10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

for the quarterly period ended March 31, 2012

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, 2012

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.)

4211 South 102nd Street, Omaha, Nebraska, 68127

(Address of principal executive offices) (Zip Code)

(402) 331-7856

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, 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 30, 2012, there were 548,336,151 outstanding shares of the registrant’s common stock.

 

 

 


Table of Contents

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 Cash Flows      6
   Notes to Condensed Consolidated Financial Statements      8

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    25

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    35

Item 4.

   Controls and Procedures    36
   PART II - OTHER INFORMATION   

Item 1.

   Legal Proceedings    37

Item 1A.

   Risk Factors    38

Item 2.

   Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities    38

Item 6.

   Exhibits    38
   Signatures    40

 

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Table of Contents

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, 2012, and the related condensed consolidated statements of income for the three-month and six-month periods ended March 31, 2012 and 2011, and the condensed consolidated statements of cash flows for the six-month periods ended March 31, 2012 and 2011. 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, 2011, 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 18, 2011, 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, 2011, 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 7, 2012

 

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Columnar amounts in thousands)

 

     March 31,     September 30,  
     2012     2011  
     (Unaudited)        

ASSETS

    

Cash and cash equivalents

   $ 1,026,478      $ 1,031,963   

Short-term investments

     53,897        3,557   

Cash and investments segregated in compliance with federal regulations (including reverse repurchase agreements of $3.7 billion at March 31, 2012 and $1.9 billion at September 30, 2011)

     5,475,006        2,519,249   

Receivable from brokers, dealers and clearing organizations

     1,375,053        834,469   

Receivable from clients, net

     8,576,935        8,059,410   

Receivable from affiliates

     83,362        92,963   

Other receivables, net

     117,934        115,316   

Securities owned, at fair value

     374,538        446,609   

Property and equipment at cost, net

     375,323        340,690   

Goodwill

     2,466,976        2,466,978   

Acquired intangible assets, net

     978,015        1,024,352   

Deferred income taxes

     3,543        4,642   

Other assets

     171,579        185,564   
  

 

 

   

 

 

 

Total assets

   $ 21,078,639      $ 17,125,762   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Payable to brokers, dealers and clearing organizations

   $ 2,345,353      $ 1,709,572   

Payable to clients

     12,162,853        8,979,327   

Accounts payable and accrued liabilities

     583,626        585,720   

Payable to affiliates

     3,882        3,912   

Deferred revenue

     37,429        42,230   

Long-term debt

     1,326,680        1,336,789   

Capitalized lease obligations

     8,834        10,784   

Deferred income taxes

     362,904        341,611   
  

 

 

   

 

 

 

Total liabilities

     16,831,561        13,009,945   
  

 

 

   

 

 

 

Stockholders’ equity:

    

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

     —          —     

Common stock, $0.01 par value; one billion shares authorized; 631,381,860 shares issued; March 31, 2012 - 548,945,607 outstanding; September 30, 2011 - 554,285,716 outstanding

     6,314        6,314   

Additional paid-in capital

     1,588,478        1,583,327   

Retained earnings

     3,868,551        3,645,846   

Treasury stock, common, at cost—March 31, 2012 - 82,436,253 shares; September 30, 2011 - 77,096,144 shares

     (1,216,605     (1,119,969

Deferred compensation

     141        146   

Accumulated other comprehensive income

     199        153   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,247,078        4,115,817   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 21,078,639      $ 17,125,762   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

     Three Months Ended March 31,     Six Months Ended March 31,  
     2012     2011     2012     2011  

Revenues:

        

Transaction-based revenues:

        

Commissions and transaction fees

   $ 292,054      $ 338,320      $ 565,437      $ 631,016   

Asset-based revenues:

        

Interest revenue

     108,139        122,804        218,894        239,624   

Brokerage interest expense

     (1,445     (1,237     (2,852     (2,528
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest revenue

     106,694        121,567        216,042        237,096   

Insured deposit account fees

     209,209        187,471        414,251        365,942   

Investment product fees

     46,232        40,440        89,719        81,137   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total asset-based revenues

     362,135        349,478        720,012        684,175   

Other revenues

     18,953        30,430        41,084        59,228   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     673,142        718,228        1,326,533        1,374,419   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Employee compensation and benefits

     174,222        169,662        346,987        332,069   

Clearing and execution costs

     24,132        25,119        44,173        48,918   

Communications

     26,727        27,811        54,862        54,725   

Occupancy and equipment costs

     37,122        33,153        74,975        68,344   

Depreciation and amortization

     17,696        16,579        34,682        32,715   

Amortization of acquired intangible assets

     23,042        24,073        46,337        48,664   

Professional services

     44,175        40,059        89,185        80,376   

Advertising

     83,543        81,400        140,171        155,983   

Other

     23,361        17,456        47,529        35,623   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     454,020        435,312        878,901        857,417   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     219,122        282,916        447,632        517,002   

Other expense:

        

Interest on borrowings

     7,274        7,486        14,318        18,310   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax income

     211,848        275,430        433,314        498,692   

Provision for income taxes

     75,150        103,762        144,656        181,985   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 136,698      $ 171,668      $ 288,658      $ 316,707   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share—basic

   $ 0.25      $ 0.30      $ 0.53      $ 0.55   

Earnings per share—diluted

   $ 0.25      $ 0.30      $ 0.52      $ 0.55   

Weighted average shares outstanding—basic

     548,578        573,305        549,165        574,407   

Weighted average shares outstanding—diluted

     554,366        579,459        554,832        580,360   

Dividends declared per share

   $ 0.06      $ 0.05      $ 0.12      $ 0.10   

See notes to condensed consolidated financial statements.

