10-Q 1 d495590d10q.htm FORM 10-Q FORM 10-Q
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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, 2013

OR

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from              to             

Commission file number: 1-35509

 

 

TD Ameritrade Holding Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   82-0543156

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

200 South 108th Avenue, Omaha, Nebraska, 68154

(Address of principal executive offices) (Zip Code)

(402) 331-7856

(Registrant’s telephone number, including area code)

4211 South 102nd Street, Omaha, Nebraska 68127

(Former address)

 

 

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, 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.    Yes  x    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 the 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

As of April 29, 2013, there were 550,175,447 outstanding shares of the registrant’s common stock.

 

 

 


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TD AMERITRADE HOLDING CORPORATION

INDEX

 

          Page No.  
   PART I - FINANCIAL INFORMATION   
Item 1.    Financial Statements   
   Report of Independent Registered Public Accounting Firm      3   
   Condensed Consolidated Balance Sheets      4   
   Condensed Consolidated Statements of Income      5   
   Condensed Consolidated Statements of Comprehensive Income      6   
   Condensed Consolidated Statements of Cash Flows      7   
   Notes to Condensed Consolidated Financial Statements      9   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      28   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      43   
Item 4.    Controls and Procedures      44   
   PART II - OTHER INFORMATION   
Item 1.    Legal Proceedings      44   
Item 1A.    Risk Factors      45   
Item 2.    Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities      46   
Item 6.    Exhibits      46   
   Signatures      48   

 

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PART I - FINANCIAL INFORMATION

Item  1. – Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

TD Ameritrade Holding Corporation

We have reviewed the condensed consolidated balance sheet of TD Ameritrade Holding Corporation and subsidiaries (the Company) as of March 31, 2013, the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended March 31, 2013 and 2012, and the condensed consolidated statements of cash flows for the six-month periods ended March 31, 2013 and 2012. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of TD Ameritrade Holding Corporation and subsidiaries as of September 30, 2012, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein) and in our report dated November 26, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2012, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ ERNST & YOUNG LLP

Chicago, Illinois

May 6, 2013

 

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     March 31,
2013
    September 30,
2012
 
     (In millions)  

ASSETS

    

Cash and cash equivalents

   $ 1,218      $ 915   

Short-term investments

     4        154   

Cash and investments segregated and on deposit for regulatory purposes

     4,384        4,030   

Receivable from brokers, dealers and clearing organizations

     1,299        1,110   

Receivable from clients, net

     8,850        8,647   

Receivable from affiliates

     136        85   

Other receivables, net

     129        118   

Securities owned, at fair value

     363        343   

Investments available-for-sale, at fair value

     97        70   

Property and equipment at cost, net

     494        444   

Goodwill

     2,467        2,467   

Acquired intangible assets, net

     887        932   

Deferred income taxes

     2        2   

Other assets

     190        196   
  

 

 

   

 

 

 

Total assets

   $ 20,520      $ 19,513   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Payable to brokers, dealers and clearing organizations

   $ 2,316      $ 1,992   

Payable to clients

     11,517        10,728   

Accounts payable and accrued liabilities

     624        632   

Payable to affiliates

     5        4   

Notes payable

     165        —     

Deferred revenue

     20        28   

Long-term debt

     1,079        1,345   

Capitalized lease obligations

     4        5   

Deferred income taxes

     378        354   
  

 

 

   

 

 

 

Total liabilities

     16,108        15,088   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock, $0.01 par value; 100 million shares authorized, none issued

     —          —     

Common stock, $0.01 par value; one billion shares authorized; 631 million shares issued; March 31, 2013 - 550 million shares outstanding; September 30, 2012 - 545 million shares outstanding

     6        6   

Additional paid-in capital

     1,579        1,587   

Retained earnings

     4,019        4,100   

Treasury stock, common, at cost: March 31, 2013 - 81 million shares;

    

September 30, 2012 - 86 million shares

     (1,227     (1,286

Net unrealized gain on investments available-for-sale

     35        18   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,412        4,425   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $       20,520      $ 19,513   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended March 31,     Six Months Ended March 31,  
     2013     2012     2013     2012  
     (In millions, except per share amounts)  

Revenues:

        

Transaction-based revenues:

        

Commissions and transaction fees

   $ 287      $ 292      $ 544      $ 566   

Asset-based revenues:

        

Interest revenue

     116        108        234        219   

Brokerage interest expense

     (2     (1     (3     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest revenue

     114        107        231        216   

Insured deposit account fees

     200        209        405        414   

Investment product fees

     62        46        117        90   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total asset-based revenues

     376        362        753        720   

Other revenues

     16        19        33        41   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     679        673        1,330        1,327   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Employee compensation and benefits

     178        174        346        347   

Clearing and execution costs

     27        24        51        44   

Communications

     29        27        57        55   

Occupancy and equipment costs

     40        37        79        75   

Depreciation and amortization

     20        18        41        35   

Amortization of acquired intangible assets

     22        23        45        46   

Professional services

     33        44        67        89   

Advertising

     76        84        128        140   

Other

     17        23        38        48   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     442        454        852        879   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     237        219        478        448   

Other expense (income):

        

Interest on borrowings

     6        7        12        14   

Gain on sale of investments

     —          —          (2     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense (income)

     6        7        10        14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax income

     231        212        468        434   

Provision for income taxes

     87        75        177        145   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 144      $ 137      $ 291      $ 289   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share - basic

   $ 0.26      $ 0.25      $ 0.53      $ 0.53   

Earnings per share - diluted

   $ 0.26      $ 0.25      $ 0.53      $ 0.52   

Weighted average shares outstanding - basic

     549        549        547        549   

Weighted average shares outstanding - diluted

     554        554        552        555   

Dividends declared per share

   $ 0.09      $ 0.06      $ 0.68      $ 0.12   

See notes to condensed consolidated financial statements.

 

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended March 31,      Six Months Ended March 31,  
     2013     2012      2013     2012  
     (In millions)  

Net income

   $ 144      $ 137       $ 291      $ 289   

Other comprehensive income:

         

Change in net unrealized gain on investments available-for-sale:

         

Net unrealized gain

     6        —           27        —     

Income tax effect

     (2     —           (10     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other comprehensive income

     4        —           17        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 148      $ 137       $ 308      $ 289   
  

 

 

   

 

 

    

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended March 31,  
     2013     2012  
     (In millions)  

Cash flows from operating activities:

    

Net income

   $ 291      $ 289   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     41        35   

Amortization of acquired intangible assets

     45        46   

Deferred income taxes

     14        22   

Gain on sale of investments

     (2     —     

Stock-based compensation

     15        18   

Excess tax benefits on stock-based compensation

     (24     (15

Other, net

     (1     6   

Changes in operating assets and liabilities:

    

Cash and investments segregated and on deposit for regulatory purposes

     (354     (2,956

Receivable from brokers, dealers and clearing organizations

     (189     (541

Receivable from clients, net

     (203     (518

Receivable from/payable to affiliates, net

     (50     10   

Other receivables, net

     (11     (3

Securities owned

     (20     72   

Other assets

     (10     5   

Payable to brokers, dealers and clearing organizations

     324        636   

Payable to clients

     789        3,184   

Accounts payable and accrued liabilities

     13        13   

Deferred revenue

     (8     (5
  

 

 

   

 

 

 

Net cash provided by operating activities

     660        298   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property and equipment

     (92     (77

Purchase of short-term investments

     —          (50

Proceeds from sale and maturity of short-term investments

     150        —     

Proceeds from sale of investments

     3        —     

Other

     1        1   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

             62        (126
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(Unaudited)

 

     Six Months Ended March 31,  
     2013     2012  
     (In millions)  

Cash flows from financing activities:

    

Principal payments on long-term debt

   $ (250   $ —     

Proceeds from notes payable

     275        —     

Principal payments on notes payable

     (110     —     

Payment of cash dividends

     (372     (66

Proceeds from exercise of stock options; Six months ended March 31, 2013 - 4.6 million shares; 2012 - 1.2 million shares

     19        5   

Purchase of treasury stock; Six months ended March 31, 2013 - 0.2 million shares; 2012 - 8.0 million shares

     (4     (130

Principal payments on capital lease obligations

     (1     (2

Excess tax benefits on stock-based compensation

     24        15   
  

 

 

   

 

 

 

Net cash used in financing activities

     (419     (178
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     303        (6

Cash and cash equivalents at beginning of period

     915        1,032   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,218      $ 1,026   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid

   $ 16      $ 17   

Income taxes paid

   $ 103      $ 100   

See notes to condensed consolidated financial statements.

 

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TD AMERITRADE HOLDING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three-Month and Six-Month Periods Ended March 31, 2013 and 2012

(Unaudited)

1. BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of TD Ameritrade Holding Corporation and its wholly-owned subsidiaries (collectively, the “Company”). Intercompany balances and transactions have been eliminated.

These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments, which are all of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report filed on Form 10-K for the fiscal year ended September 30, 2012.

Recently Adopted Accounting Pronouncements

ASU 2011-05 — On October 1, 2012, the Company adopted Accounting Standards Update (“ASU”) 2011-05, Presentation of Comprehensive Income. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and allows two options for presenting the components of net income and other comprehensive income: (1) in a single continuous statement of comprehensive income or (2) in two separate but consecutive statements, consisting of a statement of net income followed by a separate statement of other comprehensive income. The Company selected the second option for adoption of ASU 2011-05. The adoption of ASU 2011-05 resulted only in changes to the manner in which components of other comprehensive income are presented in the Company’s condensed consolidated financial statements.

2. CASH AND CASH EQUIVALENTS

The Company’s cash and cash equivalents is summarized in the following table (dollars in millions):

 

     March 31,
2013
     September 30,
2012
 

Corporate

   $ 391       $ 403   

Broker-dealer subsidiaries

     719         406   

Trust company subsidiary

     84         95   

Investment advisory subsidiaries

     24         11   
  

 

 

    

 

 

 

Total

   $           1,218       $ 915   
  

 

 

    

 

 

 

Capital requirements may limit the amount of cash available for dividend from the broker-dealer and trust company subsidiaries to the parent company. Most of the trust company cash and cash equivalents arises from client transactions in the process of settlement, and therefore is generally not available for corporate purposes. Cash and cash equivalents of the investment advisory subsidiaries is generally not available for corporate purposes.

 

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3. CASH AND INVESTMENTS SEGREGATED AND ON DEPOSIT FOR REGULATORY PURPOSES

Cash and investments segregated and on deposit for regulatory purposes consists of the following (dollars in millions):

 

     March 31,
2013
     September 30,
2012
 

Reverse repurchase agreements (collateralized by U.S. government debt securities)

   $ 2,476       $ 2,181   

U.S. government debt securities

     1,724         1,564   

Cash in demand deposit accounts

     28         179   

Cash on deposit with futures commission merchant

     105         96   

U.S. government debt securities on deposit with futures commission merchant

     51         10   
  

 

 

    

 

 

 

Total

   $           4,384       $ 4,030   
  

 

 

    

 

 

 

4. INCOME TAXES

The Company’s effective income tax rate for the six months ended March 31, 2013 was 37.8%, compared to 33.4% for the six months ended March 31, 2012. The provision for income taxes for the six months ended March 31, 2012 was significantly lower than normal primarily due to $19 million of favorable resolutions of state income tax matters. This favorably impacted the Company’s earnings for the six months ended March 31, 2012 by approximately three cents per share.

