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Executives

Fred Tomczyk - President and CEO

Bill Gerber - EVP and CFO

Bill Murray - MD, IR

Analysts

Bill Katz - Citigroup

Rich Repetto - Sandler O'Neill

Alex Kramm - UBS

Michael Carrier - Deutsche Bank

Brian Bedell - ISI Group

Matt Fischer - CLSA

Chris Harris - Wells Fargo

Howard Chen - Credit Suisse

Daniel Harris - Goldman Sachs

Joel Jeffrey - KBW

Eric Bertrand - Barclays Capital

Chris Allen - Evercore Partners

TD Ameritrade Holding Corporation (AMTD) F1Q2012 (Qtr End 12/31/11) Earnings Call January 17, 2012 8:30 AM ET

Operator

Good day, everyone, and welcome to the TD Ameritrade Holding Corporation's December 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.

Bill Murray

Good morning, everyone, and welcome to the TD Ameritrade December quarter earnings call. In a minute, we'll be hearing from Fred and Bill, but first hopefully you've had seen our press release and located today's slide presentation. It can be found on amtd.com.

I'd also like to refer you to our Safe Harbor statement which is on Slide 2 of the presentation that we will be referring to forward-looking statements. We will also be discussing some non-GAAP financial measures such as EBITDA. Reconciliations of these financial measures to the most comparable GAAP financial measures are in the slide presentation as well. We'd also like you to review our description of risk factors contained in our most recent financial reports Forms 10-Q and 10-K.

As usual, the call is intended for the investors and analysts and may not be reproduced in the media in whole or in part without prior consent of TD Ameritrade. As usual, we have a large number of covering analysts. So if you can keep your questions to two, we'd appreciate it and I'm sure we'll get to everyone.

With that, we have Fred and Bill here to review the December quarter results and major accomplishments. Let me turn the call over to Fred.

Fred Tomczyk

Thanks, Bill. Good morning, everyone, and thanks for joining us today to discuss our December quarter results.

When we met last quarter, we talked about the high degree of uncertainty in the markets and the fear of a double-dip recession in the U.S. Well, one quarter later, there are signs of the U.S. economy improving. We seem to have avoided a double-dip recession, but growth is at a pace that continues to suggest this will be a long slow recovery.

At the same time, the cloud of uncertainty over Europe remains. It is clearly impacting the markets and as a result investor sentiment. And the Fed continues to intervene in the markets which when combined with the European debt crisis has flattened the yield curve considerably over the last six months.

I think we all need to recognize that none of us knows how this is all going to play out. In this type of environment, I think it's important to focus on what you can control, keep a healthy balance sheet, protect yourself from the downside and be ready to take up advantage of opportunities that may come along.

With that in mind, our game plan continues to be to: first, focus on maintaining our strong organic growth momentum; second, focus on keeping expenses in check and identifying and realizing greater operating efficiencies from an increased focus on what we do and how we do it; third, adopting our IDA expenses strategy to incur an expected interested rate levels and the shape of the yield curve. And fourth, maintaining a strong balance sheet that could be used to take advantage of opportunities as they arise.

Our results for the quarter are a reflection of us executing on that strategy. We'll look at the results for our December quarter, let's turn to Slide 3. Earnings per share was $0.27, up 8% from a year ago. We are net revenues of $653 million, essentially flat with last year. Our operating expenses excluding advertising were down $18 million or 5% sequentially.

We've invested in our growth over the last two years and those investments have paid off for us. We're now focused on finding ways to keep expenses in check and self-fund new investments that will drive growth over the next two or three years.

Net new client assets for the quarter came in at $10.2 billion and 11% annualized growth rate, as we continue to gather assets at double digit rates. Client trades came in at an average of 367,000 trades per day, essentially flat with last year and we repurchased 6.7 million shares or over 1% of our outstanding shares during the quarter. This combined with our $0.06 quarterly dividend result in us returning over 90% of our quarterly earnings to our shareholders.

Let's now turn to Slide 4 for a closer look at progress on our growth strategy. At the end of the quarter we're 10.2 billion net new client assets and 11% annualized growth rate. We continue to average double-digit annualized growth as we have over the last three years.

Both our retail and institutional channels continue to gather assets at healthy rates. Both channels continue to benefit from sales and service strategy that generate strong referral opportunities. And we continue to add new services that our clients tell us they are looking for in order to expand the relationship with us.

We launched the online cash services providing debit cards with ATM rebates, online bill pay, check writing and enhanced money movement capabilities. We launched an another addition to the Amerivest suite of products. The Amerivest Supplemental Income Portfolios are designed to help clients generate income while in retirement.

We launched Life 2.0, a new web resource that offers tools, check list and education to help investors, primarily women, plan and respond to significant life changing events that can impact their financial future. For our RIA clients, we integrated a number of the more popular customer relationship management systems as part of Veo's Open Access capabilities.

