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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 March 31, 2020
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.)
4707 Executive Drive,
San Diego,
California
92121
(Address of Principal Executive Offices) (Zip Code)
(800)
877-7210
(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 April 30, 2020 was 78,864,125.

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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, 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 expected impacts of the coronavirus disease 2019 (“COVID-19”) pandemic on the Company's businesses, and any other statements that are not related to present facts or current conditions or that are not purely historical, constitute forward-looking statements. These forward-looking statements are based on the Company’s historical performance and its plans, estimates, and expectations as of May 5, 2020. 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 indentures 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, if any; 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, expense plans and technology initiatives; the performance of third-party service providers to which business processes have been transitioned; the Company’s ability to control operating risks, information technology systems risks, cybersecurity risks, and sourcing risks; the

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effects of the COVID-19 pandemic, including efforts to contain it; and the other factors set forth in Part I, “Item 1A. Risk Factors” in the Company’s 2019 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 first quarter of 2020 included net income of $155.6 million, or $1.92 per share, which compares to $155.4 million, or $1.79 per share, for the first quarter of 2019.
Asset Growth Trends
Total brokerage and advisory assets served were $669.9 billion as of March 31, 2020, down 2% from $684.0 billion as of March 31, 2019. Total net new assets were $12.5 billion for the three months ended March 31, 2020, compared to $4.0 billion for the same period in 2019.
Net new advisory assets were $12.5 billion for the three months ended March 31, 2020, compared to $4.6 billion for the same period in 2019. As of March 31, 2020, our advisory assets had grown to $322.3 billion, compared to $311.9 billion as of March 31, 2019, an increase of 3%, and represented 48% of total brokerage and advisory assets served.
We had no net new brokerage assets for the three months ended March 31, 2020, compared to an outflow of $0.7 billion for the same period in 2019. As of March 31, 2020, our brokerage assets were $347.6 billion, down from $372.1 billion as of March 31, 2019, a decrease of 7%.
Gross Profit Trends
Gross profit, a non-GAAP financial measure, of $575.6 million for the three months ended March 31, 2020, increased 4% from $555.8 million for the quarter ended March 31, 2019. Gross profit is calculated as net revenues, 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 9 to the Financial Metrics table within the “How We Evaluate Our Business” section for additional information on gross profit.
Stockholder Capital Returns
We returned $169.7 million of capital to stockholders during the three months ended March 31, 2020, including $19.7 million of dividends and $150.0 million of share repurchases, representing 1,809,553 shares.
COVID-19 Response
In response to the coronavirus disease 2019 (“COVID-19”) pandemic, we took measures to protect the health and safety of our employees, as well as the stability and continuity of our operations. For example, we equipped and enabled a substantial majority of employees to work remotely, implemented physical distancing and enhanced cleaning protocols throughout our corporate offices, and worked closely with our vendors to maintain service

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continuity throughout the market volatility and increased operational volumes that occurred during the quarter. We also continued our focus on supporting our advisors during this unprecedented situation by extending service hours and providing additional resources to enable them to deliver differentiated service to their clients. For information about the risks associated with COVID-19, see Part II, “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q.
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 programs 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 sponsors 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 products and services, including related disclosures, in the context of the changing regulatory environment and competitive landscape for brokerage and advisory accounts.

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How We Evaluate Our Business
We focus on several key metrics in evaluating the success of our business relationships and our resulting financial position and operating performance. Our key operating, business and financial metrics are as follows:
 
Three Months Ended March 31,
 
 
Operating and Business Metrics (dollars in billions)
2020
 
2019
 
% Change
Advisory assets(1)(2)
$
322.3

 
$
311.9

 
3
%
Brokerage assets(1)(3)
347.6

 
372.1

 
(7
%)
Total Brokerage and Advisory Assets served(1)(4)
$
669.9

 
$
684.0

 
(2
%)
 
 
 
 
 
 
Net new advisory assets(5)
$
12.5

 
$
4.6

 
n/m

Net new brokerage assets(6)
—

 
(0.7
)
 
n/m

Total Brokerage and Advisory Net New Assets(4)
$
12.5

 
$
4.0

 
n/m

 
 
 
 
 
 
Insured cash account balances(1)
$
34.5

 
$
21.7

 
59
%
Deposit cash account balances(1)
8.7

 
4.3

 
102
%
Total Insured Sweep Balances(4)
43.2

 
25.9

 
67
%
Money market account balances(1)
1.8

 
4.8

 
(63
%)
Purchased money market fund balances(1)
2.8

 
—

 
n/m

Total Client Cash Balances(4)
$
47.8


$
30.7

 
56
%
 
 
 
 
 
 
Advisors
16,763

 
16,189

 
4
%
 
Three Months Ended March 31,
Financial Metrics (dollars in millions, except per share data)
2020
 
2019
Total net revenues
$
1,463.4

 
$
1,371.7

Recurring gross profit rate (trailing twelve months)(7)
88.1
%
 
86.3
%
Pre-tax income
$
207.6

 
$
203.8

Net income
$
155.6

 
$
155.4

Earnings per share, diluted
$
1.92

 
$
1.79

 
 
 
 
Non-GAAP Financial Measures(8)
 
 
 
Gross profit(9)
$
575.6

 
$
555.8

Gross profit growth from prior period(9)
3.6
%
 
19.8
%
Gross profit as a % of net revenue(9)
39.3
%
 
40.5
%
_______________________________
(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)
Balances may not foot due to rounding.
(5)
Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively.
(6)
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.
(7)
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 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.

