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TD Ameritrade Holding Corporation (NYSE:AMTD)

F3Q 2011 Earnings Conference Call

July 19, 2011 08:30 ET

Executives

Bill Murray – Managing Director, Investor Relations

Fred Tomczyk – President and Chief Executive Officer

Bill Gerber – Chief Financial Officer

Analysts

Rich Repetto – Sandler O'Neill

Patrick O'Shaughnessy – Raymond James

Daniel Harris – Goldman Sachs

Eric Bertrand – Barclays Capital

Matt Fischer – CLSA

Joel Jeffrey – KBW

Chris Harris – Wells Fargo

Howard Chen – Credit Suisse

Alex Kramm – UBS

Michael Carrier – Deutsche Bank

Mac Sykes – Gabelli & Company

David Chiaverini – BMO Capital Markets

Michael Tarkan – FBR

Operator

Good day, everyone and welcome to the TD Ameritrade Holding Corporation’s June Quarter Earnings Results Conference Call. This call is being recorded. With us today from the company is President and Chief Executive Officer, Fred Tomczyk and Chief Financial Officer, Bill Gerber.

At this time, I would like to turn the call over to Bill Murray, Managing Director of Investor Relations. Please go ahead, sir.

Bill Murray – Managing Director, Investor Relations

Thank you, operator. Good morning, everyone and welcome to the TD Ameritrade June quarter earnings call. By now, you have most likely seen our press release and I’d like to direct you to amtd.com to view today’s presentation.

Before we begin, I would like to refer you to our Safe Harbor statement, which is on slide two of the presentation as we will be referring to forward-looking statements. We will also be discussing some non-GAAP financial measures such as EBITDA. You can find a reconciliation of these financial measures to the most comparable GAAP financial measures in the slide presentation.

We’d also like to review our description of risk factors contained in our most recent annual and quarterly reports, Forms 10-Q and 10-K. As usual, the call is intended for investors and analysts and may not be reproduced in the media in whole or in part without prior consent of TD Ameritrade. Once again, we have a large number of covering analysts, so if you can keep your questions to two, we will try to get through most of you in the allotted time.

With that, we have Fred Tomczyk and Bill Gerber here to review our third fiscal quarter results and major accomplishments. Fred?

Fred Tomczyk – President and Chief Executive Officer

Thank you, Bill and good morning everyone and thanks for joining us today to discuss our June quarter results. As we all know, the one thing the markets do not like is uncertainty. Well, we have lots of that today, the state of the US economy, the European debt situation, and last but not least, the discussions in Washington around the deficit and the debt ceiling.

As a result, the slowdown in retail engagement that we normally see in the summer months started early this year. However, we are pleased with our performance as we continue to gather assets and build our long-term earnings power despite this difficult environment. While we don’t believe we will see these uncertainties clear in the short-term, we do expect to see some resolution by the fall, which will bring greater certainty to the markets.

Our strategy and business model continues to work for us. Our strong balance sheet and cash position allowed us to buyback close to 5 million shares of our outstanding stock during the quarter, which when combined with our quarterly dividend, means that we returned 80% of our quarterly net income to our shareholders. We continue to be well-positioned to drive further organic growth and to take advantage of opportunities as they present themselves.

Let’s turn to slide three to talk more about our third quarter results. We ended the quarter with $0.27 on earnings per share and net revenues of $685 million. This includes a $0.02 per share charge related to technology related write-offs, which Bill will discuss in more detail shortly.

Turning to our key metrics for the quarter, trades per day were 370,000. Net new assets were $7.9 billion or an 8% annualized growth rate. We ended the quarter with record interest-sensitive assets of $74 billion and total client assets of $414 billion. Overall, we are pleased with our results in light of the environment we find ourselves in. So far in July, trades per day are at 348,000, up 5% from June volumes.

Last quarter, we said our intention was to return 40% to 60% of our net income to shareholders over the fiscal year, more if we saw the opportunity to do so. Well, this quarter we took advantage of the pullback in the markets and our stock to buyback more shares. So far this fiscal year, we have bought back 10 million shares at an average price of $19.05.

Let’s now turn to slide four for a closer look at our asset gathering results. In the March quarter, we brought in $7.9 billion in net new assets and organic growth rate up 8%. Our sales efforts continue to drive growth even as the retail investor has pulled back and we remain focused on maintaining our momentum. Year-to-date, we have gathered over $29 billion in net new assets. That’s $1 billion ahead of where we were last year, which was a record year. And our annualized growth rate year-to-date is a strong 11% at the top end of our target range. Asset gathering has come in a bit from the historical June quarter perspective in the retail channel as a result of the current market environment, but we remain encouraged by the success of our sales efforts and the work we are doing to further expand our offer.

Cash management will be a major area of focus for us in the fourth quarter, as we build out the systems to support new functionality for our clients and we will again be adding to our sales force over the quarter to drive further organic growth in fiscal 2012. Each of these further enhances our ability to continue on our journey to be a premier asset gatherer.

In May we were recognized by SmartMoney Magazine as one of the top online brokers. The publication commended us for our customer service in mutual funds and investment products with outstanding five star ratings. Within the institutional channel, we continue to see strong asset gathering for both traditional RAAs and breakaway brokers. Over the last nine months, we’ve added 260 breakaway brokers, up nearly 20% year-over-year. Our pipeline remains healthy and sales efforts have been successful in driving new clients, accounts, and assets for the firm. Just like the retail channel, we will make investments in sales and service personnel to help us maintain our service levels and our asset gathering momentum. And platform enhancements, enhancements will remain an important part of maintaining strong client engagement and satisfaction.

