UNITED STATES SECURITIES AND EXCHANGE COMMISSION | ||||||||
Washington, D.C. 20549 | ||||||||
FORM 10-K | ||||||||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the fiscal year ended September 30, 2017 | ||||||||
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the transition period from to | ||||||||
Commission file number: 1-35509 | ||||||||
TD Ameritrade Holding Corporation | ||||||||
(Exact name of registrant as specified in its charter) | ||||||||
Delaware | 82-0543156 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
200 South 108th Avenue, Omaha, Nebraska 68154 (Address of principal executive offices) (Zip Code) (402) 331-7856 (Registrant's telephone number, including area code) | ||||||||
Securities registered pursuant to Section 12(b) of the Act: | ||||||||
Title of each class | Name of each exchange on which registered | |||||||
Common Stock — $0.01 par value | The Nasdaq Stock Market LLC Nasdaq Global Select Market | |||||||
Securities registered pursuant to Section 12(g) of the Act: | ||||||||
(Title of class) | ||||||||
None | ||||||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨ | ||||||||
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ | ||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨ | ||||||||
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨ | ||||||||
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ | ||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. | ||||||||
Large accelerated filer þ | Accelerated filer ¨ | Smaller reporting company ¨ | ||||||
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Emerging growth company ¨ | |||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ | ||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ | ||||||||
The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $22.0 billion computed by reference to the closing sale price of the stock on the Nasdaq Global Select Market on March 31, 2017, the last trading day of the registrant's most recently completed second fiscal quarter. | ||||||||
The number of shares of common stock outstanding as of November 2, 2017 was 566,939,277 shares. | ||||||||
DOCUMENTS INCORPORATED BY REFERENCE | ||||||||
Definitive Proxy Statement relating to the registrant's 2018 Annual Meeting of Stockholders to be filed hereafter (incorporated into Part III hereof). | ||||||||
TD AMERITRADE HOLDING CORPORATION
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Unless otherwise indicated, references to "we," "us," "our," "Company," or "TD Ameritrade" mean TD Ameritrade Holding Corporation and its subsidiaries, and references to "fiscal" mean the Company's fiscal year ended September 30. References to the "parent company" mean TD Ameritrade Holding Corporation.
PART I
Item 1. Business
Form of Organization
The Company was established in 1971 as a local investment banking firm and began operations as a retail discount securities brokerage firm in 1975. The parent company is a Delaware corporation.
Operations
We are a leading provider of securities brokerage services and related technology-based financial services to retail investors, traders and independent registered investment advisors ("RIAs"). We provide our services predominantly through the Internet, a national branch network and relationships with RIAs. We believe that our services appeal to a broad market of independent, value-conscious retail investors, traders and RIAs. We use our platform to offer brokerage services to retail investors under a simple, low-cost commission structure and brokerage custodial services to RIAs.
We have been an innovator in electronic brokerage services since entering the retail securities brokerage business in 1975. We believe that we were the first brokerage firm to offer the following products and services to retail clients: touch-tone trading; trading over the Internet; unlimited, streaming, free real-time quotes; extended trading hours; direct access to market destinations; and commitment on the speed of order execution. Over the years the number of brokerage accounts, RIA relationships, average daily trading volume and total assets in client accounts have substantially increased. We have also built, and continue to invest in, a proprietary trade processing platform that is both cost-efficient and highly scalable, significantly lowering our operating costs per trade. In addition, we have made significant investments in building the TD Ameritrade brand.
Strategy
We intend to capitalize on the growth and consolidation of the retail brokerage industry in the United States and leverage our low-cost infrastructure to grow our market share and profitability. Our long-term growth strategy is to increase our market share of total assets in client accounts, while maintaining a leadership position in client trading, by providing superior offerings to long-term investors, RIAs and active traders. We strive to enhance the client experience by providing asset management products and services, enhanced trading tools and capabilities and a superior, proprietary, single-platform system to support RIAs. The key elements of our strategy are as follows:
• | Focus on brokerage services. We continue to focus on attracting active traders, long-term investors and RIAs to our brokerage services. This focused strategy is designed to enable us to maintain our low operating cost structure while offering our clients outstanding products and services. We primarily route for execution of client trades on an agency, rather than a principal, basis. We maintain only a small inventory of fixed income securities to meet client requirements. |
• | Provide a comprehensive long-term investor solution. We continue to expand our suite of diversified investment products and services to best serve investors' needs. We help clients make investment decisions by providing simple-to-use investment tools, guidance, education and objective third-party research. |
• | Maintain industry leadership and market share with active traders. We help active traders make better-informed investment decisions by offering fast access to markets, insight into market trends and innovative tools such as strategy back-testing and comprehensive options research and trading capabilities. |
• | Continue to be a leader in the RIA industry. We provide RIAs with comprehensive brokerage and custody services supported by our robust integrated technology platform, customized personal service and practice management solutions. |
• | Leverage our infrastructure to add incremental revenue. Through our proprietary technology, we are able to provide a robust online experience for long-term investors and active traders. Our low-cost, scalable |
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systems provide speed, reliability and quality trade execution services for clients. The scalable capacity of our trading system allows us to add a significant number of transactions while incurring minimal additional fixed costs.
• | Continue to be a low-cost provider of quality services. We achieve low operating costs per trade by creating economies of scale, utilizing our proprietary transaction-processing systems, continuing to automate processes and locating much of our operations in low-cost geographical areas. This low fixed-cost infrastructure provides us with significant financial flexibility. In addition, our bank deposit account arrangements with The Toronto-Dominion Bank ("TD") and other third-party financial institutions enable our clients to invest in an FDIC-insured deposit product without the need for the Company to establish the significant levels of capital that would be required to maintain our own bank charter. |
• | Continue to differentiate our offerings through innovative technologies and service enhancements. We have been an innovator in our industry for over 40 years. We continually strive to provide our clients with the ability to customize their trading experience. We provide our clients greater choice by offering features and functionality to meet their specific needs. |
• | Leverage the TD Ameritrade brand. We believe that we have a superior brand identity and that our advertising has established TD Ameritrade as a leading brand in the retail brokerage market. |
• | Continue to evaluate opportunities for growth through acquisitions. When evaluating potential acquisitions, we look for transactions that will give us operational leverage, technological leverage, increased market share or other strategic opportunities. On September 18, 2017, we completed our acquisition of the brokerage business of Scottrade Financial Services, Inc. ("Scottrade"), a Delaware corporation. The transaction combined highly complementary franchises and added significant scale to our retail business with the addition of approximately three million funded client accounts, extended our leadership in trading, and expanded the size of our branch network. See "Acquisition of Scottrade Financial Services, Inc." below for further information about the acquisition of Scottrade. |
Acquisition of Scottrade Financial Services, Inc.
On September 18, 2017, we completed our previously announced acquisition of Scottrade pursuant to an Agreement and Plan of Merger dated October 24, 2016 (the "Merger Agreement"), among the Company, Rodger O. Riney, as Voting Trustee of the Rodger O. Riney Family Voting Trust U/A/D 12/31/2012 (the "Riney Stockholder"), and Alto Acquisition Corp. (the "Merger Subsidiary"), a wholly-owned subsidiary of the Company. Pursuant to the terms of the Merger Agreement, the Merger Subsidiary merged with and into Scottrade (the "Acquisition"), with Scottrade surviving as our wholly-owned subsidiary.
Immediately prior to the closing of the Acquisition, pursuant to the terms and conditions set forth in a separate Agreement and Plan of Merger, TD Bank, N.A., a wholly-owned subsidiary of TD, acquired Scottrade Bank, which was a wholly-owned subsidiary of Scottrade, from Scottrade (the "Bank Merger") for approximately $1.38 billion in cash, subject to post-closing adjustments (the "Bank Merger Consideration"). Immediately prior to the closing of the Acquisition, we also issued 11,074,197 shares of our common stock to TD at a price of $36.12 per share, or approximately $400 million, pursuant to a subscription agreement dated October 24, 2016 between the Company and TD and in satisfaction of certain preemptive stock purchase rights of TD as set forth in the Stockholders Agreement between the Company and TD dated as of June 22, 2005, as amended. Immediately following the Bank Merger, the Acquisition was completed. The aggregate consideration paid by us for all of the outstanding capital stock of Scottrade consisted of 27,685,493 shares of our common stock and $3.07 billion in cash, subject to post-closing adjustments (the "Cash Consideration"). The Cash Consideration was funded with the Bank Merger Consideration paid by TD Bank, N.A. to Scottrade, the proceeds received from our issuance of the 3.300% Senior Notes on April 27, 2017, cash on hand and cash proceeds from the sale of our common stock to TD, as described above. At the closing of the Acquisition, 1,736,815 shares of our common stock otherwise payable to the Riney Stockholder were deposited into a third-party custodian account (the “Escrow Account”) pursuant to an escrow agreement to secure certain indemnification obligations of the Riney Stockholder under the Merger Agreement.
In connection with the closing of the Acquisition, we also entered into a registration rights agreement with TD, the Riney Stockholder and the other stockholders described therein (the "Ricketts Stockholders") providing for certain customary registration rights with respect to their shares of our common stock. With respect to TD and the Ricketts
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Stockholders, this registration rights agreement supersedes and replaces the Amended and Restated Registration Rights Agreement, dated as of June 22, 2005, by and among the Company, TD and the Ricketts Stockholders.
In connection with the closing of the Acquisition, we entered into a stockholder agreement with the Riney Stockholder (the "Riney Stockholders Agreement"), which contains various provisions relating to stock ownership, voting, election of directors and other matters.
Client Offerings
We deliver products and services aimed at providing a comprehensive, personalized experience for retail and active traders, long-term investors and independent RIAs. Our client offerings are described below:
Trading and Investing Platforms
• | tdameritrade.com Web Platform is our core offering for self-directed retail investors. We offer a broad array of tools and services, including alerts, screeners, conditional orders and free fundamental third-party research. The Dock is an ever-present dashboard of streaming content that makes it easy for clients to stay on top of current market activities relevant to their investment positions. Modules such as streaming news, stock events, and account balances ensure clients stay well informed. Free planning tools are also provided, such as Portfolio Planner to efficiently create a bundle of securities to trade, invest and rebalance and Retirement Planner to assess retirement needs. Social Signals is a one of a kind trading resource that pulls insights from Twitter and compiles them in one place. |
• | Trade Architect® is a powerful and intuitive web-based platform that helps retail investors and active traders identify opportunities and stay informed. It includes advanced features such as complex options, Level II equity and option quotes, streaming news from CNBC, free research reports from sources such as Credit Suisse, Market Edge, TheStreet.com, CFRA (formerly S&P Capital IQ) and Ford Equality, visual position profit/loss analysis and Trade Finder, a tool that simplifies the process of identifying and making option trades based on the client's strategy. |
• | thinkorswim® is a downloadable desktop platform designed for advanced traders, featuring easy-to-use interfaces, elite-level trading and analytical tools, and fast and efficient order routing for complex trading strategies. thinkorswim clients trade a broad range of products including stock and stock options, index options, futures and futures options, foreign exchange and exchange-traded funds ("ETFs"). |
• | TD Ameritrade Mobile allows on-the-go investors and traders to trade and monitor accounts from web-enabled mobile devices with features such as alerts, research, streaming market commentary and the ability to deposit a check directly from a smartphone or tablet. With a mobile device, a client can snap a picture of a bar code on any item, and if the company is publicly traded, Snapstock™ can return the company name, ticker symbol and a stock quote along with company-related news and charts. Access is available through the TD Ameritrade Mobile App, the more advanced TD Ameritrade Mobile Trader App or via a mobile browser at the TD Ameritrade Mobile Site. |
• | TD Ameritrade Institutional is a leading provider of comprehensive brokerage and custody services to more than 6,000 independent RIAs and their clients. Our advanced technology platform, coupled with personal support from our dedicated service teams, allows RIAs to grow and manage their practices more effectively and efficiently while optimizing time with clients. Additionally, TD Ameritrade Institutional provides a robust offering of products, programs and services. These services are all designed to help advisors build their businesses and do the best possible job they can to help their clients with their financial goals. |
Other Offerings
• | TD Ameritrade Education offers a comprehensive suite of investor education for stocks, options, income investing and portfolio management. TD Ameritrade Education offers free education to our clients primarily built around an investing method that is designed to teach both experienced and beginning investors how to approach the selection process for investment securities and actively manage their investment portfolios. Course offerings are generally combined with web-based tools and ongoing service and support and are offered in a variety of learning formats. |
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• | TD Ameritrade's Goal Planning sessions are a complimentary service where clients meet with an investment consultant and develop an investment plan, based on a variety of factors including personal goals, time to achieve goal, risk tolerance, assets and net worth. Clients learn how likely they are to achieve their goals and how hypothetical changes to their decisions could influence their plan. |
• | Essential Portfolios® is an automated, low-cost investing solution that uses advanced technology to help long-term investors pursue their financial goals, with access to five non-proprietary goal-oriented ETF portfolios. Our subsidiary, TD Ameritrade Investment Management, LLC ("TDAIM"), recommends an investment portfolio based on an investor's objective, time horizon and risk tolerance. |
• | Selective Portfolios® (formerly known as Amerivest®) is an advisory service that develops portfolios of ETFs or mutual funds, along with cash and cash alternatives, to help long-term investors pursue their financial goals. Our subsidiary, TDAIM, recommends an investment portfolio based on an investor's objective, time horizon and risk tolerance. |
• | AdvisorDirect® is a national referral service for investors who wish to engage the services of an independent RIA. AdvisorDirect refers interested investors to one or more independent RIAs that are unaffiliated with TD Ameritrade and that offer investment management and/or financial planning services to investors served by TD Ameritrade's branch offices. We strive to have all RIAs participating in AdvisorDirect meet or exceed TD Ameritrade's professional eligibility requirements. |
• | TD Ameritrade Network is our new broadcast network, offering real-time market news, insights and investor education. The network's programming features experienced journalists and financial experts. During fiscal 2018, we expect to have six hours of live programming available daily. |
• | TD Ameritrade Corporate Services provides self-directed brokerage services to employees of corporations, either directly in partnership with the employer or through joint marketing relationships with third-party administrators, such as 401(k) providers and employee benefit consultants. Trust and custody services are also offered to a wide range of plan types through our TD Ameritrade Trust Company subsidiary. |
• | TD Ameritrade Singapore Pte. Ltd. enables retail investors in Singapore to trade the U.S. markets by providing access to trading technology, low commission rates, free education and customer service. Clients can trade stocks, ETFs, options, futures, and options on futures using the thinkorswim trading platform and thinkorswim Mobile. TD Ameritrade Singapore Pte. Ltd. is licensed by the Monetary Authority of Singapore. |
Products and Services
We strive to provide the best value of retail brokerage services to our clients. The products and services available to our clients include:
• | Common and preferred stock. Clients can purchase common and preferred stocks, American Depository Receipts and closed-end funds traded on any United States exchange or quotation system. |
• | Exchange-Traded Funds. ETFs are baskets of securities (stocks or bonds) that typically track recognized indices. They are similar to mutual funds, except that they trade on an exchange like stocks. Our ETF Market Center offers our clients nearly 300 commission-free ETFs from leading providers with Morningstar Associates, LLC research and ratings and diverse investment strategies. Trades in these ETFs are commission-free, provided the funds are held for 30 days or longer. Our website includes an ETF screener, along with independent research and commentary, to assist investors in their decision-making. |
• | Options. We offer a full range of option trades, including complex and multi-leg option strategies. |
• | Futures. We offer futures trades, as well as options on futures, in a wide variety of commodities, stock indices and currencies. |
• | Foreign exchange. We offer access to trading in over 75 different currency pairs. |
• | Mutual funds. Clients can compare and select from a portfolio of over 13,000 mutual funds from leading fund families, including a broad range of no-transaction-fee ("NTF") funds. Clients can also easily exchange funds within the same mutual fund family. |
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• | Fixed income. We offer our clients access to a variety of Treasury, corporate, government agency and municipal bonds, as well as certificates of deposit. |
• | New and secondary issue securities. We offer primary and secondary offerings of fixed income securities, closed-end funds, common stock and preferred stock. |
• | Margin lending. We extend credit to clients that maintain margin accounts. Portfolio margin, which bases margin requirements on the net exposure of all positions in an account rather than just on individual positions, is also available for accounts with net liquidating values of at least $125,000. |
• | Cash management services. Through third-party banking relationships, we offer FDIC-insured deposit accounts and money market mutual funds to our clients as cash sweep alternatives. Through these relationships, we also offer free standard checking, free online bill pay and ATM services with unlimited ATM fee reimbursements at any machine nationwide. |
• | Annuities. We offer access to a full range of competitively priced fixed and variable annuities provided by highly-rated insurance carriers. |
We earn commissions and transaction fees on client trades in common and preferred stock, ETFs, closed-end funds, options, futures, foreign exchange, mutual funds and fixed income securities. Order routing revenue generated from revenue-sharing arrangements with market destinations is a component of commissions and transaction fees. Margin lending and the related securities lending business generate net interest revenue. Cash management services and fee-based mutual funds generate bank deposit account fees and investment product fee revenues. Other revenues include revenue from education services, miscellaneous securities brokerage fees and annuities. The following table presents the percentage of net revenues contributed by each class of similar services during the last three fiscal years:
Percentage of Net Revenues Fiscal Year Ended September 30, | |||||||||
Class of Service | 2017 | 2016 | 2015 | ||||||
Commissions and transaction fees | 37.6 | % | 41.2 | % | 43.1 | % | |||
Bank deposit account fees | 30.1 | % | 27.8 | % | 25.8 | % | |||
Net interest revenue | 18.8 | % | 17.9 | % | 19.2 | % | |||
Investment product fees | 11.5 | % | 11.3 | % | 10.3 | % | |||
Other revenues | 2.0 | % | 1.8 | % | 1.6 | % | |||
Net revenues | 100.0 | % | 100.0 | % | 100.0 | % | |||
We provide our clients with an array of channels to access our products and services. These include the Internet, our network of retail branches, mobile trading applications, interactive voice response and registered representatives via telephone.