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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.
(8)
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.
(9)
Set forth below is a calculation of gross profit, 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 March 31,
Gross Profit (in millions)
2020
 
2019
Total net revenues
$
1,463.4

 
$
1,371.7

Commission and advisory expense
870.8

 
799.7

Brokerage, clearing, and exchange fees
17.0

 
16.1

Gross profit(1)
$
575.6


$
555.8

_______________________________
(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 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 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 our captive insurance subsidiary at March 31, 2020, 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 Securities Administrators Association that related to our historical compliance with certain state “blue sky” laws and resulted in aggregate fines of $26.4 million, all of which were covered by our captive insurance subsidiary loss reserves. 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, each of which has been completed. We also agreed to offer customers remediation in the

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form of reimbursement for any actual losses, plus interest. As of the date of this Quarterly Report on Form 10-Q, customer remediation is substantially complete and the cost is not expected to be material.
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, we acquired all of the outstanding equity interests of Allen & Company of Florida, LLC (“Allen & Company”), a broker-dealer and registered investment adviser (“RIA”), for a total purchase price of $34.9 million. Allen & Company advisors and staff became employees of the Company. 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 domestic and international financial markets. Global economic conditions deteriorated significantly in March 2020 as efforts to contain the COVID-19 pandemic led to a sharp decline in demand while also disrupting global supply chains. The short-term economic impact is expected to be significant. The depth and duration of the economic contraction will depend, among other things, on the success of containment efforts; medical progress on testing, treatment, and eventually a potential vaccine; policy efforts to mitigate the impact of the downturn; the level of economic activity as the pandemic continues and the pace at which economic activity resumes and if and when the pandemic abates.
In January and February 2020, prior to the downturn, the U.S. economy was exhibiting solid growth, with a strong labor market and moderate household spending, but some continued weakness in business spending. As of the date of this Quarterly Report on Form 10-Q, however, the U.S. economy finds itself in a potentially deep economic contraction that has increased financial market stress and created heightened uncertainty for both consumers and businesses. The economic impacts of the pandemic occurred so quickly that they are not fully reflected in the economic data. For example, March 2020 data, largely released over the course of April 2020, did not capture the full effect of social distancing efforts, which only became widespread in the second half of the month. There is, however, some early data for March 2020 that shows a large, even historic, disruption to economic activity, at least in the short term. New claims for unemployment insurance, which are reported weekly, have come in over multiple weeks at unprecedented levels. March 2020 retail sales fell by the most on record. Survey-based data has also shown a historic drop in consumer confidence. On the business side, industrial production has posted its largest decline since the 1940s, while survey-based data shows the services sector has been particularly hard hit.
Congress, the Trump administration, and the Federal Reserve (the “Fed”) have responded to the downturn, enacting policies to try to limit the economic fallout, keep financial markets functioning smoothly, and support the eventual recovery. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, a more than $2 trillion fiscal stimulus package aimed at supporting consumers and businesses. The Fed, in addition to lowering interest rates and resuming bond purchases, or quantitative easing, has enacted a wide range of programs to increase liquidity, strengthen credit markets and support lending. There is no guarantee that these measures will achieve their intended aims, or that any remedial or prophylactic effects that they have will be sustained.
In response to increased economic uncertainty, markets entered a period of heightened volatility in the first quarter. The S&P 500 Index achieved its all-time high of the 2009-2020 bull market on February 19, 2020. It entered a bear market, closing down more than 20%, on March 12, 2020, the fastest bear market on record, and reached its low for the quarter on March 23, 2020, a 34% decline, before partially rebounding into the end of the quarter. The index finished the quarter down 19.6%, including dividends. International equity markets also struggled—the broad MSCI indexes for both developed international and emerging market equities underperformed the S&P 500. The Bloomberg Barclays U.S. Aggregate Bond Index did post gains over the quarter, with a total return of 3.2%, lifted by strong performance of U.S. Treasury bonds. During the quarter, both high-yield and investment-grade corporate credit spreads expanded to levels consistent with recessions, reflecting considerable stress in credit markets.
Our business is 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 2019 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. In response to COVID-19, the Fed lowered the fed funds target range by 1.5%, or the equivalent of six quarter-point rate cuts, over the course of two emergency meetings in March 2020. The first rate reduction took place on March 3, 2020, when the Fed lowered the fed funds rate by 0.5%, and the second took place on March 15, 2020, when the Fed lowered the fed funds rate an additional 1.0%. The two moves together lowered the target range to 0.0 - 0.25%. These measures are in addition to announcing open-ended bond purchases, expanding the types of bonds the Fed can purchase, and introducing a broad range of programs to reduce credit stress and maintain market liquidity. The Fed also signaled rates will likely remain low for some time, specifying that it would not raise rates until it was “confident that the economy has weathered recent events.”