In the June quarter, we launched Veo applications for the iPad and other mobile devices, which have been very well received by our advisor clients. Additional enhancements to technology, practice management offerings and other advisor services will continue into the next year.

Now, let’s turn to client activity on slide five. As we progressed through the quarter, the uncertainties in the macroeconomic environment began to have a more pronounced impact on the retail investor. Equity exchange volumes slowed as intraday’s volatility for the quarter was the second lowest we’ve seen in 12 quarters. As we’ve said before, our trading activity tends to move with intraday volatility. We ended the quarter with 270,000 trades per day or a 6.6% activity rate. Derivatives on the other hand outperformed market volumes. One-third of our daily client trades were in derivative products this quarter and the number of clients derivative trades per day went up 7% year-over-year and we continue to see healthy growth in the request for approval to trade these securities.

In May, we launched Trade Architect completing our three tier trading offering for our clients. The great thing about the platform is that it helps give investors trade ideas with pictures of graphs rather than a screen full of words and numbers. The platform uses graphic features like heat maps to help investors quickly understand how sectors and their underlying securities are performing. There is a hunger for platforms that make it easier for investors to take a more technical approach to managing their portfolio. Our clients have given us excellent feedbacks so far and we will continue to update and expand the platform to keep it fresh and relevant in line with client feedback.

We expect to complete the thinkorswim conversion in the fourth quarter. Once that takes place, all equity and option trades will clear in house. And mobile offerings continue to grow as a distribution channel. 5% of our daily trades are placed via mobile devices and we’re attracting an average 1200 new mobile users each day. And finally the same SmartMoney survey that gave us top marks for our customer service and investment products also awarded us five stars for our trading tools and named us the best provider of foreign exchange trading education. We appreciate the third-party validation of our efforts and we’ll continue to enhance our offering to keep up with the evolving needs of today’s investor.

Now, let’s turn to slide six. Our growth strategy continues to work despite a difficult market environment. Economic uncertainty continues, but we believe we’ll start to see some of the issues clear up by the fall, which will allow for greater certainty in the market one way or the other. The one thing we have emphasized throughout our organization during this economy cycle and these uncertain times is to focus on what we can control, not what we can’t and we can’t control the market or the economy.

Organic growth and asset gathering and trading are the keys to our growth strategy. We have executed well against the strategy so far throughout this cycle and we remain focused on maintaining our organic growth momentum. For us it’s more of the same, focusing our efforts on sales, service and driving client engagement, whether it through people, new products and services or enhanced technology.

We will keep a sharp eye on expenses in the light of the current environment and we will continue to invest in growth, where it makes sense. Given the flattening of the yield curve, we do expect the IDA net yield may experience from slightest compression in the fourth quarter.

Short-term rate interest rates remain near zero and from a planning perspective management is now assuming that the Fed funds rate will not increase during our 2012 fiscal year. And five to seven years rates have been quite volatile recently. We can’t predict or influence what will happen with short or long-term interest rates, but we are continue to manage our firm with the focus on the long-term and building our earnings power and delivering shareholder value to our shareholders.

Our net yield on the IDA has been relatively stable for four consecutive quarters now, as our extension strategies have clearly worked for us. And as always we will continue to be good stewards of our shareholders capital. Our intent is to return 40% to 60% of our net income through accommodation of stock buybacks and dividends. We believe that leave us with the flexibility to continue to be opportunistic in the marketplace should we come across opportunities to further enhance shareholder value.

There are number of ways in which we could deploy our capital, but as always we will be thoughtful and only pursue opportunities that make both strategic and financial sense. We will continue to be aggressively stock buybacks, given our current share price and so long as that continues, you should expect us to take advantage of that opportunity.

In closing, these remain uncertain times, but we are certain about a few important things. First, our growth strategy is working and we are executing that strategy well. Second, we are well position to deliver earnings growth on the assumption that interest rates don’t change and significant earnings growth if they do change.

And lastly, we will continue to have a focus on delivering value to our shareholders. Thanks to our unique business model and strong balance sheet and capital position, we are fortunate to be able to take advantage of opportunities to deploy or return capital to the benefit of our shareholders. We remain optimistic and focused on what we can control and are well position to take advantage of opportunities as they present themselves.

And with that, I will turn it over to Bill.

Bill Gerber – Chief Financial Officer

Thanks, Fred. Three months ago, when we updated you on the March quarter results, the economy environment was very different. The yield curve was more favorable, market sentiment was generally positive and consensus economic forecast expected rate increases to begin in early 2012. As Fred mentioned, we are now in the more difficult business environment with lots of uncertainty. Despite this, we are maintaining our focus on what we can control. So, let’s begin with the financial overview on slide seven.

We will start with the June quarter to June quarter comparisons on the left side of the page. But before I get in to the details, please recognize that the June quarter last year was the second highest ever in terms of trades per day for the company and the March quarter on the right hand side of the page was the highest ever in terms of trades per day. So, trading being lower this quarter on a comparative basis isn’t surprising.

Now the details, transaction based revenues for the quarter seen on line one, were down $51 million from last year’s results. Trades were down $44,000 per day, driving $35 million of the decrease. The remaining $16 million of the decline was due to lower commission rates, which were down $0.71 to $12.08. This decline was due primarily to three areas.

