LPL Financial Holdings Inc.
Feb 9, 2017

LPL Financial Announces Fourth Quarter and Full Year 2016 Results

Fourth Quarter 2016 Key Performance Indicators

Full Year 2016 Key Performance Indicators

Key Updates

SAN DIEGO, Feb. 09, 2017 (GLOBE NEWSWIRE) -- LPL Financial Holdings Inc. (NASDAQ:LPLA) (the "Company") today announced results for its fourth quarter ended December 31, 2016, reporting net income of $42 million, or $0.46 per share. This compares with $27 million, or $0.28 per share, in the fourth quarter of 2015 and $52 million, or $0.58 per share, in the prior quarter.

"We delivered another solid quarter capping a strong year of business and financial results," said Mark Casady, chairman of the board. "I am proud of our company's transformation over the past few years and have the utmost confidence in Dan Arnold and our leadership team to drive the business going forward."

"I am honored to lead LPL into our next phase of growth," said Dan Arnold, president and CEO. "We had a strong 2016 with our best recruiting year ever, and we made significant progress on service, technology, and preparing for the DOL fiduciary rule." Arnold continued, "As we look forward to 2017, our priorities are growing our core business and executing with excellence. We believe this will improve our advisors' experience, and create long-term shareholder value."

"We were pleased with our progress on productivity and efficiency in 2016, and we plan to stay disciplined on expenses in 2017," said Matt Audette, CFO. "We continue to focus on investments that drive growth while maintaining balance sheet strength so we can be flexible in deploying capital."

Additional Fourth Quarter 2016 Financial and Business Highlights

Market Drivers

Advisors

Gross Profit

Expenses

Taxes

Capital Management

*As announced in our Q3 2016 earnings release, an institutional client was acquired by a bank with its own broker-dealer and departed in September 2016. Approximately $2.4 billion of affiliated brokerage assets left in Q4 2016. Excluding those assets, total net new assets would have grown at a 4% annualized rate, and net new brokerage assets would have grown at a less than 1% annualized rate.

Conference Call and Additional Information

The Company will hold a conference call to discuss its results at 5:00 p.m. EST on Thursday, February 9, 2017. The conference call can be accessed by dialing either 877-677-9122 (domestic) or 708-290-1401 (international) and entering passcode 92153975.

The conference call will also be webcast simultaneously on the Investor Relations section of the Company's website (investor.lpl.com), where a replay of the call will also be available following the live webcast. A telephonic replay will be available approximately two hours after the call and can be accessed by dialing 855-859-2056 (domestic) or 404-537-3406 (international) and entering passcode 92153975. The telephonic replay will be available until 11:59 p.m. EST on February 16, 2017 and the webcast replay will be available until March 2, 2017.

About LPL Financial

LPL Financial LLC, a wholly owned subsidiary of LPL Financial Holdings Inc. (NASDAQ:LPLA), is a leader in the retail financial advice market and served $509 billion in advisory and brokerage assets as of December 31, 2016. LPL is one of the fastest growing RIA custodians and is the nation's largest independent broker-dealer (based on total revenues, Financial Planning magazine June 1996-2016). The Company provides proprietary technology, comprehensive clearing and compliance services, practice management programs and training, and independent research to more than 14,000 independent financial advisors and over 700 financial institutions, enabling them to help their clients turn life's aspirations into financial realities. Advisors associated with LPL also serviced an estimated 46,000 retirement plans with an estimated $127 billion in retirement plan assets, as of December 31, 2016. LPL also supports approximately 4,000 financial advisors licensed and affiliated with insurance companies with customized clearing, advisory platforms, and technology solutions. LPL Financial and its affiliates have more than 3,200 employees with primary offices in Boston, Charlotte, and San Diego. For more information, please visit www.lpl.com.

Securities and Advisory Services offered through LPL Financial. A Registered Investment Advisor, Member FINRA/SIPC.

**Non-GAAP Financial Measures

Management believes that presenting certain non-GAAP measures by excluding or including certain items can be helpful to investors and analysts who may wish to use some or all of 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 measures and metrics discussed below are appropriate for evaluating the performance of the Company.

Gross Profit is calculated as net revenues less commission and advisory expenses and brokerage, clearing, and exchange fees. All other expense categories, including depreciation and amortization, 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 its gross profit amounts to be non-GAAP measures that may not be comparable to those of others in its industry. Management believes that Gross Profit can be useful to investors because it shows the Company's core operating performance before indirect costs that are general and administrative in nature.

Core G&A consists of total operating expenses, which were $917.6 million for the three months ended December 31, 2016, excluding the following expenses: commission and advisory, regulatory charges (see FN 8), promotional (see FN 9), employee share-based compensation (see FN 10), depreciation and amortization, amortization of intangible assets, and brokerage, clearing, and exchange. The Company's 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 against the Company's total operating expenses, please see footnote 7 on page 18 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. Prior to 2016, the Company calculated Core G&A as consisting of total operating expenses, excluding the items described above, as well as excluding other items that primarily consisted of acquisition and integration costs resulting from various acquisitions and organizational restructuring and conversion costs. Beginning with results reported for Q1 2016, Core G&A was presented as including these items that were historically adjusted out, and for periods prior to Q1 2016, reflects those items in employee share-based compensation and other historical adjustments for comparative purposes.

EBITDA is defined as net income plus interest expense, income tax expense, depreciation, and amortization. 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.