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Results of Operations
The following discussion presents an analysis of our results of operations for the three months ended March 31, 2020 and 2019. 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 March 31,
 
 
(Dollars in thousands)
2020
 
2019
 
% Change
REVENUES
 
 
 
 
 
Commission
$
503,444

 
$
461,359

 
9.1
 %
Advisory
579,027

 
453,938

 
27.6
 %
Asset-based
285,506

 
296,363

 
(3.7
)%
Transaction and fee
137,096

 
122,480

 
11.9
 %
Interest income, net of interest expense
9,542

 
12,321

 
(22.6
)%
Other
(51,218
)
 
25,218

 
(303.1
)%
Total net revenues    
1,463,397

 
1,371,679

 
6.7
 %
EXPENSES
 
 
 
 

Commission and advisory
870,795

 
799,698

 
8.9
 %
Compensation and benefits
146,802

 
136,912

 
7.2
 %
Promotional
57,398

 
51,349

 
11.8
 %
Depreciation and amortization
26,644

 
23,470

 
13.5
 %
Amortization of intangible assets
16,570

 
16,168

 
2.5
 %
Occupancy and equipment
39,546

 
33,106

 
19.5
 %
Professional services
14,605

 
19,612

 
(25.5
)%
Brokerage, clearing, and exchange
17,024

 
16,144

 
5.5
 %
Communications and data processing
10,835

 
12,327

 
(12.1
)%
Other
26,228

 
26,403

 
(0.7
)%
Total operating expenses    
1,226,447

 
1,135,189

 
8.0
 %
Non-operating interest expense and other
29,318

 
32,716

 
(10.4
)%
INCOME BEFORE PROVISION FOR INCOME TAXES
207,632

 
203,774

 
1.9
 %
PROVISION FOR INCOME TAXES
51,991

 
48,376

 
7.5
 %
NET INCOME
$
155,641

 
$
155,398

 
0.2
 %

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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, which 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, included in our unaudited condensed consolidated statements of income (dollars in thousands):
 
Three Months Ended March 31,
 
 
 
2020
 
2019
 
$ Change
 
% Change
Sales-based
$
228,391

 
$
190,999

 
$
37,392

 
19.6
%
Trailing
275,053

 
270,360

 
4,693

 
1.7
%
Total commission revenue
$
503,444

 
$
461,359

 
$
42,085

 
9.1
%
The increase in sales-based commission revenue for the three months ended March 31, 2020, compared with the same period in 2019 was driven by market volatility caused by the COVID-19 pandemic that led to an increase in sales of mutual funds, equities and fixed income, partially offset by a decrease in sales of annuities.
The increase in trailing revenues for the three months ended March 31, 2020, compared with the same period in 2019 was primarily due to mutual funds and annuities, partially offset by a decrease in other trail-eligible assets due to market downturn.
The following table summarizes activity in brokerage assets for the periods presented (in billions):
 
Three Months Ended March 31,
 
2020
 
2019
Balance - Beginning of period
$
398.6

 
$
346.0

Net new brokerage assets
—

 
(0.7
)
Market impact(1)
(51.0
)
 
26.8

Balance - End of period
$
347.6

 
$
372.1

_______________________________
(1)
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.
We are uncertain, as of the date of this Quarterly Report on Form 10-Q, of the effect of the COVID-19 pandemic on our future commission revenues. In particular, we cannot predict whether market volatility will result in an increase in sales-based commissions that will offset the decrease we expect in the market value of trail-eligible assets resulting from the recent market downturn.
Advisory Revenues
Advisory revenues primarily represent fees charged on our corporate RIA platform provided to clients of our advisors based on the value of their advisory assets. Advisory fees are billed to clients in advance, on a quarterly basis, and are recognized as revenue ratably during the quarter. The majority of our accounts are on a calendar quarter and are billed using values as of the last business day of the preceding quarter. The value of the assets in an advisory account on the billing date determines the amount billed, and accordingly, the revenues earned in the following three month period. Advisory revenues collected on our corporate advisory platform are proposed by the advisor and agreed to by the client and average 1.0% of the underlying assets with a maximum of 2.5% of the underlying assets as of March 31, 2020.
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

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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 metrics. The advisory revenue generated by a Hybrid RIA is not included in our advisory revenues, although 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 March 31, 2020.
The following table summarizes the composition of advisory assets for the periods presented (dollars in billions):
 
March 31,
 
 
 
 
 
2020
 
2019
 
$ Change

 
% Change

Corporate platform advisory assets
$
200.7

 
$
191.8

 
$
8.9

 
4.6
%
Hybrid platform advisory assets
121.6

 
120.1

 
1.5

 
1.2
%
Total advisory assets
$
322.3

 
$
311.9

 
$
10.4

 
3.3
%
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 for the periods presented (in billions):
 
Three Months Ended March 31,
 
2020
 
2019
Balance - Beginning of period
$
365.8

 
$
282.0

Net new advisory assets
12.5

 
4.6

Market impact(1)
(56.0
)
 
