What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-02-23 compared with 2020-02-21 · 1290 added, 3 removed, 3 unchanged (100% of the section changed)

Financial Statements and Supplementary Data

The Consolidated Financial Statements and Supplementary Data are included as an annex to this Annual Report on Form 10-K.

See the Index to Consolidated Financial Statements and Supplementary Data on page F-1.

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018

Consolidated Statements of Financial Condition as of December 31, 2020 and 2019

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018

Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018

Notes to Consolidated Financial Statements

Note 1 - Organization and Description of the Company

Note 2 - Summary of Significant Accounting Practices

Note 3 - Revenues

Note 4 - Acquisitions

Note 5 - Fair Value Measurements

Note 6 - Held-to-Maturity Securities

Note 7 - Receivables and Payables

Note 8 - Fixed Assets

Note 9 - Goodwill and Other Intangible Assets

Note 10 - Accounts Payable and Accrued Liabilities

Note 11 - Long-term and Other Borrowings

Note 12 - Leases

Note 13 - Income Taxes

Note 14 - Commitments and Contingencies

Note 15 - Stockholders’ Equity

Note 16 - Share-based Compensation

Note 17 - Earnings per Share

Note 18 - Employee and Advisor Benefit Plans

Note 19 - Related Party Transactions

Note 20 - Net Capital and Regulatory Requirements

Note 21 - Financial Instruments with Off-Balance-Sheet Credit Risk and Concentration of Credit Risk

Note 22 - Subsequent Event

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of

LPL Financial Holdings Inc.

San Diego, California

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial condition of LPL Financial Holdings Inc.

and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenues - Trailing Commission Revenue Accrual - Refer to Note 3 to the financial statements

Critical Audit Matter Description

The Company’s trailing commission revenues are generally received in arrears and therefore estimated and accrued at year-end.

The estimate is based on commission revenues received in prior periods, adjusted using change factors based on market performance and the payment frequency for each investment product type and sponsor.

Because of the volume of investment product types and sponsors and variability in the corresponding

payment frequencies, the Company performs manual calculations and exercises judgment in determining the revenue estimate.

We identified the Company’s trailing commission revenue accrual as a critical audit matter because of the judgments necessary for management to estimate the revenue accrual.

This required an increased extent of audit effort and a high degree of auditor judgment when performing audit procedures to evaluate the inputs and judgments related to the revenue accrual and evaluating the results of those procedures.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the inputs and judgments used by management to estimate the year-end accrual for trailing commission revenues included the following, among others:

• We tested the effectiveness of internal controls over the accrual for trailing commission revenues, including those over the inputs and judgments used by management in the calculation of the accrual and the historical lookback analysis comparing monthly accruals to subsequent cash receipts

• We compared management’s market performance data to external sources and challenged their methodology for potential management bias by evaluating the sensitivity of changes in market factors on the accrual

• We compared the accrual to actual trailing commission revenue received subsequent to year-end

• We tested the historical cash receipts used to estimate the year-end accrual by comparing them to bank statements

• We evaluated the payment frequency assumption used by management in the estimation of the accrual for a sample of investment product types and sponsors by comparing the assumption to the actual cash receipts frequency

• We tested the mathematical accuracy of the accrual

/s/ DELOITTE & TOUCHE LLP

San Diego, California

February 23, 2021

We have served as the Company's auditor since 2001.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share data)

Years Ended December 31,

2020 2019 2018

Advisory $ 2,327,519 $ 1,982,869 $ 1,793,493

Commission 1,906,560 1,892,407 1,919,694

Asset-based 1,044,517 1,165,979 972,515

Transaction and fee 506,071 480,328 471,299

Interest income, net of interest expense 29,412 46,508 40,210

Other 57,561 56,765 ( 8,811 )

Total net revenues

5,871,640 5,624,856 5,188,400

Advisory and commission 3,697,147 3,388,186 3,177,576

Compensation and benefits 609,257 556,128 506,650

Promotional 208,250 205,537 208,603

Depreciation and amortization 109,732 95,779 87,656

Amortization of intangible assets 67,358 65,334 60,252

Occupancy and equipment 166,389 136,163 115,598

Professional services 57,067 73,887 85,651

Brokerage, clearing and exchange 71,185 64,445 63,154

Communications and data processing 52,399 49,859 46,322

Other 101,018 114,546 119,278

Total operating expenses

5,139,802 4,749,864 4,470,740

Non-operating interest expense and other 105,765 130,001 125,023

Loss on extinguishment of debt — 3,156 —

INCOME BEFORE PROVISION FOR INCOME TAXES 626,073 741,835 592,637

PROVISION FOR INCOME TAXES 153,433 181,955 153,178

NET INCOME $ 472,640 $ 559,880 $ 439,459

EARNINGS PER SHARE (Note 17)

Earnings per share, basic $ 5.96 $ 6.78 $ 4.99

Earnings per share, diluted $ 5.86 $ 6.62 $ 4.85

Weighted-average shares outstanding, basic 79,244 82,552 88,119

Weighted-average shares outstanding, diluted 80,702 84,624 90,619

See notes to consolidated financial statements.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(In thousands, except share data)

Cash and cash equivalents $ 808,612 $ 590,209

Cash segregated under federal and other regulations 923,158 822,697

Restricted cash 67,264 58,872

Receivables from:

405,106 433,986

Product sponsors, broker-dealers and clearing organizations 233,192 177,654

Advisor loans, net

547,372 441,743

306,640 298,790

Securities owned:

Trading — at fair value 29,252 46,447

Held-to-maturity — at amortized cost 13,235 11,806

Securities borrowed 30,130 17,684

Fixed assets, net

582,868 533,044

Operating lease assets 101,921 102,477

Goodwill 1,513,866 1,503,648

Intangible assets, net

397,486 439,838

Deferred income taxes, net 24,112 —

Other assets 539,357 401,343

Total assets $ 6,523,571 $ 5,880,238

LIABILITIES AND STOCKHOLDERS’ EQUITY

Drafts payable $ 178,403 $ 218,636

Payables to clients 1,356,083 1,058,873

Payables to broker-dealers and clearing organizations 89,743 92,002

Accrued advisory and commission expenses payable 187,040 174,330

Accounts payable and accrued liabilities 681,554 557,969

Income taxes payable 28,145 20,129

Unearned revenue 95,328 82,842

Securities sold, but not yet purchased — at fair value 206 176

Long-term and other borrowings, net

2,345,414 2,398,818

Operating lease liabilities 139,377 141,900

Finance lease liabilities 107,424 108,592

Deferred income taxes, net — 2,098

Total liabilities 5,208,717 4,856,365

Commitments and contingencies (Note 14)

STOCKHOLDERS’ EQUITY:

Common stock, $ 0.001 par value;

600,000,000 shares authorized;

127,585,764 shares and 126,494,028 shares issued at December 31, 2020 and 2019, respectively

Additional paid-in capital 1,762,770 1,703,973

Treasury stock, at cost — 48,115,037 shares and 46,259,989 shares at December 31, 2020 and 2019, respectively

( 2,391,062 ) ( 2,234,793 )

Retained earnings

1,943,019 1,554,567

Total stockholders’ equity 1,314,854 1,023,873

Total liabilities and stockholders’ equity $ 6,523,571 $ 5,880,238

See notes to consolidated financial statements.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(In thousands)

Capital Accumulated Other

Comprehensive

Income (Loss) Retained

Earnings Total

Stockholders’

Common Stock Treasury Stock

Shares Amount Shares Amount

BALANCE — December 31, 2017 123,030 $ 123 $ 1,556,117 33,262 $ ( 1,309,568 ) $ — $ 718,336 $ 965,008

Net income, net of tax expense — 439,459 439,459

Issuance of common stock to settle restricted stock units 369 — — 75 ( 4,843 ) ( 4,843 )

Treasury stock purchases 6,533 ( 417,891 ) ( 417,891 )

Cash dividends on common stock ( 88,360 ) ( 88,360 )

Stock option exercises and other 1,511 2 49,058 ( 49 ) 1,767 711 51,538

Share-based compensation — — 29,162 29,162

BALANCE — December 31, 2018 124,910 $ 125 $ 1,634,337 39,821 $ ( 1,730,535 ) $ — $ 1,070,146 $ 974,073

Cumulative effect of accounting change 5,724 5,724

Net income, net of tax expense — 559,880 559,880

Issuance of common stock to settle restricted stock units 366 — — 75 ( 5,863 ) ( 5,863 )

Treasury stock purchases 6,419 ( 500,370 ) ( 500,370 )

Cash dividends on common stock ( 82,597 ) ( 82,597 )

Stock option exercises and other 1,218 1 36,772 ( 55 ) 1,975 1,414 40,162

Share-based compensation — — 32,864 32,864

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, net of tax expense — 472,640 472,640

Issuance of common stock to settle restricted stock units 417 — — 134 ( 9,420 ) ( 9,420 )

Treasury stock purchases 1,810 ( 150,036 ) ( 150,036 )

Cash dividends on common stock ( 79,097 ) ( 79,097 )

