NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Month and Nine Month Periods Ended June 30, 2020 and 2019
(Unaudited)
1. Basis of Presentation, Organization and Recent Accounting Pronouncements
Basis of Presentation
The condensed consolidated financial statements include the accounts of TD Ameritrade Holding Corporation (the "Parent") and its wholly-owned subsidiaries (collectively, the "Company"). Intercompany balances and transactions have been eliminated.
These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, reflect all adjustments, which are all of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles ("GAAP"). These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report filed on Form 10-K for the fiscal year ended September 30, 2019.
Organization
The Company provides securities brokerage services, including trade execution, clearing services and margin lending, through its broker-dealer subsidiaries; futures and foreign exchange trade execution services through its futures commission merchant ("FCM") and forex dealer member ("FDM") subsidiary; and bundled retirement plan solutions to plan sponsors and their advisors through its state-chartered trust company subsidiary. The Company also provides cash sweep and deposit account products through third-party relationships, including relationships with affiliates.
In March 2020, the World Health Organization declared the spread of coronavirus disease 2019 ("COVID-19") a worldwide pandemic. The pandemic has negatively impacted the global economy and caused significant volatility in the financial markets. The Company continues to actively monitor the pandemic and has taken and intends to continue taking steps to identify and mitigate the adverse impacts on, and risks to, the Company's business, financial condition, liquidity, operations, employees, clients and business partners. In response to the pandemic and for the protection of the Company's employees, clients and business partners, the Company implemented remote work arrangements for nearly all of its employees, has restricted business travel and has temporarily closed its retail branches. To date, with the Company's ability to meet a vast majority of its clients' needs through its technology-based platforms and services, these arrangements have not materially affected the Company's ability to maintain its business operations, including the operation of its financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. Based on information available as of the date of this report, the Company does not expect the pandemic to have a material adverse impact on its financial condition, results of operations or cash flows in the near term; although, given the daily evolution of the pandemic, the global responses to curb its spread and the related economic impacts, the Company is currently unable to estimate the long-term effects of the pandemic on its financial condition, results of operations or cash flows.
On November 24, 2019, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with The Charles Schwab Corporation ("Schwab") and Americano Acquisition Corp., a wholly-owned subsidiary of Schwab. On May 14, 2020, the Company entered into Amendment No. 1 to the Merger Agreement. The Merger Agreement and Amendment No. 1 to the Merger Agreement were included as Exhibit 2.1 and Exhibit 2.2, respectively, to the Company's Form 8-K's filed with the SEC on November 27, 2019 and May 15, 2020, respectively. Upon the terms and subject to the conditions of the Merger Agreement, Americano Acquisition Corp. will merge with and into the Company (the "Merger"), with the Company surviving as a wholly-owned subsidiary of Schwab. Pursuant to and subject to the terms of the Merger Agreement, at the effective time of the Merger, each share of the Company's common stock, $0.01 par value, issued and outstanding immediately prior to the effective time of the Merger (other than treasury shares held by the Company and certain shares held by Schwab), will be converted into the right to receive 1.0837 shares of Schwab's voting common stock, $0.01 par value (the "Merger Consideration"); however, if the Merger Consideration issuable in respect of shares of the Company's common stock owned by The Toronto-Dominion Bank ("TD") and its affiliates as of immediately prior to the effective time of the Merger, together with any other shares of Schwab common stock then owned by TD and its affiliates, would equal a number of shares of Schwab common stock exceeding 9.9% (or such lower percentage of shares of Schwab common stock as the Federal Reserve Board permits TD to acquire in the Merger consistent with a determination that TD does not control Schwab for purposes of the Bank Holding Company Act of 1956, as amended, or the Home Owners' Loan Act of 1933, as amended) of the issued and outstanding shares of Schwab common stock as of immediately following the effective time of the Merger, then TD will receive one share of nonvoting common stock of Schwab in lieu of each such excess share of Schwab common stock. On June 4, 2020, the Company and Schwab each held a special meeting of stockholders, where the stockholders of both companies approved the proposals related to the Merger. In addition, on June 4, 2020, the U.S. Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, with respect to the Merger. Completion of the Merger remains subject to the satisfaction of customary closing conditions set forth in the Merger Agreement, including receipt of other regulatory approvals. The parties expect the transaction to close during the second half of calendar year 2020.
For the three and nine months ended June 30, 2020, the Company incurred $10 million and $43 million, respectively, of costs related to the proposed Merger, which are included in professional services on the Condensed Consolidated Statements of Income.
Recently Adopted Accounting Pronouncements
ASU 2016-02 — On October 1, 2019, the Company adopted Accounting Standards Update ("ASU") 2016-02, Leases, by applying the standard at the adoption date, recognizing a cumulative-effect adjustment to the opening balance of retained earnings. As a result, restated financial information and the additional disclosures required under the new standard will not be provided for the comparative periods presented. The new guidance requires quantitative and qualitative disclosures that provide information about the amounts related to leasing arrangements recorded in the condensed consolidated financial statements. The Company elected a package of practical expedients available under the new guidance, which allows an entity to not reassess prior conclusions related to existing contracts containing leases, lease classification and initial direct costs. In addition, the Company has elected to apply the short-term lease exception for lease arrangements with a maximum term of 12 months or less. Upon the adoption of the lease standard, the Company recognized a right-of-use ("ROU") asset and a lease liability on the Condensed Consolidated Balance Sheet related to non-cancelable operating leases.
The cumulative effect of the changes made to the Company's Condensed Consolidated Balance Sheet as of October 1, 2019 for the adoption of ASU 2016-02 were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
|
Adjustments from Adoption of
ASU 2016-02
|
|
Balance at
October 1, 2019
|
|
Assets:
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
308
|
|
|
$
|
341
|
|
(1
|
)
|
$
|
649
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accounts payable and other liabilities
|
|
884
|
|
|
342
|
|
(2
|
)
|
1,226
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
Retained earnings
|
|
8,580
|
|
|
(1
|
)
|
(3
|
)
|
8,579
|
|
(1) Adjustments include the following: (a) an increase of $347 million for the recognition of the ROU asset and (b) a decrease of $6 million for lease payments made to lessors at or before the commencement date, which were reclassified to the ROU lease liability upon the adoption of the lease standard.
(2) Adjustments include the following: (a) an increase of $379 million for the recognition of the ROU lease liability and (b) decreases of $30 million for deferred rent and $7 million related to the early termination of lease obligations, which were reclassified to the ROU asset upon the adoption of the lease standard.
|
|
|
|
(3)
|
Represents the impact of a lease obligation which had no future benefit upon the adoption of the lease standard.
|
The adoption of this standard did not have a material impact on the Company's results of operations or cash flows. See Note 6 for additional information regarding the Company's operating leases.
Recently Issued Accounting Pronouncements
ASU 2020-04 — In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting if certain criteria are met. The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022. The Company is evaluating the guidance and the potential impact of adopting ASU 2020-04 on its condensed consolidated financial statements.
ASU 2019-12 — In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification ("ASC") Topic 740, Income Taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 will be effective for the Company's fiscal year beginning October 1, 2021, with early adoption permitted. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. The Company does not expect this ASU to have a material impact on its condensed consolidated financial statements.
ASU 2016-13 — In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about an entity's expected credit losses on financial instruments and other commitments to extend credit at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to develop credit loss estimates. Subsequent to issuing ASU 2016-13, the FASB has issued additional standards for the purpose of clarifying certain aspects of ASU 2016-13, as well as providing codification improvements and targeted transition relief under the standard. The subsequently issued ASUs have the same effective date and transition requirements as ASU 2016-13. ASU 2016-13 will be effective for the Company's fiscal year beginning October 1, 2020, using a modified retrospective approach. Early adoption is permitted. The Company does not expect this ASU to have a material impact on its condensed consolidated financial statements.
2. Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
The Company's cash and cash equivalents is summarized in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
September 30,
2019
|
|
Broker-dealer subsidiaries
|
|
$
|
1,685
|
|
|
$
|
2,260
|
|
|
Corporate
|
|
685
|
|
|
366
|
|
|
Futures commission merchant and forex dealer member subsidiary
|
|
152
|
|
|
94
|
|
|
Investment advisory subsidiaries
|
|
35
|
|
|
8
|
|
|
Trust company subsidiary
|
|
20
|
|
|
124
|
|
|
Total cash and cash equivalents
|
|
$
|
2,577
|
|
|
$
|
2,852
|
|
Capital requirements may limit the amount of cash available for dividend from the broker-dealer, FCM/FDM and trust company subsidiaries to the Parent.
The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported within the Condensed Consolidated Balance Sheets to the total of the same amounts shown in the Condensed Consolidated Statements of Cash Flows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
September 30,
2019
|
|
Cash and cash equivalents
|
|
$
|
2,577
|
|
|
$
|
2,852
|
|
|
Restricted cash and restricted cash equivalents included in cash and investments segregated and on deposit for regulatory purposes
|
|
11,401
|
|
|
7,341
|
|
|
Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the Condensed Consolidated Statements of Cash Flows
|
|
$
|
13,978
|
|
|
$
|
10,193
|
|
Amounts included in restricted cash and restricted cash equivalents consist primarily of qualified deposits in special reserve bank accounts for the exclusive benefit of clients under Rule 15c3-3 of the Securities Exchange Act of 1934 (the "Exchange Act") and other regulations. Restricted cash equivalents consists of highly-liquid investments with an original maturity of three months or less.
3. Cash and Investments Segregated and on Deposit for Regulatory Purposes
Cash and investments segregated and on deposit for regulatory purposes consists of the following (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
September 30,
2019
|
|
U.S. government debt securities
|
|
$
|
9,157
|
|
|
$
|
4,369
|
|
|
Cash in demand deposit accounts
|
|
5,793
|
|
|
2,304
|
|
|
U.S. government agency mortgage-backed securities
|
|
3,107
|
|
|
1,318
|
|
|
Cash on deposit with futures commission merchants
|
|
259
|
|
|
168
|
|
|
Reverse repurchase agreements (collateralized by U.S. government debt securities)
|
|
—
|
|
|
500
|
|
|
U.S. government debt securities on deposit with futures commission merchant
|
|
—
|
|
|
25
|
|
|
Total
|
|
$
|
18,316
|
|
|
$
|
8,684
|
|
4. Investments Available-for-Sale
The following tables present the amortized cost and fair value of available-for-sale securities (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
1,589
|
|
|
$
|
209
|
|
|
$
|
—
|
|
|
$
|
1,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
1,591
|
|
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
1,668
|
|
The following table presents the contractual maturities of available-for-sale securities as of June 30, 2020 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Available-for-sale U.S. Treasury securities:
|
|
|
|
|
|
Due within one to five years
|
|
$
|
584
|
|
|
$
|
645
|
|
|
Due within five to ten years
|
|
617
|
|
|
694
|
|
|
Due after ten years
|
|
388
|
|
|
459
|
|
|
Total available-for-sale U.S. Treasury securities
|
|
$
|
1,589
|
|
|
$
|
1,798
|
|
5. Income Taxes
The Company's effective income tax rate for the nine months ended June 30, 2020 and 2019 was 24.4% and 24.2%, respectively. The provision for income taxes for the nine months ended June 30, 2020 included $7 million of net favorable adjustments related to state income tax matters and a $7 million benefit related to federal income tax matters. These items had a favorable impact on the Company's earnings for the nine months ended June 30, 2020 of approximately $0.03 per share. The provision for income taxes for the nine months ended June 30, 2019 included $18 million of favorable adjustments related to state income tax matters and a $3 million income tax benefit resulting from the vesting of equity-based compensation. These items had a favorable impact on the Company's earnings for the nine months ended June 30, 2019 of approximately $0.04 per share.
6. Leases
The Company enters into various non-cancelable operating leases for certain facilities, including corporate offices, retail branches and data centers. The Company determines if an arrangement is a lease at inception. Operating leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement or remeasurement date of a lease based on the present value of lease payments over the lease term. The Company utilizes an incremental borrowing rate to determine the present value of lease payments for each lease, as the lease agreements do not provide an implicit rate. The estimated incremental borrowing rate reflects a secured rate and is based on the term of the lease and the interest rate environment at the lease commencement or remeasurement date. Operating lease ROU assets include (1) lease
payments made at or before the commencement date and (2) initial indirect costs; and exclude lease incentives. The Company's lease terms may include options to extend or terminate the lease. Only those renewal and termination options which the Company is reasonably certain of exercising are included in the calculation of the lease liability.
The following tables present balance sheet and supplemental operating lease information (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
Balance Sheet Information:
|
|
|
|
Assets:
|
|
|
|
Other assets:
|
|
|
|
Operating lease right-of-use assets, net
|
|
$
|
316
|
|
|
Liabilities:
|
|
|
|
Accounts payable and other liabilities:
|
|
|
|
Operating lease liabilities
|
|
$
|
352
|
|
|
Supplemental Information:
|
|
|
|
Weighted-average remaining lease term (years)
|
|
8.1
|
|
|
Weighted-average discount rate
|
|
2.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2020
|
|
Supplemental Cash Flow Information:
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
50
|
|
|
Lease liabilities arising from obtaining right-of-use assets
|
|
$
|
24
|
|
The following table summarizes the amount and classification of operating lease expense for the periods indicated (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Condensed Consolidated
Statements of Income Classification
|
|
Three Months Ended June 30, 2020
|
|
Nine Months Ended June 30, 2020
|
|
Operating lease costs, net (1)
|
|
Occupancy and equipment costs
|
|
$
|
21
|
|
|
$
|
58
|
|
|
|
|
|
(1)
|
Includes short-term lease costs and is net of sublease income. The short-term lease costs and sublease income are not material for the periods presented. Operating lease costs and sublease income include transactions with related parties, which are not material for the periods presented.
|
Operating lease expense is recognized on a straight-line basis over the lease term. The Company's lease agreements do not contain any material residual value guarantees or restrictive covenants.
The following table presents the maturities of lease liabilities as of June 30, 2020 (dollars in millions):
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Operating Leases
|
|
2020 Remaining
|
|
$
|
2
|
|
|
2021
|
|
51
|
|
|
2022
|
|
56
|
|
|
2023
|
|
49
|
|
|
2024
|
|
46
|
|
|
Thereafter (to 2033)
|
|
193
|
|
|
Total lease payments
|
|
397
|
|
|
Amount representing interest
|
|
(45
|
)
|
|
Present value of lease liabilities
|
|
$
|
352
|
|
In accordance with the disclosure requirements for the adoption of ASU 2016-02, the Company is presenting its operating lease commitment table as of September 30, 2019, which was previously disclosed in Note 16 of the Company's annual report on Form 10-K for the fiscal year ended September 30, 2019 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Minimum Lease Payments
|
|
Sublease Income
|
|
Net Lease Commitments
|
|
2020
|
|
$
|
72
|
|
|
$
|
(2
|
)
|
|
$
|
70
|
|
|
2021
|
|
64
|
|
|
(1
|
)
|
|
63
|
|
|
2022
|
|
55
|
|
|
—
|
|
|
55
|
|
|
2023
|
|
49
|
|
|
—
|
|
|
49
|
|
|
2024
|
|
45
|
|
|
—
|
|
|
45
|
|
|
Thereafter (to 2033)
|
|
191
|
|
|
—
|
|
|
191
|
|
|
Total
|
|
$
|
476
|
|
|
$
|
(3
|
)
|
|
$
|
473
|
|
7. Long-term Debt and Other Borrowings
Long-term debt consists of the following (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
Face
Value
|
|
Unamortized Discounts and Debt Issuance Costs
|
|
Fair Value
Adjustment (1)
|
|
Net Carrying
Value
|
|
Senior Notes:
|
|
|
|
|
|
|
|
|
|
Variable-rate Notes due 2021
|
|
$
|
600
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
598
|
|
|
2.950% Notes due 2022
|
|
750
|
|
|
(2
|
)
|
|
22
|
|
|
770
|
|
|
3.750% Notes due 2024
|
|
400
|
|
|
(3
|
)
|
|
—
|
|
|
397
|
|
|
3.625% Notes due 2025
|
|
500
|
|
|
(2
|
)
|
|
50
|
|
|
548
|
|
|
3.300% Notes due 2027
|
|
800
|
|
|
(7
|
)
|
|
94
|
|
|
887
|
|
|
2.750% Notes due 2029
|
|
500
|
|
|
(5
|
)
|
|
41
|
|
|
536
|
|
|
Total long-term debt
|
|
$
|
3,550
|
|
|
$
|
(21
|
)
|
|
$
|
207
|
|
|
$
|
3,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Face
Value
|
|
Unamortized Discounts and Debt Issuance Costs
|
|
Fair Value
Adjustment (1)
|
|
Net Carrying
Value
|
|
Senior Notes:
|
|
|
|
|
|
|
|
|
|
Variable-rate Notes due 2021
|
|
$
|
600
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
598
|
|
|
2.950% Notes due 2022
|
|
750
|
|
|
(3
|
)
|
|
6
|
|
|
753
|
|
|
3.750% Notes due 2024
|
|
400
|
|
|
(3
|
)
|
|
—
|
|
|
397
|
|
|
3.625% Notes due 2025
|
|
500
|
|
|
(3
|
)
|
|
25
|
|
|
522
|
|
|
3.300% Notes due 2027
|
|
800
|
|
|
(8
|
)
|
|
40
|
|
|
832
|
|
|
2.750% Notes due 2029
|
|
500
|
|
|
(5
|
)
|
|
(3
|
)
|
|
492
|
|
|
Total long-term debt
|
|
$
|
3,550
|
|
|
$
|
(24
|
)
|
|
$
|
68
|
|
|
$
|
3,594
|
|
|
|
|
|
(1)
|
Fair value adjustments relate to changes in the fair value of the debt while in a fair value hedging relationship. See "Fair Value Hedging" below.
|
Senior Notes — As of June 30, 2020 and September 30, 2019, the Company had $3.55 billion aggregate principal amount of unsecured Senior Notes (together, the "Senior Notes"). The fixed rate and variable rate Senior Notes pay interest semi-annually and quarterly, respectively, in arrears. Key information about the Senior Notes outstanding is summarized in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Date Issued
|
|
Maturity Date
|
|
Aggregate Principal
|
|
Interest Rate
|
|
2021 Notes
|
|
October 30, 2018
|
|
November 1, 2021
|
|
$600
|
|
Variable
|
|
2022 Notes
|
|
March 4, 2015
|
|
April 1, 2022
|
|
$750
|
|
2.950%
|
|
2024 Notes
|
|
October 30, 2018
|
|
April 1, 2024
|
|
$400
|
|
3.750%
|
|
2025 Notes
|
|
October 17, 2014
|
|
April 1, 2025
|
|
$500
|
|
3.625%
|
|
2027 Notes
|
|
April 27, 2017
|
|
April 1, 2027
|
|
$800
|
|
3.300%
|
|
2029 Notes
|
|
August 13, 2019
|
|
October 1, 2029
|
|
$500
|
|
2.750%
|
Lines of Credit — TD Ameritrade Clearing, Inc. ("TDAC"), a clearing broker-dealer subsidiary of the Company, utilizes secured uncommitted lines of credit for short-term liquidity. Under these secured uncommitted lines, TDAC borrows on either a demand or short-term basis from two unaffiliated banks and pledges client margin securities as collateral. Advances under the secured uncommitted lines are dependent on TDAC having acceptable collateral as determined by each secured uncommitted credit agreement. At June 30, 2020, the terms of the secured uncommitted credit agreements do not specify borrowing limits. The availability of TDAC's secured uncommitted lines is subject to approval by the individual banks each time an advance is requested and may be denied. There were no borrowings outstanding under the secured uncommitted lines of credit as of June 30, 2020 and September 30, 2019.
