AMTD_2014.03.31_10Q

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended March 31, 2014
OR
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from              to             
Commission file number: 1-35509
 
TD Ameritrade Holding Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
 
82-0543156
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
200 South 108th Avenue, Omaha, Nebraska, 68154
(Address of principal executive offices) (Zip Code)
(402) 331-7856
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.     Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.     Yes  x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes  ¨    No  x
As of April 30, 2014, there were 551,569,868 outstanding shares of the registrant’s common stock.
 


TD AMERITRADE HOLDING CORPORATION
INDEX
 
 
 
Page No.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 


2

PART I – FINANCIAL INFORMATION
Item 1. – Financial Statements


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors
TD Ameritrade Holding Corporation
We have reviewed the condensed consolidated balance sheet of TD Ameritrade Holding Corporation and subsidiaries (the Company) as of March 31, 2014, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended March 31, 2014 and 2013, and the condensed consolidated statements of cash flows for the six-month periods ended March 31, 2014 and 2013. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of TD Ameritrade Holding Corporation and subsidiaries as of September 30, 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein) and in our report dated November 22, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2013, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
May 9, 2014


3

TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
March 31,
2014
 
September 30,
2013
 
(In millions)
ASSETS
 
 
 
Cash and cash equivalents
$
933

 
$
1,062

Cash and investments segregated and on deposit for regulatory purposes
5,216

 
5,894

Receivable from brokers, dealers and clearing organizations
1,114

 
1,348

Receivable from clients, net
11,250

 
8,984

Receivable from affiliates
117

 
117

Other receivables, net
151

 
137

Securities owned, at fair value
391

 
323

Property and equipment at cost, net
486

 
497

Goodwill
2,467

 
2,467

Acquired intangible assets, net
796

 
841

Other assets
166

 
166

Total assets
$
23,087

 
$
21,836


LIABILITIES AND STOCKHOLDERS’ EQUITY

 
 
 
Liabilities:
 
 
 
Payable to brokers, dealers and clearing organizations
$
3,032

 
$
1,973

Payable to clients
13,215

 
13,183

Accounts payable and accrued liabilities
651

 
582

Payable to affiliates
6

 
4

Notes payable
115

 
—

Deferred revenue
10

 
14

Long-term debt
1,040

 
1,052

Deferred income taxes
351

 
352

Total liabilities
18,420

 
17,160


Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value; 100 million shares authorized, none issued
—

 
—

Common stock, $0.01 par value; one billion shares authorized; 631 million shares issued;
March 31, 2014 - 551 million shares outstanding;
September 30, 2013 - 550 million shares outstanding
6

 
6

Additional paid-in capital
1,604

 
1,592

Retained earnings
4,282

 
4,304

Treasury stock, common, at cost:
March 31, 2014 - 80 million shares;
September 30, 2013 - 81 million shares
(1,219
)
 
(1,226
)
Accumulated other comprehensive loss
(6
)
 
—

Total stockholders’ equity
4,667

 
4,676

Total liabilities and stockholders’ equity
$
23,087

 
$
21,836

See notes to condensed consolidated financial statements.


4

TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
 
(In millions, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Transaction-based revenues:
 
 
 
 
 
 
 
Commissions and transaction fees
$
374

 
$
287

 
$
702

 
$
544


Asset-based revenues:
 
 
 
 
 
 
 
Interest revenue
148

 
116

 
276

 
234

Brokerage interest expense
(2
)
 
(2
)
 
(4
)
 
(3
)
Net interest revenue
146

 
114

 
272

 
231


Insured deposit account fees
202

 
200

 
410

 
405

Investment product fees
75

 
62

 
147

 
117

Total asset-based revenues
423

 
376

 
829

 
753

Other revenues
15

 
16

 
33

 
33

Net revenues
812

 
679

 
1,564

 
1,330


Operating expenses:
 
 
 
 
 
 
 
Employee compensation and benefits
193

 
178

 
376

 
346

Clearing and execution costs
34

 
27

 
63

 
51

Communications
28

 
29

 
56

 
57

Occupancy and equipment costs
40

 
40

 
77

 
79

Depreciation and amortization
24

 
20

 
48

 
41

Amortization of acquired intangible assets
22

 
22

 
45

 
45

Professional services
37

 
33

 
75

 
67

Advertising
94

 
76

 
157

 
128

Other
17

 
17

 
37

 
38

Total operating expenses
489

 
442

 
934

 
852

    
Operating income
323

 
237

 
630

 
478


Other expense (income):
 
 
 
 
 
 
 
Interest on borrowings
6

 
6

 
12

 
12

Gain on sale of investments
—

 
—

 
—

 
(2
)
Total other expense (income)
6

 
6

 
12

 
10


Pre-tax income
317

 
231

 
618

 
468

Provision for income taxes
123

 
87

 
232

 
177

Net income
$
194

 
$
144

 
$
386

 
$
291


Earnings per share - basic
$
0.35

 
$
0.26

 
$
0.70

 
$
0.53

Earnings per share - diluted
$
0.35

 
$
0.26

 
$
0.70

 
$
0.53


Weighted average shares outstanding - basic
551

 
549

 
551

 
547

Weighted average shares outstanding - diluted
556

 
554

 
555

 
552


Dividends declared per share
$
0.12

 
$
0.09

 
$
0.74

 
$
0.68

See notes to condensed consolidated financial statements.


5

TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
 
(In millions)

Net income
$
194

 
$
144

 
$
386

 
$
291


Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 

Investments available-for-sale:
 
 
 
 
 
 
 
Net unrealized gain
—

 
6

 
—

 
27


Cash flow hedging instruments:
 
 
 
 
 
 
 
Net unrealized loss
(9
)
 
—

 
(9
)
 
—

Total other comprehensive income (loss), before tax
(9
)
 
6

 
(9
)
 
27

Income tax effect
3

 
(2
)
 
3

 
(10
)
Total other comprehensive income (loss), net of tax
(6
)
 
4

 
(6
)
 
17

Comprehensive income
$
188

 
$
148

 
$
380

 
$
308

See notes to condensed consolidated financial statements.


6

TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended March 31,
 
2014
 
2013
 
(In millions)
Cash flows from operating activities:
 
 
 
Net income
$
386

 
$
291

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
48

 
41

Amortization of acquired intangible assets
45

 
45

Deferred income taxes
2

 
14

Gain on sale of investments
—

 
(2
)
Stock-based compensation
16

 
15

Excess tax benefits on stock-based compensation
(8
)
 
(24
)
Other, net
(1
)
 
(1
)
Changes in operating assets and liabilities:
 
 
 
Cash and investments segregated and on deposit for regulatory purposes
678

 
(354
)
Receivable from brokers, dealers and clearing organizations
234

 
(189
)
Receivable from clients, net
(2,266
)
 
(203
)
Receivable from/payable to affiliates, net
2

 
(50
)
Other receivables, net
(14
)
 
(11
)
Securities owned, at fair value
(68
)
 
(20
)
Other assets
(25
)
 
(10
)
Payable to brokers, dealers and clearing organizations
1,059

 
324

Payable to clients
32

 
789

Accounts payable and accrued liabilities
70

 
13

Deferred revenue
(4
)
 
(8
)
Net cash provided by operating activities
186

 
660


Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(37
)
 
(92
)
Proceeds from sale and maturity of short-term investments
—

 
150

Proceeds from sale of investments
13

 
3

Other
1

 
1

Net cash provided by (used in) investing activities
(23
)
 
62

 
See notes to condensed consolidated financial statements.