We plan to continue giving RIAs greater flexibility and choice, while helping them improve the efficiency and effectiveness of their business. And our breakaway broker pipeline remains as robust as ever. After a record year in 2011, we started 2012 up 14% from the same quarter a year ago.

Well, looking forward, we decided to do a front-to-back review of our new client acquisition process to ensure it was as effective and efficient as we could make it. We started with reintegrating our marketing and advertising strategy. We conducted a creative agency review last spring and throughout the fall we were to develop a new look and feel that we believe will help separate TD Ameritrade from our peers and enhance our client acquisition efforts.

You may have already seen some of this new work which launched on January 9. You'll see even more over the weeks and months to come. While it's still very early, feedback has been quite positive so far.

Next, we are using lean methods to improve the new account opening process. Lean is bringing together associates from all levels of the organization to identify opportunities to bring greater effectiveness and efficiency to our existing new account opening processes.

And finally, we continue to refine and enhance our new client development process to ensure that new clients understand and are aware of the breadth of our products and services early in their tenure with us.

Now let's take a look at trading on Slide 5. Trading volumes did slow as we progressed through the quarter, in line with exchange volumes. In fact, December 2011 was the lowest trading month we had since September of 2010. That contributed to an activity rate of 6.5% for the quarter, which is the second lowest we've seen in the last three years.

Overall trades were relatively flat when we compare with the same quarter a year ago. In January, we've seen trading volumes at an average of 345,000 trades per day.

Now, while volumes have improved over December, clients continue to hesitate in their trading and investing in the face of all of the uncertainty in the markets right now. They do remain engaged with their portfolios as logins continue to grow, but they are reticent to move into the market in the face of all of the uncertainty.

We've seen these types of markets before and the one thing we do know is that this will change. We have one quarter down in fiscal 2012. We have three more to go.

Now, while we can't forecast where the markets will go, we are focused on helping our clients find ways to trade regardless of what the market is doing. And our clients are finding those opportunities.

Derivatives trading continues to grow, climbing from 30% of trade volume a year ago to 35% today. Options and futures have regular expirations. And as a result, trading in these products tends to be more resilient, particularly in difficult markets. Weekly options in particular have become very popular. Futures tend to grow on popularity as world events unfold. They're truly a news-driven product, and today we have lots of news impacting the markets.

We continue to see an increase in clients trading options. They are telling us that they're using a variety of strategies to help navigate volatile and range-bound markets. In fact, over 60,000 TD Ameritrade clients traded options for the first time in the last 12 months.

This quarter, we updated both our Trade Architect and thinkorswim platforms to help these investors more easily and quickly plan, manage and react to market news and information.

For Trade Architect, we added analyses and commentary from premium third-party research providers for stocks in ETFs. For thinkorswim, we added economic calendars to help traders plan ahead for events that might move markets, an audio feed that provides breaking global economic news and a Forex Global Currency Map that gives traders a bird's-eye view of the world's financial markets.

In October, we launched an options market center for RIAs that provides advanced trading software, an extensive option education program, all supported by an option strategy desk for help and support. We will include breakout sessions on option strategies for our advisors at our upcoming national conference, our largest annual event for our RIA clients each year.

Looking ahead through the rest of 2012, we will continue to innovate and develop new tools and services to help our clients develop and validate trading ideas.

Turning to Slide 6. Now when we step back and look at the quarter, we are pleased with the trends we see and the progress we continue to make on the various key initiatives we have been focused on. There are many external influences that are impacting the market environment right now like the economy, new regulations, elections, the debt crises in Europe and what's happening with interest rates and the yield curve.

They affect all of us in financial services and they affect investor sentiment. While we can't control how these external influences will play out, we can control how we deal with what the market throws at us. And with that in mind, the management team and I feel good about where we stand and how we will continue to deliver in the very difficult environment.

We're 100% focused on managing TD Ameritrade to deliver strong long-term earning power and enhancing shareholder value. Here is what you can expect from us for the rest of 2012. First, we will remain focused on maintaining the strong organic growth momentum that we've built. Two, we will continue to focus on increasing the effectiveness and efficiency of our business processes and keeping expenses in check. Third, we'll be mindful of how we adapt our IDA extension strategy to the environment we find ourselves in. It comes down a balance of what is the right thing to do for both the short-term and for long-term.

Last quarter, we told you that we planned to extend 40% of our institutional IDA balances, averaging that extension in over a five-to-six month period. When we originally decided to pursue that strategy over the summer, the spread between two year swap rates and five year swap rates was approximately 130 basis points.

But as we went through the fall and early winter that spread narrowed to just over 50 basis points. That's a significant flattening of the yield curve and a reduction in the benefit of lengthening the duration of those IDA balances. Given how much the yield curve is being influenced by the Federal Reserve and the uncertainties in Europe right now, we did not like the risk we were to trade off, of making this particular change right now.

So while we did some extensions, we did pause on these extensions as the spread narrowed. We still believe the institutional book should be extended, but the timing isn't right, particularly when you look at the outlook for yield curve implied by global insights or the forward yield curve. Bill will discuss this in more detail in a few minutes.

