LPL Financial Holdings Inc. 10-K

Item 8. Financial Statements and Supplementary Data Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 34 ) 63 Consolidated Statements of Income for the years ended December 31, 202 3 , 202 2 and 202 1 65 Consolidated Statements of Financial Condition as of December 31, 202 3 and 202 2 66 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 202 3 , 202 2 and 2021 67 Consolidated Statements of Cash Flows for the years ended December 31, 202 3 , 202 2 and 2021 68 Notes to Consolidated Financial Statements 70 Note 1 - Organization and Description of the Company 70 Note 2 - Summary of Significant Accounting Policies 70 Note 3 - Revenue 77 Note 4 - Acquisitions 81 Note 5 - Fair Value Measurements 83 Note 6 - Investment Securities 88 Note 7 - Receivables from and Payables to Brokers, Dealers and Clearing Organizations 88 Note 8 - Property and Equipment, Net 89 Note 9 - Goodwill and Other Intangibles, Net 89 Note 10 - Other Assets and Other Liabilities 91 Note 11 - Corporate Debt and Other Borrowings, Net 92 Note 12 - Leases 94 Note 13 - Income Taxes 95 Note 14 - Commitments and Contingencies 97 Note 15 - Stockholders’ Equity 99 Note 16 - Share-based Compensation, Employee Incentives and Benefit Plans 100 Note 17 - Earnings per Share 102 Note 18 - Net Capital and Regulatory Requirements 102 Note 19 - Financial Instruments with Off-Balance Sheet Credit Risk and Concentrations of Credit Risk 103 Note 20 - Subsequent Events 104 62 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of LPL Financial Holdings Inc. San Diego, California Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial condition of LPL Financial Holdings Inc. and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, based on criteria established in Internal Control — Integrated Fram ework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2024, 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. Acquisition of Financial Resources Group Investment Services, LLC — Valuation of acquired definite-lived intangible assets and contingent consideration — Refer to Notes 4 and 5 to the financial statements Critical Audit Matter Description On January 31, 2023, the Company acquired the equity of Financial Resources Group Investment Services, LLC, a broker-dealer and independent branch office. Total consideration for the transaction was $189.2 million, which included an initial cash payment of $143.8 million and a liability of $45.4 million for contingent consideration, which represents the acquisition date fair value of the additional cash consideration that may be transferred to the sellers if certain asset growth is achieved in the three years following the closing. During the three months ended December 31, 2023, the Company recorded a $26.7 million fair value adjustment in other expense to increase the fair value of the contingent consideration liability as a result of asset and market growth during the quarter. 63 The Company accounted for the acquisition under the acquisition method of accounting for business combinations. The purchase price is allocated across the estimated fair value of the definite-lived intangible and tangible assets acquired and liabilities assumed, with the excess purchase price allocated to goodwill. The Company used the income approach to estimate the fair value of the intangible assets, which are comprised of $34.7 million of bank relationships and $18.8 million of advisor relationships. The fair value of the intangible assets required management to make significant estimates and assumptions related to future net cash flows and discount rates. The Company determines the fair value for its contingent consideration obligations using a Monte-Carlo simulation model. Contingent payments are estimated by applying significant unobservable inputs, including forecasted growth rates applied to project future revenue or asset growth and discount rates which are based on the cost of debt and equity. Given the fair value determination of intangible assets and contingent consideration requires management to make significant estimates and assumptions related to the forecasts of future net cash flows and asset growth and the selection of the discount rates, performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the valuation of intangible assets and contingent consideration included the following, among others: • We tested the design, implementation and operating effectiveness of internal controls over the valuation of the intangible assets and contingent consideration, including understanding management’s processes and controls over forecasts of future net cash flows and asset growth and the selection of the discount rates. • We evaluated management’s policies and methodology for establishing the fair value of intangible assets, and contingent consideration used in the purchase price allocation and remeasured at December 31, 2023. • We assessed the knowledge, skill, ability, and objectivity of management’s valuation specialist and evaluated the work performed. • We evaluated the reasonableness of business assumptions related to future net cash flows for the intangible assets and projected future revenue or asset growth over the earnout periods for the contingent consideration, considering the past performance of the acquired company, the Company’s strategic plan going forward, previous acquisitions by the Company, and evidence obtained in other areas of the audit, and obtained audit support to substantiate the material assumptions therein. • With the assistance of our fair value specialists, we tested: – the reasonableness of the income approach valuation methodology by challenging key valuation assumptions related to future net cash flows and discount rates and comparing them to industry benchmarks and data, and testing the mathematical accuracy of the valuation of intangible assets by performing a recalculation. – the reasonableness of the Monte-Carlo simulation model by independently running Monte-Carlo simulations to calculate independent estimates of the fair value of contingent consideration. We compared the results of our estimates of fair value of the contingent consideration to the Company’s fair value estimates. – the reasonableness of the discount rates by developing a range of independent estimates and comparing those to the discount rates selected by management. /s/ Deloitte & Touche LLP San Diego, California February 21, 2024 We have served as the Company's auditor since 2001. 64 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Income (In thousands, except per share data) Years Ended December 31, 2023 2022 2021 REVENUE Advisory $ 4,135,681 $ 3,875,154 $ 3,525,430 Commission: Trailing 1,299,840 1,292,358 1,404,628 Sales-based 1,252,783 1,033,806 974,055 Total commission 2,552,623 2,326,164 2,378,683 Asset-based: Client cash 1,509,869 953,624 360,847 Other asset-based 867,860 806,649 787,220 Total asset-based 2,377,729 1,760,273 1,148,067 Service and fee 508,437 467,381 411,761 Transaction 199,939 181,260 156,336 Interest income, net 159,415 77,126 28,577 Other 119,024 ( 86,533 ) 71,976 Total revenue 10,052,848 8,600,825 7,720,830 EXPENSE Advisory and commission 5,915,807 5,324,827 5,180,090 Compensation and benefits 979,681 820,736 741,003 Promotional 459,233 339,994 302,285 Occupancy and equipment 248,620 219,798 185,531 Depreciation and amortization 246,994 199,817 151,428 Interest expense on borrowings 186,804 126,234 104,414 Amortization of other intangibles 107,211 87,560 79,260 Brokerage, clearing and exchange 105,984 86,063 86,023 Communications and data processing 75,717 67,687 60,296 Professional services 72,583 72,519 73,231 Loss on extinguishment of debt — — 24,400 Other 209,439 143,937 131,540 Total expense 8,608,073 7,489,172 7,119,501 INCOME BEFORE PROVISION FOR INCOME TAXES 1,444,775 1,111,653 601,329 PROVISION FOR INCOME TAXES 378,525 265,951 141,463 NET INCOME $ 1,066,250 $ 845,702 $ 459,866 EARNINGS PER SHARE Earnings per share, basic $ 13.88 $ 10.60 $ 5.75 Earnings per share, diluted $ 13.69 $ 10.40 $ 5.63 Weighted-average shares outstanding, basic 76,807 79,801 80,002 Weighted-average shares outstanding, diluted 77,861 81,285 81,742 See notes to consolidated financial statements. 