5. NOTES PAYABLE AND LONG-TERM DEBT

Notes payable and long-term debt consist of the following (dollars in millions):

 

March 31, 2013

   Face
Value
     Unamortized
Discount
    Fair Value
Adjustment (1)
     Net Carrying
Value
 

Notes payable:

          

Parent Revolving Facility

   $ 165       $  —        $  —         $ 165   

Senior Notes:

          

4.150% Senior Notes due 2014

     500         —          21         521   

5.600% Senior Notes due 2019

     500         (1     59         558   
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal - Long-term debt

     1,000         (1     80         1,079   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total notes payable and long-term debt

   $ 1,165       $ (1   $ 80       $ 1,244   
  

 

 

    

 

 

   

 

 

    

 

 

 

September 30, 2012

   Face
Value
     Unamortized
Discount
    Fair Value
Adjustment (1)
     Net Carrying
Value
 

Senior Notes:

          

2.950% Senior Notes due 2012

   $ 250       $ —        $ 1       $ 251   

4.150% Senior Notes due 2014

     500         —          27         527   

5.600% Senior Notes due 2019

     500         (1     68         567   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total long-term debt

   $ 1,250       $ (1   $ 96       $ 1,345   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Fair value adjustments relate to changes in the fair value of the debt while in a fair value hedging relationship. See “Interest Rate Swaps” below.

Interest Rate Swaps – The Company is exposed to changes in the fair value of its fixed-rate Senior Notes resulting from interest rate fluctuations. To hedge this exposure, on December 30, 2009, the Company entered into fixed-for-variable interest rate swaps on the 2.950% Senior Notes due December 1, 2012 (the “2012 Notes”) and the 4.150% Senior Notes due December 1, 2014 (the “2014 Notes”) for notional amounts of $250 million and $500 million, respectively, with maturity dates matching the respective maturity dates of the 2012 Notes and 2014 Notes. In addition, on January 7, 2011, the Company entered into a fixed-for-variable interest rate swap on the 5.600% Senior Notes due December 1, 2019 (the “2019 Notes”) for a notional amount of $500 million, with a maturity date matching the maturity date of the 2019 Notes. The interest rate swaps effectively change the fixed-rate interest on the Senior Notes to variable-rate interest. Under the terms of the interest rate swap agreements, the Company receives semi-annual fixed-rate interest payments based on the same rates applicable to the Senior Notes, and makes quarterly variable-rate interest payments based on three-month LIBOR plus (a) 0.9693% for the swap on the

 

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2012 Notes, (b) 1.245% for the swap on the 2014 Notes and (c) 2.3745% for the swap on the 2019 Notes. On December 1, 2012, the Company paid in full the outstanding principal under the 2012 Notes and the interest rate swap on the 2012 Notes expired. As of March 31, 2013, the weighted-average effective interest rate on the Senior Notes was 2.10%.

The interest rate swaps are accounted for as fair value hedges and qualify for the shortcut method of accounting. Changes in the payment of interest resulting from the interest rate swaps are recorded in interest on borrowings on the Condensed Consolidated Statements of Income. Changes in fair value of the interest rate swaps are completely offset by changes in fair value of the related notes, resulting in no effect on net income. The following table summarizes gains and losses resulting from changes in the fair value of the interest rate swaps and the hedged fixed-rate debt for the periods indicated (dollars in millions):

 

     Three Months Ended March 31,     Six Months Ended March 31,  
     2013     2012     2013     2012  

Gain (loss) on fair value of interest rate swaps

   $ (8   $ (8   $ (16   $ (10

Gain (loss) on fair value of hedged fixed-rate debt

     8        8        16        10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gain (loss) recorded in interest on borrowings

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes the fair value of outstanding derivatives designated as hedging instruments on the Condensed Consolidated Balance Sheets (dollars in millions):

 

     March 31,
2013
     September 30,
2012
 

Derivatives recorded under the caption Other assets:

     

Interest rate swap assets

   $               80       $ 96   

The interest rate swaps are subject to counterparty credit risk. Credit risk is managed by limiting activity to approved counterparties that meet a minimum credit rating threshold and by entering into credit support agreements. The bilateral credit support agreements related to the interest rate swaps require daily collateral coverage, in the form of cash or U.S. Treasury securities, for the aggregate fair value of the interest rate swaps. As of March 31, 2013 and September 30, 2012, the interest rate swap counterparties for the Senior Notes had pledged $94 million and $113 million of collateral, respectively, to the Company in the form of cash. A liability for collateral pledged to the Company in the form of cash is recorded in accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheets.

TD Ameritrade Holding Corporation Credit Agreement — On December 28, 2012, the Company borrowed $275 million under the TD Ameritrade Holding Corporation senior unsecured revolving credit facility (the “Parent Revolving Facility”). The Company used the proceeds to fund a $0.50 per share special cash dividend, paid on the Company’s common stock on December 31, 2012. During the three months ended March 31, 2013, the Company repaid $110 million of the borrowings. As of March 31, 2013, $165 million of borrowings remained outstanding under the Parent Revolving Facility. The maturity date of the Parent Revolving Facility is June 28, 2014. Interest is payable monthly based on one-month LIBOR plus an interest rate margin. As of March 31, 2013, the interest rate margin was 1.50%, determined by reference to the Company’s public debt ratings, and the interest rate was 1.70%.

6. CAPITAL REQUIREMENTS

The Company’s broker-dealer subsidiaries are subject to the SEC Uniform Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of 1934, or the “Exchange Act”), administered by the SEC and the Financial Industry Regulatory Authority (“FINRA”), which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirement may fluctuate on a daily basis.

TD Ameritrade Clearing, Inc. (“TDAC”), the Company’s clearing broker-dealer subsidiary, and TD Ameritrade, Inc., the Company’s introducing broker-dealer subsidiary, compute net capital under the alternative method as permitted by Rule 15c3-1. TDAC is required to maintain minimum net capital of the greater of $1.5 million, which is based on the type of business conducted by the broker-dealer, or 2% of aggregate debit balances arising from client transactions.

Under Rule 15c3-1, TD Ameritrade, Inc. is required to maintain minimum net capital of the greater of $250,000 or 2% of aggregate debit balances. As a futures commission merchant registered with the Commodity Futures Trading Commission (“CFTC”), TD Ameritrade, Inc. is also subject to CFTC Regulation 1.17 under the Commodity Exchange Act, administered by the CFTC and the National Futures Association, which requires the maintenance of minimum net capital of the greatest of (a) $1.0 million, (b) its futures risk-based capital requirement, equal to 8% of the total risk margin requirement for all futures positions carried by the futures commission merchant in client and nonclient accounts, or (c) its Rule 15c3-1 net capital requirement.

 

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Under the alternative method, a broker-dealer may not repay any subordinated borrowings, pay cash dividends or make any unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount of (a) less than 5% of aggregate debit balances, (b) less than 110% of its risk-based capital requirement under CFTC Regulation 1.17, or (c) less than 120% of its minimum dollar requirement. These net capital thresholds, which are specified in Exchange Act Rule 17a-11 and CFTC Regulation 1.12, are typically referred to as “early warning” net capital thresholds.

Net capital and net capital requirements for the Company’s broker-dealer subsidiaries are summarized in the following tables (dollars in millions):

 

TD Ameritrade Clearing, Inc.

 

Date

   Net Capital      Required
Net Capital
(2% of
Aggregate
Debit Balances)
     Net Capital
in Excess  of
Required

Net Capital
     Net Capital
in Excess  of
Early Warning
Threshold

(5% of
Aggregate
Debit Balances)
     Ratio of
Net Capital
to Aggregate
Debit Balances
 

March 31, 2013

   $  1,215       $  215       $  1,000       $  677         11.29

September 30, 2012

   $ 1,302       $ 203       $ 1,099       $ 796         12.86

TD Ameritrade, Inc.

        

Date

   Net Capital      Required
Net Capital (8%
of Total
Risk Margin or
Minimum Dollar
Requirement)
     Net Capital
in Excess of
Required
Net Capital
     Net Capital
in Excess of
Early Warning
Threshold
(110% of
Required

Net Capital)
        

March 31, 2013

   $ 226       $ 12       $ 214       $ 212      

September 30, 2012

   $ 261       $ 8       $ 253       $ 252      

The Company’s non-depository trust company subsidiary, TD Ameritrade Trust Company (“TDATC”), is subject to capital requirements established by the State of Maine, which require TDATC to maintain minimum Tier 1 capital, as defined. TDATC’s Tier 1 capital was $21 million and $20 million as of March 31, 2013 and September 30, 2012, respectively, which exceeded the required Tier 1 capital by $8 million and $10 million, respectively.

7. COMMITMENTS AND CONTINGENCIES

Legal and Regulatory Matters

Reserve Fund Matters – During September 2008, The Reserve, an independent mutual fund company, announced that the net asset value of the Reserve Yield Plus Fund declined below $1.00 per share. The Yield Plus Fund was not a money market mutual fund, but its stated objective was to maintain a net asset value of $1.00 per share. TD Ameritrade, Inc.’s clients continue to hold shares in the Yield Plus Fund (now known as “Yield Plus Fund – In Liquidation”), which is being liquidated. On July 23, 2010, The Reserve announced that through that date it had distributed approximately 94.8% of the Yield Plus Fund assets as of September 15, 2008 and that the Yield Plus Fund had approximately $39.7 million in total remaining assets. The Reserve stated that the fund’s Board of Trustees has set aside almost the entire amount of the remaining assets to cover potential claims, fees and expenses. The Company estimates that TD Ameritrade, Inc. clients’ current positions held in the Reserve Yield Plus Fund amount to approximately 79% of the fund.

 

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On January 27, 2011, TD Ameritrade, Inc. entered into a settlement with the SEC, agreeing to pay $0.012 per share to all eligible current or former clients that purchased shares of the Yield Plus Fund and continued to own those shares. Clients who purchased Yield Plus Fund shares through independent registered investment advisors were not eligible for the payment. In February 2011, the Company paid clients approximately $10 million under the settlement agreement.

In November 2008, a purported class action lawsuit was filed with respect to the Yield Plus Fund. The lawsuit is captioned Ross v. Reserve Management Company, Inc. et al. and is pending in the U.S. District Court for the Southern District of New York. The Ross lawsuit is on behalf of persons who purchased shares of Reserve Yield Plus Fund. On November 20, 2009, the plaintiffs filed a first amended complaint naming as defendants the fund’s advisor, certain of its affiliates and the Company and certain of its directors, officers and shareholders as alleged control persons. The complaint alleges claims of violations of the federal securities laws and other claims based on allegations that false and misleading statements and omissions were made in the Reserve Yield Plus Fund prospectuses and in other statements regarding the fund. The complaint seeks an unspecified amount of compensatory damages including interest, attorneys’ fees, rescission, exemplary damages and equitable relief. On January 19, 2010, the defendants submitted motions to dismiss the complaint. The motions are pending.