And finally, we will maintain a strong balance sheet and leverage that strength to deploy capital to the benefit of our shareholders. We bought back up over 1% of our shares during the quarter and we have 30 million shares left on our authorization. We also declared a $0.06 quarterly dividend, which will be paid out on February 15.

In closing, there has been and continues to be a difficult market environment and we continue to execute against our strategy, the strong asset gathering, tightened expense management and effective deployment of our strong free cash flow.

And with that, I'll turn the call over to Bill.

Bill Gerber

Thanks, Fred. As we have said many times, we will continue with our strategy to focus and execute on what we can control to mitigate difficult environmental factors. That strategy has continued to drive results for us and this quarter was no different.

Consistent with the decline in the broad market volumes and the New York Stock Exchange and NASDAQ, retail engagement also declined over the quarter. And while the LIBOR yield curve improved on the short-end, the long-end flattened. Based with these economic headwinds we are maintaining focus on organic growth, adapting our IDA extension strategy to the environments, managing our operating expenses and returning cash to shareholders. We've set out to execute on these components of our growth strategy and we believe that we've delivered on each of them.

For closer look let's begin with the financial overview on Slide 7. We'll start with the December quarter to December quarter comparisons on the left side of the page. Note, that there was one less trading day in this year's quarter.

Transaction-based revenues for the quarter seen on Line 1 were down $20 million or 7% from last year's results, as trades per day were flat and commission rates were down $0.49. Commission rates were $11.90 in the quarter versus $12.39 last year. The majority of the decline was due to mix. On Line 2, asset-based revenue is up $23 million or 7%, as balance growth once again offset rate compression. We will discuss this more, a bit later.

On Line 4, net revenue was flat. On Line 5, operating expenses before advertising were $368 million. This included approximately $7 million, a one-time severance related expense. Last quarter we noted that $370 million was a reasonable quarterly run rate entering this fiscal year. Although we beat this run rate, we are not changing our annual guidance based on one quarter. However, we do intend to continue to manage expenses through process improvements and self-funding growth via lean methodologies.

On Line 6, ad spend was down 24%. This was primarily a timing difference, as our new ad launch kicked-off in the second week of January. On Line 11, pre-tax income was $221 million, flat with last year. However, EPS was $0.27 a share, up 8% year-over-year, as we incurred a lower effective tax rate due to the expiration of a few states statutes of limitations and had fewer shares outstanding due to buybacks. The combination of the severance expense and tax benefit resulted in a net benefit of about $0.01 per share in the quarter.

EBITDA for the quarter was $269 million or 41% of revenues. We are providing sequential quarter comparisons on the right side of the page. Please note that there was one-and-a-half less trading days in this December quarter. The revenue decrease on Line 4 was primarily due to lower trading revenue and lower margin lending revenue. Of note, commission rates slightly improved due to higher payment for order flow.

The operating expense decrease of $10 million on Line 7 was primarily due to non-recurring unusual expense items from the September quarter offset by the $7 million severance this quarter and higher seasonal ad spend this quarter. Earnings per share on Line 13 was down 7% due to the topline declines.

Now let's turn to spread-based revenue on Slide 8. On a year-over-year basis, revenue is up $20 million or 7% as average balances were up $14 billion or 24%. Net interest margin declined 29 basis points, driving $25 million less revenue that balance growth drove over $45 million of revenue increases. Sequentially, revenue declined $9 million entirely due to margin lending as average balances were down $800 million and the rate slightly declined due to mix.

The net interest margin declined 18 basis points due to several moving parts. Of note, segregated cash is elevated due to lower margin balances and additional cash management transfers temporarily sitting on our broker-dealer balance sheet. More on this in a bit.

Further, we experienced continued compression in the IDA yield as we expected. Let's look at the IDA on Slide 9. We continue to deliver impressive results on IDA. On a year-over-year basis, revenue is up $27 million or 15% as balance growth contributed $56 million of higher revenue offset by lower rates driving $29 million less revenue. Balances are up $14 billion year-over-year or 31%, an incredible growth rate by any measure.

Sequentially, revenue continued to rise despite rate compression. Revenue was up $5 million as balances grew $5 billion on average. The net yield was 1.37% in the quarter, down 8 basis points from last quarter, in line with our expectations as we work to manage the excess float down. The lower yield on the portfolio was due to the significant growth in the quarter as well as managing the timing of extensions given the shape of the yield curve. Ironically, as we grow the IDA balances, it continues to put pressure on the NIM rate in the short term.

Our targeted float balances are 5% to 10% of the total portfolio, but they averaged 11% to 12% of the portfolio for the quarter, consistent with last quarter. We still intend to extend 40% of the institutional portfolio in the three to seven-year area of the swap curve, but we are choosing to be patient in implementing this strategy based of the yield curve.