7

TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Unaudited)
 
 
Six Months Ended March 31,
 
2014
 
2013
 
(In millions)
Cash flows from financing activities:
 
 
 
Principal payments on long-term debt
$
—

 
$
(250
)
Proceeds from notes payable
155

 
275

Principal payments on notes payable
(40
)
 
(110
)
Payment of cash dividends
(408
)
 
(372
)
Proceeds from exercise of stock options: Six months ended
March 31, 2014 - 0.4 million shares; 2013 - 4.6 million shares
7

 
19

Purchase of treasury stock: Six months ended
March 31, 2014 - 0.5 million shares; 2013 - 0.2 million shares
(14
)
 
(4
)
Principal payments on capital lease obligations
—

 
(1
)
Excess tax benefits on stock-based compensation
8

 
24

Net cash used in financing activities
(292
)
 
(419
)

Net increase (decrease) in cash and cash equivalents
(129
)
 
303


Cash and cash equivalents at beginning of period
1,062

 
915

Cash and cash equivalents at end of period
$
933

 
$
1,218


Supplemental cash flow information:
 
 
 
Interest paid
$
15

 
$
16

Income taxes paid
$
127

 
$
103

See notes to condensed consolidated financial statements.


8

TD AMERITRADE HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Month and Six Month Periods Ended March 31, 2014 and 2013
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of TD Ameritrade Holding Corporation and its wholly-owned subsidiaries (collectively, the “Company”). Intercompany balances and transactions have been eliminated.
These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments, which are all of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report filed on Form 10-K for the fiscal year ended September 30, 2013.
Recently Adopted Accounting Pronouncements
ASU 2011-11 — On October 1, 2013 the Company retrospectively adopted, for all comparative periods presented, Accounting Standards Update (“ASU”) 2011-11, Disclosures about Offsetting Assets and Liabilities, and ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The amendments in these ASUs enhance disclosures by requiring additional information about financial and derivative instruments, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either (1) offset (netting assets and liabilities) in accordance with Section 210-20-45 or Section 815-10-45 of the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) or (2) subject to an enforceable master netting arrangement or similar agreement. Adoption of ASU 2011-11 and ASU 2013-01 resulted only in the additional disclosures presented in Note 9.
2. CASH AND CASH EQUIVALENTS
The Company’s cash and cash equivalents is summarized in the following table (dollars in millions):
 
 
March 31,
2014
 
September 30,
2013
Corporate
$
347

 
$
429

Broker-dealer subsidiaries
508

 
540

Trust company subsidiary
64

 
74

Investment advisory subsidiaries
14

 
19

Total
$
933

 
$
1,062

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

9

3. CASH AND INVESTMENTS SEGREGATED AND ON DEPOSIT FOR REGULATORY PURPOSES
Cash and investments segregated and on deposit for regulatory purposes consists of the following (dollars in millions):
 
 
March 31,
2014
 
September 30,
2013
Reverse repurchase agreements (collateralized by U.S. government debt securities)
$
1,590

 
$
2,618

U.S. government debt securities
2,976

 
1,995

Cash in demand deposit accounts
508

 
1,154

Cash on deposit with futures commission merchant
92

 
77

U.S. government debt securities on deposit with futures commission merchant
50

 
50

Total
$
5,216

 
$
5,894

4. INCOME TAXES
The Company’s effective income tax rate for the six months ended March 31, 2014 was 37.5%, compared to 37.8% for the six months ended March 31, 2013. The provision for income taxes for the six months ended March 31, 2014 was slightly lower than normal primarily due to $9 million of favorable resolutions of state income tax matters, partially offset by $2 million of unfavorable deferred income tax adjustments resulting from state income tax law changes. These items had a net favorable impact on the Company’s earnings for the six months ended March 31, 2014 of approximately one cent per share.
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following (dollars in millions):
 
March 31, 2014
Face
Value
 
Fair Value
Adjustment (1)
 
Net Carrying
Value
Notes payable:
 
 
 
 
 
Parent Revolving Facility
$
115

 
$
—

 
$
115

Senior Notes:
 
 
 
 
 
4.150% Senior Notes due 2014
500

 
8

 
508

5.600% Senior Notes due 2019
500

 
32

 
532

Subtotal – Long-term debt
1,000

 
40

 
1,040

Total notes payable and long-term debt
$
1,115

 
$
40

 
$
1,155

September 30, 2013
Face
Value
 
Fair Value
Adjustment (1)
 
Net Carrying
Value
Senior Notes:
 
 
 
 
 
4.150% Senior Notes due 2014
$
500

 
$
15

 
$
515

5.600% Senior Notes due 2019
500

 
37

 
537

Total long-term debt
$
1,000

 
$
52

 
$
1,052

 
(1)
Fair value adjustments relate to changes in the fair value of the debt while in a fair value hedging relationship. See “Fair Value Hedging” below.
Fair Value Hedging – The Company is exposed to changes in the fair value of its fixed-rate Senior Notes resulting from interest rate fluctuations. To hedge this exposure, on December 30, 2009, the Company entered into a fixed-for-variable interest rate swap on the 4.150% Senior Notes due December 1, 2014 (the “2014 Notes”) for a notional amount of $500 million with a maturity date matching the maturity date of the 2014 Notes. In addition, on January 7, 2011, the Company entered into a fixed-for-variable interest rate swap on the 5.600% Senior Notes due December 1, 2019 (the “2019 Notes” and, collectively with the 2014 Notes, the “Senior Notes”) for a notional amount of $500 million, with a maturity date matching the maturity date of the 2019 Notes. The interest rate swaps effectively change the fixed-rate interest on the Senior Notes to variable-rate interest. Under the terms of the interest rate swap agreements, the Company receives semi-annual fixed-rate interest payments based on the same rates applicable to the Senior Notes, and makes quarterly variable-rate interest payments based on three-month LIBOR plus (a) 1.245% for the

10

swap on the 2014 Notes and (b) 2.3745% for the swap on the 2019 Notes. As of March 31, 2014, the weighted average effective interest rate on the Senior Notes was 2.05%.
The interest rate swaps are accounted for as fair value hedges and qualify for the shortcut method of accounting. Changes in the payment of interest resulting from the interest rate swaps are recorded in interest on borrowings on the Condensed Consolidated Statements of Income. Changes in fair value of the interest rate swaps are completely offset by changes in fair value of the related notes, resulting in no effect on net income. The following table summarizes gains and losses resulting from changes in the fair value of the interest rate swaps and the hedged fixed-rate debt for the periods indicated (dollars in millions):
 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
Gain (loss) on fair value of interest rate swaps
$
(1
)
 