One payment for order flows lower this quarter due to fewer trades and less shares per trade being executed by clients. Two, higher futures and foreign exchange trades being done by clients both of which are at a lower price point and they have no payment for order flow. And three are active traders, many of whom have negotiated rates, remain trading in the market while our long-term investor clients are generally less active today.

On line 2, asset-based revenue is up $47 million or 14%. We will discuss this in a bit. All-in revenues were down $7 million or 1% year-over-year. On line 5, operating expenses before advertising is up $34 million or 10%. Remember, our 2010 results were positively impacted by $9 million related to the final distribution of the Reserve Primary Fund.

As Fred mentioned, we incurred about $0.02 of earnings per share impact from technology-related expenses. These were primarily in the other expense line. These expenses related to our decision to stop development of a new back office system, which we had begun to capitalize costs last year plus some of the last costs related to our exiting of the Kansas City data center to our new Carrollton, Texas data center. The remainder of the increases from last year were primarily due to continued strategic investments in sales and technology impacting employment and professional services.

Backing out the technology-related expenses, our run rate would have been within the $350 million to $360 million quarterly range we mentioned last quarter. We continue to evaluate our overall expenses. As we have said, we will continue to invest in areas that make strategic sense, those being sales, technology, and advertising. We will probably be a bit above the $360 million range for the September quarter as we finalized the thinkorswim conversion and make further progress on some of our larger initiatives. We will provide more color regarding our ongoing expense plans in October when we released guidance for fiscal 2012.

On line 6, advertising is down $4 million as we pulled back this quarter as planned. On line 8, operating income is down $37 million or 12%, but operating margin is still strong 38% of net revenues. Our earnings per share in line 14 was $0.27 in the quarter. Additionally, this quarter we had about 17 million fewer average shares outstanding due to the buyback programs we have executed in the last year.

On line 16, you will note that EBITDA remained strong at $302 million or 44% of net revenues. We are again providing comparison to the sequential quarter on the right hand side of the page. Please note that there was one more trading day and one more interest day in this quarter versus the March quarter.

The same general trends that affected the June-to-June comparisons are here as well. Lower trades per day drove lower commission revenue. Asset-based revenues held up quite well. Expenses were up due to the technology-related expenses we discussed, resulting in EPS being down $0.03 from the March quarter. Before I move to the next slide, I want to mention that we also included a year-to-date comparison in the appendix for your reference.

Now, let’s turn to spread-based revenue on slide eight. The top graph shows revenue while the bottom graph depicts balances and rates. Revenue was up $37 million or 13% from the June quarter last year as balance growth drove $54 million of increases offset by rate compression driving $17 million of revenue declines. This is the third consecutive quarter that spread-based revenue has increased; a tremendous accomplishment in this environment.

As you look at the bottom graph, balances are up $9 billion or 17% from last year due to a $2 billion increase in margin balances and $7 billion increase in IDA balances. Overall, net interest margin increased for the second straight quarter to 2.07%.

Let’s turn to deeper dive of the IDA on the next slide. Similar to the previous slide, revenue is on the top graph, while balance and rate are on the bottom graph. Revenues up $17 million, or 9% year-over-year, as balance growth contributed $29 million of higher revenue, offset by lower rates driving $12 billion less revenue. Balances continue to grow in our $7 billion, or 17% year-over-year as I just mentioned.

We averaged $49 billion in balances during the quarter that we ended the quarter in excess of $50 billion. The net yield was 1.60% in the quarter, flat from last quarter. We have maintained relatively stable IDA net yield for the last four quarters now. This is despite the rate environment and the ever-changing yield curve. To that point, the yield curve proved to be quite volatile during the last three months. We included the graph for your reference in the appendix highlighting this.

In terms of duration, average duration remained at about 2.4 years well within our targeted two to three year range. We will likely keep in this range of duration for the next few quarters. As we have said many times, the key factors are continuing to improve in IDA spreads are whether our retail and institutional monies remain in the propositions we expect and further changes to the yield curve.

In April, we told you that we thought our IDA yield had stabilized, and barring any unforeseen changes, would gradually increase for the next several quarters. Given the shape of the yield curve right now, we may experience slight compression in the September quarter. The goal is income though, and our strong balance growth has been offsetting rate compression.

So, let’s turn to the next slide to review our interest rate sensitive assets. We have nearly $74 billion in interest sensitive balances now which is yet another record. Balances are up $10 billion, or 16% from last year. And of note, the IDA balances have nearly doubled in the last two years. We have clearly demonstrated strong organic growth and we will continue to focus on this as a top to strategic initiatives.

Now, let’s turn to slide 11 to discuss our capital structure. During the quarter, we bought back 4.8 million shares in an average price of $20 million, $24 million or $97 million. Of note, we purchased nearly half of those shares in the month of June and in an average price of $19.16.

Year-to-date we have purchased 10 million shares and then averaged price of $19.05 per share. We have 20 million sales remaining on our authorization, and we plan to act on those over time. Additionally, in the June quarter we paid out of third quarterly dividend $0.05 a share for about $29 million, and are today, announcing our September quarter dividend of $0.05 per share to be paid August 16th holders of record on August 2nd.

