LPL Financial Holdings Inc.
LPL Financial Holdings Inc. (Form: 10-Q, Received: 10/30/2014 17:27:41)


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to
Commission File Number: 001-34963
LPL Financial Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware
20-3717839
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

75 State Street, Boston, MA 02109
(Address of Principal Executive Offices) (Zip Code)

(617) 423-3644
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes      o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes      o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes      x No
The number of shares of Common Stock, par value $0.001 per share, outstanding as of October 27, 2014 was 98,808,921 .




TABLE OF CONTENTS
Item Number
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




i



WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended ( Exchange Act ), with the Securities and Exchange Commission ( SEC ). You may read and copy any document we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public from the SEC’s internet site at http://www.sec.gov .
On our internet site, http://www.lpl.com , we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual reports on Form 10-K, our proxy statements, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Hard copies of all such filings are available free of charge by request via email ( investor.relations@lpl.com ), telephone (617) 897-4574, or mail (LPL Financial Investor Relations at 75 State Street, 24th Floor, Boston, MA 02109). The information contained or incorporated on our website is not a part of this Quarterly Report on Form 10-Q.
When we use the terms LPLFH, we, us, our and the Company, we mean LPL Financial Holdings Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q regarding the Company's future financial and operating results, growth, business strategies, plans, liquidity, future share repurchases, and future dividends, including statements regarding projected savings, projected expenses, and anticipated improvements to the Company's operating model, services, and technology as a result of the Service Value Commitment, 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 30, 2014 . 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 brokerage and advisory assets; fluctuations in levels of net new advisory assets and the related impact on fee revenue; effects of competition in the financial services industry; 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; changes in the growth of the Company’s fee-based business; the effect of current, pending and future legislation, regulation and regulatory actions, including 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; the Company's success in integrating the operations of acquired businesses; execution of the Company's plans related to the Service Value Commitment, including the Company's ability to successfully transform and transition business processes to third party service providers; the Company's success in negotiating and developing commercial arrangements with third party service providers that will enable the Company to realize the service improvements and efficiencies expected to result from the Service Value Commitment; 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 2013 Annual Report on Form 10-K, as may be amended or updated in our Quarterly Reports on Form 10-Q. 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 quarterly report, 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 quarterly report.

ii


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)
 
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
  
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
REVENUES:
 
 
 
 
 
 
 
 
Commission
 
$
520,388

 
$
527,419

 
$
1,590,139

 
$
1,521,390

Advisory
 
340,369

 
299,101

 
998,016

 
878,421

Asset-based
 
121,283

 
107,447

 
354,494

 
318,718

Transaction and fee
 
94,674

 
93,799

 
276,284

 
271,808

Interest income, net of interest expense
 
4,727

 
4,509

 
14,279

 
13,343

Other
 
7,793

 
20,937

 
36,182

 
43,248

Total net revenues
 
1,089,234

 
1,053,212

 
3,269,394

 
3,046,928

EXPENSES:
 
 
 
 
 
 
 
 

Commission and advisory
 
746,001

 
724,835

 
2,242,206

 
2,086,075

Compensation and benefits
 
106,290

 
102,310

 
317,459

 
299,317

Promotional
 
36,669

 
36,807

 
93,581

 
85,276

Depreciation and amortization
 
24,519

 
21,432

 
70,618

 
61,451

Occupancy and equipment
 
19,043

 
16,568

 
62,922

 
49,649

Professional services
 
38,174

 
18,955

 
82,736

 
47,588

Brokerage, clearing and exchange
 
12,090

 
11,360

 
36,594

 
32,958

Communications and data processing
 
11,476

 
11,017

 
32,598

 
31,401

Regulatory fees and other
 
8,476

 
8,234

 
25,437

 
23,339

Restructuring charges
 
9,928

 
6,482

 
26,473

 
19,851

Other
 
8,218

 
20,547

 
25,958

 
37,116

Total operating expenses
 
1,020,884

 
978,547

 
3,016,582

 
2,774,021

Non-operating interest expense
 
12,897

 
13,363

 
38,651

 
38,190

Loss on extinguishment of debt
 

 

 

 
7,962

Total expenses
 
1,033,781

 
991,910

 
3,055,233

 
2,820,173

INCOME BEFORE PROVISION FOR INCOME TAXES
 
55,453

 
61,302

 
214,161

 
226,755

PROVISION FOR INCOME TAXES
 
22,181

 
23,671

 
84,663

 
89,316

NET INCOME
 
$
33,272

 
$
37,631

 
$
129,498

 
$
137,439

EARNINGS PER SHARE (NOTE 12)
 
 
 
 
 
 
 
 

Earnings per share, basic
 
$
0.33

 
$
0.36

 
$
1.29

 
$
1.30

Earnings per share, diluted
 
$
0.33

 
$
0.36

 
$
1.26

 
$
1.29

Weighted-average shares outstanding, basic
 
100,052

 
104,271

 
100,519

 
105,670

Weighted-average shares outstanding, diluted
 
101,834

 
105,705

 
102,384

 
106,934

See notes to unaudited condensed consolidated financial statements.