25.3

Balance - End of period
$
322.3

 
$
311.9

_______________________________
(1)
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 in a particular quarter drive advisory revenue in future quarters, due to billing quarterly in advance. Therefore, the full impact of net new advisory assets to advisory revenue is not realized in the same period.
The growth in advisory revenue for the three months ended March 31, 2020 compared to the same period in 2019 was due to net new advisory assets resulting from our recruiting efforts and strong advisor productivity, offset by market losses as represented by lower levels of the S&P 500 index.
Our advisory revenues for the three months ending June 30, 2020 will generally be based on advisory asset values as of March 31, 2020. As a result, we expect those advisory revenues to be adversely affected by the market downturn in the first quarter of 2020 resulting from the COVID-19 pandemic despite our net new advisory asset growth in the first quarter of 2020.
Asset-Based Revenues
Asset-based revenues consist of omnibus processing and networking services (collectively referred to as “recordkeeping”), our sponsorship programs with financial product manufacturers, 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 and money market programs at various banks. Pursuant to contractual arrangements, we receive fees based on account type and invested balances for administration and recordkeeping.
Asset-based revenues for the three months ended March 31, 2020 decreased compared to the same period in 2019 primarily due to decreased revenues from our client cash programs, offset by an increase in sponsorship programs and recordkeeping revenues.

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Client cash revenues for the three months ended March 31, 2020 decreased compared to the same period in 2019 due to the impact of a lower federal funds effective rate during 2020, offset by higher average client cash balances. For the three months ended March 31, 2020, our average client cash balances increased to $38.5 billion compared to $31.3 billion for the same period in 2019.
Revenues for our recordkeeping and sponsorship programs for the three months ended March 31, 2020, which are largely based on the market value of the underlying assets, increased compared to the same period in 2019 due to higher value of underlying advisory assets.
We expect client cash revenues during the three months ending June 30, 2020 to be adversely affected by the impact of a lower federal funds effective rate. In addition, the recent market downturn will have an adverse impact on recordkeeping revenues during the three months ending June 30, 2020 in light of the decreased market value of the 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 months ended March 31, 2020 compared to the same period in 2019 primarily due to increased transaction volume in response to the market volatility caused by the COVID-19 pandemic, partially offset by a decrease in conference service revenue due to the cancellation of one of our first quarter advisor conferences.
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 decreased for the three months ended March 31, 2020, compared to the same period in 2019 primarily due to lower average interest rates.
Other Revenues
Other revenues primarily include mark-to-market gains or losses on assets held by us in our advisor non-qualified deferred compensation plan and model research portfolios, marketing allowances received from certain financial product manufacturers, primarily those who offer alternative investments, such as non-traded real estate investment trusts and business development companies, and other miscellaneous revenues.
Other revenues decreased for the three months ended March 31, 2020 compared to the same period in 2019 primarily due to unrealized losses on assets held in our advisor non-qualified deferred compensation plan caused by the market downturn.
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 based on the fair value of the awards at each reporting period; 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.

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The following table shows the components of our payout ratio, which is a statistical or operating measure:
 
Three Months Ended March 31,
 
 
 
2020
 
2019
 
Change
Base payout rate(1)
82.70
%
 
82.95
%
 
(25 bps)
Production based bonuses
2.37
%
 
2.04
%
 
33 bps
Total payout ratio
85.07
%
 
84.99
%
 
8 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 months ended March 31, 2020 compared with the same period in 2019, primarily due to an increase in production based bonuses, which were driven by broader price reductions on our corporate advisory platform, offset by a decrease in base payout rate driven by a spike in the sale of equities, which have a lower payout.
Compensation and Benefits Expense
Compensation and benefits expense includes salaries, wages, benefits, share-based compensation and related taxes for our employees, as well as compensation for temporary employees and consultants.
 
Three Months Ended March 31,
 
 
 
2020
 
2019
 
Change
Average number of employees
4,350
 
4,267
 
1.9%
Compensation and benefits expense increased for the three months ended March 31, 2020 compared with the same period in 2019 due to an increase in salary and discretionary bonus expenses resulting from an increase in headcount.
Promotional Expense
Promotional expense includes costs related to our hosting of certain advisor conferences that serve as training, sales, and marketing events, business development costs related to advisor recruitment and retention, and other costs that support advisor business growth.
The increase in promotional expense for the three months ended March 31, 2020 compared with the same period in 2019 was primarily driven by an increase in costs associated with advisor loans, advertising, and conference expenses, partially offset by a decrease in recruiter and advisor promotions.
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 March 31, 2020 compared with the same period in 2019 was primarily due to an increase in internally developed 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 March 31, 2020 compared with the same period in 2019.
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 months ended March 31, 2020 compared with the same period in 2019 was primarily due to an increase in costs related to software licensing fees in support of our service and technology investments.