Let's look at yield curve scenarios on Slide 10. This is a little bit of a confusing slide, so stick with me while I explain what it all means. We are graphing the spread between the two-year and the five-year swap rates since it is a factor we consider when determining our extension plans. The key issue is whether we are getting paid for locking in moneys for five years versus two years.

As you can see, fiscal 2011 saw this spread rise and fall dramatically during the year. We started fiscal 2012 at a spread of about 70 basis points. At that time, the Global Insight's consensus economist forecast, which is the dotted blue line, suggested that this spread would rise throughout the year ending September with a spread of 105 basis points. This in effect was our fiscal 2012 high-end guidance rate scenario. One quarter into the year, the spread is at 54 basis points, 20 basis points lower than what the economists had predicted 90 days earlier.

As mentioned, the short end of the curve actually improved during the quarter. The four-year swap rates and shorter were all higher than the October '11 economists forecast for the December quarter. The five-year swap rates and longer were at or slightly below the same estimates. The combination of higher short rates and lower long rates is driving the drop in the two versus five-year spread noted on the slide.

We're also showing the January 2012 Global Insight's forecast, which is the dotted grey line, which are suggesting a fairly rapid increase in the spread over the next few quarters. And finally, we included the actual swap forwards where the market thinks the spread will be over the next nine months. As you can see, the market thinks this spread will remain fairly below in the near term.

Clearly, there is a variety of opinions on rate forecasts, and I think all of you know my confidence in economist forecasts. That being said, we have modeled multiple scenarios that factor in the mix of balances, rate environments and our extension plans and timing. Based on these, we remain comfortable in reaffirming our fiscal 2012 IDA net yield range of 1.3% to 1.4%. If rates remain at current levels or near the forwards forecast, we could be at the lower end of our range for the full year 2012.

Now let's look at our interest rate-sensitive assets on Slide 11. We continue to break records in our interest rate-sensitive assets. We are now at almost $80 billion. Balances are up $11 billion or 16% from last year, primarily due to organic growth.

The composition of the interest rate-sensitive assets has changed this quarter due to additional cash transfers. $3 billion has been moved from money market mutual funds, primarily from retail client. $2 billion of this moved to segregated cash on the broker-dealer balance sheet until later this spring when it will be moved to the IDA. And $1 billion went directly to the IDA.

The net result is that money market mutual fund balances are now only at $5 billion, down 80% from three years ago. These cash transfers are a win-win as a client on average receives higher yields and FDIC insurance coverage, while we earn a higher yield on those balances as well.

Now let's turn to Slide 12 to discuss liquid assets. We continue to maintain a strong liquid asset position. As you can see, our liquid assets are $918 million, which is up $66 million from the September quarter. This increase was primarily due to earnings and lower capital required in the broker-dealer to support the lower-margin loans and were offset by returning 92% of quarterly net income to shareholders. We continue to target between $500 million and $1 billion of liquid assets as the appropriate levels for us to maintain in order to provide us flexibility to seize opportunities.

With that, let's now turn to the last slide. We are only three months into fiscal 2012, but we are off to a strong start. Our strategy of focusing on what we can control continues to drive our results. We remain focused on our organic growth efforts and we plan to maintain that momentum. Our efforts around expense management and process improvements are already yielding results, and we continue to focus on removing excess costs.

The interest rate environment remains difficult, but we are adapting our extension plans accordingly. Our balance sheet is strong and we continue to return earnings to shareholders through share repurchases and dividends. We have 30 million shares remaining on our authorization that we can act on.

Our strategy is working through a very challenging economic environment. We remain focused on building our long-term earnings power and we are well-positioned when the environment improves.

And with that, I'll turn the call over to operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Bill Katz of Citigroup.

Bill Katz - Citigroup

I should understand your priorities for the year on the rate discussion, but to be fair, your metrics are generally running towards the low end of your guidance whether it be rates or activity rates, et cetera. I know you're working on project lean. But sort of curious from here any incremental moves to help protect the downside of the earnings range just given what we're seeing so far in activity rates and rates so far?

Fred Tomczyk

I mean the first half is we do wanted to club that 40% extension of IDA balances which helps protect the downside of the net interest margin, not just this year, but it helps actually. It's important to next year. I think that's the first point. We are going to keep expenses in check. We're going to continue to push on lean. And as Bill said, we have over $900 million of liquid assets. So we have lots of opportunities and levers that we can pull to protect the downside.

But beyond that, as long as we keep this organic growth up and it continues to work through, we're going to continue to play our game. And I don't see a reason to change that, because it's not just about '12, it's also about '13 and '14.

Bill Katz - Citigroup

There has been some discussion around what TD might be doing in terms of the relationship for the IDA accounts. I know it comes up more next year than this year. But any initial discussions with the bank about any kind of economic changes in the relationship.