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 further adjusted to exclude certain non-cash charges and other adjustments, including unusual or non-recurring charges and gains. 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 Credit Agreement-defined 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, and capital investments.

Forward-Looking Statements

Statements in this press release regarding the Company's future financial and operating results, outlook, growth, plans, business strategies, future market position, future operating environment, and goals, including forecasts and statements relating to the Company's expense and capital plans, target leverage ratio, opportunities for the deployment of cash, future efficiency gains, future investments and future expense growth, 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 February 9, 2017. The words "anticipates", "believes", "expects", "may", "plans", "predicts", "will", and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are not guarantees that the future results, plans, intentions, or expectations expressed or implied by the Company will be achieved. Matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, legislative, regulatory, competitive, and other factors, which may cause actual financial or operating results, levels of activity, or the timing of events, to be materially different 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; fluctuations in the value of advisory and brokerage assets; fluctuations in levels of net new assets and the related impact on revenue; fluctuations in the number of retail investors served by the Company; effects of competition in the financial services industry and the success of the Company in attracting and retaining financial advisors and institutions; changes in the number of the Company's financial advisors and institutions, and their ability to market effectively financial products and services; changes in interest rates and fees payable by banks participating in the Company's cash sweep program, including the Company's success in negotiating agreements with current or additional counterparties; the Company's strategy in managing cash sweep program fees; changes in the growth and profitability of the Company's fee-based business; the effect of current, pending and future legislation, regulation and regulatory actions, including the U.S. Department of Labor's final rule ("DOL Rule") and disciplinary actions imposed by federal and state securities regulators and self-regulatory organizations; the costs of settling and remediating issues related to pending or future regulatory matters or legal proceedings; execution of the Company's capital management plans, including its compliance with the terms of its existing credit agreement; the price, the availability of shares, and trading volumes of the Company's common stock, which will affect the timing and size of future share repurchases by the Company; changes made to the Company's offerings and services in response to the current, pending and future legislation, regulation and regulatory actions, including the DOL Rule, and the effect that such changes may have on the Company's gross profit streams and costs; execution of the Company's plans and its success in realizing the expense savings and service improvements and efficiencies expected to result from its initiatives and programs, particularly its expense plans and technological initiatives; the Company's success in negotiating and developing commercial arrangements with third-party services providers; the performance of third-party service providers to which business processes are transitioned from the Company; the Company's ability to control operating risks, information technology systems risks, cybersecurity risks, and sourcing risks; and the other factors set forth in Part I, "Item 1A. Risk Factors" in the Company's 2015 Annual Report on Form 10-K, as may be amended or updated in the Company's Quarterly Reports on Form 10-Q or subsequent filings with the SEC. 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
(Dollars in thousands, except per share data)
(Unaudited)
        
 Three Months Ended December 31,   Years Ended December 31,  
 2016 2015 %  Change 2016 2015 %  Change
REVENUES           
Commission$423,267  $463,486  (9%) $1,737,435  $1,976,845  (12%)
Advisory325,383  324,241  % 1,289,681  1,352,454  (5%)
Asset-based144,136  124,062  16% 556,475  493,687  13%
Transaction and fee102,788  96,849  6% 415,715  401,948  3%
Interest income, net of interest expense5,342  4,216  27% 21,282  19,192  11%
Other6,541  7,492  (13%) 28,795  30,928  (7%)
Total net revenues1,007,457  1,020,346  (1%) 4,049,383  4,275,054  (5%)
EXPENSES           
Commission and advisory646,501  685,127  (6%) 2,600,624  2,864,813  (9%)
Compensation and benefits108,741  104,938  4% 436,557  440,049  (1%)
Promotional35,602  34,782  2% 148,612  139,198  7%
Depreciation and amortization19,783  22,526  (12%) 75,928  73,383  3%
Amortization of intangible assets9,499  9,532  % 38,035  38,239  (1%)
Occupancy and equipment25,609  22,155  16% 92,956  84,112  11%
Professional services17,944  20,608  (13%) 67,128  64,522  4%
Brokerage, clearing and exchange14,213  12,836  11% 54,509  52,516  4%
Communications and data processing12,652  12,897  (2%) 44,453  46,871  (5%)
Restructuring charges  480  n/m   11,967  n/m
Other27,075  30,897  (12%) 96,587  117,693  (18%)
Total operating expenses917,619  956,778  (4%) 3,655,389  3,933,363  (7%)
Non-operating interest expense24,895  18,465  35% 96,478  59,136  63%
INCOME BEFORE PROVISION FOR INCOME TAXES64,943  45,103  44% 297,516  282,555  5%
PROVISION FOR INCOME TAXES23,207  18,291  27% 105,585  113,771  (7%)
NET INCOME$41,736  $26,812  56% $191,931  $168,784  14%
Earnings per share, basic$0.47  $0.29  62% $2.15  $1.77  21%
Earnings per share, diluted$0.46  $0.28  64% $2.13  $1.74  22%
Weighted-average shares outstanding, basic 89,212   93,878  (5%)  89,072   95,273  (7%)
Weighted-average shares outstanding, diluted 91,014   95,340  (5%)  90,013   96,786  (7%)


LPL Financial Holdings Inc.
Condensed Consolidated Statements of Income Trend
(Dollars in thousands, except per share data)
(Unaudited)
  