Client Service and Support
We strive to provide the best client service in the industry as measured by: (1) speed of response time to telephone calls, (2) turnaround time responding to client inquiries and (3) client satisfaction with the account relationship.
We endeavor to optimize our client service by:
• | Ensuring prompt response to client service calls through adequate staffing with properly trained and motivated personnel in our client service departments, a majority of whom hold the Series 7 license; |
• | Tailoring client service to the particular expectations of the clients of each of our client segments; and |
• | Expanding our use of technology to provide automated responses to the most typical inquiries generated in the course of clients' securities trading, investing and related activities. |
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We provide access to client service and support through the following means:
• | Websites. Our websites provide basic information on how to use our services, as well as an in-depth education center that includes a selection of online investing courses. "Ted," our Virtual Investment Consultant, is a web tool that allows retail clients to interact with a virtual representative to ask about our products, tools and services. |
• | Branches. We offer a nationwide network of nearly 600 retail branches, which includes the addition of approximately 500 retail branches from the acquisition of Scottrade. After the completion of the Scottrade integration, we plan to have a network of approximately 360 branch offices, located in 48 states and the District of Columbia. |
• | Email. Clients are encouraged to use email to contact our client service representatives. Our operating standards require a response within 24 hours of receipt of the email; however, we strive to respond within four hours after receiving the original message. |
• | Telephone. For clients who choose to call or whose inquiries necessitate calling one of our client service representatives, we provide a toll-free number that connects to advanced call handling systems. These systems provide automated answering and directing of calls to the proper department. Our systems also allow linkage between caller identification and the client database to give the client service representative immediate access to the client's account data when the call is received. Client service representatives are available 24 hours a day, seven days a week. |
• | TTY services for the hearing impaired. To ensure effective communication in connection with the provision of financial services, we provide qualified sign language and oral interpreters and/or other auxiliary aids and services free of charge for the hearing impaired. |
• | Mobile app. Support on our TD Ameritrade Mobile Trader App allows clients to text with a trading specialist for immediate answers to their questions or share their screen for help with navigating the app. |
Technology and Information Systems
Our technological capabilities and systems are central to our business and are critical to our goal of providing the best execution at the best value to our clients. Our operations require reliable, scalable systems that can handle complex financial transactions for our clients with speed and accuracy. We maintain sophisticated and proprietary technology that automates traditionally labor-intensive securities transactions. Our ability to effectively leverage and adopt new technology to improve our services is a key component of our success.
We continue to make investments in technology and information systems. We have spent a significant amount of resources to increase capacity and improve speed, reliability and security. To provide for system continuity during potential power outages, we have equipped our data centers with uninterruptible power supply units and back-up generators.
Advertising and Marketing
We intend to continue to grow and increase our market share by advertising online, on television, in print, on our own websites, and utilizing various forms of social media. We invest heavily in advertising programs designed to bring greater brand recognition to our services. We intend to continue to aggressively advertise our services. From time to time, we may choose to increase our advertising to target specific groups of investors or to increase or decrease advertising in response to market conditions.
Advertising for retail clients is generally conducted through digital, search and social media, financial news networks and other television and cable networks. We also place print advertisements in a broad range of business publications. Advertising for institutional clients is significantly less than for retail clients and is generally conducted through highly-targeted media.
To monitor the success of our various marketing efforts, we utilize a media mix model that uses robust data sets to analyze the return on investment of our marketing channels. This model also supports decisions on spending levels and helps us determine the point at which we begin to experience diminishing returns. Additionally, our advanced
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data and analytics capabilities enable a more targeted, personalized experience for prospective and existing clients. How we share client information is disclosed in our privacy statement.
All of our securities brokerage-related communications with the public are regulated by the Financial Industry Regulatory Authority ("FINRA"). All of our futures and foreign exchange brokerage-related communications with the public are regulated by the National Futures Association ("NFA").
Clearing Operations
Our subsidiaries, TD Ameritrade Clearing, Inc. ("TDAC") and Scottrade, Inc., provide clearing and execution services for our securities brokerage business. Clearing services include the confirmation, receipt, settlement, delivery and record-keeping functions involved in processing securities transactions. Our clearing broker-dealer subsidiaries provide the following back office functions:
• | Maintaining client accounts; |
• | Extending credit in a margin account to the client; |
• | Engaging in securities lending and borrowing transactions; |
• | Settling securities transactions with clearinghouses such as The Depository Trust & Clearing Corporation and The Options Clearing Corporation; |
• | Settling commissions and transaction fees; |
• | Preparing client trade confirmations and statements; |
• | Performing designated cashiering functions, including the delivery and receipt of funds and securities to or from the client; |
• | Possession, control and safeguarding of funds and securities in client accounts; |
• | Processing cash sweep transactions to and from bank deposit accounts and money market mutual funds; |
• | Transmitting tax accounting information to the client and to the applicable tax authority; and |
• | Forwarding prospectuses, proxy materials and other shareholder information to clients. |
We contract with external providers for futures clearing. We also contract with an external provider to facilitate foreign exchange trading for our clients.
We currently expect to complete the integration of Scottrade, Inc. in the second quarter of fiscal 2018, at which time the clearing operations for Scottrade, Inc. will cease.
Competition
We believe that the principal determinants of success in the retail brokerage market are brand recognition, size of client base and client assets, ability to attract new clients and client assets, client trading activity, efficiency of operations, technology infrastructure and advancements and access to financial resources. We also believe that the principal factors considered by clients in choosing a brokerage firm are reputation, client service quality, price, convenience, product offerings, quality of trade execution, platform capabilities, innovation and overall value. Based on our experience, focus group research and the success we have enjoyed to date, we believe that we presently compete successfully in each of these categories.
The market for brokerage services, particularly electronic brokerage services, continues to evolve and is highly competitive. We experience significant competition and expect this competitive environment to continue. We encounter direct competition from numerous other brokerage firms, many of which provide online brokerage services. These competitors include E*TRADE Financial Corporation, The Charles Schwab Corporation and Fidelity Investments. Scottrade was previously a competitor, but we acquired Scottrade on September 18, 2017. For further information about the Scottrade acquisition, see "Acquisition of Scottrade Financial Services, Inc." above. We also encounter competition from established full-commission brokerage firms such as Merrill Lynch and Morgan Stanley, as well as financial institutions, mutual fund sponsors, online wealth management services and other organizations, some of which provide online brokerage services.
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Regulation
The securities, futures and foreign exchange industries are subject to extensive regulation under federal and state law. Broker-dealers are required to register with the U.S. Securities and Exchange Commission ("SEC") and to be members of FINRA. Our futures commission merchant ("FCM") and forex dealer member ("FDM") subsidiary, TD Ameritrade Futures & Forex LLC ("TDAFF"), is registered with the Commodity Futures Trading Commission ("CFTC") and is a member of, and the corresponding services functions are regulated by, the NFA. Our broker-dealer subsidiaries are subject to the requirements of the Securities Exchange Act of 1934 (the "Exchange Act") relating to broker-dealers, including, among other things, minimum net capital requirements under the SEC Uniform Net Capital Rule (Rule 15c3-1), best execution requirements for client trades under SEC guidelines and FINRA rules and segregation of client funds under the SEC Customer Protection Rule (Rule 15c3-3), administered by the SEC and FINRA. TDAFF is subject to regulations under the Commodity Exchange Act, administered by the CFTC and NFA, including CFTC Regulations 1.17 and 5.7, which require the maintenance of minimum adjusted net capital, and CFTC Regulation 1.20, which requires segregation of client funds.
Net capital rules are designed to protect clients, counterparties and creditors by requiring a broker-dealer, an FCM or an FDM to have sufficient liquid resources available to satisfy its financial obligations. Net capital is a measure of a broker-dealer's, an FCM's or an FDM's readily available liquid assets, reduced by its total liabilities other than approved subordinated debt. Under the Uniform Net Capital Rule, a broker-dealer may not repay any subordinated borrowings, pay cash dividends or make any unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount below required levels. An FCM and FDM, such as TDAFF, must provide notice to the CFTC if its adjusted net capital amounts are below required levels.
As explained in SEC guidelines and FINRA rules, brokers are required to seek the best execution reasonably available for their clients' orders. In part, this requires brokers to use reasonable diligence so that the price to the client is as favorable as possible under prevailing market conditions. We send client orders to a number of market centers, including market makers and exchanges, which encourages competition and ensures redundancy. We utilize a committee structure to conduct regular reviews of the securities trade execution quality we obtain from these market centers. For non-directed client orders, it is our policy to route orders to market centers based on a number of factors that are more fully discussed in the Supplemental Materials of FINRA Rule 5310, including, where applicable, but not necessarily limited to, speed of execution, price improvement opportunities, differences in price disimprovement, likelihood of executions, the marketability of the order, size guarantees, service levels and support, the reliability of order handling systems, client needs and expectations, transaction costs and whether the firm will receive remuneration for routing order flow to such market centers. Price improvement is available under certain market conditions and for certain order types and we regularly monitor executions to test for such improvement if available. Each quarter we also publicly disclose on SEC Rule 606 Reports information about the market centers we use and the related order routing revenue we received. Our SEC Rule 606 Reports can be found at www.tdameritrade.com.
Certain of our subsidiaries are also registered as investment advisors under the Investment Advisers Act of 1940. We are also subject to regulation in all 50 states and the District of Columbia, including registration requirements. TD Ameritrade Trust Company is chartered in the state of Maine as a state-regulated non-depository trust company.
In their capacity as securities clearing firms, TDAC and Scottrade, Inc. are members of The Depository Trust & Clearing Corporation ("DTCC") and The Options Clearing Corporation ("OCC"), each of which is registered as a clearing agency with the SEC. As members of these clearing agencies, TDAC and Scottrade, Inc. are required to comply with the rules of such clearing agencies, including rules relating to possession or control of client funds and securities, margin lending and execution and settlement of transactions.
Margin lending activities are subject to limitations imposed by regulations of the Federal Reserve System and FINRA. In general, these regulations provide that, in the event of a significant decline in the value of securities collateralizing a margin account, we are required to obtain additional collateral from the borrower or liquidate security positions.
We are subject to a number of state, federal and foreign laws applicable to companies conducting business on the Internet that address client privacy, system security and safeguarding practices and the use of client information.
For additional, important information relating to government regulation, please review the information set forth under the heading "Risk Factors Relating to the Regulatory and Legislative Environment" in Item 1A — Risk Factors.
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Risk Management
Our business activities expose us to various risks. Identifying and measuring our risks is critical to our ability to manage risk within acceptable tolerance levels in order to minimize the effect on our business, results of operations and financial condition.
Our management team is responsible for managing risk, and it is overseen by our board of directors, primarily through the board's Risk Committee. We use risk management processes and have policies and procedures for identifying, measuring and managing risks, including establishing threshold levels for our most significant risks. Our risk management, compliance, internal audit, and legal departments assist management in identifying and managing risks. Our management team's Enterprise Risk Committee ("ERC") is responsible for reviewing risk exposures and risk mitigation. Subcommittees of the ERC have been established to assist in identifying and managing specific areas of risk.
Our business exposes us to the following broad categories of risk:
Operational Risk — Operational risk is the risk of loss resulting from inadequate or failed internal processes or controls, human error or misconduct, systems and technology problems or from external events. It also involves compliance with regulatory and legal requirements. Operational risk is the most prevalent form of risk in our risk profile. We manage operational risk by establishing policies and procedures to accomplish timely and efficient processing, obtaining periodic internal control attestations from management and conducting internal audit reviews to evaluate the effectiveness of internal controls.
Cyber Security Risk — Cyber security risk is the risk of a malicious technological attack intended to impact the confidentiality, availability, or integrity of our systems and data, including sensitive client data. Our technology and security teams rely on a layered system of preventive and detective technologies, practices, and policies to detect, mitigate, and neutralize cyber security threats. Cyber attacks can also result in financial and reputational risk.
Market Risk — Market risk is the risk of loss resulting from adverse movements in market factors, such as asset prices, foreign exchange rates and interest rates. Our market risk related to asset prices is mitigated by our routing for execution of client trades primarily on an agency, rather than a principal, basis and our maintenance of only a small inventory of fixed-income securities to meet client requirements. Interest rate risk is our most prevalent form of market risk. For more information about our interest rate risk and how we manage it, see Item 7A — Quantitative and Qualitative Disclosures About Market Risk.
Credit Risk — Credit risk is the risk of loss resulting from failure of obligors to honor their payments. Our exposure to credit risk mainly arises from client margin lending and leverage activities, securities lending activities and other counterparty credit risks. For more information about our credit risk and how we manage it, see Item 7A – Quantitative and Qualitative Disclosures About Market Risk.
Liquidity Risk — Liquidity risk is the risk of loss resulting from the inability to meet current and future cash flow needs. We actively monitor our liquidity position at the holding company and at the broker-dealer and FCM/FDM subsidiary levels. For more information, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.
Strategic Risk — Strategic risk is the risk of loss arising from ineffective business strategies, improper implementation of business strategies, or lack of responsiveness to changes in the business and competitive environment. Our executive management is responsible for establishing an appropriate corporate strategy intended to create value for stockholders, clients and employees, with oversight by our board of directors. Our management is responsible for defining the priorities, initiatives and resources necessary to execute the strategic plan, the success of which is regularly evaluated by the board of directors.
Reputational Risk — Reputational risk is the risk arising from possible negative perceptions, whether true or not, of the Company among our clients, counterparties, stockholders, suppliers, employees and regulators. The potential for either enhancing or damaging our reputation is inherent in almost all aspects of business activity. We manage this risk through our commitment to a set of core values that emphasize and reward high standards of ethical behavior, maintaining a culture of compliance and by being responsive to client and regulatory requirements.
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Risk is inherent in our business, and therefore, despite our efforts to manage risk, there can be no assurance that we will not sustain unexpected losses. For a discussion of the factors that could materially affect our business, financial condition or future results of operations, see Item 1A — Risk Factors.
Intellectual Property Rights
Our success and ability to compete are significantly dependent on our intellectual property. We rely on copyright, trade secret, trademark, domain name, patent and contract laws to protect our intellectual property and have utilized the various methods available to us, including filing applications for patents and trademark registrations with the United States Patent and Trademark Office and entering into written licenses and other technology agreements with third parties. Our patented and patent pending technologies include stock indexing and investor education technologies, as well as innovative trading and analysis tools. Our trademarks include both our primary brand, TD Ameritrade, as well as brands for other products and services. A substantial portion of our intellectual property is protected by trade secrets. The source and object code for our proprietary software is also protected using applicable methods of intellectual property protection and general protections afforded to confidential information. In addition, it is our policy to enter into confidentiality and intellectual property ownership agreements with our employees and confidentiality and noncompetition agreements with our independent contractors and business partners and to control access to and distribution of our intellectual property.
Employees
As of September 30, 2017, we had 10,412 full-time equivalent employees. After completion of the Scottrade integration, we expect to have approximately 8,800 full-time equivalent employees. The Scottrade integration is currently expected to occur during the second quarter of fiscal 2018. None of our employees is covered by a collective bargaining agreement. We believe that our relations with our employees are good.
Financial Information about Segments and Geographic Areas
We primarily operate in the securities brokerage industry and have no other reportable segments. Substantially all of our revenues from external clients for the fiscal years ended September 30, 2017, 2016 and 2015 were derived from our operations in the United States.
Websites and Social Media Disclosure
From time to time, the Company may use its website and/or Twitter as distribution channels of material information. The Company's Code of Business Conduct and Ethics, financial data and other important information regarding the Company is routinely accessible through and posted on the Company's website at www.amtd.com and its Twitter account @TDAmeritradePR. We ask that interested parties visit or subscribe to newsfeeds at www.amtd.com/newsroom to automatically receive email alerts and other information, including the most up-to-date corporate financial information, presentation announcements, transcripts and archives. The website to access the Company's Twitter account is https://twitter.com/TDAmeritradePR. Website links provided in this report, although correct when published, may change in the future. We make available free of charge on our website at www.amtd.com/investor-relations/sec-filings/ our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. Our SEC filings are also available on the SEC's website at http://www.sec.gov/.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the following factors which could materially affect our business, financial condition or future results of operations. Although the risks described below are those that management believes are the most significant, these are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently do not deem to be material also may materially affect our business, financial condition or future results of operations.
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Risk Factors Relating to Our Business Operations
Economic conditions and other securities industry risks could adversely affect our business.
Substantially all of our revenues are derived from our securities brokerage business. Like other securities brokerage businesses, we are directly affected by economic, social and political conditions, broad trends in business and finance and changes in volume and price levels of securities transactions. Events in global financial markets in recent years resulted in substantial market volatility and increased client trading volume. However, any sustained downturn in general economic conditions or U.S. equity markets could result in reduced client trading volume and net revenues. Severe market fluctuations or weak economic conditions could reduce our trading volume and net revenues and have a material adverse effect on our profitability.
We have exposure to 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 FDIC-insured deposit account arrangements with TD Bank USA, N.A. and TD Bank N.A. and with other third-party financial institutions, which are subject to interest rate risk. During fiscal 2009, the Federal Open Market Committee reduced the federal funds target range to between 0% and 0.25%, where it remained until December 2015 when it started to gradually increase to its current target range of between 1.00% and 1.25%. In addition, medium- to long-term interest rates have also decreased substantially since fiscal 2009. This lower interest rate environment has compressed our net interest spread and reduced our spread-based revenues. Continued uncertainty resulting from U.S. fiscal and political matters, including concerns about federal, state and municipal debt levels, taxes, U.S. debt ratings, immigration policies and international conflicts have impacted and may continue to impact the U.S. and global economic recovery.
