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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2021
or
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34963
LPL Financial Holdings Inc.
(Exact name of registrant as specified in its charter)
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Delaware | 20-3717839 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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4707 Executive Drive, | San Diego, | California | 92121 |
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock - par value $0.001 per share | LPLA | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically 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.
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| 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 26, 2021 was 80,147,365.
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TABLE OF CONTENTS | Page |
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Note 1 - Organization and Description of the Company | |
Note 2 - Summary of Significant Accounting Policies | |
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Note 9 - Commitments and Contingencies | |
Note 10 - Stockholders’ Equity | |
Note 11 - Share-based Compensation | |
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Note 14 - Related Party Transactions | |
Note 15 - Net Capital and Regulatory Requirements | |
Note 16 - Financial Instruments with Off-Balance-Sheet Credit Risk and Concentration of Credit Risk | |
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (“Exchange Act”), with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public on 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. 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.
We may use our website as a means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure promulgated by the SEC. These disclosures are included on our website in the “Investor Relations” or “Press Releases” sections. Accordingly, investors should monitor these portions of our website in addition to following the Company’s press releases, SEC filings, public conference calls and webcasts.
When we use the terms “LPLFH”, “LPL”, “we”, “us”, “our” and “the Company”, 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;
•the Company’s future revenues 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 acquisitions;
•expected impacts of the coronavirus disease 2019 (“COVID-19”) pandemic on the Company’s business; 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 November 2, 2021. 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 from 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 advisory and brokerage assets, including net new assets, and the related impact on revenues;
•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 offerings;
•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;
•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 the Company’s amended and restated credit agreement (“Credit Agreement”) and the indentures governing the Company’s senior unsecured notes (the “Indentures”);
•the price, availability and trading volumes of shares of the Company’s common stock, which will affect the timing and size of future share repurchases by the Company, 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 acquisitions, including its acquisition involving the wealth management business of Waddell & Reed Financial, Inc., 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 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 2020 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.
PART I — FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
LPL is a leader in the markets we serve, supporting more than 19,000 financial advisors, and approximately 800 institution-based investment programs and 450 registered investment adviser (“RIA”) firms nationwide. We are steadfast in our commitment to the advisor-centered model and the belief that Americans deserve access to objective guidance from a financial advisor. At LPL, independence means that advisors have the freedom they deserve to choose the business model, services, and technology resources that allow them to run their perfect practice. And they have the freedom to manage their client relationships, because they know their clients best. Our mission is to take care of our advisors, so they can take care of their clients.
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 comprehensive financial advice from an advisor. 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 freedom and choice through access to a wide range of diligently evaluated non-proprietary products.
Executive Summary
Financial Highlights
Results for the third quarter of 2021 included net income of $103.1 million, or $1.26 per diluted share, which compares to $103.8 million, or $1.29 per diluted share, for the third quarter of 2020.
Asset Growth Trends
Total advisory and brokerage assets were $1.1 trillion at September 30, 2021, up 40% from $810.4 billion at September 30, 2020. Total net new assets were $29.0 billion for the three months ended September 30, 2021, compared to $11.1 billion for the same period in 2020.
Net new advisory assets were $21.7 billion for the three months ended September 30, 2021, compared to $10.4 billion for the same period in 2020. Advisory assets were $594.0 billion, or 52% of total advisory and brokerage assets served, at September 30, 2021, up 46% from $405.9 billion at September 30, 2020.
Net new brokerage assets were $7.3 billion for the three months ended September 30, 2021, compared to $0.7 billion for the same period in 2020. Brokerage assets were $538.6 billion at September 30, 2021, up 33% from $404.4 billion at September 30, 2020.
Gross Profit Trends
Gross profit, a non-GAAP financial measure, was $631.1 million for the three months ended September 30, 2021, and increased 25% from $505.7 million for the three months ended September 30, 2020. Gross profit is calculated as total revenue, less advisory and commission expense and brokerage, clearing and exchange fees. We believe that gross profit can provide investors with useful insight into the Company’s core operating performance before indirect costs that are general and administrative in nature. See the “How We Evaluate Our Business” section for additional information on gross profit.
Common Stock Dividends and Share Repurchases
During the three months ended September 30, 2021, we paid shareholders a cash dividend of $20.1 million and repurchased 276,800 of our outstanding shares for a total of $40.0 million.
COVID-19 Response
In response to the COVID-19 pandemic, we have taken measures to protect the health and safety of our employees, as well as the stability and continuity of our operations. For example, we have equipped and enabled a substantial majority of employees to work remotely, enhanced cleaning protocols throughout our corporate offices, and worked closely with our vendors to maintain service continuity throughout the market volatility and increased operational volumes that occurred from time to time during the pandemic. We also made extra support available to our advisors by extending service hours and providing additional resources to enable them to deliver differentiated services to their clients. Please consult Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with COVID-19.
Our Sources of Revenue
Our revenue is 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 revenue through our bank sweep vehicles and money market programs and the access we provide to a variety of product providers with the following product lines:
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• Alternative Investments | | • Retirement Plan Products |
• Annuities | | • Separately Managed Accounts |
• Exchange Traded Products | | • Structured Products |
• Insurance Based Products | | • Unit Investment Trusts |
• Mutual Funds | | |
Under our self-clearing platform, we custody the majority of client assets invested in these financial products, for which we provide statements, transaction processing and ongoing account management. In return for these services, mutual funds, insurance companies, banks and other financial product 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 advisory and brokerage accounts.
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:
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| As of and for the Three Months Ended | | |
| September 30, | | June 30, | | September 30, | | |
Operating Metrics (dollars in billions)(1) | 2021 | | 2021 | | 2020 | | |
| Advisory and Brokerage Assets | | | | | | | |
Advisory assets(2)(3) | $ | 594.0 | | | $ | 577.6 | | | $ | 405.9 | | | |
Brokerage assets(2)(4) | 538.6 | | | 534.7 | | | 404.4 | | | |
Total Advisory and Brokerage Assets(2) | $ | 1,132.6 | | | $ | 1,112.3 | | | $ | 810.4 | | | |
| Advisory assets as a % of total Advisory and Brokerage Assets | 52.4 | % | | 51.9 | % | | 50.1 | % | | |
| | | | | | | |
| Net New Assets | | | | | | | |
Net new advisory assets(5) | $ | 21.7 | | | $ | 54.9 | | | $ | 10.4 | | | |
Net new brokerage assets(6) | 7.3 | | | 51.1 | | | 0.7 | | | |
Total Net New Assets(7) | $ | 29.0 | | | $ | 106.0 | | | $ | 11.1 | | | |
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Organic Net New Assets(7) | | | | | | | |
| Organic net new advisory assets | $ | 21.1 | | | $ | 21.4 | | | $ | 10.4 | | | |
| Organic net new brokerage assets | 5.6 | | | 15.6 | | | 0.7 | | | |
| Total Organic Net New Assets | $ | 26.7 | | | $ | 37.1 | | | $ | 11.1 | | | |
| | | | | | | |
Organic advisory net new assets annualized growth(7)(8) | 15.6% | | 17.3% | | 11.0% | | |
Total organic net new assets annualized growth(7)(8) | 10.2% | | 15.5% | | 5.8% | | |
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Client Cash Balances(2) | | | | | | | |
| Insured cash account balances | $ | 30.5 | | | $ | 34.1 | | | $ | 34.7 | | | |
| Deposit cash account balances | 8.6 | | | 7.6 | | | 8.0 | | | |
| Total Bank Sweep Balances | 39.0 | | | 41.7 | | | 42.7 | | | |
| Money market account balances | 9.9 | | | 5.0 | | | 1.5 | | | |
| Purchased money market fund balances | 1.8 | | | 1.7 | | | 2.3 | | | |
| Total Client Cash Balances | $ | 50.7 | | | $ | 48.4 | | | $ | 46.6 | | | |
| | | | | | | |
Net buy (sell) activity(9) | $ | 17.6 | | | $ | 18.1 | | | $ | 9.3 | | | |
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| As of and for the Three Months Ended | | |
| September 30, | | June 30, | | September 30, | | | | |
| Business and Financial Metrics (dollars in millions) | 2021 | | 2021 | | 2020 | | | | |
| Advisors - period end | 19,627 | | | 19,114 | | | 17,168 | | | | | |
Average total assets per advisor(10) | $ | 57.7 | | | $ | 58.2 | | | $ | 47.2 | | | | | |
| Employees - period end | 5,457 | | | 5,344 | | | 4,658 | | | | | |
| | | | | | | | | |
| Share repurchases | $ | 40.0 | | | $ | — | | | $ | — | | | | | |
| Dividends | $ | 20.1 | | | $ | 20.0 | | | $ | 19.8 | | | | | |
| | | | | | | | | |
Leverage ratio(11) | 2.18 | | | 2.26 | | | 2.15 | | | | | |
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| Financial Metrics (dollars in millions, except per share data) | 2021 | | 2020 | | 2021 | | 2020 |
| Total revenue | $ | 2,020.8 | | | $ | 1,460.3 | | | $ | 5,626.6 | | | $ | 4,290.4 | |
| Net income | $ | 103.1 | | | $ | 103.8 | | | $ | 351.8 | | | $ | 361.1 | |
| Earnings per share (“EPS”), diluted | $ | 1.26 | | | $ | 1.29 | | | $ | 4.30 | | | $ | 4.48 | |
| Non-GAAP Financial Metrics (dollars in millions, except per share data) | | | | | | | |
EPS prior to amortization of intangible assets and acquisition costs(12) | $ | 1.77 | | | $ | 1.44 | | | $ | 5.38 | | | $ | 4.93 | |
Gross profit(13) | $ | 631.1 | | | $ | 505.7 | | | $ | 1,812.1 | | | $ | 1,569.5 | |
EBITDA(14) | $ | 225.0 | | | $ | 204.9 | | | $ | 711.6 | | | $ | 692.2 | |
| EBITDA as a % of Gross profit | 35.6 | % | | 40.5 | % | | 39.3 | % | | 44.1 | % |
Core G&A(15) | $ | 270.9 | | | $ | 227.1 | | | $ | 758.8 | | | $ | 672.7 | |
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(1)Totals may not foot due to rounding.
(2)Advisory and brokerage assets consist of assets that are custodied, networked and non-networked and reflect market movement in addition to new assets, inclusive of new business development and net of attrition. Client cash balances are also included in total advisory and brokerage assets.
(3)Advisory assets consists of total advisory assets under custody at our broker-dealer subsidiaries, LPL Financial LLC (“LPL Financial”) and Waddell & Reed, LLC (“Waddell & Reed”). Please consult the “Results of Operations” section for a tabular presentation of advisory assets.
(4)Brokerage assets consists of brokerage assets serviced by advisors licensed with LPL Financial and Waddell & Reed.
(5)Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively.
(6)Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively.
(7)Total net new assets includes $68.9 billion of assets during the three months ended June 30, 2021 and $2.3 billion of assets during the three months ended September 30, 2021 related to the acquisition of the wealth management business of Waddell & Reed Financial, Inc. Organic net new assets and related growth rates exclude these assets.
(8)Calculated as annualized current period net new assets divided by preceding period total advisory and brokerage assets.
(9)Represents the amount of securities purchased less the amount of securities sold in client accounts custodied with LPL Financial and Waddell & Reed. Reported activity does not include any other cash activity, such as deposits, withdrawals, dividends received or fees paid.
(10)Calculated based on the end-of-period total advisory and brokerage assets divided by the end-of-period advisor count.
(11)Leverage ratio is related to a financial covenant from our Credit Agreement and is calculated by dividing Credit Agreement net debt, which equals consolidated total debt plus corporate cash, by Credit Agreement EBITDA. Please consult the “Debt and Related Covenants” section for more information.
(12)EPS prior to amortization of intangible assets and acquisition costs is a non-GAAP financial measure defined as adjusted net income, a non-GAAP measure defined as net income plus the after-tax impact of amortization of intangible assets and acquisition costs, divided by the weighted average number of diluted shares outstanding for the applicable period. The Company presents adjusted net income and EPS prior to amortization of intangible assets and acquisition costs because management believes that these metrics can provide investors with useful insight into the Company’s core operating performance by excluding non-cash items and acquisition costs that management does not believe impact the Company’s ongoing operations. Adjusted net income and EPS prior to amortization of intangible assets and acquisition costs are not measures of the Company's financial performance under GAAP and should not be considered as an alternative to net income, earnings per diluted share or any other performance measure derived in accordance with GAAP. Below is a reconciliation of net income and earnings per diluted share to adjusted net income and EPS prior to amortization of intangible assets and acquisition costs for the periods presented (in millions, except per share data):
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Adjusted net income / EPS prior to amortization of intangible assets and acquisition costs Reconciliation | Amount | Per Share | | Amount | Per Share | | Amount | Per Share | | Amount | Per Share |
| Net income / earnings per diluted share | $ | 103.1 | | $ | 1.26 | | | $ | 103.8 | | $ | 1.29 | | | $ | 351.8 | | $ | 4.30 | | | $ | 361.1 | | $ | 4.48 | |
| Amortization of intangible assets | 21.5 | | 0.26 | | | 16.8 | | 0.21 | | | 58.9 | | 0.72 | | | 50.1 | | 0.62 | |
Acquisition costs(16) | 35.9 | | 0.44 | | | — | | — | | | 62.1 | | 0.76 | | | — | | — | |
| Tax benefit | (15.4) | | (0.19) | | | (4.7) | | (0.06) | | | (32.4) | | (0.40) | | | (14.0) | | (0.17) | |
| Adjusted net income / EPS prior to amortization of intangible assets and acquisition costs | $ | 145.1 | | $ | 1.77 | | | $ | 115.9 | | $ | 1.44 | | | $ | 440.4 | | $ | 5.38 | | | $ | 397.2 | | $ | 4.93 | |
| Diluted share count | 81.8 | | | | 80.6 | | | | 81.8 | | | | 80.6 | | |
(13)Gross profit is a non-GAAP financial measure defined as total revenue less advisory and commission expense and brokerage, clearing and exchange fees. All other expense categories, including depreciation and amortization of fixed assets and amortization of intangible assets, are considered by management to be general and administrative in nature. Because our gross profit amounts do not include any depreciation and amortization expense, we consider our gross profit amounts to be non-GAAP financial measures that may not be comparable to those of others in our industry. We believe that gross profit amounts can provide investors with useful insight into our core operating performance before indirect costs that are general and administrative in nature. Below is a reconciliation of gross profit for the periods presented (in millions):
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| Gross Profit | 2021 | | 2020 | | 2021 | | 2020 |
| Total revenue | $ | 2,020.8 | | | $ | 1,460.3 | | | $ | 5,626.6 | | | $ | 4,290.4 | |
| Advisory and commission expense | 1,366.8 | | | 936.8 | | | 3,748.9 | | | 2,667.4 | |
| Brokerage, clearing and exchange fees | 22.8 | | | 17.8 | | | 65.7 | | | 53.4 | |
Gross profit(†) | $ | 631.1 | | | $ | 505.7 | | | $ | 1,812.1 | | | $ | 1,569.5 | |
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(†) Totals may not foot due to rounding.
