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 Chief Executive Officer, Fred Tomczyk and Chief Financial Officer, Steve Boyle. At this time, I would like to turn the call over to Bill Murray, Managing Director of Investor Relations. Please go ahead, sir.

Thank you, operator and good morning everyone and welcome to our December quarter earnings call. Please refer to our press release and December quarter earnings presentation, which can be found on amtd.com. The earnings presentation includes our Safe Harbor statement and reconciliation of certain non-GAAP financial measures to the most comparable GAAP financial measures. Description of risk factors are included in our most recent financial reports, Forms 10-Q and 10-K. As usual, this 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. As is our normal custom, please limit your questions to two, so that we can cover as many of your questions as possible. With that, let me turn the call over to Fred.

Thank you, Bill and good morning and welcome everyone. While we had a strong start to fiscal 2016 as we continue to gather assets at a double-digit pace and at the same time maintain good expense control. Having said that, the markets are off to a rather wild start in January, so I am sure that 2016 will be another interesting year. Despite the market environment, the one constant has been and will continue to be our continued focus on what we can control and the execution of our growth strategy. Let’s take a look at those results starting with the first quarter highlights on Slide 3. Average client trades per day were 438,000 in the December quarter, an activity rate of 6.6%. Net new client assets were $17.5 billion a 10% annualized growth rate and our second best quarter ever. Client assets ended the quarter at $695 billion, up 3% from last year. Fee-based investment balances were $157 billion, up 3% year-over-year. We have grown interest-sensitive assets to a record $110 billion, up 9% from last year and we earned net revenues of $812 million, down slightly from last year. This resulted in our delivering $0.39 of diluted earnings per share for the quarter, which is flat year-over-year. Keep in mind last year’s December quarter was a robust quarter for trading, where trades per day were 19,000 higher in that quarter by comparison. Now, let’s look at how we execute in each area of our growth strategy starting with asset gathering on Slide 4. Fiscal 2016 is off to a strong start gathering over $17 billion in net new client assets and at double-digit annualized growth rate. This performance is second only to last year’s December quarter, which was our best quarter ever. Our retail channel had a strong…

Thank you, Fred and good morning everyone. We are pleased with our results for the quarter. We continue to deliver on items within our control and are off to a good start for fiscal 2016. As Fred said, our results are credited to strong asset gathering and good expense control. Expenses were at their lowest levels since the June 2014 quarter due to efficiency gains at a few favorable timing items. So with that, let’s begin with the financial overview on Slide 8. We will start with the year-over-year comparisons. Overall, revenue was down $7 million or 1% year-over-year to $812 million. On line one, transaction based revenue was $328 million, down $31 million or 9% due to both lower trades per day and lower commission rates. Trades per day were down 19,000 or 4% due to the strong prior year and despite reasonable volatility. Commission rates were down $0.55 per trade from last year, reflecting declines from fiscal 2015. On line two, asset based revenue was up $22 million or 5% primarily due to balanced growth. On line five, operating expenses excluding advertising totaled $407 million for the quarter, down $4 million. This quarter included $7 million of favorable timing items. We will continue to manage expenses closely, but the next quarter there will be seasonal increases. That being said, we would expect quarterly operating expenses excluding advertising to be similar to Q2 2015 at $425 million to $435 million. We also realized some favorable state tax items this quarter as in the prior year quarter. All of this resulted in earning per share of $0.39 which was consistent with last year. Key ratios remained strong. On line 14, return on equity was 17% for the quarter. And on line 17 and 18, our EBITDA was $387 million or…

[Operator Instructions] And the first question comes from Rich Repetto with Sandler O’Neill.

Yes. Good morning Fred and good morning Steve.

Good morning.

So I guess the first question is on the capital return and more specifically share repurchases and it was $1 million this quarter, $7 million last quarter, so was it purely an issue of the stock price and would you be more aggressive in the first quarter given where the stock price is here now in the calendar first quarter?

First off, as you know Rich, we always put on our share repurchase algorithm in place, hopefully at the start of each quarter. This quarter, we were not able to do that, because after we did the earnings, we had inside information with the transition from myself to Tim. And so we were actually locked out of the market for a fair bit of the quarter before we got the share repurchase algorithm in. So I think it’s just lighter this quarter for that reason. And we would definitely say – I think it’s fair to say, as you look forward given what’s happened to the stock price, we will be more aggressive here just given what’s happened with the stock so far in January.

