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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to
Commission File Number: 001-34963
LPL Financial Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware
20-3717839
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
75 State Street,
Boston,
Massachusetts
02109
(Address of Principal Executive Offices) (Zip Code)
(617)
423-3644
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock - par value $0.001 per share
LPLA
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes     o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes     o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
x
Accelerated Filer
☐
Non-accelerated Filer
☐
Smaller Reporting Company
☐
 
 
Emerging Growth Company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐ Yes    x No
The number of shares of Common Stock, par value $0.001 per share, outstanding as of October 23, 2019 was 80,831,085.

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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and other information required by the Securities Exchange Act of 1934, as amended (“Exchange Act”), with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public from the SEC’s internet site at SEC.gov.
We post the following filings to LPL.com as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual reports on Form 10-K, our proxy statements, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Hard copies of all such filings are available free of charge by request via email (investor.relations@lpl.com), telephone ((617) 897-4574), or mail (LPL Financial Investor Relations at 75 State Street, 22nd Floor, Boston, MA 02109). The information contained or incorporated on our website is not a part of this Quarterly Report on Form 10-Q.
When we use the terms “LPLFH”, “LPL”, “we”, “us”, “our”, and the “Company”, we mean LPL Financial Holdings Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in Part I, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report on Form 10-Q regarding the Company’s future financial and operating results, outlook, growth, plans, business strategies, liquidity and future share repurchases, including statements regarding future resolution of regulatory matters, legal proceedings and related costs, future revenue and expenses, future affiliation models and capabilities, market and macroeconomic trends, and projected savings and anticipated improvements to the Company’s operating model, services, and technologies as a result of its investments, initiatives, programs and/or acquisitions, as well as any other statements that are not related to present facts or current conditions or that are not purely historical, constitute forward-looking statements. These forward-looking statements are based on the Company’s historical performance and its plans, estimates, and expectations as of October 29, 2019. The words “anticipates,” “believes,” “expects,” “may,” “plans,” “predicts,” “will,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are not guarantees that the future results, plans, intentions, or expectations expressed or implied by the Company will be achieved. Matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, legislative, regulatory, competitive, and other factors, which may cause actual financial or operating results, levels of activity, or the timing of events, to be materially different than those expressed or implied by forward-looking statements. Important factors that could cause or contribute to such differences include: changes in general economic and financial market conditions, including retail investor sentiment; changes in interest rates and fees payable by banks participating in the Company’s client cash programs, including the Company’s success in negotiating agreements with current or additional counterparties; the Company’s strategy and success in managing client cash program fees; fluctuations in the levels of brokerage and advisory assets, including net new assets, and the related impact on revenue; effects of competition in the financial services industry; the success of the Company in attracting and retaining financial advisors and institutions, and their ability to market effectively financial products and services; whether retail investors served by newly-recruited advisors choose to move their respective assets to new accounts at the Company; changes in growth and profitability of the Company’s fee-based business, including the Company’s centrally managed advisory platform; the effect of current, pending, and future legislation, regulation, and regulatory actions, including disciplinary actions imposed by federal and state regulators and self-regulatory organizations, and the implementation of Regulation BI (Best Interest); the cost of settling and remediating issues related to regulatory matters or legal proceedings, including actual costs of reimbursing customers for losses in excess of our reserves; changes made to the Company’s services and pricing, including in response to competitive developments and current, pending, and future legislation, regulation, and regulatory actions, and the effect that such changes may have on the Company’s gross profit streams and costs; execution of the Company’s capital management plans, including its compliance with the terms of its credit agreement and the indenture governing its senior notes; the price, the availability of shares, and trading volumes of the Company’s common stock, which will affect the timing and size of future share repurchases by the Company; execution of the Company’s plans and its success in realizing the synergies, expense savings, service improvements or efficiencies expected to result from its investments, initiatives and programs, including its acquisitions of Allen & Company of Florida, LLC (“Allen & Company”) and AdvisoryWorld and its expense plans and technology initiatives; the performance of third-party service providers to which business processes are transitioned; the Company’s ability to control operating risks, information technology systems risks, cybersecurity risks, and sourcing risks; and the other factors set forth in Part

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I, “Item 1A. Risk Factors” in the Company’s 2018 Annual Report on Form 10-K, as may be amended or updated in the Company’s Quarterly Reports on Form 10-Q. Except as required by law, the Company specifically disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this Quarterly Report on Form 10-Q, even if its estimates change, and you should not rely on statements contained herein as representing the Company’s views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

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PART I — FINANCIAL INFORMATION
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
We are a leader in the retail financial advice market and the nation’s largest independent broker-dealer. We serve independent financial advisors and financial institutions, providing them with the technology, research, clearing and compliance services, and practice management programs they need to create and grow their practices. We enable them to provide objective financial guidance to millions of American families seeking wealth management, retirement planning, financial planning and asset management solutions.
We believe that objective financial guidance is a fundamental need for everyone. We enable our advisors to focus on what they do best—create the personal, long-term relationships that are the foundation for turning life’s aspirations into financial realities. We do that through a singular focus on providing our advisors with the front-, middle-, and back-office support they need to serve the large and growing market for independent investment advice. We believe that we are the only company that offers advisors the unique combination of an integrated technology platform, comprehensive self-clearing services, and open architecture access to a wide range of non-proprietary products, all delivered in an environment unencumbered by conflicts from product manufacturing, underwriting, and market-making.
We believe investors achieve better outcomes when working with a financial advisor. We strive to make it easy for advisors to do what is best for their clients, while protecting advisors and investors and promoting independence and choice through access to a wide range of diligently evaluated non-proprietary products.
Executive Summary
Financial Highlights
Results for the third quarter of 2019 included net income of $131.7 million, or $1.57 per share, which compares to $106.9 million, or $1.19 per share, for the third quarter of 2018.
Asset Growth Trends
Total brokerage and advisory assets served were $719.3 billion as of September 30, 2019, up 6% from $681.0 billion as of September 30, 2018. Total net new assets were $9.9 billion for the three months ended September 30, 2019, compared to $4.4 billion for the same period in 2018.
Net new advisory assets were $9.2 billion for the three months ended September 30, 2019, compared to $5.1 billion for the same period in 2018. As of September 30, 2019, our advisory assets had grown to $338.0 billion, compared to $306.1 billion as of September 30, 2018, and represented 47% of total brokerage and advisory assets served.
Net new brokerage assets were an inflow of $0.6 billion for the three months ended September 30, 2019, compared to an outflow of $0.8 billion for the same period in 2018. As of September 30, 2019, our brokerage assets had grown to $381.3 billion from $374.9 billion as of September 30, 2018.
Gross Profit Trends
Gross profit, a non-GAAP financial measure, of $542.5 million for the three months ended September 30, 2019, increased 10% from $493.2 million for the quarter ended September 30, 2018. Gross profit is calculated as net revenues, which were $1,415.5 million for the three months ended September 30, 2019, less commission and advisory expenses and brokerage, clearing, and exchange fees. Management presents gross profit because we believe that measure may provide useful insight to investors in evaluating the Company’s core operating performance before indirect costs that are general and administrative in nature. See footnote 8 to the Financial Metrics table within the “How We Evaluate Our Business” section for additional information on gross profit.
Stockholder Capital Returns
We returned $150.8 million of capital to stockholders during the three months ended September 30, 2019, including $20.5 million of dividends and $130.3 million of share repurchases, representing 1,668,305 shares.

