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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 | % |
| | | | | | |
| Net New Brokerage Assets (in billions)(4) | $ | (12.9 | ) | | $ | (5.6 | ) | | n/m |
|
| Net New Advisory Assets (in billions)(5) | 18.8 |
| | $ | 8.9 |
| | n/m |
|
| Total Brokerage and Advisory Net New Assets (in billions) | $ | 5.9 |
| | $ | 3.3 |
| | n/m |
|
| | | | | | |
| 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 |
|
| $ | 29.2 |
| | (3 | )% |
| | | | | | |
| Advisors | 14,253 |
| | 14,185 |
| | — | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| Financial Metrics (dollars in millions, except per share data) | 2022 | | 2021 | | 2022 | | 2021 |
| Total revenue | $ | 2,038.9 | | | $ | 1,898.3 | | | $ | 4,104.6 | | | $ | 3,605.9 | |
| Net income | $ | 160.5 | | | $ | 119.1 | | | $ | 294.3 | | | $ | 248.7 | |
| Earnings per share (“EPS”), diluted | $ | 1.97 | | | $ | 1.46 | | | $ | 3.61 | | | $ | 3.05 | |
| Non-GAAP Financial Metrics (dollars in millions, except per share data) | | | | | | | |
EPS prior to amortization of intangible assets and acquisition costs(12) | $ | 2.24 | | | $ | 1.85 | | | $ | 4.20 | | | $ | 3.62 | |
Gross profit(13) | $ | 711.1 | | | $ | 601.6 | | | $ | 1,380.1 | | | $ | 1,181.0 | |
EBITDA(14) | $ | 310.7 | | | $ | 243.4 | | | $ | 577.9 | | | $ | 486.6 | |
Core G&A(15) | $ | 286.0 | | | $ | 251.7 | | | $ | 566.9 | | | $ | 487.9 | |
(1)Totals may not foot due to rounding.
(2)Advisory and brokerage assets consist 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. Client cash balances are also included in total advisory and brokerage assets.
(3)Advisory assets consist of total advisory assets under custody at the Company’s broker-dealer subsidiary, LPL Financial LLC (“LPL Financial”), and Waddell & Reed, LLC. As of June 30, 2022, there were no advisory assets under custody at Waddell & Reed, LLC. Please consult the “Results of Operations” section for a tabular presentation of advisory assets.
(4)Brokerage assets consist of total brokerage assets under custody at the Company’s broker-dealer subsidiary, LPL Financial, and Waddell & Reed, LLC. As of June 30, 2022, there were no brokerage assets under custody at Waddell & Reed, LLC. Please consult the “Results of Operations” section for a tabular presentation of brokerage assets.
(5)Net new advisory assets consist 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.
(6)Net new brokerage assets consist 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.
(7)Calculated as annualized current period net new assets divided by preceding period assets in their respective categories of advisory assets or total advisory and brokerage assets.
(8)During the second quarter of 2022, the Company updated its definition of client cash balances to include client cash accounts and exclude purchased money market funds. Client cash accounts include cash that clients have deposited with LPL Financial that is included in Client payables in the condensed consolidated balance sheets. Prior period disclosures have been updated to reflect this change as applicable.
(9)Represents the amount of securities purchased less the amount of securities sold in client accounts custodied with LPL Financial.
(10)Calculated based on the end-of-period total advisory and brokerage assets divided by the end-of-period advisor count.
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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 | % |
| | | | | | | | | | | | | | | | | |
| June 30, | | March 31, | | June 30, |
| Credit Agreement Net Debt Reconciliation | 2022 | | 2022 | | 2021 |
| Corporate debt and other borrowings | $ | 2,743.3 | | | $ | 2,745.9 | | | $ | 2,754.0 | |
Corporate cash(16) | (241.5) | | | (270.2) | | | (278.4) | |
Credit Agreement Net Debt(†) | $ | 2,501.8 | | | $ | 2,475.8 | | | $ | 2,475.6 | |
| | | | | |
| June 30, | | March 31, | | June 30, |
| EBITDA and Credit Agreement EBITDA Reconciliation | 2022 | | 2022 | | 2021 |
| Net income | $ | 505.4 | | | $ | 464.0 | | | $ | 464.1 | |
| Interest expense on borrowings | 110.2 | | | 106.6 | | | 100.4 | |
| Provision for income taxes | 154.8 | | | 145.6 | | | 143.9 | |
| Depreciation and amortization | 173.1 | | | 161.4 | | | 128.4 | |
| Amortization of other intangibles | 84.3 | | | 83.0 | | | 71.5 | |
EBITDA(†) | $ | 1,027.8 | | | $ | 960.5 | | | $ | 908.2 | |
| Credit Agreement Adjustments: | | | | | |
| Acquisition costs and other | $ | 86.9 | | | $ | 101.2 | | | $ | 45.1 | |
| Employee share-based compensation expense | 45.8 | | | 43.2 | | | 37.5 | |
M&A accretion(17) | 32.1 | | | 40.4 | | | 77.0 | |
| Advisor share-based compensation expense | 2.3 | | | 2.3 | | | 2.3 | |
| Loss on extinguishment of debt | — | | | — | | | 24.4 | |
Credit Agreement EBITDA(†) | $ | 1,194.9 | | | $ | 1,147.7 | | | $ | 1,094.5 | |
| | | | | |
| June 30, | | March 31, | | June 30, |
| 2022 | | 2022 | | 2021 |
| Leverage Ratio | 2.09 | | | 2.16 | | | 2.26 | |
_______________________________
(†) Totals may not foot due to rounding.
(12)EPS prior to amortization of intangible assets and acquisition costs is a non-GAAP financial measure defined as adjusted net income, a non-GAAP financial measure defined as net income plus the after-tax impact of amortization of other intangibles and acquisition costs, divided by the weighted average number of diluted shares outstanding for the applicable period. The Company presents adjusted net income and EPS prior to amortization of intangible assets and acquisition costs because management believes that these metrics can provide investors with useful insight into the Company’s core operating performance by excluding non-cash items and acquisition costs that management does not believe impact the Company’s ongoing operations. Adjusted net income and EPS prior to amortization of intangible assets and acquisition costs are not measures of the Company's financial performance under GAAP and should not be considered as alternatives to net income, earnings per diluted share or any other performance measure derived in accordance with GAAP. Below is a reconciliation of net income and earnings per diluted share to adjusted net income and EPS prior to amortization of intangible assets and acquisition costs for the periods presented (in millions, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Adjusted net income / EPS prior to amortization of intangible assets and acquisition costs Reconciliation | Amount | Per Share | | Amount | Per Share | | Amount | Per Share | | Amount | Per Share |
| Net income / earnings per diluted share | $ | 160.5 | | $ | 1.97 | | | $ | 119.1 | | $ | 1.46 | | | $ | 294.3 | | $ | 3.61 | | | $ | 248.7 | | $ | 3.05 | |
| Amortization of other intangibles | 21.2 | | 0.26 | | | 19.9 | | 0.24 | | | 42.4 | | 0.52 | | | 37.4 | | 0.46 | |
Acquisition costs(18) | 8.9 | | 0.11 | | | 23.8 | | 0.29 | | | 22.2 | | 0.27 | | | 26.2 | | 0.32 | |
| Tax benefit | (7.9) | | (0.10) | | | (11.7) | | (0.14) | | | (16.9) | | (0.21) | | | (17.0) | | (0.21) | |
Adjusted net income / EPS prior to amortization of intangible assets and acquisition costs(†) | $ | 182.7 | | $ | 2.24 | | | $ | 151.1 | | $ | 1.85 | | | $ | 342.0 | | $ | 4.20 | | | $ | 295.3 | | $ | 3.62 | |
| Weighted-average shares outstanding, diluted | 81.4 | | | | 81.7 | | | | 81.5 | | | | 81.6 | | |
| |
(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. |
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(2) | Brokerage assets consists of assets serviced by advisors licensed with LPL Financial. |
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(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.
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(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. |
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(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. |
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(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. |
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(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.
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| | | | | | | | | | | | | | | |
| | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| Gross Profit Reconciliation | 2022 | | 2021 | | 2022 | | 2021 |
| Total revenue | $ | 2,038.9 | | | $ | 1,898.3 | | | $ | 4,104.6 | | | $ | 3,605.9 | |
| Advisory and commission expense | 1,304.4 | | | 1,273.2 | | | 2,678.6 | | | 2,382.1 | |
| Brokerage, clearing and exchange expense | 23.4 | | | 23.5 | | | 46.0 | | | 42.8 | |
Gross Profit(†) | $ | 711.1 | | | $ | 601.6 | | | $ | 1,380.1 | | | $ | 1,181.0 | |
(†) Totals may not foot due to rounding.
(14)EBITDA is a non-GAAP financial measure defined as net income plus interest expense on borrowings, provision for income taxes, depreciation and amortization, and amortization of other intangibles.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. Below is a reconciliation of EBITDA for the periods presented (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| EBITDA Reconciliation | 2022 | | 2021 | | 2022 | | 2021 |
| Net income | $ | 160.5 | | | $ | 119.1 | | | $ | 294.3 | | | $ | 248.7 | |
| Interest expense on borrowings | 28.8 | | | 25.2 | | | $ | 56.0 | | | 50.2 | |
| Provision for income taxes | 51.8 | | | 42.5 | | | $ | 91.4 | | | 78.1 | |
| Depreciation and amortization | 48.5 | | | 36.7 | | | $ | 93.9 | | | 72.2 | |
| Amortization of other intangibles | 21.2 | | | 19.9 | | | $ | 42.4 | | | 37.4 | |
EBITDA(†) | $ | 310.7 | | | $ | 243.4 | | | $ | 577.9 | | | $ | 486.6 | |
(†) Totals may not foot due to rounding.
(15)Core G&A is a non-GAAP financial measure defined as total expense less the following expenses: advisory and commission; depreciation and amortization; interest expense on borrowings; brokerage, clearing and exchange; amortization of other intangibles; loss on extinguishment of debt; promotional; acquisition costs; employee share-based compensation; and regulatory charges. Management presents Core G&A because it believes Core G&A reflects the corporate 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 expense, 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 expense as calculated in accordance with GAAP. Below is a reconciliation of Core G&A for the periods presented (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| Core G&A Reconciliation | 2022 | | 2021 | | 2022 | | 2021 |
| Total expense | $ | 1,826.6 | | | $ | 1,736.6 | | | $ | 3,718.9 | | | $ | 3,279.1 | |
| Advisory and commission | 1,304.4 | | | 1,273.2 | | | 2,678.6 | | | 2,382.1 | |
| Depreciation and amortization | 48.5 | | | 36.7 | | | 93.9 | | | 72.2 | |
| Interest expense on borrowings | 28.8 | | | 25.2 | | | 56.0 | | | 50.2 | |
| Brokerage, clearing and exchange | 23.4 | | | 23.5 | | | 46.0 | | | 42.8 | |
| Amortization of other intangibles | 21.2 | | | 19.9 | | | 42.4 | | | 37.4 | |
| Loss on extinguishment of debt | — | | | — | | | — | | | 24.4 | |
Total G&A(†) | 400.4 | | | 358.1 | | | 802.1 | | | 670.0 | |
Promotional (ongoing)(18)(19) | 83.8 | | | 64.1 | | | 171.2 | | | 118.3 | |
| Employee share-based compensation | 13.7 | | | 11.1 | | | 26.4 | | | 22.5 | |
Acquisition costs(18) | 8.9 | | | 23.8 | | | 22.2 | | | 26.2 | |
| Regulatory charges | 8.1 | | | 7.4 | | | 15.4 | | | 15.0 | |
Core G&A(†) | $ | 286.0 | | | $ | 251.7 | | | $ | 566.9 | | | $ | 487.9 | |
(†) Totals may not foot due to rounding.
(16)See the “Liquidity and Capital Resources” section for additional information about Corporate Cash.
(17)M&A accretion is an adjustment to reflect the annualized expected run rate EBITDA of an acquisition as permitted by the Credit Agreement for up to eight fiscal quarters following the close of the transaction.
(18)Acquisition costs include the costs to setup, onboard and integrate acquired entities. The below table summarizes the primary components of acquisition costs for the periods presented (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| Acquisition costs | 2022 | | 2021 | | 2022 | | | | 2021 |
| Compensation and benefits | $ | 6.7 | | | $ | 13.9 | | | $ | 12.3 | | | | | $ | 15.5 | |
| Professional services | 1.9 | | | 6.3 | | | 7.5 | | | | | 6.9 | |
Promotional(19) | — | | 0.2 | | 1.9 | | | | | 0.2 |
| Other | 0.3 | | 3.4 | | | 0.5 | | | | | 3.6 | |
| Acquisition costs | $ | 8.9 | | | $ | 23.8 | | | $ | 22.2 | | | | | $ | 26.2 | |
(19)Promotional (ongoing) for the three and six months ended June 30, 2022 includes $5.8 million and $8.1 million, respectively, of support costs related to full-time employees that are classified within Compensation and benefits expense in the condensed consolidated statements of income. Promotional (ongoing) for the six months ended June 30, 2022 excludes $1.9 million of expenses incurred as a result of acquisitions, which are included in the Acquisition costs line item.
Legal &and Regulatory Matters
The financial services industry is subject to extensive regulation by U.S. federal, state and international government agencies as well as various self-regulatory organizations. We seek to participate in the development of significant rules and regulations that govern our industry. We have been investing in our compliance functions to monitor our adherence to the numerous legal and regulatory requirements applicable to our business. Compliance with all applicable laws and regulations involves a significant investment in time and resources. Any new laws or regulations applicable to our business, any changes to existing laws or regulations, or any changes to the interpretations or enforcement of those laws or regulations may affect our operations and/or financial condition.
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 SeptemberJune 30, 2017,2022, 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, the United States Department
Table of Labor issued a final rule (the “DOL Rule”) and related exemptions that, broaden the circumstances under which we may be considered a “fiduciary” with respect to certain accounts that are subject to the ERISA, and the prohibited transaction rules under section 4975 of the Internal Revenue Code. These types of accounts include many employer-sponsored retirement plans and individual retirement accounts ("IRAs"). The DOL also finalized certain prohibited transaction exemptions 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 applicable 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. Because ERISA plans and IRAs comprise a significant portion of our business, we continue to expect that compliance with the DOL Rule and reliance on new and amended prohibited transaction exemptions 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 the SEC for more information about the risks associated with the DOL Rule and related exemptions and their potential impact on our operations.Contents 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.
On August 15, 2017,April 30, 2021, we entered intoacquired the Asset Purchase Agreement with the NPH Sellers to acquire certain assets and rightswealth management business of the NPH Sellers, including the Sellers' business relationships with financial advisors who become affiliated with LPL Financial. We paid $325 million to the NPH Sellers at closing, which occurred on August 15, 2017, and have agreed to a potential contingent payment of up to $122.8 million (the “NPH Contingent Payment”Waddell & Reed Financial, Inc. (“Waddell & Reed”). 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. 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 States financial markets. In the United States, economic data continued to point to fairly steady economic growth over the second and third quarter of 2017 after some slowing in the first quarter. According to the most recent estimate byfrom the U.S. Bureau of Economic Analysis, real gross domestic product (“GDP”) grewthe U.S. economy contracted at an annualized ratepace of 3.0%0.9% in the thirdsecond quarter of 2017. This estimate translates2022 after contracting at an annualized pace of 1.6% in the first quarter of 2022. The economy was negatively impacted by elevated inflation, a drag from net exports and geopolitical uncertainties from the Russian invasion of Ukraine.