Securities Sold Under Agreements to Repurchase (repurchase agreements) — Under repurchase agreements, the Company receives cash from the counterparty and provides U.S. government debt securities as collateral. The Company's repurchase agreements generally mature between seven and 90 days following the transaction date and are accounted for as secured borrowings. There were no borrowings outstanding under repurchase agreements as of June 30, 2020 and September 30, 2019. See "General Contingencies" in Note 9 for a discussion of the potential risks associated with repurchase agreements and how the Company mitigates those risks.
Fair Value Hedging — The Company is exposed to changes in the fair value of its fixed-rate Senior Notes resulting from interest rate fluctuations. To hedge a vast majority of this exposure, the Company has entered into fixed-for-variable interest rate swaps on each of the 2022 Notes, 2025 Notes, 2027 Notes and 2029 Notes (together, the "Hedged Senior Notes"). Each fixed-for-variable interest rate swap has a notional amount and a maturity date matching the aggregate principal amount and maturity date, respectively, for each of the respective Hedged Senior Notes.
The interest rate swaps effectively change the fixed-rate interest on the Hedged Senior Notes to variable-rate interest. Under the terms of the interest rate swap agreements, the Company receives semi-annual fixed-rate interest payments based on the same rates applicable to the Hedged Senior Notes, and makes quarterly variable-rate interest payments based on three-month LIBOR plus (1) 0.9486% for the swap on the 2022 Notes, (2) 1.1022% for the swap on the 2025 Notes, (3) 1.0340% for the swap on the 2027 Notes and (4) 1.2000% for the swap on the 2029 Notes. As of June 30, 2020, the weighted average effective interest rate on the aggregate principal balance of the Senior Notes was 2.40%.
The interest rate swaps are accounted for as fair value hedges and qualify for the shortcut method of accounting. Changes in the payment of interest resulting from the interest rate swaps are recorded in interest on borrowings on the Condensed Consolidated Statements of Income. Changes in fair value of the interest rate swaps are completely offset by changes in fair value of the related Hedged Senior Notes, resulting in no effect on net income. The following table summarizes gains and losses resulting from changes in the fair value of interest rate swaps designated as fair value hedges and the hedged fixed-rate debt for the periods indicated (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Gain (loss) on fair value of interest rate swaps
|
|
$
|
14
|
|
|
$
|
53
|
|
|
$
|
139
|
|
|
$
|
139
|
|
|
Gain (loss) on fair value of hedged fixed-rate debt
|
|
(14
|
)
|
|
(53
|
)
|
|
(139
|
)
|
|
(139
|
)
|
|
Net gain (loss) recorded in interest on borrowings
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Balance Sheet Impact of Hedging Instruments — The following table summarizes the classification and the fair value of outstanding derivatives designated as hedging instruments on the Condensed Consolidated Balance Sheets (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
September 30,
2019
|
|
Pay-variable interest rate swaps designated as fair value hedges:
|
|
|
|
|
|
Other assets
|
|
$
|
207
|
|
|
$
|
71
|
|
|
Accounts payable and other liabilities
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
The interest rate swaps are subject to counterparty credit risk. Credit risk is managed by limiting activity to approved counterparties that meet a minimum credit rating threshold, by entering into credit support agreements, and/or by utilizing approved central clearing counterparties registered with the Commodity Futures Trading Commission ("CFTC"). The interest rate swaps require daily collateral coverage, in the form of cash or U.S. Treasury securities, for the aggregate fair value of the interest rate swaps (including accrued interest). As of June 30, 2020 and September 30, 2019, the pay-variable interest rate swap counterparties had pledged $211 million and $86 million of collateral, respectively, to the Company in the form of cash. A liability for collateral pledged to the Company in the form of cash is recorded in accounts payable and other liabilities on the Condensed Consolidated Balance Sheets. As of September 30, 2019, the Company had pledged $3 million of collateral to the pay-variable interest rate swap counterparties in the form of cash. An asset for collateral pledged to the swap counterparties in the form of cash is recorded in other receivables on the Condensed Consolidated Balance Sheets.
TD Ameritrade Holding Corporation Senior Revolving Credit Facility — On April 21, 2017, the Parent entered into a credit agreement consisting of a senior unsecured committed revolving credit facility in the aggregate principal amount of $300 million (the "Parent Revolving Facility"). The maturity date of the Parent Revolving Facility is April 21, 2022. The obligations under the Parent Revolving Facility are not guaranteed by any subsidiary of the Parent. On August 3, 2020, the Parent entered into an amendment to its Parent Revolving Facility. For information regarding this amendment, see Note 16, Subsequent Event.
The applicable interest rate under the Parent Revolving Facility is calculated as a per annum rate equal to, at the option of the Parent, (1) LIBOR plus an interest rate margin ("Parent Eurodollar loans") or (2) (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. There were no borrowings outstanding under the Parent Revolving Facility as of June 30, 2020 and September 30, 2019. As of June 30, 2020, the interest rate margin would have been 1.125% for Parent Eurodollar loans and 0.125% for ABR loans, and the commitment fee was 0.125%, each determined by reference to the Company's public debt ratings.
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. Senior Revolving Credit Facilities — As of June 30, 2020, TDAC had access to two senior unsecured committed revolving credit facilities with an aggregate principal amount of $1.45 billion, consisting of a $600 million (the "$600 Million Revolving Facility") and an $850 million (the "$850 Million Revolving Facility") senior revolving facility. On April 21, 2020, TDAC entered into an amendment to the $850 Million Revolving Facility, which provides for a senior unsecured revolving credit facility in the aggregate principal amount of $850 million that matures on April 20, 2021. The maturity date of the $600 Million Revolving Facility is April 21, 2022. On August 3, 2020, TDAC entered into an amendment to its $600 Million Revolving Facility. For information regarding this amendment, see Note 16, Subsequent Event.
The applicable interest rate under the $600 Million Revolving Facility is calculated as a per annum rate equal to, at the option of TDAC, (1) LIBOR plus an interest rate margin ("TDAC Eurodollar loans") or (2) 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 commitment fees ranging from 0.07% to 0.175% on any unused amounts of the $600 Million Revolving Facility, determined by reference to the Company's public debt ratings. There were no borrowings outstanding under the $600 Million Revolving Facility as of June 30, 2020 and September 30, 2019. As of June 30, 2020, the interest rate margin would have been 1.00% for both TDAC Eurodollar loans and Federal Funds Rate loans, and the commitment fee was 0.10%, each determined by reference to the Company's public debt ratings.
The applicable interest rate under the $850 Million Revolving Facility is calculated as a per annum rate equal to, at the option of TDAC, (1) LIBOR plus an interest rate margin ("Amended Eurodollar loans") or (2) the federal funds effective rate plus an interest rate margin ("Amended Federal Funds Rate loans"). The interest rate margin ranges from 1.00% to 1.50% for both Amended Eurodollar loans and Amended Federal Funds Rate loans, determined by reference to the Company's public debt ratings. TDAC is obligated to pay commitment fees ranging from 0.20% to 0.35% on any unused amounts of the $850 Million Revolving Facility, determined by reference to the Company's public debt ratings. There were no borrowings outstanding under the $850 Million Revolving Facility as of June 30, 2020 and September 30, 2019. As of June 30, 2020, the interest rate margin would have been 1.25% for both Amended Eurodollar loans and Amended Federal Funds Rate loans, and the commitment fee was 0.25%, each determined by reference to the Company's public debt ratings.
The $850 Million Revolving Facility contains negative covenants that limit or restrict, subject to certain exceptions, the incurrence of liens, indebtedness of TDAC, changes in nature of business, mergers, consolidations, and the sale of all or substantially all of the assets of TDAC. TDAC is also required to maintain a minimum consolidated tangible net worth and is required to maintain compliance with minimum regulatory net capital requirements. The $850 Million Revolving Facility also contains customary affirmative covenants, including, but not limited to, compliance with applicable law, payment of taxes, maintenance of insurance, preservation of corporate existence, keeping of proper books of record and account and maintenance of properties.
8. Capital Requirements
The Company's broker-dealer subsidiaries are subject to the SEC Uniform Net Capital Rule (Rule 15c3-1 under the Exchange Act), administered by the SEC and the Financial Industry Regulatory Authority, which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirements may fluctuate on a daily basis. TDAC, the Company's clearing broker-dealer subsidiary, and TD Ameritrade, Inc., an introducing broker-dealer subsidiary of the Company, compute net capital under the alternative method as permitted by SEC Rule 15c3-1. TDAC is required to maintain minimum net capital of the greater of $1.5 million, which is based on the type of business conducted by the broker-dealer, or 2% of aggregate debit balances arising from client transactions. TD Ameritrade, Inc. is required to maintain minimum net capital of the greater of $250,000 or 2% of aggregate debit balances arising from client transactions. In addition, under the alternative method, a broker-dealer may not repay any subordinated borrowings, pay cash dividends or make any unsecured advances or loans to its parent company or employees if such payment would result in net capital of less than (1) 5% of aggregate debit balances or (2) 120% of its minimum dollar requirement.
TD Ameritrade Futures & Forex LLC ("TDAFF"), the Company's FCM and FDM subsidiary registered with the CFTC, is subject to CFTC Regulations 1.17 and 5.7 under the Commodity Exchange Act, administered by the CFTC and the National Futures Association. As an FCM, TDAFF is required to maintain minimum adjusted net capital under CFTC Regulation 1.17 of the greater of (1) $1.0 million or (2) its futures risk-based capital requirement, equal to 8% of the total risk margin requirement for all futures and options on futures positions carried by the FCM in client and nonclient accounts. As an FDM, TDAFF is also subject to the net capital requirements under CFTC Regulation 5.7, which requires TDAFF to maintain minimum adjusted net capital of the greater of (1) any amount required under CFTC Regulation 1.17 as described above or (2) $20.0 million plus 5% of all foreign exchange liabilities owed to forex clients in excess of $10.0 million. In addition, an FCM and FDM must provide notice to the CFTC if its adjusted net capital amounts to less than (1) 110% of its risk-based capital requirement under CFTC Regulation 1.17, (2) 150% of its $1.0 million minimum dollar requirement or (3) 110% of $20.0 million plus 5% of all foreign exchange liabilities owed to forex clients in excess of $10.0 million.
Net capital and net capital requirements for the Company's broker-dealer subsidiaries are summarized in the following tables (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TD Ameritrade Clearing, Inc.
|
|
Date
|
|
Net
Capital
|
|
Required
Net Capital
(2% of
Aggregate
Debit Balances)
|
|
Net Capital
in Excess of
Required
Net Capital
|
|
Ratio of Net
Capital to
Aggregate
Debit Balances
|
|
June 30, 2020
|
|
$
|
3,383
|
|
|
$
|
512
|
|
|
$
|
2,871
|
|
|
13.20
|
%
|
|
September 30, 2019
|
|
$
|
3,188
|
|
|
$
|
493
|
|
|
$
|
2,695
|
|
|
12.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TD Ameritrade, Inc.
|
|
Date
|
|
Net
Capital
|
|
Required
Net Capital
(Minimum Dollar
Requirement)
|
|
Net Capital
in Excess of
Required
Net Capital
|
|
June 30, 2020
|
|
$
|
355
|
|
|
$
|
0.25
|
|
|
$
|
354
|
|
|
September 30, 2019
|
|
$
|
289
|
|
|
$
|
0.25
|
|
|
$
|
289
|
|
Adjusted net capital and adjusted net capital requirements for the Company's FCM and FDM subsidiary are summarized in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TD Ameritrade Futures & Forex LLC
|
|
Date
|
|
Adjusted Net
Capital
|
|
Required Adjusted Net Capital
($20 Million Plus 5% of All Foreign Exchange Liabilities Owed to Forex Clients in Excess of $10 Million)
|
|
Adjusted Net
Capital
in Excess of
Required
Adjusted Net
Capital
|
|
June 30, 2020
|
|
$
|
175
|
|
|
$
|
23
|
|
|
$
|
152
|
|
|
September 30, 2019
|
|
$
|
140
|
|
|
$
|
23
|
|
|
$
|
117
|
|
The Company's non-depository trust company subsidiary, TD Ameritrade Trust Company ("TDATC"), is subject to capital requirements established by the State of Maine, which require TDATC to maintain minimum Tier 1 capital. TDATC's Tier 1 capital was $18 million and $43 million as of June 30, 2020 and September 30, 2019, which exceeded the required Tier 1 capital by $3 million and $22 million, respectively.
9. Commitments and Contingencies
Legal and Regulatory Matters
Order Routing Matters — In 2014, five putative class action complaints were filed regarding TD Ameritrade, Inc.'s routing of client orders and one putative class action was filed regarding Scottrade, Inc.'s routing of client orders. Five of the six cases were dismissed and the United States Court of Appeals, 8th Circuit, affirmed the dismissals in those cases that were appealed. The one remaining case is Roderick Ford (replacing Gerald Klein) v. TD Ameritrade Holding Corporation, et al., Case No. 8:14CV396 (U.S. District Court, District of Nebraska). In the remaining case, plaintiff alleges that, when routing client orders to various market centers, defendants did not seek best execution, and instead routed clients' orders to market venues that paid TD Ameritrade, Inc. the most money for order flow. Plaintiff alleges that defendants made misrepresentations and omissions regarding the Company's order routing practices. The complaint asserts claims of violations of Section 10(b) and 20 of the Exchange Act and SEC Rule 10b-5. The complaint seeks damages, injunctive relief, and other relief. Plaintiff filed a motion for class certification, which defendants opposed. On July 12, 2018, the Magistrate Judge issued findings and a recommendation that plaintiff's motion for class certification be denied. Plaintiff filed objections to the Magistrate Judge's findings and recommendation, which defendants opposed. On September 14, 2018, the District Judge sustained plaintiff's objections, rejected the Magistrate Judge's recommendation and granted plaintiff's motion for class certification. On September 28, 2018, defendants filed a petition requesting that the U.S. Court of Appeals, 8th Circuit, grant an immediate appeal of the District Court's class certification decision. The U.S. Court of Appeals, 8th Circuit, granted defendants' petition on December 18, 2018. Briefing on the appeal is complete. The Securities Industry and Financial Markets Association and the U.S. Chamber of Commerce have filed amicus curiae briefs in support of the Company's appeal. The Company intends to vigorously defend against this lawsuit and is unable to predict the outcome or the timing of the ultimate resolution of the lawsuit, or the potential loss, if any, that may result.
Litigation Relating to the Merger — On May 12, 2020, a putative class action complaint challenging the Merger was filed in the Delaware Court of Chancery. The complaint is captioned Hawkes v. Bettino et al., case number 2020-0306-PAF, and names as Defendants each member of the Company's board of directors who was on the Company's board of directors when the Merger Agreement was approved, TD and Schwab. Among other things, the complaint asserts a claim against such directors alleging that the Merger violates Section 203 of the Delaware General Corporation Law (the "Section 203 Claim") and that the definitive joint proxy statement/prospectus fails to disclose that the Merger does not comply with Section 203, which the complaint claims is a material omission. The complaint also alleges claims for breach of fiduciary duty against members of the Company's board of directors who the Plaintiff alleges are affiliated with TD and against TD as the Company's alleged controlling stockholder, relating to the insured deposit account agreement entered into between Schwab and TD. The complaint further alleges a claim against Schwab for aiding and abetting breaches of fiduciary duty. The complaint sought to enjoin the Company's stockholder vote on and consummation of the Merger and seeks an award of damages.
