UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2021
or
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o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34963
LPL Financial Holdings Inc.
(Exact name of registrant as specified in its charter)
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Delaware | 20-3717839 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | (I.R.S. Employer Identification No.) |
75 State Street, Boston, MA 02109 | | | | | | | | | | | |
4707 Executive Drive, | San Diego, | California | 92121 |
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock - par value $0.001 per share | LPLA | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer Accelerated Filer | x | | Accelerated filer Filero | ☐ |
Non-accelerated filer Filero | (Do not check if a smaller reporting company)☐ | Smaller Reporting Company | ☐ |
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| | Emerging growth company Growth Companyo | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o☐ Yes x No
The number of shares of Common Stock, par value $0.001 per share, outstanding as of October 24, 2017April 27, 2021 was 90,190,130.79,943,183.
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TABLE OF CONTENTS | Page |
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Note6 - Held-to-Maturity Securities | |
Note7 - Goodwill and Other Intangible Assets | |
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Note 10 - Commitments and Contingencies | |
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Note 15 - Related Party Transactions | |
Note 16 - Net Capital and Regulatory Requirements | |
Note 14. Financial17 - Financial Instruments with Off-Balance-Sheet Credit Risk and ConcentrationsConcentration of Credit Risk | |
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (“Exchange Act”Act”), with the Securities and Exchange Commission (“SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public from the SEC’s internet site at http://www.sec.govSEC.gov.
On our internet site, http://www.lpl.com, weWe post the following filings to LPL.com as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual reports on Form 10-K, our proxy statements, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Hard copiesCopies of all such filings are available free of charge by request via email (investor.relations@lpl.com), telephone (617) 897-4574,((617) 897-4574) or mail (LPL Financial Investor Relations at 75 State Street, 22nd Floor, Boston, MA 02109). The information contained or incorporated on our website is not a part of this Quarterly Report on Form 10-Q.
We may use our website as a means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure promulgated by the SEC. These disclosures are included on our website in the “Investor Relations” or “Press Releases” sections. Accordingly, investors should monitor these portions of our website, in addition to following the Company’s press releases, SEC filings, public conference calls and webcasts.
When we use the terms “LPLFH”, “LPL”, “we”, “us”, “our”, and the “Company”“the Company”, we mean LPL Financial Holdings Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in Item 2 - “Management’sPart I, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report on Form 10-Q regarding regarding:
•the Company’s future financial and operating results, outlook, success in recruiting and onboarding advisors from the broker/dealer network of National Planning Holdings, Inc. (“NPH”), growth, plans, business strategies, liquidity future indebtedness,and future share repurchases, and future dividends, including statements regarding future resolution of regulatory matters, legal proceedings and related costs,costs;
•the Company’s future revenues and expenses,expenses;
•future affiliation models and capabilities;
•market and macroeconomic trends;
•projected savings and anticipated improvements to the Company’s operating model, services and technologies as a result of its investments, initiatives, programs and/or acquisitions, as well as and acquisitions;
•expected impacts of the coronavirus disease 2019 (“COVID-19”) pandemic on the Company’s businesses; and
•any other statements that are not related to present facts or current conditions or that are not purely historical, constitute forward-looking statements.
These forward-looking statements are based on the Company’s historical performance and its plans, estimates and expectations as of October 31, 2017.May 4, 2021. The words “anticipates,” “believes,” “expects,” “may,” “plans,” “predicts,” “will,”“will” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are not guarantees that the future results, plans, intentions or expectations expressed or implied by the Company will be achieved. Matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, legislative, regulatory, competitive and other factors, which may cause actual financial or operating results, levels of activity or the timing of events to be materially different than those expressed or implied by forward-looking statements. Important factors that could cause or contribute to such differences include:
•changes in general economic and financial market conditions, including retail investor sentiment;
•changes in interest rates and fees payable by banks participating in the Company’s client cash programs, including the Company’s success in negotiating agreements with current or additional counterparties;
•the Company’s strategy and success in managing client cash program fees;
•fluctuations in the valuelevels of advisory and brokerage and advisory assets; fluctuations in levels ofassets, including net new assets, and the related impact on fee revenue; fluctuations in the number of retail investors served by the Company; revenues;
•effects of competition in the financial services industry; changes in
•the numbersuccess of the Company’sCompany in attracting and retaining financial advisors and institutions, and their ability to market effectively financial products and services;
•whether retail investors served by newly-recruited advisors choose to move their respective assets to new accounts at the success of the Company in attracting and retaining financial advisors and institutions; Company;
•changes in interest rates and fees payable by banks participating in the Company’s cash sweep program, including the Company’s success in negotiating agreements with current or additional counterparties; the Company’s strategy in managing cash sweep program fees; changes in the growth and profitability of the Company’s fee-based business; business, including the Company’s centrally managed advisory platform;
•the effect of current, pending and future legislation, regulation and regulatory actions, including the United States Department of Labor (“DOL”) final rule on conflicts of interest (Definition of the term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice, the “DOL Rule”), which became applicable on June 9, 2017, and disciplinary actions imposed by federal and state regulators and self-regulatory organizations;
•the costscost of settling and remediating issues related to pending or future regulatory matters or legal proceedings; proceedings, including actual costs of reimbursing customers for losses in excess of our reserves;
•changes made to the Company’s offeringsservices and servicespricing, including in response to competitive developments and current, pending and future legislation, regulation and regulatory actions, including the DOL Rule, and the effect that such changes may have on the Company’s gross profit streams and costs;
•execution of the Company’s capital management plans, including its compliance with the terms of its credit agreement and the indentureindentures governing its senior notes;
•the price, the availability of shares, and trading volumes of shares of the Company’s common stock, which will affect the timing and size of future share repurchases by the Company; Company, if any;
•execution of the Company’s plans and its success in realizing the synergies, expense savings, and service improvements andor efficiencies expected to result from its investments, initiatives and programs, particularlyacquisitions, including its acquisition involving the wealth management business of Waddell & Reed Financial, Inc., expense plans and technologicaltechnology initiatives; the Company’s success in
negotiating and developing commercial arrangements with third-party services providers; •the performance of third-party service providers to which business processes arehave been transitioned;
•the Company’s ability to control operating risks, information technology systems risks, cybersecurity risks and sourcing risks;
•the effects of the COVID-19 pandemic, including efforts to contain it; and
•the other factors set forth in Part I, “Item 1A. Risk Factors” in the Company’s 20162020 Annual Report on Form 10-K, as may be amended or updated in the Company’s Quarterly Reports on Form 10-Q. In particular, the Company can provide no assurance that the assets reported as serviced by NPH’s financial advisors will translate into assets serviced at LPL Financial. Important factors that could cause or contribute to such differences include: difficulties and delays in recruiting or transferring the licenses of NPH’s advisors and/or onboarding the clients or businesses of NPH’s advisors; disruptions of the Company’s business due to transaction-related uncertainty or other factors making it more difficult to maintain relationships with its financial advisors and their clients, employees, other business partners or governmental entities; the inability to implement onboarding plans and other consequences associated with acquisitions; the choice by clients of NPH’s advisors not to open brokerage and/or advisory accounts at LPL Financial and/or move their respective assets from NPH to a new account at LPL Financial; changes in general economic and financial market conditions, including retail investor sentiment; fluctuations in the value of assets under custody; and effects of competition in the financial services industry, including competitors’ success in recruiting NPH’s advisors
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Except as required by law, the Company specifically disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this quarterly report,Quarterly Report on Form 10-Q, even if its estimates change, and you should not rely on statements contained herein as representing the Company’s views as of any date subsequent to the date of this quarterly report.Quarterly Report on Form 10-Q.
PART I — FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
We areLPL is a leader in the retail financial advice market, the nation’s largest independent broker-dealer (based on total revenues, Financial Planning magazine June 1996-2017), a top custodian for registered investment advisors (“RIAs”), and a leading independent consultant to retirement plans. We provide an integrated platform of brokerage and investment advisory services tomarkets we serve, supporting more than 14,000 independent17,000 financial advisors (our “advisors”), includingnationwide. We are steadfast in our commitment to the advisor-centered model and the belief that Americans deserve access to objective guidance from a financial advisor. At LPL, independence means that advisors at more than 700 financial institutions acrosshave the country, enablingfreedom they deserve to choose the business model, services, and technology resources that allow them to providerun their retail investors (“clients”) with objective financial advice through a lower conflict model. We also support approximately 3,700 financial advisors who are affiliated and licensed with insurance companies that use our customized clearing, advisory platforms, and technology solutions.
Throughperfect practice. And they have the freedom to manage their client relationships, because they know their clients best. Our mission is to take care of our advisors, we are oneso they can take care of the largest distributors of financial products and services in the United States, and we believe we are one of the top five firms in the United States ranked by number of advisors.their clients.
We believe that objective financial guidance is a fundamental need for everyone. We enable our advisors to focus on what they do best—create the personal, long-term relationships that are the foundation for turning life’s aspirations into financial realities. We do that through a singular focus on providing our advisors with the front-, middle-, and back-office support they need to serve the large and growing market for independent investment advice.comprehensive financial advice from an advisor. We believe that LPL Financial LLC, our broker-dealer subsidiary (“LPL Financial”), iswe are the only company that offers advisors the unique combination of an integrated technology platform, comprehensive self-clearing services and open architecture access to a wide range of non-proprietary products, all delivered in an environment unencumbered by conflicts from product manufacturing, underwriting and market-making.
We believe investors achieve better outcomes when working with a financial advisor. LPL Financial strivesWe strive to make it easy for advisors to do what is best for their clients, while protecting advisors and investors and promoting independencefreedom and choice through access to a wide range of diligently evaluated non-proprietary products.
Executive Summary
Net IncomeFinancial Highlights
Net incomeResults for the thirdfirst quarter of 2017 was $58.12021 included net income of $129.6 million, or $0.63 $1.59 per share, which compares to $52.0$155.6 million, or $0.58$1.92 per share, infor the thirdfirst quarter of 2016. Increased cash sweep revenue and advisory fee revenue contributed to the earnings per share growth.2020.
Asset Growth Trends
Total advisory and brokerage assets served were $560.0$958.3 billion as of March 31, 2021, up 43% from $669.9 billion as of September 30, 2017, up 11.5% from $502.4 billion as of September 30, 2016.March 31, 2020. Total net new assets were $2.9 $28.9 billion forfor the three months ended September 30, 2017,March 31, 2021, compared to $1.0$14.3 billion for the same period in 2016.2020.
Net new advisory assets were $6.9$22.7 billion for the three months ended September 30, 2017,March 31, 2021, compared to $4.1 billion in the same period in 2016. As of September 30, 2017, our advisory assets had grown to $250.2 billion from the prior year balance of $205.5 billion and represented 44.7% of total brokerage and advisory assets served.
Net new brokerage assets were an outflow of $4.0 billion for the three months ended September 30, 2017, compared to an outflow of $3.1$13.2 billion for the same period in 2016. The2020. As of March 31, 2021, our advisory assets were $496.7 billion, up from $322.3 billion as of March 31, 2020, an increase in netof 54%, and represented 52% of total advisory and brokerage assets served.
Net new brokerage asset outflows primarily reflectedassets were $6.2 billion for the impact of brokeragethree months ended March 31, 2021, compared to advisory asset conversions between periods.$1.2 billion for the same period in 2020. As of September 30, 2017,March 31, 2021, our brokerage assets had grown to $309.8were $461.6 billion, up from $296.9$347.6 billion as of September 30, 2016.March 31, 2020, an increase of 33%.
Gross Profit Trends
Gross profit, a non-GAAP financial measure, of $386.9$579.4 million for the three months ended March 31, 2021, increased 1% from $575.6 million for the three months ended September 30, 2017, reflected an increase of 11.5% in comparison to $346.9 million for the quarter ended September 30, 2016. Management presents grossMarch 31, 2020. Gross profit which is calculated as nettotal revenues, less commission and advisory expenses and brokerage, clearing and exchange fees,fees. Management presents gross profit because we believe that measure may beprovide useful insight to investors in evaluating the Company’s core operating performance before indirect costs that are general and administrative in nature. See footnote 79 to the Financial Metrics table within the “How We Evaluate Our Business” section for additional information on gross profit. The increase in period-over-period gross profit was primarily due to increases in cash sweep revenue from the impact of the increases
Shareholder Capital Returns
We returned $20.0 million of capital, in the target range for the federal funds effective rate
announced in eachform of March and June 2017, increases in advisory revenues resulting from net new assets and market gains as represented by higher levels of the S&P 500 index.
Acquisition of NPH
On August 15, 2017, we entered into an asset purchase agreement (the “Asset Purchase Agreement”) with National Planning Holdings, Inc. (“NPH”), and its four broker-dealer subsidiaries (collectively with NPH, the “NPH Sellers”) to acquire certain assets and rights of the NPH Sellers, including business relationships with financial advisors who become affiliated with LPL Financial. We paid $325 million to the Sellers at closing and have agreed to a potential contingent payment of up to $122.8 million.
Capital Management Activity
We returned $47.5 million of capitaldividends, to shareholders during the three months ended September 30, 2017, including $22.5 millionMarch 31, 2021.
COVID-19 Response
In response to the COVID-19 pandemic, we have taken measures to protect the health and $25.0 million of share repurchases (representing 539,385 shares).
On September 21, 2017 we issued $400 million in aggregate principal amount of add-on senior notes above par at a yield to worst of 5.12% (coupon rate of 5.75%). We used $200 million in proceeds of the offering to pay down a portionsafety of our term loan,employees, as well as the stability and continuity of our operations. For example, we planhave equipped and enabled a substantial majority of employees to usework remotely, implemented physical distancing and enhanced cleaning protocols throughout our corporate offices, and have worked closely with our vendors to maintain service continuity throughout the remaining proceeds for general corporate purposes, including funding costs relatedincreased market volatility and operational volumes that occurred during the year. We also made extra support available to our acquisition of NPH. As a result ofadvisors by extending service hours and providing additional resources to enable them to deliver differentiated services to their clients. Please consult Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the refinancing, we also reduced the spread on the interest rates on our term loan and revolving credit facility by 25 basis points each.risks associated with COVID-19.
Our Sources of Revenue
Our revenues are derived primarily from fees and commissions from products and advisory services offered by our advisors to their clients, a substantial portion of which we pay out to our advisors, as well as fees we receive from our advisors for the use of our technology, custody, clearing, trust and reporting platforms. We also generate asset-based revenues through our cashbank sweep programvehicles and money market programs and the access we provide to a variety of product providers with the following product lines:
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• Alternative Investments | | • Retirement Plan Products |
• Annuities | | • Separately Managed Accounts |
• Exchange Traded Products | | • Structured Products |
• Insurance Based Products | | • Unit Investment Trusts |
• Mutual Funds | | |
Under our self-clearing platform, we custody the majority of client assets invested in these financial products, for which we provide statements, transaction processing and ongoing account management. In return for these services, mutual funds, insurance companies, banks and other financial product manufacturerssponsors pay us fees based on asset levels or number of accounts managed. We also earn interest from margin loans made to our advisors’ clients.
We regularly review various aspects of our operations and service offerings, including our policies, procedures and platforms, in response to marketplace developments. We currently expectseek to implement changes tocontinuously improve and enhance aspects of our operations and service offerings in order to position our advisors for long-term growth and to align with competitive and regulatory developments. For example, we regularly review the structure and fees of our advisory programs,products and services, including related disclosures, in the context of the changing regulatory environment and competitive landscape for retirementadvisory and brokerage accounts.
We track recurring revenue, a characterization
Table of net revenue and a statistical measure, which we define to include our revenues from asset-based fees, advisory fees, trailing commissions, cash sweep programs, and certain other fees that are based upon client accounts and advisors. Because certain recurring revenues are associated with asset balances, they will fluctuate depending on the market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, recurring revenue is meaningful to us despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.
Contents
The table below summarizes the sources and drivers of our revenue:
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| | | Nine Months Ended September 30, 2017 |
| Sources of Revenue | Primary Drivers | Net Revenues (millions) | % of Total Net Revenue | Recurring Revenues (millions) | % Recurring |
Advisor-driven revenue with ~85%-90% total payout ratio | Commission | - Sales - Transactions - Brokerage asset levels | $1,245 | 39% | $716 | 57.5% |
Advisory | - Corporate advisory asset levels | $1,033 | 33% | $1,028 | 99.5% |
Attachment revenue retained by us | Asset-Based - Cash Sweep Fees - Sponsorship Fees - Record Keeping | - Cash balances - Interest rates - Number of accounts - Client asset levels
| $515 | 16% | $507 | 98.4% |
Transaction and Fee - Trades - Client (Investor) Accounts - Advisor Seat and Technology | - Client activity - Number of clients - Number of advisors - Number of accounts - Premium technology subscribers | $321 | 10% | $185 | 57.6% |
Other | - Margin accounts - Alternative investment transactions | $51 | 2% | $20 | 39.2% |
| Total | $3,165 | 100% | $2,456 | 77.6% |
How We Evaluate Our Business
We focus on several key operating and financial metrics in evaluating the success of our business relationships and our resulting financial position and operating performance. In April 2020, we updated our definition of net new assets to make our figures more comparable with other companies. Our updated definition now includes dividends and interest, and subtracts advisory fees. All net new asset figures below align with our new definition. Our key operating, business and financial metrics are as follows: | | | | | | | | | | | | | |
| As of and for the Three Months Ended March 31, | | |
Operating Metrics (dollars in billions)(1) | 2021 | | 2020 | | |
Advisory and Brokerage Assets | | | | | |
Advisory assets(2)(3) | $ | 496.7 | | | $ | 322.3 | | | |
Brokerage assets(2)(4) | 461.6 | | | 347.6 | | | |
Total Advisory and Brokerage Assets(2) | $ | 958.3 | | | $ | 669.9 | | | |
Advisory Assets % of Total Advisory and Brokerage Assets | 51.8 | % | | 48.1 | % | | |
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Net New Assets | | | | | |
Net new advisory assets(5) | $ | 22.7 | | | $ | 13.2 | | | |
Net new brokerage assets(6) | 6.2 | | | 1.2 | | | |
Total Net New Assets(7) | $ | 28.9 | | | $ | 14.3 | | | |
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Total Net New Assets Annualized Growth Rate(8) | 12.8 | % | | 7.5% | | |
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Client Cash Balances(2) | | | | | |
Insured cash account balances | $ | 37.4 | | | $ | 34.5 | | | |
Deposit cash account balances | 7.9 | | | 8.7 | | | |
Total Bank Sweep Balances | 45.3 | | | 43.2 | | | |
Money market account balances | 1.3 | | | 1.8 | | | |
Purchased money market fund balances | 1.6 | | | 2.8 | | | |
Total Client Cash Balances | $ | 48.3 | | | $ | 47.8 | | | |
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Net Buy (Sell) Activity(9) | $ | 17.4 | | | $ | 0.2 | | | |
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| As of and for the Three Months Ended March 31, | | |
Business and Financial Metrics (dollars in millions, except per share data) | 2021 | | 2020 | | | | |
Advisors | 17,672 | | | 16,763 | | | | | |
Average Total Assets per Advisor(10) | $ | 54.2 | | | $ | 40.0 | | | | | |
Employees - period end | 4,815 | | | 4,358 | | | | | |
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Share Repurchases | $ | — | | | $ | 150.0 | | | | | |
Dividends | $ | 20.0 | | | $ | 19.7 | | | | | |
% of Capital Returned to Shareholders(11) | 14.0 | % | | 101.3 | % | | | | |
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Leverage Ratio(12) | 2.11 | | | 2.07 | | | | | |
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| Nine Months Ended September 30, | | |
Operating Metrics | 2017 | | 2016 | | % Change |
Brokerage Assets (in billions)(1)(2) | $ | 309.8 |
| | $ | 296.9 |
| | 4 | % |
Advisory Assets (in billions)(1)(3) | 250.2 |
| | 205.5 |
| | 22 | % |
Total Brokerage and Advisory Assets served(in billions)(1) | $ | 560.0 |
| | $ | 502.4 |
| | 11 | % |
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Net New Brokerage Assets (in billions)(4) | $ | (12.9 | ) | | $ | (5.6 | ) | | n/m |
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Net New Advisory Assets (in billions)(5) | 18.8 |
| | $ | 8.9 |
| | n/m |
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Total Brokerage and Advisory Net New Assets (in billions) | $ | 5.9 |
| | $ | 3.3 |
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Insured Cash Account Balances (in billions)(1) | $ | 21.9 |
| | $ | 21.1 |
| | 4 | % |
Deposit Cash Account Balances (in billions)(1) | 4.1 |
| | 4.2 |
| | (2 | )% |
Money Market Account Balances (in billions)(1) | 2.3 |
| | 3.9 |
| | (41 | )% |
Total Cash Sweep Balances | $ | 28.3 |
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| $ | 29.2 |
| | (3 | )% |
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Advisors | 14,253 |
| | 14,185 |
| | — | % |
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| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Total revenues | $ | 1,707.6 | | | $ | 1,463.4 | | | | | |
Net Income | $ | 129.6 | | | $ | 155.6 | | | | | |
Earnings per share (“EPS”), diluted | $ | 1.59 | | | $ | 1.92 | | | | | |
EPS prior to amortization of intangible assets and acquisition costs(13) | $ | 1.77 | | | $ | 2.06 | | | | | |
Gross Profit(14) | $ | 579.4 | | | $ | 575.6 | | | | | |
EBITDA(15) | $ | 267.5 | | | $ | 280.2 | | | | | |
EBITDA as a % of Gross Profit | 46.2 | % | | 48.7 | % | | | | |
Core G&A(16) | $ | 236.3 | | | $ | 223.2 | | | | | |
(1)Totals may not foot due to rounding.
(2)Advisory and brokerage assets consists of assets that are custodied, networked and non-networked and reflect market movement in addition to new assets, inclusive of new business development and net of attrition. Insured cash account balances, deposit cash account balances, money market account balances and purchased money market fund balances are also included in total advisory and brokerage assets.
(3)Advisory assets consists of total advisory assets under custody at our broker-dealer subsidiary, LPL Financial LLC (“LPL Financial”). Please consult the “Results of Operations” section for a tabular presentation of advisory assets.
(4)Brokerage assets consists of brokerage assets serviced by advisors licensed with LPL Financial.
(5)Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively. Figures for net new advisory assets reported prior to April 2020 did not include dividends and interest or subtract advisory fees. The figure previously reported for the three months ended March 31, 2020 was an inflow of $12.5 billion.
(6)Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively. Figures for net new brokerage assets reported prior to April 2020 did not include dividends and interest. The figure previously reported for the three months ended March 31, 2020 was $0.0 billion.
(7)Includes $11.8 billion of assets that transitioned onto our platform from BMO Harris, during the three months ended March 31, 2021.
(8)Calculated as annualized current period net new assets divided by preceding period total advisory and brokerage assets.
(9)Represents the amount of securities purchased less the amount of securities sold in client accounts custodied with LPL Financial. Reported activity does not include any other cash activity, such as deposits, withdrawals, dividends received or fees paid.
(10)Calculated based on the end-of-period total advisory and brokerage assets divided by the end-of-period advisor count.
(11)Percentage of capital returned to shareholders is calculated as dividends plus share repurchases, divided by net income plus amortization of intangible assets, net of tax.
(12)A financial covenant from our credit agreement calculated as consolidated total debt to consolidated EBITDA. Please consult the “Debt and Related Covenants” section for more information.
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Financial Metrics | 2017 | | 2016 | | 2017 | | 2016 |
Total net revenues (in millions) | $ | 1,064.1 |
| | $ | 1,017.4 |
| | $ | 3,165.0 |
| | $ | 3,041.9 |
|
Total net revenues increase (decrease) from prior period | 4.6 | % | | (3.5 | )% | | 4.0 | % | | (6.5 | )% |
Recurring revenue as a % of net revenue | 79.6 | % | | 74.3 | % | | 77.6 | % | | 74.0 | % |
Pre-tax income (in millions) | $ | 96.6 |
| | $ | 68.2 |
| | $ | 284.7 |
| | $ | 232.6 |
|
Net income (in millions) | $ | 58.1 |
| | $ | 52.0 |
| | $ | 174.8 |
| | $ | 150.2 |
|
Earnings per share, diluted | $ | 0.63 |
| | $ | 0.58 |
| | $ | 1.90 |
| | $ | 1.67 |
|
| | | | | | | |
Non-GAAP Measures(6) | | | | | | | |
Gross profit (in millions)(7) | $ | 386.9 |
| | $ | 346.9 |
| | $ | 1,151.6 |
| | $ | 1,047.5 |
|
Gross profit growth from prior period(7) | 11.5 | % | | 2.1 | % | | 9.9 | % | | 1.2 | % |
Gross profit as a % of net revenue(7) | 36.4 | % | | 34.1 | % | | 36.4 | % | | 34.4 | % |
(13)EPS prior to amortization of intangible assets and acquisition costs is a non-GAAP financial measure defined as GAAP EPS plus the per share impact of amortization of intangible assets and acquisition costs. The per share impact is calculated as amortization of intangible assets expense and acquisition costs, net of applicable tax benefit, divided by the number of shares outstanding for the applicable period. Acquisition costs are the one-time costs to setup, onboard and integrate acquired entities. The Company presents EPS prior to amortization of intangible assets and acquisition costs because management believes that the metric can assist investors in comparing our performance to that of other companies on a consistent basis without regard to certain items which do not directly affect our ongoing operating performance. EPS prior to amortization of intangible assets and acquisition costs is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to GAAP EPS or any other performance measure derived in accordance with GAAP. Below is a reconciliation of EPS prior to amortization of intangible assets and acquisition costs to the Company’s GAAP EPS for the periods presented: | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
EPS Reconciliation (in millions, except per share data) | 2021 | | 2020 | | | | |
GAAP EPS | $ | 1.59 | | | $ | 1.92 | | | | | |
Amortization of intangible assets | $ | 17.4 | | | $ | 16.6 | | | | | |
Acquisition costs | $ | 2.4 | | | $ | — | | | | | |
Tax benefit | $ | (5.3) | | | $ | (4.6) | | | | | |
Amortization of intangible assets and acquisition costs, net of tax benefit | $ | 14.5 | | | $ | 11.9 | | | | | |
Diluted share count | 81.6 | | | 81.2 | | | | | |
EPS impact | $ | 0.18 | | | $ | 0.15 | | | | | |
EPS prior to amortization of intangible assets and acquisition costs | $ | 1.77 | | | $ | 2.06 | | | | | |
(14)Set forth below is a calculation of gross profit, calculated as total revenues less advisory and commission expenses and brokerage, clearing and exchange fees. All other expense categories, including depreciation and amortization of fixed assets and amortization of intangible assets, are considered by management to be general and administrative in nature. Because our gross profit amounts do not include any depreciation and amortization expense, we consider our gross profit amounts to be non-GAAP financial measures that may not be comparable to those of others in our industry. We believe that gross profit amounts can provide investors with useful insight into our core operating performance before indirect costs that are general and administrative in nature.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
Gross Profit (in millions) | 2021 | | 2020 | | | | |
Total revenues | $ | 1,707.6 | | | $ | 1,463.4 | | | | | |
Advisory and commission expense | 1,108.9 | | | 870.8 | | | | | |
Brokerage, clearing and exchange fees | 19.4 | | | 17.0 | | | | | |
Gross profit(†) | $ | 579.4 | | | $ | 575.6 | | | | | |
| |
(1) | Brokerage and advisory assets served are comprised of assets that are custodied, networked, and non-networked and reflect market movement in addition to new assets, inclusive of new business development and net of attrition. Insured cash account balances, money market account balances, and beginning in July 2016, deposit cash account balances are included in brokerage and advisory assets served. Our brokerage and advisory assets does not include retirement plan assets, which are custodied with various third-party providers, supported by advisors licensed with LPL Financial. The Company estimated such assets at $137 billion, representing approximately 41,000 retirement plans, at September 30, 2017. |
| |
(2) | Brokerage assets consists of assets serviced by advisors licensed with LPL Financial. |
| |
(3) | Advisory assets consists of total advisory assets under custody at LPL Financial, consisting of total assets on LPL Financial's corporate advisory platform serviced by advisors who are investment advisor representatives of LPL Financial and total assets on LPL Financial's independent advisory platform serviced by advisors who are investment advisor representatives of separate investment advisor firms (“Hybrid RIAs”) rather than that of LPL Financial. See “Results of Operations” for a tabular presentation of advisory assets. |
(†) Totals may not foot due to rounding.