Changes in interest rates could affect the interest earned on assets differently than interest paid on liabilities. A rising interest rate environment generally results in our earning a larger net interest spread. Conversely, a falling interest rate environment generally results in our earning a smaller net interest spread. Our most prevalent form of interest rate risk is referred to as "gap" risk. This risk occurs when the interest rates we earn on assets change at a different frequency or amount than the interest rates we pay on liabilities. For example, in the current low interest rate environment, sharp increases in short-term interest rates could result in net interest spread compression if the yields paid on interest-bearing client balances were to increase faster than our earnings on interest-earning assets. If we are unable to effectively manage our interest rate risk, changes in interest rates could have a material adverse effect on our profitability.
Our brokerage operations have exposure to liquidity risk.
Maintaining adequate liquidity is crucial to our brokerage operations, including key functions such as transaction settlement and margin lending. We are subject to cash deposit and collateral requirements with clearinghouses such as the DTCC and the OCC, which may fluctuate significantly from time to time based on the nature and size of our clients' trading activity. Our liquidity needs to support interest-earning assets are primarily met by client cash balances or financing created from our securities lending activities. A reduction of funds available from these sources may require us to seek other potentially more expensive forms of financing, such as borrowings on our revolving credit facilities. Our liquidity could be constrained if we are unable to obtain financing on acceptable terms, or at all, due to a variety of unforeseen market disruptions. Inability to meet our funding needs on a timely basis would have a material adverse effect on our business.
We are exposed to credit risk with clients and counterparties.
We extend margin credit and leverage to clients, which are collateralized by client cash and securities. We also borrow and lend securities in connection with our broker-dealer business. A significant portion of our net revenues is derived from interest on margin loans. By permitting clients to purchase securities on margin and exercise leverage with options and futures positions, we are subject to risks inherent in extending credit, especially during periods of rapidly declining markets in which the value of the collateral held by us could fall below the amount of a client's indebtedness. In addition, in accordance with regulatory guidelines, we collateralize borrowings of securities by depositing cash or securities with lenders. Sharp changes in market values of substantial amounts of securities and the failure by parties to the borrowing transactions to honor their commitments could have a material adverse effect on our revenues and profitability. We also engage in financial transactions with counterparties, including securities
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sold under agreements to repurchase, that expose us to credit losses in the event counterparties cannot meet their obligations.
Our clearing operations expose us to liability for errors in clearing functions.
Our broker-dealer subsidiaries, TDAC and Scottrade, Inc., provide clearing and execution services for our securities brokerage business. Clearing and execution services include the confirmation, receipt, settlement and delivery functions involved in securities transactions. Clearing brokers also assume direct responsibility for the possession or control of client securities and other assets and the clearing of client securities transactions. However, clearing brokers also must rely on third-party clearing organizations, such as the DTCC and the OCC, in settling client securities transactions. Clearing securities firms, such as TDAC and Scottrade, Inc., are subject to substantially more regulatory control and examination than introducing brokers that rely on others to perform clearing functions. Errors in performing clearing functions, including clerical and other errors related to the handling of funds and securities held by us on behalf of clients, could lead to regulatory fines and civil penalties as well as losses and liability in related legal proceedings brought by clients and others.
A default by a large financial institution could adversely affect financial markets.
The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, clearing or other relationships among the institutions. For example, increased centralization of trading activities through particular clearing houses, central agents or exchanges is occurring. This is driven by market forces and by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and similar laws in other jurisdictions, and it may increase our concentration of risk with respect to these entities. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing houses, clearing agencies, exchanges, banks and securities firms, with which we interact on a daily basis, and therefore could have a material adverse effect on our business.
Systems failures, delays and capacity constraints could harm our business.
We receive and process trade orders through a variety of electronic channels, including the Internet, mobile trading applications and our interactive voice response system. These methods of trading are heavily dependent on the integrity of the electronic systems supporting them. Our systems and operations are vulnerable to damage or interruption from human error, natural disasters, power loss, computer viruses, distributed denial of service ("DDOS") attacks, spurious spam attacks, intentional acts of vandalism and similar events. It could take several hours or more to restore full functionality following any of these events. Extraordinary trading volumes could cause our computer systems to operate at an unacceptably slow speed or even fail. Extraordinary Internet traffic caused by DDOS, spam attacks or extreme market volatility could cause our website or other trading applications to be unavailable or slow to respond. While we have made significant investments to upgrade the reliability and scalability of our systems and added hardware to address extraordinary Internet traffic, there can be no assurance that our systems will be sufficient to handle such extraordinary circumstances. Slowness or unavailability may not impact all trading channels evenly, and some trading channels may be impacted while others are not. Social media and media reports may conflate one channel being unavailable with all channels being unavailable. We may not be able to project accurately the rate, timing or cost of any increases in our business or to expand and upgrade our systems and infrastructure to accommodate any increases in a timely manner. Systems failures and delays could occur and could cause, among other things, unanticipated disruptions in service to our clients, substantial losses to our clients, slower system response time resulting in transactions not being processed as quickly as our clients desire, decreased levels of client service and client satisfaction and harm to our reputation. We are also dependent on the integrity and performance of securities exchanges, clearing houses and other intermediaries to which client orders are routed for execution and settlement. Systems failures and constraints and transaction errors at such intermediaries could result in delays and erroneous or unanticipated execution prices, cause substantial losses for us and our clients and subject us to claims from our clients for damages. The occurrence of any of these events could have a material adverse effect on our business, results of operations and financial condition.
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Failure to protect client data or prevent breaches of our information systems could expose us to liability or reputational damage.
We are dependent on information technology networks and systems to securely process, transmit and store electronic information and to communicate among our locations and with our clients and vendors. As the breadth and complexity of this infrastructure continue to grow, the potential risk of security breaches and cyber-attacks increases. As a financial services company, we are continuously subject to cyber-attacks, DDOS and ransomware attacks, malicious code and computer viruses by activists, hackers, organized crime, foreign state actors and other third parties. Such breaches could lead to shutdowns or disruptions of our systems, account takeovers and unauthorized gathering, monitoring, misuse, loss, total destruction and disclosure of data and confidential information of ours, our clients, our employees or other third parties, or otherwise materially disrupt our or our clients' or other third parties' network access or business operations. In addition, vulnerabilities of our external service providers and other third parties could pose security risks to client information. The secure transmission of confidential information over public networks is also a critical element of our operations.
We, along with the financial services industry in general, have experienced losses related to clients' login and password information being compromised, generally caused by attacks capturing credentials directly from clients themselves, through phishing attacks, clients' use of non-secure public computers or vulnerabilities of clients' private computers and mobile devices. In 2007, we discovered and eliminated unauthorized code from our computer systems that had allowed an unauthorized third party to retrieve client email addresses, names, addresses and phone numbers from an internal database. Following the incident, we incurred significant remediation costs. In addition, in 2013, Scottrade, which we acquired in September 2017, experienced a database breach, and we may not know the full extent of security controls in place at Scottrade. We are aware of subsequent attempts by other attackers to penetrate our systems using similar techniques and similar attacks against other financial institutions. Although we have taken steps to reduce the risk of such threats, our risk and exposure to a cyber-attack or related breach remains heightened due to the evolving nature of these threats, our plans to continue to implement mobile access solutions to serve our clients, our routine transmission of sensitive information to third parties, the current global economic and political environment, external extremist parties and other developing factors. If a cyber-attack or similar breach were to occur, we could suffer damage to our reputation and incur significant remediation costs and losses.
In providing services to clients, we manage, utilize and store sensitive and confidential client data, including personal data. As a result, we are subject to numerous laws and regulations designed to protect this information, such as U.S. federal and state laws and foreign regulations governing the protection of personally identifiable information. These laws and regulations are increasing in complexity and number, change frequently and sometimes conflict. If any person, including any of our employees, negligently disregards or intentionally breaches our established controls with respect to client data, or otherwise mismanages or misappropriates that data, we could be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution in one or more jurisdictions. Unauthorized disclosure of sensitive or confidential client data, whether through systems failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients. Similarly, unauthorized access to or through our information systems, whether by our employees or third parties, including a cyber-attack by third parties who may deploy viruses, worms or other malicious software programs, could result in negative publicity, significant remediation costs, legal liability, regulatory fines, financial responsibility under our asset protection guarantee to reimburse clients for losses resulting from unauthorized activity in their accounts and damage to our reputation and could have a material adverse effect on our results of operations. In addition, our liability insurance might not be sufficient in type or amount to cover us against claims related to security breaches, cyber-attacks and other related breaches.
Aggressive competition could reduce our market share and harm our financial performance.
The market for electronic brokerage services is continually evolving and is intensely competitive. The retail brokerage industry has experienced significant consolidation, which may continue in the future, and which may increase competitive pressures in the industry. Consolidation could enable other firms to offer a broader range of products and services than we do, or offer them at lower prices. There has been aggressive price competition in the industry, including various free trade offers and reduced trading commissions. We expect this competitive environment to continue in the future. We face direct competition from numerous retail brokerage firms, including E*TRADE Financial Corporation, The Charles Schwab Corporation and Fidelity Investments. We also encounter competition from the broker-dealer affiliates of established full-commission brokerage firms, such as Merrill Lynch
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and Morgan Stanley, as well as from financial institutions, mutual fund sponsors, online wealth management services and other organizations, some of which provide online brokerage services. Some of our competitors have greater financial, technical, marketing and other resources, offer a wider range of services and financial products, and have greater name recognition and a more extensive client base than we do. We believe that the general financial success of companies within the retail securities industry will continue to attract new competitors to the industry, such as banks, software development companies, insurance companies, providers of online financial information and others. These companies may provide a more comprehensive suite of services than we do or offer services at lower prices. Increased competition, including pricing pressure, could have a material adverse effect on our results of operations and financial condition.
We will need to introduce new products and services and enhance existing products and services to remain competitive.
Our future success depends in part on our ability to develop and enhance our products and services. In addition, the adoption of new Internet, networking or telecommunications technologies or other technological changes could require us to incur substantial expenditures to enhance or adapt our services or infrastructure.
There are significant technical and financial costs and risks in the development of new or enhanced products and services, including the risk that we might be unable to effectively use new technologies, adapt our services to emerging industry standards or develop, introduce and market enhanced or new products and services. An inability to develop new products and services, or enhance existing offerings, could have a material adverse effect on our profitability.
Advisory services subject us to additional risks.
We provide investment advisory services to investors through our SEC-registered investment advisors, TD Ameritrade, Inc., TD Ameritrade Investment Management, LLC, Scottrade Investment Management, Inc. ("SIM") and TradeWise Advisors, Inc. ("TradeWise"). TD Ameritrade, Inc. offers AdvisorDirect,® a service that refers a client to an independent RIA. TD Ameritrade Investment Management, LLC recommends an investment portfolio, through Selective Portfolios® or Essential Portfolios,® based on an investor's objectives, time horizon and risk tolerance. SIM offers guidance solutions and refers clients to independent RIAs. TradeWise provides an option advisory service for self-directed investors. The risks associated with these investment advisory activities include those arising from possible conflicts of interest, unsuitable investment recommendations, inadequate due diligence, inadequate disclosure and fraud. Realization of these risks could lead to liability for client losses, regulatory fines, civil penalties and harm to our reputation and business.
We rely on external service providers to perform certain key functions.
We rely on a number of external service providers for certain key technology, processing, service and support functions. These include the services of other broker-dealers, market makers, exchanges and clearinghouses to execute and settle client orders. We contract with external providers for futures and foreign exchange clearing. External content providers provide us with financial information, market news, charts, option and stock quotes, research reports and other fundamental data that we offer to clients. These service providers face technological, operational and security risks of their own. Any significant failures by them, including improper use or disclosure of our confidential client, employee or company information, could interrupt our business, cause us to incur losses and harm our reputation.
We cannot assure that any external service providers will be able to continue to provide these services to meet our current needs in an efficient, cost-effective manner or that they will be able to adequately expand their services to meet our needs in the future. Some external service providers have assets that are important to the services they provide us located outside the United States, and their ability to provide these services is subject to risks from unfavorable political, economic, legal or other developments, such as social or political instability, changes in governmental policies or changes in laws and regulations.
An interruption in or the cessation of service by any external service provider as a result of systems failures, capacity constraints, financial constraints or problems, unanticipated trading market closures or for any other reason, and our inability to make alternative arrangements in a smooth and timely manner, if at all, could have a material adverse effect on our business, results of operations and financial condition.
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Risk Factors Relating to the Regulatory and Legislative Environment
Legislation has and may continue to result in changes to rules and regulations applicable to our business, which may negatively impact our business and financial results.
The Dodd-Frank Act, enacted in 2010, requires many federal agencies to adopt new rules and regulations applicable to the financial services industry and also calls for many studies regarding various industry practices. In particular, the Dodd-Frank Act gives the SEC discretion to adopt rules regarding standards of conduct for broker-dealers providing investment advice to retail customers. The U.S. Department of Labor ("DOL") has enacted regulations changing the definition of who is an investment advice fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA) and how such advice can be provided to account holders in retirement accounts such as 401(k) plans and Individual Retirement Arrangements (IRAs). The DOL regulations deem many of the investment, rollover and asset management recommendations from us to our clients regarding their retirement accounts fiduciary "investment advice" under ERISA. One of the most significant impacts on our business from the DOL regulations and related prohibited transaction exemptions will be the impact on our fee and compensation practices. These regulations may subject us to an increased risk of class actions and other litigation and regulatory risks. Additional rulemaking or legislative action could negatively impact our business and financial results. While we have not yet been required to make other material changes to our business or operations as a result of the Dodd-Frank Act or other rulemaking or legislative action, it is not certain what the scope of future rulemaking or interpretive guidance from the SEC, FINRA, DOL, banking regulators and other regulatory agencies may be, how the courts and regulators might interpret these rules and what impact this will have on our compliance costs, business, operations and profitability.
Our profitability could also be affected by new or modified laws that impact the business and financial communities generally, including changes to the laws governing banking, the securities market, fiduciary duties, conflicts of interest, taxation, electronic commerce, client privacy and security of client data. As existing laws are modified and new laws are implemented, we may incur significant additional costs and have to expend a significant amount of time to develop and integrate appropriate systems and procedures to ensure initial and continuing compliance with such laws. These additional costs could have a material adverse effect on our profitability.
Failure to comply with net capital requirements could adversely affect our business.
The SEC, FINRA, CFTC, NFA and various other regulatory agencies have stringent rules with respect to the maintenance of specific levels of net capital by securities broker-dealers, FCMs and FDMs. Net capital is a measure of a broker-dealer's, an FCM's or an FDM's readily available liquid assets, reduced by its total liabilities other than approved subordinated debt. Our broker-dealer and FCM/FDM subsidiaries are required to comply with net capital requirements. If we fail to maintain the required net capital, the SEC or the CFTC could suspend or revoke our registration, and FINRA or the NFA could expel us from membership, which could ultimately lead to our liquidation, or they could impose censures, fines or other sanctions. If the net capital rules are changed or expanded, or if there is an unusually large charge against net capital, then our operations that require capital could be limited, and we may not be able to pay dividends or make stock repurchases. A large operating loss or charge against net capital could have a material adverse effect on our ability to maintain or expand our business.
Extensive regulation and regulatory uncertainties could harm our business.
The securities industry is subject to extensive regulation by federal, state, international government and self-regulatory agencies, and financial services companies are subject to regulations covering all aspects of the securities business. Regulations are intended to ensure the integrity of financial markets, appropriate capitalization of broker-dealers, FCMs and FDMs and the protection of clients and their assets. These regulations often serve to limit our business activities through capital, client protection and market conduct requirements, as well as restrictions on the activities that we are authorized to conduct. Federal, state, self-regulatory organizations and foreign regulators can, among other things, censure, fine, issue cease-and-desist orders to, suspend or expel a regulated entity or any of its officers or employees. Despite our efforts to comply with applicable legal requirements, there are a number of risks, including in areas where applicable laws or regulations may be unclear or where regulators could revise their previous guidance, and we could fail to establish and enforce procedures to comply with applicable legal requirements and regulations, which could have a material adverse effect on our business.
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Past turmoil in the financial markets has contributed to changes in laws and regulations, heightened scrutiny of the conduct of financial services firms and increasing penalties for violations of applicable laws and regulations. We may be adversely affected by new laws or regulations, changes in the interpretation of existing laws or regulations or more rigorous enforcement. The new laws and regulations may be complex, and we may not have the benefit of regulatory or federal interpretations to guide us in compliance. Changes in laws and regulations or new interpretations of existing laws and regulations also can have adverse effects on our methods and costs of doing business. We also may be adversely affected by other regulatory changes related to suitability of financial products, supervision, sales practices, application of fiduciary standards, best execution and market structure, which could limit the Company's business. Because TD, among other things, owns more than 25% of our common stock, we are considered a non-bank subsidiary of TD under the Bank Holding Company Act of 1956 (the "BHC Act"). As a result, under the BHC Act, we are subject to the supervision and regulation of the Federal Reserve. These banking regulations limit the activities and the types of businesses that we may conduct and the types of companies we may acquire, and under these regulations the Federal Reserve could impose significant limitations on our current business and operations. TD is currently regulated as a "financial holding company" under the BHC Act, which allows TD and us to engage in a much broader set of activities than would otherwise be permitted under the BHC Act. Any failure of TD to maintain its status as a financial holding company could result in substantial limitations on certain of our activities.
