CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30,
2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor
Subsidiary
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
(In millions)
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
248
|
|
|
$
|
2
|
|
|
$
|
1,605
|
|
|
$
|
—
|
|
|
$
|
1,855
|
|
Cash and investments segregated and on
deposit for regulatory purposes
|
|
—
|
|
|
—
|
|
|
8,729
|
|
|
—
|
|
|
8,729
|
|
Receivable from brokers, dealers and
clearing organizations
|
|
—
|
|
|
—
|
|
|
1,190
|
|
|
—
|
|
|
1,190
|
|
Receivable from clients, net
|
|
—
|
|
|
—
|
|
|
11,941
|
|
|
—
|
|
|
11,941
|
|
Receivable from affiliates
|
|
8
|
|
|
—
|
|
|
138
|
|
|
(40
|
)
|
|
106
|
|
Investments available-for-sale, at fair value
|
|
757
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
757
|
|
Investments in subsidiaries
|
|
5,894
|
|
|
5,779
|
|
|
—
|
|
|
(11,673
|
)
|
|
—
|
|
Goodwill
|
|
—
|
|
|
—
|
|
|
2,467
|
|
|
—
|
|
|
2,467
|
|
Acquired intangible assets, net
|
|
—
|
|
|
146
|
|
|
429
|
|
|
—
|
|
|
575
|
|
Other, net
|
|
163
|
|
|
21
|
|
|
1,083
|
|
|
(69
|
)
|
|
1,198
|
|
Total assets
|
|
$
|
7,070
|
|
|
$
|
5,948
|
|
|
$
|
27,582
|
|
|
$
|
(11,782
|
)
|
|
$
|
28,818
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Payable to brokers, dealers and
clearing organizations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,040
|
|
|
$
|
—
|
|
|
$
|
2,040
|
|
Payable to clients
|
|
—
|
|
|
—
|
|
|
19,055
|
|
|
—
|
|
|
19,055
|
|
Accounts payable and other liabilities
|
|
171
|
|
|
—
|
|
|
413
|
|
|
(19
|
)
|
|
565
|
|
Payable to affiliates
|
|
31
|
|
|
—
|
|
|
18
|
|
|
(40
|
)
|
|
9
|
|
Long-term debt
|
|
1,817
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,817
|
|
Deferred income taxes
|
|
—
|
|
|
54
|
|
|
277
|
|
|
(50
|
)
|
|
281
|
|
Total liabilities
|
|
2,019
|
|
|
54
|
|
|
21,803
|
|
|
(109
|
)
|
|
23,767
|
|
Stockholders' equity
|
|
5,051
|
|
|
5,894
|
|
|
5,779
|
|
|
(11,673
|
)
|
|
5,051
|
|
Total liabilities and stockholders' equity
|
|
$
|
7,070
|
|
|
$
|
5,948
|
|
|
$
|
27,582
|
|
|
$
|
(11,782
|
)
|
|
$
|
28,818
|
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED
MARCH 31
,
2017
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor
Subsidiary
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
(In millions)
|
Net revenues
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
902
|
|
|
$
|
(4
|
)
|
|
$
|
904
|
|
Operating expenses
|
|
1
|
|
|
—
|
|
|
549
|
|
|
(4
|
)
|
|
546
|
|
Operating income
|
|
5
|
|
|
—
|
|
|
353
|
|
|
—
|
|
|
358
|
|
Other expense
|
|
14
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
Income (loss) before income taxes and equity
in income of subsidiaries
|
|
(9
|
)
|
|
—
|
|
|
353
|
|
|
—
|
|
|
344
|
|
Provision for (benefit from) income taxes
|
|
(2
|
)
|
|
—
|
|
|
132
|
|
|
—
|
|
|
130
|
|
Income (loss) before equity in income of
subsidiaries
|
|
(7
|
)
|
|
—
|
|
|
221
|
|
|
—
|
|
|
214
|
|
Equity in income of subsidiaries
|
|
221
|
|
|
221
|
|
|
—
|
|
|
(442
|
)
|
|
—
|
|
Net income
|
|
$
|
214
|
|
|
$
|
221
|
|
|
$
|
221
|
|
|
$
|
(442
|
)
|
|
$
|
214
|
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED
MARCH 31
,
2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor
Subsidiary
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
(In millions)
|
Net revenues
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
846
|
|
|
$
|
(5
|
)
|
|
$
|
846
|
|
Operating expenses
|
|
5
|
|
|
—
|
|
|
503
|
|
|
(5
|
)
|
|
503
|
|
Operating income
|
|
—
|
|
|
—
|
|
|
343
|
|
|
—
|
|
|
343
|
|
Other expense
|
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
Income (loss) before income taxes and equity
in income of subsidiaries
|
|
(13
|
)
|
|
—
|
|
|
343
|
|
|
—
|
|
|
330
|
|
Provision for income taxes
|
|
—
|
|
|
—
|
|
|
125
|
|
|
—
|
|
|
125
|
|
Income (loss) before equity in income of
subsidiaries
|
|
(13
|
)
|
|
—
|
|
|
218
|
|
|
—
|
|
|
205
|
|
Equity in income of subsidiaries
|
|
218
|
|
|
218
|
|
|
—
|
|
|
(436
|
)
|
|
—
|
|
Net income
|
|
$
|
205
|
|
|
$
|
218
|
|
|
$
|
218
|
|
|
$
|
(436
|
)
|
|
$
|
205
|
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX
MONTHS ENDED
MARCH 31
,
2017
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor
Subsidiary
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
(In millions)
|
Net revenues
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
1,759
|
|
|
$
|
(12
|
)
|
|
$
|
1,762
|
|
Operating expenses
|
|
8
|
|
|
—
|
|
|
1,055
|
|
|
(12
|
)
|
|
1,051
|
|
Operating income
|
|
7
|
|
|
—
|
|
|
704
|
|
|
—
|
|
|
711
|
|
Other expense
|
|
28
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
28
|
|
Income (loss) before income taxes and equity
in income of subsidiaries
|
|
(21
|
)
|
|
—
|
|
|
704
|
|
|
—
|
|
|
683
|
|
Provision for (benefit from) income taxes
|
|
(6
|
)
|
|
—
|
|
|
259
|
|
|
—
|
|
|
253
|
|
Income (loss) before equity in income of
subsidiaries
|
|
(15
|
)
|
|
—
|
|
|
445
|
|
|
—
|
|
|
430
|
|
Equity in income of subsidiaries
|
|
445
|
|
|
445
|
|
|
—
|
|
|
(890
|
)
|
|
—
|
|
Net income
|
|
$
|
430
|
|
|
$
|
445
|
|
|
$
|
445
|
|
|
$
|
(890
|
)
|
|
$
|
430
|
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX
MONTHS ENDED
MARCH 31
,
2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor
Subsidiary
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Total
|
|
|
(In millions)
|
Net revenues
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
1,659
|
|
|
$
|
(10
|
)
|
|
$
|
1,659
|
|
Operating expenses
|
|
9
|
|
|
—
|
|
|
973
|
|
|
(10
|
)
|
|
972
|
|
Operating income
|
|
1
|
|
|
—
|
|
|
686
|
|
|
—
|
|
|
687
|
|
Other expense
|
|
26
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26
|
|
Income (loss) before income taxes and equity
in income of subsidiaries
|
|
(25
|
)
|
|
—
|
|
|
686
|
|
|
—
|
|
|
661
|
|
Provision for (benefit from) income taxes
|
|
(8
|
)
|
|
—
|
|
|
252
|
|
|
—
|
|
|
244
|
|
Income (loss) before equity in income of
subsidiaries
|
|
(17
|
)
|
|
—
|
|
|
434
|
|
|
—
|
|
|
417
|
|
Equity in income of subsidiaries
|
|
434
|
|
|
434
|
|
|
—
|
|
|
(868
|
)
|
|
—
|
|
Net income
|
|
$
|
417
|
|
|
$
|
434
|
|
|
$
|
434
|
|
|
$
|
(868
|
)
|
|
$
|
417
|
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX
MONTHS ENDED
MARCH 31
,
2017
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor
Subsidiary
|
|
Non-Guarantor
Subsidiaries
|
|
Total
|
|
|
(In millions)
|
Net cash provided by (used in) operating activities
|
|
$
|
(85
|
)
|
|
$
|
—
|
|
|
$
|
711
|
|
|
$
|
626
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
—
|
|
|
—
|
|
|
(79
|
)
|
|
(79
|
)
|
Net cash used in investing activities
|
|
—
|
|
|
—
|
|
|
(79
|
)
|
|
(79
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payment of cash dividends
|
|
(190
|
)
|
|
—
|
|
|
—
|
|
|
(190
|
)
|
Purchase of treasury stock for income tax withholding on
stock-based compensation
|
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
Other
|
|
34
|
|
|
—
|
|
|
—
|
|
|
34
|
|
Net cash used in financing activities
|
|
(171
|
)
|
|
—
|
|
|
—
|
|
|
(171
|
)
|
Intercompany investing and financing activities, net
|
|
740
|
|
|
—
|
|
|
(740
|
)
|
|
—
|
|
Net increase (decrease) in cash and cash equivalents
|
|
484
|
|
|
—
|
|
|
(108
|
)
|
|
376
|
|
Cash and cash equivalents at beginning of period
|
|
248
|
|
|
2
|
|
|
1,605
|
|
|
1,855
|
|
Cash and cash equivalents at end of period
|
|
$
|
732
|
|
|
$
|
2
|
|
|
$
|
1,497
|
|
|
$
|
2,231
|
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX
MONTHS ENDED
MARCH 31
,
2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Guarantor
Subsidiary
|
|
Non-Guarantor
Subsidiaries
|
|
Total
|
|
|
(In millions)
|
Net cash provided by operating activities
|
|
$
|
44
|
|
|
$
|
—
|
|
|
$
|
977
|
|
|
$
|
1,021
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
—
|
|
|
—
|
|
|
(58
|
)
|
|
(58
|
)
|
Purchase of short-term investments
|
|
(201
|
)
|
|
—
|
|
|
—
|
|
|
(201
|
)
|
Proceeds from sale and maturity of short-term investments
|
|
200
|
|
|
—
|
|
|
—
|
|
|
200
|
|
Net cash used in investing activities
|
|
(1
|
)
|
|
—
|
|
|
(58
|
)
|
|
(59
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payment of cash dividends
|
|
(182
|
)
|
|
—
|
|
|
—
|
|
|
(182
|
)
|
Purchase of treasury stock
|
|
(269
|
)
|
|
—
|
|
|
—
|
|
|
(269
|
)
|
Purchase of treasury stock for income tax withholding on
stock-based compensation
|
|
(29
|
)
|
|
—
|
|
|
—
|
|
|
(29
|
)
|
Other, net
|
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
|
Net cash used in financing activities
|
|
(464
|
)
|
|
—
|
|
|
—
|
|
|
(464
|
)
|
Intercompany investing and financing activities, net
|
|
390
|
|
|
—
|
|
|
(390
|
)
|
|
—
|
|
Net increase (decrease) in cash and cash equivalents
|
|
(31
|
)
|
|
—
|
|
|
529
|
|
|
498
|
|
Cash and cash equivalents at beginning of period
|
|
920
|
|
|
2
|
|
|
1,056
|
|
|
1,978
|
|
Cash and cash equivalents at end of period
|
|
$
|
889
|
|
|
$
|
2
|
|
|
$
|
1,585
|
|
|
$
|
2,476
|
|
15. SUBSEQUENT EVENTS
Senior Notes —
On
April 27, 2017
, the Company sold, through a public offering,
$800 million
aggregate principal amount of unsecured
3.300%
Senior Notes due
April 1, 2027
(the “2027 Notes”). Interest on the 2027 Notes will be payable in arrears semi-annually on April 1 and October 1 of each year. The Company intends to use the net proceeds from the issuance of the 2027 Notes for general corporate purposes, including, without limitation, the financing of the cash consideration payable by the Company in its planned acquisition of Scottrade.
