LPL Financial Holdings Inc. 10-K

Item 8. Financial Statements and Supplementary Data Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 34 ) 58 Consolidated Statements of Income for the years ended December 31, 202 2 , 202 1 and 20 20 60 Consolidated Statements of Financial Condition as of December 31, 202 2 and 202 1 61 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 202 2 , 202 1 and 20 20 62 Consolidated Statements of Cash Flows for the years ended December 31, 202 2 , 202 1 and 20 20 63 Notes to Consolidated Financial Statements 65 Note 1 - Organization and Description of the Company 65 Note 2 - Summary of Significant Accounting Policies 65 Note 3 - Revenue 72 Note 4 - Acquisitions 76 Note 5 - Fair Value Measurements 76 Note 6 - Investment Securities 81 Note 7 - Receivables from and Payables to Brokers, Dealers and Clearing Organizations 81 Note 8 - Property and Equipment, Net 82 Note 9 - Goodwill and Other Intangibles, Net 82 Note 10 - Other Assets and Other Liabilities 84 Note 11 - Corporate Debt and Other Borrowings, Net 85 Note 12 - Leases 87 Note 13 - Income Taxes 88 Note 14 - Commitments and Contingencies 90 Note 15 - Stockholders’ Equity 92 Note 16 - Share-based Compensation, Employee Incentives and Benefit Plans 92 Note 17 - Earnings per Share 95 Note 18 - Net Capital and Regulatory Requirements 95 Note 19 - Financial Instruments with Off-Balance Sheet Credit Risk and Concentrations of Credit Risk 96 Note 20 - Subsequent Events 96 57 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of LPL Financial Holdings Inc. 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, 2022 and 2021, the related consolidated statements of income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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, 2023 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. Revenue - Trailing Commission Revenue Accrual — Refer to Note 3 to the financial statements Critical Audit Matter Description The Company’s trailing commission revenue is generally received in arrears and therefore estimated and accrued at year-end. The estimate is based on commissions revenue 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. 58 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 revenue, 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, 2023 We have served as the Company's auditor since 2001. 59 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Income (In thousands, except per share data) Years Ended December 31, 2022 2021 2020 REVENUE Advisory $ 3,875,154 $ 3,525,430 $ 2,327,519 Commission: Trailing 1,292,358 1,404,628 1,135,796 Sales-based 1,033,806 974,055 770,764 Total commission 2,326,164 2,378,683 1,906,560 Asset-based: Client cash 953,624 360,847 481,388 Other asset-based 806,649 787,220 563,129 Total asset-based 1,760,273 1,148,067 1,044,517 Service and fee 467,381 411,761 357,722 Transaction 181,260 156,336 148,349 Interest income, net 77,126 28,577 29,412 Other ( 86,533 ) 71,976 57,561 Total revenue 8,600,825 7,720,830 5,871,640 EXPENSE Advisory and commission 5,324,827 5,180,090 3,697,147 Compensation and benefits 820,736 741,003 609,257 Promotional 339,994 302,285 208,250 Occupancy and equipment 219,798 185,531 166,389 Depreciation and amortization 199,817 151,428 109,732 Interest expense on borrowings 126,234 104,414 105,765 Amortization of other intangibles 87,560 79,260 67,358 Brokerage, clearing and exchange 86,063 86,023 71,185 Professional services 72,519 73,231 57,067 Communications and data processing 67,687 60,296 52,399 Loss on extinguishment of debt — 24,400 — Other 143,937 131,540 101,018 Total expense 7,489,172 7,119,501 5,245,567 INCOME BEFORE PROVISION FOR INCOME TAXES 1,111,653 601,329 626,073 PROVISION FOR INCOME TAXES 265,951 141,463 153,433 NET INCOME $ 845,702 $ 459,866 $ 472,640 EARNINGS PER SHARE Earnings per share, basic $ 10.60 $ 5.75 $ 5.96 Earnings per share, diluted $ 10.40 $ 5.63 $ 5.86 Weighted-average shares outstanding, basic 79,801 80,002 79,244 Weighted-average shares outstanding, diluted 81,285 81,742 80,702 See notes to consolidated financial statements. 60 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Financial Condition (In thousands, except share data) December 31, 2022 2021 ASSETS Cash and equivalents $ 847,519 $ 495,246 Cash and equivalents segregated under federal or other regulations 2,199,362 1,496,463 Restricted cash 90,389 80,655 Receivables from clients, net 561,569 578,889 Receivables from brokers, dealers and clearing organizations 56,276 102,503 Advisor loans, net 1,123,004 963,869 Other receivables, net 677,766 581,483 Investment securities 52,610 49,192 Property and equipment, net 780,357 658,841 Goodwill 1,642,468 1,642,443 Other intangibles, net 427,676 455,028 Other assets 1,023,230 886,988 Total assets $ 9,482,226 $ 7,991,600 LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES: Client payables $ 2,694,929 $ 1,712,224 Payables to brokers, dealers and clearing organizations 147,752 170,119 Accrued advisory and commission expenses payable 203,292 222,379 Corporate debt and other borrowings, net 2,717,444 2,814,044 Accounts payable and accrued liabilities 448,630 384,025 Other liabilities 1,102,627 1,018,276 Total liabilities 7,314,674 6,321,067 Commitments and contingencies (Note 14) STOCKHOLDERS’ EQUITY: Common stock, $ 0.001 par value; 600,000,000 shares authorized; 129,655,843 shares and 128,758,086 shares issued at December 31, 2022 and 2021, respectively 130 129 Additional paid-in capital 1,912,886 1,841,402 Treasury stock, at cost — 50,407,844 shares and 48,768,145 shares at December 31, 2022 and 2021, respectively ( 2,846,536 ) ( 2,498,600 ) Retained earnings 3,101,072 2,327,602 Total stockholders’ equity 2,167,552 1,670,533 Total liabilities and stockholders’ equity $ 9,482,226 $ 7,991,600 See notes to consolidated financial statements. 61 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (In thousands) Additional Paid-In Capital Retained Earnings Total Stockholders’ Equity Common Stock Treasury Stock Shares Amount Shares Amount BALANCE — December 31, 2019 126,494 $ 126 $ 1,703,973 46,260 $ ( 2,234,793 ) $ 1,554,567 $ 1,023,873 Cumulative effect of accounting change — — — — — ( 7,317 ) ( 7,317 ) Net income — — — — — 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 - $ 1.00 per share — — — — — ( 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 Net income — — — — — 459,866 459,866 Issuance of common stock to settle restricted stock units 406 — — 147 ( 20,230 ) — ( 20,230 ) Treasury stock purchases — — — 580 ( 90,011 ) — ( 90,011 ) Cash dividends on common stock - $ 1.00 per share — — — — — ( 80,095 ) ( 80,095 ) Stock option exercises and other 766 2 34,457 ( 74 ) 2,703 4,812 41,974 Share-based compensation — — 44,175 — — — 44,175 BALANCE — December 31, 2021 128,758 $ 129 $ 1,841,402 48,768 $ ( 2,498,600 ) $ 2,327,602 $ 1,670,533 Net income — — — — — 845,702 845,702 Issuance of common stock to settle restricted stock units 368 — — 136 ( 25,157 ) — ( 25,157 ) Treasury stock purchases — — — 1,566 ( 325,031 ) — ( 325,031 ) Cash dividends on common stock - $ 1.00 per share — — — — — ( 79,833 ) ( 79,833 ) Stock option exercises and other 530 1 18,876 ( 62 ) 2,252 7,601 28,730 Share-based compensation — — 52,608 — — — 52,608 BALANCE — December 31, 2022 129,656 $ 130 $ 1,912,886 50,408 $ ( 2,846,536 ) $ 3,101,072 $ 2,167,552 See notes to consolidated financial statements. 62 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Years Ended December 31, 2022 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 845,702 $ 459,866 $ 472,640 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 199,817 151,428 109,732 Amortization of other intangibles 87,560 79,260 67,358 Amortization of debt issuance costs 6,853 5,733 5,384 Share-based compensation 52,608 44,175 33,975 Provision for credit losses 13,667 9,168 5,824 Deferred (benefit) provision for income taxes ( 93,349 ) 18,464 ( 23,684 ) Loss on extinguishment of debt — 24,400 — Loan forgiveness 179,529 151,427 113,126 Other 14,783 ( 10,007 ) ( 12,673 ) Changes in operating assets and liabilities: Receivables from clients, net 17,254 ( 174,236 ) 28,475 Receivables from brokers, dealers and clearing organizations 46,227 ( 4,764 ) ( 57,372 ) Advisor loans, net ( 341,872 ) ( 526,677 ) ( 219,813 ) Other receivables, net ( 107,588 ) ( 140,021 ) ( 18,480 ) Investment securities - trading ( 73 ) ( 8,732 ) 16,072 Other assets ( 148,263 ) ( 136,182 ) ( 126,641 ) Client payables 982,705 177,703 256,977 Payables to brokers, dealers and clearing organizations ( 22,367 ) 80,376 ( 2,259 ) Accrued advisory and commission expenses payable ( 19,087 ) 29,771 12,710 Accounts payable and accrued liabilities 50,664 12,390 ( 6,585 ) Other liabilities 183,381 211,819 137,142 Operating lease assets ( 2,574 ) ( 2,227 ) ( 1,967 ) Net cash provided by operating activities 1,945,577 453,134 789,941 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 306,596 ) ( 215,987 ) ( 155,532 ) Acquisitions, net of cash acquired ( 56,458 ) ( 245,913 ) ( 30,556 ) Purchases of securities classified as held-to-maturity ( 10,936 ) ( 1,741 ) ( 6,511 ) Proceeds from maturities of securities classified as held-to-maturity 5,000 5,000 5,100 Purchases of other investments ( 7,410 ) — — Net cash used in investing activities ( 376,400 ) ( 458,641 ) ( 187,499 ) Continued on following page 63 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Years Ended December 31, 2022 2021 2020 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facilities 815,000 1,585,000 1,806,000 Repayments of revolving credit facilities ( 905,000 ) ( 1,495,000 ) ( 1,851,000 ) Repayment of senior secured term loans ( 10,700 ) ( 10,700 ) ( 10,700 ) Repayment of senior unsecured notes — ( 900,000 ) — Proceeds from senior unsecured notes — 1,300,000 — Payment of debt issuance costs ( 1,872 ) ( 15,929 ) — Make-whole premium on redemption of senior unsecured notes — ( 25,875 ) — Payment of contingent consideration — ( 8,941 ) ( 10,000 ) Tax payments related to settlement of restricted stock units ( 25,157 ) ( 20,230 ) ( 9,420 ) Repurchase of common stock ( 325,031 ) ( 90,011 ) ( 150,036 ) Dividends on common stock ( 79,833 ) ( 80,095 ) ( 79,097 ) Proceeds from stock option exercises and other 28,730 41,974 30,236 Principal payment of finance leases and obligations ( 408 ) ( 1,356 ) ( 1,169 ) Net cash (used in) provided by financing activities ( 504,271 ) 278,837 ( 275,186 ) NET INCREASE IN CASH AND EQUIVALENTS, CASH AND EQUIVALENTS SEGREGATED UNDER FEDERAL OR OTHER REGULATIONS AND RESTRICTED CASH 1,064,906 273,330 327,256 CASH AND EQUIVALENTS, CASH AND EQUIVALENTS SEGREGATED UNDER FEDERAL OR OTHER REGULATIONS AND RESTRICTED CASH — Beginning of year 2,072,364 1,799,034 1,471,778 CASH AND EQUIVALENTS, CASH AND EQUIVALENTS SEGREGATED UNDER FEDERAL OR OTHER REGULATIONS AND RESTRICTED CASH — End of year $ 3,137,270 $ 2,072,364 $ 1,799,034 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 118,824 $ 103,689 $ 106,879 Income taxes paid $ 238,155 $ 144,556 $ 169,237 Cash paid for amounts included in the measurement of operating lease liabilities $ 24,657 $ 22,355 $ 21,368 Cash paid for amounts included in the measurement of finance lease liabilities $ 8,825 $ 9,716 $ 9,592 NONCASH DISCLOSURES: Capital expenditures included in accounts payable and accrued liabilities $ 33,957 $ 21,373 $ 12,186 Lease assets obtained in exchange for operating lease liabilities $ 10,785 $ 3,602 $ 7,968 December 31, 2022 2021 2020 Cash and equivalents $ 847,519 $ 495,246 $ 808,612 Cash and equivalents segregated under federal or other regulations 2,199,362 1,496,463 923,158 Restricted cash 90,389 80,655 67,264 Total cash and equivalents, cash and equivalents segregated under federal or other regulations and restricted cash shown in the statements of cash flows $ 3,137,270 $ 2,072,364 $ 1,799,034 See notes to consolidated financial statements. 