$
(8
)
 
$
(12
)
 
$
(16
)
Gain (loss) on fair value of hedged fixed-rate debt
1

 
8

 
12

 
16

Net gain (loss) recorded in interest on borrowings
$
—

 
$
—

 
$
—

 
$
—

Cash Flow Hedging – The Company plans to refinance its 2014 Notes on or near their December 1, 2014 maturity date.  On January 17, 2014, the Company entered into forward-starting interest rate swap contracts with an aggregate notional amount of $500 million to hedge against changes in the benchmark interest rate component of future interest payments resulting from the anticipated fixed-rate debt issuance.  The Company has designated the contracts as a cash flow hedge of the future interest payments.  The Company expects to settle the swap contracts in cash upon the earlier of the date of the debt issuance or December 1, 2014.  If, upon settlement, the current 10-year LIBOR swap rate is greater than the fixed rate (3.341%) of the swap contracts, the Company would realize a gain and receive a payment from the contract counterparties.  However, if, at the time of settlement, the current 10-year LIBOR swap rate is less than the fixed rate of the swap contracts, the Company would realize a loss and be required to make a payment to the contract counterparties. 
Under cash flow hedge accounting, until settlement the swap contracts are carried at fair value and, to the extent they are an effective hedge, any unrealized gains or losses are recorded in other comprehensive income (loss).  Any ineffective portion of the unrealized gains or losses is immediately recorded into earnings. The Company evaluates the effectiveness of forward-starting interest rate swap agreements on a quarterly basis. The Company did not record any ineffectiveness for the six months ended March 31, 2014. Upon settlement, any realized gain or loss that has been recorded in other comprehensive income (loss) will be amortized into earnings over the term of the newly-issued fixed-rate debt. As of March 31, 2014, the Company expects to reclassify $0.3 million of pre-tax net unrealized losses, that are currently reported in accumulated other comprehensive loss, into earnings within the next 12 months.
The following table summarizes pre-tax losses resulting from changes in the fair value of the forward-starting interest rate swaps for the periods indicated (dollars in millions):
 
Amount of Loss Recognized in Other Comprehensive Income (Loss)
(Effective Portion)
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
Forward-starting interest rate swaps
$
(9
)
 
$
—

 
$
(9
)
 
$
—

Balance Sheet Impact of Hedging Instruments — The following table summarizes the fair value of outstanding derivatives designated as hedging instruments on the Condensed Consolidated Balance Sheets (dollars in millions):
 
 
 
Balance Sheet Location
 
March 31,
2014
 
September 30,
2013
Interest rate contracts:
 
 
 
 
 
 
Pay-variable interest rate swaps designated as fair value hedges
 
Other assets
 
$
40

 
$
52

Forward-starting interest rate swaps designated as cash flow hedges
 
Accounts payable and accrued liabilities
 
$
(9
)
 
$
—


11

The interest rate swaps are subject to counterparty credit risk. Credit risk is managed by limiting activity to approved counterparties that meet a minimum credit rating threshold, by entering into credit support agreements, or by utilizing approved central clearing counterparties registered with the Commodity Futures Trading Commission. The interest rate swaps require daily collateral coverage, in the form of cash or U.S. Treasury securities, for the aggregate fair value of the interest rate swaps. As of March 31, 2014 and September 30, 2013, the pay-variable interest rate swap counterparties had pledged $55 million and $67 million of collateral, respectively, to the Company in the form of cash. A liability for collateral pledged to the Company in the form of cash is recorded in accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheets. As of March 31, 2014, the Company had pledged $24 million of collateral to the forward-starting interest rate swap counterparties in the form of cash. An asset for collateral pledged to the swap counterparties in the form of cash is recorded in other assets on the Condensed Consolidated Balance Sheets.
TD Ameritrade Holding Corporation Credit Agreement — On December 13, 2013, the Company borrowed $155 million under the TD Ameritrade Holding Corporation senior unsecured revolving credit facility (the “Parent Revolving Facility”). The Company used the proceeds to partially fund a $0.50 per share special cash dividend, paid on the Company’s common stock on December 17, 2013. As of March 31, 2014, there was $115 million of borrowings outstanding under the Parent Revolving Facility. The maturity date of the Parent Revolving Facility is June 28, 2014. Interest is payable monthly based on one-month LIBOR plus an interest rate margin. As of March 31, 2014, the interest rate margin was 1.25%, determined by reference to the Company’s public debt ratings, and the interest rate was 1.41%.
6. CAPITAL REQUIREMENTS
The Company’s broker-dealer subsidiaries are subject to the SEC Uniform Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of 1934, or the “Exchange Act”), administered by the SEC and the Financial Industry Regulatory Authority (“FINRA”), which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirement may fluctuate on a daily basis.
TD Ameritrade Clearing, Inc. (“TDAC”), the Company’s clearing broker-dealer subsidiary, and TD Ameritrade, Inc., the Company’s introducing broker-dealer subsidiary, compute net capital under the alternative method as permitted by Rule 15c3-1. TDAC is required to maintain minimum net capital of the greater of $1.5 million, which is based on the type of business conducted by the broker-dealer, or 2% of aggregate debit balances arising from client transactions.
Under Rule 15c3-1, TD Ameritrade, Inc. is required to maintain minimum net capital of the greater of $250,000 or 2% of aggregate debit balances. As a futures commission merchant registered with the Commodity Futures Trading Commission (“CFTC”), TD Ameritrade, Inc. is also subject to CFTC Regulation 1.17 under the Commodity Exchange Act, administered by the CFTC and the National Futures Association, which requires the maintenance of minimum net capital of the greatest of (a) $1.0 million, (b) its futures risk-based capital requirement, equal to 8% of the total risk margin requirement for all futures positions carried by the futures commission merchant in client and nonclient accounts, or (c) its Rule 15c3-1 net capital requirement.
Under the alternative method, a broker-dealer may not repay any subordinated borrowings, pay cash dividends or make any unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount of (a) less than 5% of aggregate debit balances, (b) less than 110% of its risk-based capital requirement under CFTC Regulation 1.17, or (c) less than 120% of its minimum dollar requirement. These net capital thresholds, which are specified in Exchange Act Rule 17a-11 and CFTC Regulation 1.12, are typically referred to as “early warning” net capital thresholds.
Net capital and net capital requirements for the Company’s broker-dealer subsidiaries are summarized in the following tables (dollars in millions):
 
TD Ameritrade Clearing, Inc.
Date
 
Net
Capital
 
Required
Net Capital
(2% of
Aggregate
Debit Balances)
 
Net Capital
in Excess of
Required
Net Capital
 
Net Capital in
Excess of
Early Warning
Threshold (5%
of Aggregate
Debit Balances)
 
Ratio of Net
Capital to
Aggregate
Debit Balances
March 31, 2014
 
$
1,423

 
$
266

 
$
1,157

 
$
757

 
10.68
%
September 30, 2013
 
$
1,302

 
$
222

 
$
1,080

 
$
746

 
11.70
%
 

12

TD Ameritrade, Inc.
Date
 
Net
Capital
 
Required
Net Capital
(8% of Total
Risk Margin)
 
