LPL Financial Announces Third Quarter 2020 Results

Thursday, 29. October 2020 21:05

Key Financial Results

  • Earnings per share ("EPS") was $1.29, and Net Income was $104 million.
    • Gross Profit** was $506 million.
    • Core G&A** was $227 million.
    • EBITDA** was $205 million and EBITDA** as a percentage of Gross Profit** was 41%.
  • EPS Prior to Amortization of Intangible Assets** was $1.44.

Key Business Results

  • Total Advisory and Brokerage Assets increased 13% year-over-year to $810 billion.
    • Advisory assets increased by 20% year-over-year to $406 billion.
    • Advisory assets as a percentage of total assets increased to 50.1%, up from 47.0% a year ago.
  • Total net new assets(1) were an inflow of $11.1 billion, translating to a 5.8% annualized growth rate. This brings the trailing twelve-month average organic growth rate to 7.1%.
    • Total net new asset annualized growth rate increased throughout the quarter and was 4.6% in July, 4.7% in August and 7.4% in September.
    • Net new advisory assets were an inflow of $10.4 billion, translating to an 11.0% annualized growth rate.
    • Net new brokerage assets were an inflow of $0.7 billion, translating to a 0.7% annualized growth rate.
    • Year-to-date production retention rate was 98.1%, up from 96.3% a year ago.
  • Recruited Assets(2) were $10.7 billion, contributing to a trailing twelve-month total of $40.8 billion.
    • Advisor count(3) was 17,168, up 195 from Q2 2020 and 819 year-over-year.
  • Total client cash balances were $46.6 billion, up $1.3 billion, or 3%, sequentially.
    • Client cash balances as a percentage of total assets were 5.7%.

Key Capital Results

  • Dividends were $20 million.
  • Cash available for corporate use was $252 million.
  • Credit Agreement Net Leverage Ratio(4) was 2.15x.

Key Updates

  • Signed an agreement with BMO Harris Bank’s retail advisory and brokerage business - BMO Harris Financial Advisors (BHFA) - to join LPL’s platform. BHFA has ~115 financial advisors serving ~$14B in advisory and brokerage assets and expects to onboard by the middle of 2021.
  • Acquired Blaze Portfolio, an advisory trading firm based in Chicago, for a transaction price of ~$12M, plus earn-out payments of up to $5M.
  • Q3 Core G&A** was $227M, which brings 2020 year-to-date total to $673M, or an annualized run-rate of ~$900M. Full-year plans continue to be in the lower half of the 2020 outlook range of $915 to $940M.

SAN DIEGO, Oct. 29, 2020 (GLOBE NEWSWIRE) -- LPL Financial Holdings Inc. (Nasdaq: LPLA) (the “Company”) today announced results for its third quarter ended September 30, 2020, reporting net income of $104 million, or $1.29 per share. This compares with $132 million, or $1.57 per share, in the third quarter of 2019 and $102 million, or $1.27 per share, in the prior quarter.

"In the third quarter, we continued to execute on our business priorities and advance our strategic plans,” said Dan Arnold, President and CEO. "This combination led to new highs for total assets and full-year recruiting. Looking ahead, we remain focused on investing in our platform to help our advisors win in the marketplace, attract new advisors, and increase our scale and capacity to invest.”

"We delivered another quarter of strong results in Q3”, said Matt Audette, CFO. "We stayed disciplined on expenses while investing to drive growth. Over the last three months, we also closed on three M&A transactions. Looking forward, we remain focused on our capital allocation priorities of investing in organic growth, pursuing M&A opportunities when appropriate, and returning capital to shareholders.”

Dividend Declaration

The Company's Board of Directors declared a $0.25 per share dividend to be paid on November 30, 2020 to all stockholders of record as of November 12, 2020.

Conference Call and Additional Information

The Company will hold a conference call to discuss its results at 5:00 p.m. EDT on Thursday, October 29. To listen, call 877-677-9122 (domestic) or 708-290-1401 (international); passcode 2390337, or visit investor.lpl.com (webcast). Replays will be available by phone and on investor.lpl.com beginning two hours after the call and until November 5 and November 19, respectively. For telephonic replay, call 855-859-2056 (domestic) or 404-537-3406 (international); passcode 2390337.

About LPL Financial

LPL Financial is a leader in the retail financial advice market, the nation’s largest independent broker-dealer+ and a leading custodian (or provider of custodial services) to RIAs. We serve independent financial advisors and financial institutions, providing them with the technology, research, clearing and compliance services, and practice management programs they need to create and grow their practices. LPL enables them to provide objective guidance to millions of American families seeking wealth management, retirement planning, financial planning and asset management solutions. LPL.com

+Based on total revenues, Financial Planning magazine June 1996-2020.

Securities and advisory services offered through LPL Financial LLC, a registered investment advisor. Member FINRA/SIPC. Throughout this communication, the terms “financial advisors” and “advisors” are used to refer to registered representatives and/or investment advisor representatives affiliated with LPL Financial LLC. We routinely disclose information that may be important to shareholders in the “Investor Relations” or “Press Releases” section of our website.

**Non-GAAP Financial Measures

Management believes that presenting certain non-GAAP financial measures by excluding or including certain items can be helpful to investors and analysts who may wish to use this information to analyze the Company’s current performance, prospects, and valuation. Management uses this non-GAAP information internally to evaluate operating performance and in formulating the budget for future periods. Management believes that the non-GAAP financial measures and metrics discussed below are appropriate for evaluating the performance of the Company.

EPS Prior to Amortization of Intangible Assets is defined as GAAP EPS plus the per share impact of amortization of intangible assets. The per share impact is calculated as amortization of intangible assets expense, net of applicable tax benefit, divided by the number of shares outstanding for the applicable period. The Company presents EPS Prior to Amortization of Intangible Assets because management believes that the metric can provide investors with useful insight into the Company’s core operating performance by excluding non-cash items that management does not believe impact the Company’s ongoing operations. EPS Prior to Amortization of Intangible Assets is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to GAAP EPS or any other performance measure derived in accordance with GAAP. For a reconciliation of EPS Prior to Amortization of Intangible Assets to GAAP EPS, please see footnote 36 on page 19 of this release.