 

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands, except share amounts)

 

     Six Months Ended March 31,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 288,658      $ 316,707   

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

    

Depreciation and amortization

     34,682        32,715   

Amortization of acquired intangible assets

     46,337        48,664   

Deferred income taxes

     22,392        4,963   

Loss on disposal of property

     7,358        1,929   

Stock-based compensation

     18,306        15,730   

Excess tax benefits on stock-based compensation

     (15,513     (8,866

Other, net

     (1,672     121   

Changes in operating assets and liabilities:

    

Cash and investments segregated in compliance with federal regulations

     (2,955,757     994,026   

Receivable from brokers, dealers and clearing organizations

     (540,584     158,010   

Receivable from clients, net

     (517,525     (1,952,566

Receivable from/payable to affiliates, net

     9,787        (1,718

Other receivables, net

     (2,618     (17,375

Securities owned

     72,071        104,354   

Other assets

     4,805        (10,614

Payable to brokers, dealers and clearing organizations

     635,781        182,020   

Payable to clients

     3,183,526        400,016   

Accounts payable and accrued liabilities

     13,200        129,251   

Deferred revenue

     (4,801     (13,249
  

 

 

   

 

 

 

Net cash provided by operating activities

     298,433        384,118   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property and equipment

     (76,671     (69,415

Cash received in sale of business

     —          5,228   

Purchase of short-term investments

     (50,449     —     

Other, net

     854        544   
  

 

 

   

 

 

 

Net cash used in investing activities

     (126,266     (63,643
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(Unaudited)

(In thousands, except share amounts)

 

     Six Months Ended March 31,  
     2012     2011  

Cash flows from financing activities:

    

Principal payments on long-term debt

   $ —        $ (4,262

Principal payments on capital lease obligations

     (1,950     (3,363

Proceeds from exercise of stock options; Six months ended March 31, 2012 - 1,239,425 shares; 2011 - 574,958 shares

     4,952        2,833   

Purchase of treasury stock; Six months ended March 31, 2012 - 8,015,813 shares; 2011 - 2,241,887 shares

     (130,261     (46,512

Return of prepayment on structured stock repurchase

     —          118,834   

Payment of cash dividends

     (65,953     (57,368

Excess tax benefits on stock-based compensation

     15,513        8,866   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (177,699     19,028   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     47        143   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (5,485     339,646   

Cash and cash equivalents at beginning of period

     1,031,963        741,492   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,026,478      $ 1,081,138   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid

   $ 16,646      $ 24,725   

Income taxes paid

   $ 99,506      $ 54,974   

Noncash financing activities:

    

Settlement of structured stock repurchase; 3,159,360 shares

   $ —        $ 50,366   

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, 2012 and 2011

(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, 2011.

Recently Adopted Accounting Pronouncements

ASU 2011-04 — On January 1, 2012, the Company adopted Accounting Standards Update (“ASU”) 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in ASU 2011-04 change the wording used to describe many of the requirements in U.S. Generally Accepted Accounting Principles for measuring fair value and for disclosing information about fair value measurements. Some of the amendments clarify the intent of the Financial Accounting Standards Board (“FASB”) about the application of existing fair value measurement and disclosure requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The adoption of ASU 2011-04 did not have a material impact on the Company’s condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

ASU 2011-11 — In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The amendments in ASU 2011-11 will enhance disclosures by requiring improved information about financial and derivative instruments that are either (1) offset (netting assets and liabilities) in accordance with Section 210-20-45 or Section 815-10-45 of the FASB Accounting Standards Codification or (2) subject to an enforceable master netting arrangement or similar agreement. ASU 2011-11 is effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods, and requires retrospective disclosures for comparative periods presented. Therefore, ASU 2011-11 will be effective for the Company’s fiscal year beginning October 1, 2013. Adoption of ASU 2011-11 is not expected to have a material impact on the Company’s financial statements.

2. CASH AND CASH EQUIVALENTS

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

 

 

     March 31,      September 30,  
     2012      2011  

Corporate

   $ 425,989       $ 259,986   

Broker-dealer subsidiaries

     507,740         656,206   

Trust company subsidiary

     74,881         108,587   

Investment advisory subsidiaries

     17,868         7,184   
  

 

 

    

 

 

 

Total

   $ 1,026,478       $ 1,031,963   
  

 

 

    

 

 

 

Capital requirements may limit the amount of cash available for dividend from the broker-dealer and trust company subsidiaries to the parent company. Cash and cash equivalents of the investment advisory subsidiaries is generally not available for corporate purposes.

 

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3. INCOME TAXES

The Company’s effective income tax rate for the six months ended March 31, 2012 was 33.4%, compared to 36.5% for the six months ended March 31, 2011. The provision for income taxes for the six months ended March 31, 2012 was significantly lower than normal primarily due to $18.5 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. The provision for income taxes for the six months ended March 31, 2011 was somewhat lower than normal due to $5.4 million of favorable resolutions of state income tax matters and $1.4 million of favorable deferred income tax adjustments resulting from state income tax law changes. These items favorably impacted the Company’s earnings for the six months ended March 31, 2011 by approximately one cent per share.

4. LONG-TERM DEBT

Long-term debt consists of the following (dollars in thousands):

 

 

     Face      Unamortized     Fair Value      Net Carrying  

March 31, 2012

   Value      Discount     Adjustment (1)      Value  

Senior Notes:

          

2.950% Senior Notes due 2012

   $ 250,000       $ (57   $ 2,442       $ 252,385   

4.150% Senior Notes due 2014

     500,000         (263     28,985         528,722   

5.600% Senior Notes due 2019

     500,000         (528     46,101         545,573   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total long-term debt

   $ 1,250,000       $ (848   $ 77,528       $ 1,326,680   
  

 

 

    

 

 

   

 

 

    

 

 

 

September 30, 2011

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

Senior Notes:

          

2.950% Senior Notes due 2012

   $ 250,000       $ (100   $ 4,170       $ 254,070   

4.150% Senior Notes due 2014

     500,000         (313     33,223         532,910   

5.600% Senior Notes due 2019

     500,000         (562     50,371         549,809   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total long-term debt

   $ 1,250,000       $ (975   $ 87,764       $ 1,336,789   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

 

(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 2012 Notes, (b) 1.245% for the swap on the 2014 Notes and (c) 2.3745% for the swap on the 2019 Notes. As of March 31, 2012, the weighted-average effective interest rate on the Senior Notes was 2.13%.

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 thousands):

 

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     Three Months Ended March 31,     Six Months Ended March 31,  
     2012     2011     2012     2011  

Gain (loss) on fair value of interest rate swaps

   $ (7,829   $ 492      $ (10,236   $ (19,023

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

     7,829        (492     10,236        19,023   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 thousands):

 

 

     March 31,      September 30,  
     2012      2011  

Derivatives recorded under the caption “Other assets”:

     

Interest rate swap assets

   $ 77,528       $ 87,764   

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, 2012, the interest rate swap counterparties for the Senior Notes had pledged $96.3 million of collateral to the Company in the form of cash. As of September 30, 2011, the interest rate swap counterparty for the 2012 Notes and 2014 Notes had pledged $50.1 million of collateral to the Company in the form of U.S. Treasury securities and the interest rate swap counterparty for the 2019 Notes had pledged $57.5 million of collateral in the form of cash. Collateral pledged to the Company in the form of cash is included in accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheets.