Stock option exercises and other 675 1 24,822 ( 89 ) 3,187 2,226 30,236

Share-based compensation — — 33,975 33,975

BALANCE — December 31, 2020 127,586 $ 127 $ 1,762,770 48,115 $ ( 2,391,062 ) $ — $ 1,943,019 $ 1,314,854

See notes to consolidated financial statements.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

Years Ended December 31,

2020 2019 2018

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 472,640 $ 559,880 $ 439,459

Adjustments to reconcile net income to net cash provided by operating activities:

Noncash items:

Depreciation and amortization 109,732 95,779 87,656

Amortization of intangible assets 67,358 65,334 60,252

Amortization of debt issuance costs 5,384 4,672 4,118

Share-based compensation 33,975 32,864 29,162

Provision for bad debts 5,824 6,698 6,113

Deferred income taxes ( 23,684 ) ( 18,615 ) ( 1,754 )

Loss on extinguishment of debt — 3,156 —

Loan forgiveness 113,126 92,502 71,520

Other ( 12,673 ) ( 11,421 ) 5,447

Changes in operating assets and liabilities:

Receivables from clients 28,475 ( 20,602 ) ( 68,888 )

Receivables from product sponsors, broker-dealers and clearing organizations

( 55,538 ) ( 7,180 ) 29,414

Advisor loans ( 225,518 ) ( 235,499 ) ( 152,227 )

Receivables from others ( 11,090 ) ( 52,365 ) ( 20,894 )

Securities owned 16,072 ( 16,848 ) ( 13,741 )

Securities borrowed ( 12,446 ) ( 12,855 ) 7,660

Operating leases ( 1,967 ) ( 1,446 ) —

Other assets ( 103,925 ) ( 62,670 ) ( 51,708 )

Drafts payable ( 40,233 ) ( 6,398 ) 39,105

Payables to clients 297,210 107,927 ( 11,945 )

Payables to broker-dealers and clearing organizations ( 2,259 ) 15,822 21,918

Accrued advisory and commission expenses payable 12,710 8,462 17,116

Accounts payable and accrued liabilities 96,521 87,210 43,987

Income taxes receivable/payable 8,016 ( 12,861 ) 32,521

Unearned revenue 12,201 2,318 8,302

Securities sold, but not yet purchased 30 7 ( 1,013 )

Net cash provided by operating activities 789,941 623,871 581,580

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures ( 155,532 ) ( 156,389 ) ( 132,688 )

Acquisitions, net of cash acquired ( 30,556 ) ( 25,853 ) ( 27,928 )

Purchase of securities classified as held-to-maturity ( 6,511 ) ( 3,745 ) ( 6,137 )

Proceeds from maturity of securities classified as held-to-maturity 5,100 5,000 5,000

Net cash used in investing activities ( 187,499 ) ( 180,987 ) ( 161,753 )

Continued on following page

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

Years Ended December 31,

2020 2019 2018

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from revolving credit facilities 1,806,000 523,000 —

Repayments of revolving credit facilities ( 1,851,000 ) ( 478,000 ) —

Repayment of senior secured term loans ( 10,700 ) ( 411,250 ) ( 15,000 )

Proceeds from senior secured term loans and senior notes — 400,000 —

Payment of debt issuance costs — ( 17,615 ) —

Payment of contingent consideration ( 10,000 ) — —

Tax payments related to settlement of restricted stock units ( 9,420 ) ( 5,863 ) ( 4,843 )

Repurchase of common stock ( 150,036 ) ( 500,370 ) ( 417,891 )

Dividends on common stock ( 79,097 ) ( 82,597 ) ( 88,360 )

Proceeds from stock option exercises and other 30,236 40,162 51,538

Principal payment of finance leases and obligations ( 1,169 ) ( 692 ) ( 8,807 )

Net cash (used in) financing activities ( 275,186 ) ( 533,225 ) ( 483,363 )

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 327,256 ( 90,341 ) ( 63,536 )

CASH, CASH EQUIVALENTS AND RESTRICTED CASH — Beginning of year 1,471,778 1,562,119 1,625,655

CASH, CASH EQUIVALENTS AND RESTRICTED CASH — End of year $ 1,799,034 $ 1,471,778 $ 1,562,119

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Interest paid $ 106,879 $ 126,949 $ 123,623

Income taxes paid $ 169,237 $ 213,339 $ 122,215

NONCASH DISCLOSURES:

Capital expenditures included in accounts payable and accrued liabilities $ 12,186 $ 13,736 $ 20,634

Lease assets obtained in exchange for operating lease liabilities $ 7,968 $ 108,879 $ —

Fixed assets obtained in exchange for finance lease liabilities

$ — $ 1,453 $ —

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated statements of financial condition that sum to the total of the same such amounts shown in the consolidated statements of cash flows.

2020 2019 2018

Cash and cash equivalents $ 808,612 $ 590,209 $ 511,096

Cash segregated under federal and other regulations 923,158 822,697 985,195

Restricted cash 67,264 58,872 65,828

Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows

$ 1,799,034 $ 1,471,778 $ 1,562,119

See notes to consolidated financial statements.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 independent 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”), a Massachusetts holding corporation, owns 100 % of the issued and outstanding common stock or other ownership interest in each of LPL Financial LLC (“LPL Financial”), AW Subsidiary, Inc., LPL Employee Services, LLC, Fortigent Holdings Company, Inc.

and LPL Insurance Associates, Inc.

(“LPLIA”), as well as a captive insurance subsidiary (the “Captive Insurance Subsidiary”) that underwrites insurance for various legal and regulatory risks of the Company.

LPLH is also the majority stockholder in PTC Holdings, Inc.

(“PTCH”), and owns 100 % of the issued and outstanding voting common stock.

Each member of PTCH’s board of directors meets the direct equity ownership interest requirements that are required by the Office of the Comptroller of the Currency.

• LPL Financial, with primary offices in San Diego, California;

Fort Mill, South Carolina;

and Boston, Massachusetts, is a clearing broker-dealer and an investment adviser that principally transacts business as an agent for its advisors and financial institutions on behalf of their clients in a broad array of financial products and services.

LPL Financial is licensed to operate in all 50 states, Washington D.C., Puerto Rico and the U.S.

Virgin Islands.

• Fortigent Holdings Company, Inc.

and its subsidiaries provide solutions and consulting services to registered investment advisers (“RIAs”), banks, and trust companies serving high-net-worth clients.

• LPLIA operates as an insurance brokerage general agency that offers life and disability insurance products and services for LPL Financial advisors.

• AW Subsidiary, Inc.

is a holding company for AdvisoryWorld 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.

• PTCH is a holding company for The Private Trust Company, N.A.

PTC is chartered as a non-depository limited purpose national bank, providing a wide range of trust, investment management oversight, and custodial services for estates and families.

PTC also provides Individual Retirement Account (“IRA”) custodial services for LPL Financial.

• LPL Employee Services, LLC is a holding company for Allen & Company of Florida, LLC (“Allen & Company”), an RIA.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ( “ GAAP ” ), which require the Company to make estimates and assumptions regarding the valuation of certain financial instruments, intangible assets, allowance for doubtful accounts, share-based compensation, accruals for liabilities, income taxes, revenue and expense accruals, and other matters that affect the consolidated financial statements and related disclosures.

Actual results could differ from those estimates under different assumptions or conditions and the differences may be material to the consolidated financial statements.

Consolidation

These consolidated financial statements include the accounts of LPLFH and its subsidiaries.

Intercompany transactions and balances have been eliminated.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Reportable Segment

Management has determined that the Company operates in one segment, given the similarities in economic characteristics between its operations and the common nature of its products and services, production and distribution process and regulatory environment.

Revenue Recognition

Revenues are recognized when control of the promised service is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

For additional information, see Note 3 - Revenues .

Compensation and Benefits

The Company records compensation and benefits expense for all cash and deferred compensation, benefits and related taxes as earned by its employees.

Compensation and benefits expense also includes fees earned by temporary employees and contractors who perform similar services to those performed by the Company’s employees, primarily software development and project management activities.

Share-Based Compensation

Certain employees, officers, directors, advisors and financial institutions of the Company participate in various long-term incentive plans that provide for granting stock options, warrants, restricted stock awards, restricted stock units, deferred stock units and performance stock units.

Stock options, warrants and restricted stock units generally vest in equal increments over a three-year period and expire on the tenth anniversary following the date of grant.

Restricted stock awards and deferred stock units generally vest over a one-year period, and performance stock units generally vest in full at the end of a three-year performance period.

The Company recognizes share-based compensation for equity awards granted to employees, officers and directors as compensation and benefits expense on the consolidated statements of income.

The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant.

The fair value of restricted stock awards, restricted stock units and deferred stock units is equal to the closing price of the Company’s stock on the date of grant.

The fair value of performance stock units is estimated using a Monte-Carlo simulation model on the date of grant.

Share-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period.

The Company recognizes share-based compensation for equity awards granted to advisors and financial institutions as advisory and commission expense on the consolidated statements of income.

The fair value of restricted stock units is equal to the closing price of the Company’s stock on the date of grant.

Share-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period.

The Company also makes assumptions regarding the number of stock options, warrants, restricted stock awards, restricted stock units, deferred stock units and performance stock units that will be forfeited.