The Company's obligations in respect to the 2027 Notes are not guaranteed by any of its subsidiaries. The Company may redeem the 2027 Notes, in whole or in part, at any time prior to
January 1, 2027
at a redemption price equal to the greater of (a)
100%
of the principal amount of the notes being redeemed, and (b) the sum of the present values of the remaining scheduled payments of principal and interest on the notes being redeemed, discounted to the date of redemption on a semi-annual basis at the comparable U.S. Treasury rate, plus 20 basis points, plus accrued and unpaid interest to the date of redemption. The Company may redeem the 2027 Notes, in whole or in part, at any time on or after
January 1, 2027
at a redemption price equal to
100%
of the principal amount of the notes being redeemed, plus accrued and unpaid interest to the date of redemption. If (a) the consummation of the Scottrade acquisition does not occur on or before
April 24, 2018
or (b) the Company notifies the trustee of the 2027 Notes in writing that the Company will not pursue the consummation of the Scottrade acquisition, the Company will be required to redeem the 2027 Notes then outstanding at a redemption price equal to
101%
of the principal amount of the notes, plus accrued and unpaid interest, if any, to, but not including, the date of this special mandatory redemption.
Unlike the 2027 Notes, which are not required to be guaranteed by any of the Company's subsidiaries, the
5.600%
Senior Notes due 2019 ("2019 Notes") are jointly and severally and fully and unconditionally guaranteed by each of the Company’s current and future subsidiaries that is or becomes a borrower or a guarantor under the TD Ameritrade Holding Corporation Credit Agreement described below. As of
April 21, 2017
, the obligations under the TD Ameritrade Holding Corporation Credit Agreement are no longer guaranteed by any subsidiary of the Parent; therefore the guarantee of the 2019 Notes was automatically released.
TD Ameritrade Holding Corporation Credit Agreement —
On
April 21, 2017
, the Parent entered into a credit agreement consisting of a senior unsecured revolving credit facility in the aggregate principal amount of
$300 million
(the "Parent Revolving Facility"). The Parent Revolving Facility replaced the Parent's prior
$300 million
unsecured revolving credit facility, which was scheduled to expire on
June 11, 2019
. The maturity date of the Parent Revolving Facility is
April 21, 2022
.
The applicable interest rate under the Parent Revolving Facility is calculated as a per annum rate equal to, at the option of the Parent, (a) LIBOR plus an interest rate margin ("Parent Eurodollar loans") or (b) (i) the highest of (x) the prime rate, (y) the federal funds effective rate (or if the federal funds effective rate is unavailable, the overnight bank funding rate) plus
0.50%
or (z) the eurodollar rate assuming a
one-month interest period
plus
1.00%
, plus (ii) an interest rate margin ("ABR loans"). The interest rate margin ranges from
0.875%
to
1.50%
for Parent Eurodollar loans and from
0%
to
0.50%
for ABR loans, determined by reference to the Company's public debt ratings. The Parent is obligated to pay a commitment fee ranging from
0.08%
to
0.20%
on any unused amount of the Parent Revolving Facility, determined by reference to the Company's public debt ratings.
The obligations under the Parent Revolving Facility are not guaranteed by any subsidiary of Parent. Prior to the termination of the Parent's prior revolving credit facility, TDAOH guaranteed the Parent’s obligations under the Parent's prior revolving credit facility and its
5.600%
Senior Notes due 2019. Upon termination of the Parent's prior revolving credit facility on
April 21, 2017
, TDAOH's guarantee of the 2019 Notes was automatically released.
The Parent Revolving Facility contains negative covenants that limit or restrict, subject to certain exceptions, the incurrence of liens, indebtedness of subsidiaries, mergers, consolidations, transactions with affiliates, change in nature of business and the sale of all or substantially all of the assets of the Company. The Parent is also required to maintain compliance with a maximum consolidated leverage ratio covenant and a minimum consolidated interest coverage ratio covenant, and the Company's broker-dealer and FCM/FDM subsidiaries are required to maintain compliance with a minimum regulatory net capital covenant.
TD Ameritrade Clearing, Inc. Credit Agreement —
On
April 21, 2017
, TDAC entered into a credit agreement consisting of a senior unsecured revolving credit facility in the aggregate principal amount of
$600 million
(the "TDAC Revolving Facility"). The TDAC Revolving Facility replaced TDAC’s prior
$300 million
unsecured revolving credit facility, which was scheduled to expire on
June 11, 2019
. The maturity date of the TDAC Revolving Facility is
April 21, 2022
.
The applicable interest rate under the TDAC Revolving Facility is calculated as a per annum rate equal to, at the option of TDAC, (a) LIBOR plus an interest rate margin ("TDAC Eurodollar loans") or (b) the federal funds effective rate plus an interest rate margin ("Federal Funds Rate loans"). The interest rate margin ranges from
0.75%
to
1.25%
for both TDAC Eurodollar loans and Federal Funds Rate loans, determined by reference to the Company's public debt ratings. TDAC is obligated to pay a commitment fee ranging from
0.07%
to
0.175%
on any unused amount of the TDAC Revolving Facility, determined by reference to the Company's public debt ratings.
The TDAC Revolving Facility contains negative covenants that limit or restrict, subject to certain exceptions, the incurrence of liens, indebtedness of TDAC, mergers, consolidations, change in nature of business and the sale of all or substantially all of the
assets of TDAC. TDAC is also required to maintain minimum tangible net worth and is required to maintain compliance with minimum regulatory net capital requirements.
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,
2016
, 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 words or 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; diluted earnings per share; the effect of reducing client pricing for online equity trades on our average commissions and transactions fees per trade; amounts of commissions and transaction fees, asset-based revenues and total operating expenses; our effective income tax rate; our capital and liquidity needs and our plans to finance such needs; and our clearinghouse deposit requirements.
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, inability to obtain regulatory approval for our planned acquisition of Scottrade Financial Services, Inc. ("Scottrade"), including the completion of the merger between Scottrade Bank and TD Bank, N.A., delay or failure to close such transaction or meet other closing conditions 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,
2016
. The forward-looking statements contained in this report speak only as of the date on which the statements were made and do not include information related to the planned acquisition of Scottrade, except where Scottrade is referred to. 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,
2016
, 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; estimates of effective income tax rates, uncertain tax positions, 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,
2016
.
The term "GAAP" refers to U.S. generally accepted accounting principles. We utilize non-GAAP calculations of earnings before interest, taxes, depreciation and amortization ("EBITDA") and liquid assets available for corporate investing and financing activities. We believe that these non-GAAP measures will allow for a better evaluation of the operating performance and liquidity of the business. Reference to these non-GAAP measures should not be considered as a substitute for results that are presented in a manner consistent with GAAP. These non-GAAP measures are provided to enhance investors' overall understanding of our financial performance.
Unless otherwise indicated, the terms "we," "us," "our" or "Company," or "TD Ameritrade" in this report refer to TD Ameritrade Holding Corporation and its wholly-owned subsidiaries.
GLOSSARY OF TERMS
In discussing and analyzing our business, we utilize several metrics and other terms that are defined in the following Glossary of Terms.
Italics
indicate other defined terms that appear elsewhere in the Glossary.
Asset-based revenues —
Revenues consisting of (1)
insured deposit account
fees, (2)
net interest revenue
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
insured deposit account
balances, average
client margin balances
, average
segregated cash
balances, average
client credit balances
, average
fee-based investment balances
and average
securities borrowing
and
securities lending
balances. Average rates consist of the average interest rates and fees earned and paid on such balances.
Average client trades per day — Total trades
divided by the number of
trading days
in the period. This metric is also known as
daily average revenue trades (
"
DARTs
"
).
Average commissions and transaction fees per trade
— Total commissions and transaction fee revenues as reported on the Company's financial statements divided by
total trades
for the period. Commissions and transaction fee revenues primarily consist of trading commissions,
order routing revenue
and markups on riskless principal transactions in fixed-income securities.
Basis point —
When referring to interest rates, one basis point represents one one-hundredth of one percent.
Beneficiary accounts — Brokerage accounts
managed by a custodian, guardian, conservator or trustee on behalf of one or more beneficiaries. Examples include accounts maintained under the Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA), guardianship, conservatorship and trust arrangements and pension or profit plan for small business accounts.
Brokerage accounts
— Accounts maintained by the Company on behalf of clients for securities brokerage activities. The primary types of brokerage accounts are
cash accounts, margin accounts, IRA accounts
and
beneficiary accounts. Futures accounts
are sub-accounts associated with a brokerage account for clients who want to trade futures and/or options on futures.
Forex accounts
are sub-accounts associated with a brokerage account for clients who want to engage in foreign exchange trading.
Cash accounts — Brokerage accounts
that do not have
margin account
approval.
Client assets
— The total value of cash and securities in
brokerage accounts.
Client cash and money market assets
— The sum of all client cash balances, including
client credit balances
and client cash balances swept into
insured deposit accounts
or money market mutual funds.
Client credit balances
— Client cash held in
brokerage accounts,
excluding balances generated by client short sales on which no interest is paid. Interest paid on client credit balances is a reduction of
net interest revenue.
Client credit balances are included in "payable to clients" on our financial statements.
Client margin balances
— The total amount of cash loaned to clients in
margin accounts.
Such loans are secured by client assets. Interest earned on client margin balances is a component of
net interest revenue.
Client margin balances are included in "receivable from clients, net" on our financial statements.
Consolidated duration —
The weighted average remaining years until maturity of our
spread-based assets
. For purposes of this calculation, floating rate balances are treated as having a one-month duration. Consolidated duration is used in analyzing our aggregate interest rate sensitivity.