Net Capital
in Excess of
Required
Net Capital
 
Net Capital in
Excess of
Early Warning
Threshold
(110% of
Required
Net Capital)
March 31, 2014
 
$
319

 
$
11

 
$
308

 
$
307

September 30, 2013
 
$
305

 
$
10

 
$
295

 
$
294

The Company’s non-depository trust company subsidiary, TD Ameritrade Trust Company (“TDATC”), is subject to capital requirements established by the State of Maine, which require TDATC to maintain minimum Tier 1 capital, as defined. TDATC’s Tier 1 capital was $25 million and $23 million as of March 31, 2014 and September 30, 2013, respectively, which exceeded the required Tier 1 capital by $10 million and $8 million, respectively.
7. COMMITMENTS AND CONTINGENCIES
Legal and Regulatory Matters
Reserve Fund Matters – During September 2008, The Reserve, an independent mutual fund company, announced that the net asset value of the Reserve Yield Plus Fund declined below $1.00 per share. The Yield Plus Fund was not a money market mutual fund, but its stated objective was to maintain a net asset value of $1.00 per share. TD Ameritrade, Inc.’s clients continue to hold shares in the Yield Plus Fund (now known as “Yield Plus Fund – In Liquidation”), which is being liquidated. On July 23, 2010, The Reserve announced that through that date it had distributed approximately 94.8% of the Yield Plus Fund assets as of September 15, 2008 and that the Yield Plus Fund had approximately $39.7 million in total remaining assets.  The Reserve stated that the fund’s Board of Trustees has set aside almost the entire amount of the remaining assets to cover potential claims, fees and expenses. The Company estimates that TD Ameritrade, Inc. clients’ current positions held in the Reserve Yield Plus Fund amount to approximately 79% of the fund.
On January 27, 2011, TD Ameritrade, Inc. entered into a settlement with the SEC, agreeing to pay $0.012 per share to all eligible current or former clients that purchased shares of the Yield Plus Fund and continued to own those shares. Clients who purchased Yield Plus Fund shares through independent registered investment advisors were not eligible for the payment. In February 2011, the Company paid clients approximately $10 million under the settlement agreement.
In November 2008, a purported class action lawsuit was filed with respect to the Yield Plus Fund. The lawsuit is captioned Ross v. Reserve Management Company, Inc. et al. and is pending in the U.S. District Court for the Southern District of New York. The Ross lawsuit is on behalf of persons who purchased shares of Reserve Yield Plus Fund. On November 20, 2009, the plaintiffs filed a first amended complaint naming as defendants the fund’s advisor, certain of its affiliates and the Company and certain of its directors, officers and shareholders as alleged control persons. The complaint alleges claims of violations of the federal securities laws and other claims based on allegations that false and misleading statements and omissions were made in the Reserve Yield Plus Fund prospectuses and in other statements regarding the fund. The complaint seeks an unspecified amount of compensatory damages including interest, attorneys’ fees, rescission, exemplary damages and equitable relief. On January 19, 2010, the defendants submitted motions to dismiss the complaint. The motions are pending.
The Company estimates that its clients’ current aggregate shortfall, based on the original par value of their holdings in the Yield Plus Fund, less the value of fund distributions to date and payments to clients under the SEC settlement, is approximately $36 million. This amount does not take into account any assets remaining in the fund that may become available for future distributions.
The Company is unable to predict the outcome or the timing of the ultimate resolution of the Ross lawsuit, or the potential loss, if any, that may result. However, management believes the outcome is not likely to have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
Other Legal and Regulatory Matters – The Company is subject to a number of other lawsuits, arbitrations, claims and other legal proceedings in connection with its business. Some of these legal actions include claims for substantial or unspecified compensatory and/or punitive damages. In addition, in the normal course of business, the Company discusses matters with its regulators raised during regulatory examinations or otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions. ASC 450, Loss Contingencies, governs the recognition and disclosure of loss contingencies, including potential losses from legal and regulatory matters. ASC 450 categorizes loss contingencies using three terms based on the likelihood of

13

occurrence of events that result in a loss: “probable” means that “the future event or events are likely to occur;” “remote” means that “the chance of the future event or events occurring is slight;” and “reasonably possible” means that “the chance of the future event or events occurring is more than remote but less than likely.” Under ASC 450, the Company accrues for losses that are considered both probable and reasonably estimable. The Company may incur losses in addition to the amounts accrued where the losses are greater than estimated by management, or for matters for which an unfavorable outcome is considered reasonably possible, but not probable.
The Company estimates that the aggregate range of reasonably possible losses in excess of amounts accrued is from $0 to $40 million as of March 31, 2014. This estimated aggregate range of reasonably possible losses is based upon currently available information for those legal and regulatory matters in which the Company is involved, taking into account the Company’s best estimate of reasonably possible losses for those cases as to which an estimate can be made. For certain cases, the Company does not believe an estimate can currently be made, as some cases are in preliminary stages and some cases have no specific amounts claimed. The Company’s estimate involves significant judgment, given the varying stages of the proceedings and the inherent uncertainty of predicting outcomes. The estimated range will change from time to time as the underlying matters, stages of proceedings and available information change. Actual losses may vary significantly from the current estimated range.
The Company believes, based on its current knowledge and after consultation with counsel, that the ultimate disposition of these legal and regulatory matters, individually or in the aggregate, is not likely to have a material adverse effect on the financial condition or cash flows of the Company. However, in light of the uncertainties involved in such matters, the Company is unable to predict the outcome or the timing of the ultimate resolution of these matters, or the potential losses, fines, penalties or equitable relief, if any, that may result, and it is possible that the ultimate resolution of one or more of these matters may be material to the Company’s results of operations for a particular reporting period.
Income Taxes
The Company’s federal and state income tax returns are subject to examination by taxing authorities. Because the application of tax laws and regulations to many types of transactions is subject to varying interpretations, amounts reported in the condensed consolidated financial statements could be significantly changed at a later date upon final determinations by taxing authorities. The Toronto-Dominion Bank (“TD”) has agreed to indemnify the Company for tax obligations, if any, pertaining to activities of TD Waterhouse Group, Inc. (“TD Waterhouse”) prior to the Company’s acquisition of TD Waterhouse in January 2006.