Although inflation was an issue for policy-makers and consumers alike, companies continued to add jobs: the U.S. economy added 1.1 million jobs in the second quarter of 2022. The unemployment rate remained unchanged throughout the quarter at 3.6%, signaling a tight labor market. The equity markets experienced intense volatility from an overall growth rate over the last four quarters at 2.3%, slightlyincreasingly hawkish Federal Reserve (“Fed”) and from monthly inflation metrics that regularly were higher than the average for the expansion. Growth has been supported by a largely healthy labor market, generally steady consumer spending, signs of improved business investment, 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 probability of the Fed following through on its median projected rate path of one more rate hike in 2017 and three more rate hikes in 2018.
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.anticipated. The S&P 500 and the Bloomberg Barclays U.S. Aggregate Bond Index has further extended its rally, posting steady gains supported by solid earnings growth. The 10-year Treasury yield was near flat over muchdeclined 16.1% and 4.7%, respectively, during the second quarter of the third 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.2022.
Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Fed policy. During the second quarter of 2022, Fed policymakers increased the target range for the federal funds rate to 1.50% to 1.75%. Fed policymakers further raised rates by 0.75% at the July policy meeting, increasing the target range for the federal funds rate to 2.25% to 2.50%. The Fed anticipates that ongoing increases to the target range will be appropriate.
Please consult the “Risks Related to Our Business and IndustryIndustry” section within Part I, “Item“Item 1A. Risk Factors” in our 20162021 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 ninesix months ended SeptemberJune 30, 20172022 and 2016. Where appropriate, we have identified specific events2021 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
| REVENUE | | | | | | | | | | | |
| Advisory | $ | 1,001,851 | | | $ | 846,313 | | | 18.4 | % | | $ | 2,048,948 | | | $ | 1,568,359 | | | 30.6 | % |
| Commission | 573,376 | | | 598,233 | | | (4.2) | % | | 1,158,901 | | | 1,155,462 | | | 0.3 | % |
| Asset-based | 363,597 | | | 279,620 | | | 30.0 | % | | 659,998 | | | 544,326 | | | 21.3 | % |
| Service and fee | 112,802 | | | 99,473 | | | 13.4 | % | | 225,614 | | | 196,297 | | | 14.9 | % |
| Transaction | 44,416 | | | 37,627 | | | 18.0 | % | | 91,142 | | | 81,747 | | | 11.5 | % |
| Interest income | 10,121 | | | 6,914 | | | 46.4 | % | | 17,866 | | | 13,432 | | | 33.0 | % |
| Other | (67,276) | | | 30,078 | | | n/m | | (97,889) | | | 46,252 | | | n/m |
| Total revenue | 2,038,887 | | | 1,898,258 | | | 7.4 | % | | 4,104,580 | | | 3,605,875 | | | 13.8 | % |
| EXPENSE | | | | | | | | | | | |
| Advisory and commission | 1,304,422 | | | 1,273,202 | | | 2.5 | % | | 2,678,556 | | | 2,382,101 | | | 12.4 | % |
| Compensation and benefits | 196,699 | | | 183,853 | | | 7.0 | % | | 388,733 | | | 345,393 | | | 12.5 | % |
| Promotional | 78,027 | | | 64,349 | | | 21.3 | % | | 165,029 | | | 118,530 | | | 39.2 | % |
| Occupancy and equipment | 55,906 | | | 41,452 | | | 34.9 | % | | 107,018 | | | 85,036 | | | 25.9 | % |
| Depreciation and amortization | 48,453 | | | 36,704 | | | 32.0 | % | | 93,907 | | | 72,203 | | | 30.1 | % |
| Interest expense on borrowings | 28,755 | | | 25,171 | | | 14.2 | % | | 55,966 | | | 50,230 | | | 11.4 | % |
| Brokerage, clearing and exchange | 23,362 | | | 23,459 | | | (0.4) | % | | 45,962 | | | 42,823 | | | 7.3 | % |
| Amortization of other intangibles | 21,168 | | | 19,925 | | | 6.2 | % | | 42,364 | | | 37,356 | | | 13.4 | % |
| Professional services | 17,290 | | | 22,500 | | | (23.2) | % | | 36,312 | | | 38,125 | | | (4.8) | % |
| Communications and data processing | 16,223 | | | 14,930 | | | 8.7 | % | | 31,350 | | | 26,923 | | | 16.4 | % |
| Loss on extinguishment of debt | — | | | — | | | — | % | | — | | | 24,400 | | | (100.0) | % |
| Other | 36,261 | | | 31,064 | | | 16.7 | % | | 73,683 | | | 55,964 | | | 31.7 | % |
| Total expense | 1,826,566 | | | 1,736,609 | | | 5.2 | % | | 3,718,880 | | | 3,279,084 | | | 13.4 | % |
| INCOME BEFORE PROVISION FOR INCOME TAXES | 212,321 | | | 161,649 | | | 31.3 | % | | 385,700 | | | 326,791 | | | 18.0 | % |
| PROVISION FOR INCOME TAXES | 51,776 | | | 42,548 | | | 21.7 | % | | 91,411 | | | 78,070 | | | 17.1 | % |
| NET INCOME | $ | 160,545 | | | $ | 119,101 | | | 34.8 | % | | $ | 294,289 | | | $ | 248,721 | | | 18.3 | % |
Revenue
Advisory
Advisory revenue represents fees charged to advisors’ clients’ advisory accounts on our corporate RIA advisory platform and is based on a percentage of the market value of the eligible assets in the clients’ advisory accounts. We provide ongoing investment advice and act as a custodian, providing brokerage and execution services on transactions, and perform administrative services for these accounts. Advisory fees are primarily billed to clients in advance, on a quarterly basis, and are recognized as revenue ratably during the quarter. The performance obligation for advisory fees is considered a series of distinct services that are substantially the same and are satisfied daily. As the value of the eligible assets in an advisory account is susceptible to changes due to customer activity, this revenue includes variable consideration and is constrained until the date that affect comparability or trends,the fees are determinable. The majority of our client accounts are on a calendar quarter and where possibleare billed using values as of the last business day of the preceding quarter. The value of the eligible assets in an advisory account on the billing date is adjusted for estimates of contributions and practical, have quantifiedwithdrawals to determine the amount billed, and accordingly, the revenue earned in the following three-month period. Advisory revenue collected on our corporate advisory platform is proposed by the advisor and agreed to by the client and averaged 1% on an annualized basis of the underlying assets for the six months ended June 30, 2022.
We also support separate investment advisor firms (“Independent RIAs”) through our Independent RIA advisory platform, which allows advisors to engage us for technology, clearing and custody services, as well as access the capabilities of our investment platforms. The assets held under an Independent 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 an Independent RIA is not included in our advisory revenue. We charge separate fees to Independent RIAs for technology, clearing, administrative, oversight and custody services, which may vary and are included in our Service and fee revenue in our condensed consolidated statements of income.
The following table summarizes the composition of advisory assets for the periods presented (in billions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, | | |
| | 2022 | | 2021 | | $ Change | | % Change |
| Corporate platform advisory assets | | $ | 372.1 | | | $ | 383.6 | | | $ | (11.5) | | | (3.0) | % |
| Independent RIA advisory assets | | 186.5 | | | 194.0 | | | (7.5) | | | (3.9) | % |
| Total advisory assets | | $ | 558.6 | | | $ | 577.6 | | | $ | (19.0) | | | (3.3) | % |
Net new advisory assets are generated throughout the quarter, therefore, the full impact of such items.net new advisory assets to advisory revenue is not realized in the same period. The following table summarizes activity impacting advisory assets for the periods presented (in billions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Balance - Beginning of period | $ | 624.3 | | | $ | 496.7 | | | $ | 643.2 | | | $ | 461.2 | |
Net new advisory assets(1) | 11.4 | | | 54.9 | | | 28.8 | | | 77.6 | |
Market impact(2) | (77.1) | | | 26.0 | | | (113.4) | | | 38.8 | |
| Balance - End of period | $ | 558.6 | | | $ | 577.6 | | | $ | 558.6 | | | $ | 577.6 | |
(1)Net new advisory assets consist 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.
(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 revenue for the three and six months ended June 30, 2022 compared to 2021 was due to an increase in billable advisory assets from continued organic growth and the completion of onboarding Waddell & Reed assets during the third quarter of 2021, partially offset by a decline in advisory asset balances due to market changes.
|
| | | | | | | | | | | | | | | | | | | | | |
| | 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 Revenues
We generate two types of commission revenues:revenue: (1) sales-based commissions that are recognized at the point of sale on the trade date and are based on a percentage of an investment product’s current market value at the time of purchase and (2) trailing commissions.commissions that are recognized over time as earned and are generally based on the market value of investment holdings in trail-eligible assets. Sales-based commission revenues,revenue, which occur wheneveroccurs when clients of our advisors trade securities or purchase various types of investment products, primarily representrepresents gross commissions generated by our advisors. The levels of sales-based commission revenuesadvisors, and 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 are recurring in nature and are earned based on the market value of investment holdings in trail eligible assets. We earn trailing commission revenues (a commission that is paid over time, such as 12(b)-1 fees)revenue primarily on mutual funds and variable annuities held by clients of our advisors.
The following table sets forth See Note 3 - Revenue, within the notes to the condensed consolidated financial statements for further detail regarding our commission revenue by product category, 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 | )% |
category.
The following table sets forth the components of our commission revenue by sales-based and trailing commission revenue (dollars(in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | $ Change | | % Change | | 2022 | | 2021 | | $ Change | | % Change |
| Sales-based | $ | 252,493 | | | $ | 249,596 | | | $ | 2,897 | | | 1.2 | % | | $ | 492,824 | | | $ | 485,869 | | | $ | 6,955 | | | 1.4 | % |
| Trailing | 320,883 | | | 348,637 | | | (27,754) | | | (8.0) | % | | 666,077 | | | 669,593 | | | (3,516) | | | (0.5) | % |
| Total commission revenue | $ | 573,376 | | | $ | 598,233 | | | $ | (24,857) | | | (4.2) | % | | $ | 1,158,901 | | | $ | 1,155,462 | | | $ | 3,439 | | | 0.3 | % |
The increase 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 | )% |
The decrease in sales-based commission revenue for the three and six months ended SeptemberJune 30, 2017,2022 compared withto 2021 was primarily driven by increases in sales of annuities and insurance products due to rising interest rates, which were partially offset by decreases in sales of mutual funds, equity and fixed income products. The decrease in trailing commission revenue for the same period in 2016,three and six months ended June 30, 2022 compared to 2021 was primarily due to a decreasevolatility driven declines 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 statements 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.
trail eligible assets.
Commission revenue is generated from trading activity related to brokerage assets. The following table summarizes activity inimpacting brokerage assets for the periods presented (in billions): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Balance - Beginning of period | $ | 538.8 | | | $ | 461.6 | | | $ | 563.2 | | | $ | 441.9 | |
Net new brokerage assets(1) | 25.8 | | | 51.1 | | | 26.0 | | | 57.3 | |
Market impact(2) | (58.6) | | | 22.0 | | | (83.2) | | | 35.5 | |
| Balance - End of period | $ | 506.0 | | | $ | 534.7 | | | $ | 506.0 | | | $ | 534.7 | |
_______________________________ |
| | | | | | | | | | | | | | | |
| | 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) | (2) 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. |
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 us 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 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. 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 assets for the three and nine months ended September 30, 2017 and 2016 had a limited impact on our advisory fee revenue for those respective periods. Rather, net new advisory assets are a primary driver of future advisory fee revenue. The revenue for any particular quarter is primarily driven by each of the prior quarter’s month-end advisory assets under management. The growth in advisory revenue for the three and nine months ended September 30, 2017 compared to the same period in 2016 was due to net new advisory assetsof time.
Asset-Based
resultingAsset-based revenue consists of fees from our recruiting efforts and strong advisor productivity, as well as market gains as represented by higher levels of the S&P 500 index and brokerage to advisory conversions.
Assets on our Hybrid RIA platform have been growing rapidly through the recruiting of new advisors 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 otherclient cash programs, 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 | % |
Asset-Based Revenues
Asset-based revenues are comprised offrom our sponsorship programs with financial product manufacturers, and fees from omnibus processing and networking services (collectively referred to as “recordkeeping”). Client cash revenue is generated on advisors’ clients’ cash balances in insured bank sweep accounts and fees from our cash sweep program.money market programs. We also receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales force education and training efforts. Compensation for these performance obligations is either a fixed fee, a percentage of the average annual amount of product sponsor assets held in advisors’ clients’ accounts, a percentage of new sales or a combination. Omnibus processing revenues arerevenue is paid to us by mutual fund product sponsors or their affiliates and areis based on the value of custodiedmutual fund assets in advisory accounts for which the Company provides omnibus processing services and the number of brokerage accounts in which the related mutual fund positions are held. Networking revenuesrevenue on brokerage assets areis correlated to the number of positions we administer and areis paid to us by mutual fund product sponsors and annuity product manufacturers. 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.
Asset-based revenuesrevenue for the three and six months ended SeptemberJune 30, 20172022 increased compared to $184.0 million, or 33.0%,2021, due to increases in client cash revenue and revenues from $138.3 millionrecordkeeping and sponsorship programs.
Revenue for our recordkeeping and sponsorship programs for the three and six months ended SeptemberJune 30, 2016. The increase2022, which is largely based on the market value of the underlying assets, increased compared to 2021 primarily due primarily to increased revenues fromcontinued organic growth in our assets under management.
Client cash sweep program. Cash sweep revenue increased to $81.6 million for the three and six months ended SeptemberJune 30, 2017, from $40.7 million for the three months ended September 30, 2016,2022 increased compared to 2021, primarily due to the impact of an increase in the target range forincreases to the federal funds effective rate partially offset by lower 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 duringin the three and six months ended SeptemberJune 30, 20172022.
Service and 2016, respectively.Fee
Asset-based revenues for the nine months ended September 30, 2017, increased to $514.6 million, or 24.8%,Service and fee revenue is generated 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 compared to September 30, 2016, with average cash sweep balances of $28.7 billionadvisor and $29.7 billion during the nine months ended September 30, 2017retail investor services, including technology, insurance, conferences, licensing, LPL Services Group, which includes Business Services and 2016, respectively.
TransactionPlanning 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 includeAdvice Services, IRA custodian, fees, contract and licensing fees, and other client account fees. In addition, weWe charge separate fees to Independent RIAs for technology, clearing, administrative, oversight and custody services, which may vary. We also host certain advisor conferences that serve as training, education, sales and marketing events for which we charge sponsors a fee for attendance.
Transactionfee. Service and fee revenues decreasedrevenue for the three and six months ended SeptemberJune 30, 20172022 increased 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 20162021, primarily due to a new 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 Marchcontract and June 2017, partially offset by a decrease in terminationlicensing fees, fees from an institutionalLPL Services Group solutions, conference fees and other client departure in the prior year that did not repeat in the current period.account fees.
Interest Income Net of Interest Expense
We earn interest income primarily from client margin accountsloans and cash equivalents, net of operating interest expense.advisor loans. Period-over-period variances correspond to changes in the average balances of assetsloans, as well as changes in interest rates. Interest income for the three and six months ended June 30, 2022 increased compared to 2021, primarily due to an increase in interest earned on advisor and margin accounts and cash equivalents.loans.