65 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Financial Condition (In thousands, except share data) December 31, 2023 2022 ASSETS Cash and equivalents $ 465,671 $ 847,519 Cash and equivalents segregated under federal or other regulations 2,007,312 2,199,362 Restricted cash 108,180 90,389 Receivables from clients, net 588,585 561,569 Receivables from brokers, dealers and clearing organizations 50,069 56,276 Advisor loans, net 1,479,690 1,123,004 Other receivables, net 743,317 677,766 Investment securities 91,311 52,610 Property and equipment, net 933,091 780,357 Goodwill 1,856,648 1,642,468 Other intangibles, net 671,585 427,676 Other assets 1,390,021 1,023,230 Total assets $ 10,385,480 $ 9,482,226 LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES: Client payables $ 2,266,176 $ 2,694,929 Payables to brokers, dealers and clearing organizations 163,337 147,752 Accrued advisory and commission expenses payable 216,541 203,292 Corporate debt and other borrowings, net 3,734,111 2,717,444 Accounts payable and accrued liabilities 485,963 448,630 Other liabilities 1,440,373 1,102,627 Total liabilities 8,306,501 7,314,674 Commitments and contingencies (Note 14) STOCKHOLDERS’ EQUITY: Common stock, $ 0.001 par value; 600,000,000 shares authorized; 130,233,328 shares and 129,655,843 shares issued at December 31, 2023 and 2022, respectively 130 130 Additional paid-in capital 1,987,684 1,912,886 Treasury stock, at cost — 55,576,970 shares and 50,407,844 shares at December 31, 2023 and 2022, respectively ( 3,993,949 ) ( 2,846,536 ) Retained earnings 4,085,114 3,101,072 Total stockholders’ equity 2,078,979 2,167,552 Total liabilities and stockholders’ equity $ 10,385,480 $ 9,482,226 See notes to consolidated financial statements. 66 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, 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 Net income — — — — — 1,066,250 1,066,250 Issuance of common stock to settle restricted stock units 448 — — 165 ( 40,005 ) — ( 40,005 ) Treasury stock purchases — — — 5,076 ( 1,109,962 ) — ( 1,109,962 ) Cash dividends on common stock - $ 1.20 per share — — — — — ( 92,190 ) ( 92,190 ) Stock option exercises and other 129 — 6,129 ( 72 ) 2,554 9,982 18,665 Share-based compensation — — 68,669 — — — 68,669 BALANCE — December 31, 2023 130,233 $ 130 $ 1,987,684 55,577 $ ( 3,993,949 ) $ 4,085,114 $ 2,078,979 See notes to consolidated financial statements. 67 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Years Ended December 31, 2023 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,066,250 $ 845,702 $ 459,866 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 246,994 199,817 151,428 Amortization of other intangibles 107,211 87,560 79,260 Amortization of debt issuance costs 8,731 6,853 5,733 Share-based compensation 68,669 52,608 44,175 Provision for credit losses 15,947 13,667 9,168 Deferred (benefit) provision for income taxes ( 68,454 ) ( 93,349 ) 18,464 Loss on extinguishment of debt — — 24,400 Loan forgiveness 223,517 179,529 151,427 Other 39,172 14,783 ( 10,007 ) Changes in operating assets and liabilities: Receivables from clients, net ( 28,070 ) 17,254 ( 174,236 ) Receivables from brokers, dealers and clearing organizations 6,207 46,227 ( 4,764 ) Advisor loans, net ( 594,438 ) ( 341,872 ) ( 526,677 ) Other receivables, net ( 71,328 ) ( 107,588 ) ( 140,021 ) Investment securities - trading ( 38,956 ) ( 73 ) ( 8,732 ) Other assets ( 213,043 ) ( 148,263 ) ( 136,182 ) Client payables ( 428,753 ) 982,705 177,703 Payables to brokers, dealers and clearing organizations 15,585 ( 22,367 ) 80,376 Accrued advisory and commission expenses payable 11,421 ( 19,087 ) 29,771 Accounts payable and accrued liabilities 31,256 50,664 12,390 Other liabilities 117,805 183,381 211,819 Operating lease assets ( 3,112 ) ( 2,574 ) ( 2,227 ) Net cash provided by operating activities 512,611 1,945,577 453,134 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 403,286 ) ( 306,596 ) ( 215,987 ) Acquisitions, net of cash acquired ( 453,475 ) ( 56,458 ) ( 245,913 ) Purchases of securities classified as held-to-maturity ( 4,725 ) ( 10,936 ) ( 1,741 ) Proceeds from maturities of securities classified as held-to-maturity 5,500 5,000 5,000 Purchases of other investments ( 4,200 ) ( 7,410 ) — Net cash used in investing activities ( 860,186 ) ( 376,400 ) ( 458,641 ) Continued on following page 68 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Years Ended December 31, 2023 2022 2021 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facilities 1,718,000 815,000 1,585,000 Repayments of revolving credit facilities ( 1,438,000 ) ( 905,000 ) ( 1,495,000 ) Repayment of senior secured term loans ( 10,700 ) ( 10,700 ) ( 10,700 ) Repayment of senior unsecured notes — — ( 900,000 ) Proceeds from senior unsecured notes 749,468 — 1,300,000 Payment of debt issuance costs ( 13,474 ) ( 1,872 ) ( 15,929 ) Make-whole premium on redemption of senior unsecured notes — — ( 25,875 ) Payment of contingent consideration — — ( 8,941 ) Tax payments related to settlement of restricted stock units ( 40,005 ) ( 25,157 ) ( 20,230 ) Repurchase of common stock ( 1,100,101 ) ( 325,031 ) ( 90,011 ) Dividends on common stock ( 92,190 ) ( 79,833 ) ( 80,095 ) Proceeds from stock option exercises and other 18,665 28,730 41,974 Principal payment of finance leases and obligations ( 195 ) ( 408 ) ( 1,356 ) Net cash (used in) provided by financing activities ( 208,532 ) ( 504,271 ) 278,837 NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS, CASH AND EQUIVALENTS SEGREGATED UNDER FEDERAL OR OTHER REGULATIONS AND RESTRICTED CASH ( 556,107 ) 1,064,906 273,330 CASH AND EQUIVALENTS, CASH AND EQUIVALENTS SEGREGATED UNDER FEDERAL OR OTHER REGULATIONS AND RESTRICTED CASH — Beginning of year 3,137,270 2,072,364 1,799,034 CASH AND EQUIVALENTS, CASH AND EQUIVALENTS SEGREGATED UNDER FEDERAL OR OTHER REGULATIONS AND RESTRICTED CASH — End of year $ 2,581,163 $ 3,137,270 $ 2,072,364 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 191,350 $ 118,824 $ 103,689 Income taxes paid $ 535,959 $ 238,155 $ 144,556 Cash paid for amounts included in the measurement of operating lease liabilities $ 27,714 $ 24,657 $ 22,355 Cash paid for amounts included in the measurement of finance lease liabilities $ 8,577 $ 8,825 $ 9,716 NONCASH DISCLOSURES: Capital expenditures included in accounts payable and accrued liabilities $ 26,021 $ 33,957 $ 21,373 Lease assets obtained in exchange for operating lease liabilities $ 17,517 $ 10,785 $ 3,602 Contingent consideration liabilities recognized at acquisition date $ 88,132 $ — $ — December 31, 2023 2022 2021 Cash and equivalents $ 465,671 $ 847,519 $ 495,246 Cash and equivalents segregated under federal or other regulations 2,007,312 2,199,362 1,496,463 Restricted cash 108,180 90,389 80,655 Total cash and equivalents, cash and equivalents segregated under federal or other regulations and restricted cash shown in the statements of cash flows $ 2,581,163 $ 3,137,270 $ 2,072,364 ` See notes to consolidated financial statements. 69 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”) is an intermediate holding company and directly or indirectly owns 100 % of the issued and outstanding common equity interests of all of LPLFH’s indirect subsidiaries, including a 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 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. • 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. • LPL Employee Services, LLC and its subsidiary, Allen & Company of Florida, LLC, along with their affiliate Financial Resources Group Investment Services, LLC (“FRGIS”), 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, acquisitions, 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. Consolidated Financial Statement Presentation Changes Certain financial statement line items have been reclassified in the consolidated statement of financial condition to better align with industry practice and the Company’s business. The Company reclassified liabilities for contingent consideration, which were previously included in accounts payable and accrued liabilities, to other liabilities in the consolidated statement of financial condition as of December 31, 2023. This reclassification has not been applied retroactively as the impact on the prior year was not material. This change did not impact total 70 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements liabilities for the periods presented; however, the consolidated statement of cash flows for the year ended December 31, 2023 has been updated to conform to the current presentation on the consolidated statement of financial condition. 