Daily average revenue trades (
"
DARTs
"
)
—
Total trades
divided by the number of
trading days
in the period. This metric is also known as
average client trades per day.
EBITDA
— EBITDA (earnings before interest, taxes, depreciation and amortization) is a non-GAAP financial measure. We consider EBITDA to be an important measure of our financial performance and of our ability to generate cash flows to service debt, fund capital expenditures and fund other corporate investing and financing activities. EBITDA is used as the denominator in the consolidated leverage ratio calculation for covenant purposes under our 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, GAAP pre-tax income, net income and cash flows from operating activities.
Fee-based investment balances
— Client assets invested in money market mutual funds, other mutual funds and Company programs such as AdvisorDirect
®
and Selective Portfolios
®
(formerly known as Amerivest
®
), on which we earn fee revenues. Fee revenues earned on these balances are included in
investment product fees
on our financial statements.
Forex accounts
- Sub-accounts maintained by the Company on behalf of clients for foreign exchange trading. Each forex account must be associated with a
brokerage account
. Forex accounts are not counted separately for purposes of the Company's client account metrics.
Funded accounts
— All open client accounts with a total
liquidation value
greater than zero.
Futures accounts
— Sub-accounts maintained by the Company on behalf of clients for trading in futures and/or options on futures. Each futures account must be associated with a
brokerage account
. Futures accounts are not counted separately for purposes of the Company's client account metrics.
Insured deposit account —
The Company is party to an Insured Deposit Account ("IDA") agreement with TD Bank USA, N.A. ("TD Bank USA"), TD Bank, N.A. and The Toronto-Dominion Bank ("TD"). Under the IDA agreement, TD Bank USA and TD Bank, N.A. (together, the "TD 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 TD Depository Institutions with respect to the money market deposit accounts. In exchange for providing these services, the TD Depository Institutions pay the Company an aggregate marketing fee based on the
weighted average yield earned on the client IDA assets, less the actual interest paid to clients, a servicing fee to the TD Depository Institutions and the cost of FDIC insurance premiums.
Interest-earning assets —
Consist of
client margin balances,
segregated cash
, deposits paid on
securities borrowing
and other cash and interest-earning investment balances.
Interest rate-sensitive assets
— Consist of
spread-based assets
and client cash invested in money market mutual funds.
Investment product fees
— Revenues earned on
fee-based investment balances
. Investment product fees include fees earned on money market mutual funds, other mutual funds and through Company programs such as AdvisorDirect
®
and Selective Portfolios
®
.
IRA accounts (Individual Retirement Arrangements)
— A personal trust account for the exclusive benefit of a U.S. individual (or his or her beneficiaries) that provides tax advantages in accumulating funds to save for retirement or other qualified purposes. These accounts are subject to numerous restrictions on additions to and withdrawals from the account, as well as prohibitions against certain investments or transactions conducted within the account. The Company offers traditional, Roth, Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) IRA accounts.
Liquid assets available for corporate investing and financing activities
— Liquid assets available for corporate investing and financing activities is a non-GAAP financial measure. We consider liquid assets available for corporate investing and financing activities to be an important measure of our liquidity. We define liquid assets available for corporate investing and financing activities as the sum of (a) excess corporate cash and cash equivalents and investments and (b) our regulated subsidiaries net capital in excess of minimum operational targets established by management. Excess corporate cash and cash equivalents and investments includes cash and cash equivalents from our investment advisory subsidiaries and excludes (i) amounts being maintained to provide liquidity for operational contingencies, including lending to our broker-dealer and FCM/FDM subsidiaries under intercompany credit agreements, (ii) amounts maintained for corporate working capital and (iii) amounts held as collateral for derivative contracts. We include the excess capital of our regulated subsidiaries in the calculation of liquid assets available for corporate investing and financing activities, rather than simply including regulated subsidiaries' cash and cash equivalents, because capital requirements may limit the amount of cash available for dividend from the regulated subsidiaries to the parent company. Excess capital, as defined under clause (b) above, is generally available for dividend from the regulated subsidiaries to the parent company. Liquid assets available for corporate investing and financing activities is based on more conservative measures of net capital than regulatory requirements because we generally manage to higher levels of net capital at our regulated subsidiaries than the regulatory thresholds require. Liquid assets available for corporate investing and financing activities should be considered as a supplemental measure of liquidity, rather than as a substitute for GAAP cash and cash equivalents.
Liquidation value
— The net value of a client's account holdings as of the close of a regular trading session. Liquidation value includes client cash and the value of long security positions, less margin balances and the cost to buy back short security positions. It also includes the value of open futures, foreign exchange and options positions.
Margin accounts — Brokerage accounts
in which clients may borrow from the Company to buy securities or for any other purpose, subject to regulatory and Company-imposed limitations.
Market fee-based investment balances
— Client assets invested in mutual funds (except money market funds) and Company programs such as AdvisorDirect
®
and Selective Portfolios,
®
on which we earn fee revenues that are largely based on a percentage of the market value of the investment. Market fee-based investment balances are a component of
fee-based investment balances
. Fee revenues earned on these balances are included in
investment product fees
on our financial statements.
Net income excluding amortization of intangible assets
— Net income excluding amortization of intangible assets is a non-GAAP financial measure. We define net income excluding amortization of intangible assets as net income (loss), adjusted to remove the after-tax effect of amortization of acquired intangible assets. We consider net income excluding amortization of intangible assets an important measure of our financial performance. Amortization of acquired intangible assets is excluded because we believe it is not indicative of underlying business performance. Net income excluding amortization of intangible assets should be considered in addition to, rather than as a substitute for, GAAP net income.
Net interest margin (
"
NIM
"
)
— A measure of the net yield on our average
spread-based assets
. Net interest margin is calculated for a given period by dividing the annualized sum of
insured deposit account
fees and
net interest revenue
by average
spread-based assets
.
Net interest revenue
— Net interest revenue is interest revenues less brokerage interest expense. Interest revenues are generated by charges to clients on margin balances maintained in
margin accounts,
the investment of cash from operations and
segregated cash
and interest earned on
securities borrowing/securities lending
. Brokerage interest expense consists of amounts paid or payable to clients based on credit balances maintained in
brokerage accounts
and interest incurred on
securities borrowing/securities lending
. Brokerage interest expense does not include interest on Company non-brokerage borrowings.
Net new assets
— Consists of total client asset inflows, less total client asset outflows, excluding activity from business combinations. Client asset inflows include interest and dividend payments and exclude changes in
client assets
due to market fluctuations. Net new assets are measured based on the market value of the assets as of the date of the inflows and outflows.
Net new asset growth rate (annualized)
— Annualized
net new assets
as a percentage of
client assets
as of the beginning of the period.
Order routing revenue
— Revenues generated from revenue-sharing arrangements with market destinations (also referred to as "payment for order flow"). Order routing revenue is a component of
transaction-based revenues.
Securities borrowing
— We borrow securities temporarily from other broker-dealers in connection with our broker-dealer business. We deposit cash as collateral for the securities borrowed, and generally earn interest revenue on the cash deposited with the counterparty. We also incur interest expense for borrowing certain securities.
Securities lending
— We loan securities temporarily to other broker-dealers in connection with our broker-dealer business. We receive cash as collateral for the securities loaned, and generally incur interest expense on the cash deposited with us. We also earn revenue for lending certain securities.
Segregated cash
— Client cash and investments segregated in compliance with Rule 15c3-3 of the Securities Exchange Act of 1934 (the Customer Protection Rule) and other regulations. Interest earned on segregated cash is a component of
net interest revenue.
Spread-based assets
— Client and brokerage-related asset balances, consisting of
insured deposit account
balances and
interest-earning assets
. Spread-based assets is used in the calculation of our
net interest margin
and our
consolidated duration
.
Total trades
— Revenue-generating client securities trades, which are executed by the Company's broker-dealer and FCM/FDM subsidiaries. Total trades are a significant source of the Company's revenues. Such trades include, but are not limited to, trades in equities, options, futures, foreign exchange, mutual funds and debt instruments. Trades generate revenue from commissions, markups on riskless principal transactions in fixed income securities, transaction fees and/or
order routing revenue
.
Trading days
— Days in which the U.S. equity markets are open for a full trading session. Reduced exchange trading sessions are treated as half trading days.
Transaction-based revenues
— Revenues generated from client trade execution, consisting primarily of commissions, markups on riskless principal transactions in fixed income securities, transaction clearing fees and
order routing revenue
.
RESULTS OF OPERATIONS
Conditions in the U.S. equity markets significantly impact the volume of our clients' trading activity. There is a strong relationship 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 generally 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 insured deposit account, margin, credit and mutual fund balances, may significantly impact our results of operations. Changes in interest rates also significantly impact our results of operations. We seek to mitigate interest rate risk by aligning the average duration of our interest-earning assets with that of our interest-bearing liabilities. We cannot predict the direction of interest rates or the levels of client balances. If interest rates rise, we generally expect to earn a larger net interest spread. Conversely, a falling interest rate environment generally would result in our earning a smaller net interest spread.
Financial Performance Metrics
Net income, diluted earnings per share and EBITDA are key metrics we use in evaluating our financial performance. Net income and diluted earnings per share are GAAP financial measures and EBITDA is a non-GAAP financial measure.
We consider EBITDA to be an important measure of our financial performance and of our ability to generate cash flows to service debt, fund capital expenditures and fund other corporate investing and financing activities. EBITDA is used as the denominator in the consolidated leverage ratio calculation for covenant purposes under our 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, GAAP pre-tax income, net income and cash flows from operating activities.
The following table sets forth net income in dollars and as a percentage of net revenues for the periods indicated, and provides reconciliations to EBITDA (dollars in millions):
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|
|
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|
|
|
|
|
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Three months ended March 31,
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Six months ended March 31,
|
|
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2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
$
|
|
% of Net Revenues
|
|
$
|
|
% of Net Revenues
|
|
$
|
|
% of Net Revenues
|
|
$
|
|
% of Net Revenues
|
Net income - GAAP
|
|
$
|
214
|
|
|
23.7
|
%
|
|
$
|
205
|
|
|
24.2
|
%
|
|
$
|
430
|
|
|
24.4
|
%
|
|
$
|
417
|
|
|
25.1
|
%
|
Add:
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Depreciation and amortization
|
|
25
|
|
|
2.8
|
%
|
|
22
|
|
|
2.6
|
%
|
|
49
|
|
|
2.8
|
%
|
|
44
|
|
|
2.7
|
%
|
Amortization of acquired intangible assets
|
|
19
|
|
|
2.1
|
%
|
|
22
|
|
|
2.6
|
%
|
|
38
|
|
|
2.2
|
%
|
|
45
|
|
|
2.7
|
%
|
Interest on borrowings
|
|
14
|
|
|
1.5
|
%
|
|
13
|
|
|
1.5
|
%
|
|
28
|
|
|
1.6
|
%
|
|
26
|
|
|
1.6
|
%
|
Provision for income taxes
|
|
130
|
|
|
14.4
|
%
|
|
125
|
|
|
14.8
|
%
|
|
253
|
|
|
14.4
|
%
|
|
244
|
|
|
14.7
|
%
|
EBITDA - non-GAAP
|
|
$
|
402
|
|
|
44.5
|
%
|
|
$
|
387
|
|
|
45.7
|
%
|
|
$
|
798
|
|
|
45.3
|
%
|
|
$
|
776
|
|
|
46.8
|
%
|
Our net income
increased
4%
and
3%
for the
second
quarter and first half of fiscal
2017
, respectively, compared to the same periods in the prior year, primarily due to an
increase
in net revenues, partially offset by increases in operating expenses, interest on borrowings and income taxes during the
second
quarter and first half of fiscal 2017. Detailed analysis of net revenues and expenses is presented later in this discussion.