5. 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), which requires the maintenance of minimum net capital, as defined. In addition, the Company’s introducing broker-dealer subsidiary (TD Ameritrade, Inc.) is registered with the Commodity Futures Trading Commission (“CFTC”) as a non-clearing futures commission merchant and is subject to CFTC Regulation 1.17 under the Commodity Exchange Act, which requires the maintenance of minimum net capital, as defined. Net capital is calculated for each broker-dealer subsidiary individually. Excess net capital of one broker-dealer subsidiary may not be used to offset a net capital deficiency of another broker-dealer subsidiary. Net capital and the related net capital requirement may fluctuate on a daily basis.

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

 

 

     March 31, 2012      September 30, 2011  
            Minimum                    Minimum         
            Net Capital      Excess             Net Capital      Excess  
     Net Capital      Required      Net Capital      Net Capital      Required      Net Capital  

TD Ameritrade Clearing, Inc.

   $ 1,199,299       $ 205,541       $ 993,758       $ 1,263,535       $ 199,308       $ 1,064,227   

TD Ameritrade, Inc.

     319,566         5,524         314,042         374,907         1,000         373,907   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 1,518,865       $ 211,065       $ 1,307,800       $ 1,638,442       $ 200,308       $ 1,438,134   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 requires TDATC to maintain minimum Tier 1 capital, as defined. TDATC’s Tier 1 capital was $19.4 million and $18.6 million as of March 31, 2012 and September 30, 2011, respectively, which exceeded the required Tier 1 capital by $9.4 million and $8.6 million, respectively.

6. COMMITMENTS AND CONTINGENCIES

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.

 

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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.

TD Ameritrade, Inc. has received subpoenas and other requests for documents and information from the SEC and other regulatory authorities regarding TD Ameritrade, Inc.’s offering of the Yield Plus Fund to clients. TD Ameritrade, Inc. is cooperating with the investigations and requests. On January 27, 2011, TD Ameritrade, Inc. entered into a settlement with the SEC, agreeing to the entry of an “Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions” (“Order”). In the Order, the SEC found that TD Ameritrade, Inc. failed reasonably to supervise its registered representatives with a view to preventing their violations of Section 17(a)(2) of the Securities Act of 1933 in connection with their offer and sale of the Yield Plus Fund. TD Ameritrade, Inc. did not admit or deny any of the findings in the Order, and no fine was imposed. Under the settlement agreement, TD Ameritrade, Inc. agreed 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.

The Pennsylvania Securities Commission has filed an administrative order against TD Ameritrade, Inc. involving the sale of Yield Plus Fund securities to certain Pennsylvania clients. An administrative hearing will be held to determine whether there have been violations of certain provisions of the Pennsylvania Securities Act of 1972 and rules thereunder and to determine what, if any, administrative sanctions should be imposed. TD Ameritrade, Inc. is defending the action.

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 Company’s SEC settlement, is approximately $37 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 Pennsylvania action and the Ross lawsuit, or the potential loss, if any, that may result from these unresolved matters. However, management believes the outcome of these pending proceedings 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 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. A substantial adverse judgment or other unfavorable resolution of these matters could have a material adverse effect on the Company’s financial condition, results of operations and cash flows or could cause the Company significant reputational harm. Management believes the Company has adequate legal defenses with respect to these legal proceedings to which it is a defendant or respondent and the outcome of these pending proceedings is not likely to have a material adverse effect on the financial condition, results of operations or cash flows of the Company. However, the Company is unable to predict the outcome or the timing of the ultimate resolution of these matters, or the potential losses, if any, that may result from these matters.

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. Management believes the outcome of any resulting actions will not be material to the Company’s financial condition, results of operations or cash flows. However, the Company is unable to predict the outcome or the timing of the ultimate resolution of these matters, or the potential fines, penalties or injunctive or other equitable relief, if any, that may result from these matters.

 

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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.

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.

As of March 31, 2012, client excess margin securities of approximately $11.9 billion and stock borrowings of approximately $1.1 billion were available to the Company to utilize as collateral on various borrowings or for other purposes. The Company had loaned approximately $2.3 billion and repledged approximately $1.4 billion of that collateral as of March 31, 2012.

Guarantees – The Company is a member of and provides guarantees to securities clearinghouses and exchanges. 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.

 

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The Company clears its clients’ futures transactions on an omnibus account basis through an external clearing firm. The Company has agreed to indemnify the external clearing firm for any loss that they may incur for the client transactions introduced to them 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, 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 amounts are based on the Company’s financial performance and other factors.

7. FAIR VALUE DISCLOSURES

FASB Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures, 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 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.

 

   

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.

 

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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, 2012 and September 30, 2011 (dollars in thousands):

 

 

     As of March 31, 2012  
     Level 1      Level 2      Level 3      Fair Value  

Assets:

           

Cash equivalents:

           

Money market mutual funds

   $ 910,290       $ —         $ —         $ 910,290   

Short-term investments:

           

U.S. government debt securities

     —           52,891         —           52,891   

U.S. government agency debt securities

     —           1,006         —           1,006   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal - Short-term investments

     —           53,897         —           53,897   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments segregated in compliance with federal regulations:

           

U.S. government debt securities

     —           1,249,416         —           1,249,416   

Securities owned:

           

Auction rate securities

     —           —           7,379         7,379   

Money market and other mutual funds

     —           —           1,099         1,099   

Equity securities

     557         272         —           829   

U.S. government debt securities

     —           362,494         —           362,494   

Municipal debt securities

     —           1,005         —           1,005   

Corporate debt securities

     —           747         —           747   

Other debt securities

     —           985         —           985   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal - Securities owned

     557         365,503         8,478         374,538   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other assets:

           

Interest rate swaps(1)

     —           77,528         —           77,528   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 910,847       $ 1,746,344       $ 8,478       $ 2,665,669   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Accounts payable and accrued liabilities:

           

Securities sold, not yet purchased:

           

Equity securities

   $ 2,971       $ 63       $ —         $ 3,034   

Municipal debt securities

     —           149         —           149   

Corporate debt securities

     —           10         —           10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ 2,971       $ 222       $ —         $ 3,193   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1) See “Interest Rate Swaps” in Note 4 for details.