(14)EBITDA is a non-GAAP financial measure defined as net income plus non-operating interest and other expense, income tax expense, depreciation and amortization, and amortization of intangible assets. During the third quarter of 2021, the Company changed its definition of EBITDA to include the loss on extinguishment of debt and has updated prior period disclosures to reflect this change as applicable. The Company presents EBITDA because management believes that it can be a useful financial metric in understanding the Company’s earnings from operations. EBITDA is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP. Below is a reconciliation of EBITDA to net income for the periods presented (in millions):
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| EBITDA Reconciliation | 2021 | | 2020 | | 2021 | | 2020 |
| Net income | $ | 103.1 | | | $ | 103.8 | | | $ | 351.8 | | | $ | 361.1 | |
| Non-operating interest expense and other | 27.1 | | | 25.2 | | | 77.3 | | | 80.8 | |
| Provision for income taxes | 34.9 | | | 31.5 | | | 113.0 | | | 119.1 | |
| Depreciation and amortization | 38.4 | | | 27.5 | | | 110.6 | | | 81.1 | |
| Amortization of intangible assets | 21.5 | | | 16.8 | | | 58.9 | | | 50.1 | |
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EBITDA(†) | $ | 225.0 | | | $ | 204.9 | | | $ | 711.6 | | | $ | 692.2 | |
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(†) Totals may not foot due to rounding.
(15)Core G&A is a non-GAAP financial measure defined as total operating expense, excluding the following expenses: advisory and commission; depreciation and amortization; amortization of intangible assets; brokerage, clearing and exchange; promotional; acquisition costs; employee share-based compensation and regulatory charges. Management presents Core G&A because it believes Core G&A reflects the corporate operating expense categories over which management can generally exercise a measure of control, compared with expense items over which management either cannot exercise control, such as advisory and commission expenses, or which management views as promotional expense necessary to support advisor growth and retention, including conferences and transition assistance. Core G&A is not a measure of the Company’s total operating expense as calculated in accordance with GAAP. Below is a reconciliation of Core G&A against the Company’s total operating expense for the periods presented (in millions):
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| Core G&A Reconciliation | 2021 | | 2020 | | 2021 | | 2020 |
| Total operating expense | $ | 1,855.7 | | | $ | 1,299.8 | | | $ | 5,060.2 | | | $ | 3,729.3 | |
| Advisory and commission | 1,366.8 | | | 936.8 | | | 3,748.9 | | | 2,667.4 | |
| Depreciation and amortization | 38.4 | | | 27.5 | | | 110.6 | | | 81.1 | |
| Amortization of intangible assets | 21.5 | | | 16.8 | | | 58.9 | | | 50.1 | |
| Brokerage, clearing and exchange | 22.8 | | | 17.8 | | | 65.7 | | | 53.4 | |
| Total G&A | 406.2 | | | 300.9 | | | 1,076.1 | | | 877.3 | |
Promotional (ongoing)(17) | 83.6 | | | 58.0 | | | 201.9 | | | 159.9 | |
Acquisition costs(17) | 35.9 | | | — | | | 62.1 | | | — | |
| Employee share-based compensation | 9.8 | | | 7.4 | | | 32.3 | | | 24.1 | |
| Regulatory charges | 6.0 | | | 8.3 | | | 21.0 | | | 20.6 | |
Core G&A(†) | $ | 270.9 | | | $ | 227.1 | | | $ | 758.8 | | | $ | 672.7 | |
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(†) Totals may not foot due to rounding.
(16)Acquisition costs include the cost to setup, onboard and integrate acquired entities and primarily include $14.8 million of compensation and benefits expenses, $12.4 million of promotional expenses, $5.8 million of professional services expenses, and other expenses during the three months ended September 30, 2021. Acquisition costs for the nine months ended September 30, 2021 also includes $13.9 million of compensation and benefits expenses, $6.3 million of professional services expenses, $1.6 million of occupancy and equipment expenses, $1.2 million of communications expenses, and other expenses that were incurred during the three months ended June 30, 2021 that are included in the respective line items in the condensed consolidated statements of income.
Legal and Regulatory Matters
As a regulated entity, we are subject to regulatory oversight and inquiries related to, among other items, our compliance and supervisory systems and procedures and other controls, as well as our disclosures, supervision and reporting. 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, additional regulation 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 legal 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 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 September 30, 2021, include estimated costs for significant regulatory matters or legal proceedings, generally relating to the adequacy of our compliance and supervisory systems and procedures and other controls, for which we believe losses are both probable and reasonably estimable.
The outcome of regulatory or legal proceedings could result in legal liability, regulatory fines or monetary penalties in excess of our accruals and insurance, which could have a material adverse effect on our business, results of operations, cash flows or financial condition. For more information on management’s loss contingency policies, see Note 9 - 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 invalidated regulations previously enacted by the U.S. Department of Labor (“DOL”) that expanded the definition of “fiduciary” and would have resulted in significant new prohibited transaction exemption requirements for 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”). In December 2020, the DOL finalized a new investment advice fiduciary prohibited transaction exemption with regard to such accounts that became effective on February 16, 2021 (the “DOL Investment Advice Fiduciary Exemption”). ERISA plans and IRAs comprise a significant portion of our business and 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, including banking regulators and state securities and insurance regulators, may respond to or attempt to enforce similar issues addressed by the DOL Investment Advice Fiduciary Exemption and Regulation BI. As of June 30, 2020, we implemented new procedures in accordance with Regulation BI.
Future laws and regulations, including new and future rulemaking by the DOL and state rules relating to the standards of conduct applicable to both retirement and non-retirement accounts, may affect our business in ways that cannot be anticipated or planned for, and may have negative impacts on our products, services and results of operations.
Acquisitions, Integrations and Divestitures
We continuously assess the competitive landscape in connection with our capital allocation framework as we pursue acquisitions, integrations and divestitures. These activities are part of our overall growth strategy, but can distort comparability when reviewing revenue and expense trends for periods presented. Our recent acquisitions are as follows:
•Waddell & Reed Financial, Inc. - In April 2021, we acquired the wealth management business of Waddell & Reed Financial, Inc.
•Blaze Portfolio Systems LLC (“Blaze”) - In October 2020, we acquired Blaze, a technology company that provides an advisor-facing trading and portfolio rebalancing platform.
•E.K. Riley Investments, LLC (“E.K. Riley”) - In August 2020, we acquired business relationships with advisors from E.K. Riley, a broker-dealer and RIA.
•Lucia Securities, LLC (“Lucia”) - In August 2020, we acquired business relationships with advisors from Lucia, a broker-dealer and RIA.
See Note 4 - Acquisitions, within the notes to the unaudited condensed consolidated financial statements for further detail.
Economic Overview and Impact of Financial Market Events
Our business is directly and indirectly sensitive to several macroeconomic factors and the state of the United States financial markets. According to the most recent estimate from the U.S. Bureau of Economic Analysis, the U.S. economy grew at an annualized pace of 6.7% in the second quarter of 2021 after growing at an annualized pace of 6.3% in the first quarter. The minutes of the September 2021 meeting of the Federal Open Market Committee suggest that growth has likely slowed substantially, largely due to the impact of the Delta variant of COVID-19. The S&P 500 Index was near flat in the third quarter, rising just 0.6% on a total return basis, while smaller stocks lagged. Non-U.S. stocks trailed their U.S. counterparts during the third quarter while fixed income markets were nearly flat.
Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Federal Reserve (“Fed”) policy. During the third quarter, Fed policymakers maintained the target range for the federal funds rate at 0 to 0.25 percent. According to projection materials released following the conclusion of the September 2021 policy meeting, the median expectation among meeting participants was evenly divided between expectations that the Fed would raise rates in 2022 versus 2023, earlier than previous projections. The Fed continues to emphasize its belief that any near-term increase in inflation is likely temporary, although upside risks have increased. At the September 2021 meeting Fed officials discussed starting to reduce the rate of bond purchases, a process they projected could begin in 2021 and be completed by mid-2022 if the economy remains on track.
Please consult the “Risks Related to Our Business and Industry” section within Part I, “Item 1A. Risk Factors” in our 2020 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.
Results of Operations
The following discussion presents an analysis of our results of operations for the three and nine months ended September 30, 2021 and 2020 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
| REVENUE | | | | | | | | | | | |
| Advisory | $ | 959,733 | | | $ | 586,941 | | | 63.5 | % | | $ | 2,528,092 | | | $ | 1,689,338 | | | 49.6 | % |
| Commission | 610,384 | | | 472,643 | | | 29.1 | % | | 1,765,846 | | | 1,403,540 | | | 25.8 | % |
| Asset-based | 301,701 | | | 253,551 | | | 19.0 | % | | 846,027 | | | 786,124 | | | 7.6 | % |
| Transaction and fee | 140,362 | | | 119,747 | | | 17.2 | % | | 418,406 | | | 376,321 | | | 11.2 | % |
| Interest income | 7,365 | | | 6,623 | | | 11.2 | % | | 20,797 | | | 22,705 | | | (8.4) | % |
| Other | 1,218 | | | 20,796 | | | (94.1) | % | | 47,470 | | | 12,329 | | | n/m |
Total revenue | 2,020,763 | | | 1,460,301 | | | 38.4 | % | | 5,626,638 | | | 4,290,357 | | | 31.1 | % |
| EXPENSE | | | | | | | | | | | |
| Advisory and commission | 1,366,832 | | | 936,766 | | | 45.9 | % | | 3,748,933 | | | 2,667,408 | | | 40.5 | % |
| Compensation and benefits | 185,980 | | | 151,271 | | | 22.9 | % | | 531,373 | | | 441,393 | | | 20.4 | % |
| Promotional | 96,012 | | | 57,970 | | | 65.6 | % | | 214,542 | | | 159,908 | | | 34.2 | % |
| Depreciation and amortization | 38,409 | | | 27,548 | | | 39.4 | % | | 110,612 | | | 81,082 | | | 36.4 | % |
| Amortization of intangible assets | 21,531 | | | 16,829 | | | 27.9 | % | | 58,887 | | | 50,088 | | | 17.6 | % |
| Occupancy and equipment | 52,695 | | | 41,874 | | | 25.8 | % | | 137,731 | | | 124,486 | | | 10.6 | % |
| Professional services | 16,722 | | | 12,301 | | | 35.9 | % | | 54,847 | | | 40,526 | | | 35.3 | % |
| Brokerage, clearing and exchange | 22,828 | | | 17,834 | | | 28.0 | % | | 65,651 | | | 53,423 | | | 22.9 | % |
| Communications and data processing | 17,824 | | | 12,547 | | | 42.1 | % | | 44,747 | | | 37,743 | | | 18.6 | % |
| Other | 36,888 | | | 24,852 | | | 48.4 | % | | 92,852 | | | 73,274 | | | 26.7 | % |
Total operating expense | 1,855,721 | | | 1,299,792 | | | 42.8 | % | | 5,060,175 | | | 3,729,331 | | | 35.7 | % |
| Non-operating interest expense and other | 27,063 | | | 25,179 | | | 7.5 | % | | 77,293 | | | 80,786 | | | (4.3) | % |
| Loss on extinguishment of debt | — | | | — | | | — | % | | 24,400 | | | — | | | 100 | % |
INCOME BEFORE PROVISION FOR INCOME TAXES | 137,979 | | | 135,330 | | | 2.0 | % | | 464,770 | | | 480,240 | | | (3.2) | % |
PROVISION FOR INCOME TAXES | 34,915 | | | 31,541 | | | 10.7 | % | | 112,985 | | | 119,148 | | | (5.2) | % |
NET INCOME | $ | 103,064 | | | $ | 103,789 | | | (0.7) | % | | $ | 351,785 | | | $ | 361,092 | | | (2.6) | % |
Revenue
Advisory
Advisory revenues represent fees charged to advisors’ clients’ advisory accounts on our corporate RIA advisory platform, and are based on a percentage of the market value of the eligible assets in the clients’ advisory accounts. We provide ongoing investment advice and act as a custodian, providing brokerage and execution services on transactions, and perform administrative services for these accounts. Advisory fees are primarily billed to clients in advance, on a quarterly basis, and are recognized as revenue ratably during the quarter. The majority of our client accounts are on a calendar quarter and are billed using values as of the last business day of the preceding quarter. The value of the eligible assets in an advisory account on the billing date determines the amount billed, and accordingly, the revenues earned in the following three-month period. Advisory revenues collected on our corporate advisory platform are proposed by the advisor and agreed to by the client and averaged 1.0% of the underlying assets for the nine months ended September 30, 2021.
We also support separate investment adviser firms (“Hybrid RIAs”) through our hybrid advisory platform, which allows advisors to engage us for technology, clearing and custody services, as well as access to the capabilities of our investment platforms. The assets held under a Hybrid RIA’s investment advisory accounts custodied with LPL Financial are included in total advisory assets and net new advisory assets. The advisory revenue generated by a Hybrid RIA is not included in our advisory revenues. We charge separate fees to Hybrid RIAs for technology, clearing, administrative, oversight and custody services, which are included in our transaction and fee revenues in our unaudited condensed consolidated statements of income.
The following table summarizes the composition of advisory assets for the periods presented (in billions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, | | Change |
| | 2021 | | 2020 | | Amount | | % |
| Corporate platform advisory assets | | $ | 395.6 | | | $ | 253.9 | | | $ | 141.7 | | | 55.8 | % |
Hybrid platform advisory assets | | 198.4 | | | 152.0 | | | 46.4 | | | 30.5 | % |
Total advisory assets(1) | | $ | 594.0 | | | $ | 405.9 | | | $ | 188.1 | | | 46.3 | % |
_______________________________
(1)Totals may not foot due to rounding.
Net new advisory assets are generated throughout the quarter, therefore, the full impact of net new advisory assets to advisory revenues is not realized in the same period. The following table summarizes activity impacting advisory assets for the periods presented (in billions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Balance - Beginning of period | $ | 577.6 | | | $ | 375.3 | | | $ | 461.2 | | | $ | 365.8 | |
Net new advisory assets(1) | 21.7 | | | 10.4 | | | 99.3 | | | 33.7 | |
Market impact(2) | (5.3) | | | 20.2 | | | 33.5 | | | 6.4 | |
| Balance - End of period | $ | 594.0 | | | $ | 405.9 | | | $ | 594.0 | | | $ | 405.9 | |
_______________________________
(1)Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively.
(2)Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, representing the implied growth or decline in asset balances due to market changes over the same period of time.
The growth in advisory revenues for the three and nine months ended September 30, 2021 compared to 2020 was due to increases in net new advisory assets resulting from acquisitions, recruiting efforts and advisor productivity, as well as market gains as represented by higher levels of the S&P 500 Index.
Commission
We generate two types of commission revenues: (1) sales-based commissions that are recognized at the point of sale on the trade date and are based on a percentage of an investment product’s current market value at the time of purchase and (2) trailing commissions that are recognized over time as earned and are generally based on the market value of investment holdings in trail-eligible assets. Sales-based commission revenues, which occur when clients trade securities or purchase various types of investment products, primarily represent gross commissions generated by our advisors, and can vary from period to period based on the overall economic environment, number of trading days in the reporting period and investment activity of our advisors’ clients. We earn trailing commission revenues primarily on mutual funds and variable annuities held by clients of our advisors. See Note 3 - Revenue, within the notes to the unaudited condensed consolidated financial statements for further detail regarding our commission revenues by product category.
