as an asset/liability
management strategy to reduce interest rate risk. Interest rate swap contracts are exchanges of interest rate payments, such as fixed-rate payments for floating-rate payments, based on notional principal amounts.

Long term investorThe customer group that includes those who invest for the long term.

LTVLoan-to-value.

NASDAQNational Association of Securities Dealers Automated Quotations.

Net New Customer Asset FlowsThe total inflows to all new and existing customer accounts less total outflows from all closed
and existing customer accounts, excluding the effects of market movements in the value of customer assets.

Net Present
Value of Equity (NPVE)The present value of expected cash inflows from existing assets, minus the present value of expected cash outflows from existing liabilities, plus the expected cash inflows and outflows from existing
derivatives and forward commitments. This calculation is performed for E*TRADE Bank.

NOLsNet operating losses.

Nonperforming assetsAssets that do not earn income, including those originally acquired to earn income
(nonperforming loans) and those not intended to earn income (REO). Loans are classified as nonperforming when full and timely collection of interest and principal becomes uncertain or when the loans are 90 days past due.



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Notional amountThe specified dollar amount underlying a derivative on which the
calculated payments are based.

NYSENew York Stock Exchange.

Operating marginLoss before other income (expense), income tax benefit and discontinued operations.

OptionsContracts that grant the purchaser, for a premium payment, the right, but not the obligation, to either purchase or
sell the associated financial instrument at a set price during a period or at a specified date in the future.

OrganicBusiness related to new and existing customers as opposed to acquisitions.

OTSOffice of Thrift Supervision.

OTTIOther-than-temporary impairment.

Principal transactionsTransactions that primarily consist of revenue from market-making activities.

QSPEsQualifying special-purpose entities.

Real estate owned (REO) and other repossessed assetsOwnership of real property by the Company, generally
acquired as a result of foreclosure or repossession.

RecoveryCash proceeds received on a loan that had been
previously charged off.

Repurchase agreementAn agreement giving the seller of an asset the right or obligation
to buy back the same or similar securities at a specified price on a given date. These agreements are generally collateralized by mortgage-backed or investment-grade securities.

Retail depositsBalances of customer cash held at the Bank; excludes brokered certificates of deposit.

Return on average total assetsAnnualized net income divided by average assets.

Return on average total shareholders equityAnnualized net income divided by average shareholders equity.

Risk-weighted assetsPrimarily computed by the assignment of specific risk-weightings assigned by the OTS to
assets and off-balance sheet instruments for capital adequacy calculations. This calculation is for E*TRADE Bank only.

SECSecurities and Exchange Commission.

Special mention loansLoans where a borrowers past credit history casts doubt on their ability to repay a loan. Loans
are classified as special mention when loans are between 30 and 89 days past due.

S&PStandard &
Poors.

Stock plan tradesTrades that originate from our corporate services business, which provides
software and services to assist corporate customers in managing their equity compensation plans. The trades typically occur when an employee of a corporate customer exercises a stock option or sells restricted stock.



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Sweep deposit accountsAccounts with the functionality to transfer brokerage
cash balances to and from a FDIC insured money market account at the banking subsidiaries.

Sub-primeDefined as
borrowers with FICO scores less than 620 at the time of origination.

Taxable equivalent interest adjustmentThe
operating interest income earned on certain assets is completely or partially exempt from federal and/or state income tax. These tax-exempt instruments typically yield lower returns than a taxable investment. To provide more meaningful comparison of
yields and margins for all interest-earning assets, the interest income earned on tax exempt assets is increased to make it fully equivalent to interest income on other taxable investments. This adjustment is done for the analytic purposes in the
net enterprise interest income/spread calculation and is not made on the consolidated statement loss, as that is not permitted under GAAP.

Tier 1 capitalAdjusted equity capital used in the calculation of capital adequacy ratios at E*TRADE Bank as required by the
OTS. Tier 1 capital equals: total shareholders equity at E*TRADE Bank, plus/(less) unrealized losses (gains) on available-for-sale securities and cash flow hedges, less deferred tax assets, goodwill and certain other intangible assets.

Troubled Debt Restructuring (TDR)A loan modification that involves granting an economic concession
to a borrower who is experiencing financial difficulty.



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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

The following discussion about our market risk disclosure includes forward-looking statements. Actual
results could differ materially from those projected in the forward-looking statements as a result of certain factors, including, but not limited to, those set forth in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2009. Market risk is our exposure to changes in interest rates, foreign exchange rates and equity and commodity prices. Our exposure to interest rate risk is related primarily to interest-earning assets and interest-bearing
liabilities.

Interest Rate Risk

The management of interest rate risk is essential to profitability. Interest rate risk is our exposure to changes in interest rates. In
general, we manage our interest rate risk by balancing variable-rate and fixed-rate assets and liabilities and we utilize derivatives in a way that reduces our overall exposure to changes in interest rates. In recent years, we have managed our
interest rate risk to achieve a minimum to moderate risk profile with limited exposure to earnings volatility resulting from interest rate fluctuations. Exposure to interest rate risk requires management to make complex assumptions regarding
maturities, market interest rates and customer behavior. Changes in interest rates, including the following, could impact interest income and expense:



| |  |  | Interest-earning assets and interest-bearing liabilities may re-price at different times or by different amounts creating a mismatch.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The yield curve may flatten or change shape affecting the spread between short- and long-term rates. Widening or narrowing spreads could impact net
interest income.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Market interest rates may influence prepayments resulting in maturity mismatches. In addition, prepayments could impact yields as premium and discounts
amortize.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

Exposure to market risk is dependent upon the distribution and composition of interest-earning
assets, interest-bearing liabilities and derivatives. The differing risk characteristics of each product are managed to mitigate our exposure to interest rate fluctuations. At March 31, 2010, 91% of our total assets were enterprise
interest-earning assets.

At March 31, 2010, approximately 57% of our total assets were residential real estate loans and
available-for-sale mortgage-backed securities. The values of these assets are sensitive to changes in interest rates, as well as expected prepayment levels. As interest rates increase, fixed rate residential mortgages and mortgage-backed securities
tend to exhibit lower prepayments. The inverse is true in a falling rate environment.

When real estate loans prepay,
unamortized premiums are written off. Depending on the timing of the prepayment, the write-offs of unamortized premiums may result in lower than anticipated yields. The Asset Liability Committee (ALCO) reviews estimates of the impact of
changing market rates on prepayments. This information is incorporated into our interest rate risk management strategy.

Our
liability structure consists of two central sources of funding: deposits and wholesale borrowings. Cash provided to us through deposits is the primary source of our funding. Our key deposit products include sweep accounts, complete savings accounts
and other money market and savings accounts. Our wholesale borrowings include securities sold under agreements to repurchase and FHLB advances. Customer payables, which represents customer cash contained within our broker-dealers, is an additional
source of funding. In addition, the parent company has issued a significant amount of corporate debt.

Our deposit accounts
and customer payables tend to be less rate-sensitive than wholesale borrowings. Agreements to repurchase securities re-price as interest rates change. Sweep accounts, complete savings accounts and other money market and savings accounts re-price at
managements discretion. FHLB advances and corporate debt generally have fixed rates.



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Derivative Instruments

We use derivative instruments to help manage our interest rate risk. Interest rate swaps involve the exchange of fixed-rate and
variable-rate interest payments between two parties based on a contractual underlying notional amount, but do not involve the exchange of the underlying notional amounts. Option products are utilized primarily to decrease the market value changes
resulting from the prepayment dynamics of the mortgage portfolio, as well as to protect against increases in funding costs. The types of options employed include Cap Options (Caps) and Floor Options (Floors). Caps mitigate
the market risk associated with increases in interest rates while Floors mitigate the risk associated with decreases in market interest rates. See derivative instruments discussion at Note 7Accounting for Derivative Instruments and
Hedging Activities in Item 1. Consolidated Financial Statements (Unaudited).

Scenario Analysis

Scenario analysis is an advanced approach to estimating interest rate risk exposure. Under the NPVE approach, the present value of all
existing assets, liabilities, derivatives and forward commitments are estimated and then combined to produce a NPVE figure. The sensitivity of this value to changes in interest rates is then determined by applying alternative interest rate
scenarios, which include, but are not limited to, instantaneous parallel shifts up 100, 200 and 300 basis points and down 100 basis points. The NPVE method is used at the E*TRADE Bank level and not for the Company. E*TRADE Bank had 97% of our
enterprise interest-earning assets at both March 31, 2010 and December 31, 2009, and held 97% of our enterprise interest-bearing liabilities at both March 31, 2010 and December 31, 2009. The sensitivity of NPVE at March 31,
2010 and December 31, 2009 and the limits established by E*TRADE Banks Board of Directors are listed below (dollars in millions):



|                                                     |        |                |        |            |                   |    |        |  |   |            |   |  |             |    |  |     |   
|---------------------------------------------------- | ------ | -------------- | ------ | ---------- | ----------------- | -- | ------ |  | - | ---------- | - |  | ----------- | -- |  | --- | --
|                                                     |        | Change in NPVE |        |            |                   |   
|Parallel Change in
Interest Rates (basis 
points)(1) |        | March 31, 2010 |        |            | December 31, 2009 |    |        |  |  
|                                                     | Amount |                |        | Percentage |                   |    | Amount |  |   | Percentage |   |  | Board Limit |   
|+300                                                 |        | $              | 49.0   |            |                   | 1  | %      |  | $ | (453.6     | ) |  | (14         | )% |  | (55 | )%
|+200                                                 |        | $              | 78.3   |            |                   | 2  | %      |  | $ | (276.6     | ) |  | (9          | )% |  | (30 | )%
|+100                                                 |        | $              | 82.4   |            |                   | 3  | %      |  | $ | (89.2      | ) |  | (3          | )% |  | (20 | )%
|-100                                                 |        | $              | (260.8 | )          |                   | (8 | )%     |  | $ | (110.5     | ) |  | (3          | )% |  | (20 | )%



|(1) |  | On March 31, 2010 and December 31, 2009, the yield on the three-month Treasury bill was 0.16% and 0.06%, respectively. As a result, the OTS
temporarily modified the requirements of the NPV Model, resulting in removal of the minus 200 and 300 basis points scenarios for the periods ended March 31, 2010 and December 31, 2009.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under criteria published by the OTS, E*TRADE Banks overall interest rate risk exposure at March 31, 2010 was characterized as
minimum. We actively manage our interest rate risk positions. As interest rates change, we will re-adjust our strategy and mix of assets, liabilities and derivatives to optimize our position. For example, a 100 basis points increase in
rates may not result in a change in value as indicated above. The ALCO monitors E*TRADE Banks interest rate risk position.



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##### Table of Contents

PART IFINANCIAL INFORMATION



|ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|------- | ---------------------------------------------

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF LOSS

(In thousands, except per share amounts)

(Unaudited)



|                                                                                    |  |                             |           |   |      |   |          |  
|----------------------------------------------------------------------------------- |  | --------------------------- | --------- | - | ---- | - | -------- | -
|                                                                                    |  | Three Months EndedMarch 31, |          
|                                                                                    |  | 2010                        |           |   | 2009 |  
|Revenue:                                                                            |  |                             |           |   |      |   |          |  
|Operating interest income                                                           |  | $                           | 406,966   |   |      | $ | 486,637  |  
|Operating interest expense                                                          |  |                             | (86,569   | ) |      |   | (207,975 | )
|                                                                                    |  |                             |           |   |      |   |          |  
|Net operating interest income                                                       |  |                             | 320,397   |   |      |   | 278,662  |  
|                                                                                    |  |                             |           |   |      |   |          |  
|Commissions                                                                         |  |                             | 113,252   |   |      |   | 125,626  |  
|Fees and service charges                                                            |  |                             | 42,230    |   |      |   | 46,715   |  
|Principal transactions                                                              |  |                             | 26,211    |   |      |   | 17,642   |  
|Gains on loans and securities, net                                                  |  |                             | 29,046    |   |      |   | 35,290   |  
|Other-than-temporary impairment (OTTI)                                            |  |                             | (14,524   | ) |      |   | (18,783  | )
|Less: noncredit portion of OTTI recognized in other comprehensive loss (before tax) |  |                             | 5,872     |   |      |   |         |  
|                                                                                    |  |                             |           |   |      |   |          |  
|Net impairment                                                                      |  |                             | (8,652    | ) |      |   | (18,873  | )
|Other revenues                                                                      |  |                             | 14,019    |   |      |   | 12,191   |  
|                                                                                    |  |                             |           |   |      |   |          |  
|Total non-interest income                                                           |  |                             | 216,106   |   |      |   | 218,681  |  
|                                                                                    |  |                             |           |   |      |   |          |  
|Total net revenue                                                                   |  |                             | 536,503   |   |      |   | 497,343  |  
|                                                                                    |  |                             |           |   |      |   |          |  
|Provision for loan losses                                                           |  |                             | 267,979   |   |      |   | 453,963  |  
|Operating expense:                                                                  |  |                             |           |   |      |   |          |  
|Compensation and benefits                                                           |  |                             | 87,210    |   |      |   | 84,172   |  
|Clearing and servicing                                                              |  |                             | 39,159    |   |      |   | 42,671   |  
|Advertising and market development                                                  |  |                             | 38,135    |   |      |   | 43,591   |  
|FDIC insurance premiums                                                             |  |                             | 19,315    |   |      |   | 12,712   |  
|Communications                                                                      |  |                             | 20,447    |   |      |   | 21,561   |  
|Professional services                                                               |  |                             | 20,290    |   |      |   | 19,630   |  
|Occupancy and equipment                                                             |  |                             | 18,207    |   |      |   | 19,541   |  
|Depreciation and amortization                                                       |  |                             | 20,646    |   |      |   | 20,274   |  
|Amortization of other intangibles                                                   |  |                             | 7,142     |   |      |   | 7,436    |  
|Facility restructuring and other exit activities                                    |  |                             | 3,373     |   |      |   | (112     | )
|Other operating expenses                                                            |  |                             | 21,412    |   |      |   | 22,508   |  
|                                                                                    |  |                             |           |   |      |   |          |  
|Total operating expense                                                             |  |                             | 295,336   |   |      |   | 293,984  |  
|                                                                                    |  |                             |           |   |      |   |          |  
|Loss before other income (expense) and income tax benefit                           |  |                             | (26,812   | ) |      |   | (250,604 | )
|Other income (expense):                                                             |  |                             |           |   |      |   |          |  
|Corporate interest income                                                           |  |                             | 23        |   |      |   | 424      |  
|Corporate interest expense                                                          |  |                             | (41,043   | ) |      |   | (87,315  | )
|Gains (losses) on sales of investments, net                                         |  |                             | 109       |   |      |   | (433     | )
|Losses on early extinguishment of debt                                              |  |                             |          |   |      |   | (2,999   | )
|Equity in income (loss) of investments and venture funds                            |  |                             | 1,794     |   |      |   | (3,129   | )
|                                                                                    |  |                             |           |   |      |   |          |  
|Total other income (expense)                                                        |  |                             | (39,117   | ) |      |   | (93,452  | )
|                                                                                    |  |                             |           |   |      |   |          |  
|Loss before income tax benefit                                                      |  |                             | (65,929   | ) |      |   | (344,056 | )
|Income tax benefit                                                                  |  |                             | (18,092   | ) |      |   | (111,371 | )
|                                                                                    |  |                             |           |   |      |   |          |  
|Net loss                                                                            |  | $                           | (47,837   | ) |      | $ | (232,685 | )
|                                                                                    |  |                             |           |   |      |   |          |  
|Basic net loss per share                                                            |  | $                           | (0.02     | ) |      | $ | (0.41    | )
|Diluted net loss per share                                                          |  | $                           | (0.02     | ) |      | $ | (0.41    | )
|Shares used in computation of per share data:                                       |  |                             |           |   |      |   |          |  
|Basic                                                                               |  |                             | 1,921,951 |   |      |   | 567,833  |  
|Diluted                                                                             |  |                             | 1,921,951 |   |      |   | 567,833  |  

See accompanying notes
to consolidated financial statements



45



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E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(In thousands, except share amounts)

(Unaudited)



|                                                                                                                                                                                                               |  |               |            |   |                  |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ---------------- | - | ---------- | -
|                                                                                                                                                                                                               |  | March 31,2010 |            |   | December 31,2009 |  
|ASSETS                                                                                                                                                                                                         |  |               |            |   |                  |   |            |  
|Cash and equivalents                                                                                                                                                                                           |  | $             | 3,068,351  |   |                  | $ | 3,483,238  |  
|Cash and investments required to be segregated under federal or other regulations                                                                                                                              |  |               | 2,087,569  |   |                  |   | 1,545,280  |  
|Trading securities                                                                                                                                                                                             |  |               | 47,047     |   |                  |   | 38,303     |  
|Available-for-sale mortgage-backed and investment securities (includes securities pledged to creditors with the right to sell or
repledge of $7,076,246 at March 31, 2010 and $7,298,631 at December 31, 2009) |  |               | 13,278,363 |   |                  |   | 13,319,712 |  
|Margin receivables                                                                                                                                                                                             |  |               | 3,986,749  |   |                  |   | 3,827,212  |  
|Loans, net (net of allowance for loan losses of $1,162,391 at March 31, 2010 and $1,182,738 at December 31,
2009)                                                                                              |  |               | 18,187,958 |   |                  |   | 19,174,933 |  
|Investment in FHLB stock                                                                                                                                                                                       |  |               | 183,949    |   |                  |   | 183,863    |  
|Property and equipment, net                                                                                                                                                                                    |  |               | 321,183    |   |                  |   | 320,169    |  
|Goodwill                                                                                                                                                                                                       |  |               | 1,952,326  |   |                  |   | 1,952,326  |  
|Other intangibles, net                                                                                                                                                                                         |  |               | 349,263    |   |                  |   | 356,404    |  
|Other assets                                                                                                                                                                                                   |  |               | 3,215,916  |   |                  |   | 3,165,045  |  
|                                                                                                                                                                                                               |  |               |            |   |                  |   |            |  
|Total assets                                                                                                                                                                                                   |  | $             | 46,678,674 |   |                  | $ | 47,366,485 |  
|                                                                                                                                                                                                               |  |               |            |   |                  |   |            |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                           |  |               |            |   |                  |   |            |  
|Liabilities:                                                                                                                                                                                                   |  |               |            |   |                  |   |            |  
|Deposits                                                                                                                                                                                                       |  | $             | 24,632,882 |   |                  | $ | 25,597,721 |  
|Securities sold under agreements to repurchase                                                                                                                                                                 |  |               | 6,385,272  |   |                  |   | 6,441,875  |  
|Customer payables                                                                                                                                                                                              |  |               | 5,620,063  |   |                  |   | 5,234,199  |  
|FHLB advances and other borrowings                                                                                                                                                                             |  |               | 2,748,438  |   |                  |   | 2,746,959  |  
|Corporate debt                                                                                                                                                                                                 |  |               | 2,400,437  |   |                  |   | 2,458,691  |  
|Accounts payable, accrued and other liabilities                                                                                                                                                                |  |               | 1,075,183  |   |                  |   | 1,137,485  |  
|                                                                                                                                                                                                               |  |               |            |   |                  |   |            |  
|Total liabilities                                                                                                                                                                                              |  |               | 42,862,275 |   |                  |   | 43,616,930 |  
|                                                                                                                                                                                                               |  |               |            |   |                  |   |            |  
|Commitments and contingencies (see Note 15)                                                                                                                                                                    |  |               |            |   |                  |   |            |  
|                                                                                                                                                                                                               |  |              
|Shareholders equity:                                                                                                                                                                                          |  |               |            |   |                  |   |            |  
|Common stock, $0.01 par value, shares authorized: 4,000,000,000; shares issued and outstanding: 1,959,785,425 at March 31,
2010 and 1,893,970,995 at December 31, 2009                                         |  |               | 19,598     |   |                  |   | 18,940     |  
|Additional paid-in capital (APIC)                                                                                                                                                                            |  |               | 6,355,505  |   |                  |   | 6,258,111  |  
|Accumulated deficit                                                                                                                                                                                            |  |               | (2,171,203 | ) |                  |   | (2,123,366 | )
|Accumulated other comprehensive loss                                                                                                                                                                           |  |               | (387,501   | ) |                  |   | (404,130   | )
|                                                                                                                                                                                                               |  |               |            |   |                  |   |            |  
|Total shareholders equity                                                                                                                                                                                     |  |               | 3,816,399  |   |                  |   | 3,749,555  |  
|                                                                                                                                                                                                               |  |               |            |   |                  |   |            |  
|Total liabilities and shareholders equity                                                                                                                                                                     |  | $             | 46,678,674 |   |                  | $ | 47,366,485 |  
|                                                                                                                                                                                                               |  |               |            |   |                  |   |            |  

See accompanying notes to consolidated financial statements



46



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E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)



|                                                                                |  |                             |         |   |      |   |          |  
|------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | -------- | -
|                                                                                |  | Three Months EndedMarch 31, |        
|                                                                                |  | 2010                        |         |   | 2009 |  
|Net loss                                                                        |  | $                           | (47,837 | ) |      | $ | (232,685 | )
|Other comprehensive income                                                      |  |                             |         |   |      |   |          |  
|Available-for-sale securities:                                                  |  |                             |         |   |      |   |          |  
|OTTI,
net(1)                                                                    |  |                             | 8,876   |   |      |   |         |  
|Noncredit portion of OTTI reclassification into othercomprehensive loss,
net(2) |  |                             | (3,588  | ) |      |   |         |  
|Unrealized gains,
net(3)                                                        |  |                             | 53,902  |   |      |   | 51,834   |  
|Reclassification into earnings,
net(4)                                          |  |                             | (17,965 | ) |      |   | (11,627  | )
|                                                                                |  |                             |         |   |      |   |          |  
|Net change from available-for-sale securities                                   |  |                             | 41,225  |   |      |   | 40,207   |  
|                                                                                |  |                             |         |   |      |   |          |  
|Cash flow hedging instruments:                                                  |  |                             |         |   |      |   |          |  
|Unrealized gains (losses),
net(5)                                               |  |                             | (33,895 | ) |      |   | 35,382   |  
|Reclassification into earnings,
net(6)                                          |  |                             | 11,388  |   |      |   | 6,817    |  
|                                                                                |  |                             |         |   |      |   |          |  
|Net change from cash flow hedging instruments                                   |  |                             | (22,507 | ) |      |   | 42,199   |  
|                                                                                |  |                             |         |   |      |   |          |  
|Foreign currency translation losses                                             |  |                             | (2,089  | ) |      |   | (3,513   | )
|                                                                                |  |                             |         |   |      |   |          |  
|Other comprehensive income                                                      |  |                             | 16,629  |   |      |   | 78,893   |  
|                                                                                |  |                             |         |   |      |   |          |  
|Comprehensive loss                                                              |  | $                           | (31,208 | ) |      | $ | (153,792 | )
|                                                                                |  |                             |         |   |      |   |          |  



|(1) |  | Amount is net of benefit from income taxes of $5.6 million for the three months ended March 31, 2010.
|--- |  | -----------------------------------------------------------------------------------------------------

|(2) |  | Amount is net of benefit from income taxes of $2.3 million for the three
months ended March 31, 2010.
|--- |  | -----------------------------------------------------------------------------------------------------

|(3) |  | Amounts are net of provision for income taxes of $34.3 million and $33.5 million for the three months ended March 31, 2010 and 2009, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Amounts are net of provision for income taxes of $11.4 million and $7.1 million for the three months ended March 31, 2010 and 2009, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Amount is net of benefit from income taxes of $17.5 million for the three months ended March 31, 2010 and provision for income taxes of $21.3
million for the three months ended March 31, 2009.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Amounts are net of benefit from income taxes of $5.9 million and $4.0 million for the three months ended March 31, 2010 and 2009, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements



47



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E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

(In thousands)

(Unaudited)



|                                                                              |  |              |  |                          |        |  |                    |           |   |                                    |   |            |                          |  |   |          |   |  |   |           |  
|----------------------------------------------------------------------------- |  | ------------ |  | ------------------------ | ------ |  | ------------------ | --------- | - | ---------------------------------- | - | ---------- | ------------------------ |  | - | -------- | - |  | - | --------- | -
|                                                                              |  | Common Stock |  | AdditionalPaid-inCapital |        |  | AccumulatedDeficit |           |   | AccumulatedOtherComprehensive
Loss |   |            | TotalShareholdersEquity | 
|                                                                              |  | Shares       |  | Amount                   |        |  |                    |          
|Balance, December 31, 2009                                                    |  | 1,893,971    |  | $                        | 18,940 |  | $                  | 6,258,111 |   |                                    | $ | (2,123,366 | )                        |  | $ | (404,130 | ) |  | $ | 3,749,555 |  
|Net loss                                                                      |  |             |  |                          |       |  |                    |          |   |                                    |   | (47,837    | )                        |  |   |         |   |  |   | (47,837   | )
|Other comprehensive income                                                    |  |             |  |                          |       |  |                    |          |   |                                    |   |           |                          |  |   | 16,629   |   |  |   | 16,629    |  
|Conversion of convertible debentures                                          |  | 58,777       |  |                          | 588    |  |                    | 60,201    |   |                                    |   |           |                          |  |   |         |   |  |   | 60,789    |  
|Exercise of stock options and related tax effects                             |  | 123          |  |                          | 1      |  |                    | (1,632    | ) |                                    |   |           |                          |  |   |         |   |  |   | (1,631    | )
|Issuance of restricted stock, net of forfeitures and retirements to pay taxes |  | 6,914        |  |                          | 69     |  |                    | (5,223    | ) |                                    |   |           |                          |  |   |         |   |  |   | (5,154    | )
|Share-based compensation                                                      |  |             |  |                          |       |  |                    | 9,168     |   |                                    |   |           |                          |  |   |         |   |  |   | 9,168     |  
|Claims settlement under Section 16(b)                                         |  |             |  |                          |       |  |                    | 35,000    |   |                                    |   |           |                          |  |   |         |   |  |   | 35,000    |  
|Other                                                                         |  |             |  |                          |       |  |                    | (120      | ) |                                    |   |           |                          |  |   |         |   |  |   | (120      | )
|                                                                              |  |              |  |                          |        |  |                    |           |   |                                    |   |            |                          |  |   |          |   |  |   |           |  
|Balance, March 31, 2010                                                       |  | 1,959,785    |  | $                        | 19,598 |  | $                  | 6,355,505 |   |                                    | $ | (2,171,203 | )                        |  | $ | (387,501 | ) |  | $ | 3,816,399 |  
|                                                                              |  |              |  |                          |        |  |                    |           |   |                                    |   |            |                          |  |   |          |   |  |   |           |  
|                                                                              |  |              |  |                          |       
|                                                                              |  | Common Stock |  | AdditionalPaid-inCapital |        |  | AccumulatedDeficit |           |   | AccumulatedOtherComprehensiveLoss  |   |            | TotalShareholdersEquity | 
|                                                                              |  | Shares       |  | Amount                   |        |  |                    |          
|Balance, December 31, 2008                                                    |  | 563,523      |  | $                        | 5,635  |  | $                  | 4,064,282 |   |                                    | $ | (845,767   | )                        |  | $ | (632,654 | ) |  | $ | 2,591,496 |  
|Net loss                                                                      |  |             |  |                          |       |  |                    |          |   |                                    |   | (232,685   | )                        |  |   |         |   |  |   | (232,685  | )
|Other comprehensive income                                                    |  |             |  |                          |       |  |                    |          |   |                                    |   |           |                          |  |   | 78,893   |   |  |   | 78,893    |  
|Exercise of stock options and related tax effects                             |  |             |  |                          |       |  |                    | (2,456    | ) |                                    |   |           |                          |  |   |         |   |  |   | (2,456    | )
|Issuance of restricted stock, net of forfeitures and retirements to pay taxes |  | 669          |  |                          | 7      |  |                    | (294      | ) |                                    |   |           |                          |  |   |         |   |  |   | (287      | )
|Share-based compensation                                                      |  |             |  |                          |       |  |                    | 10,839    |   |                                    |   |           |                          |  |   |         |   |  |   | 10,839    |  
|Other                                                                         |  | 7,860        |  |                          | 79     |  |                    | 12,272    |   |                                    |   |           |                          |  |   |         |   |  |   | 12,351    |  
|                                                                              |  |              |  |                          |        |  |                    |           |   |                                    |   |            |                          |  |   |          |   |  |   |           |  
|Balance, March 31, 2009                                                       |  | 572,052      |  | $                        | 5,721  |  | $                  | 4,084,643 |   |                                    | $ | (1,078,452 | )                        |  | $ | (553,761 | ) |  | $ | 2,458,151 |  
|                                                                              |  |              |  |                          |        |  |                    |           |   |                                    |   |            |                          |  |   |          |   |  |   |           |  

See accompanying notes to consolidated financial statements



48



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E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                                                          |  |                             |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                          |  | Three Months EndedMarch 31, |           
|                                                                                                                          |  | 2010                        |            |   | 2009 |  
|Cash flows from operating activities:                                                                                     |  |                             |            |   |      |   |            |  
|Net loss                                                                                                                  |  | $                           | (47,837    | ) |      | $ | (232,685   | )
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                                 |  |                             |            |   |      |   |            |  
|Provision for loan losses                                                                                                 |  |                             | 267,979    |   |      |   | 453,963    |  
|Depreciation and amortization (including discount amortization and accretion)                                             |  |                             | 86,200     |   |      |   | 82,827     |  
|Net impairment, gains on loans and securities, net and (gains) losses on sales of investments, net                        |  |                             | (20,503    | ) |      |   | (16,074    | )
|Equity in (income) loss of investments and venture funds                                                                  |  |                             | (1,794     | ) |      |   | 3,129      |  
|Losses on early extinguishment of debt                                                                                    |  |                             |           |   |      |   | 2,999      |  
|Share-based compensation                                                                                                  |  |                             | 9,168      |   |      |   | 10,839     |  
|Deferred taxes                                                                                                            |  |                             | (15,660    | ) |      |   | (112,100   | )
|Other                                                                                                                     |  |                             | (7,142     | ) |      |   | (3,460     | )
|Net effect of changes in assets and liabilities:                                                                          |  |                             |            |   |      |   |            |  
|Increase in cash and investments required to be segregated under federal or other regulations                             |  |                             | (553,291   | ) |      |   | (759,782   | )
|(Increase) decrease in margin receivables                                                                                 |  |                             | (161,963   | ) |      |   | 345,652    |  
|Increase in customer payables                                                                                             |  |                             | 392,077    |   |      |   | 428,609    |  
|Proceeds from sales of loans held-for-sale                                                                                |  |                             | 33,175     |   |      |   |           |  
|Originations of loans held-for-sale                                                                                       |  |                             | (28,674    | ) |      |   |           |  
|Proceeds from sales, repayments and maturities of trading securities                                                      |  |                             | 75,560     |   |      |   | 678,649    |  
|Purchases of trading securities                                                                                           |  |                             | (84,339    | ) |      |   | (671,397   | )
|Increase in other assets                                                                                                  |  |                             | (38,400    | ) |      |   | (13,082    | )
|Increase in accounts payable, accrued and other liabilities                                                               |  |                             | 48,666     |   |      |   | 76,119     |  
|                                                                                                                          |  |                             |            |   |      |   |            |  
|Net cash (used in) provided by operating activities                                                                       |  |                             | (46,778    | ) |      |   | 274,206    |  
|                                                                                                                          |  |                             |            |   |      |   |            |  
|Cash flows from investing activities:                                                                                     |  |                             |            |   |      |   |            |  
|Purchases of available-for-sale mortgage-backed and investment securities                                                 |  |                             | (2,626,883 | ) |      |   | (5,281,856 | )
|Proceeds from sales, maturities of and principal payments on available-for-sale mortgage-backed and investment
securities |  |                             | 2,726,174  |   |      |   | 4,341,212  |  
|Net decrease in loans receivable                                                                                          |  |                             | 635,294    |   |      |   | 697,066    |  
|Capital expenditures for property and equipment                                                                           |  |                             | (22,185    | ) |      |   | (23,168    | )
|Proceeds from sale of REO and repossessed assets                                                                          |  |                             | 50,543     |   |      |   | 36,127     |  
|Other                                                                                                                     |  |                             |           |   |      |   | (4,991     | )
|                                                                                                                          |  |                             |            |   |      |   |            |  
|Net cash provided by (used in) investing activities                                                                       |  | $                           | 762,943    |   |      | $ | (235,610   | )
|                                                                                                                          |  |                             |            |   |      |   |            |  

See accompanying notes to consolidated financial statements



49



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##### Table of Contents

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS(Continued)

(In thousands)

(Unaudited)



|                                                                       |  |                             |            |   |      |   |            |  
|---------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                       |  | Three Months EndedMarch 31, |           
|                                                                       |  | 2010                        |            |   | 2009 |  
|Cash flows from financing activities:                                  |  |                             |            |   |      |   |            |  
|Net increase in deposits                                               |  | $                           | 19,462     |   |      | $ | 1,504,836  |  
|Sale of deposits                                                       |  |                             | (980,549   | ) |      |   |           |  
|Net decrease in securities sold under agreements to repurchase         |  |                             | (55,941    | ) |      |   | (422,242   | )
|Advances from other long-term borrowings                               |  |                             | 850,000    |   |      |   | 850,000    |  
|Payments on advances from other long-term borrowings                   |  |                             | (850,000   | ) |      |   | (1,250,000 | )
|Claims settlement under Section 16(b)                                  |  |                             | 35,000     |   |      |   |           |  
|Net cash flow from derivatives hedging liabilities                     |  |                             | (146,556   | ) |      |   | (95,522    | )
|Other                                                                  |  |                             | 1,427      |   |      |   | 24,813     |  
|                                                                       |  |                             |            |   |      |   |            |  
|Net cash (used in) provided by financing activities                    |  |                             | (1,127,157 | ) |      |   | 611,885    |  
|                                                                       |  |                             |            |   |      |   |            |  
|Effect of exchange rates on cash                                       |  |                             | (3,895     | ) |      |   | (12,024    | )
|                                                                       |  |                             |            |   |      |   |            |  
|(Decrease) increase in cash and equivalents                            |  |                             | (414,887   | ) |      |   | 638,457    |  
|Cash and equivalents, beginning of period                              |  |                             | 3,483,238  |   |      |   | 3,853,849  |  
|                                                                       |  |                             |            |   |      |   |            |  
|Cash and equivalents, end of period                                    |  | $                           | 3,068,351  |   |      | $ | 4,492,306  |  
|                                                                       |  |                             |            |   |      |   |            |  
|Supplemental disclosures:                                              |  |                             |            |   |      |   |            |  
|Cash paid for interest                                                 |  | $                           | 89,703     |   |      | $ | 220,448    |  
|Cash paid for income taxes                                             |  | $                           | 2,464      |   |      | $ | 2,662      |  
|Non-cash investing and financing activities:                           |  |                             |            |   |      |   |            |  
|Conversion of convertible debentures to common stock                   |  | $                           | 60,789     |   |      | $ |           |  
|Transfers from loans to other real estate owned and repossessed assets |  | $                           | 89,880     |   |      | $ | 43,095     |  
|Issuance of common stock upon acquisition                              |  | $                           |           |   |      | $ | 9,000      |  
|Reclassification of loans held-for-investment to loans held-for-sale   |  | $                           | 252,627    |   |      | $ |           |  



See accompanying notes to consolidated financial statements



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E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OrganizationE*TRADE Financial Corporation is a financial services company that provides online brokerage and
related products and services primarily to individual retail investors under the brand E*TRADE Financial. The Company also provides investor-focused banking products, primarily sweep deposits and savings products.

Basis of PresentationThe consolidated financial statements include the accounts of the Company and its
majority-owned subsidiaries as determined under the voting interest model. Entities in which the Company holds at least a 20% ownership or in which there are other indicators of significant influence are generally accounted for by the equity method.
Entities in which the Company holds less than 20% ownership and does not have the ability to exercise significant influence are generally carried at cost. Intercompany accounts and transactions are eliminated in consolidation. The Company also
evaluates its continuing involvement with certain entities to determine if the Company is required to consolidate the entities under the variable interest entity model. This evaluation is based on a qualitative assessment of whether the Company has
both: 1) the power to direct matters that most significantly impact the activities of the variable interest entity; and 2) the obligation to absorb losses or the right to receive benefits of the variable interest entity that could potentially be
significant to the variable interest entity.

Certain prior period items in these consolidated financial statements have been
reclassified to conform to the current period presentation. These consolidated financial statements reflect all adjustments, which are all normal and recurring in nature, necessary to present fairly the financial position, results of operations and
cash flows for the periods presented.

The Company reports corporate interest income and corporate interest expense separately
from operating interest income and operating interest expense. The Company believes reporting these two items separately provides a clearer picture of the financial performance of the Companys operations than would a presentation that combined
these two items. Operating interest income and operating interest expense is generated from the operations of the Company. Corporate debt, which is the primary source of the corporate interest expense, has been issued primarily in connection with
recapitalization transactions and past acquisitions, such as Harrisdirect and BrownCo.

Similarly, the Company reports
gains (losses) on sales of investments, net separately from gains on loans and securities, net. The Company believes reporting these two items separately provides a clearer picture of the financial performance of its operations than would a
presentation that combined these two items. Gains on loans and securities, net are the result of activities in the Companys operations, namely its balance sheet management segment. Gains (losses) on sales of investments, net relate to
historical equity investments of the Company at the corporate level and are not related to the ongoing business of the Companys operating subsidiaries.

Use of EstimatesThe consolidated financial statements were prepared in accordance with GAAP, which require
management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods presented. Actual results could differ from managements estimates. Material estimates in
which management believes near-term changes could reasonably occur include allowance for loan losses; fair value measurements; classification and valuation of certain investments; accounting for derivative instruments; estimates of effective tax
rates, deferred taxes and valuation allowances; valuation of goodwill and other intangibles; and valuation and expensing of share-based payments.

Financial Statement Descriptions and Related Accounting PoliciesFinancial statement descriptions and related
accounting policies are more fully described in Item 8. Financial Statements and Supplementary Data in



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the Companys Annual Report on Form 10-K for the year ended December 31, 2009, as amended by a Current Report on Form 8-K filed concurrently on May 5, 2010.

Margin ReceivablesThe fair value of securities that the Company received as collateral in connection with margin
receivables and stock borrowing activities, where the Company is permitted to sell or re-pledge the securities, was approximately $5.5 billion and $5.3 billion as of March 31, 2010 and December 31, 2009, respectively. Of this amount, $1.1
billion and $0.9 billion had been pledged or sold in connection with securities loans, bank borrowings and deposits with clearing organizations as of March 31, 2010 and December 31, 2009, respectively.

New Accounting and Disclosure GuidanceBelow is the new accounting and disclosure guidance that relates to
activities in which the Company is engaged.

Accounting for Transfers of Financial Assets

In June 2009, the Financial Accounting Standards Board (FASB) amended the derecognition provisions in the accounting guidance
for transfers and servicing, including the removal of the concept of qualifying special-purpose entities (QSPEs). The Companys adoption of the amended derecognition provisions to transfers of financial assets, which did not impact
its financial condition, results of operations or cash flows, will be applied to transfers of financial assets occurring on or after January 1, 2010.

Consolidation of Variable Interest Entities

In June 2009, the FASB amended the accounting and disclosure guidance for the consolidation of variable interest entities. The amended
accounting guidance requires the reconsideration of previous conclusions related to the consolidation of variable interest entities, including whether an entity is a variable interest entity and whether the Company is the variable interest
entitys primary beneficiary. The amended accounting guidance carries forward the scope of the previous accounting guidance for the consolidation of variable interest entities with the addition of entities previously considered QSPEs. The
amended accounting and disclosure guidance became effective January 1, 2010 for the Company. The Companys reconsideration of previous conclusions related to the consolidation of variable interest entities did not result in the
consolidation of additional entities as of January 1, 2010. Beginning on January 1, 2010, the Companys assessment of whether it is a variable interest entitys primary beneficiary will be ongoing and will consider changes in
facts and circumstances related to the variable interest entities.

Fair Value Measurements and DisclosuresImproving Disclosures
about Fair Value Measurements

In January 2010, the FASB amended the disclosure guidance related to fair value
measurements. The amended disclosure guidance requires new fair value measurement disclosures and clarifies existing fair value measurement disclosure requirements. The amended disclosure guidance related to disclosures about purchases, sales,
issuances and settlements of Level 3 instruments will be effective for fiscal years beginning after December 15, 2010, or January 1, 2011 for the Company. The Companys disclosures about fair value measurements will reflect the
adoption of the amended disclosure guidance related to disclosures about purchases, sales, issuances and settlements of Level 3 instruments in the first quarter of 2011. The remaining amended disclosure guidance became effective January 1, 2010
for the Company. The Companys disclosures about fair value measurements reflect the adoption of the remaining disclosure guidance in Note 4Fair Value Disclosures.

Derivatives and HedgingScope Exception Related To Embedded Credit Derivatives

In March 2010, the FASB amended the accounting guidance for derivatives and hedging to clarify the type of embedded credit derivative that
is exempt from embedded derivative bifurcation requirements. An embedded



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credit derivative that is related only to the subordination of one financial instrument to another qualifies for the exemption. As a result, entities that have contracts containing an embedded
credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The amended accounting guidance will be effective at the beginning of the first fiscal quarter beginning
after June 15, 2010, or July 1, 2010 for the Company. The Company is currently evaluating the impact of the amended accounting guidance but does not expect the adoption to have a material impact on its financial condition, results of
operations or cash flows in future periods.

NOTE 2FACILITY RESTRUCTURING AND OTHER EXIT ACTIVITIES

The following table summarizes the expense recognized by the Company as facility restructuring and other exit activities for
the periods presented (dollars in thousands):



|                                                       |  |                             |       |   |      |   |      |  
|------------------------------------------------------ |  | --------------------------- | ----- | - | ---- | - | ---- | -
|                                                       |  | Three MonthsEnded March 31, |      
|                                                       |  | 2010                        |       |   | 2009 |  
|International brokerage business                       |  | $                           | 3,645 |   |      | $ |     |  
|Other exit activities                                  |  |                             | (272  | ) |      |   | (112 | )
|                                                       |  |                             |       |   |      |   |      |  
|Total facility restructuring and other exit activities |  | $                           | 3,373 |   |      | $ | (112 | )
|                                                       |  |                             |       |   |      |   |      |  

Exit of Non-Core Operations

International Brokerage Business

In the fourth quarter of 2009, the Company decided to restructure its international brokerage business, which provided trading products
and services through two primary channels: 1) cross-border trading, where customers residing outside of the U.S. trade in U.S. securities; and 2) local market trading, where customers residing outside of the U.S. trade in non-U.S. securities. The
Company believes the local market trading is not a key strategic component of its global brokerage product offering and therefore decided to exit this channel. This exit does not qualify for discontinued operations accounting as the Company will
have significant continuing involvement in the international brokerage business with cross-border trading.

The Company
entered into agreements to sell the local market trading operations in Germany, the Nordic region and the United Kingdom. The sale of the local market trading operations in Germany was completed in December 2009 and the Company closed the sale of
the local market trading operations in the Nordic region and United Kingdom in April 2010.



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As of March 31, 2010 and December 31, 2009, the local market trading operations in
Nordic and UK were considered held-for-sale. Below is a table summarizing the carrying amounts of the major classes of assets and liabilities of these operations as of March 31, 2010 and December 31, 2009 (dollars in thousands):



|                                                                                  |  |               |         |                  |   |        
|--------------------------------------------------------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|                                                                                  |  | March 31,2010 |         | December 31,2009
|Assets                                                                            |  |               |         |                  |   |        
|Cash and equivalents                                                              |  | $             | 206,192 |                  | $ | 226,060
|Cash and investments required to be segregated under federal or other regulations |  |               | 119,415 |                  |   | 141,082
|Margin receivables                                                                |  |               | 75,745  |                  |   | 83,131 
|Property and equipment, net                                                       |  |               | 3,750   |                  |   | 3,461  
|Other assets                                                                      |  |               | 19,746  |                  |   | 19,286 
|                                                                                  |  |               |         |                  |   |        
|Total assets                                                                      |  | $             | 424,848 |                  | $ | 473,020
|                                                                                  |  |               |         |                  |   |        
|Liabilities                                                                       |  |               |         |                  |   |        
|Customer payables                                                                 |  | $             | 389,064 |                  | $ | 440,606
|Accounts payable, accrued and other liabilities                                   |  |               | 7,782   |                  |   | 8,741  
|                                                                                  |  |               |         |                  |   |        
|Total liabilities                                                                 |  | $             | 396,846 |                  | $ | 449,347
|                                                                                  |  |               |         |                  |   |        

As a result of the international brokerage business
restructuring, the Company recognized $3.6 million in expense during the three months ended March 31, 2010, including $2.8 million in severance costs and $0.8 million in asset write-off costs. The Company expects the total charges for this
restructuring to be up to $25 million, $19.3 million of which had been incurred as of March 31, 2010.

Facility
restructuring and other exit activities expenses are not allocated to the Companys operating segments but are reported as a component of the Corporate/Other category within the Companys segment information.