| |
(4) | Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively. |
| |
(5) | Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively. |
| |
(6) | Our management believes that presenting certain non-GAAP measures by excluding or including certain items can be helpful to investors and analysts who may wish to use some or all of this information to analyze our current performance, prospects, and valuation. Our management uses this non-GAAP information internally to evaluate operating performance and in formulating the budget for future periods. Our management believes that the non-GAAP measures and metrics presented above and discussed below are appropriate for evaluating the performance of the Company. |
| |
(7) | Set forth below is a calculation of gross profit (in millions), calculated as net revenues less commission and advisory expenses and brokerage, clearing, and exchange fees. All other expense categories, including depreciation and amortization of fixed assets and amortization of intangible assets, are considered general and administrative in nature. Because our gross profit amounts do not include any depreciation and amortization expense, we consider our gross profit amounts to be non-GAAP measures that may not be comparable to those of others in our industry. We believe that gross profit amounts can be useful to investors because they show the Company’s core operating performance before indirect costs that are general and administrative in nature.(15)EBITDA is a non-GAAP financial measure defined as net income plus interest and other expense, income tax expense, depreciation and amortization, and amortization of intangible assets. The Company presents EBITDA because management believes that it can be a useful financial metric in understanding the Company’s earnings from operations. EBITDA is not a measure of the Company’s financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of profitability or liquidity. In addition, the Company’s EBITDA can differ significantly from EBITDA calculated by other companies, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. Below is a reconciliation of EBITDA to net income for the periods presented: | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | EBITDA Reconciliation (in millions) | 2021 | | 2020 | | | | | Net income | $ | 129.6 | | | $ | 155.6 | | | | | | Non-operating interest expense and other | 25.1 | | | 29.3 | | | | | | Provision for income taxes | 35.5 | | | 52.0 | | | | | | Depreciation and amortization | 35.5 | | | 26.6 | | | | | | Amortization of intangible assets | 17.4 | | | 16.6 | | | | | | Loss on extinguishment of debt | 24.4 | | | — | | | | | | EBITDA | $ | 267.5 | | | $ | 280.2 | | | | | |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Gross Profit | 2017 | | 2016 | | 2017 | | 2016 |
Total net revenues (in millions) | $ | 1,064.1 |
| | $ | 1,017.4 |
| | $ | 3,165.0 |
| | $ | 3,041.9 |
|
Commission and advisory expense (in millions) | 663.8 |
| | 657.4 |
| | 1,971.9 |
| | 1,954.1 |
|
Brokerage, clearing, and exchange fees (in millions) | 13.4 |
| | 13.1 |
| | 41.5 |
| | 40.3 |
|
Gross profit (in millions) | $ | 386.9 |
|
| $ | 346.9 |
|
| $ | 1,151.6 |
|
| $ | 1,047.5 |
|
(16)Core G&A is a non-GAAP financial measure. Core G&A consists of total operating expenses, excluding the following expenses: advisory and commission, regulatory charges, promotional, employee share-based compensation, depreciation and amortization, amortization of intangible assets, and brokerage, clearing and exchange. Management presents Core G&A because it believes Core G&A reflects the corporate operating expense categories over which management can generally exercise a measure of control, compared with expense items over which management either cannot exercise control, such as advisory and commission expenses, or which management views as promotional expense necessary to support advisor growth and retention, including conferences and transition assistance. Core G&A is not a measure of the Company’s total operating expenses as calculated in accordance with GAAP. Below is a reconciliation of Core G&A against the Company’s total operating expenses for the periods presented:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
Operating Expense Reconciliation (in millions) | 2021 | | 2020 | | | | |
Core G&A | $ | 236.3 | | | $ | 223.2 | | | | | |
Regulatory charges | 7.6 | | | 6.2 | | | | | |
Promotional | 54.2 | | | 57.4 | | | | | |
Acquisition costs | 2.4 | | | — | | | | | |
Employee share-based compensation | 11.4 | | | 8.6 | | | | | |
Total G&A | 311.8 | | | 295.4 | | | | | |
Advisory and commission | 1,108.9 | | | 870.8 | | | | | |
Depreciation and amortization | 35.5 | | | 26.6 | | | | | |
Amortization of intangible assets | 17.4 | | | 16.6 | | | | | |
Brokerage, clearing and exchange | 19.4 | | | 17.0 | | | | | |
Total operating expenses | $ | 1,493.0 | | | $ | 1,226.4 | | | | | |
Legal &and Regulatory Matters
As a regulated entity, we are subject to regulatory oversight and inquiries related to, among other items, our compliance and supervisory systems and procedures and other controls, as well as our disclosures, supervision and reporting. The environmentWe review these items in the ordinary course of business in our effort to adhere to legal and regulatory requirements applicable to our operations. Nevertheless, additional regulation increased regulatory compliance obligations, and enhanced regulatory enforcement has resulted, and may result in the future, in additional operational and compliance costs, as well as increased costs in the form of penalties and fines, investigatory and settlement costs, customer restitution and remediation related to regulatory matters. In the ordinary course of business, we periodically identify or become aware of purported inadequacies, deficiencies and other issues. It is our policy to evaluate these matters for potential securities lawlegal or regulatory violations, and other potential compliance issues. It is also our policy to self-report known violations and issues as required by applicable law and regulation. When deemed probable that matters may result in financial losses, we accrue for those losses if the amounts can be reasonably estimated, based on an estimate of possible fines, customer restitution and losses related to the repurchase of sold securities and other losses, as applicable. Certain regulatory and other legal claims and losses may be covered through our wholly-owned captive insurance subsidiary, which is chartered with the insurance commissioner in the Statestate of Tennessee. Our ability
Assessing the probability of a loss occurring and the timing and amount of any loss related to estimate such costs may varya regulatory matter or legal proceeding, whether or not covered by our captive insurance subsidiary, is inherently difficult and requires judgments based on a variety of factors and assumptions. There are particular uncertainties and complexities involved when assessing the current stageadequacy of evaluationloss reserves for potential liabilities that are self-insured by our captive insurance subsidiary, which depends in part on historical claims experience, including the actual timing and statuscosts of discussion with regulators, as applicable. resolving matters that begin in one policy period and are resolved in a subsequent period.
Our accruals, including those established through theour captive insurance subsidiary at September 30, 2017,March 31, 2021, include estimated costs for significant regulatory matters or legal proceedings, generally relating to the adequacy of our compliance and supervisory systems and procedures and other controls, for which we believe losses are both probable and reasonably estimable.
The outcome of regulatory mattersor legal proceedings could result in legal liability, regulatory fines or monetary penalties in excess of our accruals and insurance, which could have a material adverse effect on our business, results of operations, cash flows or financial condition. For more information on management’s loss contingency policies, see Note 8.10 - Commitments and Contingencies, within the notes to the unaudited condensed consolidated financial statements.
In April 2016,June 2018, the United StatesU.S. Court of Appeals for the Fifth Circuit invalidated regulations previously enacted by the U.S. Department of Labor issued a final rule (the “DOL Rule”(“DOL”) that expanded the definition of “fiduciary” and related exemptions that, broaden the circumstances under which we may be considered a “fiduciary” with respect towould have resulted in significant new
prohibited transaction exemption requirements for our servicing of certain retirement plan accounts that are subject to the ERISA, and the prohibited transaction rules under section 4975Employee Retirement Income Security Act of the Internal Revenue Code. These types of accounts include many employer-sponsored retirement plans1974, as amended (“ERISA”), and individual retirement accounts ("IRAs"(“IRAs”). TheIn December 2020, the DOL also finalized certaina new investment advice fiduciary prohibited transaction exemptionsexemption with regard to such accounts that allow investment advisors to receive compensation for providing investment advice under arrangements that would otherwise be prohibited due to conflicts of interest. The DOL Rule became applicableeffective on June 9, 2017 and the full implementation date for conditions under related exemptions currently is January 1, 2018; however, a delay in the full implementation date has been proposed. We are continuing to analyze and evaluate the impact of the DOL Rule and related amendments to exemptions on our clients, potential clients, and our business, as the DOL Rule and exemption requirements become applicable. BecauseFebruary 16, 2021. ERISA plans and IRAs comprise a significant portion of our business and we continue to expect that compliance with the DOL Rulecurrent and future laws and regulations with respect to retail retirement savings and reliance on new and amended prohibited transaction exemptions under such laws and regulations will require increased legal, compliance, information technology and other costs and could lead to a greater risk of class action lawsuits and other litigation. Please consult the Retirement Plan Services Regulation section within Part I, “Item 1. Business” within our 2016 Annual Report on Form 10-K as filed with
In June 2019, the SEC for more information aboutadopted a new standard of conduct applicable to retail brokerage accounts (“Regulation BI”) with a compliance date of June 30, 2020. Regulation BI requires that broker-dealers act in the risks associated withbest interest of retail customers without placing their own financial or other interests ahead of the customer’s and imposes new obligations related to disclosure, duty of care, conflicts of interest and compliance. Certain state securities and insurance regulators have also adopted, proposed or are considering adopting similar laws and regulations. In addition, it is unclear how and whether other regulators, including banking regulators and state securities and insurance regulators,may respond to or attempt to enforce similar issues addressed by the newly proposed DOL Rule and related exemptionsRegulation BI. As of June 30, 2020, we implemented new procedures in accordance with Regulation BI.
Future laws and their potential impactregulations, including the new rule proposed by the DOL and state rules relating to the standards of conduct applicable to both retirement and non-retirement accounts, may affect our business in ways that cannot be anticipated or planned for, and may have negative impacts on our products, services and results of operations.
Acquisitions, Integrations and Divestitures
From time to time we undertake acquisitions or divestitures based on opportunities inWe continuously assess the competitive landscape.landscape in connection with our capital allocation framework as we pursue acquisitions, integrations and divestitures. These activities are part of our overall growth strategy, but can distort comparability when reviewing revenue and expense trends for periods presented. Our recent acquisitions are as follows:
On August 15, 2017,•Waddell & Reed Financial, Inc. (“Waddell & Reed”) - In December 2020, we entered into the Asset Purchase Agreementan agreement with the NPH SellersMacquarie Management Holdings, Inc. (“Macquarie”) to acquire certain assetsthe wealth management business of Waddell & Reed. The transaction closed on April 30, 2021.
•Blaze Portfolio Systems LLC (“Blaze”) - In October 2020, we acquired Blaze, a technology company that provides an advisor-facing trading and rights of the NPH Sellers, including the Sellers'portfolio rebalancing platform.
•E.K. Riley Investments, LLC (“E.K. Riley”) - In August 2020, we acquired business relationships with financial advisors who become affiliatedfrom E.K. Riley, a broker-dealer and registered investment adviser (“RIA”).
•Lucia Securities, LLC (“Lucia”) - In August 2020, we acquired business relationships with LPL Financial. We paid $325 million to the NPH Sellers at closing, which occurred on August 15, 2017,advisors from Lucia, a broker-dealer and have agreed to a potential contingent payment of up to $122.8 million (the “NPH Contingent Payment”). The NPH Contingent Payment would be paid on an interpolated basis based on the percentage of transferred GDC between 72% and 93.5%. No NPH Contingent Payment would be due in the event that the transferred GDC percentage is less than 72%. We expect to incur increased costs related to this transaction, including: compensation and benefits expense related to the additional staffing, as well as contingent labor costs, needed to support the onboarding of the NPH advisors and their clients to our systems, as well as to provide ongoing support to the anticipated increases in the number of advisors, clients and total assets served on our platform; fees for account closure and transfers that we agreed to pay on behalf of NPH financial advisors under the Asset Purchase Agreement; onboarding financial assistance costs for advisors joining LPL Financial; and technology capacity investments to support the expected increase in demands on our systems. We expect the incurrence of these costs to be largely complete by mid-2018. We also anticipate an increase to amortization related to the purchased intangibles under the Asset Purchase Agreement. RIA firm.
See Note 34 - Acquisitions, within the notes to the unaudited condensed consolidated financial statements for further detail. There have been no other material acquisitions, integrations, or divestitures during the nine months ended September 30, 2017 or during the nine months ended September 30, 2016.
Economic Overview and Impact of Financial Market Events
Our business is directly and indirectly sensitive to several macroeconomic factors and the state of the United StatesU.S. financial markets. In the United States, economic dataThe global economy in general continued to point to fairly steady economic growth over the second and third quarter of 2017 after some slowingshow improvement in the first quarter.quarter of 2021, supported by additional fiscal stimulus, accommodative central bank policy and accelerating vaccine distribution. Despite clear progress, efforts to contain the COVID-19 pandemic continue to play a significant role in the global economy and the recovery has been uneven, with progress in some regions delayed by the impact of new COVID-19 variants as well as varying policy responses.
The outlook for the U.S. economy, in particular, has improved substantially over the first quarter of 2021. The Federal Reserve’s (“Fed”) most recent median GDP projection for 2021, released following its March 16-17, 2021 policy meeting, saw the economy growing 6.5% in 2021, a large upgrade from a median projection of 4.2% just three months earlier. According to the most recent estimate by the U.S. Bureau of Economic Analysis, real gross domestic product (“GDP”) grewthe U.S. economy expanded at an annualized rate of 3.0%4.3% in the fourth quarter of 2020 after a dramatic rebound in the third quarter. Data received during the first quarter of 2017. This estimate translates2021 suggests that growth has likely accelerated further from fourth quarter 2020 levels. The unemployment rate, which had spiked to an overall growth rate over14.8% in April 2020 has declined steadily to 6.0% in March 2021, according to the last four quarters at 2.3%, slightly higher than the average for the expansion. GrowthFed. The Fed also reports that consumer spending has beenincreased, supported by a largely healthy labor market, generally steady consumer spending, signs of improved business investment,an additional fiscal stimulus passed in March 2021, high savings levels and continued low interest rates. Stronger global growth has also provided support, with stable or accelerating growth across most major economies. Business and consumer confidence have remained elevated, with only modest declines since the run-up following the U.S. elections in November 2016. Despite economic stability and a healthy labor market, inflation has remained below the Federal Reserve’s (“Fed”) 2% target. While a prospective rise in U.S. economic growth to 2-3% may seem modest by historical standards, it would still be above the Congressional Budget Office’s estimate of potential GDP growth; and could be enough to further tighten the labor market, push wages higher, and increase the probabilitygradual reopening of the Fed following througheconomy. Business investment has continued to rebound and readings on its median projected rate pathboth manufacturing and service sector activity are showing strong acceleration, although off of one more rate hike in 2017 and three more rate hikes in 2018.weak levels for those sectors most impacted by the pandemic.
Equity volatility remained low throughout the third quarter of 2017 and into the start of the fourth quarter, while broad measures of financial stress have been subdued. The S&P 500 Index has further extended its rally, posting steady gains supported by solid earnings growth. Thereturned 6.2% during the first quarter of 2021. Smaller stocks significantly outperformed the larger stocks represented in the S&P 500 Index for the second straight quarter, as the Russell 2000 Index returned 12.7%. Value-style stocks performed better than their growth counterparts as leading value sectors energy and financials outperformed while the growth-heavy technology sector lagged. Non-U.S. stocks trailed their U.S. counterparts during the quarter as the U.S. dollar strengthened. Developed international equities returned 3.6% while emerging markets (“EM”) returned 2.3%, based on the MSCI EAFE and MSCI EM indexes. Most fixed income sectors fell as interest rates rose sharply, with the 10-year Treasury yield was near flat over muchclimbing from 0.93% at year-end 2020 to 1.74% at the end of the thirdfirst quarter but has pushed higher in September and October. Stable financial conditions have helped more economically sensitive fixed income sectors generally outperform higher quality sectors.2021. The Bloomberg Barclays U.S. Aggregate Bond Index lost 3.4% over the quarter.
Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Fed policy. During the first quarter of 2021, Fed policymakers maintained the target range for the federal funds rate at 0.0 to 0.25%. According to projection materials released following the conclusion of the March 16-17, 2021 policy meeting, the median expectation among meeting participants remains that the Fed will not begin raising rates until after 2023, although a few participants projected the Fed raising rates as early as 2022 and several in 2023. Federal Reserve Chair Jerome Powell continues to emphasize the Fed’s belief that any near-term increase in inflation is likely to be transitory and that the Fed would like to see realized inflation moderately above 2.0% for a meaningful period of time before it would raise interest rates.
Please consult the Risks“Risks Related to Our Business and IndustryIndustry” section within Part I, “Item 1A. Risk Factors” in our 20162020 Annual Report on Form 10-K for more information about the risks associated with significant interest rate changes, and the potential related effects on our profitability and financial condition. Following the conclusion
Results of Operations
The following discussion presents an analysis of our results of operations for the three and nine months ended September 30, 2017March 31, 2021 and 2016. Where appropriate, we have identified specific events and changes that affect comparability or trends, and where possible and practical, have quantified the impact2020. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
(Dollars in thousands) | 2021 | | 2020 | | % Change | | | | | | |
REVENUES | | | | | | | | | | | |
Advisory | $ | 722,046 | | | $ | 579,027 | | | 24.7 | % | | | | | | |
Commission | 557,229 | | | 503,444 | | | 10.7 | % | | | | | | |
Asset-based | 264,706 | | | 285,506 | | | (7.3) | % | | | | | | |
Transaction and fee | 140,944 | | | 137,096 | | | 2.8 | % | | | | | | |
Interest income | 6,518 | | | 9,542 | | | (31.7) | % | | | | | | |
Other | 16,174 | | | (51,218) | | | (131.6) | % | | | | | | |
Total revenues | 1,707,617 | | | 1,463,397 | | | 16.7 | % | | | | | | |
EXPENSES | | | | | | | | | | | |
Advisory and commission | 1,108,899 | | | 870,795 | | | 27.3 | % | | | | | | |
Compensation and benefits | 161,540 | | | 146,802 | | | 10.0 | % | | | | | | |
Promotional | 54,181 | | | 57,398 | | | (5.6) | % | | | | | | |
Depreciation and amortization | 35,499 | | | 26,644 | | | 33.2 | % | | | | | | |
Amortization of intangible assets | 17,431 | | | 16,570 | | | 5.2 | % | | | | | | |
Occupancy and equipment | 43,584 | | | 39,546 | | | 10.2 | % | | | | | | |
Professional services | 15,625 | | | 14,605 | | | 7.0 | % | | | | | | |
Brokerage, clearing and exchange | 19,364 | | | 17,024 | | | 13.7 | % | | | | | | |
Communications and data processing | 11,993 | | | 10,835 | | | 10.7 | % | | | | | | |
Other | 24,900 | | | 26,228 | | | (5.1) | % | | | | | | |
Total operating expenses | 1,493,016 | | | 1,226,447 | | | 21.7 | % | | | | | | |
Non-operating interest expense and other | 25,059 | | | 29,318 | | | (14.5) | % | | | | | | |
Loss on extinguishment of debt | 24,400 | | | — | | | 100.0 | % | | | | | | |
INCOME BEFORE PROVISION FOR INCOME TAXES | 165,142 | | | 207,632 | | | (20.5) | % | | | | | | |
PROVISION FOR INCOME TAXES | 35,522 | | | 51,991 | | | (31.7) | % | | | | | | |
NET INCOME | $ | 129,620 | | | $ | 155,641 | | | (16.7) | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Revenues | | | |
Commission | $ | 403,011 |
| | $ | 431,686 |
| | (6.6 | )% | | $ | 1,244,881 |
| | $ | 1,314,168 |
| | (5.3 | )% |
Advisory | 356,945 |
| | 321,911 |
| | 10.9 | % | | 1,033,319 |
| | 964,298 |
| | 7.2 | % |
Asset-based | 183,953 |
| | 138,291 |
| | 33.0 | % | | 514,626 |
| | 412,339 |
| | 24.8 | % |
Transaction and fee | 103,999 |
| | 108,413 |
| | (4.1 | )% | | 321,522 |
| | 312,927 |
| | 2.7 | % |
Interest income, net of interest expense | 6,162 |
| | 5,372 |
| | 14.7 | % | | 17,931 |
| | 15,940 |
| | 12.5 | % |
Other | 10,038 |
| | 11,767 |
| | (14.7 | )% | | 32,760 |
| | 22,254 |
| | 47.2 | % |
Total net revenues | 1,064,108 |
| | 1,017,440 |
| | 4.6 | % | | 3,165,039 |
| | 3,041,926 |
| | 4.0 | % |
Expenses | | | | |
| | | | | | |
Commission and advisory | 663,765 |
| | 657,432 |
| | 1.0 | % | | 1,971,874 |
| | 1,954,123 |
| | 0.9 | % |
Compensation and benefits | 113,659 |
| | 107,988 |
| | 5.3 | % | | 337,170 |
| | 327,816 |
| | 2.9 | % |
Promotional | 42,935 |
| | 42,609 |
| | 0.8 | % | | 111,595 |
| | 113,010 |
| | (1.3 | )% |
Depreciation and amortization | 21,996 |
| | 18,434 |
| | 19.3 | % | | 63,933 |
| | 56,145 |
| | 13.9 | % |
Amortization of intangible assets | 9,352 |
| | 9,502 |
| | (1.6 | )% | | 28,296 |
| | 28,536 |
| | (0.8 | )% |
Occupancy and equipment | 22,803 |
| | 23,530 |
| | (3.1 | )% | | 70,989 |
| | 67,347 |
| | 5.4 | % |
Professional services | 16,438 |
| | 17,045 |
| | (3.6 | )% | | 50,732 |
| | 49,184 |
| | 3.1 | % |
Brokerage, clearing, and exchange | 13,491 |
| | 13,098 |
| | 3.0 | % | | 41,567 |
| | 40,296 |
| | 3.2 | % |
Communications and data processing | 10,866 |
| | 10,333 |
| | 5.2 | % | | 32,525 |
| | 31,801 |
| | 2.3 | % |
Other | 24,376 |
| | 25,356 |
| | (3.9 | )% | | 71,140 |
| | 69,512 |
| | 2.3 | % |
Total operating expenses | 939,681 |
| | 925,327 |
| | 1.6 | % | | 2,779,821 |
| | 2,737,770 |
| | 1.5 | % |
Non-operating interest expense | 26,519 |
| | 23,889 |
| | 11.0 | % | | 78,131 |
| | 71,583 |
| | 9.1 | % |
Loss on extinguishment of debt | 1,268 |
| | — |
| | n/m |
| | 22,407 |
| | — |
| | n/m |
|
Income before provision for income taxes | 96,640 |
| | 68,224 |
| | 41.7 | % | | 284,680 |
| | 232,573 |
| | 22.4 | % |
Provision for income taxes | 38,498 |
| | 16,270 |
| | 136.6 | % | | 109,915 |
| | 82,378 |
| | 33.4 | % |
Net income | $ | 58,142 |
| | $ | 51,954 |
| | 11.9 | % | | $ | 174,765 |
| | $ | 150,195 |
| | 16.4 | % |
Revenues
Commission RevenuesAdvisory
Advisory revenues primarily represent fees charged to clients of our advisors for the use of our corporate RIA advisory platform, and are based on the value of their advisory assets. Advisory fees are billed to clients in advance, on a quarterly basis, and are recognized as revenue ratably during the quarter. The majority of our client accounts are on a calendar quarter and are billed using values as of the last business day of the preceding quarter. The value of the assets in an advisory account on the billing date determines the amount billed, and accordingly, the revenues earned in the following three-month period. Advisory revenues collected on our corporate advisory platform are proposed by the advisor and agreed to by the client and averaged 1.0% of the underlying assets for the three months ended March 31, 2021.
We also support separate investment adviser firms (“Hybrid RIAs”), through our hybrid advisory platform, which allows advisors to engage us for technology, clearing and custody services, as well as access to the capabilities of our investment platforms. The assets held under a Hybrid RIA’s investment advisory accounts custodied with LPL Financial are included in total advisory assets and net new advisory assets. The advisory revenue generated by a Hybrid RIA is not included in our advisory revenues. We charge separate fees to Hybrid RIAs for technology, clearing, administrative, oversight and custody services, which are included in our transaction and fee revenues in our unaudited condensed consolidated statements of income. The administrative fees collected on our hybrid advisory platform vary and can reach a maximum of 0.2% of the underlying assets as of March 31, 2021.
The following table summarizes the composition of advisory assets for the periods presented (dollars in billions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, | | | | |
| | 2021 | | 2020 | | $ Change | | % Change |
Corporate platform advisory assets | | $ | 317.5 | | | $ | 200.7 | | | $ | 116.8 | | | 58.2 | % |
Hybrid platform advisory assets | | 179.2 | | | 121.6 | | | 57.6 | | | 47.4 | % |
Total advisory assets(1) | | $ | 496.7 | | | $ | 322.3 | | | $ | 174.4 | | | 54.1 | % |
(1)Totals may not foot due to rounding.
Net new advisory assets are generated throughout the quarter, therefore, the full impact of net new advisory assets to advisory revenues is not realized in the same period. The following table summarizes activity in advisory assets for the periods presented (in billions):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Balance - Beginning of period | $ | 461.2 | | | $ | 365.8 | | | | | |
Net new advisory assets(1) | 22.7 | | | 13.2 | | | | | |
Market impact(2) | 12.8 | | | (56.7) | | | | | |
Balance - End of period | $ | 496.7 | | | $ | 322.3 | | | | | |
(1)Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively. Previously reported figures for net new advisory assets did not include dividends and interest or subtract advisory fees. The figure previously reported for the three months ended March 31, 2020 was an inflow of $12.5 billion.
(2)Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, representing the implied growth or decline in asset balances due to market changes over the same period of time.
The growth in advisory revenues for the three months ended March 31, 2021 compared to 2020 was due to net new advisory assets resulting from our recruiting efforts and strong advisor productivity, as well as market gains as represented by higher levels of the S&P 500 Index.
Commission
We generate two types of commission revenues: sales-based commissions and trailing commissions. Sales-based commission revenues, which occur wheneverwhen clients of our advisors trade securities or purchase various types of investment products, primarily represent gross commissions generated by our advisors. The levels of sales-based commission revenues can vary from period to period based on the overall economic environment, number of trading days in the reporting period and investment activity of our advisors’ clients. Trailing commission revenues, which are paid over time, are recurring in nature and are earned based on the market value of investment holdings in trail eligibletrail-eligible assets. We earn trailing commission revenues (a commission that is paid over time, such as 12(b)-1 fees) primarily on mutual funds and variable annuities held by clients of our advisors. See Note 3 - Revenues, within the notes to the unaudited condensed consolidated financial statements for further detail regarding our commission revenues by product category.
The following table sets forth our commission revenue, by product category,revenues included in our unaudited condensed consolidated statements of income (dollars in thousands):
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2017 | | 2016 | | $ Change | | % Change |
Variable annuities | $ | 163,778 |
| | $ | 169,413 |
| | $ | (5,635 | ) | | (3.3 | )% |
Mutual funds | 131,339 |
| | 137,238 |
| | (5,899 | ) | | (4.3 | )% |
Alternative investments | 6,676 |
| | 8,514 |
| | (1,838 | ) | | (21.6 | )% |
Fixed annuities | 32,764 |
| | 44,933 |
| | (12,169 | ) | | (27.1 | )% |
Equities | 17,748 |
| | 20,263 |
| | (2,515 | ) | | (12.4 | )% |
Fixed income | 23,912 |
| | 21,756 |
| | 2,156 |
| | 9.9 | % |
Insurance | 17,338 |
| | 18,083 |
| | (745 | ) | | (4.1 | )% |
Group annuities | 9,319 |
| | 11,266 |
| | (1,947 | ) | | (17.3 | )% |
Other | 137 |
| | 220 |
| | (83 | ) | | (37.7 | )% |
Total commission revenue | $ | 403,011 |
| | $ | 431,686 |
| | $ | (28,675 | ) | | (6.6 | )% |
The following table sets forth our commission revenue, by sales-based and trailing commission revenue (dollars in thousands): |
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2017 | | 2016 | | $ Change | | % Change |
|
Sales-based | | | | |
|
| |
|
|
Variable annuities | $ | 46,148 |
| | $ | 57,337 |
| | $ | (11,189 | ) | | (19.5 | )% |
Mutual funds | 30,638 |
| | 34,985 |
| | (4,347 | ) | | (12.4 | )% |
Alternative investments | 2,550 |
| | 7,198 |
| | (4,648 | ) | | (64.6 | )% |
Fixed annuities | 27,906 |
| | 41,995 |
| | (14,089 | ) | | (33.5 | )% |
Equities | 17,748 |
| | 20,263 |
| | (2,515 | ) | | (12.4 | )% |
Fixed income | 17,967 |
| | 16,588 |
| | 1,379 |
| | 8.3 | % |
Insurance | 15,906 |
| | 16,520 |
| | (614 | ) | | (3.7 | )% |
Group annuities | 1,098 |
| | 1,258 |
| | (160 | ) | | (12.7 | )% |
Other | 137 |
| | 220 |
| | (83 | ) | | (37.7 | )% |
Total sales-based revenue | $ | 160,098 |
| | $ | 196,364 |
| | $ | (36,266 | ) | | (18.5 | )% |
Trailing | | | | | | |
|
|
Variable annuities | $ | 117,630 |
| | $ | 112,076 |
| | $ | 5,554 |
| | 5.0 | % |
Mutual funds | 100,701 |
| | 102,253 |
| | (1,552 | ) | | (1.5 | )% |
Alternative investments | 4,126 |
| | 1,316 |
| | 2,810 |
| | 213.5 | % |
Fixed annuities | 4,858 |
| | 2,938 |
| | 1,920 |
| | 65.4 | % |
Fixed income | 5,945 |
| | 5,168 |
| | 777 |
| | 15.0 | % |
Insurance | 1,432 |
| | 1,563 |
| | (131 | ) | | (8.4 | )% |
Group annuities | 8,221 |
| | 10,008 |
| | (1,787 | ) | | (17.9 | )% |
Total trailing revenue | $ | 242,913 |
| | $ | 235,322 |
| | $ | 7,591 |
| | 3.2 | % |
Total commission revenue | $ | 403,011 |
| | $ | 431,686 |
| | $ | (28,675 | ) | | (6.6 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | $ Change | | % Change |
Sales-based | $ | 236,273 | | | $ | 228,391 | | | $ | 7,882 | | | 3.5 | % |
Trailing | 320,956 | | | 275,053 | | | 45,903 | | | 16.7 | % |
Total commission revenues | $ | 557,229 | | | $ | 503,444 | | | $ | 53,785 | | | 10.7 | % |
The decreaseincrease in sales-based commission revenuerevenues for the three months ended September 30, 2017,March 31, 2021 compared withto 2020 was primarily driven by rising long-term interest rates that led to an increase in sales of annuities and fixed income products.