Okay. And I guess my one follow-up would be on the expense, you outperformed versus model in the expenses. And I know you have some incremental investment, but I guess one of the expense lines, the clearing and execution per trade it was the lowest I think we have seen in quite a while. I guess overall can we get a little bit deeper on – was there anything going on in that line? And I guess you said where it’s going to trend for the year, but anything else as we are in this volatile environment?

Yes. So Rich, we typically get an OCC rebate this quarter. I mean, it was a little bit larger this year than it’s been historically. That was the primary reason for that. And then in terms of overall expense, I think we gave pretty clear guidance on next quarter 4.25 to 4.35. I think we expect to be well within our guidance range and we are pleased that we have been able to realize some incremental efficiency this quarter.

Okay. Thanks, guys.

Thank you. And the next question comes from Mike Carrier with Bank of America Merrill Lynch.

Thanks, guys. Steve, I think just on the spread-based outlook, it looks like the IEA might have come in a little bit, I don’t know more muted this quarter and I think you mentioned some of the drivers and the ones margin balances might have been one of it. When you think about the outlook in terms of the Fed moving and re-pricing some of those products and maybe what you are seeing in SEC lending just given this more volatile environment, I guess any sense and maybe the direction of that part of the business? I know it’s more volatile, but it seems like there is some puts and takes in the outlook that maybe there is some guidance.

Yes. I think there is sort of parts and pieces to the interest rate sensitivity I would think about. So overall, obviously, loan rates are moving quite a bit. We are still within our guidance range there. I think we gave pretty explicit guidance on what 25 basis points does for us. I think our clients have reacted the way that we would have expected them to react. So, I think that’s pretty much right in line with what we were expecting. I think as you mentioned that the market environment has had some changes on our balance sheet that are going to reflect themselves in NII. And I would say as you said there are puts and takes there. So, we are seeing very strong IDA growth. Margin balances have held in pretty well in January, but we would expect in this kind of environment that we would see some declines in margin balances. Stock lending is always difficult to predict. Cash levels, free credits are up significantly, so cash is up. And so that’s going to have a positive impact on NII, but a dampening impact on the net interest margin percentage. So, overall, I think we feel pretty good, but there is obviously a lot of moving parts. The market seems to change everyday.

Yes. And I think you got to look at it over the balance of the year. And with the 25 basis points move, we did increase our lending rates and we did – we basically didn’t pass anything along on the cash credit rate. So, it should improve as we go through the year.

Okay, thanks. And then just quick follow-up, on the investment product revenues or those fees, I think there was a benefit from the Amerivest I guess normalizing other rebates. Obviously, markets are down year-to-date. So, just wanted to make sure we understand how that can impact it and then what you are seeing in this environment in terms of growth maybe in the fee-based products, because the net new asset growth continues to be pretty strong, just where some of that money is going?

Yes. So, I think the best way to think about Amerivest is you should think about sort of the client activity and then the accounting. So, in terms of what actually happened last quarter, we had a strong performance quarter for our Amerivest portfolio. So, the vast majority of them were up. So, we have effectively hit the reset button on the rebate, which only happens if there is two consecutive quarters of negative performance. So, that resulted in us being able to recognize a couple of million of revenue that we had previously deferred. If we are down this quarter, we would reserve another – about $5.5 million, but we wouldn’t have to pay that out unless we had two consecutive quarters of down performance. So over time, that’s been unlikely, but obviously, we will see how this market plays out. In terms of investment product fees, we think we mentioned that Amerivest and AdvisorDirect were both up 11% year-over-year. I think that’s indicative of a reasonable growth rate for those portfolios. We will see how they behave in this market growth.

Yes, but the market is down, I don’t know, 7% or 8% right now so far in January, so the fees will come down.

Yes and we have a sensitivity on that on Page 15 of the deck.

Okay, thanks a lot.

Thank you. And the next question comes from Dan Fannon with Jefferies.

Thanks. In terms of the M&A, can you talk about the mix of institutional versus retail and maybe from a backlog perspective kind of compare it today with the institutional component to a year ago and how that’s different?

Well, the M&A in the quarter, as I said, the retail asset gathering is slightly up year-over-year and the institutional side is down. The institutional side is down largely to existing advisors. They are continuing to grow, but they are not growing as fast as they did last year at the same time. And the growth rates continue to be very good for both channels and the mixes continues to be relatively consistent, roughly 70% institutional and 30% retail. With respect to sort of pipelines, the pipelines are still very full and very robust with respect to breakaway brokers and sales opportunities. We have got a National Conference coming up, which is usually a big event for us where we do gather a lot of assets in the quarter following that conference, but the sales cycle just takes a bit of time here. But it’s not surprising to me I think the market was flat last year. So, it’s just a more challenging market for people to gather assets, but we continue to do quite well in that market.