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 $ 19.7 million, $ 5.7 million and $ 6.1 million during the years ended December 31, 2023, 2022 and 2021, respectively. The Company incurred expense for services provided by these related parties of $ 3.6 million, $ 3.4 million and $ 2.2 million during the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023, receivables from and payables to related parties were $ 5.0 million and $ 0.4 million, respectively. As of December 31, 2022, 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. 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 71 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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. 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 equivalents are composed of U.S. government obligations. 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, 2023, this line item included interest bearing deposits, U.S. treasury bills with original maturities of 90 days or less and approximately $ 0.3 million 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. 72 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Restricted Cash Restricted cash primarily represents cash held and for use by the captive insurance subsidiary and is primarily comprised of money market funds. 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, 2023 2022 2021 Beginning balance — January 1 $ 909 $ 987 $ 520 Provision for credit losses 1,054 66 424 (Charge-offs) recoveries, net ( 373 ) ( 144 ) 43 Ending balance — December 31 $ 1,590 $ 909 $ 987 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 $ 341.0 million and $ 280.0 million as of December 31, 2023 and 2022. The following table reflects a roll-forward of the allowance for credit losses on advisor loans (in thousands): December 31, 2023 2022 2021 Beginning balance — January 1 $ 15,144 $ 11,575 $ 8,797 Provision for credit losses 8,393 4,790 7,074 (Charge-offs) recoveries, net ( 10,560 ) 361 ( 4,296 ) Other — ( 1,582 ) — Ending balance — December 31 $ 12,977 $ 15,144 $ 11,575 73 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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, 2023 2022 2021 Beginning balance — January 1 $ 2,788 $ 1,083 $ 1,068 Provision for credit losses 6,500 8,811 1,670 Charge-offs, net of recoveries ( 7,840 ) ( 8,688 ) ( 1,655 ) Other — 1,582 — Ending balance — December 31 $ 1,448 $ 2,788 $ 1,083 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. 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 and post-implementation stages. The Company capitalizes software development costs for projects during the application development phase, in which management has authorized and committed to funding the project and it is probable that the project will be completed and utilized as intended. 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 74 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 impairment occurred for the years ended December 31, 2023, 2022 or 2021. Acquisitions Accounting for business combinations requires the Company to make significant estimates and assumptions with respect to intangible assets, liabilities assumed, pre-acquisition contingencies, useful lives and liabilities for contingent consideration, as applicable. These assumptions include, but are not limited to, future expected cash flows, asset or revenue growth, discount rates, and market conditions 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, liabilities assumed and any liabilities for contingent consideration, as applicable, 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 or recorded. Certain of the Company’s acquisitions include contingent consideration, which may result in the transfer of additional cash consideration to the sellers if certain asset or revenue growth is achieved in the years following an acquisition. For acquisitions accounted for under the acquisition method of accounting for business combinations, any such contingent consideration is recognized at its estimated fair value on the date of acquisition. This contingent consideration is remeasured at its fair value at each subsequent reporting date until the contingency is resolved. Any changes in fair value are recognized in other expense in the consolidated statements of operations. 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, liabilities assumed or liabilities for contingent consideration 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 or recorded, whichever comes first, any subsequent adjustments are recognized in the consolidated statements of income. The Company also enters into asset acquisitions for single identifiable intangible assets which are accounted for under a cost accumulation model in which cash consideration and transaction costs are allocated to the intangible assets acquired. 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. The Company does not recognize a liability for contingent payments in acquisitions that are accounted for as asset acquisitions as the amounts to be paid will be uncertain until a future measurement date. 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, 2023, 2022 or 2021. 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 75 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements definite-lived intangibles recognized for the years ended December 31, 2023, 2022 or 2021. 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, 2023, the contract and collateral market values of borrowed securities were $ 4.3 million and $ 4.1 million, respectively. As of December 31, 2022, the contract and collateral market values of borrowed securities were $ 9.6 million and $ 9.3 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 Accounting Standards Codification 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 76 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements determined estimates of losses incurred, but not yet reported to the Company as well as specific reserves for proceedings and matters that are probable and estimable. The captive insurance subsidiary is funded by payments from LPL Financial and has cash reserves to cover losses, including $ 103.4 million in restricted cash. 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 Accounting Pronouncements In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures to enhance the transparency of income tax disclosures relating to the rate reconciliation, disclosure of income taxes paid, and certain other disclosures. The ASU should be applied prospectively and is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact on the related disclosures; however, it does not expect this update to have an impact on its financial condition or results of operations. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures to improve the disclosures about reportable segments and include more detailed information about a reportable segment’s expenses. This ASU also requires that a public entity with a single reportable segment, like the Company, provide all of the disclosures required as part of the amendments and all existing disclosures required by Topic 280. The ASU should be applied retrospectively to all prior periods presented in the financial statements and is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact on the related disclosures; however, it does not expect this update to have an impact on its financial condition or results of operations. Recently Adopted Accounting Pronouncements There were no new accounting pronouncements adopted during the year ended December 31, 2023 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. 77 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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, 2023. 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. 