Gross Profit is calculated as net revenues, which were $1,460 million for the three months ended September 30, 2020, less commission and advisory expenses and brokerage, clearing and exchange fees, which were $937 million and $18 million, respectively, for the three months ended September 30, 2020. All other expense categories, including depreciation and amortization of fixed assets and amortization of intangible assets, are considered general and administrative in nature. Because the Company’s Gross Profit amounts do not include any depreciation and amortization expense, the Company considers Gross Profit to be a non-GAAP financial measure that may not be comparable to similar measures used by others in its industry. Management believes that Gross Profit can provide investors with useful insight into the Company’s core operating performance before indirect costs that are general and administrative in nature.

Core G&A consists of total operating expenses, less the following expenses: commission and advisory, regulatory charges, promotional, employee share-based compensation, depreciation and amortization, amortization of intangible assets, and brokerage, clearing and exchange. Management presents Core G&A because it believes Core G&A reflects the corporate operating expense categories over which management can generally exercise a measure of control, compared with expense items over which management either cannot exercise control, such as commission and advisory expenses, or which management views as promotional expense necessary to support advisor growth and retention, including conferences and transition assistance. Core G&A is not a measure of the Company’s total operating expenses as calculated in accordance with GAAP. For a reconciliation of Core G&A to the Company’s total operating expenses, please see footnote 9 on page 17 of this release. The Company does not provide an outlook for its total operating expenses because it contains expense components, such as commission and advisory expenses, that are market-driven and over which the Company cannot exercise control. Accordingly a reconciliation of the Company’s outlook for Core G&A to an outlook for total operating expenses cannot be made available without unreasonable effort.

EBITDA is defined as net income plus interest and other expense, income tax expense, depreciation and amortization, and amortization of intangible assets. The Company presents EBITDA because management believes that it can be a useful financial metric in understanding the Company’s earnings from operations. EBITDA is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of profitability or liquidity. In addition, the Company’s EBITDA can differ significantly from EBITDA calculated by other companies, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, and capital investments. For a reconciliation of EBITDA to net income, please see footnote 25 on page 18 of this release.

Credit Agreement EBITDA is defined in, and calculated by management in accordance with, the Company's credit agreement (“Credit Agreement”) as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense, tax expense, depreciation and amortization, and amortization of intangible assets, and is further adjusted to exclude certain non-cash charges and other adjustments, including unusual or non-recurring charges and gains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions. The Company presents Credit Agreement EBITDA because management believes that it can be a useful financial metric in understanding the Company’s debt capacity and covenant compliance under its Credit Agreement. Credit Agreement EBITDA is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of profitability or liquidity. In addition, the Company’s calculation of Credit Agreement EBITDA can differ significantly from adjusted EBITDA calculated by other companies, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, capital investments, and types of adjustments made by such companies. For a reconciliation of Credit Agreement EBITDA to net income, please see footnote 25 on page 18 of this release.

Forward-Looking Statements

Statements in this press release regarding the Company's future financial and operating results, growth, priorities and business strategies, including forecasts and statements relating to future expenses (including 2020 Core G&A** outlook), future capabilities, future advisor service experience, future investments and capital deployment, long-term shareholder value and BMO Harris Bank's agreement to join LPL's platform, as well as any other statements that are not related to present facts or current conditions or that are not purely historical, constitute forward-looking statements. These forward-looking statements are based on the Company's historical performance and its plans, estimates, and expectations as of October 29, 2020. Forward-looking statements are not guarantees that the future results, plans, intentions, or expectations expressed or implied will be achieved. Matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, legislative, regulatory, competitive, and other factors, which may cause actual financial or operating results, levels of activity or the timing of events, to be materially different than those expressed or implied by forward-looking statements. Important factors that could cause or contribute to such differences include: changes in general economic and financial market conditions, including retail investor sentiment; changes in interest rates and fees payable by banks participating in the Company's client cash programs; the Company's strategy and success in managing client cash program fees; changes in the growth and profitability of the Company's fee-based business; fluctuations in the levels of advisory and brokerage assets, including net new assets, and the related impact on revenue; the effects of competition in the financial services industry and the success of the Company in attracting and retaining financial advisors and institutions; whether the retail investors served by newly-recruited advisors choose to move their respective assets to new accounts at the Company; the effect of current, pending and future legislation, regulation and regulatory actions, including disciplinary actions imposed by federal and state regulators and self-regulatory organizations and the implementation of Regulation BI (Best Interest); the costs of settling and remediating issues related to regulatory matters or legal proceedings, including actual costs of reimbursing customers for losses in excess of our reserves; changes made to the Company’s services and pricing, and the effect that such changes may have on the Company’s gross profit streams and costs; the execution of the Company's plans and its success in realizing the synergies, expense savings, service improvements, and/or efficiencies expected to result from its initiatives, acquisitions and programs; the effects of the COVID-19 pandemic; the successful onboarding of advisors and client assets, in connection with BMO Harris Bank's agreement to join LPL's platform; the successful integration of Blaze Portfolio's service offerings into LPL's technology platform; and the other factors set forth in Part I, “Item 1A. Risk Factors” in the Company's 2019 Annual Report on Form 10-K, as may be amended or updated in the Company's Quarterly Reports on Form 10-Q or other filings with the Securities and Exchange Commission. Except as required by law, the Company specifically disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this earnings release, even if its estimates change, and you should not rely on statements contained herein as representing the Company's views as of any date subsequent to the date of this press release.