The Company estimates that its clients’ current aggregate shortfall, based on the original par value of their holdings in the Yield Plus Fund, less the value of fund distributions to date and the value of payments under the SEC settlement, is approximately $36 million. This amount does not take into account any assets remaining in the fund that may become available for future distributions.

The Company is unable to predict the outcome or the timing of the ultimate resolution of the Ross lawsuit, or the potential loss, if any, that may result. However, management believes the outcome is not likely to have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

Other Legal and Regulatory Matters – The Company is subject to a number of other lawsuits, arbitrations, claims and other legal proceedings in connection with its business. Some of these legal actions include claims for substantial or unspecified compensatory and/or punitive damages. In addition, in the normal course of business, the Company discusses matters with its regulators raised during regulatory examinations or otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions. Accounting Standards Codification (“ASC”) 450, Loss Contingencies, governs the recognition and disclosure of loss contingencies, including potential losses from legal and regulatory matters. ASC 450 categorizes loss contingencies using three terms based on the likelihood of occurrence of events that result in a loss: “probable” means that “the future event or events are likely to occur;” “remote” means that “the chance of the future event or events occurring is slight;” and “reasonably possible” means that “the chance of the future event or events occurring is more than remote but less than likely.” Under ASC 450, the Company accrues for losses that are considered both probable and reasonably estimable. The Company may incur losses in addition to the amounts accrued where the losses are greater than estimated by management, or for matters for which an unfavorable outcome is considered reasonably possible, but not probable.

The Company estimates that the aggregate range of reasonably possible losses in excess of amounts accrued is from $0 to $60 million as of March 31, 2013. This estimated aggregate range of reasonably possible losses is based upon currently available information for those legal and regulatory matters in which the Company is involved, taking into account the Company’s best estimate of reasonably possible losses for those cases as to which an estimate can be made. For certain cases, the Company does not believe an estimate can currently be made, as some cases are in preliminary stages and some cases have no specific amounts claimed. The Company’s estimate involves significant judgment, given the varying stages of the proceedings and the inherent uncertainty of predicting outcomes. The estimated range will change from time to time as the underlying matters, stages of proceedings and available information change. Actual losses may vary significantly from the current estimated range.

The Company believes, based on its current knowledge and after consultation with counsel, that the ultimate disposition of these legal and regulatory matters, individually or in the aggregate, is not likely to have a material adverse effect on the financial condition or cash flows of the Company. However, in light of the uncertainties involved in such matters, the Company is unable to predict the outcome or the timing of the ultimate resolution of these matters, or the potential losses, fines, penalties or equitable relief, if any, that may result, and it is possible that the ultimate resolution of one or more of these matters may be material to the Company’s results of operations for a particular reporting period.

Income Taxes

The Company’s federal and state income tax returns are subject to examination by taxing authorities. Because the application of tax laws and regulations to many types of transactions is subject to varying interpretations, amounts reported in the condensed consolidated financial statements could be significantly changed at a later date upon final determinations by taxing authorities. The Toronto-Dominion Bank (“TD”) has agreed to indemnify the Company for tax obligations, if any, pertaining to activities of TD Waterhouse Group, Inc. (“TD Waterhouse”) prior to the Company’s acquisition of TD Waterhouse in January 2006.

 

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General Contingencies

In the ordinary course of business, there are various contingencies that are not reflected in the condensed consolidated financial statements. These include the Company’s broker-dealer subsidiaries’ client activities involving the execution, settlement and financing of various client securities, options, futures and foreign exchange transactions. These activities may expose the Company to credit risk in the event the clients are unable to fulfill their contractual obligations.

The Company extends margin credit and leverage to its clients. In margin transactions, the Company extends credit to the client, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the client’s account. In connection with these activities, the Company also executes and clears client transactions involving the sale of securities not yet purchased (“short sales”). Such margin-related transactions may expose the Company to credit risk in the event a client’s assets are not sufficient to fully cover losses that the client may incur. Leverage involves securing a large potential future obligation with a lesser amount of cash and securities. The risks associated with margin credit and leverage increase during periods of rapid market movements, or in cases where leverage or collateral is concentrated and market movements occur. In the event the client fails to satisfy its obligations, the Company has the authority to purchase or sell financial instruments in the client’s account at prevailing market prices in order to fulfill the client’s obligations. However, during periods of rapid market movements, clients who utilize margin credit or leverage and who have collateralized their obligations with securities may find that the securities have a rapidly depreciating value and may not be sufficient to cover their obligations in the event of liquidation. The Company seeks to mitigate the risks associated with its client margin and leverage activities by requiring clients to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels throughout each trading day and, pursuant to such guidelines, requires clients to deposit additional collateral, or to reduce positions, when necessary.

The Company loans securities temporarily to other broker-dealers in connection with its broker-dealer business. The Company receives cash as collateral for the securities loaned. Increases in securities prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the market value of securities loaned on a daily basis and requiring additional cash as collateral when necessary, and by participating in a risk-sharing program offered through the Options Clearing Corporation (“OCC”).

The Company borrows securities temporarily from other broker-dealers in connection with its broker-dealer business. The Company deposits cash as collateral for the securities borrowed. Decreases in securities prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event the counterparty to these transactions does not return the cash deposited, the Company may be exposed to the risk of selling the securities at prevailing market prices. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the collateral values on a daily basis and requiring collateral to be returned by the counterparties when necessary, and by participating in a risk-sharing program offered through the OCC.

The Company transacts in reverse repurchase agreements (securities purchased under agreements to resell) in connection with its broker-dealer business. The Company’s policy is to take possession or control of securities with a market value in excess of the principal amount loaned, plus accrued interest, in order to collateralize resale agreements. The Company monitors the market value of the underlying securities that collateralize the related receivable on resale agreements on a daily basis and may require additional collateral when deemed appropriate.

 

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The following table summarizes client excess margin securities and stock borrowings that were available to the Company to utilize as collateral on various borrowings or for other purposes, and the amount of that collateral loaned or repledged by the Company (dollars in billions):

 

     March 31,
2013
     September 30,
2012
 

Client excess margin securities

   $ 12.2       $ 12.0   

Stock borrowings

     1.2         0.9   
  

 

 

    

 

 

 

Total collateral available

   $ 13.4       $ 12.9   
  

 

 

    

 

 

 

Collateral loaned

   $ 2.3       $ 1.9   

Collateral repledged

     1.6         1.2   
  

 

 

    

 

 

 

Total collateral loaned or repledged

   $             3.9       $ 3.1   
  

 

 

    

 

 

 

The Company is subject to cash deposit and collateral requirements with clearinghouses based on its clients’ trading activity. The following table summarizes cash deposited with and securities pledged to clearinghouses by the Company (dollars in millions):

 

     March 31,
2013
     September 30,
2012
 

Cash

   $ 120       $ 121   

U.S. government debt securities

     60         56   
  

 

 

    

 

 

 

Total

   $             180       $ 177   
  

 

 

    

 

 

 

Guarantees

The Company is a member of and provides guarantees to securities clearinghouses and exchanges in connection with client trading activities. Under related agreements, the Company is generally required to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. The Company’s liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted to the clearinghouse as collateral. However, the potential for the Company to be required to make payments under these agreements is considered remote. Accordingly, no contingent liability is carried on the Condensed Consolidated Balance Sheets for these guarantees.

The Company clears its clients’ futures transactions on an omnibus account basis through an unaffiliated clearing firm. The Company has agreed to indemnify the unaffiliated clearing firm for any loss that it may incur for the client transactions introduced to it by the Company.

See “Insured Deposit Account Agreement” in Note 10 for a description of a guarantee included in that agreement.

Employment Agreements

The Company has entered into employment agreements with several of its key executive officers. These employment agreements generally provide for annual base salary and incentive compensation, as well as stock award acceleration and severance payments in the event of termination of employment under certain defined circumstances or changes in control of the Company. Incentive compensation, a portion of which is awarded in the form of stock-based compensation, is based on the Company’s financial performance and other factors.

8. FAIR VALUE DISCLOSURES

ASC 820-10, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.

ASC 820-10 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability, developed based on market data

 

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obtained from sources independent of the Company. Unobservable inputs reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:

 

   

Level 1— Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. This category includes active exchange-traded funds, money market mutual funds, mutual funds and equity securities.

 

   

Level 2— Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Such inputs include quoted prices in markets that are not active, quoted prices for similar assets and liabilities in active and inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. This category includes most debt securities and other interest-sensitive financial instruments. This category also includes convertible preferred equity securities for which the fair value is measured on an as-converted basis.

 

   

Level 3 — Unobservable inputs for the asset or liability, where there is little, if any, observable market activity or data for the asset or liability. This category includes assets and liabilities related to money market and other mutual funds managed by The Reserve for which the net asset value has declined below $1.00 per share and the funds are being liquidated. This category also includes auction rate securities for which the periodic auctions have failed.

The following tables present the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and September 30, 2012 (dollars in millions):

 

     As of March 31, 2013  
     Level 1      Level 2      Level 3      Fair Value  

Assets:

           

Cash equivalents:

           

Money market mutual funds

   $ 1,026       $ —         $ —         $ 1,026   

Short-term investments:

           

U.S. government debt securities

     —           4         —           4   

Investments segregated for regulatory purposes:

           

U.S. government debt securities

     —           1,775         —           1,775   

Securities owned:

           

Auction rate securities

     —           —           5         5   

Money market and other mutual funds

     —           —           1         1   

U.S. government debt securities

     —           352         —           352   

Other

     1         4         —           5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal - Securities owned

     1         356         6         363   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments available-for-sale:

           

Equity securities

     97         —           —           97   

Other assets:

           

Interest rate swaps(1)

     —           80         —           80   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 1,124       $ 2,215       $ 6       $ 3,345   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Accounts payable and accrued liabilities:

           

Securities sold, not yet purchased:

           

Equity securities

   $ 3       $ —         $ —         $ 3   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) See “Interest Rate Swaps” in Note 5 for details.

 

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     As of September 30, 2012  
     Level 1      Level 2      Level 3      Fair Value  

Assets:

           

Cash equivalents:

           

Money market mutual funds

   $  768       $ —         $ —         $ 768   

U.S. government debt securities

     —           50         —           50   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal - Cash equivalents

     768         50         —           818   
  

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments:

           

U.S. government debt securities

     —           154         —           154   

Investments segregated for regulatory purposes:

           

U.S. government debt securities

     —           1,574         —           1,574   

Securities owned:

           

Auction rate securities

     —           —           6         6   

Money market and other mutual funds

     —           —           1         1   

U.S. government debt securities

     —           333         —           333   

Other

     1         2         —           3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal - Securities owned

     1         335         7         343   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments available-for-sale:

           

Convertible preferred equity securities

     —           70         —           70   

Other assets:

           

Interest rate swaps(1)

     —           96         —           96   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 769       $ 2,279       $ 7       $ 3,055   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Accounts payable and accrued liabilities:

           

Securities sold, not yet purchased:

           

Equity securities

   $ 3       $ —         $ —         $ 3   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) See “Interest Rate Swaps” in Note 5 for details.