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Our Sources of Revenue
Our revenues are derived primarily from fees and commissions from products and advisory services offered by our advisors to their clients, a substantial portion of which we pay out to our advisors, as well as fees we receive from our advisors for the use of our technology, custody, clearing, trust, and reporting platforms. We also generate asset-based revenues through our cash sweep vehicles and money market program and the access we provide to a variety of product providers with the following product lines:
• Alternative Investments
 
• Retirement Plan Products
• Annuities
 
• Separately Managed Accounts
• Exchange Traded Products
 
• Structured Products
• Insurance Based Products
 
• Unit Investment Trusts
• Mutual Funds
 
 
Under our self-clearing platform, we custody the majority of client assets invested in these financial products, for which we provide statements, transaction processing, and ongoing account management. In return for these services, mutual funds, insurance companies, banks, and other financial product manufacturers pay us fees based on asset levels or number of accounts managed. We also earn interest from margin loans made to our advisors’ clients.
We regularly review various aspects of our operations and service offerings, including our policies, procedures, and platforms, in response to marketplace developments. We seek to continuously improve and enhance aspects of our operations and service offerings in order to position our advisors for long-term growth and to align with competitive and regulatory developments. For example, we regularly review the structure and fees of our advisory programs, including related disclosures, in the context of the changing regulatory environment for retirement accounts.


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How We Evaluate Our Business
We focus on several key business and financial metrics in evaluating the success of our business relationships and our resulting financial position and operating performance. Our key business and financial metrics are as follows:
 
Nine Months Ended September 30,
 
 
Business Metrics (dollars in billions) (balances may not foot due to rounding)
2019
 
2018
 
% Change
Advisory assets(1)(2)
$
338.0

 
$
306.1

 
10
%
Brokerage assets(1)(3)
381.3

 
374.9

 
2
%
Total Brokerage and Advisory Assets served(1)
$
719.3

 
$
681.0

 
6
%
 
 
 
 
 
 
Net new advisory assets(4)
$
20.4

 
$
22.6

 
n/m

Net new brokerage assets(5)
(2.6
)
 
23.2

 
n/m

Total Brokerage and Advisory Net New Assets
$
17.8

 
$
45.8

 
n/m

 
 
 
 
 
 
Insured cash account balances(1)
$
22.2

 
$
21.0

 
6
%
Deposit cash account balances(1)
4.6

 
3.9

 
18
%
Total Insured Sweep Balances
26.8

 
25.0

 
7
%
Money market account balances(1)
2.6

 
3.3

 
(21
%)
Purchased money market fund balances(1)
1.8

 
—

 
n/m

Total Client Cash Balances
$
31.2


$
28.2

 
11
%
 
 
 
 
 
 
Advisors
16,349

 
16,174

 
1
%
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Financial Metrics (dollars in millions, except per share data)
2019
 
2018
 
2019
 
2018
Total net revenues
$
1,415.5

 
$
1,331.0

 
$
4,177.0

 
$
3,871.4

Recurring gross profit rate (trailing twelve months)(6)
87.1
%
 
85.0
%
 
87.1
%
 
85.0
%
Pre-tax income
$
178.0

 
$
147.4

 
$
576.8

 
$
430.2

Net income
$
131.7

 
$
106.9

 
$
433.2

 
$
319.2

Earnings per share, diluted
$
1.57

 
$
1.19

 
$
5.07

 
$
3.49

 
 
 
 
 
 
 
 
Non-GAAP Financial Measures(7)
 
 
 
 
 
 
 
Gross profit(8)
$
542.5

 
$
493.2

 
$
1,634.1

 
$
1,439.9

Gross profit growth from prior period(8)
10.0
%
 
27.5
%
 
13.5
%
 
25.0
%
Gross profit as a % of net revenue(8)
38.3
%
 
37.1
%
 
39.1
%
 
37.2
%
_______________________________
(1)
Brokerage and advisory assets 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, deposit cash account balances, money market account balances and purchased money market fund balances are also included in brokerage and advisory assets served.
(2)
Advisory assets consists of total advisory assets under custody at our broker-dealer subsidiary, LPL Financial LLC (“LPL Financial”). See Results of Operations for a tabular presentation of advisory assets.
(3)
Brokerage assets consists of assets serviced by advisors licensed with LPL Financial.
(4)
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.
(5)
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.
(6)
Recurring gross profit rate refers to the percentage of our gross profit, a non-GAAP financial measure, that was recurring for the period presented. We track recurring gross profit, a characterization of gross profit and a statistical measure, which

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is defined to include asset-based revenues, advisory revenues, trailing commission revenues, and certain other fee revenues that are based upon the number of client accounts and advisors, less the expenses associated with such revenues and certain other recurring expenses not specifically associated with a revenue line. We allocate other recurring expenses on a pro-rata basis against specific revenue lines at our discretion. Because certain sources of recurring gross profit are associated with asset balances, they will fluctuate depending on the market values and current interest rates. Accordingly, our recurring gross profit can be negatively impacted by adverse external market conditions. However, we believe that recurring gross profit is meaningful despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.
(7)
We believe that presenting certain non-GAAP financial 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. We believe that the non-GAAP financial measures and metrics presented above and discussed below are appropriate for evaluating the performance of the Company.
(8)
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 financial measures that may not be comparable to those of others in our industry. We believe that gross profit amounts can provide investors with useful insight into our core operating performance before indirect costs that are general and administrative in nature.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Gross Profit (in millions)
2019
 