Other
Other Revenues
Other revenuesrevenue primarily include 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-marketincludes unrealized gains and losses on assets held by us forin our advisor non-qualified deferred compensation plan and our model research portfolios, and other miscellaneous revenues.revenue, which is not generated from contracts with customers.
Other revenues decreasedrevenue for the three and six months ended SeptemberJune 30, 2017,2022 decreased compared to the same period in 20162021, 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 gainslosses 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 decreasean increase in alternative investment marketing allowances.dividend income on assets held in our advisor non-qualified deferred compensation plan.
Expenses
CommissionExpense
Advisory and Commission
Advisory Expenses
Commission and advisory expenses are comprisedcommission expense consists of the following: base payout amounts that are earned by and paid out to advisors and institutions based on advisory and commission and advisory revenuesrevenue earned on each client’s account; productionaccount, production- based bonuses earned by advisors and institutions based on the levels of advisory and commission and advisory revenuesrevenue they produce;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 advisorycommission fee expensesexpense 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 of our commission and advisory revenues (referred to as gross dealer concessions, or "GDC"), as set forth on our unaudited condensed consolidated statements of income. The following table shows the components ofsets forth our production payout and total payout ratios, each ofrate, which is a statistical or operating measure:
|
| | | | | | | | | | | | | | | |
| | 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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Payout rate | 86.97 | % | | 86.35 | % | | 62 bps | | 86.53 | % | | 86.01 | % | | 52 bps |
| | | | | | | | | | | |
| | | | | | | | | | | |
_______________________________ | |
(1) | Our production payout ratio is calculated as commission and advisory expenses, divided by GDC (see description above). |
| |
(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, increasedrate for the three and six months Septemberended June 30, 20172022 increased compared with the same period in 2016to 2021, primarily due to an increase in non-GDC sensitive payout, which includes advisor deferred compensation and advisor share-based compensation.the impact of onboarding large financial institutions during 2021.
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, benefits, share-based compensation and related employee benefits and taxes for our employees, (including share-based compensation), as well as compensation for temporary workers and contractors. The following table sets forth our average number of employees for the three and consultants.six months ended June 30, 2022 as compared to 2021:
|
| | | | | | | | | | | |
| | 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% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| Average number of employees | 6,107 | | 5,137 | | 18.9% | | 6,083 | | 4,962 | | 22.6% |
Compensation and benefits expense increased for the three and six months ended SeptemberJune 30, 20172022 increased by $12.8 million and $43.3 million compared with the same period in 2016to 2021, primarily due to an increase in salary and employee benefit expense 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.headcount.
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.Promotional
Promotional Expense
Promotional expenses includeexpense includes 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 as business development costs related to recruiting, including transition assistance and amortization related to forgivable loans issued to advisors.
Promotional expense remained relatively flat for the three months ended September 30, 2017 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 2016 was primarily driven by lower conference expenses and a decrease in amounts paid as advisor referral bonuses.
Depreciation and Amortization Expense
Depreciation and amortization expense represents the benefits received for using long-lived assets. Those assets consist of fixed assets, which include internally developed software, hardware, leasehold improvements, and other equipment.
The increase in depreciation and amortization of $3.6 million and $7.8 millioncosts that support advisor business growth. Promotional expense for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2022 increased by $13.7 million and $46.5 million compared with the same periods in 2016, wasto 2021, primarily due to increases in purchased hardwarerecruited assets and softwareadvisors that led to higher costs to support transition assistance and an increaseretention, as well as increases 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.conference spend as we returned to in-person events.
Occupancy and Equipment Expense
Occupancy and equipment expense includes the costs of leasing and maintaining our office spaces, software licensing and maintenance costs and maintenance expensesexpense on computer hardware and other equipment.
Occupancy and equipment expense for the three and six months ended June 30, 2022 increased by $14.5 million and $22.0 million compared to 2021, primarily due to increases in expenses related to software licenses and our technology portfolio.
Depreciation and Amortization
Depreciation and amortization expense relates to the use of property and equipment, which includes internally developed software, hardware, leasehold improvements and other equipment. Depreciation and amortization expense for the three and six months ended June 30, 2022 increased by $11.7 million and $21.7 million compared to 2021, primarily due to our continued investment in technology to support integrations, enhance our advisor platform and end-client experience, and support large financial institution onboarding.
Brokerage, Clearing and Exchange
Brokerage, clearing and exchange expense includes expenses originating from trading or clearing operations as well as any exchange membership fees. These fees fluctuate largely in line with the volume of sales and trading activity. Brokerage, clearing and exchange expense remained relatively flatconstant for the three months ended SeptemberJune 30, 2017 compared with the same period in 2016.
The increase in occupancy2022 and equipment expense of $3.6increased by $3.1 million for the ninesix months ended SeptemberJune 30, 2017 2022 compared with the same period in 2016, wasto 2021, primarily due to an increase in costs relatedthe volume of sales and trading activity.
Amortization of Other Intangibles
Amortization of other intangibles expense represents the benefits received for the use of long-lived intangible assets established through our acquisitions. Amortization of other intangibles for the three and six months ended June 30, 2022 increased by $1.2 million and $5.0 million compared to repairs and maintenance2021, primarily due to increases in intangible assets resulting from our acquisition of computer hardware and equipment as well as an increase in non-capitalized software costs in supportthe wealth management business of our service and technology investments, partially offset by a decrease in rent expense and software licensing fees.Waddell & Reed on April 30, 2021. See Note 4 - Acquisitions,for additional information.
Professional Services
Professional services expense includes costs paid to outside firms for assistance with legal, accounting, technology, regulatory marketing, and general corporate matters, as well as non-capitalized costs related to service and technology enhancements.
Professional services remained relatively flat for the three months ended September 30, 2017 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, was 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 activityexpense for the three and ninesix months ended SeptemberJune 30, 2017,2022 decreased by $5.2 million and $1.8 million compared withto 2021, primarily due to a decrease in consulting services as internal hiring has replaced the same periods in 2016.use of certain consultants.
Communications and Data Processing
Communications and data processing 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 ofmarkets, as well as customer statement processing and postage costs.
Communications and data processing expense remained relatively flat for the three and ninesix months ended SeptemberJune 30, 2017,2022 increased by $1.3 million and $4.4 million compared to 2021, primarily due to increases in costs associated with client statement production due to growth in our advisor count, which led to an increase in the same periodscustomer base.
Loss on Extinguishment of Debt
On March 15, 2021, we issued senior unsecured notes due in 2016.2029 and redeemed our existing senior unsecured notes due in 2025. In connection with these transactions, we incurred a $24.4 million loss on extinguishment of debt for the six months ended June 30, 2021.
Other ExpensesExpense
Other expenses includeexpense includes the estimated costs of the investigation, settlement and resolution of regulatory matters (including customer restitution and remediation), licensing fees, insurance, broker-dealer regulatorregulatory fees, travel-related expenses and other miscellaneous expenses.
The decrease Other expense depends in other expensespart on the size and timing of $1 millionresolving regulatory matters and the availability of self-insurance coverage, which depends in part on the amount and timing of resolving historical claims. Other expense for the three months ended SeptemberJune 30, 2017,2022 increased by $5.2 million compared with the same period in 2016, wasto 2021, primarily due to lower costs associated with the investigation, settlement, and resolution of regulatory matters.
The increaseincreases in other expenses of $1.6 milliontravel related costs. Other expense for the ninesix months ended SeptemberJune 30, 2017,2022 increased by $17.7 million compared with the same period in 2016, wasto 2021, primarily driven by an increase in regulatory investigation fees, partially offset by a one time recovery relateddue 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 rate on our senior unsecured notes issued in March and September 2017Waddell & Reed transitional support through April 2022 and an increase in interest expensetravel 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.
Loss on Extinguishment of Debt
On September 21, 2017, we entered into a second amendment (“the Amendment”) which amended and restated the existing credit agreement of our subsidiary LPL Holdings, Inc. (“LPLH”) and repriced our existing $500.0 million senior secured revolving credit facility 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 the existing senior notes due 2025. We used $200 million in proceeds from the offering to pay down our existing Term Loan B to $1,500 million. In connection with the execution of the Amendment, we accelerated the recognition of $1.3 million of unamortized debt issuance costs as a loss on extinguishment of debt in our unaudited condensed consolidated statements of income.
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.costs.
Provision for Income Taxes
We estimate our full-yearOur effective income tax rate atwas 24.4% and 26.3% for the end of each reporting period. This estimate is used in providingthree months ended June 30, 2022 and 2021, respectively, and 23.7% and 23.9% for income taxes on a year-to-date basisthe six months ended June 30, 2022 and may change in subsequent interim periods.2021, respectively. The tax rate in any quarter can be affected positively and negatively by adjustments that are required to be reported in the quarter in which resolution of a particular item occurs. TheCompany’s effective income tax rates reflectrate differs from the impactfederal corporate tax rate of 21.0%, primarily as a result of state taxes, state and federal 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% and 23.8%rates for the three and six months ended SeptemberJune 30, 20172022 and 2016, respectively.
Our effective tax rate was 38.6%2021 benefited from share-based compensation and 35.4% foroption exercises during those periods, partially offset by settlement contingencies recognized during the ninethree and six months ended SeptemberJune 30, 20172022 and 2016, respectively.2021.
During the third quarter of 2016, we updated our calculation of the tax benefits that we could obtain 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.
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
|
| | | | | | | |
| | 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 |
|
| Cash and cash equivalents — beginning of period | 747,709 |
| | 724,529 |
|
| Cash and cash equivalents — end of period | $ | 577,961 |
| | $ | 787,364 |
|
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 other capital returns to shareholders. Our liquidity needs at LPL Financial are driven primarily by the level and volatility of our capacity for additional borrowing.
Net cash provided by operating activities includes changes in operating assetsclient activity. Management maintains a set of liquidity sources and liabilities, including balances related 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 overallmonitors certain business trends and clients’ behaviors.
The decreasemarket metrics closely in cash flows provided by operating activities for the nine months ended September 30, 2017 comparedan effort 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 repurchases of our common stock and debt issuance costs incurred in connection with our refinancings completed in March and September 2017.
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 our working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures for the foreseeable future. In addition,
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. Corporate Cash, a component of cash and equivalents, is the sum of cash and equivalents from the following: (1) cash and equivalents held at the Parent, (2) cash and equivalents held at regulated subsidiaries as defined by the Company’s Credit Agreement, which include LPL Financial and The Private Trust Company, N.A. (“PTC”), in excess of the capital requirements of the Company’s Credit Agreement (which, in the case of LPL Financial, is net capital in excess of 10% of its aggregate debits, or five times the net capital required in accordance with Exchange Act Rule 15c3-1), and (3) cash and equivalents held at non-regulated subsidiaries.
We believe Corporate Cash is a useful measure of the Parent’s liquidity, as it represents the capital available for use in excess of the amount we have certainare required to reserve pursuant to the Credit Agreement. The following table presents the components of Corporate Cash (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Cash and equivalents | $ | 700,395 | | | $ | 495,246 | |
| Cash at regulated subsidiaries | (546,299) | | | (284,105) | |
| Excess cash at regulated subsidiaries per the Credit Agreement | 87,400 | | | 25,846 | |
| Corporate Cash | $ | 241,496 | | | $ | 236,987 | |
| | | |
| Corporate Cash | | | |
| Cash at Parent | $ | 144,358 | | | $ | 202,407 | |
| Excess cash at regulated subsidiaries per the Credit Agreement | 87,400 | | | 25,846 | |
| Cash at non-regulated subsidiaries | 9,738 | | | 8,734 | |
| Corporate Cash | $ | 241,496 | | | $ | 236,987 | |
Corporate Cash is monitored as part of our liquidity risk management. We target maintaining $200.0 million in Corporate Cash, which covers approximately 18 months of principal and interest due on our corporate debt. The Company maintains additional liquidity through a $1.0 billion secured committed revolving credit facility. The Parent has the ability to borrow against the credit facility for working capital adequacyand general corporate purposes. Dividends from and excess capital generated by regulated subsidiaries are the primary sources of liquidity. Subject to regulatory approval or notification, capital generated by regulated subsidiaries can be distributed to the Parent to the extent the capital levels exceed regulatory requirements, related to our registered broker-dealer subsidiary and bank trust subsidiary and have met all suchCredit Agreement requirements and expectinternal capital thresholds. During the six months ended June 30, 2022 and 2021, regulated subsidiaries paid dividends of $331.0 million and $275.0 million to continue to do so for the foreseeable future. We regularly evaluate our existing indebtedness, including refinancing thereof, based on a number of factors, including our capital requirements, future prospects, contractual restrictions, the availability of refinancing on attractive terms, and general market conditions.Parent, respectively.
Share Repurchases
We engage in share repurchase programs, which are approved by our 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, including transactions withtransactions. 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 first half of 2021, the majority of our affiliates,capital deployment was focused on supporting organic growth and acquisitions. While we continue to see opportunities to deploy capital in this manner, we resumed share repurchases in the third quarter of 2021 with the initial focus on an amount to offset dilution. We repurchased $100.0 million, representing 564,522 shares, during the six months ended June 30, 2022. The timing of purchases and the amount of stock purchased generallyshare repurchases, if any, is determined at our discretion within the constraints of our senior secured credit agreement,Credit Agreement, the indenture governingIndentures, applicable laws and consideration of our Notes, and 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 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.
LPL Financial Liquidity
LPL Financial relies primarily on client payables to fund margin lending. LPL Financial maintains additional liquidity through external lines of credit totaling $500.0 million at June 30, 2022. LPL Financial also maintains a line of credit with the Parent.
External Liquidity Sources
The following table presents amounts outstanding and available under our external lines of credit at June 30, 2022 (in millions):
| | | | | | | | | | | | | | | |
| Description | Borrower | Maturity Date | Outstanding | Available | |
| Senior secured, revolving credit facility | LPL Holdings, Inc. | March 2026 | $ | — | | $ | 1,000 | | |
Broker-dealer revolving credit facility(1) | LPL Financial LLC | July 2024 | $ | — | | $ | 300 | | |
| | | | | |
| Unsecured, uncommitted lines of credit | LPL Financial LLC | September 2022 | $ | — | | $ | 75 | | |
| Unsecured, uncommitted lines of credit | LPL Financial LLC | September 2022 | $ | — | | $ | 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 | |
_____________________________
(1)On August 4, 2022, LPL Financial LLC entered into a committed senior unsecured revolving credit facility that matures on August 3, 2023 and allows for a maximum borrowing of $1.0 billion. This credit facility replaced the $300.0 million committed senior unsecured revolving credit facility that was scheduled to mature on July 31, 2024.
Capital RequirementsResources
The Company seeks to manage capital levels in support of its 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 andor 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 of our operations, weWe 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 underone of our revolving credit facility.facilities.