Financial services firms are subject to numerous conflicts of interest or perceived conflicts of interest, over which federal and state regulators and self-regulatory organizations have increased their scrutiny. Addressing conflicts of interest is a complex and difficult undertaking. Our business and reputation could be harmed if we were to fail, or appear to fail, to address conflicts appropriately.
In addition, we use the Internet as a major distribution channel to provide services to our clients. A number of regulatory agencies have adopted regulations regarding client privacy, system security and safeguarding practices and the use of client information by service providers. Additional laws and regulations relating to the Internet and safeguarding practices could be adopted in the future, including laws related to access, identity theft and regulations regarding the pricing, taxation, content and quality of products and services delivered over the Internet. Complying with these laws and regulations may be expensive and time-consuming and could limit our ability to use the Internet as a distribution channel, which would have a material adverse effect on our business and profitability.
While we maintain systems and procedures designed to ensure that we comply with applicable laws and regulations, violations could occur. In addition, some legal and regulatory frameworks provide for the imposition of fines or penalties for non-compliance even though the non-compliance was inadvertent or unintentional and even though systems and procedures reasonably designed to prevent violations were in place at the time. There may be other negative consequences resulting from a finding of non-compliance, including restrictions on certain activities. Such a finding may also damage our reputation and our relationships with regulators and could restrict the ability of institutional investment managers to invest in our securities.
We are subject to litigation and regulatory investigations and proceedings and may not always be successful in defending against such claims and proceedings.
The financial services industry faces substantial litigation and regulatory risks. We are subject to arbitration claims and lawsuits in the ordinary course of our business, as well as class actions and other significant litigation. We also are the subject of inquiries, investigations and proceedings by regulatory and other governmental agencies. Actions brought against us may result in settlements, awards, injunctions, fines, penalties and other results adverse to us. Predicting the outcome of such matters is inherently difficult, particularly where claims are brought on behalf of various classes of claimants or by a large number of claimants, when claimants seek substantial or unspecified damages or when investigations or legal proceedings are at an early stage. A substantial judgment, settlement, fine or penalty could be material to our operating results or cash flows for a particular period, depending on our results for that period, or could cause us significant reputational harm, which could harm our business prospects. In market downturns, the volume of legal claims and amount of damages sought in litigation and regulatory proceedings against financial services companies have historically increased. We are also subject to litigation claims from third parties alleging infringement of their intellectual property rights. Such litigation can require the expenditure of significant resources, regardless of whether the claims have merit. If we were found to have infringed a third-party patent or other intellectual property right, then we could incur substantial liability and in some circumstances could
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be enjoined from using the relevant technology or providing related products and services, which could have a material adverse effect on our business and results of operations.
Risk Factors Relating to Acquisitions
Our acquisition of Scottrade presents certain risks that we may not realize the financial and strategic goals that were contemplated at the time we agreed to enter into the transaction.
Risks we face in connection with our acquisition and integration of Scottrade include that:
• | our ongoing business may be disrupted and our management's attention may be diverted by integration activities; |
• | the Scottrade acquisition might not further our business strategy as we expected, we might not integrate Scottrade's business or technology as successfully as we expected, or we might have overpaid for Scottrade or otherwise might not realize the expected return on our investment to the extent or in the timeframe forecasted, which could adversely affect our business or results of operations; |
• | we may not realize the benefits or cost savings anticipated to be derived from the Scottrade acquisition as initially predicted, if at all, for a number of reasons, including if a larger than predicted number of customers decide not to continue to use Scottrade's or our services; |
• | we face numerous risks and uncertainties combining and integrating our businesses and systems with Scottrade's, including the need to combine or separate business activities, accounting and data processing systems and management controls and to integrate relationships with customers and business counterparties; |
• | we could fail to retain and integrate key Scottrade personnel who are critical to the successful operation and integration of the business; |
• | our results of operations or financial condition could be adversely impacted by: claims or liabilities that we assumed from Scottrade or that are otherwise related to the acquisition, including claims made by government agencies, terminated employees, current or former customers, former stockholders or other third parties; contractual relationships of Scottrade that we would not have entered into but for the merger, the termination or modification of which may be costly or disruptive to our business; unfavorable revenue recognition or other accounting treatment as a result of Scottrade's practices; and intellectual property claims or disputes; |
• | we may have failed to identify or assess the magnitude of liabilities, shortcomings or other circumstances of Scottrade, which could result in unexpected litigation or regulatory exposure, unfavorable accounting treatment, unexpected increases in taxes, a loss of anticipated tax benefits or other adverse effects on our business, results of operations or financial condition; |
• | we may have difficulty incorporating Scottrade's technologies with our existing technologies and product lines while maintaining uniform standards, architecture, controls, procedures and policies; |
• | we may be exposed to increased risk of a security breach until the Scottrade systems are fully integrated, as those systems are subject to their own set of security controls; |
• | we may be exposed to increased risk of litigation and costs and liabilities associated with it; |
• | we could experience additional or unexpected changes in how we are required to account for the acquisition pursuant to U.S. generally accepted accounting principles; |
• | we have incurred, and will continue to incur, transaction expenses, including legal, regulatory and other costs associated with consummating the transaction, as well as expenses related to formulating and implementing integration plans, including facilities and systems consolidation costs and employment-related costs; |
• | our use of cash to pay for the acquisition limits other potential uses of our cash, including stock repurchases, dividend payments and retirement of outstanding indebtedness; |
• | our debt issuance to finance the acquisition increases our interest expense, leverage and debt service requirements; and |
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• | our common equity issuance in connection with the acquisition diluted our existing stockholders and may result in a decline in earnings per share. |
We will need to successfully manage the integration of Scottrade and future growth effectively. Integration and additional growth may place a significant strain upon our management, administrative, operational, financial reporting, internal control and compliance infrastructure. Managing future growth also may be difficult due to the expanded geographic locations acquired as part of the Scottrade transaction.
As a result of these risks and challenges, we may not realize the full benefits that we initially anticipated from the Scottrade transaction in a timely manner or at all. There can be no assurance that we will be able to successfully integrate the operations of Scottrade and accurately anticipate and respond to the changing demands we will face as part of the integration. We may not be able to manage growth effectively or to achieve growth at all. Failure to manage the integration of Scottrade and future growth effectively could have a material adverse effect on our business, financial condition, results of operations and prospects.
Acquisitions involve risks that could adversely affect our business.
We may pursue other acquisitions of businesses and technologies. Acquisitions entail numerous risks, including:
• | difficulties in the integration of acquired operations, services and products; |
• | failure to achieve expected synergies; |
• | diversion of management's attention from other business concerns; |
• | assumption of unknown material liabilities of acquired companies; |
• | amortization of acquired intangible assets, which could reduce future reported earnings; |
• | potential loss of clients or key employees of acquired companies; and |
• | dilution to existing stockholders. |
As part of our growth strategy, we regularly consider, and from time to time engage in, discussions and negotiations regarding transactions, such as acquisitions, mergers and combinations within our industry. The purchase price for possible acquisitions could be paid in cash, through the issuance of common stock or other securities, borrowings or a combination of these methods.
We cannot be certain that we will be able to identify, consummate and successfully integrate acquisitions, and no assurance can be given with respect to the timing, likelihood or business effect of any possible transaction. For example, we could begin negotiations that we subsequently decide to suspend or terminate for a variety of reasons. However, opportunities may arise from time to time that we will evaluate. Any transactions that we consummate would involve risks and uncertainties to us. These risks could cause the failure of any anticipated benefits of an acquisition to be realized, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Risk Factors Relating to Owning Our Stock
The market price of our common stock has experienced, and may continue to experience, substantial volatility.
Our common stock, and the U.S. securities markets in general, can experience significant price fluctuations. The market prices of securities of financial services companies, in particular, have been especially volatile. The price of our common stock could decrease substantially. Among the factors that may affect our stock price are the following:
• | speculation in the investment community or the press about, or actual changes in, our competitive position, organizational structure, executive team, operations, financial condition, financial reporting and results, effectiveness of cost reduction initiatives, or strategic transactions; |
• | the announcement of new products, services, acquisitions, or dispositions by us or our competitors; |
• | sales of a substantial number of shares of our common stock by (i) TD, (ii) J. Joe Ricketts, our founder, and certain members of his family and trusts held for their benefit, and (iii) Rodger O. Riney, as voting trustee |
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of his family trust, who currently have registration rights covering approximately 234 million shares, 59 million shares, and 28 million shares, respectively, of our common stock; and
• | increases or decreases in revenue or earnings, changes in earnings estimates by the investment community, changes in the interest rate environment or in market expectations regarding the interest rate environment and variations between estimated financial results and actual financial results. |
Changes in the stock market generally or as it concerns our industry, as well as geopolitical, economic, and business factors unrelated to us, may also affect our stock price.
Because the market price of our common stock can fluctuate significantly, we could become the object of securities class action litigation, which could result in substantial costs and a diversion of management's attention and resources and could have a material adverse effect on our business and the price of our common stock.
We are restricted by the terms of our revolving credit facilities and senior notes.
Our senior unsecured revolving credit facilities contain various covenants and restrictions that may, in certain circumstances and subject to carveouts and exceptions, which may be material, limit our ability to:
• | incur additional indebtedness; |
• | create liens; |
• | sell all or substantially all of our assets; |
• | change the nature of our business; |
• | merge or consolidate with another entity; and |
• | conduct transactions with affiliates. |
Under our revolving credit facilities, we are also required to maintain compliance with a maximum consolidated leverage ratio covenant (not to exceed 3.00:1.00) and a minimum consolidated interest coverage ratio covenant (not less than 4.00:1:00). TDAC is required to maintain compliance with a minimum consolidated tangible net worth covenant and our broker-dealer and FCM/FDM subsidiaries are required to maintain compliance with minimum regulatory net capital covenants.
Our senior unsecured notes contain various covenants and restrictions that may, in certain circumstances and subject to carveouts and exceptions, which may be material, limit our ability to:
• | create liens; |
• | merge or consolidate with another entity; and |
• | sell all or substantially all of our assets. |
As a result of the covenants and restrictions contained in the revolving credit facilities and our senior unsecured notes, we are limited in how we conduct our business. We cannot guarantee that we will be able to remain in compliance with these covenants or be able to obtain waivers for noncompliance in the future. A failure to comply with these covenants could have a material adverse effect on our financial condition by impairing our ability to secure and maintain financing.
Our corporate debt level may limit our ability to obtain additional financing.
As of September 30, 2017, we had approximately $2.55 billion of long-term debt, consisting of:
• | $500 million of 5.600% Senior Notes with principal due in full on December 1, 2019; |
• | $750 million of 2.950% Senior Notes with principal due in full on April 1, 2022; |
• | $500 million of 3.625% Senior Notes with principal due in full on April 1, 2025; and |
• | $800 million of 3.300% Senior Notes with principal due in full on April 1, 2027. |
Our ability to meet our cash requirements, including our debt repayment obligations, is dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which
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are or may be beyond our control. We cannot provide assurance that our business will generate sufficient cash flows from operations to fund our cash requirements. If we are unable to meet our cash requirements from operations, we would be required to obtain alternative financing. The degree to which we may be leveraged as a result of the indebtedness we have incurred could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes, could make us more vulnerable to industry downturns and competitive pressures or could limit our flexibility in planning for, or reacting to, changes and opportunities in our industry, which may place us at a competitive disadvantage. There can be no assurance that we would be able to obtain alternative financing, that any such financing would be on acceptable terms or that we would be permitted to do so under the terms of existing financing arrangements. In the absence of such financing, our ability to respond to changing business and economic conditions, make future acquisitions, react to adverse operating results, meet our debt repayment obligations or fund required capital expenditures could be materially and adversely affected.
Our business, financial position, and results of operations could be harmed by adverse rating actions by credit rating agencies.
If our counterparty credit rating or the credit ratings of our outstanding indebtedness are downgraded, or if rating agencies indicate that a downgrade may occur, our business, financial position, and results of operations could be adversely affected and perceptions of our financial strength could be damaged. A downgrade would have the effect of increasing our incremental borrowing costs and could decrease the availability of funds for borrowing. In addition, a downgrade could adversely affect our relationships with our clients.
TD exercises significant influence over TD Ameritrade.
As of October 1, 2017, TD owned approximately 41% of our outstanding common stock. As a result, TD will generally have the ability to significantly influence the outcome of any matter submitted to a vote of our stockholders and as a result of its significant share ownership in TD Ameritrade, TD may have the power, subject to applicable law, to significantly influence actions that might be favorable to TD, but not necessarily favorable to our other stockholders.
The stockholders agreement provides that TD may designate five of the twelve members of our board of directors, subject to adjustment based on TD's ownership positions in TD Ameritrade. As of October 1, 2017, based on its ownership positions, TD has the right to designate five members of our board of directors. Accordingly, TD is able to significantly influence the outcome of all matters that come before our board.
TD is permitted under the stockholders agreement to exercise voting rights on up to 45% of our outstanding shares of common stock until termination of the stockholders agreement (January 24, 2021). If our stock repurchases cause TD's ownership percentage to exceed 45%, TD is required to use reasonable efforts to sell or dispose of such excess stock, subject to TD's commercial judgment as to the optimal timing, amount and method of sales with a view to maximizing proceeds from such sales. TD has no absolute obligation to reduce its ownership percentage to 45% by the termination of the stockholders agreement. However, prior to and following the termination of the stockholders agreement, TD is required to vote any such excess stock on any matter in the same proportions as all the outstanding shares of stock held by holders other than TD and its affiliates are voted. In no event may TD Ameritrade repurchase shares of its common stock that would result in TD's ownership percentage exceeding 47%. There is no restriction on the number of shares TD may own following the termination of the stockholders agreement.
The ownership position and governance rights of TD could also discourage a third party from proposing a change of control or other strategic transaction concerning TD Ameritrade. As a result, our common stock could trade at prices that do not reflect a "takeover premium" to the same extent as do the stocks of similarly situated companies that do not have a stockholder with an ownership interest as large as TD's ownership interest.
We have extensive relationships and business transactions with TD and some of its affiliates, which if terminated or adversely modified could have a material adverse effect on our business, financial condition and results of operations.
We have extensive relationships and business transactions with TD and certain of its affiliates. The insured deposit account agreement between us and affiliates of TD provides a significant portion of our revenue. This agreement enables our clients to invest in an FDIC-insured deposit product without the need for us to establish the significant levels of capital that would be required to maintain our own bank charter. During fiscal 2017, net revenues related
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to this agreement accounted for approximately 30% of our net revenues. For fiscal year 2017, the average balance of client cash swept to our insured deposit account offering was $93 billion. The average yield earned on the insured deposit account balances was 59 basis points higher than the average net yield earned on segregated cash balances during fiscal 2017. The termination or adverse modification of this agreement without replacing it on comparable terms with a different counterparty, which may not be available, could have a material adverse effect on our business, financial condition and results of operations. If this agreement was terminated or adversely modified and we were permitted to establish our own bank charter for purposes of offering an FDIC-insured deposit product, we would be required to establish and maintain significant levels of capital within a bank subsidiary. We would also be subject to various other risks associated with banking, including credit risk on loans and investments, liquidity risk associated with bank balance sheet management, operational risks associated with banking systems and infrastructure and additional regulatory requirements and supervision.
Conflicts of interest may arise between TD Ameritrade and TD, which may be resolved in a manner that adversely affects our business, financial condition or results of operations.
Conflicts of interest may arise between us and TD in areas relating to past, ongoing and future relationships, including corporate opportunities, potential acquisitions or financing transactions, sales or other dispositions by TD of its interests in TD Ameritrade and the exercise by TD of its influence over our management and affairs. Some of the directors on our board are also officers or directors of TD or its subsidiaries. Service as a director or officer of both TD Ameritrade and TD or its other subsidiaries could create conflicts of interest if such directors or officers are faced with decisions that could have materially different implications for us and for TD. Our amended and restated certificate of incorporation contains provisions relating to the avoidance of direct competition between us and TD. In addition, a committee of our board consisting of outside independent directors reviews and approves or ratifies transactions with TD and its affiliates. There can be no assurance that any of the foregoing potential conflicts would be resolved in a manner that does not adversely affect our business, financial condition or results of operations. In addition, the provisions of the stockholders agreement related to non-competition are subject to numerous exceptions and qualifications and may not prevent us and TD from competing with each other to some degree.
The terms of the stockholders agreement, our charter documents and Delaware law could inhibit a takeover that stockholders may consider favorable.
Provisions in the stockholders agreement between TD and the Company, our certificate of incorporation and bylaws and Delaware law will make it difficult for any party to acquire control of us in a transaction not approved by the requisite number of directors. These provisions include:
• | the presence of a classified board of directors; |
• | the ability of the board of directors to issue and determine the terms of preferred stock; |
• | advance notice requirements for inclusion of stockholder proposals at stockholder meetings; and |
• | the anti-takeover provisions of Delaware law. |
These provisions could delay, deter or prevent a change of control or change in management that might provide stockholders with a premium to the market price of their common stock.
Our future ability to pay regular dividends to holders of our common stock is subject to the discretion of our board of directors and will be limited by our ability to generate sufficient earnings and cash flows.
Payment of future cash dividends on our common stock will depend on our ability to generate earnings and cash flows. However, sufficient cash may not be available to pay such dividends. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend upon a number of factors that the board of directors deems relevant, including future earnings, the success of our business activities, capital requirements, the general financial condition and future prospects of our business and general business conditions. If we are unable to generate sufficient earnings and cash flows from our business, we may not be able to pay dividends on our common stock.