NOTE 3OPERATING INTEREST INCOME AND OPERATING INTEREST EXPENSE

The following table shows the components of operating interest income and operating interest expense (dollars in thousands):



|                                               |  |                             |         |   |      |   |          |  
|---------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | -------- | -
|                                               |  | Three Months EndedMarch 31, |        
|                                               |  | 2010                        |         |   | 2009 |  
|Operating interest income:                     |  |                             |         |   |      |   |          |  
|Loans, net                                     |  | $                           | 241,580 |   |      | $ | 313,328  |  
|Mortgage-backed and investment securities      |  |                             | 109,293 |   |      |   | 127,069  |  
|Margin receivables                             |  |                             | 44,713  |   |      |   | 26,937   |  
|Other                                          |  |                             | 11,380  |   |      |   | 19,303   |  
|                                               |  |                             |         |   |      |   |          |  
|Total operating interest income                |  |                             | 406,966 |   |      |   | 486,637  |  
|                                               |  |                             |         |   |      |   |          |  
|Operating interest expense:                    |  |                             |         |   |      |   |          |  
|Deposits                                       |  |                             | (19,960 | ) |      |   | (97,014  | )
|Securities sold under agreements to repurchase |  |                             | (34,746 | ) |      |   | (61,169  | )
|FHLB advances and other borrowings             |  |                             | (29,428 | ) |      |   | (46,110  | )
|Other                                          |  |                             | (2,435  | ) |      |   | (3,682   | )
|                                               |  |                             |         |   |      |   |          |  
|Total operating interest expense               |  |                             | (86,569 | ) |      |   | (207,975 | )
|                                               |  |                             |         |   |      |   |          |  
|Net operating interest income                  |  | $                           | 320,397 |   |      | $ | 278,662  |  
|                                               |  |                             |         |   |      |   |          |  



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NOTE 4FAIR VALUE DISCLOSURES

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. In determining fair value, the Company may use various valuation approaches, including market, income and/or cost approaches. The fair value hierarchy requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is a market-based measure considered from the perspective of a market participant. Accordingly, even when market assumptions are not readily
available, the Companys own assumptions reflect those that market participants would use in pricing the asset or liability at the measurement date. The fair value measurement accounting guidance describes the following three levels used to
classify fair value measurements:



| |  |  | Level 1Quoted prices in active markets for identical assets or liabilities.
| | - |  | ----------------------------------------------------------------------------



| |  |  | Level 2Quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3Unobservable inputs that are significant to the fair value of the assets or liabilities.
| | - |  | ------------------------------------------------------------------------------------------------

The availability of observable inputs can vary and in certain cases, the inputs used to measure fair value may fall into different levels
of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to
a fair value measurement requires judgment and consideration of factors specific to the asset or liability.

Recurring Fair Value
Measurement Techniques

U.S. Treasury Securities and Agency Debentures

The fair value measurements of U.S. Treasury securities are classified as Level 1 of the fair value hierarchy as they are based on quoted
market prices in active markets. The fair value measurements of agency debentures are classified as Level 2 of the fair value hierarchy as they are based on quoted market prices that can be derived from assumptions observable in the marketplace.

Residential Mortgage-backed Securities

The Companys residential mortgage-backed securities portfolio is comprised of agency mortgage-backed securities and CMOs, which
represent the majority of the portfolio, and non-agency CMOs. As agency mortgage-backed securities and CMOs are guaranteed by U.S. government sponsored and federal agencies, these securities were AAA-rated as of March 31, 2010. The majority of
the Companys non-agency CMOs are backed by first lien mortgages and were below investment grade or non-rated as of March 31, 2010. The following table represents additional information about the residential mortgage-backed securities
portfolio as of March 31, 2010:



|                                  |  |                             |   |  |                                            
|--------------------------------- |  | --------------------------- | - |  | -------------------------------------------
|                                  |  | Weighted AverageCoupon Rate |   |  | Weighted AverageContractualMaturity (Years)
|Agency mortgage-backed securities |  | 4.17                        | % |  | 26                                         
|Agency CMOs                       |  | 4.66                        | % |  | 24                                         
|Non-agency CMOs                   |  | 4.44                        | % |  | 26                                         

The fair value of agency
mortgage-backed securities is determined using market and income approaches with quoted market prices, recent market transactions and spread data for similar instruments. The fair value of agency CMOs is determined using market and income approaches
with the Companys own trading activities for identical or similar instruments. Agency mortgage-backed securities and CMOs are generally categorized in Level 2 of the fair value hierarchy.



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Non-agency CMOs are valued using market and income approaches with market observable data,
including recent market transactions when available. The Company also utilized a pricing service to corroborate the market observability of the Companys inputs used in the fair value measurements. The valuations of non-agency CMOs reflect the
Companys best estimate of what market participants would consider in pricing the financial instruments. The following table presents additional information about the underlying loans and significant inputs for the valuation of non-agency CMOs
as of March 31, 2010:



|                    |  |                 |   |  |              
|------------------- |  | --------------- | - |  | -------------
|                    |  | WeightedAverage |   |  | Range        
|Underlying loans:   |  |                 |   |  |              
|Coupon rate         |  | 4.79            | % |  | 2.45% - 7.04%
|Maturity (years)    |  | 25              |   |  | 13  27      
|Significant inputs: |  |                 |   |  |              
|Yield               |  | 4               | % |  | 2% - 10%     
|Default rate        |  | 43              | % |  | 2% - 100%    
|Loss severity       |  | 46              | % |  | 7% - 86%     
|Prepayment rate     |  | 10              | % |  | 0% - 33%     

The
Company considers the price transparency for these financial instruments to be a key determinant of the degree of judgment involved in determining the fair value. As of March 31, 2010, the majority of the Companys non-agency CMOs were
categorized in Level 3 of the fair value hierarchy.

Other Debt Securities

The fair value measurement of other agency debt securities is determined using market and income approaches with the Companys own
trading activities for identical instruments and is generally categorized in Level 2 of the fair value hierarchy. The Companys municipal bonds are revenue bonds issued by state and other local government agencies. The valuation of corporate
bonds is impacted by the credit worthiness of the corporate issuer. The majority of the Companys municipal bonds and corporate bonds were rated investment grade as of March 31, 2010. These securities are valued using a market approach
with pricing service valuations corroborated by recent market transactions for similar or identical bonds. Municipal bonds and corporate bonds are generally categorized in Level 2 of the fair value hierarchy.

Derivative Instruments

The majority of the Companys derivative instruments, interest rate swap and option contracts, are valued with an income approach
using pricing models that are commonly used by the financial services industry. The market observable inputs used in the pricing models include the swap curve, the volatility surface and prime basis from a financial data provider. The Company does
not consider these models to involve significant judgment on the part of management and corroborated the fair value measurements with counterparty valuations. The Companys derivative instruments are generally categorized in Level 2 of the fair
value hierarchy. The consideration of credit risk, the Companys or the counterpartys, did not result in an adjustment to the valuation of its derivative instruments in the periods presented.

Securities Owned and Securities Sold, Not Yet Purchased

Securities transactions entered into by a broker-dealer subsidiary are included in trading securities and securities sold, not yet
purchased in the Companys fair value disclosures. For equity securities, the Companys definition of actively traded is based on average daily volume and other market trading statistics. The fair value of securities owned and securities
sold, not yet purchased is determined using listed or quoted market prices and are categorized in Level 1 or Level 2 of the fair value hierarchy.



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Recurring Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis are summarized below (dollars in thousands):



|                                                                 |  |         |         |         |   |            |  |            |         |  |   |           
|---------------------------------------------------------------- |  | ------- | ------- | ------- | - | ---------- |  | ---------- | ------- |  | - | ----------
|                                                                 |  | Level 1 |         | Level 2 |   | Level 3    |  | Fair Value
|March 31, 2010:                                                  |  |         |         |         |   |            |  |            |         |  |   |           
|Assets                                                           |  |         |         |         |   |            |  |            |         |  |   |           
|Trading securities                                               |  | $       | 39,895  |         | $ | 6,254      |  | $          | 898     |  | $ | 47,047    
|Available-for-sale securities:                                   |  |         |         |         |   |            |  |            |         |  |   |           
|Residential mortgage-backed securities:                          |  |         |         |         |   |            |  |            |         |  |   |           
|Agency mortgage-backed securities and CMOs                       |  |         |        |         |   | 8,449,816  |  |            |        |  |   | 8,449,816 
|Non-agency CMOs and other                                        |  |         |        |         |   | 138,431    |  |            | 233,130 |  |   | 371,561   
|                                                                 |  |         |         |         |   |            |  |            |         |  |   |           
|Total residential mortgage-backed securities                     |  |         |        |         |   | 8,588,247  |  |            | 233,130 |  |   | 8,821,377 
|                                                                 |  |         |         |         |   |            |  |            |         |  |   |           
|Investment securities:                                           |  |         |         |         |   |            |  |            |         |  |   |           
|Debt securities:                                                 |  |         |         |         |   |            |  |            |         |  |   |           
|U.S. Treasury securities and agency debentures                   |  |         | 245,859 |         |   | 3,971,000  |  |            |        |  |   | 4,216,859 
|Other agency debt securities                                     |  |         |        |         |   | 181,399    |  |            |        |  |   | 181,399   
|Municipal bonds                                                  |  |         |        |         |   | 39,563     |  |            |        |  |   | 39,563    
|Corporate bonds                                                  |  |         |        |         |   | 18,305     |  |            |        |  |   | 18,305    
|                                                                 |  |         |         |         |   |            |  |            |         |  |   |           
|Total debt securities                                            |  |         | 245,859 |         |   | 4,210,267  |  |            |        |  |   | 4,456,126 
|Publicly traded equity securities:                               |  |         |         |         |   |            |  |            |         |  |   |           
|Corporate investments                                            |  |         |        |         |   | 696        |  |            | 164     |  |   | 860       
|                                                                 |  |         |         |         |   |            |  |            |         |  |   |           
|Total investment securities                                      |  |         | 245,859 |         |   | 4,210,963  |  |            | 164     |  |   | 4,456,986 
|                                                                 |  |         |         |         |   |            |  |            |         |  |   |           
|Total available-for-sale securities                              |  |         | 245,859 |         |   | 12,799,210 |  |            | 233,294 |  |   | 13,278,363
|                                                                 |  |         |         |         |   |            |  |            |         |  |   |           
|Other assets:                                                    |  |         |         |         |   |            |  |            |         |  |   |           
|Derivative
assets(1)                                             |  |         |        |         |   | 84,909     |  |            |        |  |   | 84,909    
|Deposits with clearing
organizations(2)                          |  |         | 34,999  |         |   |           |  |            |        |  |   | 34,999    
|                                                                 |  |         |         |         |   |            |  |            |         |  |   |           
|Total other assets measured at fair value on a recurring basis   |  |         | 34,999  |         |   | 84,909     |  |            |        |  |   | 119,908   
|                                                                 |  |         |         |         |   |            |  |            |         |  |   |           
|Total assets measured at fair value on a recurring
basis(3)      |  | $       | 320,753 |         | $ | 12,890,373 |  | $          | 234,192 |  | $ | 13,445,318
|                                                                 |  |         |         |         |   |            |  |            |         |  |   |           
|Liabilities                                                      |  |         |         |         |   |            |  |            |         |  |   |           
|Derivative
liabilities(1)                                        |  | $       |        |         | $ | 37,118     |  | $          |        |  | $ | 37,118    
|Securities sold, not yet purchased                               |  |         | 35,853  |         |   | 3,745      |  |            |        |  |   | 39,598    
|                                                                 |  |         |         |         |   |            |  |            |         |  |   |           
|Total liabilities measured at fair value on a recurring
basis(3) |  | $       | 35,853  |         | $ | 40,863     |  | $          |        |  | $ | 76,716    
|                                                                 |  |         |         |         |   |            |  |            |         |  |   |           



|(1) |  | All derivative assets and liabilities are interest rate contracts.
Information related to derivative instruments is detailed in Note 7Accounting for Derivative Instruments and Hedging Activities.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Represents U.S. Treasury securities held by a broker-dealer subsidiary.
|--- |  | -----------------------------------------------------------------------

|(3) |  | Assets and liabilities measured at fair value on a recurring basis
represented 29% and less than 1% of the Companys total assets and total liabilities, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                                                                            |  |         |         |         |   |            |  |            |         |  |   |           
|--------------------------------------------------------------------------- |  | ------- | ------- | ------- | - | ---------- |  | ---------- | ------- |  | - | ----------
|                                                                            |  | Level 1 |         | Level 2 |   | Level 3    |  | Fair Value
|                                                                            |  |         |         |        
|December 31, 2009:                                                          |  |         |         |         |   |            |  |            |         |  |   |           
|Assets                                                                      |  |         |         |         |   |            |  |            |         |  |   |           
|Investments required to be segregated under federal or other
regulations(1) |  | $       | 687,617 |         | $ |           |  | $          |        |  | $ | 687,617   
|Trading securities                                                          |  |         | 31,085  |         |   | 5,727      |  |            | 1,491   |  |   | 38,303    
|Available-for-sale securities:                                              |  |         |         |         |   |            |  |            |         |  |   |           
|Residential mortgage-backed securities:                                     |  |         |         |         |   |            |  |            |         |  |   |           
|Agency mortgage-backed securities and CMOs                                  |  |         |        |         |   | 8,948,904  |  |            | 17,972  |  |   | 8,966,876 
|Non-agency CMOs and other                                                   |  |         |        |         |   | 140,534    |  |            | 234,629 |  |   | 375,163   
|                                                                            |  |         |         |         |   |            |  |            |         |  |   |           
|Total residential mortgage-backed securities                                |  |         |        |         |   | 9,089,438  |  |            | 252,601 |  |   | 9,342,039 
|                                                                            |  |         |         |         |   |            |  |            |         |  |   |           
|Investment securities:                                                      |  |         |         |         |   |            |  |            |         |  |   |           
|Debt securities:                                                            |  |         |         |         |   |            |  |            |         |  |   |           
|Agency debentures                                                           |  |         |        |         |   | 3,920,011  |  |            |        |  |   | 3,920,011 
|Municipal bonds                                                             |  |         |        |         |   | 38,990     |  |            |        |  |   | 38,990    
|Corporate bonds                                                             |  |         |        |         |   | 17,823     |  |            |        |  |   | 17,823    
|                                                                            |  |         |         |         |   |            |  |            |         |  |   |           
|Total debt securities                                                       |  |         |        |         |   | 3,976,824  |  |            |        |  |   | 3,976,824 
|Publicly traded equity securities:                                          |  |         |         |         |   |            |  |            |         |  |   |           
|Corporate investments                                                       |  |         |        |         |   | 676        |  |            | 173     |  |   | 849       
|                                                                            |  |         |         |         |   |            |  |            |         |  |   |           
|Total investment securities                                                 |  |         |        |         |   | 3,977,500  |  |            | 173     |  |   | 3,977,673 
|                                                                            |  |         |         |         |   |            |  |            |         |  |   |           
|Total available-for-sale securities                                         |  |         |        |         |   | 13,066,938 |  |            | 252,774 |  |   | 13,319,712
|                                                                            |  |         |         |         |   |            |  |            |         |  |   |           
|Other assets:                                                               |  |         |         |         |   |            |  |            |         |  |   |           
|Derivative assets                                                           |  |         |        |         |   | 93,397     |  |            |        |  |   | 93,397    
|Deposits with clearing
organizations(1)                                     |  |         | 38,000  |         |   |           |  |            |        |  |   | 38,000    
|                                                                            |  |         |         |         |   |            |  |            |         |  |   |           
|Total other assets measured at fair value on a recurring basis              |  |         | 38,000  |         |   | 93,397     |  |            |        |  |   | 131,397   
|                                                                            |  |         |         |         |   |            |  |            |         |  |   |           
|Total assets measured at fair value on a recurring
basis(2)                 |  | $       | 756,702 |         | $ | 13,166,062 |  | $          | 254,265 |  | $ | 14,177,029
|                                                                            |  |         |         |         |   |            |  |            |         |  |   |           
|Liabilities                                                                 |  |         |         |         |   |            |  |            |         |  |   |           
|Derivative liabilities                                                      |  | $       |        |         | $ | 143,602    |  | $          |        |  | $ | 143,602   
|Securities sold, not yet purchased                                          |  |         | 27,861  |         |   | 3,112      |  |            |        |  |   | 30,973    
|                                                                            |  |         |         |         |   |            |  |            |         |  |   |           
|Total liabilities measured at fair value on a recurring
basis(2)            |  | $       | 27,861  |         | $ | 146,714    |  | $          |        |  | $ | 174,575   
|                                                                            |  |         |         |         |   |            |  |            |         |  |   |           



|(1) |  | Represents U.S. Treasury securities held by a broker-dealer subsidiary.
|--- |  | -----------------------------------------------------------------------

|(2) |  | Assets and liabilities measured at fair value on a recurring basis
represented 30% and less than 1% of the Companys total assets and total liabilities, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



58



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The following tables present additional information about Level 3 assets and liabilities
measured at fair value on a recurring basis (dollars in thousands):



|                                                       |  |                   |                                        |   |                               |                         |         |   |                      |   |         |   |  |   |     |  
|------------------------------------------------------ |  | ----------------- | -------------------------------------- | - | ----------------------------- | ----------------------- | ------- | - | -------------------- | - | ------- | - |  | - | --- | -
|                                                       |  | TradingSecurities |                                        |   | Available-for-sale Securities |                        
|                                                       |  |                   | AgencyMortgage-backedSecuritiesandCMOs |   |                               | Non-agencyCMOs andOther |         |   | CorporateInvestments |  
|Balance, December 31, 2009                             |  | $                 | 1,491                                  |   |                               | $                       | 17,972  |   |                      | $ | 234,629 |   |  | $ | 173 |  
|Realized and unrealized gains
(losses)(1):             |  |                   |                                        |   |                               |                         |         |   |                      |   |         |   |  |   |     |  
|Included in
earnings(2)                                |  |                   | (642                                   | ) |                               |                         |        |   |                      |   | (8,475  | ) |  |   |    |  
|Included in other comprehensive
income(3)              |  |                   |                                       |   |                               |                         |        |   |                      |   | 18,994  |   |  |   | (9  | )
|Purchases, sales, other settlements and issuances, net |  |                   | 49                                     |   |                               |                         |        |   |                      |   | (10,153 | ) |  |   |    |  
|Transfers in to Level
3(4)                             |  |                   |                                       |   |                               |                         |        |   |                      |   | 7,239   |   |  |   |    |  
|Transfers out of Level
3(4)                            |  |                   |                                       |   |                               |                         | (17,972 | ) |                      |   | (9,104  | ) |  |   |    |  
|                                                       |  |                   |                                        |   |                               |                         |         |   |                      |   |         |   |  |   |     |  
|Balance, March 31, 2010                                |  | $                 | 898                                    |   |                               | $                       |        |   |                      | $ | 233,130 |   |  | $ | 164 |  
|                                                       |  |                   |                                        |   |                               |                         |         |   |                      |   |         |   |  |   |     |  



|(1) |  | The majority of total realized and unrealized gains (losses) were related to
instruments held at March 31, 2010.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|(2) |  | The majority of realized and unrealized gains (losses) included in earnings
are reported in the net impairment line item.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

|(3) |  | The majority of realized and unrealized gains (losses) included in other comprehensive income are reported in the net change from available-for-sale
securities line item.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | The Companys transfers in and out of Level 3 are as of the beginning
of the reporting period on a quarterly basis.
|--- |  | -------------------------------------------------------------------------------------------------------------------



|                                                       |  |                   |                         |   |                              |                      |         |                              |  |   |     |   |  |   |      |  
|------------------------------------------------------ |  | ----------------- | ----------------------- | - | ---------------------------- | -------------------- | ------- | ---------------------------- |  | - | --- | - |  | - | ---- | -
|                                                       |  | TradingSecurities |                         |   | Available-for-saleSecurities |                      |         | DerivativeInstruments,Net(5) | 
|                                                       |  |                   | Non-agencyCMOs andOther |   |                              | CorporateInvestments |         |                             
|Balance, December 31, 2008                             |  | $                 | 33,406                  |   |                              | $                    | 304,661 |                              |  | $ | 170 |   |  | $ | (492 | )
|Realized and unrealized gains
(losses)(1):             |  |                   |                         |   |                              |                      |         |                              |  |   |     |   |  |   |      |  
|Included in
earnings(2)                                |  |                   | (2,082                  | ) |                              |                      | (18,783 | )                            |  |   |    |   |  |   | (8   | )
|Included in other comprehensive
income(3)              |  |                   |                        |   |                              |                      | 15,433  |                              |  |   | (7  | ) |  |   |     |  
|Purchases, sales, other settlements and issuances, net |  |                   | (681                    | ) |                              |                      | (31,610 | )                            |  |   |    |   |  |   |     |  
|Transfers in and/or (out) of Level
3(4)                |  |                   |                        |   |                              |                      | 254,544 |                              |  |   |    |   |  |   |     |  
|                                                       |  |                   |                         |   |                              |                      |         |                              |  |   |     |   |  |   |      |  
|Balance, March 31, 2009                                |  | $                 | 30,643                  |   |                              | $                    | 524,245 |                              |  | $ | 163 |   |  | $ | (500 | )
|                                                       |  |                   |                         |   |                              |                      |         |                              |  |   |     |   |  |   |      |  



|(1) |  | The majority of total realized and unrealized gains (losses) were related to
instruments held at March 31, 2009.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|(2) |  | The majority of realized and unrealized gains (losses) included in earnings
are reported in the net impairment line item.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

|(3) |  | The majority of realized and unrealized gains (losses) included in other
comprehensive income are reported in the net change from available-for-sale securities line item.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | The Companys transfers in and out of Level 3 are as of the beginning
of the reporting period on a quarterly basis.
|--- |  | -------------------------------------------------------------------------------------------------------------------

|(5) |  | Represents derivative assets net of derivative liabilities for presentation
purposes only.
|--- |  | ------------------------------------------------------------------------------------------

Level 3 Assets and Liabilities

Level 3 assets and liabilities included instruments whose value is determined using pricing models, discounted cash flow methodologies, or
similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. While the Companys fair value estimates of Level 3 instruments utilized observable inputs where
available, the valuation included significant management judgment in determining the relevance and reliability of market information considered and the financial instruments were therefore classified as Level 3.

The Companys transfers of certain CMOs in and out of Level 3 are generally driven by changes in price transparency for the
securities. Financial instruments for which actively quoted prices or pricing parameters are



59



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available will have a higher degree of price transparency than financial instruments that are thinly traded or not quoted. As of March 31, 2010, less than 1% of the Companys total
assets and none of its total liabilities represented instruments measured at fair value on a recurring basis categorized as Level 3.