Fred Tomczyk

Not of any consequence. TD is very happy with the relationship. If there is any discussion, it just relates to any potential impact of Basel III and Dodd-Frank, but it has nothing to do with the economic. And just to be clear, when an agreement comes up for renewal I think in another year-and-a-half, if my memory is right, it requires two years' notice. So they've already essentially recommitted for another five years. I think that's an important point.

Operator

Our next question comes from Rich Repetto of Sandler O'Neill.

Rich Repetto - Sandler O'Neill

I guess my question is on rates, Bill. You talked about being comfortable on the IDA spread, but with the NIMs right at the bottom-end to 170, I guess some thoughts on how you feel about going forward there. And then also related, can you give us a feel for how much of these float balances you actually have? You know, extended and how much you've got more to go of the 40% of the institutional?

Bill Gerber

Sure, let me start by going in a reverse order. We extended about two in the quarter and so we probably have another five, may be six remaining. So that part of it. We do think that when we look at the overall net interest margin we think that certainly margin balances are sitting at the very low-end and actually below the low-end where we thought they were going to be. We expected that in a more normalized environment would rebound that is an important investment in evaluating the 170. But I think that if they stay where they are, certainly 170 could be under a little pressure.

Rich Repetto - Sandler O'Neill

What's the $7 million in severance for one-time? What severance are we talking about here?

Fred Tomczyk

I can't remember the exact date, but earlier in the quarter, we did as a management team sit down and decided to reduce our expense run rate. And so we did part ways with about a 145 of our associates.

Operator

Our next question comes from Alex Kramm of UBS.

Alex Kramm - UBS

Just staying on the rate question again, I think both of you just mentioned to prepare not only for this year, but also for '13, '14 and so forth. So can you give us a feel for where we would be in IDA yields for next year, if things change? And also, where you think you will be, if your extension strategy is completely done? I mean just getting a little bit of early look into the next couple of years.

Fred Tomczyk

That is all contingent on what's going to happen with interest rates, both in fed funds and LIBOR, but also the shape of the yield curve. So you'll get a variety of answers depending on what you want to believe in, the global insights forecast, what the forwards are saying, whether you believe it's just going to stay where it is, which nobody is predicting or you believe we're heading into Japan.

So we've modeled all those scenarios and the outcome of that is highly contingent on what all happens there. And that's a hard one to answer with the absence of making a call on what the yield curve is going to look like right now.

Bill Murray

And certainly Alex, what I said is that if the forwards are right then we will be at the low-end of our guidance for the current year. Obviously, every quarter we'll touch and this will give you a more better view and we're all hopefully be in 2013. But I completely agree to what Fred said, it's a tough call right now when you see those swap curve moving that fast, you don't know which way it's going to go.

Alex Kramm - UBS

I totally appreciate the answer, but I'm sure you've modeled out how things would become if things really stay as they are right now. So any comments there would probably be helpful. So if you can comment on that, please. Other than that, just real quick as a follow up, in terms of the cash management stuff that have you rolled out, any early indication that people are grazing at, that they see it and that they actually maybe move more money and/or use them?

Fred Tomczyk

On the cash management moves, it's still pretty early. People told us that that's really what they want from us. But right now I think it's pretty early too. There is no noticeable impact of any of by numbers at this point.

With respect to the other one, I mean it depend what you want to call, I mean to say while yield curve stays flat. And obviously that's going to put a little bit of downward pressure on the NIM next year, but keep in mind, you need to understand the balance growth as well. So we focus on the revenue versus just the NIM. I think probably the best one to use and you know you can debate it, but it's the forward curve which would look better.

Bill Murray

And if you'll recall, on this call last year Alex I called the end of rate compression. So that was good, listed by at least 12 months in counting. But just the rates are moving all over the place is very, very difficult right now.

Fred Tomczyk

Just for any external influences between Europe and let the Federal Reserves, doing it's really hard to predict that environment.

Operator

Our next question comes from Michael Carrier of Deutsche Bank.

Michael Carrier - Deutsche Bank

One follow-up on NIM. You've given the transfer, you mentioned $2 billion maybe out of $5 billion to $6 billion reaming to extend. Given were the two-to-five year swap spread is where would you expect or where do you feel more comfortable for that trade-off of kind in a short-term versus long-term upside to move the remaining balances. Like where would you be comfortable for that curve to be in order to make that move?

Fred Tomczyk

Well to start of with, I mean we are still extending. So there shouldn't be any confusion there. And in the normal course, we run the retail book on a five-to-seven year ladder and we run the institutional book on a two year ladder. As that money rolls in and as new money rolls in, we continue to roll that. We very much take the view we're not going to try that on interest rates and what might happen or not happen.

With respect to the institutional piece, the reason we pause is because we are making a change in our ALM strategy. And when you're making that change, I do think you should pause and make sure you're implementing it over a prolonged period of time and in the right environment. That's really what we're doing. So I would separate the 2 million or the 3 million depending on how you look at it that will be extended in the normal course. And primarily retail is going to go into the five-to-seven year part of the curve.

