Online broker

E*Trade

(EGRP)

made a point about diversification Thursday.

The company

said that it had earned 2 cents a share, excluding certain items, in its quarter ended Sept. 30, when analysts had expected it to break even.

What was responsible for the surprising profit? Its unsung banking business.

Combined with steady operating expenses and costs -- which included a 20% cut in advertising and marketing spending -- E*Trade improved from a loss of 12 cents a share in the year-ago quarter.

Against a backdrop of earnings warnings and disappointing results from financial services companies both large and small and on a day when the markets were rallying, the news sparked interest in E*Trade's downtrodden stock, driving it up $2.44, or 21%, to $13.88.

Ameritrade

(AMTD) - Get Report

, an online brokerage set to report results next week, also saw its stock climb $1.69, or 13%, to $14.56.

Brokerages typically are very sensitive to market swings and online and discount brokerages, in particular, can be hit hard because much of their revenue comes from commissions. But E*Trade's expanded sources may indeed be taking hold, as trading revenue declined as a percentage of overall revenue to 44% from 54% in the fiscal third quarter.

The diversification came from the purchase of

TST Recommends

Telebanc

(now

E*Trade Bank

) early this year. And E*Trade promises that it'll pay off in future quarters, too. Even if the markets remain rocky, E*Trade expects it'll hit the

First Call/Thomson Financial

consensus estimate of 22 cents a share in fiscal 2001, which ends next Sept. 30, said Len Purkis, E*Trade's chief financial officer. He expects revenue will reach $1.7 billion to $1.9 billion, up from $1.37 billion in fiscal 2000.

"There remains upside to the bottom line if there is a strong rebound in equity markets," Purkis said during a conference call.

For the fiscal first quarter, Purkis said E*Trade expects results between break even and a profit of 2 cents a share. New accounts should total 260,000 to 300,000, a bit lower than the most-recent quarter's net new accounts of 337,290, he said, and fiscal first quarter revenue should be consistent with the fourth quarter's $340.3 million, unless the markets rebound, which could lead to strong growth. In the year-ago fiscal fourth quarter, E*Trade had $193 million in revenue and $330.3 million in the fiscal third quarter.

E*Trade's earnings were a surprise for two other reasons: The company has a history of booking losses because of heavy advertising spending, and the drastic decline in

Knight Trading's

(NITE)

trading numbers had some investors worrying how Knight's customers, the online brokers, were faring.

E*Trade obviously experienced the same decline in trading activity as its online competitors. Its daily average trades fell 11% to 150,000 in the most recent quarter from the previous one and trading revenue fell to $152 million from $180 million. The daily average inflow of assets fell to $94.5 million from $121 million in the fiscal third quarter. But the bank continued to grow, adding to E*Trade's $300.7 million in interest income, up from $257.2 million in the third quarter.

For fiscal 2000, though, E*Trade booked a loss of 11 cents a share. That's better than the 30 cents a share it lost in fiscal 1999, but it makes 22 cents a share for fiscal 2001 look like quite a goal indeed.