 

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     As of September 30, 2011  
     Level 1      Level 2      Level 3      Fair Value  

Assets:

           

Cash equivalents:

           

Money market mutual funds

   $ 949,804       $ —         $ —         $ 949,804   

Short-term investments:

           

U.S. government debt securities

     —           2,528         —           2,528   

U.S. government agency debt securities

     —           1,029         —           1,029   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal - Short-term investments

     —           3,557         —           3,557   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities owned:

           

Auction rate securities

     —           —           19,609         19,609   

Money market and other mutual funds

     —           —           1,098         1,098   

Equity securities

     521         278         —           799   

U.S. government debt securities

     —           423,010         —           423,010   

Municipal debt securities

     —           972         —           972   

Corporate debt securities

     —           653         —           653   

Other debt securities

     —           468         —           468   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal - Securities owned

     521         425,381         20,707         446,609   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other assets:

           

Interest rate swaps (1)

     —           87,764         —           87,764   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 950,325       $ 516,702       $ 20,707       $ 1,487,734   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Accounts payable and accrued liabilities:

           

Securities sold, not yet purchased:

           

Equity securities

   $ 4,600       $ 55       $ —         $ 4,655   

Municipal debt securities

     —           178         —           178   

Corporate debt securities

     —           9         —           9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ 4,600       $ 242       $ —         $ 4,842   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1) See “Interest Rate Swaps” in Note 4 for details.

There were no transfers between any levels of the fair value hierarchy during the periods presented in the tables below. The following tables present the changes in Level 3 assets and liabilities measured on a recurring basis for the three months and six months ended March 31, 2012 and 2011 (dollars in thousands):

 

 

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

Balance, December 31, 2011

   $ 7,608      $ 1,098   

Net losses included in earnings(1)

     (44     —     

Purchases

     440        1   

Settlements

     (625     —     
  

 

 

   

 

 

 

Balance, March 31, 2012

   $ 7,379      $ 1,099   
  

 

 

   

 

 

 

 

 

(1) Net losses on auction rate securities are recorded in other revenues on the Condensed Consolidated Statements of Income and substantially all relate to assets held as of March 31, 2012.

 

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

Balance, September 30, 2011

   $ 19,609      $ 1,098   

Net losses included in earnings(1)

     (165     —     

Purchases

     440        1   

Sales

     (1,555     —     

Settlements

     (10,950     —     
  

 

 

   

 

 

 

Balance, March 31, 2012

   $ 7,379      $ 1,099   
  

 

 

   

 

 

 

 

(1) Net losses on auction rate securities are recorded in other revenues on the Condensed Consolidated Statements of Income and substantially all relate to assets held as of March 31, 2012.

 

     Three Months Ended March 31, 2011  
     Securities Owned  
     Auction Rate     Money Market and  
     Securities     Other Mutual Funds  

Balance, December 31, 2010

   $ 194,523      $ 970   

Net gains included in earnings(1)

     2,592        —     

Purchases, sales, issuances and settlements, net

     (87,730     56   
  

 

 

   

 

 

 

Balance, March 31, 2011

   $ 109,385      $ 1,026   
  

 

 

   

 

 

 

 

(1) Net gains on auction rate securities are recorded in other revenues on the Condensed Consolidated Statements of Income and $0.8 million of the net gains relate to assets held as of March 31, 2011.

 

     Six Months Ended March 31, 2011  
     Securities Owned  
     Auction Rate     Money Market and  
     Securities     Other Mutual Funds  

Balance, September 30, 2010

   $ 209,288      $ 5,404   

Net gains included in earnings(1)

     2,971        —     

Purchases, sales, issuances and settlements, net

     (102,874     (4,378
  

 

 

   

 

 

 

Balance, March 31, 2011

   $ 109,385      $ 1,026   
  

 

 

   

 

 

 

 

(1) Net gains on auction rate securities are recorded in other revenues on the Condensed Consolidated Statements of Income and $0.8 million of the net gains relate to assets held as of March 31, 2011.

There were no nonfinancial assets or liabilities measured at fair value during the three months and six months ended March 31, 2012 and 2011.

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.

 

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Level 2 Measurements:

Debt Securities – 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.

Interest Rate Swaps – These derivatives are valued 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.

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:

 

 

Asset   

Valuation

Technique

  

Unobservable

Input

   Range   

Weighted

Average

Auction Rate Securities

   Discounted   

Constant

prepayment rate (Annual)

   15% - 20%    18%
     cash flow    Yield premium for illiquidity    2%    2%

Fair Value of Financial Instruments Not Recorded at Fair Value

Cash and investments segregated in compliance with federal regulations include 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 approximates fair value (categorized as Level 2 of the fair value hierarchy).

Senior Notes – As of March 31, 2012, 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 $1.341 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $1.327 billion. As of September 30, 2011, the Company’s Senior Notes had an aggregate estimated fair value, based on quoted market prices, of approximately $1.340 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $1.337 billion.

 

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8. 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 thousands, except per share amounts):

 

 

     Three Months Ended March 31,      Six Months Ended March 31,  
     2012      2011      2012      2011  

Net income

   $ 136,698       $ 171,668       $ 288,658       $ 316,707   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding—basic

     548,578         573,305         549,165         574,407   

Effect of dilutive securities:

           

Common stock equivalent shares related to stock-based compensation

     5,788         6,154         5,667         5,953   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding—diluted

     554,366         579,459         554,832         580,360   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share—basic

   $ 0.25       $ 0.30       $ 0.53       $ 0.55   

Earnings per share—diluted

   $ 0.25       $ 0.30       $ 0.52       $ 0.55   

9. COMPREHENSIVE INCOME

Comprehensive income is as follows for the periods indicated (dollars in thousands):

 

 

     Three Months Ended March 31,      Six Months Ended March 31,  
     2012      2011      2012      2011  

Net income

   $ 136,698       $ 171,668       $ 288,658       $ 316,707   

Other comprehensive income:

           

Net unrealized investment gains

     2         1         4         1   

Foreign currency translation adjustment

     15         9         42         140   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive income

     17         10         46         141   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 136,715       $ 171,678       $ 288,704       $ 316,848   
  

 

 

    

 

 

    

 

 

    

 

 

 

10. RELATED PARTY TRANSACTIONS

Transactions with TD and Affiliates

As a result of the acquisition of TD Waterhouse during fiscal 2006, TD became an affiliate of the Company. TD owned approximately 45.1% of the Company’s common stock as of March 31, 2012, of which 45% is permitted to be voted under the terms of the Stockholders Agreement among TD, the Company and certain other stockholders. Pursuant to the Stockholders Agreement, 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

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 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 a fee based on the yield earned on the client IDA assets, less the actual interest paid to clients, a flat fee to the Depository Institutions of 25 basis points and the cost of FDIC insurance premiums.