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, 2023 2022 2021 Commission revenue Annuities $ 1,482,690 $ 1,269,634 $ 1,210,899 Mutual funds 666,942 679,912 768,168 Fixed income 154,177 119,196 126,543 Equities 110,698 114,446 131,975 Other 138,116 142,976 141,098 Total commission revenue $ 2,552,623 $ 2,326,164 $ 2,378,683 78 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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, 2023 2022 2021 Commission revenue Trailing Annuities $ 742,930 $ 727,324 $ 785,735 Mutual funds 521,300 525,170 576,719 Other 35,610 39,864 42,174 Total trailing revenue $ 1,299,840 $ 1,292,358 $ 1,404,628 Sales-based Annuities $ 739,760 $ 542,310 $ 425,164 Fixed income 154,177 119,196 126,543 Mutual funds 145,642 154,742 191,449 Equities 110,698 114,446 131,975 Other 102,506 103,112 98,924 Total sales-based revenue $ 1,252,783 $ 1,033,806 $ 974,055 Total commission revenue $ 2,552,623 $ 2,326,164 $ 2,378,683 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 79 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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, 2023 2022 2021 Asset-based revenue Client cash $ 1,509,869 $ 953,624 $ 360,847 Sponsorship programs 452,753 394,181 385,791 Recordkeeping 415,107 412,468 401,429 Total asset-based revenue $ 2,377,729 $ 1,760,273 $ 1,148,067 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 registered investment advisors 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 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, 2023 2022 2021 Service and fee revenue Over time (1) $ 387,763 $ 351,465 $ 301,302 Point-in-time (2) 120,674 115,916 110,459 Total service and fee revenue $ 508,437 $ 467,381 $ 411,761 ____________________ (1) Service and fee revenue recognized over time includes revenue such as IRA custodian fees, error and omission insurance fees and technology fees. (2) Service and fee revenue recognized at a point-in-time includes revenue such as account fees, IRA termination fees and conference fees. 80 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 increased from $ 138.1 million as of December 31, 2022 to $ 156.2 million as of December 31, 2023. The increase in unearned revenue for the year ended December 31, 2023 is primarily driven by cash payments received or due in advance of satisfying the Company’s performance obligations, partially offset by $ 136.9 million of revenue recognized during the year ended December 31, 2023 that was included in the unearned revenue balance as of December 31, 2022. 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. NOTE 4 - ACQUISITIONS Acquisition of Financial Resources Group Investment Services, LLC On January 31, 2023, the Company acquired the equity of Financial Resources Group Investment Services, LLC, a broker-dealer and independent branch office, in order to expand its addressable markets and complement organic growth. Total consideration for the transaction was $ 189.2 million, which included an initial cash payment of $ 143.8 million and a liability of $ 45.4 million for contingent consideration, which represents the acquisition date fair value of the additional cash consideration that may be transferred to the sellers if certain asset growth is achieved in the three years following the closing. The Company recognized $ 1.4 million of transaction costs as part of this acquisition. During the three months ended December 31, 2023, the Company recorded a $ 26.7 million fair value adjustment in other expense to increase the fair value of the contingent consideration liability as a result of asset and market growth during the quarter. The Company estimates that this contingent consideration may be settled for an amount up to $ 85.0 million in the years following the closing. 81 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company accounted for the acquisition under the acquisition method of accounting for business combinations. At December 31, 2023, the Company had allocated $ 129.7 million of the purchase price to goodwill, $ 53.5 million to definite-lived intangible assets, $ 9.0 million to cash acquired, and the remainder to other assets acquired and liabilities assumed as part of the acquisition. The goodwill primarily includes synergies expected to result from combining operations and is deductible for tax purposes. The intangible assets are comprised of $ 34.7 million of bank relationships and $ 18.8 million of advisor relationships which were assigned useful lives of 15 years and 6 years respectively. These intangible assets were valued using the income approach and are included in the Advisor and enterprise relationships line item in Note 9 - Goodwill and Other Intangibles, Net . The fair value determination of bank and advisor relationships required the Company to make significant estimates and assumptions related to future net cash flows and discount rates. Other Acquisitions During the year ended December 31, 2023, the Company completed a total of 19 acquisitions under the Liquidity & Succession solution, in which the Company buys advisor practices. The Company also completed the acquisition of Boenning & Scattergood’s Private Client Group on January 31, 2023. Certain of these acquisitions have been accounted for as business combinations and certain have been accounted for as asset acquisitions. The Company recognized $ 6.0 million of transaction costs as part of these acquisitions. Business Combinations The assets and liabilities acquired as part of acquisitions that qualify as business combinations are recognized at fair value as of the acquisition date. This fair value determination requires the Company to make significant estimates and assumptions about market conditions, future expected cash flows, asset or revenue growth, discount rates, and market conditions which 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 may record adjustments to assets acquired, liabilities assumed, liabilities for contingent consideration, or goodwill as additional information becomes available. The Com pany accounted for five Liquidity & Succession transactions under the acquisition method of accounting for business combinations. Total consideration for these transactions was $ 190.2 million, which included initial consideration of $ 147.4 million, including $ 140.3 million of cash, and a liability of $ 42.7 million for contingent consideration, which represents the acquisition date fair value of the additional cash consideration that may be transferred to the sellers if certain asset growth is achieved in the three to five years following the closing. The Company estimates that this contingent consideration may be settled for amounts up to $ 107.2 million in the years following the closing. At December 31, 2023, the Company allocated $ 84.5 million of the purchase price to goodwill and $ 105.7 million to the definite-lived intangible assets acquired as part of these acquisitions. The goodwill primarily includes synergies expected to result from combining operations and is deductible for tax purposes. The intangible assets are comprised of $ 59.5 million of client relationships, $ 31.8 million of advisor relationships, and $ 14.4 million of technology which were valued using the income approach and assigned useful lives ranging from seven to 15 years. See Note 9 – Goodwill and Other Intangibles, Net , for additional information. The fair value determination of client relationships, advisor relationships and technology required the Company to make significant estimates and assumptions related to future net cash flows and discount rates. Additionally, certain fair value determinations relate to acquisitions that were completed during the fourth quarter of 2023. The Company has provisionally allocated $ 37.5 million to definite-lived intangible assets, $ 62.3 million to goodwill, and $ 22.7 million to liabilities for contingent consideration related to these acquisitions; however, these allocations may change as the Company completes its purchase accounting analysis. Asset Acquisitions The Compan y accounted for fifteen other acquisitions as asset acquisitions. These transactions included initial consideration of $ 180.4 million, including $ 142.3 million which was allocated to client relationships and $ 38.1 million which was allocated to advisor relationships. The client and advisor relationship intangible assets were assigned useful lives of 14 years and 15 years, respectively. These transactions include potential contingent payments of up to $ 73.1 million in the three years following the closing if certain asset growth is achieved. The Company has not recognized a liability for these contingent payments as the amounts to be paid will be uncertain until a future measurement date. See Note 9 - Goodwill and Other Intangibles, Net , for additional information. 82 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Acquisitions Completed in Prior Periods 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 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, 2023 or 2022. 