Our registered broker-dealer, LPL Financial is subject to the SEC’s 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 SeptemberJune 30, 2017,2022, LPL Financial had net capital of $166.5$156.9 million with a minimum net capital requirement of $6.8$15.4 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”).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”)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 Uniform 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 common 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,on borrowings, provision for income taxes, depreciation and amortization, and amortization of other intangibles, and is 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 June 30, 2022, 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):
|
| | | |
| Net income | $ | 216,501 |
|
| Non-operating interest expense | 103,026 |
|
| Provision for income taxes | 133,122 |
|
| Loss on extinguishment of debt | 22,407 |
|
| Depreciation and amortization | 83,716 |
|
| Amortization of intangible assets | 37,795 |
|
| 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. |
| |
(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. |
| |
(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. |
| |
(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:
|
| | | |
| Financial Ratio | Covenant Requirement | | Actual Ratio |
| Leverage Test (Maximum) | 5.00 | | 3.21 |
| Interest Coverage (Minimum) | 3.00 | | 6.88 |
Off-Balance Sheet Arrangements | | | | | | | | | | | |
| June 30, 2022 |
| Financial Ratio | Covenant Requirement | | Actual Ratio |
| Leverage Ratio (Maximum) | 5.00 | | 2.09 |
| Interest Coverage (Minimum) | 3.00 | | 12.22 |
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, seeSee Note 9 - 8Corporate Debt and Other Borrowings, Net,. Commitments and Contingencies and Note 14. Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk, within the notes to the unaudited condensed consolidated financial statements.statements for further detail regarding the Credit Agreement and the Indentures.
Contractual Obligations
During the ninesix months ended SeptemberJune 30, 2017,2022, 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 20162021 Annual Report on Form 10-K. See Note 9 - Note 7. Corporate Debt and Other Borrowings, Net 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“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 20162021 Annual Report on Form 10-K, for further detail on operating lease obligations and obligations under noncancelable service contracts.detail.
Fair Value
We use fair value measurements to record certain financial assets and liabilities at fair value and to determine fair value disclosures. See Note 4. Fair Value Measurements, within the notes to the unaudited condensed consolidated financial statements for a detailed discussion regarding our fair value measurements.Contents
Critical Accounting Policies and Estimates
In the notes to our consolidated financial statements and in “ItemPart II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 20162021 Annual Report on Form 10-K, we have disclosed those accounting policies that we consider to be most significant in determining our results of operations and financial condition.condition and involve a higher degree of judgment and complexity. There have been no material changes to those policies that we consider to be significantmaterial since the filing of our 20162021 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 June 30, | | Six Months Ended June 30, |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | 2022 | | 2021 | | 2022 | | 2021 |
| REVENUES | | 2017 | | 2016 | | 2017 | | 2016 | |
| REVENUE | | REVENUE | | | | | | | | |
| Advisory | | Advisory | | $ | 1,001,851 | | | $ | 846,313 | | | $ | 2,048,948 | | | $ | 1,568,359 | |
| Commission | | $ | 403,011 |
| | $ | 431,686 |
| | $ | 1,244,881 |
| | $ | 1,314,168 |
| Commission | | 573,376 | | | 598,233 | | | 1,158,901 | | | 1,155,462�� | |
| Advisory | | 356,945 |
| | 321,911 |
| | 1,033,319 |
| | 964,298 |
| |
| Asset-based | | 183,953 |
| | 138,291 |
| | 514,626 |
| | 412,339 |
| Asset-based | | 363,597 | | | 279,620 | | | 659,998 | | | 544,326 | |
| Transaction and fee | | 103,999 |
| | 108,413 |
| | 321,522 |
| | 312,927 |
| |
| Interest income, net of interest expense | | 6,162 |
| | 5,372 |
| | 17,931 |
| | 15,940 |
| |
| Service and fee | | Service and fee | | 112,802 | | | 99,473 | | | 225,614 | | | 196,297 | |
| Transaction | | Transaction | | 44,416 | | | 37,627 | | | 91,142 | | | 81,747 | |
| Interest income | | Interest income | | 10,121 | | | 6,914 | | | 17,866 | | | 13,432 | |
| Other | | 10,038 |
| | 11,767 |
| | 32,760 |
| | 22,254 |
| Other | | (67,276) | | | 30,078 | | | (97,889) | | | 46,252 | |
| Total net revenues | | 1,064,108 |
| | 1,017,440 |
| | 3,165,039 |
| | 3,041,926 |
| |
| EXPENSES | | | | | | | | |
| |
| Commission and advisory | | 663,765 |
| | 657,432 |
| | 1,971,874 |
| | 1,954,123 |
| |
| Total revenue | | Total revenue | | 2,038,887 | | | 1,898,258 | | | 4,104,580 | | | 3,605,875 | |
| EXPENSE | | EXPENSE | | | | | | | | |
| Advisory and commission | | Advisory and commission | | 1,304,422 | | | 1,273,202 | | | 2,678,556 | | | 2,382,101 | |
| Compensation and benefits | | 113,659 |
| | 107,988 |
| | 337,170 |
| | 327,816 |
| Compensation and benefits | | 196,699 | | | 183,853 | | | 388,733 | | | 345,393 | |
| Promotional | | 42,935 |
| | 42,609 |
| | 111,595 |
| | 113,010 |
| Promotional | | 78,027 | | | 64,349 | | | 165,029 | | | 118,530 | |
| Occupancy and equipment | | Occupancy and equipment | | 55,906 | | | 41,452 | | | 107,018 | | | 85,036 | |
| Depreciation and amortization | | 21,996 |
| | 18,434 |
| | 63,933 |
| | 56,145 |
| Depreciation and amortization | | 48,453 | | | 36,704 | | | 93,907 | | | 72,203 | |
| Amortization of intangible assets | | 9,352 |
| | 9,502 |
| | 28,296 |
| | 28,536 |
| |
| Occupancy and equipment | | 22,803 |
| | 23,530 |
| | 70,989 |
| | 67,347 |
| |
| Interest expense on borrowings | | Interest expense on borrowings | | 28,755 | | | 25,171 | | | 55,966 | | | 50,230 | |
| Brokerage, clearing and exchange | | Brokerage, clearing and exchange | | 23,362 | | | 23,459 | | | 45,962 | | | 42,823 | |
| Amortization of other intangibles | | Amortization of other intangibles | | 21,168 | | | 19,925 | | | 42,364 | | | 37,356 | |
| Professional services | | 16,438 |
| | 17,045 |
| | 50,732 |
| | 49,184 |
| Professional services | | 17,290 | | | 22,500 | | | 36,312 | | | 38,125 | |
| Brokerage, clearing, and exchange | | 13,491 |
| | 13,098 |
| | 41,567 |
| | 40,296 |
| |
| Communications and data processing | | 10,866 |
| | 10,333 |
| | 32,525 |
| | 31,801 |
| Communications and data processing | | 16,223 | | | 14,930 | | | 31,350 | | | 26,923 | |
| Loss on extinguishment of debt | | Loss on extinguishment of debt | | — | | | — | | | — | | | 24,400 | |
| Other | | 24,376 |
| | 25,356 |
| | 71,140 |
| | 69,512 |
| Other | | 36,261 | | | 31,064 | | | 73,683 | | | 55,964 | |
| Total operating expenses | | 939,681 |
| | 925,327 |
| | 2,779,821 |
| | 2,737,770 |
| |
| Non-operating interest expense | | 26,519 |
| | 23,889 |
| | 78,131 |
| | 71,583 |
| |
| Loss on extinguishment of debt | | 1,268 |
| | — |
| | 22,407 |
| | — |
| |
| Total expense | | Total expense | | 1,826,566 | | | 1,736,609 | | | 3,718,880 | | | 3,279,084 | |
| INCOME BEFORE PROVISION FOR INCOME TAXES | | 96,640 |
| | 68,224 |
| | 284,680 |
| | 232,573 |
| INCOME BEFORE PROVISION FOR INCOME TAXES | | 212,321 | | | 161,649 | | | 385,700 | | | 326,791 | |
| PROVISION FOR INCOME TAXES | | 38,498 |
| | 16,270 |
| | 109,915 |
| | 82,378 |
| PROVISION FOR INCOME TAXES | | 51,776 | | | 42,548 | | | 91,411 | | | 78,070 | |
| NET INCOME | | $ | 58,142 |
| | $ | 51,954 |
| | $ | 174,765 |
| | $ | 150,195 |
| NET INCOME | | $ | 160,545 | | | $ | 119,101 | | | $ | 294,289 | | | $ | 248,721 | |
| EARNINGS PER SHARE (Note 11) | | | | | | | | |
| |
| EARNINGS PER SHARE | | EARNINGS PER SHARE | | | | | | | | |
| Earnings per share, basic | | $ | 0.65 |
| | $ | 0.58 |
| | $ | 1.94 |
| | $ | 1.69 |
| Earnings per share, basic | | $ | 2.01 | | | $ | 1.49 | | | $ | 3.68 | | | $ | 3.11 | |
| Earnings per share, diluted | | $ | 0.63 |
| | $ | 0.58 |
| | $ | 1.90 |
| | $ | 1.67 |
| Earnings per share, diluted | | $ | 1.97 | | | $ | 1.46 | | | $ | 3.61 | | | $ | 3.05 | |
| Weighted-average shares outstanding, basic | | 89,967 |
| | 89,092 |
| | 90,029 |
| | 89,025 |
| Weighted-average shares outstanding, basic | | 79,947 | | | 80,063 | | | 79,961 | | | 79,880 | |
| Weighted-average shares outstanding, diluted | | 92,042 |
| | 89,951 |
| | 92,027 |
| | 89,732 |
| Weighted-average shares outstanding, diluted | | 81,410 | | | 81,728 | | | 81,493 | | | 81,608 | |
See notes to unaudited condensed consolidated financial statements.
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive IncomeFinancial Condition
(In thousands, except share data)
(Unaudited)
(In thousands)
| | | | | | | | | | | | |
| ASSETS | | June 30, 2022 | | December 31, 2021 |
| Cash and equivalents | | $ | 700,395 | | | $ | 495,246 | |
| Cash segregated under federal or other regulations | | 863,500 | | | 1,496,463 | |
| Restricted cash | | 89,833 | | | 80,655 | |
| Receivables from clients, net | | 695,405 | | | 578,889 | |
| Receivables from brokers, dealers and clearing organizations | | 71,555 | | | 102,503 | |
| Advisor loans, net | | 1,035,158 | | | 963,869 | |
| Other receivables, net | | 600,906 | | | 581,483 | |
| Investment securities | | 47,695 | | | 49,192 | |
| Property and equipment, net | | 726,224 | | | 658,841 | |
| Goodwill | | 1,642,468 | | | 1,642,443 | |
| Other intangibles, net | | 433,485 | | | 455,028 | |
| Other assets | | 829,862 | | | 886,988 | |
| Total assets | | $ | 7,736,486 | | | $ | 7,991,600 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| LIABILITIES: | | | | |
| Client payables | | $ | 1,498,374 | | | $ | 1,712,224 | |
| Payables to brokers, dealers and clearing organizations | | 154,909 | | | 170,119 | |
| Accrued advisory and commission expenses payable | | 199,691 | | | 222,379 | |
| Corporate debt and other borrowings, net | | 2,720,747 | | | 2,814,044 | |
| Accounts payable and accrued liabilities | | 363,768 | | | 384,025 | |
| Other liabilities | | 954,937 | | | 1,018,276 | |
| Total liabilities | | 5,892,426 | | | 6,321,067 | |
| Commitments and contingencies (Note 10) | | | | |
| STOCKHOLDERS’ EQUITY: | | | | |
| Common stock, $0.001 par value; 600,000,000 shares authorized; 129,365,714 shares and 128,758,086 shares issued at June 30, 2022 and December 31, 2021, respectively | | 129 | | | 129 | |
| Additional paid-in capital | | 1,879,312 | | | 1,841,402 | |
| Treasury stock, at cost — 49,427,892 shares and 48,768,145 shares at June 30, 2022 and December 31, 2021, respectively | | (2,620,798) | | | (2,498,600) | |
| Retained earnings | | 2,585,417 | | | 2,327,602 | |
| Total stockholders’ equity | | 1,844,060 | | | 1,670,533 | |
| Total liabilities and stockholders’ equity | | $ | 7,736,486 | | | $ | 7,991,600 | |
|
| | | | | | | | | | | | | | | | |
| | | 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 |
|
See notes to unaudited condensed consolidated financial statements.