64 Table of Contents 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 enterprises (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 personalized financial advice and brokerage services to retail investors (their “ clients ” ). The Company’s most significant, wholly owned subsidiaries are described below: • LPL Holdings, Inc. (“LPLH” or “Parent”), a Massachusetts holding corporation, is an intermediate holding company and directly or indirectly owns 100 % of the issued and outstanding common stock of all of LPLFH’s indirect subsidiaries, including a captive insurance subsidiary (the “Captive Insurance Subsidiary”) that underwrites insurance for various legal and regulatory risks of the Company. • LPL Financial LLC (“LPL Financial”), with primary offices in San Diego, California; Fort Mill, South Carolina; Boston, Massachusetts; and Austin, Texas, is a clearing broker-dealer and an investment advisor that principally transacts business as an agent for its advisors and enterprises 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 advisors (“RIAs”), banks and trust companies serving high-net-worth clients. • LPL Insurance Associates, Inc. operates as an insurance brokerage general agency that offers life and disability insurance products and services for LPL Financial advisors. • AW Subsidiary, Inc. is a holding company for AdvisoryWorld and Blaze Portfolio Systems LLC (“Blaze”). AdvisoryWorld offers technology products, including proposal generation, investment analytics and portfolio modeling, to both the Company’s advisors and external clients in the wealth management industry. Blaze provides an advisor-facing trading and portfolio rebalancing platform. • PTC Holdings, Inc. (“PTCH”) is a holding company for The Private Trust Company, N.A. (“PTC”). PTC is chartered as a non-depository limited purpose national bank, providing a wide range of trust, investment management oversight, and custodial services for estates and families. PTC, together with its affiliate Fiduciary Trust Company of New Hampshire, also provides Individual Retirement Account (“IRA”) custodial services for LPL Financial. Each member of PTCH’s Board of Directors meets the direct equity ownership interest requirements that are required by the Office of the Comptroller of the Currency (“OCC”). • LPL Employee Services, LLC and its subsidiary, Allen & Company of Florida, LLC, provide primary support for the Company’s employee advisor affiliation model. 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, goodwill and other intangibles, allowance for credit losses on receivables, share-based compensation, accruals for liabilities, income taxes, revenue and expense accruals and other matters that affect the consolidated financial statements and related disclosures. Actual results could differ from those estimates under different assumptions or conditions and the differences may be material to the consolidated financial statements. 65 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Consolidated Financial Statement Presentation Changes The Company reclassified certain financial statement line items in the consolidated statements of income during the year ended December 31, 2021 to more closely align with industry practice and the Company’s business, and to better serve financial statement users. Prior period amounts in the consolidated statements of income have been reclassified to conform to this presentation as follows: • The Company has disaggregated the activity previously reported in the Transaction and fee line item in Total revenue into its Service and fee and Transaction components; • The Company has included Interest expense on borrowings and Loss on extinguishment of debt in Total expense. Previously, these amounts were presented after Total operating expense. These changes did not impact total net income for the periods presented. Consolidation These consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany transactions and balances have been eliminated. Related Party Transactions In the ordinary course of business, the Company enters into related party transactions with beneficial owners of more than five percent of the Company’s outstanding common stock. Additionally, through its subsidiary LPL Financial, the Company provides services and charitable contributions to LPL Financial Charitable Foundation Inc., a charitable organization that provides volunteer and financial support within the Company’s local communities. The Company recognized revenue for services provided to these related parties of $ 5.7 million, $ 6.1 million and $ 4.8 million during the years ended December 31, 2022, 2021 and 2020, respectively. The Company incurred expense for services provided by these related parties of $ 3.4 million, $ 2.2 million and $ 3.8 million during the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022 and 2021, receivables from and payables to related parties were not material. 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 Revenue is 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 - Revenue . 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. Share-Based Compensation Certain employees, officers, directors, advisors and enterprises participate in the Company’s 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. 66 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 enterprises 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 makes assumptions regarding the number of 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. As a result, changes in the forfeiture assumptions do not impact the total amount of expense ultimately recognized over the service period. Rather, different forfeiture assumptions would only impact the timing of expense recognition over the service period. See Note 16 - Share-Based Compensation, Employee Incentives and Benefit Plans , 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 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. Income Taxes 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 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 its provision for income taxes, deferred tax assets and liabilities and any valuation allowances recorded against the deferred tax assets. 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 expense in the period they are generated. 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 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 equivalents are composed of interest and noninterest-bearing deposits, money market funds and U.S. government obligations. 67 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Cash and Equivalents Segregated Under Federal or Other Regulations The Company’s broker-dealer 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. At December 31, 2022, this line item included interest bearing deposits, U.S. treasury bills with original maturities of 90 days or less and approximately $ 100,000 of cash for the proprietary accounts of broker-dealers. The U.S. treasury bills accrue income as earned. Discounts are accreted using a method that approximates the effective yield method over the term of the bill and are recorded to interest income, net as an adjustment to the investment yield. Restricted Cash Restricted cash primarily represents cash held and for use by the Captive Insurance Subsidiary. Receivables from Clients, Net and Client Payables 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. Client payables 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, the Company establishes an allowance for credit losses that it believes is sufficient to cover expected credit losses. When establishing this allowance for credit losses, the Company considers a number of factors, including its ability to collect from the client or the client’s advisor and its historical experience in collecting on such transactions. The following table reflects a roll-forward of the allowance for credit losses on receivables from clients (in thousands): December 31, 2022 2021 2020 Beginning balance — January 1 $ 987 $ 520 $ 115 Provision for credit losses 66 424 432 (Charge-offs) recoveries, net ( 144 ) 43 ( 27 ) Ending balance — December 31 $ 909 $ 987 $ 520 Advisor Loans, Net Advisor loans, net include loans made to new and existing advisors and enterprises to facilitate their partnership with the Company, transition to the Company’s platform or fund business development activities. The decision to extend credit to an advisor or enterprise is generally based on their credit history and ability to generate future revenue. Loans made can be either repayable or forgivable over terms generally up to ten years provided that the advisor or enterprise remains licensed through LPL Financial. Forgivable loans are not repaid in cash and are amortized over the term of the loan. If an advisor or enterprise terminates their arrangement with the Company prior to the loan maturity date, the remaining balance becomes repayable immediately. An allowance for credit losses is recorded at the inception of a repayable loan or upon conversion to a repayable loan upon termination or change in agreed upon terms using estimates and assumptions based on historical lifetime loss experience and expectations of future loss rates based on current facts. Advisor repayable loans, net totaled $ 280.0 million and $ 191.2 million as of December 31, 2022 and 2021. 