Our ability to pay cash dividends on our common stock is also dependent on the ability of our subsidiaries to pay dividends to the parent company. Some of our subsidiaries are subject to requirements of the SEC, FINRA, the
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CFTC, the NFA and other regulators relating to liquidity, capital standards and the use of client funds and securities, which may limit funds available for the payment of dividends to the parent company.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our Company-owned corporate headquarters facility is located in Omaha, Nebraska and provides more than 500,000 square feet of building space. Our headquarters facility has earned Leadership in Energy and Environmental Design (LEED) Platinum Certification, the highest level of distinction awarded by the U.S. Green Building Council. We also lease approximately 80,000 square feet of building space on property adjacent to the headquarters for administrative and operational facilities. These leases expire in 2020. We own additional administrative and operational facilities that provide approximately 790,000 and 200,000 square feet of building space located in St. Louis, Missouri and Denver, Colorado, respectively.
We lease approximately 195,000 and 140,000 square feet of building space for additional operations centers in Jersey City, New Jersey and Fort Worth, Texas, respectively. The Jersey City lease expires in 2020 and the Fort Worth lease expires in 2018. During October 2015, we purchased land in Southlake, Texas, on which we are currently constructing a new operations center. We intend to transition our Fort Worth operations to Southlake once construction of the new facility is completed, which is scheduled for late 2017.
We lease smaller administrative and operational facilities in California, Colorado, Illinois, Maryland, Massachusetts, Michigan, Texas and Utah. We own two data center facilities, located in Richardson, Texas and St. Louis, Missouri, and we lease two data center facilities, located in St. Louis, Missouri and Scottsdale, Arizona. We also lease nearly 600 branch offices, which includes the addition of approximately 500 branch office leases assumed in the acquisition of Scottrade. After the completion of the Scottrade integration, we plan to have a total network of approximately 360 branch offices, located in 48 states and the District of Columbia. We believe that our facilities are suitable and adequate to meet our needs.
Item 3. Legal Proceedings
For information regarding legal proceedings, see Note 15 — Commitments and Contingencies – "Legal and Regulatory Matters" under Item 8, Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Price Range of Common Stock
Prior to December 12, 2015, our common stock traded on the New York Stock Exchange ("NYSE") under the symbol "AMTD." On December 12, 2015, our common stock began trading on the Nasdaq Global Select Market under the symbol "AMTD." The following table shows the high and low sales prices for our common stock for the periods indicated, as reported by the NYSE through December 11, 2015 and the Nasdaq Global Select Market thereafter. The prices reflect inter-dealer prices and do not include retail markups, markdowns or commissions.
Common Stock Price For the Fiscal Year Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First Quarter | $ | 44.79 | $ | 33.26 | $ | 37.90 | $ | 29.69 | ||||||||
Second Quarter | $ | 47.41 | $ | 36.36 | $ | 33.93 | $ | 24.88 | ||||||||
Third Quarter | $ | 44.11 | $ | 36.12 | $ | 32.93 | $ | 26.47 | ||||||||
Fourth Quarter | $ | 49.24 | $ | 41.88 | $ | 35.39 | $ | 26.37 | ||||||||
The closing sale price of our common stock as reported on the Nasdaq Global Select Market on November 2, 2017 was $49.87 per share. As of that date there were 631 holders of record of our common stock based on information provided by our transfer agent. The number of stockholders of record does not reflect the number of individual or institutional stockholders that beneficially own our stock because most stock is held in the name of nominees. Based on information available to us, we believe there are approximately 67,000 beneficial holders of our common stock.
Dividends
We declared and paid an $0.18 per share and a $0.17 per share quarterly cash dividend on our common stock during each quarter of fiscal years 2017 and 2016, respectively. On October 24, 2017, we declared a $0.21 per share quarterly cash dividend for the first quarter of fiscal 2018. We are scheduled to pay the quarterly cash dividend on November 21, 2017 to all holders of record of our common stock as of November 7, 2017. The payment of any future dividends will be at the discretion of our board of directors and will depend upon a number of factors that the board of directors deems relevant, including future earnings, the success of our business activities, capital requirements, the general financial condition and future prospects of our business and general business conditions.
Our ability to pay cash dividends on our common stock is also dependent on the ability of our subsidiaries to pay dividends to the parent company. Some of our subsidiaries are subject to requirements of the SEC, FINRA, the CFTC, the NFA and other regulators relating to liquidity, capital standards and the use of client funds and securities, which may limit funds available for the payment of dividends to the parent company. See Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition — "Liquidity and Capital Resources" for further information.
Securities Authorized for Issuance Under Equity Compensation Plans
Information about securities authorized for issuance under the Company's equity compensation plans is contained in Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
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Performance Graph
The following Company common stock performance information is not deemed to be "soliciting material" or to be "filed" with the SEC or subject to the SEC's proxy rules or to the liabilities of Section 18 of the Exchange Act and shall not be deemed to be incorporated by reference into any prior or subsequent filing by the Company under the Securities Act of 1933, as amended, or the Exchange Act.
The following graph and table set forth information comparing the cumulative total return through the end of the Company's most recent fiscal year from a $100 investment on September 30, 2012 in the Company's common stock, a broad-based stock index and the stocks comprising an industry peer group.
Period Ended | ||||||||||||
Index | 9/30/12 | 9/30/13 | 9/30/14 | 9/30/15 | 9/30/16 | 9/30/17 | ||||||
TD Ameritrade Holding Corporation | 100.00 | 178.60 | 235.29 | 228.39 | 258.43 | 364.32 | ||||||
S&P 500 | 100.00 | 119.34 | 142.89 | 142.02 | 163.93 | 194.44 | ||||||
Peer Group | 100.00 | 170.36 | 238.24 | 239.79 | 267.17 | 377.46 | ||||||
The Peer Group is comprised of the following companies that have significant retail brokerage operations:
E*TRADE Financial Corporation
The Charles Schwab Corporation
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers
ISSUER PURCHASES OF EQUITY SECURITIES
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Maximum Number of Shares that May Yet Be Purchased Under the Program | |||||||||
July 1, 2017 — July 31, 2017 | 6,428 | $ | 43.12 | — | 25,979,986 | ||||||||
August 1, 2017 — August 31, 2017 | 3,113 | $ | 45.75 | — | 25,979,986 | ||||||||
September 1, 2017 — September 30, 2017 | 36 | $ | 43.15 | — | 25,979,986 | ||||||||
Total — Three months ended September 30, 2017 | 9,577 | $ | 43.98 | — | 25,979,986 | ||||||||
On November 20, 2015, our board of directors authorized the repurchase of up to 30 million shares of our common stock. We disclosed this authorization on November 20, 2015 in our annual report on Form 10-K. This program was the only stock repurchase program in effect and no programs expired during the fourth quarter of fiscal 2017.
During the quarter ended September 30, 2017, 9,577 shares were repurchased from employees for income tax withholding in connection with distributions of stock-based compensation.
Item 6. Selected Financial Data
Fiscal Year Ended September 30, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(In millions, except per share amounts) | ||||||||||||||||||||
Consolidated Statements of Income Data: | ||||||||||||||||||||
Net revenues | $ | 3,676 | $ | 3,327 | $ | 3,247 | $ | 3,123 | $ | 2,764 | ||||||||||
Operating income | 1,466 | 1,318 | 1,325 | 1,285 | 1,056 | |||||||||||||||
Net income | 872 | 842 | 813 | 787 | 675 | |||||||||||||||
Earnings per share — basic | $ | 1.65 | $ | 1.59 | $ | 1.50 | $ | 1.43 | $ | 1.23 | ||||||||||
Earnings per share — diluted | $ | 1.64 | $ | 1.58 | $ | 1.49 | $ | 1.42 | $ | 1.22 | ||||||||||
Weighted average shares outstanding — basic | 529 | 531 | 543 | 550 | 549 | |||||||||||||||
Weighted average shares outstanding — diluted | 531 | 534 | 547 | 554 | 554 | |||||||||||||||
Dividends declared per share | $ | 0.72 | $ | 0.68 | $ | 0.60 | $ | 0.98 | $ | 0.86 | ||||||||||
As of September 30, | ||||||||||||||||||||
2017* | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 1,472 | $ | 1,855 | $ | 1,978 | $ | 1,460 | $ | 1,062 | ||||||||||
Investments available-for-sale, at fair value | 746 | 757 | — | — | 13 | |||||||||||||||
Total assets | 38,627 | 28,818 | 26,375 | 23,829 | 21,832 | |||||||||||||||
Notes payable and long-term obligations | 2,555 | 1,817 | 1,800 | 1,249 | 1,048 | |||||||||||||||
Stockholders' equity | 7,247 | 5,051 | 4,903 | 4,748 | 4,676 | |||||||||||||||
* The growth in our consolidated balance sheet during fiscal 2017 was primarily due to our acquisition of Scottrade on September 18, 2017.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words "may," "could," "would," "should," "believe," "expect," "anticipate," "plan," "estimate," "target," "project," "intend" and similar words or expressions. In particular, forward-looking statements contained in this discussion include our expectations regarding: the effect of client trading activity on our results of operations; the effect of changes in interest rates on our net interest spread; diluted earnings per share; amounts of commissions and transaction fees, commission revenues, order routing revenue, asset-based revenues, bank deposit account fees, net interest revenue, investment product fees and other revenues; the average yield earned on bank deposit account assets; amounts of total operating expenses, acquisition-related synergies, acquisition-related expenses, advertising expense and other expense; our effective income tax rate; our capital and liquidity needs and our plans to finance such needs; and our clearinghouse deposit requirements.
The Company's actual results could differ materially from those anticipated in such forward-looking statements. Important factors that may cause such differences include, but are not limited to: general economic and political conditions and other securities industry risks; fluctuations in interest rates; stock market fluctuations and changes in client trading activity; credit risk with clients and counterparties; increased competition; systems failures, delays and capacity constraints; cyber security and network security risks; liquidity risks; new laws and regulations affecting our business; regulatory and legal matters; difficulties and delays in integrating the Scottrade Financial Services, Inc. ("Scottrade") business or fully realizing cost savings and other benefits from the acquisition; business disruption following the Scottrade acquisition; changes in asset quality and credit risk; the inability to sustain revenue and earnings growth; changes in interest rates and capital markets; inflation; customer borrowing, repayment, investment and deposit practices; customer disintermediation; the introduction, withdrawal, success and timing of business initiatives; competitive conditions; disruptions due to Scottrade integration-related uncertainty or other factors making it more difficult to maintain relationships with employees, customers, other business partners or governmental entities; the inability to realize synergies or to implement integration plans and other consequences associated with mergers, acquisitions and uncertainties; and the other risks and uncertainties set forth under Item 1A — Risk Factors of this Form 10-K. The forward-looking statements contained in this report speak only as of the date on which the statements were made. We undertake no obligation to publicly update or revise these statements, whether as a result of new information, future events or otherwise, except to the extent required by the federal securities laws.
Glossary of Terms
In discussing and analyzing our business, we utilize several metrics and other terms that are defined in the following Glossary of Terms. Italics indicate other defined terms that appear elsewhere in the Glossary. The term "GAAP" refers to U.S. generally accepted accounting principles.
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 commissions and transaction fee revenues as reported on the Company's consolidated financial statements, less order routing revenue, divided by total trades for the period. Commissions and transaction fee revenues primarily consist of trading commissions, order routing revenue and markups on riskless principal transactions in fixed-income securities.
Basis point — When referring to interest rates, one basis point represents one one-hundredth of one percent.
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Bank deposit account fees — Revenues generated from the Insured Deposit Account agreement and a sweep program that is offered to eligible clients of the Company whereby clients' uninvested cash is swept to FDIC-insured accounts at 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 the Company on behalf of clients for securities brokerage activities. The primary types of brokerage accounts are cash accounts, margin accounts, IRA accounts and beneficiary accounts. Futures accounts are sub-accounts associated with a brokerage account for clients who want to trade futures and/or options on futures. Forex accounts are sub-accounts associated with a brokerage account for clients who want to engage in foreign exchange trading.
Cash accounts — Brokerage accounts that do not have margin account approval.
Client assets — The total value of cash and securities in brokerage accounts.
Client cash and money market assets — The sum of all client cash balances, including client credit balances and client cash balances swept into 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.
Commissions and transaction fees — Revenues earned on trading commissions, order routing revenue and markups on riskless principal transactions in fixed-income securities. Revenues earned on trading commissions includes client trades in common and preferred stock, ETFs, closed-end funds, options, futures, foreign exchange, mutual funds and fixed income securities.
Consolidated duration — The weighted average remaining years until maturity of our spread-based assets. For purposes of this calculation, floating rate balances are treated as having a one-month duration. Consolidated duration is used in analyzing our aggregate interest rate sensitivity.
Daily average revenue trades ("DARTs") — Total trades divided by the number of trading days in the period. This metric is also known as average client trades per day.
EBITDA — EBITDA (earnings before interest, taxes, depreciation and amortization) is a non-GAAP financial measure. We consider EBITDA to be an important measure of our financial performance and of our ability to generate cash flows to service debt, fund capital expenditures and fund other corporate investing and financing activities. EBITDA is used as the denominator in the consolidated leverage ratio calculation for covenant purposes under our senior revolving credit facility. EBITDA eliminates the non-cash effect of tangible asset depreciation and amortization and intangible asset amortization. EBITDA should be considered in addition to, rather than as a substitute for, GAAP pre-tax income, net income and cash flows from operating activities.
Fee-based investment balances — Client assets invested in money market mutual funds, other mutual funds and Company programs such as AdvisorDirect,® Essential Portfolios® and Selective 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 the Company on behalf of clients for foreign exchange trading. Each forex account must be associated with a brokerage account. Forex accounts are not counted separately for purposes of the Company's client account metrics.
Funded accounts — All open client accounts with a total liquidation value greater than zero.
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Futures accounts — Sub-accounts maintained by the Company on behalf of clients for trading in futures and/or options on futures. Each futures account must be associated with a brokerage account. Futures accounts are not counted separately for purposes of the Company's client account metrics.
Insured deposit account — The Company is party to an Insured Deposit Account ("IDA") agreement with TD Bank USA, N.A. ("TD Bank USA"), TD Bank, N.A. and The Toronto-Dominion Bank ("TD"). Under the IDA agreement, TD Bank USA and TD Bank, N.A. (together, the "TD Depository Institutions") make available to clients of the Company FDIC-insured money market deposit accounts as either designated sweep vehicles or as non-sweep deposit accounts. The Company provides marketing, recordkeeping and support services for the TD Depository Institutions with respect to the money market deposit accounts. In exchange for providing these services, the TD Depository Institutions pay the Company an aggregate marketing fee based on the weighted average yield earned on the client IDA assets, less the actual interest paid to clients, a servicing fee to the TD Depository Institutions and the cost of FDIC insurance premiums. Fee revenues earned under this agreement are included in bank deposit account fees on the Company's 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 include fees earned on money market mutual funds, other mutual funds and through Company programs such as AdvisorDirect® and Selective Portfolios®.
IRA accounts (Individual Retirement Arrangements) — A personal trust account for the exclusive benefit of a U.S. individual (or his or her beneficiaries) that provides tax advantages in accumulating funds to save for retirement or other qualified purposes. These accounts are subject to numerous restrictions on additions to and withdrawals from the account, as well as prohibitions against certain investments or transactions conducted within the account. The Company offers traditional, Roth, Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) IRA accounts.
Liquid assets available for corporate investing and financing activities — Liquid assets available for corporate investing and financing activities is a non-GAAP financial measure. We consider liquid assets available for corporate investing and financing activities to be an important measure of our liquidity. We define liquid assets available for corporate investing and financing activities as the sum of (a) excess corporate cash and cash equivalents and investments, less securities sold under agreements to repurchase, and (b) our regulated subsidiaries' net capital in excess of minimum operational targets established by management. Excess corporate cash and cash equivalents and investments includes cash and cash equivalents from our investment advisory subsidiaries and excludes (i) amounts being maintained to provide liquidity for operational contingencies, including lending to our broker-dealer and FCM/FDM subsidiaries under intercompany credit agreements, (ii) amounts maintained for corporate working capital and (iii) amounts held as collateral for derivative contracts. We include the excess capital of our regulated subsidiaries in the calculation of liquid assets available for corporate investing and financing activities, rather than simply including regulated subsidiaries' cash and cash equivalents, because capital requirements may limit the amount of cash available for dividend from the regulated subsidiaries to the parent company. Excess capital, as defined under clause (b) above, is generally available for dividend from the regulated subsidiaries to the parent company. Liquid assets available for corporate investing and financing activities is based on more conservative measures of net capital than regulatory requirements because we generally manage to higher levels of net capital at our regulated subsidiaries than the regulatory thresholds require. Liquid assets available for corporate investing and financing activities should be considered as a supplemental measure of liquidity, rather than as a substitute for GAAP cash and cash equivalents.
Liquidation value — The net value of a client's account holdings as of the close of a regular trading session. Liquidation value includes client cash and the value of long security positions, less margin balances and the cost to buy back short security positions. It also includes the value of open futures, foreign exchange and options positions.
Margin accounts — Brokerage accounts in which clients may borrow from the Company to buy securities or for any other purpose, subject to regulatory and Company-imposed limitations.
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Market fee-based investment balances — Client assets invested in mutual funds (except money market funds) and Company programs such as AdvisorDirect,® Essential Portfolios® and Selective Portfolios,® on which we earn fee revenues that are largely based on a percentage of the market value of the investment. Market fee-based investment balances are a component of fee-based investment balances. Fee revenues earned on these balances are included in investment product fees on our consolidated financial statements.
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 Company non-brokerage borrowings.
Net new assets — Consists of total client asset inflows, less total client asset outflows, excluding activity from business combinations. Client asset inflows include interest and dividend payments and exclude changes in client assets due to market fluctuations. Net new assets are measured based on the market value of the assets as of the date of the inflows and outflows.