LPL Financial Holdings Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)

 Three Months Ended September 30,   Nine Months Ended September 30,  
 2020 2019 %
Change
 2020 2019 %
Change
REVENUES           
Commission$472,643  $474,993  % $1,403,540  $1,415,487  (1%)
Advisory586,941  514,363  14% 1,689,338  1,449,610  17%
Asset-based253,551  292,140  (13%) 786,124  877,054  (10%)
Transaction and fee119,747  121,222  (1%) 376,321  362,037  4%
Interest income, net of interest expense6,623  11,531  (43%) 22,705  35,542  (36%)
Other20,796  1,276  n/m 12,329  37,231  n/m
Total net revenues1,460,301  1,415,525  3% 4,290,357  4,176,961  3%
EXPENSES           
Commission and advisory936,766  856,635  9% 2,667,408  2,494,355  7%
Compensation and benefits151,271  138,300  9% 441,393  407,000  8%
Promotional57,970  61,715  (6%) 159,908  154,487  4%
Depreciation and amortization27,548  24,062  14% 81,082  70,116  16%
Amortization of intangible assets16,829  16,286  3% 50,088  48,703  3%
Occupancy and equipment41,874  34,417  22% 124,486  100,843  23%
Professional services12,301  17,666  (30%) 40,526  56,115  (28%)
Brokerage, clearing and exchange17,834  16,380  9% 53,423  48,518  10%
Communications and data processing12,547  12,535  % 37,743  37,394  1%
Other24,852  27,599  (10%) 73,274  83,977  (13%)
Total operating expenses1,299,792  1,205,595  8% 3,729,331  3,501,508  7%
Non-operating interest expense and other25,179  31,944  (21%) 80,786  98,617  (18%)
INCOME BEFORE PROVISION FOR INCOME TAXES135,330  177,986  (24%) 480,240  576,836  (17%)
PROVISION FOR INCOME TAXES31,541  46,272  (32%) 119,148  143,632  (17%)
NET INCOME$103,789  $131,714  (21%) $361,092  $433,204  (17%)
EARNINGS PER SHARE           
Earnings per share, basic$1.31  $1.61  (19%) $4.56  $5.20  (12%)
Earnings per share, diluted$1.29  $1.57  (18%) $4.48  $5.07  (12%)
Weighted-average shares outstanding, basic 79,176   81,833  (3%)  79,207   83,315  (5%)
Weighted-average shares outstanding, diluted 80,550   83,844  (4%)  80,612   85,421  (6%)

LPL Financial Holdings Inc.
Condensed Consolidated Statements of Income Trend
(In thousands, except per share data)
(Unaudited)

 Quarterly Results
 Q3 2020 Q2 2020 Q1 2020
REVENUES     
Commission$472,643  $427,453  $503,444 
Advisory586,941  523,370  579,027 
Asset-based253,551  247,067  285,506 
Transaction and fee119,747  119,478  137,096 
Interest income, net of interest expense6,623  6,540  9,542 
Other20,796  42,751  (51,218)
Total net revenues1,460,301  1,366,659  1,463,397 
EXPENSES     
Commission and advisory936,766  859,847  870,795 
Compensation and benefits151,271  143,320  146,802 
Promotional57,970  44,540  57,398 
Depreciation and amortization27,548  26,890  26,644 
Amortization of intangible assets16,829  16,689  16,570 
Occupancy and equipment41,874  43,066  39,546 
Professional services12,301  13,620  14,605 
Brokerage, clearing and exchange expense17,834  18,565  17,024 
Communications and data processing12,547  14,361  10,835 
Other24,852  22,194  26,228 
Total operating expenses1,299,792  1,203,092  1,226,447 
Non-operating interest expense and other25,179  26,289  29,318 
INCOME BEFORE PROVISION FOR INCOME TAXES135,330  137,278  207,632 
PROVISION FOR INCOME TAXES31,541  35,616  51,991 
NET INCOME$103,789  $101,662  $155,641 
EARNINGS PER SHARE     
Earnings per share, basic$1.31  $1.29  $1.96 
Earnings per share, diluted$1.29  $1.27  $1.92 
Weighted-average shares outstanding, basic 79,176   78,940   79,507 
Weighted-average shares outstanding, diluted 80,550   80,127   81,166 

LPL Financial Holdings Inc.
Condensed Consolidated Statements of Financial Condition
(Dollars in thousands, except par value)
(Unaudited)

  September 30,
2020
 June 30,
2020
 December 31,
2019
ASSETS
Cash and cash equivalents $800,799  $845,228  $590,209 
Cash segregated under federal and other regulations 667,121  574,429  822,697 
Restricted cash 75,295  70,051  58,872 
Receivables from:      
Clients, net of allowance 424,131  385,894  433,986 
Product sponsors, broker-dealers and clearing organizations 205,508  177,752  177,654 
Advisor loans, net of allowance 509,124  474,718  441,743 
Others, net of allowance 306,952  314,856  298,790 
Securities owned:      
Trading — at fair value 28,215  35,327  46,447 
Held-to-maturity — at amortized cost 13,058  14,406  11,806 
Securities borrowed 23,510  10,944  17,684 
Fixed assets, net of accumulated depreciation and amortization 570,592  556,490  533,044 
Operating lease assets 99,565  101,741  102,477 
Goodwill 1,503,648  1,503,648  1,503,648 
Intangible assets, net of accumulated amortization 409,427  406,740  439,838 
Deferred income taxes, net 744  751   
Other assets 453,038  432,758  401,343 
Total assets $6,090,727  $5,905,733  $5,880,238 
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:      
Drafts payable $176,916  $206,084  $218,636 
Payables to clients 1,153,014  1,034,445  1,058,873 
Payables to broker-dealers and clearing organizations 84,405  87,706  92,002 
Accrued commission and advisory expenses payable 175,278  162,620  174,330 
Accounts payable and accrued liabilities 586,432  521,088  557,969 
Income taxes payable 14,619  88,376  20,129 
Unearned revenue 99,694  100,377  82,842 
Securities sold, but not yet purchased — at fair value 337  71  176 
Long-term and other borrowings, net 2,347,517  2,349,619  2,398,818 
Operating lease liabilities 137,569  140,293  141,900 
Finance lease liabilities 107,498  107,548  108,592 
Deferred income taxes, net     2,098 
Total liabilities 4,883,279  4,798,227  4,856,365 
STOCKHOLDERS’ EQUITY:      
Common stock, $.001 par value; 600,000,000 shares authorized; 127,409,741 shares issued at September 30, 2020 and 126,494,028 shares issued at December 31, 2019 127  127  126 
Additional paid-in capital 1,748,310  1,733,334  1,703,973 
Treasury stock, at cost — 48,134,535 shares at September 30, 2020 and 46,259,989 shares at December 31, 2019 (2,391,449) (2,391,961) (2,234,793)
Retained earnings 1,850,460  1,766,006  1,554,567 
Total stockholders’ equity 1,207,448  1,107,506  1,023,873 
Total liabilities and stockholders’ equity $6,090,727  $5,905,733  $5,880,238 