2018
 
2019
 
2018
Total net revenues
$
1,415.5

 
$
1,331.0

 
$
4,177.0

 
$
3,871.4

Commission and advisory expense
856.6

 
822.0

 
2,494.4

 
2,384.3

Brokerage, clearing, and exchange fees
16.4

 
15.8

 
48.5

 
47.2

Gross profit(1)
$
542.5


$
493.2


$
1,634.1


$
1,439.9

_______________________________
(1)
Balances may not foot due to rounding.
Legal & Regulatory Matters
As a regulated entity, we are subject to regulatory oversight and inquiries related to, among other items, our compliance and supervisory systems and procedures and other controls, as well as our disclosures, supervision and reporting. We review these items in the ordinary course of business in our effort to adhere to legal and regulatory requirements applicable to our operations. Nevertheless, the environment of 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 law 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 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 state of Tennessee.
Assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory matter or a legal proceeding, whether or not covered by the Company’s 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 adequacy of loss 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 costs of resolving matters that begin in one policy period and are resolved in a subsequent period.
Our accruals, including those established through the captive insurance subsidiary at September 30, 2019, include estimated costs for significant regulatory matters, 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. For example, on May 1, 2018, we agreed to a settlement structure with the North American

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Securities Administrators Association related to our historical compliance with certain state “blue sky” laws, which resulted in aggregate fines of approximately $26.4 million. As part of the settlement structure, we engaged independent third party consultants to conduct a historical review of securities transactions and an operational review of our systems for complying with blue sky securities registration requirements. We also agreed to offer customers remediation in the form of reimbursement for any actual losses, plus interest. We believe our captive insurance subsidiary has adequate loss reserves to cover the aggregate fines and the costs of remediation. As of the date of this Quarterly Report on Form 10-Q, the historical review of transactions has been completed; however, the costs of potential customer remediation are still being calculated and cannot be estimated at this time. The actual costs of reimbursing customers for losses could exceed our reserves.
The outcome of regulatory matters 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 10. Commitments and Contingencies, within the notes to the unaudited condensed consolidated financial statements.
In June 2018, the U.S. Court of Appeals for the Fifth Circuit issued a mandate invalidating regulations previously enacted by the U.S. Department of Labor (“DOL”) that expanded the definition of “fiduciary” and would have resulted in significant new restrictions on our servicing of certain retirement plan accounts subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and individual retirement accounts (“IRAs”), including compliance with expanded prohibited transaction requirements under section 4975 of the Internal Revenue Code (the “DOL Rule”). The DOL has indicated that it may propose a new fiduciary rule with regard to such accounts. Because ERISA plans and IRAs comprise a significant portion of our business, we continue to expect that compliance with current and future laws and regulations with respect to retail retirement savings and reliance on prohibited transaction exemptions under such laws and regulations will require increased legal, compliance, information technology, and other costs and could lead to a greater risk of class action lawsuits and other litigation.
In June 2019, the SEC adopted a new standard of conduct applicable to retail brokerage accounts (“Regulation BI”), with a compliance date of June 30, 2020. Regulation BI requires that broker-dealers act in the best interest of retail customers without placing their own financial or other interests ahead of the customer’s and imposes new obligations related to disclosure, duty of care, conflicts of interest and compliance. Certain state securities and insurance regulators have also adopted, proposed or are considering adopting similar laws and regulations. In addition, it is unclear how and whether other regulators - banking regulators, and the state securities and insurance regulators - may respond to or attempt to enforce similar issues addressed by the former DOL Rule and Regulation BI.
Uncertainty regarding pending and future laws and regulations, including with regard to the implementation of Regulation BI, a potential new rule proposed by the DOL and state rules, relating to the standards of conduct applicable to both retirement and non-retirement accounts, may have impacts on our business in ways which cannot be anticipated or planned for, and which may have further impact on our products and services, and results of operations.
Acquisitions, Integrations, and Divestitures
From time to time we undertake acquisitions or divestitures based on opportunities in the competitive landscape. These activities are part of our overall growth strategy, but can distort comparability when reviewing revenue and expense trends for periods presented.
On August 1, 2019, the Company acquired all of the outstanding equity interests of Allen & Company of Florida, LLC (“Allen & Company”), a broker-dealer and registered investment adviser. Allen & Company advisors and staff joined the Company as employees.
See Note 4. Acquisitions, within the notes to the unaudited condensed consolidated financial statements for further detail.

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Economic Overview and Impact of Financial Market Events
Our business is directly and indirectly sensitive to several macroeconomic factors and the state of the U.S. financial markets. In the United States, economic data continued to point to slowing economic growth over the third quarter of 2019. According to the most recent estimate by the Bureau of Economic Analysis, real gross domestic product (“GDP”) grew at an annualized rate of 2.0% in the second quarter, with third quarter data consistent with continued growth at a similar rate. Growth has generally moderated over the last several quarters from over 3% growth seen in mid-2018, due in part to headwinds from slower global growth and uncertainty around trade policy. Forward expectations remain muted but not recessionary. The Federal Reserve’s (“Fed”) most recent median GDP projections, released following its September 17-18, 2019 policy meeting, put expected U.S. growth at 2.2% for all of 2019, which would signal growth expectations of under 2% over the final two quarters of the year. The median Fed projection for 2020 is 2%. Together these numbers imply that the boost to growth from fiscal stimulus has run its course and that growth will return to a rate modestly below the expansion average of 2.3%. The U.S. economy continues to be supported by strong household spending, supported by healthy labor markets and still low interest rates. Business investment, however, has softened amid trade uncertainty and manufacturing has slowed. The slowdown in global growth remains a key concern, with major international organizations, such as the International Monetary Fund and World Bank, lowering forecasts as the year has progressed.

Equity markets continued to bounce back from sharp declines in the fourth quarter of 2018 as increased central bank support offset growth concerns. Third quarter gains were modest but still positive, with the S&P 500 Index climbing 1.7% over the quarter, pushing its total return for the year to just over 20%. Both international developed and emerging market stocks have continued to lag behind U.S. markets, trailing again in the third quarter. Bonds also fared well during the quarter, helped by further declines in yields, with the benchmark 10-year Treasury yield falling to just under 1.7% (bond prices rise when yields falls.) The broad Bloomberg Barclays U.S. Aggregate Bond Index posted a 2.3% over the third quarter, bringing its total return for the year to 8.5%.

Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Fed policy. Please consult the Risks Related to Our Business and Industry section within Part I, “Item 1A. Risk Factors” in our 2018 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. The Fed instituted its first rate cut since 2008 in July 2019 and followed through with a second rate cut in September, bringing the federal funds rate target range to 1.75 - 2.0%. The minutes from both the July and September 2019 policy meetings revealed policymakers’ rising concerns about downside risks to growth forecasts, primarily from trade uncertainty and a weakening global growth outlook, despite a positive baseline expectation of continued moderate growth. In September, two members of the policy committee voted against the additional rate cut, while one voted for a larger cut, with the minutes revealing internal debate about how much future accommodation might be needed. At the same time, the policy statement continued to emphasize that any decision would be data dependent.