Our EBITDA
increased
4%
and
3%
for the
second
quarter and first half of fiscal
2017
, respectively, compared to the same periods in the prior year, primarily due to an
increase
in net revenues, partially offset by an
increase
in operating expenses excluding depreciation and amortization during the
second
quarter and first half of fiscal 2017.
Our diluted earnings per share
increased
5%
to
$0.40
and
4%
to
$0.81
for the
second
quarter and first half of fiscal
2017
, respectively, compared to
$0.38
and
$0.78
for the
second
quarter and first half of fiscal 2016, respectively. The increases were primarily due to higher net income and a decrease in the weighted average diluted shares outstanding as a result of our stock repurchase programs. We are expecting a decrease in our commissions and transactions fees and increases in our asset-based revenues and total operating expenses for the remainder of fiscal 2017; however, we still expect our diluted earnings per share for fiscal 2017 to range from $1.50 to $1.80. Details regarding our revised expectations for certain revenue and expense line items are presented later in this discussion.
Operating Metrics
Our largest sources of revenues are asset-based revenues and transaction-based revenues. For the
first half of
fiscal
2017
, asset-based revenues and transaction-based revenues accounted for
58%
and
41%
of our net revenues, respectively. Asset-based revenues consist of (1) insured deposit account fees, (2) net interest revenue 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 insured deposit account balances, average client margin balances, average segregated cash balances, average client credit balances, average fee-based investment balances and average securities borrowing and lending balances. Average rates consist of the average interest rates and fees earned and paid on such balances. The primary factors driving our transaction-based revenues are total client trades and average commissions and transaction fees per trade. We also consider client account and client asset metrics, although we believe they are generally of less significance to our results of operations for any particular period than our metrics for asset-based and transaction-based revenues.
Asset-Based Revenue Metrics
We calculate the return on our insured deposit account balances and our interest-earning assets 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 insured deposit account fees and net interest revenue by average spread-based assets. Spread-based assets consist of client and brokerage-related asset balances, including insured deposit account balances, client margin balances, segregated cash, deposits paid on securities borrowing and other cash and interest-earning investment balances. The following table sets forth net interest margin and average spread-based assets (dollars in millions):
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Three months ended
March 31,
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Increase/
(Decrease)
|
|
Six months ended
March 31,
|
|
Increase/
(Decrease)
|
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2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Average insured deposit account balances
|
|
$
|
95,140
|
|
|
$
|
83,992
|
|
|
$
|
11,148
|
|
|
$
|
94,191
|
|
|
$
|
82,158
|
|
|
$
|
12,033
|
|
Average interest-earning assets
|
|
24,584
|
|
|
21,831
|
|
|
2,753
|
|
|
24,519
|
|
|
22,010
|
|
|
2,509
|
|
Average spread-based balances
|
|
$
|
119,724
|
|
|
$
|
105,823
|
|
|
$
|
13,901
|
|
|
$
|
118,710
|
|
|
$
|
104,168
|
|
|
$
|
14,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured deposit account fee revenue
|
|
$
|
269
|
|
|
$
|
235
|
|
|
$
|
34
|
|
|
$
|
514
|
|
|
$
|
462
|
|
|
$
|
52
|
|
Net interest revenue
|
|
154
|
|
|
147
|
|
|
7
|
|
|
305
|
|
|
300
|
|
|
5
|
|
Spread-based revenue
|
|
$
|
423
|
|
|
$
|
382
|
|
|
$
|
41
|
|
|
$
|
819
|
|
|
$
|
762
|
|
|
$
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avg. annualized yield—insured deposit account fees
|
|
1.13
|
%
|
|
1.11
|
%
|
|
0.02
|
%
|
|
1.08
|
%
|
|
1.11
|
%
|
|
(0.03
|
)%
|
Avg. annualized yield—interest-earning assets
|
|
2.50
|
%
|
|
2.66
|
%
|
|
(0.16
|
)%
|
|
2.46
|
%
|
|
2.69
|
%
|
|
(0.23
|
)%
|
Net interest margin (NIM)
|
|
1.41
|
%
|
|
1.43
|
%
|
|
(0.02
|
)%
|
|
1.36
|
%
|
|
1.44
|
%
|
|
(0.08
|
)%
|
The following tables set forth key metrics that we use in analyzing net interest revenue, which is a component of net interest margin (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Revenue (Expense)
|
|
Increase/
(Decrease)
|
|
Interest Revenue (Expense)
|
|
Increase/
(Decrease)
|
|
|
Three months ended
March 31,
|
|
|
Six months ended
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Segregated cash
|
|
$
|
10
|
|
|
$
|
3
|
|
|
$
|
7
|
|
|
$
|
17
|
|
|
$
|
4
|
|
|
$
|
13
|
|
Client margin balances
|
|
109
|
|
|
111
|
|
|
(2
|
)
|
|
217
|
|
|
222
|
|
|
(5
|
)
|
Securities lending/borrowing, net
|
|
31
|
|
|
32
|
|
|
(1
|
)
|
|
65
|
|
|
73
|
|
|
(8
|
)
|
Other cash and interest-earning investments
|
|
4
|
|
|
1
|
|
|
3
|
|
|
7
|
|
|
2
|
|
|
5
|
|
Client credit balances
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
Net interest revenue
|
|
$
|
154
|
|
|
$
|
147
|
|
|
$
|
7
|
|
|
$
|
305
|
|
|
$
|
300
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance
|
|
%
Change
|
|
Average Balance
|
|
%
Change
|
|
|
Three months ended
March 31,
|
|
|
Six months ended
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Segregated cash
|
|
$
|
8,680
|
|
|
$
|
6,549
|
|
|
33
|
%
|
|
$
|
8,702
|
|
|
$
|
6,359
|
|
|
37
|
%
|
Client margin balances
|
|
11,871
|
|
|
11,562
|
|
|
3
|
%
|
|
11,885
|
|
|
11,913
|
|
|
0
|
%
|
Securities borrowing
|
|
931
|
|
|
719
|
|
|
29
|
%
|
|
943
|
|
|
752
|
|
|
25
|
%
|
Other cash and interest-earning investments
|
|
3,102
|
|
|
3,001
|
|
|
3
|
%
|
|
2,989
|
|
|
2,986
|
|
|
0
|
%
|
Interest-earning assets
|
|
$
|
24,584
|
|
|
$
|
21,831
|
|
|
13
|
%
|
|
$
|
24,519
|
|
|
$
|
22,010
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client credit balances
|
|
$
|
16,138
|
|
|
$
|
14,409
|
|
|
12
|
%
|
|
$
|
16,122
|
|
|
$
|
14,225
|
|
|
13
|
%
|
Securities lending
|
|
1,654
|
|
|
1,937
|
|
|
(15
|
)%
|
|
1,771
|
|
|
2,156
|
|
|
(18
|
)%
|
Interest-bearing liabilities
|
|
$
|
17,792
|
|
|
$
|
16,346
|
|
|
9
|
%
|
|
$
|
17,893
|
|
|
$
|
16,381
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avg. Annualized Yield (Cost)
|
|
Net Yield
Increase/
(Decrease)
|
|
Avg. Annualized Yield (Cost)
|
|
Net Yield
Increase/
(Decrease)
|
|
|
Three months ended
March 31,
|
|
|
Six months ended
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Segregated cash
|
|
0.46
|
%
|
|
0.19
|
%
|
|
0.27
|
%
|
|
0.38
|
%
|
|
0.14
|
%
|
|
0.24
|
%
|
Client margin balances
|
|
3.67
|
%
|
|
3.79
|
%
|
|
(0.12
|
)%
|
|
3.61
|
%
|
|
3.66
|
%
|
|
(0.05
|
)%
|
Other cash and interest-earning investments
|
|
0.54
|
%
|
|
0.17
|
%
|
|
0.37
|
%
|
|
0.49
|
%
|
|
0.11
|
%
|
|
0.38
|
%
|
Client credit balances
|
|
(0.01
|
)%
|
|
(0.01
|
)%
|
|
0.00
|
%
|
|
(0.01
|
)%
|
|
(0.01
|
)%
|
|
0.00
|
%
|
Net interest revenue
|
|
2.50
|
%
|
|
2.66
|
%
|
|
(0.16
|
)%
|
|
2.46
|
%
|
|
2.69
|
%
|
|
(0.23
|
)%
|
The following tables set forth key metrics that we use in analyzing investment product fee revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee Revenue
|
|
Increase/
(Decrease)
|
|
Fee Revenue
|
|
Increase/
(Decrease)
|
|
|
Three months ended
March 31,
|
|
|
Six months ended
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Money market mutual fund
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
8
|
|
|
$
|
4
|
|
|
$
|
4
|
|
Market fee-based investment balances
|
|
99
|
|
|
86
|
|
|
13
|
|
|
189
|
|
|
177
|
|
|
12
|
|
Total investment product fees
|
|
$
|
103
|
|
|
$
|
88
|
|
|
$
|
15
|
|
|
$
|
197
|
|
|
$
|
181
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance
|
|
%
Change
|
|
Average Balance
|
|
%
Change
|
|
|
Three months ended
March 31,
|
|
|
Six months ended
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Money market mutual fund
|
|
$
|
3,529
|
|
|
$
|
5,816
|
|
|
(39
|
)%
|
|
$
|
3,616
|
|
|
$
|
5,784
|
|
|
(37
|
)%
|
Market fee-based investment balances
|
|
176,898
|
|
|
147,297
|
|
|
20
|
%
|
|
171,768
|
|
|
150,105
|
|
|
14
|
%
|
Total fee-based investment balances
|
|
$
|
180,427
|
|
|
$
|
153,113
|
|
|
18
|
%
|
|
$
|
175,384
|
|
|
$
|
155,889
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Annualized Yield
|
|
Increase/
(Decrease)
|
|
Average Annualized Yield
|
|
Increase/
(Decrease)
|
|
|
Three months ended
March 31,
|
|
|
Six months ended
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Money market mutual fund
|
|
0.44
|
%
|
|
0.18
|
%
|
|
0.26
|
%
|
|
0.41
|
%
|
|
0.12
|
%
|
|
0.29
|
%
|
Market fee-based investment balances
|
|
0.22
|
%
|
|
0.23
|
%
|
|
(0.01
|
)%
|
|
0.22
|
%
|
|
0.23
|
%
|
|
(0.01
|
)%
|
Total investment product fees
|
|
0.23
|
%
|
|
0.23
|
%
|
|
0.00
|
%
|
|
0.22
|
%
|
|
0.23
|
%
|
|
(0.01
|
)%
|
Transaction-Based Revenue Metrics
The following table sets forth several key metrics regarding client trading activity, which we utilize in measuring and evaluating performance and the results of our operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
%
Change
|
|
Six months ended
March 31,
|
|
%
Change
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Total trades (in millions)
|
|
32.05
|
|
|
31.06
|
|
|
3
|
%
|
|
62.48
|
|
|
58.66
|
|
|
7
|
%
|
Average client trades per day
|
|
516,994
|
|
|
509,120
|
|
|
2
|
%
|
|
501,837
|
|
|
473,041
|
|
|
6
|
%
|
Trading days
|
|
62.0
|
|
|
61.0
|
|
|
2
|
%
|
|
124.5
|
|
|
124.0
|
|
|
0
|
%
|
Average commissions and transaction fees per trade
|
|
$
|
11.38
|
|
|
$
|
11.60
|
|
|
(2
|
)%
|
|
$
|
11.51
|
|
|
$
|
11.74
|
|
|
(2
|
)%
|
Order routing revenue (in millions)
|
|
$
|
83
|
|
|
$
|
76
|
|
|
9
|
%
|
|
$
|
162
|
|
|
$
|
147
|
|
|
10
|
%
|
Average order routing revenue per trade
(1)
|
|
$
|
2.58
|
|
|
$
|
2.46
|
|
|
5
|
%
|
|
$
|
2.59
|
|
|
$
|
2.50
|
|
|
4
|
%
|
|
|
(1)
|
Average order routing revenue per trade is included in average commissions and transaction fees per trade.