For the quarter, we effectively returned 80% of our net income to shareholders through dividend and buyback and year-to-date that number is 58% at the high end of our targeted 40% to 60% range. During in the quarter, we also adjusted our revolving credit facilities, expanding from one $300 million facility at the holding company level to two $300 million facilities, one still at the holding company level and one at our clearing broker dealer. This structure provides us with more flexibility and it was all done on better terms.

Now, let’s move to liquid assets on slide 12. We continue to maintain a strong liquid asset position. As you can see our liquid assets are $802 million, which is up about $50 million from the March quarter. The increase is primarily due to earnings plus lower capital required in the broker/dealer to support the margin loans and includes us returning 80% of our net income to shareholders during the quarter. We continue to target between $500 million and $1 billion, as the appropriate levels for us to maintain in order to provide a flexibility to seize on opportunities.

So, in conclusion, let’s move to our key takeaways on slide 13. The June quarter we saw a shift in the business environment. There is a lot of global uncertainty right now, as we all know. Despite this net new assets grew at an 8% annualized rate and we continue to have a strong 11% growth year-to-date. Trading declined with lower market volumes and lower volatility, but we retained our leadership position.

IDA net yield remained stable, but we may see slight compression on rate this quarter. Remember though the goal is income, and with balances now in excess of $50 billion, balance growth will continue to offset rate compression. We will continue to manage expenses, but we will be opportunistic to invest where it makes sense in sales, technology, and advertising.

And finally, we are well-positioned financially with a strong balance sheet, strong liquid asset position, and a continued commitment to capital deployment. Summer seasonality and market uncertainty is apparent, but we remain focused on what we can control and will manage the company for long-term earnings power and shareholder value.

And with that, I will turn the call back over to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Rich Repetto of Sandler O'Neill. Please go ahead.

Rich Repetto – Sandler O'Neill

Yeah, good morning, Fred. Good morning Bill.

Fred Tomczyk

Hi Rich.

Bill Gerber

Hi Rich.

Rich Repetto – Sandler O'Neill

I guess the first question is on the key driver, the investor activity, so Fred it sounds like you think that this is mostly just due to the pullback, which you acknowledged was sort of abrupt in June, but do you think it’s summer seasonality and uncertainty. So you think is there any other divers that you can see by having a better look at the customer base and maybe what the impact of the city reverse split was in the quarter?

Fred Tomczyk

The city did have some impact but is rather insignificant. I think to your question what we saw generally is and I would say it started in the middle of May. All of a sudden people started pulling away. There is no question about that. The active traders continue to trade, but there was less volatility to trade off, so they slowed down a bit, but continuing to be quite active in the market. But if you look at the sort of less active traders are though, just investors, long-term investors, they definitely pullback, got conservative. You see that in a whole variety of metrics when you want to look at their net sellers of equities, they only think positive on mutual fund flows was into taxable bond funds.

And you saw very low intraday volatility. And so just despite the uncertainty in the last half of May and June, there wasn’t a lot of intraday volatility, so it was dead. Since June, the reality is and so far in July you have seen a little bit more volatility and you are seeing the (indiscernible) come up a bit and you are seeing the trading come up a bit, but there is no question, the long-term investor is on the sidelines here and hesitating until they see some of the uncertainty clear, particularly around the US debt ceiling.

Rich Repetto – Sandler O'Neill

Got it. Okay, thanks. And then my one follow-up would be it shows a return like you said in the presentation 80% of income back to shareholders. And that’s well above the 40% to 60% with the stock at least as far as close last night a little bit above 18. Could you expect to be well above that range again in the quarter?

Fred Tomczyk

We have said 40% to 60% more on opportunity. I think I was pretty clear that these share prices, it will be more.

Rich Repetto – Sandler O'Neill

Okay, thanks guys.

Bill Gerber

Okay, Rich.

Operator

Our next question comes from Patrick O'Shaughnessy of Raymond James. Please go ahead.

Patrick O'Shaughnessy – Raymond James

Hey, good morning guys.

Bill Gerber

Hi Patrick.

Patrick O'Shaughnessy – Raymond James

I was hoping you could maybe provide some more commentary around the breakaway brokers’ RAA business. I think there is probably couple of trends out there that seem like they should be favorable to you. One, I think some of the sign on bonuses that some of the big warehouses signed or ended out a few years ago probably are coming due. Now, I think on top of that, some of the warehouses are talking about layoffs and certainly they are under pressure. So, how are those trends impacting the inflow of breakaway brokers that you guys are seeing?

Fred Tomczyk

Those types – the trends you are talking about right there, I think, are more indicative of what’s in the pipeline. On the pipeline, it’s very big right now, but we also had very good success against sort of which you might call the independent broker dealers in this environment. So, whether it’s the wire houses or the independent broker dealers, we’ve had very good success so far this year. And as I said, I think all of those things are weighing into that as the economic environment, bonuses coming up, I think it’s just the uncertainty about the economy and how they might deal with that. All those things, the regulatory changes and the fiduciary role, all those things are causing uncertainty. And the one thing about the RAA model is you know what that is and you have certainty. And as you believe in the long run that is the model that most advisors see as the end game for them both personally and also for the clients.

Patrick O'Shaughnessy – Raymond James

Got you. And then my follow-up question, Bill, you always like to say that you think half of your marketing spend works, you are just sure which have. This quarter certainly you took your marketing spend down by quite a bit, but your new account additions have actually stayed pretty strong. So, is there an argument there that maybe you could take down your marketing spend going forward and still keep 80%, 90% of your new account growth?