LPL Financial Holdings Inc.
Management's Statements of Operations(5)
(In thousands, except per share data)
(Unaudited)

Certain information presented on pages 8-15 of this release is presented as reviewed by the Company’s management and includes information derived from the Company’s Unaudited Condensed Consolidated Statements of Income, non-GAAP financial measures, and operational and performance metrics. For information on non-GAAP financial measures, please see the section titled "Non-GAAP Financial Measures" that begins on page 3 of this release.

 Quarterly Results
 Q3 2020 Q2 2020 %
Change
 Q3 2019 %
Change
Gross Profit(5)         
Sales-based commissions$180,357  $159,512  13% $194,342  (7%)
Trailing commissions292,286  267,941  9% 280,651  4%
Advisory586,941  523,370  12% 514,363  14%
Commission and advisory fees1,059,584  950,823  11% 989,356  7%
Production based payout(6)(917,831) (819,953) 12% (857,384) 7%
Commission and advisory fees, net of payout141,753  130,870  8% 131,972  7%
Client cash108,705  116,266  (7%) 162,517  (33%)
Other asset-based(7)144,846  130,801  11% 129,623  12%
Transaction and fee119,747  119,478  % 121,222  (1%)
Interest income and other, net(8)8,484  9,397  (10%) 13,556  (37%)
Total net commission and advisory fees and attachment revenue523,535  506,812  3% 558,890  (6%)
Brokerage, clearing and exchange expense(17,834) (18,565) (4%) (16,380) 9%
Gross Profit(5)505,701  488,247  4% 542,510  (7%)
          
G&A Expense         
Core G&A(9)227,099  222,406  2% 215,198  6%
Regulatory charges8,326  6,115  n/m 7,905  n/m
Promotional57,970  44,540  30% 61,715  (6%)
Employee share-based compensation7,420  8,040  (8%) 7,414  %
Total G&A300,815  281,101  7% 292,232  3%
EBITDA(5)204,886  207,146  (1%) 250,278  (18%)
Depreciation and amortization27,548  26,890  2% 24,062  14%
Amortization of intangible assets16,829  16,689  1% 16,286  3%
Non-operating interest expense and other25,179  26,289  (4%) 31,944  (21%)
INCOME BEFORE PROVISION FOR INCOME TAXES135,330  137,278  (1%) 177,986  (24%)
PROVISION FOR INCOME TAXES31,541  35,616  (11%) 46,272  (32%)
NET INCOME$103,789  $101,662  2% $131,714  (21%)
Earnings per share, diluted$1.29  $1.27  2% $1.57  (18%)
Weighted-average shares outstanding, diluted 80,550   80,127  1%  83,844  (4%)
EPS Prior to Amortization of Intangible Assets(5)(36)$1.44  $1.42  1% $1.71  (16%)

LPL Financial Holdings Inc.
Management's Statements of Operations Trend(5)
(In thousands, except per share data)
(Unaudited)

 Quarterly Results
 Q3 2020 Q2 2020 Q1 2020
Gross Profit(5)     
Sales-based commissions$180,357  $159,512  $228,391 
Trailing commissions292,286  267,941  275,053 
Advisory586,941  523,370  579,027 
Commission and advisory fees1,059,584  950,823  1,082,471 
Production based payout(6)(917,831) (819,953) (920,835)
Commission and advisory fees, net of payout141,753  130,870  161,636 
Client cash108,705  116,266  151,398 
Other asset-based(7)144,846  130,801  134,108 
Transaction and fee119,747  119,478  137,096 
Interest income and other, net(8)8,484  9,397  8,364 
Total net commission and advisory fees and attachment revenue523,535  506,812  592,602 
Brokerage, clearing and exchange expense(17,834) (18,565) (17,024)
Gross Profit(5)505,701  488,247  575,578 
      
G&A Expense     
Core G&A(9)227,099  222,406  223,211 
Regulatory charges8,326  6,115  6,157 
Promotional57,970  44,540  57,398 
Employee share-based compensation7,420  8,040  8,648 
Total G&A300,815  281,101  295,414 
EBITDA(5)204,886  207,146  280,164 
Depreciation and amortization27,548  26,890  26,644 
Amortization of intangible assets16,829  16,689  16,570 
Non-operating interest expense and other25,179  26,289  29,318 
INCOME BEFORE PROVISION FOR INCOME TAXES135,330  137,278  207,632 
PROVISION FOR INCOME TAXES31,541  35,616  51,991 
NET INCOME$103,789  $101,662  $155,641 
Earnings per share, diluted$1.29  $1.27  $1.92 
Weighted-average shares outstanding, diluted 80,550  80,127   81,166 
EPS Prior to Amortization of Intangible Assets(5)(36)$1.44  $1.42  $2.06 