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Results of Operations
The following discussion presents an analysis of our results of operations for the three and nine months ended September 30, 2019 and 2018. Where appropriate, we have identified specific events and changes that affect comparability or trends, and where possible and practical, have quantified the impact of such items.
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
(In thousands)
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
REVENUES
 
 
 
 
 
 
 
 
 
 
 
Commission
$
474,993

 
$
486,875

 
(2.4
)%
 
$
1,415,487

 
$
1,449,771

 
(2.4
)%
Advisory
514,363

 
458,087

 
12.3
 %
 
1,449,610

 
1,319,391

 
9.9
 %
Asset-based
292,140

 
248,895

 
17.4
 %
 
877,054

 
706,834

 
24.1
 %
Transaction and fee
121,222

 
118,941

 
1.9
 %
 
362,037

 
352,045

 
2.8
 %
Interest income, net of interest expense
11,531

 
10,512

 
9.7
 %
 
35,542

 
28,426

 
25.0
 %
Other
1,276

 
7,687

 
(83.4
)%
 
37,231

 
14,891

 
150.0
 %
Total net revenues    
1,415,525

 
1,330,997

 
6.4
 %
 
4,176,961

 
3,871,358

 
7.9
 %
EXPENSES
 
 
 
 

 
 
 
 
 
 
Commission and advisory
856,635

 
821,950

 
4.2
 %
 
2,494,355

 
2,384,266

 
4.6
 %
Compensation and benefits
138,300

 
128,007

 
8.0
 %
 
407,000

 
373,884

 
8.9
 %
Promotional
61,715

 
52,628

 
17.3
 %
 
154,487

 
163,462

 
(5.5
)%
Depreciation and amortization
24,062

 
22,838

 
5.4
 %
 
70,116

 
65,759

 
6.6
 %
Amortization of intangible assets
16,286

 
15,676

 
3.9
 %
 
48,703

 
44,580

 
9.2
 %
Occupancy and equipment
34,417

 
30,308

 
13.6
 %
 
100,843

 
84,848

 
18.9
 %
Professional services
17,666

 
23,129

 
(23.6
)%
 
56,115

 
61,223

 
(8.3
)%
Brokerage, clearing, and exchange
16,380

 
15,844

 
3.4
 %
 
48,518

 
47,154

 
2.9
 %
Communications and data processing
12,535

 
12,334

 
1.6
 %
 
37,394

 
34,546

 
8.2
 %
Other
27,599

 
29,219

 
(5.5
)%
 
83,977

 
88,175

 
(4.8
)%
Total operating expenses    
1,205,595

 
1,151,933

 
4.7
 %
 
3,501,508

 
3,347,897

 
4.6
 %
Non-operating interest expense and other
31,944

 
31,705

 
0.8
 %
 
98,617

 
93,267

 
5.7
 %
INCOME BEFORE PROVISION FOR INCOME TAXES
177,986

 
147,359

 
20.8
 %
 
576,836

 
430,194

 
34.1
 %
PROVISION FOR INCOME TAXES
46,272

 
40,494

 
14.3
 %
 
143,632

 
111,033

 
29.4
 %
NET INCOME
$
131,714

 
$
106,865

 
23.3
 %
 
$
433,204

 
$
319,161

 
35.7
 %
 

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Revenues
Commission Revenues
We generate two types of commission revenues: sales-based commissions and trailing commissions. Sales-based commission revenues, which occur when clients trade securities or purchase various types of investment products, primarily represent gross commissions generated by our advisors. The levels of sales-based commission revenues can vary from period to period based on the overall economic environment, number of trading days in the reporting period, and investment activity of our advisors’ clients. Trailing commission revenues, commissions that are paid over time, are recurring in nature and are earned based on the market value of investment holdings in trail-eligible assets. We earn trailing commission revenues primarily on mutual funds and variable annuities held by clients of our advisors. See Note 3. Revenues, within the notes to the unaudited condensed consolidated financial statements for further detail regarding our commission revenue by product category.
The following table sets forth our commission revenue, by sales-based and trailing commission revenue (in thousands):
 
Three Months Ended September 30,
 
 
 
2019
 
2018
 
$ Change
 
% Change
Sales-based
$
194,342

 
$
193,545

 
$
797

 
0.4
 %
Trailing
280,651

 
293,330

 
(12,679
)
 
(4.3
)%
Total commission revenue
$
474,993

 
$
486,875

 
$
(11,882
)
 
(2.4
)%
The increase in sales-based commission revenue for the three months ended September 30, 2019, compared with the same period in 2018 was driven by market volatility that led to an increase in sales of mutual funds and variable annuities.
The decrease in trailing revenues for the three months ended September 30, 2019, compared with the same period in 2018 was primarily due to market volatility impacting the underlying market value of mutual funds and variable annuities.
The following table sets forth our commission revenue, by sales-based and trailing commission revenue (in thousands):
 
Nine Months Ended September 30,
 
 
 
2019
 
2018
 
$ Change
 
% Change
Sales-based
$
588,872

 
$
577,308

 
$
11,564

 
2.0
 %
Trailing
826,615

 
872,463

 
(45,848
)
 
(5.3
)%
Total commission revenue
$
1,415,487

 
$
1,449,771

 
$
(34,284
)
 
(2.4
)%
The increase in sales-based commission revenue for the nine months ended September 30, 2019, compared with the same period in 2018 was driven by market volatility that led to an increase in sales of fixed annuities, partially offset by a decrease in activity for equities.
The decrease in trailing revenues for the nine months ended September 30, 2019, compared with the same period in 2018 was primarily due to market volatility impacting the underlying market value of mutual funds and variable annuities.

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The following table summarizes activity in brokerage assets for the periods presented (in billions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Balance - Beginning of period
$
378.7

 
$
367.5

 
$
346.0

 
$
342.1

 
Net new brokerage assets
0.6

 
(0.8
)
 
(2.6
)
 
23.2

(1) 
Market impact(2)
2.0

 
8.2

 
37.9

 
9.6

 
Balance - End of period
$
381.3

 
$
374.9

 
$
381.3

 
$
374.9

 
_______________________________
(1)
Includes assets attributable to the Company’s acquisition of the broker-dealer network of National Planning Holdings, Inc. (“NPH”).
(2)
Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, with such difference 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 registered investment advisor (“RIA”) platform provided 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 advisory platform are proposed by the advisor and agreed to by the client and average 1.0% of the underlying assets with a maximum of 2.5% of the underlying assets as of September 30, 2019.
We also support separate investment adviser firms (“Hybrid RIAs”) through our independent advisory platform, which allows advisors to engage us for technology, clearing, and custody services, as well as access to the capabilities of our investment platforms. The assets held under a Hybrid RIA’s investment advisory accounts custodied with LPL Financial are included in our brokerage and advisory assets, net new advisory assets, and advisory assets under custody metrics. However, we charge separate fees to Hybrid RIAs for technology, clearing, administrative, oversight, and custody services. The administrative fees collected on our independent advisory platform vary and can reach a maximum of 0.2% of the underlying assets as of September 30, 2019.
The following table summarizes the composition of total advisory assets as of September 30, 2019 and 2018 (in billions):
 
September 30,
 
 
 
 
 
2019
 
2018
 
$ Change

 
% Change

Corporate platform advisory assets
$
209.4

 
$
184.8

 
$
24.6

 
13.3
%
Hybrid platform advisory assets
128.6

 
121.3

 
7.3

 
6.0
%
Total advisory assets
$
338.0

 
$
306.1

 
$
31.9

 
10.4
%
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.