General Contingencies
In the ordinary course of business, there are various contingencies that are not reflected in the condensed consolidated financial statements. These include the Company’s broker-dealer subsidiaries’ client activities involving the execution, settlement and financing of various client securities, options, futures and foreign exchange transactions. These activities may expose the Company to credit risk in the event the clients are unable to fulfill their contractual obligations.
The Company extends margin credit and leverage to its clients. In margin transactions, the Company extends credit to the client, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the client’s account. In connection with these activities, the Company also executes and clears client transactions involving the sale of securities not yet purchased (“short sales”). Such margin-related transactions may expose the Company to credit risk in the event a client’s assets are not sufficient to fully cover losses that the client may incur. Leverage involves securing a large potential future obligation with a lesser amount of cash and securities. The risks associated with margin credit and leverage increase during periods of rapid market movements, or in cases where leverage or collateral is concentrated and market movements occur. In the event the client fails to satisfy its obligations, the Company has the authority to purchase or sell financial instruments in the client’s account at prevailing market prices in order to fulfill the client’s obligations. However, during periods of rapid market movements, clients who utilize margin credit or leverage and who have collateralized their obligations with securities may find that the securities have a rapidly depreciating value and may not be sufficient to cover their obligations in the event of liquidation. The Company seeks to mitigate the risks associated with its client margin and leverage activities by requiring clients to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels throughout each trading day and, pursuant to such guidelines, requires clients to deposit additional collateral, or to reduce positions, when necessary.
The Company loans securities temporarily to other broker-dealers in connection with its broker-dealer business. The Company receives cash as collateral for the securities loaned. Increases in securities prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the market value of securities loaned on a daily basis and requiring additional cash as collateral when necessary, and by participating in a risk-sharing program offered through the Options Clearing Corporation (“OCC”).

14

The Company borrows securities temporarily from other broker-dealers in connection with its broker-dealer business. The Company deposits cash as collateral for the securities borrowed. Decreases in securities prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event the counterparty to these transactions does not return the cash deposited, the Company may be exposed to the risk of selling the securities at prevailing market prices. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the collateral values on a daily basis and requiring collateral to be returned by the counterparties when necessary, and by participating in a risk-sharing program offered through the OCC.
The Company transacts in reverse repurchase agreements (securities purchased under agreements to resell) in connection with its broker-dealer business. The Company’s policy is to take possession or control of securities with a market value in excess of the principal amount loaned, plus accrued interest, in order to collateralize resale agreements. The Company monitors the market value of the underlying securities that collateralize the related receivable on resale agreements on a daily basis and may require additional collateral when deemed appropriate.
The following table summarizes the fair values of client margin securities and stock borrowings that were available to the Company to utilize as collateral on various borrowings or for other purposes, and the amount of that collateral loaned or repledged by the Company (dollars in billions):
 
March 31,
2014
 
September 30,
2013
Client margin securities
$
15.6

 
$
12.5

Stock borrowings
1.0

 
1.2

Total collateral available
$
16.6

 
$
13.7

 
 
 
 
Collateral loaned
$
3.0

 
$
1.9

Collateral repledged
2.1

 
1.8

Total collateral loaned or repledged
$
5.1

 
$
3.7

The Company is subject to cash deposit and collateral requirements with clearinghouses based on its clients’ trading activity. The following table summarizes cash deposited with and securities pledged to clearinghouses by the Company (dollars in millions):
Assets
 
Balance Sheet Classification
 
March 31,
2014
 
September 30,
2013
Cash
 
Receivable from brokers, dealers and clearing organizations
 
$
139

 
$
115

U.S. government debt securities
 
Securities owned, at fair value
 
156

 
61

Total
 
 
 
$
295

 
$
176

Guarantees
The Company is a member of and provides guarantees to securities clearinghouses and exchanges in connection with client trading activities. Under related agreements, the Company is generally required to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. The Company’s liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted to the clearinghouse as collateral. However, the potential for the Company to be required to make payments under these agreements is considered remote. Accordingly, no contingent liability is carried on the Condensed Consolidated Balance Sheets for these guarantees.
The Company clears its clients’ futures transactions on an omnibus account basis through unaffiliated clearing firms. The Company has agreed to indemnify the unaffiliated clearing firms for any loss that they may incur for the client transactions introduced to them by the Company.
See “Insured Deposit Account Agreement” in Note 12 for a description of a guarantee included in that agreement.
Employment Agreements
The Company has entered into employment agreements with several of its key executive officers. These employment agreements generally provide for annual base salary and incentive compensation, as well as stock award acceleration and severance payments

15

in the event of termination of employment under certain defined circumstances or changes in control of the Company. Incentive compensation, a portion of which is awarded in the form of stock-based compensation, is based on the Company’s financial performance and other factors.
8. FAIR VALUE DISCLOSURES
Fair Value Measurement — Definition and Hierarchy
ASC 820-10, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
ASC 820-10 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
 
•
Level 1— Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. This category includes active exchange-traded funds, money market mutual funds, mutual funds and equity securities.
•
Level 2— Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Such inputs include quoted prices in markets that are not active, quoted prices for similar assets and liabilities in active and inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. This category includes most debt securities and other interest-sensitive financial instruments.
•
Level 3 — Unobservable inputs for the asset or liability, where there is little, if any, observable market activity or data for the asset or liability.

16

The following tables present the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of March 31, 2014 and September 30, 2013 (dollars in millions):
 
 
As of March 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market mutual funds
$
869

 
$
—

 
$
—

 
$
869


Investments segregated for regulatory purposes:
 
 
 
 
 
 
 
U.S. government debt securities
—

 
3,026

 
—

 
3,026


Securities owned:
 
 
 
 
 
 
 
Auction rate securities
—

 
—

 
3

 
3

Money market and other mutual funds
—

 
—

 
1

 
1

U.S. government debt securities
—

 
382

 
—

 
382

Other
1

 
4

 
—

 
5

Subtotal - Securities owned
1

 
386

 
4

 
391


Other assets:
 
 
 
 
 
 
 
Pay-variable interest rate swaps(1)
—

 
40

 
—

 
40

U.S. government debt securities
—

 
4

 
—

 
4

Subtotal - Other assets
—

 
44

 
—

 
44

Total assets at fair value
$
870

 
$
3,456

 
$
4

 
$
4,330


Liabilities:
 
 
 
 
 
 
 
Accounts payable and accrued liabilities:
 
 
 
 
 
 
 
Forward-starting interest rate swaps(2)
$
—

 
$
9

 
$
—

 
$
9


Securities sold, not yet purchased:
 
 
 
 
 
 
 
Equity securities
8

 
—

 
—

 
8

Total liabilities at fair value
$
8

 
$
9

 
$
—

 
$
17

 
(1)
See “Fair Value Hedging” in Note 5 for details.
(2)
See "Cash Flow Hedging" in Note 5 for details.