Michael Carrier - Deutsche Bank

And then, maybe there is a follow-up on expenses. It continues to be something that you guys have done a pretty good job on balancing, the net new asset growth continues to be leading the industry, so you want to invest in the business. But when you look over the past three years it seems like you guys have done a lot of investments and obviously it's paid off.

So when we think about a product lean, is there any way to maybe size up like the percent of cost structure that's constantly being analyzed or reviewed? What the opportunity could be over time, particularly if you're in environment where the NIM faces further pressure, activity rates in terms of volumes are under some pressure, yet balancing you still want to invest in the business for that long-term opportunity on the net new asset, account growth.

Fred Tomczyk

I don't think you should look at lean as primarily focused on expense reduction. It's first and foremost is designed to make sure that all of our processes basically are as effective as they can be. We started with new accounts, because we open a lot of new accounts every year and so we look at that as growth. I think, it starts off with very much of focus on improving the client experience, because that's where we're focused on continuing the growth.

When we get the efficiencies out of that process, there is two things that we'll use that for. First, we would like to continue to grow without adding so much expenses every year such that we start to increase our operating leverage as we continue to grow and gather momentum on asset gathering, that's the first. The second is that if we find expense savings opportunities, to find a way to use those to invest in most things that we think we want to invest in to continue that momentum for the next two or three years.

Operator

Our next question comes from Brian Bedell of ISI Group.

Brian Bedell - ISI Group

So Fred, can you give us a comment on how January is trending so far? Obviously, with a little bounce-back from a very weak December obviously is somewhat tepid so far, but that does include the first week of January, which may have still been impacted by vacations. Do you sense that we're having better momentum, certainly like in the second week versus the first week? And as we move into January, better momentum in both trading and then also in that net new assets growth?

Fred Tomczyk

I think you're accurate. The first week of January was unusual, but having said that I would say that even post-first week of January, it continues to be somewhat tepid. I think with what's going on in Europe right now particularly, I think a lot of investors are a bit frozen-up. And while it continue to login, they look at things and monitoring their accounts and their investments on a regular and frequent basis.

They really are hesitant. They don't know what to do. And I talked to professional investors they would say the same thing. There's a very difficult market because it moved so much based on just some headlines out of Europe and that which are very hard to predict. And hopefully, that gets cleared up one way or the other and I think then the market will get some conviction.

Brian Bedell - ISI Group

We see some stabilization in the market just very recently related to certainly last quarter and improvement in the equity and to see if we can sort of continue on this path. Do you think that's the precondition to improve the client sentiment?

Fred Tomczyk

Yes, I think as long as the market starts to get some consistent momentum in the direction one or the other, there is more signs of the U.S. economy improving. I think this will change.

Brian Bedell - ISI Group

And then just follow-up on the online banking. Obviously, that's pretty early to just roll that out in December. What are some of the strategies you expect to implement over the next weeks and months in terms of getting your service representatives in call centers, basically getting your customers to either switch into that or adopt it or switch from other banks. Are there specific strategies that you think will build the momentum in that fairly quickly over the next few months?

Fred Tomczyk

We have been doing some referral cross-selling programs and that takes time to build-up. But I think the thing we have to keep in mind is we're coming up in the retirement season. And what we had in the retirement season is focus of all those service centers and the sales and service strategies will shift considerably all into retirement. So that's just a reality, it's a seasonal thing and then after that we'll get back to it.

Operator

Our next question comes from Matt Fischer of CLSA.

Matt Fischer - CLSA

Just to go through your expenses real quick, given the timing of the ad expenses, should we expect to see in fiscal 2Q the similar type of jump you see normally in the first quarter?

Fred Tomczyk

Yes, we think it has been and will be higher in the second quarter than the first quarter. Yes.

Matt Fischer - CLSA

And then does that run into the third quarter now or you in all kind of get to put into the second quarter?

Fred Tomczyk

Third quarter should go down a little bit. It usually goes down a little bit from the second quarter. So usually it's between the first and second quarter where you see the bigger burst in the ad spend and that it would more level us in the third quarter.

Matt Fischer - CLSA

And then, I know it's smaller than some of your peers, but maybe you could give us an update on the fee waivers, how much this quarter and then how much you're still collecting from clients?

Fred Tomczyk

The fee waivers this quarter were $8 million. So that's going down, it should because when we move the money out of the money market firms we would expect it's going to stay right above $8 million assuming that we stay at the $5 billion level of money market fund going forward. And right now our yield is about 8 basis points.

Operator

Our next question comes from Chris Harris of Wells Fargo.

Chris Harris - Wells Fargo

The activity levels really aren't where we like to see them. But Fred you mentioned earlier, growth from logins still remains pretty good. And in prior periods have you noticed is that usually a good leading indicator for future Dodd activity? Have you all done any kind of studies or looked back as to how that relationship holds up?