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES20
Condensed 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)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | Additional
Paid-In
Capital | | | | | | | | Retained
Earnings | | Total
Stockholders’
Equity |
| | Common Stock | | | Treasury Stock | | | |
| | Shares | | Amount | | | Shares | | Amount | | | |
| BALANCE — March 31, 2021 | 128,137 | | | $ | 128 | | | $ | 1,787,095 | | | 48,211 | | | $ | (2,406,221) | | | | | $ | 2,053,319 | | | $ | 1,434,321 | |
| | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | | | 119,101 | | | 119,101 | |
| Issuance of common stock to settle restricted stock units | 67 | | | — | | | — | | | 10 | | | (1,453) | | | | | — | | | (1,453) | |
| | | | | | | | | | | | | | | |
| Cash dividends on common stock - $0.25 per share | — | | | — | | | — | | | — | | | — | | | | | (20,031) | | | (20,031) | |
| Stock option exercises and other | 227 | | | — | | | 9,299 | | | (18) | | | 639 | | | | | 1,295 | | | 11,233 | |
| Share-based compensation | — | | | — | | | 11,741 | | | — | | | — | | | | | — | | | 11,741 | |
| | | | | | | | | | | | | | | |
| BALANCE — June 30, 2021 | 128,431 | | | $ | 128 | | | $ | 1,808,135 | | | 48,203 | | | $ | (2,407,035) | | | | | $ | 2,153,684 | | | $ | 1,554,912 | |
| | | | | | | | | | | | | | | |
| |
| | | | | Additional
Paid-In
Capital | | | | | | | | Retained
Earnings | | Total
Stockholders’
Equity |
| Common Stock | | | Treasury Stock | | | |
| Shares | | Amount | | | Shares | | Amount | | | |
| BALANCE — March 31, 2022 | 129,221 | | | $ | 129 | | | $ | 1,861,019 | | | 49,160 | | | $ | (2,569,035) | | | | | $ | 2,442,893 | | | $ | 1,735,006 | |
| | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | | | 160,545 | | | 160,545 | |
| Issuance of common stock to settle restricted stock units | 32 | | | — | | | — | | | 13 | | | (2,397) | | | | | — | | | (2,397) | |
| Treasury stock purchases | — | | | — | | | — | | | 272 | | | (50,005) | | | | | — | | | (50,005) | |
| Cash dividends on common stock - $0.25 per share | — | | | — | | | — | | | — | | | — | | | | | (19,982) | | | (19,982) | |
| Stock option exercises and other | 113 | | | — | | | 3,975 | | | (17) | | | 639 | | | | | 1,961 | | | 6,575 | |
| Share-based compensation | — | | | — | | | 14,318 | | | — | | | — | | | | | — | | | 14,318 | |
| | | | | | | | | | | | | | | |
| BALANCE — June 30, 2022 | 129,366 | | | $ | 129 | | | $ | 1,879,312 | | | 49,428 | | | $ | (2,620,798) | | | | | $ | 2,585,417 | | | $ | 1,844,060 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 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, 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 |
|
| Issuance of common stock to settle restricted stock units, net | 141 |
| | 1 |
| |
|
| | 49 |
| | (1,099 | ) | | | | | | (1,098 | ) |
| Treasury stock purchases | | | | | | | 635 |
| | (25,013 | ) | | | | | | (25,013 | ) |
| Cash dividends on common stock | | | | | | | | | | | | | (66,773 | ) | | (66,773 | ) |
| Stock option exercises and other | 54 |
| |
|
| | 1,321 |
| | (93 | ) | | 3,320 |
| | | | (1,745 | ) | | 2,896 |
|
| Share-based compensation |
|
| | | | 16,875 |
| | | | | | | | | | 16,875 |
|
| 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 |
|
| Issuance of common stock to settle restricted stock units, net | 350 |
| |
|
| | — |
| | 79 |
| | (3,155 | ) | | | | | | (3,155 | ) |
| Treasury stock purchases | | | | | | | 2,017 |
| | (83,721 | ) | | | | | | (83,721 | ) |
| Cash dividends on common stock | | | | | | | | | | | | | (67,765 | ) | | (67,765 | ) |
| Stock option exercises and other | 2,558 |
| | 3 |
| | 76,287 |
| | (51 | ) | | 1,821 |
| | | | (235 | ) | | 77,876 |
|
| Share-based compensation | | | | | 21,885 |
| | | | | | | | | | 21,885 |
|
| BALANCE — September 30, 2017 | 122,826 |
| | $ | 123 |
| | $ | 1,543,428 |
| | 32,666 |
| | $ | (1,279,700 | ) | | $ | — |
| | $ | 676,714 |
| | $ | 940,565 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | Additional Paid-In Capital | | | | | | | | Retained Earnings | | Total Stockholders’ Equity |
| | Common Stock | | | Treasury Stock | | | |
| | Shares | | Amount | | | Shares | | Amount | | | |
| BALANCE — December 31, 2020 | 127,586 | | | 127 | | | $ | 1,762,770 | | | 48,115 | | | $ | (2,391,062) | | | | | $ | 1,943,019 | | | $ | 1,314,854 | |
| | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | | | 248,721 | | | 248,721 | |
| Issuance of common stock to settle restricted stock units | 363 | | | — | | | — | | | 130 | | | (17,483) | | | | | — | | | (17,483) | |
| | | | | | | | | | | | | | | |
| Cash dividends on common stock - $0.50 per share | — | | | — | | | — | | | — | | | — | | | | | (40,011) | | | (40,011) | |
| Stock option exercises and other | 482 | | | 1 | | | 21,648 | | | (42) | | | 1,510 | | | | | 1,955 | | | 25,114 | |
| Share-based compensation | — | | | — | | | 23,717 | | | — | | | — | | | | | — | | | 23,717 | |
| | | | | | | | | | | | | | | |
| BALANCE — June 30, 2021 | 128,431 | | | $ | 128 | | | $ | 1,808,135 | | | 48,203 | | | $ | (2,407,035) | | | | | $ | 2,153,684 | | | $ | 1,554,912 | |
| | | | | | | | | | | | | | | |
| |
| | | | | Additional
Paid-In
Capital | | | | | | | | Retained Earnings | | Total Stockholders’ Equity |
| Common Stock | | | Treasury Stock | | | |
| Shares | | Amount | | | Shares | | Amount | | | |
| BALANCE — December 31, 2021 | 128,758 | | | $ | 129 | | | $ | 1,841,402 | | | 48,768 | | | $ | (2,498,600) | | | | | $ | 2,327,602 | | | $ | 1,670,533 | |
| | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | | | 294,289 | | | 294,289 | |
| Issuance of common stock to settle restricted stock units | 311 | | | — | | | — | | | 128 | | | (23,359) | | | | | — | | | (23,359) | |
| Treasury stock purchases | — | | | — | | | — | | | 564 | | | (100,011) | | | | | — | | | (100,011) | |
| Cash dividends on common stock - $0.50 per share | — | | | — | | | — | | | — | | | — | | | | | (39,995) | | | (39,995) | |
| Stock option exercises and other | 297 | | | — | | | 10,249 | | | (32) | | | 1,172 | | | | | 3,521 | | | 14,942 | |
| Share-based compensation | — | | | — | | | 27,661 | | | — | | | — | | | | | — | | | 27,661 | |
| | | | | | | | | | | | | | | |
| BALANCE — June 30, 2022 | 129,366 | | | $ | 129 | | | $ | 1,879,312 | | | 49,428 | | | $ | (2,620,798) | | | | | $ | 2,585,417 | | | $ | 1,844,060 | |
See notes to unaudited condensed consolidated financial statements.
| | | | | | | | | | | | | | |
| LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES |
| Condensed Consolidated Statements of Cash Flows |
| (In thousands) |
| (Unaudited) |
| | Six Months Ended June 30, |
| | 2022 | | 2021 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
| Net income | | $ | 294,289 | | | $ | 248,721 | |
| Adjustments to reconcile net income to net cash used in operating activities: | | | | |
| Noncash items: | | | | |
| Depreciation and amortization | | 93,907 | | | 72,203 | |
| Amortization of other intangibles | | 42,364 | | | 37,356 | |
| Amortization of debt issuance costs | | 2,977 | | | 2,750 | |
| Share-based compensation | | 27,661 | | | 23,717 | |
| | | | |
| Provision for credit losses | | 7,840 | | | 3,357 | |
| Deferred income taxes | | (305) | | | (252) | |
| Loss on extinguishment of debt | | — | | | 24,400 | |
| Loan forgiveness | | 88,069 | | | 62,920 | |
| Other | | 875 | | | (4,341) | |
| Changes in operating assets and liabilities: | | | | |
| Receivables from clients, net | | (116,476) | | | (126,839) | |
| Receivables from brokers, dealers and clearing organizations | | 30,948 | | | (17,166) | |
| Advisor loans, net | | (161,539) | | | (301,272) | |
| Other receivables, net | | (20,325) | | | (82,414) | |
| Investment securities - trading | | 3,164 | | | 147 | |
| Other assets | | (50,318) | | | (49,887) | |
| Client payables | | (213,850) | | | (50,894) | |
| Payables to brokers, dealers and clearing organizations | | (15,210) | | | 19,346 | |
| Accrued advisory and commission expenses payable | | (22,688) | | | 22,500 | |
| Accounts payable and accrued liabilities | | 71,813 | | | (49,158) | |
| Other liabilities | | (64,733) | | | 107,051 | |
| Operating lease assets | | (899) | | | (979) | |
| Net cash used in operating activities | | (2,436) | | | (58,734) | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | |
| Capital expenditures | | (149,805) | | | (84,976) | |
| Acquisitions, net of cash acquired | | (19,913) | | | (243,007) | |
| | | | |
| Purchases of securities classified as held-to-maturity | | (4,919) | | | — | |
| Proceeds from maturities of securities classified as held-to-maturity | | 2,500 | | | 2,500 | |
| Net cash used in investing activities | | (172,137) | | | (325,483) | |
Continued on following page |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
(Unaudited)
(In thousands)Contents
|
| | | | | | | | |
| | | 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 SUBSIDIARIES
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 |
| | $ | — |
|
| | | | | | | | | | | | | | |
| LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES |
| Condensed Consolidated Statements of Cash Flows |
| (In thousands) |
| (Unaudited) |
| | Six Months Ended June 30, |
| | 2022 | | 2021 |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
| Proceeds from revolving credit facilities | | 465,000 | | | 695,000 | |
| Repayments of revolving credit facilities | | (555,000) | | | (695,000) | |
| Repayment of senior unsecured notes | | — | | | (900,000) | |
| Repayment of senior secured term loans | | (5,350) | | | (5,350) | |
| Proceeds from senior unsecured notes | | — | | | 1,300,000 | |
| Payment of debt issuance costs | | — | | | (15,929) | |
| Make-whole premium on redemption of senior unsecured notes | | — | | | (25,875) | |
| Payment of contingent consideration | | — | | | (7,298) | |
| Tax payments related to settlement of restricted stock units | | (23,359) | | | (17,483) | |
| Repurchase of common stock | | (100,011) | | | — | |
| Dividends on common stock | | (39,995) | | | (40,011) | |
| | | | |
| Proceeds from stock option exercises and other | | 14,942 | | | 25,114 | |
| Principal payment of finance leases and obligations | | (290) | | | (1,185) | |
| Net cash (used in) provided by financing activities | | (244,063) | | | 311,983 | |
| NET DECREASE IN CASH AND EQUIVALENTS, CASH SEGREGATED UNDER FEDERAL OR OTHER REGULATIONS AND RESTRICTED CASH | | (418,636) | | | (72,234) | |
| CASH AND EQUIVALENTS, CASH SEGREGATED UNDER FEDERAL OR OTHER REGULATIONS AND RESTRICTED CASH — Beginning of period | | 2,072,364 | | | 1,799,034 | |
| CASH AND EQUIVALENTS, CASH SEGREGATED UNDER FEDERAL OR OTHER REGULATIONS AND RESTRICTED CASH — End of period | | $ | 1,653,728 | | | $ | 1,726,800 | |
| | | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | |
| Interest paid | | $ | 53,936 | | | $ | 51,611 | |
| Income taxes paid | | $ | 92,727 | | | $ | 100,594 | |
| Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 12,052 | | | $ | 10,910 | |
| Cash paid for amounts included in the measurement of finance lease liabilities | | $ | 4,477 | | | $ | 5,309 | |
| NONCASH DISCLOSURES: | | | | |
| Capital expenditures included in accounts payable and accrued liabilities | | $ | 31,969 | | | $ | 16,013 | |
| Lease assets obtained in exchange for operating lease liabilities | | $ | 7,837 | | | $ | — | |
| | | | |
| | June 30, |
| | 2022 | | 2021 |
| Cash and equivalents | | $ | 700,395 | | | $ | 906,720 | |
| Cash segregated under federal or other regulations | | 863,500 | | | 741,432 | |
| Restricted cash | | 89,833 | | | 78,648 | |
| Total cash and equivalents, cash segregated under federal or other regulations and restricted cash shown in the statements of cash flows | | $ | 1,653,728 | | | $ | 1,726,800 | |
| | | | |
| | | | |
| | | | |
| | | | |
See notes to unaudited condensed consolidated financial statements.
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 independentpersonalized 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 advisor 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 (“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 provides an advisor-facing trading and portfolio rebalancing platform.
•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 (“OCC”). 2•. SummaryLPL Employee Services, LLC and its subsidiary, Allen & Company of Significant Accounting PoliciesFlorida, LLC, provide primary support for the Company’s employee advisor affiliation model.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements have been(“condensed consolidated financial statements”) are 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,goodwill and other intangibles, allowance for doubtful accounts,credit losses on receivables, share-based compensation, accruals for liabilities, income taxes, revenue and expense accruals, and other matters that affect the condensed 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 of operations 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 condensed 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 do not include all informationthe accounts of LPLFH and notes necessary for a complete presentation of results of income, comprehensive income, financial position,its subsidiaries. Intercompany transactions and cash flows in conformity with GAAP. Accordingly, thesebalances have been eliminated. The unaudited condensed consolidated 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, 2016,2021, contained in the Company’s Annual Report on Form 10-K as filed with the SEC.Securities and Exchange Commission (“SEC”).
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)Statement Presentation Changes
The Company’s significant accounting policies areCompany reclassified certain financial statement line items in the consolidated statements of income included in its Annual Report on Form 10-K for the year ended December 31, 2021 to more closely align with industry practice and the Company’s business and to better serve financial statement users. Prior period amounts in the condensed consolidated statements of income have been reclassified to conform to this presentation as follows:
• The Company has disaggregated the activity previously reported in the Transaction and fee line item in Total revenue into its Service and fee and Transaction components; and
• The Company has included Interest expense on borrowings and Loss on extinguishment of debt in Total expense. Previously, these amounts were presented after Total operating expense.
These changes did not impact total net income for the three and six months ended June 30, 2021. The Company also updated the condensed consolidated statement of cash flows for the six months ended June 30, 2021 to conform to changes made to the presentation of the statements of financial condition during the year ended December 31, 2021. See Note 2.2 - Summary of Significant Accounting Policies, in the Company’s audited2021 Annual Report on Form 10-K for additional information.
In addition, during the year ended December 31, 2021, the Company concluded that it is acting in a principal capacity for fractional shares held in customer brokerage accounts resulting from the dividend reinvestment program (“DRIP”) that the Company offers. The Company concluded that it should account for these shares as a secured borrowing with underlying financial assets pledged as collateral. The Company corrected its condensed consolidated statement of cash flows for the six months ended June 30, 2021 to reflect the changes in the condensed consolidated statement of financial condition related to this activity in the prior period. As a result, the Company corrected the condensed consolidated statement of cash flows to reflect an increase in the change in other assets line item and an offsetting increase in the change in other liabilities line item of $18.2 million for the six months ended June 30, 2021. This adjustment did not have an impact on earnings, earnings per share, or net cash provided by operating activities in the prior period. The Company has evaluated the impact of the error on previously issued condensed consolidated financial statements and determined, based on consideration of quantitative and qualitative factors, that the impact of the error is immaterial.
Related Party Transactions
In the ordinary course of business, the Company has related notesparty transactions with beneficial owners of more than 5 percent of the Company’s outstanding common stock. Additionally, through its subsidiary LPL Financial, the Company provides services and charitable contributions to LPL Financial Charitable Foundation Inc., a charitable organization that provides volunteer and financial support within the Company’s local communities.
The Company recognized revenue for services provided to these related parties of $1.4 million and $1.5 million during the three months ended June 30, 2022 and 2021, respectively, and $3.0 million and $2.9 million during the six months ended June 30, 2022 and 2021, respectively. The Company incurred expense for the yearservices provided by these related parties of $0.4 million during both the three months ended June 30, 2022 and 2021, and $2.3 million and $0.8 million during the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022 and December 31, 20162021, receivables from and payables to related parties were not material.
Recently Issued or Adopted Accounting Pronouncements
There are . There have been no significant changes to theserelevant recently issued accounting policies duringpronouncements that would materially impact the first nine months of 2017.
Consolidation
These unauditedCompany’s condensed consolidated financial statements includeand related disclosures. There were no new accounting pronouncements adopted during 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 determinedsix months ended June 30, 2022 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 regardingmaterially impacted 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, 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 itscondensed consolidated financial statements and related disclosures.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
In May 2017, the FASB issued ASU No. 2017-09,
NOTE 3 - REVENUE
Commission
The following table presents total commission revenue disaggregated by product category (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Commission revenue | | | | | | | |
| Annuities | $ | 311,263 | | | $ | 305,100 | | | $ | 610,997 | | | $ | 585,876 | |
| Mutual funds | 168,234 | | | 195,688 | | | 357,761 | | | 368,838 | |
| Fixed income | 29,013 | | | 34,862 | | | 54,218 | | | 67,024 | |
| Equities | 29,909 | | | 30,517 | | | 64,542 | | | 69,428 | |
| Other | 34,957 | | | 32,066 | | | 71,383 | | | 64,296 | |
| Total commission revenue | $ | 573,376 | | | $ | 598,233 | | | $ | 1,158,901 | | | $ | 1,155,462 | |
The following table presents sales-based and trailing commission revenue disaggregated by product category (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Commission revenue | | | | | | | |
| Sales-based | | | | | | | |
| Annuities | $ | 129,371 | | | $ | 112,619 | | | $ | 236,104 | | | $ | 208,158 | |
| Mutual funds | 39,522 | | | 50,250 | | | 87,067 | | | 97,529 | |
| Fixed income | 29,013 | | | 34,862 | | | 54,218 | | | 67,024 | |
| Equities | 29,909 | | | 30,517 | | | 64,542 | | | 69,428 | |
| Other | 24,678 | | | 21,348 | | | 50,893 | | | 43,730 | |
| Total sales-based revenue | 252,493 | | | 249,596 | | | 492,824 | | | 485,869 | |
| Trailing | | | | | | | |
| Annuities | 181,892 | | | 192,481 | | | 374,893 | | | 377,718 | |
| Mutual funds | 128,712 | | | 145,438 | | | 270,694 | | | 271,309 | |
| | | | | | | |
| Other | 10,279 | | | 10,718 | | | 20,490 | | | 20,566 | |
| Total trailing revenue | 320,883 | | | 348,637 | | | 666,077 | | | 669,593 | |
| Total commission revenue | $ | 573,376 | | | $ | 598,233 | | | $ | 1,158,901 | | | $ | 1,155,462 | |
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
Asset-Based
The following table sets forth asset-based revenue disaggregated by product category (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Asset-based revenue | | | | | | | |
| Client cash | $ | 154,700 | | | $ | 90,377 | | | $ | 239,416 | | | $ | 187,481 | |
| Sponsorship programs | 104,593 | | | 95,978 | | | 205,975 | | | 177,690 | |
| Recordkeeping | 104,304 | | | 93,265 | | | 214,607 | | | 179,155 | |
| Total asset-based revenue | $ | 363,597 | | | $ | 279,620 | | | $ | 659,998 | | | $ | 544,326 | |
Service and Fee
The following table sets forth service and fee revenue disaggregated by recognition pattern (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Service and fee revenue | | | | | | | |
Point-in-time(1) | $ | 24,061 | | | $ | 25,283 | | | $ | 55,868 | | | $ | 48,558 | |
Over time(2) | 88,741 | | | 74,190 | | | 169,746 | | | 147,739 | |
| Total service and fee revenue | $ | 112,802 | | | $ | 99,473 | | | $ | 225,614 | | | $ | 196,297 | |
(1)Scope of Modification Accounting (Topic 718)Service and fee revenue recognized at a point-in-time includes revenue such as IRA termination fees, confirmation fees and account fees.