The forfeiture assumption is ultimately adjusted to the actual forfeiture rate.

Therefore, changes in the forfeiture assumptions do not impact the total amount of expense ultimately recognized over the vesting period.

Rather, different forfeiture assumptions would only impact the timing of expense recognition over the vesting period.

See Note 16 - Share-Based Compensation , for additional information regarding share-based compensation for equity awards granted.

Earnings Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the basic 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.

In preparing the consolidated financial statements, the Company estimates income tax expense based on various jurisdictions where it conducts business.

The Company needs to estimate current tax obligations and to

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

assess temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities.

These temporary differences result in deferred tax assets and liabilities.

The Company then must assess the likelihood that the deferred tax assets will be realized.

A valuation allowance is established to the extent that it is more likely than not that such deferred tax assets will not be realized.

When the Company establishes a valuation allowance or modifies the existing allowance in a certain reporting period, it generally records a corresponding increase or decrease to tax expense in the consolidated statements of income.

Management makes significant judgments in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowances recorded against the deferred tax asset.

Changes in the estimate of these taxes occur periodically due to changes in the tax rates, changes in the business operations, implementation of tax planning strategies, resolution with taxing authorities of issues where the Company had previously taken certain tax positions, and newly enacted statutory, judicial and regulatory guidance.

These changes could have a material effect on the Company’s consolidated statements of income, financial condition or cash flows in the period or periods in which they occur.

Income tax credits are accounted for using the flow-through method as a reduction of income tax in the years utilized.

The Company recognizes the tax effects of a position in the consolidated financial statements only if it is more likely than not to be sustained based solely on its technical merits;

otherwise no benefits of the position are to be recognized.

The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit.

Moreover, each tax position meeting the recognition threshold is required to be measured as the largest amount that is greater than 50 percent likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.

Cash and Cash Equivalents

Cash equivalents are highly liquid investments with an original maturity of 90 days or less that are not required to be segregated under federal or other regulations.

The Company’s cash and cash equivalents are composed of interest and noninterest-bearing deposits, money market funds and U.S.

government obligations.

Cash Segregated Under Federal and Other Regulations

The Company’s subsidiary, LPL Financial, is required to maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of its customers in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and other regulations.

Held within this account is approximately $ 100,000 for the proprietary accounts of broker-dealers.

Restricted Cash

Restricted cash primarily represents cash held by and for use by the Captive Insurance Subsidiary.

Receivables from and Payables to Clients

Receivables from clients include amounts due on cash and margin transactions.

The Company extends credit to clients of its advisors to finance their purchases of securities on margin and receives income from interest charged on such extensions of credit.

Payables to clients represent credit balances in client accounts arising from deposits of funds, proceeds from sales of securities and dividend and interest payments received on securities held in client accounts at LPL Financial.

The Company pays interest on certain client payable balances.

Receivables from clients are generally fully secured by securities held in the clients’ accounts.

To the extent that margin loans and other receivables from clients are not fully collateralized by client securities, management establishes an allowance that it believes is sufficient to cover any probable losses.

When establishing this allowance, management considers a number of factors, including its ability to collect from the client or the client’s advisor and the Company’s historical experience in collecting on such transactions.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following schedule reflects the Company’s activity in providing for an allowance for uncollectible amounts due from clients (in thousands):

2020 2019 2018

Beginning balance — January 1 $ 115 $ 640 $ 466

Impact of ASU 2016-13 adoption — — —

Provision for bad debts 432 130 174

Charge-offs, net of recoveries ( 27 ) ( 655 ) —

Ending balance — December 31 $ 520 $ 115 $ 640

Advisor Loans

The Company periodically extends credit to its advisors in the form of recruiting loans, commission advances and other loans.

The decision to extend credit to an advisor is generally based on the advisor’s credit history and their ability to generate future revenues.

Loans made in connection with recruiting can be either repayable or forgivable over terms generally up to ten years provided that the advisor remains licensed through LPL Financial.

Forgivable loans are not repaid in cash and are amortized over the term of the loan.

If an advisor terminates their arrangement with the Company prior to the loan maturity date, the remaining balance becomes repayable immediately.

An allowance for uncollectible amounts is recorded at the inception of repayable loans and upon advisor termination for forgivable loans using estimates and assumptions based on historical lifetime loss experience and expectations of future loss rates based on current facts.

Advisor repayable loans totaled $ 128.2 million and advisor forgivable loans that have become repayable upon advisor termination totaled $ 3.0 million as of December 31, 2020.

Included in the table below is a $ 1.2 million allowance for advisor forgivable loans that have become repayable.

The following schedule reflects the Company’s activity in providing for an allowance for uncollectible amounts for advisor loans (in thousands):

2020 2019 2018

Beginning balance — January 1 $ 3,974 $ 5,080 $ 3,264

Impact of ASU 2016-13 adoption 6,227 — —

Provision for bad debts 1,694 1,500 2,206

Charge-offs, net of recoveries ( 5,132 ) ( 2,606 ) ( 390 )

Ending balance — December 31 $ 6,763 $ 3,974 $ 5,080

Receivables from Others

Receivables from others primarily consist of accrued fees from product sponsors and other fees due from advisors.

An allowance for uncollectible amounts is recorded at inception using estimates and assumptions based on historical experience, current facts and other factors.

Management monitors the adequacy of these estimates through periodic evaluations against actual trends experienced.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following schedule reflects the Company’s activity in providing for an allowance for uncollectible amounts due from others (in thousands):

2020 2019 2018

Beginning balance — January 1 $ 10,292 $ 8,099 $ 6,115

Impact of ASU 2016-13 adoption 3,617 — —

Provision for bad debts 3,559 3,671 3,733

Charge-offs, net of recoveries ( 14,367 ) ( 1,478 ) ( 1,749 )

Ending balance — December 31 $ 3,101 $ 10,292 $ 8,099

Securities Owned and Securities Sold, But Not Yet Purchased

Securities owned and securities sold, but not yet purchased include trading and held-to-maturity securities.

The Company generally classifies its investments in debt and equity instruments (including mutual funds, annuities, corporate bonds, government bonds and municipal bonds) as trading securities, except for U.S.

government notes held by PTC, which are classified as held-to-maturity securities.

The Company has not classified any investments as available-for-sale.

Investment classifications are subject to ongoing review and may change.

Securities classified as trading are carried at fair value, while securities classified as held-to-maturity are carried at amortized cost.

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.

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 Company makes estimates about the fair value of investments and the timing for recognizing losses based on market conditions and other factors.

If these estimates change, the Company may recognize additional losses.

Both unrealized and realized gains and losses on trading securities are recognized in other revenues on a net basis in the consolidated statements of income.

Securities Borrowed

The Company borrows securities from other broker-dealers to make deliveries or to facilitate customer short sales.

Securities borrowed are accounted for as collateralized financings and are recorded at contract value, representing the amount of cash provided for securities borrowed transactions (generally in excess of market values).

The adequacy of the collateral deposited, which is determined by comparing the market value of the securities borrowed to the cash loaned , is continuously monitored and is adjusted when considered necessary to minimize the risk associated with this activity.

As of December 31, 2020, the contract and collateral market values of borrowed securities were $ 30.1 million and $ 29.1 million, respectively.

As of December 31, 2019, the contract and collateral market values of borrowed securities were $ 17.7 million and $ 17.2 million, respectively.

Internally developed software, leasehold improvements, computers and software and furniture and equipment are recorded at historical cost, net of accumulated depreciation and amortization.

Depreciation is recognized using the straight-line method over the estimated useful lives of the assets.

The Company expenses software development costs as incurred during the preliminary project stage, while capitalizing costs at the point at which the conceptual formulation, design and testing of possible software project alternatives are complete and management authorizes and commits to funding the project.

The costs of internally developed software that qualify for

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

capitalization are capitalized as fixed assets and subsequently amortized over the estimated useful life of the software, which is generally three years .

The Company does not capitalize pilot projects or projects for which it believes that the future economic benefits are less than probable.

Leasehold improvements are amortized over the lesser of their useful lives or the terms of the underlying leases.

Computers and software, as well as furniture and equipment, are depreciated over a period of three to seven years .

Land is not depreciated.

Management reviews fixed assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable.

No impairment occurred for the years ended December 31, 2020, 2019 or 2018.

When acquiring companies, the Company recognizes separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values.

Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed.

While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, these estimates are inherently uncertain and subject to refinement.

As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of income.

Accounting for business combinations requires the Company’s management to make significant estimates and assumptions with respect to intangible assets, liabilities assumed and pre-acquisition contingencies.

These assumptions are based in part on historical experience, market data and information obtained from the management of the acquired companies.

The Company also enters into asset acquisitions for single identifiable assets.

Accounting for asset acquisitions requires the Company’s management to make significant estimates and assumptions with respect to the useful life of the asset purchased.

These assumptions are based in part on historical experience and market data.

Examples of critical estimates in valuing certain of the intangible assets the Company has acquired include, but are not limited to:

(i) future expected cash flows;

and (ii) discount rates.

