* EPS 30 cents, 33 cents ex items, ahead of expectations
* Revenue falls 1.6 percent to $613.8 million
* To record charge of 5-10 cents related to ARS settlement
* CEO sees trading, earnings dip in current quarter
* Shares up 4.8 percent (Adds CEO comment, details from conference call, analyst, share movement, byline)
By Jonathan Spicer
NEW YORK, July 21 (Reuters) - TD Ameritrade Holding Corp AMTD.O reported a 16 percent profit drop on Tuesday, beating expectations and boosting shares of the second-biggest U.S. online brokerage, which also outlined the impact of its deal to end a probe of auction rate securities.
Record trading in the quarter offset low interest rates, sending the company’s shares up 4.8 percent.
TD Ameritrade said it would take a one-time charge of between 5 cents and 10 cents per share in the current quarter, after agreeing to a settlement, announced Monday, with New York’s attorney general to buy back auction rate securities.
Management said on a conference call it could not predict the outcome of its offer to buy back between $400 million and $500 million of the securities -- 90 percent of which it said was held by one “reputable” mutual fund firm that has been “the most active in the market at redeeming them.”
The buy-back estimate is more broad than the $456 million the office of New York Attorney General Andrew Cuomo said TD Ameritrade would return, following an investigation into illegal marketing and sales of the securities, which are long-term debts whose rates are set at periodic auctions.
Ultimately, TD Ameritrade expects the loss from the settlement to be immaterial, as ARS issuers refinance or redeem the securities, management said, stressing that TD Ameritrade’s role in the frozen ARS market was less important than dealers that agreed to much larger settlements.
“It is interesting that (TD Ameritrade) is taking a different tact from Charles Schwab and others that are farther down the line” from the ARS dealers, said Jason Ren, a Chicago-based equity analyst at Morningstar. “I suppose they have the liquidity on the balance sheet to stomach the blow.”
Charles Schwab Corp SCHW.O, the No. 1 online broker, denied similar allegations from Cuomo's office as "unfair" and "without merit" this week. [ID:nN2094630]
TD Ameritrade’s shares climbed 86 cents to $18.58 -- its highest level in more than a month -- on the Nasdaq.
Earnings were $170.5 million, or 30 cents a share, in its fiscal third quarter, down from $204.4 million, or 34 cents a share, in the same period a year earlier.
Excluding unusual items, the Omaha, Nebraska-based company earned 33 cents per share, ahead of the 29 cents expected, on average, by analysts polled by Reuters Estimates.
Net Revenue slipped 1.6 percent to $613.8 million, still well ahead of the $594.1 million expected by analysts.
‘WELL ABOVE EXPECTATIONS’
The “results were well above expectations ... (and) the beat looks lasting at this first glance, so we’d expect the stock to hold today’s gains,” Fox-Pitt Kelton analyst David Trone said in a note to clients.
There was record average trading in the quarter as individual investors and advisers jumped in to take advantage of the stock market bounce in April, May and June. TD Ameritrade’s transaction-based revenue climbed 36 percent.
But with interest rates near zero this year, the company in January began waiving a portion of fees on clients’ money market funds. That led to a 42 percent drop in revenue from interest on assets in the quarter.
TD Ameritrade acquired options-focused brokerage thinkorswim in June, which also boosted results.
“While we do foresee a slowdown in trading levels, and therefore earnings in the September quarter, we continue to focus on executing our strategy and managing for the other side of the cycle,” Chief Executive Fred Tomczyk said on a conference call with analysts and media.
Fee-generating trading jumped 21 percent from the previous quarter to an average of 392,000 trades per day, but dipped 7 percent from May to June -- and another 9 percent so far in July -- going into the typically quiet summer season. Volatility has also eased, which may hamper revenue in the current quarter.
The addition of thinkorswim, which TD Ameritrade bought for $606 million, added an average 14,000 trades per day. The acquisition’s impact will also likely be “minimal” in the current quarter, management said, adding the company still “has the capacity” to aggressively pursue another takeover.
TD Ameritrade, which runs the country’s largest discount trading platform, added $6.9 billion in net new assets, better than both the previous quarter and the same quarter last year.
Meanwhile, Toronto-Dominion Bank TD.TO, which owns about 47.5 percent of TD Ameritrade, said the brokerage's earnings would contribute C$68 million ($62 million) to its third-quarter earnings, due in late August. (Reporting by Jonathan Spicer, with additional reporting by Juan Lagorio; Editing by Maureen Bavdek)