The following table sets forth the components of our commission revenues (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2021 | | 2020 | | Amount | | % | | 2021 | | 2020 | | Amount | | % |
| Sales-based | $ | 239,804 | | | $ | 180,357 | | | $ | 59,447 | | | 33.0 | % | | $ | 725,673 | | | $ | 568,260 | | | $ | 157,413 | | | 27.7 | % |
Trailing | 370,580 | | | 292,286 | | | 78,294 | | | 26.8 | % | | 1,040,173 | | | 835,280 | | | 204,893 | | | 24.5 | % |
Total commission revenues | $ | 610,384 | | | $ | 472,643 | | | $ | 137,741 | | | 29.1 | % | | $ | 1,765,846 | | | $ | 1,403,540 | | | $ | 362,306 | | | 25.8 | % |
The increase in sales-based commission revenues for the three and nine months ended September 30, 2021 compared to 2020 was primarily driven by increases in sales of annuities, mutual funds and fixed income products. The increase in trailing commission revenues for the three and nine months ended September 30, 2021 compared to 2020 was primarily due to the increase in value of annuities and mutual funds as a result of market increases.
The following table summarizes activity impacting brokerage assets for the periods presented (in billions): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Balance - Beginning of period | $ | 534.7 | | | $ | 386.4 | | | $ | 441.9 | | | $ | 398.6 | |
Net new brokerage assets(1) | 7.3 | | | 0.7 | | | 64.6 | | | 4.7 | |
Market impact(2) | (3.4) | | | 17.3 | | | 32.1 | | | 1.1 | |
| Balance - End of period | $ | 538.6 | | | $ | 404.4 | | | $ | 538.6 | | | $ | 404.4 | |
_______________________________ (1) Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively.
(2) Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, representing the implied growth or decline in asset balances due to market changes over the same period of time.
Asset-Based
Asset-based revenues consist of fees from our client cash programs, fees from our sponsorship programs with financial product manufacturers, and fees from omnibus processing and networking services (collectively referred to as “recordkeeping”). Client cash-based revenues are generated on advisors’ clients’ cash balances in bank sweep accounts and money market programs. We receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales force education and training efforts. Compensation for these performance obligations are either a fixed fee, a percentage of the average annual amount of product sponsor assets held in advisors’ clients’ accounts, a percentage of new sales or a combination. Omnibus processing revenues are paid to us by mutual fund product sponsors or their affiliates and are based on the value of mutual fund assets in accounts for which the Company provides omnibus processing services and the number of accounts in which the related mutual fund positions are held. Networking revenues on brokerage assets are correlated to the number of positions we administer and are paid to us by mutual fund product sponsors and annuity product manufacturers.
Asset-based revenues for the three and nine months ended September 30, 2021 increased compared to 2020 primarily due to increased revenues from recordkeeping and sponsorship programs, partially offset by a decrease in client cash revenues.
Revenues for our recordkeeping and sponsorship programs for the three and nine months ended September 30, 2021, which are largely based on the market value of the underlying assets, increased compared to 2020 due to the impact of market appreciation on the value of the underlying assets.
Client cash revenues for the three and nine months ended September 30, 2021 decreased compared to 2020 due to the impact of a lower federal funds effective rate, partially offset by higher average client cash balances. For the three months ended September 30, 2021, our average client cash balances increased to $49.6 billion compared to $45.6 billion in 2020. For the nine months ended September 30, 2021, our average client cash balances increased to $48.7 billion compared to $43.4 billion in 2020.
Transaction and Fee
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. We charge separate fees to Hybrid RIAs for technology, clearing, administrative, oversight and custody services which may vary. 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 for the three and nine months ended September 30, 2021 increased compared to 2020 primarily due to an increase in licensing fee, IRA custodian fee, and technology fee revenues.
Interest Income
We earn interest income from client margin loans, advisor loans, cash segregated under federal and other regulations and cash equivalents. Period-over-period variances correspond to changes in the average balances of margin loans and cash balances as well as changes in interest rates.
Interest income for the three months ended September 30, 2021 increased compared to 2020, primarily due to an increase in interest earned on advisor and margin loans, partially offset by lower average interest rates. Interest income for the nine months ended September 30, 2021 decreased compared to 2020, primarily due to lower average interest rates, partially offset by an increase in interest earned on advisor and margin loans.
Other
Other revenues primarily include unrealized gains and losses on assets held by us in our advisor non-qualified deferred compensation plan and model research portfolios, and other miscellaneous revenues which are not generated from contracts with customers. Other revenues for the three months ended September 30, 2021 decreased compared to 2020, primarily due to a decrease in unrealized gains on assets held in our advisor non-qualified deferred compensation plan, which assets are based on the market performance of the underlying investment allocations chosen by advisors in the plan.
Other revenues for the nine months ended September 30, 2021 increased compared to 2020, primarily due to increases in realized and unrealized gains on assets held in our advisor non-qualified deferred compensation plan, which assets are based on the market performance of the underlying investment allocations chosen by advisors, partially offset by a decrease in dividend income on assets held in our advisor non-qualified deferred compensation plan.
Expense
Advisory and Commission
Advisory and commission expenses consist of the following: payout amounts that are earned by and paid out to advisors and institutions based on advisory and commission revenues earned on each client’s account; production- based bonuses earned by advisors and institutions based on the levels of advisory and commission 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 grant date; and the deferred advisory and commissions fee expenses associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors.
The following table sets forth our payout rate, which is a statistical or operating measure:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Payout rate | 87.15 | % | | 86.62 | % | | 53 bps | | 86.43 | % | | 85.96 | % | | 47 bps |
| | | | | | | | | | | |
| | | | | | | | | | | |
Our payout rate for the three and nine months ended September 30, 2021 increased compared to 2020 primarily due to higher production bonus payouts and changes in product mix.
Compensation and Benefits
Compensation and benefits include salaries, wages, benefits, share-based compensation and related taxes for our employees, as well as compensation for temporary workers and contractors. The following table sets forth our average number of employees for the three and nine months ended September 30, 2021, compared to 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Average number of employees | 5,427 | | 4,634 | | 17.1% | | 5,117 | | 4,504 | | 13.6% |
Compensation and benefits for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to an increase in salary and employee benefit expenses resulting from an increase in headcount.
Promotional
Promotional expenses include business development costs related to advisor recruitment and retention, costs related to hosting certain advisory conferences that serve as training, sales and marketing events and other costs that support advisor business growth. Promotional expenses for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to an increase in costs associated with advisor recruitment and advisor loans.
Depreciation and Amortization
Depreciation and amortization relates to the use of fixed assets, which include internally developed software, hardware, leasehold improvements and other equipment. Depreciation and amortization for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to our continued investment in technology to improve our advisor platform and end-client experience.
Amortization of Intangible Assets
Amortization of intangible assets represents the benefits received for the use of long-lived intangible assets established through our acquisitions. Amortization of intangible assets for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to increases in intangible assets resulting from the acquisition of the wealth management business of Waddell & Reed Financial, Inc. on April 30, 2021, as well as an acquisition during the fourth quarter of 2020. See Note 4 - Acquisitions and Note 7 - Goodwill and Other Intangible Assets for additional information.
Occupancy and Equipment
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. Occupancy and equipment expense for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to increases in expenses related to software licenses and our technology portfolio.
Professional Services
Professional services expenses include costs paid to outside firms for assistance with legal, accounting, technology, regulatory and general corporate matters, as well as non-capitalized costs related to service and technology enhancements. Professional services expenses for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to increases in non-capitalized costs related to our service and technology projects.
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. These fees fluctuate largely in line with the volume of sales and trading activity. Brokerage, clearing and exchange fees for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to an increase in the volume of sales and trading activity.
Communications and Data Processing
Communications and data processing expense consists primarily of the cost of voice and data telecommunication lines supporting our business, including connectivity to data centers, exchanges and markets, as well as customer statement processing and postage costs. Communications and data processing expense for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to increases in costs associated with client statement production.
Loss on Extinguishment of Debt
On March 15, 2021, we increased our borrowing capacity under and extended the maturity date of our existing senior revolving credit facility, issued senior unsecured notes due in 2029 and redeemed our existing senior unsecured notes due in 2025. In connection with these transactions, we incurred a $24.4 million loss on extinguishment of debt in the three months ended March 31, 2021.
Provision for Income Taxes
Our effective income tax rate was 25.3% and 23.3% for the three months ended September 30, 2021 and 2020, respectively. The increase in our effective income tax rate for the three months ended September 30, 2021 compared to 2020 was primarily due to the release of unrecognized tax benefits in the prior year.
Our effective income tax rate was 24.3% and 24.8% for the nine months ended September 30, 2021 and 2020, respectively.
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, the COVID-19 pandemic has had a significant impact on global financial markets, and we continue to monitor its effects on the overall economy and our operations. We are not yet able to determine the full impact of the pandemic; however, should it continue, there could be a material and adverse financial impact to our results of operations. Please consult Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with COVID-19.
Liquidity and Capital Resources
We have established liquidity and capital policies intended to support the execution of strategic initiatives, while meeting regulatory capital requirements and maintaining ongoing and sufficient liquidity. We believe liquidity is of critical importance to the Company and, in particular, to LPL Financial, our primary broker-dealer subsidiary. The objective of our policies is to ensure that we can meet our strategic, operational and regulatory liquidity and capital requirements under both normal operating conditions and under periods of stress in the financial markets.
Liquidity
Our liquidity needs are primarily driven by capital requirements at LPL Financial, interest due on our corporate debt and other capital returns to shareholders. Our liquidity needs at LPL Financial are driven primarily by the level and volatility of our client activity. Management maintains a set of liquidity sources and monitors certain business trends and market metrics closely in an effort to ensure we have sufficient liquidity. We believe that based on current levels of cash flows from operations and anticipated growth, together with available external liquidity sources, we have adequate liquidity to satisfy our working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures for the foreseeable future.
Parent Company Liquidity
LPL Holdings, Inc. (“Parent”), the direct holding company of our operating subsidiaries, considers its primary source of liquidity to be corporate cash. We define corporate cash as the sum of cash and cash equivalents from the following: (1) cash held at the Parent, (2) excess cash at LPL Financial per the Credit Agreement, which is the net
capital held at LPL Financial in excess of 10% of its aggregate debits, or five times the net capital required in accordance with Exchange Act Rule 15c3-1, and (3) other available cash, which includes cash and cash equivalents held at The Private Trust Company, N.A. (“PTC”), in excess of Credit Agreement capital requirements, excess cash held at Waddell & Reed per the Credit Agreement, or the net capital held in excess of 10% of its aggregate indebtedness, and cash and cash equivalents held at non-regulated subsidiaries.
We believe corporate cash is a useful measure of the Parent’s liquidity as it is the primary source of capital above and beyond the capital deployed in our regulated subsidiaries. The following table presents the components of corporate cash (in thousands):
| | | | | | | | |
| September 30, 2021 | December 31, 2020 |
| Corporate Cash | | |
| Cash at Parent | $ | 181,061 | | $ | 201,385 | |
| Excess cash at LPL Financial per Credit Agreement | 62,637 | | 67,574 | |
| Other available cash | $ | 21,953 | | $ | 10,960 | |
| Total Corporate Cash | $ | 265,651 | | $ | 279,919 | |
Corporate cash is monitored as part of our liquidity risk management. We target maintaining $200.0 million in corporate cash, which covers approximately 24 months of principal and interest due on our corporate debt. The Company maintains additional liquidity through a $1.0 billion secured committed revolving credit facility. The Parent has the ability to borrow against the credit facility for working capital and general corporate purposes. Dividends from and excess capital generated by LPL Financial are the primary sources of liquidity. Subject to regulatory approval or notification, capital generated by LPL Financial can be distributed to the Parent to the extent the capital levels exceed both regulatory requirements and internal capital thresholds. As of September 30, 2021, LPL Financial maintained excess regulatory capital of $62.6 million over Credit Agreement requirements. During the three and nine months ended September 30, 2021, LPL Financial paid dividends of $115.0 million and $390.0 million to the Parent, respectively.
Share Repurchases
We engage in share repurchase programs, which are approved by our Board of Directors, pursuant to which we may repurchase our issued and outstanding shares of common stock from time to time. Purchases may be effected in open market or privately negotiated transactions. Our current capital deployment framework remains focused on investing in organic growth first, pursuing acquisitions where appropriate, and returning excess capital to shareholders. In the first half of 2021, the majority of our capital deployment was focused on supporting organic growth and acquisitions. While we continue to see opportunities to deploy capital in this manner, we resumed share repurchases in the third quarter of 2021 with the initial focus on an amount to offset dilution. We repurchased $40.0 million, representing 276,800 shares, and expect to continue repurchases with a similar focus while maintaining our ability to reassess capital deployment opportunities over time. The timing and amount of share repurchases, if any, is determined at our discretion within the constraints of our Credit Agreement, the Indentures, applicable laws and consideration of our general liquidity needs. See Note 10 - Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our share repurchases.
Common Stock 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 10 - Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our dividends.
LPL Financial Liquidity
LPL Financial relies primarily on customer payables to fund margin lending. LPL Financial maintains additional liquidity through external lines of credit totaling $575.0 million at September 30, 2021. LPL Financial also maintains a line of credit with the Parent.
External Liquidity Sources
The following table presents our external lines of credit at September 30, 2021 (in millions):
| | | | | | | | | | | | | | | |
| Description | Borrower | Maturity Date | Outstanding | Available | |
| Senior secured, revolving credit facility | LPL Holdings, Inc. | March 2026 | $ | — | | $ | 1,000 | | |
| Broker-dealer revolving credit facility | LPL Financial LLC | July 2024 | $ | — | | $ | 300 | | |
| Secured, uncommitted lines of credit | LPL Financial LLC | March 2022 | $ | — | | $ | 75 | | |
| Unsecured, uncommitted lines of credit | LPL Financial LLC | September 2022 | $ | — | | $ | 75 | | |
| Unsecured, uncommitted lines of credit | LPL Financial LLC | September 2022 | $ | — | | $ | 50 | | |
| Unsecured, uncommitted lines of credit | LPL Financial LLC | None | $ | — | | $ | 75 | | |
| Secured, uncommitted lines of credit | LPL Financial LLC | None | $ | — | | unspecified | |
| Secured, uncommitted lines of credit | LPL Financial LLC | None | $ | — | | unspecified | |
Capital Resources
The Company seeks to manage capital levels in support of our business strategy of generating and effectively deploying capital for the benefit of our shareholders.
Our primary requirement for working capital relates to funds we loan to our advisors’ clients for trading conducted on margin and funds 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 loans we are making to advisors and timing associated with receivables and payables, which we have satisfied in the past from internally generated cash flows.
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 flows or, if needed, with funds drawn on our uncommitted lines of credit at LPL Financial or 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 equal to the greater of $250,000 or 2% of aggregate debit balances arising from client transactions. At September 30, 2021, LPL Financial had net capital of $133.3 million with a minimum net capital requirement of $14.1 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% 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.