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The following table summarizes activity in advisory assets (in billions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Balance - Beginning of period
$
327.3

 
$
291.5

 
$
282.0

 
$
273.0

 
Net new advisory assets
9.2

 
5.1

 
20.4

 
22.6

(1) 
Market impact(2)
1.5

 
9.5

 
35.6

 
10.5

 
Balance - End of period
$
338.0

 
$
306.1

 
$
338.0

 
$
306.1

 
_______________________________
(1)
Includes assets attributable to the Company’s acquisition of NPH.
(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.
Net new advisory assets for the three and nine months ended September 30, 2019 and 2018 had a limited impact on our advisory revenue for those respective periods. Rather, net new advisory assets are a primary driver of future advisory revenue. The revenue for any particular quarter is primarily driven by the value of each of the prior quarter’s month-end advisory assets under custody.
The growth in advisory revenue for the three and nine months ended September 30, 2019 compared to the same periods in 2018 was due to net new advisory assets resulting from our recruiting efforts and strong advisor productivity, as well as market gains as represented by higher levels of the S&P 500 index.
Asset-Based Revenues
Asset-based revenues are comprised of our sponsorship programs with financial product manufacturers, omnibus processing and networking services, collectively referred to as recordkeeping, and fees from our client cash programs. We receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales education and training efforts. Omnibus processing revenues are paid to us by mutual fund product sponsors and are based on the value of custodied assets in advisory accounts and the number of brokerage accounts in which the related mutual fund positions are held. Networking revenues on brokerage assets are correlated to the number of positions we administer and are paid to us by mutual fund and annuity product manufacturers. Client cash-based revenues are generated on advisors’ clients’ cash balances in insured sweep accounts at various banks and money market programs. Pursuant to contractual arrangements, we receive fees based on account type and invested balances for administration and recordkeeping.
Asset-based revenues for the three and nine months ended September 30, 2019 increased compared to the same periods in 2018 primarily due to increased revenues from our client cash programs, sponsorship programs and recordkeeping revenues.
Client cash revenue for the three and nine months ended September 30, 2019 increased compared to the same periods in 2018 due to the impact of a higher federal funds effective rate during 2019. For the three months ended September 30, 2019, our average client cash balances increased as compared to the same period in 2018, with balances of $30.7 billion and $28.2 billion, respectively. For the nine months ended September 30, 2019, our average client cash balances increased as compared to the same period in 2018, with balances of $30.6 billion and $28.7 billion, respectively.
Revenues for our recordkeeping and sponsorship programs for the three and nine months ended September 30, 2019, which are largely based on the market value of the underlying assets, increased compared to the same periods in 2018 due to the impact of market appreciation on the value of those underlying assets.
Transaction and Fee Revenues
Transaction revenues primarily include fees we charge to our advisors and their clients for executing certain transactions in brokerage and fee-based advisory accounts. Fee revenues primarily include IRA custodian fees, contract and licensing fees, and other client account fees. In addition, we host certain advisor conferences that serve as training, education, sales, and marketing events, for which we charge a fee for attendance.
Transaction and fee revenues increased for the three and nine months ended September 30, 2019 compared to the same periods in 2018 primarily due to the expansion of advisor and client-based fee revenue driven by advisor growth.

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Interest Income, Net of Interest Expense
We earn interest income from client margin accounts and cash equivalents, net of operating expense. Period-over-period variances correspond to changes in the average balances of assets in margin accounts and cash equivalents as well as changes in interest rates.
Interest income, net of interest expense increased for the three and nine months ended September 30, 2019, compared to the same periods in 2018 primarily due to the impact of higher interest rates.
Other Revenues
Other revenues primarily include mark-to-market gains or losses on assets held by us in our advisor non-qualified deferred compensation plan and model research portfolios, marketing allowances received from certain financial product manufacturers, primarily those who offer alternative investments, such as non-traded real estate investment trusts and business development companies, and other miscellaneous revenues.
Other revenues decreased for the three months ended September 30, 2019 compared to the same period in 2018 primarily due to unrealized losses on assets held in our advisor non-qualified deferred compensation plan and a decrease in dividend income on assets held in our advisor non-qualified deferred compensation plan.
Other revenues increased for the nine months ended September 30, 2019 compared to the same period in 2018 primarily due to unrealized gains on assets held in our advisor non-qualified deferred compensation plan and an increase in dividend income on assets held in our advisor non-qualified deferred compensation plan.
Expenses
Commission and Advisory Expenses
Commission and advisory expenses are comprised of the following: base payout amounts that are earned by and paid out to advisors and institutions based on commission and advisory revenues earned on each client’s account; production based bonuses earned by advisors and institutions based on the levels of commission and advisory revenues they produce; the recognition of share-based compensation expense from equity awards granted to advisors and financial institutions; and the deferred commissions and advisory fee expenses associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors.
The following table shows the components of our payout ratio, which is a statistical or operating measure:
 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
2019
 
2018
 
 
2019
 
2018
 
Base payout rate(1)
83.05
%
 
83.12
%
 
(7 bps)
 
83.13
%
 
83.07
%
 
6 bps
Production based bonuses
3.61
%
 
3.36
%
 
25 bps
 
2.96
%
 
2.75
%
 
21 bps
Total payout ratio
86.66
%
 
86.48
%
 
18 bps
 
86.09
%
 
85.82
%
 
27 bps
_______________________________
(1)
Our base payout rate is calculated as commission and advisory expenses less production based bonuses and mark-to-market gains or losses on the non-qualified deferred compensation plan, divided by commission and advisory revenues.
Our total payout ratio increased for the three and nine months ended September 30, 2019 compared with the same periods in 2018 primarily due to an increase in production based bonuses which were driven by an increase in advisory revenue.
Compensation and Benefits Expense
Compensation and benefits expense includes salaries and wages and related benefits and taxes for our employees (including share-based compensation), as well as compensation for temporary employees and consultants.
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Average number of employees
4,376
 
4,078
 
7.3%
 
4,323
 
3,947
 
9.5%
Compensation and benefits expense increased for the three and nine months ended September 30, 2019 compared with the same periods in 2018 due to an increase in salary expenses resulting from an increase in headcount.