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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 months ended March 31, 2020 compared with the same period in 2019 was primarily due to decreases in non-capitalized costs related to outsourced 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 was consistent with the increase in the volume of sales and trading activity for the three months ended March 31, 2020 compared with the same period in 2019.
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 decrease in communications and data processing expense for the three months ended March 31, 2020 compared with the same period in 2019 was primarily due to a decrease in client statement costs.
Other Expenses
Other expenses includes 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.
Other expenses remained flat for the three months ended March 31, 2020 compared with the same period in 2019.
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.
The decrease in non-operating interest expense and other for the three months ended March 31, 2020 compared with the same period in 2019 was primarily due to a lower outstanding principal balance, and a lower interest rate on our senior secured term loan, partially offset by an increase in balance from issuing additional senior unsecured notes in 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 or 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 25.0% and 23.7% for the three months ended March 31, 2020 and 2019, respectively.
The increase in our effective tax rate for the three months ended March 31, 2020 compared with the same period in 2019 was primarily due to a reduction in tax benefits associated with stock option exercises under Accounting Standards Codification (“ASC”) Topic 718.

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COVID-19 Impact
On March 11, 2020, the World Health Organization designated the spread of COVID-19 as a pandemic. As of the date of this Quarterly Report on Form 10-Q, COVID-19 has had a significant impact on global financial markets, and we continue to monitor its effects on the overall economy and our operations. We are not yet able to determine the full impact of the pandemic; however, should it continue for an extended period, there could be a material and adverse financial impact to our results of operations. For more information about the risks associated with COVID-19, see Part II, “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q.
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.
A summary of changes in cash flow data is provided as follows (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Net cash flows provided by (used in):
 
 
 
Operating activities
$
381,176

 
$
35,233

Investing activities
(36,516
)
 
(30,320
)
Financing activities
(112,843
)
 
(139,061
)
Net increase (decrease) in cash, cash equivalents and restricted cash
231,817

 
(134,148
)
Cash, cash equivalents and restricted cash — beginning of period
1,471,778

 
1,562,119

Cash, cash equivalents and restricted cash — end of period
$
1,703,595

 
$
1,427,971

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 includes 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 three months ended March 31, 2020 compared to the same period in 2019 was primarily attributable to an increase in payables to clients and a decrease in receivables from clients, due to the timing of payments made, partially offset by an increase in receivables from product sponsors, broker-dealers and clearing organizations.
The increase in cash flows used in investing activities for the three months ended March 31, 2020 compared to the same period in 2019 was primarily attributable to an increase in capital expenditures and purchases of held-to-maturity securities.
The decrease in cash flows used in financing activities for the three months ended March 31, 2020 compared to the same period in 2019 was primarily attributable to proceeds from our revolving lines of credit, partially offset by an increase in repurchases of our common stock.
We have actively monitored our liquidity needs since the start of the COVID-19 pandemic. We believe that based on current levels of operations and anticipated growth, our 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 committed revolving credit facility of LPL Financial, 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. We believe that this will remain the case in reasonably likely stress scenarios involving a sustained market downturn and the persistence of current interest

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rates. We note that the earliest principal maturity date for our long-term borrowings is 2025 and our revolving credit facilities mature in 2024, which makes us less dependent on capital markets in the near-term.
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. In particular, we believe that our liquidity planning has positioned us to meet reasonably foreseeable liquidity needs resulting from higher transaction volumes and price volatility, including higher margin requirements of clearing corporations and exchanges. For short-term liquidity needs we have the ability to draw on the committed revolving credit facility of LPL Financial and our senior secured revolving credit facility for a combined available amount of up to $1.1 billion.
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. See Note 11. Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our share repurchases. We suspended share repurchases in mid-March in light of the business and financial uncertainties created by the COVID-19 pandemic. The resumption, timing and amount of future share repurchases, will generally be determined at our discretion within the constraints of our Credit Agreement, the indentures governing our senior unsecured notes (the “Indentures”), and consideration of our general liquidity needs.
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 Indentures. See Note 11. Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our dividends.
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 committed 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.
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 at 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 March 31, 2020, LPL Financial had net capital of $125.1 million with a minimum net capital requirement of $8.5 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.

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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.
Debt and Related Covenants
See Note 8. Borrowings, within the notes to the unaudited condensed consolidated financial statements for further detail regarding the Credit Agreement and the Indentures.
The Credit Agreement and the Indentures 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 Indentures 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, and calculated by management in accordance with, 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 March 31, 2020, 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 be subject to certain equity cure rights. The required ratios under our financial covenants and actual ratios were as follows:
Financial Ratio
Covenant Requirement
 
Actual
Ratio
Leverage Test (Maximum)
5.00
 
2.07
Interest Coverage (Minimum)
3.00
 
9.19
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.

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Contractual Obligations
During the three months ended March 31, 2020, there were no material changes in our contractual obligations, other than in the ordinary course of business, from those disclosed in our 2019 Annual Report on Form 10-K. See Note 8. Borrowings 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 2019 Annual Report on Form 10-K, for further detail on operating lease obligations and obligations under noncancelable service contracts.
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 2019 Annual Report on Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of operations and financial condition. There have been no other material changes to those policies that we consider to be significant since the filing of our 2019 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 March 31,
 
 
2020
 
2019
REVENUES
 
 
 
 
Commission
 
$
503,444

 
$
461,359

Advisory
 
579,027

 
453,938

Asset-based
 
285,506

 
296,363

Transaction and fee
 
137,096

 
122,480

Interest income, net of interest expense
 
9,542

 
12,321

Other
 
(51,218
)
 