On May 12, 2020, the Plaintiff also filed (i) a motion seeking to preliminarily enjoin the Company's stockholder vote on the Merger on the grounds that the Merger is subject to the business combination restrictions of Section 203, and (ii) a motion for expedited proceedings, which asked the Court to set a preliminary injunction hearing on this Section 203 Claim in advance of the Company's stockholder vote on the Merger. On May 15, 2020, the Court held a hearing on the Plaintiff's motion for expedited proceedings. The Court granted the Plaintiff's motion for expedited discovery, but declined to hold any injunction hearing on the Plaintiff's Section 203 Claim prior to the Company's June 4, 2020 special meeting. On May 22, 2020, the Company filed a Form 8-K with the Securities and Exchange Commission providing the Company's stockholders with certain Section 203-related disclosures and asking stockholders to approve the Merger by the affirmative vote of at least 662/3% of the outstanding shares of the Company's common stock not deemed owned by Schwab under Section 203. On May 26, 2020, Plaintiff and Defendants entered into a stipulation that, among other things, provided that if the Merger received the requisite stockholder support contemplated by Section 203, Plaintiff would dismiss his Section 203 Claim as moot and withdraw his application for a preliminary injunction. At the Company's June 4, 2020 special meeting, the votes cast in favor of the Merger represented in excess of 662/3% of the outstanding Common Stock not allegedly deemed owned by Schwab under Section 203. Accordingly, on June 11, 2020, Plaintiff dismissed his Section 203 claim as moot and withdrew his preliminary injunction motion. The Defendants intend to defend vigorously against the remaining claims alleged in the complaint and believe that the claims are without merit.
In addition, as previously disclosed, eight complaints were filed by purported stockholders of the Company in federal court challenging the Merger, including (i) Kent v. TD Ameritrade Holding Corporation et al., case number 1:20-cv-00388, filed in the United States District Court for the District of Delaware; (ii) Stein v. TD Ameritrade Holding Corporation et al., case number 1:20-cv-00410, filed in the United States District Court for the District of Delaware; (iii) Roth v. TD Ameritrade Holding Corporation et al., case number 2:20-cv-03425, filed in the United States District Court for the District of New Jersey; (iv) Litwin v. TD Ameritrade Holding Corporation et al., case number 2:20-cv-03569, filed in the United States District Court for the District of New Jersey; (v) Bernstein v. TD Ameritrade Holding Corporation et al., case number 2:20-cv-03695, filed in the United States District Court for the District of New Jersey; (vi) Garrison v. TD Ameritrade Holding Corporation et al., case number 1:20-cv-02850, filed in the United States District Court for the Southern District of New York; (vii) Paine-Mantha v. TD Ameritrade Holding Corporation et al., case number 1:20-cv-00637, filed in the United States District Court for the District of Delaware; and (viii) Kong v. TD Ameritrade Holding Corporation et al., case number 2:20-cv-05970, filed in the United States District Court for the District of New Jersey, which complaints are collectively referred to as the federal actions. The complaints named as defendants, the Company and members of its board of directors and, in the case of two of the actions, Schwab. The complaints generally alleged, among other things, that the defendants authorized the filing of a materially incomplete and misleading registration statement. In addition to costs and attorneys' fees, the lawsuits sought to enjoin the vote of the Company's stockholders and the closing of the acquisition; and in the event the transaction were consummated, to set aside the transaction and/or obtain rescissionary or other damages. The Company believes that the claims asserted in the lawsuits were without merit and that that no further disclosure was required to supplement the definitive joint proxy statement/prospectus under applicable law. On May 27, 2020, the Company filed a Form 8-K with the Securities and Exchange Commission voluntarily making supplemental disclosures related to the Merger. In light of the supplemental disclosures, the plaintiffs in the federal actions agreed to dismiss their claims with prejudice. As of July 14, 2020, all of the federal actions have been voluntarily dismissed.
Other Legal and Regulatory Matters — The Company is subject to a number of other lawsuits, arbitrations, claims and other legal proceedings in connection with its business. Some of these legal actions include claims for substantial or unspecified compensatory and/or punitive damages. In addition, in the normal course of business, the Company discusses matters with its regulators raised during regulatory examinations or otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions. ASC 450, Loss Contingencies, governs the recognition and disclosure of loss contingencies, including potential losses from legal and regulatory matters. ASC 450 categorizes loss contingencies using three terms based on the likelihood of occurrence of events that result in a loss: "probable" means that "the future event or events are likely to occur;" "remote" means that "the chance of the future event or events occurring is slight;" and "reasonably possible" means that "the chance of the future event or events occurring is more than remote but less than likely." Under ASC 450, the Company accrues for losses that are considered both probable and reasonably estimable. The Company may incur losses in addition to the amounts accrued where
the losses are greater than estimated by management, or for matters for which an unfavorable outcome is considered reasonably possible, but not probable.
The Company estimates that the aggregate range of reasonably possible losses in excess of amounts accrued is from $0 to $90 million as of June 30, 2020. This estimated aggregate range of reasonably possible losses is based upon currently available information for those legal and regulatory matters in which the Company is involved, taking into account the Company's best estimate of reasonably possible losses for those matters as to which an estimate can be made. For certain matters, the Company does not believe an estimate can currently be made, as some matters are in preliminary stages and some matters have no specific amounts claimed. The Company's estimate involves significant judgment, given the varying stages of the proceedings and the inherent uncertainty of predicting outcomes. The estimated range will change from time to time as the underlying matters, stages of proceedings and available information change. Actual losses may vary significantly from the current estimated range.
The Company believes, based on its current knowledge and after consultation with counsel, that the ultimate disposition of these legal and regulatory matters, individually or in the aggregate, is not likely to have a material adverse effect on the financial condition or cash flows of the Company. However, in light of the uncertainties involved in such matters, the Company is unable to predict the outcome or the timing of the ultimate resolution of these matters, or the potential losses, fines, penalties or equitable relief, if any, that may result, and it is possible that the ultimate resolution of one or more of these matters may be material to the Company's results of operations for a particular reporting period.
Income Taxes
The Company's federal and state income tax returns are subject to examination by taxing authorities. Because the application of tax laws and regulations to many types of transactions is subject to varying interpretations, amounts reported in the condensed consolidated financial statements could be significantly changed at a later date upon final determinations by taxing authorities.
General Contingencies
In the ordinary course of business, there are various contingencies that are not reflected in the condensed consolidated financial statements. These include the Company's broker-dealer and FCM/FDM subsidiaries' client activities involving the execution, settlement and financing of various client securities, options, futures and foreign exchange transactions. These activities may expose the Company to credit risk and losses in the event the clients are unable to fulfill their contractual obligations.
The Company extends margin credit and leverage to its clients. In margin transactions, the Company extends credit to the client, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the client's account. In connection with these activities, the Company also routes client orders for execution and clears client transactions involving the sale of securities not yet purchased ("short sales"). Such margin-related transactions may expose the Company to credit risk in the event a client's assets are not sufficient to fully cover losses that the client may incur. Leverage involves securing a large potential future obligation with a lesser amount of collateral. The risks associated with margin credit and leverage increase during periods of rapid market movements, or in cases where leverage or collateral is concentrated and market movements occur. In the event the client fails to satisfy its obligations, the Company has the authority to liquidate certain positions in the client's account(s) at prevailing market prices in order to fulfill the client's obligations. However, during periods of rapid market movements, clients who utilize margin credit or leverage and who have collateralized their obligations with securities may find that the securities have a rapidly depreciating value (or increasing value with respect to short positions) and may not be sufficient to cover their obligations in the event of liquidation. The Company seeks to mitigate the risks associated with its client margin and leverage activities by requiring clients to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels throughout each trading day and, pursuant to such guidelines, requires clients to deposit additional collateral, or to reduce positions, when necessary.
The Company contracts with unaffiliated FCM, FDM and broker-dealer entities to clear and execute futures, options on futures and foreign exchange transactions for its clients. This can result in concentrations of credit risk with one or more of these counterparties. This risk is partially mitigated by the counterparties' obligation to comply with rules and regulations governing FCMs, FDMs and broker-dealers in the United States. These rules generally require maintenance of minimum net capital thresholds and segregation of client funds and securities. In addition, the Company manages this risk by requiring credit approvals for counterparties and by utilizing account funding and sweep arrangement agreements that generally specify that all client cash in excess of futures funding requirements be transferred back to the clients' securities brokerage accounts at the Company on a daily basis.
The Company loans securities temporarily to other broker-dealers in connection with its broker-dealer business. The Company receives cash as collateral for the securities loaned. Increases in securities prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities, the Company may be exposed to the risk of acquiring the securities at higher prevailing market prices in order to satisfy its client obligations. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring
the market value of securities loaned on a daily basis and requiring additional cash as collateral when necessary, and by participating in a risk-sharing program offered through the Options Clearing Corporation ("OCC").
The Company borrows securities temporarily from other broker-dealers in connection with its broker-dealer business. The Company deposits cash as collateral for the securities borrowed. Decreases in securities prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event the counterparty to these transactions does not return the cash deposited, the Company may be exposed to the risk of selling the securities at lower prevailing market prices. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the collateral values on a daily basis and requiring collateral to be returned by the counterparties when necessary, and by participating in a risk-sharing program offered through the OCC.
The Company transacts in reverse repurchase agreements (securities purchased under agreements to resell) in connection with its broker-dealer business. The Company's policy is to take possession or control of securities with a market value in excess of the principal amount loaned, plus accrued interest, in order to collateralize resale agreements. The Company monitors the market value of the underlying securities that collateralize the related receivable on resale agreements on a daily basis and may require additional collateral when deemed appropriate.
The Company utilizes securities sold under agreements to repurchase (repurchase agreements) to finance its short-term liquidity and capital needs. Under these agreements, the Company receives cash from the counterparties and provides U.S. Treasury securities as collateral, allowing the counterparties the right to sell or repledge the collateral. These agreements expose the Company to credit losses in the event the counterparties cannot meet their obligations. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the market value of pledged securities owned on a daily basis and requiring the counterparties to return cash or excess collateral pledged when necessary.
The Company has accepted collateral in connection with client margin loans and securities borrowed. Under applicable agreements, the Company is generally permitted to repledge securities held as collateral and use them to enter into securities lending arrangements. The following table summarizes the fair values of client margin securities and stock borrowings that were available to the Company to utilize as collateral on various borrowings or for other purposes, and the amount of that collateral loaned or repledged by the Company (dollars in billions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
September 30,
2019
|
|
Client margin securities
|
|
$
|
30.7
|
|
|
$
|
28.6
|
|
|
Stock borrowings
|
|
0.9
|
|
|
1.9
|
|
|
Total collateral available
|
|
$
|
31.6
|
|
|
$
|
30.5
|
|
|
|
|
|
|
|
|
Collateral loaned
|
|
$
|
3.3
|
|
|
$
|
3.2
|
|
|
Collateral repledged
|
|
6.5
|
|
|
4.6
|
|
|
Total collateral loaned or repledged
|
|
$
|
9.8
|
|
|
$
|
7.8
|
|
The Company is subject to cash deposit and collateral requirements with clearinghouses based on its clients' trading activity. The following table summarizes cash deposited with and securities pledged to clearinghouses by the Company (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Condensed Consolidated Balance Sheet Classification
|
|
June 30,
2020
|
|
September 30,
2019
|
|
Cash
|
|
Receivable from brokers, dealers and clearing
organizations
|
|
$
|
819
|
|
|
$
|
545
|
|
|
U.S. government debt securities
|
|
Securities owned, at fair value
|
|
182
|
|
|
168
|
|
|
Total
|
|
$
|
1,001
|
|
|
$
|
713
|
|
The Company manages its sweep program through off-balance sheet arrangements with TD and unaffiliated third-party depository financial institutions (together, the "Sweep Program Counterparties"). The sweep program is offered to eligible clients whereby the client's uninvested cash is swept into FDIC-insured (up to specified limits) money market deposit accounts at the Sweep Program Counterparties. The Company earns revenue on client cash at the Sweep Program Counterparties based on the return of floating-rate and fixed-rate notional investments. The Company designates amounts and maturity dates for the fixed-rate notional investments within the sweep program portfolios, subject to certain limitations. In the event the Company instructs the Sweep Program Counterparties to withdraw a fixed-rate notional investment prior to its maturity, the Company may be required to reimburse the Sweep Program Counterparties for any losses incurred as a result of the early withdrawal. In order to mitigate the risk of potential loss due to an early withdrawal of fixed-rate notional investments, the Company maintains a certain level of short-
term floating-rate investments within the sweep program portfolios to meet client cash demands. See "Insured Deposit Account Agreement" in Note 15 for a description of the sweep arrangement between the Company and TD.
Guarantees
The Company is a member of and provides guarantees to securities clearinghouses and exchanges in connection with client trading activities. Under related agreements, the Company is generally required to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. The Company's liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted to the clearinghouse as collateral. However, the likelihood that the Company would be required to make payments under these agreements is considered remote. Accordingly, no contingent liability is carried on the Condensed Consolidated Balance Sheets for these guarantees.
The Company clears its clients' futures and options on futures transactions on an omnibus account basis through unaffiliated FCMs. The Company also contracts with an external provider to facilitate foreign exchange trading for its clients. The Company has agreed to indemnify these unaffiliated FCMs and the external provider for any loss that they may incur from the client transactions introduced to them by the Company.
See "Insured Deposit Account Agreement" in Note 15 for a description of the guarantees included in that agreement.
10. Fair Value Disclosures
Fair Value Measurement — Definition and Hierarchy
ASC 820-10, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
ASC 820-10 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company's own assumptions about the assumptions other market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
|
|
|
|
•
|
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. This category includes active exchange-traded funds, money market mutual funds, mutual funds and equity securities.
|
|
|
|
|
•
|
Level 2 — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Such inputs include quoted prices in markets that are not active, quoted prices for similar assets and liabilities in active and inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. This category includes most debt securities, U.S. government agency mortgage-backed securities, which consist of Ginnie Mae Conventional Residential Mortgages and Ginnie Mae Home Equity Conversion Mortgages, and other interest-sensitive financial instruments.
|
|
|
|
|
•
|
Level 3 — Unobservable inputs for the asset or liability, where there is little, if any, observable market activity or data for the asset or liability.
|
The following tables present the Company's fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and September 30, 2019 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
2,078
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,078
|
|
|
Investments segregated and on deposit for regulatory purposes:
|
|
|
|
|
|
|
|
|
|
U.S. government debt securities
|
|
—
|
|
|
9,157
|
|
|
—
|
|
|
9,157
|
|
|
U.S. government agency mortgage-backed securities
|
|
—
|
|
|
3,107
|
|
|
—
|
|
|
3,107
|
|
|
Subtotal - Investments segregated and on deposit for regulatory purposes
|
|
—
|
|
|
12,264
|
|
|
—
|
|
|
12,264
|
|
|
Securities owned:
|
|
|
|
|
|
|
|
|
|
U.S. government debt securities
|
|
—
|
|
|
411
|
|
|
—
|
|
|
411
|
|
|
Equity securities
|
|
10
|
|
|
1
|
|
|
—
|
|
|
11
|
|
|
Other
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
|
Subtotal - Securities owned
|
|
10
|
|
|
416
|
|
|
—
|
|
|
426
|
|
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
|
|
U.S. government debt securities
|
|
—
|
|
|
1,798
|
|
|
—
|
|
|
1,798
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
Pay-variable interest rate swaps(1)
|
|
—
|
|
|
207
|
|
|
—
|
|
|
207
|
|
|
Other
|
|
2
|
|
|
1
|
|
|
—
|
|
|
3
|
|
|
Subtotal - Other assets
|
|
2
|
|
|
208
|
|
|
—
|
|
|
210
|
|
|
Total assets at fair value
|
|
$
|
2,090
|
|
|
$
|
14,686
|
|
|
$
|
—
|
|
|
$
|
16,776
|
|
|
|
|
|
(1)
|
See "Fair Value Hedging" in Note 7 for details.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
2,486
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,486
|
|
|
Investments segregated and on deposit for regulatory purposes:
|
|
|
|
|
|
|
|
|
|
U.S. government debt securities
|
|
—
|
|
|
4,394
|
|
|
—
|
|
|
4,394
|
|
|
U.S. government agency mortgage-backed securities
|
|
—
|
|
|
1,318
|
|
|
—
|
|
|
1,318
|
|
|
Subtotal - Investments segregated and on deposit for regulatory purposes
|
|
—
|
|
|
5,712
|
|
|
—
|
|
|
5,712
|
|
|
Securities owned:
|
|
|
|
|
|
|
|
|
|
U.S. government debt securities
|
|
—
|
|
|
524
|
|
|
—
|
|
|
524
|
|
|
Other
|
|
2
|
|
|
6
|
|
|
—
|
|
|
8
|
|
|
Subtotal - Securities owned
|
|
2
|
|
|
530
|
|
|
—
|
|
|
532
|
|
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
|
|
U.S. government debt securities
|
|
—
|
|
|
1,668
|
|
|
—
|
|
|
1,668
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
Pay-variable interest rate swaps(1)
|
|
—
|
|
|
71
|
|
|
—
|
|
|
71
|
|
|
U.S. government debt securities
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
Subtotal - Other assets
|
|
—
|
|
|
72
|
|
|
—
|
|
|
72
|
|
|
Total assets at fair value
|
|
$
|
2,488
|
|
|
$
|
7,982
|
|
|
$
|
—
|
|
|
$
|
10,470
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities:
|
|
|
|
|
|
|
|
|
|
Pay-variable interest rate swaps(1)
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
|
|
|
(1)
|
See "Fair Value Hedging" in Note 7 for details.
|
There were no transfers between any levels of the fair value hierarchy during the periods covered by this report.