Fred Tomczyk

I wish that were true. It’s Fred. I am going to take this question, because I think whenever you have a marketing you have a momentum that naturally goes with it. But, I think making the assumption we could cut marketing and keep up the new accounts, we don’t believe that. What we did do is when we saw the how things started to change in the middle of May, we decided to say, okay, well, there is no sense spending a lot of money in this environment and even it’s true that summer will be the same way. We’ve got to pull in. Until the uncertainty clears, just we don’t see, we don’t see it as a good use of our shareholders’ money.

Patrick O'Shaughnessy – Raymond James

All right, I appreciate it.

Fred Tomczyk

Okay.

Operator

Our next question comes from Daniel Harris from Goldman Sachs. Please go ahead.

Daniel Harris – Goldman Sachs

Hey, good morning guys. How are you doing?

Bill Gerber

Hey, Dan. How are you?

Daniel Harris – Goldman Sachs

I wanted to touch a little bit on the NIM that you guys were able to generate this quarter. Maybe if you could give some more color. Obviously a lot of compression out there on the rate curve and reinvestment yield. So, sort of two questions here, what are you guys reinvesting at more broadly for the interest earning assets? And then two, how should we be thinking about that going forward, given the environment, not the IDA yield, but just the overall NIM for the franchise?

Bill Gerber

Yeah, the NIM is obviously made up of several key areas, Dan, and probably the one that is almost impossible for us to gauge is when you get a hot stock that wants to be, the people on the short and so there is a lot of activity in our stock (indiscernible) business and this quarter the hot stocks in there were the lot of the Chinese stocks. So, we got a boost in the NIM from that in the quarter. And I think generally, just watch the LIBOR curve and you can see where we are investing and it’s, there is really no magic to it, but we still think that the NIM is doable to keep in this range for an extended period.

Daniel Harris – Goldman Sachs

Okay, that’s helpful. The other area that was a surprise was the uptick in margin loans despite as you guys had talked about, investors getting a little bit shaky in the market and pulling back on trading and yet margins loans were higher. What do you attribute that to? Is that sustainable? And what you guys have been seeing maybe in the first two weeks of July?

Bill Gerber

Yeah, margin loans, I mean, they do tend to fluctuate. So, we ended the quarter at about $8.9 billion. So, there was a downtrend. We started the quarter strong and then it stayed strong for a while and then it started moving probably mid to late May and it came down. And there hasn’t been a heck a lot of additional information we would give out relative to July, outside of the trading activity as Fred said earlier.

Daniel Harris – Goldman Sachs

Okay, thanks guys.

Bill Gerber

Okay, Dan.

Operator

Our next question comes from Eric Bertrand of Barclays Capital. Please go ahead.

Eric Bertrand – Barclays Capital

Hey, guys. Coming off of Dan’s question on the margin loans. The yield continue to compress, I think the balances are up, offsetting a lot of the compression. If you start to see the reverse – if you start to see balances come off, could we see yield tick back up as the mix shifts favorably towards you?

Bill Gerber

That is certainly possible. It really, like everything it depends on who is borrowing. And the, obviously, people with higher balances get a lower rate, not much a surprise there. So, it’s really a mixture is very important in order to watch that.

Eric Bertrand – Barclays Capital

Okay. Fair enough. And can you comment on your efforts to work more extensively with TD on the banking products. What are some of the first products are you expecting to rollout, I believe next quarter your comment and what are the economics from your site?

Bill Gerber

Yes, when we say banking products I think just for clarity is not so much we wanted to go into being a direct bank. Let sort of backup for a second. So, first off on the lending side, we will work with TD2 and sort of originate loans, but we will just generate referrals, which we give to them and they go from there. We really not interested in getting into the credit business in that way we just don’t have those competencies or capabilities.

The second, working with branches, we continue to do that to get new accounts and assets that continues to move along, along with expectation. When it comes to products, what’s we are trying to do with cash management is more about having the functionality our clients are looking for from us. So, these are the things like money movement, the ease of doing that, check writing, check imaging, bill pays those types of things. That the things that you come to expect from the banking account you can do in the IDA inside TD Ameritrade and you may or may not need a separate banking account.

But it’s not to go and offer direct checking accounts. We do offer a savings account, but the savings account we use as a defense of product only not as an offense of product. We are not going to start to chase yield with banking products. Is that answers your question?

Eric Bertrand – Barclays Capital

Yes, thank you.

Fred Tomczyk

Okay.

Operator

Our next question comes from Matt Fischer of CLSA. Please go ahead.

Matt Fischer – CLSA

Thanks. Good morning guys.

Fred Tomczyk

Hi, Matt.

Matt Fischer – CLSA

Hey, first just to follow on the TD Bank branches. How many of your FAs are out there now and do you have any metrics regarding referrals that they are generating and how that relationship just working out?

Fred Tomczyk

We don’t start our retail institutions. We are not going to start out what we get from TD. Having said that, there is about 30 to I think 35 by Cs that are working directly with TD branches now.

Matt Fischer – CLSA

Okay. And you are going to expand that footprint into basically across the continent?

Fred Tomczyk

We will expand that footprint as we see opportunity. We will continue to grow, but we are being cautious to make sure we bring it up and do it right. Don’t all of a sudden magically go to 100.

Matt Fischer – CLSA

Right, okay. How many are you adding I guess per quarter I don’t remember you did last year?