25,218

Total net revenues
 
1,463,397

 
1,371,679

EXPENSES
 
 
 
 
Commission and advisory
 
870,795

 
799,698

Compensation and benefits
 
146,802

 
136,912

Promotional
 
57,398

 
51,349

Depreciation and amortization
 
26,644

 
23,470

Amortization of intangible assets
 
16,570

 
16,168

Occupancy and equipment
 
39,546

 
33,106

Professional services
 
14,605

 
19,612

Brokerage, clearing, and exchange
 
17,024

 
16,144

Communications and data processing
 
10,835

 
12,327

Other
 
26,228

 
26,403

Total operating expenses
 
1,226,447

 
1,135,189

Non-operating interest expense and other
 
29,318

 
32,716

INCOME BEFORE PROVISION FOR INCOME TAXES
 
207,632

 
203,774

PROVISION FOR INCOME TAXES
 
51,991

 
48,376

NET INCOME
 
$
155,641

 
$
155,398

EARNINGS PER SHARE (Note 13)
 
 
 
 
Earnings per share, basic
 
$
1.96

 
$
1.84

Earnings per share, diluted
 
$
1.92

 
$
1.79

Weighted-average shares outstanding, basic
 
79,507

 
84,487

Weighted-average shares outstanding, diluted
 
81,166

 
86,742

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
March 31,
2020
 
December 31, 2019
Cash and cash equivalents
$
418,202

 
$
590,209

Cash segregated under federal and other regulations
1,217,692

 
822,697

Restricted cash
67,701

 
58,872

Receivables from:
 
 
 
Clients, net of allowance of $376 at March 31, 2020 and $115 at December 31, 2019
360,533

 
433,986

Product sponsors, broker-dealers, and clearing organizations
218,690

 
177,654

Advisor loans, net of allowance of $6,573 at March 31, 2020 and $3,974 at December 31, 2019
457,470

 
441,743

Others, net of allowance of $3,710 at March 31, 2020 and $10,292 at December 31, 2019
351,169

 
298,790

Securities owned:
 
 
 
Trading — at fair value
29,199

 
46,447

Held-to-maturity — at amortized cost
14,361

 
11,806

Securities borrowed
15,927

 
17,684

Fixed assets, net of accumulated depreciation and amortization of $414,322 at March 31, 2020 and $388,355 at December 31, 2019
542,821

 
533,044

Operating lease assets
103,870

 
102,477

Goodwill
1,503,648

 
1,503,648

Intangible assets, net of accumulated amortization of $561,223 at March 31, 2020 and $544,653 at December 31, 2019
423,341

 
439,838

Deferred income taxes, net
517

 
—

Other assets
385,625

 
401,343

Total assets
$
6,110,766

 
$
5,880,238

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
LIABILITIES:
Drafts payable
$
149,832

 
$
218,636

Payables to clients
1,328,882

 
1,058,873

Payables to broker-dealers and clearing organizations
117,860

 
92,002

Accrued commission and advisory expenses payable
155,360

 
174,330

Accounts payable and accrued liabilities
454,241

 
557,969

Income taxes payable
65,282

 
20,129

Unearned revenue
109,420

 
82,842

Securities sold, but not yet purchased — at fair value
295

 
176

Long-term and other borrowings, net
2,467,719

 
2,398,818

Operating lease liabilities
142,922

 
141,900

Finance lease liabilities
107,596

 
108,592

Deferred income taxes, net
—

 
2,098

Total liabilities
5,099,409

 
4,856,365

Commitments and contingencies (Note 10)
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
Common stock, $.001 par value; 600,000,000 shares authorized; 127,035,564 shares issued at March 31, 2020 and 126,494,028 shares issued at December 31, 2019
127

 
126

Additional paid-in capital
1,720,276

 
1,703,973

Treasury stock, at cost — 48,177,751 shares at March 31, 2020 and 46,259,989 shares at December 31, 2019
(2,392,712
)
 
(2,234,793
)
Retained earnings
1,683,666

 
1,554,567

Total stockholders’ equity
1,011,357

 
1,023,873

Total liabilities and stockholders’ equity
$
6,110,766

 
$
5,880,238

See notes to unaudited condensed consolidated financial statements.

18
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands)

 
Three Months Ended March 31, 2019
 
 
 
 
 
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, 2018
124,910

 
$
125

 
$
1,634,337

 
39,821

 
$
(1,730,535
)
 
$
—

 
$
1,070,146

 
$
974,073

Net income, net of tax expense
 
 
 
 
 
 
 
 
 
 
—

 
155,398

 
155,398

Cumulative effect of accounting change
 
 
 
 
 
 
 
 
 
 
 
 
5,724

 
5,724

Issuance of common stock to settle restricted stock units, net
204

 
—

 
—

 
58

 
(4,428
)
 
 
 
 
 
(4,428
)
Treasury stock purchases
 
 
 
 
 
 
1,747

 
(125,034
)
 
 
 
 
 
(125,034
)
Cash dividends on common stock
 
 
 
 
 
 
 
 
 
 
 
 
(21,079
)
 