Goodwill and Other Intangible Assets

Goodwill and other indefinite-lived intangible assets are tested annually for impairment in the fourth fiscal quarter and between annual tests if certain events occur indicating that the carrying amounts may be impaired.

If a qualitative assessment is used and the Company determines that the fair value of a reporting unit or indefinite-lived intangible asset is more likely than not (i.e., a likelihood of more than 50%) less than its carrying amount, a quantitative impairment test will be performed.

An impairment loss will be recognized if a reporting unit’s carrying amount exceeds its fair value, to the extent that it does not exceed the total carrying amount of goodwill.

No impairment of goodwill or other indefinite-lived intangible assets was recognized for the years ended December 31, 2020, 2019 or 2018.

Intangible assets that are deemed to have definite lives are amortized over their useful lives, generally ranging from 5 to 20 years.

They are reviewed for impairment when there is evidence that events or changes in circumstances indicate that the carrying amount may not be recoverable.

Recoverability of assets to be held and used is measured by comparing the carrying amount to the estimated undiscounted future cash flows expected to be generated.

If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value.

There was no impairment of definite-lived intangible assets recognized for the years ended December 31, 2020, 2019 or 2018.

See Note 9 - Goodwill and Other Intangible Assets , for additional information regarding the Company’s goodwill and other intangible assets.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Debt Issuance Costs

Debt issuance and amendment costs are capitalized and amortized as additional interest expense over the expected term of the related debt agreement.

Debt issuance costs are presented as a direct deduction from the carrying amount of the related debt liability.

Costs incurred while obtaining the revolving credit facility are included in other assets and subsequently amortized ratably over the term of the revolving credit facility, regardless of whether there are any outstanding borrowings on the revolving credit facility.

Fair Value of Financial Instruments

The Company’s financial assets and liabilities are carried at fair value or at amounts that, because of their short-term nature, approximate current fair value, with the exception of its held-to-maturity securities and indebtedness, which are carried at amortized cost.

The Company measures the implied fair value of its debt instruments using trading levels obtained from a third-party service provider.

Accordingly, the debt instruments qualify as Level 2 fair value measurements.

See Note 5 - Fair Value Measurements , for additional information regarding the Company’s fair value measurements.

As of December 31, 2020, the carrying amount and fair value of the Company’s indebtedness was approximately $ 2,359.3 million and $ 2,402.4 million, respectively.

As of December 31, 2019, the carrying amount and fair value was approximately $ 2,415.0 million and $ 2,476.0 million, respectively.

Commitments and Contingencies

The Company recognizes a liability for loss contingencies when it believes it is probable a liability has occurred and the amount can be reasonably estimated.

If some amount within a range of loss appears at the time to be a better estimate than any other amount within the range, the Company accrues that amount.

When no amount within the range is a better estimate than any other amount, however, the Company accrues the minimum amount in the range.

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.

The Company also accrues for losses at its Captive Insurance Subsidiary for those matters covered by self-insurance.

The Captive Insurance Subsidiary records losses and loss reserve liabilities based on actuarially determined estimates of losses incurred, but not yet reported to the Company as well as specific reserves for proceedings and matters that are probable and estimable.

The Captive Insurance Subsidiary is funded by payments from the Company’s other subsidiaries and has cash reserves to cover losses.

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 and requires management to make significant judgments.

For additional information, see Note 14 - Commitments and Contingencies - “Legal & Regulatory Matters.”

Lease assets and lease liabilities are recognized based on the present value of the future lease payments over the lease term at the lease commencement date.

The Company estimates its incremental borrowing rate based on information available at the commencement date in determining the present value of future payments.

For additional information, see Note 12 - Leases .

Recently Issued Accounting Pronouncements

There are no recently issued accounting pronouncements that would materially impact the Company’s consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts.

ASU 2016-13 also requires additional disclosures regarding significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio.

The Company adopted the provisions of this guidance on January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and recognized a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Results for reporting periods beginning after January 1, 2020 are presented under Topic 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

The adoption had no material impact on the Company’s recognition of credit losses.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement .

ASU 2018-13 removes or modifies certain current disclosures, and requires additional disclosures.

The changes are meant to provide more relevant information regarding valuation techniques and inputs used to arrive at measures of fair value, uncertainty in the fair value measurements and how changes in fair value measurements impact an entity’s performance and cash flows.

Certain disclosures in ASU 2018-13 will need to be applied on a retrospective basis and others on a prospective basis.

The Company adopted the provisions of this guidance on January 1, 2020.

The adoption had no material impact on the Company’s related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Topic 350):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which aligns the accounting for costs to implement a cloud computing arrangement that is a service with the guidance on capitalizing costs for developing or obtaining internal-use software.

The Company prospectively adopted the provisions of this guidance on January 1, 2020.

The adoption had no material impact on the Company’s consolidated financial statements.

NOTE 3 - REVENUES

Revenues are recognized when control of the promised services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

Revenues are analyzed to determine whether the Company is the principal (i.e., reports revenues on a gross basis) or agent (i.e., reports revenues on a net basis) in the contract.

Principal or agent designations depend primarily on the control an entity has over the product or service before control is transferred to a customer.

The indicators of which party exercises control include primary responsibility over performance obligations, inventory risk before the good or service is transferred and discretion in establishing the price.

Advisory revenues represent fees charged to advisors’ clients’ accounts on the Company’s corporate advisory platform.

The Company provides ongoing investment advice and acts as a custodian, providing brokerage and execution services on transactions, and performs administrative services for these accounts.

This series of performance obligations transfers control of the services to the client over time as the services are performed.

These revenues are recognized ratably over time to match the continued delivery of the performance obligations to the client over the life of the contract.

The advisory revenues generated from the Company’s corporate advisory platform are based on a percentage of the market value of the eligible assets in the clients’ advisory accounts.

As such, the consideration for these revenues are variable and an estimate of the variable consideration is constrained due to dependence on unpredictable market impacts on client portfolio values.

The constraint is removed once the portfolio value can be determined.

The Company provides advisory services to clients on its corporate advisory platform through the advisor.

The Company is the principal in these arrangements and recognizes advisory revenues on a gross basis, as the Company is responsible for satisfying the performance obligations and has control over determining the fees.

Commission revenues represent sales commissions generated by advisors for their clients’ purchases and sales of securities on exchanges and over-the-counter, as well as purchases of other investment products.

The Company views the selling, distribution and marketing, or any combination thereof, of investment products to such clients as a single performance obligation to the product sponsors.

The Company is the principal for commission revenues, as it is responsible for the execution of the clients’ purchases and sales, and maintains relationships with the product sponsors.

Advisors assist the Company in performing its obligations.

Accordingly, total commission revenues are reported on a gross basis.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table presents total commission revenues disaggregated by investment product category (in thousands):

Years Ended December 31,

2020 2019 2018

Commission revenues

Annuities $ 976,357 $ 1,000,806 $ 999,689

Mutual funds 590,074 589,411 616,445

Fixed income 88,714 102,391 98,091

Equities 126,920 79,446 84,823

Other 124,495 120,353 120,646

Total commission revenues

$ 1,906,560 $ 1,892,407 $ 1,919,694

The Company generates two types of commission revenues:

sales-based commissions that are recognized at the point of sale on the trade date and trailing commissions that are recognized over time as earned.

Sales-based commission revenues vary by investment product and are based on a percentage of an investment product’s current market value at the time of purchase.

Trailing commission revenues are generally based on a percentage of the current market value of clients’ investment holdings in trail-eligible assets, and are recognized over the period during which services, such as ongoing support, are performed.

As trailing commission revenues are based on the market value of clients’ investment holdings, the consideration is variable and an estimate of the variable consideration is constrained due to dependence on unpredictable market impacts.

The constraint is removed once the investment holdings value can be determined.

The following table presents sales-based and trailing commission revenues disaggregated by product category (in thousands):

Years Ended December 31,

2020 2019 2018

Commission revenues

$ 327,412 $ 380,317 $ 379,252

145,836 146,695 141,597

88,714 102,391 98,091

126,920 79,446 84,823

81,882 74,003 73,013

Total sales-based revenues

$ 770,764 $ 782,852 $ 776,776

$ 648,945 $ 620,489 $ 620,437

444,238 442,716 474,848

42,613 46,350 47,633

Total trailing revenues

$ 1,135,796 $ 1,109,555 $ 1,142,918

Total commission revenues

$ 1,906,560 $ 1,892,407 $ 1,919,694

Asset-based revenues consist of fees from the Company’s client cash programs, which consist of fees from its money market programs and insured bank sweep vehicles, sponsorship programs, and recordkeeping.

Client Cash Revenues

Client cash revenues are generated based on advisors’ clients’ cash balances in insured bank sweep accounts and money market programs.

The Company receives fees based on account type and invested balances for administration and recordkeeping.

These fees are paid and recognized over time.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Sponsorship Programs

The Company receives fees from product sponsors, primarily mutual fund and annuity companies, for marketing support and sales force education and training efforts.

Compensation for these performance obligations is either a fixed fee, a percentage of the average annual amount of product sponsor assets held in advisors’ clients’ accounts, a percentage of new sales or some combination.