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, 2023 and 2022, 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 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 83 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements observable market interest rates that correspond to the remaining maturities or the next interest reset dates. At December 31, 2023 and 2022, 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, 2023 and 2022, the Company did not adjust prices received from the independent third-party pricing services. Contingent Consideration — The Company measures contingent consideration liabilities at fair value at the acquisition date, as applicable, and thereafter on a recurring basis using unobservable (Level 3) inputs. These contingent consideration liabilities are reflected in other liabilities at December 31, 2023 and in accounts payable and accrued liabilities at December 31, 2022. See Note 2 - Summary of Significant Accounting Policies and Note 4 - Acquisitions for additional information. Level 3 Recurring Fair Value Measurements The Company determines the fair value for its contingent consideration obligations using Monte-Carlo simulation and discounted cash flows models. Contingent payments are estimated by applying significant unobservable inputs, including forecasted growth rates applied to project future revenue or asset growth and discount rates which are based on the cost of debt and equity. These projections are measured against the performance targets specified in each respective acquisition agreement, which may include growth in assets under management, net new assets, asset conversion or retention, or revenue growth. Significant increases or decreases in the Company’s forecasted growth rates over the measurement period or discount rates would result in a higher or lower fair value measurement. The following table summarizes inputs used in the measurement of contingent consideration using Monte-Carlo simulation models (dollars in thousands): December 31, Quantitative Information About Level 3 Fair Value Measurements 2023 2022 Type Valuation Techniques Unobservable Inputs Range $ 114,844 $ — Contingent Consideration Monte-Carlo Simulation Model Forecasted Growth Rates 12.0 % - 29.5 % Discount Rate 13.6 % - 15.7 % The Company also had contingent consideration of $ 4.0 million and $ 3.9 million at December 31, 2023 and 2022, respectively, that was measured using a discounted cash flow model in which a discount rate is applied to an estimated payment based on an expectation of future transactions. 84 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, 2023 Level 1 Level 2 Level 3 Total Assets Cash equivalents $ 166 $ — $ — $ 166 Cash equivalents segregated under federal or other regulations 720,077 — — 720,077 Restricted cash 103,226 — — 103,226 Investment securities - trading: Mutual funds 50,518 — — 50,518 U.S. treasury obligations 25,388 — — 25,388 Money market funds 107 — — 107 Equity securities 43 — — 43 Debt securities — 32 — 32 Total investment securities - trading 76,056 32 — 76,088 Other assets: Deferred compensation plan 677,548 — — 677,548 Fractional shares - investment (1) 177,131 — — 177,131 Other investments — 3,960 — 3,960 Total other assets 854,679 3,960 — 858,639 Total assets at fair value $ 1,754,204 $ 3,992 $ — $ 1,758,196 Liabilities Other liabilities: Securities sold, but not yet purchased: Equity securities $ 487 $ — $ — $ 487 Mutual funds 55 — — 55 Total securities sold, but not yet purchased 542 — — 542 Fractional shares - repurchase obligation (1) 177,131 — — 177,131 Contingent consideration — — 118,844 118,844 Total other liabilities 177,673 — 118,844 296,517 Total liabilities at fair value $ 177,673 $ — $ 118,844 $ 296,517 ____________________ (1) Investment in and related repurchase obligation for fractional shares resulting from the Company’s DRIP. 85 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, 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 — contingent consideration $ — $ — $ 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. 86 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, 2023 Carrying Value Level 1 Level 2 Level 3 Total Fair Value Assets Cash $ 465,505 $ 465,505 $ — $ — $ 465,505 Cash segregated under federal or other regulations 1,287,235 1,287,235 — — 1,287,235 Restricted cash 4,954 4,954 — — 4,954 Receivables from clients, net 588,585 — 588,585 — 588,585 Receivables from brokers, dealers and clearing organizations 50,069 — 50,069 — 50,069 Advisor repayable loans, net (1) 340,985 — — 236,888 236,888 Other receivables, net 743,317 — 743,317 — 743,317 Investment securities - held-to-maturity securities 15,223 — 15,079 — 15,079 Other assets: Securities borrowed 4,334 — 4,334 — 4,334 Deferred compensation plan (2) 6,217 6,217 — — 6,217 Other investments (3) 4,695 — 4,695 — 4,695 Total other assets 15,246 6,217 9,029 — 15,246 Liabilities Client payables $ 2,266,176 $ — $ 2,266,176 $ — $ 2,266,176 Payables to brokers, dealers and clearing organizations 163,337 — 163,337 — 163,337 Corporate debt and other borrowings, net 3,734,111 — 3,680,199 — 3,680,199 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 ____________________ (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. 87 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, 2023 2022 Trading securities - at fair value: Mutual funds $ 50,518 $ 10,679 U.S. treasury obligations 25,388 24,402 Money market funds 107 112 Equity securities 43 980 Debt securities 32 585 Total trading securities $ 76,088 $ 36,758 Held-to-maturity securities - at amortized cost: U.S. government notes $ 15,223 $ 15,852 Total held-to-maturity securities $ 15,223 $ 15,852 Total investment securities $ 91,311 $ 52,610 At December 31, 2023, 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 $ 4,978 $ 10,245 $ — $ — $ 15,223 U.S. government notes — at fair value $ 4,899 $ 10,180 $ — $ — $ 15,079 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, 2023 2022 Receivables: Receivables from clearing organizations $ 39,968 $ 46,075 Securities failed-to-deliver 8,425 9,083 Receivables from brokers and dealers 1,676 1,118 Total receivables $ 50,069 $ 56,276 Payables: Payables to brokers and dealers $ 101,052 $ 82,685 Payables to clearing organizations 34,879 41,495 Securities failed-to-receive 27,406 23,572 Total payables $ 163,337 $ 147,752 88 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, 2023 (in thousands): Historical Cost Accumulated Depreciation and Amortization Net Carrying Value Internally developed software $ 1,232,159 $ ( 648,972 ) $ 583,187 Computers and software 354,966 ( 262,051 ) 92,915 Buildings 107,873 ( 19,379 ) 88,494 Leasehold improvements 94,938 ( 49,496 ) 45,442 Furniture and equipment 86,203 ( 77,593 ) 8,610 Land 4,678 — 4,678 Work in progress (1) 109,765 — 109,765 Total property and equipment, net $ 1,990,582 $ ( 1,057,491 ) $ 933,091 ____________________ (1) Work in progress includes $ 34.6 million of internal software in development and related hardware and software at December 31, 2023. 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 Work in progress (1) 69,794 — 69,794 Total property and equipment, net $ 1,597,352 $ ( 816,995 ) $ 780,357 (1) Work in progress includes $ 69.2 million of internal software in development and related hardware and software at December 31, 2022. Depreciation and amortization was $ 247.0 million, $ 199.8 million and $ 151.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. NOTE 9 - GOODWILL AND OTHER INTANGIBLES, NET During the year ended December 31, 2023, the Company completed various acquisitions, which were accounted for under the acquisition method of accounting for business combinations and as asset acquisitions. See Note 4 - Acquisitions , for additional information. A summary of the activity impacting goodwill is presented below (in thousands): Balance at December 31, 2021 $ 1,642,443 Goodwill acquired 25 Balance at December 31, 2022 1,642,468 Goodwill acquired 214,180 Balance at December 31, 2023 $ 1,856,648 89 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, 2023 (thousands): Weighted-Average Life Remaining (in years) Gross Carrying Value Accumulated Amortization Net Carrying Value Definite-lived intangibles, net (1) : Advisor and enterprise relationships 7.3 $ 935,478 $ ( 614,277 ) $ 321,201 Product sponsor relationships 2.2 234,086 ( 209,076 ) 25,010 Client relationships 12.6 313,585 ( 51,328 ) 262,257 Technology 8.7 33,460 ( 10,162 ) 23,298 Total definite-lived intangible assets, net $ 1,516,609 $ ( 884,843 ) $ 631,766 Other indefinite-lived intangibles: Trademark and trade name 39,819 Total other intangibles, net $ 671,585 ____________________ (1) During the year ended December 31, 2023, the Company completed various acquisitions which were accounted for under the acquisition method of accounting for business combinations and as asset acquisitions. See Note 4 - Acquisitions , for additional information . 