Nonrecurring Fair Value Measurements

The Company measures certain other assets at fair value on a nonrecurring basis: 1) one- to four-family and home equity loans in which the
amount of the loan balance in excess of the estimated current property value less costs to sell has been charged-off; and 2) real estate acquired through foreclosure that is carried at the lower of the propertys carrying value or fair value,
less estimated selling costs. The following table presents the losses associated with the assets measured at fair value on a nonrecurring basis during the three months ended March 31, 2010 and 2009 and still held on the consolidated balance
sheet as of the periods presented (dollars in thousands):



|                          |  |                |         |                             |   |         |  |         |         |  |   |       
|------------------------- |  | -------------- | ------- | --------------------------- | - | ------- |  | ------- | ------- |  | - | ------
|                          |  | Carrying Value |         | Losses                     
|                          |  | As ofMarch 31, |         | Three Months EndedMarch 31,
|                          |  | 2010           |         | 2009(1)                     |   | 2010    |  | 2009(1)
|Loans receivable:         |  |                |         |                             |   |         |  |         |         |  |   |       
|One- to four-family       |  | $              | 457,603 |                             |   | N/A     |  | $       | 91,240  |  |   | N/A   
|Home equity               |  |                | 23,817  |                             |   | N/A     |  |         | 31,715  |  |   | N/A   
|                          |  |                |         |                             |   |         |  |         |         |  |   |       
|Total loans
receivable(2) |  | $              | 481,420 |                             | $ | 287,106 |  | $       | 122,955 |  | $ | 99,336
|                          |  |                |         |                             |   |         |  |         |         |  |   |       
|REO(3)                    |  | $              | 91,280  |                             | $ | 58,069  |  | $       | 10,977  |  | $ | 14,872



|(1) |  | As the amended fair value measurement disclosure guidance was not adopted by the Company until January 1, 2010, certain disclosures are excluded
for periods presented prior to the adoption date.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The fair value measurements of one- to four-family and home equity loans, regardless of whether or not the loans were held on the consolidated
balance sheet as of March 31, 2010, resulted in $95.9 million of one- to four-family loan charge-offs and $37.6 million of home equity loan charge-offs for the three months ended March 31, 2010. The fair value measurements of one-to
four-family and home equity loans, regardless of whether or not the loans were held on the consolidated balance sheet as of March 31, 2009, resulted in charge-offs totaling $107.6 million for the three months ended March 31, 2009.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The fair value measurements of REO, regardless of whether or not the REO was held on the consolidated balance sheet as of the period presented,
resulted in net losses totaling $12.1 million and $15.9 million for the three months ended March 31, 2010 and 2009, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Property valuations are based on the most recent property value data available, which may include appraisals, prices for identical or
similar properties, broker price opinions or home price indices. These fair value measurements were classified as Level 3 of the fair value hierarchy as the majority of the valuations included Level 3 inputs that were significant to the estimate of
fair value.

Disclosures about Fair Value of Financial Instruments

The fair value measurements accounting guidance also requires the disclosure of the fair value of financial instruments not otherwise
disclosed above. Different market assumptions and estimation methodologies could significantly affect fair value amounts. The fair value of financial instruments, not otherwise disclosed above, whose fair value approximates carrying value is
summarized as follows:



| |  |  | Cash and equivalents, cash required to be segregated, margin receivables and customer payablesFair value is estimated to be carrying
value.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Investment in FHLB stockFHLB stock is carried at cost, which is considered to be a reasonable estimate of fair value.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



60



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The fair value of financial instruments whose fair values were different from their carrying
values is summarized below (dollars in thousands):



|                                               |  |                |            |                   |   |               |  |            |            |  |   |           
|---------------------------------------------- |  | -------------- | ---------- | ----------------- | - | ------------- |  | ---------- | ---------- |  | - | ----------
|                                               |  | March 31, 2010 |            | December 31, 2009
|                                               |  | CarryingValue  |            | Fair Value        |   | CarryingValue |  | Fair Value
|Assets                                         |  |                |            |                   |   |               |  |            |            |  |   |           
|Loans,
net(1)                                  |  | $              | 18,187,958 |                   | $ | 17,232,443    |  | $          | 19,174,933 |  | $ | 18,439,112
|                                               |  |                |            |                  
|Liabilities                                    |  |                |            |                   |   |               |  |            |            |  |   |           
|Deposits                                       |  | $              | 24,632,882 |                   | $ | 24,657,684    |  | $          | 25,597,721 |  | $ | 25,620,950
|Securities sold under agreements to repurchase |  | $              | 6,385,272  |                   | $ | 6,460,490     |  | $          | 6,441,875  |  | $ | 6,518,762 
|FHLB advances and other borrowings             |  | $              | 2,748,438  |                   | $ | 2,591,702     |  | $          | 2,746,959  |  | $ | 2,562,228 
|Corporate debt                                 |  | $              | 2,400,437  |                   | $ | 3,279,519     |  | $          | 2,458,691  |  | $ | 3,390,734 



|(1) |  | The carrying value of loans, net includes the allowance for loan losses of $1.2 billion as of both March 31, 2010 and December 31, 2009.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Loans, netFor the held-for-investment portfolio, including one- to four-family, home equity, and consumer and other loans, fair value is
estimated by differentiating loans based on their individual portfolio characteristics, such as product classification, loan category, pricing features and remaining maturity. Management adjusts assumptions for expected losses, prepayments and
discount rates to reflect the individual characteristics of the loans, such as credit risk, coupon, term, and payment characteristics, as well as the secondary market conditions for these types of loans. For loans held-for-sale that were originated
through, but not yet purchased by, a third party company, fair value is estimated using third party commitments to purchase loans. For loans held-for-sale that the Company plans to securitize, fair value is estimated at the anticipated pool level
using prices based on the pending securitization.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | DepositsFor sweep deposit accounts, complete savings accounts, other money market and savings accounts and checking accounts, fair value
is the amount payable on demand at the reporting date. For certificates of deposit and brokered certificates of deposit, fair value is estimated by discounting future cash flows at the rates currently offered for deposits of similar remaining
maturities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Securities sold under agreements to repurchaseFair value is determined by discounting future cash flows at the rate implied for other
similar instruments with similar remaining maturities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FHLB advances and other borrowingsFor FHLB advances, fair value is estimated by discounting future cash flows at the rates currently
offered for borrowings of similar remaining maturities. For subordinated debentures, fair value is estimated by discounting future cash flows at the rate implied by dealer pricing quotes. For margin collateral, overnight and other short-term
borrowings and collateralized borrowings, fair value approximates carrying value.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Corporate debtFair value is estimated using dealer pricing quotes. The fair value of the non-interest-bearing convertible debentures is
directly correlated to the intrinsic value of the Companys underlying stock. As the price of the Companys stock increases relative to the conversion price, the fair value of the convertible debentures increases.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTE 5AVAILABLE-FOR-SALE MORTGAGE-BACKED AND INVESTMENT SECURITIES

The amortized cost basis and fair value of available-for-sale mortgage-backed and investment securities are shown in the
following tables (dollars in thousands):



|                                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|---------------------------------------------- |  | ------------- | ---------- | --------------------- | - | ---------------------- |  | - | ---------- | - |  | - | ----------
|                                               |  | AmortizedCost |            | GrossUnrealized Gains |   | GrossUnrealized Losses |  |   | Fair Value
|March 31, 2010:                                |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Residential mortgage-backed securities:        |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Agency mortgage-backed securities and CMOs     |  | $             | 8,408,926  |                       | $ | 71,198                 |  | $ | (30,308    | ) |  | $ | 8,449,816 
|Non-agency CMOs and other                      |  |               | 564,325    |                       |   | 43                     |  |   | (192,807   | ) |  |   | 371,561   
|                                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Total residential mortgage-backed securities   |  |               | 8,973,251  |                       |   | 71,241                 |  |   | (223,115   | ) |  |   | 8,821,377 
|                                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Investment securities:                         |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Debt securities:                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|U.S. Treasury securities and agency debentures |  |               | 4,199,705  |                       |   | 20,233                 |  |   | (3,079     | ) |  |   | 4,216,859 
|Other agency debt securities                   |  |               | 183,000    |                       |   |                       |  |   | (1,601     | ) |  |   | 181,399   
|Municipal bonds                                |  |               | 42,478     |                       |   | 11                     |  |   | (2,926     | ) |  |   | 39,563    
|Corporate bonds                                |  |               | 25,390     |                       |   | 41                     |  |   | (7,126     | ) |  |   | 18,305    
|                                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Total debt securities                          |  |               | 4,450,573  |                       |   | 20,285                 |  |   | (14,732    | ) |  |   | 4,456,126 
|Publicly traded equity securities:             |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Corporate investments                          |  |               | 164        |                       |   | 696                    |  |   |           |   |  |   | 860       
|                                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Total investment securities                    |  |               | 4,450,737  |                       |   | 20,981                 |  |   | (14,732    | ) |  |   | 4,456,986 
|                                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Total available-for-sale securities            |  | $             | 13,423,988 |                       | $ | 92,222                 |  | $ | (237,847   | ) |  | $ | 13,278,363
|                                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|December 31, 2009:                             |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Residential mortgage-backed securities:        |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Agency mortgage-backed securities and CMOs     |  | $             | 8,945,396  |                       | $ | 85,184                 |  | $ | (63,704    | ) |  | $ | 8,966,876 
|Non-agency CMOs and other                      |  |               | 590,215    |                       |   | 17                     |  |   | (215,069   | ) |  |   | 375,163   
|                                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Total residential mortgage-backed securities   |  |               | 9,535,611  |                       |   | 85,201                 |  |   | (278,773   | ) |  |   | 9,342,039 
|                                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Investment securities:                         |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Debt securities:                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Agency debentures                              |  |               | 3,928,927  |                       |   | 5,883                  |  |   | (14,799    | ) |  |   | 3,920,011 
|Municipal bonds                                |  |               | 42,474     |                       |   |                       |  |   | (3,484     | ) |  |   | 38,990    
|Corporate bonds                                |  |               | 25,422     |                       |   | 6                      |  |   | (7,605     | ) |  |   | 17,823    
|                                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Total debt securities                          |  |               | 3,996,823  |                       |   | 5,889                  |  |   | (25,888    | ) |  |   | 3,976,824 
|Publicly traded equity securities:             |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Corporate investments                          |  |               | 173        |                       |   | 676                    |  |   |           |   |  |   | 849       
|                                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Total investment securities                    |  |               | 3,996,996  |                       |   | 6,565                  |  |   | (25,888    | ) |  |   | 3,977,673 
|                                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           
|Total available-for-sale securities            |  | $             | 13,532,607 |                       | $ | 91,766                 |  | $ | (304,661   | ) |  | $ | 13,319,712
|                                               |  |               |            |                       |   |                        |  |   |            |   |  |   |           



62



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Contractual Maturities

The contractual maturities of available-for-sale debt securities, including mortgage-backed and debt securities, at March 31, 2010
are shown below (dollars in thousands):



|                                         |  |                |            |            |   |           
|---------------------------------------- |  | -------------- | ---------- | ---------- | - | ----------
|                                         |  | Amortized Cost |            | Fair Value
|Due within one year                      |  | $              | 5          |            | $ | 5         
|Due within one to five years             |  |                | 3,305,176  |            |   | 3,323,974 
|Due within five to ten years             |  |                | 1,885,726  |            |   | 1,884,802 
|Due after ten years                      |  |                | 8,232,917  |            |   | 8,068,722 
|                                         |  |                |            |            |   |           
|Total available-for-sale debt securities |  | $              | 13,423,824 |            | $ | 13,277,503
|                                         |  |                |            |            |   |           

Other-Than-Temporary Impairment of Investments

The following tables show the fair value and unrealized losses on investments, aggregated by investment category, and
the length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):



|                                               |  |                     |           |                  |                   |         |           |       |                  |           |  |           |          |                  |  |   |           |  |   |          |  
|---------------------------------------------- |  | ------------------- | --------- | ---------------- | ----------------- | ------- | --------- | ----- | ---------------- | --------- |  | --------- | -------- | ---------------- |  | - | --------- |  | - | -------- | -
|                                               |  | Less than 12 Months |           |                  | 12 Months or More |         |           | Total |                 
|                                               |  | FairValue           |           | UnrealizedLosses |                   |         | FairValue |       | UnrealizedLosses |           |  | FairValue |          | UnrealizedLosses | 
|March 31, 2010:                                |  |                     |           |                  |                   |         |           |       |                  |           |  |           |          |                  |  |   |           |  |   |          |  
|Residential mortgage-backed securities:        |  |                     |           |                  |                   |         |           |       |                  |           |  |           |          |                  |  |   |           |  |   |          |  
|Agency mortgage-backed securities and CMOs     |  | $                   | 2,813,517 |                  | $                 | (14,748 | )         |       | $                | 929,222   |  | $         | (15,560  | )                |  | $ | 3,742,739 |  | $ | (30,308  | )
|Non-agency CMOs and other                      |  |                     | 12,697    |                  |                   | (4,483  | )         |       |                  | 354,135   |  |           | (188,324 | )                |  |   | 366,832   |  |   | (192,807 | )
|Debt securities:                               |  |                     |           |                  |                   |         |           |       |                  |           |  |           |          |                  |  |   |           |  |   |          |  
|U.S. Treasury securities and agency debentures |  |                     | 348,430   |                  |                   | (3,079  | )         |       |                  |          |  |           |         |                  |  |   | 348,430   |  |   | (3,079   | )
|Other agency debt securities                   |  |                     | 181,399   |                  |                   | (1,601  | )         |       |                  |          |  |           |         |                  |  |   | 181,399   |  |   | (1,601   | )
|Municipal bonds                                |  |                     |          |                  |                   |        |           |       |                  | 36,883    |  |           | (2,926   | )                |  |   | 36,883    |  |   | (2,926   | )
|Corporate bonds                                |  |                     |          |                  |                   |        |           |       |                  | 18,228    |  |           | (7,126   | )                |  |   | 18,228    |  |   | (7,126   | )
|                                               |  |                     |           |                  |                   |         |           |       |                  |           |  |           |          |                  |  |   |           |  |   |          |  
|Total temporarily impaired securities          |  | $                   | 3,356,043 |                  | $                 | (23,911 | )         |       | $                | 1,338,468 |  | $         | (213,936 | )                |  | $ | 4,694,511 |  | $ | (237,847 | )
|                                               |  |                     |           |                  |                   |         |           |       |                  |           |  |           |          |                  |  |   |           |  |   |          |  
|December 31, 2009:                             |  |                     |           |                  |                   |         |           |       |                  |           |  |           |          |                  |  |   |           |  |   |          |  
|Residential mortgage-backed securities:        |  |                     |           |                  |                   |         |           |       |                  |           |  |           |          |                  |  |   |           |  |   |          |  
|Agency mortgage-backed securities and CMOs     |  | $                   | 3,656,469 |                  | $                 | (42,667 | )         |       | $                | 946,056   |  | $         | (21,037  | )                |  | $ | 4,602,525 |  | $ | (63,704  | )
|Non-agency CMOs and other                      |  |                     | 27,245    |                  |                   | (14,747 | )         |       |                  | 347,600   |  |           | (200,322 | )                |  |   | 374,845   |  |   | (215,069 | )
|Debt securities:                               |  |                     |           |                  |                   |         |           |       |                  |           |  |           |          |                  |  |   |           |  |   |          |  
|Agency debentures                              |  |                     | 2,349,310 |                  |                   | (14,799 | )         |       |                  |          |  |           |         |                  |  |   | 2,349,310 |  |   | (14,799  | )
|Municipal bonds                                |  |                     |          |                  |                   |        |           |       |                  | 38,986    |  |           | (3,484   | )                |  |   | 38,986    |  |   | (3,484   | )
|Corporate bonds                                |  |                     |          |                  |                   |        |           |       |                  | 17,748    |  |           | (7,605   | )                |  |   | 17,748    |  |   | (7,605   | )
|                                               |  |                     |           |                  |                   |         |           |       |                  |           |  |           |          |                  |  |   |           |  |   |          |  
|Total temporarily impaired securities          |  | $                   | 6,033,024 |                  | $                 | (72,213 | )         |       | $                | 1,350,390 |  | $         | (232,448 | )                |  | $ | 7,383,414 |  | $ | (304,661 | )
|                                               |  |                     |           |                  |                   |         |           |       |                  |           |  |           |          |                  |  |   |           |  |   |          |  

Effective April 1, 2009, the Company adopted the amended guidance for the recognition and presentation
of OTTI for debt securities. The Company assessed whether it intends to sell, or whether it is more likely than not that the Company will be required to sell a security before recovery of its amortized cost basis. For debt



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securities that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of its amortized cost basis, the
Company determines the amount of the impairment that is related to credit and the amount due to all other factors. The credit loss component is the difference between the securitys amortized cost basis and the present value of its expected
future cash flows and is recognized in earnings. The noncredit loss component is the difference between the present value of its expected future cash flows and the fair value and is recognized through other comprehensive income.

The Company does not believe that any individual unrealized loss in the available-for-sale portfolio as of March 31, 2010 represents
a credit related impairment. The majority of the unrealized losses on mortgage-backed securities are attributable to changes in interest rates and a re-pricing of risk in the market. All agency mortgage-backed securities and CMOs and U.S. Treasury
securities and agency debentures are AAA-rated. Municipal bonds and corporate bonds are evaluated by reviewing the credit-worthiness of the issuer and general market conditions. The Company does not intend to sell the securities in an unrealized
loss position and it is not more likely than not that the Company will be required to sell the debt securities before the anticipated recovery of its remaining amortized cost of the securities in an unrealized loss position at March 31, 2010.

The majority of the Companys available-for-sale portfolio consists of residential mortgage-backed securities. For
residential mortgage-backed securities, the Company calculates the credit portion of OTTI by comparing the present value of the expected future cash flows with the amortized cost basis of the security. The expected future cash flows are determined
using the remaining contractual cash flows adjusted for future credit losses. The estimate of expected future credit losses includes the following assumptions: 1) expected default rates based on current delinquency trends, foreclosure statistics of
the underlying mortgages and loan documentation type; 2) expected loss severity based on the underlying loan characteristics, including loan-to-value, origination vintage and geography; and 3) expected loan prepayments and principal reduction based
on current experience and existing market conditions that may impact the future rate of prepayments. The expected cash flows of the security are then discounted at the interest rate used to recognize interest income on the security to arrive at the
present value amount. The following table presents a summary of the significant inputs considered for securities that were other-than-temporarily impaired as of March 31, 2010:



|                |  |                  |  |          
|--------------- |  | ---------------- |  | ---------
|                |  | March 31, 2010  
|                |  | Weighted Average |  | Range    
|Default
rate(1) |  | 8%               |  | 1% - 40% 
|Loss severity   |  | 45%              |  | 40% - 65%
|Prepayment rate |  | 11%              |  | 6% - 45% 



|(1) |  | Represents the expected default rate for the next twelve months.
|--- |  | ----------------------------------------------------------------

The following table presents a roll-forward of the credit loss component of the amortized cost of debt securities, which has noncredit
loss recognized in other comprehensive income and has credit loss recognized in earnings for the three months ended March 31, 2010 (dollars in thousands):



|                                         |  |                                     |        
|---------------------------------------- |  | ----------------------------------- | -------
|                                         |  | Three MonthsEnded March 
31,2010(1)
|Credit loss balance, beginning of period |  | $                                   | 150,372
|Additions:                               |  |                                     |        
|Initial credit impairment                |  |                                     | 724    
|Subsequent credit impairment             |  |                                     | 7,928  
|                                         |  |                                     |        
|Credit loss balance, end of period       |  | $                                   | 159,024
|                                         |  |                                     |        



|(1) |  | The Company adopted the amended guidance for the recognition and presentation of OTTI for debt securities on April 1, 2009.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------



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Within the securities portfolio, the highest concentration of credit risk is the non-agency
CMO portfolio. The Company recognized $8.6 million in net impairment for non-agency CMO securities for the three months ended March 31, 2010. The Company concluded that approximately $263.1 million of non-agency CMO securities were
other-than-temporarily impaired as a result of deterioration in the expected credit performance of the underlying loans in the securities. For the three months ended March 31, 2010, these securities were written down to their fair value by
recording gross OTTI of $14.5 million, of which $5.9 million was recorded as the noncredit portion of OTTI through other comprehensive income (before tax). For the three months ended March 31, 2009, the Company recognized net impairment of
$18.8 million on non-agency CMO securities.

The detailed components of the gains on loans and securities, net line item on
the consolidated statement of loss are shown below.

Gains on Loans and Securities, Net

Gains on loans and securities, net are as follows (dollars in thousands):



|                                          |  |                             |        |   |      |   |        |  
|----------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                          |  | Three Months EndedMarch 31, |       
|                                          |  | 2010                        |        |   | 2009 |  
|Losses on loans, net                      |  | $                           | (885   | ) |      | $ |       |  
|Gains on securities, net                  |  |                             |        |   |      |   |        |  
|Gains on available-for-sale securities    |  |                             | 29,588 |   |      |   | 38,316 |  
|Losses on available-for-sale securities   |  |                             | (133   | ) |      |   | (508   | )
|Gains (losses) on trading securities, net |  |                             | 679    |   |      |   | (2,468 | )
|Hedge ineffectiveness                     |  |                             | (203   | ) |      |   | (50    | )
|                                          |  |                             |        |   |      |   |        |  
|Gains on securities, net                  |  |                             | 29,931 |   |      |   | 35,290 |  
|                                          |  |                             |        |   |      |   |        |  
|Gains on loans and securities, net        |  | $                           | 29,046 |   |      | $ | 35,290 |  
|                                          |  |                             |        |   |      |   |        |  

NOTE 6LOANS, NET

Loans, net are summarized as follows (dollars in thousands):



|                            |  |               |            |   |                  |   |            |  
|--------------------------- |  | ------------- | ---------- | - | ---------------- | - | ---------- | -
|                            |  | March 31,2010 |            |   | December 31,2009 |  
|Loans held-for-sale         |  | $             | 255,107    |   |                  | $ | 7,865      |  
|Loans receivable, net:      |  |               |            |   |                  |   |            |  
|One- to four-family         |  |               | 9,752,563  |   |                  |   | 10,567,129 |  
|Home equity                 |  |               | 7,422,280  |   |                  |   | 7,769,711  |  
|Consumer and other          |  |               | 1,761,950  |   |                  |   | 1,841,317  |  
|                            |  |               |            |   |                  |   |            |  
|Total loans receivable      |  |               | 18,936,793 |   |                  |   | 20,178,157 |  
|Unamortized premiums, net   |  |               | 158,449    |   |                  |   | 171,649    |  
|Allowance for loan losses   |  |               | (1,162,391 | ) |                  |   | (1,182,738 | )
|                            |  |               |            |   |                  |   |            |  
|Total loans receivable, net |  |               | 17,932,851 |   |                  |   | 19,167,068 |  
|                            |  |               |            |   |                  |   |            |  
|Total loans, net            |  | $             | 18,187,958 |   |                  | $ | 19,174,933 |  
|                            |  |               |            |   |                  |   |            |  



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The following table provides an analysis of the allowance for loan losses for the three
months ended March 31, 2010 and 2009 (dollars in thousands):



|                                               |  |                             |           |   |      |   |           |  
|---------------------------------------------- |  | --------------------------- | --------- | - | ---- | - | --------- | -
|                                               |  | Three Months EndedMarch 31, |          
|                                               |  | 2010                        |           |   | 2009 |  
|Allowance for loan losses, beginning of period |  | $                           | 1,182,738 |   |      | $ | 1,080,611 |  
|Provision for loan losses                      |  |                             | 267,979   |   |      |   | 453,963   |  
|Charge-offs                                    |  |                             | (302,385  | ) |      |   | (342,978  | )
|Recoveries                                     |  |                             | 14,059    |   |      |   | 9,212     |  
|                                               |  |                             |           |   |      |   |           |  
|Net charge-offs                                |  |                             | (288,326  | ) |      |   | (333,766  | )
|                                               |  |                             |           |   |      |   |           |  
|Allowance for loan losses, end of period       |  | $                           | 1,162,391 |   |      | $ | 1,200,808 |  
|                                               |  |                             |           |   |      |   |           |  

Loans held-for-sale included approximately $250 million of one- to four-family loans that were reclassified
from loans held-for-investment to loans held-for-sale at March 31, 2010. The Company plans to securitize these loans with Fannie Mae during the second quarter of 2010. For the foreseeable future, the Company does not plan to securitize or sell
any of its remaining one- to four-family loans in the held-for-investment portfolio.