Great. And then just a follow-up, Steven, I think you highlighted $7 million of, I don’t know, one-time or helpful benefits in the quarter on the expense side and was the bulk of that in the clearing and execution line?

Yes. I would say about half, a little bit more than half, yes.

Great. Thank you.

Thank you. And the next question comes from Conor Fitzgerald with Goldman Sachs.

Thanks. Just circling back on your comments for the pipeline being robust for advisor growth, do you have any sense for whether that’s kind of DOL related at all in terms of things you are hearing from advisors that your platform might be relatively more attractive if we go to a fiduciary world?

To be quite honest, I don’t have a handle on that, Conor. Not sure here that I think there are articles right now going on that basically a lot of the wire houses that had the buyouts that they did many years ago are now running their course. So, I think that’s one of the reasons there is just lots of opportunities in the market right now. So, there is a lot of people that no longer have these forgivable loans, but they are all fully paid off. But I haven’t heard anybody talk the DOL as a unique opportunity in the RIA space at this point.

That’s helpful. Thanks. And then just a couple of banks have highlighted this quarter about the impact of higher FDIC fees in the back half of the year. I guess that would impact you through your IDA yields, correct? And does your 2016 guidance kind of contemplate an increase in FDIC fees?

Yes. So, that hasn’t been finalized yet. So, it’s not in our guidance and that would flow through the IDA as you mentioned.

But we wouldn’t expect anything to hit until the fourth quarter at this point.

And is it about 4 or 5 basis point impact is that the way to be thinking about it?

They haven’t finalized the rule whether it’s going to come in over one year, over two years, so it’s really speculative at this point.

Thanks for taking my questions.

Thank you. And the next question comes from Chris Harris with Wells Fargo.

Thanks. Good morning, guys. The incremental spending you are doing on advice, just wondering if you guys can bracket that for us curious on knowing exactly how much of your expense base is attributable to those incremental investments. And then related to that, how committed are you to those investments if the environment gets much worse?

Well, I will take the second question first. I mean when we make investments, our investments were with a view to 3 year to 5 years out. So the environment will not matter to finishing up those projects and investments. We will continue and follow through and finish them. And in particular, in difficult markets I think getting those done are important. I am not going to get specific on how much we are investing in that. I don’t think that’s a level of granularity we have normally not gone. I wouldn’t call it a huge number, but it is one of our top priorities in the organization.

Okay, very good. And then just a quick follow-up on rates, just a little bit curious here just looking at the data that the rise we saw in short-term interest rates in the quarter didn’t really look to have a positive impact on your asset yields and I know obviously the Fed didn’t move rates until late in the quarter, but other short-term rates were up and that did have a positive contribution for Schwab, any thoughts on maybe why you guys didn’t get a little bit more of an uplift there?

Yes. So this is Steve. So, we have a pretty conservative cash portfolio, so bank deposits, treasuries, money markets and so we wouldn’t expect those to move up dramatically. And then the IDA fee will move up with the Fed Funds, so those really are the key drivers.

And our price changes on loans did not take effect till January 1.

Okay. Thank you.

Thank you. And the next question comes from Alex Kramm with UBS.

Yes. Hey, good morning. I guess just staying on the same topic, Steve you did give a lot of color on the rate impact, but maybe can be a little bit more specific in terms of where some of these buckets are exactly running right now, I mean margin loans, is that coming up by 25 bps basically quarter-over-quarter. And then also with some of the things you talked about with TD and on the IDA side where is that running right now, pretty much exactly right now if you can disclose?

Well, so I think we said that the margin loans, we put in a 25 basis point increase across the board, so I think you should expect that to be fully phased in next quarter. And then on the float balances on the IDA, which is about $22 billion, we would expect that that’s on the 25 basis point increase that, that half of that 12.5 basis points goes towards the management fee, so we would see a 12.5 basis point increase on a fully phased-in basis.

Alright, great, that’s helpful. Thanks for clarifying. And then just I guess secondly, on the investments fee balances, you highlighted those as an area of strength. If I look at I think the first slide, you actually said investment fee balance is up 3% and that’s exactly in line with total client assets. And I hear you on Amerivest and AdvisorDirect growing a lot faster, so what are the detractors, is it just straight old good old mutual fund sales or where are the areas of weakness that you had why total investment products are not outperforming total client assets?

We would just be historical on mutual funds, yes.

Alright, that’s it for me. Thanks.

Thank you. And the next question comes from Bill Katz with Citigroup.