The increase in trailing commission revenues for the same period in 2016,three months ended March 31, 2021 compared to 2020 was primarily due to a decrease in activity for fixed and variable annuities. Fixed and variable annuities commissions were primarily affected by marketplace uncertainties in response to the DOL Rule, which became applicable on June 9, 2017 and changes in commission structures.
Trailing revenues are recurring in nature and the increase in revenue for the period reflects an increase in the market value of the underlying assets.
The following table sets forth our commission revenue, by product category, included in our unaudited condensed consolidated statementsannuities and mutual funds as a result of income (in thousands):
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2017 | | 2016 | | $ Change | | % Change |
Variable annuities | $ | 498,027 |
| | $ | 514,521 |
| | $ | (16,494 | ) | | (3.2 | )% |
Mutual funds | 397,323 |
| | 406,741 |
| | (9,418 | ) | | (2.3 | )% |
Alternative investments | 20,565 |
| | 25,415 |
| | (4,850 | ) | | (19.1 | )% |
Fixed annuities | 109,236 |
| | 150,622 |
| | (41,386 | ) | | (27.5 | )% |
Equities | 58,520 |
| | 61,588 |
| | (3,068 | ) | | (5.0 | )% |
Fixed income | 77,664 |
| | 63,703 |
| | 13,961 |
| | 21.9 | % |
Insurance | 51,355 |
| | 56,297 |
| | (4,942 | ) | | (8.8 | )% |
Group annuities | 31,799 |
| | 34,708 |
| | (2,909 | ) | | (8.4 | )% |
Other | 392 |
| | 573 |
| | (181 | ) | | (31.6 | )% |
Total commission revenue | $ | 1,244,881 |
| | $ | 1,314,168 |
| | $ | (69,287 | ) | | (5.3 | )% |
The following table sets forth our commission revenue, by sales-based and trailing commission revenue (in thousands):
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2017 | | 2016 | | $ Change | | % Change |
|
Sales-based | | | | | | | |
Variable annuities | $ | 150,103 |
| | $ | 186,963 |
| | $ | (36,860 | ) | | (19.7 | )% |
Mutual funds | 102,009 |
| | 111,548 |
| | (9,539 | ) | | (8.6 | )% |
Alternative investments | 11,348 |
| | 20,892 |
| | (9,544 | ) | | (45.7 | )% |
Fixed annuities | 94,930 |
| | 142,962 |
| | (48,032 | ) | | (33.6 | )% |
Equities | 58,520 |
| | 61,588 |
| | (3,068 | ) | | (5.0 | )% |
Fixed income | 60,371 |
| | 48,648 |
| | 11,723 |
| | 24.1 | % |
Insurance | 46,914 |
| | 52,047 |
| | (5,133 | ) | | (9.9 | )% |
Group annuities | 3,929 |
| | 4,222 |
| | (293 | ) | | (6.9 | )% |
Other | 392 |
| | 573 |
| | (181 | ) | | (31.6 | )% |
Total sales-based revenue | $ | 528,516 |
| | $ | 629,443 |
| | $ | (100,927 | ) | | (16.0 | )% |
Trailing | | | | | | | |
Variable annuities | $ | 347,924 |
| | $ | 327,558 |
| | $ | 20,366 |
| | 6.2 | % |
Mutual funds | 295,314 |
| | 295,193 |
| | 121 |
| | — | % |
Alternative investments | 9,217 |
| | 4,523 |
| | 4,694 |
| | 103.8 | % |
Fixed annuities | 14,306 |
| | 7,660 |
| | 6,646 |
| | 86.8 | % |
Fixed income | 17,293 |
| | 15,055 |
| | 2,238 |
| | 14.9 | % |
Insurance | 4,441 |
| | 4,250 |
| | 191 |
| | 4.5 | % |
Group annuities | 27,870 |
| | 30,486 |
| | (2,616 | ) | | (8.6 | )% |
Total trailing revenue | $ | 716,365 |
| | $ | 684,725 |
| | $ | 31,640 |
| | 4.6 | % |
Total commission revenue | $ | 1,244,881 |
| | $ | 1,314,168 |
| | $ | (69,287 | ) | | (5.3 | )% |
The decrease in sales-based commission revenue for the nine months ended September 30, 2017, compared with the same period in 2016, was primarily due to a decrease in activity for fixed and variable annuities, partially, offset by an increase in fixed income commissions that were primarily driven by the anticipation of the federal funds rate increases announced in March and June 2017, respectively. Fixed and variable annuities commissions were primarily challenged by marketplace uncertainties in response to the DOL Rule which became applicable June 9, 2017.
Trailing revenues are recurring in nature and the increase in revenue for the period reflects an increase in the market value of the underlying assets.
increases.
The following table summarizes activity in brokerage assets for the periods presented (in billions): | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Balance - Beginning of period | $ | 441.9 | | | $ | 398.6 | | | | | |
Net new brokerage assets(1) | 6.2 | | | 1.2 | | | | | |
Market impact(2) | 13.5 | | | (52.2) | | | | | |
Balance - End of period | $ | 461.6 | | | $ | 347.6 | | | | | |
_______________________________ |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Balance - Beginning of period | $ | 305.2 |
| | $ | 291.9 |
| | $ | 297.8 |
| | $ | 288.4 |
|
Net new brokerage assets | (4.0 | ) | | (3.1 | ) | | (12.9 | ) | | (5.6 | ) |
Market impact(1) | 8.6 |
| | 8.1 |
| | 24.9 |
| | 14.1 |
|
Balance - End of period | $ | 309.8 |
| | $ | 296.9 |
| | $ | 309.8 |
| | $ | 296.9 |
|
| |
(1) | Market impact is the difference between the beginning(1) Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest. We consider conversions from and ending asset balance less the net new asset amounts, with the remainder representing the implied growth or decline in asset balances due to market changes over the same period of time. |
Advisory Revenues
Advisory revenues primarily represent fees charged on our corporate RIA platform provided through LPL Financial to clients of our advisors based on the value of their advisory assets. Advisory fees are billed to clients on either a calendar quarter or non-calendar quarter basis of their choice, at the beginning of that period, and are recognized as revenue ratably during the quarter. The majority of our accounts are billed in advance using values as of the last business day of each immediately preceding calendar quarter. The value of the assets in an advisory account on the billing date determines the amount billed, and accordingly, the revenues earned in the following three month period. Advisory revenues collected on our corporate RIA platform are proposed by the advisor and agreed to by the client and average 1.0% of the underlying assets, and the maximum fees charged for these accounts as of September 30, 2017 was 3.0%.
We also support Hybrid RIAs, through our Hybrid RIA platform, which allows advisors to engage usdeposits and withdrawals, respectively. Previously reported figures for technology, clearing, and custody services, as well as access to the capabilities of our investment platforms. Most financial advisors associated with Hybrid RIAs carry their brokerage license with LPL Financial and access our fully-integrated brokerage platform under standard terms, although some financial advisors associated with Hybrid RIAs do not carry a brokerage license with us. The assets held under Hybrid RIAs' investment advisory accounts that are custodied with LPL Financial are included in our brokerage and advisory assets, net new brokerage assets did not include dividends and interest or subtract advisory assets, and advisory assets metrics. However, the advisory revenue generated by a Hybrid RIA is earned by the Hybrid RIA, and accordingly is not included in our advisory revenue. We charge separate fees to Hybrid RIAs for technology, clearing, administrative, and custody services.fees. The administrative fees collected on our Hybrid RIA platform vary and can reach a maximum of 0.6% of the underlying assets as of September 30, 2017.
Furthermore, we support certain financial advisors at broker-dealers affiliated with insurance companies through our customized advisory platforms and charge fees to these advisors based on the value of assets within these advisory accounts.
The following table summarizes activity in advisory assets (in billions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Balance - Beginning of period | $ | 236.8 |
| | $ | 196.1 |
| | $ | 211.6 |
| | $ | 187.2 |
|
Net new advisory assets | 6.9 |
| | 4.1 |
| | 18.8 |
| | 8.9 |
|
Market impact(1) | 6.5 |
| | 5.3 |
| | 19.8 |
| | 9.4 |
|
Balance - End of period | $ | 250.2 |
| | $ | 205.5 |
| | $ | 250.2 |
| | $ | 205.5 |
|
| |
(1) | Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, with the remainder representing the implied growth or decline in asset balances due to market changes over the same period of time. |
Net new advisory assetsfigure previously reported for the three and nine months ended September 30, 2017March 31, 2020 was $0.0 billion.
(2) Market impact is the difference between the beginning and 2016 had a limited impact on our advisory fee revenue for those respective periods. Rather,ending asset balance less the net new advisory assets are a primary driver of future advisory fee revenue. The revenue for any particular quarter is primarily driven by each ofasset amounts, representing the prior quarter’s month-end advisory assets under management. Theimplied growth or decline in advisory revenue for the three and nine months ended September 30, 2017 comparedasset balances due to market changes over the same period of time.
While there has been a COVID-19 vaccine roll out and the number of cases in 2016 was duethe United States is decreasing, that could change and we cannot predict how the ongoing COVID-19 pandemic and foreign and domestic responses to net new advisory assets
resulting fromit will impact our recruiting efforts and strong advisor productivity, as well as market gains as represented by higher levelsfuture sales-based or trailing commission revenues. While domestic equity markets have recovered, COVID-19 cases remain widespread in many parts of the S&P 500 indexworld, and brokerage to advisory conversions.
Assets on our Hybrid RIA platform have been growing rapidly through the recruiting of new advisorssignificant market disruptions and the transition of existing advisors onto that platform. This continued shift of advisors to our Hybrid RIA platform has caused the growth in our advisory revenue to appear to lag behind the rate of growth of advisory assets as we earn the administrative and other fees discussed above, as opposed to earning advisory fees.
The following table summarizes the composition of total advisory assets as of September 30, 2017 and 2016 (in billions):
|
| | | | | | | | | | | | | | | |
| | September 30, | | | | |
| | 2017 | | 2016 | | $ Change |
| | % Change |
|
Corporate Platform Advisory Assets | | $ | 145.0 |
| | $ | 124.9 |
| | $ | 20.1 |
| | 16.1 | % |
Hybrid Platform Advisory Assets | | 105.2 |
| | 80.6 |
| | 24.6 |
| | 30.5 | % |
Total advisory assets | | $ | 250.2 |
| | $ | 205.5 |
| | $ | 44.7 |
| | 21.8 | % |
volatility remain possible.Asset-Based Revenues
Asset-based revenues are comprisedconsist of fees from omnibus processing and networking services (collectively referred to as “recordkeeping”), our sponsorship programs with financial product manufacturers omnibus processing and networking services, and fees from our client cash sweep program. We receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales education and training efforts.programs. Omnibus processing revenues are paid to us by mutual fund product sponsors and are based on the value of custodied assets in advisory accounts and the number of brokerage accounts in which the related mutual fund positions are held. Networking revenues on brokerage assets are correlated to the number of positions we administer and are paid to us by mutual fund and annuity product manufacturers. We receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales education and training efforts. Client cash-based revenues are generated on advisors’ clients’ cash balances in
insured bank sweep accounts and money market programs. Pursuant to contractual arrangements, uninvested cash balances in our advisors’ client accounts are swept into either insured cash accounts at various banks or third-party money market funds, for which we receive fees, including administrative and recordkeeping fees based on account type and the invested balances.balances for administration and recordkeeping.
Asset-based revenues for the three months ended September 30, 2017 increasedMarch 31, 2021 decreased compared to $184.0 million, or 33.0%, from $138.3 million2020 primarily due to decreased client cash revenues, partially offset by an increase in recordkeeping revenues and sponsorship programs.
Revenues for our recordkeeping and sponsorship programs for the three months ended September 30, 2016. The increase isMarch 31, 2021, which are largely based on the market value of the underlying assets, increased compared to 2020 due primarily to increasedthe impact of market appreciation on the value of the underlying assets.
Client cash revenues from our cash sweep program. Cash sweep revenue increased to $81.6 million for the three months ended September 30, 2017, from $40.7 million for the three months ended September 30, 2016,March 31, 2021 decreased compared to 2020 due to the impact of an increase in the target range for thea lower federal funds effective rate, partially offset by lowerhigher average client cash sweep balances. As of September 30, 2017, our cash sweep balances decreased compared to September 30, 2016, with average cash sweep balances of $28.0 billion and $29.1 billion duringFor the three months ended September 30, 2017 and 2016, respectively.
Asset-based revenues for the nine months ended September 30, 2017,March 31, 2021, our average client cash balances increased to $514.6 million, or 24.8%, from $412.3 million compared with the same period in 2016. The increase is due primarily to increased revenues from our cash sweep program. Cash sweep revenues increased to $213.1 million for the nine months ended September 30, 2017, from $125.0 million for the nine months ended September 30, 2016, due to the impact of the increase in the target range for the federal funds effective rate, partially offset by lower cash sweep balances. As of September 30, 2017, our cash sweep balances decreased$48.4 billion compared to September 30, 2016, with average cash sweep balances of $28.7$38.5 billion and $29.7 billion during the nine months ended September 30, 2017 and 2016, respectively.in 2020.
Transaction and Fee Revenues
Transaction revenues primarily include fees we charge to our advisors and their clients for executing certain transactions in brokerage and fee-based advisory accounts. Fee revenues primarily include IRA custodian fees, contract and licensing fees and other client account fees. In addition, we host certain advisor conferences that serve as training, education, sales and marketing events, for which we charge a fee for attendance.
Transaction and fee revenues decreasedincreased for the three months ended September 30, 2017March 31, 2021 compared to the same period in 2016 due to a decrease in IRA custodian termination fees from an institutional client departure in the prior year, which did not repeat in the current quarter, partially offset by a new fee announced in 2017 for alternative investments effective for 2016.
Transaction and fee revenues increased for the nine months ended September 30, 2017 compared to the same period in 20162020 primarily due to a newan increase in technology fee announced in 2017 for alternative investments effective for 2016
that was billed and recorded in the current period, a higher volume of fixed income transactions related to the federal funds rate increases in March and June 2017,revenues, partially offset by a decrease in terminationtransaction fees from an institutional client departuredue to trading volatility in 2020 caused by the prior year that did not repeat in the current period.COVID-19 pandemic.
Interest Income Net of Interest Expense
We earn interest income from client margin accountsloans, cash segregated under federal and other regulations and cash equivalents, net of operating interest expense.equivalents. Period-over-period variances correspond to changes in the average balances of assets in margin accountsloans and cash equivalents.balances as well as changes in interest rates.
Interest income for the three months ended March 31, 2021 decreased compared to 2020, primarily due to lower average interest rates.
Other Revenues
Other revenues primarily include mark-to-market gains or losses on assets held by us in our advisor non-qualified deferred compensation plan and model research portfolios, marketing allowances received from certain financial product manufacturers, primarily those who offer alternative investments, such as non-traded real estate investment trusts and business development companies, mark-to-market gains and losses on assets held by us for our advisor non-qualified deferred compensation plan and our model research portfolios, and other miscellaneous revenues.
Other revenues decreased for the three months ended September 30, 2017,March 31, 2021 increased compared to the same period in 2016 2020, primarily due to a decrease in alternative investment marketing allowances.
Other revenues increased for the nine months ended September 30, 2017, compared to the same period in 2016 primarily due to an increase of $9.2 million in realized and unrealized gains on assets held in our advisor non-qualified deferred compensation plan, which are based on the market performance of the underlying investment allocations chosen by advisors in the plan, partially offset by a decrease in alternative investment marketing allowances.dividend income on assets held in our advisor non-qualified deferred compensation plan.
Expenses
CommissionAdvisory and Commission
Advisory Expenses
Commission and advisorycommission expenses are comprisedconsist of the following: base payout amounts that are earned by and paid out to advisors and institutions based on commissionadvisory and advisorycommission revenues earned on each client’s account; production based bonuses earned by advisors and institutions based on the levels of commissionadvisory and advisorycommission revenues they produce; the recognition of share-based compensation expense from equity awards granted to advisors and financial institutions based on the fair value of the awards at each reporting period;grant date; and the deferred commissionsadvisory and advisorycommissions fee expenses associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors.
Our production payout ratio is calculated as commission and advisory expenses divided by the sum
The following table shows the components ofsets forth our production payout and total payout ratios, each ofratio, which is a statistical or operating measure:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
| 2021 | | 2020 | | Change | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Payout ratio | 85.62 | % | | 85.07 | % | | 55 bps | | | | | | |
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| Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2017 | | 2016 | | | 2017 | | 2016 | |
Base payout rate(1) | 83.01 | % | | 83.10 | % | | (9 bps) | | 82.98 | % | | 82.93 | % | | 5 bps |
Production based bonuses | 3.04 | % | | 3.04 | % | | — | | 2.44 | % | | 2.39 | % | | 5 bps |
GDC sensitive payout | 86.05 | % | | 86.14 | % | | (9 bps) | | 85.42 | % | | 85.32 | % | | 10 bps |
Non-GDC sensitive payout(2) | 1.29 | % | | 1.10 | % | | 19 bps | | 1.13 | % | | 0.44 | % | | 69 bps |
Total Payout Ratio | 87.34 | % | | 87.24 | % | | 10 bps | | 86.55 | % | | 85.76 | % | | 79 bps |
_______________________________ | |
(1) | Our production payout ratio is calculated as commission and advisory expenses, divided by GDC (see description above). |
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(2) | Non-GDC Sensitive Payout includes share-based compensation expense from equity awards granted to advisors and financial institutions and mark-to-market gains or losses on amounts designated by advisors as deferred. |
Our total payout ratio, a statistical or operating measure, increased for the three months September 30, 2017ended March 31, 2021 increased compared withto 2020, primarily due to price reductions on our corporate advisory platform.
Compensation and Benefits
Compensation and benefits include salaries, wages, benefits, share-based compensation and related taxes for our employees, as well as compensation for temporary workers and contractors. The following table sets forth our average number of employees for the same period in 2016three months ended March 31, 2021, compared to 2020.
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| Three Months Ended March 31, | | | | | | |
| 2021 | | 2020 | | Change | | | | | | |
Average number of employees | 4,787 | | 4,350 | | 10.0% | | | | | | |
Compensation and benefits for the three months ended March 31, 2021 increased compared to 2020, primarily due to an increase in non-GDC sensitive payout, which includes advisor deferred compensationsalary and advisor share-based compensation.
Our total payout ratio increased for the nine months ended September 30, 2017 compared with the same period in 2016 primarily due to an increase in non-GDC sensitive payout, which includes advisor deferred compensation and advisor share-based compensation.
Compensation and Benefits Expense
Compensation and benefits expense includes salaries and wages and related employee benefits and taxes for our employees (including share-based compensation), as well as compensation for temporary employees and consultants.
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| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Average Number of Employees | 3,508 | | 3,262 | | 7.5% | | 3,397 | | 3,332 | | 2.0% |
Compensation and benefits expense increased for the three months ended September 30, 2017 compared with the same period in 2016 due to an increase in salary expensebenefit expenses resulting from an increase in headcount and an increase in contingent labor costs to support the NPH acquisition, partially offset by an increase in capitalized salary and benefits costs associated with technology projects.
Compensation and benefits expense increased for the nine months ended September 30, 2017 compared with the same period in 2016 due to higher recruiter compensation pursuant to incentive compensation plans, an increase in contingent labor for DOL rule implementation and to support the NPH acquisition and an increase in salaries expense as a result of an increase in headcount, partially offset by an increase in capitalized salary and benefits associated with technology projects.headcount.
Promotional Expense
Promotional expenses include business development costs related to ouradvisor recruitment and retention, costs related to hosting of certain advisoradvisory conferences that serve as training, sales and marketing events as well asand other costs that support advisor business development costs related to recruiting, including transition assistance and amortization related to forgivable loans issued to advisors.
Promotional expense remained relatively flatgrowth. The decrease in promotional expenses for the three months ended September 30, 2017March 31, 2021 compared with the same period in 2016.
The decrease in promotional expense for the nine months ended September 30, 2017 compared with the same period in 2016to 2020 was primarily driven by lower conference expenses and a decrease in amounts paid as advisor referral bonuses.conference expenses due to conferences being cancelled or held in a virtual format in response to the COVID-19 pandemic, partially offset by an increase in costs associated with advisor loans.
Depreciation and Amortization Expense
Depreciation and amortization expense representsrelates to the benefits received for using long-lived assets. Those assets consistuse of fixed assets, which include internally developed software, hardware, leasehold improvements and other equipment.
The increase in depreciation Depreciation and amortization of $3.6 million and $7.8 million for the three and nine months ended September 30, 2017, respectively,March 31, 2021 increased compared with the same periods in 2016, wasto 2020, primarily due to increasesour continued investment in purchased hardwaretechnology to improve our advisor platform and software and an increase in depreciation expense associated with our new office buildings in Fort Mill, South Carolina, which were completed in October 2016.
Amortization of Intangible assets
Amortization of intangible assets is consistent over prior periods and represents the benefits received for using long-lived assets, which consist of intangible assets established through our acquisitions.end-client experience.
Occupancy and Equipment Expense
Occupancy and equipment expense includesexpenses include the costs of leasing and maintaining our office spaces, software licensing and maintenance costs and maintenance expenses on computer hardware and other equipment.
Occupancy and equipment expense remained relatively flatexpenses for the three months ended September 30, 2017March 31, 2021 increased compared with the same period in 2016.
The increase in occupancy and equipment expense of $3.6 million for the nine months ended September 30, 2017 compared with the same period in 2016, wasto 2020, primarily due to an increase in costs related to repairssoftware maintenance and maintenance of computer hardware and equipment as well as an increase in non-capitalized software costslicensing fees in support of our service and technology investments, partially offset by a decrease in rentinvestments.
Non-Operating Interest Expense and Other
Non-operating interest expense and software licensing fees.
Professional Services
Professional services includes costs paid to outside firms for assistance with legal, accounting, technology, regulatory, marketing,other include expenses from our senior secured credit facilities, senior unsecured notes, finance leases and general corporate matters, as well as non-capitalized costs related to serviceother non-operating expenses. Non-operating interest expense and technology enhancements.
Professional services remained relatively flatother for the three months ended September 30, 2017March 31, 2021 decreased compared with the same period in 2016.
The increase in professional services of $1.5 million for the nine months ended September 30, 2017 compared with the same period in 2016, respectively, wasto 2020, primarily due to an increase in costs related to outsourced service and technology enhancements.
Brokerage, Clearing, and Exchange Fees
Brokerage, clearing, and exchange fees include expenses originating from trading and clearing operations as well as any exchange membership fees. Changes in brokerage, clearing and exchange fees fluctuate largely in line with the volume of sales and trading activity.
Brokerage, clearing, and exchange fees have remained relatively flat and consistent with the volume of sales and trading activity for the three and nine months ended September 30, 2017, compared with the same periods in 2016.
Communications and Data Processing
Communications expense consists primarily of the cost of voice and data telecommunication lines supporting our business, including connectivity to data centers, exchanges, and markets. Data processing expense consists primarily of customer statement processing and postage costs.
Communications and data processing expense remained relatively flat for the three and nine months ended September 30, 2017, compared with the same periods in 2016.
Other Expenses
Other expenses include the estimated costs of the investigation, settlement, and resolution of regulatory matters, licensing fees, insurance, broker-dealer regulator fees, and other miscellaneous expenses.
The decrease in other expenses of $1 million for the three months ended September 30, 2017, compared with the same period in 2016, was primarily due toa lower costs associated with the investigation, settlement, and resolution of regulatory matters.
The increase in other expenses of $1.6 million for the nine months ended September 30, 2017, compared with the same period in 2016, was primarily driven by an increase in regulatory investigation fees, partially offset by a one time recovery related to a previously settled regulatory matter in the first quarter of 2016 that lowered other expenses for that period.
Non-Operating Interest Expense
Non-operating interest expense results from our credit facilities. Period-over-period variances correspond to higher LIBOR rates, the fixed interest rateoutstanding principal balance on our senior unsecured notes issued in March and September 2017 and an increase in interest expense related to our leasehold financing obligation, which we began recording in the fourth quarter of 2016, after the completion of our new office buildings in Fort Mill, South Carolina in October 2016.
secured term loan.
Loss on Extinguishment of Debt
On September 21, 2017,March 15, 2021, we entered into a second amendment (“closed debt transactions in which we increased the Amendment”) which amendedborrowing capacity and restatedextended the existing credit agreementmaturity date of our subsidiary LPL Holdings, Inc. (“LPLH”) and repriced our existing $500.0 million senior secured revolving credit facility to 2026, issued senior unsecured notes due in 2029 and $1,695.8 million senior secured Term Loan B facility. Additionally, we raised $400.0 million in aggregate principal amount of notes (the “Additional Notes”) as an add-on to theredeemed our existing senior unsecured notes due 2025. We used $200 million in proceeds from the offering to pay down our existing Term Loan B to $1,500 million.2025. In connection with the execution of the Amendment,these transactions, we accelerated the recognition of $1.3incurred $24.4 million of unamortized debt issuance costs as a loss on extinguishment of debt in our unaudited condensed consolidated statementsdebt.
In March 2017, we closed a refinancing of our senior secured credit facilities with a new seven year Term Loan B facility in an aggregate principal amount of $1,700.0 million and a five year revolving credit facility in an aggregate amount of $500.0 million. The proceeds of the new Term Loan B, together with the proceeds from the offering of $500.0 million aggregate principal amount of 5.75% senior notes (the "Original Notes" and together with the “Additional Notes,” the "Notes") and cash, were used to repay our then existing senior secured credit facilities and to pay accrued interest and related fees and expenses. The refinancing led to the extinguishment of the previous Term Loan A and B facilities, which required that we accelerate the recognition of $21.1 million of related unamortized debt issuance costs that had no future economic benefit, and recognize that amount as a loss on extinguishment of debt in our unaudited condensed consolidated statements of income in the first quarter of 2017.
Provision for Income Taxes
We estimate our full-year effective income tax rate at the end of each reporting period. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The tax rate in any quarter can be affected positively andor negatively by adjustments that are required to be reported in the quarter in which resolution of a particular item occurs. The effective income tax rates reflect the impact of state taxes, settlement contingencies, tax credits and expenses that are not deductible forother permanent differences in tax purposes.deductibility of certain expenses.
Our effective income tax rate was 39.8%21.5% and 23.8%25.0% for the three months ended September 30, 2017March 31, 2021 and 2016,2020, respectively.
Our The decrease in our effective income tax rate was 38.6% and 35.4% for the ninethree months ended September 30, 2017March 31, 2021 compared to 2020 was primarily due to an increase in tax benefits associated with stock compensation under Accounting Standards Codification (“ASC”) Topic 718, and 2016, respectively.a reduction in unrecognized tax benefits related to the statute of limitations.
During
COVID-19 Impact
On March 11, 2020, the third quarterWorld Health Organization designated the spread of 2016, we updated our calculationCOVID-19 as a pandemic. As of the tax benefits thatdate of this Quarterly Report on Form 10-Q, the COVID-19 pandemic has had a significant impact on global financial markets, and we continue to monitor its effects on the overall economy and our operations. We are not yet able to determine the full impact of the pandemic; however, should it continue, there could obtainbe a material and adverse financial impact to our results of operations. Please consult Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with internally developed software. The total additional tax benefit recorded during the third quarter of 2016, net of potential tax contingencies, was approximately $11.7 million.COVID-19.