(2), which amends the scope of modification accounting for share-based payment arrangements. ASU 2017-09 provides guidance on the types of changes to the termsService and fee revenue recognized over time includes revenue such as error and omission insurance fees, IRA custodian fees and technology fees.
Unearned Revenue
The Company records unearned revenue when cash payments are received 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 classificationdue in advance of the awardsCompany’s performance obligations, including amounts which are refundable. The increase in the same immediately before and afterunearned revenue balance for the modification. The updatesix months ended June 30, 2022 is effective for annual periods beginning afterprimarily driven by cash payments received or due in advance of satisfying the Company’s performance obligations, offset by $158.5 million of revenue recognized that was included in the unearned revenue balance as of December 31, 2021.
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 its consolidated financial statementsreceives cash in advance for advisory services to be performed and related disclosures.conferences to be held in future periods. 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.
Recently Adopted Accounting Pronouncements
NOTE 4 - ACQUISITIONS
On January 1, 2017,April 30, 2021, the Company adopted ASU 2016-09, Improvementsacquired the wealth management business of Waddell & Reed Financial, Inc. for $300.0 million in order to Employee Share-Based Payment Accountingexpand its addressable markets and complement organic growth (the “Waddell & Reed Acquisition”). The ASU is designed to identify areasCompany accounted for simplification involving several aspectsthe acquisition under the acquisition method of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows.business combinations. The adoption of ASU 2016-09 had no material impact on its consolidated financial statements; however, it did reduce the Company's effective tax rate for the three and nine months ended September 30, 2017.
3. Acquisitions
National Planning Holdings, Inc.
On August 15, 2017, the Company entered into an asset purchase agreement with National Planning Holdings, Inc. (“NPH”), and its four broker-dealer subsidiaries (collectively with NPH, “NPH Sellers”) to acquire certain assets and rightsallocated $128.6 million of the NPH Sellers, including business relationships with financial advisors who become affiliated withpurchase price to goodwill, $122.7 million to definite-lived intangible assets, $62.3 million to cash acquired, and the Company. In accordance with ASC 805, Business Combinations, control will transfer whenremainder to other assets acquired and liabilities assumed as part of the Company beginsacquisition. The goodwill primarily includes the synergies expected to onboard NPHresult from combining operations and onboarding advisors 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").
The Company paid $325 million to the NPH Sellers at closing, which occurred on August 15, 2017Company’s platform 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 the conclusion of the Conversion Perioddeductible for tax purposes. See Note 7 - Goodwill and will be calculated based on the percentage of aggregate trailing twelve-month gross dealer concessions (“GDC”) 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% and 93.5% and in the event that the percentage is less than 72%Other Intangibles, Net, no Contingent Payment would be due.
for additional information.
27
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) |
4
. Fair Value Measurements
NOTE 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 ninesix months ended SeptemberJune 30, 2017.2022 or 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 SeptemberJune 30, 2017,2022 and December 31, 2021, 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.
Trading 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 negotiable 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 SeptemberJune 30, 2017,2022 and December 31, 2021, the Company did not adjust prices received from the independent third-party pricing services.
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.
Fractional Shares— The Company’s investment in fractional shares held by customers is reflected in other assets while the related purchase obligation for such shares is reflected in other liabilities. The Company uses prices obtained from independent third-party pricing services to measure the fair value of its investment in fractional shares held by customers and the related repurchase obligation. 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. At June 30, 2022 and December 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) |
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 managementCompany 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.
Recurring Fair Value Measurements
The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at September 30, 2017(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | |
| Cash equivalents | $ | 72,316 | | | $ | — | | | $ | — | | | $ | 72,316 | |
| Investment securities — trading: | | | | | | | |
| U.S. treasury obligations | 24,493 | | | — | | | — | | | 24,493 | |
| Mutual funds | 9,820 | | | — | | | — | | | 9,820 | |
| Equity securities | 876 | | | — | | | — | | | 876 | |
| Money market funds | 126 | | | — | | | — | | | 126 | |
| Other | 50 | | | 12 | | | — | | | 62 | |
| Total investment securities — trading | 35,365 | | | 12 | | | — | | | 35,377 | |
| Other assets: | | | | | | | |
| Deferred compensation plan | 437,994 | | | — | | | — | | | 437,994 | |
| Other investments | — | | | 8,458 | | | — | | | 8,458 | |
Fractional shares — investment(1) | 102,834 | | | — | | | — | | | 102,834 | |
| Total other assets: | 540,828 | | | 8,458 | | | — | | | 549,286 | |
| Total assets at fair value | $ | 648,509 | | | $ | 8,470 | | | $ | — | | | $ | 656,979 | |
| Liabilities | | | | | | | |
| Accounts payable and accrued liabilities | $ | — | | | $ | — | | | $ | 3,690 | | | $ | 3,690 | |
| Other liabilities: | | | | | | | |
| Securities sold, but not yet purchased: | | | | | | | |
| Mutual funds | 541 | | | — | | | — | | | 541 | |
| Equity securities | 208 | | | — | | | — | | | 208 | |
| Debt securities | — | | | 62 | | | — | | | 62 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total securities sold, but not yet purchased | 749 | | | 62 | | | — | | | 811 | |
Fractional shares — repurchase obligation(1) | 102,834 | | | — | | | — | | | 102,834 | |
| Total other liabilities | 103,583 | | | 62 | | | — | | | 103,645 | |
| Total liabilities at fair value | $ | 103,583 | | | $ | 62 | | | $ | 3,690 | | | $ | 107,335 | |
____________________
(1)Investment in and related repurchase obligation for fractional shares resulting from the Company’s DRIP program.
|
| | | | | | | | | | | | | | | |
| | 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 |
|
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
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, 2016(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | |
| Cash equivalents | $ | 12,056 | | | $ | — | | | $ | — | | | $ | 12,056 | |
| Investment securities - trading: | | | | | | | |
| U.S. treasury obligations | 19,599 | | | — | | | — | | | 19,599 | |
| Mutual funds | 19,112 | | | — | | | — | | | 19,112 | |
| Equity securities | 440 | | | — | | | — | | | 440 | |
| Money market funds | 123 | | | — | | | — | | | 123 | |
| Total investment securities — trading | 39,274 | | | — | | | — | | | 39,274 | |
| Other assets: | | | | | | | |
| Deferred compensation plan | 499,548 | | | — | | | — | | | 499,548 | |
| Other investments | — | | | 9,166 | | | — | | | 9,166 | |
Fractional shares - investment(1) | 114,574 | | | — | | | — | | | 114,574 | |
| Total other assets | 614,122 | | | 9,166 | | | — | | | 623,288 | |
| Total assets at fair value | $ | 665,452 | | | $ | 9,166 | | | $ | — | | | $ | 674,618 | |
| Liabilities | | | | | | | |
| Accounts payable and accrued liabilities | $ | — | | | $ | — | | | $ | 3,530 | | | $ | 3,530 | |
| Other liabilities: | | | | | | | |
| Securities sold, but not yet purchased: | | | | | | | |
| | | | | | | |
| Equity securities | 467 | | | — | | | — | | | 467 | |
| Debt securities | — | | | 105 | | | — | | | 105 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total securities sold, but not yet purchased | 467 | | | 105 | | | — | | | 572 | |
Fractional shares - repurchase obligation(1) | 114,574 | | | — | | | — | | | 114,574 | |
| Total other liabilities | 115,041 | | | 105 | | | — | | | 115,146 | |
| Total liabilities at fair value | $ | 115,041 | | | $ | 105 | | | $ | 3,530 | | | $ | 118,676 | |
____________________
(1)Investment in and related repurchase obligation for fractional shares resulting from the Company’s DRIP program.
|
| | | | | | | | | | | | | | | |
| | 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 |
|
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
5
. Held-to-Maturity Securities
Fair Value of Financial Instruments Not Measured at Fair Value
The following tables summarize the carrying values, fair values and fair value hierarchy level classification of financial instruments that are not measured at fair value (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
| Assets | | | | | | | | | |
| Cash | $ | 628,079 | | | $ | 628,079 | | | $ | — | | | $ | — | | | $ | 628,079 | |
| Cash segregated under federal or other regulations | 863,500 | | | 863,500 | | | — | | | — | | | 863,500 | |
| Restricted cash | 89,833 | | | 89,833 | | | — | | | — | | | 89,833 | |
| Receivables from clients, net | 695,405 | | | — | | | 695,405 | | | — | | | 695,405 | |
| Receivables from brokers, dealers and clearing organizations | 71,555 | | | — | | | 71,555 | | | — | | | 71,555 | |
Advisor repayable loans, net(1) | 231,249 | | | — | | | — | | | 199,898 | | | 199,898 | |
| Other receivables, net | 600,906 | | | — | | | 600,906 | | | — | | | 600,906 | |
| Investment securities — held-to-maturity securities | 12,318 | | | — | | | 12,059 | | | — | | | 12,059 | |
| Other assets: | | | | | | | | | |
| Securities borrowed | 6,155 | | | — | | | 6,155 | | | — | | | 6,155 | |
Deferred compensation plan(2) | 8,387 | | | 8,387 | | | — | | | — | | | 8,387 | |
Other investments(3) | 4,645 | | | — | | | 4,645 | | | — | | | 4,645 | |
| Total other assets | 19,187 | | | 8,387 | | | 10,800 | | | — | | | 19,187 | |
| Liabilities | | | | | | | | | |
| Client payables | $ | 1,498,374 | | | $ | — | | | $ | 1,498,374 | | | $ | — | | | $ | 1,498,374 | |
| Payables to brokers, dealers and clearing organizations | 154,909 | | | — | | | 154,909 | | | — | | | 154,909 | |
| Corporate debt and other borrowings, net | 2,720,747 | | 2,720,747 | | — | | | 2,515,982 | | | — | | | 2,515,982 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
| Assets | | | | | | | | | |
| Cash | $ | 483,190 | | | $ | 483,190 | | | $ | — | | | $ | — | | | $ | 483,190 | |
| Cash segregated under federal or other regulations | 1,496,463 | | | 1,496,463 | | | — | | | — | | | 1,496,463 | |
| Restricted cash | 80,655 | | | 80,655 | | | — | | | — | | | 80,655 | |
| Receivables from clients, net | 578,889 | | | — | | | 578,889 | | | — | | | 578,889 | |
| Receivables from brokers, dealers and clearing organizations | 102,503 | | | — | | | 102,503 | | | — | | | 102,503 | |
Advisor repayable loans, net(1) | 191,242 | | | — | | | — | | | 176,864 | | | 176,864 | |
| Other receivables, net | 581,483 | | | — | | | 581,483 | | | — | | | 581,483 | |
| Investment securities - held-to-maturity securities | 9,918 | | | — | | | 9,915 | | | — | | | 9,915 | |
| Other assets: | | | | | | | | | |
| Securities borrowed | 9,958 | | | — | | | 9,958 | | | — | | | 9,958 | |
Other investments(3) | 4,595 | | | — | | | 4,595 | | | — | | | 4,595 | |
| Total other assets | 14,553 | | | — | | | 14,553 | | | — | | | 14,553 | |
| Liabilities | | | | | | | | | |
| Client payables | $ | 1,712,224 | | | $ | — | | | $ | 1,712,224 | | | $ | — | | | $ | 1,712,224 | |
| Payables to brokers, dealers and clearing organizations | 170,119 | | | — | | | 170,119 | | | — | | | 170,119 | |
| Corporate debt and other borrowings, net | 2,814,044 | | | — | | | 2,885,536 | | | — | | | 2,885,536 | |
____________________(1)Includes repayable loans and forgivable loans which have converted to repayable upon advisor termination.
(2)Includes cash balances awaiting investment or distribution to plan participants.
(3)Other investments include Depository Trust Company holds certaincommon shares and Federal Reserve stock.
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 6 - INVESTMENT SECURITIES
The Company’s investment securities include debt and equity securities that the Company has classified as trading securities, which are carried at fair value, as well as investments in securities, primarily U.S. government notes, which are held by The Private Trust Company, N.A. to satisfy minimum capital requirements of the OCC. These securities are recorded at amortized cost becauseand classified as held-to-maturity as the Company has both the intent and the ability to hold these investments to maturity. Interest income is accrued
The following table summarizes investment securities (in thousands):
| | | | | | | | | | | | | | |
| | | June 30, 2022 | | December 31, 2021 |
| Trading securities - at fair value: | | | | |
| U.S. treasury obligations | | $ | 24,493 | | | $ | 19,599 | |
| Mutual funds | | 9,820 | | | 19,112 | |
| Equity securities | | 876 | | | 440 | |
| Money market funds | | 126 | | | 123 | |
| Other | | 62 | | | — | |
| | | | |
| Total trading securities | | $ | 35,377 | | | $ | 39,274 | |
| Held-to-maturity securities - at amortized cost: | | | | |
| U.S. government notes | | $ | 12,318 | | | $ | 9,918 | |
| Total held-to-maturity securities | | $ | 12,318 | | | $ | 9,918 | |
| Total investment securities | | $ | 47,695 | | | $ | 49,192 | |
At June 30, 2022, the held-to-maturity securities were scheduled to mature as earned. Premiums and discounts are amortized using a method that approximatesfollows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Within one year | | After one but within five years | | After five but within ten years | | After ten years | | Total |
| U.S. government notes — at amortized cost | $ | 5,545 | | | $ | 6,773 | | | $ | — | | | $ | — | | | $ | 12,318 | |
| U.S. government notes — at fair value | $ | 5,483 | | | $ | 6,576 | | | $ | — | | | $ | — | | | $ | 12,059 | |
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 7 - GOODWILL AND OTHER INTANGIBLES, NET
On April 30, 2021, the effective yield method overCompany completed the termWaddell & Reed Acquisition. The Company allocated $128.6 million of the securitypurchase price to goodwill, $122.7 million to definite-lived intangible assets, $62.3 million to cash acquired, and the remainder to other assets acquired and liabilities assumed as part of the Waddell & Reed Acquisition. The intangible assets are recordedcomprised primarily of advisor relationships with a weighted average useful life of approximately 9 years. See Note 4 - Acquisitions,for additional information.