17

 
As of September 30, 2013
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market mutual funds
$
969

 
$
—

 
$
—

 
$
969


Investments segregated for regulatory purposes:
 
 
 
 
 
 
 
U.S. government debt securities
—

 
2,045

 
—

 
2,045


Securities owned:
 
 
 
 
 
 
 
Auction rate securities
—

 
—

 
5

 
5

Money market and other mutual funds
—

 
—

 
1

 
1

U.S. government debt securities
—

 
313

 
—

 
313

Other
1

 
3

 
—

 
4

Subtotal - Securities owned
1

 
316

 
6

 
323


Other assets:
 
 
 
 
 
 
 
Equity securities
13

 
—

 
—

 
13

Pay-variable interest rate swaps(1)
—

 
52

 
—

 
52

U.S. government debt securities
—

 
4

 
—

 
4

Subtotal - Other assets
13

 
56

 
—

 
69

Total assets at fair value
$
983

 
$
2,417

 
$
6

 
$
3,406


Liabilities:
 
 
 
 
 
 
 
Accounts payable and accrued liabilities:
 
 
 
 
 
 
 
      Securities sold, not yet purchased:
 
 
 
 
 
 
 
      Equity securities
$
13

 
$
—

 
$
—

 
$
13

 
 
(1)
See “Fair Value Hedging” in Note 5 for details.
There were no transfers between any levels of the fair value hierarchy during the periods covered by this report.
Valuation Techniques
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to the Company’s Level 1 assets and liabilities. If quoted prices in active markets for identical assets and liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. This pricing methodology applies to the Company’s Level 2 assets and liabilities.
Level 2 Measurements:
Debt Securities – Fair values for debt securities are based on prices obtained from an independent pricing vendor. The primary inputs to the valuation include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. The Company validates the vendor pricing by periodically comparing it to pricing from another independent pricing service. The Company has not adjusted prices obtained from the independent pricing vendor for any periods presented in the condensed consolidated financial statements because no significant pricing differences have been observed.
Interest Rate Swaps – These derivatives are valued by the Company using a valuation model provided by a third party service that incorporates interest rate yield curves, which are observable for substantially the full term of the contract. The valuation model is widely accepted in the financial services industry and does not involve significant judgment because most of the inputs are observable in the marketplace. Credit risk is not an input to the valuation because in each case the Company or counterparty has possession of collateral, in the form of cash or U.S. Treasury securities, in amounts equal to or exceeding the fair value of the

18

interest rate swaps. The Company validates the third party service valuations by comparing them to valuation models provided by the swap counterparties.
Level 3 Measurements:
The Company has no material assets or liabilities classified as Level 3 of the fair value hierarchy.
Fair Value of Financial Instruments Not Recorded at Fair Value
Cash and cash equivalents, receivable from/payable to brokers, dealers and clearing organizations, receivable from/payable to clients, receivable from/payable to affiliates, other receivables, accounts payable and accrued liabilities and notes payable are short-term in nature and accordingly are carried at amounts that approximate fair value. Cash and cash equivalents include cash and highly-liquid investments with an original maturity of three months or less (categorized as Level 1 of the fair value hierarchy). Receivable from/payable to brokers, dealers and clearing organizations, receivable from/payable to clients, receivable from/payable to affiliates, other receivables, accounts payable and accrued liabilities and notes payable are recorded at or near their respective transaction prices and historically have been settled or converted to cash at approximately that value (categorized as Level 2 of the fair value hierarchy).
Cash and investments segregated and on deposit for regulatory purposes includes reverse repurchase agreements (securities purchased under agreements to resell). Reverse repurchase agreements are treated as collateralized financing transactions and are carried at amounts at which the securities will subsequently be resold, plus accrued interest. The Company’s reverse repurchase agreements generally have a maturity of seven days and are collateralized by U.S. Treasury securities in amounts exceeding the carrying value of the resale agreements. Accordingly, the carrying value of reverse repurchase agreements approximates fair value (categorized as Level 2 of the fair value hierarchy). In addition, this category includes cash held in demand deposit accounts and on deposit with a futures commission merchant, for which the carrying values approximate the fair value (categorized as Level 1 of the fair value hierarchy). See Note 3 for a summary of cash and investments segregated and on deposit for regulatory purposes.
Senior Notes – As of March 31, 2014, the Company’s Senior Notes had an aggregate estimated fair value, based on quoted market prices (categorized as Level 1 of the fair value hierarchy), of approximately $1.081 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $1.040 billion. As of September 30, 2013, the Company’s Senior Notes had an aggregate estimated fair value, based on quoted market prices, of approximately $1.100 billion, compared to the aggregate carrying value of the Senior Notes on the Condensed Consolidated Balance Sheet of $1.052 billion.

19

9. OFFSETTING ASSETS AND LIABILITIES
Substantially all of the Company’s reverse repurchase agreements, securities borrowing and securities lending activity and derivative financial instruments are transacted under master agreements that may allow for net settlement in the ordinary course of business, as well as offsetting of all contracts with a given counterparty in the event of default by one of the parties. However, for financial statement purposes, the Company does not net balances related to these financial instruments.
The following table presents information about the potential effect of rights of setoff associated with the Company’s recognized assets and liabilities as of March 31, 2014 and September 30, 2013 (dollars in millions):
 
 
 
 
 
 
 
Gross Amounts Not Offset in the
Condensed Consolidated
Balance Sheet
 
 
 
Gross Amounts
of Recognized
Assets and
Liabilities
 
Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheet
 
Net Amounts
Presented in
the Condensed
Consolidated
Balance Sheet
 
Financial
Instruments(3)
 
Collateral
Received or
Pledged
(Including
Cash) (4)
 
Net Amount (5)
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Investments segregated for regulatory
purposes:
 
 
 
 
 
 
 
 
 
 
 
Reverse repurchase agreements
$
1,590

 
$
—

 
$
1,590

 
$
—

 
$
(1,590
)
 
$
—


Receivable from brokers, dealers and
clearing organizations:
 
 
 
 
 
 
 
 
 
 
 
Deposits paid for securities
borrowed (1)
956

 
—

 
956

 
(64
)
 
(876
)
 
16


Other assets:
 
 
 
 
 
 
 
 
 
 
 
Pay-variable interest rate swaps
40

 
—

 
40

 
—

 
(40
)
 
—

Total
$
2,586

 
$
—

 
$
2,586

 
$
(64
)
 
$
(2,506
)
 
$
16

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Payable to brokers, dealers and clearing
organizations:
 
 
 
 
 
 
 
 
 
 
 
Deposits received for securities
loaned (2)
$
2,980

 
$
—

 
$
2,980

 
$
(64
)
 
$
(2,613
)
 
$
303


Accounts payable and accrued liabilities:
 
 
 
 
 
 
 
 
 
 
 
Forward-starting interest rate swaps
9

 
—

 
9

 
—

 
(9
)
 
—

Total
$
2,989

 
$
—

 
$
2,989

 
$
(64
)
 
$
(2,622
)
 
$
303

 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Investments segregated for regulatory
purposes:
 
 
 
 
 
 
 
 
 
 
 
Reverse repurchase agreements
$
2,618

 
$
—

 
$
2,618

 
$
—

 
$
(2,618
)
 
$
—


Receivable from brokers, dealers and
clearing organizations:
 
 
 
 
 
 
 
 
 
 
 
Deposits paid for securities
borrowed (1)
1,220

 
—

 
1,220

 
(168
)
 
(1,020
)
 
32


Other assets:
 
 
 
 
 
 
 
 
 
 
 
Pay-variable interest rate swaps
52

 
—

 
52

 
—

 
(52
)
 
—

Total
$
3,890

 
$
—

 
$
3,890

 
$
(168
)
 
$
(3,690
)
 
$
32

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Payable to brokers, dealers and clearing
organizations:
 