In April 2021, the Company acquired a broker-dealer as part of the Waddell & Reed acquisition (“Waddell & Reed broker-dealer”). The Waddell & Reed broker-dealer is required to maintain net capital of $250,000, which represents
the greater of 2% of its aggregate debits or the minimum net capital requirement of $250,000. At September 30, 2021, the Waddell & Reed broker-dealer had net capital of $8.2 million. The Company expects to dissolve the Waddell & Reed broker-dealer during the fourth quarter of 2021.
Our subsidiary PTC is also subject to various regulatory capital requirements. Failure to meet the respective minimum capital requirements can result in certain mandatory and discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC’s operations.
Debt and Related Covenants
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 allow us to pay dividends and distributions or repurchase our capital stock only when certain conditions are met. In addition, our revolving credit facility requires us to be in compliance with certain financial covenants as of the last day of each fiscal quarter. The financial covenants require the calculation of Credit Agreement EBITDA, as defined in, and calculated by management in accordance with, the Credit Agreement. The Credit Agreement defines Credit Agreement EBITDA as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense, tax expense, depreciation and amortization, and is 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, 2021, we were in compliance with both financial covenants, a maximum Consolidated Total Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement) or “Leverage Ratio” and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio (as defined in the Credit Agreement) or “Interest Coverage”. 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:
| | | | | | | | | | | |
| September 30, 2021 |
| Financial Ratio | Covenant Requirement | | Actual Ratio |
| Leverage Ratio (Maximum) | 5.00 | | 2.18 |
| Interest Coverage (Minimum) | 3.00 | | 12.42 |
See Note 8 - Long-term and Other Borrowings, within the notes to the unaudited condensed consolidated financial statements for further detail regarding the Credit Agreement and the Indentures.
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 9 - Commitments and Contingencies and Note 16 - 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, 2021, there were no material changes in our contractual obligations, other than in the ordinary course of business, from those disclosed in our 2020 Annual Report on Form 10-K. See Note 8 - Long-term and Other Borrowings and Note 9 - 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 2020 Annual Report on Form 10-K, for further detail.
Fair Value of Financial Instruments
We use fair value measurements to record certain financial assets and liabilities at fair value and to determine fair value disclosures. See Note 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 2020 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 changes to those policies that we consider to be material since the filing of our 2020 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.
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, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| REVENUE | | | | | | | | |
| Advisory | | $ | 959,733 | | | $ | 586,941 | | | $ | 2,528,092 | | | $ | 1,689,338 | |
| Commission | | 610,384 | | | 472,643 | | | 1,765,846 | | | 1,403,540 | |
| Asset-based | | 301,701 | | | 253,551 | | | 846,027 | | | 786,124 | |
| Transaction and fee | | 140,362 | | | 119,747 | | | 418,406 | | | 376,321 | |
| Interest income | | 7,365 | | | 6,623 | | | 20,797 | | | 22,705 | |
| Other | | 1,218 | | | 20,796 | | | 47,470 | | | 12,329 | |
| Total revenue | | 2,020,763 | | | 1,460,301 | | | 5,626,638 | | | 4,290,357 | |
| EXPENSE | | | | | | | | |
| Advisory and commission | | 1,366,832 | | | 936,766 | | | 3,748,933 | | | 2,667,408 | |
| Compensation and benefits | | 185,980 | | | 151,271 | | | 531,373 | | | 441,393 | |
| Promotional | | 96,012 | | | 57,970 | | | 214,542 | | | 159,908 | |
| Depreciation and amortization | | 38,409 | | | 27,548 | | | 110,612 | | | 81,082 | |
| Amortization of intangible assets | | 21,531 | | | 16,829 | | | 58,887 | | | 50,088 | |
| Occupancy and equipment | | 52,695 | | | 41,874 | | | 137,731 | | | 124,486 | |
| Professional services | | 16,722 | | | 12,301 | | | 54,847 | | | 40,526 | |
| Brokerage, clearing and exchange | | 22,828 | | | 17,834 | | | 65,651 | | | 53,423 | |
| Communications and data processing | | 17,824 | | | 12,547 | | | 44,747 | | | 37,743 | |
| Other | | 36,888 | | | 24,852 | | | 92,852 | | | 73,274 | |
| Total operating expense | | 1,855,721 | | | 1,299,792 | | | 5,060,175 | | | 3,729,331 | |
| Non-operating interest expense and other | | 27,063 | | | 25,179 | | | 77,293 | | | 80,786 | |
| Loss on extinguishment of debt | | — | | | — | | | 24,400 | | | — | |
| INCOME BEFORE PROVISION FOR INCOME TAXES | | 137,979 | | | 135,330 | | | 464,770 | | | 480,240 | |
| PROVISION FOR INCOME TAXES | | 34,915 | | | 31,541 | | | 112,985 | | | 119,148 | |
| NET INCOME | | $ | 103,064 | | | $ | 103,789 | | | $ | 351,785 | | | $ | 361,092 | |
| EARNINGS PER SHARE (Note 12) | | | | | | | | |
| Earnings per share, basic | | $ | 1.29 | | | $ | 1.31 | | | $ | 4.40 | | | $ | 4.56 | |
| Earnings per share, diluted | | $ | 1.26 | | | $ | 1.29 | | | $ | 4.30 | | | $ | 4.48 | |
| Weighted-average shares outstanding, basic | | 80,182 | | | 79,176 | | | 79,981 | | | 79,207 | |
| Weighted-average shares outstanding, diluted | | 81,849 | | | 80,550 | | | 81,772 | | | 80,612 | |
See notes to unaudited condensed consolidated financial statements.
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Unaudited)
(In thousands, except share data)
| | | | | | | | | | | | |
| ASSETS | | September 30, 2021 | | December 31, 2020 |
| Cash and cash equivalents | | $ | 977,789 | | | $ | 808,612 | |
| Cash segregated under federal and other regulations | | 811,716 | | | 923,158 | |
Restricted cash | | 85,381 | | | 67,264 | |
| Receivables from: | | | | |
Clients, net of allowance of $800 at September 30, 2021 and $520 at December 31, 2020 | | 592,170 | | | 405,106 | |
Product sponsors, broker-dealers and clearing organizations | | 257,742 | | | 233,192 | |
Advisor loans, net of allowance of $9,124 at September 30, 2021 and $6,763 at December 31, 2020 | | 814,514 | | | 547,372 | |
Others, net of allowance of $3,026 at September 30, 2021 and $3,101 at December 31, 2020 | | 453,245 | | | 306,640 | |
| Securities owned: | | | | |
| Trading — at fair value | | 32,085 | | | 29,252 | |
| Held-to-maturity — at amortized cost | | 11,183 | | | 13,235 | |
| Securities borrowed | | 10,217 | | | 30,130 | |
| | | | |
Fixed assets, net of accumulated depreciation and amortization of $598,921 at September 30, 2021 and $489,997 at December 31, 2020 | | 624,529 | | | 582,868 | |
Operating lease assets | | 96,716 | | | 101,921 | |
| Goodwill | | 1,641,238 | | | 1,513,866 | |
Intangible assets, net of accumulated amortization of $670,898 at September 30, 2021 and $612,011 at December 31, 2020 | | 470,989 | | | 397,486 | |
| Deferred income taxes, net | | 24,489 | | | 24,112 | |
| Other assets | | 651,803 | | | 539,357 | |
| Total assets | | $ | 7,555,806 | | | $ | 6,523,571 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| LIABILITIES: |
| Drafts payable | | $ | 190,451 | | | $ | 178,403 | |
| Payables to clients | | 1,419,889 | | | 1,356,083 | |
| Payables to broker-dealers and clearing organizations | | 148,193 | | | 89,743 | |
| Accrued advisory and commission expenses payable | | 224,438 | | | 187,040 | |
| Accounts payable and accrued liabilities | | 815,632 | | | 681,554 | |
| Income taxes payable | | 8,082 | | | 28,145 | |
| Unearned revenue | | 168,331 | | | 95,328 | |
| Securities sold, but not yet purchased — at fair value | | 170 | | | 206 | |
| Long-term and other borrowings, net | | 2,725,691 | | | 2,345,414 | |
| Operating lease liabilities | | 132,394 | | | 139,377 | |
| Finance lease liabilities | | 106,146 | | | 107,424 | |
| | | | |
| | | | |
| Total liabilities | | 5,939,417 | | | 5,208,717 | |
| Commitments and contingencies (Note 9) | | | | |
| STOCKHOLDERS’ EQUITY: | | | | |
Common stock, $0.001 par value; 600,000,000 shares authorized; 128,602,814 shares issued at September 30, 2021 and 127,585,764 shares issued at December 31, 2020 | | 128 | | | 127 | |
| Additional paid-in capital | | 1,826,247 | | | 1,762,770 | |
Treasury stock, at cost — 48,475,390 shares at September 30, 2021 and 48,115,037 shares at December 31, 2020 | | (2,447,933) | | | (2,391,062) | |
| | | | |
| Retained earnings | | 2,237,947 | | | 1,943,019 | |
| Total stockholders’ equity | | 1,616,389 | | | 1,314,854 | |
| Total liabilities and stockholders’ equity | | $ | 7,555,806 | | | $ | 6,523,571 | |
See notes to unaudited condensed consolidated financial statements.
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| | | | | Additional
Paid-In
Capital | | | | | | | | Retained
Earnings | | Total
Stockholders’
Equity |
| | Common Stock | | | Treasury Stock | | | |
| | Shares | | Amount | | | Shares | | Amount | | | |
| BALANCE — June 30, 2020 | 127,239 | | | $ | 127 | | | $ | 1,733,334 | | | 48,155 | | | $ | (2,391,961) | | | | | $ | 1,766,006 | | | $ | 1,107,506 | |
| | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | | | 103,789 | | | 103,789 | |
| Issuance of common stock to settle restricted stock units, net | 11 | | | — | | | — | | | 4 | | | (372) | | | | | — | | | (372) | |
| | | | | | | | | | | | | | | |
Cash dividends on common stock - $0.25 per share | — | | | — | | | — | | | — | | | — | | | | | (19,809) | | | (19,809) | |
| Stock option exercises and other | 160 | | | — | | | 7,137 | | | (24) | | | 884 | | | | | 474 | | | 8,495 | |
| Share-based compensation | — | | | — | | | 7,839 | | | — | | | — | | | | | — | | | 7,839 | |
| | | | | | | | | | | | | | | |
| BALANCE — September 30, 2020 | 127,410 | | | $ | 127 | | | $ | 1,748,310 | | | 48,135 | | | $ | (2,391,449) | | | | | $ | 1,850,460 | | | $ | 1,207,448 | |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 |
| | | | | Additional
Paid-In
Capital | | | | | | | | Retained
Earnings | | Total
Stockholders’
Equity |
| Common Stock | | | Treasury Stock | | | |
| Shares | | Amount | | | Shares | | Amount | | | |
| BALANCE — June 30, 2021 | 128,431 | | | $ | 128 | | | $ | 1,808,135 | | | 48,203 | | | $ | (2,407,035) | | | | | $ | 2,153,684 | | | $ | 1,554,912 | |
| | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | | | 103,064 | | | 103,064 | |
| Issuance of common stock to settle restricted stock units, net | 22 | | | — | | | — | | | 10 | | | (1,422) | | | | | — | | | (1,422) | |
| Treasury stock purchases | — | | | — | | | — | | | 277 | | | (40,005) | | | | | — | | | (40,005) | |
Cash dividends on common stock - $0.25 per share | — | | | — | | | — | | | — | | | — | | | | | (20,057) | | | (20,057) | |
| Stock option exercises and other | 150 | | | — | | | 7,866 | | | (15) | | | 529 | | | | | 1,256 | | | 9,651 | |
| Share-based compensation | — | | | — | | | 10,246 | | | — | | | — | | | | | — | | | 10,246 | |
| | | | | | | | | | | | | | | |
| BALANCE — September 30, 2021 | 128,603 | | | $ | 128 | | | $ | 1,826,247 | | | 48,475 | | | $ | (2,447,933) | | | | | $ | 2,237,947 | | | $ | 1,616,389 | |
Continued on following page
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| | | | | Additional Paid-In Capital | | | | | | | | 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 | |
| Cumulative effect of accounting change | — | | | — | | | — | | | — | | | — | | | | | (7,317) | | | (7,317) | |
| Net income | — | | | — | | | — | | | — | | | — | | | | | 361,092 | | | 361,092 | |
| Issuance of common stock to settle restricted stock units, net | 401 | | | — | | | — | | | 128 | | | (8,909) | | | | | — | | | (8,909) | |
| Treasury stock purchases | — | | | — | | | — | | | 1,810 | | | (150,036) | | | | | — | | | (150,036) | |
Cash dividends on common stock - $0.75 per share | — | | | — | | | — | | | — | | | — | | | | | (59,267) | | | (59,267) | |
| Stock option exercises and other | 515 | | | 1 | | | 18,519 | | | (63) | | | 2,289 | | | | | 1,385 | | | 22,194 | |
| Share-based compensation | — | | | — | | | 25,818 | | | — | | | — | | | | | — | | | 25,818 | |
| | | | | | | | | | | | | | | |
| BALANCE — September 30, 2020 | 127,410 | | | $ | 127 | | | $ | 1,748,310 | | | 48,135 | | | $ | (2,391,449) | | | | | $ | 1,850,460 | | | $ | 1,207,448 | |
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| | | | | Additional
Paid-In
Capital | | | | | | | | Retained Earnings | | Total Stockholders’ Equity |
| Common Stock | | | Treasury Stock | | | |
| Shares | | Amount | | | Shares | | Amount | | | |
| BALANCE — December 31, 2020 | 127,586 | | | $ | 127 | | | $ | 1,762,770 | | | 48,115 | | | $ | (2,391,062) | | | | | $ | 1,943,019 | | | $ | 1,314,854 | |
| | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | | | 351,785 | | | 351,785 | |
| Issuance of common stock to settle restricted stock units, net | 386 | | | — | | | — | | | 139 | | | (18,905) | | | | | — | | | (18,905) | |
| Treasury stock purchases | — | | | — | | | — | | | 277 | | | (40,005) | | | | | — | | | (40,005) | |
Cash dividends on common stock - $0.75 per share | — | | | — | | | — | | | — | | | — | | | | | (60,068) | | | (60,068) | |
| Stock option exercises and other | 631 | | | 1 | | | 29,514 | | | (56) | | | 2,039 | | | | | 3,211 | | | 34,765 | |
| Share-based compensation | — | | | — | | | 33,963 | | | — | | | — | | | | | — | | | 33,963 | |
| | | | | | | | | | | | | | | |
| BALANCE — September 30, 2021 | 128,603 | | | $ | 128 | | | $ | 1,826,247 | | | 48,475 | | | $ | (2,447,933) | | | | | $ | 2,237,947 | | | $ | 1,616,389 | |
See notes to unaudited condensed consolidated financial statements.