68 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The following table reflects a roll-forward of the allowance for credit losses on advisor loans (in thousands): December 31, 2022 2021 2020 Beginning balance — January 1 $ 11,575 $ 8,797 $ 13,461 Impact of ASU 2016-13 adoption — — 8,748 Provision for credit losses 4,790 7,074 3,642 Recoveries (charge-offs), net 361 ( 4,296 ) ( 17,054 ) Other ( 1,582 ) — — Ending balance — December 31 $ 15,144 $ 11,575 $ 8,797 Other Receivables, Net Other receivables, net primarily consist of receivables due from product sponsors and others and miscellaneous receivables. An allowance for credit losses 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. The following table reflects a roll-forward of the allowance for credit losses on other receivables (in thousands): December 31, 2022 2021 2020 Beginning balance — January 1 $ 1,083 $ 1,068 $ 805 Impact of ASU 2016-13 adoption — — 1,097 Provision for credit losses 8,811 1,670 1,610 Charge-offs, net of recoveries ( 8,688 ) ( 1,655 ) ( 2,444 ) Other 1,582 — — Ending balance — December 31 $ 2,788 $ 1,083 $ 1,068 Investment Securities Investment securities include trading and held-to-maturity securities. The Company also has securities that have been sold, but not yet purchased, which are reflected in other liabilities on the consolidated statements of financial condition. The Company generally classifies its investments in debt and equity instruments as trading securities, except for U.S. government notes held by its wholly owned subsidiary PTC, which are held to satisfy minimum capital requirements of the OCC and classified as held-to-maturity securities because the Company has both the intent and the ability to hold these investments to maturity. The Company has not classified any investments as available-for-sale. 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. 69 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Realized and unrealized gains and losses on trading securities are recognized in other revenue on a net basis in the consolidated statements of income. Property and Equipment, Net 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 capitalization are included in property and equipment and subsequently amortized over the estimated useful life of the software, which is generally 3 to 5 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 are depreciated over a period of 3 to 5 years. Furniture and equipment are depreciated over a period of 3 to 7 years. Land is not depreciated. Management reviews property and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable . No i mpairment occurred for the years ended December 31, 2022, 2021 or 2020. Acquisitions Accounting for business combinations requires the Company to make significant estimates and assumptions with respect to intangible assets, liabilities assumed and pre-acquisition contingencies. These assumptions include, but are not limited to, future expected cash flows and discount rates, and are based in part on historical experience, market data and information obtained from the management of the acquired companies. When acquiring companies in business combinations, the Company recognizes separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill is recognized for business combinations as of the acquisition date and 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. The Company also enters into asset acquisitions for single identifiable assets. Accounting for asset acquisitions requires the Company 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. Goodwill and Other Intangibles, Net Goodwill and other indefinite-lived intangibles are evaluated 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 is more likely than not (i.e., a likelihood of more than 50%) less than its carrying amount, a quantitative impairment analysis 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 intangibles was recognized for the years ended December 31, 2022, 2021 or 2020. Intangibles 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 70 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements definite-lived intangibles recognized for the years ended December 31, 2022, 2021 or 2020. See Note 9 - Goodwill and Other Intangibles, Net , for additional information. Securities Borrowed The Company borrows securities from other broker-dealers to make deliveries or to facilitate customer short sales. Securities borrowed, which are included in other assets in the consolidated statements of financial condition, are accounted for as collateralized borrowings and are recorded at the contract value, which represents 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, 2022, the contract and collateral market values of borrowed securities were $ 9.6 million and $ 9.3 million, respectively. As of December 31, 2021, the contract and collateral market values of borrowed securities were $ 10.0 million and $ 9.7 million, respectively. Fractional Shares The Company acts in a principal capacity in respect of fractional shares resulting from the dividend reinvestment program (“DRIP”) that is offered to clients by aggregating dividends received by clients, executing purchases of whole shares and allocating the whole shares to clients on a fractional basis based on the dividend amounts that are reinvested. Shares remaining after this process and fractional shares purchased by the Company in client liquidations are included in the Company’s inventory and reflected as investment securities on the Company’s consolidated statements of financial condition. Fractional shares that have been allocated to clients do not meet the criteria for sale accounting in ASC 860, Transfers and Servicing , and are accounted for as a secured borrowing (repurchase obligation related to shares held by clients) with a corresponding investment in fractional shares. These are reflected in other assets and other liabilities, respectively, on the Company’s consolidated statements of financial condition. The Company has elected the fair value option to measure these financial assets and the corresponding repurchase obligation and determines fair value based on quoted prices in active markets. 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 in the consolidated statements of financial condition 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. Leases Lease assets and liabilities are recognized based on the present value of the future lease payments over the lease term at the lease commencement date and reflected in other assets and other liabilities, respectively, on the consolidated statements of financial condition. 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 . 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, 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 71 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements from LPL Financial and has cash reserves to cover losses, including $ 88.7 million in restricted cash at the Captive Insurance Subsidiary. 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 and Regulatory Matters.” Recently Issued or Adopted Accounting Pronouncements There are no relevant recently issued accounting pronouncements that would materially impact the Company’s consolidated financial statements and related disclosures. There were no new accounting pronouncements adopted during the year ended December 31, 2022 that materially impacted the Company’s consolidated financial statements and related disclosures. NOTE 3 - REVENUE Revenue is 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. Revenue is analyzed to determine whether the Company is the principal (i.e., reports revenue on a gross basis) or agent (i.e., reports revenue 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 Advisory revenue represents fees charged to advisors’ clients’ advisory accounts on the Company’s corporate RIA advisory platform and is based on a percentage of the market value of the eligible assets in the clients’ advisory accounts. 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. Advisory fees are primarily billed to clients in advance, on a quarterly basis, and are recognized as revenue ratably during the quarter. The performance obligation for advisory fees is considered a series of distinct services that are substantially the same and are satisfied daily. As the value of the eligible assets in an advisory account is susceptible to changes due to customer activity, this revenue includes variable consideration and is constrained until the date that the fees are determinable. The majority of our client accounts are on a calendar quarter and are billed using values as of the last business day of the preceding quarter. The value of the eligible assets in an advisory account on the billing date is adjusted for estimates of contributions and withdrawals to determine the amount billed, and accordingly, the revenue earned in the following three-month period. Advisory revenue collected on the Company’s corporate advisory platform is proposed by the advisor and agreed to by the client and was approximately 1 % of the underlying assets for the year ended December 31, 2022. The Company also supports independent RIA firms that conduct their business through separate registered investment advisor firms (“Independent RIAs”) through its Independent RIA advisory platform, which allows advisors to engage the Company for technology, clearing and custody services, as well as access the capabilities of the Company’s investment platforms. The assets held under an Independent RIA’s investment advisory accounts custodied with LPL Financial are included in total advisory assets and net new advisory assets. The advisory revenue generated by an Independent RIA is not included in the Company’s advisory revenue. The Company charges separate fees to Independent RIAs for technology, clearing, administrative, oversight and custody services, which may vary and are included in service and fee revenue in the consolidated statements of income. Commission The Company earns commission revenue from sales commissions generated by advisors for their clients’ purchases and sales of securities or other investment products and from product sponsors for the selling, distribution and marketing, or any combination thereof, of investment products to such clients both of which are viewed as a single performance obligation. 