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Promotional Expense
Promotional expenses include costs related to our hosting of certain advisor conferences that serve as training, sales, and marketing events, as well as business development costs related to recruiting, such as transition assistance and expenses associated with loans issued to advisors.
The increase in promotional expense for the three months ended September 30, 2019 compared with the same period in 2018 was primarily driven by increases in expenses associated with advisor loans and our largest annual advisor conference.
The decrease in promotional expense for the nine months ended September 30, 2019 compared with the same period in 2018 was primarily driven by 2018 recruiter and advisor costs related to the onboarding of advisors from NPH, offset by an increase in expense associated with advisor loans.
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 expense for the three months ended September 30, 2019 compared with the same period in 2018 was primarily due to an increase in internally developed software.
The increase in depreciation and amortization expense for the nine months ended September 30, 2019 compared with the same period in 2018 was primarily due to increases in purchased hardware and software.
Amortization of Intangible Assets
Amortization of intangible assets represents the benefits received for using long-lived assets, which consist of intangible assets established through our acquisitions.
Amortization of intangible assets remained relatively flat for the three months ended September 30, 2019 compared with the same period in 2018.
The increase in amortization of intangible assets for the nine months ended September 30, 2019 compared with the same period in 2018 was due to the intangible assets recorded during 2018 as part of our acquisition of NPH.
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 expenses on computer hardware and other equipment.
The increase in occupancy and equipment expense for the three and nine months ended September 30, 2019 compared with the same periods in 2018 was primarily due to an increase in costs related to software licensing fees in support of our service and technology investments.
Professional Services
Professional services 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.
The decrease in professional services for the three and nine months ended September 30, 2019 compared with the same periods in 2018 was primarily due to decreases in non-capitalized costs related to our service and technology projects during the period.
Brokerage, Clearing, and Exchange Fees
Brokerage, clearing, and exchange fees include expenses originating from trading or 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.
The slight increase in brokerage, clearing, and exchange fees is relatively consistent with the volume of sales and trading activity for the three and nine months ended September 30, 2019 compared with the same periods in 2018.

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Communications and Data Processing
Communications expense consists primarily of the cost of voice and data telecommunication lines supporting our business, including connectivity to data centers, exchanges, and markets. Data processing expense consists primarily of customer statement processing and postage costs.
The increase in communications and data processing expense for the three and nine months ended September 30, 2019 compared with the same periods in 2018 was primarily due to client statement production.
Other Expenses
Other expenses include the estimated costs of the investigation, settlement and resolution of regulatory matters (including customer restitution and remediation), licensing fees, insurance, broker-dealer regulator fees, and other miscellaneous expenses. Other expenses will depend in part on the size and timing of resolving regulatory matters and the availability of self-insurance coverage, which depends in part on the amount and timing of resolving historical claims. There are particular uncertainties and complexities involved when assessing the potential costs and timing of regulatory matters, including the adequacy of loss reserves for potential liabilities that are self-insured by our captive insurance subsidiary.
The decrease in other expenses for the three months ended September 30, 2019 compared with the same period in 2018 was primarily driven by lower insurance costs.
The decrease in other expenses for the nine months ended September 30, 2019 compared with the same period in 2018 was primarily driven by lower costs associated with the investigation, settlement, and resolution of regulatory matters and insurance costs.
Non-Operating Interest Expense and Other
Non-operating interest expense and other represents expense from our senior secured credit facilities, senior unsecured notes, finance leases and other non-operating expenses.
Non-operating interest expense and other remained relatively flat for the three months ended September 30, 2019 compared with the same period in 2018.
The increase in non-operating interest expense and other for the nine months ended September 30, 2019 compared with the same period in 2018 was primarily driven by higher LIBOR rates in the beginning of 2019.
Provision for Income Taxes
We estimate our full-year effective income tax rate at the end of each reporting period. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The tax rate in any quarter can be affected positively and negatively by adjustments that are required to be reported in the quarter in which resolution of a particular item occurs. The effective income tax rates reflect the impact of state taxes, settlement contingencies, tax credits, and other permanent differences in tax deductibility of certain expenses.
Our effective tax rate was 26.0% and 27.5% for the three months ended September 30, 2019 and 2018, respectively. The decrease in our effective tax rate for the three months ended September 30, 2019 compared with the same period in 2018 was primarily due to a deduction associated with stock option exercises under Accounting Standards Codification (“ASC”) Topic 718.
Our effective tax rate was 24.9% and 25.8% for the nine months ended September 30, 2019 and 2018, respectively. The decrease in our effective tax rate for the nine months ended September 30, 2019 compared with the same period in 2018 was primarily due to the settlement of legal contingencies in 2018.
Liquidity and Capital Resources
Senior management establishes our liquidity and capital policies. These policies include senior management’s review 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, regulatory capital requirements, and future liquidity needs for strategic activities. Our Treasury department assists in evaluating, monitoring, and controlling the business activities that impact our financial condition, liquidity, and capital structure. The objectives of these policies are to support our corporate business strategies while ensuring ongoing and sufficient liquidity.

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A summary of changes in cash flow data is provided as follows (in thousands):
 
Nine Months Ended September 30,
 
2019
 
2018
Net cash flows (used in) provided by:
 
 
 
Operating activities
$
509,769

 
$
196,063

Investing activities
(129,129
)
 
(86,353
)
Financing activities
(434,076
)
 
(341,937
)
Net decrease in cash, cash equivalents and restricted cash
(53,436
)
 
(232,227
)
Cash, cash equivalents and restricted cash — beginning of period
1,562,119