Liquidity and Capital Resources
Senior management establishes ourWe have established liquidity and capital policies. These policies include senior management’s reviewintended to support the execution of short- and long-term cash flow forecasts, review of capital expenditures, and daily monitoring of liquidity for our subsidiaries. Decisions on the allocation of capital are based upon, among other things, projected profitability and cash flow, risks of the business,strategic initiatives, while meeting regulatory capital requirements and futuremaintaining ongoing and sufficient liquidity. We believe liquidity needs foris of critical importance to the Company and, in particular, to LPL Financial, our broker-dealer subsidiary. The objective of our policies is to ensure that we can meet our strategic, activities. Our Treasury Department assists in evaluating, monitoring,operational and controlling the business activities that impact our financial condition,regulatory liquidity and capital structurerequirements under both normal operating conditions and maintains relationships with various lenders. The objectivesunder periods of these policies are to support our corporate business strategies while ensuring ongoing and sufficient liquidity.stress in the financial markets.
A summary of changes in our cash flow is provided as follows (in thousands):Liquidity
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| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Net cash flows provided by (used in): | | | |
Operating activities | $ | 134,602 |
| | $ | 262,085 |
|
Investing activities | (413,556 | ) | | (96,025 | ) |
Financing activities | 109,206 |
| | (103,225 | ) |
Net (decrease) increase in cash and cash equivalents | (169,748 | ) | | 62,835 |
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Cash and cash equivalents — beginning of period | 747,709 |
| | 724,529 |
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Cash and cash equivalents — end of period | $ | 577,961 |
| | $ | 787,364 |
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Cash requirements andOur liquidity needs are primarily funded throughdriven by capital requirements at LPL Financial, interest due on our cash flow from operationscorporate debt and our capacity for additional borrowing.
Net cash provided by operating activities includes changes in operating assets and liabilities, including balances relatedcapital returns to settlement and funding of client transactions, receivables from product sponsors, and accrued commission and advisory expenses due to our advisors. Operating assets and liabilities that arise from the settlement and funding of transactions by our advisors’ clients are the principal cause of changes to our net cash from operating activities and can fluctuate significantly from day-to-day and period-to-period depending on overall trends and clients’ behaviors.
The decrease in cash flows provided by operating activities for the nine months ended September 30, 2017 compared to the same period in 2016 was primarily attributable to a decrease in cash provided by cash segregated under federal and other regulations, client receivables and an increase in cash used by payables to clients, partially offset by an increase in cash provided by advisor loans.
The increase in cash flows used in investing activities for the nine months ended September 30, 2017 compared to the same period in 2016 was attributable to the NPH acquisition.
The increase in cash flows provided by financing activities for the nine months ended September 30, 2017 compared to the same period in 2016 was primarily attributable to an increase in cash resulting from our September 2017 debt refinancing and an increase in proceeds from stock option exercises, partially offset by an increase in repurchasesholders of our common stockstock. Our liquidity needs at LPL Financial are driven primarily by the level and debt issuance costs incurredvolatility of our client activity. Management maintains a set of liquidity sources and monitors certain business trends and market metrics closely in connection with our refinancings completed in March and September 2017.
an effort to ensure we have sufficient liquidity. We believe that based on current levels of cash flows from operations and anticipated growth, cash flow from operations, together with other available external liquidity sources, of funds, which include three uncommitted lines of credit available and the revolving credit facility established through our senior secured credit agreement, will bewe have adequate liquidity to satisfy ourout working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures for the foreseeable future. In addition, we have certain
Parent Company Liquidity
LPL Holdings, Inc. (“Parent”), the direct holding company of our operating subsidiaries, considers its primary source of liquidity to be corporate cash. We define corporate cash as the sum of (1) cash held at the Parent and its non-regulated subsidiaries, (2) cash held at The Private Trust Company, N.A. (“PTC”) in excess of our senior secured credit agreement (the “Credit Agreement”) capital adequacy requirements related to our registered broker-dealer subsidiary and bank trust subsidiary and have met all such requirements and expect(3) cash held at LPL Financial in excess of 10 percent of its aggregate debits, which represents five times the net capital LPL Financial is required to continuemaintain under the terms of the Credit Agreement. We believe corporate cash is a useful measure of the Parent’s liquidity as it is the primary source of capital above and beyond the capital deployed in our regulated subsidiaries. Corporate cash is monitored as part of our liquidity risk management. We target maintaining close to do so$200 million in corporate cash to cover approximately 24 months of principal and interest due on our corporate debt. The Company maintains additional liquidity through a $1 billion secured committed revolving credit facility. The Parent has the ability to borrow against the credit facility for the foreseeable future. We regularly evaluate our existing indebtedness, including refinancing thereof, based on a number of factors, including ourworking capital requirements, future prospects, contractual restrictions, the availability of refinancing on attractive terms, and general market conditions.corporate purposes. Dividends from and excess capital generated by LPL Financial are the primary sources of corporate cash. Subject to regulatory approval or notification, capital generated by LPL Financial can be distributed to the Parent to the extent the capital levels exceed both regulatory requirements and internal capital thresholds. As of March 31, 2021, LPL Financial maintained excess regulatory capital of $42 million over Credit Agreement requirements. During the three months ended March 31, 2021, LPL Financial paid dividends of $175 million to the Parent.
Share Repurchases
We engage in share repurchase programs, which are approved by our Boardboard of Directors,directors (the “Board of Directors”), pursuant to which we may repurchase our issued and outstanding shares of common stock from time to time. Purchases may be effected in open market or privately negotiated transactions,transactions. We suspended share repurchases in early 2020 in light of the business and financial uncertainties created by the COVID-19 pandemic, which have since diminished. Our current capital deployment framework remains focused on investing in organic growth first, pursuing acquisitions where appropriate, and returning excess capital to shareholders. In the near term we are focused on allocating capital to organic growth and acquisitions, and will reassess capital deployment opportunities, including transactions with our affiliates, withshare repurchases over time. If we have excess capital to deploy beyond organic growth and acquisitions, we would consider restarting share repurchases. Also, the resumption, timing of purchases and the amount of stock purchased generallyfuture share repurchases, if any, will be determined at our discretion within the constraints of our senior secured credit agreement,Credit Agreement, the indentureindentures governing our Notes,senior unsecured notes (the “Indentures”) and consideration of our general liquidity needs.
During See Note 11 - Stockholders’ Equity, within the nine months ended September 30, 2017, we repurchased a total of 2,016,532 shares of our common stock at a weighted-average price of $41.52 per share for a total cost of $83.7 million. As of September 30, 2017, the Company was authorized to purchase up to an additional $141.3 million of shares pursuantnotes to the unaudited condensed consolidated financial statements for additional information regarding our share repurchase programs approved by the Board of Directors.repurchases.
Common Stock Dividends
The payment, timing and amount of any dividends are subject to approval by ourthe Board of Directors as well as certain limits under our senior secured credit agreementCredit Agreement and the indenture governing our Notes.Indentures. See Note 9.11 - Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our dividends.
Operating LPL Financial Liquidity
LPL Financial relies primarily on customer payables to provide liquidity and to fund margin lending. LPL Financial maintains additional liquidity through external lines of credit totaling approximately $575 million. LPL Financial also maintains a line of credit with the Parent.
External Liquidity Sources
The following table presents our external lines of credit at March 31, 2021 (dollars in millions):
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Description | Borrower | Maturity Date | Outstanding | Available |
Senior secured, revolving credit facility | LPL Holdings, Inc. | March 2026 | $ | — | | $ | 1,000 | |
Broker-dealer revolving credit facility | LPL Financial LLC | July 2024 | $ | — | | $ | 300 | |
Secured, uncommitted lines of credit | LPL Financial LLC | March 2022 | $ | — | | $ | 75 | |
Unsecured, uncommitted lines of credit | LPL Financial LLC | September 2021 | $ | — | | $ | 75 | |
Unsecured, uncommitted lines of credit | LPL Financial LLC | September 2021 | $ | — | | $ | 50 | |
Unsecured, uncommitted lines of credit | LPL Financial LLC | None | $ | — | | $ | 75 | |
Secured, uncommitted lines of credit | LPL Financial LLC | None | $ | — | | unspecified |
Secured, uncommitted lines of credit | LPL Financial LLC | None | $ | — | | unspecified |
Capital RequirementsResources
The Company seeks to manage capital levels in support of our business strategy of generating and effectively deploying capital for the benefit of our shareholders.
Our primary requirement for working capital relates to funds we loan to our advisors’ clients for trading conducted on margin and funds that we are required to maintain for regulatory capital and reserves based on the requirements of our regulators and clearing organizations, which also consider client balances and trading activities. We have several sources of funds that enable us to meet increases in working capital requirements that relate to increases in client margin activities and balances. These sources include cash and cash equivalents on hand, cash and securities segregated under federal and other regulations, the committed revolving credit facility of LPL Financial and proceeds from re-pledgingrepledging or selling client securities in margin accounts. When an advisor’s client purchases securities on margin or uses securities as collateral to borrow from us on margin, we are permitted, pursuant to the applicable securities industry regulations,
to repledge, loan or sell securities, up to 140% of the client’s margin loan balance, that collateralize those margin accounts. As of September 30, 2017, we had approximately $221.3 million of client margin loans, collateralized with securities having a fair value of approximately $309.9 million that we can re-pledge, loan, or sell. Of these securities, approximately $45.0 million were client-owned securities pledged to the Options Clearing Corporation as collateral to secure client obligations related to options positions. As of September 30, 2017, there were no restrictions that materially limited our ability to re-pledge, loan, or sell the remaining $264.9 million of client collateral.
Our other working capital needs are primarily related to advisor loans we are making to advisors and timing associated with receivables and payables, which we have satisfied in the past from internally generated cash flows.
Notwithstanding the self-funding nature
We may sometimes be required to fund timing differences arising from the delayed receipt of client funds associated with the settlement of client transactions in securities markets. These timing differences are funded either with internally generated cash flowflows or, if needed, with funds drawn on our uncommitted lines of credit at our broker-dealer subsidiary LPL Financial or under one of our revolving credit facility.facilities.
Our registered broker-dealer, LPL Financial is subject to the SEC’sSecurities and Exchange Commission’s (“SEC”) Uniform Net Capital Rule, which requires the maintenance of minimum net capital. LPL Financial computes net capital requirements under the alternative method, which requires firms to maintain minimum net capital as defined, equal to the greater of $250,000 or 2.0%2% of aggregate debit balances arising from client transactions. At September 30, 2017,March 31, 2021, LPL Financial had net capital of $166.5$98.9 million with a minimum net capital requirement of $6.8$11.5 million.
LPL Financial’s ability to pay dividends greater than 10% of its excess net capital during any 35 day35-day rolling period requires approval from the Financial Industry Regulatory Authority (“FINRA”). In addition, payment of dividends is restricted if LPL Financial’s net capital would be less than 5% of aggregate customer debit balances.
LPL Financial also acts as an introducing broker for commodities and futures. Accordingly, its trading activities are subject to the National Futures Association’s (“NFA”) financial requirements and it is required to maintain net capital that is in excess of or equal to the greatest of NFA’s minimum financial requirements. The NFA was designated by the Commodity Futures Trading Commission as LPL Financial’s primary regulator for such activities. Currently, the highest NFA requirement is the minimum net capital calculated and required pursuant to the SEC’s Net Capital Rule.
Our subsidiary, The Private Trust Company, N.A. (“PTC”),PTC, is also subject to various regulatory capital requirements. Failure to meet the respective minimum capital requirements can initiateresult in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC’s operations.
Debt and Related Covenants
On September 21, 2017, we entered into the Amendment and refinanced our existing $500.0 million senior secured revolving credit facility and $1,695.8 million of existing senior secured Term Loan B facility. Additionally, we raised $400.0 million in aggregate principal amount of Additional Notes as an add-on to the Original Notes. The Additional Notes are governed by the same indenture, and have the same terms, as the Original Notes. We used $200 million in proceeds from the offering to pay down our Term Loan B to $1,500 million. As of September 30, 2017 our revolving credit facility remained undrawn. See Note 7. Debt, within the notes to the unaudited condensed consolidated financial statements for further detail.
The Credit Agreement and the indenture governing the NotesIndentures contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:
•incur additional indebtedness or issue disqualified stock or preferred stock;
pay•declare dividends, on, or other distributions to stockholders;
•repurchase equity interests;
•redeem or repurchase our capital stock;
create liens;
sell assets;
make investments or acquisitions;
redeem debtindebtedness that is subordinated in right of payment to certain debt instruments;
•make investments or acquisitions;
•create liens;
•sell assets;
•guarantee indebtedness;
•engage in certain transactions with affiliates;
•enter into agreements that restrict dividends or other payments from subsidiaries; and
•consolidate, merge or transfer all or substantially all orof our assets.
Our Credit Agreement and the Indentures allow us to pay dividends and distributions or repurchase our capital stock only when certain conditions are met. In addition, our revolving credit facility requires us to be in compliance with certain financial covenants as of the last day of each fiscal quarter. The financial covenants require the calculation of Credit Agreement EBITDA, a non-GAAP measure, isas defined in, and calculated by management in accordance with, the Credit Agreement. The Credit Agreement defines Credit Agreement EBITDA as “Consolidated EBITDA”,EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense, tax expense, depreciation and amortization, and further adjusted to exclude certain non-cash charges and other adjustments (including unusual or non-recurring charges) and gains. We present Credit Agreement EBITDA becausegains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions.
As of March 31, 2021, we believe that it can be a usefulwere in compliance with both financial metric in understanding our debt capacity and covenant compliance. However, Credit Agreement EBITDA is not a measure of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of profitability or liquidity. In addition, our Credit Agreement-defined EBITDA measure can differ significantly from adjusted EBITDA calculated by other companies, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, and capital investments.
Set forth below is a reconciliation from our net income to Credit Agreement EBITDA for the twelve months ended September 30, 2017 (in thousands):
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| | | |
Net income | $ | 216,501 |
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Non-operating interest expense | 103,026 |
|
Provision for income taxes | 133,122 |
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Loss on extinguishment of debt | 22,407 |
|
Depreciation and amortization | 83,716 |
|
Amortization of intangible assets | 37,795 |
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EBITDA | 596,567 |
|
Credit Agreement Adjustments: | |
Employee share-based compensation expense(1) | 19,973 |
|
Advisor share-based compensation expense(2) | 9,933 |
|
Other(3) | 28,699 |
|
Credit Agreement EBITDA(4) | $ | 655,172 |
|
_______________________________ | |
(1) | Represents share-based compensation for equity awards granted to employees, officers, and directors. Such awards are measured based on the grant-date fair value and recognized over the requisite service period of the individual awards, which generally equals the vesting period. |
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(2) | Represents share-based compensation for equity awards granted to advisors and to financial institutions based on the fair value of the awards at each reporting period. |
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(3) | Represents other items that are adjustable in accordance with our Credit Agreement to arrive at Credit Agreement EBITDA including employee severance costs, employee signing costs, employee retention or completion bonuses, and other non-recurring costs. |
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(4) | Under the Credit Agreement, management calculates Credit Agreement EBITDA for a four-quarter period at the end of each fiscal quarter, and in so doing may make further adjustments to prior quarters. |
Our Credit Agreement and the indenture governing the Notes prohibit us from paying dividends and distributions or repurchasing our capital stock except for limited purposes or in limited amounts. In addition, our revolving credit facility requires compliance withcovenants, a maximum Consolidated Total Debt to Consolidated EBITDA Ratio ("Leverage Test", as(as defined in the Credit Agreement) or “Leverage Ratio” and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio ("Interest Coverage", as(as defined in the Credit Agreement), tested as of the last day of each fiscal quarter. or “Interest Coverage”. The breach of this covenant isthese financial covenants would be subject to certain equity cure rights.
As of September 30, 2017, we were in compliance with all of our revolving credit facility covenant requirements. The maximum permittedrequired ratios under our financial covenants and actual ratios were as follows:
| | | | | | | | | | | |
| March 31, 2021 |
Financial Ratio | Covenant Requirement | | Actual Ratio |
Leverage Ratio (Maximum) | 5.00 | | 2.11 |
Interest Coverage (Minimum) | 3.00 | | 10.24 |
See Note 8 - Long-term and Other Borrowings, within the notes to the unaudited condensed consolidated financial statements for further detail regarding the Credit Agreement and the Indentures.
|
| | | |
Financial Ratio | Covenant Requirement | | Actual Ratio |
Leverage Test (Maximum) | 5.00 | | 3.21 |
Interest Coverage (Minimum) | 3.00 | | 6.88 |
Off-Balance Sheet Arrangements
We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet the needs of our advisors’ clients. These arrangements include Company commitments to extend credit. For information on these arrangements, see Note 8.10 - Commitments and Contingencies and Note 14.17 - Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk,, within the notes to the unaudited condensed consolidated financial statements.
Contractual Obligations
During the ninethree months ended September 30, 2017,March 31, 2021, there have beenwere no material changes in our contractual obligations, other than the Asset Purchase Agreement, the Amendment and in the ordinary course of business, from those disclosed in our 20162020 Annual Report on Form 10-K. See Note 8 - Note 7. DebtLong-term and Other Borrowings and Note 8.10 - Commitments and Contingencies, within the notes to the unaudited condensed consolidated financial statements, as well as the Contractual Obligations section within Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 20162020 Annual Report on Form 10-K, for further detail on operating lease obligations and obligations under noncancelable service contracts.detail.
Fair Value of Financial Instruments
We use fair value measurements to record certain financial assets and liabilities at fair value and to determine fair value disclosures. See Note 45 - . Fair Value Measurements, within the notes to the unaudited condensed consolidated financial statements for a detailed discussion regarding our fair value measurements.
Critical Accounting Policies and Estimates
In the notes to our consolidated financial statements and in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 20162020 Annual Report on Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of operations and financial condition. There have been no material changes to those policies that we consider to be significantmaterial since the filing of our 20162020 Annual Report on Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to GAAP.
Recently Issued Accounting Pronouncements
Refer to Note 2. Summary of Significant Accounting Policies, within the notes to the unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to us.
Item 1. Financial Statements (unaudited)
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
| | | | | | | | | | | | Three Months Ended March 31, | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | 2021 | | 2020 | |
REVENUES | | 2017 | | 2016 | | 2017 | | 2016 | REVENUES | | | | | |
Advisory | | Advisory | | $ | 722,046 | | | $ | 579,027 | | |
Commission | | $ | 403,011 |
| | $ | 431,686 |
| | $ | 1,244,881 |
| | $ | 1,314,168 |
| Commission | | 557,229 | | | 503,444 | | |
Advisory | | 356,945 |
| | 321,911 |
| | 1,033,319 |
| | 964,298 |
| |
Asset-based | | 183,953 |
| | 138,291 |
| | 514,626 |
| | 412,339 |
| Asset-based | | 264,706 | | | 285,506 | | |
Transaction and fee | | 103,999 |
| | 108,413 |
| | 321,522 |
| | 312,927 |
| Transaction and fee | | 140,944 | | | 137,096 | | |
Interest income, net of interest expense | | 6,162 |
| | 5,372 |
| | 17,931 |
| | 15,940 |
| |
Interest income | | Interest income | | 6,518 | | | 9,542 | | |
Other | | 10,038 |
| | 11,767 |
| | 32,760 |
| | 22,254 |
| Other | | 16,174 | | | (51,218) | | |
Total net revenues | | 1,064,108 |
| | 1,017,440 |
| | 3,165,039 |
| | 3,041,926 |
| |
Total revenues | | Total revenues | | 1,707,617 | | | 1,463,397 | | |
EXPENSES | | | | | | | | |
| EXPENSES | | | | | |
Commission and advisory | | 663,765 |
| | 657,432 |
| | 1,971,874 |
| | 1,954,123 |
| |
Advisory and commission | | Advisory and commission | | 1,108,899 | | | 870,795 | | |
Compensation and benefits | | 113,659 |
| | 107,988 |
| | 337,170 |
| | 327,816 |
| Compensation and benefits | | 161,540 | | | 146,802 | | |
Promotional | | 42,935 |
| | 42,609 |
| | 111,595 |
| | 113,010 |
| Promotional | | 54,181 | | | 57,398 | | |
Depreciation and amortization | | 21,996 |
| | 18,434 |
| | 63,933 |
| | 56,145 |
| Depreciation and amortization | | 35,499 | | | 26,644 | | |
Amortization of intangible assets | | 9,352 |
| | 9,502 |
| | 28,296 |
| | 28,536 |
| Amortization of intangible assets | | 17,431 | | | 16,570 | | |
Occupancy and equipment | | 22,803 |
| | 23,530 |
| | 70,989 |
| | 67,347 |
| Occupancy and equipment | | 43,584 | | | 39,546 | | |
Professional services | | 16,438 |
| | 17,045 |
| | 50,732 |
| | 49,184 |
| Professional services | | 15,625 | | | 14,605 | | |
Brokerage, clearing, and exchange | | 13,491 |
| | 13,098 |
| | 41,567 |
| | 40,296 |
| |
Brokerage, clearing and exchange | | Brokerage, clearing and exchange | | 19,364 | | | 17,024 | | |
Communications and data processing | | 10,866 |
| | 10,333 |
| | 32,525 |
| | 31,801 |
| Communications and data processing | | 11,993 | | | 10,835 | | |
Other | | 24,376 |
| | 25,356 |
| | 71,140 |
| | 69,512 |
| Other | | 24,900 | | | 26,228 | | |
Total operating expenses | | 939,681 |
| | 925,327 |
| | 2,779,821 |
| | 2,737,770 |
| Total operating expenses | | 1,493,016 | | | 1,226,447 | | |
Non-operating interest expense | | 26,519 |
| | 23,889 |
| | 78,131 |
| | 71,583 |
| |
Non-operating interest expense and other | | Non-operating interest expense and other | | 25,059 | | | 29,318 | | |
Loss on extinguishment of debt | | 1,268 |
| | — |
| | 22,407 |
| | — |
| Loss on extinguishment of debt | | 24,400 | | | 0 | | |
INCOME BEFORE PROVISION FOR INCOME TAXES | | 96,640 |
| | 68,224 |
| | 284,680 |
| | 232,573 |
| INCOME BEFORE PROVISION FOR INCOME TAXES | | 165,142 | | | 207,632 | | |
PROVISION FOR INCOME TAXES | | 38,498 |
| | 16,270 |
| | 109,915 |
| | 82,378 |
| PROVISION FOR INCOME TAXES | | 35,522 | | | 51,991 | | |
NET INCOME | | $ | 58,142 |
| | $ | 51,954 |
| | $ | 174,765 |
| | $ | 150,195 |
| NET INCOME | | $ | 129,620 | | | $ | 155,641 | | |
EARNINGS PER SHARE (Note 11) | | | | | | | | |
| |
EARNINGS PER SHARE (Note 13) | | EARNINGS PER SHARE (Note 13) | | | | | |
Earnings per share, basic | | $ | 0.65 |
| | $ | 0.58 |
| | $ | 1.94 |
| | $ | 1.69 |
| Earnings per share, basic | | $ | 1.63 | | | $ | 1.96 | | |
Earnings per share, diluted | | $ | 0.63 |
| | $ | 0.58 |
| | $ | 1.90 |
| | $ | 1.67 |
| Earnings per share, diluted | | $ | 1.59 | | | $ | 1.92 | | |
Weighted-average shares outstanding, basic | | 89,967 |
| | 89,092 |
| | 90,029 |
| | 89,025 |
| Weighted-average shares outstanding, basic | | 79,697 | | | 79,507 | | |
Weighted-average shares outstanding, diluted | | 92,042 |
| | 89,951 |
| | 92,027 |
| | 89,732 |
| Weighted-average shares outstanding, diluted | | 81,622 | | | 81,166 | | |
See notes to unaudited condensed consolidated financial statements.
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive IncomeFinancial Condition
(Unaudited)
(In thousands)
thousands, except share data)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
NET INCOME | | $ | 58,142 |
| | $ | 51,954 |
| | $ | 174,765 |
| | $ | 150,195 |
|
Other comprehensive income, net of tax: | | | | | | | | |
Unrealized gain (loss) on cash flow hedges, net of tax expense (benefit) of $0, $85, $187 and $133 for the three and nine months ended September 30, 2017 and 2016, respectively | | — |
| | 135 |
| | 293 |
| | 209 |
|
Reclassification adjustment for realized gain on cash flow hedges included in the condensed consolidated statements of income, net of tax expense of $0, $48, $406, and $204 for the three and nine months ended September 30, 2017 and 2016, respectively | | — |
| | (70 | ) | | (608 | ) | | (318 | ) |
Total other comprehensive income (loss), net of tax | | — |
| | 65 |
| | (315 | ) | | (109 | ) |
TOTAL COMPREHENSIVE INCOME | | $ | 58,142 |
| | $ | 52,019 |
| | $ | 174,450 |
| | $ | 150,086 |
|
| | | | | | | | | | | | |
ASSETS | | March 31, 2021 | | December 31, 2020 |
Cash and cash equivalents | | $ | 839,144 | | | $ | 808,612 | |
Cash segregated under federal and other regulations | | 839,428 | | | 923,158 | |
Restricted cash | | 73,507 | | | 67,264 | |
Receivables from: | | | | |
Clients, net of allowance of $615 at March 31, 2021 and $520 at December 31, 2020 | | 453,132 | | | 405,106 | |
Product sponsors, broker-dealers and clearing organizations | | 240,465 | | | 233,192 | |
Advisor loans, net of allowance of $7,362 at March 31, 2021 and $6,763 at December 31, 2020 | | 558,144 | | | 547,372 | |
Others, net of allowance of $3,238 at March 31, 2021 and $3,101 at December 31, 2020 | | 351,443 | | | 306,640 | |
Securities owned: | | | | |
Trading — at fair value | | 47,964 | | | 29,252 | |
Held-to-maturity — at amortized cost | | 11,972 | | | 13,235 | |
Securities borrowed | | 13,565 | | | 30,130 | |
| | | | |
Fixed assets, net of accumulated depreciation and amortization of $524,766 at March 31, 2021 and $489,997 at December 31, 2020 | | 588,736 | | | 582,868 | |
Operating lease assets | | 99,306 | | | 101,921 | |
Goodwill | | 1,513,866 | | | 1,513,866 | |
Intangible assets, net of accumulated amortization of $629,442 at March 31, 2021 and $612,011 at December 31, 2020 | | 383,794 | | | 397,486 | |
Deferred income taxes, net | | 24,246 | | | 24,112 | |
Other assets | | 576,699 | | | 539,357 | |
Total assets | | $ | 6,615,411 | | | $ | 6,523,571 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
LIABILITIES: |
Drafts payable | | $ | 151,397 | | | $ | 178,403 | |
Payables to clients | | 1,294,664 | | | 1,356,083 | |
Payables to broker-dealers and clearing organizations | | 125,563 | | | 89,743 | |
Accrued advisory and commission expenses payable | | 195,044 | | | 187,040 | |
Accounts payable and accrued liabilities | | 655,787 | | | 681,554 | |
Income taxes payable | | 58,546 | | | 28,145 | |
Unearned revenue | | 123,152 | | | 95,328 | |
Securities sold, but not yet purchased — at fair value | | 1,316 | | | 206 | |
Long-term and other borrowings, net | | 2,332,809 | | | 2,345,414 | |
Operating lease liabilities | | 136,419 | | | 139,377 | |
Finance lease liabilities | | 106,393 | | | 107,424 | |
| | | | |
| | | | |
Total liabilities | | 5,181,090 | | | 5,208,717 | |
Commitments and contingencies (Note 10) | | | | |
STOCKHOLDERS’ EQUITY: | | | | |
Common stock, $0.001 par value; 600,000,000 shares authorized; 128,136,874 shares issued at March 31, 2021 and 127,585,764 shares issued at December 31, 2020 | | 128 | | | 127 | |
Additional paid-in capital | | 1,787,095 | | | 1,762,770 | |
Treasury stock, at cost — 48,210,851 shares at March 31, 2021 and 48,115,037 shares at December 31, 2020 | | (2,406,221) | | | (2,391,062) | |
| | | | |
Retained earnings | | 2,053,319 | | | 1,943,019 | |
Total stockholders’ equity | | 1,434,321 | | | 1,314,854 | |
Total liabilities and stockholders’ equity | | $ | 6,615,411 | | | $ | 6,523,571 | |
See notes to unaudited condensed consolidated financial statements.