Valuation Techniques
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to the Company's Level 1 assets and liabilities. If quoted prices in active markets for identical assets and liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. This pricing methodology applies to the Company's Level 2 assets and liabilities.
Level 2 Measurements:
Debt securities — Fair values for debt securities are based on prices obtained from an independent pricing vendor. The primary inputs to the valuation include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. The Company validates the vendor pricing by periodically comparing it to pricing from another independent pricing service. The Company has not adjusted prices obtained from the independent pricing vendor for any periods presented in the condensed consolidated financial statements because no significant pricing differences have been observed.
U.S. government agency mortgage-backed securities — Fair values for mortgage-backed securities are based on prices obtained from an independent pricing vendor. The primary inputs to the valuation include quoted prices for similar assets in active markets and in markets that are not active, a market-derived prepayment curve, weighted average yields on the underlying collateral and spreads to benchmark indices. The Company validates the vendor pricing by periodically comparing it to pricing from two other
independent sources. The Company has not adjusted prices obtained from the independent pricing vendor for any periods presented in the condensed consolidated financial statements because no significant pricing differences have been observed.
Interest rate swaps — These derivatives are valued by the Company using a valuation model provided by a third-party service that incorporates interest rate yield curves, which are observable for substantially the full term of the contract. The valuation model is widely accepted in the financial services industry and does not involve significant judgment because most of the inputs are observable in the marketplace. Credit risk is not an input to the valuation because in each case the Company or counterparty has possession of collateral, in the form of cash or U.S. Treasury securities, in amounts equal to or exceeding the fair value of the interest rate swaps. The Company validates the third-party service valuations by comparing them to valuation models provided by the swap counterparties.
Level 3 Measurements:
The Company has no assets or liabilities classified as Level 3 of the fair value hierarchy.
Fair Value of Financial Instruments Not Recorded at Fair Value
Receivable from/payable to brokers, dealers and clearing organizations, receivable from/payable to clients, receivable from/payable to affiliates, other receivables and accounts payable and other liabilities are short-term in nature and accordingly are carried at amounts that approximate fair value. These financial instruments are recorded at or near their respective transaction prices and historically have been settled or converted to cash at approximately that value (categorized as Level 2 of the fair value hierarchy).
Cash and investments segregated and on deposit for regulatory purposes includes reverse repurchase agreements (securities purchased under agreements to resell). Reverse repurchase agreements are treated as collateralized financing transactions and are carried at amounts at which the securities will subsequently be resold, plus accrued interest. The Company's reverse repurchase agreements generally have a maturity of seven days and are collateralized by securities in amounts exceeding the carrying value of the resale agreements. Accordingly, the carrying value of reverse repurchase agreements approximates fair value (categorized as Level 2 of the fair value hierarchy). Cash and investments segregated and on deposit for regulatory purposes also includes cash held in demand deposit accounts and on deposit with futures commission merchants, for which the carrying values approximate the fair value (categorized as Level 1 of the fair value hierarchy). See Note 3 for a summary of cash and investments segregated and on deposit for regulatory purposes.
Long-term debt — As of June 30, 2020, the Company's Senior Notes had an aggregate estimated fair value, based on quoted market prices (categorized as Level 1 of the fair value hierarchy), of approximately $3.84 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $3.74 billion. As of September 30, 2019, the Company's Senior Notes had an aggregate estimated fair value, based on quoted market prices, of approximately $3.67 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $3.59 billion.
11. Offsetting Assets and Liabilities
Substantially all of the Company's reverse repurchase agreements, securities borrowing and securities lending activity and derivative financial instruments are transacted under master agreements that may allow for net settlement in the ordinary course of business, as well as offsetting of all contracts with a given counterparty in the event of default by one of the parties. However, for financial statement purposes, the Company does not net balances related to these financial instruments.
The following tables present information about the potential effect of rights of setoff associated with the Company's recognized assets and liabilities as of June 30, 2020 and September 30, 2019 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the
Condensed Consolidated
Balance Sheet
|
|
|
|
|
|
Gross Amounts
of Recognized
Assets and
Liabilities
|
|
Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheet
|
|
Net Amounts
Presented in
the Condensed
Consolidated
Balance Sheet
|
|
Financial
Instruments(4)
|
|
Collateral
Received or
Pledged
(Including
Cash)(5)
|
|
Net
Amount(6)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from brokers, dealers
and clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits paid for
securities borrowed(1)
|
|
$
|
871
|
|
|
$
|
—
|
|
|
$
|
871
|
|
|
$
|
(60
|
)
|
|
$
|
(805
|
)
|
|
$
|
6
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-variable interest rate swaps
|
|
207
|
|
|
—
|
|
|
207
|
|
|
(207
|
)
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
1,078
|
|
|
$
|
—
|
|
|
$
|
1,078
|
|
|
$
|
(267
|
)
|
|
$
|
(805
|
)
|
|
$
|
6
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable to brokers, dealers
and clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits received for
securities loaned(2)(3)
|
|
$
|
3,279
|
|
|
$
|
—
|
|
|
$
|
3,279
|
|
|
$
|
(60
|
)
|
|
$
|
(2,795
|
)
|
|
$
|
424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the
Condensed Consolidated
Balance Sheet
|
|
|
|
|
|
Gross Amounts
of Recognized
Assets and
Liabilities
|
|
Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheet
|
|
Net Amounts
Presented in
the Condensed
Consolidated
Balance Sheet
|
|
Financial
Instruments(4)
|
|
Collateral
Received or
Pledged
(Including
Cash)(5)
|
|
Net
Amount(6)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments segregated and on
deposit for regulatory purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse repurchase agreements
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
(500
|
)
|
|
$
|
—
|
|
|
Receivable from brokers, dealers
and clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits paid for
securities borrowed(1)
|
|
1,864
|
|
|
—
|
|
|
1,864
|
|
|
(38
|
)
|
|
(1,795
|
)
|
|
31
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-variable interest rate swaps
|
|
71
|
|
|
—
|
|
|
71
|
|
|
(71
|
)
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
2,435
|
|
|
$
|
—
|
|
|
$
|
2,435
|
|
|
$
|
(109
|
)
|
|
$
|
(2,295
|
)
|
|
$
|
31
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable to brokers, dealers
and clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits received for
securities loaned(2)(3)
|
|
$
|
3,189
|
|
|
$
|
—
|
|
|
$
|
3,189
|
|
|
$
|
(38
|
)
|
|
$
|
(2,821
|
)
|
|
$
|
330
|
|
|
Accounts payable and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-variable interest rate swaps
|
|
3
|
|
|
—
|
|
|
3
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
3,192
|
|
|
$
|
—
|
|
|
$
|
3,192
|
|
|
$
|
(41
|
)
|
|
$
|
(2,821
|
)
|
|
$
|
330
|
|
|
|
|
|
(1)
|
Included in the gross amounts of deposits paid for securities borrowed is $491 million and $723 million as of June 30, 2020 and September 30, 2019, respectively, transacted through a risk-sharing program with the OCC, which guarantees the return of cash to the Company. See "General Contingencies" in Note 9 for a discussion of the potential risks associated with securities borrowing transactions and how the Company mitigates those risks.
|
|
|
|
|
(2)
|
Included in the gross amounts of deposits received for securities loaned is $2.32 billion and $2.48 billion as of June 30, 2020 and September 30, 2019, respectively, transacted through a risk-sharing program with the OCC, which guarantees the return of securities to the Company. See "General Contingencies" in Note 9 for a discussion of the potential risks associated with securities lending transactions and how the Company mitigates those risks.
|
|
|
|
|
(3)
|
Substantially all of the Company's securities lending transactions have a continuous contractual term and, upon notice by either party, may be terminated within two business days. The following table summarizes the Company's gross liability for securities lending transactions by the class of securities loaned (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
September 30,
2019
|
|
Deposits received for securities loaned:
|
|
|
|
|
|
Equity securities
|
|
$
|
2,720
|
|
|
$
|
2,629
|
|
|
Exchange-traded funds
|
|
378
|
|
|
285
|
|
|
Real estate investment trusts
|
|
98
|
|
|
181
|
|
|
Closed-end funds
|
|
76
|
|
|
86
|
|
|
Other
|
|
7
|
|
|
8
|
|
|
Total
|
|
$
|
3,279
|
|
|
$
|
3,189
|
|
|
|
|
|
(4)
|
Amounts represent recognized assets and liabilities that are subject to enforceable master agreements with rights of setoff.
|
|
|
|
|
(5)
|
Represents the fair value of collateral the Company had received or pledged under enforceable master agreements, limited for table presentation purposes to the net amount of the recognized assets due from or liabilities due to each counterparty. At June 30, 2020 and September 30, 2019, the Company had received total collateral with a fair value of $1.07 billion and $2.43 billion, respectively, and pledged total collateral with a fair value of $2.84 billion and $2.86 billion, respectively.
|
|
|
|
|
(6)
|
Represents the amount for which, in the case of net recognized assets, the Company had not received collateral, and in the case of net recognized liabilities, the Company had not pledged collateral.
|
12. Accumulated Other Comprehensive Income (Loss)
The following tables present the net change in fair value recorded for each component of other comprehensive income before and after income tax for the periods indicated (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
|
|
Before Tax
|
|
Tax Effect
|
|
Net of Tax
|
|
Before Tax
|
|
Tax Effect
|
|
Net of Tax
|
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain
|
|
$
|
3
|
|
|
$
|
(1
|
)
|
|
$
|
2
|
|
|
$
|
17
|
|
|
$
|
(4
|
)
|
|
$
|
13
|
|
|
Cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for portion of realized loss amortized to net income(1)
|
|
2
|
|
|
(1
|
)
|
|
1
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
Other comprehensive income
|
|
$
|
5
|
|
|
$
|
(2
|
)
|
|
$
|
3
|
|
|
$
|
18
|
|
|
$
|
(5
|
)
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
|
|
Before Tax
|
|
Tax Effect
|
|
Net of Tax
|
|
Before Tax
|
|
Tax Effect
|
|
Net of Tax
|
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain
|
|
$
|
132
|
|
|
$
|
(32
|
)
|
|
$
|
100
|
|
|
$
|
42
|
|
|
$
|
(10
|
)
|
|
$
|
32
|
|
|
Cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for portion of realized loss amortized to net income(1)
|
|
4
|
|
|
(1
|
)
|
|
3
|
|
|
3
|
|
|
(1
|
)
|
|
2
|
|
|
Other comprehensive income
|
|
$
|
136
|
|
|
$
|
(33
|
)
|
|
$
|
103
|
|
|
$
|
45
|
|
|
$
|
(11
|
)
|
|
$
|
34
|
|
(1) The before tax reclassification amounts and the related tax effects are included in interest on borrowings and provision for income taxes, respectively, on the Condensed Consolidated Statements of Income.
The following table presents after-tax changes in each component of accumulated other comprehensive income (loss) for the periods indicated (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
156
|
|
|
$
|
12
|
|
|
$
|
58
|
|
|
$
|
(7
|
)
|
|
Other comprehensive income before reclassifications
|
|
2
|
|
|
13
|
|
|
100
|
|
|
32
|
|
|
Ending balance
|
|
$
|
158
|
|
|
$
|
25
|
|
|
$
|
158
|
|
|
$
|
25
|
|
|
Cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(15
|
)
|
|
$
|
(18
|
)
|
|
$
|
(17
|
)
|
|
$
|
(20
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
1
|
|
|
—
|
|
|
3
|
|
|
2
|
|
|
Ending balance
|
|
$
|
(14
|
)
|
|
$
|
(18
|
)
|
|
$
|
(14
|
)
|
|
$
|
(18
|
)
|
|
Total accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
141
|
|
|
$
|
(6
|
)
|
|
$
|
41
|
|
|
$
|
(27
|
)
|
|
Current period change
|
|
3
|
|
|
13
|
|
|
103
|
|
|
34
|
|
|
Ending balance
|
|
$
|
144
|
|
|
$
|
7
|
|
|
$
|
144
|
|
|
$
|
7
|
|
13. Earnings Per Share
The difference between the numerator and denominator used in the computation of basic and diluted earnings per share consists of common stock equivalent shares related to stock-based compensation for all periods presented. There were no material antidilutive awards for the three and nine months ended June 30, 2020 and 2019.
14. Revenue Recognition
The following tables set forth the disaggregation of the Company's revenue by major source for the periods indicated (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
Asset-based revenues:
|
|
|
|
|
|
Bank deposit account fees
|
|
$
|
391
|
|
|
$
|
421
|
|
|
Net interest revenue
|
|
303
|
|
|
383
|
|
|
Investment product fees
|
|
128
|
|
|
151
|
|
|
Total asset-based revenues
|
|
822
|
|
|
955
|
|
|
Transaction-based revenues:
|
|
|
|
|
|
Order routing revenue
|
|
340
|
|
|
117
|
|
|
Commissions (1)
|
|
261
|
|
|
320
|
|
|
Other
|
|
51
|
|
|
40
|
|
|
Total transaction-based revenues
|
|
652
|
|
|
477
|
|
|
Other revenues
|
|
112
|
|
|
59
|
|
|
Net revenues
|
|
$
|
1,586
|
|
|
$
|
1,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
Asset-based revenues:
|
|
|
|
|
|
Bank deposit account fees
|
|
$
|
1,289
|
|
|
$
|
1,280
|
|
|
Net interest revenue
|
|
994
|
|
|
1,120
|
|
|
Investment product fees
|
|
418
|
|
|
431
|
|
|
Total asset-based revenues
|
|
2,701
|
|
|
2,831
|
|
|
Transaction-based revenues:
|
|
|
|
|
|
Order routing revenue
|
|
695
|
|
|
365
|
|
|
Commissions(1)
|
|
599
|
|
|
1,010
|
|
|
Other
|
|
144
|
|
|
125
|
|
|
Total transaction-based revenues
|
|
1,438
|
|
|
1,500
|
|
|
Other revenues
|
|
219
|
|
|
126
|
|
|
Net revenues
|
|
$
|
4,358
|
|
|
$
|
4,457
|
|
(1) Effective October 3, 2019, the Company reduced its online exchange-listed stock, exchange traded funds (ETF) (domestic and Canadian) and option trade commissions from $6.95 to $0 per trade (plus $0.65 per contract and no exercise or assignment fees on option trades).
The amount of revenue recognized by the Company is measured based on the consideration specified in contracts with its clients. The Company recognizes revenue when a performance obligation is satisfied over time as the services are performed or at a point in time depending on the nature of the services provided as further discussed below.
Asset-Based Revenues
Asset-based revenues consists of bank deposit account fees, net interest revenue and investment product fees. The primary factors
driving the Company's asset-based revenues are average balances and average rates. Average balances consist primarily of average client bank 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.
Bank deposit account fees
Bank deposit account fees consists of revenues earned and recognized over time resulting from a sweep program that is offered to eligible clients of the Company whereby clients' uninvested cash is swept off-balance sheet to FDIC-insured (up to specified limits) accounts with Sweep Program Counterparties participating in the program. These revenues are based on the return of floating-rate and fixed-rate notional investments, less the actual interest paid to clients and other applicable fees. Bank deposit account fees are collected from the Sweep Program Counterparties on a monthly basis. See "Insured Deposit Account Agreement" in Note 15 for a description of the sweep arrangement between the Company and TD.
Net interest revenue
Net interest revenue, which is generated from financial instruments covered by various other areas of GAAP, is not within the scope of ASC Topic 606, Revenue from Contracts with Customers, and is included in the table above to reconcile to net revenues disclosed within the Condensed Consolidated Statements of Income. Net interest revenue primarily consists of income generated by interest charged to clients on margin balances, net interest revenue from securities borrowed and securities loaned transactions and interest earned on client cash, net of interest paid to clients on their credit balances.
Investment product fees
Investment product fee revenue consists of revenues earned and recorded over time on client assets invested in money market mutual funds, other mutual funds and certain investment programs. Investment product fees also includes fees earned on client assets managed by independent registered investment advisors ("RIAs") utilizing the Company's trading and investing platforms. Investment product fees are collected from clients and RIAs on a monthly or quarterly basis. Primary revenue sources within investment product fees are described below.
The following tables present the significant components of investment product fees for the periods indicated (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
Investment product fees:
|
|
|
|
|
|
Mutual fund service fees
|
|
$
|
71
|
|
|
$
|
73
|
|
|
Investment program fees
|
|
56
|
|
|
70
|
|
|
Other
|
|
1
|
|
|
8
|
|
|
Total investment product fees
|
|
$
|
128
|
|
|
$
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
Investment product fees:
|
|
|
|
|
|
Mutual funds service fees
|
|
$
|
230
|
|
|
$
|
208
|
|
|
Investment program fees
|
|
184
|
|
|
199
|
|
|
Other
|
|
4
|
|
|
24
|
|
|
Total investment product fees
|
|
$
|
418
|
|
|
$
|
431
|
|
Mutual fund service fees includes shareholder services fees and SEC Rule 12b-1 service and distribution fees. Shareholder services fees are earned on the Company's client assets invested in money market mutual funds and other mutual funds for record-keeping and administrative services provided to these funds. The Company earns SEC Rule 12b-1 service and distribution fees for marketing and distribution services provided to these funds. The fees earned are based on contractual rates applied to the average daily net asset value of eligible shares of a respective fund held by the Company's clients. Shareholder services fees are earned over time and collected from the funds on a monthly or quarterly basis. SEC Rule 12b-1 fees are also earned over time and collected from the funds on a monthly or quarterly basis, as the variable consideration of a transaction price is no longer constrained and the value of consideration can be determined as discussed previously.