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 Total definite-lived intangibles, net $ 1,165,489 $ ( 777,632 ) $ 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, t he Company completed various acquisitions which were accounted for under the acquisition method of accounting for business combinations and as asset acquisitions. See Note 4 - Acquisitions , for additional information . Total amortization of other intangibles was $ 107.2 million, $ 87.6 million and $ 79.3 million for the years ended December 31, 2023, 2022 and 2021, respectively. Future amortization is estimated as follows (in thousands): 2024 - remainder $ 111,227 2025 102,908 2026 64,652 2027 59,503 2028 53,711 Thereafter 239,765 Total $ 631,766 90 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, 2023 2022 Other assets: Deferred compensation $ 683,765 $ 496,319 Prepaid assets 173,039 144,607 Fractional shares - investment (1) 177,131 122,253 Deferred tax assets, net (2) 167,450 98,997 Operating lease assets (3) 93,797 92,534 Debt issuance costs, net 9,065 6,422 Other 85,774 62,098 Total other assets $ 1,390,021 $ 1,023,230 Other liabilities: Deferred compensation $ 684,178 $ 497,736 Unearned revenue (4) 156,214 138,109 Operating lease liabilities (3) 123,477 125,280 Fractional shares - repurchase obligation (1) 177,131 122,253 Finance lease liabilities (3) 105,465 105,660 Taxes payable 24,522 113,503 Other 169,386 86 Total other liabilities $ 1,440,373 $ 1,102,627 _______________________________ (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. 91 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, 2023 December 31, 2022 Corporate Debt Balance Applicable Margin Interest Rate Balance Applicable Margin Interest rate Maturity Term Loan B (1)(2) $ 1,027,200 SOFR+ 185 bps 7.206 % $ 1,037,900 LIBOR+ 175 bps 5.870 % 11/12/2026 2027 Senior Notes (1) 400,000 Fixed Rate 4.625 % 400,000 Fixed Rate 4.625 % 11/15/2027 2028 Senior Notes (1) 750,000 Fixed Rate 6.750 % — Fixed Rate — % 11/17/2028 2029 Senior Notes (1) 900,000 Fixed Rate 4.000 % 900,000 Fixed Rate 4.000 % 3/15/2029 2031 Senior Notes (1) 400,000 Fixed Rate 4.375 % 400,000 Fixed Rate 4.375 % 5/15/2031 Total Corporate Debt 3,477,200 2,737,900 Less: Unamortized Debt Issuance Cost ( 23,089 ) ( 20,456 ) Corporate debt, net $ 3,454,111 $ 2,717,444 Other Borrowings Revolving Credit Facility (2)(3) 280,000 ABR+ 37.5 bps / SOFR+ 147.5 bps 6.966 % — LIBOR+125 bps 5.642 % 3/15/2026 Total other borrowings $ 280,000 $ — Corporate Debt and Other Borrowings, Net $ 3,734,111 $ 2,717,444 _______________________________ (1) No leverage or interest coverage maintenance covenants. (2) In March 2023, the Company amended its Credit Agreement to transition the Parent Revolving Credit Facility and Term Loan B from London Interbank Offered Rate (“LIBOR”)-based to Secured Overnight Financing Rate (“SOFR”)-based interest rates, which became effective in March and April 2023, respectively. (3) The Parent’s outstanding balance at December 31, 2023 was comprised of an alternate base rate (“ABR”)-based balance of $ 18.0 million with the applicable margin of ABR + 37.5 bps ( 8.875 %) and a SOFR-based balance of $ 262.0 million with the applicable margin of SOFR + 147.5 bps ( 6.835 %). The minimum calendar year payments and maturities of the corporate debt and other borrowings as of December 31, 2023 were as follows (in thousands): 2024 $ 10,700 2025 10,700 2026 1,285,800 2027 400,000 2028 750,000 Thereafter 1,300,000 Total $ 3,757,200 The following table presents amounts outstanding and available under the Company’s external lines of credit at December 31, 2023 (in millions): Description Borrower Maturity Date Outstanding Available Senior secured, revolving credit facility LPL Holdings, Inc. March 2026 $ 280 $ 1,720 Broker-dealer revolving credit facility LPL Financial LLC July 2024 $ — $ 1,000 Unsecured, uncommitted lines of credit LPL Financial LLC None $ — $ 75 Unsecured, uncommitted lines of credit LPL Financial LLC September 2024 $ — $ 50 Secured, uncommitted lines of credit LPL Financial LLC March 2025 $ — $ 75 Secured, uncommitted lines of credit LPL Financial LLC None $ — unspecified Secured, uncommitted lines of credit LPL Financial LLC None $ — unspecified 92 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Issuance of 2028 Senior Notes LPLH issued $ 750.0 million in aggregate principal amount of 6.750 % senior notes on November 17, 2023 at 99.929 % (“2028 Senior Notes”). The 2028 Senior Notes are unsecured obligations that will mature on November 17, 2028, and are fully and unconditionally guaranteed on a senior unsecured basis by the Company. Interest on the 2028 Senior Notes is payable semi-annually. The Company used the proceeds from the issuance to repay borrowings made under its senior secured revolving credit facility and for general corporate purposes. The Company may redeem all or part of the 2028 Senior Notes at any time and from time to time prior to October 17, 2028 at a redemption price equal to the greater of: the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date (assuming the 2028 Senior Notes matured on October 17, 2028) on a semi-annual basis at the Treasury Rate (as defined in the First Supplemental Indenture dated November 17, 2023) plus 35 basis points less interest accrued to, but excluding, the redemption date, or 100% of the principal amount of the 2028 Senior Notes to be redeemed, plus, in either case, accrued and unpaid interest thereon to, but excluding, the redemption date. Thereafter, the Company may redeem all or part of the 2028 Senior Notes at any time and from time to time, at a redemption price equal to 100% of the principal amount of the 2028 Senior Notes being redeemed plus accrued and unpaid interest thereon. In connection with the issuance of the 2028 Senior Notes, the Company incurred $ 6.3 million in costs, which were capitalized as debt issuance costs in the consolidated statements of financial condition. Credit Agreement On March 13, 2023, LPLFH and LPLH entered into a sixth amendment agreement to the Company’s amended and restated credit agreement (the “Credit Agreement”), which, among other things, replaced LIBOR with SOFR. The Credit Agreement subjects the Company to certain financial and non-financial covenants. As of December 31, 2023, the Company was in compliance with such covenants. Parent Revolving Credit Facility On July 18, 2023, LPLH amended its revolving credit facility to, among other things, increase the maximum borrowing from $ 1.0 billion to $ 2.0 billion. Borrowings under the revolving credit facility bear interest at a rate per annum ranging from 112.5 to 187.5 basis points over SOFR plus 10 basis points or 12.5 to 87.5 basis points over the alternate base rate (the greatest of (i) the NYFRB Rate plus 1/2 of 1%, (ii) the Prime Rate and (iii) the Adjusted Term SOFR Rate for a one month Interest Period plus 1 %, each as defined in the Credit Agreement) depending on the Debt Ratings (as defined in the Credit Agreement). In connection with the amendment of the credit facility, LPLH incurred $ 5.5 million in costs, which were capitalized as debt issuance costs in the consolidated statements of financial condition. Broker-Dealer Revolving Credit Facility On July 18, 2023, LPL Financial, the Company’s broker-dealer subsidiary, renewed its committed senior unsecured revolving credit facility that matures on July 16, 2024 and allows for a maximum borrowing of up to $ 1.0 billion. Borrowings under the credit facility bear interest at a rate per annum equal to 1.25 % per annum plus the greatest of (i) SOFR 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 renewal of the credit facility, LPL Financial incurred $ 1.7 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. LPL Financial was in compliance with such covenants as of December 31, 2023. Other External Lines of Credit LPL Financial maintained five uncommitted lines of credit as of December 31, 2023. 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 were no balances outstanding under these lines at December 31, 2023 or December 31, 2022. 