| | | | | | | | | | | | | | |
| LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES |
| Condensed Consolidated Statements of Cash Flows |
| (Unaudited) |
| (In thousands) |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
| Net income | | $ | 351,785 | | | $ | 361,092 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| | | | |
| Depreciation and amortization | | 110,612 | | | 81,082 | |
| Amortization of intangible assets | | 58,887 | | | 50,088 | |
| Amortization of debt issuance costs | | 4,242 | | | 4,040 | |
| Share-based compensation | | 33,963 | | | 25,818 | |
| | | | |
| Provision for bad debts | | 6,097 | | | 4,193 | |
| Deferred income taxes | | (377) | | | (316) | |
| Loss on extinguishment of debt | | 24,400 | | | — | |
| Loan forgiveness | | 98,241 | | | 84,678 | |
| Other | | (6,746) | | | (8,860) | |
| Changes in operating assets and liabilities: | | | | |
| Receivables from clients | | (187,330) | | | 9,571 | |
Receivables from product sponsors, broker-dealers and clearing organizations | | (24,058) | | | (27,854) | |
| Advisor loans | | (363,743) | | | (158,382) | |
| Receivables from others | | (140,222) | | | (11,470) | |
| Securities owned | | (1,881) | | | 16,883 | |
| Securities borrowed | | 19,912 | | | (5,826) | |
| Operating leases | | (1,778) | | | (1,419) | |
| Other assets | | (89,811) | | | (56,990) | |
| Drafts payable | | 12,048 | | | (41,720) | |
| Payables to clients | | 63,771 | | | 94,141 | |
| Payables to broker-dealers and clearing organizations | | 58,449 | | | (7,597) | |
| Accrued advisory and commission expenses payable | | 31,831 | | | 948 | |
| Accounts payable and accrued liabilities | | 89,895 | | | 40,064 | |
| Income taxes receivable/payable | | (20,062) | | | (5,510) | |
| Unearned revenue | | 71,581 | | | 16,852 | |
| Securities sold, but not yet purchased | | (36) | | | 161 | |
| Net cash provided by operating activities | | 199,670 | | | 463,667 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | |
| Capital expenditures | | (139,962) | | | (111,961) | |
| Acquisitions, net of cash acquired | | (241,604) | | | (18,899) | |
| | | | |
| Purchase of securities classified as held-to-maturity | | (1,741) | | | (5,082) | |
| Proceeds from maturity of securities classified as held-to-maturity | | 3,750 | | | 3,850 | |
| Net cash used in investing activities | | (379,557) | | | (132,092) | |
| | | | |
| Continued on following page |
|
| | | | | | | | | | | | | | |
| LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES |
| Condensed Consolidated Statements of Cash Flows |
| (Unaudited) |
| (In thousands) |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
| Proceeds from revolving credit facilities | | 695,000 | | | 1,271,000 | |
| Repayments of revolving credit facilities | | (695,000) | | | (1,316,000) | |
| Repayment of senior unsecured notes | | (900,000) | | | — | |
| Repayment of senior secured term loans | | (8,025) | | | (8,025) | |
| Proceeds from senior unsecured notes | | 1,300,000 | | | — | |
| Payment of debt issuance costs | | (15,929) | | | — | |
| Make-whole premium on redemption of senior unsecured notes | | (25,875) | | | — | |
| Payment of contingent consideration | | (8,941) | | | (10,000) | |
| Tax payments related to settlement of restricted stock units | | (18,905) | | | (8,909) | |
| Repurchase of common stock | | (40,005) | | | (150,036) | |
| Dividends on common stock | | (60,068) | | | (59,267) | |
| | | | |
| Proceeds from stock option exercises and other | | 34,765 | | | 22,194 | |
| Principal payment of finance leases and obligations | | (1,278) | | | (1,095) | |
| Net cash provided by (used in) financing activities | | 255,739 | | | (260,138) | |
| NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | 75,852 | | | 71,437 | |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH — Beginning of period | | 1,799,034 | | | 1,471,778 | |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH — End of period | | $ | 1,874,886 | | | $ | 1,543,215 | |
| | | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | |
| Interest paid | | $ | 77,672 | | | $ | 89,719 | |
| Income taxes paid | | $ | 133,425 | | | $ | 125,110 | |
| Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 16,545 | | | $ | 16,140 | |
| Cash paid for amounts included in the measurement of finance lease liabilities | | $ | 7,520 | | | $ | 7,412 | |
| NONCASH DISCLOSURES: | | | | |
| Capital expenditures included in accounts payable and accrued liabilities | | $ | 22,727 | | | $ | 16,466 | |
| Lease assets obtained in exchange for operating lease liabilities | | $ | 2,448 | | | $ | 3,447 | |
| | | | |
| | September 30, |
| | 2021 | | 2020 |
| Cash and cash equivalents | | $ | 977,789 | | | $ | 800,799 | |
| Cash segregated under federal and other regulations | | 811,716 | | | 667,121 | |
| Restricted cash | | 85,381 | | | 75,295 | |
Total cash, cash equivalents and restricted cash shown in the statement of cash flows | | $ | 1,874,886 | | | $ | 1,543,215 | |
| | | | |
| | | | |
| | | | |
| | | | |
See notes to unaudited condensed consolidated financial statements.
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 1 - ORGANIZATION AND DESCRIPTION OF THE COMPANY
LPL Financial Holdings Inc. (“LPLFH”), a Delaware holding corporation, together with its consolidated subsidiaries (collectively, the “Company”), provides an integrated platform of brokerage and investment advisory services to independent financial advisors and financial advisors at financial institutions (collectively, “advisors”) in the United States. Through its custody and clearing platform, using both proprietary and third-party technology, the Company provides access to diversified financial products and services, enabling its advisors to offer objective financial advice and brokerage services to retail investors (their “clients”). The Company’s most significant, wholly owned subsidiaries are described below:
•LPL Holdings, Inc. (“LPLH” or “Parent”), a Massachusetts holding corporation, is an intermediate holding company and directly or indirectly owns 100% of the issued and outstanding common stock of all of LPLFH’s indirect subsidiaries, including a captive insurance subsidiary (the “Captive Insurance Subsidiary”) that underwrites insurance for various legal and regulatory risks of the Company.
•LPL Financial LLC (“LPL Financial”), with primary offices in San Diego, California; Fort Mill, South Carolina; Boston, Massachusetts; and Austin, Texas, 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.
•LPL Insurance Associates, Inc. operates as an insurance brokerage general agency that offers life and disability insurance products and services for LPL Financial advisors.
•AW Subsidiary, Inc. is a holding company for AdvisoryWorld and Blaze Portfolio Systems LLC (“Blaze”). AdvisoryWorld offers technology products, including proposal generation, investment analytics and portfolio modeling, to both the Company’s advisors and external clients in the wealth management industry. Blaze offers a trading and rebalancing platform to both the Company’s advisors and external clients.
•PTC Holdings, Inc. (“PTCH”) is a holding company for The Private Trust Company, N.A. (“PTC”). PTC is chartered as a non-depository limited purpose national bank, providing a wide range of trust, investment management oversight, and custodial services for estates and families. PTC also provides Individual Retirement Account (“IRA”) custodial services for LPL Financial. 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 (“OCC”).
•LPL Employee Services, LLC is a holding company for Allen & Company of Florida, LLC (“Allen & Company”), an RIA.
•Waddell & Reed Financial Services, LLC and its subsidiaries provide investment management and wealth management services to clients.
NOTE 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 credit losses for receivables, 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
| | | | | | | | |
| | |
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
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 condensed consolidated financial statements.
The unaudited condensed consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany transactions and balances have been eliminated. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the related notes for the year ended December 31, 2020, contained in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”).
Recently Issued Accounting Pronouncements
There are no relevant recently issued accounting pronouncements that would materially impact the Company’s condensed consolidated financial statements and related disclosures.
NOTE 3 - REVENUE
Commission
The following table presents total commission revenues disaggregated by product category (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Commission revenues | | | | | | | |
| Annuities | $ | 314,134 | | | $ | 250,823 | | | $ | 900,010 | | | $ | 714,122 | |
| Mutual funds | 201,120 | | | 146,788 | | | 569,958 | | | 436,744 | |
| Fixed income | 30,092 | | | 16,731 | | | 97,116 | | | 64,319 | |
| Equities | 28,943 | | | 30,283 | | | 98,371 | | | 95,689 | |
| Other | 36,095 | | | 28,018 | | | 100,391 | | | 92,666 | |
Total commission revenues | $ | 610,384 | | | $ | 472,643 | | | $ | 1,765,846 | | | $ | 1,403,540 | |
The following table presents sales-based and trailing commission revenues disaggregated by product category (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Commission revenues | | | | | | | |
| Sales-based | | | | | | | |
Annuities | $ | 108,983 | | | $ | 81,475 | | | $ | 317,141 | | | $ | 238,287 | |
Mutual funds | 46,934 | | | 33,871 | | | 144,463 | | | 109,121 | |
Fixed income | 30,092 | | | 16,731 | | | 97,116 | | | 64,319 | |
Equities | 28,943 | | | 30,283 | | | 98,371 | | | 95,689 | |
Other | 24,852 | | | 17,997 | | | 68,582 | | | 60,844 | |
Total sales-based revenues | $ | 239,804 | | | $ | 180,357 | | | $ | 725,673 | | | $ | 568,260 | |
Trailing | | | | | | | |
Annuities | $ | 205,151 | | | $ | 169,348 | | | $ | 582,869 | | | $ | 475,835 | |
Mutual funds | 154,186 | | | 112,917 | | | 425,495 | | | 327,623 | |
| | | | | | | |
Other | 11,243 | | | 10,021 | | | 31,809 | | | 31,822 | |
Total trailing revenues | $ | 370,580 | | | $ | 292,286 | | | $ | 1,040,173 | | | $ | 835,280 | |
Total commission revenues | $ | 610,384 | | | $ | 472,643 | | | $ | 1,765,846 | | | $ | 1,403,540 | |
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
Asset-Based
The following table sets forth asset-based revenues disaggregated by product category (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Asset-based revenues | | | | | | | |
Client cash | $ | 91,257 | | | $ | 108,705 | | | $ | 278,738 | | | $ | 376,369 | |
Sponsorship programs | 101,426 | | | 70,641 | | | 279,116 | | | 198,975 | |
Recordkeeping | 109,018 | | | 74,205 | | | 288,173 | | | 210,780 | |
| Total asset-based revenues | $ | 301,701 | | | $ | 253,551 | | | $ | 846,027 | | | $ | 786,124 | |
Transaction and Fee
Transaction revenues primarily include fees the Company charges to advisors and their clients for executing certain transactions in brokerage and fee-based advisory accounts. Transaction revenues are recognized at the point-in-time that a transaction is executed, which is generally the trade date. Fee revenues may be generated from advisors or their clients. Fee revenues primarily include IRA custodian fees, contract and licensing fees, and other client account fees. The Company charges separate fees to Hybrid RIAs for technology, clearing, administrative, oversight and custody services. In addition, the Company hosts certain advisor conferences that serve as training, education, sales and marketing events, for which the Company collects a fee for attendance. Fee revenues are recognized when the Company satisfies its performance obligations. Recognition varies from point-in-time to over time depending on whether the service is provided once at an identifiable point-in-time or if the service is provided continually over the contract life.
The following table sets forth transaction and fee revenues disaggregated by recognition pattern (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Transaction and fee revenues | | | | | | | |
Point-in-time(1) | $ | 63,269 | | | $ | 52,444 | | | $ | 190,608 | | | $ | 170,388 | |
Over time(2) | 77,093 | | | 67,303 | | | 227,798 | | | 205,933 | |
| Total transaction and fee revenues | $ | 140,362 | | | $ | 119,747 | | | $ | 418,406 | | | $ | 376,321 | |
_______________________________
(1)Transaction and fee revenues recognized at a point-in-time include revenues such as transaction fees, IRA termination fees and technology fees.
(2)Transaction and fee revenues recognized over time include revenues such as error and omission insurance fees, IRA custodian fees and technology fees.
Unearned Revenue
The Company records unearned revenue when cash payments are received or due in advance of the Company’s performance obligations, including amounts which are refundable. The increase in the unearned revenue balance for the nine months ended September 30, 2021 compared to 2020 is primarily driven by cash payments received or due in advance of satisfying the Company’s performance obligations, offset by $93.5 million of revenues recognized that were included in the unearned revenue balance as of December 31, 2020.
For advisory services, revenue is recognized as the Company provides the administration, brokerage and execution services over time to satisfy the performance obligations. For conference revenue, the Company recognizes revenue as the conferences are held.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 4 - ACQUISITIONS
On April 30, 2021, the Company acquired the wealth management business of Waddell & Reed Financial, Inc. for $300.0 million. The Company recorded purchase accounting adjustments during the third quarter of 2021 which resulted in a $5.4 million decrease to provisional goodwill and a $4.0 million increase to provisional intangible assets. At September 30, 2021, the Company had provisionally allocated $127.4 million of the purchase price to goodwill, $122.7 million to definite-lived intangible assets, and the remainder to other assets acquired and liabilities assumed as part of the acquisition. See Note 7 - Goodwill and Other Intangible Assets, for additional information.
On October 26, 2020, the Company acquired Blaze Portfolio Systems LLC, a technology company that provides an advisor-facing trading and portfolio rebalancing platform. The Company paid $11.6 million at closing and agreed to a future contingent payment of up to $4.0 million.
On August 18, 2020, the Company acquired business relationships with advisors from E.K. Riley Investments, LLC and Lucia Securities, LLC, two unrelated broker-dealers and RIAs, for a combined $18.4 million. Both transactions have potential contingent payments.
NOTE 5 - FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Inputs used to measure fair value are prioritized within a three-level fair value hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
There have been no transfers of assets or liabilities between these fair value measurement classifications during the three and nine months ended September 30, 2021 or September 30, 2020.
The Company’s fair value measurements are evaluated within the fair value hierarchy, based on the nature of inputs used to determine the fair value at the measurement date. At September 30, 2021 and December 31, 2020, the Company had the following financial assets and liabilities that are measured at fair value on a recurring basis:
Cash Equivalents — The Company’s cash equivalents include money market funds, which are short term in nature with readily determinable values derived from active markets.
Securities Owned and Securities Sold, But Not Yet Purchased — The Company’s trading securities consist of house account model portfolios established and managed for the purpose of benchmarking the performance of its fee-based advisory platforms and temporary positions resulting from the processing of client transactions.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
The Company uses prices obtained from independent third-party pricing services to measure the fair value of its trading securities. Prices received from the pricing services are validated using various methods including comparison to prices received from additional pricing services, comparison to available quoted market prices and review of other relevant market data including implied yields of major categories of securities. In general, these quoted prices are derived from active markets for identical assets or liabilities. When quoted prices in active markets for identical assets and liabilities are not available, the quoted prices are based on similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. For certificates of deposit and treasury securities, the Company utilizes market-based inputs, including observable market interest rates that correspond to the remaining maturities or the next interest reset dates. At September 30, 2021, the Company did not adjust prices received from the independent third-party pricing services.
Other Assets — The Company’s other assets include: (1) deferred compensation plan assets that are invested in money market and other mutual funds, which are actively traded and valued based on quoted market prices; and (2) certain non-traded real estate investment trusts and auction rate notes, which are valued using quoted prices for identical or similar securities and other inputs that are observable or can be corroborated by observable market data.
Accounts Payable and Accrued Liabilities — The Company’s accounts payable and accrued liabilities include contingent consideration liabilities that are measured using Level 3 inputs.