 Quarterly Results
 Q4 2016 Q3 2016 Q2 2016
REVENUES     
Commission$423,267  $431,686  $445,755 
Advisory325,383  321,911  322,955 
Asset-based144,136  138,291  137,797 
Transaction and fee102,788  108,413  101,824 
Interest income, net of interest expense5,342  5,372  5,238 
Other6,541  11,767  5,612 
Total net revenues1,007,457  1,017,440  1,019,181 
EXPENSES     
Commission and advisory646,501  657,432  660,680 
Compensation and benefits108,741  107,988  105,773 
Promotional35,602  42,609  34,717 
Depreciation and amortization19,783  18,434  18,749 
Amortization of intangible assets9,499  9,502  9,509 
Occupancy and equipment25,609  23,530  21,980 
Professional services17,944  17,045  14,984 
Brokerage, clearing and exchange14,213  13,098  13,609 
Communications and data processing12,652  10,333  10,971 
Other27,075  25,356  24,656 
Total operating expenses917,619  925,327  915,628 
Non-operating interest expense24,895  23,889  23,804 
INCOME BEFORE PROVISION FOR INCOME TAXES64,943  68,224  79,749 
PROVISION FOR INCOME TAXES23,207  16,270  31,900 
NET INCOME$41,736  $51,954  $47,849 
Earnings per share, basic$0.47  $0.58  $0.54 
Earnings per share, diluted$0.46  $0.58  $0.53 
Weighted-average shares outstanding, basic 89,212  89,092  89,019 
Weighted-average shares outstanding, diluted 91,014  89,951  89,699 


LPL Financial Holdings Inc.
Condensed Consolidated Statements of Financial Condition
(Dollars in thousands, except par value)
(Unaudited)
 
  December 31,
 2016
 December 31, 2015
ASSETS
Cash and cash equivalents $747,709  $724,529 
Cash and securities segregated under federal and other regulations 768,219  671,339 
Restricted cash 42,680  27,839 
Receivables from:    
Clients, net of allowance of $1,580 at December 31, 2016 and $1,464 at December 31, 2015 341,199  339,089 
Product sponsors, broker-dealers, and clearing organizations 175,122  161,224 
Advisor loans, net of allowance of $1,852 at December 31, 2016 and $697 at December 31, 2015 194,526  148,978 
Others, net of allowance of $12,851 at December 31, 2016 and $9,856 at December 31, 2015 189,632  180,161 
Securities owned:    
Trading — at fair value 11,404  11,995 
Held-to-maturity 8,862  9,847 
Securities borrowed 5,559  6,001 
Income taxes receivable    
Fixed assets, net of accumulated depreciation and amortization of $355,919 at December 31, 2016 and $328,880 at December 31, 2015 387,368  275,419 
Goodwill 1,365,838  1,365,838 
Intangible assets, net of accumulated amortization of $380,775 at December 31, 2016 and $342,740 at December 31, 2015 353,996  392,031 
Other assets 242,812  206,771 
Total assets $4,834,926  $4,521,061 
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Drafts payable $198,839  $189,083 
Payables to clients 863,765  747,421 
Payables to broker-dealers and clearing organizations 63,032  48,032 
Accrued commission and advisory expenses payable 128,476  129,512 
Accounts payable and accrued liabilities 385,545  332,492 
Income taxes payable 4,607  8,680 
Unearned revenue 62,785  65,480 
Securities sold, but not yet purchased — at fair value 183  268 
Senior secured credit facilities, net of unamortized debt issuance cost of $21,924 at December 31, 2016 and $26,797 at December 31, 2015 2,175,436  2,188,240 
Leasehold financing obligation 105,649  59,940 
Deferred income taxes, net 25,614  36,303 
Total liabilities 4,013,931  3,805,451 
Commitments and contingencies    
STOCKHOLDERS' EQUITY:    
Common stock, $.001 par value; 600,000,000 shares authorized; 119,917,854 shares issued at December 31, 2016 and 119,572,352 shares issued at December 31, 2015 120  119 
Additional paid-in capital 1,445,256  1,418,298 
Treasury stock, at cost — 30,621,270 shares at December 31, 2016 and 30,048,027 shares at December 31, 2015 (1,194,645) (1,172,490)
Accumulated other comprehensive income 315  553 
Retained earnings 569,949  469,130 
Total stockholders' equity 820,995  715,610 
Total liabilities and stockholders' equity $4,834,926  $4,521,061 


LPL Financial Holdings Inc.
Management's Statements of Operations (1)
(Dollars in thousands, except per share data)
(Unaudited)

The information presented on pages 9-17 of this release is presented as reviewed by the Company's management and includes information derived from the Company's Condensed Consolidated Statements of Income, non-GAAP measures, and operational and performance metrics. For information on non-GAAP measures, please see the section titled "Non-GAAP Financial Measures" that begins on page 3 of this release.