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIESCondensed Consolidated Statements of Financial Condition
(Unaudited)
(In thousands, except share data)
|
| | | | | | | | |
ASSETS | | September 30, 2017 | | December 31, 2016 |
Cash and cash equivalents | | $ | 577,961 |
| | $ | 747,709 |
|
Cash and securities segregated under federal and other regulations | | 754,683 |
| | 768,219 |
|
Restricted cash | | 45,224 |
| | 42,680 |
|
Receivables from: | | | | |
Clients, net of allowance of $490 at September 30, 2017 and $1,580 at December 31, 2016 | | 391,650 |
| | 341,199 |
|
Product sponsors, broker-dealers, and clearing organizations | | 179,576 |
| | 175,122 |
|
Advisor loans, net of allowance of $3,660 at September 30, 2017 and $1,852 at December 31, 2016 | | 184,328 |
| | 194,526 |
|
Others, net of allowance of $6,351 at September 30, 2017 and $12,851 at December 31, 2016 | | 214,235 |
| | 189,632 |
|
Securities owned: | | | | |
Trading — at fair value | | 13,419 |
| | 11,404 |
|
Held-to-maturity — at amortized cost | | 11,832 |
| | 8,862 |
|
Securities borrowed | | 16,655 |
| | 5,559 |
|
Fixed assets, net of accumulated depreciation and amortization of $410,902 at September 30, 2017 and $355,919 at December 31, 2016 | | 402,246 |
| | 387,368 |
|
Goodwill | | 1,365,838 |
| | 1,365,838 |
|
Intangible assets, net of accumulated amortization of $409,070 at September 30, 2017 and $380,775 at December 31, 2016 | | 325,700 |
| | 353,996 |
|
National Planning Holdings acquisition payment | | 325,000 |
| | — |
|
Other assets | | 249,926 |
| | 242,812 |
|
Total assets | | $ | 5,058,273 |
| | $ | 4,834,926 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
LIABILITIES: |
Drafts payable | | $ | 153,366 |
| | $ | 198,839 |
|
Payables to clients | | 767,250 |
| | 863,765 |
|
Payables to broker-dealers and clearing organizations | | 53,239 |
| | 63,032 |
|
Accrued commission and advisory expenses payable | | 133,133 |
| | 128,476 |
|
Accounts payable and accrued liabilities | | 403,723 |
| | 385,545 |
|
Income taxes payable | | 11,440 |
| | 4,607 |
|
Unearned revenue | | 73,551 |
| | 62,785 |
|
Securities sold, but not yet purchased — at fair value | | 135 |
| | 183 |
|
Long-term debt, net of unamortized debt issuance cost of $23,637 at September 30, 2017 and $21,924 at December 31, 2016 | | 2,388,321 |
| | 2,175,436 |
|
Leasehold financing and capital lease obligations | | 108,223 |
| | 105,649 |
|
Deferred income taxes, net | | 25,327 |
| | 25,614 |
|
Total liabilities | | 4,117,708 |
| | 4,013,931 |
|
Commitments and contingencies (Note 8) | | | | |
STOCKHOLDERS’ EQUITY: | | | | |
Common stock, $.001 par value; 600,000,000 shares authorized; 122,825,821 shares issued at September 30, 2017 and 119,917,854 shares issued at December 31, 2016 | | 123 |
| | 120 |
|
Additional paid-in capital | | 1,543,428 |
| | 1,445,256 |
|
Treasury stock, at cost — 32,665,566 shares at September 30, 2017 and 30,621,270 shares at December 31, 2016 | | (1,279,700 | ) | | (1,194,645 | ) |
Accumulated other comprehensive income | | — |
| | 315 |
|
Retained earnings | | 676,714 |
| | 569,949 |
|
Total stockholders’ equity | | 940,565 |
| | 820,995 |
|
Total liabilities and stockholders’ equity | | $ | 5,058,273 |
| | $ | 4,834,926 |
|
See notes to unaudited condensed consolidated financial statements.
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 2020 |
| | | | | Additional Paid-In Capital | | | | | | Accumulated Other Comprehensive Income (loss) | | Retained Earnings | | Total Stockholders’ Equity | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (loss) | | Retained Earnings | | Total Stockholders’ Equity |
| Common Stock | | Treasury Stock | | | Common Stock | | Treasury Stock | |
| Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | |
BALANCE — December 31, 2015 | 119,572 |
| | $ | 119 |
| | $ | 1,418,298 |
| | 30,048 |
| | $ | (1,172,490 | ) | | $ | 553 |
| | $ | 469,130 |
| | $ | 715,610 |
| |
Net income and other comprehensive income (loss), net of tax expense | | | | | | | | | | | (109 | ) | | 150,195 |
| | 150,086 |
| |
BALANCE — December 31, 2019 | | BALANCE — December 31, 2019 | 126,494 | | | $ | 126 | | | $ | 1,703,973 | | | 46,260 | | | $ | (2,234,793) | | | $ | 0 | | | $ | 1,554,567 | | | $ | 1,023,873 | |
Cumulative effect of accounting change | | Cumulative effect of accounting change | | (7,317) | | | (7,317) | |
Net income, net of tax expense | | Net income, net of tax expense | | 0 | | | 155,641 | | | 155,641 | |
Issuance of common stock to settle restricted stock units, net | 141 |
| | 1 |
| |
|
| | 49 |
| | (1,099 | ) | | | | | | (1,098 | ) | Issuance of common stock to settle restricted stock units, net | 315 | | | 0 | | | 0 | | | 122 | | | (8,370) | | | (8,370) | |
Treasury stock purchases | | | | | | | 635 |
| | (25,013 | ) | | | | | | (25,013 | ) | Treasury stock purchases | | 1,810 | | | (150,036) | | | (150,036) | |
Cash dividends on common stock | | | | | | | | | | | | | (66,773 | ) | | (66,773 | ) | Cash dividends on common stock | | (19,713) | | | (19,713) | |
Stock option exercises and other | 54 |
| |
|
| | 1,321 |
| | (93 | ) | | 3,320 |
| | | | (1,745 | ) | | 2,896 |
| Stock option exercises and other | 227 | | | 1 | | | 6,971 | | | (14) | | | 487 | | | 488 | | | 7,947 | |
Share-based compensation |
|
| | | | 16,875 |
| | | | | | | | | | 16,875 |
| Share-based compensation | — | | | 9,332 | | | 9,332 | |
Excess tax benefits (tax deficiency) from share-based compensation | | | | | (1,457 | ) | | | | | | | | | | (1,457 | ) | |
BALANCE — September 30, 2016 | 119,767 |
| | $ | 120 |
| | $ | 1,435,037 |
| | 30,639 |
| | $ | (1,195,282 | ) | | $ | 444 |
| | $ | 550,807 |
| | $ | 791,126 |
| |
BALANCE — December 31, 2016 | 119,918 |
| | $ | 120 |
| | $ | 1,445,256 |
| | 30,621 |
| | $ | (1,194,645 | ) | | $ | 315 |
| | $ | 569,949 |
| | $ | 820,995 |
| |
Net income and other comprehensive income (loss), net of tax expense | | | | | | | | | | | (315 | ) | | 174,765 |
| | 174,450 |
| |
| BALANCE — March 31, 2020 | | BALANCE — March 31, 2020 | 127,036 | | | $ | 127 | | | $ | 1,720,276 | | | 48,178 | | | $ | (2,392,712) | | | $ | 0 | | | $ | 1,683,666 | | | $ | 1,011,357 | |
| | | | Three Months Ended March 31, 2021 |
| | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (loss) | | Retained Earnings | | Total Stockholders’ Equity |
| | | Common Stock | | Treasury Stock | |
| | | Shares | | Amount | | Shares | | Amount | |
BALANCE — December 31, 2020 | | BALANCE — December 31, 2020 | 127,586 | | | $ | 127 | | | $ | 1,762,770 | | | 48,115 | | | $ | (2,391,062) | | | $ | 0 | | | $ | 1,943,019 | | | $ | 1,314,854 | |
| Net income, net of tax expense | | Net income, net of tax expense | | 0 | | | 129,620 | | | 129,620 | |
Issuance of common stock to settle restricted stock units, net | 350 |
| |
|
| | — |
| | 79 |
| | (3,155 | ) | | | | | | (3,155 | ) | Issuance of common stock to settle restricted stock units, net | 296 | | | 0 | | | 0 | | | 120 | | | (16,030) | | | (16,030) | |
Treasury stock purchases | | | | | | | 2,017 |
| | (83,721 | ) | | | | | | (83,721 | ) | |
| Cash dividends on common stock | | | | | | | | | | | | | (67,765 | ) | | (67,765 | ) | Cash dividends on common stock | | (19,980) | | | (19,980) | |
Stock option exercises and other | 2,558 |
| | 3 |
| | 76,287 |
| | (51 | ) | | 1,821 |
| | | | (235 | ) | | 77,876 |
| Stock option exercises and other | 255 | | | 1 | | | 12,348 | | | (24) | | | 871 | | | 660 | | | 13,880 | |
Share-based compensation | | | | | 21,885 |
| | | | | | | | | | 21,885 |
| Share-based compensation | | 11,977 | | | 11,977 | |
BALANCE — September 30, 2017 | 122,826 |
| | $ | 123 |
| | $ | 1,543,428 |
| | 32,666 |
| | $ | (1,279,700 | ) | | $ | — |
| | $ | 676,714 |
| | $ | 940,565 |
| |
| BALANCE — March 31, 2021 | | BALANCE — March 31, 2021 | 128,137 | | | $ | 128 | | | $ | 1,787,095 | | | 48,211 | | | $ | (2,406,221) | | | $ | 0 | | | $ | 2,053,319 | | | $ | 1,434,321 | |
See notes to unaudited condensed consolidated financial statements.
| | | | | | | | | | | | | | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES |
Condensed Consolidated Statements of Cash Flows |
(Unaudited) |
(In thousands) |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
Net income | | $ | 129,620 | | | $ | 155,641 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| | | | |
Depreciation and amortization | | 35,499 | | | 26,644 | |
Amortization of intangible assets | | 17,431 | | | 16,570 | |
Amortization of debt issuance costs | | 1,306 | | | 1,348 | |
Share-based compensation | | 11,977 | | | 9,332 | |
| | | | |
Provision for bad debts | | 1,977 | | | 2,691 | |
Deferred income taxes | | (133) | | | (89) | |
Loss on extinguishment of debt | | 24,400 | | | 0 | |
Loan forgiveness | | 29,966 | | | 25,714 | |
Other | | (2,624) | | | (1,841) | |
Changes in operating assets and liabilities: | | | | |
Receivables from clients | | (48,120) | | | 73,192 | |
Receivables from product sponsors, broker-dealers and clearing organizations | | (7,273) | | | (41,036) | |
Advisor loans | | (41,337) | | | (48,013) | |
Receivables from others | | (45,002) | | | (56,089) | |
Securities owned | | (18,399) | | | 15,221 | |
Securities borrowed | | 16,565 | | | 1,757 | |
Operating leases | | (343) | | | (371) | |
Other assets | | (39,205) | | | (51,675) | |
Drafts payable | | (27,006) | | | (68,804) | |
Payables to clients | | (61,419) | | | 270,009 | |
Payables to broker-dealers and clearing organizations | | 35,820 | | | 25,858 | |
Accrued advisory and commission expenses payable | | 8,004 | | | (18,970) | |
Accounts payable and accrued liabilities | | (20,629) | | | (27,763) | |
Income taxes receivable/payable | | 30,401 | | | 45,153 | |
Unearned revenue | | 27,824 | | | 26,578 | |
Securities sold, but not yet purchased | | 1,110 | | | 119 | |
Net cash provided by operating activities | | 60,410 | | | 381,176 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | |
Capital expenditures | | (41,109) | | | (33,973) | |
| | | | |
| | | | |
Purchase of securities classified as held-to-maturity | | 0 | | | (3,793) | |
Proceeds from maturity of securities classified as held-to-maturity | | 1,250 | | | 1,250 | |
Net cash used in investing activities | | (39,859) | | | (36,516) | |
| | | | |
Continued on following page |
|
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES |
Condensed Consolidated Statements of Cash Flows |
(Unaudited) |
(In thousands) |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
Proceeds from revolving credit facilities | | 225,000 | | | 616,000 | |
Repayments of revolving credit facilities | | (225,000) | | | (545,000) | |
Repayment of senior unsecured notes | | (900,000) | | | 0 | |
Repayment of senior secured term loans | | (2,675) | | | (2,675) | |
Proceeds from senior unsecured notes | | 900,000 | | | 0 | |
Payment of debt issuance costs | | (12,150) | | | 0 | |
Make-whole premium on redemption of senior unsecured notes | | (25,875) | | | 0 | |
Payment of contingent consideration | | (3,645) | | | (10,000) | |
Tax payments related to settlement of restricted stock units | | (16,030) | | | (8,370) | |
Repurchase of common stock | | 0 | | | (150,036) | |
Dividends on common stock | | (19,980) | | | (19,713) | |
| | | | |
Proceeds from stock option exercises and other | | 13,880 | | | 7,947 | |
Principal payment of finance leases and obligations | | (1,031) | | | (996) | |
Net cash used in financing activities | | (67,506) | | | (112,843) | |
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | (46,955) | | | 231,817 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH — Beginning of period | | 1,799,034 | | | 1,471,778 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH — End of period | | $ | 1,752,079 | | | $ | 1,703,595 | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | |
Interest paid | | $ | 33,729 | | | $ | 37,842 | |
Income taxes paid | | $ | 5,101 | | | $ | 6,928 | |
NONCASH DISCLOSURES: | | | | |
Capital expenditures included in accounts payable and accrued liabilities | | $ | 11,535 | | | $ | 15,031 | |
Lease assets obtained in exchange for operating lease liabilities | | $ | 0 | | | $ | 3,447 | |
| | | | |
| | | | |
| | | | |
| | | | |
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
Net income | | $ | 174,765 |
| | $ | 150,195 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Noncash items: | | | | |
Depreciation and amortization | | 63,933 |
| | 56,145 |
|
Amortization of intangible assets | | 28,296 |
| | 28,536 |
|
Amortization of debt issuance costs | | 3,272 |
| | 4,318 |
|
Share-based compensation | | 21,885 |
| | 16,875 |
|
Excess tax benefits related to share-based compensation | | — |
| | (20 | ) |
Provision for bad debts | | 2,993 |
| | 2,885 |
|
Deferred income tax provision | | (68 | ) | | (194 | ) |
Loss on extinguishment of debt | | 22,407 |
| | — |
|
Loan forgiveness | | 39,713 |
| | 32,646 |
|
Other | | (11,876 | ) | | (3,522 | ) |
Changes in operating assets and liabilities: | | | | |
Cash and securities segregated under federal and other regulations | | 13,536 |
| | 74,225 |
|
Deposit of restricted cash related to captive insurance subsidiary | | (14,068 | ) | | (15,939 | ) |
Release of restricted cash related to captive insurance subsidiary | | 11,527 |
| | 3,863 |
|
Receivables from clients | | (49,360 | ) | | 46,376 |
|
Receivables from product sponsors, broker-dealers, and clearing organizations | | (4,454 | ) | | (15,518 | ) |
Advisor loans | | (31,323 | ) | | (62,592 | ) |
Receivables from others | | (18,103 | ) | | (14,343 | ) |
Securities owned | | (1,347 | ) | | 686 |
|
Securities borrowed | | (11,096 | ) | | (4,446 | ) |
Other assets | | 6,305 |
| | 1,657 |
|
Drafts payable | | (45,473 | ) | | (27,639 | ) |
Payables to clients | | (96,515 | ) | | (32,132 | ) |
Payables to broker-dealers and clearing organizations | | (9,793 | ) | | 3,858 |
|
Accrued commission and advisory expenses payable | | 4,656 |
| | (263 | ) |
Accounts payable and accrued liabilities | | 17,239 |
| | 20,095 |
|
Income taxes receivable/payable | | 6,833 |
| | (10,964 | ) |
Unearned revenue | | 10,766 |
| | 7,479 |
|
Securities sold, but not yet purchased | | (48 | ) | | (182 | ) |
Net cash provided by operating activities | | $ | 134,602 |
| | $ | 262,085 |
|
| | | | |
Continued on following page |
| | | | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIESThe following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial condition that sum to the total of the same such amounts shown in the statement of cash flows.
Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
(In thousands)
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | |
Capital expenditures | | $ | (85,597 | ) | | $ | (97,448 | ) |
Proceeds from disposal of fixed assets | | 12 |
| | — |
|
Purchase of securities classified as held-to-maturity | | (5,969 | ) | | (4,020 | ) |
Proceeds from maturity of securities classified as held-to-maturity | | 3,000 |
| | 4,000 |
|
National Planning Holdings acquisition payment | | (325,000 | ) | | — |
|
Deposits of restricted cash | | (2 | ) | | — |
|
Release of restricted cash | | — |
| | 1,443 |
|
Net cash used in investing activities | | (413,556 | ) | | (96,025 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
Repayment of senior secured term loans | | (2,401,610 | ) | | (13,257 | ) |
Proceeds from senior secured term loans and senior notes | | 2,611,594 |
| | — |
|
Payment of debt issuance costs | | (22,676 | ) | | — |
|
Tax payments related to settlement of restricted stock units | | (3,155 | ) | | (1,098 | ) |
Repurchase of common stock | | (83,721 | ) | | (25,013 | ) |
Dividends on common stock | | (67,765 | ) | | (66,773 | ) |
Excess tax benefits related to share-based compensation | | — |
| | 20 |
|
Proceeds from stock option exercises and other | | 77,876 |
| | 2,896 |
|
Payment of leasehold financing obligation | | (1,337 | ) | | — |
|
Net cash provided by (used in) financing activities | | 109,206 |
| | (103,225 | ) |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | (169,748 | ) | | 62,835 |
|
CASH AND CASH EQUIVALENTS — Beginning of period | | 747,709 |
| | 724,529 |
|
CASH AND CASH EQUIVALENTS — End of period | | $ | 577,961 |
| | $ | 787,364 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | |
Interest paid | | $ | 77,253 |
| | $ | 69,170 |
|
Income taxes paid | | $ | 103,157 |
| | $ | 94,997 |
|
NONCASH DISCLOSURES: | | | | |
Capital expenditures included in accounts payable and accrued liabilities | | $ | 12,280 |
| | $ | 20,931 |
|
Finance and capital lease obligations | | $ | 3,906 |
| | $ | 45,998 |
|
Debt issuance cost included in accounts payable and accrued liabilities | | $ | 1,390 |
| | $ | — |
|
Discount on proceeds from senior secured credit facilities recorded as debt issuance cost | | $ | 5,040 |
| | $ | — |
|
| | | | | | | | | | | | | | |
| | March 31, |
| | 2021 | | 2020 |
Cash and cash equivalents | | $ | 839,144 | | | $ | 418,202 | |
Cash segregated under federal and other regulations | | 839,428 | | | 1,217,692 | |
Restricted cash | | 73,507 | | | 67,701 | |
Total cash, cash equivalents and restricted cash shown in the statement of cash flows | | $ | 1,752,079 | | | $ | 1,703,595 | |
See notes to unaudited condensed consolidated financial statements.
22
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
1. Organization and Description of the Company
NOTE 1 - ORGANIZATION AND DESCRIPTION OF THE COMPANY
LPL Financial Holdings Inc. (“LPLFH”), a Delaware holding corporation, together with its consolidated subsidiaries (collectively, the “Company”), provides an integrated platform of brokerage and investment advisory services to independent financial advisors and financial advisors at financial institutions (collectively, “advisors”) in the United States. Through its custody and clearing platform, using both proprietary and third-party technology, the Company provides access to diversified financial products and services, enabling its advisors to offer independentobjective financial advice and brokerage services to retail investors (their “clients”). The Company’s most significant, wholly owned subsidiaries are described below:
Description of Subsidiaries
•LPL Holdings, Inc. (“LPLH” or “Parent”), a Massachusetts holding corporation, is an intermediate holding company and directly or indirectly owns 100% of the issued and outstanding common stock or other ownership interest in each of LPL Financial LLC (“LPL Financial”), Fortigent Holdings Company, Inc., Independent Advisers Group Corporation (“IAG”), LPL Insurance Associates, Inc. (“LPLIA”), LPL Independent Advisor Services Group LLC (“IASG”), and UVEST Financial Services Group, Inc. (“UVEST”). LPLH is also the majority stockholder in PTC Holdings, Inc. (“PTCH”), and owns 100%all of the issued and outstanding voting common stock. Each member of PTCH’s board of directors meets the direct equity ownership interest requirements that are required by the Office of the Comptroller of the Currency. The Company has establishedLPLFH’s indirect subsidiaries, including a wholly-owned series captive insurance entitysubsidiary (the “Captive Insurance Subsidiary”) that underwrites insurance for various legal and regulatory risks.risks of the Company.
•LPL Financial LLC (“LPL Financial”), with primary offices in Boston, Massachusetts; San Diego, California; and Fort Mill, South Carolina,Carolina; Boston, Massachusetts; and Austin, Texas, is a clearing broker-dealer and an investment advisoradviser that principally transacts business as an agent for its advisors and financial institutions on behalf of their clients in a broad array of financial products and services. LPL Financial is licensed to operate in all 50 states, Washington D.C., Puerto Rico and the U.S. Virgin Islands.
•Fortigent Holdings Company, Inc. and its subsidiaries (“Fortigent”) provide solutions and consulting services to registered investment advisors,advisers (“RIAs”), banks and trust companies serving high-net-worth clients.
PTCH•LPL Insurance Associates, Inc. operates as an insurance brokerage general agency that offers life and disability insurance products and services for LPL Financial advisors.
•AW Subsidiary, Inc. is a holding company for AdvisoryWorld and Blaze Portfolio Systems LLC (“Blaze”). AdvisoryWorld offers technology products, including proposal generation, investment analytics and portfolio modeling, to both the Company’s advisors and external clients in the wealth management industry. Blaze offers a trading and rebalancing platform to both the Company’s advisors and external clients.
•PTC Holdings, Inc. (“PTCH”) is a holding company for The Private Trust Company, N.A. (“PTC”). PTC is chartered as a non-depository limited purpose national bank, providing a wide range of trust, investment management oversight, and custodial services for estates and families. PTC also provides Individual Retirement Account (“IRA”) custodial services for LPL Financial.
LPLIA operates as an insurance brokerage general agency Each member of PTCH’s board of directors meets the direct equity ownership interest requirements that offers life, long-term care, and disability insurance products and services for LPL Financial advisors.
are required by the Office of the Comptroller of the Currency. 2•. SummaryLPL Employee Services, LLC is a holding company for Allen & Company of Significant Accounting PoliciesFlorida, LLC (“Allen & Company”), an RIA.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements have beenare prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), which require the Company to make estimates and assumptions regarding the valuation of certain financial instruments, intangible assets, allowance for doubtful accounts, share-based compensation, accruals for liabilities, income taxes, revenue and expense accruals, and other matters that affect the consolidated financial statements and related disclosures. The unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the results for the interim periods presented. Actual results could differ from those estimates under different assumptions or conditions and the differences may be material to the consolidated financial statements.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
The unaudited condensed consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany transactions and balances have been eliminated.
The unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of results of income, comprehensive income, financial position and cash flows in conformity with GAAP. Accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the related notes for the year ended December 31, 2016,2020, contained in the Company’s Annual Report on Form 10-K as filed with the SEC.
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company’s significant accounting policies are included in Note 2. Summary of Significant Accounting Policies, in the Company’s audited consolidated financial statementsSecurities and the related notes for the year ended December 31, 2016Exchange Commission (“SEC”). There have been no significant changes to these accounting policies during the first nine months of 2017.
Consolidation
These unaudited condensed consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments in which the Company exercises significant influence but does not exercise control and is not the primary beneficiary are accounted for using the equity method.
Reportable Segment
Management has determined that the Company operates in one segment, given the similarities in economic characteristics between our operations and the common nature of our products and services, production and distribution processes, and regulatory environment.
Fair Value of Financial Instruments
The Company’s financial assets and liabilities are carried at fair value or at amounts that, because of their short-term nature, approximate current fair value, with the exception of its held-to-maturity securities and indebtedness, which the Company carries at amortized cost. The Company measures the implied fair value of its debt instruments using trading levels obtained from a third-party service provider. Accordingly, the debt instruments qualify as Level 2 fair value measurements. See Note 4. Fair Value Measurements, for additional detail regarding the Company’s fair value measurements. As of September 30, 2017, the carrying amount and fair value of the Company’s indebtedness was approximately $2,400.0 million and $2,440.2 million, respectively. As of December 31, 2016, the carrying amount and fair value was approximately $2,197.4 million and $2,218.9 million, respectively.
Recently Issued Accounting Pronouncements
In May 2014,There are no recently issued accounting pronouncements that would materially impact the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers: Topic 606, to supersede nearly all existing revenue recognition guidance under GAAP. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date for implementation of ASU 2014-09 by one year and is now effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted but not earlier than the original effective date. ASU 2014-09 also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. The Company expects to adopt the provisions of this guidance on January 1, 2018 using the modified retrospective approach with a cumulative-effect adjustment to opening retained earnings. The Company has performed an assessment of its revenue contracts as well as worked with industry participants on matters of interpretation and application and has not identified any material changes to the timing or amount of its revenue recognition under ASU 2014-09. The Company's accounting policies will not change materially since the principles of revenue recognition from ASU 2014-09 are largely consistent with existing guidance and current practices applied by the Company. The Company is also evaluating its disclosures and may provide additional disaggregation of revenue upon adoption of ASU 2014-09.
In February 2016, the FASB issued ASU 2016-02, Leases, which establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. The Company expects to adopt the provisions of this guidance on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting (Topic 718), which amends the scope of modification accounting for share-based payment arrangements. ASU 2017-09 provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The update is effective for annual periods beginning after December
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
15, 2017 and interim periods within those years. Early adoption is permitted. The Company does not expect a material impact from this update on itsCompany’s consolidated financial statements and related disclosures.
Recently Adopted Accounting Pronouncements
On January 1, 2017,NOTE 3 - REVENUES
Revenues are recognized when control of the promised services is transferred to customers in an amount that reflects the consideration the Company adopted ASU 2016-09, Improvementsexpects to Employee Share-Based Payment Accounting.be entitled to in exchange for those services. Revenues are analyzed to determine whether the Company is the principal (i.e., reports revenues on a gross basis) or agent (i.e., reports revenues on a net basis) in the contract. Principal or agent designations depend primarily on the control an entity has over the product or service before control is transferred to a customer. The ASUindicators of which party exercises control include primary responsibility over performance obligations, inventory risk before the good or service is designedtransferred and discretion in establishing the price.
Advisory
Advisory revenues represent fees charged to identify areasadvisors’ clients’ accounts on the Company’s corporate advisory platform. The Company provides ongoing investment advice and acts as a custodian, providing brokerage and execution services on transactions, and performs administrative services for simplification involving several aspectsthese accounts. This series of accountingperformance obligations transfers control of the services to the client over time as the services are performed. These revenues are recognized ratably over time to match the continued delivery of the performance obligations to the client over the life of the contract. The advisory revenues generated from the Company’s corporate advisory platform are based on a percentage of the market value of the eligible assets in the clients’ advisory accounts. As such, the consideration for share-based payment transactions, includingthese revenues are variable and an estimate of the income tax consequences, classificationvariable consideration is constrained due to dependence on unpredictable market impacts on client portfolio values. The constraint is removed once the portfolio value can be determined.
The Company provides advisory services to clients on its corporate advisory platform through the advisor. The Company is the principal in these arrangements and recognizes advisory revenues on a gross basis, as the Company is responsible for satisfying the performance obligations and has control over determining the fees.
Commission
Commission revenues represent sales commissions generated by advisors for their clients’ purchases and sales of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur,securities on exchanges and over-the-counter, as well as certain classificationspurchases of other investment products. The Company views the selling, distribution and marketing, or any combination thereof, of investment products to such clients as a single performance obligation to the product sponsors.
The Company is the principal for commission revenues, as it is responsible for the execution of the clients’ purchases and sales, and maintains relationships with the product sponsors. Advisors assist the Company in performing its obligations. Accordingly, total commission revenues are reported on a gross basis.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
The following table presents total commission revenues disaggregated by investment product category (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Commission revenues | | | | | | | |
Annuities | $ | 280,776 | | | $ | 245,662 | | | | | |
Mutual funds | 173,150 | | | 156,156 | | | | | |
Fixed income | 32,162 | | | 29,125 | | | | | |
Equities | 38,911 | | | 37,421 | | | | | |
Other | 32,230 | | | 35,080 | | | | | |
Total commission revenues | $ | 557,229 | | | $ | 503,444 | | | | | |
The Company generates two types of commission revenues: sales-based commissions that are recognized at the point of sale on the statementtrade date and trailing commissions that are recognized over time as earned. Sales-based commission revenues vary by investment product and are based on a percentage of an investment product’s current market value at the time of purchase. Trailing commission revenues are generally based on a percentage of the current market value of clients’ investment holdings in trail-eligible assets, and are recognized over the period during which services, such as ongoing support, are performed. As trailing commission revenues are based on the market value of clients’ investment holdings, the consideration is variable and an estimate of the variable consideration is constrained due to dependence on unpredictable market impacts. The constraint is removed once the investment holdings value can be determined.