Investment program fees are earned through fees charged to clients enrolled in product offerings which are actively managed by TD Ameritrade Investment Management, LLC, a wholly-owned subsidiary of the Company. These fees are earned over time and
are based on contractual rates applied to asset balances held by the Company's clients in these product offerings. Certain program fees are based on quarter-end balances and are collected from clients in advance, at the beginning of each calendar quarter. Revenues collected on a quarterly basis, less refunds for clients ceasing participation in the program, are recognized during the quarter as performance obligations are satisfied. Other program fees are based on average daily asset balances and collected from clients on a monthly basis.
The Company also earns investment program fees through referral and asset-based program fees on its client assets managed by independent RIAs utilizing the Company's platform. These fees are earned based on contractual rates applied to the client's average daily asset balances under management. Referral fees are earned over time and collected from the independent RIAs on a monthly or quarterly basis, as the variable consideration of a transaction price is no longer constrained and the value of consideration can be determined as discussed previously. Asset-based program fees are also earned over time and collected from the independent RIAs on a monthly or quarterly basis.
Transaction-Based Revenues
Transaction-based revenues primarily consists of order routing revenue and trading commissions earned on trade execution, net of promotional allowances. The primary factors driving the Company's transaction-based revenues are total trades and average commissions per trade. Commission rates are based on rates established by the Company, which vary by type of trade. Transaction-based revenues are earned and recognized at a point in time, on a trade-date basis, as clients execute trades. These trades are generally settled and trading commissions are collected from the Company's clients within one to two business days after the trade date. Order routing revenues are generated from arrangements with market centers to receive cash payments and/or rebates in exchange for routing orders to these firms for execution and are generally collected from the market centers on a monthly basis. Securities owned by clients, including those that collateralize margin or similar transactions, are not reflected in the accompanying condensed consolidated financial statements.
Other Revenues
Other revenues primarily include proxy income, solicit and tender fees and other fees charged for ancillary services provided by the Company to its clients. In addition, other revenues include fair market value adjustments and gains/losses associated with investments held by the Company's broker-dealer subsidiaries. Other revenues generated from investments is covered by various other areas of GAAP, is not within the scope of ASC 606 and is included in the table above to reconcile to net revenues disclosed within the Condensed Consolidated Statements of Income. Proxy fee income is earned and collected at a point in time when the Company distributes proxy statements to its clients on behalf of a registrant and the revenue is based on the volume of proxies distributed and the rate per unit charged to each registrant. Solicit and tender fees are earned and collected from clients at a point in time when the Company has satisfied its obligation to maintain its client accounts holding securities affected by corporate actions.
Contract Balances
The following table presents the opening and closing balances of the Company's receivables from contracts with clients that are within the scope of ASC 606 on the Condensed Consolidated Balance Sheets (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Balances
|
|
|
|
Receivable from Clients
|
|
Receivable from Affiliates
|
|
Other Receivables
|
|
Total Receivables from
Contracts with Clients
|
|
Opening balance, September 30, 2019
|
|
$
|
25
|
|
|
$
|
7
|
|
|
$
|
125
|
|
|
$
|
157
|
|
|
Closing balance, June 30, 2020
|
|
8
|
|
|
9
|
|
|
216
|
|
|
233
|
|
|
Increase (decrease)
|
|
$
|
(17
|
)
|
|
$
|
2
|
|
|
$
|
91
|
|
|
$
|
76
|
|
The difference between the opening and closing balances of the Company's total receivables from contracts with clients primarily results from the timing difference between the Company's performance and the receipt of payments. No other significant contract assets or liabilities exist as of June 30, 2020 and September 30, 2019.
Unsatisfied Performance Obligations
The Company does not have any unsatisfied performance obligations subject to a practical expedient election under ASC 606.
15. Related Party Transactions
Transactions with TD and its Affiliates
As a result of the Company's acquisition of TD Waterhouse Group, Inc. during fiscal year 2006, TD became an affiliate of the Company. TD owned approximately 43% of the Company's common stock as of June 30, 2020. Pursuant to the stockholders agreement between TD and the Company, TD has the right to designate five of the twelve members of the Company's board of directors. The Company transacts business and has extensive relationships with TD and certain of its affiliates. Transactions with TD and its affiliates are discussed and summarized below.
Insured Deposit Account Agreement
The Company is party to an insured deposit account ("IDA") agreement with TD Bank USA, N.A. ("TD Bank USA"), TD Bank, N.A. and TD. Under the IDA agreement, TD Bank USA and TD Bank, N.A. (together, the "TD Depository Institutions") make available to clients of the Company FDIC-insured (up to specified limits) 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.
The current IDA agreement became effective as of January 1, 2013 and had an initial term expiring July 1, 2018. It is automatically renewable for successive five-year terms, provided that it may be terminated by either the Company or the TD Depository Institutions by providing written notice of non-renewal at least two years prior to the initial expiration date or the expiration date of any subsequent renewal period. As of July 1, 2016, notice of non-renewal was not provided by either party; therefore, the IDA agreement was automatically renewed for an additional five-year term on July 1, 2018.
The fee earned on the IDA agreement is calculated based on two primary components: (1) the yield on fixed-rate notional investments, based on prevailing fixed rates for identical balances and maturities in the interest rate swap market (generally LIBOR-based) at the time such investments were added to the IDA portfolio (including any adjustments required to adjust the variable rate leg of such swaps to a one-month reset frequency and the overall swap payment frequency to monthly) and (2) the yield on floating-rate investments. As of June 30, 2020, the IDA portfolio was comprised of approximately 78% fixed-rate notional investments and 22% floating-rate investments.
The IDA agreement provides that the Company may designate amounts and maturity dates for the fixed-rate notional investments in the IDA portfolio, subject to certain limitations. For example, if the Company designates that $100 million of deposits be invested in 5-year fixed-rate investments, and on the day such investment is confirmed by the TD Depository Institutions the prevailing fixed yield for the applicable 5-year U.S. dollar LIBOR-based swaps is 1.45%, then the Company will earn a gross fixed yield of 1.45% on that portion of the portfolio (before any deductions for interest paid to clients, the servicing fee to the TD Depository Institutions and the cost of FDIC insurance premiums). In the event that (1) the federal funds effective rate is established at 0.75% or greater and (2) the rate on 5-year U.S. dollar interest rate swaps is equal to or greater than 1.50% for 20 consecutive business days, then the rate earned by the Company on new fixed-rate notional investments will be reduced by 20% of the excess of the 5-year U.S. dollar swap rate over 1.50%, up to a maximum of 0.10%.
The yield on floating-rate investments is calculated daily based on the greater of the following rates published by the Federal Reserve: (1) the interest rate paid by Federal Reserve Banks on balances held in excess of required reserve balances and contractual clearing balances under Regulation D and (2) the daily effective federal funds rate.
The interest rates paid to clients are set by the TD Depository Institutions and are not linked to any index. The servicing fee to the TD Depository Institutions under the IDA agreement is equal to 25 basis points on the aggregate average daily balance in the IDA accounts, subject to adjustment as it relates to deposits of less than or equal to $20 billion kept in floating-rate investments or in fixed-rate notional investments with a maturity of up to 24 months ("short-term fixed-rate investments"). For such floating-rate and short-term fixed-rate investments, the servicing fee is equal to the difference of the interest rate earned on the investments less the FDIC premiums paid (in basis points), divided by two. The servicing fee has a floor of 3 basis points (subject to adjustment from time to time to reflect material changes to the TD Depository Institutions' leverage costs) and a maximum of 25 basis points.
In the event the marketing fee computation results in a negative amount, the Company must pay the TD Depository Institutions the negative amount. This effectively results in the Company guaranteeing the TD Depository Institutions revenue equal to the servicing fee on the IDA agreement, plus the reimbursement of FDIC insurance premiums. The marketing fee computation under the IDA agreement is affected by many variables, including the type, duration, principal balance and yield of the fixed-rate and floating-rate investments, the prevailing interest rate environment, the amount of client deposits and the yield paid on client deposits. Because a negative marketing fee computation would arise only if there were extraordinary movements in many of these variables, the maximum potential amount of future payments the Company could be required to make under this arrangement cannot be reasonably estimated. Management believes the likelihood that the marketing fee calculation would result in a negative
amount is remote. Accordingly, no contingent liability is carried on the Condensed Consolidated Balance Sheets for the IDA agreement. In the event the Company withdraws a notional investment prior to its maturity, the Company is required to reimburse the TD Depository Institutions an amount equal to the economic replacement value of the investment, as defined in the IDA agreement. See "General Contingencies" in Note 9 for a discussion of how the Company mitigates the risk of losses due to the early withdrawal of fixed-rate notional investments.
In addition, the Company has various other services agreements and transactions with TD and its affiliates. The following tables summarize revenues and expenses resulting from transactions with TD and its affiliates for the periods indicated (dollars in millions):
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Revenues from TD and its Affiliates
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Condensed Consolidated
Statement of Income Classification
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Three Months Ended
June 30,
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Nine Months Ended
June 30,
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Description
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2020
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2019
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2020
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2019
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Insured Deposit Account Agreement
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Bank deposit account fees
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$
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365
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$
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392
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$
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1,208
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$
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1,193
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Order Routing Agreement
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Other revenues
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13
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6
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|
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29
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17
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Other
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Various
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3
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|
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2
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|
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9
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|
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19
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Total revenues
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$
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381
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$
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400
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$
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1,246
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$
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1,229
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Expenses to TD and its Affiliates
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Condensed Consolidated
Statement of Income Classification
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Three Months Ended
June 30,
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Nine Months Ended
June 30,
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Description
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2020
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2019
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2020
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2019
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Order Routing Agreement
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Other expense
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$
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11
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$
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4
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$
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23
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$
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13
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Other
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Various
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2
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3
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6
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6
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Total expenses
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$
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13
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$
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7
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$
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29
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$
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19
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The following table summarizes the classification and amount of receivables from and payables to TD and its affiliates on the Condensed Consolidated Balance Sheets resulting from related party transactions (dollars in millions):
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June 30,
2020
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September 30,
2019
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Assets:
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Receivable from brokers, dealers and clearing organizations
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$
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342
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$
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—
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Receivable from affiliates
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105
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112
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Liabilities:
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Payable to brokers, dealers and clearing organizations
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$
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33
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$
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44
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Payable to affiliates
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5
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5
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Accounts payable and other liabilities
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2
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2
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Receivables from and payables to brokers, dealers and clearing organizations primarily relate to securities borrowing and lending activity and are settled in accordance with customary contractual terms. Receivables from and payables to TD affiliates resulting from client cash sweep activity are generally settled in cash the next business day. Other receivables from and payables to affiliates of TD are generally settled in cash on a monthly basis.
TD, along with other financial institutions, participates as a lender under the Parent Revolving Facility and the TDAC Revolving Facilities. For additional information regarding the Company's revolving facilities, see Note 7, Long-term Debt and Other Borrowings. As of June 30, 2020 and September 30, 2019, the total lending commitment received from TD under these credit facilities was $229 million and $221 million, respectively.
16. Subsequent Event
On August 3, 2020, the Parent entered into an amendment to its $300 million senior unsecured committed revolving credit facility (the "Parent Revolving Facility Amendment") and TDAC entered into an amendment to its $600 million senior unsecured committed revolving credit facility (together with the Parent Revolving Facility Amendment, the "Amended Credit Agreements").
The Amended Credit Agreements were entered into in connection with Schwab's pending acquisition of the Company pursuant to the Merger Agreement. Among other things, the amendments modify the definition of "change of control," so that the consummation of the Merger does not constitute a "change of control" under each such Amended Credit Agreement.
Additionally, the Parent Revolving Facility Amendment contemplates additional modifications that are conditioned on, among other things, the consummation of the Merger and the provision of a parent guarantee from Schwab. If such conditions are satisfied, certain financial covenant and reporting obligations will be modified as set forth in the Parent Revolving Facility Amendment.
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
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, 2019, 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 impact of the pandemic on our financial condition, results of operations and cash flows; the closing date of the merger between the Company and The Charles Schwab Corporation ("Schwab"); the effect of changes in interest rates on our net interest spread; the effect of client trading activity on our results of operations; the amount of our net revenues; the amounts of our total operating expenses, including the annualized impact of hiring new employees in our service centers; our effective income tax rate; our capital and liquidity needs and our plans to finance such needs; and our plans to return capital to stockholders through cash dividends.
In March 2020, the World Health Organization declared the spread of coronavirus disease 2019 ("COVID-19") a worldwide pandemic. The pandemic has negatively impacted the global economy and caused significant volatility in the financial markets. We continue to actively monitor the pandemic and have taken and intend to continue taking steps to identify and mitigate the adverse impacts on, and risks to, the Company's business, financial condition, liquidity, operations, employees, clients and business partners. In response to the pandemic and for the protection of our employees, clients and business partners, we implemented remote work arrangements for nearly all of our employees, have restricted business travel and have temporarily closed our retail branches. To date, with our ability to meet a vast majority of our clients' needs through our technology-based platforms and services, these arrangements have not materially affected our ability to maintain our business operations. The impact of the pandemic on financial markets resulted in heightened client engagement during the second and third quarters of fiscal year 2020. Additionally, in response to the pandemic, during March 2020 the Federal Open Market Committee decreased the target range for the federal funds rate by 150 basis points (to between 0 to 0.25%). Based on information available as of the date of this report, we do not expect the pandemic to have a material adverse impact on our financial condition, results of operations or cash flows in the near term; although, given the daily evolution of the pandemic, the global responses to curb its spread and the related economic impacts, we are currently unable to estimate the long-term effects of the pandemic on our financial condition, results of operations or cash flows.
On November 24, 2019, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Schwab and Americano Acquisition Corp., a wholly-owned subsidiary of Schwab. On May 14, 2020, the Company entered into Amendment No. 1 to the Merger Agreement. The Merger Agreement and Amendment No. 1 to the Merger Agreement were included as Exhibit 2.1 and Exhibit 2.2, respectively, to the Company's current reports on Form 8-K filed with the Securities and Exchange Commission ("SEC") on November 27, 2019 and May 15, 2020, respectively. Upon the terms and subject to the conditions of the Merger Agreement, Americano Acquisition Corp. will merge with and into the Company (the "Merger"), with the Company surviving as a wholly-owned subsidiary of Schwab. Pursuant to and subject to the terms of the Merger Agreement, our stockholders will receive 1.0837 shares of Schwab's voting common stock for each share of the Company's common stock (the "Merger Consideration"); however, if the Merger Consideration issuable in respect of shares of the Company's common stock owned by The Toronto-Dominion Bank ("TD") and its affiliates as of immediately prior to the effective time of the Merger, together with any other shares of Schwab common stock then owned by TD and its affiliates, would equal a number of shares of Schwab common stock exceeding 9.9% (or such lower percentage of shares of Schwab common stock as the Federal Reserve Board permits TD to acquire in the Merger consistent with a determination that TD does not control Schwab for purposes of the Bank Holding Company Act of 1956, as amended, or the Home Owners' Loan Act of 1933, as amended) of the issued and outstanding shares of Schwab common stock as of immediately following the effective time of the Merger, then TD will receive one share of nonvoting common stock of Schwab in lieu of each such excess share of Schwab common stock. On June 4, 2020, the Company and Schwab each held a special meeting of stockholders, where the stockholders of both companies approved the proposals related to the Merger. In addition, on June 4, 2020, the U.S. Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with respect to the Merger. Completion of the Merger remains subject to the satisfaction of customary closing conditions set forth in the Merger Agreement, including receipt of other regulatory
approvals. The parties expect the transaction to close during the second half of calendar year 2020. For the three and nine months ended June 30, 2020, we incurred $10 million and $43 million, respectively, of costs related to the proposed Merger, which are included in professional services on the Condensed Consolidated Statements of Income.
There are risks, uncertainties and assumptions that could cause our actual results or performance to differ materially from those contained in our forward-looking statements. Among the risks, uncertainties and assumptions that could cause our actual results or performance to differ materially from those contained in our forward-looking statements are the risks, uncertainties and assumptions disclosed under Part II, Item 1A. – "Risk Factors," of this quarterly report on Form 10-Q. We are also subject to the risks, uncertainties and assumptions disclosed under Item 1A. – "Risk Factors" of, and elsewhere in, our annual report on Form 10-K for the fiscal year ended September 30, 2019, including, among others, economic, social and political conditions and other securities industry risks; interest rate risks; liquidity risks; client and counterparty credit risks; our ability to introduce new products and services and update or enhance existing products and services to remain competitive; clearing function risks; systemic risk; aggressive competition; information system risks, network security risks; investment advisory services risks; merger and acquisition risks; external service provider risks; employee misconduct risks; LIBOR phase-out risks; new laws, rules, regulations and regulatory guidance affecting our business; net capital requirements; extensive regulation and regulatory uncertainties; and litigation, investigations and proceedings involving our business, as well as the risk that our risk management practices may leave us exposed to unidentified or unanticipated risks. The forward-looking statements contained in this report speak only as of the date on which they were made. We undertake no obligation to publicly update or revise such 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 in our annual report on Form 10-K for the fiscal year ended September 30, 2019, 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; and accruals for contingent liabilities. 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, 2019.