 Quarterly Results
 Q4 2016 Q3 2016 %  Change Q4 2015 %  Change
Revenues         
Sales-based commissions$188,943  $196,364  (4%) $229,303  (18%)
Trailing commissions234,324  235,322  % 234,183  %
Advisory325,383  321,911  1% 324,241  %
GDC(2)748,650  753,597  (1%) 787,727  (5%)
Cash sweep revenue(3)48,756  40,701  20% 27,217  79%
Other asset-based(4)95,380  97,590  (2%) 96,845  (2%)
Transaction and fee102,788  108,413  (5%) 96,849  6%
Other(5)11,883  17,139  (31%) 11,708  1%
Total net revenues1,007,457  1,017,440  (1%) 1,020,346  (1%)
Commission and advisory expense646,501  657,432  (2%) 685,127  (6%)
Brokerage, clearing, and exchange14,213  13,098  9% 12,836  11%
Gross profit(6)346,743  346,910  % 322,383  8%
Expense         
Core G&A(7)180,974  175,385  3% 179,490  1%
Regulatory charges(8)6,275  4,436  41% 7,835  (20%)
Promotional(9)35,602  42,609  (16%) 34,782  2%
Employee share-based compensation(10)4,772  4,431  8% 4,083  17%
Other historical adjustments(11)    n/m 567  n/m
Total G&A227,623  226,861  % 226,757  %
EBITDA119,120  120,049  (1%) 95,626  25%
Depreciation and amortization19,783  18,434  7% 22,526  (12%)
Amortization of intangible assets9,499  9,502  % 9,532  %
Non-operating interest expense24,895  23,889  4% 18,465  35%
INCOME BEFORE PROVISION FOR INCOME TAXES64,943  68,224  (5%) 45,103  44%
PROVISION FOR INCOME TAXES23,207  16,270  43% 18,291  27%
NET INCOME$41,736  $51,954  (20%) $26,812  56%
Earnings per share, diluted$0.46  $0.58  (21%) $0.28  64%
Weighted-average shares outstanding, diluted 91,014  89,951  1%  95,340  (5%)


LPL Financial Holdings Inc.
Management's Statements of Operations Trend (1)
(Dollars in thousands, except per share data)
(Unaudited)

The information presented on pages 9-17 of this release is presented as reviewed by the Company's management and includes information derived from the Company's Condensed Consolidated Statements of Income, non-GAAP measures, and operational and performance metrics. For information on non-GAAP measures, please see the section titled "Non-GAAP Financial Measures" that begins on page 3 of this release.

 Quarterly Results
 Q4 2016 Q3 2016 Q2 2016
Revenues     
Sales-based commissions$188,943  $196,364  $218,266 
Trailing commissions234,324  235,322  227,489 
Advisory325,383  321,911  322,955 
GDC(2)748,650  753,597  768,710 
Cash sweep revenue(3)48,756  40,701  40,857 
Other asset-based(4)95,380  97,590  96,940 
Transaction and fee102,788  108,413  101,824 
Other(5)11,883  17,139  10,850 
Total net revenues1,007,457  1,017,440  1,019,181 
Commission and advisory expense646,501  657,432  660,680 
Brokerage, clearing, and exchange14,213  13,098  13,609 
Gross profit(6)346,743  346,910  344,892 
Expense     
Core G&A(7)180,974  175,385  168,076 
Regulatory charges(8)6,275  4,436  5,567 
Promotional(9)35,602  42,609  34,717 
Employee share-based compensation(10)4,772  4,431  4,721 
Total G&A227,623  226,861  213,081 
EBITDA119,120  120,049  131,811 
Depreciation and amortization19,783  18,434  18,749 
Amortization of intangible assets9,499  9,502  9,509 
Non-operating interest expense24,895  23,889  23,804 
INCOME BEFORE PROVISION FOR INCOME TAXES64,943  68,224  79,749 
PROVISION FOR INCOME TAXES23,207  16,270  31,900 
NET INCOME$41,736  $51,954  $47,849 
Earnings per share, diluted$0.46  $0.58  $0.53 
Weighted-average shares outstanding, diluted 91,014  89,951   89,699 


LPL Financial Holdings Inc.
Monthly Metrics (1)
(Dollars in thousands, except where noted)
(Unaudited)
 
(End of Period $ in billions, unless noted) December 2016 November 2016 Nov to Dec % Change October 2016 September 2016
Assets Served          
Brokerage Assets(12) $297.8  $294.0  1.3% $291.5  $296.9 
Advisory Assets(13) 211.6  207.3  2.1% 203.3  205.5 
Total Brokerage and Advisory Assets(14) $509.4  $501.3  1.6% $494.8  $502.4 
           
Insured Cash Account Balances(15) $22.8  $21.9  4.1% $21.3  $21.1 
Deposit Cash Account Balances(16) 4.4  4.3  2.3% 4.2  4.2 
Money Market Account Cash Balances(17) 4.1  4.0  2.5% 4.0  3.9 
Total Client Cash Sweep Balances(18) $31.3  $30.2  3.6% $29.5  $29.2 
           
Market Indices          
S&P 500 Index (end of period) 2,239  2,199  1.8% 2,126  2,168 
Fed Funds Effective Rate (average bps) 54  41  13  40  40 


LPL Financial Holdings Inc.
Operating Measures (1)
(Dollars in thousands, except where noted)
(Unaudited)
 
 Q4 2016 Q3 2016 % Change Q4 2015 % Change
Market Drivers         
S&P 500 Index (end of period)2,239  2,168  3% 2,044  10%
Fed Funds Daily Effective Rate (FFER) (average bps)45  39  6bps 16  29bps
          
Assets (dollars in billions)         
Brokerage Assets(12)$297.8  $296.9  % $288.4  3%
Advisory Assets(13)211.6  205.5  3% 187.2  13%
Total Brokerage and Advisory Assets(14)$509.4  $502.4  1% $475.6  7%
Advisory % of Total Assets41.5% 40.9% 60bps 39.4% 210bps
          