Okay. Thank you. Good morning and I appreciate taking my questions. Just to stay on the rate leverage discussion for a moment, I think you mentioned as part of your qualifier a parallel shift of rates, however year-to-date, I think we have seen a pretty stock flattening in the mid to belly part of the curve which I think is where you are probably most leveraged, how does that influence the $0.06 to $0.09 of earnings, if at all?

Well, I think the way to think about it Bill is a, we are well already one quarter into the year, so you have got to bring some stuff down, I think second thing is in the first 12 months of an interest rate increase, let’s assume a parallel shift, 90% of that benefit is due to short-term rates not long-term rates. And so but the long-term rates does matter, it will matter more in ‘17 and ‘18 and ‘19. So I think that has much more to do about future years’ earnings, but will have a smaller impact on 2016.

Okay, that’s helpful. And then just on trading, thanks for the commentary for January, it sounds like maybe more of your active traders are a bit more engaged and as you mentioned that’s more of your general clients, what does that mean for – a two part question I guess, for sort of revenue capture per trade. And then as you put your pricing in on the margin balances would you expect a full 25 basis point increase on your margin yields?

I think we have answered that question. Yes, we would on the margin loans.

Apologize, I missed that.

Yes. But the IDA, I think you just – just to be clear, while we get the 12.5 basis point lift, it is on the floating balances. The reality is the lift to the overall yield on overall portfolio was – it will be a little bit lower because of the tractor. So repeat the – what was the – repeat the question again Bill, sorry.

Yes. I am sorry to make you ask it twice. On the revenue capture per trade sort of wondering, how does that comparing relative to the lift of volume into the new quarter?

Well, it’s hard to call it right now, because it does depend on the mix of the products you are trading. In this type of market, you would expect to have your futures go up a bit because of the biggest future contract, trading is really on the S&P. So basically that will drive that up, which will have the tendency to drive commission per trade down. Secondly, with the WICs popping like it is, basically you would expect fewer contracts per option trade. So that will also have the tendency to drive your contract commission and your order flow revenue down a bit. So there will be – I think just given the current nature, we will have some downward pressure in the short-term.

Okay Thank you. I am sorry for confusing.

But it’s been pretty stable for the last quarter or two.

Okay. Thank you.

Thank you. And the next question comes from Devin Ryan with JMP Securities.

Thanks. Good morning, just a couple of follow-ups here. So first on the DOL fiduciary role and I guess as we are likely moving closer to a final rule, just wanted to see if you guys were hearing something new around options trading and whether that will be a lot of retirement accounts. And then if you can just trying to help us frame out that impact for Ameritrade if in fact you can’t trade options?

Okay. I mean you are bringing back some more memory here. First off, we would expect – I believe you can trade options at an IRA if it is purely a self-directed account, but it’s only when you are giving some form of advisory get caught by device that basically you – you are basically are prohibited from trading options on an IRA. I think we are hopeful based on our discussions with the DOL that basically they will have some relief on options trading in IRA accounts in those circumstances. But in any event, we think we are actually in a fairly safe position because most of our clients are self directed. With respect to the deal, well we are not hearing anything new. I think we are in a dark period right now until they sort of come up the other end of their deliberations. There has been lots of input, lots of comments and lots of letters written to the DOL that got us set through all those and then make their determinations and we will anxiously await to see what they come out with at the end.

Okay, that’s helpful. Thank you. And then I know that you guys have said no strategic holes to fill, but with market valuations coming in here, just as you are thinking about opportunities to invest back in your business versus opportunities for inorganic growth. Are there any additive products or services are either coming back on the radar with the market resets here or are you seeing any increase in sellers for specific technologies or products just with the increase in market stress?

At this point, I think it’s a little early to tell. I mean there is sort of the correction here has all happened in January. We are only into week three. From our perspective, we have invested. We are going to continue to invest at a prudent pace. I think with respect to other players in the market, as we have always said, we will do whatever we think makes strategic and financial sense. But at this point, well I think we continue to think we have got a pretty full product set. We are not going to see we need the capability that we need to acquire right now. So we continue to invest organically. We do see opportunities and things to invest in and we continue to make those investments. As we said earlier, a lot of work is going on right now on revised guidance offerings, because we think we have opportunity to get better at that and to change the conversation and make it more relevant to today’s investor.

Great. Thank you.

Thank you. And the next question comes from Joel Jeffrey with KBW.

Hi, good morning guys. Just as a follow-up to Devin’s question and I am not sure if you can give this level of disclosure, but can you tell us what percentage of the DARTs are or options trades that are coming from IRAs that are advisor driven accounts?