The Company has an active loan
modification program that focuses on the mitigation of potential losses in the loan portfolio. As part of the program, the Company considers modifications in which it made an economic concession to a borrower experiencing financial difficulty a TDR.
The Company has also modified a number of loans through traditional collections actions taken in the normal course of servicing delinquent accounts. These actions typically result in an insignificant delay in the timing of payments; therefore, the
Company does not consider such activities to be economic concessions to the borrowers.

Included in the allowance for loan
losses at March 31, 2010 was a specific allowance of $231.0 million that was established for TDRs. The specific allowance for these individually impaired loans represents the expected loss over the remaining life of the loan, including the
economic concession to the borrower. The average recorded investment in TDR loans was $669.3 million and $115.5 million and the interest income recognized on these loans was $3.5 million and $0.6 million for the three months ended March 31,
2010 and 2009, respectively. The following table shows detailed information related to the Companys modified loans accounted for as TDRs as of March 31, 2010 and December 31, 2009 (dollars in thousands):



|                    |  |                              |         |                            |   |                                                |  |    |  
|------------------- |  | ---------------------------- | ------- | -------------------------- | - | ---------------------------------------------- |  | -- | -
|                    |  | RecordedInvestmentin TDRs(1) |         | SpecificValuationAllowance |   | Specific ValuationAllowance as a %of TDR Loans | 
|March 31, 2010      |  |                              |         |                            |   |                                               
|One- to four-family |  | $                            | 283,511 |                            | $ | 34,474                                         |  | 12 | %
|Home equity         |  |                              | 427,404 |                            |   | 196,503                                        |  | 46 | %
|                    |  |                              |         |                            |   |                                                |  |    |  
|Total(1)            |  | $                            | 710,915 |                            | $ | 230,977                                        |  | 32 | %
|                    |  |                              |         |                            |   |                                                |  |    |  
|December 31, 2009   |  |                              |         |                            |   |                                                |  |    |  
|One- to four-family |  | $                            | 207,581 |                            | $ | 26,916                                         |  | 13 | %
|Home equity         |  |                              | 371,320 |                            |   | 166,636                                        |  | 45 | %
|                    |  |                              |         |                            |   |                                                |  |    |  
|Total(1)            |  | $                            | 578,901 |                            | $ | 193,552                                        |  | 33 | %
|                    |  |                              |         |                            |   |                                                |  |    |  



|(1) |  | At March 31, 2010 and December 31, 2009, respectively, $612.5
million and $519.2 million of TDRs had an associated specific valuation allowance, and $98.4 million and $59.7 million did not have an associated specific valuation allowance as the amount of the loan balance in excess of the estimated current
property value less costs to sell has been charged-off.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTE 7ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company enters into derivative transactions primarily to protect against interest rate risk on the value of certain
assets, liabilities and future cash flows. Derivative instruments designated in hedging relationships that mitigate exposure to the variability in expected future cash flows or other forecasted transactions are considered cash flow hedges.
Derivative instruments in hedging relationships that mitigate exposure to changes in the fair value of assets or liabilities are considered fair value hedges. The Company also recognizes certain contracts and commitments as derivatives when the
characteristics of those contracts and commitments meet the definition of a derivative. Each derivative is recorded on the consolidated balance sheet at fair value as a freestanding asset or liability. Cash flow and fair value hedge ineffectiveness
is re-measured on a quarterly basis. The following table summarizes the location and fair value amounts of derivative instruments reported in the consolidated balance sheet (dollars in thousands):



|                                                       |  |            |        |              |   |          |        |  |   |         |  
|------------------------------------------------------ |  | ---------- | ------ | ------------ | - | -------- | ------ |  | - | ------- | -
|                                                       |  | Fair Value |       
|                                                       |  | Asset(1)   |        | Liability(2) |   |          | Net(3) | 
|March 31, 2010                                         |  |            |        |              |   |          |        |  |   |         |  
|Derivatives designated as hedging instruments:         |  |            |        |              |   |          |        |  |   |         |  
|Interest rate contracts:                               |  |            |        |              |   |          |        |  |   |         |  
|Cash flow hedges                                       |  | $          | 77,713 |              | $ | (37,118  | )      |  | $ | 40,595  |  
|Fair value hedges                                      |  |            | 7,196  |              |   |         |        |  |   | 7,196   |  
|                                                       |  |            |        |              |   |          |        |  |   |         |  
|Total derivatives designated as hedging
instruments(4) |  | $          | 84,909 |              | $ | (37,118  | )      |  | $ | 47,791  |  
|                                                       |  |            |        |              |   |          |        |  |   |         |  
|December 31, 2009                                      |  |            |        |              |   |          |        |  |   |         |  
|Derivatives designated as hedging instruments:         |  |            |        |              |   |          |        |  |   |         |  
|Interest rate contracts:                               |  |            |        |              |   |          |        |  |   |         |  
|Cash flow hedges                                       |  | $          | 87,534 |              | $ | (143,602 | )      |  | $ | (56,068 | )
|Fair value hedges                                      |  |            | 5,863  |              |   |         |        |  |   | 5,863   |  
|                                                       |  |            |        |              |   |          |        |  |   |         |  
|Total derivatives designated as hedging
instruments(4) |  | $          | 93,397 |              | $ | (143,602 | )      |  | $ | (50,205 | )
|                                                       |  |            |        |              |   |          |        |  |   |         |  



|(1) |  | Reflected in the other assets line item on the consolidated balance sheet.
|--- |  | --------------------------------------------------------------------------

|(2) |  | Reflected in the accounts payable, accrued and other liabilities line item on the consolidated balance sheet.
|--- |  | -------------------------------------------------------------------------------------------------------------

|(3) |  | Represents derivative assets net of derivative liabilities for presentation purposes only.
|--- |  | ------------------------------------------------------------------------------------------

|(4) |  | There were no derivatives not designated as hedging instruments as of March 31, 2010 and December 31, 2009.
|--- |  | -----------------------------------------------------------------------------------------------------------

Cash Flow Hedges

The majority of the Companys derivative instruments as of March 31, 2010 and December 31, 2009 were designated as cash
flow hedges. These hedges, which include a combination of interest rate swaps, forward-starting swaps and purchased options, including caps and floors, are used primarily to reduce the variability of future cash flows associated with existing
variable-rate assets and liabilities and forecasted issuances of liabilities.

The effective portion of changes in fair value
of the derivative instruments that hedge cash flows is reported as a component of accumulated other comprehensive loss, net of tax in the consolidated balance sheet, for both active and terminated hedges. Amounts are then included in net operating
interest income as a yield adjustment in the same period the hedged transaction affects earnings. The ineffective portion of changes in fair value of the derivative instruments is reported as a fair value adjustment in the gains on loans and
securities, net line item in the consolidated statement of loss.

If it becomes probable that a hedged forecasted transaction
will not occur, amounts included in accumulated other comprehensive loss related to the specific hedging instruments are reclassified into the gains on loans and securities, net line item in the consolidated statement of loss. If hedge accounting is
discontinued because a derivative instrument ceases to be a highly effective hedge; or is sold, terminated or de-designated, amounts



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included in accumulated other comprehensive loss related to the specific hedging instrument continue to be reported in other comprehensive income or loss until the forecasted transaction affects
earnings. Derivative instruments no longer in hedging relationships continue to be recorded at fair value with changes in fair value reported in the gains on loans and securities, net line item in the consolidated statement of loss.

The future issuances of liabilities, including repurchase agreements, are largely dependent on the market demand and liquidity in the
wholesale borrowings market. As of March 31, 2010, the Company believes the forecasted issuance of all debt in cash flow hedge relationships is probable. However, unexpected changes in market conditions in future periods could impact the
ability to issue this debt. The Company believes the forecasted issuance of debt in the form of repurchase agreements is most susceptible to an unexpected change in market conditions.

The following table summarizes information related to the Companys interest rate contracts in cash flow hedge relationships hedging
variable-rate assets and liabilities and the forecasted issuances of liabilities (dollars in thousands):



|                                                |  |                |           |            |   |           |                  |   |          |   |  |         |          |   |             |      |   |            |      |   |                       |      |   |  |      
|----------------------------------------------- |  | -------------- | --------- | ---------- | - | --------- | ---------------- | - | -------- | - |  | ------- | -------- | - | ----------- | ---- | - | ---------- | ---- | - | --------------------- | ---- | - |  | -----
|                                                |  |                |           | Fair Value |   |           | Weighted-Average
|                                                |  | NotionalAmount |           | Asset      |   | Liability |                  |   | Net      |   |  | PayRate |          |   | ReceiveRate |      |   | StrikeRate |      |   | RemainingLife (Years)
|March 31, 2010:                                 |  |                |           |            |   |           |                  |   |          |   |  |         |          |   |             |      |   |            |      |   |                       |      |   |  |      
|Pay-fixed interest rate swaps:                  |  |                |           |            |   |           |                  |   |          |   |  |         |          |   |             |      |   |            |      |   |                       |      |   |  |      
|Repurchase agreements                           |  | $              | 850,000   |            | $ | 2,072     |                  | $ | (18,430  | ) |  | $       | (16,358  | ) |             | 3.96 | % |            | 0.26 | % |                       | N/A  |   |  | 9.29 
|FHLB advances                                   |  |                | 450,000   |            |   |          |                  |   | (18,688  | ) |  |         | (18,688  | ) |             | 4.19 | % |            | 0.26 | % |                       | N/A  |   |  | 8.88 
|Purchased interest rate forward-starting swaps: |  |                |           |            |   |           |                  |   |          |   |  |         |          |   |             |      |   |            |      |   |                       |      |   |  |      
|Repurchase agreements                           |  |                | 300,000   |            |   | 2,559     |                  |   |         |   |  |         | 2,559    |   |             | 3.79 | % |            | N/A  |   |                       | N/A  |   |  | 10.17
|FHLB advances                                   |  |                | 200,000   |            |   | 102       |                  |   |         |   |  |         | 102      |   |             | 3.35 | % |            | N/A  |   |                       | N/A  |   |  | 7.08 
|Purchased interest rate
options(1):             |  |                |           |            |   |           |                  |   |          |   |  |         |          |   |             |      |   |            |      |   |                       |      |   |  |      
|Caps                                            |  |                | 2,685,000 |            |   | 27,796    |                  |   |         |   |  |         | 27,796   |   |             | N/A  |   |            | N/A  |   |                       | 4.26 | % |  | 3.10 
|Floors                                          |  |                | 900,000   |            |   | 45,184    |                  |   |         |   |  |         | 45,184   |   |             | N/A  |   |            | N/A  |   |                       | 6.36 | % |  | 2.74 
|                                                |  |                |           |            |   |           |                  |   |          |   |  |         |          |   |             |      |   |            |      |   |                       |      |   |  |      
|Total cash flow hedges                          |  | $              | 5,385,000 |            | $ | 77,713    |                  | $ | (37,118  | ) |  | $       | 40,595   |   |             | 3.92 | % |            | 0.26 | % |                       | 4.79 | % |  | 5.04 
|                                                |  |                |           |            |   |           |                  |   |          |   |  |         |          |   |             |      |   |            |      |   |                       |      |   |  |      
|December 31, 2009:                              |  |                |           |            |   |           |                  |   |          |   |  |         |          |   |             |      |   |            |      |   |                       |      |   |  |      
|Pay-fixed interest rate swaps:                  |  |                |           |            |   |           |                  |   |          |   |  |         |          |   |             |      |   |            |      |   |                       |      |   |  |      
|Repurchase agreements                           |  | $              | 1,565,000 |            | $ |          |                  | $ | (125,954 | ) |  | $       | (125,954 | ) |             | 4.87 | % |            | 0.26 | % |                       | N/A  |   |  | 9.68 
|FHLB advances                                   |  |                | 530,000   |            |   |          |                  |   | (17,648  | ) |  |         | (17,648  | ) |             | 4.32 | % |            | 0.25 | % |                       | N/A  |   |  | 8.11 
|Purchased interest rate forward-starting swaps: |  |                |           |            |   |           |                  |   |          |   |  |         |          |   |             |      |   |            |      |   |                       |      |   |  |      
|Repurchase agreements                           |  |                | 200,000   |            |   | 2,031     |                  |   |         |   |  |         | 2,031    |   |             | 3.88 | % |            | N/A  |   |                       | N/A  |   |  | 10.09
|Purchased interest rate
options(1):             |  |                |           |            |   |           |                  |   |          |   |  |         |          |   |             |      |   |            |      |   |                       |      |   |  |      
|Caps                                            |  |                | 2,185,000 |            |   | 36,233    |                  |   |         |   |  |         | 36,233   |   |             | N/A  |   |            | N/A  |   |                       | 4.76 | % |  | 3.42 
|Floors                                          |  |                | 1,900,000 |            |   | 49,270    |                  |   |         |   |  |         | 49,270   |   |             | N/A  |   |            | N/A  |   |                       | 6.43 | % |  | 1.46 
|                                                |  |                |           |            |   |           |                  |   |          |   |  |         |          |   |             |      |   |            |      |   |                       |      |   |  |      
|Total cash flow hedges                          |  | $              | 6,380,000 |            | $ | 87,534    |                  | $ | (143,602 | ) |  | $       | (56,068  | ) |             | 4.66 | % |            | 0.25 | % |                       | 5.54 | % |  | 4.97 
|                                                |  |                |           |            |   |           |                  |   |          |   |  |         |          |   |             |      |   |            |      |   |                       |      |   |  |      



|(1) |  | Caps are used to hedge repurchase agreements. Floors are used to hedge home equity lines of credit.
|--- |  | ---------------------------------------------------------------------------------------------------

Additionally, the Company enters into forward purchase and sale agreements, which are considered cash flow hedges, when the terms of the
commitments exactly match the terms of the securities purchased or sold. As of March 31, 2010 and December 31, 2009, there were no forward contracts accounted for as cash flow hedges.



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The following table shows: 1) amounts recorded in accumulated other comprehensive loss
related to derivative instruments accounted for as cash flow hedges; 2) amount of ineffectiveness recorded in earnings related to derivative instruments accounted for as cash flow hedges; 3) the notional amount and fair value of terminated
derivative instruments accounted for as cash flow hedges for the periods presented; and 4) the amortization of terminated derivative instruments accounted for as cash flow hedges included in net operating interest income (dollars in thousands):



|                                                                                                     |  |                             |           |   |      |   |          |  
|---------------------------------------------------------------------------------------------------- |  | --------------------------- | --------- | - | ---- | - | -------- | -
|                                                                                                     |  | Three Months EndedMarch 31, |          
|                                                                                                     |  | 2010                        |           |   | 2009 |  
|Impact on accumulated other comprehensive loss (net of tax):                                         |  |                             |           |   |      |   |          |  
|Beginning balance                                                                                    |  | $                           | (278,548  | ) |      | $ | (417,489 | )
|Unrealized gains (losses), net                                                                       |  |                             | (33,895   | ) |      |   | 35,382   |  
|Reclassifications into earnings, net                                                                 |  |                             | 11,388    |   |      |   | 6,817    |  
|                                                                                                     |  |                             |           |   |      |   |          |  
|Ending balance                                                                                       |  | $                           | (301,055  | ) |      | $ | (375,290 | )
|                                                                                                     |  |                             |           |   |      |   |          |  
|                                                                                                     |  |                            
|Cash flow hedge
ineffectiveness(1)(2)                                                                |  | $                           | (170      | ) |      | $ | (50      | )
|                                                                                                     |  |                            
|Derivatives terminated during the period:                                                            |  |                             |           |   |      |   |          |  
|Notional                                                                                             |  | $                           | 1,245,000 |   |      | $ | 790,000  |  
|Fair value of net losses recognized in accumulated other comprehensive loss                          |  | $                           | (136,243  | ) |      | $ | (95,522  | )
|Amortization of terminated interest rate swaps and options included in net operating interest income |  | $                           | (12,622   | ) |      | $ | (8,824   | )



|(1) |  | The amount of ineffectiveness recorded in earnings for cash flow hedges is equal to the excess of the cumulative change in the fair value of the actual
derivative over the cumulative change in the fair value of a hypothetical derivative which is created to match the exact terms of the underlying instruments being hedged.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The cash flow hedge ineffectiveness is reflected in the gains on loans and securities, net line item on the consolidated statement of loss.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

During the upcoming twelve months, the Company expects to include a pre-tax amount of approximately
$8.1 million of net unrealized gains that are currently reflected in accumulated other comprehensive loss in net operating interest income as a yield adjustment in the same periods in which the related items affect earnings. The losses
accumulated in other comprehensive loss on terminated derivative instruments will be included in net operating interest income over the periods the related items will affect earnings, ranging from 14 days to approximately 13 years.

The following table shows the balance in accumulated other comprehensive loss attributable to open cash flow hedges and
discontinued cash flow hedges (dollars in thousands):



|                                                                      |  |                             |          |   |      |   |          |  
|--------------------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | -------- | -
|                                                                      |  | Three Months EndedMarch 31, |         
|                                                                      |  | 2010                        |          |   | 2009 |  
|Accumulated other comprehensive loss balance (net of tax) related to: |  |                             |          |   |      |   |          |  
|Open cash flow hedges                                                 |  | $                           | (18,083  | ) |      | $ | (170,695 | )
|Discontinued cash flow hedges                                         |  |                             | (282,972 | ) |      |   | (204,595 | )
|                                                                      |  |                             |          |   |      |   |          |  
|Total cash flow hedges                                                |  | $                           | (301,055 | ) |      | $ | (375,290 | )
|                                                                      |  |                             |          |   |      |   |          |  



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The following table shows the balance in accumulated other comprehensive loss attributable
to cash flow hedges by type of hedged item (dollars in thousands):



|                                                                          |  |                             |          |   |      |   |          |  
|------------------------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | -------- | -
|                                                                          |  | Three Months EndedMarch 31, |         
|                                                                          |  | 2010                        |          |   | 2009 |  
|Accumulated other comprehensive loss balance related to cash flow hedges: |  |                             |          |   |      |   |          |  
|Repurchase agreements                                                     |  | $                           | (428,701 | ) |      | $ | (576,406 | )
|FHLB advances                                                             |  |                             | (106,320 | ) |      |   | (121,531 | )
|Home equity lines of credit                                               |  |                             | 51,376   |   |      |   | 92,452   |  
|Other                                                                     |  |                             | (794     | ) |      |   | 1,759    |  
|                                                                          |  |                             |          |   |      |   |          |  
|Total cash flow hedges before tax                                         |  |                             | (484,439 | ) |      |   | (603,726 | )
|Tax benefit                                                               |  |                             | 183,384  |   |      |   | 228,436  |  
|                                                                          |  |                             |          |   |      |   |          |  
|Total cash flow hedges, net of tax                                        |  | $                           | (301,055 | ) |      | $ | (375,290 | )
|                                                                          |  |                             |          |   |      |   |          |  

Fair Value Hedges

The Company uses interest rate swaps to offset its exposure to changes in value of certain fixed-rate assets and liabilities. Changes in
the fair value of the derivatives are recognized currently in the gains on loans and securities, net line item.

Fair value
hedges are accounted for by recording the fair value of the derivative instrument and the change in fair value of the asset or liability being hedged on the consolidated balance sheet. To the extent that the hedge is ineffective, the changes in the
fair values will not offset and the difference, or hedge ineffectiveness, is reflected in the gains on loans and securities, net line item in the consolidated statement of loss. Cash payments or receipts and related accruals during the reporting
period on derivatives included in fair value hedge relationships are recorded as an adjustment to interest income or interest expense on the hedged item.

Hedge accounting is discontinued for fair value hedges if a derivative instrument ceases to be highly effective as a hedge or if the
derivative is sold, terminated or de-designated. If fair value hedge accounting is discontinued, the net gain or loss on the asset or liability being hedged at the time of de-designation is amortized to interest expense or interest income over the
expected remaining life of the hedged item using the effective interest method. Changes in the fair value of the derivative instruments after de-designation of fair value hedge accounting are recorded in the gains on loans and securities, net line
item in the consolidated statement of loss. For a discontinued fair value hedge, the previously hedged item is no longer adjusted for changes in fair value.