The components of other intangibles, net were as an adjustment tofollows at June 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Weighted-Average Life
Remaining
(in years) | | Gross
Carrying
Value | | Accumulated Amortization | | Net
Carrying
Value |
Definite-lived intangibles, net(1): | | | | | | | |
| Advisor and financial institution relationships | 5.5 | | $ | 806,372 | | | $ | (509,294) | | | $ | 297,078 | |
| Product sponsor relationships | 3.7 | | 234,086 | | | (191,210) | | | 42,876 | |
| Client relationships | 7.9 | | 66,603 | | | (25,306) | | | 41,297 | |
| Technology | 5.9 | | 19,040 | | | (6,625) | | | 12,415 | |
| Trade names | 0.0 | | 1,200 | | | (1,200) | | | — | |
| Total definite-lived intangible assets, net | | | $ | 1,127,301 | | | $ | (733,635) | | | $ | 393,666 | |
| Other indefinite-lived intangibles: | | | | | | | |
| Trademark and trade name | | | | | | | 39,819 | |
| Total other intangibles, net | | | | | | | $ | 433,485 | |
(1)Definite-lived intangibles, net includes the investment yield.impact of immaterial acquisitions during the period presented that were made in the normal course of business.
The components of other intangibles, net were as follows at December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Weighted-Average Life
Remaining
(in years) | | Gross
Carrying
Value | | Accumulated Amortization | | Net
Carrying
Value |
| Definite-lived intangibles, net: | | | | | | | |
| Advisor and financial institution relationships | 5.9 | | $ | 806,531 | | | $ | (476,000) | | | $ | 330,531 | |
| Product sponsor relationships | 4.1 | | 234,086 | | | (185,255) | | | 48,831 | |
| Client relationships | 7.2 | | 45,623 | | | (23,379) | | | 22,244 | |
| Technology | 6.4 | | 19,040 | | | (5,477) | | | 13,563 | |
| Trade names | 0.3 | | 1,200 | | | (1,160) | | | 40 | |
| Total definite-lived intangibles, net | | | $ | 1,106,480 | | | $ | (691,271) | | | $ | 415,209 | |
| Other indefinite-lived intangibles: | | | | | | | |
| Trademark and trade name | | | | | | | 39,819 | |
| Total other intangibles, net | | | | | | | $ | 455,028 | |
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
Total amortization of intangible assets was $21.2 million and $19.9 million for the three months ended June 30, 2022 and 2021, respectively, and $42.4 million and $37.4 million for the six months ended June 30, 2022 and 2021, respectively. Future amortization is estimated as follows (in thousands):
| | | | | |
| 2022 - remainder | $ | 43,088 | |
| 2023 | 81,852 | |
| 2024 | 81,080 | |
| 2025 | 72,707 | |
| 2026 | 34,450 | |
| Thereafter | 80,489 | |
| Total | $ | 393,666 | |
NOTE 8 - OTHER ASSETS AND OTHER LIABILITIES
The amortized cost, gross unrealized loss,components of other assets and fair value of securities held-to-maturityother liabilities were as follows (thousands):
| | | | | | | | | | | | | | |
| | | June 30, 2022 | | December 31, 2021 |
| Other assets: | | | | |
| Deferred compensation | | $ | 446,381 | | | $ | 499,548 | |
| Prepaid assets | | 119,846 | | | 115,018 | |
Fractional shares — investment(1) | | 102,834 | | | 114,574 | |
| Operating lease assets | | 97,656 | | | 95,075 | |
| Debt issuance costs, net | | 6,378 | | | 7,303 | |
| Deferred income taxes, net | | 5,953 | | | 5,648 | |
| Other | | 50,814 | | | 49,822 | |
| Total other assets | | $ | 829,862 | | | $ | 886,988 | |
| | | | |
| Other liabilities: | | | | |
| Deferred compensation | | $ | 446,356 | | | $ | 499,245 | |
Unearned revenue(2) | | 166,862 | | | 160,926 | |
| Operating lease liabilities | | 131,986 | | | 130,304 | |
| Finance lease liabilities | | 105,777 | | | 106,067 | |
Fractional shares — repurchase obligation(1) | | 102,834 | | | 114,574 | |
| Other | | 1,122 | | | 7,160 | |
| Total other liabilities | | $ | 954,937 | | | $ | 1,018,276 | |
(1)Investment in and related repurchase obligation for fractional shares resulting from the Company’s DRIP program.
(2)See Note 3 - Revenue for further information.
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 9 - CORPORATE DEBT AND OTHER BORROWINGS, NET
The Company’s outstanding corporate debt and other borrowings, net were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 | | |
| Corporate Debt | | Balance | | Applicable Margin | | Interest Rate | | Balance | | Applicable Margin | | Interest rate | | Maturity |
Term Loan B(1) | | $ | 1,043,250 | | | LIBOR+175 bps | | 2.81 | % | | $ | 1,048,600 | | | LIBOR+175 bps | | 1.85 | % | | 11/12/2026 |
| | | | | | | | | | | | | | |
2027 Senior Notes(1) | | 400,000 | | | Fixed Rate | | 4.63 | % | | 400,000 | | | Fixed Rate | | 4.63 | % | | 11/15/2027 |
2029 Senior Notes(1) | | 900,000 | | | Fixed Rate | | 4.00 | % | | 900,000 | | | Fixed Rate | | 4.00 | % | | 3/15/2029 |
2031 Senior Notes(1) | | 400,000 | | | Fixed Rate | | 4.38 | % | | 400,000 | | | Fixed Rate | | 4.38 | % | | 5/15/2031 |
| Total Corporate Debt | | 2,743,250 | | | | | | | 2,748,600 | | | | | | | |
| | | | | | | | | | | | | | |
| Less: Unamortized Debt Issuance Cost | | (22,503) | | | | | | | (24,556) | | | | | | | |
| Corporate debt, net | | $ | 2,720,747 | | | | | | | $ | 2,724,044 | | | | | | | |
| Other Borrowings | | | | | | | | | | | | | | |
Revolving Credit Facility(2) | | — | | | LIBOR+125 bps | | 3.04 | % | | 55,000 | | | ABR+25 bps | | 3.50 | % | | 3/15/2026 |
| Unsecured, Uncommitted Lines of Credit | | — | | | Broker Base Rate+75 bps | | 1.00 | % | | 35,000 | | | Broker Base Rate+75 bps | | 1.00 | % | | 9/30/2022 |
| Total other borrowings | | $ | — | | | | | | | $ | 90,000 | | | | | | | |
| Corporate Debt and Other Borrowings, Net | | $ | 2,720,747 | | | | | | | $ | 2,814,044 | | | | | | | |
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Amortized cost | $ | 11,832 |
| | $ | 8,862 |
|
| Gross unrealized loss | (43 | ) | | (31 | ) |
| Fair value | $ | 11,789 |
| | $ | 8,831 |
|
At September(2)Borrowings 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 (PRIME rate), depending on the Consolidated Secured Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement).
The following table presents amounts outstanding and available under the Company’s external lines of credit at June 30, 2017,2022 (in millions):
| | | | | | | | | | | | | | |
| Description | Borrower | Maturity Date | Outstanding | Available |
| Senior secured, revolving credit facility | LPL Holdings, Inc. | March 2026 | $ | — | | $ | 1,000 | |
Broker-dealer revolving credit facility(1) | LPL Financial LLC | July 2024 | $ | — | | $ | 300 | |
| | | | |
| Unsecured, uncommitted lines of credit | LPL Financial LLC | September 2022 | $ | — | | $ | 75 | |
| Unsecured, uncommitted lines of credit | LPL Financial LLC | September 2022 | $ | — | | $ | 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 |
_________________________
(1)On August 4, 2022, LPL Financial LLC entered into a committed senior unsecured revolving credit facility that matures on August 3, 2023 and allows for a maximum borrowing of $1.0 billion. This credit facility replaced the securities held-to-maturity were$300.0 million committed senior unsecured revolving credit facility that was 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 | $ | 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
TheOutstanding balances under our external lines of credit at December 31, 2021 were repaid in goodwill and intangible assetsJanuary 2022. There were a result of various acquisitions. See Note 8. Goodwill and Other Intangible Assets, inno borrowings outstanding under the Company’s audited consolidated financial statements and the related notes in the 2016 Annual Report on Form 10-K for a discussionexternal lines of the componentscredit at June 30, 2022.
Issuance of goodwill and additional information regarding intangible assets.2031 Senior Notes
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
7. Debt
On September 21, 2017, LPLFH and LPLH entered into a second amendment (the “Amendment”) to its amended and restated credit agreement, dated March 10, 2017, (as amended by that certain amendment agreement, dated as 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 and $1,695.8 million senior secured Term Loan B facility. Additionally, LPLH raised $400.0 million in aggregate principal amount of 4.375% senior notes (the “Additional Notes”),on May 18, 2021, which were issued aboveat par at 103.0% as an add-on to(“2031 Senior Notes”). The Company used 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 offeringissuance to pay downrepay borrowings made under the senior secured revolving credit facility related to the Waddell & Reed Acquisition. In connection with the issuance of the 2031 Senior Notes, the Company incurred $3.8 million in costs, which were capitalized as debt issuance costs in the condensed consolidated statements of financial condition.
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
Issuance of 2029 Senior Notes
LPLH raised $900.0 million in aggregate principal amount of 4.00% senior notes on March 15, 2021, which were issued at par (“2029 Senior Notes”). The Company used the proceeds from the issuance of the 2029 Senior Notes, along with existing Corporate Cash available, to redeem its Term Loan Bexisting 5.75% senior unsecured notes due in 2025. In connection with this redemption, the Company recognized $24.4 million as a loss on extinguishment of debt on the condensed consolidated statement of income for the six months ended June 30, 2021. In connection with the issuance of the 2029 Senior Notes, the Company incurred $9.0 million in costs, which were capitalized as debt issuance costs in the condensed consolidated statements of financial condition.
Credit Agreement
On March 15, 2021, LPLFH and LPLH entered into a fifth amendment agreement (the “Amendment”) to $1,500 million.the Company’s amended and restated credit agreement (“Credit Agreement”), which, among other things, increased the size of its senior secured revolving credit facility to $1.0 billion and extended its maturity date. 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, and accelerated the recognition of $1.3 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.condition. 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 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, which requiredCredit Agreement subjects the Company to accelerate the recognitioncertain financial and non-financial covenants. As 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 guarantors (“Indenture”).
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”).
The Notes are unsecured obligations, will mature on September 15, 2025, and bear interest at the rate of 5.75% per year, with interest payable semi-annually, beginning on September 15, 2017 with respect to the Additional Notes. The Company may redeem all or part of the Notes at any time prior to March 15, 2020 (subject to a customary “equity claw” redemption right) at 100% of the principal amount redeemed plus a “make-whole” premium. ThereafterJune 30, 2022, the Company may redeem all or part of the Notes at annually declining redemption premiums until March 15, 2023, at and after which date the redemption price will be equal to 100% of the principal amount redeemed.was in compliance with such covenants.
Senior SecuredParent Revolving Credit FacilitiesFacility
Borrowings under the Term Loan B facility bear interest at a rate per annum of 225 basis points over the Eurodollar Rate or 125 basis points over the base rate (as defined in the Credit Agreement), and have no leverage or interest coverage maintenance covenants. 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 up to Consolidated EBITDA$300.0 million. Borrowings bear interest at a rate per annum ranging from 112.5 to 137.5 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 December 31, 2016 were as follows (dollars in thousands):June 30, 2022.
|
| | | | | | | | | |
| | | 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 |
| | | | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Bank Loans Payable
The Company maintains threemaintained 5 uncommitted lines of credit. Twocredit as of June 30, 2022. NaN of the lines have unspecified limits, which are primarily dependent on the Company’sLPL Financial’s ability to provide sufficient collateral. The third line has a $200 million limit, and allows for both collateralized and uncollateralized borrowings. The Company drew $30 million on one of theother three lines of credit at an interest rate of 2.55% during the three months ended September 30, 2017 andhave a total limit of $119$200.0 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 December 31, 2016.which allow for uncollateralized borrowings.
8. Commitments and Contingencies
Leases
The Company leases office space and equipment under various operating leases. These leases are generally subject to scheduled base rent and maintenance cost increases, which are recognized on a straight-line basis over the period of the leases. Total rental expense for all operating 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.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
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
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 SeptemberJune 30, 2017.2022 or December 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 condensed 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; or the potential opportunities for settlement and the status of any settlement discussions; as well as the potential for insurance coverage and indemnification, if available.discussions. 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.estimated.
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.
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.assumptions and estimates. 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 SeptemberJune 30, 2017,2022 and December 31, 2021, these self-insurance liabilities were $73.7 million and $67.2 million, respectively, and are included in accountsAccounts payable and accrued liabilities in the unaudited condensed consolidated statements of financial condition. The increase in self-insurance liabilities during the six months ended June 30, 2022 was driven by $18.2 million of additional reserves for claims that had been incurred but not reported, which were partially offset by $11.7 million of payments made during the period. Self-insurance related charges are included in other expensesOther expense in the unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2017.income.
Other Commitments
As of SeptemberJune 30, 2017,2022, the Company had approximately $221.3$523.6 million of client margin loans that were collateralized with securities having a fair value of approximately $309.9$733.1 million that itLPL Financial can re-pledge,repledge, loan or sell. Of these securities, approximately $45.0$65.1 million were client-owned securities pledged to the Options Clearing Corporation as collateral to secure client obligations related to options positions. As of SeptemberJune 30, 2017,2022, there were no restrictions that materially limited the Company’s ability to re-pledge,repledge, loan or sell the remaining $264.9$668.0 million of client collateral.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
Investment securities on the unaudited condensed consolidated statements of financial condition includes $4.1include $4.5 million and $3.0$4.6 million of trading securities pledged to clearing organizationsthe Options Clearing Corporation at SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively, and $20.0 million and $15.0 million of trading securities pledged to the National Securities Clearing Corporation at June 30, 2022 and December 31, 2021, respectively.
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 of Directors”)Directors as well as certain limits under the Credit Agreement and the Indenture.indentures governing the Company’s senior unsecured notes (the “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 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Dividend per Share | | Total Cash Dividend | | Dividend per Share | | Total Cash Dividend |
| First quarter | $ | 0.25 | | | $ | 20.0 | | | $ | 0.25 | | | $ | 20.0 | |
| Second quarter | $ | 0.25 | | | $ | 20.0 | | | $ | 0.25 | | | $ | 20.0 | |
| | | | | | | |
| | | | | | | |
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 treasuryTreasury stock on the unaudited condensed consolidated statements of financial condition. Purchases
The Company resumed share repurchases in the third quarter of 2021, and during the six months ended June 30, 2022 repurchased 564,522 shares of common stock at a weighted-average price of $177.16 for a total of $100.0 million. As of June 30, 2022, the Company had $159.8 million remaining under the existing share repurchase program. Future share repurchases 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 managementCompany within the constraints of the Credit Agreement, the IndentureIndentures and the Company’s general liquidityworking capital 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, the Company was authorized to purchase up to an additional $141.3 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.NOTE 12 - SHARE-BASED COMPENSATION
In November 2010,May 2021, the Company adopted a 2010the 2021 Omnibus Equity Incentive Plan (as amended and restated in May 2015, the “2010(the “2021 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.compensation to the Company’s employees, non-employee directors and other service providers. The 20102021 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 Advisor and InstitutionCompany’s 2010 Omnibus Equity Incentive Plan (the “2010 Plan”). Following the 2008 Stock Optionadoption of the 2021 Plan, the Company is no longer making grants under the 2010 Plan, and the Director Restricted Stock2021 Plan (collectively,is the “Predecessor Plans”). Upon adoption of the 2010 Plan,only plan under which equity awards were no longer made under the Predecessor Plans; however,are granted. However, awards previously granted under the Predecessor Plans2010 Plan will remain outstanding until vested, exercised or forfeited.forfeited, as applicable.