93 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 13 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 $ 88.5 million and $ 92.4 million at December 31, 2023 and December 31, 2022, respectively. The components of lease expense were as follows (in thousands): Years Ended December 31, 2023 2022 2021 Operating lease cost $ 19,303 $ 21,862 $ 19,712 Finance lease cost: Amortization of right-of-use assets $ 3,876 $ 4,753 $ 5,150 Interest on lease liabilities 8,382 8,417 8,360 Total finance lease cost $ 12,258 $ 13,170 $ 13,510 Supplemental weighted-average information related to leases was as follows: December 31, 2023 2022 Weighted-average remaining lease term (years): Finance leases 22.8 23.8 Operating leases 5.2 6.2 Weighted-average discount rate: Finance leases 7.94 % 7.94 % Operating leases 6.80 % 6.77 % Maturities of lease liabilities as of December 31, 2023 were as follows (in thousands): Operating Leases Finance Leases 2024 $ 28,483 $ 8,727 2025 27,757 8,879 2026 26,656 9,035 2027 26,146 9,193 2028 26,393 9,354 Thereafter 12,770 197,178 Total lease payments 148,205 242,366 Less imputed interest 24,728 136,901 Total $ 123,477 $ 105,465 94 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, 2023 2022 2021 Current provision for income taxes: Federal $ 355,393 $ 276,499 $ 96,389 State 91,586 82,801 26,610 Total current provision for income taxes 446,979 359,300 122,999 Deferred (benefit) provision for income taxes: Federal ( 56,539 ) ( 69,656 ) 14,446 State ( 11,915 ) ( 23,693 ) 4,018 Total deferred (benefit) provision for income taxes ( 68,454 ) ( 93,349 ) 18,464 Provision for income taxes $ 378,525 $ 265,951 $ 141,463 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, 2023 2022 2021 Federal statutory income tax rates 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 5.0 4.2 4.1 Non-deductible expenses 0.9 0.3 0.7 Research and development credits ( 0.6 ) ( 0.4 ) ( 0.4 ) Share-based compensation ( 0.2 ) ( 1.8 ) ( 2.7 ) Other 0.1 0.6 0.8 Effective income tax rates 26.2 % 23.9 % 23.5 % The Company’s effective income tax rate differs from the federal corporate tax rate of 21.0 % primarily as a result of state taxes, non-deductible expenses, tax credits and benefits from the vesting and exercise of share-based compensation. 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. 95 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, 2023 2022 Deferred tax assets: Deferred compensation (1) $ 183,054 $ 134,316 Operating lease liabilities 33,319 33,826 Tax credit carryforwards 35,200 — Finance lease liabilities 28,475 28,528 Forgivable loans 23,864 19,688 Capitalized research and development expenditures (2) 19,294 28,855 Accrued liabilities (1) 18,973 15,185 Share-based compensation 15,254 19,246 Other 9,275 17,562 Deferred tax assets 366,708 297,206 Less: valuation allowance ( 33,922 ) — Total deferred tax assets 332,786 297,206 Deferred tax liabilities: Internally developed software (2) ( 58,020 ) ( 70,906 ) Depreciation of property and equipment (2) ( 48,036 ) ( 52,085 ) Amortization of other intangibles ( 31,801 ) ( 50,072 ) Operating lease assets ( 25,488 ) ( 25,146 ) Other ( 1,991 ) — Total deferred tax liabilities ( 165,336 ) ( 198,209 ) Deferred tax assets, net $ 167,450 $ 98,997 _______________________________ (1) The deferred tax asset for deferred compensation as of December 31, 2022 has been reclassified from the accrued liabilities category, as previously reported for the period ending December 31, 2022. (2) The deferred tax asset for capitalized research and development expenditures and the deferred tax liability for internally developed software as of December 31, 2022 has been reclassified from the deferred tax liability for depreciation of property and equipment category, as previously reported for the period ending December 31, 2022. The increase in deferred tax assets, net as of December 31, 2023 compared to December 31, 2022 was primarily driven by accruals of deferred compensation that are deductible when paid. Our $ 9.3 million of gross capital losses realized during 2023 can be carried back three years and carried forward five years. At December 31, 2023, there were $ 33.9 million of tax credits that can be carried forward 15 years and will begin to expire during 2032, and $ 1.3 million of tax credits that can be carried forward 10 years and will begin to expire during 2032. We believe that it is more likely than not that the tax credit carryforwards will not be realized and have recorded a valuation allowance of $ 33.9 million on the deferred tax assets related to these tax credit carryforwards. 96 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The following table reflects a reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits (in thousands): December 31, 2023 2022 2021 Balance — beginning of year $ 52,270 $ 57,014 $ 54,435 Increases for tax positions taken during the current year 10,433 8,365 3,672 Increases for tax positions taken in the prior years 10,606 6,412 11,965 Reductions as a result of a lapse of the applicable statute of limitations and decreases in prior-year tax positions ( 11,717 ) ( 19,521 ) ( 13,058 ) Balance — end of year $ 61,592 $ 52,270 $ 57,014 At December 31, 2023 and 2022, there were $ 54.7 million and $ 46.6 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, 2023 and 2022, the liability for unrecognized tax benefits included accrued interest of $ 8.0 million and $ 4.6 million, respectively, and penalties of $ 5.5 million and $ 4.1 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 2020 to 2022 remain open to examination in the federal jurisdiction. The tax years of 2012 to 2022 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 $ 23.0 million related to settleme nts and the statute of limitations expiration in federal and various state jurisdictions. 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, 2023 (in thousands): 2024 $ 135,217 2025 78,430 2026 36,215 2027 24,161 2028 — Thereafter — Total $ 274,023 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 97 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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, 2023 or 2022. 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 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 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 staff of the SEC proposed a potential settlement with the Company to resolve its civil investigation. Under the SEC’s proposed resolution, the Company would pay a $ 50.0 million civil monetary penalty. As a result of the foregoing, the Company has recorded $ 40.0 million in other expense in the consolidated statements of income for the year ended December 31, 2023 to reflect the amount of the penalty that is not covered by the Company’s captive insurance subsidiary. The Company has not yet reached a settlement in principle with the SEC, and any settlement agreement remains subject to the negotiation of the civil monetary penalty and definitive documentation. 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 its 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. 98 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The following table provides a reconciliation of the beginning and ending balances of self-insurance liabilities for the years presented (in thousands): December 31, 2023 2022 2021 Beginning balance — January 1 $ 74,071 $ 67,152 $ 51,501 Losses incurred 36,319 36,462 34,756 Losses paid ( 27,507 ) ( 29,543 ) ( 19,105 ) Ending balance — December 31 $ 82,883 $ 74,071 $ 67,152 Other Commitments As of December 31, 2023, the Company had approximately $ 474.7 million of client margin loans that were collateralized with securities having a fair value of approximately $ 664.6 million that LPL Financial can repledge, loan or sell. Of these securities, approximately $ 277.1 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, 2023, there were no restrictions that materially limited the Company’s ability to repledge, loan or sell the remaining $ 387.5 million of client collateral. Investment securities on the consolidated statements of financial condition include $ 5.5 million and $ 4.5 million of trading securities pledged to the Options Clearing Corporation at December 31, 2023 and 2022, respectively, and $ 19.9 million of trading securities pledged to the National Securities Clearing Corporation at both December 31, 2023 and 2022. NOTE 15 - STOCKHOLDERS’ EQUITY Dividends The payment, timing, and amount of any dividends are subject to approval by LPLFH’s Board of Directors as well as certain limits under the Credit Agreement. 