Fred Tomczyk

Yes, as long as the logins continue to be elevated and the market starts to move, and it get a conviction one way or the other trades will take off. In fact there's a little bit of a pent-up demand, but not happens, and we've proven that over time. It's just getting that event which you can't control to happen here. And it's just hard for an investor when your market is bumpy and you're based on news headlines and this winds up in the same spot.

Chris Harris - Wells Fargo

It makes sense. Now switching gears a little here, you mentioned in your prepared remarks the pipeline in breakaway broker activity still looks very, very strong. Are you guys getting any benefits right now from some of the wirehouse as really trying to focus a little bit more on profitability and forcing out some of the lower (pre-screened) advisors. Are you guys seeing an uptick as a result of that or is it something else driving that growth?

Fred Tomczyk

I think there have been some changes recently that some of them have made, which I'm sure you read about. I think it's a little early for that to be in our results, because breakaways is a bit of a longer-term sales cycle. So I don't think that's what's in our numbers today. But I do think it's mainly our marketing and sales strategies continued to work for us. And we have very good customer service and net aggregate scores. And with our Open Access strategy, we have a lot of people who basically are talking about the company in the market right now. And that's helping us.

Chris Harris - Wells Fargo

So wirehouse refocus on profitability that could be even a bigger tailwind for your future pipeline I guess.

Operator

Our next question comes from Howard Chen of Credit Suisse.

Howard Chen - Credit Suisse

Just on the continued asset gathering that you all put up, anything new or interesting to know with respect to where it's coming from whether it be the mix of institutional versus retail, size of customers or maybe payout from some of the new initiatives you all put in place?

Bill Gerber

It was pretty much the same as last quarter. So it's been running about 60% institutional, 40% retail. It's continuing on the retention side. Asset outflows continued to improve. So very few customers feel people are leaving us or taking assets away from us. And other than that, it's just a continual momentum. Even on new accounts, while they continue to be of very good sizes, people want to come in there. They're sitting with cash more than they used to.

Howard Chen - Credit Suisse

I realized you're less impacted by the money market fund business positively or negatively. But curious, what's your capacity to do further bulk transfers from the money market funds? And Fred, you've been pretty outspoken on your broader views about money market reforms. So just any update or expectations there over the next coming months?

Fred Tomczyk

I think there continues to be some capacity. There is only $5 billion left in the money market fund. So you could presumably say, take all that down.

And on the second one, in the free credits right now, there is I think about $10 billion. That's a little bit more than we would normally have, but merger loans are coming which is driving part of what's driving that. So you might say somewhere between $5 million and $10 million is potential, but we don't have any current strategies to try and move that.

With respect to money market reform, I really don't have any insight as to what's going to happen. There are obviously three possible alternatives or a combination of those alternatives that are being considered by the regulators. One is our floating net asset value, which I think everybody dislikes. Our capital buffer or a liquidity charge for people getting out in event which I think when people go through that, I think that will be a difficult thing to implement, because it may work on who is going to call the event and may work on 'an event', but when you have an 'an event', it gets awkward and difficult to manage.

So I do think you wind up back in a capital buffer sort of model as probably the right scenario. In some respects, money markets funds are product that, you know, basically is avoiding the regulatory capital buffers, sort of what not a bank deposit account. And so you could see why they might change that. They just want to make sure they unattend the consequences of that and the impact on the short-term lending markets.

Operator

Our next question comes from Daniel Harris of Goldman Sachs.

Daniel Harris - Goldman Sachs

I want to focus on the margin lending, obviously down sequentially on average. And one of the things we've noticed in the past is it tends to correlate a little bit with the S&P. So the Vicks was down and yet margin loans were down pretty significantly. What are you seeing in your clients that's driving that and any color on the early year change? And that will be helpful.

Fred Tomczyk

The margin lending tends, you're right, focused on buying power and seeing people's buying power as usually good tell as to whether or not there is going to be more or less margin lending. So I think what we're seeing right now is risk-on, risk-off trade and we're seeing a little bit more of the risk-off. As we said, it's not been an environment where retail has been comfortable and just seeing they're backing away a little bit from the market right now as a thing directly correlated with taking down their margin debts. So in January, it's been stable with where December ended. So I will see how that works out going forward.

Daniel Harris - Goldman Sachs

And then second, you mentioned that payment for order flow sequentially anyway ticked higher. What was driven on? I'm guessing that's on the option side, but any color there will be helpful, especially whether or not that could be sustainable.

Bill Gerber

Sure. We've certainly gone through and continue all the time to go through negotiations with our vendors about where we are with our payment floor-to-floor with them, and we have concentrated on a couple of different vendors to increase that payment. So that I would say is the real driving force behind the change this quarter.

Operator

Our next question comes from Joel Jeffrey of KBW.

Joel Jeffrey - KBW

Just sort of sticking with the revenue per trade thought, it seems like it's been declining a bit, and you guys mentioned it was due to mix shifts. I mean how should we think about that going forward and what's specific in the mix shift has been driving it?