As the value of product sponsor assets held in advisors’ clients’ accounts is susceptible to unpredictable market changes, these revenues include variable consideration and are constrained until the date that the fees are determinable.

Recordkeeping

The Company generates revenues from fees it collects for providing recordkeeping, account maintenance, reporting and other related services to product sponsors.

This includes revenues from omnibus processing in which the Company establishes and maintains sub-account records for its clients to reflect the purchase, exchange and redemption of mutual fund shares, and consolidates clients’ trades within a mutual fund.

Omnibus processing fees are paid to the Company by the mutual fund or its affiliates and are based on the value of mutual fund assets in accounts for which the Company provides omnibus processing services and the number of accounts in which the related mutual fund positions are held.

Recordkeeping revenues also include revenues from networking recordkeeping services.

Networking revenues on brokerage assets are correlated to the number of positions or value of assets that the Company administers and are paid by mutual fund and annuity product manufacturers.

These recordkeeping revenues are recognized over time as the Company fulfills its performance obligations.

As recordkeeping fees are susceptible to unpredictable market changes that influence market value and fund positions, these revenues include variable consideration and are constrained until the date that the fees are determinable.

Depending on the contract, the Company is either principal or agent for recordkeeping revenues.

In instances in which the Company is providing services to financial product manufacturers on behalf of third parties and does not have ultimate control of the service before transfer to the customer, the Company is considered to be an agent and reports revenues on a net basis.

In other cases, where the Company uses a sub-contractor to provide services and is responsible for unperformed services, the Company is considered principal and reports revenues on a gross basis.

The following table sets forth asset-based revenues at a disaggregated level (in thousands):

Years Ended December 31,

2020 2019 2018

Asset-based revenues

$ 481,388 $ 652,793 $ 500,418

Sponsorship programs

272,935 251,899 224,726

Recordkeeping

290,194 261,287 247,371

Total asset-based revenues $ 1,044,517 $ 1,165,979 $ 972,515

Transaction and Fee

Transaction revenues primarily include fees the Company charges to advisors and their clients for executing certain transactions in brokerage and fee-based advisory accounts.

Transaction revenues are recognized at the point-in-time that a transaction is executed, which is generally the trade date.

Fee revenues may be generated from advisors or their clients.

Fee revenues primarily include IRA custodian fees, contract and licensing fees, and other client account fees.

In addition, the Company hosts certain advisor conferences that serve as training, education, sales and marketing events, for which the Company collects a fee for attendance.

Fee revenues are recognized when the Company satisfies its performance obligations.

Recognition varies from point-in-time to over time depending on whether the service is provided once at an identifiable point-in-time or if the service is provided continually over the contract life.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table sets forth transaction and fee revenues disaggregated by recognition pattern (in thousands):

Years Ended December 31,

2020 2019 2018

Transaction and fee revenues

Point-in-time (1)

$ 228,744 $ 215,234 $ 221,265

Over time (2)

277,327 265,094 250,034

Total transaction and fee revenues $ 506,071 $ 480,328 $ 471,299

____________________

(1) Transaction and fee revenues recognized point-in-time include revenues such as transaction fees, IRA termination fees and technology fees.

(2) Transaction and fee revenues recognized over time include revenues such as error and omission insurance fees, IRA custodian fees and technology fees.

The Company is the principal and recognizes transaction and fee revenues on a gross basis as it is primarily responsible for delivering the respective services being provided, which is demonstrated by the Company’s ability to control the fee amounts charged to customers.

Interest Income, Net of Interest Expense

The Company earns interest income from client margin accounts and cash equivalents, net of interest expense.

Interest expense from operations for the years ended December 31, 2020, 2019 and 2018 was not material.

Other revenues primarily include unrealized gains and losses on assets held by the Company for its advisor non-qualified deferred compensation plan and model research portfolios, marketing allowances received from certain financial product manufacturers, primarily those who offer alternative investments, such as non-traded real estate investment trusts and business development companies, and other miscellaneous revenues.

These revenues are not generated from contracts with customers.

Unearned Revenue

The Company records unearned revenue when cash payments are received or due in advance of the Company’s performance obligations, including amounts which are refundable.

The increase in the unearned revenue balance for the year ended December 31, 2020 is primarily driven by cash payments received or due in advance of satisfying the Company’s performance obligations, offset by $ 82.8 million of revenues recognized that were included in the unearned revenue balance as of December 31, 2019.

The Company receives cash revenues for advisory services not yet performed and conferences not yet held.

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.

NOTE 4 - ACQUISITIONS

On December 2, 2020 , the Company entered into an agreement with Macquarie Management Holdings, Inc.(“Macquarie”) to acquire the wealth management business of Waddell & Reed Financial, Inc.

(“Waddell & Reed”) for $ 300.0 million upon completion of Macquarie’s acquisition of all of the issued and outstanding common shares of Waddell & Reed.

The transaction is expected to close in the middle of 2021, subject to satisfaction of closing conditions.

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 potential contingent payment of up to $ 4.0 million.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

On August 18, 2020 , the Company acquired business relationships with advisors from E.K.

Riley Investments, LLC (“E.K.

Riley”) and Lucia Securities, LLC (“Lucia”), two unrelated broker-dealers and RIAs, for a combined $ 18.4 million.

Both transactions have potential contingent payments.

On August 1, 2019 , the Company acquired Allen & Company, and under the transaction structure Allen & Company advisors and staff became employees of the Company.

The Company paid approximately $ 24.9 million at closing and made an additional contingent payment of $ 10.0 million in February 2020.

On December 3, 2018 , the Company acquired AdvisoryWorld, a technology company that provides proposal generation, investment analytics and portfolio modeling capabilities in the wealth management industry, for $ 28.1 million.

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 years ended December 31, 2020 and 2019.

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 December 31, 2020 and 2019, the Company had the following financial assets and liabilities that are measured at fair value on a recurring basis:

Cash Equivalents — The Company’s cash equivalents include money market funds, which are short term in nature with readily determinable values derived from active markets.

Securities Owned and Securities Sold, But Not Yet Purchased — The Company’s trading securities consist of house account model portfolios established and managed for the purpose of benchmarking the performance of its fee-based advisory platforms and temporary positions resulting from the processing of client transactions.

Examples of these securities include money market funds, U.S.

treasury obligations, mutual funds, certificates of deposit and equity and debt securities.

The Company uses prices obtained from independent third-party pricing services to measure the fair value of its trading securities.

In general, these quoted prices are derived from active markets for identical assets or liabilities.

At December 31, 2020 and 2019, 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

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 December 31, 2020 (in thousands):

Level 1 Level 2 Level 3 Total

Cash equivalents $ 6,205 $ — $ — $ 6,205

Securities owned — trading:

Money market funds 125 — — 125

Mutual funds 9,137 — — 9,137

Equity securities 492 — — 492

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

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

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at December 31, 2019 (in thousands):

Level 1 Level 2 Level 3 Total

Cash equivalents $ 17,426 $ — $ — $ 17,426

Securities owned — trading:

Money market funds 92 — — 92

Mutual funds 25,202 — — 25,202

Equity securities 556 — — 556

Debt securities — 151 — 151

treasury obligations

20,446 — — 20,446

Total securities owned — trading 46,296 151 — 46,447

Other assets 267,740 10,393 — 278,133

Total assets at fair value $ 331,462 $ 10,544 $ — $ 342,006

Securities sold, but not yet purchased:

Equity securities $ 153 $ — $ — $ 153

Debt securities — 23 — 23

Total securities sold, but not yet purchased 153 23 — 176

Accounts payable and accrued liabilities — — 10,000 10,000

Total liabilities at fair value $ 153 $ 23 $ 10,000 $ 10,176

NOTE 6 - HELD-TO-MATURITY SECURITIES

The Company holds U.S.

government notes, which are recorded at amortized cost because the Company has both the intent and the ability to hold these investments to maturity.

Interest income is accrued as earned.

Premiums and discounts are amortized using a method that approximates the effective yield method over the term of the security and are recorded as an adjustment to the investment yield.