Net new asset growth rate (annualized) — Annualized net new assets as a percentage of client assets as of the beginning of the period.
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 amortization of acquired intangible assets and acquisition-related expenses. 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 will allow for a better evaluation of the operating performance of the business and facilitate 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 the Company’s 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 diluted EPS.
Order routing revenue — Revenues generated from revenue-sharing arrangements with market destinations (also referred to as "payment for order flow"). Order routing revenue is a component of transaction-based revenues.
Securities borrowing — We borrow securities temporarily from other broker-dealers in connection with our broker-dealer business. We deposit cash as collateral for the securities borrowed, and generally earn interest revenue on the cash deposited with the counterparty. We also incur interest expense for borrowing certain securities.
Securities lending — We loan securities temporarily to other broker-dealers in connection with our broker-dealer business. We receive cash as collateral for the securities loaned, and generally incur interest expense on the cash deposited with us. We also earn revenue for lending certain securities.
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.
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Total trades — Revenue-generating client securities trades, which are executed by the Company's broker-dealer and FCM/FDM subsidiaries. Total trades are a significant source of the Company's revenues. Such trades include, but are not limited to, trades in equities, options, futures, foreign exchange, mutual funds and debt instruments. Trades generate revenue from commissions, markups on riskless principal transactions in fixed income securities, transaction fees and/or order routing revenue.
Trading days — Days in which the U.S. equity markets are open for a full trading session. Reduced exchange trading sessions are treated as half trading days.
Transaction-based revenues — Revenues generated from client trade execution, consisting primarily of commissions, markups on riskless principal transactions in fixed income securities, transaction clearing fees and order routing revenue.
Financial Statement Overview
We provide securities brokerage and clearing services to our clients through our introducing and clearing broker-dealer subsidiaries. We also provide futures and foreign exchange trade execution services to our clients through our futures commission merchant ("FCM") and forex dealer member ("FDM") subsidiary. Substantially all of our net revenues are derived from our brokerage activities and clearing and execution services. Our primary focus is serving retail clients and independent registered investment advisors by providing services with straightforward, affordable pricing.
Our largest sources of revenues are asset-based revenues and transaction-based revenues. 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 client trades and average commissions per trade. We also receive order routing revenue, which results from arrangements we have with many execution agents to receive cash payments in exchange for routing trade orders to these firms for execution. Order routing revenue is included in commissions and transaction fees on our consolidated financial statements.
Our largest operating expense generally is employee compensation and benefits. Employee compensation and benefits expense includes salaries, bonuses, stock-based compensation, group insurance, contributions to benefit programs, recruitment, severance and other related employee costs.
Clearing and execution costs include incremental third-party expenses that tend to fluctuate as a result of fluctuations in client accounts or trades. Examples of expenses included in this category are outsourced clearing services, statement and confirmation processing and postage costs and clearing expenses paid to the National Securities Clearing Corporation, option exchanges and other market centers. Communications expense includes telecommunications, other postage, news and quote costs. Occupancy and equipment costs include the costs of leasing and maintaining our office spaces, software licensing and maintenance costs and maintenance expenses on computer hardware and other equipment. Depreciation and amortization includes depreciation on property and equipment and amortization of leasehold improvements. Amortization of acquired intangible assets consists of amortization of amounts allocated to the value of intangible assets acquired in business combinations.
Professional services expense includes costs paid to outside firms for assistance with legal, accounting, technology, regulatory, marketing and general management issues. Advertising costs include production and placement of advertisements in various media, including online, television, print and email, as well as client promotion and development costs. Advertising expenses may fluctuate significantly from period to period. Other operating expenses include provision for bad debt losses, fraud and error losses, gains or losses on disposal of property, insurance expenses, travel expenses and other miscellaneous expenses.
Interest on borrowings consists of interest expense on our long-term debt and other borrowings. Gain on sale of investments represents gains realized on corporate (non broker-dealer) investments.
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Acquisition of Scottrade
On September 18, 2017, we completed our previously announced acquisition of Scottrade, a Delaware corporation, pursuant to an Agreement and Plan of Merger dated October 24, 2016 (the "Merger Agreement"), among the Company, Rodger O. Riney, as Voting Trustee of the Rodger O. Riney Family Voting Trust U/A/D 12/31/2012 (the "Riney Stockholder"), and Alto Acquisition Corp. (the "Merger Subsidiary"), a wholly-owned subsidiary of the Company. Pursuant to the terms of the Merger Agreement, the Merger Subsidiary merged with and into Scottrade (the "Acquisition"), with Scottrade surviving as our wholly-owned subsidiary.
Immediately prior to the closing of the Acquisition, pursuant to the terms and conditions set forth in a separate Agreement and Plan of Merger, TD Bank, N.A., a wholly-owned subsidiary of The Toronto-Dominion Bank ("TD"), acquired Scottrade Bank, which was a wholly-owned subsidiary of Scottrade, from Scottrade (the "Bank Merger") for approximately $1.38 billion in cash, subject to post-closing adjustments (the "Bank Merger Consideration"). Immediately prior to the closing of the Acquisition, we also issued 11,074,197 shares of our common stock to TD at a price of $36.12 per share, or approximately $400 million, pursuant to a subscription agreement dated October 24, 2016 between the Company and TD and in satisfaction of certain preemptive stock purchase rights of TD as set forth in the Stockholders Agreement between the Company and TD dated as of June 22, 2005, as amended. Immediately following the Bank Merger, the Acquisition was completed. The aggregate consideration paid by us for all of the outstanding capital stock of Scottrade consisted of 27,685,493 shares of our common stock and $3.07 billion in cash, subject to post-closing adjustments (the "Cash Consideration"). The Cash Consideration was funded with the Bank Merger Consideration paid by TD Bank, N.A. to Scottrade, the proceeds received from our issuance of the 3.300% Senior Notes on April 27, 2017, cash on hand and cash proceeds from the sale of our common stock to TD, as described above. At the closing of the Acquisition, 1,736,815 shares of our common stock otherwise payable to the Riney Stockholder were deposited into a third-party custodian account (the “Escrow Account”) pursuant to an escrow agreement to secure certain indemnification obligations of the Riney Stockholder under the Merger Agreement.
In connection with the closing of the Acquisition, we also entered into a registration rights agreement with TD, the Riney Stockholder and the other stockholders described therein (the "Ricketts Stockholders") providing for certain customary registration rights with respect to their shares of our common stock. With respect to TD and the Ricketts Stockholders, this registration rights agreement supersedes and replaces the Amended and Restated Registration Rights Agreement, dated as of June 22, 2005, by and among the Company, TD and the Ricketts Stockholders.
In connection with the closing of the Acquisition, we entered into a stockholder agreement with the Riney Stockholder (the "Riney Stockholders Agreement"), which contains various provisions relating to stock ownership, voting, election of directors and other matters.
We expect to realize approximately $175 million to $225 million of pre-tax expense synergies from the Acquisition during fiscal 2018, primarily consisting of cost savings related to the elimination of duplicate expenditures.
For additional information regarding the acquisition, see Note 2 - Business Acquisition under Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires us to make judgments and estimates that may have a significant impact upon our financial results. Note 1, under Item 8, Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements, of this Form 10-K 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
We test goodwill and our indefinite-lived acquired intangible asset for impairment on at least an annual basis, or whenever events occur or changes in circumstances indicate that the carrying values may not be recoverable. In performing the goodwill impairment tests, we utilize quoted market prices of our common stock to estimate the fair value of the Company as a whole. The estimated fair value is then allocated to our reporting units based on operating
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revenues, and is compared with the carrying value of the reporting units. No impairment charges have resulted from our annual goodwill impairment tests.
To determine if the indefinite-lived intangible asset is impaired, we first assess certain qualitative factors. Based on this assessment, if it is determined that more likely than not the fair value of the indefinite-lived intangible asset is less than its carrying amount, we perform a quantitative impairment test. No impairment charges have resulted from the annual indefinite-lived intangible asset impairment tests.
We review our finite-lived acquired intangible assets for impairment whenever events occur or changes in circumstances indicate that the carrying amount of such asset may not be recoverable. We evaluate recoverability by comparing the undiscounted cash flows associated with the asset to the asset's carrying amount. We also evaluate the remaining useful lives of intangible assets each reporting period to determine if events or trends warrant a revision to the remaining period of amortization. We have had no events or trends that have warranted a material revision to the originally estimated useful lives.
Estimates of effective income tax rates, uncertain tax positions, deferred income taxes and related valuation allowances
We estimate our income tax expense based on the various jurisdictions where we conduct business. This requires us to estimate our current income tax obligations and to assess temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities. Temporary differences result in deferred income tax assets and liabilities. We must evaluate the likelihood that deferred income tax assets will be realized. To the extent we determine that realization is not "more likely than not," we establish a valuation allowance. Establishing or increasing a valuation allowance results in a corresponding increase to income tax expense in our consolidated financial statements. Conversely, to the extent circumstances indicate that a valuation allowance can be reduced or is no longer necessary, that portion of the valuation allowance is reversed, reducing income tax expense.
We must make significant judgments to calculate our provision for income taxes, our deferred income tax assets and liabilities and any valuation allowance against our deferred income tax assets. We must also exercise judgment in determining the need for, and amount of, any accruals for uncertain tax positions. Because the application of tax laws and regulations to many types of transactions is subject to varying interpretations, amounts reported in our consolidated financial statements could be significantly changed at a later date upon final determinations by taxing authorities.
Accruals for contingent liabilities
Accruals for contingent liabilities, such as legal and regulatory claims and proceedings, reflect an estimate of probable losses for each matter. In making such estimates, we consider many factors, including the progress of the matter, prior experience and the experience of others in similar matters, available defenses, insurance coverage, indemnification provisions and the advice of legal counsel and other experts. In many matters, such as those in which substantial or indeterminate damages or fines are sought, or where cases or proceedings are in the early stages, it is not possible to determine whether a loss will be incurred, or to estimate the range of that loss, until the matter is close to resolution, in which case no accrual is made until that time. Because matters may be resolved over long periods of time, accruals are adjusted as more information becomes available or when an event occurs requiring a change. Significant judgment is required in making these estimates, and the actual cost of resolving a matter may ultimately differ materially from the amount accrued.
Valuation of guarantees
We enter into guarantees in the ordinary course of business, primarily to meet the needs of our clients and to manage our asset-based revenues. We record a liability for the estimated fair value of the guarantee at its inception. If actual results differ significantly from these estimates, our results of operations could be materially affected. For further details regarding our guarantees, see the following sections under Item 8, Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements: "Guarantees" under Note 15 — Commitments and Contingencies and "Insured Deposit Account Agreement" under Note 21 — Related Party Transactions.
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Results of Operations
Conditions in the U.S. equity markets significantly impact the volume of our clients' trading activity. There is a strong relationship between the volume of our clients' trading activity and our results of operations. We cannot predict future trading volumes in the U.S. equity markets. If client trading activity increases, we generally expect that it would have a positive impact on our results of operations. If client trading activity declines, we expect that it would have a negative impact on our results of operations.
Changes in average balances, especially client bank deposit account, margin, credit and mutual fund balances, may significantly impact our results of operations. Changes in interest rates also significantly impact our results of operations. We seek to mitigate interest rate risk by aligning the average duration of our interest-earning assets with that of our interest-bearing liabilities. We cannot predict the direction of interest rates or the levels of client balances. If interest rates rise, we generally expect to earn a larger net interest spread. Conversely, a falling interest rate environment generally would result in our earning a smaller net interest spread.
Financial Performance Metrics
Net income, diluted earnings per share and EBITDA are key metrics we use in evaluating our financial performance. Net income and diluted earnings per share are GAAP financial measures and EBITDA is a non-GAAP financial measure.
We consider EBITDA to be an important measure of our financial performance and of our ability to generate cash flows to service debt, fund capital expenditures and fund other corporate investing and financing activities. EBITDA is used as the denominator in the consolidated leverage ratio calculation for covenant purposes under 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):
Fiscal Year Ended September 30, | |||||||||||||||||||||
2017 | 2016 | 2015 | |||||||||||||||||||
$ | % of Net Revenues | $ | % of Net Revenues | $ | % of Net Revenues | ||||||||||||||||
Net income | $ | 872 | 23.7 | % | $ | 842 | 25.3 | % | $ | 813 | 25.0 | % | |||||||||
Add: | |||||||||||||||||||||
Depreciation and amortization | 102 | 2.8 | % | 92 | 2.8 | % | 91 | 2.8 | % | ||||||||||||
Amortization of acquired intangible assets | 79 | 2.1 | % | 86 | 2.6 | % | 90 | 2.8 | % | ||||||||||||
Interest on borrowings | 71 | 1.9 | % | 53 | 1.6 | % | 43 | 1.3 | % | ||||||||||||
Provision for income taxes | 522 | 14.2 | % | 423 | 12.7 | % | 475 | 14.6 | % | ||||||||||||
EBITDA | $ | 1,646 | 44.8 | % | $ | 1,496 | 45.0 | % | $ | 1,512 | 46.6 | % | |||||||||
Fiscal Year Ended September 30, 2017 Compared to Fiscal Year Ended September 30, 2016
Our net income increased 4% for fiscal 2017 compared to fiscal 2016, primarily due to an increase in net revenues, partially offset by an increase in operating expenses, a higher effective tax rate during fiscal 2017 and an increase in interest on borrowings due to increases in our average debt outstanding and the average effective interest rate incurred on our debt. Detailed analysis of net revenues and expenses is presented later in this discussion.
Our EBITDA increased 10% for fiscal 2017 compared to fiscal 2016, primarily due to an increase in net revenues, partially offset by an increase in operating expenses excluding depreciation and amortization.
Our diluted earnings per share increased 4% to $1.64 for fiscal 2017 compared to $1.58 for fiscal 2016, primarily due to higher net income. Based on our expectations for net revenues and expenses, which includes an estimated $320 million to $410 million of acquisition-related expenses, we expect diluted earnings per share to range from $1.50 to $2.00 for fiscal year 2018, depending largely on the level of client trading activity, client asset growth and
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the level of interest rates. Details regarding our fiscal year 2018 expectations for net revenues and expenses are presented later in this discussion.
Fiscal Year Ended September 30, 2016 Compared to Fiscal Year Ended September 30, 2015
Our net income increased 4% for fiscal 2016 compared to fiscal 2015, primarily due to an increase in net revenues and a lower effective tax rate, partially offset by an increase in operating expenses and interest on borrowings during fiscal 2016 and a $7 million gain on sale of investments during the prior year.
Our EBITDA decreased 1% for fiscal 2016 compared to fiscal 2015, primarily due to an increase in operating expenses excluding depreciation and amortization during fiscal 2016 and a $7 million gain on sale of investments during the prior year, partially offset by an increase in net revenues.