Level 3 Recurring Fair Value Measurements
The Company determines the fair value for its contingent consideration obligations using a scenario-based approach whereby the Company assesses the expected number of future transactions. The contingent payment is estimated by applying a discount rate to the expected payment to calculate the fair value as of the valuation date. The Company’s management evaluates the underlying projections and other related factors used in determining fair value each period and makes updates when there have been significant changes in management’s expectations.
The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at September 30, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | |
| Cash equivalents | $ | 9,855 | | | $ | — | | | $ | — | | | $ | 9,855 | |
| Securities owned — trading: | | | | | | | |
| Money market funds | 127 | | | — | | | — | | | 127 | |
| Mutual funds | 11,914 | | | — | | | — | | | 11,914 | |
| Equity securities | 436 | | | — | | | — | | | 436 | |
| Debt securities | — | | | 12 | | | — | | | 12 | |
| U.S. treasury obligations | 19,596 | | | — | | | — | | | 19,596 | |
| | | | | | | |
| Total securities owned — trading | 32,073 | | | 12 | | | — | | | 32,085 | |
| Other assets | 457,294 | | | 9,161 | | | — | | | 466,455 | |
| Total assets at fair value | $ | 499,222 | | | $ | 9,173 | | | $ | — | | | $ | 508,395 | |
| Liabilities | | | | | | | |
| Securities sold, but not yet purchased: | | | | | | | |
| | | | | | | |
| Equity securities | $ | 59 | | | $ | — | | | $ | — | | | $ | 59 | |
| Debt securities | — | | | 111 | | | — | | | 111 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total securities sold, but not yet purchased | 59 | | | 111 | | | — | | | 170 | |
| Accounts payable and accrued liabilities | — | | | — | | | 3,451 | | | 3,451 | |
| Total liabilities at fair value | $ | 59 | | | $ | 111 | | | $ | 3,451 | | | $ | 3,621 | |
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | |
| Cash equivalents | $ | 6,205 | | | $ | — | | | $ | — | | | $ | 6,205 | |
| Securities owned — trading: | | | | | | | |
| Money market funds | 125 | | | — | | | — | | | 125 | |
| Mutual funds | 9,137 | | | — | | | — | | | 9,137 | |
| Equity securities | 492 | | | — | | | — | | | 492 | |
| U.S. treasury obligations | 19,498 | | | — | | | — | | | 19,498 | |
| Total securities owned — trading | 29,252 | | | — | | | — | | | 29,252 | |
| Other assets | 371,202 | | | 8,953 | | | — | | | 380,155 | |
| Total assets at fair value | $ | 406,659 | | | $ | 8,953 | | | $ | — | | | $ | 415,612 | |
| Liabilities | | | | | | | |
| Securities sold, but not yet purchased: | | | | | | | |
| | | | | | | |
| Equity securities | $ | 203 | | | $ | — | | | $ | — | | | $ | 203 | |
| Debt securities | — | | | 3 | | | — | | | 3 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total securities sold, but not yet purchased | 203 | | | 3 | | | — | | | 206 | |
| Accounts payable and accrued liabilities | — | | | — | | | 3,228 | | | 3,228 | |
| Total liabilities at fair value | $ | 203 | | | $ | 3 | | | $ | 3,228 | | | $ | 3,434 | |
Fair Value of Financial Instruments not Measured at Fair Value
The fair value of cash and cash equivalents, cash segregated under federal and other regulations, and restricted cash was estimated to approximate the carrying value and are classified as Level 1 of the fair value hierarchy.
The fair value of receivables from clients, product sponsors, broker-dealers and clearing organizations, advisor loans and others, securities borrowed, drafts payable, payables to clients, broker-dealers and clearing organizations, and other payables was estimated to approximate the carrying value and are classified as Level 2 of the fair value hierarchy due to their short-term nature.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 6 - HELD-TO-MATURITY SECURITIES
The Company, through its wholly owned subsidiary The Private Trust Company, N.A., holds U.S. government notes to satisfy minimum capital requirements of the OCC. These securities are recorded at amortized cost and classified as held-to-maturity securities because the Company has both the intent and the ability to hold these investments to maturity. Interest income is accrued as earned. Premiums and discounts are amortized using a method that approximates the effective yield method over the term of the security and are recorded as an adjustment to the investment yield.
The amortized cost, gross unrealized gain and fair value of held-to-maturity securities were as follows (in thousands): | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| Amortized cost | $ | 11,183 | | | $ | 13,235 | |
| Gross unrealized gain | 55 | | | 159 | |
Fair value(1) | $ | 11,238 | | | $ | 13,394 | |
(1)The fair value of held-to-maturity securities is classified as Level 2 of the fair value hierarchy.
At September 30, 2021, the held-to-maturity securities were scheduled to mature as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Within one year | | After one but within five years | | After five but within ten years | | Total |
| U.S. government notes — at amortized cost | $ | 5,004 | | | $ | 6,179 | | | $ | — | | | $ | 11,183 | |
| U.S. government notes — at fair value | $ | 5,042 | | | $ | 6,196 | | | $ | — | | | $ | 11,238 | |
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company recorded purchase accounting adjustments during the third quarter of 2021 which resulted in a $5.4 million decrease to provisional goodwill and a $4.0 million increase to provisional intangible assets acquired as part of the acquisition of the wealth management business of Waddell & Reed Financial, Inc. At September 30, 2021, the Company had provisionally allocated $127.4 million of the purchase price to goodwill, $122.7 million to definite-lived intangible assets, and the remainder to other assets acquired and liabilities assumed as part of the acquisition. Acquired intangible assets are comprised primarily of advisor relationships with a weighted average useful life of approximately 9 years. See Note 4 - Acquisitions, for additional information.
A summary of the activity impacting goodwill is presented below (in thousands):
| | | | | |
| Balance at December 31, 2019 | $ | 1,503,648 | |
Goodwill acquired | 10,218 | |
| Balance at December 31, 2020 | 1,513,866 | |
| Goodwill acquired | 127,372 | |
| Balance at September 30, 2021 | $ | 1,641,238 | |
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
The components of intangible assets were as follows at September 30, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Weighted-Average Life
Remaining
(in years) | | Gross
Carrying
Value | | Accumulated Amortization | | Net
Carrying
Value |
| Definite-lived intangible assets: | | | | | | | |
| Advisor and financial institution relationships | 5.7 | | $ | 802,222 | | | $ | (460,219) | | | $ | 342,003 | |
| Product sponsor relationships | 4.3 | | 234,086 | | | (182,278) | | | 51,808 | |
| Client relationships | 7.4 | | 45,520 | | | (22,359) | | | 23,161 | |
| Technology | 6.6 | | 19,040 | | | (4,912) | | | 14,128 | |
| Trade names | 0.6 | | 1,200 | | | (1,130) | | | 70 | |
| Total definite-lived intangible assets | | | $ | 1,102,068 | | | $ | (670,898) | | | $ | 431,170 | |
| Indefinite-lived intangible assets: | | | | | | | |
| Trademark and trade name | | | | | | | 39,819 | |
| Total intangible assets | | | | | | | $ | 470,989 | |
The components of intangible assets were as follows at December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Weighted-Average Life
Remaining
(in years) | | Gross
Carrying
Value | | Accumulated Amortization | | Net
Carrying
Value |
| Definite-lived intangible assets: | | | | | | | |
| Advisor and financial institution relationships | 5.4 | | $ | 670,542 | | | $ | (415,169) | | | $ | 255,373 | |
| Product sponsor relationships | 5.1 | | 234,086 | | | (173,345) | | | 60,741 | |
| Client relationships | 7.9 | | 44,810 | | | (19,237) | | | 25,573 | |
| Technology | 7.3 | | 19,040 | | | (3,220) | | | 15,820 | |
| Trade names | 1.3 | | 1,200 | | | (1,040) | | | 160 | |
| Total definite-lived intangible assets | | | $ | 969,678 | | | $ | (612,011) | | | $ | 357,667 | |
| Indefinite-lived intangible assets: | | | | | | | |
| Trademark and trade name | | | | | | | 39,819 | |
| Total intangible assets | | | | | | | $ | 397,486 | |
Total amortization of intangible assets was $21.5 million and $16.8 million for the three months ended September 30, 2021 and 2020, respectively, and $58.9 million and $50.1 million for the nine months ended September 30, 2021 and 2020, respectively. Future amortization is estimated as follows (in thousands):
| | | | | |
| 2021 - remainder | $ | 21,479 | |
| 2022 | 84,751 | |
| 2023 | 80,655 | |
| 2024 | 79,883 | |
| 2025 | 71,510 | |
| Thereafter | 92,892 | |
Total | $ | 431,170 | |
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 8 - LONG-TERM AND OTHER BORROWINGS
The Company’s outstanding long-term borrowings were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | | |
| Long-Term Borrowings | | Balance | | Applicable Margin | | Interest Rate | | Balance | | Applicable Margin | | Interest rate | | Maturity |
Term Loan B(1) | | $ | 1,051,275 | | | LIBOR+175 bps | | 1.83 | % | | $ | 1,059,300 | | | LIBOR+175 bps | | 1.90 | % | | 11/12/2026 |
2025 Senior Notes(1) | | — | | | Fixed Rate | | — | % | | 900,000 | | | Fixed Rate | | 5.75 | % | | 9/15/2025 |
2027 Senior Notes(1) | | 400,000 | | | Fixed Rate | | 4.63 | % | | 400,000 | | | Fixed Rate | | 4.63 | % | | 11/15/2027 |
2029 Senior Notes(1) | | 900,000 | | | Fixed Rate | | 4.00 | % | | — | | | Fixed Rate | | — | % | | 3/15/2029 |
2031 Senior Notes(1) | | 400,000 | | | Fixed Rate | | 4.38 | % | | — | | | Fixed Rate | | — | % | | 5/15/2031 |
Total long-term borrowings(2) | | 2,751,275 | | | | | | | 2,359,300 | | | | | | | |
| Plus: Unamortized Premium | | — | | | | | | | 7,083 | | | | | | | |
| Less: Unamortized Debt Issuance Cost | | (25,584) | | | | | | | (20,969) | | | | | | | |
| Total Long-Term Borrowings | | $ | 2,725,691 | | | | | | | $ | 2,345,414 | | | | | | | |
_______________________________
(1)No leverage or interest coverage maintenance covenants.
(2)The fair value of the Company’s debt was $2,803.7 million and $2,402.4 million at September 30, 2021 and December 31, 2020, respectively and was classified as Level 2 in the fair value hierarchy.
The following table presents amounts available under the Company’s external lines of credit at September 30, 2021 (in millions):
| | | | | | | | | | | | | | |
| Other Borrowings | Borrower | Maturity Date | Outstanding | Available |
| Senior secured, revolving credit facility | LPL Holdings, Inc. | March 2026 | $ | — | | $ | 1,000 | |
| Broker-dealer revolving credit facility | LPL Financial LLC | July 2024 | $ | — | | $ | 300 | |
| Secured, uncommitted lines of credit | LPL Financial LLC | March 2022 | $ | — | | $ | 75 | |
| Unsecured, uncommitted lines of credit | LPL Financial LLC | September 2022 | $ | — | | $ | 75 | |
| Unsecured, uncommitted lines of credit | LPL Financial LLC | September 2022 | $ | — | | $ | 50 | |
| Unsecured, uncommitted lines of credit | LPL Financial LLC | None | $ | — | | $ | 75 | |
| Secured, uncommitted lines of credit | LPL Financial LLC | None | $ | — | | unspecified |
| Secured, uncommitted lines of credit | LPL Financial LLC | None | $ | — | | unspecified |
There were no borrowings outstanding under the Company’s external lines of credit at September 30, 2021 or December 31, 2020, respectively.
Issuance of 2031 Senior Notes
LPLH raised $400.0 million in aggregate principal amount of 4.375% senior notes on May 18, 2021, which were issued at par (“2031 Senior Notes”). The Company used the proceeds from the issuance to repay borrowings made under the senior secured revolving credit facility related to the acquisition of the wealth management business of Waddell & Reed Financial, Inc. The 2031 Senior Notes are unsecured obligations, governed by an indenture, that will mature on May 15, 2031, and bear interest at the rate of 4.375% per year, with interest payable semi-annually. The Company may redeem all or part of the 2031 Senior Notes at any time prior to May 15, 2026 (subject to a customary “equity claw” redemption right) at 100% of the principal amount redeemed plus any accrued and unpaid interest thereon and a “make-whole” premium. Thereafter, the Company may redeem all or part of the 2031 Senior Notes at annually declining redemption premiums until May 15, 2029, at and after which date the redemption price will be equal to 100% of the principal amount redeemed plus any accrued and unpaid interest thereon. In connection with the issuance of the 2031 Senior Notes, the Company incurred $3.8 million in costs, which were capitalized as debt issuance costs in the unaudited condensed consolidated statements of financial condition.
Issuance of 2029 Senior Notes
LPLH raised $900.0 million in aggregate principal amount of 4.00% senior notes on March 15, 2021, which were issued at par (“2029 Senior Notes”). The Company used the proceeds from the issuance of the 2029 Senior Notes, along with existing corporate cash available, to redeem the 2025 Senior Notes. In connection with this redemption,
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
the Company recognized $24.4 million as a loss on extinguishment of debt on the unaudited condensed consolidated statements of income.
The 2029 Senior Notes are unsecured obligations, governed by an indenture, that will mature on March 15, 2029, and bear interest at the rate of 4.00% per year, with interest payable semi-annually. The Company may redeem all or part of the 2029 Senior Notes at any time prior to March 15, 2024 (subject to a customary “equity claw” redemption right) at 100% of the principal amount redeemed plus any accrued and unpaid interest thereon and a “make-whole” premium. Thereafter, the Company may redeem all or part of the 2029 Senior Notes at annually declining redemption premiums until March 15, 2026, at and after which date the redemption price will be equal to 100% of the principal amount redeemed plus any accrued and unpaid interest thereon. In connection with the issuance of the 2029 Senior Notes, the Company incurred $9.0 million in costs, which were capitalized as debt issuance costs in the unaudited condensed consolidated statements of financial condition.
Credit Agreement
On March 15, 2021, LPLFH and LPLH entered into a fifth amendment agreement (the “Amendment”) to the Company’s amended and restated credit agreement (“Credit Agreement”), which, among other things, increased the size of its senior secured revolving credit facility to $1.0 billion and extended the maturity date of its senior secured revolving credit facility. In connection with the execution of the Amendment, the Company incurred $3.2 million in costs, which are capitalized as debt issuance costs in the unaudited condensed consolidated statements of financial condition. The Credit Agreement subjects the Company to certain financial and non-financial covenants. As of September 30, 2021, the Company was in compliance with such covenants.
Parent Revolving Credit Facility
Borrowings under the revolving credit facility bear interest at a rate per annum ranging from 125 to 175 basis points over the Eurodollar Rate or 25 to 75 basis points over the base rate, depending on the Consolidated Secured Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement).
Broker-Dealer Revolving Credit Facility
On July 31, 2019, LPL Financial, the Company’s broker-dealer subsidiary, entered into a committed, unsecured revolving credit facility that matures on July 31, 2024 and allows for a maximum borrowing of $300.0 million. Borrowings bear interest at a rate per annum ranging from 112.5 to 137.5 basis points over the Federal Funds Rate or Eurodollar Rate, depending on the Parent Leverage Ratio (each as defined in the broker-dealer credit agreement). The broker-dealer credit agreement subjects LPL Financial to certain financial and non-financial covenants with which LPL Financial was in compliance as of September 30, 2021.