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. We believe that these non-GAAP measures may be useful in evaluating 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.
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) bank 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 bank 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 per trade — Total transaction fees and commissions revenue as reported on our consolidated financial statements, less order routing revenue, divided by total trades for the period. Transaction fees and commissions revenue primarily consist of order routing revenue, trading commissions 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.
Bank deposit account fees — Revenues generated from a sweep program that is offered to eligible clients of the Company whereby clients' uninvested cash is swept to FDIC-insured (up to specified limits) money market deposit accounts at affiliated and non-affiliated third-party financial institutions participating in the program.
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 us 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 bank deposit accounts or money market mutual funds.
Client credit balances — Client cash held in brokerage accounts, excluding balances generated by client short sales on which no interest is paid. Interest paid on client credit balances is a reduction of net interest revenue. Client credit balances are included in "payable to clients" on our consolidated 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 consolidated 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 our programs such as AdvisorDirect,® Essential Portfolios, Selective Portfolios and Personalized Portfolios on which we earn fee revenues. Fee revenues earned on these balances are included in "investment product fees" on our consolidated financial statements.
Forex accounts — Sub-accounts maintained by us 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 our client account metrics.
Funded accounts — All open client accounts with a total liquidation value greater than zero.
Futures accounts — Sub-accounts maintained by us 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 our client account metrics.
Insured Deposit Account — We are 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 our clients FDIC-insured (up to specified limits) money market deposit accounts as either designated sweep vehicles or as non-sweep deposit accounts. We provide 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 us 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. Fee revenues earned under this agreement are included in "bank deposit account fees" on our consolidated financial statements.
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 consists of fees earned on client assets invested in money market mutual funds, other mutual funds and through investment programs such as AdvisorDirect,® Essential Portfolios, Selective Portfolios and Personalized Portfolios. Investment product fees also includes fees earned on client assets managed by independent registered investment advisors utilizing our trading and investing platforms.
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. We offer traditional, Roth, Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) IRA accounts.
Liquid assets — Liquid assets is a non-GAAP financial measure that we consider to be an important measure of our liquidity. Liquid assets may be utilized for general corporate purposes and is defined as the sum of (1) corporate cash and cash equivalents, (2) corporate investments, less securities sold under agreements to repurchase, and (3) our regulated subsidiaries' net capital in excess of minimum operational targets established by management. Corporate cash and cash equivalents includes cash and cash equivalents from our investment advisory subsidiaries. Liquid assets represents available capital, including any capital from our regulated subsidiaries in excess of established management operational targets. We include the excess capital of our regulated subsidiaries in the calculation of liquid assets, 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. Net capital in excess of minimum operational targets established by management is generally available for dividend from the regulated subsidiaries to the parent company. Liquid assets 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 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 us to buy securities or for any other purpose, subject to regulatory and Company-imposed limitations.
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 bank 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 our 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.
Non-GAAP Net Income and Non-GAAP Diluted EPS — Non-GAAP net income and non-GAAP diluted earnings per share ("EPS") are non-GAAP financial measures. We define non-GAAP net income as net income adjusted to remove the after-tax effect of (1) amortization of acquired intangible assets and (2) acquisition-related expenses associated with the Company's business acquisitions. We consider non-GAAP net income and non-GAAP diluted EPS as important measures of our financial performance because they exclude certain items that may not be indicative of our core operating results and business outlook and may be useful in evaluating the operating performance of the business and facilitating a meaningful comparison of our results in the current period to those in prior and future periods. Amortization of acquired intangible assets is excluded because management does not believe it is indicative of our underlying business performance. Acquisition-related expenses are excluded as these costs are not representative of the costs of running our on-going business. Non-GAAP net income and non-GAAP diluted EPS should be considered in addition to, rather than as a substitute for, GAAP net income and GAAP diluted EPS.
Order routing revenue — Revenues generated from payments and/or rebates received from market centers. 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.
Securities sold under agreements to repurchase (repurchase agreements) — We sell securities to counterparties with an agreement to repurchase the same or substantially the same securities at a stated price plus interest on a specified date. We utilize repurchase agreements to finance our short-term liquidity and capital needs. Under these financing transactions, we receive cash from counterparties and provide U.S. Treasury securities as collateral.
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 bank 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 our broker-dealer and FCM/FDM subsidiaries. Trades generate revenue from order routing, commissions, markups on riskless principal transactions in fixed income securities and transaction fees.
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 fees and commissions — Revenues earned on order routing, trading commissions and markups on riskless principal transactions in fixed-income securities. Revenues earned on trading commissions includes client trades in options (contract fees), futures, foreign exchange, mutual funds, fixed income securities, exchange-traded notes and closed-end funds. In addition, trading commissions are earned on client trades in common and preferred stock, exchange traded funds ("ETFs") and options which are processed through a broker or the interactive voice response phone system.
Transaction-based revenues — Revenues generated from client trade execution, consisting primarily of order routing revenue, commissions, markups on riskless principal transactions in fixed income securities and transaction clearing fees.
Results of Operations
Changes in average client balances, especially bank deposit account, margin, credit and fee-based investment 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 us earning a smaller net interest spread.
Conditions in the U.S. equity markets significantly impact the volume of our clients' trading activity. There is a 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 generally expect that it would have a negative impact on our results of operations.
Effective October 3, 2019, we reduced our online exchange-listed stock, exchange-traded funds ("ETF") (domestic and Canadian) and option trade commissions from $6.95 to $0 per trade (plus $0.65 per contract and no exercise or assignment fees on option trades).
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 the TD Ameritrade Holding Corporation 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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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
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Nine months ended June 30,
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|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
$
|
|
% of Net Revenues
|
|
$
|
|
% of Net Revenues
|
|
$
|
|
% of Net Revenues
|
|
$
|
|
% of Net Revenues
|
|
Net income (GAAP)
|
|
$
|
569
|
|
|
35.9
|
%
|
|
$
|
555
|
|
|
37.2
|
%
|
|
$
|
1,393
|
|
|
32.0
|
%
|
|
$
|
1,658
|
|
|
37.2
|
%
|
|
Add:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
43
|
|
|
2.7
|
%
|
|
38
|
|
|
2.5
|
%
|
|
127
|
|
|
2.9
|
%
|
|
109
|
|
|
2.4
|
%
|
|
Amortization of acquired intangible assets
|
|
29
|
|
|
1.8
|
%
|
|
31
|
|
|
2.1
|
%
|
|
90
|
|
|
2.1
|
%
|
|
93
|
|
|
2.1
|
%
|
|
Interest on borrowings
|
|
25
|
|
|
1.6
|
%
|
|
37
|
|
|
2.5
|
%
|
|
88
|
|
|
2.0
|
%
|
|
107
|
|
|
2.4
|
%
|
|
Provision for income taxes
|
|
184
|
|
|
11.6
|
%
|
|
188
|
|
|
12.6
|
%
|
|
450
|
|
|
10.3
|
%
|
|
530
|
|
|
11.9
|
%
|
|
EBITDA (non-GAAP)
|
|
$
|
850
|
|
|
53.6
|
%
|
|
$
|
849
|
|
|
56.9
|
%
|
|
$
|
2,148
|
|
|
49.3
|
%
|
|
$
|
2,497
|
|
|
56.0
|
%
|
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Our net income increased 3% for the third quarter of fiscal year 2020 compared to the same period in the prior fiscal year, primarily due to an increase in net revenues, a decrease in interest on borrowings and a decrease in the effective income tax rate. The impact of these items was partially offset by an increase in operating expenses and the effect of a $60 million gain on a business-related divestiture during the third quarter of the prior fiscal year. Detailed analysis of net revenues and expenses is presented later in this discussion.
Our EBITDA increased slightly for the third quarter of fiscal year 2020 compared to the same period in the prior fiscal year, primarily due to an increase in net revenues, mostly offset by an increase in operating expenses excluding depreciation and amortization and the effect of a $60 million gain on a business-related divestiture during the third quarter of the prior fiscal year.
Our diluted earnings per share increased 5% to $1.05 for the third quarter of fiscal year 2020 compared to $1.00 for the third quarter of the prior fiscal year due to higher net income and a 2% decrease in the weighted average diluted shares outstanding as a result of our stock repurchase programs.
Nine Months Ended June 30, 2020 Compared to Nine Months Ended June 30, 2019
Our net income decreased 16% for the first nine months of fiscal year 2020 compared to the same period in the prior fiscal year, primarily due to an increase in operating expenses, a decrease in net revenues and the effects of a $60 million gain on a business-related divestiture and a $14 million favorable legal settlement during the first nine months of the prior fiscal year. The impact of these items was partially offset by lower income taxes and a decrease in interest on borrowings.
Our EBITDA decreased 14% for the first nine months of fiscal year 2020 compared to the same period in the prior fiscal year, primarily due to an increase in operating expenses excluding depreciation and amortization, a decrease in net revenues and the effect of a $60 million gain on a business-related divestiture and a $14 million favorable legal settlement during the first nine months of the prior fiscal year.
Our diluted earnings per share decreased 13% to $2.57 for the first nine months of fiscal year 2020 compared to $2.96 for the first nine months of the prior fiscal year due to lower net income, partially offset by a 3% decrease in the weighted average diluted shares outstanding as a result of our stock repurchase programs.
Operating Metrics
Our largest sources of revenues are asset-based revenues and transaction-based revenues. For the first nine months of fiscal year 2020, asset-based revenues and transaction-based revenues accounted for 62% and 33% of our net revenues, respectively. Asset-based revenues consist of (1) bank 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 bank 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 trades and average commissions 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 bank 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 bank deposit account fees and net interest revenue by average spread-based assets. Spread-based assets consist of average bank deposit account balances and average interest-earning assets, which include 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
June 30,
|
|
Increase/
(Decrease)
|
|
Nine months ended
June 30,
|
|
Increase/
(Decrease)
|
|
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Average bank deposit account balances
|
|
$
|
152,448
|
|
|
$
|
110,333
|
|
|
$
|
42,115
|
|
|
$
|
131,492
|
|
|
$
|
113,135
|
|
|
$
|
18,357
|
|
|
Average interest-earning assets
|
|
45,427
|
|
|
32,605
|
|
|
12,822
|
|
|
39,354
|
|
|
31,217
|
|
|
8,137
|
|
|
Average spread-based balances
|
|
$
|
197,875
|
|
|
$
|
142,938
|
|
|
$
|
54,937
|
|
|
$
|
170,846
|
|
|
$
|
144,352
|
|
|
$
|
26,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposit account fee revenue
|
|
$
|
391
|
|
|
$
|
421
|
|
|
$
|
(30
|
)
|
|
$
|
1,289
|
|
|
$
|
1,280
|
|
|
$
|
9
|
|
|
Net interest revenue
|
|
303
|
|
|
383
|
|
|
(80
|
)
|
|
994
|
|
|
1,120
|
|
|
(126
|
)
|
|
Spread-based revenue
|
|
$
|
694
|
|
|
$
|
804
|
|
|
$
|
(110
|
)
|
|
$
|
2,283
|
|
|
$
|
2,400
|
|
|
$
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avg. annualized yield—bank deposit account fees
|
|
1.01
|
%
|
|
1.51
|
%
|
|
(0.50
|
)%
|
|
1.29
|
%
|
|
1.49
|
%
|
|
(0.20
|
)%
|
|
Avg. annualized yield— interest-earning assets
|
|
2.65
|
%
|
|
4.65
|
%
|
|
(2.00
|
)%
|
|
3.32
|
%
|
|
4.73
|
%
|
|
(1.41
|
)%
|
|
Net interest margin (NIM)
|
|
1.39
|
%
|
|
2.23
|
%
|
|
(0.84
|
)%
|
|
1.76
|
%
|
|
2.19
|
%
|
|
(0.43
|
)%
|
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):
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Revenue (Expense)
|
|
Increase/
(Decrease)
|
|
Interest Revenue (Expense)
|
|
Increase/
(Decrease)
|
|
|
|
Three months ended
June 30,
|
|
|
Nine months ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Segregated cash
|
|
$
|
12
|
|
|
$
|
34
|
|
|
$
|
(22
|
)
|
|
$
|
80
|
|
|
$
|
82
|
|
|
$
|
(2
|
)
|
|
Client margin balances
|
|
179
|
|
|
271
|
|
|
(92
|
)
|
|
623
|
|
|
816
|
|
|
(193
|
)
|
|
Securities lending/borrowing, net
|
|
100
|
|
|
54
|
|
|
46
|
|
|
243
|
|
|
158
|
|
|
85
|
|
|
Other cash and interest-earning investments
|
|
13
|
|
|
26
|
|
|
(13
|
)
|
|
56
|
|
|
71
|
|
|
(15
|
)
|
|
Client credit balances
|
|
(1
|
)
|
|
(2
|
)
|
|
1
|
|
|
(8
|
)
|
|
(7
|
)
|
|
(1
|
)
|
|
Net interest revenue
|
|
$
|
303
|
|
|
$
|
383
|
|
|
$
|
(80
|
)
|
|
$
|
994
|
|
|
$
|
1,120
|
|
|
$
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance
|
|
%
Change
|
|
Average Balance
|
|
%
Change
|
|
|
|
Three months ended
June 30,
|
|
|
Nine months ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Segregated cash
|
|
$
|
19,209
|
|
|
$
|
5,728
|
|
|
235
|
%
|
|
$
|
12,337
|
|
|
$
|
4,800
|
|
|
157
|
%
|
|
Client margin balances
|
|
18,335
|
|
|
20,639
|
|
|
(11
|
)%
|
|
19,711
|
|
|
20,749
|
|
|
(5
|
)%
|
|
Securities borrowing
|
|
931
|
|
|
1,249
|
|
|
(25
|
)%
|
|
1,129
|
|
|
924
|
|
|
22
|
%
|
|
Other cash and interest-earning investments
|
|
6,952
|
|
|
4,989
|
|
|
39
|
%
|
|
6,177
|
|
|
4,744
|
|
|
30
|
%
|
|
Interest-earning assets
|
|
$
|
45,427
|
|
|
$
|
32,605
|
|
|
39
|
%
|
|
$
|
39,354
|
|
|
$
|
31,217
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client credit balances
|
|
$
|
30,979
|
|
|
$
|
18,979
|
|
|
63
|
%
|
|
$
|
25,195
|
|
|
$
|
19,167
|
|
|
31
|
%
|
|
Securities lending
|
|
2,291
|
|
|
3,015
|
|
|
(24
|
)%
|
|
2,487
|
|
|
2,669
|
|
|
(7
|
)%
|
|
Interest-bearing liabilities
|
|
$
|
33,270
|
|
|
$
|
21,994
|
|
|
51
|
%
|
|
$
|
27,682
|
|
|
$
|
21,836
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avg. Annualized Yield (Cost)
|
|
Net Yield
Increase/
(Decrease)
|
|
Avg. Annualized Yield (Cost)
|
|
Net Yield
Increase/
(Decrease)
|
|
|
|
Three months ended
June 30,
|
|
|
Nine months ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Segregated cash
|
|
0.25
|
%
|
|
2.37
|
%
|
|
(2.12
|
)%
|
|
0.85
|
%
|
|
2.25
|
%
|
|
(1.40
|
)%
|
|
Client margin balances
|
|
3.88
|
%
|
|
5.19
|
%
|
|
(1.31
|
)%
|
|
4.15
|
%
|
|
5.19
|
%
|
|
(1.04
|
)%
|
|
Other cash and interest-earning investments
|
|
0.75
|
%
|
|
2.03
|
%
|
|
(1.28
|
)%
|
|
1.19
|
%
|
|
1.97
|
%
|
|
(0.78
|
)%
|
|
Client credit balances
|
|
(0.01
|
)%
|
|
(0.05
|
)%
|
|
0.04
|
%
|
|
(0.04
|
)%
|
|
(0.05
|
)%
|
|
0.01
|
%
|
|
Net interest revenue
|
|
2.65
|
%
|
|
4.65
|
%
|
|
(2.00
|
)%
|
|
3.32
|
%
|
|
4.73
|
%
|
|
(1.41
|
)%
|
The following table sets forth key metrics that we use in analyzing investment product fee revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Increase / (Decrease)
|
|
Nine months ended
June 30,
|
|
Increase / (Decrease)
|
|
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Average fee-based investment balances
|
|
$
|
164,800
|
|
|
$
|
290,607
|
|
|
$
|
(125,807
|
)
|
|
$
|
173,711
|
|
|
$
|
275,945
|
|
|
$
|
(102,234
|
)
|
|
Average annualized yield—investment product fees
|
|
0.31
|
%
|
|
0.21
|
%
|
|
0.10
|
%
|
|
0.32
|
%
|
|
0.21
|
%
|
|
0.11
|
%
|
|