Our diluted earnings per share increased 6% to $1.58 for fiscal 2016 compared to $1.49 for fiscal 2015, primarily due to higher net income and a 2% decrease in 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 fiscal 2017, asset-based revenues and transaction-based revenues accounted for 60% and 38% 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 client 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 client and brokerage-related asset balances, including bank deposit account balances, client margin balances, segregated cash, deposits paid on securities borrowing and other cash and interest-earning investment balances. The following table sets forth net interest margin and average spread-based assets (dollars in millions):
Fiscal Year | '17 vs. '16 Increase/ (Decrease) | '16 vs. '15 Increase/ (Decrease) | ||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||
Average bank deposit account balances | $ | 93,922 | $ | 83,706 | $ | 75,737 | $ | 10,216 | $ | 7,969 | ||||||||||
Average interest-earning assets | 25,316 | 22,652 | 20,223 | 2,664 | 2,429 | |||||||||||||||
Average spread-based balances | $ | 119,238 | $ | 106,358 | $ | 95,960 | $ | 12,880 | $ | 10,398 | ||||||||||
Bank deposit account fee revenue | $ | 1,107 | $ | 926 | $ | 839 | $ | 181 | $ | 87 | ||||||||||
Net interest revenue | 690 | 595 | 622 | 95 | (27 | ) | ||||||||||||||
Spread-based revenue | $ | 1,797 | $ | 1,521 | $ | 1,461 | $ | 276 | $ | 60 | ||||||||||
Average yield — bank deposit account fees | 1.16 | % | 1.09 | % | 1.09 | % | 0.07 | % | 0.00 | % | ||||||||||
Average yield — interest-earning assets | 2.69 | % | 2.59 | % | 3.03 | % | 0.10 | % | (0.44 | )% | ||||||||||
Net interest margin (NIM) | 1.49 | % | 1.41 | % | 1.50 | % | 0.08 | % | (0.09 | )% | ||||||||||
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The following tables set forth key metrics that we use in analyzing net interest revenue, which is a component of net interest margin (dollars in millions):
Interest Revenue (Expense) Fiscal Year | '17 vs. '16 Increase/ (Decrease) | '16 vs. '15 Increase/ (Decrease) | ||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||
Segregated cash | $ | 49 | $ | 15 | $ | 5 | $ | 34 | $ | 10 | ||||||||||
Client margin balances | 482 | 436 | 443 | 46 | (7 | ) | ||||||||||||||
Securities lending/borrowing, net | 139 | 141 | 174 | (2 | ) | (33 | ) | |||||||||||||
Other cash and interest-earning investments | 22 | 5 | 1 | 17 | 4 | |||||||||||||||
Client credit balances | (2 | ) | (2 | ) | (1 | ) | — | (1 | ) | |||||||||||
Net interest revenue | $ | 690 | $ | 595 | $ | 622 | $ | 95 | $ | (27 | ) | |||||||||
Average Balance Fiscal Year | '17 vs. '16 % Change | '16 vs. '15 % Change | ||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||
Segregated cash | $ | 8,282 | $ | 7,034 | $ | 4,683 | 18 | % | 50 | % | ||||||||
Client margin balances | 12,542 | 11,751 | 12,113 | 7 | % | (3 | )% | |||||||||||
Securities borrowing | 1,004 | 932 | 924 | 8 | % | 1 | % | |||||||||||
Other cash and interest-earning investments | 3,488 | 2,935 | 2,503 | 19 | % | 17 | % | |||||||||||
Interest-earning assets | $ | 25,316 | $ | 22,652 | $ | 20,223 | 12 | % | 12 | % | ||||||||
Client credit balances | $ | 16,182 | $ | 14,669 | $ | 12,440 | 10 | % | 18 | % | ||||||||
Securities lending | 2,004 | 2,084 | 2,258 | (4 | )% | (8 | )% | |||||||||||
Interest-bearing liabilities | $ | 18,186 | $ | 16,753 | $ | 14,698 | 9 | % | 14 | % | ||||||||
Average Yield (Cost) Fiscal Year | '17 vs. '16 Net Yield Increase/ (Decrease) | '16 vs. '15 Net Yield Increase/ (Decrease) | |||||||||||||
2017 | 2016 | 2015 | |||||||||||||
Segregated cash | 0.58 | % | 0.21 | % | 0.11 | % | 0.37 | % | 0.10 | % | |||||
Client margin balances | 3.79 | % | 3.65 | % | 3.60 | % | 0.14 | % | 0.05 | % | |||||
Other cash and interest-earning investments | 0.63 | % | 0.18 | % | 0.04 | % | 0.45 | % | 0.14 | % | |||||
Client credit balances | (0.01 | )% | (0.01 | )% | (0.01 | )% | 0.00 | % | 0.00 | % | |||||
Net interest revenue | 2.69 | % | 2.59 | % | 3.03 | % | 0.10 | % | (0.44 | )% | |||||
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The following tables set forth key metrics that we use in analyzing investment product fee revenues (dollars in millions):
Fee Revenue Fiscal Year | '17 vs. '16 Increase/ (Decrease) | '16 vs. '15 Increase/ (Decrease) | ||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||
Money market mutual fund | $ | 16 | $ | 11 | $ | — | $ | 5 | $ | 11 | ||||||||||
Market fee-based investment balances | 407 | 363 | 334 | 44 | 29 | |||||||||||||||
Total investment product fees | $ | 423 | $ | 374 | $ | 334 | $ | 49 | $ | 40 | ||||||||||
Average Balance Fiscal Year | '17 vs. '16 % Change | '16 vs. '15 % Change | ||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||
Money market mutual fund | $ | 3,613 | $ | 5,671 | $ | 5,620 | (36 | )% | 1 | % | ||||||||
Market fee-based investment balances | 181,510 | 155,063 | 150,431 | 17 | % | 3 | % | |||||||||||
Total fee-based investment balances | $ | 185,123 | $ | 160,734 | $ | 156,051 | 15 | % | 3 | % | ||||||||
Average Yield Fiscal Year | '17 vs. '16 Increase/ (Decrease) | '16 vs. '15 Increase/ (Decrease) | |||||||||||||
2017 | 2016 | 2015 | |||||||||||||
Money market mutual fund | 0.42 | % | 0.19 | % | 0.01 | % | 0.23 | % | 0.18 | % | |||||
Market fee-based investment balances | 0.22 | % | 0.23 | % | 0.22 | % | (0.01 | )% | 0.01 | % | |||||
Total investment product fees | 0.23 | % | 0.23 | % | 0.21 | % | 0.00 | % | 0.02 | % | |||||
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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:
Fiscal Year | '17 vs. '16 % Change | '16 vs. '15 % Change | ||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||
Total trades (in millions) | 127.68 | 116.66 | 115.85 | 9 | % | 1 | % | |||||||||||
Average client trades per day | 510,710 | 462,918 | 461,541 | 10 | % | 0 | % | |||||||||||
Trading days | 250.0 | 252.0 | 251.0 | (1 | )% | 0 | % | |||||||||||
Average commissions per trade(1) | $ | 8.33 | $ | 9.20 | $ | 9.50 | (9 | )% | (3 | )% | ||||||||
Order routing revenue (in millions) | $ | 320 | $ | 299 | $ | 299 | 7 | % | 0 | % | ||||||||
(1) Effective in September 2017, the average commissions per trade metric was revised to exclude order routing revenue. Prior periods have been updated to conform to the current presentation.
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:
Fiscal Year | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Funded accounts (beginning of year) | 6,950,000 | 6,621,000 | 6,301,000 | |||||||||
Funded accounts (end of year) | 11,004,000 | 6,950,000 | 6,621,000 | |||||||||
Percentage change during year | 58 | % | 5 | % | 5 | % | ||||||
Client assets (beginning of year, in billions) | $ | 773.8 | $ | 667.4 | $ | 653.1 | ||||||
Client assets (end of year, in billions) | $ | 1,118.5 | $ | 773.8 | $ | 667.4 | ||||||
Percentage change during year | 45 | % | 16 | % | 2 | % | ||||||
Net new assets (in billions) | $ | 80.1 | $ | 60.3 | $ | 63.0 | ||||||
Net new assets growth rate | 10 | % | 9 | % | 10 | % | ||||||
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Consolidated Statements of Income Data
The following table summarizes certain data from our Consolidated Statements of Income for analysis purposes (dollars in millions):
Fiscal Year | '17 vs. '16 % Change | '16 vs. '15 % Change | ||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||
Revenues: | ||||||||||||||||||
Transaction-based revenues: | ||||||||||||||||||
Commissions and transaction fees | $ | 1,384 | $ | 1,372 | $ | 1,401 | 1 | % | (2 | )% | ||||||||
Asset-based revenues: | ||||||||||||||||||
Bank deposit account fees | 1,107 | 926 | 839 | 20 | % | 10 | % | |||||||||||
Net interest revenue | 690 | 595 | 622 | 16 | % | (4 | )% | |||||||||||
Investment product fees | 423 | 374 | 334 | 13 | % | 12 | % | |||||||||||
Total asset-based revenues | 2,220 | 1,895 | 1,795 | 17 | % | 6 | % | |||||||||||
Other revenues | 72 | 60 | 51 | 20 | % | 18 | % | |||||||||||
Net revenues | 3,676 | 3,327 | 3,247 | 10 | % | 2 | % | |||||||||||
Operating expenses: | ||||||||||||||||||
Employee compensation and benefits | 962 | 839 | 807 | 15 | % | 4 | % | |||||||||||
Clearing and execution costs | 149 | 136 | 148 | 10 | % | (8 | )% | |||||||||||
Communications | 131 | 137 | 125 | (4 | )% | 10 | % | |||||||||||
Occupancy and equipment costs | 181 | 171 | 163 | 6 | % | 5 | % | |||||||||||
Depreciation and amortization | 102 | 92 | 91 | 11 | % | 1 | % | |||||||||||
Amortization of acquired intangible assets | 79 | 86 | 90 | (8 | )% | (4 | )% | |||||||||||
Professional services | 260 | 178 | 159 | 46 | % | 12 | % | |||||||||||
Advertising | 254 | 260 | 248 | (2 | )% | 5 | % | |||||||||||
Other | 92 | 110 | 91 | (16 | )% | 21 | % | |||||||||||
Total operating expenses | 2,210 | 2,009 | 1,922 | 10 | % | 5 | % | |||||||||||
Operating income | 1,466 | 1,318 | 1,325 | 11 | % | (1 | )% | |||||||||||
Other expense (income): | ||||||||||||||||||
Interest on borrowings | 71 | 53 | 43 | 34 | % | 23 | % | |||||||||||
Loss on debt refinancing | 1 | — | — | N/A | N/A | |||||||||||||
Gain on sale of investments | — | — | (7 | ) | N/A | (100 | )% | |||||||||||
Other | — | — | 1 | N/A | (100 | )% | ||||||||||||
Total other expense (income) | 72 | 53 | 37 | 36 | % | 43 | % | |||||||||||
Pre-tax income | 1,394 | 1,265 | 1,288 | 10 | % | (2 | )% | |||||||||||
Provision for income taxes | 522 | 423 | 475 | 23 | % | (11 | )% | |||||||||||
Net income | $ | 872 | $ | 842 | $ | 813 | 4 | % | 4 | % | ||||||||
Other information: | ||||||||||||||||||
Effective income tax rate | 37.4 | % | 33.4 | % | 36.9 | % | ||||||||||||
Average debt outstanding | $ | 2,093 | $ | 1,748 | $ | 1,564 | 20 | % | 12 | % | ||||||||
Effective interest rate incurred on borrowings | 3.40 | % | 3.03 | % | 2.73 | % | ||||||||||||
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Fiscal Year Ended September 30, 2017 Compared to Fiscal Year Ended September 30, 2016
Net Revenues
Commissions and transaction fees increased 1% to $1.38 billion, primarily due to increased client trading activity, partially offset by lower average commissions per trade and the effect of two less trading days during fiscal 2017 compared to fiscal 2016. Total trades increased 9% as average client trades per day increased 10% to 510,710 for fiscal 2017 compared to 462,918 for fiscal 2016. Average commissions per trade decreased to $8.33 from $9.20, primarily due to our reduction in client pricing for online equity and option trades. Effective March 6, 2017, we reduced our online equity and ETF trade commissions from $9.99 to $6.95 per trade and also lowered options pricing to $6.95 per trade (plus $0.75 per contract). We expect average commissions per trade to decrease to between $7.50 and $7.80 per trade during fiscal 2018, reflecting a full-year impact of reduced client pricing for online equity trades. Average commissions per trade is also dependent on the mix of client trading activity and other factors. We expect revenues from commissions and transaction fees to increase to between $1.55 billion to $1.76 billion for fiscal 2018, consisting of commission revenues ranging from $1.21 billion to $1.37 billion and order routing revenue ranging from $345 million to $385 million. The expected increase in commissions and transaction fees is primarily due to the full-year effect of Scottrade's client trading activity, partially offset by an expected decrease in the average commissions per trade as described above.
Asset-based revenues, which consist of bank deposit account fees, net interest revenue and investment product fees, increased 17% to $2.22 billion, primarily due to a 12% increase in average spread-based assets, an increase of 8 basis points in net interest margin to 1.49% and a 17% increase in average market fee-based investment balances. The increase in net interest margin was primarily due to the Federal Open Market Committee increasing the target range for the federal funds rate by 75 basis points (to between 1.00% and 1.25%) during fiscal 2017, partially offset by the impact of higher average segregated cash and other cash and interest-earning investment balances, which earn a lower net interest spread and a higher Insured Deposit Account ("IDA") management fee on floating rate balances due to the federal funds rate increases. We expect asset-based revenues to increase to between $3.0 billion and $3.39 billion for fiscal 2018, primarily due to growth in average spread-based and fee-based investment balances and increases in the average yields earned on those balances. The expected growth in the average balances reflects the full-year effect of the Scottrade acquisition and our continued organic growth. The low end of the estimated range for asset-based revenues assumes a 25 basis point increase in the federal funds rate towards the end of fiscal 2018 and a flattening of interest rates across the swap curve. The high end of the estimated range for asset-based revenues assumes multiple increases in the federal funds rate and in interest rates across the swap curve for fiscal 2018.
Bank deposit account fees increased 20% to $1.11 billion, primarily due to a 12% increase in average client bank deposit account balances and an increase of 7 basis points in the average yield earned on those balances. The growth in the average bank deposit account balances is primarily due to our success in attracting net new client assets. The average yield earned on bank deposit account assets increased primarily due to floating-rate investment balances within the IDA portfolio benefiting from the fiscal 2017 federal funds rate increases and investments within the IDA portfolio, including maturities of investments and new balance growth, being invested at higher rates. The increase in the average yield was partially offset by a higher IDA management fee on floating rate balances due to the federal funds rate increases and higher interest rates paid to clients. We expect bank deposit account fees to increase to between $1.52 billion and $1.65 billion for fiscal 2018, as we expect growth in the average bank deposit account balances and an increase in the average yield earned on those balances. The expected growth in the average bank deposit account balances reflects the full-year effect of the Scottrade acquisition and our continued organic growth. We expect the average yield earned on bank deposit account assets will increase to between 1.25% and 1.30%, primarily due to the full-year effect of the fiscal 2017 federal funds rate increases and the anticipated federal funds rate increases during fiscal 2018, along with balance growth and maturities of investments within the bank deposit account portfolio being invested at higher rates. For more information about the IDA agreement, see Note 21 — Related Party Transactions under Item 8, Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements.
Net interest revenue increased 16% to $690 million, primarily due to increases in the average yields earned on segregated cash, client margin balances and other cash and interest-earning investment balances as a result of the federal funds rate increases during fiscal 2017 and a 7% increase in average client margin balances. The average yield earned on interest-earning assets increased 10 basis points to 2.69% primarily due to the benefits realized from
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the federal funds rate increases during fiscal 2017. We expect net interest revenue to increase to between $990 million to $1.19 billion for fiscal 2018, primarily due to the expected growth in average interest-earning balances and the expected increases in the average yields earned on those balances. The expected growth in the average interest-earning balances reflects the full-year effect of the Scottrade acquisition and the expected increases in the average yields reflect the full-year effect of the fiscal 2017 federal funds rate increases and the anticipated federal funds rate increases during fiscal 2018. Net interest revenue is dependent on the extent of balance growth, the demand for stock lending and the interest rate environment.
Investment product fees increased 13% to $423 million, primarily due to a 17% increase in average market fee-based investment balances and an increase of 23 basis points in the average yield earned on money market mutual fund balances. These increases were partially offset by a decrease of 1 basis point in the average yield earned on market fee-based investment balances and a 36% decrease in the average money market mutual fund balances. We expect investment product fees to increase to between $490 million and $550 million for fiscal 2018, primarily due to the expected growth in average fee-based investment balances, reflecting the full-year effect of the Scottrade acquisition and our continued organic growth.
Other revenues increased 20% to $72 million, primarily due to increased fees related to proxy and platform services. We expect other revenues to increase to between $90 million and $100 million for fiscal 2018, primarily due to the full-year effect of the Scottrade acquisition.
Operating Expenses
Total operating expenses, which includes $88 million of acquisition-related expenses, increased 10% to $2.21 billion during fiscal 2017. We expect total operating expenses to increase to between $3.21 billion to $3.34 billion for fiscal 2018, reflecting a full year of Scottrade expenses, partially offset by expected cost synergies, ranging from $175 million to $225 million, related to the integration of Scottrade. We also expect to incur acquisition-related costs ranging from $320 million to $410 million, which are included in our range of expected total operating expenses for fiscal 2018.
Employee compensation and benefits expense increased 15% to $962 million, primarily due to an increase in average headcount related to our strategic growth initiatives and the Scottrade acquisition in September 2017, approximately $35 million of severance costs related to the Scottrade integration and higher incentive-based compensation related to Company and individual performance. The average number of full-time equivalent employees increased to 6,661 for fiscal 2017 compared to 5,858 for fiscal 2016.
Clearing and execution costs increased 10% to $149 million, primarily due to higher client trading volumes and the impact of a $5 million benefit from a retroactive fee decrease from a clearinghouse during the prior year.
Communications expense decreased 4% to $131 million, primarily due to decreased costs for quotes and market information.
Occupancy and equipment costs increased 6% to $181 million, primarily due to increased software licensing and facilities expenses.
Depreciation and amortization increased 11% to $102 million, primarily due to recent technology infrastructure upgrades and depreciation of assets recorded in the Scottrade acquisition.
Amortization of acquired intangible assets decreased 8% to $79 million, primarily due to certain acquired intangible assets becoming fully amortized during the prior year, partially offset by amortization of intangible assets recorded in the Scottrade acquisition.
Professional services expense increased 46% to $260 million, primarily due to approximately $50 million of costs for legal, accounting, consulting and contract services in connection with the Scottrade acquisition and higher usage of consulting and contract services related to other operational and technology-related initiatives.
Advertising expense decreased 2% to $254 million, primarily due to additional spending during the prior year in connection with our sponsorship of the Summer Olympics. We generally adjust our level of advertising spending in relation to stock market activity and other market conditions in an effort to maximize the number of new accounts while minimizing the advertising cost per new account. We expect advertising to increase to between $260 million and $280 million for fiscal 2018.
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Other operating expenses decreased 16% to $92 million, primarily due to $11 million of service contract termination costs incurred during the prior year and lower losses on the disposal of property during fiscal 2017.
Other Expense and Income Taxes
Interest on borrowings increased 34% to $71 million, primarily due to a 20% increase in average debt outstanding and an increase of 37 basis points in the average effective interest rate incurred on our debt. On April 27, 2017, we issued $800 million of 3.300% Senior Notes due April 1, 2027 to finance a portion of the cash consideration paid in connection with the Scottrade acquisition. Other expense is expected to increase to between $75 million and $85 million for fiscal 2018, primarily due to the full-year effect of interest expense related to the issuance of the 2027 Senior Notes.