|
Client Account and Client Asset Metrics
The following table sets forth certain metrics regarding client accounts and client assets, which we use to analyze growth and trends in our client base:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
%
Change
|
|
Six months ended
March 31,
|
|
%
Change
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Funded accounts (beginning of period)
|
|
7,046,000
|
|
|
6,686,000
|
|
|
5
|
%
|
|
6,950,000
|
|
|
6,621,000
|
|
|
5
|
%
|
Funded accounts (end of period)
|
|
7,189,000
|
|
|
6,777,000
|
|
|
6
|
%
|
|
7,189,000
|
|
|
6,777,000
|
|
|
6
|
%
|
Percentage change during period
|
|
2
|
%
|
|
1
|
%
|
|
|
|
3
|
%
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client assets (beginning of period, in billions)
|
|
$
|
797.0
|
|
|
$
|
695.3
|
|
|
15
|
%
|
|
$
|
773.8
|
|
|
$
|
667.4
|
|
|
16
|
%
|
Client assets (end of period, in billions)
|
|
$
|
846.7
|
|
|
$
|
711.2
|
|
|
19
|
%
|
|
$
|
846.7
|
|
|
$
|
711.2
|
|
|
19
|
%
|
Percentage change during period
|
|
6
|
%
|
|
2
|
%
|
|
|
|
9
|
%
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net new assets (in billions)
|
|
$
|
19.5
|
|
|
$
|
14.1
|
|
|
38
|
%
|
|
$
|
38.1
|
|
|
$
|
31.6
|
|
|
21
|
%
|
Net new assets annualized growth rate
|
|
10
|
%
|
|
8
|
%
|
|
|
|
10
|
%
|
|
10
|
%
|
|
|
Condensed Consolidated Statements of Income Data
The following table summarizes certain data from our Condensed Consolidated Statements of Income for analysis purposes (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
%
Change
|
|
Six months ended March 31,
|
|
%
Change
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and transaction fees
|
|
$
|
365
|
|
|
$
|
360
|
|
|
1
|
%
|
|
$
|
719
|
|
|
$
|
689
|
|
|
4
|
%
|
Asset-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured deposit account fees
|
|
269
|
|
|
235
|
|
|
14
|
%
|
|
514
|
|
|
462
|
|
|
11
|
%
|
Net interest revenue
|
|
154
|
|
|
147
|
|
|
5
|
%
|
|
305
|
|
|
300
|
|
|
2
|
%
|
Investment product fees
|
|
103
|
|
|
88
|
|
|
17
|
%
|
|
197
|
|
|
181
|
|
|
9
|
%
|
Total asset-based revenues
|
|
526
|
|
|
470
|
|
|
12
|
%
|
|
1,016
|
|
|
943
|
|
|
8
|
%
|
Other revenues
|
|
13
|
|
|
16
|
|
|
(19
|
)%
|
|
27
|
|
|
27
|
|
|
0
|
%
|
Net revenues
|
|
904
|
|
|
846
|
|
|
7
|
%
|
|
1,762
|
|
|
1,659
|
|
|
6
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
229
|
|
|
208
|
|
|
10
|
%
|
|
443
|
|
|
408
|
|
|
9
|
%
|
Clearing and execution costs
|
|
37
|
|
|
37
|
|
|
0
|
%
|
|
73
|
|
|
67
|
|
|
9
|
%
|
Communications
|
|
29
|
|
|
33
|
|
|
(12
|
)%
|
|
64
|
|
|
66
|
|
|
(3
|
)%
|
Occupancy and equipment costs
|
|
45
|
|
|
43
|
|
|
5
|
%
|
|
89
|
|
|
85
|
|
|
5
|
%
|
Depreciation and amortization
|
|
25
|
|
|
22
|
|
|
14
|
%
|
|
49
|
|
|
44
|
|
|
11
|
%
|
Amortization of acquired intangible assets
|
|
19
|
|
|
22
|
|
|
(14
|
)%
|
|
38
|
|
|
45
|
|
|
(16
|
)%
|
Professional services
|
|
59
|
|
|
37
|
|
|
59
|
%
|
|
111
|
|
|
74
|
|
|
50
|
%
|
Advertising
|
|
80
|
|
|
81
|
|
|
(1
|
)%
|
|
137
|
|
|
143
|
|
|
(4
|
)%
|
Other
|
|
23
|
|
|
20
|
|
|
15
|
%
|
|
47
|
|
|
40
|
|
|
18
|
%
|
Total operating expenses
|
|
546
|
|
|
503
|
|
|
9
|
%
|
|
1,051
|
|
|
972
|
|
|
8
|
%
|
Operating income
|
|
358
|
|
|
343
|
|
|
4
|
%
|
|
711
|
|
|
687
|
|
|
3
|
%
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on borrowings
|
|
14
|
|
|
13
|
|
|
8
|
%
|
|
28
|
|
|
26
|
|
|
8
|
%
|
Total other expense
|
|
14
|
|
|
13
|
|
|
8
|
%
|
|
28
|
|
|
26
|
|
|
8
|
%
|
Pre-tax income
|
|
344
|
|
|
330
|
|
|
4
|
%
|
|
683
|
|
|
661
|
|
|
3
|
%
|
Provision for income taxes
|
|
130
|
|
|
125
|
|
|
4
|
%
|
|
253
|
|
|
244
|
|
|
4
|
%
|
Net income
|
|
$
|
214
|
|
|
$
|
205
|
|
|
4
|
%
|
|
$
|
430
|
|
|
$
|
417
|
|
|
3
|
%
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
37.8
|
%
|
|
37.9
|
%
|
|
|
|
37.0
|
%
|
|
36.9
|
%
|
|
|
Average debt outstanding
|
|
$
|
1,748
|
|
|
$
|
1,748
|
|
|
0
|
%
|
|
$
|
1,749
|
|
|
$
|
1,748
|
|
|
0
|
%
|
Effective interest rate incurred on borrowings
|
|
3.30
|
%
|
|
2.97
|
%
|
|
|
|
3.24
|
%
|
|
2.93
|
%
|
|
|
Three-Month Periods Ended
March 31, 2017
and
2016
Net Revenues
Commissions and transaction fees
increased
1%
to
$365 million
, primarily due to increased client trading activity, partially offset by lower average commissions and transaction fees per trade. Total trades
increased
3%
, as average client trades per day
increased
2%
to
516,994
for the
second
quarter of fiscal
2017
compared to
509,120
for the
second
quarter of the prior year and there was one more trading day during the second quarter of fiscal 2017 compared to the second quarter of fiscal 2016. Average commissions and transaction fees per trade
decreased
to
$11.38
for the
second
quarter of fiscal
2017
from
$11.60
for the
second
quarter of the prior year, primarily due to our reduction in client pricing for online equity trades and clients receiving reduced commission trades as a result of price competition in the industry, partially offset by a 5% increase in average order routing revenue per trade. Effective March 6, 2017, we reduced our online equity and ETF trade commissions from $9.99 to $6.95 per trade and also lowered options pricing to $6.95 per trade (plus $0.75 per contract). The reduction in client pricing for online equity trades is expected to decrease our commissions and transaction fees by $80 million to $90 million for fiscal 2017, which equates to approximately $1.10 to $1.30 per trade, and we also expect commissions and transaction fees to decrease to between $300 million and $320 million per quarter for the remainder of fiscal 2017.
Asset-based revenues, which consists of insured deposit account fees, net interest revenue and investment product fees,
increased
12%
to $
526 million
, primarily due to a
13%
increase
in average spread-based assets and a 20% increase in average market fee-based investment balances. These increases were partially offset by a
decrease
of 2 basis points in net interest margin to
1.41%
and the effect of one less interest day during the second quarter of fiscal 2017 compared to the second quarter of fiscal 2016. Net interest margin decreased as the benefits realized on the December 2016 and March 2017 federal funds rate increases were more than offset by the impact of higher average segregated cash balances, which earn a lower net interest spread, the increased FDIC surcharge which began in July 2016 and lower negotiated interest rates for clients with larger margin balances. The Federal Open Market Committee increased the target range for the federal funds rate by 0.25% on December 14, 2016 to between 0.50% and 0.75% and increased the target range for the federal funds rate by 0.25% on March 15, 2017 to between 0.75% and 1.00%. Due to the growth in asset-based balances and the favorable impact of the federal funds rate increases, we expect asset-based revenues to increase to between $560 million and $580 million per quarter for the remainder of fiscal 2017.