The amortized cost, gross unrealized gain and fair value of held-to-maturity securities were as follows (in thousands):

Amortized cost $ 13,235 $ 11,806

Gross unrealized gain 159 83

Fair value $ 13,394 $ 11,889

At December 31, 2020, 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

government notes — at amortized cost $ 4,995 $ 8,240 $ — $ 13,235

government notes — at fair value $ 5,048 $ 8,346 $ — $ 13,394

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 7 - RECEIVABLES FROM PRODUCT SPONSORS, BROKER-DEALERS AND CLEARING ORGANIZATIONS AND PAYABLES TO BROKER-DEALERS AND CLEARING ORGANIZATIONS

Receivables from product sponsors, broker-dealers and clearing organizations and payables to broker-dealers and clearing organizations were as follows (in thousands):

Commissions receivable from product sponsors and others $ 135,991 $ 138,258

Receivables from clearing organizations 89,794 28,140

Receivables from broker-dealers 2,550 1,020

Securities failed-to-deliver 4,857 10,236

Total receivables

$ 233,192 $ 177,654

Payables to clearing organizations $ 19,117 $ 15,264

Payables to broker-dealers 50,528 58,130

Securities failed-to-receive 20,098 18,608

Total payables

$ 89,743 $ 92,002

NOTE 8 - FIXED ASSETS

The components of fixed assets were as follows at December 31, 2020 (in thousands):

Value Accumulated

Depreciation and Amortization Net

Internally developed software $ 418,018 $ ( 241,390 ) $ 176,628

Computers and software 195,800 ( 151,792 ) 44,008

Buildings 107,895 ( 7,753 ) 100,142

Leasehold improvements 88,135 ( 31,202 ) 56,933

Furniture and equipment 83,365 ( 57,860 ) 25,505

Land 4,678 — 4,678

Construction in progress (1)

174,974 — 174,974

Total fixed assets

$ 1,072,865 $ ( 489,997 ) $ 582,868

____________________

(1) Construction in progress includes internal software in development of $ 161.3 million at December 31, 2020.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The components of fixed assets were as follows at December 31, 2019 (in thousands):

Value Accumulated

Depreciation and Amortization Net

Internally developed software $ 327,585 $ ( 187,494 ) $ 140,091

Computers and software 171,099 ( 124,248 ) 46,851

Buildings 107,895 ( 3,877 ) 104,018

Leasehold improvements 83,543 ( 25,655 ) 57,888

Furniture and equipment 79,970 ( 47,081 ) 32,889

Land 4,678 — 4,678

Construction in progress (1)

146,629 — 146,629

Total fixed assets

$ 921,399 $ ( 388,355 ) $ 533,044

____________________

(1) Construction in progress includes internal software in development of $ 133.3 million at December 31, 2019.

Depreciation and amortization was $ 109.7 million, $ 95.8 million and $ 87.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.

NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS

For the year ended December 31, 2020, the Company recorded $ 10.2 million in goodwill in connection with the acquisition of Blaze and $ 18.9 million in advisor relationships, $ 1.4 million in client relationships, and $ 3.5 million in technology in connection with the acquisitions of Blaze, E.K.

Riley and Lucia.

A summary of the activity in goodwill is presented below (in thousands):

Balance at December 31, 2018 $ 1,490,247

Goodwill acquired

Balance at December 31, 2019 1,503,648

Goodwill acquired 10,218

Balance at December 31, 2020 $ 1,513,866

The components of intangible assets were as follows at December 31, 2020 (dollars in thousands):

Weighted-Average Life

(in years) Gross

Value Accumulated Amortization Net

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

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The components of intangible assets were as follows at December 31, 2019 (dollars in thousands):

Weighted-Average Life

(in years) Gross

Value Accumulated Amortization Net

Definite-lived intangible assets:

Advisor and financial institution relationships 6.1 $ 651,642 $ ( 365,470 ) $ 286,172

Product sponsor relationships 6.1 234,086 ( 161,435 ) 72,651

Client relationships 8.7 42,234 ( 15,277 ) 26,957

Technology 9.0 15,510 ( 1,551 ) 13,959

Trade names 2.3 1,200 ( 920 ) 280

Total definite-lived intangible assets $ 944,672 $ ( 544,653 ) $ 400,019

Indefinite-lived intangible assets:

Trademark and trade name 39,819

Total intangible assets $ 439,838

Total amortization of intangible assets was $ 67.4 million, $ 65.3 million and $ 60.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Future amortization is estimated as follows (in thousands):

2021 $ 69,090

Thereafter 37,622

NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities were as follows (in thousands):

Advisor deferred compensation plan liability $ 372,395 $ 269,289

Accrued compensation 104,069 77,202

Accounts payable 60,984 68,436

Other accrued liabilities 144,106 143,042

Total accounts payable and accrued liabilities $ 681,554 $ 557,969

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 11 - LONG-TERM AND OTHER BORROWINGS

The Company’s outstanding borrowings were as follows (dollars in thousands):

December 31, 2020 December 31, 2019

Long-Term Borrowings

Balance Applicable

Margin Interest Rate

Balance Applicable

Margin Interest rate Maturity

Senior Secured Term Loan B (1)

$ 1,059,300 LIBOR+ 175 bps

1.90 % $ 1,070,000 LIBOR+ 175 bps

3.54 % 11/12/2026

Senior Unsecured Notes (1)(2)

900,000 Fixed Rate 5.75 % 900,000 Fixed Rate 5.75 % 9/15/2025

Senior Unsecured Notes (1)(3)

400,000 Fixed Rate 4.63 % 400,000 Fixed Rate 4.63 % 11/15/2027

Total long-term borrowings 2,359,300 2,370,000

Unamortized Premium 7,083 8,583

Unamortized Debt Issuance Cost ( 20,969 ) ( 24,765 )

Net Carrying Value

$ 2,345,414 $ 2,353,818

Other Borrowings

Revolving Credit Facility (4)

$ — ABR+ 25 bps

— $ 45,000 ABR+ 25 bps

5.00 % 11/12/2024

Broker-Dealer Revolving Credit Facility — FFR+ 125 bps

— — FFR+ 125 bps

Total borrowings $ 2,345,414 $ 2,398,818

_______________________________

(1) No leverage or interest coverage maintenance covenants.

(2) The 2025 Notes were issued in two separate transactions:

$ 500.0 million in original notes were issued in March 2017 at par and $ 400.0 million in additional notes were issued in September 2017 and priced at 103.0 % of the aggregate principal amount.

(3) The 2027 Notes were issued in November 2019 at par.

(4) The alternate base rate (ABR) was the PRIME rate, and reflects the interest rate incurred on the senior secured revolving credit facility on the outstanding balances as of December 31, 2019.

2019 Credit Agreement Amendment

On November 12, 2019, LPLFH and LPLH entered into a fourth amendment agreement (the “Amendment”) to the Company’s amended and restated credit agreement (“Credit Agreement”), and repriced its senior secured Term Loan B facility (“Term Loan B”), increased the size of its senior secured revolving credit facility to $ 750.0 million and extended the maturity dates applicable to its Term Loan B and its senior secured revolving credit facility.

In connection with the execution of the Amendment, the Company incurred $ 13.5 million in costs which are capitalized as debt issuance costs in the consolidated statements of financial condition and accelerated the recognition of $ 3.2 million of unamortized debt issuance costs as a loss on extinguishment of debt in the consolidated statements of income.

The Credit Agreement subjects the Company to certain financial and non-financial covenants.

As of December 31, 2020, the Company was in compliance with such covenants.

Issuance of 2027 Senior Notes

LPLH raised $ 400.0 million in aggregate principal amount of 4.625 % senior notes on November 12, 2019, which were issued at par (“2027 Notes”).

The 2027 Notes are unsecured obligations, governed by an indenture, that will mature on November 15, 2027, and bear interest at the rate of 4.625 % per year, with interest payable semi-annually.

The Company may redeem all or part of the 2027 Notes at any time prior to November 15, 2022 (subject to a customary “equity claw” redemption right) at 100 % of the principal amount redeemed plus a “make-whole” premium.

Thereafter, the Company may redeem all or part of the 2027 Notes at annually declining redemption premiums until November 15, 2024, at and after which date the redemption price will be equal to 100 % of the principal amount redeemed plus any accrued and unpaid interest thereon.

Issuance of 2025 Senior Notes

LPLH issued $ 500.0 million aggregate principal amount of 5.75 % senior notes on March 10, 2017 and $ 400.0 million aggregate principal amount of 5.75 % senior notes on September 21, 2017 (together, the “2025 Notes”).

The 2025 Notes are unsecured obligations, governed by an indenture, that will mature on September 15, 2025, and bear interest at the rate of 5.75 % per year, with interest payable semi-annually.

The Company may redeem all or part of the 2025 Notes at annually declining redemption premiums until March 15, 2023, at and after which date the redemption price will be equal to 100% of the principal amount redeemed.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Borrowings under the Term Loan B facility bear interest at a rate per annum of 175 basis points over the Eurodollar Rate or 75 basis points over the base rate (as defined in the Credit Agreement), and have no leverage or interest coverage maintenance covenants.

The Eurodollar Rate option is the one-, two-, three-, or six-month LIBOR rate, as selected by LPLH, or, with the approval of the applicable lenders, twelve-month LIBOR rate or the LIBOR rate for another period acceptable to the Administrative Agent (including a shorter period).

The LIBOR rate, on which the Eurodollar Rate is based, is expected to be discontinued by June 30, 2023.

The Credit Agreement permits LPLH to agree with the administrative agent for the Credit Agreement on a replacement benchmark rate subject to certain conditions (including that a majority of the lenders do not object to such replacement rate within a specified period of time following notice thereof from the administrative agent).

The Company is required to make quarterly payments on the Term Loan B facility equal to 0.25 % of the aggregate principal amount of the loans under the Term Loan B facility.

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 up to $ 300.0 million.

LPL Financial incurred approximately $ 1.5 million in debt issuance costs.

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.

LPL Financial was in compliance with such covenants as of December 31, 2020.

The minimum calendar year payments and maturities of the long-term borrowings as of December 31, 2020 were as follows (in thousands):

2021 $ 10,700

Thereafter 1,405,800

Total $ 2,359,300

Other External Lines of Credit

LPL Financial maintained six uncommitted lines of credit as of December 31, 2020.