There were 20,055,94517,754,197 shares authorized for grant under the 20102021 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 7,664,31813,777,931 shares remaining available for future issuance under the 2010 Plan, as of Septemberat June 30, 2017.2022.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 ninesix months ended SeptemberJune 30, 2017:2022:
|
| | | | | | | | | | | | | |
| | | 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, 2021 | | 1,204,420 | | | $ | 45.65 | | | | | |
| Granted | | — | | | $ | — | | | | | |
| Exercised | | (295,318) | | | $ | 34.60 | | | | | |
| Forfeited and Expired | | (1,433) | | | $ | 77.53 | | | | | |
| Outstanding — June 30, 2022 | | 907,669 | | | $ | 49.20 | | | 4.49 | | $ | 122,792 | |
| Exercisable — June 30, 2022 | | 907,669 | | | $ | 49.20 | | | 4.49 | | $ | 122,792 | |
| Exercisable and expected to vest — June 30, 2022 | | 907,669 | | | $ | 49.20 | | | 4.49 | | $ | 122,792 | |
The following table summarizes information about outstanding stock options and warrants at Septemberas of June 30, 2017:2022:
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| | | | | | | | | | | | | | | | |
| | | 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 |
|
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | | 148,450 | | | $ | 19.85 | | | 3.64 | | 148,450 | | | $ | 19.85 | |
| $25.01 - $35.00 | | 93,510 | | | $ | 29.09 | | | 0.49 | | 93,510 | | | $ | 29.09 | |
| $35.01 - $45.00 | | 221,804 | | | $ | 39.48 | | | 4.70 | | 221,804 | | | $ | 39.48 | |
| $45.01 - $65.00 | | 76,442 | | | $ | 48.95 | | | 2.31 | | 76,442 | | | $ | 48.95 | |
| $65.01 - $75.00 | | 166,223 | | | $ | 65.50 | | | 5.65 | | 166,223 | | | $ | 65.50 | |
| $75.01 - $80.00 | | 201,240 | | | $ | 77.53 | | | 6.62 | | 201,240 | | | $ | 77.53 | |
| | | 907,669 | | | $ | 49.20 | | | 4.49 | | 907,669 | | | $ | 49.20 | |
The Company recognizes share-based compensation forhas not granted 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.or warrants since 2019. The Company recognized no share-based compensation related to the vesting of these awards of $2.0 million and $2.3stock options during the three months ended June 30, 2022, $0.7 million during the three months ended SeptemberJune 30, 20172021, and 2016, respectively, and $5.8$0.2 million and $8.5$1.5 million during the ninesix months ended SeptemberJune 30, 20172022 and 2016, respectively, which is included in compensation and benefits expense on the unaudited condensed consolidated statements of income.2021, respectively. As of SeptemberJune 30, 2017, total2022, there was no unrecognized compensation cost related to non-vested stock options granted to employees and officers was $9.5 million, which is expected to be recognized over a weighted-average period of 2.01 years.
During 2011 and 2012as 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 recognizedremaining share-based compensation of $0.8 million and $0.6 millionexpense was recognized 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.March 31, 2022.
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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, as of and for the ninesix months ended SeptemberJune 30, 20172022:: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2021 | | 1,051 | | | $ | 156.54 | | | 915,907 | | | $ | 111.10 | |
| Granted | | 1,864 | | | $ | 173.78 | | | 357,658 | | | $ | 187.16 | |
| Vested | | (2,101) | | | $ | 165.16 | | | (311,334) | | | $ | 104.31 | |
| Forfeited | | — | | | $ | — | | | (45,080) | | | $ | 141.01 | |
| Outstanding — June 30, 2022 | | 814 | | | $ | 173.78 | | | 917,151 | | (1) | $ | 141.59 | |
| Expected to vest — June 30, 2022 | | 814 | | | $ | 173.78 | | | 783,476 | | | $ | 147.46 | |
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| | | | | | | | | | | | | | |
| | | 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 |
|
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$12.8 million and $2.0$9.9 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 SeptemberJune 30, 20172022 and 2016,2021, respectively, and $8.9$24.7 million and $6.5$20.1 million during the ninesix months ended SeptemberJune 30, 20172022 and 2016, respectively, which is included in compensation and benefits expense on the unaudited condensed consolidated statements of income.2021, respectively. As of SeptemberJune 30, 2017,2022, total unrecognized compensation cost for restricted stock awards and stock units granted to directors, employees and officers was $15.5$83.0 million, which is expected to be recognized over a weighted-average remaining period of 2.092.22 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 million and $1.7$0.6 million related to the vesting of these restricted stock unitsawards during both the three months ended SeptemberJune 30, 20172022 and 2016, respectively,2021 and $5.3 million and $1.0$1.2 million during both the ninesix months ended SeptemberJune 30, 20172022 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.2021. As of SeptemberJune 30, 2017,2022, total unrecognized compensation cost for restricted stock units granted to advisors and financial institutions was $6.9$3.5 million, which is expected to be recognized over a weighted-average remaining period of 1.851.83 years.
11. Earnings Per Share
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 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 June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Net income | $ | 160,545 | | | $ | 119,101 | | | $ | 294,289 | | | $ | 248,721 | |
| | | | | | | |
| Basic weighted-average number of shares outstanding | 79,947 | | | 80,063 | | | 79,961 | | | 79,880 | |
| Dilutive common share equivalents | 1,463 | | | 1,665 | | | 1,532 | | | 1,728 | |
| Diluted weighted-average number of shares outstanding | 81,410 | | | 81,728 | | | 81,493 | | | 81,608 | |
| | | | | | | |
| Basic earnings per share | $ | 2.01 | | | $ | 1.49 | | | $ | 3.68 | | | $ | 3.11 | |
| Diluted earnings per share | $ | 1.97 | | | $ | 1.46 | | | $ | 3.61 | | | $ | 3.05 | |
The computation of diluted earnings per share excludes stock options, warrants and stock units that are anti-dilutive. For the threesix months ended SeptemberJune 30, 20172022 and 2016,2021, stock options, warrants and stock units representing common share equivalents of 1,168,7722,001 shares and 4,622,8022,604 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 Taxes
The Company’s effective income tax rate differs from the federal corporate tax rate of 35.0%, primarily as a result of state taxes, settlement contingencies, tax credits, tax deductions that are not expensed for financial statement purposes, and expenses that are not deductible for tax purposes. These items resulted in effective tax rates of 39.8% and 23.8% for the three months ended September 30, 2017 and 2016 respectively, and 38.6% and 35.4% for the nine months ended September 30, 2017 and 2016, respectively.
During the third quarter of 2016, the Company updated its calculation of the tax benefits that it could obtain associated with the software that it has developed. The total additional tax benefits recorded during the third quarter of 2016, net of potential tax contingencies, was approximately $11.7 million.
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 Capital and Regulatory Requirements
The Company operates in a highly regulated industry. Applicable laws and regulations restrict permissible activities and investments and require compliance with various financial and customer-related regulations. 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 entity for the protection of investors or public interest. Furthermore, where the agencies determine that such operations are unsafe or unsound, fail to comply with applicable law, or are otherwise inconsistent with the laws and regulations or with the supervisory policies, greater restrictions may be imposed.NOTE 14 - 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 June 30, 2022, had net capital of $166.5$156.9 million, with awhich was $141.5 million in excess of its minimum net capital requirement of $6.8 million as of September 30, 2017.$15.4 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 SeptemberJune 30, 20172022 and December 31, 2016,2021, LPL Financial and PTC met all capital adequacy requirements to which they were subject.
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK
AND CONCENTRATIONS OF CREDIT RISK
LPL Financial may offer repayable loans to recruit or support the transition of an advisor to its platform. LPL Financial also offers forgivable loans for similar purposes that may convert to repayable loans upon advisor termination. LPL Financial may incur losses if advisors do not fulfill their obligations with respect to these loans. To mitigate this risk, LPL Financial monitors the performance and creditworthiness of the advisor prior to offering repayable loans.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
14
. 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, which is 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 16 - SUBSEQUENT EVENTS
On October 24, 2017, theThe Company’s Board of Directors declared a cash dividend of $0.25 per share on the Company'sCompany’s outstanding common stock to be paid on November 27, 2017August 31, 2022 to all stockholders of record on August 17, 2022.
November 9, 2017.
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. Thesemodels and in connection with our dividend reinvestment program. Trading securities couldare included in Investment securities while securities sold, but not yet purchased are included in Other liabilities on the condensed consolidated statements of financial condition and can 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 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 trading securities 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 product and can range from $5,000 to $250,000 per model.
At September 30, 2017, the fair value of our trading securities owned was $13.4 million. Securities sold, but not yet purchased were immaterial at September 30, 2017. The fair value of securities included within other assets was $181.9 million at September 30, 2017. See Note 4. 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. 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. product.
In addition, we haveare subject to market risk resulting from system incidents or interruptions and human error, which can require customer trade corrections for our customers.corrections. We also havebear market risk on the fees we earn that are based on the market value of advisory and brokerage and advisory assets, as well as assets on which trailing commissions are paid and assets eligible for sponsor payments.
As of June 30, 2022, the fair value of our trading securities was $35.4 million and securities sold, but not yet purchased were $0.8 million. The fair value of securities included within other assets was $549.3 million as of June 30, 2022. See Note 5 - Fair Value Measurements, within the notes to the condensed consolidated financial statements for information regarding the fair value of investment securities; securities sold, but not yet purchased; and other assets associated with our client facilitation activities.
Interest Rate Risk
We are exposed to risk associated with changes in interest rates. As of SeptemberJune 30, 2017, all of the $1.52022, $1.0 billion of our 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 net income before taxes given assets owned,revenue generated by our client cash balances, which areis 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 June 30, 2022 | | Annual Impact of an Interest Rate(†) Increase of |
| | | | 10 Basis | | 25 Basis | | 50 Basis | | 100 Basis |
| Corporate Debt and Other Borrowings | | | Points | | Points | | Points | | Points |
| Term Loan B | | $ | 1,043,250 | | | $ | 1,037 | | | $ | 2,591 | | | $ | 5,183 | | | $ | 10,366 | |
| | | | | | | | | | |
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|
| | | | | | | | | | | | | | | | | | | | |
| | | 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 |
|
See Note 7.(†) Debt,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,is 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. 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 9 - Corporate Debt and Other Borrowings, Net within the notes to the condensed consolidated financial statements for additional information.
As of SeptemberJune 30, 20172022, we offered our advisors and their clients three primary cashtwo insured bank sweep vehicles and a money market program, including money market accounts as well as the ability to participate in purchased money market funds, that are interest rate sensitive: oursensitive. Our sweep vehicles include an (1) 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 and (2) an insured deposit cash account (“DCA”) for advisory individual retirement accounts, and a money market sweep vehicle involving multiple money market fund providers.accounts. 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 primarily 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. We are subject to credit risk from certain loans extended to our advisors as well as the activities of our advisors’ clients during the execution, settlement and financing of various transactions on behalf of these clients.
Credit risk includes the risk thatfrom certain loans to advisors arises when we extend to advisorsloans with repayment terms to facilitate theiradvisors’ transition to our platform or to fund their business development activities that are not repaid in full or on time. Credit risk also includes thearises in respect of advisor loans when a forgivable loan converts to repayable upon advisor termination.
Credit risk thatalso arises when collateral posted with LPL Financial by clients to support margin lending or derivative trading is insufficient to meet client’sclients’ contractual obligations to LPL. 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.
LPL Financial. 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 and six months ended SeptemberJune 30, 20172022 and 2016.2021. 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, pleasePlease consult the “Risks Related to our TechnologyOur Technology” and the “Risks Related to Our Business Generally and Industry” sections within Part I, “Item“Item 1A. Risk Factors” in our 20162021 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 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 have 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 2021 Annual Report on Form 10-K for more information about the risks associated with the COVID-19 pandemic.
Regulatory and Legal Risk
The regulatory environment in which we operate is discussed in detail within Part I, “Item 1, Business Section”“Item 1. Business” in our 20162021 Annual Report on Form 10-K. In recent years, and during the periodperiods presented in this Quarterly Report on Form 10-Q, we have observed the SEC, FINRA, U.S. Department of Labor 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 Related to Our Regulatory Environment sectionEnvironment” and the “Risks Related to Our Business and Industry” sections within Part I, “Item“Item 1A. Risk Factors” in our 20162021 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. OurFor a discussion of our ERM framework, is designed to promote clear lines of risk management accountabilityplease see the “Risk Management” section within Part II, “Item 7A. Quantitative and 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 defenseQualitative Disclosures About Market Risk” 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 effect2021 Annual Report on the Company.
Risk Oversight Committee of LPL FinancialForm 10-K.
The Audit Committee has mandated that the ROC oversee our risk management activities, including those 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 policies and procedures that govern the conduct of business by 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.
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 thirdsecond quarter ended SeptemberJune 30, 2017,2022 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“Item 1A. Risk Factors” in the Company’s 20162021 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 SeptemberJune 30, 2017:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 Program (millions)(1) |
| April 1, 2022 through April 30, 2022 | | 114,137 | | $ | 194.61 | | | 114,137 | | $ | 187.5 | |
| May 1, 2022 through May 31, 2022 | | 158,222 | | $ | 175.66 | | | 158,222 | | $ | 159.8 | |
| June 1, 2022 through June 30, 2022 | | — | | | $ | — | | | — | | | $ | 159.8 | |
| Total | | 272,359 | | | | 272,359 | | |
|
| | | | | | | | | | | | | |
| 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 |
|
The repurchases may be executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, including transactions with affiliates, with the timing of purchases and the amount of shares purchased generally determined at the discretion of the Company within the constraints of the Credit Agreement, the Indentures, applicable laws and consideration of the Company’s general liquidity needs. Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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| | | | | | | |
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 |
| | |
4.110.1 |
| |
|
10.131.1 |
| |
|
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.
|
(2 | ) | | Incorporated by reference to Amendment No. 2 to 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.
Furnished herewith. |
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.
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| | | | | | | | | | |
| | LPL Financial Holdings Inc. |
| Date: | October 31, 2017August 4, 2022 | By: | /s/ DAN H. ARNOLD |
| | | Dan H. Arnold |
| | | President and Chief Executive Officer |
| | | |
| Date: | October 31, 2017August 4, 2022 | By: | /s/ MATTHEW J. AUDETTE |
| | | Matthew J. Audette |
| | | Chief Financial Officer |
| | | |
| Date: | August 4, 2022 | By: | /s/ BRENT B. SIMONICH |
| | | Brent B. Simonich |
| | | Chief Accounting Officer |