Fred Tomczyk

Well, we don’t add so much per quarter as much as every year around this time. We look out into 2012 and we decide now many we add. Last two years we have added 100 new ICs in the fourth quarter. This year right now it’s probably going to be more like 70.

Matt Fischer – CLSA

Okay. And then if regarding the DARTs you mentioned futures and foreign exchange being I guess a bigger piece. Could you give us the breakdown of ETS options and futures and foreign exchange the percent of total DARTs?

Bill Gerber

Futures and foreign exchange is 7% this last quarter. ETS is about 12%.

Matt Fischer – CLSA

Okay and option?

Fred Tomczyk

Option is about 25.

Bill Gerber

Sorry, options to be about 25, 26.

Matt Fischer – CLSA

Okay, great. And then lastly you mentioned your success against both independent on the large wire houses. Could you give us any idea in terms of net new asset coming from breakaway brokers or how many breakaway brokers you were able to pull away this quarter?

Fred Tomczyk

Well, we don’t spread out our net new assets by breakaway brokers in existing RAAs and obviously we know those numbers, but we don’t disclose them. I don’t have that number in the quarter off the top of my head, but it is 260 year-to-date.

Matt Fischer – CLSA

Okay.

Fred Tomczyk

When you talk later, Bill Murray may be able to give you that answer.

Matt Fischer – CLSA

Okay, great. Thank you very much.

Bill Gerber

Okay, Matt. Thanks.

Operator

Our next question comes from Joel Jeffrey of KBW. Please go ahead.

Joel Jeffrey – KBW

Good morning guys.

Fred Tomczyk

Hi, Joel.

Joel Jeffrey – KBW

Yeah, couple of times during your presentation, you said you are expecting the IDA to compress next quarter. You were sort of very specific about that. Is there anything that you are seeing after the quarter that you believe will cause it to expanding in or stay steady or you are just being sort of conservative in your guidance?

Fred Tomczyk

I think this is one you are asking us to sort of predict what’s going to happen with the yield curve. The yield curve has been extremely volatile depending on which week you pick, which day you pick, and sometimes the last three weeks, which time of the day you are picking will give you a different answer. So, I think right now what we are trying to say is so volatile and has sort of flattened somewhat. We could very well, we are not saying we will, but we could see some compression in the fourth quarter. It will be not significant, but having said that we come back in the fall and hopefully some of this uncertainty clears, I think we will be in a better position to say where we think it’s going to go.

Joel Jeffrey – KBW

Okay, great. And then just lastly past few years you guys have certainly been growing net new assets at greater than 10%, but just your asset base continues to grow. I mean, how long do you think you can continue to grow at this rate and do you continue to need to make the types of investments in sales to support this or can you get some further operating leverage to grow at consistent rate like this?

Fred Tomczyk

Well, we hope that’s forever, but I think to be realistic, we have always said 7% to 11%. I think depending on your timeframe and everything I do think coming down into the 8%, 9% range over, eventually it will be a reality, because every year you get bigger, this gets harder, particularly on the retail side, but also on the institution side. It gets harder the bigger you get. And so you have to continue to push.

We continue to say 7% to 11% and it is higher in the institutional business and the retail business. We haven’t seen any signs of that coming off obviously in this market environment, that’s hard. And we are in the summer season, so the fourth quarter is not going to be up there. But for the year, we feel pretty comfortable. We have the upper end of the range. And management team is certainly focused on 2012 delivering the same kind of numbers.

Joel Jeffrey – KBW

Great. Thanks for taking my questions.

Fred Tomczyk

Joel, just one other point on the IDA, I forgot to – neglected to mention is what we talked about is all basically says we don’t do any alternative ALM strategies or extension strategies. And no other things that we will look at over the summer as the yield curve takes shape.

Joel Jeffrey – KBW

Great, thanks.

Fred Tomczyk

Okay.

Operator

Our next question comes from Chris Harris of Wells Fargo. Please go ahead.

Chris Harris – Wells Fargo

Thank you very much. Good morning.

Bill Gerber

Hi, Chris.

Chris Harris – Wells Fargo

I know that acquisitions are always part of the mix for you guys and you clearly have a lot of liquidity, I know you can’t comment on specific transactions, but I was wondering if you could maybe share your perspective on just the general environment for deals right now, whether you are seeing good opportunities or whether you are finding it maybe difficult to negotiate with sellers?

Fred Tomczyk

Well, we are not actively negotiating with any sellers right now. So, I can’t really specifically comment on anyone right now. We continue always to be active in looking at potential transactions. We are very careful to make sure that in both strategic and financial sense. I do think we also have to recognize we are in a period here where there is a fair bit of uncertainty. And when you have uncertainty you tend to take your time. And right now, we will be prudent, I don’t – we want to see what’s going to happen with the US economy and the US debt ceiling just like everyone else. And so for the next little here, while we will be continued to be active we are going to continue to be cautious here.

Chris Harris – Wells Fargo

Okay, thanks for that Fred. And then just a follow-up on growth, it sounds like the growth in your retail business slowed a little bit from a net new asset perspective. And just wondering if you guys could share with us any more granularity there, what – maybe where that growth is kind of slowing whether it’s the active investor or more the long-term investor maybe just you can give us a little bit more detail if possible?