Two of the lines have unspecified limits, which are primarily dependent on their 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.

There were no balances outstanding as of December 31, 2020 or December 31, 2019.

NOTE 12 - LEASES

The Company determines if an arrangement is a lease or contains a lease at inception.

The Company has operating and finance leases for corporate offices and equipment with remaining lease terms of 1 to 16 years, some of which include options to extend the lease for up to 20 years.

For leases with renewal options, the lease term is extended to reflect renewal options the Company is reasonably certain to exercise.

Operating lease assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date.

As most of the Company’s leases do not provide

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

an implicit rate, the Company estimates its incremental borrowing rate based on information available at the commencement date in determining the present value of future payments.

Lease expense for net present value of payments is recognized on a straight-line basis over the lease term.

Finance lease assets are included in fixed assets in the consolidated statements of financial condition and at December 31, 2020 were $ 102.2 million.

The components of lease expense were as follows (in thousands):

Years Ended December 31,

Operating lease cost $ 18,757 $ 17,610

Finance lease cost:

Amortization of right-of-use assets $ 5,141 $ 4,786

Interest on lease liabilities 8,423 8,387

Total finance lease cost $ 13,564 $ 13,173

Supplemental cash flow information related to leases was as follows (in thousands):

Years Ended December 31,

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 21,368 $ 19,117

Operating cash flows from finance leases $ 8,423 $ 8,387

Financing cash flows from finance leases $ 1,169 $ 692

Supplemental weighted-average information related to leases was as follows:

Weighted-average remaining lease term (years):

Finance leases 25.3 26.2

Operating leases 7.9 9.1

Weighted-average discount rate:

Finance leases 7.82 % 7.75 %

Operating leases 7.07 % 7.27 %

Maturities of lease liabilities as of December 31, 2020 were as follows (in thousands):

Operating Leases Finance Leases

2021 $ 22,025 $ 9,735

2022 22,577 8,802

2023 22,222 8,577

2024 22,024 8,727

2025 21,724 8,879

Thereafter 75,333 224,760

Total lease payments 185,905 269,480

Less imputed interest 46,528 162,056

Total $ 139,377 $ 107,424

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 13 - INCOME TAXES

The Company’s provision for income taxes was as follows (in thousands):

2020 2019 2018

Current provision:

$ 137,360 $ 156,378 $ 120,211

39,757 44,192 34,721

Total current provision

177,117 200,570 154,932

Deferred expense (benefit):

( 17,991 ) ( 13,971 ) ( 1,874 )

( 5,693 ) ( 4,644 ) 120

Total deferred benefit

( 23,684 ) ( 18,615 ) ( 1,754 )

Provision for income taxes $ 153,433 $ 181,955 $ 153,178

A reconciliation of the U.S.

federal statutory income tax rates to the Company’s effective income tax rates is set forth below:

Years Ended December 31,

2020 2019 2018

Federal statutory income tax rates 21.0 % 21.0 % 21.0 %

State income taxes, net of federal benefit

Non-deductible expenses

Share-based compensation

( 1.0 ) ( 1.4 ) ( 1.4 )

Research & development credits

( 0.3 ) ( 0.3 ) ( 0.3 )

Effective income tax rates 24.5 % 24.5 % 25.8 %

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 tax rates of 24.5 %, 24.5 % and 25.8 % for the years ended December 31, 2020, 2019 and 2018, respectively.

The decrease in the Company’s effective income tax rate in 2019 compared to 2018 was due to decreases in non-deductible expenses.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The components of the net deferred income taxes included in the consolidated statements of financial condition were as follows (in thousands):

Deferred tax assets:

Accrued liabilities

$ 120,638 $ 82,105

Share-based compensation

15,890 14,823

Operating lease liabilities

37,632 37,580

Finance lease liabilities

28,519 28,350

Provision for bad debts

Forgivable loans

13,158 10,845

Total deferred tax assets

226,208 186,485

Deferred tax liabilities:

Amortization of intangible assets

( 64,907 ) ( 70,953 )

Depreciation of fixed assets

( 97,612 ) ( 87,739 )

Operating lease assets

( 27,681 ) ( 27,189 )

( 11,896 ) ( 2,702 )

Total deferred tax liabilities

( 202,096 ) ( 188,583 )

Deferred income taxes, net $ 24,112 $ ( 2,098 )

The following table reflects a reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits, including interest and penalties (in thousands):

2020 2019 2018

Balance — Beginning of year $ 52,098 $ 46,287 $ 42,657

Increases for tax positions taken during the current year

8,053 9,314 10,042

Reductions as a result of a lapse of the applicable statute of limitations and decreases in prior-year tax positions ( 5,716 ) ( 3,503 ) ( 6,412 )

Balance — End of year $ 54,435 $ 52,098 $ 46,287

At December 31, 2020 and 2019, there were $ 48.1 million and $ 46.1 million, respectively, of unrecognized tax benefits that if recognized, would favorably affect the effective income tax rate in any future periods.

The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes within the consolidated statements of financial condition.

At December 31, 2020 and 2019, the liability for unrecognized tax benefits included accrued interest of $ 7.3 million and $ 6.4 million, respectively, and penalties of $ 4.4 million.

The Company and its subsidiaries file income tax returns in the federal jurisdiction, as well as most state jurisdictions, and are subject to routine examinations by the respective taxing authorities.

The Company has concluded all federal income tax matters for years through 2011 and all state income tax matters for years through 2007.

The tax years of 2012 to 2019 remain open to examination in the federal jurisdiction.

The tax years of 2008 to 2019 remain open to examination in the state jurisdictions.

In the next 12 months, it is reasonably possible that the Company may realize a reduction in unrecognized tax benefits of $ 2.7 million primarily related to the statute of limitations expiration in various state jurisdictions.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 14 - 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.

Future minimum payments under service, development and agency contracts, and other contractual obligations with initial terms greater than one year were as follows at December 31, 2020 (in thousands):

2021 $ 47,187

Thereafter 328

Total $ 105,528

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 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 December 31, 2020.

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

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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.

On May 1, 2018 the Company agreed to a settlement structure with the North American Securities Administrators Association that related to the Company’s historical compliance with certain state “blue sky” laws and resulted in aggregate fines of approximately $ 26.4 million, the majority of which were covered by the Captive Insurance Subsidiary’s loss reserves.

As part of the settlement structure, the Company engaged independent third party consultants to conduct a historical review of securities transactions and an operational review of the Company’s systems for complying with blue sky securities registration requirements.

The Company also agreed to offer customers remediation in the form of reimbursement for any actual losses, plus interest, and these costs were not material.

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 December 31, 2020 and 2019, these self-insurance liabilities were $ 51.5 million and $ 40.1 million, respectively, and are included in accounts payable and accrued liabilities in the consolidated statements of financial condition.

Self-insurance related charges are included in other expenses in the consolidated statements of income for the years ended December 31, 2020, 2019 and 2018.

Other Commitments

As of December 31, 2020, the Company had approximately $ 338.5 million of client margin loans that were collateralized with securities having a fair value of approximately $ 473.9 million that LPL Financial can repledge, loan or sell.

Of these securities, approximately $ 69.9 million were client-owned securities pledged to the Options Clearing Corporation as collateral to secure client obligations related to options positions.

As of December 31, 2020, there were no restrictions that materially limited the Company’s ability to repledge, loan or sell the remaining $ 404.0 million of client collateral.

Securities owned, trading, on the consolidated statements of financial condition includes $ 4.5 million and $ 5.5 million pledged to the Options Clearing Corporation at December 31, 2020 and 2019, respectively, and $ 15.0 million pledged to the National Securities Clearing Corporation at December 31, 2020 and 2019.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 15 - STOCKHOLDERS’ EQUITY

The payment, timing, and amount of any dividends are subject to approval by the Company’s board of directors (the “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):

2020 2019 2018

Dividend per Share Total Cash Dividend Dividend per Share Total Cash Dividend Dividend per Share Total Cash Dividend

First quarter $ 0.25 $ 19.7 $ 0.25 $ 21.1 $ 0.25 $ 22.6

Second quarter $ 0.25 $ 19.7 $ 0.25 $ 20.8 $ 0.25 $ 22.3

Third quarter $ 0.25 $ 19.8 $ 0.25 $ 20.5 $ 0.25 $ 21.9

Fourth quarter $ 0.25 $ 19.8 $ 0.25 $ 20.2 $ 0.25 $ 21.5

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 consolidated statements of financial condition.

On November 13, 2018, the Board of Directors authorized an increase to the Company’s existing share repurchase program, enabling the Company to repurchase its issued and outstanding common stock from time to time.

As of December 31, 2020, the Company had $ 349.8 million remaining under the existing share repurchase program.

Future share repurchases may be effected in open market or privately negotiated transactions, including transactions with affiliates, with the timing of purchases and the amount of stock purchased generally determined at the discretion of the Company within the constraints of the Credit Agreement, the indentures, and the Company’s general working capital needs.

During the first quarter of 2020, the Company repurchased 1.8 million shares of common stock at a weighted-average price of $ 82.91 for a total of $ 150.0 million.