 

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There were no transfers between any levels of the fair value hierarchy during the periods presented in the table below. The following table presents the changes in Level 3 assets measured at fair value on a recurring basis for the three months and six months ended March 31, 2013 and 2012 (dollars in millions):

 

     Three Months Ended  
     March 31, 2013      March 31, 2012  
     Auction Rate
Securities
    Money Market
and Other
Mutual Funds
     Auction Rate
Securities
    Money Market
and Other
Mutual Funds
 

Balance, beginning of period

   $ 6      $ 1       $ 8      $ 1   

Settlements

     (1     —           (1     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance, ending of period

   $ 5      $ 1       $ 7      $ 1   
  

 

 

   

 

 

    

 

 

   

 

 

 
     Six Months Ended  
     March 31, 2013      March 31, 2012  
     Auction Rate
Securities
    Money Market
and Other
Mutual Funds
     Auction Rate
Securities
    Money Market
and Other
Mutual Funds
 

Balance, beginning of period

   $ 6      $ 1       $ 20      $ 1   

Sales

     —          —           (2     —     

Settlements

     (1     —           (11     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance, ending of period

   $ 5      $ 1       $ 7      $ 1   
  

 

 

   

 

 

    

 

 

   

 

 

 

There were no nonfinancial assets or liabilities measured at fair value during the three months and six months ended March 31, 2013 and 2012.

Valuation Techniques

In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to the Company’s Level 1 assets and liabilities. If quoted prices in active markets for identical assets and liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. This pricing methodology applies to the Company’s Level 2 assets and liabilities.

Level 2 Measurements:

Convertible Preferred Equity Securities – As of September 30, 2012, these securities represented the Company’s investment in 39,000 shares of Knight Capital Group, Inc. (“Knight”) 2% convertible preferred shares. Each preferred share was convertible to 666.667 shares of Knight Class A common stock. The fair value of the preferred securities was based on quoted market prices of Knight Class A common stock on an as-converted basis. On February 28, 2013, all of the Company’s preferred shares were converted into approximately 26 million shares of Knight Class A common stock (categorized as Level 1 of the fair value hierarchy).

Debt Securities – Fair values for debt securities are based on prices obtained from an independent pricing vendor. The primary inputs to the valuation include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. The Company validates the vendor pricing by periodically comparing it to pricing from another independent pricing service. The Company has not adjusted prices obtained from the independent pricing vendor for any periods presented in the condensed consolidated financial statements because no significant pricing differences have been observed.

Interest Rate Swaps – These derivatives are valued by the counterparties using a model that incorporates interest rate yield curves, which are observable for substantially the full term of the contract. The valuation model is widely accepted in the financial services industry and does not involve significant judgment because most of the inputs are observable in the marketplace. Counterparty credit risk is not an input to the valuation because the Company has possession of collateral, in the form of cash or U.S. Treasury securities, in amounts equal to or exceeding the fair value of the interest rate swaps. The Company validates the counterparty valuations by comparing them to a valuation model provided by another third party service.

 

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Level 3 Measurements:

Money Market and Other Mutual Funds – The fair value of positions in money market and other mutual funds managed by The Reserve is estimated by management based on the underlying portfolio holdings data published by The Reserve.

Auction Rate Securities (“ARS”) – ARS are long-term variable rate securities tied to short-term interest rates that are reset through a “Dutch auction” process, which generally occurs every seven to 35 days. Holders of ARS were previously able to liquidate their holdings to prospective buyers by participating in the auctions. During fiscal 2008, the Dutch auction process failed and holders were no longer able to liquidate their holdings through the auction process. The fair value of Company ARS holdings is primarily estimated based on an internal pricing model. The pricing model takes into consideration the characteristics of the underlying securities, as well as multiple inputs, including counterparty credit quality, expected timing of redemptions and an estimated yield premium that a market participant would require over otherwise comparable securities to compensate for the illiquidity of the ARS. These inputs require significant management judgment.

The following table summarizes quantitative information about Level 3 unobservable inputs as of March 31, 2013 and September 30, 2012:

 

Asset   Valuation Technique   Unobservable Input   Range   Weighted Average
Auction Rate Securities   Discounted
cash flow
  Constant prepayment rate (Annual)   15% - 20%   17%
    Yield premium for illiquidity   2%   2%

Fair Value of Financial Instruments Not Recorded at Fair Value

Cash and cash equivalents, receivable from/payable to brokers, dealers and clearing organizations, receivable from/payable to clients, receivable from/payable to affiliates, other receivables, accounts payable and accrued liabilities and notes payable are short-term in nature and accordingly are carried at amounts that approximate fair value. Cash and cash equivalents include cash and highly-liquid investments with an original maturity of three months or less (categorized as Level 1 of the fair value hierarchy). Receivable from/payable to brokers, dealers and clearing organizations, receivable from/payable to clients, receivable from/payable to affiliates, other receivables, accounts payable and accrued liabilities and notes payable are recorded at or near their respective transaction prices and historically have been settled or converted to cash at approximately that value (categorized as Level 2 of the fair value hierarchy).

Cash and investments segregated and on deposit for regulatory purposes includes reverse repurchase agreements (securities purchased under agreements to resell). Reverse repurchase agreements are treated as collateralized financing transactions and are carried at amounts at which the securities will subsequently be resold, plus accrued interest. The Company’s reverse repurchase agreements generally have a maturity of seven days and are collateralized by U.S. Treasury securities in amounts exceeding the carrying value of the resale agreements. Accordingly, the carrying value of reverse repurchase agreements approximates fair value (categorized as Level 2 of the fair value hierarchy). In addition, this category includes cash held in demand deposit accounts and on deposit with a futures commission merchant, for which the carrying values approximate the fair value (categorized as Level 1 of the fair value hierarchy). See Note 3 for a summary of cash and investments segregated and on deposit for regulatory purposes.

Senior Notes – As of March 31, 2013, the Company’s Senior Notes had an aggregate estimated fair value, based on quoted market prices (categorized as Level 1 of the fair value hierarchy), of approximately $1.128 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $1.079 billion. As of September 30, 2012, the Company’s Senior Notes had an aggregate estimated fair value, based on quoted market prices, of approximately $1.373 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $1.345 billion.

 

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9. EARNINGS PER SHARE

The following is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per share for the periods indicated (in millions, except per share amounts):

 

     Three Months Ended March 31,      Six Months Ended March 31,  
     2013      2012      2013      2012  

Net income

   $ 144       $ 137       $ 291       $ 289   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding - basic

     549         549         547         549   

Effect of dilutive securities:

           

Common stock equivalent shares related to stock-based compensation

     5         5         5         6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding - diluted (1)

     554         554         552         555   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share - basic

   $ 0.26       $ 0.25       $ 0.53       $ 0.53   

Earnings per share - diluted

   $ 0.26       $ 0.25       $ 0.53       $ 0.52   

 

(1) The Company excluded from the calculation of diluted earnings per share 0.2 million and 2.5 million shares underlying stock-based compensation awards for the three months ended March 31, 2013 and 2012, respectively, and 1.4 million and 2.5 million shares underlying stock-based compensation awards for the six months ended March 31, 2013 and 2012, respectively, because their inclusion would have been antidilutive.

10. RELATED PARTY TRANSACTIONS

Transactions with TD and Affiliates

As a result of the Company’s acquisition of TD Waterhouse during fiscal 2006, TD became an affiliate of the Company. TD owned approximately 45% of the Company’s common stock as of March 31, 2013. Pursuant to the Stockholders Agreement among TD, the Company and certain other stockholders, TD has the right to designate five of twelve members of the Company’s board of directors. The Company transacts business and has extensive relationships with TD and certain of its affiliates. Transactions with TD and its affiliates are discussed and summarized below.

Insured Deposit Account Agreement

Through December 31, 2012, the Company was party to an insured deposit account (“IDA”) agreement, dated as of December 19, 2009, with TD Bank USA, N.A. (“TD Bank USA”), TD Bank, N.A. and TD (the “old IDA agreement”). Under the old IDA agreement, TD Bank USA and TD Bank, N.A. (together, the “Depository Institutions”) made available to clients of the Company FDIC-insured money market deposit accounts as either designated sweep vehicles or as non-sweep deposit accounts. The Company provided marketing, recordkeeping and support services for the Depository Institutions with respect to the money market deposit accounts. In exchange for providing these services, the Depository Institutions paid the Company an aggregate marketing fee based on the weighted average yield earned on the client IDA assets, less the actual interest paid to clients, a flat servicing fee to the Depository Institutions of 25 basis points and the cost of FDIC insurance premiums.

The fee earned on the old IDA agreement was calculated based on two primary components: (a) the yield on fixed-rate “notional” investments, based on prevailing fixed rates for identical balances and maturities in the interest rate swap market (generally LIBOR-based) at the time such investments were added to the IDA portfolio (including any adjustments required to adjust the variable rate leg of such swaps to a one-month reset frequency and the overall swap payment frequency to monthly) and (b) the yield on floating-rate investments, based on the monthly average rate for 30-day LIBOR. The agreement provided that, from time to time, the Company may request amounts and maturity dates for the fixed-rate notional investments in the IDA portfolio, subject to the approval of the Depository Institutions. For example, if the Company requested (and the Depository Institutions agreed) that $100 million of deposits should be invested in 5-year fixed-rate investments, and on the day such investment was approved the prevailing fixed yield for the applicable 5-year U.S. dollar LIBOR-based swaps was 1.00%, then the Company would earn a gross fixed yield of 1.00% on that portion of the portfolio (before any deductions for interest paid to clients, the flat 25 basis point servicing fee to the Depository Institutions and the cost of FDIC insurance premiums). The interest rates paid to clients were set by the Depository Institutions and were not linked to any index.

 

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On January 17, 2013, the Company entered into a new IDA agreement among the same parties (the “new IDA agreement”), which superseded and replaced the old IDA agreement. The new IDA agreement became effective as of January 1, 2013 and has an initial term expiring July 1, 2018. It is automatically renewable for successive five-year terms, provided that it may be terminated by either the Company or the Depository Institutions by providing written notice of non-renewal at least two years prior to the initial expiration date or the expiration date of any subsequent renewal period. The marketing fee calculation under the new IDA agreement is substantially similar to the old IDA agreement, with certain significant differences described below.