72 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company is generally the principal for commission revenue, 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 revenue is reported on a gross basis. The following table presents total commission revenue disaggregated by product category (in thousands): Years Ended December 31, 2022 2021 2020 Commission revenue Annuities $ 1,269,634 $ 1,210,899 $ 976,357 Mutual funds 679,912 768,168 590,074 Fixed income 119,196 126,543 88,714 Equities 114,446 131,975 126,920 Other 142,976 141,098 124,495 Total commission revenue $ 2,326,164 $ 2,378,683 $ 1,906,560 The Company generates two types of commission revenue: (1) sales-based commissions that are recognized at the point of sale on the trade date and are based on a percentage of an investment product’s current market value at the time of purchase and (2) trailing commissions that are recognized over time as earned and are generally based on the market value of investment holdings in trail-eligible assets. Sales-based commission revenue, which occurs when clients trade securities or purchase various types of investment products, primarily represents gross commissions generated by the Company’s advisors and can vary from period to period based on the overall economic environment, number of trading days in the reporting period and investment activity of the Company’s advisors’ clients. The Company earns trailing commission revenue primarily on mutual funds and variable annuities held by clients of the Company’s advisors. Trailing commission revenue is recognized over the time the client owns the investment or holds the contract and is generally earned based on a fixed rate applied. The ongoing revenue is not recognized at the time of sale because it is variably constrained due to factors outside the Company’s control including market volatility and the client's investment hold period. The revenue will not be recognized until it is probable that a significant reversal will not occur. The following table presents sales-based and trailing commission revenue disaggregated by product category (in thousands): Years Ended December 31, 2022 2021 2020 Commission revenue Sales-based Annuities $ 542,310 $ 425,164 $ 327,412 Mutual funds 154,742 191,449 145,836 Fixed income 119,196 126,543 88,714 Equities 114,446 131,975 126,920 Other 103,112 98,924 81,882 Total sales-based revenue $ 1,033,806 $ 974,055 $ 770,764 Trailing Annuities $ 727,324 $ 785,735 $ 648,945 Mutual funds 525,170 576,719 444,238 Other 39,864 42,174 42,613 Total trailing revenue $ 1,292,358 $ 1,404,628 $ 1,135,796 Total commission revenue $ 2,326,164 $ 2,378,683 $ 1,906,560 73 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Asset-Based Asset-based revenue consists of fees from the Company’s client cash programs, fees from our sponsorship programs with financial product manufacturers and fees from omnibus processing and networking services (collectively referred to as “recordkeeping”). Client Cash Revenue Client cash revenue is earned daily and is generated on advisors’ clients’ cash balances in insured bank sweep accounts and a money market account based on a rate applied, as a percentage, to the deposits placed. The Company also receives fees based on account type and invested balances for administration and recordkeeping. These fees are generally earned and recognized over time on a net basis as the Company acts as an agent in these arrangements. The performance obligation with the financial institutions that participate in the sweep program is considered a series of distinct services that are substantially the same and are satisfied each day. Recordkeeping The Company generates revenue from fees it collects for providing recordkeeping, account maintenance, reporting and other related services to product sponsors. This includes revenue 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 product sponsors or their affiliates and are based on the value of mutual fund assets in accounts for which the Company provides omnibus processing services and the number of accounts in which the related mutual fund positions are held. Recordkeeping also includes revenue from networking services. Networking revenue on brokerage assets is correlated to the number of positions or value of assets that the Company administers and is paid by mutual fund and annuity product manufacturers. Recordkeeping revenue is 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, this revenue includes variable consideration and is constrained until the date that the fees are determinable. Sponsorship Programs The Company receives fees from certain financial product manufacturers in connection with sponsorship programs that support the Company’s marketing and sales force education and training efforts. Compensation for these performance obligations is either a fixed fee, a percentage of the average annual amount of product sponsor assets held in advisors’ clients’ accounts, a percentage of new sales or a combination of these. As the value of product sponsor assets held in advisors’ clients’ accounts is susceptible to unpredictable market changes, this revenue includes variable consideration and is constrained until the date that the fees are determinable. Sponsorship revenue is generally recognized over time as the Company fulfills its performance obligations. The following table sets forth asset-based revenue disaggregated by product category (in thousands): Years Ended December 31, 2022 2021 2020 Asset-based revenue Client cash $ 953,624 $ 360,847 $ 481,388 Recordkeeping 412,468 401,429 290,194 Sponsorship programs 394,181 385,791 272,935 Total asset-based revenue $ 1,760,273 $ 1,148,067 $ 1,044,517 Service and Fee Service and fee revenue is generated from advisor and retail investor services, including technology, insurance, conferences, licensing, business services and planning and advice services, IRA custodian and other client account fees. The Company charges separate fees to RIAs for technology, clearing, administrative, oversight and custody services, which may vary. The Company also hosts certain advisor conferences that serve as training, education, sales and marketing events for which the Company collects a fee from sponsors. Service and fee revenue is 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. Performance obligations for service and fee revenue recognized over time are 74 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements considered a series of distinct services that are substantially the same and are satisfied each day over the contract term. The Company is the principal and recognizes service 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. The following table sets forth service and fee revenue disaggregated by recognition pattern (in thousands): Years Ended December 31, 2022 2021 2020 Service and fee revenue Point-in-time (1) $ 115,916 $ 110,459 $ 85,451 Over time (2) 351,465 301,302 272,271 Total service and fee revenue $ 467,381 $ 411,761 $ 357,722 ____________________ (1) Service and fee revenue recognized at a point-in-time includes revenue such as IRA termination fees, conference services and account fees. (2) Service and fee revenue recognized over time includes revenue such as error and omission insurance fees, IRA custodian fees and technology fees. Transaction Transaction revenue includes transaction charges generated by advisory and brokerage accounts from mutual funds, exchange-traded funds and fixed income products and is primarily recognized at a point-in-time. Point-in-time transaction revenue includes revenue from clearing and transaction charges and is recognized on a trade-date basis as the performance obligation is satisfied when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to/from the customer. The Company is the principal and recognizes transaction revenue 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 The Company earns interest income primarily from client margin loans, cash and equivalents segregated under federal or other regulations and advisor repayable loans and pays interest on certain client cash balances held in the client cash account. Other Other revenue primarily includes unrealized gains and losses on assets held by the Company for its advisor non-qualified deferred compensation plan and model research portfolios and other miscellaneous revenue, which is generally 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. Unearned revenue decreased from $ 160.9 million as of December 31, 2021 to $ 138.1 million as of December 31, 2022. The decrease in unearned revenue for the year ended December 31, 2022 is primarily driven by $ 159.5 million of revenue recognized during the year ended December 31, 2022 that was included in the unearned revenue balance as of December 31, 2021, partially offset by cash payments received or due in advance of satisfying the Company’s performance obligations. The Company receives cash in advance for advisory services to be performed and conferences to be held in future periods. For advisory services, revenue is recognized as the Company provides the administration, brokerage and execution services over time to satisfy the performance obligations. For conference revenue, the Company recognizes revenue as the conferences are held. 75 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 4 - ACQUISITIONS On November 2, 2022, the Company entered into a definitive purchase agreement to acquire Financial Resources Group Investment Services, LLC (“FRGIS”), a broker-dealer and independent branch office. T he transaction closed on January 31, 2023 for an initial payment of approximately $ 140 million with potential contingent payments over the three years following the closing. Given the recent closing, the purchase accounting analysis has not yet been completed. During the year ended December 31, 2022, the Company acquired client relationship intangible assets of $ 54.1 million as a result of acquisitions under its Liquidity & Succession solution. These acquisitions were accounted for as asset acquisitions with an assigned useful life of 9 years. See Note 9 - Goodwill and Other Intangibles, Net , for additional information. On April 30, 2021, the Company acquired the wealth management business of Waddell & Reed Financial, Inc. for $ 300.0 million in order to expand its addressable markets and complement organic growth (the “Waddell & Reed Acquisition”). The Company accounted for the acquisition under the acquisition method of accounting for business combinations. The Company allocated $ 128.6 million of the purchase price to goodwill, $ 122.7 million to definite-lived intangible assets, $ 62.3 million to cash acquired and the remainder to other assets acquired and liabilities assumed as part of the acquisition. The goodwill primarily includes the synergies expected to result from combining operations and onboarding advisors and assets to the Company’s platform and is deductible for tax purposes. See Note 9 - Goodwill and Other Intangibles, Net , for additional information. 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, 2022 or 2021. The Company’s fair value measurements are evaluated within the fair value hierarchy based on the nature of inputs used to determine the fair value at the measurement date. At December 31, 2022 and 2021, the Company had the following financial assets and liabilities that are measured at fair value on a recurring basis: Cash Equivalents — The Company’s cash equivalents include money market funds and U.S. government obligations, which are short term in nature with readily determinable values derived from active markets. Cash Equivalents Segregated Under Federal or Other Regulations — The Company’s cash equivalents segregated under federal or other regulations include U.S. treasury bills, which are short term in nature with readily determinable values derived from active markets. Trading Securities 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. 