The following table presents sales-based and trailing commission revenues disaggregated by product category (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Commission revenues | | | | | | | |
Sales-based | | | | | | | |
Annuities | $ | 95,539 | | | $ | 92,525 | | | | | |
Mutual funds | 47,279 | | | 45,534 | | | | | |
Fixed income | 32,162 | | | 29,125 | | | | | |
Equities | 38,911 | | | 37,421 | | | | | |
Other | 22,382 | | | 23,786 | | | | | |
Total sales-based revenues | $ | 236,273 | | | $ | 228,391 | | | | | |
Trailing | | | | | | | |
Annuities | $ | 185,237 | | | $ | 153,137 | | | | | |
Mutual funds | 125,871 | | | 110,622 | | | | | |
| | | | | | | |
Other | 9,848 | | | 11,294 | | | | | |
Total trailing revenues | $ | 320,956 | | | $ | 275,053 | | | | | |
Total commission revenues | $ | 557,229 | | | $ | 503,444 | | | | | |
Asset-Based
Asset-based revenues consist of fees from the Company’s client cash flows.programs, which consist of fees from its money market programs and insured bank sweep vehicles, sponsorship programs and recordkeeping.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
Client Cash Revenues
Client cash revenues are generated based on advisors’ clients’ cash balances in insured bank sweep accounts and money market programs. The adoptionCompany receives fees based on account type and invested balances for administration and recordkeeping. These fees are paid and recognized over time.
Sponsorship Programs
The Company receives fees from product sponsors, primarily mutual fund and annuity companies, for marketing support and sales force education and training efforts. Compensation for these performance obligations is either a fixed fee, a percentage of ASU 2016-09 had no material impactthe average annual amount of product sponsor assets held in advisors’ clients’ accounts, a percentage of new sales or some combination. As the value of product sponsor assets held in advisors’ clients’ accounts is susceptible to unpredictable market changes, these revenues include variable consideration and are constrained until the date that the fees are determinable.
Recordkeeping
The Company generates revenues from fees it collects for providing recordkeeping, account maintenance, reporting and other related services to product sponsors. This includes revenues from omnibus processing in which the Company establishes and maintains sub-account records for its clients to reflect the purchase, exchange and redemption of mutual fund shares, and consolidates clients’ trades within a mutual fund. Omnibus processing fees are paid to the Company by the mutual fund or its affiliates and are based on the value of mutual fund assets in accounts for which the Company provides omnibus processing services and the number of accounts in which the related mutual fund positions are held. Recordkeeping revenues also include revenues from networking recordkeeping services. Networking revenues on brokerage assets are correlated to the number of positions or value of assets that the Company administers and are paid by mutual fund and annuity product manufacturers. These recordkeeping revenues are recognized over time as the Company fulfills its consolidatedperformance obligations. As recordkeeping fees are susceptible to unpredictable market changes that influence market value and fund positions, these revenues include variable consideration and are constrained until the date that the fees are determinable.
Depending on the contract, the Company is either principal or agent for recordkeeping revenues. In instances in which the Company is providing services to financial statements; however,product manufacturers on behalf of third parties and does not have ultimate control of the service before transfer to the customer, the Company is considered to be an agent and reports revenues on a net basis. In other cases, where the Company uses a sub-contractor to provide services and is responsible for unperformed services, the Company is considered principal and reports revenues on a gross basis.
The following table sets forth asset-based revenues at a disaggregated level (in thousands): | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Asset-based revenues | | | | | | | |
Client cash | $ | 97,104 | | | $ | 151,398 | | | | | |
Sponsorship programs | 81,712 | | | 64,449 | | | | | |
Recordkeeping | 85,890 | | | 69,659 | | | | | |
Total asset-based revenues | $ | 264,706 | | | $ | 285,506 | | | | | |
Transaction and Fee
Transaction revenues primarily include fees the Company charges to advisors and their clients for executing certain transactions in brokerage and fee-based advisory accounts. Transaction revenues are recognized at the point-in-time that a transaction is executed, which is generally the trade date. Fee revenues may be generated from advisors or their clients. Fee revenues primarily include IRA custodian fees, contract and licensing fees, and other client account fees. In addition, the Company hosts certain advisor conferences that serve as training, education, sales and marketing events, for which the Company collects a fee for attendance. Fee revenues are recognized when the Company satisfies its performance obligations. Recognition varies from point-in-time to over time depending on whether the service is provided once at an identifiable point-in-time or if the service is provided continually over the contract life.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
The following table sets forth transaction and fee revenues disaggregated by recognition pattern (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Transaction and fee revenues | | | | | | | |
Point-in-time(1) | $ | 65,813 | | | $ | 65,638 | | | | | |
Over time(2) | 75,131 | | | 71,458 | | | | | |
Total transaction and fee revenues | $ | 140,944 | | | $ | 137,096 | | | | | |
(1)Transaction and fee revenues recognized point-in-time include revenues such as transaction fees, IRA termination fees and technology fees.
(2)Transaction and fee revenues recognized over time include revenues such as error and omission insurance fees, IRA custodian fees and technology fees.
The Company is the principal and recognizes transaction and fee revenues on a gross basis as it did reduceis primarily responsible for delivering the Company's effective tax raterespective services being provided, which is demonstrated by the Company’s ability to control the fee amounts charged to customers.
Interest Income
The Company earns interest income from client margin loans, cash segregated under federal and other regulations and cash equivalents.
Other
Other revenues primarily include unrealized gains and losses on assets held by the Company for its advisor non-qualified deferred compensation plan and model research portfolios, marketing allowances received from certain financial product manufacturers, primarily those who offer alternative investments, such as non-traded real estate investment trusts and business development companies, and other miscellaneous revenues. These revenues are not generated from contracts with customers.
Unearned Revenue
The Company records unearned revenue when cash payments are received or due in advance of the Company’s performance obligations, including amounts which are refundable. The increase in the unearned revenue balance for the three and nine months ended September 30, 2017.March 31, 2021 is primarily driven by cash payments received or due in advance of satisfying the Company’s performance obligations, offset by $92.3 million of revenues recognized that were included in the unearned revenue balance as of December 31, 2020.
For advisory services, revenue is recognized as the Company provides the administration, brokerage and execution services over time to satisfy the performance obligations. For conference revenue, the Company recognizes revenue as the conferences are held. National Planning Holdings, Inc.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 4 - ACQUISITIONS
On August 15, 2017,December 2, 2020, the Company entered into an asset purchase agreement with National PlanningMacquarie Management Holdings, Inc. (“NPH”), and its four broker-dealer subsidiaries (collectively with NPH, “NPH Sellers”Macquarie”) to acquire certain assets and rightsthe wealth management business of the NPH Sellers, including business relationships with financial advisors who become affiliated with the Company. In accordance with ASC 805, Waddell & Reed Financial, Inc. (“Waddell & Reed”) for $300 million.Business Combinations, The transaction closed on April 30, 2021.control will transfer when
On October 26, 2020, the Company begins to onboard NPH advisorsacquired Blaze Portfolio Systems LLC, a technology company that provides an advisor-facing trading and client assets onto its platform, which will occur in two waves, beginning in the fourth quarter of 2017. The Company anticipates completing the conversion by the end of the first quarter of 2018 (the "Conversion Period").
portfolio rebalancing platform. The Company paid $325$11.6 million to the NPH Sellers at closing which occurred on August 15, 2017 and is included in the National Planning Holdings acquisition payment on the unaudited condensed consolidated statements of financial condition. The Company has agreed to a potential contingent payment of up to $122.8 million (the “Contingent Payment”). The Contingent Payment would be payable following$4.0 million.
On August 18, 2020, the conclusion of the Conversion PeriodCompany acquired business relationships with advisors from E.K. Riley Investments, LLC (“E.K. Riley”) and will be calculated based on the percentage of aggregate trailing twelve-month gross dealer concessionsLucia Securities, LLC (“GDC”Lucia”) in respect of NPH Sellers’ client accounts that transfer to the Company. The Contingent Payment would be paid on an interpolated basis based on the percentage of transferred GDC between 72%, two unrelated broker-dealers and 93.5% and in the event that the percentage is less than 72%, no Contingent Payment would be due.RIAs, for a combined $18.4 million. Both transactions have potential contingent payments.
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
4. Fair Value MeasurementsNOTE 5 - FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date under current market conditions.date. Inputs used to measure fair value are prioritized within a three-level fair value hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
There have been no transfers of assets or liabilities between these fair value measurement classifications during the ninethree months ended September 30, 2017.March 31, 2021.
The Company’s fair value measurements are evaluated within the fair value hierarchy, based on the nature of inputs used to determine the fair value at the measurement date. At September 30, 2017,March 31, 2021 and December 31, 2020, the Company had the following financial assets and liabilities that are measured at fair value on a recurring basis:
Cash Equivalents — The Company’s cash equivalents include money market funds, which are short term in nature with readily determinable values derived from active markets.
Securities Owned and Securities Sold, But Not Yet Purchased — The Company’s trading securities consist of house account model portfolios established and managed for the purpose of benchmarking the performance of its fee-based advisory platforms and temporary positions resulting from the processing of client transactions. Examples of these securities include money market funds, U.S. treasury obligations, mutual funds, certificates of deposit and traded equity and debt securities.
The Company uses prices obtained from independent third-party pricing services to measure the fair value of its trading securities. Prices received from the pricing services are validated using various methods including comparison to prices received from additional pricing services, comparison to available quoted market prices and review of other relevant market data including implied yields of major categories of securities. In general, these quoted prices are derived from active markets for identical assets or liabilities. When quoted prices in active markets for identical assets and liabilities are not available, the quoted prices are based on similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. For certificates of deposit and treasury securities, the Company utilizes market-based inputs, including observable market interest rates that correspond to the remaining maturities or the next interest reset dates. At September 30, 2017,March 31, 2021, the Company did not adjust prices received from the independent third-party pricing services.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
Other Assets — The Company’s other assets include: (1) deferred compensation plan assets that are invested in money market and other mutual funds, which are actively traded and valued based on quoted market prices; and (2) certain non-traded real estate investment trusts and auction rate notes, which are valued using quoted prices for identical or similar securities and other inputs that are observable or can be corroborated by observable market data.
Accounts Payable and Accrued Liabilities — The Company’s accounts payable and accrued liabilities include contingent consideration liabilities that are measured using Level 3 inputs.
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Level 3 Recurring Fair Value Measurements
The Company determines the fair value for its contingent consideration obligations using an incomea scenario-based approach whereby the Company assesses the expected number of future performance of the acquired assets.transactions. The contingent payment is estimated usingby applying a discounted cash flow ofdiscount rate to the expected payment amount to calculate the fair value as of the valuation date. The Company’s management evaluates the underlying projections and other related factors used in determining fair value each period and makes updates when there have been significant changes in management’s expectations.
The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at September 30, 2017March 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents | $ | 6,529 | | | $ | 0 | | | $ | 0 | | | $ | 6,529 | |
Securities owned — trading: | | | | | | | |
Money market funds | 132 | | | 0 | | | 0 | | | 132 | |
Mutual funds | 27,692 | | | 0 | | | 0 | | | 27,692 | |
Equity securities | 512 | | | 0 | | | 0 | | | 512 | |
Debt securities | 0 | | | 130 | | | 0 | | | 130 | |
U.S. treasury obligations | 19,498 | | | 0 | | | 0 | | | 19,498 | |
| | | | | | | |
Total securities owned — trading | 47,834 | | | 130 | | | 0 | | | 47,964 | |
Other assets | 398,895 | | | 9,147 | | | 0 | | | 408,042 | |
Total assets at fair value | $ | 453,258 | | | $ | 9,277 | | | $ | 0 | | | $ | 462,535 | |
Liabilities | | | | | | | |
Securities sold, but not yet purchased: | | | | | | | |
| | | | | | | |
Equity securities | $ | 83 | | | $ | 0 | | | $ | 0 | | | $ | 83 | |
Debt securities | 0 | | | 1,233 | | | 0 | | | 1,233 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total securities sold, but not yet purchased | 83 | | | 1,233 | | | 0 | | | 1,316 | |
Accounts payable and accrued liabilities | 0 | | | 0 | | | 3,300 | | | 3,300 | |
Total liabilities at fair value | $ | 83 | | | $ | 1,233 | | | $ | 3,300 | | | $ | 4,616 | |
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents | $ | 6,244 |
| | $ | — |
| | $ | — |
| | $ | 6,244 |
|
Securities owned — trading: | | | | | | | |
|
Money market funds | 302 |
| | — |
| | — |
| | 302 |
|
Mutual funds | 8,851 |
| | — |
| | — |
| | 8,851 |
|
Equity securities | 187 |
| | — |
| | — |
| | 187 |
|
Debt securities | — |
| | 1 |
| | — |
| | 1 |
|
U.S. treasury obligations | 4,078 |
| | — |
| | — |
| | 4,078 |
|
Total securities owned — trading | 13,418 |
| | 1 |
| | — |
| | 13,419 |
|
Other assets | 172,038 |
| | 9,893 |
| | — |
| | 181,931 |
|
Total assets at fair value | $ | 191,700 |
| | $ | 9,894 |
| | $ | — |
| | $ | 201,594 |
|
Liabilities | | | | | | | |
Securities sold, but not yet purchased: | | | | | | | |
Equity securities | $ | 135 |
| | $ | — |
| | $ | — |
| | $ | 135 |
|
Total securities sold, but not yet purchased | 135 |
| | — |
| | — |
| | 135 |
|
Accounts payable and accrued liabilities | — |
| | — |
| | 527 |
| | 527 |
|
Total liabilities at fair value | $ | 135 |
| | $ | — |
| | $ | 527 |
| | $ | 662 |
|
29
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at December 31, 20162020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents | $ | 6,205 | | | $ | 0 | | | $ | 0 | | | $ | 6,205 | |
Securities owned — trading: | | | | | | | |
Money market funds | 125 | | | 0 | | | 0 | | | 125 | |
Mutual funds | 9,137 | | | 0 | | | 0 | | | 9,137 | |
Equity securities | 492 | | | 0 | | | 0 | | | 492 | |
U.S. treasury obligations | 19,498 | | | 0 | | | 0 | | | 19,498 | |
Total securities owned — trading | 29,252 | | | 0 | | | 0 | | | 29,252 | |
Other assets | 371,202 | | | 8,953 | | | 0 | | | 380,155 | |
Total assets at fair value | $ | 406,659 | | | $ | 8,953 | | | $ | 0 | | | $ | 415,612 | |
Liabilities | | | | | | | |
Securities sold, but not yet purchased: | | | | | | | |
| | | | | | | |
Equity securities | $ | 203 | | | $ | 0 | | | $ | 0 | | | $ | 203 | |
Debt securities | 0 | | | 3 | | | 0 | | | 3 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total securities sold, but not yet purchased | 203 | | | 3 | | | 0 | | | 206 | |
Accounts payable and accrued liabilities | 0 | | | 0 | | | 3,228 | | | 3,228 | |
Total liabilities at fair value | $ | 203 | | | $ | 3 | | | $ | 3,228 | | | $ | 3,434 | |
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents | $ | 168,320 |
| | $ | — |
| | $ | — |
| | $ | 168,320 |
|
Securities owned — trading: | | | | | | | |
Money market funds | 474 |
| | — |
| | — |
| | 474 |
|
Mutual funds | 7,585 |
| | — |
| | — |
| | 7,585 |
|
Equity securities | 35 |
| | — |
| | — |
| | 35 |
|
Debt securities | — |
| | 314 |
| | — |
| | 314 |
|
U.S. treasury obligations | 2,996 |
| | — |
| | — |
| | 2,996 |
|
Total securities owned — trading | 11,090 |
| | 314 |
| | — |
| | 11,404 |
|
Other assets | 134,914 |
| | 7,105 |
| | — |
| | 142,019 |
|
Total assets at fair value | $ | 314,324 |
| | $ | 7,419 |
| | $ | — |
| | $ | 321,743 |
|
Liabilities | | | | | | | |
Securities sold, but not yet purchased: | | | | | | | |
Equity securities | $ | 168 |
| | $ | — |
| | $ | — |
| | $ | 168 |
|
Debt securities | — |
| | 15 |
| | — |
| | 15 |
|
Total securities sold, but not yet purchased | 168 |
|
| 15 |
|
| — |
|
| 183 |
|
Accounts payable and accrued liabilities | — |
| | 86 |
| | 527 |
| | 613 |
|
Total liabilities at fair value | $ | 168 |
| | $ | 101 |
| | $ | 527 |
| | $ | 796 |
|
5. Held-to-Maturity SecuritiesNOTE 6 - HELD-TO-MATURITY SECURITIES
The Company holds certain investments in securities, primarily U.S. government notes, which are recorded at amortized cost because the Company has both the intent and the ability to hold these investments to maturity. Interest income is accrued as earned. Premiums and discounts are amortized using a method that approximates the effective yield method over the term of the security and are recorded as an adjustment to the investment yield.
The amortized cost, gross unrealized loss,gain and fair value of held-to-maturity securities held-to-maturity were as follows (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Amortized cost | $ | 11,832 |
| | $ | 8,862 |
|
Gross unrealized loss | (43 | ) | | (31 | ) |
Fair value | $ | 11,789 |
| | $ | 8,831 |
|
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Amortized cost | $ | 11,972 | | | $ | 13,235 | |
Gross unrealized gain | 116 | | | 159 | |
Fair value | $ | 12,088 | | | $ | 13,394 | |
At September 30, 2017,March 31, 2021, the held-to-maturity securities held-to-maturity were scheduled to mature as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Within one year | | After one but within five years | | After five but within ten years | | Total |
U.S. government notes — at amortized cost | $ | 4,999 | | | $ | 6,973 | | | $ | 0 | | | $ | 11,972 | |
U.S. government notes — at fair value | $ | 5,048 | | | $ | 7,040 | | | $ | 0 | | | $ | 12,088 | |
|
| | | | | | | | | | | | | | | |
| Within one year | | After one but within five years | | After five but within ten years | | Total |
U.S. government notes — at amortized cost | $ | 3,753 |
| | $ | 7,579 |
| | $ | 500 |
| | $ | 11,832 |
|
U.S. government notes — at fair value | $ | 3,742 |
| | $ | 7,547 |
| | $ | 500 |
| | $ | 11,789 |
|
6. Goodwill and Other Intangible Assets
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
The balances in goodwill and intangible assets were a result of various acquisitions. See Note 8.9 - Goodwill and Other Intangible Assets, in the Company’s audited consolidated financial statements and the related notes in
the 20162020 Annual Report on Form 10-K for a discussion of the components of goodwill and additional information
regarding intangible assets.
NOTE 8 - LONG-TERM AND OTHER BORROWINGS
The Company’s outstanding borrowings were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 | | |
Long-Term Borrowings | | Balance | | Applicable Margin | | Interest Rate | | Balance | | Applicable Margin | | Interest rate | | Maturity |
Term Loan B(1) | | $ | 1,056,625 | | | LIBOR+175 bps | | 1.86 | % | | $ | 1,059,300 | | | LIBOR+175 bps | | 1.90 | % | | 11/12/2026 |
2025 Senior Notes(1)(2) | | 0 | | | Fixed Rate | | 0 | % | | 900,000 | | | Fixed Rate | | 5.75 | % | | |
2027 Senior Notes(1)(3) | | 400,000 | | | Fixed Rate | | 4.63 | % | | 400,000 | | | Fixed Rate | | 4.63 | % | | 11/15/2027 |
2029 Senior Notes(1)(4) | | 900,000 | | | Fixed Rate | | 4.00 | % | | 0 | | | Fixed Rate | | 0 | % | | 3/15/2029 |
Total long-term borrowings | | 2,356,625 | | | | | | | 2,359,300 | | | | | | | |
Plus: Unamortized Premium | | 0 | | | | | | | 7,083 | | | | | | | |
Less: Unamortized Debt Issuance Cost | | (23,816) | | | | | | | (20,969) | | | | | | | |
Net Carrying Value | | $ | 2,332,809 | | | | | | | $ | 2,345,414 | | | | | | | |
Other Borrowings | | | | | | | | | | | | | | |
Parent Revolving Credit Facility | | $ | 0 | | | ABR+25 bps | | 0 | % | | $ | 0 | | | ABR+25 bps | | 0 | % | | 3/15/2026 |
Broker-Dealer Revolving Credit Facility | | 0 | | | FFR+125 bps | | 0 | % | | 0 | | | FFR+125 bps | | 0 | % | | 7/31/2024 |
Total borrowings | | $ | 2,332,809 | | | | | | | $ | 2,345,414 | | | | | | | |
_______________________________
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(1)No leverage or interest coverage maintenance covenants.
7(2). DebtThe 2025 Notes were redeemed in March 2021.
(3)The 2027 Notes were issued in November 2019 at par.
(4)The 2029 Notes were issued in March 2021 at par.
Credit Agreement
On September 21, 2017,March 15, 2021, LPLFH and LPLH entered into a secondfifth amendment agreement (the “Amendment”) to itsthe Company’s amended and restated credit agreement dated March 10, 2017, (as amended by that certain amendment agreement, dated as(“Credit Agreement”), which, among other things, increased the size of June 20, 2017, the Amendment, and as further amended to date, the “Credit Agreement”) and repriced its existing $500.0 million senior secured revolving credit facility to $1.0 billion and $1,695.8 millionextended the maturity date of its senior secured Term Loan Brevolving credit facility. Additionally, LPLH raised $400.0 million in aggregate principal amount of notes (the “Additional Notes”), which were issued above par at 103.0% as an add-on to the existing senior notes due 2025. The Additional Notes issued in the offering are governed by the same indenture, and have the same terms, as the Original Notes (as defined below). LPLH used $200 million in proceeds from the offering to pay down its Term Loan B to $1,500 million. In connection with the execution of the Amendment, the Company incurred $9.1$3.2 million in costs, which are capitalized as debt issuance costs in the unaudited condensed consolidated statements of financial condition,condition. The Credit Agreement subjects the Company to certain financial and acceleratednon-financial covenants. As of March 31, 2021, the recognitionCompany was in compliance with such covenants.
Issuance of $1.32029 Senior Notes
LPLH raised $900.0 million of unamortized debt issuance costs as a loss on extinguishment of debt in its unaudited condensed consolidated statements of income.
On March 10, 2017, LPLFH and LPLH entered into a fourth amendment agreement, which amended and restated LPLH’s existing credit agreement and refinanced LPLH’s then outstanding senior secured credit facilities. The proceeds of the new Term Loan B, together with the proceeds from the offering of $500.0 million aggregate principal amount of 5.75%4.00% senior notes (the “Original Notes” and, together with the Additional Notes, the “Notes”) and cash, were used to repay LPLH’s then existing senior secured credit facilities and to pay accrued interest and related fees and expenses. The refinancing led to the extinguishment of the previous Term Loan A and B facilities,on March 15, 2021, which required the Company to accelerate the recognition of $21.1 million of related unamortized debt issuance costs, and recognize that amount as a loss on extinguishment of debt in its unaudited condensed consolidated statements of income.
Issuance of 5.75% Senior Notes due 2025
The Original Notes were issued in March 2017 pursuant to an Indenture, dated March 10, 2017, among LPLH, U.S. Bank National Association, as trustee, and certain of the Company’s subsidiaries as guarantorsat par (“Indenture”2029 Senior Notes”).
The Additional Notes were issued in September 2017 pursuant to a Supplemental Indenture, dated September 21, 2017, among LPLH, U.S. Bank National Association, as trustee, and certain of the Company’s subsidiaries as guarantors (“Supplemental Indenture”).
The2029 Senior Notes are unsecured obligations, governed by an indenture, that will mature on SeptemberMarch 15, 2025,2029, and bear interest at the rate of 5.75%4.00% per year, with interest payable semi-annually, beginning on September 15, 2017 with respect to the Additional Notes.semi-annually. The Company may redeem all or part of the 2029 Senior Notes at any time prior to March 15, 20202024 (subject to a customary “equity claw” redemption right) at 100% of the principal amount redeemed plus a “make-whole” premium. Thereafter, the Company may redeem all or part of the 2029 Senior Notes at annually declining redemption premiums until March 15, 2023,2026, at and after which date the redemption price will be equal to 100% of the principal amount redeemed.redeemed plus any accrued and unpaid interest thereon. In connection with the issuance of the 2029 Senior Notes, the Company incurred $9.0 million in costs, which are capitalized as debt issuance costs in the unaudited condensed consolidated statements of financial condition.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
Issuance of 2027 Senior Secured Credit FacilitiesNotes
LPLH raised $400.0 million in aggregate principal amount of 4.625% senior notes on November 12, 2019, which were issued at par (“2027 Senior Notes”). The 2027 Senior Notes are unsecured obligations, governed by an indenture, that will mature on November 15, 2027, and bear interest at the rate of 4.625% per year, with interest payable semi-annually. The Company may redeem all or part of the 2027 Senior Notes at any time prior to November 15, 2022 (subject to a customary “equity claw” redemption right) at 100% of the principal amount redeemed plus a “make-whole” premium. Thereafter, the Company may redeem all or part of the 2027 Senior Notes at annually declining redemption premiums until November 15, 2024, at and after which date the redemption price will be equal to 100% of the principal amount redeemed plus any accrued and unpaid interest thereon.
Redemption of 2025 Senior Notes
LPLH issued $500.0 million aggregate principal amount of 5.75% senior notes on March 10, 2017 and $400.0 million aggregate principal amount of 5.75% senior notes on September 21, 2017 (together, the “2025 Senior Notes”). The company used the proceeds from the issuance of the 2029 Senior Notes on March 15, 2021, along with existing corporate cash available, to redeem the 2025 Senior Notes. In connection with the transaction, the Company recognized $24.4 million as a loss on extinguishment of debt on the unaudited condensed consolidated statements of income.
Term Loan B
Borrowings under the senior secured Term Loan B facility bear interest at a rate per annum of 225175 basis points over the Eurodollar Rate or 12575 basis points over the base rate (as defined in the Credit Agreement), and have no leverage or interest coverage maintenance covenants. The Eurodollar Rate option is the one-, two-, three- or six-month LIBOR rate, as selected by LPLH, or, with the approval of the applicable lenders, twelve-month LIBOR rate or the LIBOR rate for another period acceptable to the Administrative Agent (including a shorter period). The LIBOR rate, on which the Eurodollar Rate is based, is expected to be discontinued by June 30, 2023. The Credit Agreement permits LPLH to agree with the administrative agent for the Credit Agreement on a replacement benchmark rate subject to certain conditions (including that a majority of the lenders do not object to such replacement rate within a specified period of time following notice thereof from the administrative agent).
The Company is required to make quarterly payments on the Term Loan B facility equal to 0.25% of the aggregate principal amount of the loans under the Term Loan B facility.
Parent Revolving Credit Facility
Borrowings under the revolving credit facility bear interest at a rate per annum ranging from 125 to 175 basis points over the Eurodollar Rate or 25 to 75 basis points over the base rate, depending on the Consolidated Secured Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement). The Eurodollar Rate option is
Broker-Dealer Revolving Credit Facility
On July 31, 2019, LPL Financial, the one-, two-, three-, or six-month LIBOR rate, as selected by LPLH, or, with the approval of the applicable lenders, twelve month LIBOR rate or the LIBOR rate for another period acceptable to the Administrative Agent (includingCompany’s broker-dealer subsidiary, entered into a shorter period). The Eurodollar Rate is subject to an interest rate floor of 0%.
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company’s outstanding long-term borrowings as of September 30, 2017 were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | September 30, 2017 | | |
Long-Term Borrowings | | Balance | | Current Applicable Margin | | Interest Rate | | Maturity |
Revolving Credit Facility | | $ | — |
| | LIBOR+150bps | | — | % | | 9/21/2022 |
Senior Secured Term Loan B(1) | | 1,500,000 |
| | LIBOR+225 bps | | 3.65 | % | | 9/21/2024 |
Senior Unsecured Notes(1)(2) | | 900,000 |
| | Fixed Rate | | 5.75 | % | | 9/15/2025 |
Total Long-Term Borrowings | | 2,400,000 |
| | | | | | |
Plus Unamortized Premium | | 11,958 |
| | | | | | |
Less Unamortized Debt Issuance Cost | | (23,637 | ) | | | | | | |
Net Carrying Value | | $ | 2,388,321 |
| | | | | | |
_____________________ | |
(1) | No leverage or interest coverage maintenance covenants. |
| |
(2) | The Senior Unsecured Notes were issued in two separate transactions; $500.0 million in notes were issued in March 2017 at par; the remaining $400.0 million were issued in September 2017 and priced at 103.0% of the aggregate principal amount.
|
The Company is required to make quarterly amortization payments on the Term Loan B facility (commencing with the fiscal quarter ending December 31, 2017), each equal to 0.25% of the original principal amount of the loans under the Term Loan B facility.