The new IDA agreement provides that the Company may designate amounts and maturity dates for the fixed-rate notional investments in the IDA portfolio, subject to certain limitations. In the event that (1) the federal funds effective rate is established at 0.75% or greater and (2) the rate on 5-year U.S. dollar interest rate swaps is equal to or greater than 1.50% for 20 consecutive business days, then the rate earned by the Company on new fixed-rate notional investments will be reduced by 20% of the excess of the 5-year U.S. dollar swap rate over 1.50%, up to a maximum of 0.10%.

Under the new IDA agreement, the yield on floating-rate investments is calculated daily based on the greater of the following rates published by the Federal Reserve: (1) the interest rate paid by Federal Reserve Banks on balances held in excess of required reserve balances and contractual clearing balances under Regulation D and (2) the daily effective federal funds rate.

As of March 31, 2013, the IDA portfolio was comprised of approximately 84% fixed-rate notional investments and 16% floating-rate investments.

The servicing fee to the Depository Institutions under the new IDA agreement is equal to 25 basis points on the aggregate average daily balance in the IDA accounts, subject to adjustment as it relates to deposits of less than or equal to $20 billion kept in floating-rate investments or in fixed-rate notional investments with a maturity of up to 24 months (“short-term fixed-rate investments”). For floating-rate and short-term fixed-rate investments, the servicing fee is equal to the difference of the interest rate earned on the investments less the FDIC premiums paid (in basis points), divided by two. The servicing fee has a floor of 3 basis points (subject to adjustment from time to time to reflect material changes to the Depository Institutions’ leverage costs) and a maximum of 25 basis points.

Under both the new and old IDA agreements, in the event the marketing fee computation results in a negative amount, the Company must pay the Depository Institutions the negative amount. This effectively results in the Company guaranteeing the Depository Institutions revenue equal to the servicing fee on the IDA agreement, plus the reimbursement of FDIC insurance premiums. The marketing fee computation under the IDA agreement is affected by many variables, including the type, duration, principal balance and yield of the fixed-rate and floating-rate investments, the prevailing interest rate environment, the amount of client deposits and the yield paid on client deposits. Because a negative marketing fee computation would arise only if there were extraordinary movements in many of these variables, the maximum potential amount of future payments the Company could be required to make under this arrangement cannot be reasonably estimated. Management believes the potential for the marketing fee calculation to result in a negative amount is remote. Accordingly, no contingent liability is carried on the Condensed Consolidated Balance Sheets for the IDA agreement.

 

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In addition, the Company has various other services agreements and transactions with TD and its affiliates. The following tables summarize revenues and expenses resulting from transactions with TD and its affiliates for the periods indicated (dollars in millions):

 

          Revenues from TD and Affiliates  
     Statement of Income    Three months ended
March 31,
     Six months ended
March 31,
 

Description

  

Classification

   2013      2012      2013      2012  

Insured Deposit Account Agreement

   Insured deposit account fees    $  200       $ 209       $ 405       $ 414   

Mutual Fund Agreements

   Investment product fees      —           1         1         2   

Referral and Strategic Alliance Agreement

   Various      3         2         5         3   

Securities borrowing and lending, net

   Net interest revenue      —           —           1         1   

Other

   Various      —           1         1         2   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

      $ 203       $ 213       $ 413       $ 422   
     

 

 

    

 

 

    

 

 

    

 

 

 
          Expenses to TD and Affiliates  
     Statement of Income    Three months ended
March 31,
     Six months ended
March 31,
 

Description

  

Classification

   2013      2012      2013      2012  

Canadian Call Center Services Agreement

   Professional services    $ 4       $ 5       $ 9       $ 9   

Other

   Various      2         1         2         3   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

      $ 6       $ 6       $ 11       $ 12   
     

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the classification and amount of receivables from and payables to TD and its affiliates on the Condensed Consolidated Balance Sheets resulting from related party transactions (dollars in millions):

 

     March 31,
2013
     September 30,
2012
 

Assets:

     

Receivable from brokers, dealers and clearing organizations

   $ 2       $ 1   

Receivable from affiliates

     136         85   

Liabilities:

     

Payable to brokers, dealers and clearing organizations

   $ 65       $ 125   

Payable to affiliates

                     5         4   

Receivables from and payables to TD affiliates resulting from client cash sweep activity are generally settled in cash the next business day. Receivables from and payables to brokers, dealers and clearing organizations primarily relate to securities borrowing and lending activity and are settled in accordance with the contractual terms. Other receivables from and payables to affiliates of TD are generally settled in cash on a monthly basis.

 

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11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Senior Notes are jointly and severally and fully and unconditionally guaranteed by TD Ameritrade Online Holdings Corp. (“TDAOH”), a wholly-owned subsidiary of the Company. Presented below is condensed consolidating financial information for the Company, its guarantor subsidiary and its non-guarantor subsidiaries for the periods indicated. Because all other comprehensive income activity occurred on the parent company for all periods presented, condensed consolidating statements of comprehensive income are not presented.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF MARCH 31, 2013

(Unaudited)

 

     Parent      Guarantor
Subsidiary
     Non-Guarantor
Subsidiaries
     Eliminations     Total  
     (In millions)  

ASSETS

             

Cash and cash equivalents

   $ 146       $ 6       $ 1,066       $ —        $ 1,218   

Short-term investments

     —           —           4         —          4   

Cash and investments segregated and on deposit for regulatory purposes

     —           —           4,384         —          4,384   

Receivable from brokers, dealers and clearing organizations

     —           —           1,299         —          1,299   

Receivable from clients, net

     —           —           8,850         —          8,850   

Investments in subsidiaries

     5,476         5,260         544         (11,280     —     

Receivable from affiliates

     2         3         133         (2     136   

Goodwill

     —           —           2,467         —          2,467   

Acquired intangible assets, net

     —           146         741         —          887   

Other, net

     225         8         1,056         (14     1,275   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,849       $ 5,423       $ 20,544       $ (11,296   $ 20,520   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Liabilities:

             

Payable to brokers, dealers and clearing organizations

   $ —         $ —         $ 2,316       $ —        $ 2,316   

Payable to clients

     —           —           11,517         —          11,517   

Accounts payable and accrued liabilities

     193         —           439         (8     624   

Payable to affiliates

     —           —           7         (2     5   

Notes payable

     165         —           —           —          165   

Long-term debt

     1,079         —           —           —          1,079   

Other

     —           50         358         (6     402   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,437         50         14,637         (16     16,108   

Stockholders’ equity

     4,412         5,373         5,907         (11,280     4,412   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,849       $  5,423       $ 20,544       $ (11,296   $ 20,520   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING BALANCE SHEET

AS OF SEPTEMBER 30, 2012

(Unaudited)

 

     Parent      Guarantor
Subsidiary
     Non-Guarantor
Subsidiaries
     Eliminations     Total  
     (In millions)  

ASSETS

             

Cash and cash equivalents

   $ 178       $ 6       $ 731       $ —        $ 915   

Short-term investments

     151         —           3         —          154   

Cash and investments segregated and on deposit for regulatory purposes

     —           —           4,030         —          4,030   

Receivable from brokers, dealers and clearing organizations

     —           —           1,110         —          1,110   

Receivable from clients, net

     —           —           8,647         —          8,647   

Investments in subsidiaries

     5,456         5,250         548         (11,254     —     

Receivable from affiliates

     5         3         83         (6     85   

Goodwill

     —           —           2,467         —          2,467   

Acquired intangible assets, net

     —           146         786         —          932   

Other, net

     230         7         961         (25     1,173   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 6,020       $ 5,412       $ 19,366       $ (11,285   $ 19,513   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Liabilities:

             

Payable to brokers, dealers and clearing organizations

   $ —         $ —         $ 1,992       $ —        $ 1,992   

Payable to clients

     —           —           10,728         —          10,728   

Accounts payable and accrued liabilities

     249         —           391         (8     632   

Payable to affiliates

     1         —           9         (6     4   

Long-term debt

     1,345         —           —           —          1,345   

Other

     —           48         356         (17     387   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,595         48         13,476         (31     15,088   

Stockholders’ equity

     4,425         5,364         5,890         (11,254     4,425   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 6,020       $ 5,412       $ 19,366       $ (11,285   $ 19,513   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED MARCH 31, 2013

(Unaudited)

 

     Parent     Guarantor
Subsidiary
     Non-Guarantor
Subsidiaries
    Eliminations     Total  
     (In millions)  

Net revenues

   $ 4      $ —         $ 679      $ (4   $ 679   

Operating expenses

     3        —           443        (4     442   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     1        —           236        —          237   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other expense (income)

     7        —           (1     —          6   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity in income of subsidiaries

     (6     —           237        —          231   

Provision for (benefit from) income taxes

     (3     —           90        —          87   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before equity in income of subsidiaries

     (3     —           147        —          144   

Equity in income of subsidiaries

     147        140         8        (295     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 144      $  140       $ 155      $ (295   $ 144   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED MARCH 31, 2012

(Unaudited)

 

     Parent     Guarantor
Subsidiary
     Non-Guarantor
Subsidiaries
     Eliminations     Total  
     (In millions)  

Net revenues

   $ 7      $ —         $ 673       $ (7   $ 673   

Operating expenses

     7        —           454         (7     454   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

     —          —           219         —          219   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other expense

     7        —           —           —          7   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes and equity in income of subsidiaries

     (7     —           219         —          212   

Provision for (benefit from) income taxes

     (2     —           77         —          75   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before equity in income of subsidiaries

     (5     —           142         —          137   

Equity in income of subsidiaries

     142        139         8         (289     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 137      $  139       $ 150       $ (289 )   $ 137   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

SIX MONTHS ENDED MARCH 31, 2013

(Unaudited)

 

     Parent     Guarantor
Subsidiary
    Non-Guarantor
Subsidiaries
    Eliminations     Total  
     (In millions)  

Net revenues

   $ 8      $ —        $ 1,329      $ (7   $ 1,330   

Operating expenses

     7        —          852        (7     852   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1        —          477        —          478   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expense (income)

     13        —          (3     —          10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity in income of subsidiaries

     (12     —          480        —          468   

Provision for (benefit from) income taxes

     (6     1        182        —          177   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in income of subsidiaries

     (6     (1     298        —          291   

Equity in income of subsidiaries

     297        285        16        (598     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 291      $ 284      $ 314      $ (598   $ 291   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

SIX MONTHS ENDED MARCH 31, 2012

(Unaudited)

 

     Parent     Guarantor
Subsidiary
    Non-Guarantor
Subsidiaries
    Eliminations     Total  
     (In millions)  

Net revenues

   $ 13      $ —        $ 1,327      $ (13   $ 1,327   

Operating expenses

     13        —          879        (13     879   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          —          448        —          448   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expense (income)

     15        —          (1     —          14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity in income of subsidiaries

     (15     —          449        —          434   

Provision for (benefit from) income taxes

     (16     (1     162        —          145   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before equity in income of subsidiaries

     1        1        287        —          289   

Equity in income of subsidiaries

     288        285        16        (589     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 289      $  286      $ 303      $ (589   $ 289   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