 

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The IDA agreement has a term of five years beginning July 1, 2008, and is automatically renewable for successive five-year terms, provided that it may be terminated by any party upon two years’ prior written notice. The agreement provides that the fee earned on the IDA agreement is calculated based on three primary components: (a) the actual yield earned on investments in place as of July 1, 2008, which were primarily fixed-income securities backed by Canadian government guarantees, (b) the yield on other fixed-rate 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 and (c) floating-rate investments, based on the monthly average rate for 30-day LIBOR. The agreement provides that, from time to time, the Company may request amounts and maturity dates for the other fixed-rate investments (component (b) above) in the IDA portfolio, subject to the approval of the Depository Institutions. As of March 31, 2012, the IDA portfolio was comprised of approximately 1% component (a) investments, 94% component (b) investments and 5% component (c) investments.

In the event the 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 of 25 basis points on the IDA agreement, plus the reimbursement of FDIC insurance premiums. The fee computation under the IDA agreement is affected by many variables, including the type, duration, credit quality, principal balance and yield of the investment portfolio at the Depository Institutions, the prevailing interest rate environment, the amount of client deposits and the yield paid on client deposits. Because a negative IDA 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 fee calculation to result in a negative amount is remote and the fair value of the guarantee is not material. Accordingly, no contingent liability is carried on the Condensed Consolidated Balance Sheets for the IDA agreement.

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 thousands):

 

 

XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX
          Revenues from TD and Affiliates  
    

Statement of Income
Classification

   Three months ended
March 31,
     Six months ended
March 31,
 

Description

      2012      2011      2012      2011  

Insured Deposit Account Agreement

   Insured deposit account fees    $ 209,209       $ 187,471       $ 414,251       $ 365,942   

Mutual Fund Agreements

   Investment product fees      512         2,250         1,649         5,873   

Referral and Strategic Alliance Agreement

   Various      1,585         900         2,966         1,686   

Securities borrowing and lending, net

   Net interest revenue      799         1,378         1,468         2,271   

TD Waterhouse Canada Order Routing Agreement    

   Other revenues      670         809         1,335         1,415   

TD Waterhouse UK Servicing Agreement

   Commissions and transaction fees      119         140         226         250   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

      $ 212,894       $ 192,948       $ 421,895       $ 377,437   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

 

XXXXXXX XXXXXXX XXXXXXX XXXXXXX XXXXXXX
          Expenses to TD and Affiliates  
    

Statement of Income

Classification

   Three months
ended March 31,
     Six months ended
March 31,
 

Description

      2012      2011      2012      2011  

Canadian Call Center Services Agreement

   Professional services    $ 4,784       $ 4,740       $ 9,004       $ 8,996   

Certificates of Deposit Brokerage Agreement

   Advertising      (116      806         1,095         1,845   

Cash Management Services Agreement

   Clearing and execution costs              425         225         755         428   

Referral and Strategic Alliance Agreement

   Various      437         453         730         1,059   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

      $ 5,530       $ 6,224       $ 11,584       $ 12,328   
     

 

 

    

 

 

    

 

 

    

 

 

 

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 thousands):

 

 

     March 31,      September 30,  
     2012      2011  

Assets:

     

Receivable from brokers, dealers and clearing organizations

   $ 950       $ 206   

Receivable from affiliates

     83,362         92,963   

Liabilities:

     

Payable to brokers, dealers and clearing organizations

   $ 99,821       $ 87,771   

Payable to affiliates

     3,882         3,912   

 

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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.

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.

TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF MARCH 31, 2012

(Unaudited)

(In thousands)

 

 

            Guarantor      Non-Guarantor               
     Parent      Subsidiary      Subsidiaries      Eliminations     Total  

ASSETS

             

Cash and cash equivalents

   $ 178,781       $ 6,043       $ 841,654       $ —        $ 1,026,478   

Short-term investments

     50,377         —           3,520         —          53,897   

Cash and investments segregated in compliance with federal regulations

     —           —           5,475,006         —          5,475,006   

Receivable from brokers, dealers and clearing organizations

     —           —           1,375,053         —          1,375,053   

Receivable from clients, net

     —           —           8,576,935         —          8,576,935   

Investments in subsidiaries

     5,421,300         5,227,769         548,566         (11,197,635     —     

Receivable from affiliates

     3,058         3,967         80,060         (3,723     83,362   

Goodwill

     —           —           2,466,976         —          2,466,976   

Acquired intangible assets, net

     —           145,674         832,341         —          978,015   

Other, net

     142,224         5,716         923,285         (28,308     1,042,917   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,795,740       $ 5,389,169       $ 21,123,396       $ (11,229,666   $ 21,078,639   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Liabilities:

             

Payable to brokers, dealers and clearing organizations

   $ —         $ —         $ 2,345,353       $ —        $ 2,345,353   

Payable to clients

     —           —           12,162,853         —          12,162,853   

Accounts payable and accrued liabilities

     221,348         —           367,958         (5,680     583,626   

Payable to affiliates

     634         —           6,971         (3,723     3,882   

Long-term debt

     1,326,680         —           —           —          1,326,680   

Other

     —           49,289         382,506         (22,628     409,167   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,548,662         49,289         15,265,641         (32,031     16,831,561   

Stockholders’ equity

     4,247,078         5,339,880         5,857,755         (11,197,635     4,247,078   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,795,740       $ 5,389,169       $ 21,123,396       $ (11,229,666   $ 21,078,639   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF SEPTEMBER 30, 2011

(Unaudited)

(In thousands)

 

            Guarantor      Non-Guarantor               
     Parent      Subsidiary      Subsidiaries      Eliminations     Total  

ASSETS

             

Cash and cash equivalents

   $ 93,469       $ 7,170       $ 931,324       $ —        $ 1,031,963   

Short-term investments

     —           —           3,557         —          3,557   

Cash and investments segregated in compliance with federal regulations

     —           —           2,519,249         —          2,519,249   

Receivable from brokers, dealers and clearing organizations

     —           —           834,469         —          834,469   

Receivable from clients, net

     —           —           8,059,410         —          8,059,410   

Investments in subsidiaries

     5,431,356         5,240,332         555,001         (11,226,689     —     

Receivable from affiliates

     6,016         3,754         89,352         (6,159     92,963   

Goodwill

     —           —           2,466,978         —          2,466,978   

Acquired intangible assets, net

     —           145,674         878,678         —          1,024,352   

Other, net

     148,759         5,773         969,580         (31,291     1,092,821   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,679,600       $ 5,402,703       $ 17,307,598       $ (11,264,139   $ 17,125,762   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Liabilities:

             

Payable to brokers, dealers and clearing organizations

   $ —         $ —         $ 1,709,572       $ —        $ 1,709,572   

Payable to clients

     —           —           8,979,327         —          8,979,327   

Accounts payable and accrued liabilities

     226,883         —           364,574         (5,737     585,720   

Payable to affiliates

     111         38         9,922         (6,159     3,912   

Long-term debt

     1,336,789         —           —           —          1,336,789   

Other

     —           49,118         371,061         (25,554     394,625   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,563,783         49,156         11,434,456         (37,450     13,009,945   

Stockholders’ equity

     4,115,817         5,353,547         5,873,142         (11,226,689     4,115,817   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,679,600       $ 5,402,703       $ 17,307,598       $ (11,264,139   $ 17,125,762   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED MARCH 31, 2012

(Unaudited)

(In thousands)

 

           Guarantor     Non-Guarantor              
     Parent     Subsidiary     Subsidiaries     Eliminations     Total  

Net revenues

   $ 7,061      $ —        $ 673,147      $ (7,066   $ 673,142   

Operating expenses

     7,360        3        453,723        (7,066     454,020   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (299     (3     219,424        —          219,122   

Other expense (income)

     7,503        —          (229     —          7,274   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (7,802     (3     219,653        —          211,848   

Provision for (benefit from) income taxes

     (2,606     (48     77,804        —          75,150   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in income of subsidiaries

     (5,196     45        141,849        —          136,698   

Equity in income of subsidiaries

     141,894        139,489        7,898        (289,281     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 136,698      $ 139,534      $ 149,747      $ (289,281   $ 136,698   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED MARCH 31, 2011

(Unaudited)

(In thousands)

 

           Guarantor     Non-Guarantor               
     Parent     Subsidiary     Subsidiaries      Eliminations     Total  

Net revenues

   $ 1,468      $ 59      $ 718,220       $ (1,519   $ 718,228   

Operating expenses

     825        61        435,945         (1,519     435,312   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     643        (2     282,275         —          282,916   

Other expense

     7,417        —          69         —          7,486   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

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

     (6,774     (2     282,206         —          275,430   

Provision for (benefit from) income taxes

     (1,976     (32     105,770         —          103,762   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before equity in income of subsidiaries

     (4,798     30        176,436         —          171,668   

Equity in income of subsidiaries

     176,466        181,444        10,272         (368,182     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 171,668      $ 181,474      $ 186,708       $ (368,182   $ 171,668   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF INCOME

SIX MONTHS ENDED MARCH 31, 2012

(Unaudited)

(In thousands)

 

           Guarantor     Non-Guarantor              
     Parent     Subsidiary     Subsidiaries     Eliminations     Total  

Net revenues

   $ 13,516      $ —        $ 1,326,534      $ (13,517   $ 1,326,533   

Operating expenses

     13,339        5        879,074        (13,517     878,901   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     177        (5     447,460        —          447,632   

Other expense (income)

     14,720        —          (402     —          14,318   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (14,543     (5     447,862        —          433,314   

Provision for (benefit from) income taxes

     (15,944     (901     161,501        —          144,656   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before equity in income of subsidiaries

     1,401        896        286,361        —          288,658   

Equity in income of subsidiaries

     287,257        285,437        16,208        (588,902     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 288,658      $ 286,333      $ 302,569      $ (588,902   $ 288,658   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF INCOME

SIX MONTHS ENDED MARCH 31, 2011

(Unaudited)

(In thousands)

 

           Guarantor     Non-Guarantor               
     Parent     Subsidiary     Subsidiaries      Eliminations     Total  

Net revenues

   $ 5,293      $ 121      $ 1,374,395       $ (5,390   $ 1,374,419   

Operating expenses

     4,439        125        858,243         (5,390     857,417   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     854        (4     516,152         —          517,002   

Other expense

     18,164        —          146         —          18,310   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

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

     (17,310     (4     516,006         —          498,692   

Provision for (benefit from) income taxes

     (9,034     (348     191,367         —          181,985   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before equity in income of subsidiaries

     (8,276     344        324,639         —          316,707   

Equity in income of subsidiaries

     324,983        332,568        18,843         (676,394     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 316,707      $ 332,912      $ 343,482       $ (676,394   $ 316,707   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

SIX MONTHS ENDED MARCH 31, 2012

(Unaudited)

(In thousands)

 

           Guarantor     Non-Guarantor        
     Parent     Subsidiary     Subsidiaries     Total  

Net cash provided by operating activities

   $ 14,151      $ 873      $ 283,409      $ 298,433   

Cash flows from investing activities:

        

Purchase of property and equipment

     —          —          (76,671     (76,671

Purchase of short-term investments

     (50,449     —          —          (50,449

Other, net

     —          —          854        854   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (50,449     —          (75,817     (126,266
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

        

Purchase of treasury stock

     (130,261     —          —          (130,261

Payment of cash dividends

     (65,953     —          —          (65,953

Other, net

     20,465        —          (1,950     18,515   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (175,749     —          (1,950     (177,699
  

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany investing and financing activities, net

     297,359        (2,000     (295,359     —     

Effect of exchange rate changes on cash and cash equivalents

     —          —          47        47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     85,312        (1,127     (89,670     (5,485

Cash and cash equivalents at beginning of period

     93,469        7,170        931,324        1,031,963   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 178,781      $ 6,043      $ 841,654      $ 1,026,478   
  

 

 

   

 

 

   

 

 

   

 

 

 

TD AMERITRADE HOLDING CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

SIX MONTHS ENDED MARCH 31, 2011

(Unaudited)

(In thousands)

 

           Guarantor      Non-Guarantor        
     Parent     Subsidiary      Subsidiaries     Total  

Net cash provided by (used in) operating activities

   $ (20,283   $ 11,465       $ 392,936      $ 384,118   

Cash flows from investing activities:

         

Purchase of property and equipment

     —          —           (69,415     (69,415

Cash received in sale of business

     —          —           5,228        5,228   

Other, net

     —          —           544        544   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net cash used in investing activities

     —          —           (63,643     (63,643
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash flows from financing activities:

         

Principal payments on long-term debt

     —          —           (4,262     (4,262

Purchase of treasury stock

     (46,512     —           —          (46,512

Return of prepayment on structured stock repurchase

     118,834        —           —          118,834   

Payment of cash dividends

     (57,368     —           —          (57,368

Other

     11,699        —           (3,363     8,336   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     26,653        —           (7,625     19,028   
  

 

 

   

 

 

    

 

 

   

 

 

 

Intercompany investing and financing activities, net

     59,906        —           (59,906     —     

Effect of exchange rate changes on cash and cash equivalents

     —          —           143        143   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net increase in cash and cash equivalents

     66,276        11,465         261,905        339,646   

Cash and cash equivalents at beginning of period

     67,033        25,058         649,401        741,492   
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 133,309      $ 36,523       $ 911,306      $ 1,081,138   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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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, 2011, 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; our migration of client cash balances into the insured deposit account offering; 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 for the fiscal year ended September 30, 2011. 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, 2011, 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, 2011.