Net New Advisory Assets(19)$4.8  $4.1  n/m $3.1  n/m
Net New Brokerage Assets(20)(2.3) (3.1) n/m (2.7) n/m
Total Net New Assets(21)$2.5  $1.0  n/m $0.4  n/m
Advisory NNA Annualized Growth(22)9% 8% n/m 7% n/m
Total NNA Annualized Growth(23)2% 1% n/m % n/m
          
Non-Hybrid RIA Brokerage Assets(24)$233.1  $235.0  (1%) $235.5  (1%)
Corporate Platform Advisory Assets(24)127.0  124.9  2% 121.4  5%
Total Corporate Assets(24)360.1  359.9  % 356.9  1%
Brokerage Assets Associated with Hybrid RIAs(25)64.7  61.9  5% 52.9  22%
Hybrid Platform Advisory Assets(25)84.6  80.6  5% 65.8  29%
Total Hybrid Platform Assets(25)149.3  142.5  5% 118.7  26%
Total Brokerage and Advisory Assets(14)$509.4  $502.4  1% $475.6  7%
Hybrid % of Total Assets29.3% 28.4% 90bps 25.0% 430bps
          
Brokerage Retirement Assets(26)$148.9  $149.2  % $142.6  4%
Advisory Retirement Assets(26)116.2  112.1  4% 100.7  15%
Total Brokerage and Advisory Retirement Assets(26) $265.1  $261.3  1% $243.3  9%
Retirement % of Total Assets52.0% 52.0% —bps 51.2% 80bps
          
Insured Cash Account Balances(15)$22.8  $21.1  8% $20.9  9%
Deposit Cash Account Balances(16)4.4  4.2  5%   n/m
Money Market Account Cash Balances(17)4.1  3.9  5% 8.1  (49%)
Total Cash Sweep Balances(18)$31.3  $29.2  7% $29.0  8%
Cash Sweep % of Total Assets6.1% 5.8% 30bps 6.1% —bps
          
Insured Cash Account Fee - bps(27)73  62  11  50  23 
Deposit Cash Account Fee - bps(27)39  36  3    n/m
Money Market Account Fee - bps(27)43  42  1  13  30 
Total Cash Sweep Fee - bps(27)64  56  8  39  25 


LPL Financial Holdings Inc.
Financial Measures (1)
(Dollars in thousands, except where noted)
(Unaudited)
 
 Q4 2016 Q3 2016 % Change Q4 2015 % Change
Commission Revenue by Product         
Variable annuities$172,147  $169,413  2% $189,255  (9%)
Mutual funds131,749  137,238  (4%) 137,392  (4%)
Alternative investments9,511  8,514  12% 16,299  (42%)
Fixed annuities34,439  44,933  (23%) 44,359  (22%)
Equities22,108  20,263  9% 21,822  1%
Fixed income22,661  21,756  4% 21,104  7%
Insurance18,613  18,083  3% 20,290  (8%)
Group annuities11,817  11,266  5% 12,730  (7%)
Other222  220  1% 235  (6%)
Total commission revenue$423,267  $431,686  (2%) $463,486  (9%)
          
Commission Revenue by Sales-based and Trailing Commission      
Sales-based commissions         
Variable annuities$58,430  $57,337  2% $76,996  (24%)
Mutual funds32,651  34,985  (7%) 35,235  (7%)
Alternative investments7,411  7,198  3% 14,471  (49%)
Fixed annuities31,310  41,995  (25%) 43,244  (28%)
Equities22,108  20,263  9% 21,822  1%
Fixed income17,999  16,588  9% 16,051  12%
Insurance17,115  16,520  4% 18,876  (9%)
Group annuities1,697  1,258  35% 2,373  (28%)
Other222  220  1% 235  (6%)
Total sales-based commissions$188,943  $196,364  (4%) $229,303  (18%)
Trailing commissions         
Variable annuities$113,717  $112,076  1% $112,259  1%
Mutual funds99,098  102,253  (3%) 102,157  (3%)
Alternative investments2,100  1,316  60% 1,828  15%
Fixed annuities3,129  2,938  7% 1,115  181%
Fixed income4,662  5,168  (10%) 5,053  (8%)
Insurance1,498  1,563  (4%) 1,414  6%
Group annuities10,120  10,008  1% 10,357  (2%)
Total trailing commissions$234,324  $235,322  % $234,183  %
Total commission revenue$423,267  $431,686  (2%) $463,486  (9%)


LPL Financial Holdings Inc.
Financial Measures (1)
(Dollars in thousands, except where noted)
(Unaudited)
 
 Q4 2016 Q3 2016 % Change Q4 2015 % Change
Payout Rate         
Base Payout Rate(28)82.28% 83.10% (82bps) 82.80% (52bps)
Production Based Bonuses3.40% 3.04% 36bps 3.46% (6bps)
GDC Sensitive Payout85.68% 86.14% (46bps) 86.26% (58bps)
Non-GDC Sensitive Payout (29)0.68% 1.10% (42bps) 0.72% (4bps)
Total Payout Ratio86.36% 87.24% (88bps) 86.98% (62bps)
Production Based Bonuses Ratio (Trailing Twelve Months)  2.6% 2.7% (10bps) 2.7% (10bps)


LPL Financial Holdings Inc.
Capital Management Measures (1)
(Dollars in thousands, except where noted)
(Unaudited)
 