Insured deposit account fees
increased
14%
to $
269 million
, primarily due to a
13%
increase
in average client IDA balances and an
increase
of
2
basis points in the average yield earned on the IDA assets. The growth in the IDA balances is due to our success in attracting net new client assets. The average yield earned on IDA assets increased due to floating-rate investment balances within the IDA portfolio benefiting from the federal funds rate increases and maturities of investments within the IDA portfolio being invested at higher rates. The increase in the average yield was partially offset by the increased FDIC surcharge. For more information about the IDA agreement, please see Note
13
–
RELATED PARTY TRANSACTIONS
under Item 1, Financial Statements – Notes to Condensed Consolidated Financial Statements.
Net interest revenue
increased
5%
to
$154 million
, primarily due to increases in the average yields earned on segregated cash and other cash and interest-earning investment balances as a result of the December 2016 and March 2017 federal funds rate increases, and increases in average client margin and segregated cash balances. These increases were partially offset by a decrease of 12 basis points in the average yield earned on client margin balances, as the benefits of the federal funds rate increases were more than offset by the impact from lower negotiated interest rates for clients with larger margin balances.
Investment product fees
increased
17%
to $
103 million
, primarily due to a 20% increase in average market fee-based investment balances and an increase of 26 basis points in the average yield earned on money market mutual fund balances. These increases were partially offset by a decrease of 1 basis point in the average yield earned on market fee-based investment balances.
Other revenues
decreased
$3 million to
$13 million
, primarily due to unfavorable fair market adjustments to U.S. government debt securities and U.S. government agency mortgage-backed securities held by our broker-dealer subsidiaries.
Operating Expenses
Total operating expenses
increased
9%
during the
second
quarter of fiscal
2017
compared to the
second
quarter of the prior year. As a result of strategic growth initiatives and costs related to the planned acquisition of Scottrade, we expect total operating expenses will increase to between $530 million and $540 million per quarter for the remainder of fiscal 2017.
Employee compensation and benefits
increased
10%
to
$229 million
, primarily due to an increase in average headcount related to strategic growth initiatives and higher incentive-based compensation related to Company and individual performance. The average number of full-time equivalent employees increased to 6,273 for the
second
quarter of fiscal
2017
compared to 5,867 for the second quarter of the prior year.
Communications expense
decreased
12%
to $
29 million
, primarily due to decreased costs for quotes and market information.
Professional services
increased
59%
to $
59 million
, primarily due to increased consulting and contract services in connection with operational, technology and Scottrade acquisition-related initiatives and higher costs associated with legal and regulatory matters.
Advertising expense
decreased
1%
to
$80 million
. We generally adjust our level of advertising spending in relation to stock market activity and other market conditions in an effort to maximize the number of new accounts while minimizing the advertising cost per new account. We find that self-directed investors tend to demonstrate more interest in financial products and services during certain times of the year, such as in months immediately preceding the annual April tax filing deadline, and less interest during certain other times, such as the summer months. In addition, in periods when advertising market demand is weak, we may adjust our spending to take advantage of attractive advertising rates.
Income Taxes
Our effective income tax rate was
37.8%
for the
second
quarter of fiscal
2017
, compared to
37.9%
for the
second
quarter of the prior year. The effective income tax rate for the
second
quarter of
2017
included $1 million of favorable tax benefits for federal incentives. The effective tax rate for the
second
quarter of the prior year included $5 million of net favorable deferred income tax adjustments due to the remeasurement of deferred tax assets and liabilities and the cumulative impact of the decline in the state tax rate, mostly offset by $4 million of unfavorable adjustments to uncertain tax positions. We expect our effective income tax rate to range from 37% to 38% for the remainder of fiscal
2017
, excluding the effect of any adjustments related to remeasurement or resolution of uncertain tax positions and federal incentives. However, we expect to experience some volatility in our quarterly and annual effective income tax rate because current accounting rules for uncertain tax positions require that any change in measurement of a tax position taken in a prior tax year be recognized as a discrete event in the period in which the change occurs.
Six-Month Periods Ended
March 31, 2017
and
2016
Net Revenues
Commissions and transaction fees
increased
4%
to
$719 million
, primarily due to increased client trading activity, partially offset by lower average commissions and transaction fees per trade. Total trades increased
7%
, as average client trades per day
increased
6%
to
501,837
for the
first half of
fiscal
2017
compared to
473,041
for the
first half of
the prior year. Average commissions and transaction fees per trade
decreased
to $
11.51
for the
first half of
fiscal
2017
from $
11.74
for the
first half of
the prior year, primarily due to our reduction in client pricing for online equity trades and clients receiving reduced commission trades as a result of price competition in the industry, partially offset by a 4% increase in average order routing revenue per trade.
Asset-based revenues
increased
8%
to $
1.02 billion
for the
first half of
fiscal
2017
, primarily due to
14%
increase
s in average spread-based assets and average market fee-based investment balances. These increases were partially offset by a decrease of 8 basis points in net interest margin to
1.36%
, a decrease of 1 basis point earned on market fee-based investment balances and the effect of one less interest day during the first half of fiscal 2017 compared to the first half of fiscal 2016. Net interest margin decreased as the benefits realized on the December 2016 and March 2017 federal funds rate increases were more than offset by a decrease in net interest revenue from our securities borrowing/lending program, the increased FDIC surcharge, which began in July 2016, lower negotiated interest rates for clients with larger margin balances and the impact of higher average segregated cash balances, which earn a lower net interest spread.
Insured deposit account fees
increased
11%
to $
514 million
, primarily due to a
15%
increase
in average client IDA balances, partially offset by a
decrease
of
3
basis points in the average yield earned on the IDA assets. The growth in IDA balances is due to our success in attracting net new client assets and due to our clients' lower net buying activity in the market during the first quarter of fiscal 2017, resulting in a higher percentage of total client assets being held in cash. The decrease in the average yield was primarily due to the increased FDIC surcharge.
Net interest revenue
increased
2%
to $
305 million
, primarily due to increases in the average yields earned on segregated cash and other cash and interest-earning investment balances as a result of the December 2016 and March 2017 federal funds rate increases and a 37% increase in average segregated cash balances. These increases were partially offset by an $
8 million
decrease
in net interest revenue from our securities borrowing/lending program and a decrease of 5 basis points in the average yield earned on client margin balances, as the benefits of the federal funds rate increases were more than offset by the impact from lower negotiated interest rates for clients with larger margin balances.
Investment product fees
increased
9%
to $
197 million
, primarily due to a 14% increase in average market fee-based investment balances and an increase of 29 basis points in the average yield earned on money market mutual fund balances. These increases were partially offset by a decrease of 1 basis point earned on market fee-based investment balances.
Operating Expenses
Total operating expenses
increased
8%
during the
first half of
fiscal
2017
compared to the
first half of
the prior year.
Employee compensation and benefits increased
9%
to
$443 million
, primarily due to an increase in average headcount related to strategic growth initiatives and increased incentive-based compensation related to Company and individual performance. The average number of full-time equivalent employees increased to 6,183 for the first half of fiscal
2017
compared to 5,816 for the first half of the prior year.
Clearing and execution costs
increased
9%
to $
73 million
, primarily due to a $5 million benefit from a retroactive fee decrease from a clearinghouse during the first quarter of the prior year.
Occupancy and equipment costs
increased
5%
to $
89 million
, primarily due to increased software licensing and facilities expenses, partially offset by decreased software maintenance expense.
Depreciation and amortization increased 11% to $49 million, primarily due to recent technology infrastructure upgrades.
Amortization of acquired intangible assets decreased 16% to $38 million, primarily due to certain acquired intangible assets becoming fully amortized during the prior year.
Professional services
increased
50%
to $
111 million
, primarily due to increased usage of consulting and contract services in connection with operational, technology and Scottrade acquisition-related initiatives and higher costs associated with legal and regulatory matters.
Other operating expenses
increased
18%
to $
47 million
, primarily due increased expenses related to new client accounts, travel and bad debt.
Income Taxes
Our effective income tax rate was
37.0%
for the
first half of
fiscal
2017
, compared to
36.9%
for the
first half of
the prior year. The effective income tax rate for the
first half of
fiscal
2017
included $7 million of net favorable resolutions of state income tax matters and $2 million of favorable tax benefits for federal incentives. These items had a net favorable impact on our earnings for the
first half of
fiscal
2017
of approximately two cents per share. The effective income tax rate for the
first half of
the prior year included $5 million of net favorable deferred income tax adjustments due to the remeasurement of deferred tax assets and liabilities and the cumulative impact of the decline in the state tax rate, and $5 million of net favorable adjustments to uncertain tax positions and related deferred income tax assets. These items had a net favorable impact our earnings for the
first half of
the prior year of approximately two cents per share.
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, TD Ameritrade Holding Corporation (the "Parent") conducts substantially all of its business through its operating subsidiaries, principally its broker-dealer and futures commission merchant ("FCM")/forex dealer member ("FDM") subsidiaries.
We have historically financed our liquidity and capital needs primarily through the use of funds generated from subsidiary operations and from borrowings under our credit agreements. We have also issued common stock and long-term debt to finance mergers and acquisitions and for other corporate purposes. Our liquidity needs during the
first half of
fiscal
2017
were financed primarily from our subsidiaries' earnings and cash on hand. We plan to finance our ordinary capital and liquidity needs during the remainder of fiscal
2017
primarily from our subsidiaries' earnings, cash on hand and borrowings. During fiscal 2017, we plan to return approximately 40% of our net income excluding amortization of intangible assets to our stockholders through cash dividends. We returned $190 million, or approximately 42% of net income excluding amortization of intangible assets, to our stockholders during the
first half of
fiscal
2017
through cash dividends. For more information about our dividends, see "Cash Dividends" later in this section.
We intend to fund the acquisition of Scottrade with new common equity, cash on hand and debt financing. The Scottrade acquisition is expected to close by September 30, 2017. For further information about the Scottrade acquisition, see Note
2
—
BUSINESS ACQUISITION
under Item 1, Financial Statements — Notes to Condensed Consolidated Financial Statements.
The Parent may make loans of cash or securities under committed and/or uncommitted lines of credit with each of its primary broker-dealer and FCM/FDM subsidiaries in order to provide liquidity for operational contingencies. Liquidity for operational contingencies could be used to fund increases in our subsidiaries' deposit requirements with clearinghouses, and to provide operating liquidity for client trading and investing activity in the normal course of business and during times of market volatility. Committed facilities of $723 million and uncommitted facilities of $600 million were available to the Parent's primary broker-dealer and FCM/FDM subsidiaries as of March 31, 2017. For more information about these credit agreements, see "Long-term Debt and Credit Facilities —
Intercompany Credit Agreements
" later in this section.
Dividends from our subsidiaries are an important source of liquidity for the parent company. Some of our subsidiaries are subject to requirements of the Securities and Exchange Commission ("SEC"), the Financial Industry Regulatory Authority ("FINRA"), the Commodity Futures Trading Commission ("CFTC"), the National Futures Association ("NFA") and other regulators relating
to liquidity, capital standards and the use of client funds and securities, which may limit funds available for the payment of dividends to the parent company.