The following table summarizes information related to the Companys interest rate contracts in fair value hedge relationships
(dollars in thousands):



|                                   |  |                |         |            |           |                  |     |   |         |  |   |             |  |      |            |  |                       |   |  |     |  |      
|---------------------------------- |  | -------------- | ------- | ---------- | --------- | ---------------- | --- | - | ------- |  | - | ----------- |  | ---- | ---------- |  | --------------------- | - |  | --- |  | -----
|                                   |  | NotionalAmount |         | Fair Value |           | Weighted-Average
|                                   |  |                | Asset   |            | Liability |                  | Net |   | PayRate |  |   | ReceiveRate |  |      | StrikeRate |  | RemainingLife (Years)
|March 31, 2010:                    |  |                |         |            |           |                  |     |   |         |  |   |             |  |      |            |  |                       |   |  |     |  |      
|Pay-fixed interest rate swaps:     |  |                |         |            |           |                  |     |   |         |  |   |             |  |      |            |  |                       |   |  |     |  |      
|U.S. Treasury securities           |  | $              | 250,000 |            | $         | 175              |     | $ |        |  | $ | 175         |  | 3.80 | %          |  | 0.29                  | % |  | N/A |  | 10.01
|Receive-fixed interest rate swaps: |  |                |         |            |           |                  |     |   |         |  |   |             |  |      |            |  |                       |   |  |     |  |      
|Corporate debt                     |  |                | 225,000 |            |           | 7,021            |     |   |        |  |   | 7,021       |  | 3.82 | %          |  | 7.38                  | % |  | N/A |  | 3.46 
|                                   |  |                |         |            |           |                  |     |   |         |  |   |             |  |      |            |  |                       |   |  |     |  |      
|Total fair value hedges            |  | $              | 475,000 |            | $         | 7,196            |     | $ |        |  | $ | 7,196       |  | 3.81 | %          |  | 3.65                  | % |  | N/A |  | 6.91 
|                                   |  |                |         |            |           |                  |     |   |         |  |   |             |  |      |            |  |                       |   |  |     |  |      
|December 31, 2009:                 |  |                |         |            |           |                  |     |   |         |  |   |             |  |      |            |  |                       |   |  |     |  |      
|Receive-fixed interest rate swaps: |  |                |         |            |           |                  |     |   |         |  |   |             |  |      |            |  |                       |   |  |     |  |      
|Corporate debt                     |  | $              | 225,000 |            | $         | 5,863            |     | $ |        |  | $ | 5,863       |  | 3.82 | %          |  | 7.38                  | % |  | N/A |  | 3.72 
|                                   |  |                |         |            |           |                  |     |   |         |  |   |             |  |      |            |  |                       |   |  |     |  |      
|Total fair value hedges            |  | $              | 225,000 |            | $         | 5,863            |     | $ |        |  | $ | 5,863       |  | 3.82 | %          |  | 7.38                  | % |  | N/A |  | 3.72 
|                                   |  |                |         |            |           |                  |     |   |         |  |   |             |  |      |            |  |                       |   |  |     |  |      



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The following table summarizes the effect of interest rate contracts designated and
qualifying as hedging instruments in fair value hedges and related hedged items on the consolidated statement of loss (dollars in thousands):



|                                     |  |                                  |       |            |                                  |        |                   |  |   |            |   |  |   |    
|------------------------------------ |  | -------------------------------- | ----- | ---------- | -------------------------------- | ------ | ----------------- |  | - | ---------- | - |  | - | ---
|                                     |  | Three Months EndedMarch 31, 2010 |       |            | Three Months EndedMarch 31, 2009
|                                     |  | HedgingInstrument                |       | HedgedItem |                                  |        | HedgingInstrument |  |   | HedgedItem
|Gains (losses) included in earnings: |  |                                  |       |            |                                  |        |                   |  |   |            |   |  |   |    
|Interest rate contracts:             |  |                                  |       |            |                                  |        |                   |  |   |            |   |  |   |    
|Corporate debt                       |  | $                                | 1,158 |            | $                                | (1,158 | )                 |  | $ | (979       | ) |  | $ | 979
|U.S. Treasury securities             |  |                                  | 175   |            |                                  | (208   | )                 |  |   |           |   |  |   |   
|Brokered certificates of deposit     |  |                                  |      |            |                                  |       |                   |  |   | (8         | ) |  |   | 8  
|                                     |  |                                  |       |            |                                  |        |                   |  |   |            |   |  |   |    
|Total fair value hedges              |  | $                                | 1,333 |            | $                                | (1,366 | )                 |  | $ | (987       | ) |  | $ | 987
|                                     |  |                                  |       |            |                                  |        |                   |  |   |            |   |  |   |    

There was less than $1.0 million in fair value hedge
ineffectiveness for the three months ended March 31, 2010 and no fair value hedge ineffectiveness for the three months ended March 31, 2009. The fair value hedge ineffectiveness is reflected in the gains on loans and securities, net line
item.

NOTE 8DEPOSITS

Deposits are summarized as follows (dollars in thousands):



|                                        |  |                      |   |  |                  |   |                    |               |            |                  |   |               |  |       |                  |  |       |  
|--------------------------------------- |  | -------------------- | - |  | ---------------- | - | ------------------ | ------------- | ---------- | ---------------- | - | ------------- |  | ----- | ---------------- |  | ----- | -
|                                        |  | Weighted-AverageRate |   |  | Amount           |   | Percentageto Total |              
|                                        |  | March 31,2010        |   |  | December 31,2009 |   |                    | March 31,2010 |            | December 31,2009 |   | March 31,2010 |  |       | December 31,2009 | 
|Sweep deposit
accounts(1)               |  | 0.07                 | % |  | 0.07             | % |                    | $             | 13,395,292 |                  | $ | 12,551,497    |  | 54.4  | %                |  | 49.0  | %
|Complete savings accounts               |  | 0.40                 | % |  | 0.50             | % |                    |               | 8,047,693  |                  |   | 9,704,045     |  | 32.7  |                  |  | 37.9  |  
|Other money market and savings accounts |  | 0.24                 | % |  | 0.29             | % |                    |               | 1,165,676  |                  |   | 1,183,392     |  | 4.7   |                  |  | 4.6   |  
|Certificates of deposit                 |  | 1.59                 | % |  | 1.69             | % |                    |               | 1,060,278  |                  |   | 1,215,780     |  | 4.3   |                  |  | 4.8   |  
|Checking accounts                       |  | 0.11                 | % |  | 0.19             | % |                    |               | 846,627    |                  |   | 813,663       |  | 3.4   |                  |  | 3.2   |  
|Brokered certificates of deposit        |  | 4.43                 | % |  | 4.51             | % |                    |               | 117,316    |                  |   | 129,344       |  | 0.5   |                  |  | 0.5   |  
|                                        |  |                      |   |  |                  |   |                    |               |            |                  |   |               |  |       |                  |  |       |  
|Total deposits                          |  | 0.27                 | % |  | 0.35             | % |                    | $             | 24,632,882 |                  | $ | 25,597,721    |  | 100.0 | %                |  | 100.0 | %
|                                        |  |                      |   |  |                  |   |                    |               |            |                  |   |               |  |       |                  |  |       |  



|(1) |  | A sweep product transfers brokerage customer balances to banking
subsidiaries, which hold these funds as customer deposits in FDIC-insured demand deposits and money market deposit accounts.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company sold approximately $1 billion of savings accounts to Discover Financial Services in March 2010.



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NOTE 9SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FHLB ADVANCES AND
OTHER BORROWINGS

The maturities of borrowings at March 31, 2010 and total borrowings at December 31, 2009 are
shown below (dollars in thousands):



|                                      |  |                         |              |                                   |       |           |  |                              |         |  |   |           |  |      |  
|------------------------------------- |  | ----------------------- | ------------ | --------------------------------- | ----- | --------- |  | ---------------------------- | ------- |  | - | --------- |  | ---- | -
|                                      |  | RepurchaseAgreements(1) |              | FHLB Advances andOther Borrowings |       | Total     |  | WeightedAverageInterest Rate |        
|                                      |  |                         | FHLBAdvances |                                   | Other |           | 
|Years Ending December 31,             |  |                         |              |                                   |       |           |  |                              |         |  |   |           |  |      |  
|2010                                  |  | $                       | 3,460,437    |                                   | $     | 500,000   |  | $                            | 17,290  |  | $ | 3,977,727 |  | 0.29 | %
|2011                                  |  |                         | 1,624,835    |                                   |       |          |  |                              | 111     |  |   | 1,624,946 |  | 0.45 | %
|2012                                  |  |                         | 100,000      |                                   |       | 350,000   |  |                              |        |  |   | 450,000   |  | 0.59 | %
|2013                                  |  |                         | 100,000      |                                   |       |          |  |                              |        |  |   | 100,000   |  | 2.05 | %
|2014                                  |  |                         | 200,000      |                                   |       | 320,000   |  |                              |        |  |   | 520,000   |  | 4.69 | %
|Thereafter                            |  |                         | 900,000      |                                   |       | 1,133,600 |  |                              | 427,437 |  |   | 2,461,037 |  | 3.19 | %
|                                      |  |                         |              |                                   |       |           |  |                              |         |  |   |           |  |      |  
|Total borrowings at March 31, 2010    |  | $                       | 6,385,272    |                                   | $     | 2,303,600 |  | $                            | 444,838 |  | $ | 9,133,710 |  | 1.39 | %
|                                      |  |                         |              |                                   |       |           |  |                              |         |  |   |           |  |      |  
|Total borrowings at December 31, 2009 |  | $                       | 6,441,875    |                                   | $     | 2,303,600 |  | $                            | 443,359 |  | $ | 9,188,834 |  | 1.43 | %
|                                      |  |                         |              |                                   |       |           |  |                              |         |  |   |           |  |      |  



|(1) |  | The maximum amount at any month end for repurchase agreements was $6.5 billion for the three months ended March 31, 2010 and $7.2 billion for the
year ended December 31, 2009.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTE 10CORPORATE DEBT

The Companys corporate debt by type is shown below (dollars in thousands):



|                                      |  |            |           |          |   |          |                         |  |     |        |  |   |          
|------------------------------------- |  | ---------- | --------- | -------- | - | -------- | ----------------------- |  | --- | ------ |  | - | ---------
|March 31, 2010                        |  | Face Value |           | Discount |   |          | Fair ValueAdjustment(1) |  | Net
|Interest-bearing notes:               |  |            |           |          |   |          |                         |  |     |        |  |   |          
|Senior notes:                         |  |            |           |          |   |          |                         |  |     |        |  |   |          
|8% Notes, due 2011                    |  | $          | 3,644     |          | $ |         |                         |  | $   |       |  | $ | 3,644    
|73/8% Notes, due 2013                 |  |            | 414,665   |          |   | (3,161   | )                       |  |     | 21,572 |  |   | 433,076  
|77/8% Notes, due 2015                 |  |            | 243,177   |          |   | (1,696   | )                       |  |     | 10,735 |  |   | 252,216  
|                                      |  |            |           |          |   |          |                         |  |     |        |  |   |          
|Total senior notes                    |  |            | 661,486   |          |   | (4,857   | )                       |  |     | 32,307 |  |   | 688,936  
|121/2% Springing lien notes, due 2017 |  |            | 930,230   |          |   | (186,953 | )                       |  |     | 8,072  |  |   | 751,349  
|                                      |  |            |           |          |   |          |                         |  |     |        |  |   |          
|Total interest-bearing notes          |  |            | 1,591,716 |          |   | (191,810 | )                       |  |     | 40,379 |  |   | 1,440,285
|Non-interest-bearing debt:            |  |            |           |          |   |          |                         |  |     |        |  |   |          
|0% Convertible debentures, due 2019   |  |            | 960,152   |          |   |         |                         |  |     |       |  |   | 960,152  
|                                      |  |            |           |          |   |          |                         |  |     |        |  |   |          
|Total corporate debt                  |  | $          | 2,551,868 |          | $ | (191,810 | )                       |  | $   | 40,379 |  | $ | 2,400,437
|                                      |  |            |           |          |   |          |                         |  |     |        |  |   |          
|                                      |  |            |           |         
|December 31, 2009                     |  | Face Value |           | Discount |   |          | Fair ValueAdjustment(1) |  | Net
|Senior notes:                         |  |            |           |          |   |          |                         |  |     |        |  |   |          
|8% Notes, due 2011                    |  | $          | 3,644     |          | $ |         |                         |  | $   |       |  | $ | 3,644    
|73/8% Notes, due 2013                 |  |            | 414,665   |          |   | (3,390   | )                       |  |     | 21,473 |  |   | 432,748  
|77/8% Notes, due 2015                 |  |            | 243,177   |          |   | (1,770   | )                       |  |     | 11,225 |  |   | 252,632  
|                                      |  |            |           |          |   |          |                         |  |     |        |  |   |          
|Total senior notes                    |  |            | 661,486   |          |   | (5,160   | )                       |  |     | 32,698 |  |   | 689,024  
|121/2% Springing lien notes, due 2017 |  |            | 930,230   |          |   | (189,838 | )                       |  |     | 8,334  |  |   | 748,726  
|                                      |  |            |           |          |   |          |                         |  |     |        |  |   |          
|Total interest-bearing notes          |  |            | 1,591,716 |          |   | (194,998 | )                       |  |     | 41,032 |  |   | 1,437,750
|Non-interest-bearing debt:            |  |            |           |          |   |          |                         |  |     |        |  |   |          
|0% Convertible debentures, due 2019   |  |            | 1,020,941 |          |   |         |                         |  |     |       |  |   | 1,020,941
|                                      |  |            |           |          |   |          |                         |  |     |        |  |   |          
|Total corporate debt                  |  | $          | 2,612,657 |          | $ | (194,998 | )                       |  | $   | 41,032 |  | $ | 2,458,691
|                                      |  |            |           |          |   |          |                         |  |     |        |  |   |          



|(1) |  | The fair value adjustment is related to changes in fair value of the debt while in a fair value hedge relationship.
|--- |  | -------------------------------------------------------------------------------------------------------------------

As of March 31, 2010, $779.6 million of the Class A convertible debentures and $2.1 million of the Class B convertible
debentures had been converted into 754.0 million shares and 1.3 million shares, respectively, of the Companys common stock.



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NOTE 11INCOME TAXES

During the quarter, the Company recognized a $78.0 million net increase to its liability for unrecognized tax benefits. The total amount
of unrecognized tax benefits as of March 31, 2010 and December 31, 2009 was $136.7 million and $58.7 million, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits as of March 31, 2010 and
December 31, 2009 are as follows (dollars in thousands):



|                                                              |  |               |         |   |                  |   |        |  
|------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------ | -
|                                                              |  | March 31,2010 |         |   | December 31,2009 |  
|Unrecognized tax benefits, beginning of period                |  | $             | 58,696  |   |                  | $ | 64,655 |  
|Additions based on tax positions related to prior years       |  |               | 81,590  |   |                  |   | 2,783  |  
|Additions based on tax positions related to the current year  |  |               |        |   |                  |   | 2,293  |  
|Reductions based on tax positions related to prior years      |  |               | (376    | ) |                  |   | (1,229 | )
|Reductions based on tax positions related to the current year |  |               |        |   |                  |   | (8,159 | )
|Settlements with taxing authorities                           |  |               | (2,700  | ) |                  |   | (681   | )
|Statute of limitations lapses                                 |  |               | (560    | ) |                  |   | (966   | )
|                                                              |  |               |         |   |                  |   |        |  
|Unrecognized tax benefits, end of period                      |  | $             | 136,650 |   |                  | $ | 58,696 |  
|                                                              |  |               |         |   |                  |   |        |  

At March 31, 2010, $114.9 million (net of federal benefits on state issues) represents the amount of
unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The additional unrecognized tax benefit recorded during the first quarter of 2010 related to the Companys recapitalization
transactions in 2009.

NOTE 12SHAREHOLDERS EQUITY

The activity in shareholders equity during the three months ended March 31, 2010 is summarized as follows (dollars in
thousands):



|                                              |  |                                         |           |                                           |   |            |       |  |   |           |  
|--------------------------------------------- |  | --------------------------------------- | --------- | ----------------------------------------- | - | ---------- | ----- |  | - | --------- | -
|                                              |  | Common Stock/Additional Paid-In Capital |           | AccumulatedDeficit/OtherComprehensiveLoss |   |            | Total | 
|Beginning balance, December 31, 2009          |  | $                                       | 6,277,051 |                                           | $ | (2,527,496 | )     |  | $ | 3,749,555 |  
|Net loss                                      |  |                                         |          |                                           |   | (47,837    | )     |  |   | (47,837   | )
|Conversions of convertible debentures         |  |                                         | 60,789    |                                           |   |           |       |  |   | 60,789    |  
|Claims settlement under Section 16(b)         |  |                                         | 35,000    |                                           |   |           |       |  |   | 35,000    |  
|Net change from available-for-sale securities |  |                                         |          |                                           |   | 41,225     |       |  |   | 41,225    |  
|Net change from cash flow hedging instruments |  |                                         |          |                                           |   | (22,507    | )     |  |   | (22,507   | )
|Other(1)                                      |  |                                         | 2,263     |                                           |   | (2,089     | )     |  |   | 174       |  
|                                              |  |                                         |           |                                           |   |            |       |  |   |           |  
|Ending balance, March 31, 2010                |  | $                                       | 6,375,103 |                                           | $ | (2,558,704 | )     |  | $ | 3,816,399 |  
|                                              |  |                                         |           |                                           |   |            |       |  |   |           |  



|(1) |  | Other includes employee stock compensation accounting and changes in accumulated other comprehensive loss from foreign currency translation.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------

In January 2010, a security holder paid the Company $35 million to settle a claim under Section 16(b)
of the Securities Exchange Act of 1934. Section 16(b) requires certain persons and entities whose securities trading activities result in short swing profits to repay such profits to the issuer of the security.
Section 16(b) liability does not require that the security holder trade while in possession of material non-public information.

Preferred Stock

On March 30, 2010, the Company amended its Certificate of Incorporation to eliminate the Series A Preferred Stock and Series B
Participating Cumulative Preferred Stock.



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Reverse Stock Split

In the first quarter of 2010, the Company announced that it would seek the approval of its stockholders for a 1-for-10 reverse stock split
and a corresponding decrease to the Companys authorized shares of common stock to a total of 400 million shares. If approved by the stockholders at the Companys 2010 Annual Meeting, which is scheduled to be held on May 13,
2010, the reverse stock split should become effective in early June 2010.

Conversions of Convertible Debentures

During the three months ended March 31, 2010, $60.8 million of the Companys convertible debentures were converted into
58.8 million shares of common stock.

NOTE 13LOSS PER SHARE

The following table is a reconciliation of basic and diluted loss per share (in thousands, except per share amounts):



|                                            |  |                             |           |   |      |   |          |  
|------------------------------------------- |  | --------------------------- | --------- | - | ---- | - | -------- | -
|                                            |  | Three Months EndedMarch 31, |          
|                                            |  | 2010                        |           |   | 2009 |  
|Basic:                                      |  |                             |           |   |      |   |          |  
|Numerator:                                  |  |                             |           |   |      |   |          |  
|Net loss                                    |  | $                           | (47,837   | ) |      | $ | (232,685 | )
|                                            |  |                             |           |   |      |   |          |  
|Denominator:                                |  |                             |           |   |      |   |          |  
|Basic weighted-average shares outstanding   |  |                             | 1,921,951 |   |      |   | 567,833  |  
|                                            |  |                             |           |   |      |   |          |  
|Diluted:                                    |  |                             |           |   |      |   |          |  
|Numerator:                                  |  |                             |           |   |      |   |          |  
|Net loss                                    |  | $                           | (47,837   | ) |      | $ | (232,685 | )
|                                            |  |                             |           |   |      |   |          |  
|Denominator:                                |  |                             |           |   |      |   |          |  
|Diluted weighted-average shares outstanding |  |                             | 1,921,951 |   |      |   | 567,833  |  
|                                            |  |                             |           |   |      |   |          |  
|Per share:                                  |  |                             |           |   |      |   |          |  
|Basic loss per share:                       |  |                             |           |   |      |   |          |  
|Net loss per share                          |  | $                           | (0.02     | ) |      | $ | (0.41    | )
|                                            |  |                             |           |   |      |   |          |  
|Diluted loss per share:                     |  |                             |           |   |      |   |          |  
|Net loss per share                          |  | $                           | (0.02     | ) |      | $ | (0.41    | )
|                                            |  |                             |           |   |      |   |          |  

For the three months ended March 31, 2010 and 2009, the Company excluded the following shares from the
calculations of diluted loss per share as the effect would have been anti-dilutive (shares in millions):



|                                                          |  |                             |  |     
|--------------------------------------------------------- |  | --------------------------- |  | ----
|                                                          |  | Three Months EndedMarch 31,
|                                                          |  | 2010                        |  | 2009
|Shares excluded as a result of the Companys net loss:    |  |                             |  |     
|Stock options and restricted stock awards and units       |  | 10.2                        |  | 3.0 
|Convertible debentures                                    |  | 959.2                       |  |    
|Other stock options and restricted stock awards and units |  | 29.4                        |  | 32.3
|                                                          |  |                             |  |     
|Total                                                     |  | 998.8                       |  | 35.3
|                                                          |  |                             |  |     



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NOTE 14REGULATORY REQUIREMENTS

Registered Broker-Dealers

The Companys U.S. broker-dealer subsidiaries are subject to the Uniform Net Capital Rule (the Rule)
under the Securities Exchange Act of 1934 administered by the SEC and FINRA, which requires the maintenance of minimum net capital. The minimum net capital requirements can be met under either the Aggregate Indebtedness method or the Alternative
method. Under the Aggregate Indebtedness method, a broker-dealer is required to maintain minimum net capital of the greater of 62/3% of its aggregate indebtedness, as defined, or a minimum dollar amount. Under the Alternative method, a broker-dealer is required to maintain net capital equal to the
greater of $250,000 or 2% of aggregate debit balances arising from customer transactions. The method used depends on the individual U.S. broker-dealer subsidiary. The Companys international broker-dealer subsidiaries, located in Europe and
Asia, are subject to capital requirements determined by their respective regulators.

As of March 31, 2010, all of
the Companys broker-dealer subsidiaries met minimum net capital requirements. Total required net capital was $0.1 billion at March 31, 2010. In addition, the Companys broker-dealer subsidiaries had excess net capital of $0.6 billion
at March 31, 2010.

Banking

E*TRADE Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on E*TRADE Banks financial condition and results of operations. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, E*TRADE Bank must meet specific capital guidelines that involve quantitative measures of E*TRADE Banks assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. In addition, E*TRADE Bank may not pay dividends to the parent company without approval from the OTS and any loans by E*TRADE Bank to the parent company and its other non-bank subsidiaries
are subject to various quantitative, arms length, collateralization and other requirements. E*TRADE Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings
and other factors.

Quantitative measures established by regulation to ensure capital adequacy require E*TRADE Bank to
maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets and Tier I capital to adjusted total assets. As shown in the table below, at both March 31, 2010 and December 31, 2009, the OTS categorized E*TRADE
Bank as well capitalized under the regulatory framework for prompt corrective action. However, events beyond managements control, such as a continued deterioration in residential real estate and credit markets, could adversely
affect future earnings and E*TRADE Banks ability to meet its future capital requirements.