Our effective income tax rate was 37.4% for fiscal 2017, compared to 33.4% for fiscal 2016. The effective tax rate for fiscal 2017 included $8 million of net favorable resolutions of state income tax matters and $4 million of favorable tax benefits for federal incentives. These items had a net favorable impact on our earnings for fiscal 2017 of approximately two cents per share. The effective tax rate for fiscal 2016 was impacted by $39 million of net favorable adjustments to uncertain tax positions and related deferred income tax assets, which included a favorable $33 million tax liability remeasurement related to a state court decision. The effective income tax rate was also impacted by an $18 million favorable tax benefit claimed during fiscal year 2016 for federal deductions and tax credits related to calendar tax year 2012 through September 30, 2016 and $5 million of net favorable deferred income tax adjustments due to the remeasurement of deferred tax assets and liabilities and the cumulative impact of the decline in the state tax rate. These items had a net favorable impact on our earnings of approximately twelve cents per share. We expect our effective income tax rate to range from 37% to 38% for fiscal 2018, excluding the effect of any adjustments related to remeasurement or resolution of uncertain tax positions and federal incentives. However, we expect to experience some volatility in our quarterly and annual effective income tax rate because current accounting rules for uncertain tax positions require that any change in measurement of a tax position taken in a prior tax year be recognized as a discrete event in the period in which the change occurs. We also anticipate the potential for increased volatility in future quarterly effective tax rates from the adoption of the new accounting standard for share-based compensation.
Fiscal Year Ended September 30, 2016 Compared to Fiscal Year Ended September 30, 2015
Net Revenues
Commissions and transaction fees decreased 2% to $1.37 billion, primarily due to lower average commissions per trade, slightly offset by increased client trading activity. Average commissions per trade decreased to $9.20 from $9.50, primarily due to lower average contracts per trade on option and futures trades and a slightly higher percentage of our clients' trades receiving reduced commission rates as a result of continued price competition in the industry. Total trades increased 1% as average client trades per day increased slightly to 462,918 for fiscal 2016 compared to 461,541 for fiscal 2015, and there was one more trading day during fiscal 2016 compared to fiscal 2015.
Asset-based revenues increased 6% to $1.90 billion primarily due to an 11% increase in average spread-based assets, an increase of 2 basis points in the average yield earned on total fee-based investment balances and the deferral of $10 million of revenue during fiscal 2015 related to a Selective Portfolios® fee rebate offer, as described below. These increases were partially offset by a decrease of 9 basis points in net interest margin to 1.41%, as the benefit realized on the December 2015 federal funds rate increase was more than offset by a decrease in net interest revenue from our securities borrowing/lending program and the impact of lower average client margin balances, which earn a larger net interest spread, as well as higher average cash balances, which earn a lower net interest spread. On December 16, 2015, the Federal Open Market Committee increased the target range for the federal funds rate by 0.25% to between 0.25% and 0.50%.
Bank deposit account fees increased 10% to $926 million, primarily due to an 11% increase in average client bank deposit account balances. The average yield earned on the bank deposit account assets was unchanged at 1.09% for fiscal year 2016, as the benefit realized on the December 2015 federal funds rate increase was partially offset by an increase in the IDA servicing fee due to more balances being kept in floating-rate investments and due to a $5 million FDIC surcharge during the fourth quarter of fiscal 2016. On March 15, 2016, the FDIC announced its final rule to increase the deposit insurance fund to a statutorily required minimum level by imposing a surcharge on quarterly assessments.
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Net interest revenue decreased 4% to $595 million, primarily due to a $33 million decrease in net interest revenue from our securities borrowing/lending program and a 3% decrease in average client margin balances, partially offset by increases in the average yields earned on segregated cash, client margin and other cash and interest-earning investment balances as a result of the December 2015 federal funds rate increase.
Investment product fees increased 12% to $374 million, primarily due to an increase of 2 basis points in the average yield earned on total fee-based investment balances, which includes the impact of the December 2015 federal funds rate increase, a 3% increase in average market fee-based investment balances and a $10 million revenue deferral during the prior year related to a Selective Portfolios® fee rebate offer. For client assets subject to the Selective Portfolios® fee rebate offer, if the model portfolio in which the client is invested experiences two consecutive quarters of negative performance (before advisory fees), the Company will refund the advisory fees for both quarters to the client. Several of the portfolios experienced negative performance for the last two quarters of fiscal 2015, therefore recognition of the revenue for the related advisory fees was deferred. Approximately $7 million of the deferred advisory fee revenue during fiscal 2015 represented rebate obligations that were paid during early fiscal 2016. The Selective Portfolios® fee rebate offer concluded on October 5, 2016, therefore the quarter ending September 30, 2017 will be the last period subject to the rebate offer.
Other revenues increased 18% to $60 million, primarily due to increased fees from processing corporate securities reorganizations during fiscal 2016 and unfavorable fair market value adjustments to U.S. government debt securities held for investment purposes by our broker-dealer subsidiaries during the prior year.
Operating Expenses
Total operating expenses increased 5% to $2.01 billion during fiscal 2016.
Employee compensation and benefits expense increased 4% to $839 million, primarily due to annual merit increases, additional costs of $10 million related to organizational changes and higher health insurance costs. The average number of full-time equivalent employees increased to 5,858 for fiscal 2016 compared to 5,826 for fiscal 2015.
Clearing and execution costs decreased 8% to $136 million, primarily due to lower option trade execution costs resulting from decreased option trading activity and fee reductions by the Options Clearing Corporation during fiscal 2016, including a $5 million benefit from a retroactive fee decrease during the first quarter of fiscal 2016.
Communications expense increased 10% to $137 million, primarily due to increased costs for quotes and market information.
Occupancy and equipment costs increased 5% to $171 million, primarily due to increased software maintenance and facilities expenses.
Professional services expense increased 12% to $178 million, primarily due to increased consulting and contract services in connection with operational, technology and acquisition-related initiatives.
Advertising expense increased 5% to $260 million primarily due to increased advertising in connection with our sponsorship of the Summer Olympics.
Other operating expenses increased 21% to $110 million, primarily due to $11 million of service contract termination costs, the impact of an $8 million insurance recovery during the prior year, higher losses on the disposal of property of $7 million and a $3 million recovery of money market funds from the final distribution of The Reserve Primary Fund during the prior year. These increases were partially offset by a decrease in bad debt expense and lower litigation, arbitration and regulatory losses.
Other Expense and Income Taxes
Interest on borrowings increased 23% to $53 million, primarily due to a 12% increase in average debt outstanding and an increase of 30 basis points in the average effective interest rate incurred on our debt. The increase in average debt outstanding was primarily due to our issuance, on March 4, 2015, of $750 million of 2.950% Senior Notes due April 1, 2022 for general corporate purposes, including liquidity for operational contingencies.
Our effective income tax rate was 33.4% for fiscal 2016, compared to 36.9% for fiscal 2015. The effective tax rate for fiscal 2016 was impacted by $39 million of net favorable adjustments to uncertain tax positions and related deferred income tax assets, which included a favorable $33 million tax liability remeasurement related to a state court decision. The effective income tax rate was also impacted by an $18 million favorable tax benefit claimed
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during fiscal year 2016 for federal deductions and tax credits related to calendar tax year 2012 through September 30, 2016 and $5 million of net favorable deferred income tax adjustments due to the remeasurement of deferred tax assets and liabilities and the cumulative impact of the decline in the state tax rate. These items had a net favorable impact on our earnings of approximately twelve cents per share. The effective tax rate for fiscal 2015 included $22 million of favorable resolutions of state income tax matters. This favorably impacted our earnings for fiscal 2015 by approximately four cents per share.
Liquidity and Capital Resources
As a holding company, TD Ameritrade Holding Corporation (the "Parent") conducts substantially all of its business through its operating subsidiaries, principally its broker-dealer and futures commission merchant ("FCM")/forex dealer member ("FDM") subsidiaries.
We have historically financed our liquidity and capital needs primarily through the use of funds generated from subsidiary operations and from 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 fiscal 2017 were financed primarily from our subsidiaries' earnings and cash on hand. In addition, on September 15, 2017, we entered into a repurchase agreement (securities sold under agreements to repurchase) to finance our short-term liquidity and capital needs. Under the repurchase agreement we received cash of $97 million from the counterparty and provided U.S. Treasury securities as collateral. The repurchase agreement matures on December 15, 2017. We plan to finance our ordinary capital and liquidity needs in fiscal 2018 primarily from our subsidiaries' earnings, cash on hand and short-term borrowings.
We completed the acquisition of Scottrade on September 18, 2017 and funded the transaction with new common equity, debt financing, including the issuance of $800 million aggregate principal amount of unsecured 3.300% Senior Notes due April 1, 2027, and cash on hand. For further information about the Scottrade acquisition and debt financing, see Note 2 — Business Acquisition and Note 10 — Long-term Debt and Other Borrowings under Item 8, Financial Statements and Supplementary Information — Notes to Consolidated Financial Statements.
The Parent may make loans of cash or securities under committed and/or uncommitted lines of credit with each of its primary broker-dealer and FCM/FDM subsidiaries in order to provide liquidity for operational contingencies. Liquidity for operational contingencies could be used to fund increases in our subsidiaries' deposit requirements with clearinghouses, and to provide operating liquidity for client trading and investing activity in the normal course of business and during times of market volatility. Committed facilities of $723 million and uncommitted facilities of $900 million were available to the Parent's primary broker-dealer and FCM/FDM subsidiaries as of September 30, 2017. For more information about these credit agreements, see "Long-term Debt and Other Borrowings — Intercompany Credit Agreements" later in this section.
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 ("FINRA"), the Commodity Futures Trading Commission ("CFTC"), the National Futures Association ("NFA") and other regulators relating to liquidity, capital standards and the use of client funds and securities, which may limit funds available for the payment of dividends to the Parent.
Broker-dealer and Futures Commission Merchant/Forex Dealer Member Subsidiaries
Our broker-dealer and FCM/FDM subsidiaries are subject to regulatory requirements that are intended to ensure their liquidity and general financial soundness. Under the SEC's Uniform Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of 1934, or the "Exchange Act"), our broker-dealer subsidiaries are required to maintain, at all times, at least the minimum level of net capital required under Rule 15c3-1. For our clearing broker-dealer subsidiaries, the minimum net capital level is determined by a calculation described in Rule 15c3-1 that is primarily based on the broker-dealers' "aggregate debits," which primarily consist of client margin balances at the clearing broker-dealers. 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
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amount of less than (a) 5% of aggregate debit balances or (b) 120% of its minimum dollar requirement. TD Ameritrade Futures & Forex LLC ("TDAFF"), our FCM and FDM subsidiary, must provide notice to the CFTC if its adjusted net capital amounts to less than (a) 110% of its risk-based capital requirement under CFTC Regulation 1.17, (b) 150% of its $1.0 million minimum dollar requirement, or (c) 110% of $20.0 million plus 5% of all liabilities owed to forex clients in excess of $10.0 million. These broker-dealer, FCM and FDM net capital thresholds, which are specified in Rule 17a-11 under the Exchange Act and CFTC Regulations 1.12 and 5.6, are typically referred to as "early warning" net capital thresholds.
The following tables summarize our broker-dealer and FCM/FDM subsidiaries' net capital and adjusted net capital, respectively, as of September 30, 2017 (dollars in millions):
Net Capital | Early Warning Threshold | Net Capital in Excess of Early Warning Threshold | ||||||||||
TD Ameritrade Clearing, Inc. | $ | 1,595 | $ | 849 | $ | 746 | ||||||
TD Ameritrade, Inc. | $ | 155 | $ | 0.3 | $ | 155 | ||||||
Scottrade, Inc. | $ | 348 | $ | 174 | $ | 174 | ||||||
Adjusted Net Capital | Early Warning Threshold | Adjusted Net Capital in Excess of Early Warning Threshold | ||||||||||
TD Ameritrade Futures & Forex LLC | $ | 77 | $ | 25 | $ | 52 | ||||||
Our clearing broker-dealer subsidiaries, TD Ameritrade Clearing, Inc. ("TDAC") and Scottrade, Inc. ("STI"), engage 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 our clearing broker-dealer subsidiaries' assets are readily convertible to cash, consisting primarily of cash and investments segregated for the exclusive benefit of clients, receivables from clients and receivables from brokers, dealers and clearing organizations. Cash and investments segregated for the exclusive benefit of clients may be held in cash, reverse repurchase agreements (collateralized by U.S. Treasury securities), U.S. Treasury securities, 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.
Our clearing broker-dealer subsidiaries are subject to cash deposit and collateral requirements with clearinghouses such as the Depository Trust & Clearing Corporation ("DTCC") and the OCC, which may fluctuate significantly from time to time based on the nature and size of our clients' trading activity.
The following table sets forth our clearing broker-dealer subsidiaries' cash and investments deposited with clearing organizations for the clearing of client equity and option trades (dollars in millions):
September 30, | |||||||
2017 | 2016 | ||||||
TD Ameritrade Clearing, Inc. | 476 | $ | 335 | ||||
Scottrade, Inc. | 73 | N/A | |||||
Liquidity needs for our clearing broker-dealer subsidiaries relating to client trading and margin borrowing are met primarily through cash balances in client brokerage accounts and lending of client margin securities. Cash balances in client brokerage accounts 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.
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Cash balances in client brokerage accounts are summarized in the following table (dollars in billions):
September 30, | |||||||
2017 | 2016 | ||||||
TD Ameritrade Clearing, Inc. | 18.5 | $ | 18.7 | ||||
Scottrade, Inc. | 6.2 | N/A | |||||
Cash and investments segregated in special reserve bank accounts for the exclusive benefit of clients under Rule 15c3-3 are summarized in the following table (dollars in billions):
September 30, | |||||||
2017 | 2016 | ||||||
TD Ameritrade Clearing, Inc. | 6.4 | $ | 8.4 | ||||
Scottrade, Inc. | 3.7 | N/A | |||||
For general liquidity needs, TDAC currently maintains a senior unsecured revolving credit facility in an aggregate principal amount of $600 million. This facility is described under Long-term Debt and Other Borrowings – TD Ameritrade Clearing, Inc. Credit Agreement later in this section.
In addition, we have established intercompany credit agreements under which the broker-dealer and FCM/FDM subsidiaries may borrow from the Parent. The Parent's intercompany credit agreements with TDAC and STI provide for committed revolving loan facilities of $400 million and $300 million, respectively, and an uncommitted revolving loan facility of $300 million for both TDAC and STI. The intercompany credit agreements are described under Long-Term Debt and Other Borrowings – Intercompany Credit Agreements later in this section.
Liquid Assets Available for Corporate Investing and Financing Activities
We consider "liquid assets available for corporate investing and financing activities" to be an important measure of our liquidity. Liquid assets available for corporate investing and financing activities is considered a non-GAAP financial measure. We include the excess capital of our regulated subsidiaries in the calculation of liquid assets available for corporate investing and financing activities, rather than simply including the regulated subsidiaries' cash and cash equivalents, because capital requirements may limit the amount of cash available for dividend from the regulated subsidiaries to the parent company. Excess capital, as defined below, is generally available for dividend from the regulated subsidiaries to the parent company. Liquid assets available for corporate investing and financing activities should be considered as a supplemental measure of liquidity, rather than as a substitute for GAAP cash and cash equivalents.
We define liquid assets available for corporate investing and financing activities as the sum of (a) excess corporate cash and cash equivalents and investments, less securities sold under agreements to repurchase, and (b) our regulated subsidiaries' net capital in excess of minimum operational targets established by management. Excess corporate cash and cash equivalents and investments includes cash and cash equivalents from our investment advisory subsidiaries and excludes (i) amounts being maintained to provide liquidity for operational contingencies, including lending to our broker-dealer and FCM/FDM subsidiaries under intercompany credit agreements, (ii) amounts maintained for corporate working capital and (iii) amounts held as collateral for derivative contracts. Liquid assets available for corporate investing and financing activities is based on more conservative measures of net capital than regulatory requirements because we generally manage to higher levels of net capital at our regulated subsidiaries than the regulatory thresholds require. During fiscal 2017, the liquid assets available for corporate investing and financing activities metric was revised to reflect changes in how we manage liquidity. The prior period has been updated to conform to the current presentation.
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The following table sets forth a reconciliation of cash and cash equivalents, which is the most directly comparable GAAP measure, to liquid assets available for corporate investing and financing activities (dollars in millions):
September 30, | Change | |||||||||||||
2017 | 2016 | |||||||||||||
Cash and cash equivalents - GAAP | $ | 1,472 | $ | 1,855 | $ | (383 | ) | |||||||
Less: | Non-corporate cash and cash equivalents | (1,174 | ) | (1,363 | ) | 189 | ||||||||
Corporate cash and cash equivalents | 298 | 492 | (194 | ) | ||||||||||
Corporate investments | 714 | 757 | (43 | ) | ||||||||||
Less: | Corporate liquidity maintained for operational contingencies | (723 | ) | (773 | ) | 50 | ||||||||
Amounts maintained for corporate working capital | (87 | ) | (87 | ) | — | |||||||||
Amounts held as collateral for derivative contracts | (40 | ) | (93 | ) | 53 | |||||||||
Excess corporate cash and cash equivalents and investments | 162 | 296 | (134 | ) | ||||||||||
Excess regulatory net capital over management targets | 46 | 357 | (311 | ) | ||||||||||
Liquid assets available for corporate investing and financing activities - non-GAAP | $ | 208 | $ | 653 | $ | (445 | ) | |||||||
The changes in liquid assets available for corporate investing and financing activities are summarized as follows (dollars in millions):
Liquid assets available for corporate investing and financing activities as of September 30, 2016 | $ | 653 | |||||
Plus: | EBITDA(1) | 1,646 | |||||
Proceeds from issuance of long-term debt | 798 | ||||||
Proceeds from issuance of common stock | 400 | ||||||
Other changes in working capital and regulatory net capital | 104 | ||||||
Decrease in corporate liquidity maintained for operational contingencies | 50 | ||||||
Proceeds from exercise of stock options | 23 | ||||||
Change in net capital related to daily futures client cash sweep | 11 | ||||||
Less: | Corporate cash paid in acquisition of Scottrade, net of corporate cash and cash equivalents acquired(2) | (1,625 | ) | ||||
Income taxes paid | (483 | ) | |||||