Voluntary prepayments of the Term Loan B facility in connection with a Repricing Transaction (as defined in the Credit Agreement) on or prior to six months after the date of the Amendment will be subject to a call premium of 1.0%. Otherwise, outstanding loans under the Term Loan B facility may be voluntarily prepaid at any time without premium or penalty.
The Company’scommitted, unsecured revolving credit facility requires compliance withthat matures on July 31, 2024 and allows for a maximum Consolidated Total Debtborrowing of $300.0 million. Borrowings bear interest at a rate per annum ranging from 112.5 to Consolidated EBITDA137.5 basis points over the Federal Funds Rate or Eurodollar Rate, depending on the Parent Leverage Ratio ("Leverage Test",(each as defined in the Credit Agreement) and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio ("Interest Coverage, as defined in the Credit Agreement), tested as of the last day of each fiscal quarter.broker-dealer credit agreement). The breach of this covenant is subjectbroker-dealer credit agreement subjects LPL Financial to certain equity cure rights.
As of September 30, 2017, LPLH also had $11.1 million of irrevocable letters of credit, with an applicable interest rate margin of 1.50%, which were supported by the Company’s revolving credit facility.
The Credit Agreement subjects the Company to certainfinancial and non-financial covenants for the benefit of the revolving credit facility and Term Loan B facility. As of September 30, 2017, the Companycovenants. LPL Financial was in compliance with such covenants.
The Company’s outstanding borrowingscovenants as of DecemberMarch 31, 2016 were as follows (dollars in thousands):2021.
|
| | | | | | | | | |
| | December 31, 2016 | | |
Senior Secured Credit Facilities | | Balance | | Interest Rate | | Maturity |
Term Loan A | | $ | 459,375 |
| | 3.27 | % | | 9/30/2019 |
2019 Term Loan B | | 420,309 |
| | 3.25 | % | | 3/29/2019 |
2021 Term Loan B | | 624,676 |
| | 4.25 | % | | 3/29/2021 |
2022 Term Loan B | | 693,000 |
| | 4.80 | % | | 11/20/2022 |
Total borrowings | | 2,197,360 |
| | | | |
Less Unamortized Debt Issuance Cost | | 21,924 |
| | | | |
Long-term borrowings — net of unamortized debt issuance cost | | $ | 2,175,436 |
| | | | |
Other External Lines of Credit
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Bank Loans Payable
The Company maintains threemaintained 6 uncommitted lines of credit. Twocredit as of March 31, 2021. NaN of the lines have limits that are unspecified, limits, which areand that depend primarily dependent on the Company’sLPL Financial’s ability to provide sufficient collateral. The third line hasother four lines have a $200total limit of $275.0 million, limit, andone of which allows for both collateralized andborrowings while the other three allow for uncollateralized borrowings. The Company drew $30 million on one of the lines of credit at an interest rate of 2.55% during the three months ended September 30, 2017 and a total of $119 million at an interest rate of 2.31% during the nine months ended September 30, 2017. The lines were not otherwise utilized during the three and nine months ended September 30, 2017 or 2016. There were no balances outstanding at September 30, 2017 or Decemberas of March 31, 2016.
8. Commitments and Contingencies
Leases
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 9 - LEASES
The Company determines if an arrangement is a lease or contains a lease at inception. The Company has operating and finance leases office spacefor corporate offices and equipment under variouswith remaining lease terms of 1 to 16 years, some of which include options to extend the lease for up to 20 years. For leases with renewal options, the lease term is extended to reflect renewal options the Company is reasonably certain to exercise.
Operating lease assets and operating leases. Theselease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date. As most of the Company’s leases are generally subject to scheduled base rent and maintenance cost increases, which aredo not provide an implicit rate, the Company estimates its incremental borrowing rate based on information available at the commencement date in determining the present value of future payments. Lease expense for net present value of payments is recognized on a straight-line basis over the periodlease term.
Finance lease assets are included in fixed assets in the unaudited condensed consolidated statements of the leases. Total rentalfinancial condition and at March 31, 2021 were $101.0 million.
The components of lease expense for all operatingwere as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Operating lease cost | $ | 4,823 | | | $ | 4,417 | | | | | |
Finance lease cost: | | | | | | | |
Amortization of right-of-use assets | $ | 1,286 | | | $ | 1,285 | | | | | |
Interest on lease liabilities | 2,104 | | | 2,103 | | | | | |
Total finance lease cost | $ | 3,390 | | | $ | 3,388 | | | | | |
Supplemental cash flow information related to leases was approximately $4.8 million and $6.3 million for the three months ended September 30, 2017 and 2016, respectively, and $15.3 million and $18.6 million for the nine months ended September 30, 2017 and 2016, respectively.as follows (in thousands): | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 5,406 | | | $ | 5,000 | |
Operating cash flows from finance leases | $ | 2,104 | | | $ | 2,103 | |
Financing cash flows from finance leases | $ | 1,031 | | | $ | 997 | |
Supplemental weighted-average information related to leases was as follows: | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Weighted-average remaining lease term (years): | | | |
Finance leases | 25.2 | | 25.3 |
Operating leases | 7.7 | | 7.9 |
Weighted-average discount rate: | | | |
Finance leases | 7.83 | % | | 7.82 | % |
Operating leases | 7.08 | % | | 7.07 | % |
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
Maturities of lease liabilities as of March 31, 2021 were as follows (in thousands):
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
2021 - remainder | $ | 16,617 | | | $ | 6,659 | |
2022 | 22,577 | | | 8,802 | |
2023 | 22,222 | | | 8,577 | |
2024 | 22,024 | | | 8,727 | |
2025 | 21,724 | | | 8,879 | |
Thereafter | 75,333 | | | 224,760 | |
Total lease payments | 180,497 | | | 266,404 | |
Less imputed interest | 44,078 | | | 160,011 | |
Total | $ | 136,419 | | | $ | 106,393 | |
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Service and Development Contracts
The Company is party to certain long-term contracts for systems and services that enable back officeback-office trade processing and clearing for its product and service offerings.
Guarantees
The Company occasionally enters into certain types of contracts that contingently require it to indemnify certain parties against third-party claims. The terms of these obligations vary and, because a maximum obligation is not explicitly stated, the Company has determined that it is not possible to make an estimate of the amount that it could be obligated to pay under such contracts.
The Company’s subsidiary, LPL Financial provides guarantees to securities clearing houses and exchanges under their standard membership agreements, which require a member to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearing houses and exchanges, all other members would be required to meet any shortfall. The Company’s liability under these arrangements is not quantifiable and maycould exceed the cash and securities it has posted as collateral. However, the potential requirement for the Company to make payments under these agreements is remote. Accordingly, no liability has been recognized for these transactions.
Loan Commitments
From time to time, LPL Financial makes loans to its advisors, primarily to newly recruited advisors to assist in the transition process, which may be forgivable. Due to timing differences, LPL Financial may make commitments to issue such loans prior to actually funding them. These commitments are generally contingent upon certain events occurring, including but not limited to the advisor joining LPL Financial. LPL Financial had no such significant unfunded loan commitments at September 30, 2017.March 31, 2021.
Legal &and Regulatory Matters
The Company is subject to extensive regulation and supervision by U.S. federal and state agencies and various self-regulatory organizations. The Company and its advisors periodically engage with such agencies and organizations, in the context of examinations or otherwise, to respond to inquiries, informational requests and investigations. From time to time, such engagements result in regulatory complaints or other matters, the resolution of which canhas in the past and may in the future include fines, customer restitution and other remediation. Assessing the probability of a loss occurring and the timing and amount of any loss related to a legal proceeding or regulatory matter is inherently difficult. While the Company exercises significant and complex judgments to make certain estimates presented in its consolidated financial statements, there are particular uncertainties and complexities involved when assessing the potential outcomes of legal proceedings and regulatory matters. The Company’s assessment process considers a variety of factors and assumptions, which may include: the procedural status of the matter and any recent developments; prior experience and the experience of others in similar matters; the size and nature of potential exposures; available
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
defenses; the progress of fact discovery; the opinions of counsel and experts; potential opportunities for settlement and the status of any settlement discussions; as well as the potential
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
for insurance coverage and indemnification, if available. The Company monitors these factors and assumptions for new developments and re-assesses the likelihood that a loss will occur and the estimated range or amount of loss, if those amounts can be reasonably determined. The Company has established an accrual for those legal proceedings and regulatory matters for which a loss is both probable and the amount can be reasonably estimated, except as otherwise covered by third-party insurance or self-insurance through its captive insurance subsidiary, as discussed below.
A putative class action lawsuit has been filed against the Company and certain of its executive officers in federal district court alleging certain misstatements and omissions related to the Company’s share repurchases and financial performance in late 2015.estimated.
Third-Party Insurance
The Company maintains third-party insurance coverage for certain potential legal proceedings, including those involving certain client claims. With respect to such client claims, the estimated losses on many of the pending matters are less than the applicable deductibles of the insurance policies.
Self-Insurance Liabilities
The Company has self-insurance for certain potential liabilities including various errors and omissions liabilities, through a wholly-owned captive insurance subsidiary.the Captive Insurance Subsidiary. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated by considering, in part, historical claims experience, severity factors and other actuarial assumptions. The estimated accruals for these potential liabilities could be significantly affected if future occurrences and claims differ from such assumptions and historical trends.trends, so there are particular complexities and uncertainties involved when assessing the adequacy of loss reserves for potential liabilities that are self-insured. As of September 30, 2017,March 31, 2021 and December 31, 2020, these self-insurance liabilities were $57.2 million and $51.5 million, respectively, and are included in accounts payable and accrued liabilities in the unaudited condensed consolidated statements of financial condition. Self-insurance related charges are included in other expenses in the unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2017.income.
Other Commitments
As of September 30, 2017,March 31, 2021, the Company had approximately $221.3approximately $387.8 million of client margin loans that were collateralized with securities having a fair value of approximately $309.9approximately $542.9 million that itthat LPL Financial can re-pledge,repledge, loan or sell. Of these securities, approximately $45.0 $67.1 million were client-owned securities pledged to the Options Clearing Corporation as collateral to secure client obligations related to options positions. As of September 30, 2017,March 31, 2021, there were no restrictions that materially limited the Company’s ability to re-pledge,repledge, loan or sell the remaining $264.9remaining $475.8 million of client collateral.
Trading securitiesSecurities owned, trading, on the unaudited condensed consolidated statements of financial condition includes $4.1 million and $3.0$4.5 million pledged to clearing organizationsthe Options Clearing Corporation at September 30, 2017both March 31, 2021 and December 31, 2016, respectively.2020, and $15.0 million pledged to the National Securities Clearing Corporation at both March 31, 2021 and December 31, 2020.
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
9. Stockholders’ EquityNOTE 11 - STOCKHOLDERS’ EQUITY
Dividends
The payment, timing, and amount of any dividends are subject to approval by the Company’s board of directors (“Board(the “Board of Directors”) as well as certain limits under the Credit Agreement and the Indenture.indentures. Cash dividends per share of common stock and total cash dividends paid on a quarterly basis were as follows for the periods indicated (in millions, except per share data):
|
| | | | | | | | | | | | | | | |
| 2017 | | 2016 |
| Dividend per Share | | Total Cash Dividend | | Dividend per Share | | Total Cash Dividend |
First quarter | $ | 0.25 |
| | $ | 22.6 |
| | $ | 0.25 |
| | $ | 22.2 |
|
Second quarter | $ | 0.25 |
| | $ | 22.6 |
| | $ | 0.25 |
| | $ | 22.3 |
|
Third quarter | $ | 0.25 |
| | $ | 22.5 |
| | $ | 0.25 |
| | $ | 22.3 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| Dividend per Share | | Total Cash Dividend | | Dividend per Share | | Total Cash Dividend |
First quarter | $ | 0.25 | | | $ | 20.0 | | | $ | 0.25 | | | $ | 19.7 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Share Repurchases
The Company engages in share repurchase programs, which are approved by the Board of Directors, pursuant to which the Company may repurchase its issued and outstanding shares of common stock from time to time. Repurchased shares are included in treasury stock on the unaudited condensed consolidated statements of financial condition. Purchases may be effected in open market or privately negotiated transactions, including transactions with affiliates, with the timing of purchases and the amount of stock purchased generally determined at the discretion of the Company’s management within the constraints of the Credit Agreement, the Indenture and general liquidity needs.
During the three and nine months ended September 30, 2017, the Company repurchased a total of 539,385 and 2,016,532 shares of its common stock at a weighted-average price of $46.37 and $41.52 per share for a total cost of $25.0 million and $83.7 million, respectively. As of September 30, 2017,March 31, 2021, the Company was authorized to purchase up to an additional $141.3$349.8 million of shares pursuant to share repurchase programs approved by the Board of Directors.
10. Share-Based Compensation
Certain employees, advisors, institutions, officers, and directors of the Company participate in various long-term incentive plans, which provide for granting stock options, warrants, restricted stock awards, restricted stock units, deferred stock units, and performance stock units. Stock options and warrants outstanding generally vest in equal increments over a three- to four-year period and expire on the tenth anniversary following the date of grant. Restricted stock awards, restricted stock units, deferred stock units, and performance stock units outstanding generally vest over a one- to four-year period. | | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 12 - SHARE-BASED COMPENSATION
In November 2010, the Company adopted athe 2010 Omnibus Equity Incentive Plan (as amended and restated in May 2015, the “2010 Plan”), which provides for the granting of stock options, warrants, restricted stock awards, restricted stock units, deferred stock units, performance stock units and other equity-based compensation. The 2010 Plan serves as the successor to the 2005 Stock Option Plan for Incentive Stock Options, the 2005 Stock Option Plan for Non-qualified Stock Options, the 2008 AdvisorSince its adoption, awards have been and Institution Incentive Plan, the 2008 Stock Option Plan, and the Director Restricted Stock Plan (collectively, the “Predecessor Plans”). Upon adoptionare only made out of the 2010 Plan.
As of March 31, 2021, the 2010 Plan awards were no longer made under the Predecessor Plans; however, awards previously granted under the Predecessor Plans remain outstanding until exercised or forfeited.
There werehad 20,055,945 shares authorized for grant under the 2010 Plan after the amendment and restatement of the plan in May 2015. There were 7,610,101 shares reserved for issuance upon exercise or conversion of outstanding awards granted, and 7,664,3182,072,500 shares remaining available for future issuance under the 2010 Plan, as of September 30, 2017.
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
issuance.
Stock Options and Warrants
The following table presents the weighted-average assumptions used in the Black-Scholes valuation model by the Company in calculating the fair value of its employee and officer stock options that have been granted during the nine months ended September 30, 2017:
|
| | | | |
Expected life (in years) | | 5.43 |
|
Expected stock price volatility | | 35.27 | % |
Expected dividend yield | | 2.61 | % |
Risk-free interest rate | | 2.14 | % |
Fair value of options | | $ | 10.63 |
|
The fair value of each stock option or warrant awarded to advisors and financial institutions is estimated on the date of the grant and revalued at each reporting period using the Black-Scholes valuation model with the following weighted-average assumptions used during the nine months ended September 30, 2017:
|
| | | | |
Expected life (in years) | | 5.20 |
|
Expected stock price volatility | | 35.45 | % |
Expected dividend yield | | 2.18 | % |
Risk-free interest rate | | 1.89 | % |
Fair value of options | | $ | 24.20 |
|
The following table summarizes the Company’s stock option and warrant activity as of and for the ninethree months ended September 30, 2017:March 31, 2021:
|
| | | | | | | | | | | | | |
| | Number of Shares | | Weighted- Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (In thousands) |
Outstanding — December 31, 2016 | | 7,153,982 |
| | $ | 30.40 |
| | | | |
Granted | | 851,810 |
| | $ | 39.48 |
| | | | |
Exercised | | (2,539,396 | ) | | $ | 30.03 |
| | | | |
Forfeited | | (322,028 | ) | | $ | 35.99 |
| | | | |
Outstanding — September 30, 2017 | | 5,144,368 |
| | $ | 31.73 |
| | 6.10 | | $ | 103,202 |
|
Exercisable — September 30, 2017 | | 3,177,079 |
| | $ | 32.35 |
| | 4.53 | | $ | 62,187 |
|
Exercisable and expected to vest — September 30, 2017 | | 5,026,510 |
| | $ | 31.67 |
| | 6.02 | | $ | 101,139 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Weighted- Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (In thousands) |
Outstanding — December 31, 2020 | | 2,000,383 | | | $ | 45.57 | | | | | |
Granted | | 0 | | | $ | 0 | | | | | |
Exercised | | (255,239) | | | $ | 48.32 | | | | | |
Forfeited and Expired | | (18,550) | | | $ | 50.19 | | | | | |
Outstanding — March 31, 2021 | | 1,726,594 | | | $ | 45.12 | | | 5.18 | | $ | 167,553 | |
Exercisable — March 31, 2021 | | 1,611,787 | | | $ | 42.82 | | | 4.98 | | $ | 160,123 | |
Exercisable and expected to vest — March 31, 2021 | | 1,721,067 | | | $ | 45.01 | | | 5.16 | | $ | 167,196 | |
The following table summarizes information about outstanding stock options and warrants at September 30, 2017:as of March 31, 2021:
|
| | | | | | | | | | | | | | | | |
| | Outstanding | | Exercisable |
Range of Exercise Prices | | Number of Shares | | Weighted- Average Exercise Price | | Weighted-Average Remaining Life (Years) | | Number of Shares | | Weighted- Average Exercise Price |
$18.04 - $23.02 | | 1,709,849 |
| | $ | 20.30 |
| | 6.24 | | 847,191 |
| | $ | 20.76 |
|
$23.41 - $30.00 | | 851,632 |
| | $ | 28.15 |
| | 3.84 | | 737,504 |
| | $ | 28.31 |
|
$31.60 - $32.33 | | 424,681 |
| | $ | 31.86 |
| | 4.92 | | 424,681 |
| | $ | 31.86 |
|
$34.00 - $39.60 | | 1,314,957 |
| | $ | 37.56 |
| | 7.15 | | 514,370 |
| | $ | 34.57 |
|
$42.59 - $54.81 | | 843,249 |
| | $ | 49.35 |
| | 7.03 | | 653,333 |
| | $ | 50.51 |
|
| | 5,144,368 |
| | $ | 31.73 |
| | 6.10 | | 3,177,079 |
| | $ | 32.35 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Outstanding | | Exercisable |
Range of Exercise Prices | | Number of Shares | | Weighted- Average Exercise Price | | Weighted-Average Remaining Life (Years) | | Number of Shares | | Weighted- Average Exercise Price |
$19.85 - $25.00 | | 379,343 | | | $ | 19.85 | | | 4.87 | | 379,343 | | | $ | 19.85 | |
$25.01 - $35.00 | | 269,458 | | | $ | 29.82 | | | 1.38 | | 269,458 | | | $ | 29.82 | |
$35.01 - $45.00 | | 335,412 | | | $ | 39.64 | | | 5.82 | | 335,412 | | | $ | 39.64 | |
$45.01 - $65.00 | | 190,378 | | | $ | 48.40 | | | 3.62 | | 190,378 | | | $ | 48.40 | |
$65.01 - $75.00 | | 247,823 | | | $ | 65.53 | | | 6.87 | | 246,312 | | | $ | 65.50 | |
$75.01 - $80.00 | | 304,180 | | | $ | 77.53 | | | 7.81 | | 190,884 | | | $ | 77.53 | |
| | 1,726,594 | | | $ | 45.12 | | | 5.18 | | 1,611,787 | | | $ | 42.82 | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company recognizes share-based compensation for stock options awarded to employees and officers based on the grant date fair value over the requisite service period of the award, which generally equals the vesting period. The Company recognized share-based compensation related to the vesting of these awardsstock options awarded to employees and officers of $2.0$0.8 million and $2.3$1.4 million during the three months ended September 30, 2017March 31, 2021 and 2016, respectively, and $5.8 million and $8.5 million during the nine months ended September 30, 2017 and 2016, respectively, which is included in compensation and benefits expense on the unaudited condensed consolidated statements of income.2020, respectively. As of September 30, 2017,March 31, 2021, total unrecognized compensation cost related to non-vested stock options granted to employees and officers was $9.5$1.9 million, which is expected to be recognized over a weighted-average period of 2.010.91 years.
During 2011 and 2012 the Company granted stock options and warrants to its advisors and financial institutions. Share-based compensation for these awards is based on the fair value of the awards at each reporting period. The Company recognized share-based compensation of $0.8 million and $0.6 million during the three months ended September 30, 2017 and 2016, respectively, and $1.4 million and $0.3 million for during the nine months ended September 30, 2017 and 2016, respectively, related to the vesting of stock options and warrants awarded to its advisors and financial institutions, which is classified within commission and advisory expense on the unaudited condensed consolidated statements of income. As of September 30, 2017, total unrecognized compensation cost related to non-vested stock options and warrants granted to advisors and financial institutions was $0.3 million, which is expected to be recognized over a weighted-average period of 0.17 years.
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
Restricted Stock and Stock Units
The following summarizes the Company’s activity in its restricted stock awards and stock units, which include restricted stock units, deferred stock units and performance stock units, for the ninethree months ended March 31, 2021:September 30, 2017: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Restricted Stock Awards | | Stock Units |
| | Number of Shares | | Weighted-Average Grant-Date Fair Value | | Number of Units | | Weighted-Average Grant-Date Fair Value |
Outstanding — December 31, 2020 | | 5,560 | | | $ | 64.74 | | | 904,445 | | | $ | 77.94 | |
Granted | | 0 | | | $ | 0 | | | 436,872 | | | $ | 143.53 | |
Vested | | 0 | | | $ | 0 | | | (295,871) | | | $ | 81.25 | |
Forfeited | | 0 | | | $ | 0 | | | (11,760) | | | $ | 83.38 | |
Outstanding — March 31, 2021 | | 5,560 | | | $ | 64.74 | | | 1,033,686 | | (1) | $ | 104.65 | |
Expected to vest — March 31, 2021 | | 5,560 | | | $ | 64.74 | | | 918,587 | | | $ | 107.62 | |
|
| | | | | | | | | | | | | | |
| | Restricted Stock Awards | | Stock Units |
| | Number of Shares | | Weighted-Average Grant-Date Fair Value | | Number of Shares | | Weighted-Average Grant-Date Fair Value |
Nonvested — December 31, 2016 | | 10,404 |
| | $ | 35.85 |
| | 982,253 |
| | $ | 30.61 |
|
Granted | | 18,700 |
| | $ | 39.73 |
| | 468,989 |
| | $ | 40.06 |
|
Vested | | (16,308 | ) | | $ | 37.25 |
| | (369,944 | ) | | $ | 36.23 |
|
Forfeited | | — |
| | $ | — |
| | (85,762 | ) | | $ | 32.27 |
|
Nonvested — September 30, 2017 | | 12,796 |
| | $ | 39.73 |
| | 995,536 |
| | $ | 32.83 |
|
Expected to vest — September 30, 2017 | | 12,796 |
| | $ | 39.73 |
| | 922,240 |
| | $ | 32.51 |
|
(1) Includes 53,133 vested and undistributed deferred stock units.The Company grants restricted stock awards and deferred stock units to its directors and restricted stock units and performance stock units to its employees and officers. Restricted stock awards and stock units must vest or else are subject to forfeiture; however, restricted stock awards are included in our shares outstanding upon grant and have the same dividend and voting rights as ourthe Company’s common stock. Share-based compensation is based on the grant date fair value and recognized over the requisite service period of the award, which generally equals the vesting period. The Company recognized $2.7$10.2 million and $2.0$6.7 million of share-based compensation related to the vesting of these restricted stock awards restricted stock units, deferred stock units, and performance stock units during the three months ended September 30, 2017March 31, 2021 and 2016, respectively and $8.9 million and $6.5 million during the nine months ended September 30, 2017 and 2016, respectively, which is included in compensation and benefits expense on the unaudited condensed consolidated statements of income.2020, respectively. As of September 30, 2017,March 31, 2021, total unrecognized compensation cost for restricted stock awards and stock units granted to directors, employees and officers was $15.5$79.2 million, which is expected to be recognized over a weighted-average remaining period of 2.092.49 years.
The Company also grants restricted stock units to its advisors and to financial institutions. Share-based compensation is based on the fair value of the awards at each reporting period. The Company recognized share-based compensation of $2.3$0.6 million and $1.7$0.7 million related to the vesting of these restricted stock unitsawards during the three months ended September 30, 2017March 31, 2021 and 2016, respectively, and $5.3 million and $1.0 million during the nine months ended September 30, 2017 and 2016, respectively, which is classified within commission and advisory
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
expense on the unaudited condensed consolidated statements of income.2020, respectively. As of September 30, 2017,March 31, 2021, total unrecognized compensation cost for restricted stock units granted to advisors and financial institutions was $6.9$4.0 million, which is expected to be recognized over a weighted-average remaining period of 1.852.02 years.
11. Earnings Per ShareNOTE 13 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if dilutive potential shares of common stock had been issued. The calculation of basic and diluted earnings per share isfor the periods noted was as follows (in thousands, except per share data):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income | $ | 58,142 |
| | $ | 51,954 |
| | $ | 174,765 |
| | $ | 150,195 |
|
| | | | | | | |
Basic weighted-average number of shares outstanding | 89,967 |
| | 89,092 |
| | 90,029 |
| | 89,025 |
|
Dilutive common share equivalents | 2,075 |
| | 859 |
| | 1,998 |
| | 707 |
|
Diluted weighted-average number of shares outstanding | 92,042 |
| | 89,951 |
| | 92,027 |
| | 89,732 |
|
| | | | | | | |
Basic earnings per share | $ | 0.65 |
| | $ | 0.58 |
| | $ | 1.94 |
| | $ | 1.69 |
|
Diluted earnings per share | $ | 0.63 |
| | $ | 0.58 |
| | $ | 1.90 |
| | $ | 1.67 |
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Net income | $ | 129,620 | | | $ | 155,641 | | | | | |
| | | | | | | |
Basic weighted-average number of shares outstanding | 79,697 | | | 79,507 | | | | | |
Dilutive common share equivalents | 1,925 | | | 1,659 | | | | | |
Diluted weighted-average number of shares outstanding | 81,622 | | | 81,166 | | | | | |
| | | | | | | |
Basic earnings per share | $ | 1.63 | | | $ | 1.96 | | | | | |
Diluted earnings per share | $ | 1.59 | | | $ | 1.92 | | | | | |
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
The computation of diluted earnings per share excludes stock options, warrants and stock units that are anti-dilutive. For the three months ended September 30, 2017March 31, 2021 and 2016,2020, stock options, warrants and stock units representing common share equivalents of 1,168,77288,853 shares and 4,622,802390,014 shares, respectively, were anti-dilutive. For the nine months ended September 30, 2017 and 2016, stock options, warrants, and stock units representing common share equivalents of 2,098,029 shares and 4,802,887 shares, respectively, were anti-dilutive.
12. Income TaxesNOTE 14 - INCOME TAXES
The Company’s effective income tax rate differs from the federal corporate tax rate of 35.0%21.0%, primarily as a result of state taxes, settlement contingencies, tax credits and other permanent differences in tax deductions that are not expensed for financial statement purposes, and expenses that are not deductible for tax purposes.deductibility of certain expenses. These items resulted in effective tax rates of 39.8%21.5% and 23.8%25.0% for the three months ended September 30, 2017March 31, 2021 and 2016 respectively, and 38.6% and 35.4%2020, respectively. The decrease in our effective income tax rate for the ninethree months ended September 30, 2017 and 2016, respectively.
During the third quarter of 2016, the Company updated its calculation of theMarch 31, 2021 compared to 2020 was primarily due to an increase in tax benefits that it could obtain associated with the software that it has developed. The total additionalstock compensation under Accounting Standards Codification (“ASC”) Topic 718, and a reduction in unrecognized tax benefits recorded duringrelated to the third quarterstatute of 2016, net of potential tax contingencies, was approximately $11.7 million.limitations.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
13. Net CapitalNOTE 15 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has related party transactions with beneficial owners of more than 10 percent of the Company’s outstanding common stock. Additionally, through its subsidiary LPL Financial, the Company provides services and Regulatory Requirementscharitable contributions to the LPL Financial Foundation, an organization that provides volunteer and financial support within the Company’s local communities.