 Q4 2016 Q3 2016
Credit Agreement EBITDA(30)   
Net income$41,736  $51,954 
Non-operating interest expense24,895  23,889 
Provision for income taxes23,207  16,270 
Depreciation and amortization19,783  18,434 
Amortization of intangible assets9,499  9,502 
EBITDA119,120  120,049 
Credit Agreement Adjustments:   
Employee share-based compensation expense(10)4,771  4,431 
Advisor share-based compensation expense(31)3,250  2,327 
Other(32)5,880  5,727 
Credit Agreement EBITDA$133,021  $132,534 
    
Total Debt   
Revolving Credit Facility Loans$  $ 
Term Loan Outstanding2,197,360  2,201,780 
Total Debt$2,197,360  $2,201,780 
    
Cash Available for Corporate Use(33)   
Cash at Parent(34)$417,317  $471,997 
Excess Cash at Broker-Dealer subsidiary per Credit Agreement75,551  50,159 
Other Available Cash6,257  7,416 
Total Cash Available for Corporate Use$499,125  $529,572 
    
Credit Agreement Net Leverage   
Total Debt$2,197,360  $2,201,780 
Cash Available (up to $300 million)300,000  300,000 
Credit Agreement Net Debt$1,897,360  $1,901,780 
Credit Agreement EBITDA (trailing twelve months)(35)$552,472  $532,555 
Credit Agreement Net Leverage Ratio(36)3.43x 3.57x


LPL Financial Holdings Inc.
Debt Schedule (1)
(Dollars in thousands, except where noted)
(Unaudited)
 
Credit FacilitiesOutstanding Applicable Margin Interest Rate Maturity
Revolving Credit Facility Loans(a)$  LIBOR+250bps   9/30/2019
        
Senior Secured Term Loans:       
2019 Term Loan A459,375  LIBOR+250bps 3.27% 9/30/2019
2019 Term Loan B(b)420,309  LIBOR+250bps 3.25% 3/29/2019
2021 Term Loan B(b)624,676  LIBOR+350bps 4.25% 3/29/2021
2022 Term Loan B(b)693,000  LIBOR+400bps 4.80% 11/20/2022
Total / Weighted-Average (at current rate)  $2,197,360    4.01%  

_____________________

(a) The Company's Revolving Credit Facility has a borrowing capacity of $400 million
(b) The Company's Term Loan B Credit Facilities have a LIBOR floor of 75 basis points


LPL Financial Holdings Inc.
Key Business and Financial Metrics (1)
(Dollars in thousands, except where noted)
(Unaudited)
 
 Q4 2016 Q3 2016 % Change Q4 2015 % Change
Advisors         
Advisors14,377  14,185  1% 14,054  2%
Net New Advisors192  (8) n/m (19) n/m
Custom Clearing Service Subscribers(37)3,988  4,207  (5%) 4,200  (5%)
Annualized commissions revenue per Advisor(38)$119  $122  (2%) $132  (10%)
Annualized GDC per Advisor(38)$210  $212  (1%) $224  (6%)
Average Total Assets per Advisor ($millions)(39)$35.4  $35.4  % $33.8  5%
Transition assistance loan amortization($ millions)(40)$12.8  $12.0  7% $10.7  20%
Total client accounts (in millions)4.7  4.7  % 4.6  2%
          
Employees - period end3,288  3,254  1% 3,410  (4%)
          
Productivity Metrics         
Advisory Revenue as a percentage of Advisory Assets, excluding Hybrid RIA assets(41)1.04% 1.06% (2bps) 1.10% (6bps)
Annualized Gross Profit / Total Brokerage and Advisory Assets0.27% 0.28% (1bps) 0.27% bps
Annualized Operating expense excluding production expense / Total Brokerage and Advisory Assets(42)0.20% 0.20% bps 0.22% (2bps)
Production Retention Rate (YTD Annualized)(43)95.6% 95.2% 40bps 96.3% (70bps)
Attachment Rate, excluding Cash Sweep Revenue(44)28.1% 29.6% (150bps) 26.1% 200bps
Recurring Revenue Rate(45)75.8% 74.3% 150bps 73.0% 280bps
EBITDA as a percentage of Gross Profit34.4% 34.6% (20bps) 29.7% 470bps
          
Capital Allocation per Share(46)
  (in millions, except per share data)
         
Share Repurchases$  $  n/m $250.0  (100%)
Dividends22.3  22.3  % 24.0  (7%)
Total Capital Allocated$22.3  $22.3  % $274.0  (92%)
Weighted-average Share Count, Diluted91.0  90.0  1% 95.3  (5%)
Total Capital Allocated per Share$0.25  $0.25  % $2.88  (91%)


Endnote Disclosures

(1) The information presented on pages 9-17 includes non-GAAP financial measures and operational and performance metrics. For more information on non-GAAP measures, please see the section titled "Non-GAAP Financial Measures" on page 3.

(2) GDC, or gross dealer concessions, a financial measure, is equal to the sum of Commission and Advisory revenues.

(3) Cash sweep revenue consists of fees from the Company's cash sweep program, specifically a money market sweep vehicle involving money market fund providers and two insured bank deposit sweep vehicles (see FNs 15, 16, and 17). Cash sweep revenues are a component of asset-based revenues and are derived from the Company's Condensed Consolidated Statements of Income.