E*TRADE Banks required
actual capital amounts and ratios are presented in the table below (dollars in thousands):



|                                        |  |        |           |       |                                                                                |   |        |               |            |  |   |      |   |  |   |          
|--------------------------------------- |  | ------ | --------- | ----- | ------------------------------------------------------------------------------ | - | ------ | ------------- | ---------- |  | - | ---- | - |  | - | ---------
|                                        |  | Actual |           |       | Minimum Required to beWell Capitalized UnderPrompt Corrective ActionProvisions |   |        | ExcessCapital
|                                        |  | Amount |           | Ratio |                                                                                |   | Amount |               | Ratio      |  |  
|March 31, 2010:                         |  |        |           |       |                                                                                |   |        |               |            |  |   |      |   |  |   |          
|Total capital to risk-weighted assets   |  | $      | 3,114,581 |       | 14.36                                                                          | % |        | >             | $2,168,935 |  | > | 10.0 | % |  | $ | 945,646  
|Tier I capital to risk-weighted assets  |  | $      | 2,835,312 |       | 13.07                                                                          | % |        | >             | $1,301,361 |  | > | 6.0  | % |  | $ | 1,533,951
|Tier I capital to adjusted total assets |  | $      | 2,869,133 |       | 6.83                                                                           | % |        | >             | $2,100,873 |  | > | 5.0  | % |  | $ | 768,260  
|December 31, 2009:                      |  |        |           |       |                                                                                |   |        |               |            |  |   |      |   |  |   |          
|Total capital to risk-weighted assets   |  | $      | 3,102,618 |       | 14.08                                                                          | % |        | >             | $2,203,492 |  | > | 10.0 | % |  | $ | 899,126  
|Tier I capital to risk-weighted assets  |  | $      | 2,818,370 |       | 12.79                                                                          | % |        | >             | $1,322,095 |  | > | 6.0  | % |  | $ | 1,496,275
|Tier I capital to adjusted total assets |  | $      | 2,860,312 |       | 6.69                                                                           | % |        | >             | $2,136,752 |  | > | 5.0  | % |  | $ | 723,560  



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NOTE 15COMMITMENTS, CONTINGENCIES AND OTHER REGULATORY MATTERS

Legal Matters

Litigation Matters

On
October 27, 2000, Ajaxo, Inc. (Ajaxo) filed a complaint in the Superior Court for the State of California, County of Santa Clara. Ajaxo sought damages and certain non-monetary relief for the Companys alleged breach of a
non-disclosure agreement with Ajaxo pertaining to certain wireless technology that Ajaxo offered the Company as well as damages and other relief against the Company for their alleged misappropriation of Ajaxos trade secrets. Following a jury
trial, a judgment was entered in 2003 in favor of Ajaxo against the Company for $1.3 million dollars for breach of the Ajaxo non-disclosure agreement. Although the jury also found in favor of Ajaxo on its claim against the Company for
misappropriation of trade secrets, the trial court subsequently denied Ajaxos requests for additional damages and relief. On December 21, 2005, the California Court of Appeal affirmed the above-described award against the Company for
breach of the nondisclosure agreement but remanded the case to the trial court for the limited purpose of determining what, if any, additional damages Ajaxo may be entitled to as a result of the jurys previous finding in favor of Ajaxo on its
claim against the Company for misappropriation of trade secrets. Although the Company paid Ajaxo the full amount due on the above-described judgment, the case, consistent with the rulings issued by the Court of Appeal, was remanded back to the trial
court, and on May 30, 2008, a jury returned a verdict in favor of the Company denying all claims raised and demands for damages against the Company. Following the trial courts filing of entry of judgment in favor of the Company on
September 5, 2008, Ajaxo filed post-trial motions for vacating this entry of judgment and requesting a new trial. On November 4, 2008, the trial court denied these motions. On December 2, 2008, Ajaxo filed a notice of appeal with the
Court of Appeal of the State of California for the Sixth District, and the parties completed the briefing of Ajaxos appeal on December 14, 2009. The Company will continue to vigorously defend itself and oppose Ajaxos appeal.

On October 11, 2006, a state class action was filed by Nikki Greenberg on her own behalf and on behalf of all those
similarly situated plaintiffs, in the Superior Court for the State of California, County of Los Angeles on behalf of all customers or consumers who allegedly made or received telephone calls from the Company that were recorded without their
knowledge or consent. On February 7, 2008, class certification was granted and the class defined to consist of (1) all persons in California who received telephone calls from the Company and whose calls were recorded without their consent
within three years of October 11, 2006, and (2) all persons who made calls from California to the Beverly Hills branch of the Company on August 8, 2006. Plaintiffs sought to recover unspecified monetary damages plus injunctive relief,
including punitive and exemplary damages, interest, attorneys fees and costs. On October 16, 2009, the court granted final approval of the parties proposed settlement agreement. Objectors to the courts order granting final
approval of the parties settlement agreement filed notices of appeal which were subsequently dismissed on January 26, 2010. The Company paid the settlement amount to the Claims Administrator on March 5, 2010. The matter will remain
open through administration of the settlement.

On October 2, 2007, a class action complaint alleging violations of the
federal securities laws was filed in the United States District Court for the Southern District of New York against the Company and its then Chief Executive Officer and Chief Financial Officer, Mitchell H. Caplan and Robert J. Simmons by Larry
Freudenberg on his own behalf and on behalf of others similarly situated (the Freudenberg Action). On July 17, 2008, the trial court consolidated this action with four other purported class actions, all of which were filed in the
United States District Court for the Southern District of New York and which were based on the same facts and circumstances. On January 16, 2009, plaintiffs served their consolidated amended class action complaint in which they also named
Dennis Webb, the Companys former Capital Markets Division President as a defendant. Plaintiffs contend, among other things, that the value of the Companys stock between April 19, 2006 and November 9, 2007 was artificially
inflated because defendants issued materially false and misleading statements and failed to disclose that the Company was experiencing a rise in delinquency rates in its mortgage and home equity portfolios; failed to timely record an impairment on
its mortgage and home equity portfolios; materially overvalued its securities portfolio, which included assets backed by mortgages; and based on the foregoing,



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lacked a reasonable basis for the positive statements made about the Companys earnings and prospects. Plaintiffs seek to recover damages in an amount to be proven at trial, including
interest and attorneys fees and costs. Defendants filed their motion to dismiss on April 2, 2009, and briefing on defendants motion to dismiss was completed on August 31, 2009. The Company intends to vigorously defend itself
against these claims.

On August 15, 2008, Ronald M. Tate as trustee of the Ronald M. Tate Trust Dtd 4/13/88, and George
Avakian filed an action in the United States District Court for the Southern District of New York against the Company, Mitchell H. Caplan and Robert J. Simmons based on the same facts and circumstances, and containing the same claims, as the
Freudenberg consolidated actions discussed above. By agreement of the parties and approval of the court, the Tate action has been consolidated with the Freudenberg consolidated actions for the purpose of pre-trial discovery. Plaintiffs seek to
recover damages in an amount to be proven at trial, including interest, attorneys and expert fees and costs. The Company intends to vigorously defend itself against these claims.

Based upon the same facts and circumstances alleged in the Freudenberg consolidated actions above, a verified shareholder derivative
complaint was filed in the United States District Court for the Southern District of New York on October 4, 2007 by Catherine Rubery, against the Company and its then Chief Executive Officer, President/Chief Operating Officer, Chief Financial
Officer and individual members of its board of directors. Plaintiff alleges, among other things, causes of action for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and violation of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder. The above federal shareholder derivative complaint has been consolidated with another shareholder derivative complaint brought by shareholder Marilyn Clark in the same court and against the same named defendants.
Three similar derivative actions, based on the same facts and circumstances as the federal derivative actions, but alleging exclusively state causes of action, have been filed in the Supreme Court of the State of New York, New York County and have
been ordered consolidated in that court. In these state derivative actions, plaintiffs Frank Fosbre, Brian Kallinen and Alexander Guiseppone filed a consolidated amended complaint on March 23, 2009. Plaintiffs in the foregoing actions seek
unspecified monetary damages against the Individual Defendants in favor of the Company, plus an injunction compelling changes to the Companys Corporate Governance policies. By agreement of the parties and approval of the respective courts,
further proceedings in both these federal and state derivative actions will continue to trail those in the federal securities class actions discussed above.

On April 2, 2008, a class action complaint alleging violations of the federal securities laws was filed by John W. Oughtred on his
own behalf and on behalf of all others similarly situated in the United States District Court for the Southern District of New York against the Company. Plaintiff contends, among other things, that the Company committed various sales practice
violations in the sale of certain auction rate securities to investors between April 2, 2003, and February 13, 2008 by allegedly misrepresenting that these securities were highly liquid and safe investments for short term investing. On
December 18, 2008, plaintiffs filed their first amended class action complaint. Defendants filed their pending motion to dismiss plaintiffs amended complaint on February 5, 2009, and briefing on defendants motion to dismiss was
completed on April 15, 2009. Plaintiffs seek to recover damages in an amount to be proven at trial, or, in the alternative, rescission of auction rate securities purchases, plus interest and attorneys fees and costs. On March 18,
2010, the District Court dismissed the complaint without prejudice. Plaintiff has an opportunity to amend the complaint. On April 22, 2010, Plaintiff amended their complaint. The Company intends to continue to vigorously defend itself against
the claims raised in this action.

Prior to Lehman Brothers declaration of bankruptcy in September 2008, E*TRADE Bank
was a counterparty to interest rate derivative contracts with a subsidiary of Lehman Brothers. The declaration of bankruptcy by Lehman Brothers triggered an event of default and early termination under E*TRADE Banks International Swap Dealers
Association Master Agreement. As of the date of the event of default, E*TRADE Banks net amount due to the Lehman Brothers subsidiary was approximately $101 million, the majority of which was collateralized by securities held by or on behalf of
the Lehman Brothers subsidiary. E*TRADE Bank currently is negotiating with Lehman Brothers in an attempt to resolve the parties respective obligations.



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On February 3, 2010, a class action complaint was filed in the United States District
Court for the Northern District of California against E*TRADE Securities LLC by Joseph Roling on his own behalf and on behalf of all others similarly situated. The lead plaintiff alleges that E*TRADE Securities LLC unlawfully charged and collected
certain account activity fees from its customers. Claimant, on behalf of himself and the putative class, asserts breach of contract, unjust enrichment and violation of California Civil Code Section 1671 and seeks equitable and injunctive relief
for alleged illegal, unfair and fraudulent practices under Californias Unfair Competition Law, California Business and Professional Code Section 17200 et seq. The plaintiff seeks, among other things, certification of the class action on
behalf of alleged similarly situated plaintiffs, unspecified damages and restitution of amounts allegedly wrongfully collected by E*TRADE Securities LLC, attorneys fees and expenses and injunctive relief. The Company intends to vigorously defend
itself against the claims raised in this action.

On March 8, 2010, Lindsay Lohan filed a complaint in the New York
Supreme Court, Nassau County, against E*TRADE Bank and E*TRADE Securities LLC. The Plaintiff alleges that E*TRADEs television advertising made unauthorized use of her characterization and likeness in violation of Section 51 of the New
York State Civil Rights Law. The Claimant seeks $100 million in damages. The Company intends to vigorously defend itself against these claims.

In addition to the matters described above, the Company is subject to various legal proceedings and claims that arise in the normal
course of business which could have a material adverse effect on its financial position, results of operations or cash flows. In each pending matter, the Company contests liability or the amount of claimed damages. In view of the inherent difficulty
of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages, or where investigation or discovery have yet to be completed, the Company cannot predict with certainty the loss or range of
loss related to such matters, how such matters will be resolved, when they will ultimately be resolved, or what any eventual settlement, fine, penalty or other relief might be. Subject to the foregoing, the Company believes that the outcome of any
such pending matter will not have a material adverse effect on the consolidated financial condition of the Company, although the outcome could be material to the Companys or a business segments operating results in the future, depending,
among other things, upon the Companys or business segments income for such period.

An unfavorable outcome in any
matter that is not covered by insurance could have a material adverse effect on the Companys business, financial condition, results of operations or cash flows. In addition, even if the ultimate outcomes are resolved in the Companys
favor, the defense of such litigation could entail considerable cost or the diversion of the efforts of management, either of which could have a material adverse effect on the Companys business, financial condition, results of operations or
cash flows.

Regulatory Matters

The securities and banking industries are subject to extensive regulation under federal, state and applicable international laws. From
time to time, the Company has been threatened with or named as a defendant in, lawsuits, arbitrations and administrative claims involving securities, banking and other matters. The Company is also subject to periodic regulatory audits and
inspections. Compliance and trading problems that are reported to regulators, such as the SEC, FINRA, OTS or FDIC by dissatisfied customers or others are investigated by such regulators, and may, if pursued, result in formal claims being filed
against the Company by customers or disciplinary action being taken against the Company or its employees by regulators. Any such claims or disciplinary actions that are decided against the Company could have a material impact on the financial
results of the Company or any of its subsidiaries.

On October 17, 2007, the SEC initiated an informal inquiry into
matters related to the Companys mortgage loan and mortgage-related securities investment portfolios. The Company is cooperating fully with the SEC in this matter.



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Beginning in approximately August 2008, representatives of various states attorneys general
and FINRA initiated inquiries regarding the purchase of auction rate securities by E*TRADE Securities LLCs customers. E*TRADE Securities LLC is cooperating with these inquiries. As of March 31, 2010, the total amount of auction rate
securities held by all E*TRADE Securities LLC customers was approximately $167.3 million.

On January 19, 2010, the North
Carolina Securities Division filed an administrative petition against E*TRADE Securities LLC seeking to revoke the North Carolina securities dealer registration of E*TRADE Securities LLC or, alternatively, to suspend that registration until all
North Carolina residents are made whole for their investments in auction rate securities purchased through E*TRADE Securities LLC. E*TRADE Securities LLC is defending that action. As of March 31, 2010, the total amount of auction rate
securities held by North Carolina customers is approximately $2.1 million.

Insurance

The Company maintains insurance coverage that management believes is reasonable and prudent. The principal insurance coverage it maintains
covers commercial general liability; property damage; hardware/software damage; cyber liability; directors and officers; employment practices liability; certain criminal acts against the Company; and errors and omissions. The Company believes that
such insurance coverage is adequate for the purpose of its business. The Companys ability to maintain this level of insurance coverage in the future, however, is subject to the availability of affordable insurance in the marketplace.

Reserves

For all legal matters, reserves are established in accordance with the loss contingencies accounting guidance. Once established, reserves
are adjusted based on available information when an event occurs requiring an adjustment.

Loans

The Company provides access to real estate loans for its customers through a third party company. This lending product is offered as a
convenience to the Companys customers and is not one of its primary product offerings. The Company structured this arrangement to minimize the assumption of any of the typical risks commonly associated with mortgage lending. The third party
company providing this product performs all processing and underwriting of these loans. Shortly after closing, the third party company purchases the loans from the Company and is responsible for the credit risk associated with these loans. The
Company had $36.7 million in commitments to originate loans, $3.5 million in commitments to sell loans and no commitments to purchase loans at March 31, 2010.

Securities, Unused Lines of Credit and Certificates of Deposit

At March 31, 2010, the Company had commitments to purchase $0.3 billion and sell $0.5 billion in securities. In addition, the Company
had approximately $0.9 billion of certificates of deposit scheduled to mature in less than one year and $1.2 billion of unfunded commitments to extend credit.

Guarantees

In prior periods when the Company sold loans, the Company provided guarantees to investors purchasing mortgage loans, which are considered
standard representations and warranties within the mortgage industry. The primary guarantees are that: the mortgage and the mortgage note have been duly executed and each is the legal, valid and binding obligation of the Company, enforceable in
accordance with its terms; the mortgage has been duly acknowledged and recorded and is valid; and the mortgage and the mortgage note are not subject to any right of rescission, set-off, counterclaim or defense, including, without limitation, the
defense of usury, and no



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such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto. The Company is responsible for the guarantees on loans sold. If these claims prove to be untrue,
the investor can require the Company to repurchase the loan and return all loan purchase and servicing release premiums. Management has determined that quantifying the potential liability exposure is not meaningful due to the nature of the standard
representations and warranties, which have resulted in a minimal amount of loan repurchases.

ETBH raised capital through the
formation of trusts, which sold trust preferred securities in the capital markets. The capital securities are mandatorily redeemable in whole at the due date, which is generally 30 years after issuance. Each trust issues trust preferred securities
at par, with a liquidation amount of $1,000 per capital security. The proceeds from the sale of issuances are invested in ETBHs subordinated debentures.

During the 30-year period prior to the redemption of the trust preferred securities, ETBH guarantees the accrued and unpaid distributions
on these securities, as well as the redemption price of the securities and certain costs that may be incurred in liquidating, terminating or dissolving the trusts (all of which would otherwise be payable by the trusts). At March 31, 2010,
management estimated that the maximum potential liability under this arrangement is equal to approximately $436.6 million or the total face value of these securities plus dividends, which may be unpaid at the termination of the trust arrangement.

NOTE 16SEGMENT INFORMATION

In the first quarter of 2010, the Company revised its segment financial reporting to reflect the manner in which its chief operating
decision maker had begun assessing the Companys performance and making resource allocation decisions. The Company no longer allocates costs associated with certain functions that are centrally managed to its operating segments. These costs are
separately reported in a Corporate/Other category.

In addition, the Company now reports FDIC insurance premiums
expense in its balance sheet management segment. These expenses were previously reported in its trading and investing segment. Balance sheet management pays the trading and investing segment for the use of its deposits via the deposit transfer
pricing arrangement, including a reimbursement for the cost associated FDIC insurance. This change did not impact the income (loss) before income taxes of either segment as the component of the deposit transfer pricing payment for FDIC insurance
premiums expense was removed.

The Companys segment financial information from prior periods has been reclassified in
accordance with the new segment financial reporting.

Trading and investing includes:



| |  |  | trading and investing related brokerage products and services;
| | - |  | --------------------------------------------------------------



| |  |  | investor-focused banking products;
| | - |  | ----------------------------------



| |  |  | market-making; and
| | - |  | ------------------



| |  |  | software and services for managing equity compensation plans.
| | - |  | -------------------------------------------------------------

Balance sheet management includes:



| |  |  | managing asset allocation and credit, liquidity and interest rate risk;
| | - |  | -----------------------------------------------------------------------



| |  |  | managing loans previously originated or purchased from third parties; and
| | - |  | -------------------------------------------------------------------------



| |  |  | managing customer cash and deposits.
| | - |  | ------------------------------------

Corporate/Other includes:



| |  |  | centrally managed functions including: finance, human resources, legal, compliance and risk management;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | technology related costs incurred to support the centrally managed functions;
| | - |  | -----------------------------------------------------------------------------



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| |  |  | restructuring and other exit activities; and
| | - |  | --------------------------------------------



| |  |  | corporate debt and corporate investments.
| | - |  | -----------------------------------------

The Company evaluates the performance of its segments based on income (loss) before income taxes.

Financial information for the Companys reportable segments is presented in the following tables (dollars in thousands):



|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | ----------------------- | - | -------- | --------------- |  | - | --------------- | - |  | ----- | -------- | - |  | - | ------- | -
|                                                                                    |  | Three Months Ended March 31, 2010 |        
|                                                                                    |  | Trading andInvesting              |         |   | Balance SheetManagement |   |          | Corporate/Other |  |   | Eliminations(1) |   |  | Total |         
|Revenue:                                                                            |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  
|Operating interest income                                                           |  | $                                 | 214,577 |   |                         | $ | 352,290  |                 |  | $ | 8               |   |  | $     | (159,909 | ) |  | $ | 406,966 |  
|Operating interest expense                                                          |  |                                   | (20,936 | ) |                         |   | (225,542 | )               |  |   |                |   |  |       | 159,909  |   |  |   | (86,569 | )
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  
|Net operating interest income                                                       |  |                                   | 193,641 |   |                         |   | 126,748  |                 |  |   | 8               |   |  |       |         |   |  |   | 320,397 |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  
|Commissions                                                                         |  |                                   | 113,252 |   |                         |   |         |                 |  |   |                |   |  |       |         |   |  |   | 113,252 |  
|Fees and service charges                                                            |  |                                   | 41,229  |   |                         |   | 1,001    |                 |  |   |                |   |  |       |         |   |  |   | 42,230  |  
|Principal transactions                                                              |  |                                   | 26,211  |   |                         |   |         |                 |  |   |                |   |  |       |         |   |  |   | 26,211  |  
|Gains on loans and securities, net                                                  |  |                                   |        |   |                         |   | 29,042   |                 |  |   | 4               |   |  |       |         |   |  |   | 29,046  |  
|Other-than-temporary impairment                                                     |  |                                   |        |   |                         |   | (14,524  | )               |  |   |                |   |  |       |         |   |  |   | (14,524 | )
|Less: noncredit portion of OTTI recognized in other comprehensive loss (before tax) |  |                                   |        |   |                         |   | 5,872    |                 |  |   |                |   |  |       |         |   |  |   | 5,872   |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  
|Net impairment                                                                      |  |                                   |        |   |                         |   | (8,652   | )               |  |   |                |   |  |       |         |   |  |   | (8,652  | )
|Other revenues                                                                      |  |                                   | 11,428  |   |                         |   | 2,591    |                 |  |   |                |   |  |       |         |   |  |   | 14,019  |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  
|Total non-interest income                                                           |  |                                   | 192,120 |   |                         |   | 23,982   |                 |  |   | 4               |   |  |       |         |   |  |   | 216,106 |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  
|Total net revenue                                                                   |  |                                   | 385,761 |   |                         |   | 150,730  |                 |  |   | 12              |   |  |       |         |   |  |   | 536,503 |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  
|Provision for loan losses                                                           |  |                                   |        |   |                         |   | 267,979  |                 |  |   |                |   |  |       |         |   |  |   | 267,979 |  
|Operating expense:                                                                  |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  
|Compensation and benefits                                                           |  |                                   | 62,811  |   |                         |   | 3,311    |                 |  |   | 21,088          |   |  |       |         |   |  |   | 87,210  |  
|Clearing and servicing                                                              |  |                                   | 19,490  |   |                         |   | 19,669   |                 |  |   |                |   |  |       |         |   |  |   | 39,159  |  
|Advertising and market development                                                  |  |                                   | 38,135  |   |                         |   |         |                 |  |   |                |   |  |       |         |   |  |   | 38,135  |  
|FDIC insurance premiums                                                             |  |                                   |        |   |                         |   | 19,315   |                 |  |   |                |   |  |       |         |   |  |   | 19,315  |  
|Communications                                                                      |  |                                   | 19,717  |   |                         |   | 229      |                 |  |   | 501             |   |  |       |         |   |  |   | 20,447  |  
|Professional services                                                               |  |                                   | 11,354  |   |                         |   | 589      |                 |  |   | 8,347           |   |  |       |         |   |  |   | 20,290  |  
|Occupancy and equipment                                                             |  |                                   | 16,897  |   |                         |   | 682      |                 |  |   | 628             |   |  |       |         |   |  |   | 18,207  |  
|Depreciation and amortization                                                       |  |                                   | 15,464  |   |                         |   | 312      |                 |  |   | 4,870           |   |  |       |         |   |  |   | 20,646  |  
|Amortization of other intangibles                                                   |  |                                   | 7,142   |   |                         |   |         |                 |  |   |                |   |  |       |         |   |  |   | 7,142   |  
|Facility restructuring and other exit activities                                    |  |                                   |        |   |                         |   |         |                 |  |   | 3,373           |   |  |       |         |   |  |   | 3,373   |  
|Other operating expenses                                                            |  |                                   | 9,004   |   |                         |   | 7,595    |                 |  |   | 4,813           |   |  |       |         |   |  |   | 21,412  |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  
|Total operating expense                                                             |  |                                   | 200,014 |   |                         |   | 51,702   |                 |  |   | 43,620          |   |  |       |         |   |  |   | 295,336 |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  
|Income (loss) before other income (expense) and income taxes                        |  |                                   | 185,747 |   |                         |   | (168,951 | )               |  |   | (43,608         | ) |  | $     |         |   |  | $ | (26,812 | )
|Other income (expense):                                                             |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  
|Corporate interest income                                                           |  |                                   |        |   |                         |   |         |                 |  |   | 23              |   |  |       |         |   |  |   | 23      |  
|Corporate interest expense                                                          |  |                                   |        |   |                         |   |         |                 |  |   | (41,043         | ) |  |       |         |   |  |   | (41,043 | )
|Gains on sales of investments, net                                                  |  |                                   |        |   |                         |   |         |                 |  |   | 109             |   |  |       |         |   |  |   | 109     |  
|Equity in income of investments and venture funds                                   |  |                                   |        |   |                         |   |         |                 |  |   | 1,794           |   |  |       |         |   |  |   | 1,794   |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  
|Total other income (expense)                                                        |  |                                   |        |   |                         |   |         |                 |  |   | (39,117         | ) |  |       |         |   |  |   | (39,117 | )
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  
|Income (loss) before taxes                                                          |  | $                                 | 185,747 |   |                         | $ | (168,951 | )               |  | $ | (82,725         | ) |  | $     |         |   |  | $ | (65,929 | )
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |         |  