The Company operates in a highly regulated industry. Applicable lawsrecognized revenues for services provided to these related parties of $1.4 million and regulations restrict permissible activities$1.1 million during the three months ended March 31, 2021 and investments and require compliance with various financial and customer-related regulations.2020, respectively. The consequences of noncompliance can include substantial monetary and non-monetary sanctions. In addition, the Company is also subject to comprehensive examinations and supervision by various governmental and self-regulatory agencies. These regulatory agencies generally have broad discretion to prescribe greater limitations on the operations of a regulated entityincurred expenses for the protectionservices provided by these related parties of investors or public interest. Furthermore, where$0.4 million and $0.5 million during the agencies determine that such operations are unsafe or unsound, failthree months ended March 31, 2021 and 2020, respectively. As of March 31, 2021 and 2020, receivables from and payables to comply with applicable law, or are otherwise inconsistent with the laws and regulations or with the supervisory policies, greater restrictions may be imposed.related parties were not material.
NOTE 16 - NET CAPITAL AND REGULATORY REQUIREMENTS
The Company’s registered broker-dealer, LPL Financial, is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1 under the Exchange Act), which requires the maintenance of minimum net capital. The net capital as defined.rules also provide that the broker-dealer’s capital may not be withdrawn if the resulting net capital would be less than minimum requirements. Additionally, certain withdrawals require the approval of the SEC and FINRA to the extent they exceed defined levels, even though such withdrawals would not cause net capital to be less than minimum requirements. Net
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
capital and the related net capital requirement may fluctuate on a daily basis. LPL Financial is a clearing broker-dealer and, as of March 31, 2021, had net capital of $166.5$98.9 million with a minimum net capital requirement of $6.8 million as of September 30, 2017.$11.5 million.
The Company’s subsidiary, PTC, also operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts toon PTC’s operations.
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, LPL Financial and PTC met all capital adequacy requirements to which they were subject.
14
. Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK
AND CONCENTRATIONS OF CREDIT RISK
LPL Financial’s client securities activities are transacted on either a cash or margin basis. In margin transactions, LPL Financial extends credit to the advisor’s client, subject to various regulatory and internal margin requirements, collateralized by cash orand securities in the client’s account. As clients write options contracts or sell securities short, LPL Financial may incur losses if the clients do not fulfill their obligations and the collateral in the clients’ accounts is not sufficient to fully cover losses that clients may incur from these strategies. To control this risk, LPL Financial monitors margin levels daily and clients are required to deposit additional collateral, or reduce positions, when necessary.
LPL Financial is obligated to settle transactions with brokers and other financial institutions even if its advisors’ clients fail to meet their obligation to LPL Financial. Clients are required to complete their transactions on the settlement date, generally threetwo business days after the trade date. If clients do not fulfill their contractual obligations, LPL Financial may incur losses. In addition, the Company occasionally enters into certain types of contracts to fulfill its sale of when, as, and if issuedwhen-issued securities. When, as, and if issuedWhen-issued securities have been authorized but are contingent upon the actual issuance of the security. LPL Financial has established procedures to reduce this risk by generally requiring that clients deposit cash or securities into their account prior to placing an order.
LPL Financial may at times hold equity securities on both a long and short basis that are recorded on the unaudited condensed consolidated statements of financial condition at market value. While long inventory positions represent LPL Financial’s ownership of securities, short inventory positions represent obligations of LPL Financial to deliver specified securities at a contracted price, which may differ from market prices prevailing at the time of completion of the transaction. Accordingly, both long and short inventory positions may result in losses or gains to LPL Financial as market values of securities fluctuate. To mitigate the risk of losses, long and short positions are marked-to-market daily and are continuously monitored by LPL Financial.
15. Subsequent EventsNOTE 18 - SUBSEQUENT EVENTS
On April 30, 2021, the Company paid $300 million to acquire all the equity interest of the wealth management business of Waddell & Reed, which includes a broker-dealer and registered investment advisor, and certain of its subsidiaries.
On
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
We maintain trading securities owned and securities sold, but not yet purchased in order to facilitate client transactions, to meet a portion of our clearing deposit requirements at various clearing organizations and to track the performance of our research models. These securities could include mutual funds, debt securities issued by the U.S. government, money market funds, corporate debt securities, certificates of deposit, and equity securities.
Changes in the value of our trading inventorysecurities may result from fluctuations in interest rates, credit ratings of the issuer, equity prices and the correlation amongor a combination of these factors. We manage
In facilitating client transactions, our trading inventory by product type. Our activities to facilitate client transactionssecurities owned and securities sold, but not yet purchased generally involve mutual fund activities,funds, including dividend reinvestments. The balancesOur positions held are based upon pendingthe settlement of client activities,transactions, which are monitored by our Service, Trading and Operations (“STO”Care”) Department. Because these positions arise from pending client transactions, there are no specific trading or position limits. department.
Positions held to meet clearing deposit requirements consist of U.S. government securities. The amount of securities deposited depends upon the requirements of the clearing organization. The level of securities deposited is monitored by the settlement areasettlements group within our STO Department.Care department.
In addition to our trading inventory and our deposit obligations, ourOur Research Departmentdepartment develops model portfolios that are used by advisors in developing client portfolios. We maintain securities owned in internal accounts based on these model portfolios to track the performance of our Research Department.department. At the time a portfolio is developed, we purchase the securities in that model portfolio in an amount equal to the account minimum, which varyvaries by productproduct.
In addition, we are subject to market risk resulting from system incidents or interruptions and human error, which can range from $5,000 to $250,000 per model.require customer trade corrections. We also have market risk on the fees we earn that are based on the market value of advisory and brokerage assets along with assets on which trailing commissions are paid, and assets eligible for sponsor payments.
At September 30, 2017,As of March 31, 2021, the fair value of our trading securities owned was $13.4 million. Securities$48.0 million and securities sold, but not yet purchased were immaterial at September 30, 2017.immaterial. The fair value of securities included within other assets was $181.9$408.0 million at September 30, 2017.as of March 31, 2021. See Note 4.5 - Fair Value Measurements, within the notes to the unaudited condensed consolidated financial statements for information regarding the fair value of trading securities owned, securities sold, but not yet purchased and other assets associated with our client facilitation activities. See Note 5.6 - Held-to-Maturity Securities, within the notes to the unaudited condensed consolidated financial statements for information regarding the fair value of securities held to maturity.
We do not enter into contracts involving derivatives or other similar financial instruments for proprietary trading purposes. During the nine months ended September 30, 2017, we used a derivative financial instrument, consisting of a non-deliverable foreign currency forward contract, to mitigate foreign currency exchange risk arising under an agreement with a third party service provider. The derivative instrument settled in June 2017. The agreement provided that on each annual anniversary date of the signing of the agreement, the price for services, which are denominated in U.S. dollars, was adjusted for the then-current exchange rate between the U.S. dollar and the Indian rupee.
In addition, we have market risk resulting from system incidents and human error, which can require trade corrections for our customers. We also have market risk on the fees we earn that are based on the market value of brokerage and advisory assets, assets on which trailing commissions are paid, and assets eligible for sponsor payments.
Interest Rate Risk
We are exposed to risk associated with changes in interest rates. As of September 30, 2017, allMarch 31, 2021, $1.1 billion of the $1.5 billion ofour outstanding debt under our Credit Agreement was subject to floating interest rate risk. While our senior secured term loans areloan is subject to increases in interest rates, we do not believe that a short-term change in interest rates would have a material impact on our income before taxes given assets owned, which are generally subject to the same, but off-setting, interest rate risk.
The following table summarizes the impact of increasing interest rates on our interest expense from the variable portion of our debt outstanding, calculated using the projected average outstanding balance over the subsequent twelve monthtwelve-month period (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Outstanding Balance at March 31, 2021 | | Annual Impact of an Interest Rate(†) Increase of |
| | | 10 Basis | | 25 Basis | | 50 Basis | | 100 Basis |
Senior Secured Credit Facility | | | Points | | Points | | Points | | Points |
Term Loan B | | $ | 1,056,625 | | | $ | 1,053 | | | $ | 2,632 | | | $ | 5,263 | | | $ | 10,526 | |
| | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Outstanding at Variable Interest Rates at September 30, 2017 | | Annual Impact of an Interest Rate Increase of |
| | | 10 Basis | | 25 Basis | | 50 Basis | | 100 Basis |
Senior Secured Credit Facilities | | | Points | | Points | | Points | | Points |
Term Loan B | | $ | 1,500,000 |
| | $ | 1,491 |
| | $ | 3,727 |
| | $ | 7,453 |
| | $ | 14,906 |
|
Revolving Credit Facility | | — |
| | — |
| | — |
| | — |
| | — |
|
Variable Rate Debt Outstanding | | $ | 1,500,000 |
| | $ | 1,491 |
| | $ | 3,727 |
| | $ | 7,453 |
| | $ | 14,906 |
|
____________________(†) Our interest rate for Term Loan B is locked in for one, two, three, six or twelve months as allowed under the Credit Agreement. At the end of the selected periods the rates will be locked in at the then current rate. The effect of these interest rate locks are not included in the table above.
See Note 7.8 - DebtLong-term and Other Borrowings, within the notes to the unaudited condensed consolidated financial statements for additional information.
Our interest rate risk is mitigated in part by having the interest rate for a portion of the Term Loan B debt, $750 million, locked in for three months and the remaining portion, $750 million, locked in for six months. At the end of each of these periods the rates will be locked in at the then current rate for one, two, three, six, or twelve months as allowed under the Credit Agreement. The effect of these interest rate locks are not included in the table above.
As of September 30, 2017March 31, 2021, we offered our advisors and their clients threetwo primary cashbank sweep vehicles that are interest rate sensitive: (1) our insured cash account (“ICA”) for individuals, trusts, and sole proprietorships and entities organized or operated to make a profit, such as corporations, partnerships, associations, business trusts and other organizations,organizations; and (2) an insured deposit cash account (“DCA”) for advisory individual retirement accounts,accounts. In
addition, we offer our advisors and their clients a money market sweep vehicle involving multipleprogram, including money market fund providers.accounts as well as the ability to participate in purchased money market funds. While clients earn interest for balances on depositdeposits in ICA and DCA, we earn a fee. OurThe fees we earn from ICAcash held in ICAs are based on prevailing interest rates in the current interest rate environment. The fees we receiveearn from DCAs are calculated as a per account fee, and such fees increase as the federal funds target rate increases, subject to a cap. The fees we earn on cash balances in our advisors’ clientclients’ accounts in our money market funds,program, including administrative and recordkeeping fees based on account type and the invested balances, are also sensitive to prevailing interest rates. Changes in interest rates and fees for the insured bank deposit sweep vehicles are monitored by our Rate Setting Committee (the “RSC”), which governs and approves any changes to our fees. By meeting promptly around the time of Federal Open Market Committee meetings, or for other market or non-market reasons, the RSC considers financial risk of the insured bank deposit sweep vehiclevehicles relative to other products into which clients may move cash balances. The fees that we receive from the DCA vehicle are calculated as a per account fee; such fees increase as the federal funds target rate increases, subject to a cap.
Credit Risk
Credit risk is the risk of loss due to adverse changes in a borrower’s, issuer’s or counterparty’s ability to meet its financial obligations under contractual or agreed upon terms. Credit risk includes the risk that loans we extend to advisors to facilitate their transition to our platform or to fund their business development activities are not repaid in full or on time. Credit risk also includes the risk that collateral posted with LPL Financial by clients to support margin lending or derivative trading is insufficient to meet client’sclients’ contractual obligations to LPL.LPL Financial. We bear credit risk on the activities of our advisors’ clients, including the execution, settlement and financing of various transactions on behalf of these clients.
These activities are transacted on either a cash or margin basis. Our credit exposure in these transactions consists primarily of margin accounts, through which we extend credit to advisors’ clients collateralized by securities in the client’s account.clients’ accounts. Under many of these agreements, we are permitted to sell, re-pledge,repledge or loan these securities held as collateral and use these securities to enter into securities lending arrangements or to deliver to counterparties to cover short positions.
As our advisors execute margin transactions on behalf of their clients, we may incur losses if clients do not fulfill their obligations, the collateral in the clients’ accounts is insufficient to fully cover losses from such investments and our advisors fail to reimburse us for such losses. Our losses on margin accounts did not exceed $0.7 millionwere immaterial during either of the ninethree months ended September 30, 2017March 31, 2021 and 2016.2020. We monitor exposure to industry sectors and individual securities and perform analyses on a regular basis in connection with our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions.
We are subject to concentration risk if we extend large loans to or have large commitments with a single counterparty, borrower or group of similar counterparties or borrowers (e.g., in the same industry), or if we accept a concentrated position as collateral for a margin loan. Receivables from and payables to clients and stock borrowing
and lending activities are conducted with a large number of clients and counterparties and potential concentration is carefully monitored. We seek to limit this risk through careful review of the underlying business and the use of limits established by senior management, taking into consideration factors including the financial strength of the counterparty, the size of the position or commitment, the expected duration of the position or commitment and other positions or commitments outstanding.
Operational Risk
Operational risk is defined as the risk of loss resulting from failed or inadequate processes or systems, actions by people or external events. We operate in diverse markets and are reliant on the ability of our employees and information technology systems, as well as third-party service providers and their systems, to manage a large numbervolume of transactions effectively.and confidential information, including personally identifiable information, effectively and securely. These risks are less direct and quantifiable than credit and market risk, but managing them is critical, particularly in a rapidly changing operating environment with increasing transaction volumes and in light of increasing reliance on systems capabilities and performance, as well as third-party service providers. In the event of athe breakdown, obsolescence or improper operation of systems, malicious cyber activity or improper action by employees, advisors or third-party service providers, we could suffer business disruptions, financial loss, data loss, regulatory sanctions and damage to our reputation. Although we have developed business continuity and disaster recovery plans, those plans could be inadequate, disrupted or otherwise unsuccessful in maintaining the competitiveness, stability, security or continuity of critical systems as a result of, among other things, obsolescence, improper operation, third-party dependencies or other limitations of our current technology.
In order to assist in the mitigation and control of operational risk, we have an operational risk framework that enablesis designed to enable assessment and reporting on operational risk across the firm. This framework helpsaims to ensure policies and procedures are in place and appropriately designed to identify and manage operational risk at appropriate levels throughout our organization and within various departments. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our employees and advisors operate within established corporate policies and limits. Notwithstanding the foregoing, please consult the Risks“Risks Related to our TechnologyOur Technology” and Risksthe “Risks Related to Our Business Generallyand Industry” sections within Part I, “Item 1A. Risk Factors” in our 20162020 Annual Report on Form 10-K for more information about the risks associated with our technology, including risks related to information security, our risk management policies and procedures, and the potential related effects on our operations.
Our senior management is monitoring developments in the COVID-19 pandemic and has implemented changes to our policies, procedures and operations to protect the integrity and continuity of our business and the health and safety of our employees. For example, we equipped and enabled a substantial majority of employees to work remotely, implemented physical distancing and enhanced cleaning protocols throughout our corporate offices and worked closely with our vendors to maintain service continuity throughout the market volatility and increased operational volumes that occurred from time to time during the pandemic. There can be no guarantee that our business continuity plans and the other efforts to manage the business implications of COVID-19 will be effective, or that there will not be material adverse effects on our results of operations. Please consult Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with COVID-19.
Regulatory and Legal Risk
The regulatory environment in which we operate is discussed in detail within Part I, “Item 1, Business Section”1. Business” in our 20162020 Annual Report on Form 10-K. In recent years, and during the period presented in this Quarterly Report on Form 10-Q, we have observed the SEC, FINRA and state regulators broaden the scope, frequency and depth of their examinations and inquiries to include greater emphasis on the quality, consistency and consistencyoversight of the industry’s execution of policiesour compliance systems and procedures.programs. Please consult the Risks“Risks Related to Our Regulatory Environment sectionEnvironment” and the “Risks Related to Our Business and Industry” sections within Part I, “Item 1A. Risk Factors” in our 20162020 Annual Report on Form 10-K for more information about the risks associated with operating within our regulatory environment, pending regulatory matters and the potential related effects on our operations.
Risk Management
We employ an enterprise risk management framework (“ERM”) framework that is intended to address key risks and responsibilities, enable us to execute our business strategy and protect our Company and its franchise. Our framework is designed to promote clear lines of risk management accountability andFor a structured escalation process for key risk information and events.
We operate a three lines of defense model whereby the primary ownership for risk and control processes is the responsibility of business and control owners who are the “first line” of defense in effectively managing risks. The first line is responsible for risk process ownership and is comprised of the business units, whose primary responsibility is for day-to-day compliance and risk management, including execution of desktop and supervisory procedures. These business owners and certain control owners implement and execute controls to manage risk, execute risk assessments, identify emerging risks, and comply with risk management policies. The second line of defense is comprised of certain departments within Compliance, Legal and Risk (“CLR”), STO, Technology, Finance, and Human Capital and this second line of defense provides risk and control assessment and oversight. The third line of defense is independent verification of the effectiveness of internal controls and is conducted by the Internal Audit Department or in third-party reviews.
Our risk management governance approach includes our Board of Directors and certain of its committees; the Risk Oversight Committee of LPL Financial (the “ROC”) and its subcommittees; the Internal Audit Department
and the CLR Department of LPL Financial; and business line management. We regularly reevaluate and, when necessary, modify our processes to improve the identification and escalation of risks and events.
Audit Committee of the Board
In addition to its other responsibilities, the Audit Committee of the Board (the “Audit Committee”) reviews our policies with respect to risk assessment and risk management, as well as our major financial risk exposures and the steps management has undertaken to control them. The Audit Committee generally provides reports to the Board at each of the Board’s regularly scheduled quarterly meetings.
Compensation and Human Resources Committee of the Board
In addition to its other responsibilities, the Compensation and Human Resources Committee of the Board assesses whether our compensation arrangements encourage inappropriate risk-taking, and whether risks arising from our compensation arrangements are reasonably likely to have a material adverse effect on the Company.
Risk Oversight Committee of LPL Financial
The Audit Committee has mandated that the ROC oversee our risk management activities, including thosediscussion of our subsidiaries. The Deputy Chief Legal and Risk Officer of LPL Financial serves as chair of the ROC, which generally meets on a monthly basis with ad hoc meetings as necessary. The members of the ROC include certain Managing Directors of LPL Financial, as well as other members of LPL Financial’s senior management team who serve as ex-officio members and represent key control areas of the Company. These individuals include, but are not limited to, the Chief Compliance Officer; the Chief Information Security Officer; the Chief AML Officer; and the Regulatory Counsel of LPL Financial. Participation in the ROC by senior officers is intended to ensure that the ROC covers the key risk areas of the Company, including its subsidiaries, and that the ROC thoroughly reviews significant matters relating to risk priorities, policies, control procedures and related exceptions, certain new and complex products and business arrangements, transactions with significant risk elements, and identified emerging risks.
The chair of the ROC provides reports to the Audit Committee at each of the Audit Committee’s regularly scheduled quarterly meetings and, as necessary or requested, to the Board. The reports generally cover topics addressed by the ROC at its meetings since the immediately preceding report. If warranted, matters of material risk are escalated to the Audit Committee or Board more frequently.
Subcommittees of the Risk Oversight Committee
The ROC has established multiple subcommittees that cover key areas of risk. The subcommittees meet regularly and are responsible for keeping the ROC informed and escalating issues in accordance with the Company’s escalation policies. The responsibilities of such subcommittees include, for example, oversight of the approval of new and complex investment products offered to advisors’ clients; oversight of the firm’s technology; issues and trends related to advisor compliance and examination findings; whistle-blower and tips hotline allegations; and oversight of disclosures related to our financial reporting.
Internal Audit Department
The Internal Audit Department provides independent verification of the effectiveness of the Company’s internal controls by conducting risk assessments and audits designed to identify and cover important risk categories. The Internal Audit Department provides regular reports to the ROC and reports to the Audit Committee at least as often as quarterly.
Control Groups
The CLR Department provides compliance oversight and guidance, and conducts various risk and other assessments to address regulatory and Company-specific risks and requirements. The CLR Department reports to the Chief Legal and Risk Officer, who reviews the results of the Company’s risk management process with the ROC, the Audit Committee, and the Board as necessary. Another key control group is the STO Risk Management team. This team identifies, defines, and remediates risk-related items within STO and acts as the liaison between STO and CLR. We also consider the Internal Audit Department to be a control group.
Business Line Management
Each business line is responsible for managing its risk, and business line management is responsible for keeping senior management, including the members of the ROC, informed of operational risk and escalating risk
matters (as defined by the Company’s escalation policies). We have conducted Company-wide escalation training for our employees. Certain business lines, including STO and Technology, have dedicated personnel with responsibilities for monitoring and managing risk-related matters. Business lines are subject to oversight by the control groups, and the Finance, CLR, Technology, and Human Capital Departments also execute certain control functions and report matters to the ROC, Audit Committee, and Board as appropriate.
Advisor Policies
In addition to the ERM framework, we also have written policiesplease see the “Risk Management” section within Part II, “Item 7A. Quantitative and procedures that govern the conduct of business byQualitative Disclosures About Market Risk” in our advisors, employees, and the terms and conditions of our relationships with product manufacturers. Our client and advisor policies address the extension of credit for client accounts, data and physical security, compliance with industry regulations, and codes of conduct and ethics to govern employee and advisor conduct, among other matters.2020 Annual report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Disclosure Committee,Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective.
Change in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the thirdfirst quarter ended September 30, 2017,March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we have been subjected to and are currently subject to legal proceedings, investigations, examinations, and inquiriesregulatory proceedings arising out of our business operations, including lawsuits, arbitration claims, governmental subpoenas, regulatory, governmental and self-regulatory organization inquiries, or investigations and enforcement proceedings initiated by the SEC, FINRA and state securities regulators, as well as other actions and claims. In the opinion of management, there are no matters outstanding that would have a material adverse impact on our operations or financial condition at September 30, 2017. See Note 8.10 - Commitments and Contingencies, within the notes to the unaudited condensed consolidated financial statements for additional information.
A putative class action lawsuit has been filed against the Company and certain of its executive officers in federal district court alleging certain misstatements and omissions related to the Company’s share repurchases and financial performance in late 2015. The Company intends to defend vigorously against the lawsuit.
Item 1A. Risk Factors
Other than the Risks Related to Our Business and Industry noted below, thereThere have been no material changes in the information regarding the Company’s risks, as set forth under Part I, “Item 1A. Risk Factors” in the Company’s 20162020 Annual Report on Form 10-K, as updated by Part II, “Item 1A. Risk Factors” in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.10-K.
Our business could be materially adversely affected as a result of the risks associated with acquisitions and investments.
We have made acquisitions and investments in the past and may pursue further acquisitions and investments in the future. These transactions are accompanied by risks. For instance, an acquisition could have a negative effect on our financial and strategic position and reputation or the acquired business could fail to further our strategic goals. Moreover, we may not be able to successfully integrate acquired businesses into ours, and therefore we may not be able to realize the intended benefits from an acquisition. We may have a lack of experience in new markets, products or technologies brought on by the acquisition and we may have an initial dependence on unfamiliar supply or distribution partners. An acquisition may create an impairment of relationships with customers or suppliers of the acquired business or our advisors or suppliers. All of these and other potential risks may serve as a diversion of our management’s attention from other business concerns, and any of these factors could have a material adverse effect on our business.
On August 15, 2017, we entered into an asset purchase agreement (the “Asset Purchase Agreement”) with National Planning Holdings, Inc. (“NPH”), and its four broker-dealer subsidiaries, (collectively with NPH, the “NPH Sellers”) (the “NPH Acquisition”). Pursuant to the Asset Purchase Agreement, we acquired certain assets and rights of the NPH Sellers, including the NPH Sellers’ business relationships with financial advisors who become affiliated with us. We, along with the NPH Sellers, have agreed to use our respective reasonable best efforts, and to take all actions reasonably necessary, to cause the transfer of the NPH Sellers’ eligible financial advisors (the “NPH Seller Representatives”) to us. Several factors could negatively affect the results of the NPH Acquisition, including, but not limited to: difficulties and delays in recruiting or transferring the licenses of NPH Seller Representatives and/or onboarding the clients or businesses of the NPH Seller Representatives; our inability to sustain revenue and earnings growth or to fully realize revenue or expense synergies or the other expected benefits of the NPH Acquisition; disruptions to our business due to transaction-related uncertainty or other factors making it more difficult to maintain relationships with our financial advisors and their clients, employees, other business partners or governmental entities; the inability to implement onboarding plans and other consequences associated with acquisitions; the choice by clients of the NPH Seller Representatives not to open brokerage and/or advisory accounts at LPL Financial and/or move their respective assets from the NPH Sellers to a new account at LPL Financial; changes in general economic and financial market conditions, including retail investor sentiment; fluctuations in the value of assets under custody; and effects of competition in the financial services industry, including competitors’ success in recruiting NPH Seller Representatives. We can provide no assurances that the assets reported as serviced by the NPH Seller Representatives will translate into assets serviced at LPL Financial, or that the NPH Seller Representatives will join LPL Financial or remain at LPL Financial.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below sets forth information regarding repurchases, reported on a trade date basis, during the three months ended September 30, 2017:None.
|
| | | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Weighted-Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs (millions) |
July 1, 2017 through July 31, 2017 | — |
| | $ | — |
| | — |
| | $ | 166.3 |
|
August 1, 2017 through August 31, 2017 | 259,600 |
| | $ | 46.27 |
| | 259,600 |
| | $ | 154.3 |
|
September 1, 2017 through September 30, 2017 | 279,785 |
| | $ | 46.46 |
| | 279,785 |
| | $ | 141.3 |
|
Total | 539,385 |
| | $ | 46.37 |
| | 539,385 |
| | $ | 141.3 |
|
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
|
| | | | | | | |
2.13.1 |
| | Asset Purchase Agreement, dated as of August 15, 2017 by and among LPL Financial LLC and National Planning Holdings, Inc., SII Investments, Inc., National Planning Corporation, IFC Holdings, Inc., Investment Centers of America, Inc. and Brooke Holdings LLC (1)
|
3.1 |
| | |
3.2 |
| | |
3.3 |
| | |
3.4 |
| | |
4.1 |
| | Supplemental Indenture, dated September 21, 2017,March 15, 2021, among LPL Holdings, Inc., U.S. Bank National Association, as trustee, and certain subsidiaries of LPL Holdings, Inc. as guarantors (6)(Incorporated by reference to the Form 8-K filed on March 15, 2021).
|
10.1 |
| | SecondFifth Amendment Agreement, dated September 21, 2017,March 15, 2021, among LPL Financial Holdings Inc., LPL Holdings, Inc., certain subsidiaries of the Company, LPL Holdings,as Subsidiary Guarantors (as defined therein), the other credit parties party thereto, the lenders party thereto andIncremental Revolving Lenders (as defined therein), JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, letter of credit issuer and swingline lender, and the otherlenders and parties party thereto (6from time to time (Incorporated by reference to the Form 8-K filed on March 15, 2021).)
|
31.110.2 |
| | |
31.1 | | | |
31.2 |
| | |
32.1 |
| | |
32.2 |
| | |
101.INS101.SCH |
| | XBRL Instance Document |
101.SCH |
| | Inline XBRL Taxonomy Extension Schema |
101.CAL |
| | Inline XBRL Taxonomy Extension Calculation |
101.LAB |
| | Inline XBRL Taxonomy Extension Label |
101.PRE |
| | Inline XBRL Taxonomy Extension Presentation |
101.DEF |
| | Inline XBRL Taxonomy Extension Definition |
104 | | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
____________________
|
| | | | | | | |
* |
| | Filed herewith. |
(1** | ) | | Incorporated by reference to the Form 8-K filed on August 15, 2017.
Furnished herewith. |
(2† | ) | | Incorporated by referencePursuant to Amendment No. 2 to17 C.F.R. §§ 230.406 and 230.83, the Registration Statement on Form S-1 filed on
July 9, 2010.
|
(3 | ) | | Incorporated by reference to the Form 8-K filed on June 19, 2012. |
(4 | ) | | Incorporated by reference to the Form 8-K filed on May 9, 2014. |
(5 | ) | | Incorporated by reference to the Form 8-K filed on March 12, 2014. |
(6 | ) | | Incorporated by reference to the Form 8-K filed on September 21, 2017.
confidential portions of this exhibit have been omitted and are marked accordingly. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | | | | | | | |
| | LPL Financial Holdings Inc. |
Date: | October 31, 2017May 4, 2021 | By: | /s/ DAN H. ARNOLD |
| | | Dan H. Arnold |
| | | President and Chief Executive Officer |
| | | |
Date: | October 31, 2017May 4, 2021 | By: | /s/ MATTHEW J. AUDETTE |
| | | Matthew J. Audette |
| | | Chief Financial Officer |
| | | |
Date: | May 4, 2021 | By: | /s/ BRENT B. SIMONICH |
| | | Brent B. Simonich |
| | | Chief Accounting Officer |