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 76 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements comparison to prices received from additional pricing services, comparison to available quoted market prices and review of other relevant market data including implied yields of major categories of securities. In general, these quoted prices are derived from active markets for identical assets or liabilities. When quoted prices in active markets for identical assets and liabilities are not available, the quoted prices are based on similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. For negotiable certificates of deposit and treasury securities, the Company utilizes market-based inputs, including observable market interest rates that correspond to the remaining maturities or the next interest reset dates. At December 31, 2022 and 2021, the Company did not adjust prices received from the independent third-party pricing services. Other Assets — The Company’s other assets include: (1) deferred compensation plan assets that are invested in life insurance, money market and other mutual funds, which are actively traded and valued based on quoted market prices, and (2) certain non-traded real estate investment trusts and auction rate notes, which are valued using quoted prices for identical or similar securities and other inputs that are observable or can be corroborated by observable market data. Fractional Shares — The Company’s investment in fractional shares held by customers is reflected in other assets while the related purchase obligation for such shares is reflected in other liabilities. The Company uses prices obtained from independent third-party pricing services to measure the fair value of its investment in fractional shares held by customers and the related repurchase obligation. Prices received from the pricing services are validated using various methods including comparison to prices received from additional pricing services, comparison to available quoted market prices and review of other relevant market data including implied yields of major categories of securities. At December 31, 2022 and 2021, the Company did not adjust prices received from the independent third-party pricing services. 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 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. 77 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Recurring Fair Value Measurements The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (in thousands): December 31, 2022 Level 1 Level 2 Level 3 Total Assets Cash equivalents $ 13,639 $ — $ — $ 13,639 Cash equivalents segregated under federal or other regulations 1,131,040 — — 1,131,040 Investment securities - trading: U.S. treasury obligations 24,402 — — 24,402 Mutual funds 10,679 — — 10,679 Equity securities 980 — — 980 Debt securities — 585 — 585 Money market funds 112 — — 112 Total investment securities - trading 36,173 585 — 36,758 Other assets: Deferred compensation plan 489,976 — — 489,976 Fractional shares - investment (1) 122,253 — — 122,253 Other investments — 5,248 — 5,248 Total other assets 612,229 5,248 — 617,477 Total assets at fair value $ 1,793,081 $ 5,833 $ — $ 1,798,914 Liabilities Accounts payable and accrued liabilities $ — $ — $ 3,860 $ 3,860 Other liabilities: Securities sold, but not yet purchased: Debt securities — 61 — 61 Equity securities 20 — — 20 Mutual funds 4 — — 4 Total securities sold, but not yet purchased 24 61 — 85 Fractional shares - repurchase obligation (1) 122,253 — — 122,253 Total other liabilities 122,277 61 — 122,338 Total liabilities at fair value $ 122,277 $ 61 $ 3,860 $ 126,198 ____________________ (1) Investment in and related repurchase obligation for fractional shares resulting from the Company’s DRIP. 78 Table of Contents 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 (in thousands): December 31, 2021 Level 1 Level 2 Level 3 Total Assets Cash equivalents $ 12,056 $ — $ — $ 12,056 Investment securities - trading: U.S. treasury obligations 19,599 — — 19,599 Mutual funds 19,112 — — 19,112 Equity securities 440 — — 440 Money market funds 123 — — 123 Total investment securities — trading 39,274 — — 39,274 Other assets: Deferred compensation plan 499,548 — — 499,548 Other investments — 9,166 — 9,166 Fractional shares - investment (1) 114,574 — — 114,574 Total other assets 614,122 9,166 — 623,288 Total assets at fair value $ 665,452 $ 9,166 $ — $ 674,618 Liabilities Accounts payable and accrued liabilities $ — $ — $ 3,530 $ 3,530 Other liabilities: Securities sold, but not yet purchased: Equity securities 467 — — 467 Debt securities — 105 — 105 Total securities sold, but not yet purchased 467 105 — 572 Fractional shares - repurchase obligation (1) 114,574 — — 114,574 Total other liabilities 115,041 105 — 115,146 Total liabilities at fair value $ 115,041 $ 105 $ 3,530 $ 118,676 ____________________ (1) Investment in and related repurchase obligation for fractional shares resulting from the Company’s DRIP. 79 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Fair Value of Financial Instruments Not Measured at Fair Value The following tables summarize the carrying values, fair values and fair value hierarchy level classification of financial instruments that are not measured at fair value (in thousands): December 31, 2022 Carrying Value Level 1 Level 2 Level 3 Total Fair Value Assets Cash $ 833,880 $ 833,880 $ — $ — $ 833,880 Cash segregated under federal or other regulations 1,068,322 1,068,322 — — 1,068,322 Restricted cash 90,389 90,389 — — 90,389 Receivables from clients, net 561,569 — 561,569 — 561,569 Receivables from brokers, dealers and clearing organizations 56,276 — 56,276 — 56,276 Advisor repayable loans, net (1) 280,040 — — 219,062 219,062 Other receivables, net 677,766 — 677,766 — 677,766 Investment securities - held-to-maturity securities 15,852 — 15,471 — 15,471 Other assets: Securities borrowed 9,626 — 9,626 — 9,626 Deferred compensation plan (2) 6,343 6,343 — — 6,343 Other investments (3) 4,647 — 4,647 — 4,647 Total other assets 20,616 6,343 14,273 — 20,616 Liabilities Client payables $ 2,694,929 $ — $ 2,694,929 $ — $ 2,694,929 Payables to brokers, dealers and clearing organizations 147,752 — 147,752 — 147,752 Corporate debt and other borrowings, net 2,717,444 — 2,530,011 — 2,530,011 December 31, 2021 Carrying Value Level 1 Level 2 Level 3 Total Fair Value Assets Cash $ 483,190 $ 483,190 $ — $ — $ 483,190 Cash segregated under federal or other regulations 1,496,463 1,496,463 — — 1,496,463 Restricted cash 80,655 80,655 — — 80,655 Receivables from clients, net 578,889 — 578,889 — 578,889 Receivables from brokers, dealers and clearing organizations 102,503 — 102,503 — 102,503 Advisor repayable loans, net (1) 191,242 — — 176,864 176,864 Other receivables, net 581,483 — 581,483 — 581,483 Investment securities - held-to-maturity securities 9,918 — 9,915 — 9,915 Other assets: Securities borrowed 9,958 — 9,958 — 9,958 Other investments (3) 4,595 — 4,595 — 4,595 Total other assets 14,553 — 14,553 — 14,553 Liabilities Client payables $ 1,712,224 $ — $ 1,712,224 $ — $ 1,712,224 Payables to brokers, dealers and clearing organizations 170,119 — 170,119 — 170,119 Corporate debt and other borrowings, net 2,814,044 — 2,885,536 — 2,885,536 ____________________ (1) Includes repayable loans and forgivable loans which have converted to repayable upon advisor termination or change in agreed upon terms. (2) Includes cash balances awaiting investment or distribution to plan participants. (3) Other investments include Depository Trust Company common shares and Federal Reserve stock. 80 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 6 - INVESTMENT SECURITIES The Company’s investment securities include debt and equity securities that the Company has classified as trading securities, which are carried at fair value, as well as investments in U.S. government notes, which are held by The Private Trust Company, N.A. to satisfy minimum capital requirements of the OCC. These securities are recorded at amortized cost and classified as held-to-maturity as the Company has both the intent and ability to hold these investments to maturity. The following table summarizes investment securities (in thousands): December 31, 2022 2021 Trading securities - at fair value: U.S. treasury obligations $ 24,402 $ 19,599 Mutual funds 10,679 19,112 Equity securities 980 440 Debt securities 585 — Money market funds 112 123 Total trading securities $ 36,758 $ 39,274 Held-to-maturity securities - at amortized cost: U.S. government notes $ 15,852 $ 9,918 Total held-to-maturity securities $ 15,852 $ 9,918 Total investment securities $ 52,610 $ 49,192 At December 31, 2022, 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 After ten years Total U.S. government notes — at amortized cost $ 5,508 $ 10,344 $ — $ — $ 15,852 U.S. government notes — at fair value $ 5,427 $ 10,044 $ — $ — $ 15,471 NOTE 7 - RECEIVABLES FROM AND PAYABLES TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS Receivables from and payables to brokers, dealers, and clearing organizations were as follows (in thousands): December 31, 2022 2021 Receivables: Receivables from clearing organizations $ 46,075 $ 80,548 Securities failed-to-deliver 9,083 16,978 Receivables from brokers and dealers 1,118 4,977 Total receivables $ 56,276 $ 102,503 Payables: Payables to brokers and dealers $ 82,685 78,080 Payables to clearing organizations 41,495 20,112 Securities failed-to-receive 23,572 71,927 Total payables $ 147,752 $ 170,119 81 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 8 - PROPERTY AND EQUIPMENT, NET The components of property and equipment, net were as follows at December 31, 2022 (in thousands): Historical Cost Accumulated Depreciation and Amortization Net Carrying Value Internally developed software $ 942,432 $ ( 476,653 ) $ 465,779 Computers and software 290,412 ( 208,299 ) 82,113 Buildings 107,873 ( 15,503 ) 92,370 Leasehold improvements 94,959 ( 43,678 ) 51,281 Furniture and equipment 87,204 ( 72,862 ) 14,342 Land 4,678 — 4,678 Construction in progress (1) 69,794 — 69,794 Total property and equipment, net $ 1,597,352 $ ( 816,995 ) $ 780,357 ____________________ (1) Construction in progress includes $ 69.2 million of internal software in development and related hardware and software at December 31, 2022. The components of property and equipment, net were as follows at December 31, 2021 (in thousands): Historical Cost Accumulated Depreciation and Amortization Net Carrying Value Internally developed software $ 716,179 $ ( 342,408 ) $ 373,771 Computers and software 214,223 ( 167,573 ) 46,650 Buildings 107,873 ( 11,627 ) 96,246 Leasehold improvements 88,538 ( 36,988 ) 51,550 Furniture and equipment 83,356 ( 65,728 ) 17,628 Land 4,678 — 4,678 Construction in progress (1) 68,318 — 68,318 Total property and equipment, net $ 1,283,165 $ ( 624,324 ) $ 658,841 ____________________ (1) Construction in progress includes $ 37.7 million of internal software in development and related hardware and software at December 31, 2021. Depreciation and amortization was $ 199.8 million, $ 151.4 million and $ 109.