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 a Glossary of Terms that is available on our website at www.amtd.com (in the “Investors” section under the heading “Financial Reports”) and is included in Item 7 of our annual report on Form 10-K for the fiscal year ended September 30, 2011.

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.

 

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Financial Performance Metrics

Pre-tax income, net income, earnings per share and EBITDA (earnings before interest, taxes, depreciation and amortization) are key metrics we use in evaluating our financial performance. EBITDA is a non-GAAP financial measure.

We consider EBITDA 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 thousands):

 

     Three months ended March 31,     Six months ended March 31,  
     2012     2011     2012     2011  
           % of Net           % of Net           % of Net           % of Net  
     $     Revenue     $     Revenue     $     Revenue     $     Revenue  

EBITDA

                

EBITDA

   $ 259,860        38.6   $ 323,568        45.1   $ 528,651        39.9   $ 598,381        43.5

Less:

                

Depreciation and amortization

     (17,696     (2.6 %)      (16,579     (2.3 %)      (34,682     (2.6 %)      (32,715     (2.4 %) 

Amortization of acquired intangible assets

     (23,042     (3.4 %)      (24,073     (3.4 %)      (46,337     (3.5 %)      (48,664     (3.5 %) 

Interest on borrowings

     (7,274     (1.1 %)      (7,486     (1.0 %)      (14,318     (1.1 %)      (18,310     (1.3 %) 

Provision for income taxes

     (75,150     (11.2 %)      (103,762     (14.4 %)      (144,656     (10.9 %)      (181,985     (13.2 %) 
  

 

 

     

 

 

     

 

 

     

 

 

   

Net income

   $ 136,698        20.3   $ 171,668        23.9   $ 288,658        21.8   $ 316,707        23.0
  

 

 

     

 

 

     

 

 

     

 

 

   

Our EBITDA decreased 12% for the first half of fiscal 2012 compared to the first half of fiscal 2011, primarily due to a 3% decrease in net revenues and a 3% increase in operating expenses. The decrease in net revenues was due primarily to a decrease of 32 basis points in net interest margin earned on spread-based balances, an 8% decrease in total client trades and a 3% decrease in average commissions and transaction fees per trade, partially offset by the effects of a 24% increase in average spread-based balances and a 17% increase in other fee-based investment balances. Detailed analysis of net revenues and operating expenses is presented later in this discussion.

Operating Metrics

Our largest sources of revenues are asset-based revenues and transaction-based revenues. For the six months ended March 31, 2012, asset-based revenues and transaction-based revenues accounted for 54% and 43% 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.

 

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Asset-Based Revenue Metrics

We calculate the return on our interest-earning assets (excluding conduit-based 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 (excluding net interest revenue from conduit-based assets) 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 (excluding conduit-based assets) 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/  
     2012     2011     (Decrease)     2012     2011     (Decrease)  

Avg. interest-earning assets (excluding conduit business)

   $ 15,472      $ 13,643      $ 1,829      $ 14,563      $ 13,303      $ 1,260   

Avg. insured deposit account balances

     58,391        46,814        11,577        58,573        45,763        12,810   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Avg. spread-based balances

   $ 73,863      $ 60,457      $ 13,406      $ 73,136      $ 59,066      $ 14,070   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest revenue (excluding conduit business)

   $ 106.6      $ 121.5      $ (14.9   $ 215.9      $ 236.9      $ (21.0

Insured deposit account fee revenue

     209.2        187.5        21.7        414.3        365.9        48.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Spread-based revenue

   $ 315.8      $ 309.0      $ 6.8      $ 630.2      $ 602.8      $ 27.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Avg. annualized yield—interest-earning assets
(excluding conduit business)

     2.73     3.56     (0.83 %)      2.92     3.52     (0.60 %) 

Avg. annualized yield—insured deposit account fees

     1.42     1.60     (0.18 %)      1.39     1.58     (0.19 %) 

Net interest margin (NIM)

     1.69     2.04     (0.35 %)      1.70     2.02     (0.32 %) 

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

 

     Interest Revenue (Expense)           Interest Revenue (Expense)        
     Three months ended           Six months ended        
     March 31,     Increase/     March 31,     Increase/  
     2012     2011     (Decrease)     2012     2011     (Decrease)  

Segregated cash

   $ 1.0      $ 0.7      $ 0.3      $ 1.4      $ 1.8      $ (0.4

Client margin balances

     81.2        99.1        (17.9     166.3        191.8        (25.5

Securities borrowing (excluding conduit business)

     25.5        22.6        2.9        50.2        44.9        5.3   

Other cash and interest-earning investments

     0.3        0.3        (0.0     0.8        0.7        0.1   

Client credit balances

     (0.3     (0.4     0.1        (0.8     (0.9     0.1   

Securities lending (excluding conduit business)

     (1.1     (0.8     (0.3     (2.0     (1.4     (0.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest revenue (excluding conduit business)

     106.6        121.5        (14.9     215.9        236.9        (21.0

Securities borrowing—conduit business

     0.1        0.2        (0.1     0.2        0.4        (0.2

Securities lending—conduit business

     (0.0     (0.1     0.1        (0.1     (0.2     0.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest revenue

   $ 106.7      $ 121.6      $ (14.9   $ 216.0      $ 237.1      $ (21.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Average Balance            Average Balance         
     Three months ended            Six months ended         
     March 31,      %     March 31,      %  
     2012      2011      Change     2012      2011      Change  

Segregated cash

   $ 5,586       $ 2,997         86   $ 4,845       $ 3,133         55

Client margin balances

     7,905         8,967         (12 %)      7,816         8,539         (8 %) 

Securities borrowing (excluding conduit business)

     554         484         14     470         508         (7 %) 

Other cash and interest-earning investments

     1,427         1,195         19     1,432         1,123         28
  

 