LPL Financial Holdings Inc.
Operating Measures(5)
(Dollars in billions, except where noted) (Unaudited)

 Q3 2020 Q2 2020 Change Q3 2019 Change
Market Drivers         
S&P 500 Index (end of period)3,363  3,100  8% 2,977  13%
Fed Funds Daily Effective Rate (FFER) (average bps)9  6  3bps 220  (211bps)
          
Assets         
Advisory Assets(10)$405.9  $375.3  8% $338.0  20%
Brokerage Assets(11)404.4  386.4  5% 381.3  6%
Total Advisory and Brokerage Assets$810.4  $761.7  6% $719.3  13%
Advisory % of Total Advisory and Brokerage Assets50.1% 49.3% 80bps 47.0% 310bps
          
Assets by Platform         
Corporate Platform Advisory Assets(12)$253.9  $233.5  9% $209.4  21%
Hybrid Platform Advisory Assets(13)152.0  141.9  7% 128.6  18%
Brokerage Assets404.4  386.4  5% 381.3  6%
Total Advisory and Brokerage Assets$810.4  $761.7  6% $719.3  13%
          
Centrally Managed Assets         
Centrally Managed Assets(14)$59.0  $54.4  8% $47.8  23%
Centrally Managed % of Total Advisory Assets14.5% 14.5% —bps 14.1% 40bps

LPL Financial Holdings Inc.
Operating Measures(5)
(Dollars in billions, except where noted) (Unaudited)

 Q3 2020 Q2 2020 Change Q3 2019 Change
Net New Assets (NNA)         
Net New Advisory Assets(15)$10.4  $10.2  n/m $10.1  n/m
Net New Brokerage Assets(16)0.7  2.8  n/m 1.8  n/m
Total Net New Assets$11.1  $13.0  n/m $11.9  n/m
          
Net Brokerage to Advisory Conversions(17)$2.0  $1.6  n/m $1.7  n/m
Advisory NNA Annualized Growth(18)11.0% 12.7% n/m 12.3% n/m
Total NNA Annualized Growth(18)5.8% 7.8% n/m 6.7% n/m
          
Net New Advisory Assets         
Corporate Platform Net New Advisory Assets(19)$7.8  $6.2  n/m $7.1  n/m
Hybrid Platform Net New Advisory Assets(20)2.6  4.0  n/m 2.9  n/m
Total Net New Advisory Assets$10.4  $10.2  n/m $10.1  n/m
Centrally Managed Net New Advisory Assets(21)$1.9  $1.3  n/m $2.0  n/m
          
Client Cash Balances         
Insured Cash Account Balances$34.7  $33.1  5% $22.2  56%
Deposit Cash Account Balances8.0  7.7  4% 4.6  74%
Total Insured Sweep Balances42.7  40.8  5% 26.8  59%
Money Market Account Cash Balances1.5  1.6  (6%) 2.6  (42%)
Purchased Money Market Funds2.3  2.8  (18%) 1.8  28%
Total Money Market Balances3.9  4.5  (13%) 4.4  (11%)
Total Client Cash Balances$46.6  $45.3  3% $31.2  49%
Client Cash Balances % of Total Assets5.7% 5.9% (20bps) 4.3% 140bps
          
Client Cash Balance Average Fees         
Insured Cash Account Average Fee - bps(22)118  127  (9) 241  (123)
Deposit Cash Account Average Fee - bps(22)38  31  7  217  (179)
Money Market Account Average Fee - bps(22)9  16  (7) 68  (59)
Purchased Money Market Fund Average Fee - bps(22)20  27  n/m 29  n/m
Total Client Cash Balance Average Fee - bps(22)95  100  (5) 211  (116)
          
Net Buy (Sell) Activity(23)$9.3  $12.5  n/m $9.0  n/m

LPL Financial Holdings Inc.
Monthly Metrics(5)
(Dollars in billions, except where noted)
(Unaudited)

  September
2020
 August
2020
 Aug to
September
Change
 July 2020 June 2020
Assets Served          
Advisory Assets(10) $405.9  $410.4  (1.1%) $392.7  $375.3 
Brokerage Assets(11) 404.4  412.2  (1.9%) 399.2  386.4 
Total Advisory and Brokerage Assets $810.4  $822.7  (1.5%) $791.9  $761.7 
           
Net New Assets (NNA)          
Net New Advisory Assets(15) $4.4  $3.1  n/m $2.9  $4.3 
Net New Brokerage Assets(16) 0.7    n/m   1.0 
Total Net New Assets $5.1  $3.1  n/m $2.9  $5.4 
Net Brokerage to Advisory Conversions(17) $0.7  $0.6  n/m $0.7  $0.7 
           
Client Cash Balances          
Insured Cash Account Balances $34.7  $33.4  3.9% $33.2  $33.1 
Deposit Cash Account Balances 8.0  7.6  5.3% 7.6  7.7 
Total Insured Sweep Balances 42.7  41.0  4.1% 40.8  40.8 
Money Market Account Cash Balances 1.5  1.5  % 1.6  1.6 
Purchased Money Market Funds 2.3  2.6  (11.5%) 2.8  2.8 
Total Money Market Balances 3.9  4.1  (4.9%) 4.4  4.5 
Total Client Cash Balances $46.6  $45.1  3.3% $45.1  $45.3 
           
Net Buy (Sell) Activity(23) $2.9  $3.6  n/m $2.9  $4.5 
           
Market Indices          
S&P 500 Index (end of period) 3,363  3,500  (3.9%) 3,271  3,100 
Fed Funds Effective Rate (average bps) 9  9  —bps 9  8 

LPL Financial Holdings Inc.
Financial Measures(5)
(Dollars in thousands, except where noted)
(Unaudited)