(4) Other asset-based revenues consists of the Company's sponsorship programs with financial product manufacturers and omnibus processing and networking services, but not including fees from cash sweep programs. Other asset-based revenues are a component of asset-based revenues and are derived from the Company's Condensed Consolidated Statements of Income.

(5) Other consists of interest income as well as other revenues, as presented on the Company's Condensed Consolidated Statements of Income.

(6) Gross Profit is a non-GAAP measure. Please see a description of Gross Profit under "Non-GAAP Financial Measures" on page 3 of this release for additional information.

(7) Core G&A is a non-GAAP 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:

 Q4 2016 Q3 2016 Q4 2015
Operating Expense Reconciliation     
Core G&A$180,974  $175,385  $179,490 
Regulatory charges6,275  4,436  7,835 
Promotional35,602  42,609  34,782 
Employee share-based compensation4,772  4,431  4,083 
Other historical adjustments    567 
Total G&A227,623  226,861  226,757 
Commissions and advisory646,501  657,432  685,127 
Depreciation & amortization19,783  18,434  22,526 
Amortization of intangible assets9,499  9,502  9,532 
Brokerage, clearing and exchange14,213  13,098  12,836 
Total operating expense$917,619  $925,327  $956,778 


(8) Regulatory charges consist of items that the Company's management relates to the resolution of regulatory issues (including remediation, restitution, and fines).

(9) Promotional expenses include costs related to hosting of advisor conferences, business development costs related to recruiting, such as transition assistance, and amortization related to forgivable loans issued to advisors.

(10) Employee share-based compensation expense represents share-based compensation for equity awards granted to employees, officers, and directors. Such awards are measured based on the grant date fair value and recognized over the requisite service period of the individual awards, which generally equals the vesting period.

(11) Other historical adjustments primarily includes acquisition and integration costs resulting from various acquisitions and organizational restructuring and conversion costs. Beginning in Q1 2016, these items are included in Core G&A expenses (see FN 7).

(12) Brokerage Assets is a component of Total Brokerage and Advisory Assets (see FN 14) and consists of assets serviced by advisors licensed with the Company's broker-dealer subsidiary LPL Financial LLC ("LPL Financial") that are custodied, networked, and non-networked, and reflect market movement in addition to new assets, inclusive of new business development and net of attrition.

(13) Advisory Assets is a component of Total Brokerage and Advisory Assets (see FN 14) and consists of advisory assets under management on the Company's corporate advisory platform (see FN 24) and Hybrid RIA assets in advisory accounts custodied at the Company (see FN 25).

(14) End of period Total Brokerage and Advisory Assets are comprised of assets that are custodied, networked, and non-networked, and reflect market movement in addition to new assets, inclusive of new business development and net of attrition. End of period Insured Cash Account, Deposit Cash Account and Money Market Account Balances are also included in Total Brokerage and Advisory Assets.

(15) Insured Cash Account Balances represents advisors' clients' accounts balances in one of the Company's two insured bank deposit sweep vehicles at the end of the reporting period. These accounts are available to individuals, trusts (where beneficiaries are natural persons), and sole proprietorships, and these assets are included in Total Brokerage and Advisory Assets (see FN 14).

(16) Deposit Cash Account Balances represents advisors' clients' accounts balances in one of the Company's two insured bank deposit sweep vehicles at the end of the reporting period. These accounts are available only to advisory individual retirement accounts (IRAs), and these assets are included in Total Brokerage and Advisory Assets (see FN 14)

(17) Money Market Account Cash Balances represents advisors' clients' accounts balances in money market fund providers at the end of the reporting period. These assets are included in Total Brokerage and Advisory Assets (see FN 14).

(18) Represents the sum of Insured Cash Account Balances, Deposit Cash Account Balances, and Money Market Account Cash Balances, which together comprise end of period assets in the Company's cash sweep program. These assets are included in Total Brokerage and Advisory Assets (see FN 14).

(19) Net New Advisory Assets consists of total client deposits into advisory accounts less total client withdrawals from advisory accounts. We consider conversions from and to brokerage accounts as deposits and withdrawals respectively.

(20) Net New Brokerage Assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts. We consider conversions from and to advisory accounts as deposits and withdrawals respectively.

(21) Total Net New Assets is equal to the sum of Net New Advisory Assets and Net New Brokerage Assets.

(22) Advisory NNA Annualized Growth is calculated as the Net New Advisory Assets as of the end of a period divided by advisory assets as of the end of the immediately preceding period and multiplying by four.

(23) Total NNA Annualized Growth is calculated as the Total Net New Assets as of the end of the period, divided by total end of period Total Brokerage and Advisory Assets as of the end of the immediately preceding period and multiplying by four.

(24) Total Corporate Assets represents the sum of total brokerage assets serviced by advisors who are licensed with LPL Financial but not associated with Hybrid RIAs (see FN 25); and total advisory assets managed on LPL Financial's corporate advisory platform by advisors who are registered investment advisory representatives of LPL Financial. Total Corporate Assets are custodied, networked, and non-networked with the Company, and reflect market movement in addition to new assets, inclusive of new business development and net of attrition.