Investment product fee revenue
|
|
$
|
128
|
|
|
$
|
151
|
|
|
$
|
(23
|
)
|
|
$
|
418
|
|
|
$
|
431
|
|
|
$
|
(13
|
)
|
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
June 30,
|
|
%
Change
|
|
Nine months ended
June 30,
|
|
%
Change
|
|
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Total trades (in millions)
|
|
213.95
|
|
|
51.95
|
|
|
312
|
%
|
|
409.04
|
|
|
161.96
|
|
|
153
|
%
|
|
Average client trades per day
|
|
3,395,970
|
|
|
824,600
|
|
|
312
|
%
|
|
2,175,729
|
|
|
870,744
|
|
|
150
|
%
|
|
Trading days
|
|
63.0
|
|
|
63.0
|
|
|
0
|
%
|
|
188.0
|
|
|
186.0
|
|
|
1
|
%
|
|
Average commissions per trade
|
|
$
|
1.46
|
|
|
$
|
6.92
|
|
|
(79
|
)%
|
|
$
|
1.82
|
|
|
$
|
7.01
|
|
|
(74
|
)%
|
|
Order routing revenue (in millions)
|
|
$
|
340
|
|
|
$
|
117
|
|
|
191
|
%
|
|
$
|
695
|
|
|
$
|
365
|
|
|
90
|
%
|
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
June 30,
|
|
%
Change
|
|
Nine months ended
June 30,
|
|
%
Change
|
|
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Funded accounts (beginning of period)
|
|
12,671,000
|
|
|
11,763,000
|
|
|
8
|
%
|
|
11,971,000
|
|
|
11,514,000
|
|
|
4
|
%
|
|
Funded accounts (end of period)
|
|
13,292,000
|
|
|
11,876,000
|
|
|
12
|
%
|
|
13,292,000
|
|
|
11,876,000
|
|
|
12
|
%
|
|
Percentage change during period
|
|
5
|
%
|
|
1
|
%
|
|
|
|
11
|
%
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client assets (beginning of period, in billions)
|
|
$
|
1,231.8
|
|
|
$
|
1,297.1
|
|
|
(5
|
)%
|
|
$
|
1,327.7
|
|
|
$
|
1,297.5
|
|
|
2
|
%
|
|
Client assets (end of period, in billions)
|
|
$
|
1,461.0
|
|
|
$
|
1,306.6
|
|
|
12
|
%
|
|
$
|
1,461.0
|
|
|
$
|
1,306.6
|
|
|
12
|
%
|
|
Percentage change during period
|
|
19
|
%
|
|
1
|
%
|
|
|
|
10
|
%
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net new assets (in billions)
|
|
$
|
32.8
|
|
|
$
|
19.5
|
|
|
68
|
%
|
|
$
|
106.9
|
|
|
$
|
71.0
|
|
|
51
|
%
|
|
Net new assets annualized growth rate
|
|
11
|
%
|
|
6
|
%
|
|
|
|
11
|
%
|
|
7
|
%
|
|
|
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
June 30,
|
|
%
Change
|
|
Nine months ended June 30,
|
|
%
Change
|
|
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposit account fees
|
|
$
|
391
|
|
|
$
|
421
|
|
|
(7
|
)%
|
|
$
|
1,289
|
|
|
$
|
1,280
|
|
|
1
|
%
|
|
Net interest revenue
|
|
303
|
|
|
383
|
|
|
(21
|
)%
|
|
994
|
|
|
1,120
|
|
|
(11
|
)%
|
|
Investment product fees
|
|
128
|
|
|
151
|
|
|
(15
|
)%
|
|
418
|
|
|
431
|
|
|
(3
|
)%
|
|
Total asset-based revenues
|
|
822
|
|
|
955
|
|
|
(14
|
)%
|
|
2,701
|
|
|
2,831
|
|
|
(5
|
)%
|
|
Transaction-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fees and commissions
|
|
652
|
|
|
477
|
|
|
37
|
%
|
|
1,438
|
|
|
1,500
|
|
|
(4
|
)%
|
|
Other revenues
|
|
112
|
|
|
59
|
|
|
90
|
%
|
|
219
|
|
|
126
|
|
|
74
|
%
|
|
Net revenues
|
|
1,586
|
|
|
1,491
|
|
|
6
|
%
|
|
4,358
|
|
|
4,457
|
|
|
(2
|
)%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
366
|
|
|
325
|
|
|
13
|
%
|
|
1,073
|
|
|
982
|
|
|
9
|
%
|
|
Clearing and execution costs
|
|
88
|
|
|
59
|
|
|
49
|
%
|
|
212
|
|
|
161
|
|
|
32
|
%
|
|
Communications
|
|
38
|
|
|
39
|
|
|
(3
|
)%
|
|
114
|
|
|
119
|
|
|
(4
|
)%
|
|
Occupancy and equipment costs
|
|
64
|
|
|
67
|
|
|
(4
|
)%
|
|
195
|
|
|
199
|
|
|
(2
|
)%
|
|
Depreciation and amortization
|
|
43
|
|
|
38
|
|
|
13
|
%
|
|
127
|
|
|
109
|
|
|
17
|
%
|
|
Amortization of acquired intangible assets
|
|
29
|
|
|
31
|
|
|
(6
|
)%
|
|
90
|
|
|
93
|
|
|
(3
|
)%
|
|
Professional services
|
|
86
|
|
|
71
|
|
|
21
|
%
|
|
253
|
|
|
218
|
|
|
16
|
%
|
|
Advertising
|
|
59
|
|
|
80
|
|
|
(26
|
)%
|
|
227
|
|
|
213
|
|
|
7
|
%
|
|
Other
|
|
35
|
|
|
61
|
|
|
(43
|
)%
|
|
137
|
|
|
142
|
|
|
(4
|
)%
|
|
Total operating expenses
|
|
808
|
|
|
771
|
|
|
5
|
%
|
|
2,428
|
|
|
2,236
|
|
|
9
|
%
|
|
Operating income
|
|
778
|
|
|
720
|
|
|
8
|
%
|
|
1,930
|
|
|
2,221
|
|
|
(13
|
)%
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on borrowings
|
|
25
|
|
|
37
|
|
|
(32
|
)%
|
|
88
|
|
|
107
|
|
|
(18
|
)%
|
|
Gain on business-related divestiture
|
|
—
|
|
|
(60
|
)
|
|
(100
|
)%
|
|
—
|
|
|
(60
|
)
|
|
(100
|
)%
|
|
Other income, net
|
|
—
|
|
|
—
|
|
|
N/A
|
|
|
(1
|
)
|
|
(14
|
)
|
|
(93
|
)%
|
|
Total other expense (income), net
|
|
25
|
|
|
(23
|
)
|
|
N/A
|
|
|
87
|
|
|
33
|
|
|
164
|
%
|
|
Pre-tax income
|
|
753
|
|
|
743
|
|
|
1
|
%
|
|
1,843
|
|
|
2,188
|
|
|
(16
|
)%
|
|
Provision for income taxes
|
|
184
|
|
|
188
|
|
|
(2
|
)%
|
|
450
|
|
|
530
|
|
|
(15
|
)%
|
|
Net income
|
|
$
|
569
|
|
|
$
|
555
|
|
|
3
|
%
|
|
$
|
1,393
|
|
|
$
|
1,658
|
|
|
(16
|
)%
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
24.4
|
%
|
|
25.3
|
%
|
|
|
|
24.4
|
%
|
|
24.2
|
%
|
|
|
|
Average debt outstanding
|
|
$
|
4,316
|
|
|
$
|
3,584
|
|
|
20
|
%
|
|
$
|
3,906
|
|
|
$
|
3,471
|
|
|
13
|
%
|
|
Effective interest rate incurred on borrowings
|
|
2.26
|
%
|
|
4.08
|
%
|
|
|
|
2.95
|
%
|
|
4.07
|
%
|
|
|
Three-Month Periods Ended June 30, 2020 and 2019
Net Revenues
Fiscal year 2020 net revenues are currently on-pace to be above the high end of the $4.9 billion and $5.3 billion range.
Asset-based revenues, which consists of bank deposit account fees, net interest revenue and investment product fees, decreased 14% to $822 million, primarily due to a decrease of 84 basis points in net interest margin to 1.39% and a net decrease of 43% in average fee-based investment balances, partially offset by a 38% increase in average spread-based balances and a $46 million increase in net interest revenue from our securities borrowing/lending program. The decrease in net interest margin was primarily due to the Federal Open Market Committee decreasing the target range for the federal funds rate by 50 basis points (to between 1.75% to 2.00%) during the fourth quarter of fiscal year 2019 and by 175 basis points during the first half of fiscal year 2020 (to between 0% to 0.25%). The growth in average spread-based balances is primarily due to our success in attracting net new client assets.
Bank deposit account fees decreased 7% to $391 million, primarily due to the impact of recent decreases in the federal funds rate on the floating-rate investment balances within the bank deposit account portfolio, as described above, and investments being reinvested at lower rates upon maturity. These decreases were partially offset by lower interest rates paid to clients resulting from recent decreases in the federal funds rate.
Net interest revenue decreased 21% to $303 million, primarily due to a decrease of 200 basis points in the average yield earned on interest-earning assets as a result of recent decreases in the federal funds rate and due to an 11% decrease in average client margin balances. These decreases were partially offset by increases in average segregated cash and other cash and interest-earning investment balances and a $46 million increase in net interest revenue from our securities borrowing/lending program.
Investment product fees decreased 15% to $128 million, primarily due to a net decrease of 43% in average fee-based investment balances, partially offset by an increase in average yields earned on certain investment products. Average fee-based investment balances decreased overall as a result of (1) the exclusion of equity and ETF assets from our Institutional Asset Based Pricing program and the discontinuation of our ETF Market Center program subsequent to the reduction of our online exchange-listed stock and ETF commissions to $0 per trade, as described below, and (2) the sale of retirement plan custody and trust assets of TD Ameritrade Trust Company, an indirect wholly-owned subsidiary of the Company ("TDATC"), during the third quarter of the prior fiscal year. The average yield earned on fee-based investment balances increased by 10 basis points, as average fee-based investment balance decreases were primarily in investment products which earn lower yields.
Transaction fees and commissions increased 37% to $652 million, primarily due to an increase in client trading activity, partially offset by lower average commissions per trade. Average client trades per day increased 312% to 3,395,970 for the third quarter of fiscal year 2020 compared to 824,600 for the third quarter of the prior fiscal year. Order routing revenue increased 191% to $340 million due to higher trading volumes. Average commissions per trade decreased to $1.46 from $6.92, primarily due to the reduction of our online exchange-listed stock, ETFs (domestic and Canadian) and option trade commissions from $6.95 to $0 per trade (plus $0.65 per contract and no exercise or assignment fees on option trades) effective October 3, 2019 and the impact of a higher percentage of zero commission equity trades during the third quarter of fiscal year 2020 as compared to the third quarter of the prior fiscal year.
Other revenues increased 90% to $112 million, primarily due to favorable fair market value adjustments to U.S. government debt securities held by our broker-dealer subsidiaries, other fee revenue associated with additional accounts and transaction processing volumes, and increased fees from processing corporate securities reorganizations.
Operating Expenses
Due to elevated levels of growth and client engagement, we anticipate total operating expenses to be slightly above the upper end of the $3.0 billion to $3.1 billion range for fiscal year 2020. In response to elevated levels of growth and client engagement, we are actively recruiting for more than 1,000 new full-time client service positions. The expense impact of these additional employees is expected to be $35 million to $45 million annually.
Employee compensation and benefits increased 13% to $366 million, primarily due to higher incentive-based compensation related to Company and individual performance, including our continued success in attracting net new client assets, and increased wages related to client services. These increases were partially offset by a decrease in the average headcount. The average number of full-time equivalent employees decreased to 8,939 for the third quarter of fiscal year 2020 compared to 9,523 for the third quarter of the prior fiscal year.
Clearing and execution costs increased 49% to $88 million, primarily due to higher client trading volumes.
Depreciation and amortization increased 13% to $43 million, primarily due to recent software and technology infrastructure upgrades.
Professional services increased 21% to $86 million, primarily due to $10 million of costs related to the proposed Merger and increased costs for contract services, technology services and regulatory mailings, partially offset by decreased usage of consulting services.
Advertising expense decreased 26% to $59 million, primarily due to less spending for media advertising and agency fees. 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.
Other operating expenses decreased 43% to $35 million, primarily due to a $20 million net legal settlement during the third quarter of the prior fiscal year and lower costs related to a reduction in travel and off-site meetings due to the COVID-19 pandemic during the third quarter of fiscal year 2020.
Other Expense (Income) and Income Taxes
Interest on borrowings decreased 32% to $25 million, primarily due to a decrease of 182 basis points in the average effective interest rate on our debt, partially offset by a 20% increase in average debt outstanding. The increase in average debt outstanding was primarily due to our use of repurchase agreements during the third quarter of fiscal year 2020. For more information regarding our debt, see "Long-term Debt and Other Borrowings" later in this section.
Gain on business-related divestiture consists of a gain from the sale of TDATC's retirement plan custody and trust assets during the third quarter of the prior fiscal year.
Our effective income tax rate was 24.4% for the third quarter of fiscal year 2020, compared to 25.3% for the third quarter of the prior fiscal year. The effective income tax rate for the third quarter of fiscal year 2020 included a $7 million benefit related to federal income tax matters. This item had a favorable impact on the Company's earnings for the third quarter of fiscal year 2020 of approximately $0.01 per share. There were no significant non-recurring items during the third quarter of the prior fiscal year. We estimate our effective income tax rate to be approximately 26% for the remainder of fiscal year 2020, excluding the effect of any adjustments related to remeasurement or resolution of uncertain tax positions. 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. We also anticipate the potential for increased volatility in our future quarterly effective income tax rate from the accounting for income taxes related to equity-based compensation, which requires the income tax effects of exercised or vested stock-based awards to be treated as discrete items in the period in which they occur.
Nine-Month Periods Ended June 30, 2020 and 2019
Net Revenues
Asset-based revenues decreased 5% to $2.70 billion, primarily due to a decrease of 43 basis points in net interest margin to 1.76% and a net decrease of 37% in average fee-based investment balances, partially offset by an 18% increase in average spread-based balances and an $85 million increase in net interest revenue from our securities borrowing/lending program. The decrease in net interest margin was primarily due to the Federal Open Market Committee decreasing the target range for the federal funds rate by 50 basis points (to between 1.75% to 2.00%) during the fourth quarter of fiscal year 2019 and by 175 basis points during the first half of fiscal year 2020 (to between 0% to 0.25%). The growth in average spread-based balances is primarily due to our success in attracting net new client assets.
Bank deposit account fees increased 1% to $1.29 billion, primarily due to a 16% increase in average client bank deposit account balances and lower interest rates paid to clients resulting from recent decreases in the federal funds rate, as described above. These increases were partially offset by the impact of recent decreases in the federal funds rate on the floating-rate investment balances within the bank deposit account portfolio and investments being reinvested at lower rates upon maturity.
Net interest revenue decreased 11% to $994 million, primarily due to a decrease of 141 basis points in the average yield earned on interest-earning assets as a result of recent decreases in the federal funds rate and a 5% decrease in average client margin balances. These decreases were partially offset by increases in average segregated cash and other cash and interest-earning investment balances and an $85 million increase in net interest revenue from our securities borrowing/lending program.
Investment product fees decreased 3% to $418 million, primarily due to a net decrease of 37% in average fee-based investment balances, partially offset by an increase in average yields earned on certain investment products. Average fee-based investment balances decreased overall as a result of (1) the exclusion of equity and ETF assets from our Institutional Asset Based Pricing program and the discontinuation of our ETF Market Center program subsequent to the reduction of our online exchange-listed stock and ETF commissions to $0 per trade, as described below, and (2) the sale of retirement plan custody and trust assets of TDATC during the third quarter of the prior fiscal year. The average yield earned on fee-based investment balances increased by 11 basis points, as average fee-based balance decreases were primarily in investment products which earn lower yields.
Transaction fees and commissions decreased 4% to $1.44 billion, primarily due to lower average commissions per trade, partially offset by an increase in client trading activity and the effect of two more trading days during the first nine months of fiscal year 2020 compared to the first nine months of the prior fiscal year. Average commissions per trade decreased to $1.82 from $7.01, primarily due to the reduction of our online exchange-listed stock, ETFs (domestic and Canadian) and option trade commissions from $6.95 to $0 per trade (plus $0.65 per contract and no exercise or assignment fees on option trades) effective October 3, 2019 and the impact of a higher percentage of zero commission equity trades during the first nine months of fiscal year 2020 as compared to the first nine months of the prior fiscal year. Average client trades per day increased 150% to 2,175,729 for the first nine months of fiscal year 2020 compared to 870,744 for the first nine months of the prior fiscal year. Order routing revenue increased 90% to $695 million due to higher trading volumes.
Other revenues increased 74% to $219 million, primarily due to favorable fair market value adjustments to U.S. government debt securities held by our broker-dealer subsidiaries, other fee revenue associated with additional accounts and transaction processing volumes, and increased fees from processing corporate securities reorganizations and proxy services.
Operating Expenses
Employee compensation and benefits increased 9% to $1.07 billion, primarily due to higher incentive-based compensation related to Company and individual performance, including our continued success in attracting net new client assets, increased wages related to client services, $12 million related to organizational changes and a $9 million special stipend award to address the residual impacts of working from home during the pandemic. These increases were partially offset by a decrease in the average headcount. The average number of full-time equivalent employees decreased to 9,056 for the first nine months of fiscal year 2020 compared to 9,439 for the first nine months of the prior fiscal year.
Clearing and execution costs increased 32% to $212 million, primarily due to higher client trading volumes.