SIX MONTHS ENDED MARCH 31, 2013

(Unaudited)

 

     Parent     Guarantor
Subsidiary
     Non-Guarantor
Subsidiaries
    Total  
     (In millions)  

Net cash provided by (used in) operating activities

   $ (41   $ —         $ 701      $ 660   

Cash flows from investing activities:

         

Purchase of property and equipment

     —          —           (92     (92

Proceeds from sale and maturity of short-term investments

     150        —           —          150   

Other, net

     —          —           4        4   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     150        —           (88     62   
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash flows from financing activities:

         

Principal payments on long-term debt

     (250     —           —          (250

Proceeds from notes payable

     275        —           —          275   

Principal payments on notes payable

     (110     —           —          (110

Payment of cash dividends

     (372     —           —          (372

Purchase of treasury stock

     (4     —           —          (4

Other, net

     43        —           (1     42   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net cash used in financing activities

     (418     —           (1     (419
  

 

 

   

 

 

    

 

 

   

 

 

 

Intercompany investing and financing activities, net

     277        —           (277     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (32     —           335        303   

Cash and cash equivalents at beginning of period

     178        6         731        915   
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 146      $ 6       $ 1,066      $ 1,218   
  

 

 

   

 

 

    

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

SIX MONTHS ENDED MARCH 31, 2012

(Unaudited)

 

     Parent     Guarantor
Subsidiary
    Non-Guarantor
Subsidiaries
    Total  
     (In millions)  

Net cash provided by operating activities

   $ 14      $ 1      $ 283      $ 298   

Cash flows from investing activities:

        

Purchase of property and equipment

     —          —          (77     (77

Purchase of short-term investments

     (50     —          —          (50

Other

     —          —          1        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (50     —          (76     (126
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

        

Purchase of treasury stock

     (130     —          —          (130

Payment of cash dividends

     (66     —          —          (66

Other, net

     20        —          (2     18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (176     —          (2     (178
  

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany investing and financing activities, net

     297        (2     (295     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     85        (1     (90     (6

Cash and cash equivalents at beginning of period

     94        7        931        1,032   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 179      $ 6      $ 841      $ 1,026   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2012, and the Condensed Consolidated Financial Statements and Notes thereto contained in this quarterly report on Form 10-Q.

This discussion contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similar expressions. In particular, forward-looking statements contained in this discussion include our expectations regarding: the effect of client trading activity on our results of operations; the effect of changes in interest rates on our net interest spread; the effect of our migration of client cash balances into the insured deposit account offering; the average yield earned on insured deposit account assets; our effective income tax rate; and our capital and liquidity needs and our plans to finance such needs.

The Company’s actual results could differ materially from those anticipated in such forward-looking statements. Important factors that may cause such differences include, but are not limited to: general economic and political conditions and other securities industry risks; fluctuations in interest rates; stock market fluctuations and changes in client trading activity; credit risk with clients and counterparties; increased competition; systems failures, delays and capacity constraints; network security risks; liquidity risk; new laws and regulations affecting our business; regulatory and legal matters and uncertainties and the other risks and uncertainties set forth under Item 1A. – Risk Factors of the Company’s annual report on Form 10-K, as amended, for the fiscal year ended September 30, 2012. The forward-looking statements contained in this report speak only as of the date on which the statements were made. We undertake no obligation to publicly update or revise these statements, whether as a result of new information, future events or otherwise, except to the extent required by the federal securities laws.

The preparation of our financial statements requires us to make judgments and estimates that may have a significant impact upon our financial results. Note 1 of our Notes to Consolidated Financial Statements for the fiscal year ended September 30, 2012, contains a summary of our significant accounting policies, many of which require the use of estimates and assumptions. We believe that the following areas are particularly subject to management’s judgments and estimates and could materially affect our results of operations and financial position: valuation of goodwill and acquired intangible assets; valuation of stock-based compensation; estimates of effective income tax rates, deferred income taxes and related valuation allowances; accruals for contingent liabilities; and valuation of guarantees. These areas are discussed in further detail under the heading “Critical Accounting Policies and Estimates” in Item 7 of our annual report on Form 10-K for the fiscal year ended September 30, 2012.

Unless otherwise indicated, the terms “we,” “us,” “our” or “Company” in this report refer to TD Ameritrade Holding Corporation and its wholly-owned subsidiaries. The term “GAAP” refers to U.S. generally accepted accounting principles.

GLOSSARY OF TERMS

In discussing and analyzing our business, we utilize several metrics and other terms that are defined in the following Glossary of Terms. Italics indicate other defined terms that appear elsewhere in the Glossary. The term “GAAP” refers to U.S. generally accepted accounting principles.

Activity rate – funded accounts — Average client trades per day during the period divided by the average number of funded accounts during the period.

Asset-based revenues — Revenues consisting of (1) net interest revenue, (2) insured deposit account fees and (3) investment product fees. The primary factors driving our asset-based revenues are average balances and average rates. Average balances consist primarily of average client margin balances, average segregated cash balances, average client credit balances, average client insured deposit account balances, average fee-based investment balances and average securities borrowing and securities lending balances. Average rates consist of the average interest rates and fees earned and paid on such balances.

Average client trades per funded account (annualized) — Total trades divided by the average number of funded accounts during the period, annualized based on the number of trading days in the fiscal year.

Average client trades per day — Total trades divided by the number of trading days in the period. This metric is also known as daily average revenue trades (“DARTs”).

 

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Average commissions and transaction fees per trade — Total commissions and transaction fee revenues as reported on the Company’s Consolidated Statements of Income (excluding clearing revenues from TD Waterhouse UK) divided by total trades for the period. Commissions and transaction fee revenues primarily consist of trading commissions, revenue-sharing arrangements with market destinations (also referred to as “payment for order flow”) and markups on riskless principal transactions in fixed-income securities.

Basis point — When referring to interest rates, one basis point represents one one-hundredth of one percent.

Beneficiary accounts — Brokerage accounts managed by a custodian, guardian, conservator or trustee on behalf of one or more beneficiaries. Examples include accounts maintained under the Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA), guardianship, conservatorship and trust arrangements and pension or profit plan for small business accounts.

Brokerage accounts — Accounts maintained by the Company on behalf of clients for securities brokerage activities. The primary types of brokerage accounts are cash accounts, margin accounts, IRA accounts and beneficiary accounts. Futures accounts are sub-accounts associated with a brokerage account for clients who wish to trade futures and/or options on futures.

Cash accounts — Brokerage accounts that do not have margin account approval.

Client assets — The total value of cash and securities in brokerage accounts.

Client cash and money market assets — The sum of all client cash balances, including client credit balances and client cash balances swept into insured deposit accounts or money market mutual funds.

Client credit balances — Client cash held in brokerage accounts, excluding balances generated by client short sales on which no interest is paid. Interest paid on client credit balances is a reduction of net interest revenue. Client credit balances are included in “payable to clients” on our Consolidated Balance Sheets.

Client margin balances — The total amount of cash loaned to clients in margin accounts. Such loans are secured by client assets. Interest earned on client margin balances is a component of net interest revenue. Client margin balances are included in “receivable from clients” on our Consolidated Balance Sheets.

Conduit-based assets — Deposits paid on securities borrowing associated with our conduit-based securities borrowing/lending business. In our conduit business, we act as an intermediary by borrowing securities from one counterparty and lending the same securities to another counterparty. We generally earn a net interest spread equal to the excess of interest earned on securities borrowing deposits over the interest paid on securities lending deposits.

Daily average revenue trades (“DARTs”)Total trades divided by the number of trading days in the period. This metric is also known as average client trades per day.

EBITDA — EBITDA (earnings before interest, taxes, depreciation and amortization) is a non-GAAP financial measure. We consider EBITDA to be an important measure of our financial performance and of our ability to generate cash flows to service debt, fund capital expenditures and fund other corporate investing and financing activities. EBITDA is used as the denominator in the consolidated leverage ratio calculation for covenant purposes under our holding company’s senior revolving credit facility. EBITDA eliminates the non-cash effect of tangible asset depreciation and amortization and intangible asset amortization. EBITDA should be considered in addition to, rather than as a substitute for, pre-tax income, net income and cash flows from operating activities.

EPS excluding amortization of intangible assets — Earnings per share (“EPS”) excluding amortization of intangible assets is a non-GAAP financial measure. We define EPS excluding amortization of intangible assets as earnings (loss) per share, adjusted to remove the after-tax effect of amortization of acquired intangible assets. We consider EPS excluding amortization of intangible assets an important measure of our financial performance. Amortization of acquired intangible assets is excluded because we believe it is not indicative of underlying business performance. EPS excluding amortization of intangible assets should be considered in addition to, rather than as a substitute for, GAAP earnings per share.

EPS from ongoing operations — EPS from ongoing operations is a non-GAAP financial measure. We define EPS from ongoing operations as earnings (loss) per share, adjusted to remove any significant unusual gains or charges. We consider EPS from ongoing operations an important measure of the financial performance of our ongoing business. Unusual gains and charges are excluded because we believe they are not likely to be indicative of the ongoing operations of our business. EPS from ongoing operations should be considered in addition to, rather than as a substitute for, GAAP earnings per share.

 

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Fee-based investment balances — Client assets invested in money market mutual funds, other mutual funds and Company programs such as AdvisorDirect® and Amerivest,TM on which we earn fee revenues. Fee revenues earned on these balances are included in investment product fees on our Consolidated Statements of Income.

Funded accounts — All open client accounts with a total liquidation value greater than zero.

Futures accounts — Sub-accounts maintained by the Company on behalf of clients for trading in futures and/or options on futures. Each futures account must be associated with a brokerage account. Futures accounts are not counted separately for purposes of the Company’s client account metrics.

Insured deposit account — The Company is party to an Insured Deposit Account (“IDA”) agreement with TD Bank USA, N.A. (“TD Bank USA”), TD Bank, N.A. and The Toronto-Dominion Bank (“TD”). Under the IDA agreement, TD Bank USA and TD Bank, N.A. (together, the “Depository Institutions”) make available to clients of the Company FDIC-insured money market deposit accounts as either designated sweep vehicles or as non-sweep deposit accounts. The Company provides marketing, recordkeeping and support services for the Depository Institutions with respect to the money market deposit accounts. In exchange for providing these services, the Depository Institutions pay the Company an aggregate marketing fee based on the yield earned on the client IDA assets, less the actual interest paid to clients, a servicing fee to the Depository Institutions of 25 basis points (subject to adjustment) and the cost of FDIC insurance premiums.

Interest rate-sensitive assets — Consist of spread-based assets and client cash invested in money market mutual funds.

Investment product fees — Revenues earned on fee-based investment balances. Investment product fees include fees earned on money market mutual funds, other mutual funds and through Company programs such as AdvisorDirect® and AmerivestTM.

IRA accounts (Individual Retirement Arrangements) — A personal trust account for the exclusive benefit of a U.S. individual (or his or her beneficiaries) that provides tax advantages in accumulating funds to save for retirement or other qualified purposes. These accounts are subject to numerous restrictions on additions to and withdrawals from the account, as well as prohibitions against certain investments or transactions conducted within the account. The Company offers traditional, Roth, Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) IRA accounts.