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. NOTE 9 - GOODWILL AND OTHER INTANGIBLES, NET On April 30, 2021, the Company completed the Waddell & Reed Acquisition. The Company allocated $ 128.6 million of the purchase price to goodwill, $ 122.7 million to definite-lived intangible assets, $ 62.3 million to cash acquired and the remainder to other assets acquired and liabilities assumed as part of the Waddell & Reed Acquisition. The intangible assets are comprised primarily of advisor relationships with a weighted average useful life of approximately 9 years. See Note 4 - Acquisitions , for additional information. A summary of the activity impacting goodwill is presented below (in thousands): Balance at December 31, 2020 $ 1,513,866 Goodwill acquired 128,577 Balance at December 31, 2021 1,642,443 Goodwill acquired 25 Balance at December 31, 2022 $ 1,642,468 82 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The components of other intangibles, net were as follows at December 31, 2022 (thousands): Weighted-Average Life Remaining (in years) Gross Carrying Value Accumulated Amortization Net Carrying Value Definite-lived intangibles, net: Advisor and enterprise relationships 5.1 $ 809,872 $ ( 542,415 ) $ 267,457 Product sponsor relationships 3.2 234,086 ( 197,165 ) 36,921 Client relationships (1) 8.0 102,491 ( 30,318 ) 72,173 Technology 5.4 19,040 ( 7,734 ) 11,306 Trade names 0.0 1,200 ( 1,200 ) — Total definite-lived intangible assets, net $ 1,166,689 $ ( 778,832 ) $ 387,857 Other indefinite-lived intangibles: Trademark and trade name 39,819 Total other intangibles, net $ 427,676 ____________________ (1) During the year ended December 31, 2022, the Company acquired client relationship intangible assets of $ 54.1 million as a result of acquisitions under its Liquidity & Succession solution. These acquisitions were accounted for as asset acquisitions with an assigned useful life of 9 years. The components of other intangibles, net were as follows at December 31, 2021 (thousands): Weighted-Average Life Remaining (in years) Gross Carrying Value Accumulated Amortization Net Carrying Value Definite-lived intangibles, net: Advisor and enterprise relationships 5.9 $ 806,531 $ ( 476,000 ) $ 330,531 Product sponsor relationships 4.1 234,086 ( 185,255 ) 48,831 Client relationships 7.2 45,623 ( 23,379 ) 22,244 Technology 6.4 19,040 ( 5,477 ) 13,563 Trade names 0.3 1,200 ( 1,160 ) 40 Total definite-lived intangibles, net $ 1,106,480 $ ( 691,271 ) $ 415,209 Other indefinite-lived intangibles: Trademark and trade name 39,819 Total other intangibles, net $ 455,028 Total amortization of other intangibles was $ 87.6 million, $ 79.3 million and $ 67.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. Future amortization is estimated as follows (in thousands): 2023 $ 86,288 2024 85,517 2025 77,143 2026 38,887 2027 33,738 Thereafter 66,284 Total $ 387,857 83 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 10 - OTHER ASSETS AND OTHER LIABILITIES The components of other assets and other liabilities were as follows (dollars in thousands): December 31, 2022 2021 Other assets: Deferred compensation $ 496,319 $ 499,548 Prepaid assets 144,607 115,018 Fractional shares - investment (1) 122,253 114,574 Deferred tax assets, net (2) 98,997 5,648 Operating lease assets (3) 92,534 95,075 Debt issuance costs, net 6,422 7,303 Other 62,098 49,822 Total other assets $ 1,023,230 $ 886,988 Other liabilities: Deferred compensation $ 497,736 $ 499,245 Unearned revenue (4) 138,109 160,926 Operating lease liabilities (3) 125,280 130,304 Fractional shares - repurchase obligation (1) 122,253 114,574 Finance lease liabilities (3) 105,660 106,067 Other 113,589 7,160 Total other liabilities $ 1,102,627 $ 1,018,276 _______________________________ (1) See Note 2 - Summary of Significant Accounting Policies for further information. (2) See Note 13 - Income Taxes for further information. (3) See Note 12 - Leases for further information. (4) See Note 3 - Revenue for further information. 84 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 11 - CORPORATE DEBT AND OTHER BORROWINGS, NET The Company’s outstanding corporate debt and other borrowings, net were as follows (in thousands): December 31, 2022 December 31, 2021 Corporate Debt Balance Applicable Margin Interest Rate Balance Applicable Margin Interest rate Maturity Term Loan B (1) $ 1,037,900 LIBOR+ 175 bps 5.87 % $ 1,048,600 LIBOR+ 175 bps 1.85 % 11/12/2026 2027 Senior Notes (1) 400,000 Fixed Rate 4.63 % 400,000 Fixed Rate 4.63 % 11/15/2027 2029 Senior Notes (1) 900,000 Fixed Rate 4.00 % 900,000 Fixed Rate 4.00 % 3/15/2029 2031 Senior Notes (1) 400,000 Fixed Rate 4.38 % 400,000 Fixed Rate 4.38 % 5/15/2031 Total Corporate Debt 2,737,900 2,748,600 Less: Unamortized Debt Issuance Cost ( 20,456 ) ( 24,556 ) Corporate debt, net $ 2,717,444 $ 2,724,044 Other Borrowings Revolving Credit Facility (2)(3) — LIBOR+ 125 bps 5.64 % 55,000 ABR+ 25 bps 3.50 % 3/15/2026 Unsecured, Uncommitted Lines of Credit (3) — Rate Determined at Time of Borrowing — % 35,000 Broker Base Rate+ 75 bps 1.00 % 9/30/2023 Total other borrowings $ — $ 90,000 Corporate Debt and Other Borrowings, Net $ 2,717,444 $ 2,814,044 _______________________________ (1) No leverage or interest coverage maintenance covenants. (2) Borrowings bear interest at a rate per annum ranging from 125 to 175 basis points over the Eurodollar Rate or 25 to 75 basis points over the base rate (PRIME rate) depending on the Consolidated Secured Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement). (3) Balances outstanding under our external lines of credit at December 31, 2021 were repaid in January 2022. The minimum calendar year payments and maturities of the corporate debt and other borrowings as of December 31, 2022 were as follows (in thousands): 2023 $ 10,700 2024 10,700 2025 10,700 2026 1,005,800 2027 400,000 Thereafter 1,300,000 Total $ 2,737,900 The following table presents amounts outstanding and available under the Company’s external lines of credit at December 31, 2022 (in millions): Description Borrower Maturity Date Outstanding Available Senior secured, revolving credit facility LPL Holdings, Inc. March 2026 $ — $ 1,000 Broker-dealer revolving credit facility LPL Financial LLC August 2023 $ — $ 1,000 Unsecured, uncommitted lines of credit LPL Financial LLC September 2023 $ — $ 75 Unsecured, uncommitted lines of credit LPL Financial LLC September 2023 $ — $ 50 Unsecured, uncommitted lines of credit LPL Financial LLC None $ — $ 75 Secured, uncommitted lines of credit LPL Financial LLC None $ — unspecified Secured, uncommitted lines of credit LPL Financial LLC None $ — unspecified 85 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Issuance of 2031 Senior Notes LPLH raised $ 400.0 million in aggregate principal amount of 4.375 % senior notes on May 18, 2021, which were issued at par (“2031 Senior Notes”). The Company used the proceeds from the issuance to repay borrowings made under the senior secured revolving credit facility related to the Waddell & Reed Acquisition. In connection with the issuance of the 2031 Senior Notes, the Company incurred $ 3.8 million in costs, which were capitalized as debt issuance costs in the consolidated statements of financial condition. Issuance of 2029 Senior Notes LPLH raised $ 900.0 million in aggregate principal amount of 4.00 % senior notes on March 15, 2021, which were issued at par (“2029 Senior Notes”). The Company used the proceeds from the issuance of the 2029 Senior Notes, along with existing corporate cash available, to redeem its existing 5.75% senior unsecured notes due in 2025. In connection with this redemption, the Company recognized $ 24.4 million as a loss on extinguishment of debt on the consolidated statements of income for the year ended December 31, 2021. In connection with the issuance of the 2029 Senior Notes, the Company incurred $ 9.0 million in costs, which were capitalized as debt issuance costs in the consolidated statements of financial condition. Credit Agreement On March 15, 2021, LPLFH and LPLH entered into a fifth amendment agreement (the “Amendment”) to the Company’s amended and restated credit agreement (“Credit Agreement”), which, among other things, increased the size of its senior secured revolving credit facility to $ 1.0 billion and extended its maturity date. In connection with the execution of the Amendment, the Company incurred $ 3.2 million in costs, which were capitalized as debt issuance costs in the consolidated statements of financial condition. The Credit Agreement subjects the Company to certain financial and non-financial covenants. As of December 31, 2022, the Company was in compliance with such covenants. Parent Revolving Credit Facility Borrowings under the revolving credit facility bear interest at a rate per annum ranging from 125 to 175 basis points over the Eurodollar Rate or 25 to 75 basis points over the base rate depending on the Consolidated Secured Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement). Broker-Dealer Revolving Credit Facility On August 4, 2022, LPL Financial, the Company’s broker-dealer subsidiary, entered into a committed senior unsecured revolving credit facility that matures on August 3, 2023 and allows for a maximum borrowing of up to $ 1.0 billion. This revolving credit facility replaced the $ 300.0 million credit facility that was due to mature on July 31, 2024. Borrowings under the credit facility bear interest at a rate per annum equal to 1.25 % per annum plus the greatest of (i) the secured overnight financing rate plus 0.10 %, (ii) the effective federal funds rate and (iii) the overnight bank funding rate, in each case, as such rate is administered or determined by the Federal Reserve Bank of New York from time to time. In connection with the credit facility, LPL Financial incurred $ 1.9 million in costs, which were capitalized as debt issuance costs in the consolidated statements of financial condition. The broker-dealer credit agreement subjects LPL Financial to certain financial and non-financial covenants. At December 31, 2022, LPL Financial’s net capital was 8% of its aggregate debits, below the 10% aggregate debits required by a financial covenant. The agreement allows 5 days to cure non-compliance with this financial covenant, and it was cured within that allowable time period. LPL Financial was in compliance with all other covenants as of December 31, 2022. Other External Lines of Credit LPL Financial maintained five uncommitted lines of credit as of December 31, 2022. Two of the lines have unspecified limits, which are primarily dependent on LPL Financial’s ability to provide sufficient collateral. The other three lines have a total limit of $ 200.0 million, which allow for uncollateralized borrowings. There was $ 35 million outstanding under these lines of credit as of December 31, 2021 and no balances outstanding as of December 31, 2022. 