 
 
 
 
 
 
 
 
 
 
Deposits received for securities
loaned (2)
$
1,948

 
$
—

 
$
1,948

 
$
(168
)
 
$
(1,561
)
 
$
219

 

20

(1)
Included in the gross amounts of deposits paid for securities borrowed is $616 million and $702 million as of March 31, 2014 and September 30, 2013, respectively, transacted through a risk-sharing program with the OCC, which guarantees the return of cash to the Company.
(2)
Included in the gross amounts of deposits received for securities loaned is $792 million and $275 million as of March 31, 2014 and September 30, 2013, respectively, transacted through a risk-sharing program with the OCC, which guarantees the return of securities to the Company.
(3)
Amounts represent recognized assets and liabilities that are subject to enforceable master agreements with rights of setoff.
(4)
Represents the fair value of collateral the Company had received or pledged under enforceable master agreements, limited for table presentation purposes to the net amount of the recognized assets due from or liabilities due to each counterparty. At March 31, 2014 and September 30, 2013, the Company had received total collateral with a fair value of $2,619 million and $3,919 million, respectively, and pledged total collateral with a fair value of $2,700 million and $1,721 million, respectively.
(5)
Represents the amount for which, in the case of net recognized assets, the Company had not received collateral, and in the case of net recognized liabilities, the Company had not pledged collateral.

10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables present the net change in fair value recorded for each component of other comprehensive income (loss) before and after income tax for the periods indicated (dollars in millions):
 
Three Months Ended March 31,
 
2014
 
2013
 
Before Tax
 
Tax Effect
 
Net of Tax
 
Before Tax
 
Tax Effect
 
Net of Tax
Investments available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gain
$
—

 
$
—

 
$
—

 
$
6

 
$
(2
)
 
$
4

    
Cash flow hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized loss
(9
)
 
3

 
(6
)
 
—

 
—

 
—

Other comprehensive income (loss)
$
(9
)
 
$
3

 
$
(6
)
 
$
6

 
$
(2
)
 
$
4


 
Six Months Ended March 31,
 
2014
 
2013
 
Before Tax
 
Tax Effect
 
Net of Tax
 
Before Tax
 
Tax Effect
 
Net of Tax
Investments available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gain
$
—

 
$
—

 
$
—

 
$
27

 
$
(10
)
 
$
17

    
Cash flow hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized loss
(9
)
 
3

 
(6
)
 
—

 
—

 
—

Other comprehensive income (loss)
$
(9
)
 
$
3

 
$
(6
)
 
$
27

 
$
(10
)
 
$
17



21

The following table presents after-tax changes in each component of accumulated other comprehensive income (loss) (dollars in millions):
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
Investments available-for-sale:
 
 
 
 
 
 
 
Beginning balance
$
—

 
$
31

 
$
—

 
$
18

Current period change
—

 
4

 
—

 
17

Ending balance
$
—

 
$
35

 
$
—

 
$
35

 
 
 
 
 
 
 
 
Cash flow hedging instruments:
 
 
 
 
 
 
 
Beginning balance
$
—

 
$
—

 
$
—

 
$
—

Current period change
(6
)
 
—

 
(6
)
 
—

Ending balance
$
(6
)
 
$
—

 
$
(6
)
 
$
—

 
 
 
 
 
 
 
 
Total accumulated other comprehensive
income (loss):
 
 
 
 
 
 
 
Beginning balance
$
—

 
$
31

 
$
—

 
$
18

Current period change
(6
)
 
4

 
(6
)
 
17

Ending balance
$
(6
)
 
$
35

 
$
(6
)
 
$
35


11. EARNINGS PER SHARE
The difference between the numerator and denominator used in the computation of basic and diluted earnings per share consists of common stock equivalent shares related to stock-based compensation for all periods presented. The Company excluded from the calculation of diluted earnings per share 0.2 million and 1.4 million shares underlying stock-based compensation awards for the three and six months ended March 31, 2013, respectively, because their inclusion would have been antidilutive. There were no material antidilutive awards for the three and six months ended March 31, 2014.
12. RELATED PARTY TRANSACTIONS
Transactions with TD and Affiliates
As a result of the Company’s acquisition of TD Waterhouse during fiscal 2006, TD became an affiliate of the Company. TD owned approximately 40% of the Company’s common stock as of March 31, 2014. Pursuant to the Stockholders Agreement among TD, the Company and certain other stockholders, TD has the right to designate five of twelve members of the Company’s board of directors. The Company transacts business and has extensive relationships with TD and certain of its affiliates. Transactions with TD and its affiliates are discussed and summarized below.
Insured Deposit Account Agreement
The Company is party to an insured deposit account (“IDA”) agreement with TD Bank USA, N.A. (“TD Bank USA”), TD Bank, N.A. and TD. Under the IDA agreement, TD Bank USA and TD Bank, N.A. (together, the “Depository Institutions”) make available to clients of the Company FDIC-insured money market deposit accounts as either designated sweep vehicles or as non-sweep deposit accounts. The Company provides marketing, recordkeeping and support services for the Depository Institutions with respect to the money market deposit accounts. In exchange for providing these services, the Depository Institutions pay the Company 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 Depository Institutions and the cost of FDIC insurance premiums.
The current IDA agreement became effective as of January 1, 2013 and has an initial term expiring July 1, 2018. It is automatically renewable for successive five-year terms, provided that it may be terminated by either the Company or the Depository Institutions by providing written notice of non-renewal at least two years prior to the initial expiration date or the expiration date of any subsequent renewal period.
The fee earned on the IDA agreement is calculated based on two primary components: (a) the yield on fixed-rate “notional” investments, based on prevailing fixed rates for identical balances and maturities in the interest rate swap market (generally LIBOR-