Other External Lines of Credit
LPL Financial maintained six uncommitted lines of credit as of September 30, 2021. Two of the lines have limits that are unspecified, and that depend primarily on LPL Financial’s ability to provide sufficient collateral. The other four lines have a total limit of $275.0 million, one of which allows for collateralized borrowings while the other three allow for uncollateralized borrowings.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Service and Development Contracts
The Company is party to certain long-term contracts for systems and services that enable back-office trade processing and clearing for its product and service offerings.
Guarantees
The Company occasionally enters into contracts that contingently require it to indemnify certain parties against third-party claims. The terms of these obligations vary and, because a maximum obligation is not explicitly stated, the Company has determined that it is not possible to make an estimate of the amount that it could be obligated to pay under such contracts.
LPL Financial provides guarantees to securities clearing houses and exchanges under their standard membership agreements, which require a member to guarantee the performance of other members. Under these agreements, if
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
a member becomes unable to satisfy its obligations to the clearing houses and exchanges, all other members would be required to meet any shortfall. The Company’s liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted as collateral. However, the potential requirement for the Company to make payments under these agreements is remote. Accordingly, no liability has been recognized for these transactions.
Loan Commitments
From time to time, LPL Financial makes loans to its advisors, primarily to newly recruited advisors to assist in the transition process, which may be forgivable. Due to timing differences, LPL Financial may make commitments to issue such loans prior to actually funding them. These commitments are generally contingent upon certain events occurring, including but not limited to the advisor joining LPL Financial. LPL Financial had no significant unfunded loan commitments at September 30, 2021.
Legal and Regulatory Matters
The Company is subject to extensive regulation and supervision by U.S. federal and state agencies and various self-regulatory organizations. The Company and its advisors periodically engage with such agencies and organizations, in the context of examinations or otherwise, to respond to inquiries, informational requests and investigations. From time to time, such engagements result in regulatory complaints or other matters, the resolution of which has in the past and may in the future include fines, customer restitution and other remediation. Assessing the probability of a loss occurring and the timing and amount of any loss related to a legal proceeding or regulatory matter is inherently difficult. While the Company exercises significant and complex judgments to make certain estimates presented in its consolidated financial statements, there are particular uncertainties and complexities involved when assessing the potential outcomes of legal proceedings and regulatory matters. The Company’s assessment process considers a variety of factors and assumptions, which may include: the procedural status of the matter and any recent developments; prior experience and the experience of others in similar matters; the size and nature of potential exposures; available defenses; the progress of fact discovery; the opinions of counsel and experts; potential opportunities for settlement and the status of any settlement discussions; as well as the potential for insurance coverage and indemnification, if available. The Company monitors these factors and assumptions for new developments and re-assesses the likelihood that a loss will occur and the estimated range or amount of loss, if those amounts can be reasonably determined. The Company has established an accrual for those legal proceedings and regulatory matters for which a loss is both probable and the amount can be reasonably estimated.
Third-Party Insurance
The Company maintains third-party insurance coverage for certain potential legal proceedings, including those involving certain client claims. With respect to such client claims, the estimated losses on many of the pending matters are less than the applicable deductibles of the insurance policies.
Self-Insurance
The Company has self-insurance for certain potential liabilities through the Captive Insurance Subsidiary. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated by considering, in part, historical claims experience, severity factors and other actuarial assumptions. The estimated accruals for these potential liabilities could be significantly affected if future occurrences and claims differ from such assumptions and historical trends, so there are particular complexities and uncertainties involved when assessing the adequacy of loss reserves for potential liabilities that are self-insured. As of September 30, 2021 and December 31, 2020, these self-insurance liabilities were $68.8 million and $51.5 million, respectively, and are included in accounts payable and accrued liabilities in the unaudited condensed consolidated statements of financial condition. Self-insurance related charges are included in other expenses in the unaudited condensed consolidated statements of income.
Other Commitments
As of September 30, 2021, the Company had approximately $495.1 million of client margin loans that were collateralized with securities having a fair value of approximately $693.1 million that LPL Financial can repledge, loan or sell. Of these securities, approximately $77.4 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, 2021, there were no restrictions that materially limited the Company’s ability to repledge, loan or sell the remaining $615.7 million of client collateral.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
Securities owned, trading, on the unaudited condensed consolidated statements of financial condition includes $4.5 million pledged to the Options Clearing Corporation at both September 30, 2021 and December 31, 2020, and $15.0 million pledged to the National Securities Clearing Corporation at both September 30, 2021 and December 31, 2020.
NOTE 10 - STOCKHOLDERS’ EQUITY
Dividends
The payment, timing, and amount of any dividends are subject to approval by the Company’s Board of Directors as well as certain limits under the Credit Agreement and Indentures. Cash dividends per share of common stock and total cash dividends paid on a quarterly basis were as follows (in millions, except per share data):
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| 2021 | | 2020 |
| Dividend per Share | | Total Cash Dividend | | Dividend per Share | | Total Cash Dividend |
| First quarter | $ | 0.25 | | | $ | 20.0 | | | $ | 0.25 | | | $ | 19.7 | |
| Second quarter | $ | 0.25 | | | $ | 20.0 | | | $ | 0.25 | | | $ | 19.7 | |
| Third quarter | $ | 0.25 | | | $ | 20.1 | | | $ | 0.25 | | | $ | 19.8 | |
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Share Repurchases
The Company engages in share repurchase programs, which are approved by the Board of Directors, pursuant to which the Company may repurchase its issued and outstanding shares of common stock from time to time. Repurchased shares are included in treasury stock on the unaudited condensed consolidated statements of financial condition.
As of September 30, 2021, the Company was authorized to purchase up to an additional $309.8 million of shares pursuant to share repurchase programs approved by the Board of Directors. The Company resumed share repurchases in the third quarter of 2021 in the amount of $40.0 million, representing 276,800 shares.
NOTE 11 - SHARE-BASED COMPENSATION
In May 2021, the Company adopted the 2021 Omnibus Equity Incentive Plan (the “2021 Plan”), which provides for the granting of stock options, warrants, restricted stock awards, restricted stock units, deferred stock units, performance stock units and other equity-based compensation to the Company’s employees, non-employee directors and other service providers. The 2021 Plan serves as the successor to the Company’s 2010 Omnibus Equity Incentive Plan (the “2010 Plan”). Following the adoption of the 2021 Plan, the Company is no longer making grants under the 2010 Plan, and the 2021 Plan is the only plan under which equity awards are granted. However, awards previously granted under the 2010 Plan will remain outstanding until vested, exercised or forfeited, as applicable.
There were 17,754,197 shares authorized for grant under the 2021 Plan and 14,784,444 shares remaining available for future issuance at September 30, 2021.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
Stock Options and Warrants
The following table summarizes the Company’s stock option and warrant activity as of and for the nine months ended September 30, 2021:
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| | Number of
Shares | | Weighted-
Average
Exercise Price | | Weighted-Average
Remaining
Contractual Term
(Years) | | Aggregate
Intrinsic
Value
(In thousands) |
| Outstanding — December 31, 2020 | | 2,000,383 | | | $ | 45.57 | | | | | |
| Granted | | — | | | $ | — | | | | | |
| Exercised | | (629,809) | | | $ | 46.79 | | | | | |
| Forfeited and Expired | | (28,674) | | | $ | 58.85 | | | | | |
| Outstanding — September 30, 2021 | | 1,341,900 | | | $ | 44.72 | | | 4.82 | | $ | 150,347 | |
| Exercisable — September 30, 2021 | | 1,250,990 | | | $ | 42.34 | | | 4.63 | | $ | 143,144 | |
| Exercisable and expected to vest — September 30, 2021 | | 1,339,980 | | | $ | 44.67 | | | 4.82 | | $ | 150,195 | |
The following table summarizes information about outstanding stock options and warrants as of September 30, 2021:
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| | | Outstanding | | Exercisable |
| Range of Exercise Prices | | Number of
Shares | | Weighted-
Average
Exercise
Price | | Weighted-Average
Remaining Life
(Years) | | Number of
Shares | | Weighted-
Average
Exercise
Price |
| $19.85 - $25.00 | | 321,985 | | | $ | 19.85 | | | 4.39 | | 321,985 | | | $ | 19.85 | |
| $25.01 - $35.00 | | 198,307 | | | $ | 29.49 | | | 0.89 | | 198,307 | | | $ | 29.49 | |
| $35.01 - $45.00 | | 275,785 | | | $ | 39.48 | | | 5.42 | | 275,785 | | | $ | 39.48 | |
| $45.01 - $65.00 | | 104,180 | | | $ | 48.43 | | | 3.14 | | 104,180 | | | $ | 48.43 | |
| $65.01 - $75.00 | | 199,939 | | | $ | 65.50 | | | 6.39 | | 199,939 | | | $ | 65.50 | |
| $75.01 - $80.00 | | 241,704 | | | $ | 77.53 | | | 7.38 | | 150,794 | | | $ | 77.53 | |
| | | 1,341,900 | | | $ | 44.72 | | | 4.82 | | 1,250,990 | | | $ | 42.34 | |
The Company recognized share-based compensation related to the vesting of stock options awarded to employees and officers of $0.7 million and $1.0 million during the three months ended September 30, 2021 and 2020, respectively, and $2.2 million and $3.4 million during the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, total unrecognized compensation cost related to non-vested stock options granted to employees and officers was $0.7 million, which is expected to be recognized over a weighted-average period of 0.42 years.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
Restricted Stock and Stock Units
The following summarizes the Company’s activity in its restricted stock awards and stock units, which include restricted stock units, deferred stock units and performance stock units, as of and for the nine months ended September 30, 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Restricted Stock Awards | | Stock Units |
| | Number of
Shares | | Weighted-Average
Grant-Date
Fair Value | | Number of
Units | | Weighted-Average
Grant-Date
Fair Value |
| Outstanding — December 31, 2020 | | 5,560 | | | $ | 64.74 | | | 904,445 | | | $ | 78.12 | |
| Granted | | 1,593 | | | $ | 156.54 | | | 487,785 | | | $ | 143.54 | |
| Vested | | (6,102) | | | $ | 72.89 | | | (385,648) | | | $ | 80.26 | |
| Forfeited | | — | | | $ | — | | | (71,986) | | | $ | 109.24 | |
| Outstanding — September 30, 2021 | | 1,051 | | | $ | 156.54 | | | 934,596 | | (1) | $ | 109.41 | |
| Expected to vest — September 30, 2021 | | 1,051 | | | $ | 156.54 | | | 816,322 | | | $ | 113.70 | |
_______________________________
(1) Includes 72,347 vested and undistributed deferred stock units.
The Company grants restricted stock awards and deferred stock units to its directors and restricted stock units and performance stock units to its employees and officers. Restricted stock awards and stock units must vest or are subject to forfeiture; however, restricted stock awards are included in shares outstanding upon grant and have the same dividend and voting rights as the Company’s common stock. The Company recognized $8.6 million and $6.0 million of share-based compensation related to the vesting of these restricted stock awards and stock units during the three months ended September 30, 2021 and 2020, respectively, and $28.7 million and $19.0 million during the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, total unrecognized compensation cost for restricted stock awards and stock units was $59.1 million, which is expected to be recognized over a weighted-average remaining period of 2.08 years.
The Company also grants restricted stock units to its advisors and to financial institutions. The Company recognized share-based compensation of $0.5 million and $0.4 million related to the vesting of these awards during the three months ended September 30, 2021 and 2020, respectively, and $1.7 million during both the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, total unrecognized compensation cost for restricted stock units granted to advisors and financial institutions was $5.8 million, which is expected to be recognized over a weighted-average remaining period of 2.34 years.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 12 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if dilutive potential shares of common stock had been issued. The calculation of basic and diluted earnings per share for the periods noted was as follows (in thousands, except per share data):
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Net income | $ | 103,064 | | | $ | 103,789 | | | $ | 351,785 | | | $ | 361,092 | |
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| Basic weighted-average number of shares outstanding | 80,182 | | | 79,176 | | | 79,981 | | | 79,207 | |
| Dilutive common share equivalents | 1,667 | | | 1,374 | | | 1,791 | | | 1,405 | |
| Diluted weighted-average number of shares outstanding | 81,849 | | | 80,550 | | | 81,772 | | | 80,612 | |
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| Basic earnings per share | $ | 1.29 | | | $ | 1.31 | | | $ | 4.40 | | | $ | 4.56 | |
| Diluted earnings per share | $ | 1.26 | | | $ | 1.29 | | | $ | 4.30 | | | $ | 4.48 | |
The computation of diluted earnings per share excludes stock options, warrants and stock units that are anti-dilutive. For the three months ended September 30, 2020, stock options, warrants and stock units representing common share equivalents of 391,011 shares were anti-dilutive. There were no such anti-dilutive shares during the three months ended September 30, 2021. For the nine months ended September 30, 2021 and 2020, stock options, warrants and stock units representing common share equivalents of 2,501 shares and 510,774 shares, respectively, were anti-dilutive.
NOTE 13 - INCOME TAXES
The Company’s effective income tax rate differs from the federal corporate tax rate of 21.0%, primarily as a result of state taxes, settlement contingencies, tax credits and other permanent differences in tax deductibility of certain expenses. These items resulted in effective income tax rates of 25.3% and 23.3% for the three months ended September 30, 2021 and 2020, respectively, and 24.3% and 24.8% for the nine months ended September 30, 2021 and 2020, respectively.
The increase in our effective income tax rate for the three months ended September 30, 2021 compared to 2020 was primarily due to the release of unrecognized tax benefits in the prior year.
NOTE 14 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has related party transactions with beneficial owners of more than ten percent of the Company’s outstanding common stock. Additionally, through its subsidiary LPL Financial, the Company provides services and charitable contributions to the LPL Financial Foundation, an organization that provides volunteer and financial support within the Company’s local communities.
The Company recognized revenues for services provided to these related parties of $1.5 million and $1.2 million during the three months ended September 30, 2021 and 2020, respectively, and $4.4 million and $3.4 million during the nine months ended September 30, 2021 and 2020, respectively. The Company incurred expenses for the services provided by these related parties of $0.5 million and $1.2 million during the three months ended September 30, 2021 and 2020, respectively, and $1.3 million and $2.1 million during the nine months ended
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
September 30, 2021 and 2020, respectively. As of September 30, 2021 and 2020, receivables from and payables to related parties were not material.
NOTE 15 - NET CAPITAL AND REGULATORY REQUIREMENTS
The Company’s registered broker-dealer, LPL Financial, is subject to the SEC’s Net Capital Rule (Rule 15c3-1 under the Exchange Act), which requires the maintenance of minimum net capital. The net capital rules also provide that the broker-dealer’s capital may not be withdrawn if the resulting net capital would be less than minimum requirements. Additionally, certain withdrawals require the approval of the SEC and FINRA to the extent they exceed defined levels, even though such withdrawals would not cause net capital to be less than minimum requirements. Net capital and the related net capital requirement may fluctuate on a daily basis. LPL Financial is a clearing broker-dealer and, as of September 30, 2021, had net capital of $133.3 million, which was $119.2 million in excess of its minimum net capital requirement of $14.1 million.