 
1,625,655

Cash, cash equivalents and restricted cash — end of period
$
1,508,683

 
$
1,393,428

Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our capacity for additional borrowing.
Net cash flows provided by operating activities include net income and adjustments for non-cash expenses, changes in operating assets and liabilities, including balances related to the settlement and funding of client transactions, receivables from product sponsors, and accrued commission and advisory expenses due to our advisors. Operating assets and liabilities that arise from the settlement and funding of transactions by our advisors’ clients are the principal cause of changes to our net cash from operating activities and can fluctuate significantly from day to day and period to period depending on overall trends and clients’ behaviors.
The increase in cash flows provided by operating activities for the nine months ended September 30, 2019 compared to the same period in 2018 was primarily attributable to an increase in net income and payables to clients due to the timing of payments made. These were partially offset by an increase in advisor loans and a decrease in drafts payable and income taxes payable.
The increase in cash flows used in investing activities for the nine months ended September 30, 2019 compared to the same period in 2018 was due to an increase in capital expenditures to support our technology projects and our Allen & Company acquisition.
The increase in cash flows used in financing activities for the nine months ended September 30, 2019 compared to the same period in 2018 was primarily attributable to an increase in repurchases of our common stock.
We believe that based on current levels of operations and anticipated growth, cash flow from operations, together with other available sources of funds, which include three uncommitted lines of credit, the revolving credit facility established through our senior secured credit agreement (the “Credit Agreement”) and the revolving credit facility of LPL Financial, our registered broker-dealer subsidiary, will be adequate 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, we have certain capital adequacy requirements related to our registered broker-dealer subsidiary and bank trust subsidiary and have met all such requirements and expect 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.
Share Repurchases
We engage in share repurchase programs, which are approved by our board of directors (the “Board of Directors”), pursuant to which we may repurchase our issued and outstanding shares of common stock from time to time. Purchases may be effected in open market or privately negotiated transactions, including transactions with our affiliates, with the timing of purchases and the amount of stock purchased generally determined at our discretion within the constraints of our Credit Agreement, the indenture governing our senior unsecured notes (the “Indenture”), and general liquidity needs. See Note 11. Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our share repurchases.
Dividends
The payment, timing, and amount of any dividends are subject to approval by the Board of Directors as well as certain limits under our Credit Agreement and the Indenture. See Note 11. Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our dividends.

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Operating Capital Requirements
Our primary requirement for working capital relates to funds we loan to our advisors’ clients for trading conducted on margin and funds 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 segregated under federal and other regulations, the revolving credit facility of LPL Financial and proceeds from repledging 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, 2019, we had approximately $331.8 million of client margin loans, collateralized with securities having a fair value of approximately $464.5 million that we can repledge, loan, or sell. Of these securities, approximately $65.5 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, 2019, there were no restrictions that materially limited our ability to repledge, loan, or sell the remaining $399.0 million of client collateral.
Our other working capital needs are primarily related to advisor loans and timing associated with receivables and payables, which we have satisfied in the past from internally generated cash flows.
We may sometimes be required to fund timing differences arising from the delayed receipt of client funds associated with the settlement of client transactions in securities markets. These timing differences are funded either with internally generated cash flow or, if needed, with funds drawn on our uncommitted lines of credit of our registered broker-dealer subsidiary LPL Financial, or under one of our revolving credit facilities.
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% of aggregate debit balances arising from client transactions. At September 30, 2019, LPL Financial had net capital of $178.3 million with a minimum net capital requirement of $8.9 million.
LPL Financial’s ability to pay dividends greater than 10% of its excess net capital during any 35 day rolling period requires approval from the Financial Industry Regulatory Authority (“FINRA”). In addition, payment of dividends is restricted if LPL Financial’s net capital would be less than 5.0% of aggregate customer debit balances.
LPL Financial also acts as an introducing broker for commodities and futures. Accordingly, its trading activities are subject to the National Futures Association’s (“NFA”) financial requirements and it is required to maintain net capital that is in excess of or equal to the greatest of NFA’s minimum financial requirements. The NFA was designated by the Commodity Futures Trading Commission as LPL Financial’s primary regulator for such activities. Currently, the highest NFA requirement is the minimum net capital calculated and required pursuant to the SEC’s Net Capital Rule.
Our subsidiary, The Private Trust Company, N.A. (“PTC”), is also subject to various regulatory capital requirements. Failure to meet the respective 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 on PTC’s operations.

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Debt and Related Covenants
See Note 8. Debt, within the notes to the unaudited condensed consolidated financial statements for further detail regarding the Credit Agreement.
The Credit Agreement and the Indenture 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;
•
declare dividends, or other distributions to stockholders;
•
repurchase equity interests;
•
redeem indebtedness 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 of our assets.
Our Credit Agreement and the Indenture 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 with certain financial covenants as of the last day of each fiscal quarter. The financial covenants require the calculation of Credit Agreement EBITDA, defined in the Credit Agreement as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense, tax expense, depreciation and amortization, and further adjusted to exclude certain non-cash charges and other adjustments (including unusual or non-recurring charges) and gains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions.
As of September 30, 2019, we were in compliance with both of our financial covenants, a maximum Consolidated Total Debt to Consolidated EBITDA Ratio (“Leverage Test,” as defined in the Credit Agreement) and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio (“Interest Coverage,” as defined in the Credit Agreement). The breach of these financial covenants would subject us to certain equity cure rights. The permitted ratios under our financial covenants and actual ratios were as follows:
Financial Ratio
Covenant Requirement
 
Actual
Ratio
Leverage Test (Maximum)
5.00
 
2.00
Interest Coverage (Minimum)
3.00
 
8.75
Off-Balance Sheet Arrangements
We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet the needs of our advisors’ clients. These arrangements include Company commitments to extend credit. For information on these arrangements, see Note 10. Commitments and Contingencies and Note 17. Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk, within the notes to the unaudited condensed consolidated financial statements.
Contractual Obligations
During the nine months ended September 30, 2019, there were no material changes in our contractual obligations, other than in the ordinary course of business, from those disclosed in our 2018 Annual Report on Form 10-K. See Note 8. Debt and Note 10. Commitments and Contingencies, within the notes to the unaudited condensed consolidated financial statements, as well as the Contractual Obligations section within Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2018 Annual Report on Form 10-K, for further detail on operating lease obligations and obligations under noncancelable service contracts.

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Fair Value of Financial Instruments
We use fair value measurements to record certain financial assets and liabilities at fair value and to determine fair value disclosures. See Note 5. Fair Value Measurements, within the notes to the unaudited condensed consolidated financial statements for a detailed discussion regarding our fair value measurements.
Critical Accounting Policies and Estimates
In the notes to our consolidated financial statements and in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2018 Annual Report on Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of operations and financial condition. For the Company’s significant accounting policies affecting leases, see Note 9. Leases, within the notes to the unaudited condensed consolidated financial statements. There have been no other material changes to those policies that we consider to be significant since the filing of our 2018 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.