Fred Tomczyk

Well, I think it’s just a general market and sentiment period. It is when you see that kind of an abrupt change that we started to see in the middle of May pretty much across everything. You do realize that people are generally nervous and they are not about to make any long-term decisions right now. When you think about, when you get into periods of heightened uncertainty, what does a CEO do, what does a consumer do, what does investor do, they are all going to be quite cautious, pull in, protect their short term, protect their downside, and not be aggressive. And that’s what we are seeing. Until this uncertainty clears and we are all looking to Washington, we’re no different than anyone else, to clear the uncertainty, so that people can get back and decide what they are going to do. And we do think after that happens, markets can deal with negative news, but they can’t deal with this uncertainty. And so, I think the best thing we can have here is for Washington to clear the uncertainty and then I think we’ll see a different market.

Chris Harris – Wells Fargo

Great. Thanks for taking my questions.

Bill Gerber

Thanks, Chris.

Operator

Our next question comes from Howard Chen of Credit Suisse. Please go ahead.

Howard Chen – Credit Suisse

Hi, good morning, Fred. Good morning, Bill?

Bill Gerber

Hi, Howard.

Howard Chen – Credit Suisse

Just given the changing business environment that you've alluded to a couple of times, are you just seeing any interesting changes in the composition of the asset gathering? In the past you've given some interesting stats on size of new customers or new mandates and retail versus institutional, so we just love any sort of update there.

Fred Tomczyk

Yeah, there really hasn’t been a change, Howard that we’ve noticed in the nature of people. What we’ve seen is a generic, pretty much across the board, people have pulled in and become more conservative. We see it everywhere, whether the long term investors definitely move to fixed income versus equities. They are being more cautious. They are keeping more power dry and being conservative. If you look at the active triggers while they are trading up some of the volatility, they are going a little bit shorter. They are not making as longer a bit. So, if you are trading options, you are trading shorter options which also has an impact on payment for order form. So, you are just seeing everybody go very short term in their orientation right now and people are waiting for the uncertainty to clear.

Howard Chen – Credit Suisse

Okay, thanks. And then, Fred, you've spoken to a couple of times in the call the desire to be aggressive on share repurchase at current levels. Just in your mind, how much is the TD Bank ownership threshold just a limiting factor in the company doing that right now?

Fred Tomczyk

Right now, it’s not a factor at all. They are below the 45%. If you recall, Howard, when our stock was up over right on 20, whatever it was, they sold all of their shares to enable us to take full advantage of the full share repurchase, authorization was, we have 20 million remaining on. So, if we went out and just bought 20 million over the next quarter, they will just come back to 45. So, it’s not a restraining factor at all right now.

Howard Chen – Credit Suisse

Perfect. Thanks a lot, Fred.

Operator

Our next question comes from Alex Kramm of UBS. Please go ahead.

Alex Kramm – UBS

Hey, good morning.

Bill Gerber

Good morning.

Alex Kramm – UBS

A couple of leftovers here. First of all, the comment interesting on the derivatives versus equities, obviously we’ve seen that. But, if I look at this quarter, market volumes looks like options again are outperforming equity. So, just wondering if you could give us a little bit more color in terms of what you’re seeing exactly when it comes to your clients. Is that just like the active investor embracing the product more? Is it people saying, I don’t know what’s going on the equities market, I’m buying a lot of covered calls to protect myself or generate incremental income, any more color there would be great, just to see the trends.

Fred Tomczyk

The only color I can give you is that certainly to our investor education offering, there is an increased interest in it and when we do webinars and whatnot on the first basics of options trading, we always take people to covered call writing, protective puts, the appropriate use of options. And particularly in this kind of a market environment that people are very interested in that and we’re seeing increased interest in those particular strategies.

Alex Kramm – UBS

All right, great. And then just lastly, obviously one of your big competitors reported yesterday and I think some of the new disclosures that they gave, they’re going to show the strong growth that they have in their kind of like proprietary advisory products which has been like an area of focus for them. Can you remind us how you are doing on that? I know you have the Amerivest product out and you have a couple of other things. Is that still a big focus and are there any metrics like they have that you have share with us in terms of how the customer adoption is there, how the revenue generation is there and how the assets coming along and just really like advisory products. Thank you.

Fred Tomczyk

So, the first thing, you call those proprietary products. I think that’s a little bit different than what I think the tried as close. We don’t have proprietary products and by intend, so strategically, we are very much committed to open architecture. Even when we do offer Amerivest we use Morningstar to do the asset allocation. We use Morningstar to pick the funds as that is definitely part of our differentiation that we don't have any real or perceived conflicts for the investor. We always do what’s in the best interest of the client and that’s something that we differentiate ourselves. That’s the first point.

The second point, I think what they are trying to get to this, annuitized assets that is something that we do measure we do spend our time on. We don’t disclose it. But what I’ll say is that when we measure that and we look at our organic growth rates only 11% year-to-date. Our organic growth rates of annuitized assets is above that number and so our management goal is continue to try to grow our annuitized assets on a faster rate than we are gathering assets generally and we have been doing that.

Alex Kramm – UBS

Right, great. Helpful. Thank you.

Operator

Our next question comes from Michael Carrier of Deutsche Bank. Please go ahead.

Michael Carrier – Deutsche Bank

Hi, guys. On the expenses, I guess two things. Do you have and you might have given this, I just missed it, but the actual expense related to that charge. I think we are back in something like ($92) million, but I just wanted to make sure?

Bill Gerber

It’s closer to $15 million, just a little over $15 million.

Michael Carrier – Deutsche Bank

Okay, 15. Okay.

Bill Gerber

That includes Kansas City.