In April 2021, the Company acquired a broker-dealer as part of its acquisition of the wealth management business of Waddell & Reed Financial, Inc. (the “Waddell & Reed broker-dealer”). The Waddell & Reed broker-dealer is required to maintain net capital of $250,000, which represents the greater of 2% of its aggregate debits or the minimum net capital requirement of $250,000. At September 30, 2021, the Waddell & Reed broker-dealer had net capital of $8.2 million, which was $8.0 million in excess of its minimum capital requirement. The Company expects to dissolve the Waddell & Reed broker-dealer during the fourth quarter of 2021.
The Company’s subsidiary, PTC, also operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC’s operations.
As of September 30, 2021 and December 31, 2020, LPL Financial and PTC met all capital adequacy requirements to which they were subject.
NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK
AND CONCENTRATIONS OF CREDIT RISK
LPL Financial’s client securities activities are transacted on either a cash or margin basis. In margin transactions, LPL Financial extends credit to the advisor’s client, subject to various regulatory and internal margin requirements, which is collateralized by cash and securities in the client’s account. As clients write options contracts or sell securities short, LPL Financial may incur losses if the clients do not fulfill their obligations and the collateral in the clients’ accounts is not sufficient to fully cover losses that clients may incur from these strategies. To control this risk, LPL Financial monitors margin levels daily and clients are required to deposit additional collateral, or reduce positions, when necessary.
LPL Financial is obligated to settle transactions with brokers and other financial institutions even if its advisors’ clients fail to meet their obligation to LPL Financial. Clients are required to complete their transactions on the settlement date, generally two business days after the trade date. If clients do not fulfill their contractual obligations, LPL Financial may incur losses. In addition, the Company occasionally enters into certain types of contracts to fulfill its sale of when-issued securities. When-issued securities have been authorized but are contingent upon the actual issuance of the security. LPL Financial has established procedures to reduce this risk by generally requiring that clients deposit cash or securities into their account prior to placing an order.
LPL Financial may at times hold equity securities on both a long and short basis that are recorded on the unaudited condensed consolidated statements of financial condition at market value. While long inventory positions represent LPL Financial’s ownership of securities, short inventory positions represent obligations of LPL Financial to deliver specified securities at a contracted price, which may differ from market prices prevailing at the time of completion of the transaction. Accordingly, both long and short inventory positions may result in losses or gains to LPL Financial as market values of securities fluctuate. To mitigate the risk of losses, long and short positions are marked-to-market daily and are continuously monitored by LPL Financial.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) |
NOTE 17 - SUBSEQUENT EVENTS
On October 28, 2021, the Board of Directors declared a cash dividend of $0.25 per share on the Company’s outstanding common stock to be paid on November 29, 2021 to all stockholders of record on November 11, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
We maintain trading securities owned and securities sold, but not yet purchased in order to facilitate client transactions, to meet a portion of our clearing deposit requirements at various clearing organizations and to track the performance of our research models. These securities could include mutual funds, debt securities and equity securities. Changes in the value of our trading securities may result from fluctuations in interest rates, credit ratings of the issuer, equity prices or a combination of these factors.
In facilitating client transactions, our securities owned and securities sold, but not yet purchased generally involve mutual funds, including dividend reinvestments. Our positions held are based upon the settlement of client transactions, which are monitored by our Service, Trading and Operations (“CARE”) department.
Positions held to meet clearing deposit requirements consist of U.S. government securities. The amount of securities deposited depends upon the requirements of the clearing organization. The level of securities deposited is monitored by the settlements group within our CARE department.
Our Research department develops model portfolios that are used by advisors in developing client portfolios. We maintain securities owned in internal accounts based on these model portfolios to track the performance of our Research department. At the time a portfolio is developed, we purchase the securities in that model portfolio in an amount equal to the account minimum, which varies by product.
In addition, we are subject to market risk resulting from system incidents or interruptions and human error, which can require customer trade corrections. We also have market risk on the fees we earn that are based on the market value of advisory and brokerage assets along with assets on which trailing commissions are paid, and assets eligible for sponsor payments.
As of September 30, 2021, the fair value of our trading securities owned was $32.1 million and the fair value of securities sold, but not yet purchased was immaterial. The fair value of securities included within other assets was $466.5 million as of September 30, 2021. See Note 5 - Fair Value Measurements, within the notes to the unaudited condensed consolidated financial statements for information regarding the fair value of trading securities owned, securities sold, but not yet purchased and other assets associated with our client facilitation activities. See Note 6 - Held-to-Maturity Securities, within the notes to the unaudited condensed consolidated financial statements for information regarding the fair value of securities held to maturity.
Interest Rate Risk
We are exposed to risk associated with changes in interest rates. As of September 30, 2021, $1.1 billion of our outstanding debt under our Credit Agreement was subject to floating interest rate risk. While our senior secured term loan is subject to increases in interest rates, we do not believe that a short-term change in interest rates would have a material impact on our income before taxes given assets owned, which are generally subject to the same, but off-setting, interest rate risk.
The following table summarizes the impact of increasing interest rates on our interest expense from the variable portion of our debt outstanding, calculated using the projected average outstanding balance over the subsequent twelve-month period (in thousands):
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| | | Outstanding Balance at September 30, 2021 | | Annual Impact of an Interest Rate(†) Increase of |
| | | | 10 Basis | | 25 Basis | | 50 Basis | | 100 Basis |
| Senior Secured Credit Facility | | | Points | | Points | | Points | | Points |
| Term Loan B | | $ | 1,051,275 | | | $ | 1,045 | | | $ | 2,611 | | | $ | 5,233 | | | $ | 10,446 | |
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____________________
(†) Our interest rate for the Term Loan B is locked in for one, two, three, six or twelve months as allowed under the Credit Agreement. At the end of the selected periods the rates will be locked in at the then current rate. The effect of these interest rate locks are not included in the table above.
See Note 8 - Long-term and Other Borrowings within the notes to the unaudited condensed consolidated financial statements for additional information.
As of September 30, 2021, we offered our advisors and their clients two primary bank sweep vehicles that are interest rate sensitive: (1) our insured cash account (“ICA”) for individuals, trusts, sole proprietorships and entities organized or operated to make a profit, such as corporations, partnerships, associations, business trusts and other organizations; and (2) an insured deposit cash account (“DCA”) for advisory individual retirement accounts. In
addition, we offer our advisors and their clients a money market program, including money market sweep accounts as well as the ability to participate in purchased money market funds. While clients earn interest on deposits in ICA and DCA, we earn a fee. The fees we earn from cash held in ICAs are based on prevailing interest rates in the current interest rate environment. The fees we earn from DCAs are calculated as a per account fee, and such fees increase as the federal funds target rate increases, subject to a cap. The fees we earn on cash balances in our advisors’ clients’ accounts in our money market program, including administrative and recordkeeping fees based on account type and the invested balances, are also sensitive to prevailing interest rates. Changes in interest rates and fees for the bank deposit sweep vehicles are monitored by our Rate Setting Committee (the “RSC”), which governs and approves any changes to our fees. By meeting promptly around the time of Federal Open Market Committee meetings, or for other market or non-market reasons, the RSC considers financial risk of the insured bank deposit sweep vehicles relative to other products into which clients may move cash balances.
Credit Risk
Credit risk is the risk of loss due to adverse changes in a borrower’s, issuer’s or counterparty’s ability to meet its financial obligations under contractual or agreed upon terms. Credit risk includes the risk that loans we extend to advisors to facilitate their transition to our platform or to fund their business development activities are not repaid in full or on time. Credit risk also includes the risk that collateral posted with LPL Financial by clients to support margin lending or derivative trading is insufficient to meet clients’ contractual obligations to LPL Financial. We bear credit risk on the activities of our advisors’ clients, including the execution, settlement and financing of various transactions on behalf of these clients.
These activities are transacted on either a cash or margin basis. Our credit exposure in these transactions consists primarily of margin accounts, through which we extend credit to advisors’ clients collateralized by securities in the clients’ accounts. Under many of these agreements, we are permitted to sell, repledge or loan these securities held as collateral and use these securities to enter into securities lending arrangements or to deliver to counterparties to cover short positions.
As our advisors execute margin transactions on behalf of their clients, we may incur losses if clients do not fulfill their obligations, the collateral in the clients’ accounts is insufficient to fully cover losses from such investments and our advisors fail to reimburse us for such losses. Our losses on margin accounts were immaterial during the three and nine months ended September 30, 2021 and 2020. We monitor exposure to industry sectors and individual securities and perform analyses on a regular basis in connection with our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions.
We are subject to concentration risk if we extend large loans to or have large commitments with a single counterparty, borrower or group of similar counterparties or borrowers (e.g., in the same industry), or if we accept a concentrated position as collateral for a margin loan. Receivables from and payables to clients and stock borrowing and lending activities are conducted with a large number of clients and counterparties and potential concentration is monitored. We seek to limit this risk through review of the underlying business and the use of limits established by senior management, taking into consideration factors including the financial strength of the counterparty, the size of the position or commitment, the expected duration of the position or commitment and other positions or commitments outstanding.
Operational Risk
Operational risk is defined as the risk of loss resulting from failed or inadequate processes or systems, actions by people or external events. We operate in diverse markets and are reliant on the ability of our employees and information technology systems, as well as third-party service providers and their systems, to manage a large volume of transactions and confidential information, including personally identifiable information, effectively and securely. These risks are less direct and quantifiable than credit and market risk, but managing them is critical, particularly in a rapidly changing operating environment with increasing transaction volumes and in light of increasing reliance on systems capabilities and performance, as well as third-party service providers. In the event of the breakdown, obsolescence or improper operation of systems, malicious cyber activity or improper action by employees, advisors or third-party service providers, we could suffer business disruptions, financial loss, data loss, regulatory sanctions and damage to our reputation. Although we have developed business continuity and disaster recovery plans, those plans could be inadequate, disrupted or otherwise unsuccessful in maintaining the competitiveness, stability, security or continuity of critical systems as a result of, among other things, obsolescence, improper operation, third-party dependencies or limitations of our current technology.
In order to assist in the mitigation and control of operational risk, we have an operational risk framework that is designed to enable assessment and reporting on operational risk across the firm. This framework aims to ensure policies and procedures are in place and appropriately designed to identify and manage operational risk at appropriate levels throughout our organization and within various departments. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our employees and advisors operate within established corporate policies and limits. Notwithstanding the foregoing, please consult the “Risks Related to Our Technology” and the “Risks Related to Our Business and Industry” sections within Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with our technology, including risks related to security, our risk management policies and procedures, and the potential related effects on our operations.
Our senior management is monitoring developments in the COVID-19 pandemic and has implemented changes to our policies, procedures and operations to protect the integrity and continuity of our business and the health and safety of our employees. For example, we have equipped and enabled a substantial majority of employees to work remotely, enhanced cleaning protocols throughout our corporate offices and worked closely with our vendors to maintain service continuity throughout the market volatility and increased operational volumes that occurred from time to time during the pandemic. We also made extra support available to our advisors by extending service hours and providing additional resources to enable them to deliver differentiated services to their clients. There can be no guarantee that our business continuity plans and the other efforts to manage the business implications of COVID-19 will be effective, or that there will not be material adverse effects on our results of operations. Please consult Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with COVID-19.
Regulatory and Legal Risk
The regulatory environment in which we operate is discussed in detail within Part I, “Item 1. Business” in our 2020 Annual Report on Form 10-K. In recent years, and during the period presented in this Quarterly Report on Form 10-Q, we have observed the SEC, FINRA and state regulators broaden the scope, frequency and depth of their examinations and inquiries to include greater emphasis on the quality, consistency and oversight of our compliance systems and programs. Please consult the “Risks Related to Our Regulatory Environment” and the “Risks Related to Our Business and Industry” sections within Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with operating within our regulatory environment, pending regulatory matters and the potential related effects on our operations.
Risk Management
We employ an enterprise risk management (“ERM”) framework that is intended to address key risks and responsibilities, enable us to execute our business strategy and protect our Company and its franchise. For a discussion of our ERM framework, please see the “Risk Management” section within Part II, “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our 2020 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective.
Change in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the third quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we have been subjected to and are currently subject to legal and regulatory proceedings arising out of our business operations, including lawsuits, arbitration claims, and inquiries, investigations and enforcement proceedings initiated by the SEC, FINRA and state securities regulators, as well as other actions and claims. See Note 9 - Commitments and Contingencies, within the notes to the unaudited condensed consolidated financial statements for additional information.
Item 1A. Risk Factors
There have been no material changes in the information regarding the Company’s risks, as set forth under Part I, “Item 1A. Risk Factors” in the Company’s 2020 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below sets forth information regarding repurchases, reported on a trade date basis, during the three months ended September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Weighted-Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program (millions)(1) |
| July 1, 2021 through July 31, 2021 | | — | | | — | | | — | | | $ | 349.8 | |
| August 1, 2021 through August 31, 2021 | | 243,944 | | $ | 131.55 | | | 243,944 | | $ | 314.7 | |
| September 1, 2021 through September 30, 2021 | | 32,856 | | $ | 149.61 | | | 32,856 | | $ | 309.8 | |
| Total | | 276,800 | | | | 276,800 | | |
(1) On November 13, 2018, the Board of Directors authorized an increase to the Company’s existing share repurchase program to authorize the repurchase of up to $1.0 billion of its issued and outstanding common shares. See Note 10 - Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information.
The repurchases are being executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, including transactions with affiliates, with the timing of purchases and the amount of shares purchased generally determined at the discretion of the Company within the constraints of the Credit Agreement, the Indentures, applicable laws and consideration of the Company’s general liquidity needs.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
| | | | | | | | |
| 3.1 | | | |
| 3.2 | | | |
| 3.3 | | | |
| 3.4 | | | |
| 4.1 | | | Indenture, dated May 18, 2021, among LPL Holdings, Inc., U.S. Bank National Association, as trustee, and certain subsidiaries of LPL Holdings, Inc., as guarantors (Incorporated by reference to the Form 8-K filed on May 18, 2021). |
| 10.1 | | | |
| 10.2 | | | |
| 10.3 | | | |
| 10.4 | | | |
| 10.5 | | | |
| 10.6 | | | |
| 10.7 | | | |
| 31.1 | | | |
| 31.2 | | | |
| 32.1 | | | |
| 32.2 | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation |
| 101.LAB | | Inline XBRL Taxonomy Extension Label |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition |
| 104 | | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
____________________
| | | | | | | | |
| * | | Filed herewith. |
| ** | | Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | LPL Financial Holdings Inc. |
| Date: | November 2, 2021 | By: | /s/ DAN H. ARNOLD |
| | | Dan H. Arnold |
| | | President and Chief Executive Officer |
| | | |
| Date: | November 2, 2021 | By: | /s/ MATTHEW J. AUDETTE |
| | | Matthew J. Audette |
| | | Chief Financial Officer |
| | | |
| Date: | November 2, 2021 | By: | /s/ BRENT B. SIMONICH |
| | | Brent B. Simonich |
| | | Chief Accounting Officer |
Exhibit 10.7