Depreciation and amortization increased 17% to $127 million, primarily due to recent software and technology infrastructure upgrades.
Professional services increased 16% to $253 million, primarily due to $43 million of costs related to the proposed Merger and increased costs for technology services, partially offset by decreased usage of consulting services and lower costs associated with legal matters.
Other operating expenses decreased 4% to $137 million, primarily due to a $20 million net legal settlement during the third quarter of the prior fiscal year and lower costs related to a reduction in travel and off-site meetings due to the COVID-19 pandemic during the third quarter of fiscal year 2020, mostly offset by increases due to operational and credit losses as a result of market volatility and increased costs associated with higher client trading volumes.
Other Expense (Income) and Income Taxes
Interest on borrowings decreased 18% to $88 million, primarily due to a decrease of 112 basis points in the average effective interest rate on our debt, partially offset by a 13% increase in average debt outstanding. The increase in average debt outstanding was primarily due to our use of repurchase agreements during the second and third quarters of fiscal year 2020. In addition, we issued $600 million of variable-rate Senior Notes due November 1, 2021 and $400 million of 3.75% Senior Notes due April 1, 2024 during the first quarter of the prior fiscal year.
Gain on business-related divestiture consists of a gain from the sale of TDATC's retirement plan custody and trust assets during the third quarter of the prior fiscal year.
Other non-operating income for the first nine months of the prior fiscal year consists of a $14 million favorable legal settlement.
Our effective income tax rate was 24.4% for the first nine months of fiscal year 2020, compared to 24.2% for the first nine months of the prior fiscal year. The effective income tax rate for the first nine months of fiscal year 2020 included $7 million of net favorable adjustments related to state income tax matters and a $7 million benefit related to federal income tax matters. These items had a favorable impact on the Company's earnings for the first nine months of fiscal year 2020 of approximately $0.03 per share. The effective income tax rate for the first nine months of the prior fiscal year included $18 million of favorable adjustments related to state income tax matters and a $3 million income tax benefit resulting from the vesting of equity-based compensation. These items had a favorable impact on our earnings for the first nine months of the prior fiscal year of approximately $0.04 per share.
Liquidity and Capital Resources
We have established liquidity and capital policies to support the successful execution of business strategies to meet operational needs and to satisfy applicable regulatory requirements under both normal and modeled stressed conditions. Our liquidity management policies are designed to mitigate the potential risk that we may be unable to meet current and future cash flow needs. Management of our liquidity is accomplished by (1) daily monitoring of our cash flow needs at TD Ameritrade Holding Corporation
(the "Parent") and its operating subsidiaries, and (2) performing periodic liquidity stress testing related to market and company-specific liquidity stress events in order to identify and plan for liquidity risk exposures.
We have historically financed our liquidity and capital needs primarily through the use of funds generated from subsidiary operations and from short-term borrowings. 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 nine months of fiscal year 2020 were financed primarily from our subsidiaries' earnings, cash on hand and borrowings. We plan to finance both our ordinary capital and liquidity needs during the remainder of fiscal year 2020 primarily from our subsidiaries' earnings, cash on hand and borrowings, as we do not expect the COVID-19 pandemic to have an adverse impact to our results of operations and cash flows in the near term.
Parent Company
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. Dividends from our subsidiaries are an important source of liquidity for the Parent. Some of our subsidiaries are subject to requirements of the Securities and Exchange Commission ("SEC"), the Financial Industry Regulatory Authority, the Commodity Futures Trading Commission ("CFTC"), the National Futures Association 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.
Prior to the proposed Merger, we had planned to return at least 90% of our non-GAAP net income to our stockholders through cash dividends and stock repurchases, pay a quarterly cash dividend of at least $0.31 per share and repurchase a minimum of 15 million shares of our common stock during fiscal year 2020. In accordance with the Merger Agreement, we plan to continue to pay a quarterly cash dividend not to exceed $0.31 per share and cease repurchases of our common stock for the remainder of fiscal year 2020. For more information about our stock repurchases and cash dividends, see "Stock Repurchase Programs" and "Cash Dividends" later in this section.
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. Liquidity 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 $1.55 billion and uncommitted facilities of $600 million under the Parent's intercompany credit agreements are available to its primary broker-dealer and FCM/FDM subsidiaries. For more information about these credit agreements, see "Long-term Debt and Other Borrowings — Intercompany Credit Agreements" later in this section.
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 SEC Rule 15c3-1. For our clearing broker-dealer subsidiary, the minimum net capital level is determined by a calculation described in SEC Rule 15c3-1 that is primarily based on the broker-dealer's "aggregate debits," which primarily consist 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 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 (1) 5% of aggregate debit balances or (2) 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 (1) 110% of its risk-based capital requirement under CFTC Regulation 1.17, (2) 150% of its $1.0 million minimum dollar requirement, or (3) 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 June 30, 2020 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Capital
|
|
Early Warning
Threshold
|
|
Net Capital in
Excess of
Early Warning
Threshold
|
|
TD Ameritrade Clearing, Inc.
|
|
$
|
3,383
|
|
|
$
|
1,281
|
|
|
$
|
2,102
|
|
|
TD Ameritrade, Inc.
|
|
$
|
355
|
|
|
$
|
0.3
|
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Capital
|
|
Early Warning
Threshold
|
|
Adjusted Net
Capital in
Excess of
Early Warning
Threshold
|
|
TD Ameritrade Futures & Forex LLC
|
|
$
|
175
|
|
|
$
|
25
|
|
|
$
|
150
|
|
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 bank 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. government debt securities), U.S. Treasury securities, U.S. government agency mortgage-backed 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 the Depository Trust & Clearing Corporation ("DTCC") and the Options Clearing Corporation ("OCC"), which may fluctuate significantly from time to time based on the nature and size of our clients' trading activity.
The following table sets forth TDAC's cash and investments deposited with clearing organizations for the clearing of client equity and option trades (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
September 30,
2019
|
|
TD Ameritrade Clearing, Inc.
|
|
$
|
991
|
|
|
$
|
703
|
|
Liquidity needs for TDAC relating to client trading and margin borrowing are met primarily through cash balances in client brokerage accounts and through lending and pledging of client margin securities. 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.
Cash balances in client brokerage accounts are summarized in the following table (dollars in billions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
September 30,
2019
|
|
TD Ameritrade Clearing, Inc.
|
|
$
|
35.6
|
|
|
$
|
26.8
|
|
Cash and investments segregated in special reserve bank accounts for the exclusive benefit of clients under SEC Rule 15c3-3 are summarized in the following table (dollars in billions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
September 30,
2019
|
|
TD Ameritrade Clearing, Inc.
|
|
$
|
18.0
|
|
|
$
|
8.4
|
|
For general liquidity needs, TDAC currently maintains two senior unsecured committed revolving credit facilities with an aggregate principal amount of $1.45 billion. TDAC also utilizes secured uncommitted lines of credit for short-term liquidity needs. These facilities are described under "Long-term Debt and Other Borrowings" later in this section.
In addition, we have established intercompany credit agreements under which our primary broker-dealer and FCM/FDM subsidiaries may borrow from the Parent. The Parent's intercompany credit agreements with TDAC provide for a committed revolving loan facility of $1.50 billion and an uncommitted revolving loan facility of $300 million. The intercompany credit agreements are described under "Long-Term Debt and Other Borrowings – Intercompany Credit Agreements" later in this section.
Liquid Assets
Liquid assets is a non-GAAP financial measure that we consider to be an important measure of our liquidity. We include the excess capital of our regulated subsidiaries in the calculation of liquid assets, 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. Liquid assets should be considered as a supplemental measure of liquidity, rather than as a substitute for GAAP cash and cash equivalents.
Liquid assets may be utilized for general corporate purposes and is defined as the sum of (1) corporate cash and cash equivalents, (2) corporate investments, less securities sold under agreements to repurchase, and (3) our regulated subsidiaries' net capital in excess of minimum operational targets established by management. Corporate cash and cash equivalents includes cash and cash equivalents from our investment advisory subsidiaries. Liquid assets 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.
The following table sets forth a reconciliation of cash and cash equivalents, which is the most directly comparable GAAP measure, to liquid assets (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Sept. 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
Cash and cash equivalents (GAAP)
|
|
$
|
2,577
|
|
|
$
|
2,852
|
|
|
$
|
(275
|
)
|
|
Less: Non-corporate cash and cash equivalents
|
|
(1,857
|
)
|
|
(2,478
|
)
|
|
621
|
|
|
Corporate cash and cash equivalents
|
|
720
|
|
|
374
|
|
|
346
|
|
|
Corporate investments
|
|
1,798
|
|
|
1,668
|
|
|
130
|
|
|
Excess regulatory net capital over management targets
|
|
1,053
|
|
|
859
|
|
|
194
|
|
|
Liquid assets (non-GAAP)
|
|
$
|
3,571
|
|
|
$
|
2,901
|
|
|
$
|
670
|
|
The changes in liquid assets are summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
Liquid assets as of September 30, 2019
|
|
$
|
2,901
|
|
|
Plus: EBITDA(1)
|
|
2,148
|
|
|
Net change in cash collateral received from interest rate swap counterparties
|
|
128
|
|
|
Less: Payment of cash dividends
|
|
(503
|
)
|
|
Other changes in working capital and regulatory net capital
|
|
(487
|
)
|
|
Purchase of property and equipment
|
|
(187
|
)
|
|
Income taxes paid
|
|
(164
|
)
|
|
Purchase of treasury stock
|
|
(143
|
)
|
|
Interest paid
|
|
(101
|
)
|
|
Purchase of treasury stock for income tax withholding on stock-based compensation
|
|
(21
|
)
|
|
Liquid assets as of June 30, 2020
|
|
$
|
3,571
|
|
|
|
|
|
(1)
|
See "Financial Performance Metrics" earlier in this section for a description of EBITDA.
|
Long-term Debt and Other Borrowings
The following is a summary of our long-term debt and other borrowings. For additional details, see Note 7 – Long-term Debt and Other Borrowings under Item 1, Financial Statements – Notes to Condensed Consolidated Financial Statements.
Senior Notes — As of June 30, 2020, we had $3.55 billion aggregate principal amount of unsecured Senior Notes (together, the "Senior Notes"). Key information about the Senior Notes outstanding is summarized in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Date Issued
|
|
Maturity Date
|
|
Aggregate Principal
|
|
Interest Rate
|
|
2021 Notes
|
|
October 30, 2018
|
|
November 1, 2021
|
|
$600
|
|
Variable
|
|
2022 Notes
|
|
March 4, 2015
|
|
April 1, 2022
|
|
$750
|
|
2.950%
|
|
2024 Notes
|
|
October 30, 2018
|
|
April 1, 2024
|
|
$400
|
|
3.750%
|
|
2025 Notes
|
|
October 17, 2014
|
|
April 1, 2025
|
|
$500
|
|
3.625%
|
|
2027 Notes
|
|
April 27, 2017
|
|
April 1, 2027
|
|
$800
|
|
3.300%
|
|
2029 Notes
|
|
August 13, 2019
|
|
October 1, 2029
|
|
$500
|
|
2.750%
|
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 vast majority of this exposure, we entered into fixed-for-variable interest rate swaps on each of the 2022 Notes, 2025 Notes, 2027 Notes and 2029 Notes (together, the "Hedged Senior Notes"). Each fixed-for-variable interest rate swap has a notional amount and a maturity date matching the aggregate principal amount and maturity date, respectively, for each of the respective Hedged Senior Notes.
The interest rate swaps effectively change the fixed-rate interest on the Hedged Senior 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 Hedged Senior Notes, and make quarterly variable-rate interest payments based on three-month LIBOR plus (1) 0.9486% for the swap on the 2022 Notes, (2) 1.1022% for the swap on the 2025 Notes, (3) 1.0340% for the swap on the 2027 Notes and (4) 1.2000% for the swap on the 2029 Notes. As of June 30, 2020, the weighted average effective interest rate on the aggregate principal balance of the Senior Notes was 2.40%.
Lines of Credit — TDAC utilizes secured uncommitted lines of credit for short-term liquidity. Under these secured uncommitted lines, TDAC borrows on either a demand or short-term basis from two unaffiliated banks and pledges client margin securities as collateral. Advances under the secured uncommitted lines are dependent on TDAC having acceptable collateral as determined by each secured uncommitted credit agreement. At June 30, 2020, the terms of the secured uncommitted credit agreements do not specify borrowing limits. The availability of TDAC's secured uncommitted lines is subject to approval by the individual banks each time an advance is requested and may be denied. There were no borrowings outstanding under the secured uncommitted lines of credit as of June 30, 2020.
Securities Sold Under Agreements to Repurchase (repurchase agreements) — Under repurchase agreements, we receive cash from the counterparty and provide U.S. government debt securities as collateral. Our repurchase agreements generally mature between seven and 90 days following the transaction date and are accounted for as secured borrowings. There were no borrowings outstanding under repurchase agreements as of June 30, 2020.
TD Ameritrade Holding Corporation Senior Revolving Credit Facility — The Parent has access to a senior unsecured committed revolving credit facility in the aggregate principal amount of $300 million (the "Parent Revolving Facility"). The maturity date of the Parent Revolving Facility is April 21, 2022. There were no borrowings outstanding under the Parent Revolving Facility as of June 30, 2020. On August 3, 2020, the Parent entered into an amendment to its Parent Revolving Facility. For information regarding this amendment, see Note 16, Subsequent Event under Item 1, Financial Statements – Notes to Condensed Consolidated Financial Statements.
TD Ameritrade Clearing, Inc. Senior Revolving Credit Facilities — TDAC has access to two senior unsecured committed revolving credit facilities with an aggregate principal amount of $1.45 billion, consisting of a $600 million (the "$600 Million Revolving Facility") and an $850 million (the "$850 Million Revolving Facility") senior revolving facility. On April 21, 2020, TDAC entered into an amendment to the $850 Million Revolving Facility, which provides for a senior unsecured revolving credit facility in the aggregate principal amount of $850 million that matures on April 20, 2021. The maturity date of the $600 Million Revolving Facility is April 21, 2022. There were no borrowings outstanding under the TDAC senior revolving facilities as of June 30, 2020. On August 3, 2020, TDAC entered into an amendment to its $600 Million Revolving Facility. For information regarding this amendment, see Note 16, Subsequent Event 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. Key information about the committed and/or uncommitted lines of credit is summarized in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Borrower Subsidiary
|
|
Committed Facility
|
|
Uncommitted Facility(1)
|
|
Termination Date
|
|
TD Ameritrade Clearing, Inc.
|
|
$1,500
|
|
$300
|
|
March 1, 2022
|
|
TD Ameritrade, Inc.
|
|
N/A
|
|
$300
|
|
March 1, 2022
|
|
TD Ameritrade Futures & Forex LLC
|
|
$45
|
|
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 the intercompany credit agreements as of June 30, 2020.
Stock Repurchase Programs
On November 20, 2015, our board of directors authorized the repurchase of up to 30 million shares of our common stock. During the first quarter of fiscal year 2020, we completed the November 20, 2015 stock repurchase authorization by repurchasing the
remaining 1.5 million shares at a weighted average purchase price of $35.23 per share. From the inception of this stock repurchase authorization through its completion in October 2019, we have repurchased a total of 30 million shares at a weighted average purchase price of $47.58 per share.
On September 11, 2019, our board of directors authorized the repurchase of up to an additional 30 million shares of our common stock. During the first quarter of fiscal year 2020, we repurchased approximately 2.2 million shares at a weighted average purchase price of $40.26 per share. As of June 30, 2020, we had approximately 27.8 million shares remaining on the stock repurchase authorization. In accordance with the Merger Agreement, we have suspended repurchases under our current stock repurchase authorization.
Cash Dividends
We declared a $0.31 per share cash dividend on our common stock during each quarter of fiscal year 2020. We paid $503 million in cash dividends during the first nine months of fiscal year 2020. We will pay the fourth quarter dividend on August 21, 2020 to all holders of record of our common stock as of August 7, 2020.
Contractual Obligations
There have been no material changes in our contractual obligations outside the ordinary course of business since September 30, 2019.
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" in Note 9 – Commitments and Contingencies and "Insured Deposit Account Agreement" in Note 15 – Related Party Transactions. Bank deposit account fees, generated from the IDA agreement and other sweep arrangements with non-affiliated third-party depository financial institutions, account for a significant percentage of our net revenues (30% of our net revenues for the first nine months of fiscal year 2020). These sweep arrangements enable our clients to invest in FDIC-insured (up to specified limits) deposit products 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 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/news-and-stories 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 www.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 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 client margin lending and leverage risk 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 may 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, and/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 bank deposit account arrangements 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 us earning a larger net interest spread. Conversely, a falling interest rate environment generally results in us earning a smaller net interest spread.
Our most prevalent form of interest rate risk is referred to as "gap" risk. Gap risk occurs when the interest rates we earn on assets change at a different frequency or amount than the interest rates we pay on liabilities. For example, in a 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 interest-earning assets with that of interest-bearing liabilities. As of June 30, 2020, our consolidated duration was 1.8 years. We have an Asset/Liability Committee serve 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 bank deposit account arrangements. 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 client bank deposit account balances 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 June 30, 2020 indicate that a gradual 1% (100 basis points) increase in interest rates over a 12-month period would result in a range of approximately $270 million to $430 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 $95 million to $110 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 are at historically low levels, including the federal funds target rate, which is currently at a range of zero to 0.25%.
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 June 30, 2020. Management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of June 30, 2020.
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.