(21,079
)
Stock option exercises and other
534

 
1

 
15,330

 
(14
)
 
513

 
 
 
233

 
16,077

Share-based compensation
—

 
 
 
8,964

 
 
 
 
 
 
 
 
 
8,964

BALANCE — March 31, 2019
125,648

 
$
126

 
$
1,658,631

 
41,612

 
$
(1,859,484
)
 
$
—

 
$
1,210,422

 
$
1,009,695

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2020
 
 
 
 
 
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, 2019
126,494

 
$
126

 
$
1,703,973

 
46,260

 
$
(2,234,793
)
 
$
—

 
$
1,554,567

 
$
1,023,873

Net income, net of tax expense
 
 
 
 
 
 
 
 
 
 
—

 
155,641

 
155,641

Cumulative effect of accounting change
 
 
 
 
 
 
 
 
 
 
 
 
(7,317
)
 
(7,317
)
Issuance of common stock to settle restricted stock units, net
315

 
—

 
—

 
122

 
(8,370
)
 
 
 
 
 
(8,370
)
Treasury stock purchases
 
 
 
 
 
 
1,810

 
(150,036
)
 
 
 
 
 
(150,036
)
Cash dividends on common stock
 
 
 
 
 
 
 
 
 
 
 
 
(19,713
)
 
(19,713
)
Stock option exercises and other
227

 
1

 
6,971

 
(14
)
 
487

 
 
 
488

 
7,947

Share-based compensation
 
 
 
 
9,332

 
 
 
 
 
 
 
 
 
9,332

BALANCE — March 31, 2020
127,036

 
$
127

 
$
1,720,276

 
48,178

 
$
(2,392,712
)
 
$
—

 
$
1,683,666

 
$
1,011,357


See notes to unaudited condensed consolidated financial statements.

19
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
 
 
Three Months Ended March 31,
 
 
 
2020
 
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net income
 
$
155,641

 
$
155,398

 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Noncash items:
 
 
 
 
 
Depreciation and amortization
 
26,644

 
23,470

 
Amortization of intangible assets
 
16,570

 
16,168

 
Amortization of debt issuance costs
 
1,348

 
1,026

 
Share-based compensation
 
9,332

 
8,964

 
Provision for bad debts
 
2,691

 
3,249

 
Deferred income tax provision
 
(89
)
 
(10
)
 
Loan forgiveness
 
25,714

 
22,807

 
Other
 
(1,841
)
 
(1,695
)
 
Changes in operating assets and liabilities:
 
 
 
 
 
Receivables from clients
 
73,192

 
19,803

 
Receivables from product sponsors, broker-dealers, and clearing organizations
 
(41,036
)
 
9,878

 
Advisor loans
 
(48,013
)
 
(45,418
)
 
Receivables from others
 
(56,089
)
 
(22,795
)
 
Securities owned
 
15,221

 
2,414

 
Securities borrowed
 
1,757

 
2,159

 
Operating leases
 
(371
)
 
(254
)
 
Other assets
 
(51,675
)
 
(30,969
)
 
Drafts payable
 
(68,804
)
 
(38,918
)
 
Payables to clients
 
270,009

 
(172,044
)
 
Payables to broker-dealers and clearing organizations
 
25,858

 
58,195

 
Accrued commission and advisory expenses payable
 
(18,970
)
 
(9,371
)
 
Accounts payable and accrued liabilities
 
(27,763
)
 
(26,982
)
 
Income taxes receivable/payable
 
45,153

 
41,750

 
Unearned revenue
 
26,578

 
18,511

 
Securities sold, but not yet purchased
 
119

 
(103
)
 
Net cash provided by operating activities
 
381,176

 
35,233

 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
Capital expenditures
 
(33,973
)
 
(30,332
)
 
Purchase of securities classified as held-to-maturity
 
(3,793
)
 
(1,238
)
 
Proceeds from maturity of securities classified as held-to-maturity
 
1,250

 
1,250

 
Net cash used in investing activities
 
(36,516
)
 
(30,320
)
 
Continued on following page
 
 
 
 
 
 
 

20
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
 
Three Months Ended March 31,
 
 
2020
 
2019
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from revolving credit facility
 
616,000

 
—

Repayments of revolving credit facility
 
(545,000
)
 
—

Repayment of senior secured term loans
 
(2,675
)
 
(3,750
)
Payment of contingent consideration
 
(10,000
)
 
—

Tax payments related to settlement of restricted stock units
 
(8,370
)
 
(4,428
)
Repurchase of common stock
 
(150,036
)
 
(125,034
)
Dividends on common stock
 
(19,713
)
 
(21,079
)
Proceeds from stock option exercises and other
 
7,947

 
16,076

Principal payment of finance leases and obligations
 
(996
)
 
(846
)
Net cash used in financing activities
 
(112,843
)
 
(139,061
)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
 
231,817

 
(134,148
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH — Beginning of period
 
1,471,778

 
1,562,119

CASH, CASH EQUIVALENTS AND RESTRICTED CASH — End of period
 
$
1,703,595

 
$
1,427,971

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
Interest paid
 
$
37,842

 
$
45,556

Income taxes paid
 
$
6,928

 
$
6,635

NONCASH DISCLOSURES:
 
 
 
 
Capital expenditures included in accounts payable and accrued liabilities
 
$
15,031

 
$
12,979

Lease assets obtained in exchange for operating lease liabilities
 
$
3,447

 
$
108,539



The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial condition that sum to the total of the same such amounts shown in the statement of cash flows.
 