 Q3 2020 Q2 2020 Change Q3 2019 Change
Commission Revenue by Product         
Annuities$250,823  $217,637  15% $252,433  (1%)
Mutual funds146,788  133,800  10% 148,672  (1%)
Fixed income16,731  18,463  (9%) 24,950  (33%)
Equities30,283  27,985  8% 20,149  50%
Other28,018  29,568  (5%) 28,789  (3%)
Total commission revenue$472,643  $427,453  11% $474,993  %
          
Commission Revenue by Sales-based and Trailing Commission      
Sales-based commissions         
Annuities$81,475  $64,287  27% $95,236  (14%)
Mutual funds33,871  29,716  14% 36,358  (7%)
Fixed income16,731  18,463  (9%) 24,950  (33%)
Equities30,283  27,985  8% 20,149  50%
Other17,997  19,061  (6%) 17,649  2%
Total sales-based commissions$180,357  $159,512  13% $194,342  (7%)
Trailing commissions         
Annuities$169,348  $153,350  10% $157,197  8%
Mutual funds112,917  104,084  8% 112,314  1%
Other10,021  10,507  (5%) 11,140  (10%)
Total trailing commissions$292,286  $267,941  9% $280,651  4%
Total commission revenue$472,643  $427,453  11% $474,993  %
          
Payout Rate         
Base Payout Rate82.97% 82.64% 33bps 83.05% (8bps)
Production Based Bonuses3.65% 3.59% 6bps 3.61% 4bps
Total Payout Ratio86.62% 86.24% 38bps 86.66% (4bps)

LPL Financial Holdings Inc.
Capital Management Measures(5)
(Dollars in thousands, except where noted)
(Unaudited)

 Q3 2020 Q2 2020
Cash Available for Corporate Use(24)   
Cash at Parent$162,035  $185,042 
Excess Cash at Broker-Dealer subsidiary per Credit Agreement78,739  77,292 
Other Available Cash11,337  19,991 
Total Cash Available for Corporate Use$252,111  $282,325 
    
Credit Agreement Net Leverage   
Total Debt (does not include unamortized premium)$2,361,975  $2,364,650 
Cash Available252,111  282,325 
Credit Agreement Net Debt$2,109,864  $2,082,325 
Credit Agreement EBITDA (trailing twelve months)(25)$980,827  $1,026,897 
Credit Agreement Net Leverage Ratio2.15x 2.03x


  September 30, 2020  
Total Debt Balance Current Applicable
Margin
 Yield At
Issuance
 Interest Rate Maturity
Revolving Credit Facility(a) $  ABR+25bps   % 11/12/2024
Broker-Dealer Revolving Credit Facility(b)   FFR+125bps   % 7/31/2024
Senior Secured Term Loan B 1,061,975  LIBOR+175 bps(c)   1.898% 11/12/2026
Senior Unsecured Notes(d) 500,000  5.75% Fixed 5.750% 5.750% 9/15/2025
Senior Unsecured Notes(d) 400,000 (e)5.75% Fixed 5.115% 5.750% 9/15/2025
Senior Unsecured Notes(f) 400,000  4.625% Fixed 4.625% 4.625% 11/15/2027
Total / Weighted Average $2,361,975      3.828%  

(a) The Revolving Credit Facility is secured and has a borrowing capacity of $750 million.
(b) The Broker-Dealer Revolving Credit Facility is unsecured and at LPL Financial LLC, the Company’s broker-dealer subsidiary, and has a borrowing capacity of $300 million.
(c) The LIBOR rate option is one-month LIBOR rate and subject to an interest rate floor of 0 basis points.
(d) The Senior Unsecured Notes were issued in two separate transactions; $500 million in notes were issued in March 2017 at par; the remaining $400 million were issued in September 2017 and priced at 103% of the aggregate principal amount.
(e) Does not include unamortized premium of approximately $7.5 million as of September 30, 2020.
(f) The Senior Unsecured Notes were issued in November 2019 at par.

LPL Financial Holdings Inc.
Key Business and Financial Metrics(5)
(Dollars in thousands, except where noted)
(Unaudited)

 Q3 2020 Q2 2020 Change Q3 2019 Change
Advisors         
Advisors17,168 16,973 1% 16,349 5%
Net New Advisors195  210  n/m 188  n/m
Annualized commission and advisory fees per Advisor(26)$248  $226  10% $243  2%
Average Total Assets per Advisor ($ in millions)(27)$47.2  $44.9  5% $44.0  7%
Transition assistance loan amortization ($ in millions)(28)$30.4  $28.6  6% $24.4  25%
Total client accounts (in millions)5.9  5.8  2% 5.5  7%
          
Employees - period end4,658 4,585 2% 4,353 7%
          
Productivity Metrics         
Advisory Revenue as a % of Corporate Advisory Assets(29)1.02% 1.02% bps 1.02% bps
Gross Profit ROA(30)27.9bps 29.3bps (1.4bps) 31.4bps (3.5bps)
OPEX as a % of Advisory and Brokerage Assets(31)17.8bps 18.2bps (0.4bps) 18.7bps (0.9bps)
EBIT ROA(32)10.1bps 11.1bps (1.0bps) 12.8bps (2.7bps)
Production Retention Rate (YTD annualized)(33)98.1% 98.6% (50bps) 96.3% 180bps
Recurring Gross Profit Rate(34)86.1% 86.8% (70bps) 87.1% (100bps)
EBITDA as a % of Gross Profit40.5% 42.4% (190bps) 46.1% (560bps)
          
Capital Expenditure ($ in millions)$40.1  $37.9  6% $40.7  (1%)
          
Share Repurchases ($ in millions)$  $  % $130.3  (100%)
Dividends ($ in millions)19.8  19.7  1% 20.5  (3%)
Total Capital Allocated ($ in millions)$19.8  $19.7  1% $150.8  (87%)
Weighted-average Share Count, Diluted80.6  80.1  1% 83.8  (4%)
Total Capital Allocated per Share(35)$0.25  $0.25  % $1.80  (86%)