Liquid assets – management target — “Liquid assets – management target” is a non-GAAP financial measure. We define “liquid assets – management target” as the sum of (a) corporate cash and cash equivalents, (b) corporate short-term investments and (c) regulatory net capital of (i) our clearing broker-dealer subsidiary in excess of 10% of aggregate debit items and (ii) our introducing broker-dealer subsidiaries in excess of a minimum operational target established by management ($50 million in the case of our primary introducing broker-dealer, TD Ameritrade, Inc.). We include the excess capital of our broker-dealer subsidiaries in “liquid assets – management target,” rather than simply including broker-dealer cash and cash equivalents, because capital requirements may limit the amount of cash available for dividend from the broker-dealer subsidiaries to the parent company. Excess capital, as defined under clause (c) above, is generally available for dividend from the broker-dealer subsidiaries to the parent company. “Liquid assets – management target” is based on more conservative measures of broker-dealer net capital than “liquid assets – regulatory threshold” (defined below) because we prefer to maintain significantly more conservative levels of net capital at the broker-dealer subsidiaries than the regulatory thresholds require. We consider “liquid assets – management target” to be a measure that reflects our liquidity that would be readily available for corporate investing and financing activities under normal operating circumstances. “Liquid assets – regulatory threshold” is a related metric that reflects our liquidity that would be available for corporate investing and financing activities under unusual operating circumstances, such as the need to provide funding for significant strategic business transactions. Our liquid assets metrics should be considered as supplemental measures of liquidity, rather than as substitutes for cash and cash equivalents.

Liquid assets – regulatory threshold — “Liquid assets – regulatory threshold” is a non-GAAP financial measure. We define “liquid assets – regulatory threshold” as the sum of (a) corporate cash and cash equivalents, (b) corporate short-term investments, (c) regulatory net capital of (i) our clearing broker-dealer subsidiary in excess of 5% of aggregate debit items and (ii) our introducing broker-dealer subsidiaries in excess of the applicable “early warning” net capital requirement and (d) Tier 1 capital of our trust company in excess of the minimum dollar requirement. We include the excess capital of our broker-dealer and trust company subsidiaries in “liquid assets – regulatory threshold,” rather than simply including broker-dealer and trust company cash and cash equivalents, because capital requirements may limit the amount of cash available for dividend from the broker-dealer and trust company subsidiaries to the parent company. Excess capital, as defined under clauses (c) and (d) above, is generally available for dividend from the broker-dealer and trust company subsidiaries to the parent company. We consider “liquid assets – regulatory threshold” to be a measure that reflects our liquidity that would be available for corporate investing and financing activities under unusual operating circumstances, such as the need to provide funding for significant strategic business transactions. “Liquid assets – management target” is a related metric that reflects our liquidity that would be readily available for corporate investing and financing activities under normal operating circumstances. Our liquid assets metrics should be considered as supplemental measures of liquidity, rather than as substitutes for cash and cash equivalents.

 

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Liquidation value — The net value of a client’s account holdings as of the close of a regular trading session. Liquidation value includes client cash and the value of long security positions, less margin balances and the cost to buy back short security positions. It also includes the value of open futures, foreign exchange and options positions.

Margin accounts — Brokerage accounts in which clients may borrow from the Company to buy securities or for any other purpose, subject to regulatory and Company-imposed limitations.

Market fee-based investment balances — Client assets invested in mutual funds (except money market funds) and Company programs such as AdvisorDirect® and Amerivest,TM on which we earn fee revenues that are largely based on a percentage of the market value of the investment. Market fee-based investment balances are a component of fee-based investment balances. Fee revenues earned on these balances are included in investment product fees on our Consolidated Statements of Income.

Net interest margin (“NIM”) — A measure of the net yield on our average spread-based assets. Net interest margin is calculated for a given period by dividing the annualized sum of net interest revenue and insured deposit account fees by average spread-based assets.

Net interest revenue — Net interest revenue is interest revenues less brokerage interest expense. Interest revenues are generated by charges to clients on margin balances maintained in margin accounts, the investment of cash from operations and segregated cash in short-term marketable securities and interest earned on securities borrowing. Brokerage interest expense consists of amounts paid or payable to clients based on credit balances maintained in brokerage accounts and interest incurred on securities lending. Brokerage interest expense does not include interest on Company non-brokerage borrowings.

Net new assets — Consists of total client asset inflows, less total client asset outflows, excluding activity from business combinations. Client asset inflows include interest and dividend payments and exclude changes in client assets due to market fluctuations. Net new assets are measured based on the market value of the assets as of the date of the inflows and outflows.

Net new asset growth rate (annualized) — Annualized net new assets as a percentage of client assets as of the beginning of the period.

New accounts — The number of new client accounts (funded and unfunded) opened in a specified period.

Operating expenses excluding advertising — Operating expenses excluding advertising is a non-GAAP financial measure. Operating expenses excluding advertising consists of total operating expenses, adjusted to remove advertising expense. We consider operating expenses excluding advertising an important measure of the financial performance of our ongoing business. Advertising spending is excluded because it is largely at the discretion of the Company, can vary significantly from period to period based on market conditions and generally relates to the acquisition of future revenues through new accounts rather than current revenues from existing accounts. Operating expenses excluding advertising should be considered in addition to, rather than as a substitute for, total operating expenses.

Return on client assets (ROCA) — Annualized pre-tax income divided by average client assets during the period.

Securities borrowing — We borrow securities temporarily from other broker-dealers in connection with our broker-dealer business. We deposit cash as collateral for the securities borrowed, and generally earn interest revenue on the cash deposited with the counterparty.

Securities lending — We loan securities temporarily to other broker-dealers in connection with our broker-dealer business. We receive cash as collateral for the securities loaned, and generally incur interest expense on the cash deposited with us.

Segregated cash — Client cash and investments segregated in compliance with Rule 15c3-3 of the Securities Exchange Act of 1934 (the Customer Protection Rule) and other regulations. Interest earned on segregated cash is a component of net interest revenue.

Spread-based assets — Client and brokerage-related asset balances, including client margin balances, segregated cash, insured deposit account balances, deposits paid on securities borrowing and other cash and interest-earning investment balances. Spread-based assets is used in the calculation of our net interest margin.

 

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Total trades — Revenue-generating client securities trades, which are executed by the Company’s broker-dealer subsidiaries, excluding trades processed for TD Waterhouse UK. Total trades are a significant source of the Company’s revenues. Such trades include, but are not limited to, trades in equities, options, futures, foreign exchange, mutual funds and debt instruments. Trades generate revenue from commissions, markups on riskless principal transactions in fixed income securities, transaction fees and/or revenue-sharing arrangements with market destinations (also known as “payment for order flow”).

Trading days — Days in which the U.S. equity markets are open for a full trading session. Reduced exchange trading sessions are treated as half trading days.

Transaction-based revenues — Revenues generated from client trade execution, consisting primarily of commissions, markups on riskless principal transactions in fixed income securities, transaction clearing fees and revenue sharing arrangements with market destinations (also known as “payment for order flow”).

RESULTS OF OPERATIONS

Conditions in the U.S. equity markets significantly impact the volume of our clients’ trading activity. There is a direct correlation between the volume of our clients’ trading activity and our results of operations. We cannot predict future trading volumes in the U.S. equity markets. If client trading activity increases, we expect that it would have a positive impact on our results of operations. If client trading activity declines, we expect that it would have a negative impact on our results of operations.

Changes in average balances, especially client margin, credit, insured deposit account and mutual fund balances, may significantly impact our results of operations. Changes in interest rates also significantly impact our results of operations. We seek to mitigate interest rate risk by aligning the average duration of our interest-earning assets with that of our interest-bearing liabilities. We cannot predict the direction of interest rates or the levels of client balances. If interest rates rise, we generally expect to earn a larger net interest spread. Conversely, a falling interest rate environment generally would result in our earning a smaller net interest spread.

Financial Performance Metrics

Pre-tax income, net income, earnings per share and EBITDA are key metrics we use in evaluating our financial performance. EBITDA is a non-GAAP financial measure.

We consider EBITDA to be an important measure of our financial performance and of our ability to generate cash flows to service debt, fund capital expenditures and fund other corporate investing and financing activities. EBITDA is used as the denominator in the consolidated leverage ratio calculation for covenant purposes under our holding company’s senior revolving credit facility. EBITDA eliminates the non-cash effect of tangible asset depreciation and amortization and intangible asset amortization. EBITDA should be considered in addition to, rather than as a substitute for, pre-tax income, net income and cash flows from operating activities.

The following table sets forth EBITDA in dollars and as a percentage of net revenues for the periods indicated, and provides reconciliations to net income, which is the most directly comparable GAAP measure (dollars in millions):

 

     Three months ended March 31,     Six months ended March 31,  
     2013     2012     2013     2012  
     $     % of Net
Revenue
    $     % of Net
Revenue
    $     % of Net
Revenue
    $     % of Net
Revenue
 
EBITDA                 

EBITDA

   $ 279        41.1   $ 260        38.6   $ 566        42.6   $ 529        39.9

Less:

                

Depreciation and amortization

     (20     (2.9 %)      (18     (2.7 %)      (41     (3.1 %)      (35     (2.6 %) 

Amortization of acquired intangible assets

     (22     (3.2 %)      (23     (3.4 %)      (45     (3.4 %)      (46     (3.5 %) 

Interest on borrowings

     (6     (0.9 %)      (7     (1.0 %)      (12     (0.9 %)      (14     (1.1 %) 

Provision for income taxes

     (87     (12.8 %)      (75     (11.1 %)      (177     (13.3 %)      (145     (10.9 %) 
  

 

 

     

 

 

     

 

 

     

 

 

   

Net income

   $  144        21.2   $  137        20.4   $ 291        21.9   $ 289        21.8
  

 

 

     

 

 

     

 

 

     

 

 

   

Our EBITDA increased 7% for the first half of fiscal 2013 compared to the first half of fiscal 2012, primarily due to a 4% decrease in operating expenses excluding depreciation and amortization, a slight increase in net revenues and a $2 million gain on the sale of an investment. The decrease in operating expenses excluding depreciation and amortization was primarily due to a 25% decrease in professional services expense and a 9% decrease in advertising expense. The slight increase in net revenues was due primarily to a 5% increase in asset-based revenues, mostly offset by a 4% decrease in transaction-based revenues and a 20% decrease in other revenues. Detailed analysis of net revenues and operating expenses is presented later in this discussion.

 

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Our diluted earnings per share was $0.53 for the first half of fiscal 2013 compared to $0.52 for the first half of fiscal 2012. Higher EBITDA was mostly offset by a higher effective income tax rate for the first half of fiscal 2013, resulting in a 1% increase in net income compared to the first half of fiscal 2012. Our effective income tax rate for the first half of the prior year was significantly lower than normal, primarily due to $19 million of favorable resolutions of state income tax matters. This favorably impacted diluted EPS for the first half of the prior year by approximately three cents per share.