86 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 14 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 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 related to the net present value of payments is recognized on a straight-line basis over the lease term. Finance lease assets are included in Property and equipment, net in the consolidated statements of financial condition and were $ 92.4 million and $ 97.1 million at December 31, 2022 and December 31, 2021, respectively. The components of lease expense were as follows (in thousands): Years Ended December 31, 2022 2021 2020 Operating lease cost $ 21,862 $ 19,712 $ 18,757 Finance lease cost: Amortization of right-of-use assets $ 4,753 $ 5,150 $ 5,141 Interest on lease liabilities 8,417 8,360 8,423 Total finance lease cost $ 13,170 $ 13,510 $ 13,564 Supplemental weighted-average information related to leases was as follows: December 31, 2022 2021 Weighted-average remaining lease term (years): Finance leases 23.8 24.6 Operating leases 6.2 6.9 Weighted-average discount rate: Finance leases 7.94 % 7.89 % Operating leases 6.77 % 6.96 % Maturities of lease liabilities as of December 31, 2022 were as follows (in thousands): Operating Leases Finance Leases 2023 $ 24,820 $ 8,577 2024 24,049 8,727 2025 23,734 8,879 2026 23,928 9,035 2027 24,309 9,193 Thereafter 34,196 206,532 Total lease payments 155,036 250,943 Less imputed interest 29,756 145,283 Total $ 125,280 $ 105,660 87 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 13 - INCOME TAXES The components of the provision for income taxes were as follows (in thousands): Years Ended December 31, 2022 2021 2020 Current provision for income taxes: Federal $ 276,499 $ 96,389 $ 137,360 State 82,801 26,610 39,757 Total current provision for income taxes 359,300 122,999 177,117 Deferred (benefit) provision for income taxes: Federal ( 69,656 ) 14,446 ( 17,991 ) State ( 23,693 ) 4,018 ( 5,693 ) Total deferred (benefit) provision for income taxes ( 93,349 ) 18,464 ( 23,684 ) Provision for income taxes $ 265,951 $ 141,463 $ 153,433 The following table reflects a reconciliation of the U.S. federal statutory income tax rates to the Company’s effective income tax rates: Years Ended December 31, 2022 2021 2020 Federal statutory income tax rates 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 4.2 4.1 4.4 Share-based compensation ( 1.8 ) ( 2.7 ) ( 1.0 ) Research and development credits ( 0.4 ) ( 0.4 ) ( 0.3 ) Non-deductible expenses 0.3 0.7 0.3 Other 0.6 0.8 0.1 Effective income tax rates 23.9 % 23.5 % 24.5 % The Company’s effective income tax rate differs from the federal corporate tax rate of 21.0 % primarily as a result of certain state taxes, benefits from share-based compensation, and other permanent differences in tax deductibility of certain 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. 88 Table of Contents 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): December 31, 2022 2021 Deferred tax assets: Accrued liabilities $ 149,501 $ 148,566 Operating lease liabilities 33,826 35,182 Finance lease liabilities 28,528 28,647 Forgivable loans 19,688 17,369 Share-based compensation 19,246 16,597 Provision for credit losses 5,040 3,691 State taxes 2,402 5,654 Other 10,120 4,604 Total deferred tax assets 268,351 260,310 Deferred tax liabilities: Depreciation of property and equipment ( 94,136 ) ( 147,659 ) Amortization of other intangibles ( 50,072 ) ( 58,833 ) Operating lease assets ( 25,146 ) ( 25,832 ) Unrealized gains — ( 22,338 ) Total deferred tax liabilities ( 169,354 ) ( 254,662 ) Deferred tax assets, net $ 98,997 $ 5,648 The increase in deferred tax assets, net as of December 31, 2022 compared to December 31, 2021 was primarily driven by deferred tax estimates the Company recorded as a result of the change in Internal Revenue Code Section 174, which requires research and development costs to be capitalized and amortized. Prior to this change the Company deducted these costs in the year incurred. 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): December 31, 2022 2021 2020 Balance — beginning of year $ 57,014 $ 54,435 $ 52,098 Increases for tax positions taken during the current year 14,777 15,637 8,053 Reductions as a result of a lapse of the applicable statute of limitations and decreases in prior-year tax positions ( 19,521 ) ( 13,058 ) ( 5,716 ) Balance — end of year $ 52,270 $ 57,014 $ 54,435 At December 31, 2022 and 2021, there were $ 46.6 million and $ 53.8 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, 2022 and 2021, the liability for unrecognized tax benefits included accrued interest of $ 4.6 million and $ 7.5 million, respectively, and penalties of $ 4.1 million and $ 3.9 million, respectively. The Company and its subsidiaries file federal and state income tax returns, which are subject to routine examinations by the respective taxing authorities. The Company has concluded all federal and state income tax matters for years through 2011. The tax years of 2012 to 2016 and 2019 to 2021 remain open to examination in the federal jurisdiction. The tax years of 2012 to 2021 remain open to examination in the state jurisdictions. In the next 12 months it is reasonably possible that the Company m ay realize a reduction in unrecognized tax benefits of $ 3.7 million relate d to settleme nts and the statute of limitations expiration in federal and various state jurisdictions. 89 Table of Contents 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, 2022 (in thousands): 2023 $ 137,212 2024 53,742 2025 18,418 2026 422 2027 161 Thereafter — Total $ 209,955 Guarantees The Company occasionally enters into contracts that contingently require it to indemnify certain parties against third-party claims. The terms of these obligations vary and, because a maximum obligation is not explicitly stated, the Company has determined that it is not possible to make an estimate of the amount that it could be obligated to pay under such contracts. LPL Financial provides guarantees to securities clearing houses and exchanges under their standard membership agreements, which require a member to guarantee the performance of other members. Under these agreements, if 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 advisors and enterprises, primarily to newly recruited advisors and enterprises 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 or enterprise joining LPL Financial. LPL Financial had no significant unfunded loan commitments at December 31, 2022 or December 31, 2021. Legal and Regulatory Matters The Company is subject to extensive regulation and supervision by U.S. federal and state agencies and various self-regulatory organizations. The Company and its advisors periodically engage with such agencies and organizations, in the context of examinations or otherwise, to respond to inquiries, informational requests and investigations. From time to time, such engagements result in regulatory complaints or other matters, the resolution of which 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; or the potential opportunities for settlement and the status of any settlement discussions. The Company monitors these factors and assumptions for new developments and re-assesses the likelihood that a loss will occur and the estimated range or amount of loss, if those amounts can be reasonably determined. The Company has 90 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements established an accrual for those legal proceedings and regulatory matters for which a loss is both probable and the amount can be reasonably estimated. In October 2022, the Company received a request for information from the Securities and Exchange Commission (“SEC”) in connection with an investigation of the Company’s compliance with records preservation requirements for business-related electronic communications stored on personal devices or messaging platforms that have not been approved by the Company. The Company intends to cooperate fully with the SEC’s inquiry. The Company has estimated that it is reasonably possible that it could incur losses as a result of this request; however, the Company cannot estimate a possible loss or range of loss at this time. At this time, the Company does not believe that this request will have a material adverse effect on its results of operations, financial position, or cash flows. 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 actuarial assumptions and estimates. The estimated accruals for these potential liabilities could be significantly affected if future occurrences and claims differ from such assumptions and historical trends, so there are particular complexities and uncertainties involved when assessing the adequacy of loss reserves for potential liabilities that are self-insured. Self-insurance liabilities are included in accounts payable and accrued liabilities in the consolidated statements of financial condition. Self-insurance related charges are included in other expense in the consolidated statements of income. The following table provides a reconciliation of the beginning and ending balances of self-insurance liabilities for the years presented (in thousands): December 31, 2022 2021 2020 Beginning balance — January 1 $ 67,152 $ 51,501 $ 40,096 Losses incurred 36,462 34,756 34,784 Losses paid ( 29,543 ) ( 19,105 ) ( 23,379 ) Ending balance — December 31 $ 74,071 $ 67,152 $ 51,501 Other Commitments As of December 31, 2022, the Company had approximately $ 466.0 million of client margin loans that were collateralized with securities having a fair value of approximately $ 652.5 million that LPL Financial can repledge, loan or sell. Of these securities, approximately $ 121.1 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, 2022, there were no restrictions that materially limited the Company’s ability to repledge, loan or sell the remaining $ 531.4 million of client collateral. Investment securities on the consolidated statements of financial condition include $ 4.5 million and $ 4.6 million of trading securities pledged to the Options Clearing Corporation at December 31, 2022 and 2021, respectively, and $ 19.9 million and $ 15.0 million of trading securities pledged to the National Securities Clearing Corporation at December 31, 2022 and 2021. 