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): 2023 2022 2021 Dividend per Share Total Cash Dividend Dividend per Share Total Cash Dividend Dividend per Share Total Cash Dividend First quarter $ 0.30 $ 23.6 $ 0.25 $ 20.0 $ 0.25 $ 20.0 Second quarter $ 0.30 $ 23.1 $ 0.25 $ 20.0 $ 0.25 $ 20.0 Third quarter $ 0.30 $ 22.8 $ 0.25 $ 20.0 $ 0.25 $ 20.1 Fourth quarter $ 0.30 $ 22.7 $ 0.25 $ 19.9 $ 0.25 $ 20.0 Share Repurchases The Company engages in a share repurchase program that was approved by the Board, pursuant to which LPLFH may repurchase its issued and outstanding shares of common stock from time to time. Repurchased shares are included in treasury stock on the consolidated statements of financial condition. On 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. During the year ended December 31, 2023 LPLFH repurchased 5,075,900 shares of common stock at a weighted-average price of $ 216.73 for a total of $ 1.1 billion. The Company also recognized $ 9.9 million of excise tax in connection with these repurchases during the year ended December 31, 2023 . As of December 31, 2023, the Company had $ 900.0 million remaining under the existing share repurchase program. Future share repurchases may be effected in open market or privately negotiated transactions, including transactions with affiliates, with the timing of purchases and the amount of stock purchased generally determined at the discretion of the Company within the constraints of the Credit Agreement and the Company’s general working capital needs. 99 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 12,796,123 shares remaining available for future issuance at December 31, 2023. 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, 2023: Number of Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (In thousands) Outstanding — December 31, 2022 673,764 $ 53.45 Granted — $ — Exercised ( 126,944 ) $ 47.60 Forfeited and Expired — $ — Outstanding — December 31, 2023 546,820 $ 54.81 3.61 $ 94,494 Exercisable — December 31, 2023 546,820 $ 54.81 3.61 $ 94,494 Exercisable and expected to vest — December 31, 2023 546,820 $ 54.81 3.61 $ 94,494 The following table summarizes information about outstanding stock options and warrants as of December 31, 2023: 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 63,123 2.11 $ 19.85 63,123 $ 19.85 $ 25.01 - $ 35.00 — 0.00 $ — — $ — $ 35.01 - $ 45.00 157,427 3.15 $ 39.48 157,427 $ 39.48 $ 45.01 - $ 65.00 36,039 1.06 $ 46.60 36,039 $ 46.60 $ 65.01 - $ 75.00 139,339 4.04 $ 65.50 139,339 $ 65.50 $ 75.01 - $ 80.00 150,892 4.92 $ 77.53 150,892 $ 77.53 546,820 3.61 $ 54.81 546,820 $ 54.81 The Company recognized no share-based compensation expense related to the vesting of stock options awarded to employees and officers during the year ended December 31, 2023. The Company recognized $ 0.2 million and $ 2.6 million of expense during the years ended December 31, 2022 and 2021, respectively. As of December 31, 2023, 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. 100 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, 2023: 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, 2022 814 $ 173.78 863,174 $ 149.34 Granted 2,753 $ 190.92 412,673 $ 220.40 Vested ( 1,999 ) $ 186.29 ( 447,788 ) $ 109.94 Forfeited — $ — ( 51,455 ) $ 215.45 Outstanding — December 31, 2023 1,568 $ 187.93 776,604 (1) $ 205.44 Expected to vest — December 31, 2023 1,568 $ 187.93 642,444 $ 219.95 ____________________ (1) Includes 90,339 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 $ 57.4 million, $ 45.4 million and $ 37.2 million of share-based compensation expense related to the vesting of these restricted stock awards and stock units during the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023, total unrecognized compensation cost for restricted stock awards and stock units was $ 74.7 million, which is expected to be recognized over a weighted-average remaining period of 1.90 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, $ 2.6 million and $ 2.3 million related to the vesting of these awards during the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023, total unrecognized compensation cost for restricted stock units granted to advisors and enterprises was $ 5.4 million, which is expected to be recognized over a weighted-average remaining period of 2.13 years. Employee Incentives and Benefit Plan s The Company sponsors a 401(k) defined contribution plan sponsored for all employees meeting eligibility requirements. The Company matches eligible employee 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 $ 30.3 million, $ 24.7 million and $ 20.9 million for the years ended December 31, 2023, 2022 and 2021, 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 $ 8.7 million, $ 4.4 million and $ 2.0 million of share-based compensation expense related to the ESPP during the years ended December 31, 2023, 2022 and 2021, respectively. The Company’s 2012 Employee Stock Purchase Plan was replaced by its 2021 Employee Stock Purchase Plan in May 2021. The Company sponsors 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 $ 652.3 million and $ 477.0 million at December 31, 2023 and 2022, respectively, which is included in other liabilities in the consolidated statements of financial condition. The cash value of the related trust assets was $ 651.1 million and $ 475.6 million at 101 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2023 and 2022, 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, 2023, the Company has recorded assets of $ 32.7 million and liabilities of $ 31.9 million, which are included in other assets and other liabilities, respectively, in the consolidated statements of financial condition. As of December 31, 2022, the Company had recorded assets of $ 20.7 million and liabilities of $ 20.8 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, 2023 2022 2021 Net income $ 1,066,250 $ 845,702 $ 459,866 Basic weighted-average number of shares outstanding 76,807 79,801 80,002 Dilutive common share equivalents 1,054 1,484 1,740 Diluted weighted-average number of shares outstanding 77,861 81,285 81,742 Basic earnings per share $ 13.88 $ 10.60 $ 5.75 Diluted earnings per share $ 13.69 $ 10.40 $ 5.63 The computation of diluted earnings per share excludes stock options, warrants and stock units that are anti-dilutive. For the years ended December 31, 2023, 2022 and 2021, stock options, warrants and stock units representing common share equivalents of 55,298 shares, 9,770 shares and 684 shares, respectively, were anti-dilutive. NOTE 18 - NET CAPITAL AND REGULATORY REQUIREMENTS The Company’s broker-dealer subsidiaries are subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1 under the Exchange Act of 1934), which requires the maintenance of minimum net capital. The net capital rules also provide that a 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 the Financial Industry Regulatory Authority 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. 102 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The following table presents the net capital position of the Company’s primary broker-dealer subsidiary (in thousands): December 31, 2023 LPL Financial LLC Net capital $ 205,314 Less: required net capital 16,678 Excess net capital $ 188,636 The Company’s subsidiary PTC also operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC’s operations. As of December 31, 2023 and 2022, LPL Financial a nd 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 relationship 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. 103 Table of Contents LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 26, 2024 to all stockholders of record on March 12, 2024 . On February 13, 2024, the Company announced that it had entered into a definitive purchase agreement to acquire Atria Wealth Solutions, Inc. (“Atria”), a wealth management solutions holding company headquartered in New York. As part of the agreement, Atria will transition its brokerage and advisory assets, currently custodied with its network of broker-dealers, to the Company’s platform. The Company expects to close the transaction in the second half of 2024 with the conversion expected in mid-2025, subject to receipt of regulatory approval and other closing conditions. 104 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.