Broker-dealer and Futures Commission Merchant/Forex Dealer Member Subsidiaries
Our broker-dealer and FCM/FDM subsidiaries are subject to regulatory requirements that are intended to ensure their liquidity and general financial soundness. Under the SEC's Uniform Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of 1934, or the "Exchange Act"), our broker-dealer subsidiaries are required to maintain, at all times, at least the minimum level of net capital required under Rule 15c3-1. For our clearing broker-dealer subsidiary, this minimum net capital level is determined by a calculation described in Rule 15c3-1 that is primarily based on the broker-dealer's "aggregate debits," which primarily are a function of client margin balances at the clearing broker-dealer. Since our aggregate debits may fluctuate significantly, our minimum net capital requirements may also fluctuate significantly from period to period. The parent company may make cash capital contributions to our broker-dealer and FCM/FDM subsidiaries, if necessary, to meet minimum net capital requirements.
Each of our broker-dealer subsidiaries may not repay any subordinated borrowings, pay cash dividends or make any unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount of less than (a) 5% of aggregate debit balances or (b) 120% of its minimum dollar requirement. TD Ameritrade Futures & Forex LLC ("TDAFF"), our FCM and FDM subsidiary, must provide notice to the CFTC if its adjusted net capital amounts to less than (a) 110% of its risk-based capital requirement under CFTC Regulation 1.17, (b) 150% of its $1.0 million minimum dollar requirement, or (c) 110% of $20.0 million plus 5% of all liabilities owed to forex clients in excess of $10.0 million. These broker-dealer, FCM and FDM net capital thresholds, which are specified in Rule 17a-11 under the Exchange Act and CFTC Regulations 1.12 and 5.6, are typically referred to as "early warning" net capital thresholds.
The following tables summarize our broker-dealer and FCM/FDM subsidiaries' net capital and adjusted net capital, respectively, as of
March 31, 2017
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Capital
|
|
Early Warning
Threshold
|
|
Net Capital in
Excess of
Early Warning
Threshold
|
TD Ameritrade Clearing, Inc.
|
|
$
|
1,519
|
|
|
$
|
728
|
|
|
$
|
791
|
|
TD Ameritrade, Inc.
|
|
$
|
131
|
|
|
$
|
0.3
|
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Capital
|
|
Early Warning
Threshold
|
|
Adjusted Net
Capital in
Excess of
Early Warning
Threshold
|
TD Ameritrade Futures & Forex LLC
|
|
$
|
107
|
|
|
$
|
24
|
|
|
$
|
83
|
|
Our clearing broker-dealer subsidiary, TD Ameritrade Clearing, Inc. ("TDAC"), engages in activities such as settling client securities transactions with clearinghouses, extending credit to clients through margin lending, securities lending and borrowing transactions and processing client cash sweep transactions to and from insured deposit accounts and money market mutual funds. These types of broker-dealer activities require active daily liquidity management.
Most of TDAC's assets are readily convertible to cash, consisting primarily of cash and investments segregated for the exclusive benefit of clients, receivables from clients and receivables from brokers, dealers and clearing organizations. Cash and investments segregated for the exclusive benefit of clients may be held in cash, reverse repurchase agreements (collateralized by U.S. Treasury securities), U.S. Treasury securities and other qualified securities. Receivables from clients consist of margin loans, which are demand loan obligations secured by readily marketable securities. Receivables from brokers, dealers and clearing organizations primarily arise from current open transactions, which usually settle or can be settled within a few business days.
TDAC is subject to cash deposit and collateral requirements with clearinghouses such as the Depository Trust & Clearing Corporation ("DTCC") and the OCC, which may fluctuate significantly from time to time based on the nature and size of our clients' trading activity. TDAC had
$360 million
and
$335 million
of cash and investments deposited with clearing organizations for the clearing of client equity and option trades as of
March 31, 2017
and September 30,
2016
, respectively. The largest amount of TDAC cash and investments ever deposited with clearing organizations was approximately
$714 million
, which occurred in October 2015.
TDAC's liquidity needs relating to client trading and margin borrowing are met primarily through cash balances in client brokerage accounts and lending of client margin securities. Cash balances in client brokerage accounts were
$18.8 billion
and
$18.7 billion
as of
March 31, 2017
and September 30,
2016
, respectively. Cash balances in client brokerage accounts not used for client trading and margin borrowing activity are not generally available for other liquidity purposes and must be segregated for the exclusive
benefit of clients under Rule 15c3-3 of the Exchange Act. TDAC had
$8.4 billion
of cash and investments segregated in special reserve bank accounts for the exclusive benefit of clients under Rule 15c3-3 as of
March 31, 2017
and September 30,
2016
.
For general liquidity needs, TDAC currently maintains a senior unsecured revolving credit facility in an aggregate principal amount of $600 million. This facility is described under Long-term Debt and Credit Facilities –
TD Ameritrade Clearing, Inc. Credit Agreement
later in this section.
In addition, we have established intercompany credit agreements under which the broker-dealer and FCM/FDM subsidiaries may borrow from the parent company. The intercompany credit agreement with TDAC provides for a committed revolving loan facility of $700 million and an uncommitted revolving loan facility of $300 million. The intercompany credit agreements are described under Long-term Debt and Credit Facilities –
Intercompany Credit Agreements
later in this section.
Liquid Assets Available for Corporate Investing and Financing Activities
We consider "liquid assets available for corporate investing and financing activities" to be an important measure of our liquidity. Liquid assets available for corporate investing and financing activities is considered a non-GAAP financial measure. We include the excess capital of our regulated subsidiaries in the calculation of liquid assets available for corporate investing and financing activities, rather than simply including the regulated subsidiaries' cash and cash equivalents, because capital requirements may limit the amount of cash available for dividend from the regulated subsidiaries to the parent company. Excess capital, as defined below, is generally available for dividend from the regulated subsidiaries to the parent company. Liquid assets available for corporate investing and financing activities should be considered as a supplemental measure of liquidity, rather than as a substitute for GAAP cash and cash equivalents.
We define liquid assets
available for corporate investing and financing activities as the sum of (a) excess corporate cash and cash equivalents and investments and (b) our regulated subsidiaries net capital in excess of minimum operational targets established by management. Excess corporate cash and cash equivalents and investments includes cash and cash equivalents from our investment advisory subsidiaries and excludes (i) amounts being maintained to provide liquidity for operational contingencies, including lending to our broker-dealer and FCM/FDM subsidiaries under intercompany credit agreements, (ii) amounts maintained for corporate working capital and (iii) amounts held as collateral for derivative contracts. Liquid assets available for corporate investing and financing activities is based on more conservative measures of net capital than regulatory requirements because we generally manage to higher levels of net capital at our regulated subsidiaries than the regulatory thresholds require. In March 2017, the liquid assets available for corporate investing and financing activities metric was revised to reflect changes in how we manage liquidity. The prior period has been updated to conform to the current presentation.
The following table sets forth a reconciliation of cash and cash equivalents, which is the most directly comparable GAAP measure, to liquid assets available for corporate investing and financing activities (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31,
|
|
Sept. 30,
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Cash and cash equivalents - GAAP
|
|
$
|
2,231
|
|
|
$
|
1,855
|
|
|
$
|
376
|
|
Less: Non-corporate cash and cash equivalents
|
|
(1,286
|
)
|
|
(1,363
|
)
|
|
77
|
|
Corporate cash and cash equivalents
|
|
945
|
|
|
492
|
|
|
453
|
|
Corporate investments
|
|
747
|
|
|
757
|
|
|
(10
|
)
|
Less: Corporate liquidity maintained for operational contingencies
|
|
(723
|
)
|
|
(773
|
)
|
|
50
|
|
Amounts maintained for corporate working capital
|
|
(87
|
)
|
|
(87
|
)
|
|
—
|
|
Amounts held as collateral for derivative contracts
|
|
(40
|
)
|
|
(93
|
)
|
|
53
|
|
Excess corporate cash and cash equivalents and investments
|
|
842
|
|
|
296
|
|
|
546
|
|
Excess regulatory net capital over management targets
|
|
122
|
|
|
357
|
|
|
(235
|
)
|
Liquid assets available for corporate investing and financing activities - non-GAAP
|
|
$
|
964
|
|
|
$
|
653
|
|
|
$
|
311
|
|
The changes in liquid assets available for corporate investing and financing activities are summarized as follows (dollars in millions):
|
|
|
|
|
|
Liquid assets available for corporate investing and financing activities as of September 30, 2016
|
|
$
|
653
|
|
|
|
|
Plus: EBITDA
(1)
|
|
798
|
|
Proceeds from exercise of stock options
|
|
23
|
|
Change in net capital related to daily futures client cash sweep
|
|
4
|
|
|
|
|
Less: Payment of cash dividends
|
|
(190
|
)
|
Income taxes paid
|
|
(103
|
)
|
Purchase of property and equipment
|
|
(79
|
)
|
Interest paid
|
|
(28
|
)
|
Additional net capital requirement due to increase in aggregate debits
|
|
(18
|
)
|
Purchase of treasury stock for income tax withholding on stock-based compensation
|
|
(15
|
)
|
Other changes in working capital and regulatory net capital
|
|
(81
|
)
|
Liquid assets available for corporate investing and financing activities as of March 31, 2017
|
|
$
|
964
|
|
|
|
(1)
|
See "Financial Performance Metrics" earlier in this section for a description of EBITDA.
|
Long-term Debt and Credit Facilities
The following is a summary of our long-term debt and credit facilities.
Senior Notes
– Our unsecured, fixed-rate Senior Notes were each sold through a public offering and pay interest semi-annually in arrears. Key information about the Senior Notes outstanding is summarized in the following table (dollars in millions):
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|
|
|
|
|
|
|
|
Description
|
|
Date Issued
|
|
Maturity Date
|
|
Aggregate Principal
|
|
Interest Rate
|
2019 Notes
|
|
November 25, 2009
|
|
December 1, 2019
|
|
$500
|
|
5.600%
|
2022 Notes
|
|
March 4, 2015
|
|
April 1, 2022
|
|
$750
|
|
2.950%
|
2025 Notes
|
|
October 17, 2014
|
|
April 1, 2025
|
|
$500
|
|
3.625%
|
On April 27, 2017, we sold, through a public offering, $800 million aggregate principal amount of unsecured 3.300% Senior Notes due April 1, 2027, the proceeds of which we intend to use for general corporate purposes, including, without limitation, the financing of the cash consideration payable by us in our planned acquisition of Scottrade. Interest on the 3.300% Senior Notes is payable semi-annually in arrears.