91 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 15 - STOCKHOLDERS’ EQUITY Dividends The payment, timing, and amount of any dividends are subject to approval by the Company’s Board of Directors as well as certain limits under the Credit Agreement and the indentures governing the Company’s senior unsecured notes (the “Indentures”). Cash dividends per share of common stock and total cash dividends paid on a quarterly basis were as follows (in millions, except per share data): 2022 2021 2020 Dividend per Share Total Cash Dividend Dividend per Share Total Cash Dividend Dividend per Share Total Cash Dividend First quarter $ 0.25 $ 20.0 $ 0.25 $ 20.0 $ 0.25 $ 19.7 Second quarter $ 0.25 $ 20.0 $ 0.25 $ 20.0 $ 0.25 $ 19.7 Third quarter $ 0.25 $ 20.0 $ 0.25 $ 20.1 $ 0.25 $ 19.8 Fourth quarter $ 0.25 $ 19.9 $ 0.25 $ 20.0 $ 0.25 $ 19.8 Share Repurchases The Company engages in a share repurchase program that was approved by the Board of Directors (the “Board”), 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. The Company resumed share repurchases in the third quarter of 2021, and during the year ended December 31, 2022 repurchased 1,566,527 shares of common stock at a weighted-average price of $ 207.49 for a total of $ 325.0 million. On September 21, 2022, the Board authorized a $ 2.1 billion increase to the amount available for repurchases of the Company’s issued and outstanding common shares. As of December 31, 2022, the Company had $ 2.0 billion 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. NOTE 16 - SHARE-BASED COMPENSATION, EMPLOYEE INCENTIVES AND BENEFIT PLANS In May 2021, the Company adopted its 2021 Omnibus Equity Incentive Plan (the “2021 Plan”), which provides for the granting of stock options, warrants, restricted stock awards, restricted stock units, deferred stock units, performance stock units and other equity-based compensation to the Company’s employees, non-employee directors and other service providers. The 2021 Plan serves as the successor to the Company’s 2010 Omnibus Equity Incentive Plan (the “2010 Plan”). Following the adoption of the 2021 Plan, the Company is no longer making grants under the 2010 Plan, and the 2021 Plan is the only plan under which equity awards are granted. However, awards previously granted under the 2010 Plan will remain outstanding until vested, exercised or forfeited, as applicable. There were 17,754,197 shares authorized for grant under the 2021 Plan and 13,781,800 shares remaining available for future issuance at December 31, 2022. 92 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Stock Options and Warrants The Company has not granted stock options or warrants since 2019. The following table summarizes the Company’s stock option and warrant activity as of and for the year ended December 31, 2022: Number of Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (In thousands) Outstanding — December 31, 2021 1,204,420 $ 45.65 Granted — $ — Exercised ( 527,595 ) $ 35.66 Forfeited and Expired ( 3,061 ) $ 51.19 Outstanding — December 31, 2022 673,764 $ 53.45 4.36 $ 109,632 Exercisable — December 31, 2022 673,764 $ 53.45 4.36 $ 109,632 Exercisable and expected to vest — December 31, 2022 673,764 $ 53.45 4.36 $ 109,632 The following table summarizes information about outstanding stock options and warrants as of December 31, 2022: Outstanding Exercisable Range of Exercise Prices Total Number of Shares Weighted- Average Remaining Life (Years) Weighted- Average Exercise Price Number of Shares Weighted- Average Exercise Price $ 19.85 - $ 25.00 84,929 3.15 $ 19.85 84,929 $ 19.85 $ 25.01 - $ 35.00 23,826 0.15 $ 31.60 23,826 $ 31.60 $ 35.01 - $ 45.00 166,168 4.19 $ 39.48 166,168 $ 39.48 $ 45.01 - $ 65.00 72,274 1.79 $ 49.06 72,274 $ 49.06 $ 65.01 - $ 75.00 153,639 5.06 $ 65.50 153,639 $ 65.50 $ 75.01 - $ 80.00 172,928 6.14 $ 77.53 172,928 $ 77.53 673,764 4.36 $ 53.45 673,764 $ 53.45 The Company recognized share-based compensation expense related to the vesting of stock options awarded to employees and officers of $ 0.2 million, $ 2.6 million and $ 4.4 million during the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, there was no unrecognized compensation cost related to non-vested stock options as the remaining share-based compensation expense was recognized during the three months ended March 31, 2022. 93 Table of Contents 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, 2022: Restricted Stock Awards Stock Units Number of Shares Weighted-Average Grant-Date Fair Value Number of Shares Weighted-Average Grant-Date Fair Value Outstanding — December 31, 2021 1,051 $ 156.54 915,907 $ 111.49 Granted 1,864 $ 173.78 393,006 $ 190.76 Vested ( 2,101 ) $ 165.16 ( 369,186 ) $ 101.24 Forfeited — $ — ( 76,553 ) $ 149.57 Outstanding — December 31, 2022 814 $ 173.78 863,174 (1) $ 148.59 Expected to vest — December 31, 2022 814 $ 173.78 744,561 $ 155.57 ____________________ (1) Includes 82,222 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 $ 45.4 million, $ 37.2 million and $ 25.1 million of share-based compensation expense related to the vesting of these restricted stock awards and stock units during the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, total unrecognized compensation cost for restricted stock awards and stock units was $ 62.5 million, which is expected to be recognized over a weighted-average remaining period of 1.91 years. The Company also grants restricted stock units to its advisors and to enterprises. The Company recognized share-based compensation expense of $ 2.6 million, $ 2.3 million and $ 2.3 million related to the vesting of these awards during the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, total unrecognized compensation cost for restricted stock units granted to advisors and enterprises was $ 5.1 million, which is expected to be recognized over a weighted-average remaining period of 2.15 years. Employee Incentives and Benefit Plan s 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 $ 24.7 million, $ 20.9 million and $ 18.8 million for the years ended December 31, 2022, 2021 and 2020, respectively, which is classified as compensation and benefits expense in the consolidated statements of income. The Company established its 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 recognized $ 4.4 million, $ 2.0 million and $ 2.2 million of share-based compensation expense related to the ESPP during the years ended December 31, 2022, 2021 and 2020, respectively. The Company’s 2012 Employee Stock Purchase Plan was replaced by its 2021 Employee Stock Purchase Plan in May 2021. 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 $ 477.0 million and $ 482.1 94 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements million at December 31, 2022 and 2021, respectively, which is included in other liabilities in the consolidated statements of financial condition. The cash value of the related trust assets was $ 475.6 million and $ 482.5 million at December 31, 2022 and 2021, respectively, 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 may receive a return based on the allocation of notional investments offered under the plan. Plan assets are held by the Company in a Rabbi Trust and accounted for in the manner described above. As of December 31, 2022, the Company has recorded assets of $ 20.7 million and liabilities of $ 20.8 million, which are included in other assets and other liabilities, respectively, in the consolidated statements of financial condition. As of December 31, 2021, the Company had recorded assets of $ 17.1 million and liabilities of $ 17.1 million. 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 computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if dilutive potential shares of common stock had been issued. The calculation of basic and diluted earnings per share for the years noted was as follows (in thousands, except per share data): Years Ended December 31, 2022 2021 2020 Net income $ 845,702 $ 459,866 $ 472,640 Basic weighted-average number of shares outstanding 79,801 80,002 79,244 Dilutive common share equivalents 1,484 1,740 1,458 Diluted weighted-average number of shares outstanding 81,285 81,742 80,702 Basic earnings per share $ 10.60 $ 5.75 $ 5.96 Diluted earnings per share $ 10.40 $ 5.63 $ 5.86 The computation of diluted earnings per share excludes stock options, warrants and stock units that are anti-dilutive. For the years ended December 31, 2022, 2021 and 2020, stock options, warrants and stock units representing common share equivalents of 9,770 shares, 684 shares and 376,598 shares, respectively, were anti-dilutive. NOTE 18 - NET CAPITAL AND REGULATORY REQUIREMENTS The Company’s registered broker-dealer, LPL Financial, is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1 under the Exchange Act), which requires the maintenance of minimum net capital. The net capital 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, 2022, had net capital of $ 49.5 million, which was $ 36.2 million in excess of its minimum net capital requirement of $ 13.3 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. 95 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 2022 and 2021, LPL Financial and PTC met all capital adequacy requirements to which they were subject. NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK AND CONCENTRATIONS OF CREDIT RISK LPL Financial may offer loans to new and existing advisors and enterprises to facilitate their partnership with LPL Financial, transition to LPL Financial’s platform or fund business development activities. LPL Financial may incur losses if advisors or enterprises do not fulfill their obligations with respect to these loans. To mitigate this risk, LPL Financial evaluates the performance and creditworthiness of the advisor or enterprise prior to offering repayable loans. LPL Financial’s client securities activities are transacted on either a cash or margin basis. In margin transactions, LPL Financial extends credit to the advisor’s client, subject to various regulatory and internal margin requirements, which is collateralized by cash and securities in the client’s account. As clients write options contracts or sell securities short, LPL Financial may incur losses if the clients do not fulfill their obligations and the collateral in the clients’ accounts is not sufficient to fully cover losses that clients may incur from these strategies. To control this risk, LPL Financial monitors margin levels daily and clients are required to deposit additional collateral, or reduce positions, when necessary. LPL Financial is obligated to settle transactions with brokers and other financial institutions even if its advisors’ clients fail to meet their obligation to LPL Financial. Clients are required to complete their transactions on the settlement date, generally two business days after the trade date. If clients do not fulfill their contractual obligations, LPL Financial may incur losses. In addition, the Company occasionally enters into certain types of contracts to fulfill its sale of when-issued securities. When-issued securities have been authorized but are contingent upon the actual issuance of the security. LPL Financial has established procedures to reduce this risk by generally requiring that clients deposit cash or securities into their account prior to placing an order. LPL Financial may at times hold equity securities on both a long and short basis that are recorded on the 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 20 - SUBSEQUENT EVENTS The Company’s Board declared a cash dividend of $ 0.30 per share on the Company’s outstanding common stock to be paid on March 28, 2023 to all stockholders of record on March 14, 2023 . 96 T a b l e o f C o n t e n t s Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.