22

based) at the time such investments were added to the IDA portfolio (including any adjustments required to adjust the variable rate leg of such swaps to a one-month reset frequency and the overall swap payment frequency to monthly) and (b) the yield on floating-rate investments. As of March 31, 2014, the IDA portfolio was comprised of approximately 79% fixed-rate notional investments and 21% floating-rate investments.
The IDA agreement provides that the Company may designate amounts and maturity dates for the fixed-rate notional investments in the IDA portfolio, subject to certain limitations. For example, if the Company designates that $100 million of deposits be invested in 5-year fixed-rate investments, and on the day such investment is confirmed by the Depository Institutions the prevailing fixed yield for the applicable 5-year U.S. dollar LIBOR-based swaps is 1.45%, then the Company will earn a gross fixed yield of 1.45% on that portion of the portfolio (before any deductions for interest paid to clients, the servicing fee to the Depository Institutions and the cost of FDIC insurance premiums). Under the current IDA agreement, in the event that (1) the federal funds effective rate is established at 0.75% or greater and (2) the rate on 5-year U.S. dollar interest rate swaps is equal to or greater than 1.50% for 20 consecutive business days, then the rate earned by the Company on new fixed-rate notional investments will be reduced by 20% of the excess of the 5-year U.S. dollar swap rate over 1.50%, up to a maximum of 0.10%.
Under the current IDA agreement, the yield on floating-rate investments is calculated daily based on the greater of the following rates published by the Federal Reserve: (1) the interest rate paid by Federal Reserve Banks on balances held in excess of required reserve balances and contractual clearing balances under Regulation D and (2) the daily effective federal funds rate.
The interest rates paid to clients are set by the Depository Institutions and are not linked to any index. The servicing fee to the Depository Institutions under the IDA agreement is equal to 25 basis points on the aggregate average daily balance in the IDA accounts, subject to adjustment as it relates to deposits of less than or equal to $20 billion kept in floating-rate investments or in fixed-rate notional investments with a maturity of up to 24 months (“short-term fixed-rate investments”). For floating-rate and short-term fixed-rate investments, the servicing fee is equal to the difference of the interest rate earned on the investments less the FDIC premiums paid (in basis points), divided by two. The servicing fee has a floor of 3 basis points (subject to adjustment from time to time to reflect material changes to the Depository Institutions’ leverage costs) and a maximum of 25 basis points.
In the event the marketing fee computation results in a negative amount, the Company must pay the Depository Institutions the negative amount. This effectively results in the Company guaranteeing the Depository Institutions revenue equal to the servicing fee on the IDA agreement, plus the reimbursement of FDIC insurance premiums. The marketing fee computation under the IDA agreement is affected by many variables, including the type, duration, principal balance and yield of the fixed-rate and floating-rate investments, the prevailing interest rate environment, the amount of client deposits and the yield paid on client deposits. Because a negative marketing fee computation would arise only if there were extraordinary movements in many of these variables, the maximum potential amount of future payments the Company could be required to make under this arrangement cannot be reasonably estimated. Management believes the potential for the marketing fee calculation to result in a negative amount is remote. Accordingly, no contingent liability is carried on the Condensed Consolidated Balance Sheets for the IDA agreement.
In addition, the Company has various other services agreements and transactions with TD and its affiliates. The following tables summarize revenues and expenses resulting from transactions with TD and its affiliates for the periods indicated (dollars in millions):
 
 
 
 
Revenues from TD and Affiliates
 
 
Statement of Income
Classification
 
Three months ended March 31,
 
Six months ended March 31,
Description
 
2014
 
2013
 
2014
 
2013
Insured Deposit Account Agreement
 
Insured deposit account fees
 
$
202

 
$
200

 
$
410

 
$
405

Referral and Strategic Alliance Agreement
 
Various
 
3

 
3

 
6

 
5

Other
 
Various
 
2

 
—

 
3

 
3

Total revenues
 
 
 
$
207

 
$
203

 
$
419

 
$
413

 
 
 
 
Expenses to TD and Affiliates
 
 
Statement of Income
Classification
 
Three months ended March 31,
 
Six months ended March 31,
Description
 
 
2014
 
2013
 
2014
 
2013
Canadian Call Center Services Agreement
 
Professional services
 
$
5

 
$
4

 
$
9

 
$
9

Other
 
Various
 
2

 
2

 
2

 
2

Total expenses
 
 
 
$
7

 
$
6

 
$
11

 
$
11


23

The following table summarizes the classification and amount of receivables from and payables to TD and its affiliates on the Condensed Consolidated Balance Sheets resulting from related party transactions (dollars in millions):
 
March 31,
2014
 
September 30,
2013
 
 
 
 
Assets:
 
 
 
Receivable from brokers, dealers and clearing organizations
$
—

 
$
1

Receivable from affiliates
117

 
117

 
 
 
 
Liabilities:
 
 
 
Payable to brokers, dealers and clearing organizations
$
110

 
$
115

Payable to affiliates
6

 
4

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

24

13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Senior Notes are jointly and severally and fully and unconditionally guaranteed by TD Ameritrade Online Holdings Corp. (“TDAOH”), a wholly-owned subsidiary of the Company. Presented below is condensed consolidating financial information for the Company, its guarantor subsidiary and its non-guarantor subsidiaries for the periods indicated. Because all other comprehensive income activity occurred on the parent company for all periods presented, condensed consolidating statements of comprehensive income are not presented.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2014
(Unaudited)
 
Parent
 
Guarantor
Subsidiary
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
 
(In millions)
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
157

 
$
3

 
$
773

 
$
—

 
$
933

Cash and investments segregated and on
deposit for regulatory purposes
—

 
—

 
5,216

 
—

 
5,216

Receivable from brokers, dealers and
clearing organizations
—

 
—

 
1,114

 
—

 
1,114

Receivable from clients, net
—

 
—

 
11,250

 
—

 
11,250

Investments in subsidiaries
5,661

 
5,548

 
—

 
(11,209
)
 
—

Receivable from affiliates
8

 
3

 
114

 
(8
)
 
117

Goodwill
—

 
—

 
2,467

 
—

 
2,467

Acquired intangible assets, net
—

 
146

 
650

 
—

 
796

Other, net
135

 
13

 
1,087

 
(41
)
 
1,194

Total assets
$
5,961

 
$
5,713

 
$
22,671

 
$
(11,258
)
 
$
23,087

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Payable to brokers, dealers and
clearing organizations
$
—

 
$
—

 
$
3,032

 
$
—

 
$
3,032

Payable to clients
—

 
—

 
13,215

 
—

 
13,215

Accounts payable and accrued liabilities
139

 
—

 
522

 
(10
)
 
651

Payable to affiliates
—

 
—

 
14

 
(8
)
 
6

Notes payable
115

 
—

 
—

 
—

 
115

Long-term debt
1,040

 
—

 
—

 
—

 
1,040

Other
—

 
52

 
340

 
(31
)
 
361

Total liabilities
1,294

 
52

 
17,123

 
(49
)
 
18,420

Stockholders’ equity
4,667

 
5,661

 
5,548

 
(11,209
)
 
4,667

Total liabilities and stockholders’ equity
$
5,961

 
$
5,713

 
$
22,671

 
$
(11,258
)
 
$
23,087


25

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2013
(Unaudited)
 
 
Parent
 
Guarantor
Subsidiary
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
 
(In millions)
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
199

 
$
7

 
$
856

 
$
—

 
$
1,062

Cash and investments segregated and on
deposit for regulatory purposes
—

 
—

 
5,894

 
—

 
5,894

Receivable from brokers, dealers and
clearing organizations
—

 
—

 
1,348

 
—

 
1,348

Receivable from clients, net
—

 
—

 
8,984

 
—

 
8,984

Investments in subsidiaries
5,568

 
5,360

 
550

 
(11,478
)
 
—

Receivable from affiliates
4

 
3

 
117

 
(7
)
 
117

Goodwill
—

 
—

 
2,467

 
—

 
2,467

Acquired intangible assets, net
—

 
146

 
695

 
—

 
841

Other, net
140

 
9

 
1,015

 
(41
)
 
1,123

Total assets
$
5,911

 
$
5,525

 
$
21,926

 
$
(11,526
)
 
$
21,836

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Payable to brokers, dealers and
clearing organizations