Endnote Disclosures

(1) In April 2020, the Company updated its definition of net new assets to include Dividends plus Interest, minus Advisory Fees. See FNs 15, 16, 19, 20 and 21.
(2) Represents the estimated total advisory and brokerage assets expected to transition to the Company's broker-dealer subsidiary, LPL Financial LLC ("LPL Financial"), associated with advisors who transferred their licenses to LPL Financial during the period. The estimate is based on prior business reported by the advisors, which has not been independently and fully verified by LPL Financial. The actual transition of assets to LPL Financial generally occurs over several quarters including the initial quarter of the transition, and the actual amount transitioned may vary from the estimate.
(3) “Financial advisors” or “Advisors” include registered representatives and/or investment adviser representatives affiliated with LPL Financial, an SEC registered broker-dealer and investment adviser. Q3 2020 advisor count included 22 advisors from the acquisition of Lucia Securities. While the Lucia advisors’ licenses transferred to LPL as of the end of Q3 2020, the client assets from Lucia Securities are expected to transfer onto LPL’s platform in Q4 2020.
(4) Compliance with the Credit Agreement Net Leverage Ratio is only required under our revolving credit facility.
(5) Certain information presented on pages 8-15 includes non-GAAP financial measures and operational and performance metrics. For more information on non-GAAP financial measures, please see the section titled “Non-GAAP Financial Measures” that begins on page 3 of this release.
(6) Production based payout is an operating measure calculated as a commission and advisory expense less advisor deferred compensation expense. Below is a reconciliation of production based payout against the Company’s commission and advisory expense for the periods presented (in thousands):

 Q3 2020 Q2 2020 Q1 2020 Q3 2019
Production based payout$917,831  $819,953  $920,835  $857,384 
Advisor deferred compensation expense18,935  39,894  (50,040) (749)
Commission and advisory expense$936,766  $859,847  $870,795  $856,635 

(7) Consists of revenues from the Company's sponsorship programs with financial product manufacturers and omnibus processing and networking services, but does not include fees from client cash programs. Other asset-based revenues are a component of asset-based revenues and are derived from the Company's Unaudited Condensed Consolidated Statements of Income.
(8) Interest income and other, net is an operating measure calculated as interest income, net of interest expense plus other revenue, less advisor deferred compensation expense. Below is a reconciliation of interest income and other, net against the Company’s interest income, net of interest expense and other revenue for the periods presented (in thousands):

 Q3 2020 Q2 2020 Q1 2020 Q3 2019
Interest income, net of interest expense$6,623  $6,540  $9,542  $11,531 
Plus: Other revenue20,796  42,751  (51,218) 1,276 
Less: Advisor deferred compensation expense(18,935) (39,894) 50,040  749 
Interest income and other, net$8,484  $9,397  $8,364  $13,556 

(9) Core G&A is a non-GAAP financial measure. Please see a description of Core G&A under “Non-GAAP Financial Measures” on page 3 of this release for additional information. Below is a reconciliation of Core G&A against the Company’s total operating expenses for the periods presented:

 Q3 2020 Q2 2020 Q1 2020 Q3 2019
Operating Expense Reconciliation (in thousands)       
Core G&A$227,099  $222,406  $223,211  $215,198 
Regulatory charges8,326  6,115  6,157  7,905 
Promotional57,970  44,540  57,398  61,715 
Employee share-based compensation7,420  8,040  8,648  7,414 
Total G&A300,815  281,101  295,414  292,232 
Commissions and advisory936,766  859,847  870,795  856,635 
Depreciation & amortization27,548  26,890  26,644  24,062 
Amortization of intangible assets16,829  16,689  16,570  16,286 
Brokerage, clearing and exchange17,834  18,565  17,024  16,380 
Total operating expenses$1,299,792  $1,203,092  $1,226,447  $1,205,595 