I don’t have that number at the top of my head. And I don’t think we provide that disclosure in any event, Joel.

Okay. And then just lastly I mean you guys have given us a lot of sensitivity analysis in your slide deck. Just wondering, do you have any sense for the sort of EPS impact from a 10% decline in the markets or a 5% decline or anything along those lines?

At the top of my head, I might make a mistake in calculating. Now, let me think about that, we can come back to you, but you have to take the investment product fees.

Investment product fees.

Yes.

On Page 15, we say a $3.8 billion reduction in fee-based assets is worth $0.01, so that’s the right rule of thumb.

10%, 158, so you should be able to do the math from that, Joel.

Okay, great. Thanks for taking my questions.

Okay.

Thank you. And the next question comes from Chris Shutler with William Blair.

Hey, guys. Good morning. On the cash balance, I was just curious I know you are at about 14.8% of assets in the December quarter in the lower half of the target range. So just wondering really what you are seeing in January and then any divergences in how advisors versus retail is acting?

Well, the first thing is that the ratio will go up, because the denominator has gone down.

Alright.

But cash balances have held in there. They have grown in both retail institution, but more so in institution.

Okay. And then the average balance in Amerivest and AdvisorDirect, I think you talked about each of those being up 11% year-over-year despite a flat market, how much of that increase Fred was – how much of that was due to existing clients adding to their balances versus bringing on new clients?

I couldn’t tell you that, because I don’t have the split, because a lot of times the new money going in to Amerivest was coming from existing clients topping up their plan. So, I don’t have that number. But I think it’s safe to assume that most of that’s going to be due to new flows.

Okay, fair enough. Thanks a lot guys.

Thank you. And the next question comes from Brian Bedell with Deutsche Bank.

Hi, good morning folks. Fred, maybe just a question going back to the retention packages that are expiring at the warehouses, what’s your thought say over the next year or so in terms of whether you think that will accelerate the breakaway broker trends? And then if you can sort of think about how the markets, the equity markets are tracing now and is that going to be sort of an offsetting headwind to get any potential acceleration of the breakaway broker trend?

Good question, Brian. I do think there is no question when the packages come up, more people will look and consider the opportunities are going independent. And remind everybody that the trend to independence has been a long and very significant secular trend we don’t see changing. And so I think that’s an upside to the breakaway broker movement from our perspective. Having said that, in down markets like this, it’s usually a time where people just hold up, talk to their clients and are less apt to make that shift. So, I think there is countervailing forces here and I think in the short-term, it’s likely to go, people will look at it, but probably pause here in the short-term.

Do you sense that you may increase your targeting given the retention packages expiring over the next year?

We are pretty aggressive in the market at all times and now wouldn’t be any different. The only thing that may change is where you are targeting. Sometimes it’s independents, sometimes it’s a wire house sometimes it’s both. It all depends on what’s going on at that particular organization.

Okay, great. That’s good color. And then just follow-up is on advertising, I think Fred you mentioned the new advertising campaign on the fee-based accounts. From an expense standpoint, should we be thinking about specific type of year-over-year growth rate in ad expenses as we move through the fiscal year?

No. I think everything I talked about is within the guidance range that we gave you earlier.

Okay, same thing. Okay, great. Thanks very much.

Thank you. And the next question comes from Chris Allen with Evercore.

Good morning, guys.

Good morning.

I think most of them has been covered. I guess just one question you noted that growth from the existing institutional RIAs had slowed a bit. Just wondering if there is anything specific you could point to there or some of these RIAs reach capacity or is just amount of the environment market more related?

In our discussions with them, it’s much more the market environment. It really is basically the market was essentially flat last year, so we target to differentiate yourself. And so it’s just a different market. The environment as I said earlier most investors are a little bit tentative right now and taking a wait-and-see attitude. So, while they maybe talking to a lot of people, taking actions just slowed down a bit here.

Yes, thanks a lot guys.

Thank you. And there are no more questions at the present time. So, I would like to turn the call back over to management for any closing comments.

Okay. Well, thank you everyone. And we are pretty pleased we are off to a good start to the year. Certainly, so far in January, we have a very different market that has a negative tone to it. It’s been good for trading volume. But I think as we move through the quarter and the balance of the year, from our point of view, we will continue to see volatility and it will all depend on geopolitical events. The price of oil seems to be a big factor right now, the growth rate in China and certainly, actions of the Fed and the Presidential election are all going to have influences on the market from here. It’s a very difficult market to call. But as we said at the beginning of the call, we would expect its volatility to continue here. With that, we will talk to you next quarter end. Take care.

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.