|(1) |  | Reflects elimination of transactions between trading and investing and
balance sheet management segments, which includes deposits and intercompany transfer pricing arrangements.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  
|----------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | ----------------------- | - | -------- | --------------- |  | - | --------------- | - |  | ----- | -------- | - |  | - | -------- | -
|                                                                                    |  | Three Months Ended March 31, 2009 |        
|                                                                                    |  | Trading andInvesting              |         |   | Balance SheetManagement |   |          | Corporate/Other |  |   | Eliminations(1) |   |  | Total |         
|Revenue:                                                                            |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  
|Operating interest income                                                           |  | $                                 | 247,037 |   |                         | $ | 444,266  |                 |  | $ | 38              |   |  | $     | (204,704 | ) |  | $ | 486,637  |  
|Operating interest expense                                                          |  |                                   | (97,951 | ) |                         |   | (314,728 | )               |  |   |                |   |  |       | 204,704  |   |  |   | (207,975 | )
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  
|Net operating interest income                                                       |  |                                   | 149,086 |   |                         |   | 129,538  |                 |  |   | 38              |   |  |       |         |   |  |   | 278,662  |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  
|Commissions                                                                         |  |                                   | 125,626 |   |                         |   |         |                 |  |   |                |   |  |       |         |   |  |   | 125,626  |  
|Fees and service charges                                                            |  |                                   | 45,055  |   |                         |   | 1,660    |                 |  |   |                |   |  |       |         |   |  |   | 46,715   |  
|Principal transactions                                                              |  |                                   | 17,642  |   |                         |   |         |                 |  |   |                |   |  |       |         |   |  |   | 17,642   |  
|Gains (losses) on loans and securities, net                                         |  |                                   | (32     | ) |                         |   | 35,291   |                 |  |   | 31              |   |  |       |         |   |  |   | 35,290   |  
|Other-than-temporary impairment                                                     |  |                                   |        |   |                         |   | (18,783  | )               |  |   |                |   |  |       |         |   |  |   | (18,783  | )
|Less: noncredit portion of OTTI recognized in other comprehensive loss (before tax) |  |                                   |        |   |                         |   |         |                 |  |   |                |   |  |       |         |   |  |   |         |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  
|Net impairment                                                                      |  |                                   |        |   |                         |   | (18,873  | )               |  |   |                |   |  |       |         |   |  |   | (18,873  | )
|Other revenues                                                                      |  |                                   | 8,894   |   |                         |   | 3,297    |                 |  |   |                |   |  |       |         |   |  |   | 12,191   |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  
|Total non-interest income                                                           |  |                                   | 197,185 |   |                         |   | 21,465   |                 |  |   | 31              |   |  |       |         |   |  |   | 218,681  |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  
|Total net revenue                                                                   |  |                                   | 346,271 |   |                         |   | 151,003  |                 |  |   | 69              |   |  |       |         |   |  |   | 497,343  |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  
|Provision for loan losses                                                           |  |                                   |        |   |                         |   | 453,963  |                 |  |   |                |   |  |       |         |   |  |   | 453,963  |  
|Operating expense:                                                                  |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  
|Compensation and benefits                                                           |  |                                   | 61,352  |   |                         |   | 2,857    |                 |  |   | 19,963          |   |  |       |         |   |  |   | 84,172   |  
|Clearing and servicing                                                              |  |                                   | 20,776  |   |                         |   | 21,895   |                 |  |   |                |   |  |       |         |   |  |   | 42,671   |  
|Advertising and market development                                                  |  |                                   | 43,586  |   |                         |   | 5        |                 |  |   |                |   |  |       |         |   |  |   | 43,591   |  
|FDIC insurance premiums                                                             |  |                                   |        |   |                         |   | 12,712   |                 |  |   |                |   |  |       |         |   |  |   | 12,712   |  
|Communications                                                                      |  |                                   | 21,028  |   |                         |   | 49       |                 |  |   | 484             |   |  |       |         |   |  |   | 21,561   |  
|Professional services                                                               |  |                                   | 8,841   |   |                         |   | 620      |                 |  |   | 10,169          |   |  |       |         |   |  |   | 19,630   |  
|Occupancy and equipment                                                             |  |                                   | 19,038  |   |                         |   | 750      |                 |  |   | (247            | ) |  |       |         |   |  |   | 19,541   |  
|Depreciation and amortization                                                       |  |                                   | 15,397  |   |                         |   | 184      |                 |  |   | 4,693           |   |  |       |         |   |  |   | 20,274   |  
|Amortization of other intangibles                                                   |  |                                   | 7,436   |   |                         |   |         |                 |  |   |                |   |  |       |         |   |  |   | 7,436    |  
|Facility restructuring and other exit activities                                    |  |                                   |        |   |                         |   |         |                 |  |   | (112            | ) |  |       |         |   |  |   | (112     | )
|Other operating expenses                                                            |  |                                   | 8,816   |   |                         |   | 9,301    |                 |  |   | 4,391           |   |  |       |         |   |  |   | 22,508   |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  
|Total operating expense                                                             |  |                                   | 206,270 |   |                         |   | 48,373   |                 |  |   | 39,341          |   |  |       |         |   |  |   | 293,984  |  
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  
|Income (loss) before other income (expense) and income taxes                        |  |                                   | 140,001 |   |                         |   | (351,333 | )               |  |   | (39,272         | ) |  |       |         |   |  |   | (250,604 | )
|Other income (expense):                                                             |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  
|Corporate interest income                                                           |  |                                   |        |   |                         |   |         |                 |  |   | 424             |   |  |       |         |   |  |   | 424      |  
|Corporate interest expense                                                          |  |                                   |        |   |                         |   |         |                 |  |   | (87,315         | ) |  |       |         |   |  |   | (87,315  | )
|Losses on sales of investments, net                                                 |  |                                   |        |   |                         |   |         |                 |  |   | (433            | ) |  |       |         |   |  |   | (433     | )
|Losses on early extinguishment of debt                                              |  |                                   |        |   |                         |   | (2,999   | )               |  |   |                |   |  |       |         |   |  |   | (2,999   | )
|Equity in loss of investments and venture funds                                     |  |                                   |        |   |                         |   |         |                 |  |   | (3,129          | ) |  |       |         |   |  |   | (3,129   | )
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  
|Total other income (expense)                                                        |  |                                   |        |   |                         |   | (2,999   | )               |  |   | (90,453         | ) |  |       |         |   |  |   | (93,452  | )
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  
|Income (loss) before taxes                                                          |  | $                                 | 140,001 |   |                         | $ | (354,332 | )               |  | $ | (129,725        | ) |  | $     |         |   |  | $ | (344,056 | )
|                                                                                    |  |                                   |         |   |                         |   |          |                 |  |   |                 |   |  |       |          |   |  |   |          |  



|(1) |  | Reflects elimination of transactions between trading and investing and
balance sheet management segments, which includes deposits and intercompany transfer pricing arrangements.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Segment Assets



|                        |  |                      |           |                         |   |                              |  |       |           |  |   |           
|----------------------- |  | -------------------- | --------- | ----------------------- | - | ---------------------------- |  | ----- | --------- |  | - | ----------
|                        |  | Trading andInvesting |           | Balance SheetManagement |   | Corporate/Other/Eliminations |  | Total
|As of March 31, 2010    |  | $                    | 9,623,032 |                         | $ | 36,052,940                   |  | $     | 1,002,702 |  | $ | 46,678,674
|As of December 31, 2009 |  | $                    | 9,047,604 |                         | $ | 37,236,570                   |  | $     | 1,082,311 |  | $ | 47,366,485

No single
customer accounted for more than 10% of total net revenue for the three months ended March 31, 
2010 and 2009.

NOTE 17SUBSEQUENT EVENTS

International Brokerage Business

The Company closed the sales of the local market trading operations in the Nordic region and United Kingdom in April 2010. The Company
recorded a slight gain on the sales of these local market trading operations.

Secondary Offering of Common Stock by Affiliates of Citadel
Investment Group

On May 4, 2010, the Company completed a secondary offering by affiliates of Citadel Investment Group
of 172 million shares of its common stock at a public offering price of $1.75 per share. The Company did not issue any shares to the public nor did it receive any proceeds from this offering. All of the shares sold were held by affiliates of
Citadel Investment Group.

Conversion of Convertible Debentures

As of May 4, 2010, a total of $1.0 billion of the convertible debentures ($1.0 billion of the Class A convertible debentures and $2.1
million of the Class B convertible debentures) had been converted into 995.9 million shares of common equity. The remaining face value of the convertible debentures as of May 4, 2010 was approximately $711.4 million.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



| | (a) |  | Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Companys disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are effective based on
their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Our Chief Executive Officer and our Chief Financial Officer have evaluated the changes to the Companys internal control over financial reporting that occurred
during our last fiscal quarter ended March 31, 2010, as required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15, and have concluded that there were no such changes that materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

PART IIOTHER
INFORMATION



|ITEM 1.    LEGAL | PROCEEDINGS
|---------------- | -----------

On
October 27, 2000, Ajaxo, Inc. (Ajaxo) filed a complaint in the Superior Court for the State of California, County of Santa Clara. Ajaxo sought damages and certain non-monetary relief for the Companys alleged breach of a
non-disclosure agreement with Ajaxo pertaining to certain wireless technology that Ajaxo offered the Company as well as damages and other relief against the Company for their alleged misappropriation of Ajaxos trade secrets. Following a jury
trial, a judgment was entered in 2003 in favor of Ajaxo against the Company for $1.3 million dollars for breach of the Ajaxo non-disclosure agreement. Although the jury also found in favor of Ajaxo on its claim against the Company for
misappropriation of trade secrets, the trial court subsequently denied Ajaxos requests for additional damages and relief. On December 21, 2005, the California Court of Appeal affirmed the above-described award against the Company for
breach of the nondisclosure



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agreement but remanded the case to the trial court for the limited purpose of determining what, if any, additional damages Ajaxo may be entitled to as a result of the jurys previous finding
in favor of Ajaxo on its claim against the Company for misappropriation of trade secrets. Although the Company paid Ajaxo the full amount due on the above-described judgment, the case, consistent with the rulings issued by the Court of Appeal, was
remanded back to the trial court, and on May 30, 2008, a jury returned a verdict in favor of the Company denying all claims raised and demands for damages against the Company. Following the trial courts filing of entry of judgment in
favor of the Company on September 5, 2008, Ajaxo filed post-trial motions for vacating this entry of judgment and requesting a new trial. On November 4, 2008, the trial court denied these motions. On December 2, 2008, Ajaxo filed a
notice of appeal with the Court of Appeal of the State of California for the Sixth District, and the parties completed the briefing of Ajaxos appeal on December 14, 2009. The Company will continue to vigorously defend itself and oppose
Ajaxos appeal.

On October 11, 2006, a state class action was filed by Nikki Greenberg on her own behalf and on
behalf of all those similarly situated plaintiffs, in the Superior Court for the State of California, County of Los Angeles on behalf of all customers or consumers who allegedly made or received telephone calls from the Company that were recorded
without their knowledge or consent. On February 7, 2008, class certification was granted and the class defined to consist of (1) all persons in California who received telephone calls from the Company and whose calls were recorded without
their consent within three years of October 11, 2006, and (2) all persons who made calls from California to the Beverly Hills branch of the Company on August 8, 2006. Plaintiffs sought to recover unspecified monetary damages plus
injunctive relief, including punitive and exemplary damages, interest, attorneys fees and costs. On October 16, 2009, the court granted final approval of the parties proposed settlement agreement. Objectors to the courts order
granting final approval of the parties settlement agreement filed notices of appeal which were subsequently dismissed on January 26, 2010. The Company paid the settlement amount to the Claims Administrator on March 5, 2010. The
matter will remain open through administration of the settlement.

On October 2, 2007, a class action complaint alleging
violations of the federal securities laws was filed in the United States District Court for the Southern District of New York against the Company and its then Chief Executive Officer and Chief Financial Officer, Mitchell H. Caplan and Robert J.
Simmons by Larry Freudenberg on his own behalf and on behalf of others similarly situated (the Freudenberg Action). On July 17, 2008, the trial court consolidated this action with four other purported class actions, all of which
were filed in the United States District Court for the Southern District of New York and which were based on the same facts and circumstances. On January 16, 2009, plaintiffs served their consolidated amended class action complaint in which
they also named Dennis Webb, the Companys former Capital Markets Division President as a defendant. Plaintiffs contend, among other things, that the value of the Companys stock between April 19, 2006 and November 9, 2007 was
artificially inflated because defendants issued materially false and misleading statements and failed to disclose that the Company was experiencing a rise in delinquency rates in its mortgage and home equity portfolios; failed to timely record an
impairment on its mortgage and home equity portfolios; materially overvalued its securities portfolio, which included assets backed by mortgages; and based on the foregoing, lacked a reasonable basis for the positive statements made about the
Companys earnings and prospects. Plaintiffs seek to recover damages in an amount to be proven at trial, including interest and attorneys fees and costs. Defendants filed their motion to dismiss on April 2, 2009, and briefing on
defendants motion to dismiss was completed on August 31, 2009. The Company intends to vigorously defend itself against these claims.

On August 15, 2008, Ronald M. Tate as trustee of the Ronald M. Tate Trust Dtd 4/13/88, and George Avakian filed an action in the
United States District Court for the Southern District of New York against the Company, Mitchell H. Caplan and Robert J. Simmons based on the same facts and circumstances, and containing the same claims, as the Freudenberg consolidated actions
discussed above. By agreement of the parties and approval of the court, the Tate action has been consolidated with the Freudenberg consolidated actions for the purpose of pre-trial discovery. Plaintiffs seek to recover damages in an amount to be
proven at trial, including interest, attorneys and expert fees and costs. The Company intends to vigorously defend itself against these claims.



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Based upon the same facts and circumstances alleged in the Freudenberg consolidated actions
above, a verified shareholder derivative complaint was filed in the United States District Court for the Southern District of New York on October 4, 2007 by Catherine Rubery, against the Company and its then Chief Executive Officer,
President/Chief Operating Officer, Chief Financial Officer and individual members of its board of directors. Plaintiff alleges, among other things, causes of action for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and
violation of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The above federal shareholder derivative complaint has been consolidated with another shareholder derivative complaint brought by shareholder Marilyn Clark in
the same court and against the same named defendants. Three similar derivative actions, based on the same facts and circumstances as the federal derivative actions, but alleging exclusively state causes of action, have been filed in the Supreme
Court of the State of New York, New York County and have been ordered consolidated in that court. In these state derivative actions, plaintiffs Frank Fosbre, Brian Kallinen and Alexander Guiseppone filed a consolidated amended complaint on
March 23, 2009. Plaintiffs in the foregoing actions seek unspecified monetary damages against the Individual Defendants in favor of the Company, plus an injunction compelling changes to the Companys Corporate Governance policies. By
agreement of the parties and approval of the respective courts, further proceedings in both these federal and state derivative actions will continue to trail those in the federal securities class actions discussed above.

On April 2, 2008, a class action complaint alleging violations of the federal securities laws was filed by John W. Oughtred on his
own behalf and on behalf of all others similarly situated in the United States District Court for the Southern District of New York against the Company. Plaintiff contends, among other things, that the Company committed various sales practice
violations in the sale of certain auction rate securities to investors between April 2, 2003, and February 13, 2008 by allegedly misrepresenting that these securities were highly liquid and safe investments for short term investing. On
December 18, 2008, plaintiffs filed their first amended class action complaint. Defendants filed their pending motion to dismiss plaintiffs amended complaint on February 5, 2009, and briefing on defendants motion to dismiss was
completed on April 15, 2009. Plaintiffs seek to recover damages in an amount to be proven at trial, or, in the alternative, rescission of auction rate securities purchases, plus interest and attorneys fees and costs. On March 18,
2010, the District Court dismissed the complaint without prejudice. On April 22, 2010, Plaintiff amended their complaint. The Company intends to continue to vigorously defend itself against the claims raised in this action.

On October 17, 2007, the SEC initiated an informal inquiry into matters related to the Companys mortgage loan and
mortgage-related securities investment portfolios. The Company is cooperating fully with the SEC in this matter.

Beginning in
approximately August 2008, representatives of various states attorneys general and FINRA initiated inquiries regarding the purchase of auction rate securities by E*TRADE Securities LLCs customers. E*TRADE Securities LLC is cooperating with
these inquiries. As of March 31, 2010, the total amount of auction rate securities held by all E*TRADE Securities LLC customers was approximately $167.3 million.

Prior to Lehman Brothers declaration of bankruptcy in September 2008, E*TRADE Bank was a counterparty to interest rate derivative
contracts with a subsidiary of Lehman Brothers. The declaration of bankruptcy by Lehman Brothers triggered an event of default and early termination under E*TRADE Banks International Swap Dealers Association Master Agreement. As of the date of
the event of default, E*TRADE Banks net amount due to the Lehman Brothers subsidiary was approximately $101 million, the majority of which was collateralized by securities held by or on behalf of the Lehman Brothers subsidiary. E*TRADE Bank
currently is negotiating with Lehman Brothers in an attempt to resolve the parties respective obligations.

On
January 19, 2010, the North Carolina Securities Division filed an administrative petition against E*TRADE Securities LLC seeking to revoke the North Carolina securities dealer registration of E*TRADE Securities LLC or, alternatively, to suspend
that registration until all North Carolina residents are made whole for their investments in auction rate securities purchased through E*TRADE Securities LLC. E*TRADE Securities LLC is defending that action. As of March 31, 2010, the total
amount of auction rate securities held by North Carolina customers is approximately $2.1 million.



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On February 3, 2010, a class action complaint was filed in the United States District
Court for the Northern District of California against E*TRADE Securities LLC by Joseph Roling on his own behalf and on behalf of all others similarly situated. The lead plaintiff alleges that E*TRADE Securities LLC unlawfully charged and collected
certain account activity fees from its customers. Claimant, on behalf of himself and the putative class, asserts breach of contract, unjust enrichment and violation of California Civil Code Section 1671 and seeks equitable and injunctive relief
for alleged illegal, unfair and fraudulent practices under Californias Unfair Competition Law, California Business and Professional Code Section 17200 et seq. The plaintiff seeks, among other things, certification of the class action on
behalf of alleged similarly situated plaintiffs, unspecified damages and restitution of amounts allegedly wrongfully collected by E*TRADE Securities LLC, attorneys fees and expenses and injunctive relief. The Company intends to vigorously defend
itself against the claims raised in this action.

On March 8, 2010, Lindsay Lohan filed a complaint in the New York
Supreme Court, Nassau County, against E*TRADE Bank and E*TRADE Securities LLC. The Plaintiff alleges that E*TRADEs television advertising made unauthorized use of her characterization and likeness in violation of Section 51 of the New
York State Civil Rights Law. The Claimant seeks $100 million in damages. The Company intends to vigorously defend itself against these claims.

In addition to the matters described above, the Company is subject to various legal proceedings and claims that arise in the normal
course of business which could have a material adverse effect on its financial position, results of operations or cash flows. In each pending matter, the Company contests liability or the amount of claimed damages. In view of the inherent difficulty
of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages, or where investigation or discovery have yet to be completed, the Company cannot predict with certainty the loss or range of
loss related to such matters, how such matters will be resolved, when they will ultimately be resolved, or what any eventual settlement, fine, penalty or other relief might be. Subject to the foregoing, the Company believes that the outcome of any
such pending matter will not have a material adverse effect on the consolidated financial condition of the Company, although the outcome could be material to the Companys or a business segments operating results in the future, depending,
among other things, upon the Companys or business segments income for such period.

An unfavorable outcome in any
matter that is not covered by insurance could have a material adverse effect on the Companys business, financial condition, results of operations or cash flows. In addition, even if the ultimate outcomes are resolved in the Companys
favor, the defense of such litigation could entail considerable cost or the diversion of the efforts of management, either of which could have a material adverse effect on the Companys business, financial condition, results of operations or
cash flows.

The Company maintains insurance coverage that management believes is reasonable and prudent. The principal
insurance coverage it maintains covers commercial general liability; property damage; hardware/software damage; cyber liability; directors and officers; employment practices liability; certain criminal acts against the Company; and errors and
omissions. The Company believes that such insurance coverage is adequate for the purpose of its business. The Companys ability to maintain this level of insurance coverage in the future, however, is subject to the availability of affordable
insurance in the marketplace.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

There have
been no material changes in our risk factors from those disclosed in our 2009 Annual Report on Form 10-K.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

None.



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|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



|ITEM 6. | EXHIBITS
|------- | --------



|      |  |                                                                                                        
|----- |  | -------------------------------------------------------------------------------------------------------
|      | 
|*10.1 |  | Employment Agreement between E*TRADE Financial Corporation and Steven J. Freiberg as of March 19, 2010.
|      | 
|*31.1 |  | CertificationSection 302 of the Sarbanes-Oxley Act of 2002                                            
|      | 
|*31.2 |  | CertificationSection 302 of the Sarbanes-Oxley Act of 2002                                            
|      | 
|*32.1 |  | CertificationSection 906 of the Sarbanes-Oxley Act of 2002                                            



|* |  | Filed herein.
|- |  | -------------



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: May 5, 2010



|                                           |  |                                                                                    
|------------------------------------------ |  | -----------------------------------------------------------------------------------
|E*TRADE Financial Corporation
(Registrant)
|                                           | 
|By                                         |  | /s/    STEVEN J. FREIBERG                                                          
|                                           |  | Steven J. Freiberg
Chief Executive Officer
(Principal Executive Officer)           
|                                           | 
|By                                         |  | /s/    BRUCE P.
NOLOP                                                              
|                                           |  | Bruce P. Nolop
Chief Financial Officer
(Principal Financial and Accounting Officer)



89