(25) The Company serves independent RIAs that conduct their advisory business through separate entities ("Hybrid RIAs") operating pursuant to the Investment Advisers Act of 1940 or through their respective states' investment advisory licensing rules, rather than through LPL Financial. Advisors associated with Hybrid RIAs pay fees to access the Company's Hybrid RIA platform for an integrated offering of technology, clearing, compliance, and custody services to Hybrid RIAs. Most financial advisors associated with Hybrid RIAs carry their brokerage license with LPL Financial, although some financial advisors associated with Hybrid RIAs do not carry a brokerage license through LPL Financial. Total Hybrid Platform Assets consist of assets managed or serviced by advisors associated with a Hybrid RIA firm that are custodied, networked, and non-networked with the Company, and reflect market movement in addition to new assets, inclusive of new business development and net of attrition. This measure does not include assets managed by Hybrid RIAs that are custodied with a third-party custodian.

(26) Total Brokerage and Advisory Retirement Assets are a component of Total Brokerage and Advisory Assets (see FN 14), and consist of retirement plan assets held in advisory and brokerage accounts that are custodied, networked, and non-networked at the Company, and reflect market movement in addition to new assets, inclusive of new business development and net of attrition. This measure does not include additional retirement plan assets serviced by advisors through either LPL Financial or Hybrid RIAs, which the Company currently estimates at approximately $127 billion.

(27) With respect to the applicable cash sweep vehicle (Insured Cash Account, Deposit Cash Account and/or Money Market Account), reflects the average fee yield over the period, as calculated by dividing total fee revenue received from such vehicle by the average end of day balance level during the quarter in such vehicle.

(28) The Company's base payout rate is calculated as commission and advisory expenses, divided by GDC (see FN 2).

(29) Non-GDC Sensitive Payout, a statistical or operating measure, includes share-based compensation expense from equity awards granted to advisors and financial institutions (see FN 31) and mark-to-market gains or losses on amounts designated by advisors as deferred.

(30) Credit Agreement EBITDA is a non-GAAP measure. Please see a description of Credit Agreement EBITDA under "Non-GAAP Financial Measures" on page 3 of this release for additional information.

(31) Advisor share-based compensation expense represents share-based compensation for the stock options and warrants awarded to advisors and financial institutions based on the fair value of the awards at each reporting period.

(32) Other represents items that are adjustable in accordance with the Credit Agreement to calculate Credit Agreement EBITDA, including employee severance costs, employee signing costs, employee retention or completion bonuses, and other non-recurring costs.

(33) Consists of cash unrestricted by the Credit Agreement and other regulations available for operating, investing, and financing uses.

(34) Parent refers to LPL Holdings, Inc., a direct subsidiary of the Company, which is the Borrower under the Credit Agreement.

(35) Under the Credit Agreement, management calculates Credit Agreement EBITDA for a four-quarter period at the end of each fiscal quarter, and in so doing may make further adjustments to prior quarters.

(36) Credit Agreement Net Leverage Ratio is calculated in accordance with the Credit Agreement, which includes a maximum of $300 million of cash available for corporate use.

(37) Custom Clearing Service Subscribers are financial advisors who are affiliated and licensed with insurance companies that receive customized clearing services, advisory platforms, and technology solutions from the Company.

(38) A simple average advisor count is used to calculate "per advisor" metrics by taking the average advisor count from the current period and sequential period. The calculation uses the average advisor count at the beginning and the end of period, and excludes Custom Clearing Service Subscribers (see FN 37).

(39) Based on end of period Total Brokerage and Advisory Assets (see FN 14) divided by end of period Advisor count.

(40) Transition assistance consists of payments to newly recruited advisors and financial institutions to assist in the transition process. Smaller advisor practices receive payments that are charged to earnings in the current period, whereas larger advisor practices and financial institutions typically receive transition assistance in the form of forgivable loans or recoverable advances that are generally amortized into earnings over a period of three to five years. Transition assistance loan amortization represents the amortizable amount of forgivable loans or recoverable advances that are charged to earnings in the period presented.

(41) Based on annualized advisory revenues divided by corporate advisory assets at the prior quarter's end (corporate advisory assets is defined as total Advisory Assets (see FN 13) less Hybrid Platform Advisory Assets (see FN 25)).

(42) Represents annualized operating expenses for the period, excluding production-related expense, divided by Total Brokerage and Advisory Assets (see FN 14) 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 include Core G&A (see FN 7), Regulatory (see FN 8), Promotional (see FN 9), Employee Share Based Compensation (see FN 10), Other Historical Adjustments (see FN 11), Depreciation & Amortization, and Amortization of Intangible Assets.

(43) 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.

(44) Attachment revenue is comprised of asset-based revenues (including revenue from cash sweep programs), transaction and fee revenue, and other revenue. Attachment rate, excluding cash sweep revenue, is calculated as attachment revenue (less revenue from cash sweep programs) over total commission and advisory revenues for the quarter.

(45) Recurring Revenue Rate refers to the percentage of total net revenue that was recurring revenue for the quarter. The Company tracks recurring revenue, a characterization of net revenue and a statistical measure, which management defines to include revenues from asset-based fees, advisory fees, trailing commissions, cash sweep programs, and certain other fees that are based upon accounts and advisors. Because certain recurring revenues are associated with asset balances, they will fluctuate depending on the market values and current interest rates. Accordingly, recurring revenue can be negatively impacted by adverse external market conditions. However, management believes that recurring revenue is meaningful despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets. 

(46) Capital Allocation per Share equals the amount of capital allocated for share repurchases and cash dividends divided by the diluted weighted-average shares outstanding.

 

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