Operating Metrics

Our largest sources of revenues are asset-based revenues and transaction-based revenues. For the first half of fiscal 2013, asset-based revenues and transaction-based revenues accounted for 57% and 41% of our net revenues, respectively. Asset-based revenues consist of (1) net interest revenue, (2) insured deposit account fees and (3) investment product fees. The primary factors driving our asset-based revenues are average balances and average rates. Average balances consist primarily of average client margin balances, average segregated cash balances, average client credit balances, average client insured deposit account balances, average fee-based investment balances and average securities borrowing and lending balances. Average rates consist of the average interest rates and fees earned and paid on such balances. The primary factors driving our transaction-based revenues are total client trades and average commissions and transaction fees per trade. We also consider client account and client asset metrics, although we believe they are generally of less significance to our results of operations for any particular period than our metrics for asset-based and transaction-based revenues.

Asset-Based Revenue Metrics

We calculate the return on our interest-earning assets and our insured deposit account balances using a measure we refer to as net interest margin. Net interest margin is calculated for a given period by dividing the annualized sum of net interest revenue and insured deposit account fees by average spread-based assets. Spread-based assets consist of client and brokerage-related asset balances, including client margin balances, segregated cash, insured deposit account balances, deposits paid on securities borrowing and other cash and interest-earning investment balances. The following table sets forth net interest margin and average spread-based assets (dollars in millions):

 

     Three months ended           Six months ended        
     March 31,     Increase/     March 31,     Increase/  
     2013     2012     (Decrease)     2013     2012     (Decrease)  

Avg. interest-earning assets

   $ 15,533      $ 15,713      $ (180   $ 15,302      $ 14,775      $ 527   

Avg. insured deposit account balances

     67,097        58,391        8,706        65,632        58,573        7,059   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Avg. spread-based balances

   $ 82,630      $ 74,104      $ 8,526      $ 80,934      $ 73,348      $ 7,586   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest revenue

   $ 114      $ 107      $ 7      $ 231      $ 216      $ 15   

Insured deposit account fee revenue

     200        209        (9     405        414        (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Spread-based revenue

   $ 314      $ 316      $ (2   $ 636      $ 630      $ 6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Avg. annualized yield - interest-earning assets

     2.95     2.69     0.26     2.99     2.88     0.11

Avg. annualized yield - insured deposit account fees

     1.19     1.42     (0.23 %)      1.22     1.39     (0.17 %) 

Net interest margin (NIM)

     1.52     1.69     (0.17 %)      1.55     1.69     (0.14 %) 

The following tables set forth key metrics that we use in analyzing net interest revenue, which is a component of net interest margin (dollars in millions):

 

     Interest Revenue (Expense)
Three months ended
March 31,
     Increase/      Interest Revenue (Expense)
Six months ended
March 31,
    Increase/  
     2013      2012      (Decrease)      2013     2012     (Decrease)  

Segregated cash

   $ 1       $ 1       $ —         $ 3      $ 1      $ 2   

Client margin balances

     85         81         4         174        166        8   

Securities lending/borrowing, net

     28         25         3         54        49        5   

Other cash and interest-earning investments

     —           —           —           1        1        —     

Client credit balances

     —           —           —           (1     (1     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net interest revenue

   $ 114       $ 107       $ 7       $ 231      $ 216      $ 15   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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        Average Balance
Three months ended
March 31,
       %
Change
    Average Balance
Six months ended
March 31,
       %
Change
 
       2013        2012          2013        2012       

Segregated cash

     $ 4,498         $ 5,586           (19 %)    $ 4,151         $ 4,845           (14 %) 

Client margin balances

       8,495           7,905           7     8,599           7,816           10

Securities borrowing

       1,061           795           33     954           682           40

Other cash and interest-earning investments

       1,479           1,427           4     1,598           1,432           12
    

 

 

      

 

 

        

 

 

      

 

 

      

Interest-earning assets

     $ 15,533         $ 15,713           (1 %)    $ 15,302         $ 14,775           4
    

 

 

      

 

 

        

 

 

      

 

 

      

Client credit balances

     $ 9,116         $ 10,056           (9 %)    $ 9,145         $ 9,441           (3 %) 

Securities lending

       2,214           1,826           21     2,037           1,772           15
    

 

 

      

 

 

        

 

 

      

 

 

      

Interest-bearing liabilities

     $ 11,330         $ 11,882           (5 %)    $ 11,182         $ 11,213           (0 %) 
    

 

 

      

 

 

        

 

 

      

 

 

      

 

      Avg. Annualized Yield (Cost)
Three months ended
March 31,
    Net Yield
Increase/

(Decrease)
    Avg. Annualized Yield (Cost)
Six months ended
March 31,
    Net Yield
Increase/

(Decrease)
 
     2013     2012       2013     2012    

Segregated cash

     0.13     0.07     0.06     0.15     0.06     0.09

Client margin balances

     3.99     4.06     (0.07 %)      4.00     4.19     (0.19 %) 

Other cash and interest-earning investments

     0.07     0.09     (0.02 %)      0.07     0.11     (0.04 %) 

Client credit balances

     (0.01 %)      (0.01 %)      0.00     (0.01 %)      (0.02 %)      0.01

Net interest revenue

     2.95     2.69     0.26     2.99     2.88     0.11

The following tables set forth key metrics that we use in analyzing investment product fee revenues (dollars in millions):

 

        Fee Revenue
Three months ended
March 31,
       Increase/
(Decrease)
     Fee Revenue
Six months ended
March 31,
       Increase/
(Decrease)
 
       2013        2012           2013        2012       

Money market mutual fund

     $ —           $ 1         $ (1    $ 1         $ 2         $ (1

Market fee-based investment balances

       62           45           17         116           88           28   
    

 

 

      

 

 

      

 

 

    

 

 

      

 

 

      

 

 

 

Total investment product fees

     $ 62         $ 46         $ 16       $ 117         $ 90         $ 27   
    

 

 

      

 

 

      

 

 

    

 

 

      

 

 

      

 

 

 

 

        Average Balance
Three months ended
March 31,
       %
Change
    Average Balance
Six months ended
March 31,
       %
Change
 
       2013        2012          2013        2012       

Money market mutual fund

     $ 5,191         $ 4,988           4   $ 5,117         $ 5,356           (4 %) 

Market fee-based investment balances

       105,708           79,910           32     100,265           76,035           32
    

 

 

      

 

 

        

 

 

      

 

 

      

Total fee-based investment balances

     $ 110,899         $ 84,898           31   $ 105,382         $ 81,391           29
    

 

 

      

 

 

        

 

 

      

 

 

      

 

      Average Annualized Yield
Three months ended
March 31,
    Increase/
(Decrease)
    Average Annualized Yield
Six months ended
March 31,
    Increase/
(Decrease)
 
     2013     2012       2013     2012    

Money market mutual fund

     0.01     0.04     (0.03 %)      0.03     0.06     (0.03 %) 

Market fee-based investment balances

     0.23     0.23     0.00     0.23     0.23     0.00

Total investment product fees

     0.22     0.22     0.00     0.22     0.22     0.00

 

34


Table of Contents

Transaction-Based Revenue Metrics

The following table sets forth several key metrics regarding client trading activity, which we utilize in measuring and evaluating performance and the results of our operations:

 

     Three months ended
March 31,
    %
Change
    Six months ended
March 31,
    %
Change
 
    2013     2012       2013     2012    

Total trades (in millions)

    22.69        24.03        (6 %)      43.06        47.00        (8 %) 

Average commissions and transaction fees per trade (1)

  $ 12.63      $ 12.15        4   $ 12.62      $ 12.03        5

Average client trades per day

    378,096        387,571        (2 %)      355,884        377,485        (6 %) 

Average client trades per funded account (annualized)

    16.0        17.1        (6 %)      15.2        16.7        (9 %) 

Activity rate - funded accounts

    6.5     6.8     (4 %)      6.1     6.7     (9 %) 

Trading days

    60.0        62.0        (3 %)      121.0        124.5        (3 %) 

 

(1) Average commissions and transaction fees per trade excludes the TD Waterhouse UK business.

Client Account and Client Asset Metrics

The following table sets forth certain metrics regarding client accounts and client assets, which we use to analyze growth and trends in our client base:

 

     Three months ended
March 31,
    %
Change
    Six months ended
March 31,
    %
Change
 
    2013     2012       2013     2012    

New accounts opened

    197,000        183,000        8     371,000        323,000        15

Funded accounts (beginning of period)

    5,836,000        5,645,000        3     5,764,000        5,617,000        3

Funded accounts (end of period)

    5,880,000        5,703,000        3     5,880,000        5,703,000        3

Percentage change during period

    1     1       2     2  

Client assets (beginning of period, in billions)

  $ 480.8      $ 406.3        18   $ 472.3      $ 378.7        25

Client assets (end of period, in billions)

  $ 516.8      $ 452.4        14   $ 516.8      $ 452.4        14

Percentage change during period

    7     11       9     19  

Net new assets (in billions)

  $ 12.9      $ 10.8        19   $ 28.5      $ 21.0        36

Net new assets annualized growth rate(1)

    11     11       12     11  

 

(1) Annualized net new assets as a percentage of client assets as of the beginning of the period.

 

35


Table of Contents

Condensed Consolidated Statements of Income Data

The following table summarizes certain data from our Condensed Consolidated Statements of Income for analysis purposes (dollars in millions):

 

      Three months ended
March 31,
    %
Change
    Six months ended
March 31,
    %
Change
 
      2013     2012       2013     2012    

Revenues:

            

Transaction-based revenues:

            

Commissions and transaction fees

   $ 287      $ 292        (2 %)    $ 544      $ 566        (4 %) 

Asset-based revenues:

            

Interest revenue

     116        108        7     234        219        7

Brokerage interest expense

     (2     (1     100     (3     (3     0
  

 

 

   

 

 

     

 

 

   

 

 

   

Net interest revenue

     114        107        7     231        216        7

Insured deposit account fees

     200        209        (4 %)      405        414        (2 %) 

Investment product fees

     62        46        35     117        90        30
  

 

 

   

 

 

     

 

 

   

 

 

   

Total asset-based revenues

     376        362        4     753        720        5

Other revenues

     16        19        (16 %)      33        41        (20 %) 
  

 

 

   

 

 

     

 

 

   

 

 

   

Net revenues

     679        673        1     1,330        1,327        0
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating expenses:

            

Employee compensation and benefits

     178        174        2     346        347        (0 %) 

Clearing and execution costs

     27        24        13     51        44        16

Communications

     29        27        7     57        55        4

Occupancy and equipment costs

     40        37        8     79        75        5

Depreciation and amortization

     20        18        11     41        35        17

Amortization of acquired intangible assets

     22        23        (4 %)      45        46        (2 %) 

Professional services

     33        44        (25 %)&