Michael Carrier – Deutsche Bank

Okay. I know you said in October, we will get more kind of guidance on the outlook for expenses, but just heading in to the next quarter. When you think about that 350 to 360 range and then just the thinkorswim conversion like any stage there, is that still like accurate meaning in that range?

Bill Gerber

We are just going to be probably a little bit above 360 for the September quarter is my best guess right now and that would be inclusive of additional monies on the pension conversion or at the Tosk conversion at Pensen and then any other larger initiatives we are kind of putting our shoulder to the wheel on.

Michael Carrier – Deutsche Bank

Okay. Right thanks. And then or maybe one, you guys have a lot of new initiatives, the organic growth continues to hold up really well. So, when you think of either trade architect, the cash management opportunity, the referrals, are there any particular strategies or initiatives that really stand out over the next six months, where based on your targets or your goals you are likely to see those ramp up or are there kind of opportunities across all of them?

Fred Tomczyk

Well, obviously there are opportunities across all of them otherwise we wouldn’t be investing in them. Sometimes things work better than you expect and sometimes they don’t and sometimes they get up quicker than you think and sometimes they don’t. So, I think to keep up the kind of that organic growth that we have got. We have to find new ways and new ideas. Particularly in the retail business to acquire new accounts and assets and so, you should make the assumption that we were always have somewhere between 2 and 5 new initiatives to try and keep up bringing in new money, in accounts and assets and that is what management continues to look at. TD Bank initiative will be one of those and there is a few more.

Michael Carrier – Deutsche Bank

Okay. Thanks guys.

Bill Gerber

Okay.

Operator

Our next question comes from Mac Sykes of Gabelli & Company. Please go ahead.

Fred Tomczyk

Hi, Mac.

Bill Gerber

Mac, are you there?

Fred Tomczyk

Are you on mute?

Mac Sykes – Gabelli & Company

Hi, sorry guys. Good morning. Just a follow-up on Michael’s question, in terms of the conversion, where would we see the impacts in terms of the line items, it just the clearing part or?

Bill Gerber

Yes, clearing line item.

Mac Sykes – Gabelli & Company

Great and what was the quarter end share accounts?

Bill Gerber

$574 million.

Mac Sykes – Gabelli & Company

Thank you.

Bill Gerber

Okay, Mac.

Operator

Our next question comes from David Chiaverini of BMO Capital Markets. Please go ahead.

David Chiaverini – BMO Capital Markets

Thanks. Good morning. I was curious about how the adoption rate is toward trade architect progressing relative to your expectations?

Fred Tomczyk

The trade architect is gotten very well. We have had over 200,000 people signed up onto it and that continues to grow and a good base of people are using it, multiple times now and getting more used to it. So, in terms of a new trading technology launch, it’s ahead of where we expect it.

David Chiaverini – BMO Capital Markets

Great.

Fred Tomczyk

And you’ll see us come up with a version 2 and then a version 3. I mean eventually it will have features and foreign exchange on it, and all the functions, all the sort of product functionality you have on, just a different look and feel that it will be a web based streaming platform. But, one of the things we built into it is to get constant feedbacks and suggestions from clients. And so we’re going to continue to upgrade it. But, so far we’ve got excellent feedback and adoption rates beyond what we’re expecting.

David Chiaverini – BMO Capital Markets

Great. And my follow-up is regarding an international offering or capability, a couple of your competitors now offer international equities trading. I was wondering are you seeing much demand from your clients and where you stand in potentially offering that capability?

Fred Tomczyk

Well, we’ve looked at that a number of times and every time we do what we see is more of the opportunity is foreigners wanting to trade on the U.S. market, not Americans wanting to trade on foreign markets. Americans have decent access to foreign exposure whether that would be through mutual funds, ETFs, ADRs, so they have a variety of ways to do that. And we haven’t seen a huge demand for that. If we saw huge demand, maybe we could do something and we’ve got lots of calls from vendors who say we could help you get that up, but we just haven’t put that near the top, unless we don’t see that as something we’re seeing a big demand from our client base at this point.

David Chiaverini – BMO Capital Markets

Thank you.

Operator

Our next question comes from Michael Tarkan of FBR. Please go ahead.

Michael Tarkan – FBR

Hey guys, most of my questions have been answered, but I just did find it interesting that you guys mention about adding around 1200 new mobile users per day. Is that primarily coming from exciting customers who are just now using the mobile platform or is that totally new Ameritrade customers, anyway you can break that up for us?

Fred Tomczyk

It would be primarily existing customers downloading the new apps. There is no question the tablets are very popular particularly the iPad.

Michael Tarkan – FBR

Okay, thank you.

Operator

I am showing no further questions at this time. I’d like to turn the call back over to Mr. Fred Tomczyk for any closing remarks.

Fred Tomczyk – President and Chief Executive Officer

Well, thanks for joining us everyone today. Obviously in light of the end market we find ourselves in, we are quite happy with how our results come out. We’re very happy with our organic growth, year-to-date we’re over $29 billion and 11% at the top end of our range. Our balance sheet continues to be strong. We bought back 10 million shares so far this year, and we remain very well positioned to continue to be aggressive on share buybacks and to take advantage of opportunities that we see as they present themselves. So, we feel pretty good about where we at. And let’s hope that next time we meet all the uncertainties cleared and we are in better markets. Thank you.

Operator

Ladies and gentlemen this does conclude today’s conference. You may all disconnect and have a wonderful day.

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