The Company suspended share repurchases in early 2020 in light of the business and financial uncertainties created by the COVID-19 pandemic.

NOTE 16 - SHARE-BASED COMPENSATION

Certain employees, advisors, institutions, officers and directors of the Company participate in various long-term incentive plans, which provide for granting stock options, warrants, restricted stock awards, restricted stock units, deferred stock units and performance stock units.

In November 2010, the Company adopted the 2010 Omnibus Equity Incentive Plan (as amended and restated in May 2015, the “2010 Plan”), which provides for the granting of stock options, warrants, restricted stock awards, restricted stock units, deferred stock units, performance stock units and other equity-based compensation.

Since its adoption, awards have been and are only made out of the 2010 Plan.

As of December 31, 2020, there were 20,055,945 shares authorized for grant and 3,531,003 shares remaining available for future issuance.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Stock Options and Warrants

The Company did not grant stock options or warrants during the year ended December 31, 2020.

The following table presents the weighted-average assumptions used in the Black-Scholes valuation model by the Company in calculating the fair value of its employee and officer stock options that have been granted:

Years Ended December 31,

Expected life (in years) 5.43 5.43

Expected stock price volatility 35.80 % 34.80 %

Expected dividend yield 1.49 % 1.71 %

Risk-free interest rate 2.47 % 2.66 %

Fair value of options $ 24.41 $ 19.86

The following table summarizes the Company’s stock option and warrant activity as of and for the year ended December 31, 2020:

Shares Weighted-

Exercise Price Weighted-

(Years) Aggregate

(In thousands)

Outstanding — December 31, 2019 2,705,241 $ 43.81

( 664,644 ) $ 37.24

Forfeited and Expired

( 40,214 ) $ 64.47

Outstanding — December 31, 2020 2,000,383 $ 45.57 5.28 $ 117,315

Exercisable — December 31, 2020 1,651,036 $ 39.61 4.74 $ 106,676

Exercisable and expected to vest — December 31, 2020 1,989,975 $ 45.41 5.27 $ 117,026

The following table summarizes information about outstanding stock options and warrants as of December 31, 2020:

Outstanding Exercisable

Range of Exercise Prices Total

Shares Weighted-

(Years) Weighted-

Price Number of

Shares Weighted-

$ 19.85 - $ 25.00

409,909 5.09 $ 19.85 409,909 $ 19.85

$ 25.01 - $ 35.00

346,442 1.39 $ 30.31 346,442 $ 30.31

$ 35.01 - $ 45.00

372,146 6.07 $ 39.64 372,146 $ 39.64

$ 45.01 - $ 65.00

216,835 3.73 $ 48.89 216,835 $ 48.89

$ 65.01 - $ 75.00

300,689 6.97 $ 65.52 190,759 $ 65.50

$ 75.01 - $ 80.00

354,362 8.01 $ 77.53 114,945 $ 77.53

2,000,383 5.28 $ 45.57 1,651,036 $ 39.61

The Company recognized share-based compensation related to the vesting of stock options awarded to employees and officers of $ 4.4 million, $ 9.8 million and $ 8.1 million during the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020, total unrecognized compensation cost related to non-vested stock options granted to employees and officers was $ 2.8 million, which is expected to be recognized over a weighted-average period of 1.07 years.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Restricted Stock and Stock Units

The following summarizes the Company’s activity in its restricted stock awards and stock units, which include restricted stock units, deferred stock units and performance stock units, for the year ended December 31, 2020:

Restricted Stock Awards Stock Units

Shares Weighted-Average

Fair Value Number of

Shares Weighted-Average

Outstanding — December 31, 2019 8,296 $ 81.99 792,185 $ 66.40

9,865 $ 64.74 567,335 $ 77.32

( 12,601 ) $ 76.10 ( 417,227 ) $ 55.29

— $ — ( 37,848 ) $ 77.62

Nonvested — December 31, 2020 5,560 $ 64.74 904,445 (1)

Expected to vest — December 31, 2020 5,560 $ 64.74 806,479 $ 79.38

____________________

(1) Includes 53,055 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 $ 25.1 million, $ 18.2 million and $ 13.8 million of share-based compensation related to the vesting of these restricted stock awards and stock units during the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020, total unrecognized compensation cost for restricted stock awards and stock units was $ 32.7 million, which is expected to be recognized over a weighted-average remaining period of 1.92 years.

The Company also grants restricted stock units to its advisors and to financial institutions.

The Company recognized share-based compensation of $ 2.3 million, $ 3.0 million and $ 6.1 million related to the vesting of these awards during the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020, total unrecognized compensation cost for restricted stock units granted to advisors and financial institutions was $ 4.7 million, which is expected to be recognized over a weighted-average remaining period of 2.18 years.

NOTE 17 - 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 calculation of basic and diluted earnings per share for the years noted was as follows (in thousands, except per share data):

Years Ended December 31,

2020 2019 2018

Net income $ 472,640 $ 559,880 $ 439,459

Basic weighted-average number of shares outstanding 79,244 82,552 88,119

Dilutive common share equivalents 1,458 2,072 2,500

Diluted weighted-average number of shares outstanding 80,702 84,624 90,619

Basic earnings per share $ 5.96 $ 6.78 $ 4.99

Diluted earnings per share $ 5.86 $ 6.62 $ 4.85

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The computation of diluted earnings per share excludes stock options, warrants and stock units that are anti-dilutive.

For the years ended December 31, 2020, 2019 and 2018, stock options, warrants and stock units representing common share equivalents of 376,598 shares, 407,059 shares and 391,632 shares, respectively, were anti-dilutive.

NOTE 18 - EMPLOYEE AND ADVISOR BENEFIT PLANS

The Company participates in a 401(k) defined contribution plan sponsored by LPL Financial.

All employees meeting minimum age and length of service requirements are eligible to participate.

The Company has an employer matching program whereby employer contributions are made to the 401(k) plan, and employees are eligible for matching contributions after completing six months of service.

For eligible employees, the Company matches up to 75 % of the first 8 % of an employee’s designated deferral of their eligible compensation.

The Company’s total cost related to the 401(k) plan was $ 18.8 million, $ 16.2 million and $ 13.1 million for the years ended December 31, 2020, 2019 and 2018, respectively, which is classified as compensation and benefits expense in the consolidated statements of income.

The Company established the 2012 Employee Stock Purchase Plan (the “ ESPP ” ) as a benefit to enable eligible employees to purchase common stock of LPLFH at a discount from the market price through payroll deductions, subject to limitations.

The ESPP provides for a 15 % discount on the market value of the stock at the lower of the grant date price (first day of the offering period) and the purchase date price (last day of the offering period).

The Company maintains a non-qualified deferred compensation plan for the purpose of attracting and retaining advisors who operate, for tax purposes, as independent contractors, by providing an opportunity for participating advisors to defer receipt of a portion of their gross commissions generated primarily from commissions earned on the sale of various products.

The deferred compensation plan has been fully funded to date by participant contributions.

Plan assets are invested in mutual funds, which are held by the Company in a Rabbi Trust.

The liability for benefits accrued under the non-qualified deferred compensation plan totaled $ 372.4 million at December 31, 2020, which is included in accounts payable and accrued liabilities in the consolidated statements of financial condition.

The cash values of the related trust assets was $ 361.1 million at December 31, 2020, which is measured at fair value and included in other assets in the consolidated statements of financial condition.

Certain employees of the Company participate in a non-qualified deferred compensation plan that permits participants to defer portions of their compensation and earn interest on the deferred amounts.

Plan assets are held by the Company in a Rabbi Trust and accounted for in the manner described above.

As of December 31, 2020, the Company has recorded assets of $ 10.1 million and liabilities of $ 10.1 million, which are included in other assets and accounts payable and accrued liabilities, respectively, in the consolidated statements of financial condition.

NOTE 19 - 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 $ 4.8 million, $ 4.1 million and $ 3.5 million, during the years ended December 31, 2020, 2019 and 2018, respectively.

The Company incurred expenses for the services provided by these related parties of $ 3.8 million, $ 3.2 million and $ 2.9 million, during the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020 and 2019, receivables from and payables to related parties were not material.

LPL FINANCIAL HOLDINGS INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 20 - 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 December 31, 2020, had net capital of $ 119.0 million with a minimum net capital requirement of $ 11.1 million.

The Company’s subsidiary, PTC, also operates in a highly regulated industry and is subject to various regulatory capital requirements.

Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC’s operations.

As of December 31, 2020 and 2019, LPL Financial and PTC met all capital adequacy requirements to which they were subject.

NOTE 21 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK

AND CONCENTRATIONS OF CREDIT RISK

LPL Financial’s client securities activities are transacted on either a cash or margin basis.

In margin transactions, LPL Financial extends credit to the advisor’s client, subject to various regulatory and internal margin requirements, collateralized by cash 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 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.

NOTE 22 - SUBSEQUENT EVENT

On February 1, 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 March 30, 2021 to all stockholders of record on March 16, 2021 .

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Other Information

On January 27, 2020 , the Board declared a cash dividend of $0.25 per share on the Company’s outstanding common stock to be paid on March 31, 2020 to all stockholders of record on March 18, 2020 .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data