Fair Value Hedging
– We are exposed to changes in the fair value of our fixed-rate Senior Notes resulting from interest rate fluctuations. To hedge a portion of this exposure, we entered into fixed-for-variable interest rate swaps on the 2019 Notes and the 2025 Notes. Each fixed-for-variable interest rate swap has a notional amount of $500 million and a maturity date matching the maturity date of the respective Senior Notes.
The interest rate swaps effectively change the fixed-rate interest on the 2019 Notes and 2025 Notes to variable-rate interest. Under the terms of the interest rate swap agreements, we receive semi-annual fixed-rate interest payments based on the same rates applicable to the Senior Notes, and make quarterly variable-rate interest payments based on three-month LIBOR plus (a) 2.3745% for the swap on the 2019 Notes and (b) 1.1022% for the swap on the 2025 Notes. As of
March 31, 2017
, the weighted average effective interest rate on the aggregate principal balance of the 2019 Notes and 2025 Notes was
2.76%
.
TD Ameritrade Holding Corporation Credit Agreement
– On April 21, 2017, The Parent entered into a credit agreement consisting of a senior unsecured revolving credit facility in the aggregate principal amount of $300 million (the "Parent Revolving Facility"). The Parent Revolving Facility replaced the Parent's prior $300 million unsecured revolving credit facility, which was scheduled to expire on June 11, 2019. The maturity date of the Parent Revolving Facility is April 21, 2022. There were no borrowings outstanding under the prior Parent unsecured revolving credit facility as of
March 31, 2017
.
TD Ameritrade Clearing, Inc. Credit Agreement
– On April 21, 2017, TDAC entered into a credit agreement consisting of a senior unsecured revolving credit facility in the aggregate principal amount of $600 million (the "TDAC Revolving Facility"). The TDAC Revolving Facility replaced TDAC's prior $300 million unsecured revolving credit facility, which was scheduled to expire
on June 11, 2019. The maturity date of the TDAC Revolving Facility is April 21, 2022. There were no borrowings outstanding under the prior TDAC unsecured revolving credit facility as of
March 31, 2017
.
For additional details regarding debt transactions subsequent to March 31, 2017, see Note 15 – SUBSEQUENT EVENTS under Item 1, Financial Statements – Notes to Condensed Consolidated Financial Statements.
Intercompany Credit Agreements
– The Parent has entered into credit agreements with each of its primary broker-dealer and FCM/FDM subsidiaries, under which the Parent may make loans of cash or securities under committed and/or uncommitted lines of credit as summarized in the table below (dollars in millions):
|
|
|
|
|
|
|
|
Borrower Subsidiary
|
|
Committed Facility
|
|
Uncommitted Facility
(1)
|
|
Termination Date
|
TD Ameritrade Clearing, Inc.
|
|
$700
|
|
$300
|
|
March 1, 2022
|
TD Ameritrade, Inc.
|
|
N/A
|
|
$300
|
|
March 1, 2022
|
TD Ameritrade Futures & Forex LLC
|
|
$22.5
|
|
N/A
|
|
August 11, 2021
|
|
|
(1)
|
The Parent is permitted, but under no obligation, to make loans under uncommitted facilities.
|
There were no borrowings outstanding under any of the intercompany credit agreements as of
March 31, 2017
.
Stock Repurchase Program
On November 20, 2015, our board of directors authorized the repurchase of up to 30 million shares of our common stock. As of
March 31, 2017
, we had approximately 26 million shares remaining under this stock repurchase authorization. We have suspended further repurchases under our current stock repurchase authorization until after the completion of the Scottrade acquisition.
Cash Dividends
We declared an $0.18 per share quarterly cash dividend on our common stock during each of the first three quarters of fiscal
2017
. We paid a total of
$190 million
in quarterly cash dividends during the first half of fiscal 2017. We expect to pay the third quarter dividend of $95 million on May 16, 2017.
CONTRACTUAL OBLIGATIONS
The following items constitute material changes in our contractual obligations outside the ordinary course of business since
September 30, 2016
:
On October 24, 2016, we entered into an Agreement and Plan of Merger to acquire Scottrade in a cash and equity transaction valued at $4 billion. The transaction will take place in two, consecutive steps. First, and as a condition precedent to our acquisition of Scottrade, TD will purchase Scottrade Bank from Scottrade for $1.3 billion, subject to closing adjustments. Additionally, we expect TD to purchase $400 million in new common equity, or approximately 11 million shares, from us in connection with the planned transaction. Immediately following TD's acquisition of Scottrade Bank, we will acquire Scottrade for $4 billion less the proceeds from the sale of Scottrade Bank, which is subject to closing adjustments. We intend to fund the acquisition of Scottrade with $1 billion in new common equity, or approximately 28 million shares, issued to Scottrade shareholders, cash on hand, proceeds from the sale of our common stock to TD, as described above, and debt financing. The transaction is subject to regulatory approvals and customary closing conditions and is expected to close by September 30, 2017.
On April 27, 2017, we issued $800 million of 3.300% Senior Notes due April 1, 2027, the proceeds of which we intend to use for general corporate purposes, including, without limitation, the financing of the cash consideration payable by us in our planned acquisition of Scottrade.
OFF-BALANCE SHEET ARRANGEMENTS
We enter into guarantees and other off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of our clients and to manage our asset-based revenues. For information on these arrangements, see the following sections under Item 1, Financial Statements – Notes to Condensed Consolidated Financial Statements: "
General Contingencies
" and "
Guarantees
" under Note
8
–
COMMITMENTS AND CONTINGENCIES
and "
Insured Deposit Account Agreement
" under Note
13
–
RELATED PARTY TRANSACTIONS
. The IDA agreement accounts for a significant percentage of our net revenues (
29%
of our net revenues for the
first half of
fiscal
2017
) and enables our clients to invest in an FDIC-insured deposit product without the need for the Company to establish the significant levels of capital that would be required to maintain our own bank charter.
WEBSITES AND SOCIAL MEDIA DISCLOSURE
From time to time, the Company may use its website and/or Twitter as distribution channels of material information. The Company's Code of Business Conduct and Ethics, financial data and other important information regarding the Company is routinely accessible through and posted on the Company's website at
www.amtd.com
and its Twitter account @TDAmeritradePR. We ask that interested parties visit or subscribe to newsfeeds at
www.amtd.com/newsroom
to automatically receive email alerts and other information, including the most up-to-date corporate financial information, presentation announcements, transcripts and archives. The website to access the Company's Twitter account is
https://twitter.com/TDAmeritradePR
. Website links provided in this report, although correct when published, may change in the future. We make available free of charge on our website at
www.amtd.com/investor-relations/sec-filings/
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. Our SEC filings are also available on the SEC's website at
http://www.sec.gov/
.
Item 3. – Quantitative and Qualitative Disclosures About Market Risk
Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and market prices. We have established policies, procedures and internal processes governing our management of market risks in the normal course of our business operations.
Market-related Credit Risk
Two primary sources of credit risk inherent in our business are (1) client credit risk related to margin lending and leverage and (2) counterparty credit risk related to securities lending and borrowing. We manage risk on client margin lending and leverage by requiring clients to maintain margin collateral in compliance with regulatory and internal guidelines. The risks associated with margin lending and leverage increase during periods of rapid market movements, or in cases where leverage or collateral is concentrated and market movements occur. We monitor required margin levels daily and, pursuant to such guidelines, require our clients to deposit additional collateral, or to reduce positions, when necessary. We continuously monitor client accounts to detect excessive concentration, large orders or positions, patterns of day trading and other activities that indicate increased risk to us. We manage risks associated with our securities lending and borrowing activities by requiring credit approvals for counterparties, by monitoring the market value of securities loaned and collateral values for securities borrowed on a daily basis and requiring additional cash as collateral for securities loaned or return of collateral for securities borrowed when necessary, and by participating in a risk-sharing program offered through the Options Clearing Corporation.
We are party to interest rate swaps related to our long-term debt, which are subject to counterparty credit risk. Credit risk on derivative financial instruments is managed by limiting activity to approved counterparties that meet a minimum credit rating threshold and by entering into credit support agreements, or by utilizing approved central clearing counterparties registered with the Commodity Futures Trading Commission. Our 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.
Interest Rate Risk
As a fundamental part of our brokerage business, we invest in interest-earning assets and are obligated on interest-bearing liabilities. In addition, we earn fees on our insured deposit account ("IDA") arrangement with TD Bank USA, N.A. and TD Bank, N.A. and on money market mutual funds, which are subject to interest rate risk. Changes in interest rates could affect the interest earned on assets differently than interest paid on liabilities. A rising interest rate environment generally results in our earning a larger net interest spread. Conversely, a falling interest rate environment generally results in our earning a smaller net interest spread.
Our most prevalent form of interest rate risk is referred to as "gap" risk. This risk occurs when the interest rates we earn on our assets change at a different frequency or amount than the interest rates we pay on our liabilities. For example, in the current low interest rate environment, sharp increases in short-term interest rates could result in net interest spread compression if the yields paid on interest-bearing client balances were to increase faster than our earnings on interest-earning assets. We seek to mitigate interest rate risk by aligning the average duration of our interest-earning assets with that of our interest-bearing liabilities. As of
March 31, 2017
, our consolidated duration was 2.1 years. We have an Asset/Liability Committee as the governance body with the responsibility of managing interest rate risk, including gap risk.
We use net interest simulation modeling techniques to evaluate the effect that changes in interest rates might have on pre-tax income. Our model includes all interest-sensitive assets and liabilities of the Company and interest-sensitive assets and liabilities associated with the IDA arrangement. The simulations involve assumptions that are inherently uncertain and, as a result, cannot precisely predict the impact that changes in interest rates will have on pre-tax income. Actual results may differ from simulated results due to differences in timing and frequency of rate changes, changes in market conditions and changes in management strategy that lead to changes in the mix of interest-sensitive assets and liabilities.
The simulations assume that the asset and liability structure of our Condensed Consolidated Balance Sheet and the IDA arrangement would not be changed as a result of a simulated change in interest rates. The results of the simulations based on our financial position as of
March 31, 2017
indicate that a gradual 1% (100 basis points) increase in interest rates over a 12-month period would result in a range of approximately $90 million to $160 million higher pre-tax income and a gradual 1% (100 basis points) decrease in interest rates over a 12-month period would result in a range of approximately $190 million to $205 million lower pre-tax income, depending largely on the extent and timing of possible increases in payment rates on client cash balances and interest rates charged on client margin balances. The results of the simulations reflect the fact that short-term interest rates remain at historically low levels despite the increase in the federal funds target range to 0.75% to 1.00% as directed by the Federal Open Market Committee in March 2017.
Other Market Risks
Substantially all of our revenues and financial instruments are denominated in U.S. dollars. We generally do not enter into derivative transactions, except for hedging purposes.
Item 4. – Controls and Procedures
Disclosure Controls and Procedures
Management, including the Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the Company's disclosure controls and procedures as of
March 31, 2017
. Management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of
March 31, 2017
.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.