Bill Gerber

We think the biggest single contributor is futures, so the increase in futures. The futures are traded under $5 a trade. So as futures is now, I think, 7% of our trading activity, that has tended to bring that number down. So as I said, it did go up sequentially. It was mostly driven, as I said, in a (inaudible) question about payment floor-to-floor. But as we watch that mix shift going forward, that would probably be the single biggest element that would cause that number to fluctuate down.

Joel Jeffrey - KBW

Can you just give us little bit more on the decline in the tax rate in the quarter?

Bill Gerber

Sure. As you know, in taxes, you have slowing your returns in the fall and for the prior year. And every three years, the statute limitations runs, you have uncertain tax positions. And we had several uncertain tax positions in different states where the statute limitations ran in October of 2011. So these would have been the 2007 tax returns that were filed in 2008, if I did that math right. And so that's what caused it.

Operator

Our next question comes from Eric Bertrand of Barclays Capital.

Eric Bertrand - Barclays Capital

Pretty robust return of capital again this quarter with the 7 million share buyback. Given where the stock is, do you expect to continue buying at this pace? Said another way, was this an accelerated pace due to the share price performance or you're looking to be pretty even with regard to the share price?

Fred Tomczyk

I think the way we look at share buybacks, we do have a 40% to 60% more on opportunity strategy, a combination of dividends and share buybacks. We haven't moved off that strategy. We do have a view that the way you should think about buybacks is we continue to believe we're building lots of long-term earning power. And because of some of the external influences right now, we should be buying shares, but we should be doing that by dollar-cost averaging as opposed to trying to make timing bet.

So we haven't change that view in any way, shape or form. As of last couple of quarters when we put in the buyback to stock has weakened and the way it's designed, it will buy back more. It's really opportunistic. And we set that each quarter.

Eric Bertrand - Barclays Capital

Shifting gears to the regulatory front, it looks like the transaction tax was actually trying to get a little bit attraction now in Europe. So not a lot of action around this side of the Atlantic. Hypothetically, how would you react to something like that over here in the U.S. side? Presumably you passed that on: A, is that accurate; B, how would you think clients would react to the higher implied commission?

Fred Tomczyk

While there has been some momentum in Europe, I think there has also been some pushback in Europe, particularly from the U.K. on a transaction tax. And as I think to make it work, it definitely requires everybody to go along I think, otherwise you create a lot of anomalies about where financial service companies are located.

Our reading of landscape in Washington is if this has no links in the United States, if it ever came, it all depends on how it's designed and whether it's on a company or whether it's on the client. I can't tell you how that's going to play out at this point. And it's going to depend on how it's designed.

Some of the earlier proposals that we've seen that it'd be a multiple of what our commission per trade is. So it's very hard to call what that might look like right now. First reaction would be to make our views known, that we think this is the wrong thing to do. It's a bad policy. It's going to hurt the retail investor more than anybody and we just don't see the merits of it.

Operator

Our next question comes from Chris Allen of Evercore Partners.

Chris Allen - Evercore Partners

Just want to follow-up on Joel's tax rate question. How do we think about the rate moving forward? Should we think about the last three quarters in 2011 to 38-ish level or somewhere in between the current level in that?

Bill Gerber

It should be about to 38% level. These statute limitations things happen every year about that time. Some of them are related to acquisition. So there can't be a different time, but historically you're looking at that December quarter. If any of these statutes are going to run, that's when they would run.

Chris Allen - Evercore Partners

I guess I just want to ask a little bit about the new advertising campaign. Obviously the level of spending in the December quarter, you kind of explained that, picking backup in the March quarter, but some people have just raised questions in terms of the account growth and the activity levels. Have you seen any initial feedback from clients the new advertising levels?

Fred Tomczyk

I think it's still too early to get a read on that. And I'd say any time you change your ad strategy, if this is a big change, it's going to take time for it to have effect, because you have to get three or four things out, and for the first lap, people are going to wonder who it is. And so it's just going to take time for it to really hit and have effect.

I think the one thing you should keep in mind, as we did, deliberately re-push some of our marketing spend into January through April as part of a strategy to concentrate it more in the retirement season and also when the new ads were coming out. As we went into December and we knew what we were going to do with the new ads and we saw what the market was like in December, we decided to pull in a bit. We just didn't see the merits of keeping up our marketing spend or increasing it in the month of December, given the declining investor engagement and the fact that new commercials were coming out very shortly.

Operator

I would now like to turn the conference over to Mr. Fred Tomczyk for any closing remarks.

Fred Tomczyk

Thank you and thank you everyone for joining us today. We talked a lot about the market environment and a lot about interest rates and the yield curve. I think having said all that, that's external. We continue to focus on what we can control. We've continued to deliver our asset gathering at a double-digit rate. We've continued basically to repurchase shares and return capital to our shareholders.

So we have a very clear, very straightforward, very simple game plan that we continue to execute on. And you shouldn't expect any change from that as we go forward to 2012. Thank you and I will look forward to getting together with you next quarter.

Operator

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

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