(10) Consists of total advisory assets under custody at LPL Financial. Q4 2019 also included advisory assets serviced by investment advisor representatives of Allen & Company of Florida, LLC ("Allen & Company") that were onboarded to LPL Financial's custodial platform in Q4 2019.
(11) Consists of brokerage assets serviced by advisors licensed with LPL Financial. Q4 2019 also included brokerage assets serviced by advisors licensed with Allen & Company that were onboarded to LPL Financial's custodial platform in Q4 2019.
(12) Consists of total assets on LPL Financial's corporate advisory platform serviced by investment advisor representatives of LPL Financial or Allen & Company.
(13) Consists of total assets on LPL Financial's independent advisory platform serviced by investment advisor representatives of separate registered investment advisor firms ("Hybrid RIAs"), rather than of LPL Financial.
(14) Represents those advisory assets in LPL Financial’s Model Wealth Portfolios, Optimum Market Portfolios, Personal Wealth Portfolios and Guided Wealth Portfolios platforms.
(15) Consists of total client deposits into advisory accounts, including advisory assets serviced by Allen & Company advisors, less total client withdrawals from advisory accounts, plus dividends, plus interest, minus advisory fees. The Company considers conversions from and to brokerage accounts as deposits and withdrawals, respectively. Figures for Net New Advisory Assets reported prior to April 2020 did not include dividends and interest or subtract advisory fees. The figure previously reported for Q3 2019 was an inflow of $9.2 billion. See FN 1.
(16) Consists of total client deposits into brokerage accounts, including brokerage assets serviced by Allen & Company advisors, less total client withdrawals from brokerage accounts, plus dividends, plus interest. The Company considers conversions from and to advisory accounts as deposits and withdrawals, respectively. Figures for Net New Brokerage Assets reported prior to April 2020 did not include dividends and interest. The figure previously reported for Q3 2019 was an inflow of $0.6 billion. See FN 1.
(17) Consists of existing custodied assets that converted from brokerage to advisory, less existing custodied assets that converted from advisory to brokerage.
(18) Calculated as annualized current period net new assets divided by preceding period assets in their respective categories of advisory assets or total advisory and brokerage assets.
(19) Consists of total client deposits into advisory accounts on LPL Financial's corporate advisory platform (FN 12) less total client withdrawals from advisory accounts on its corporate advisory platform, plus dividends, plus interest, minus advisory fees. Figures for Corporate Platform Net New Advisory Assets reported prior to April 2020 did not include dividends and interest or subtract advisory fees. The figure previously reported for Q3 2019 was an inflow of $6.6 billion. See FN 1.
(20) Consists of total client deposits into advisory accounts on LPL Financial's independent advisory platform (FN 13) less total client withdrawals from advisory accounts on its independent advisory platform, plus dividends, plus interest, minus advisory fees. Figures for Hybrid Platform Net New Advisory Assets reported prior to April 2020 did not include dividends and interest or subtract advisory fees. The figure previously reported for Q3 2019 was an inflow of $2.6 billion. See FN 1.
(21) Consists of total client deposits into centrally managed assets accounts (FN 14) less total client withdrawals from centrally managed assets accounts, plus dividends, plus interest, minus advisory fees. Figures for Centrally Managed Net New Advisory Assets reported prior to April 2020 did not include dividends and interest or subtract advisory fees. The figure previously reported for Q3 2019 was an inflow of $1.9 billion. See FN 1.
(22) Calculated by dividing revenue for the period by the average balance during the period.
(23) Represents the amount of securities purchased less the amount of securities sold in client accounts custodied with LPL Financial. Reported activity does not include any other cash activity, such as deposits, withdrawals, dividends received or fees paid.
(24) Consists of cash unrestricted by the Credit Agreement and other regulations available for operating, investing, and financing uses.
(25) EBITDA and Credit Agreement EBITDA are non-GAAP financial measures. Please see a description of EBITDA and Credit Agreement EBITDA under “Non-GAAP Financial Measures” on page 3 of this release for additional information. Under the Credit Agreement, management calculates Credit Agreement EBITDA for a trailing twelve month period at the end of each fiscal quarter, and in doing so may make further adjustments to prior quarters. Below are reconciliations of EBITDA and Credit Agreement EBITDA to net income for the periods presented (dollars in thousands):

 Q3 2020 Q2 2020
EBITDA and Credit Agreement EBITDA Reconciliations   
Net income$487,768  $515,693 
Non-operating interest expense112,170  118,935 
Provision for income taxes157,471  172,202 
Loss on extinguishment of debt3,156  3,156 
Depreciation and amortization106,745  103,259 
Amortization of intangible assets66,719  66,176 
EBITDA$934,029  $979,421 
Credit Agreement Adjustments:   
Employee share-based compensation expense$31,287  $31,281 
Advisor share-based compensation expense2,404  2,495 
Other13,107  13,700 
Credit Agreement EBITDA (trailing twelve months)$980,827  $1,026,897 

(26) Calculated based on the average advisor count from the current period and prior period.
(27) Calculated based on the end-of-period total advisory and brokerage assets divided by end-of-period advisor count.
(28) Represents the amortization expense amount of forgivable loans for transition assistance to advisors and financial institutions.
(29) Represents advisory revenue as a percentage of Corporate Platform Advisory Assets (FN 12) for the trailing twelve month period.
(30) Represents Gross Profit (FN 5), a non-GAAP financial measure, for the trailing twelve month period, divided by average month-end total advisory and brokerage assets for the trailing twelve month period.
(31) Represents operating expenses for the trailing twelve month period, excluding production-related expense, divided by average month-end total advisory and brokerage assets for the period. Production-related expense includes commissions and advisory expense and brokerage, clearing and exchange expense. For purposes of this metric, operating expenses includes Core G&A (FN 9), a non-GAAP financial measure, as well as regulatory charges, promotional, employee share-based compensation, depreciation & amortization, and amortization of intangible assets.
(32) EBIT ROA is calculated as Gross Profit ROA less OPEX as a percentage of Total Advisory and Brokerage Assets.
(33) Reflects retention of commission and advisory revenues, calculated by deducting the prior year production of the annualized year-to-date attrition rate, over the prior year total production.
(34) Recurring Gross Profit Rate refers to the percentage of the Company’s Gross Profit, a non-GAAP financial measure, that was recurring for the trailing twelve month period. Management tracks Recurring Gross Profit, a characterization of Gross Profit and a statistical measure, which is defined to include the Company’s revenues from asset-based fees, advisory fees, trailing commissions, client cash programs and certain other fees that are based upon client accounts and advisors, less the expenses associated with such revenues and certain other recurring expenses not specifically associated with a revenue line. Management allocates such other recurring expenses on a pro-rata basis against specific revenue lines at its discretion.
(35) Capital Allocated per Share equals the amount of capital allocated for share repurchases and cash dividends divided by the diluted weighted-average shares outstanding.
(36) EPS Prior to Amortization of Intangible Assets is a non-GAAP financial measure. Please see a description of EPS Prior to Amortization of Intangible Assets under “Non-GAAP Financial Measures” on page 3 of this release for additional information. Below is a reconciliation of EPS Prior to Amortization of Intangible Assets to the Company’s GAAP EPS for the periods presented:

EPS Reconciliation (in thousands, except per share data)Q3 2020
EPS$1.29 
Amortization of Intangible Assets16,829 
Tax Benefit(4,712)
Amortization of Intangible Assets Net of Tax Benefit$12,117 
Diluted Share Count80,550 
EPS Impact$0.15 
EPS Prior to Amortization of Intangible Assets$1.44 

Investor Relations - Chris Koegel, (617) 897-4574
Media Relations - Jeff Mochal, (704) 733-3589
investor.lpl.com/contactus.cfm

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