 
March 31,
 
 
2020
 
2019
Cash and cash equivalents
 
$
418,202

 
$
676,903

Cash segregated under federal and other regulations
 
1,217,692

 
708,241

Restricted cash
 
67,701

 
42,827

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
 
$
1,703,595

 
$
1,427,971

See notes to unaudited condensed consolidated financial statements.


21
 
 
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


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 independent financial advice and brokerage services to retail investors (their “clients”).
Description of Subsidiaries
LPL Holdings, Inc. (“LPLH”), a Massachusetts holding corporation, owns 100% of the issued and outstanding common stock or other ownership interest in each of LPL Financial LLC (“LPL Financial”), AW Subsidiary, Inc., LPL Employee Services, LLC, Fortigent Holdings Company, Inc. and LPL Insurance Associates, Inc. (“LPLIA”), as well as a captive insurance subsidiary (the “Captive Insurance Subsidiary”) that underwrites insurance for various legal and regulatory risks of the Company. LPLH is also the majority stockholder in PTC Holdings, Inc. (“PTCH”), and owns 100% 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.
LPL Financial, with primary offices in San Diego, California; Fort Mill, South Carolina; and Boston, Massachusetts, is a clearing broker-dealer and an investment adviser 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 provide solutions and consulting services to registered investment advisers (“RIAs”), banks, and trust companies serving high-net-worth clients.
LPLIA 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, which 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.
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.
LPL Employee Services, LLC is a holding company for Allen & Company of Florida, LLC (“Allen & Company”), an RIA.
2.    Summary of Significant Accounting Policies
Basis of Presentation
The unaudited 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, allowance for doubtful accounts, share-based compensation, accruals for liabilities, income taxes, revenue and expense accruals, and other matters that affect the consolidated financial statements and related disclosures. The unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the results for the interim periods presented. Actual results could differ from those estimates under different assumptions or conditions and the differences may be material to the consolidated financial statements.
The unaudited condensed consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany transactions and balances have been eliminated.

22
 
 
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)

The unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of results of income, comprehensive income, financial position, and cash flows in conformity with GAAP. Accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the related notes for the year ended December 31, 2019, contained in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”).
See below for significant accounting polices updated on January 1, 2020. A summary of other significant accounting policies are included in Note 2. Summary of Significant Accounting Policies, in the Company’s audited consolidated financial statements and the related notes for the year ended December 31, 2019.
Receivables from and Payables to Clients
Receivables from clients include amounts due on cash and margin transactions. The Company extends credit to clients of its advisors to finance their purchases of securities on margin and receives income from interest charged on such extensions of credit. Payables to clients represent credit balances in client accounts arising from deposits of funds, proceeds from sales of securities, and dividend and interest payments received on securities held in client accounts at LPL Financial. The Company pays interest on certain client payable balances.
Receivables from clients are generally fully secured by securities held in the clients’ accounts. To the extent that margin loans and other receivables from clients are not fully collateralized by client securities, management establishes an allowance that it believes is sufficient to cover any probable losses. When establishing this allowance, management considers a number of factors, including its ability to collect from the client or the client’s advisor and the Company’s historical experience in collecting on such transactions.
The following schedule reflects the Company’s activity in providing for an allowance for uncollectible amounts due from clients (in thousands):
 
March 31,
 
2020
Beginning balance — January 1
$
115

Impact of CECL adoption
—

Provision for bad debts
261

Charge-offs, net of recoveries
—

Ending balance — March 31
$
376


Advisor Loans
The Company periodically extends credit to its advisors in the form of recruiting loans, commission advances, and other loans. The decision to extend credit to an advisor is generally based on the advisor’s credit history and their ability to generate future commissions. Loans made in connection with recruiting can be either repayable or forgivable over terms generally up to ten years provided that the advisor remains licensed through LPL Financial. Forgivable loans are not repaid in cash and are amortized over the term of the loan. If an advisor terminates their arrangement with the Company prior to the loan maturity date, the remaining balance becomes repayable immediately. An allowance for uncollectible amounts is recorded at the inception of repayable loans and upon advisor termination for forgivable loans using estimates and assumptions based on historical lifetime loss experience and expectations of future loss rates based on current facts.
Advisor repayable loans totaled $109.8 million and advisor forgivable loans that have become repayable upon advisor termination totaled $2.9 million as of March 31, 2020. Included in the table below is a $1.4 million allowance for advisor forgivable loans that have become repayable.

23
 
 
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)

The following schedule reflects the Company’s activity in providing for an allowance for uncollectible amounts for advisor loans (in thousands):
 
March 31,
 
2020
Beginning balance — January 1
$
3,974

Impact of CECL adoption
6,227

Provision for bad debts
1,225

Charge-offs, net of recoveries
(4,853
)
Ending balance — March 31
$
6,573