 

    

 

 

      

 

 

    

 

 

    

Interest-earning assets (excluding conduit business)

     15,472         13,643         13     14,563         13,303         9

Securities borrowing—conduit business

     241         279         (14 %)      212         320         (34 %) 
  

 

 

    

 

 

      

 

 

    

 

 

    

Interest-earning assets

   $ 15,713       $ 13,922         13   $ 14,775       $ 13,623         8
  

 

 

    

 

 

      

 

 

    

 

 

    

Client credit balances

   $ 10,056       $ 8,479         19   $ 9,441       $ 8,221         15

Securities lending (excluding conduit business)

     1,585         1,604         (1 %)      1,560         1,603         (3 %) 
  

 

 

    

 

 

      

 

 

    

 

 

    

Interest-bearing liabilities (excluding conduit business)

     11,641         10,083         15     11,001         9,824         12

Securities lending—conduit business

     241         279         (14 %)      212         320         (34 %) 
  

 

 

    

 

 

      

 

 

    

 

 

    

Interest-bearing liabilities

   $ 11,882       $ 10,362         15   $ 11,213       $ 10,144         11
  

 

 

    

 

 

      

 

 

    

 

 

    

 

     Avg. Annualized Yield (Cost)           Avg. Annualized Yield (Cost)        
     Three months ended     Net Yield     Six months ended     Net Yield  
     March 31,     Increase/     March 31,     Increase/  
     2012     2011     (Decrease)     2012     2011     (Decrease)  

Segregated cash

     0.07     0.10     (0.03 %)      0.06     0.11     (0.05 %) 

Client margin balances

     4.06     4.42     (0.36 %)      4.19     4.44     (0.25 %) 

Other cash and interest-earning investments

     0.09     0.09     0.00     0.11     0.12     (0.01 %) 

Client credit balances

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

Net interest revenue (excluding conduit business)

     2.73     3.56     (0.83 %)      2.92     3.52     (0.60 %) 

Securities borrowing—conduit business

     0.21     0.24     (0.03 %)      0.19     0.26     (0.07 %) 

Securities lending—conduit business

     (0.09 %)      (0.16 %)      0.07     (0.09 %)      (0.14 %)      0.05

Net interest revenue

     2.69     3.49     (0.80 %)      2.88     3.44     (0.56 %) 

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

 

xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx
     Fee Revenue            Fee Revenue         
     Three months ended            Six months ended         
     March 31,      Increase/     March 31,      Increase/  
     2012      2011      (Decrease)     2012      2011      (Decrease)  

Money market mutual fund

   $ 0.5       $ 2.3       $ (1.8 )      $ 1.6       $ 5.9       $ (4.3

Other investment product fees

     45.7         38.1         7.6         88.1         75.2         12.9   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total investment product fees

   $ 46.2       $ 40.4       $ 5.8      $ 89.7       $ 81.1       $ 8.6   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx
     Average Balance            Average Balance         
     Three months ended            Six months ended         
     March 31,      %     March 31,      %  
     2012      2011      Change     2012      2011      Change  

Money market mutual fund

   $ 4,988       $ 8,797         (43 %)    $ 5,356       $ 8,817         (39 %) 

Other fee-based investment balances

     79,910         69,484         15     76,035         66,666         14
  

 

 

    

 

 

      

 

 

    

 

 

    

Total fee-based investment balances

   $ 84,898       $ 78,281         8   $ 81,391       $ 75,483         8
  

 

 

    

 

 

      

 

 

    

 

 

    

 

xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx
     Average Annualized Yield           Average Annualized Yield        
     Three months ended     Net Yield     Six months ended     Net Yield  
     March 31,     Increase/     March 31,     Increase/  
     2012     2011     (Decrease)     2012     2011     (Decrease)  

Money market mutual fund

     0.04     0.10     (0.06 %)      0.06     0.13     (0.07 %) 

Other investment product fees

     0.23     0.22     0.01     0.23     0.22     0.01

Total investment product fees

     0.22     0.21     0.01     0.22     0.21     0.01

 

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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           Six months ended        
     March 31,     %     March 31,     %  
     2012     2011     Change     2012     2011     Change  

Total trades (in millions)

     24.03        27.23        (12 %)      47.00        50.84        (8 %) 

Average commissions and transaction fees per trade (1)

   $ 12.15      $ 12.42        (2 %)    $ 12.03      $ 12.41        (3 %) 

Average client trades per day

     387,571        439,158        (12 %)      377,485        405,135        (7 %) 

Average client trades per funded account (annualized)

     17.1        20.1        (15 %)      16.7        18.6        (10 %) 

Activity rate—funded accounts

     6.8     8.0     (15 %)      6.7     7.4     (9 %) 

Trading days

     62.0        62.0        0     124.5        125.5        (1 %) 

 

(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           Six months ended        
     March 31,     %     March 31,     %  
     2012     2011     Change     2012     2011     Change  

New accounts opened

     183,000        176,000        4     323,000        340,000        (5 %) 

Funded accounts (beginning of period)

     5,645,000        5,491,000        3     5,617,000        5,455,000        3

Funded accounts (end of period)

     5,703,000        5,547,000        3     5,703,000        5,547,000        3

Percentage change during period

     1     1       2     2  

Client assets (beginning of period, in billions)

   $ 406.3      $ 386.4        5   $ 378.7      $ 354.8        7

Client assets (end of period, in billions)

   $ 452.4      $ 412.3        10   $ 452.4      $ 412.3        10

Percentage change during period

     11     7       19     16  

Net new assets (in billions)

   $ 10.8      $ 11.5        (6 %)    $ 21.0      $ 21.2        (1 %) 

Net new assets annualized growth rate(1)

     11     12       11     12  

 

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

 

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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           Six months ended        
     March 31,     %     March 31,     %  
     2012     2011     Change     2012     2011     Change  

Revenues:

            

Transaction-based revenues:

            

Commissions and transaction fees

   $ 292.1      $ 338.3        (14 %)    $ 565.4      $ 631.0        (10 %) 

Asset-based revenues:

            

Interest revenue

     108.1        122.8        (12 %)      218.9        239.6        (9 %) 

Brokerage interest expense

     (1.4     (1.2     17     (2.9     (2.5     13
  

 

 

   

 

 

     

 

 

   

 

 

   

Net interest revenue

     106.7        121.6        (12 %)      216.0        237.1        (9 %) 

Insured deposit account fees

     209.2        187.5        12     414.3        365.9        13

Investment product fees

     46.2  &nb