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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 September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
REVENUES
 
 
 
 
 
 
 
 
Commission
 
$
474,993

 
$
486,875

 
$
1,415,487

 
$
1,449,771

Advisory
 
514,363

 
458,087

 
1,449,610

 
1,319,391

Asset-based
 
292,140

 
248,895

 
877,054

 
706,834

Transaction and fee
 
121,222

 
118,941

 
362,037

 
352,045

Interest income, net of interest expense
 
11,531

 
10,512

 
35,542

 
28,426

Other
 
1,276

 
7,687

 
37,231

 
14,891

Total net revenues
 
1,415,525

 
1,330,997

 
4,176,961

 
3,871,358

EXPENSES
 
 
 
 
 
 
 
 

Commission and advisory
 
856,635

 
821,950

 
2,494,355

 
2,384,266

Compensation and benefits
 
138,300

 
128,007

 
407,000

 
373,884

Promotional
 
61,715

 
52,628

 
154,487

 
163,462

Depreciation and amortization
 
24,062

 
22,838

 
70,116

 
65,759

Amortization of intangible assets
 
16,286

 
15,676

 
48,703

 
44,580

Occupancy and equipment
 
34,417

 
30,308

 
100,843

 
84,848

Professional services
 
17,666

 
23,129

 
56,115

 
61,223

Brokerage, clearing, and exchange
 
16,380

 
15,844

 
48,518

 
47,154

Communications and data processing
 
12,535

 
12,334

 
37,394

 
34,546

Other
 
27,599

 
29,219

 
83,977

 
88,175

Total operating expenses
 
1,205,595

 
1,151,933

 
3,501,508

 
3,347,897

Non-operating interest expense and other
 
31,944

 
31,705

 
98,617

 
93,267

INCOME BEFORE PROVISION FOR INCOME TAXES
 
177,986

 
147,359

 
576,836

 
430,194

PROVISION FOR INCOME TAXES
 
46,272

 
40,494

 
143,632

 
111,033

NET INCOME
 
$
131,714

 
$
106,865

 
$
433,204

 
$
319,161

EARNINGS PER SHARE (Note 13)
 
 
 
 
 
 
 
 

Earnings per share, basic
 
$
1.61

 
$
1.22

 
$
5.20

 
$
3.59

Earnings per share, diluted
 
$
1.57

 
$
1.19

 
$
5.07

 
$
3.49

Weighted-average shares outstanding, basic
 
81,833

 
87,426

 
83,315

 
88,841

Weighted-average shares outstanding, diluted
 
83,844

 
89,878

 
85,421

 
91,447

See notes to unaudited condensed consolidated financial statements.

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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Unaudited)
(In thousands, except share data)
ASSETS
September 30,
2019
 
December 31, 2018
Cash and cash equivalents
$
929,536

 
$
511,096

Cash segregated under federal and other regulations
526,741

 
985,195

Restricted cash
52,406

 
65,828

Receivables from:
 
 
 
Clients, net of allowance of $730 at September 30, 2019 and $640 at December 31, 2018
418,976

 
412,944

Product sponsors, broker-dealers, and clearing organizations
171,151

 
166,793

Advisor loans, net of allowance of $5,168 at September 30, 2019 and $5,080 at December 31, 2018
397,653

 
298,821

Others, net of allowance of $10,989 at September 30, 2019 and $8,099 at December 31, 2018
268,262

 
248,711

Securities owned:
 
 
 
Trading — at fair value
32,774

 
29,267

Held-to-maturity — at amortized cost
13,043

 
13,001

Securities borrowed
10,231

 
4,829

Fixed assets, net of accumulated depreciation and amortization of $364,405 at September 30, 2019 and $308,155 at December 31, 2018
504,410

 
461,418

Operating lease assets
104,305

 
—

Goodwill
1,502,679

 
1,490,247

Intangible assets, net of accumulated amortization of $528,022 at September 30, 2019 and $479,319 at December 31, 2018
456,469

 
484,171

Other assets
351,912

 
305,147

Total assets
$
5,740,548

 
$
5,477,468

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
LIABILITIES:
Drafts payable
$
141,423

 
$
225,034

Payables to clients
1,119,575

 
950,946

Payables to broker-dealers and clearing organizations
85,341

 
76,180

Accrued commission and advisory expenses payable
162,104

 
164,211

Accounts payable and accrued liabilities
487,399

 
478,644

Income taxes payable
7,146

 
32,990

Unearned revenue
85,003

 
80,524

Securities sold, but not yet purchased — at fair value
206

 
169

Long-term borrowing, net
2,360,218

 
2,371,808

Operating lease liabilities
144,194

 
—

Finance lease liabilities
107,184

 
—

Leasehold financing and capital lease obligations
—

 
104,564

Deferred income taxes, net
20,805

 
18,325

Total liabilities
4,720,598

 
4,503,395

Commitments and contingencies (Note 10)
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
Common stock, $.001 par value; 600,000,000 shares authorized; 126,186,912 shares issued at September 30, 2019 and 124,909,796 shares issued at December 31, 2018
126

 
125

Additional paid-in capital
1,687,021

 
1,634,337

Treasury stock, at cost — 44,858,459 shares at September 30, 2019 and 39,820,646 shares at December 31, 2018
(2,114,814
)
 
(1,730,535
)
Retained earnings
1,447,617

 
1,070,146

Total stockholders’ equity
1,019,950

 
974,073

Total liabilities and stockholders’ equity
$
5,740,548

 
$
5,477,468

See notes to unaudited condensed consolidated financial statements.

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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands)
 
Three Months Ended September 30, 2018
 
 
 
 
 
Additional
Paid-In
Capital
 
 
 
 
 
Accumulated Other
Comprehensive
Income (loss)
 
Retained
Earnings
 
Total
Stockholders’
Equity
 
Common Stock
 
 
Treasury Stock
 
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
BALANCE — June 30, 2018
124,461

 
$
124

 
$
1,610,567

 
36,053

 
$
(1,490,020
)
 
$
—

 
$
886,025

 
$
1,006,696

Net income and other comprehensive income (loss), net of tax expense
 
 
 
 
 
 
 
 
 
 
—

 
106,865

 
106,865

Issuance of common stock to settle restricted stock units, net
47

 
—

 
—

 
12

 
(741
)
 
 
 
 
 
(741
)
Treasury stock purchases
 
 
 
 
 
 
1,849

 
(122,483
)
 
 
 
 
 
(122,483
)
Cash dividends on common stock
 
 
 
 
 
 
 
 
 
 
 
 
(21,941
)
 
(21,941
)
Stock option exercises and other
103

 
—

 
3,160

 
(12
)
 
397

 
 
 
221

 
3,778

Share-based compensation
—

 
—

 
7,293

 
 
 
 
 
 
 
 
 
7,293

BALANCE — September 30, 2018
124,611

 
$
124

 
$
1,621,020

 
37,902

 
$
(1,612,847
)
 
$
—

 
$
971,170

 
$
979,467

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2019
 
 
 
 
 
Additional
Paid-In
Capital