1



LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
NET INCOME
 
$
33,272

 
$
37,631

 
$
129,498

 
$
137,439

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Unrealized gain (loss) on cash flow hedges, net of tax expense (benefit) of ($63), ($155), $863, and ($155) for the three and nine months ended September 30, 2014 and 2013, respectively
 
(101
)
 
(250
)
 
1,361

 
(250
)
Reclassification adjustment for realized gain on cash flow hedges included in net income, net of tax expense of $85, $0, $113, and $0 for the three and nine months ended September 30, 2014 and 2013, respectively
 
(135
)
 

 
(180
)
 

Total other comprehensive income (loss), net of tax
 
(236
)
 
(250
)
 
1,181

 
(250
)
TOTAL COMPREHENSIVE INCOME
 
$
33,036

 
$
37,381

 
$
130,679

 
$
137,189


See notes to unaudited condensed consolidated financial statements.


2



LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in thousands, except par value)

 
September 30,
2014
 
December 31, 2013
ASSETS
Cash and cash equivalents
$
459,494

 
$
516,584

Cash and securities segregated under federal and other regulations
418,507

 
512,351

Receivables from:
 
 
 
Clients, net of allowance of $1,237 at September 30, 2014 and $588 at December 31, 2013
342,304

 
373,675

Product sponsors, broker-dealers and clearing organizations
178,439

 
174,070

Others, net of allowance of $9,383 at September 30, 2014 and $7,091 at December 31, 2013
281,411

 
272,018

Securities owned:
 

 
 

Trading — at fair value
12,926

 
8,964

Held-to-maturity
9,345

 
6,853

Securities borrowed
8,327

 
7,102

Income taxes receivable
25,404

 

Fixed assets, net of accumulated depreciation and amortization of $300,823 at September 30, 2014 and $263,321 at December 31, 2013
207,413

 
189,059

Debt issuance costs, net of accumulated amortization of $10,991 at September 30, 2014 and $7,751 at December 31, 2013
13,040

 
16,281

Goodwill
1,365,838

 
1,361,361

Intangible assets, net of accumulated amortization of $295,332 at September 30, 2014 and $266,285 at December 31, 2013
440,526

 
464,522

Other assets
155,193

 
139,991

Total assets
$
3,918,167

 
$
4,042,831

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Drafts payable
$
135,095

 
$
194,971

Payables to clients
565,221

 
565,204

Payables to broker-dealers and clearing organizations
38,315

 
43,157

Accrued commission and advisory expenses payable
143,024

 
135,149

Accounts payable and accrued liabilities
287,219

 
301,644

Income taxes payable

 
4,320

Unearned revenue
68,817

 
73,739

Securities sold, but not yet purchased — at fair value
18

 
211

Senior secured credit facilities
1,526,967

 
1,535,096

Deferred income taxes, net
90,119

 
89,369

Total liabilities
2,854,795

 
2,942,860

Commitments and contingencies
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

Common stock, $.001 par value; 600,000,000 shares authorized; 118,124,141 shares issued at September 30, 2014 and 117,112,465 shares issued at December 31, 2013
118

 
117

Additional paid-in capital
1,346,701

 
1,292,374

Treasury stock, at cost — 18,187,765 shares at September 30, 2014 and 15,216,301 shares at December 31, 2013
(655,822
)
 
(506,205
)
Accumulated other comprehensive income
1,296

 
115

Retained earnings
371,079

 
313,570

Total stockholders’ equity
1,063,372

 
1,099,971

Total liabilities and stockholders’ equity
$
3,918,167

 
$
4,042,831

See notes to unaudited condensed consolidated financial statements.

3



LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands)


 
 
 
 
 
Additional
Paid-In
Capital
 
 
 
 
 
Accumulated Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
Stockholders'
Equity
 
Common Stock
 
 
Treasury Stock
 
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
BALANCE — December 31, 2012
115,714

 
$
116

 
$
1,228,075

 
9,422

 
$
(287,998
)
 
$

 
$
199,827

 
$
1,140,020

Net income and other comprehensive loss, net of tax expense
 
 
 
 
 
 
 
 
 
 
(250
)
 
137,439

 
137,189

Treasury stock purchases
 
 
 
 
 
 
4,910

 
(184,318
)
 
 
 
 
 
(184,318
)
Cash dividends on common stock
 
 
 
 
 
 
 
 
 
 
 
 
(48,672
)
 
(48,672
)
Stock option exercises and other
1,140

 
1

 
27,623

 
(19
)
 
663

 
 
 
(98
)
 
28,189

Share-based compensation


 
 
 
17,330

 
 
 
 
 
 
 
 
 
17,330

Excess tax benefits from share-based compensation
 
 
 
 
1,919

 
 
 
 
 
 
 
 
 
1,919

BALANCE — September 30, 2013
116,854

 
$
117

 
$
1,274,947

 
14,313

 
$
(471,653
)
 
$
(250
)
 
$
288,496

 
$
1,091,657

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE — December 31, 2013
117,112

 
$
117

 
$
1,292,374

 
15,216

 
$
(506,205
)
 
$
115

 
$
313,570

 
$
1,099,971

Net income and other comprehensive income, net of tax expense
 
 
 
 
 
 
 
 
 
 
1,181

 
129,498

 
130,679

Issuance of common stock to settle restricted stock units, net
40

 
1

 


 
13

 
(674
)
 
 
 
 
 
(673
)
Treasury stock purchases
 
 
 
 
 
 
2,990

 
(150,021
)
 
 
 
 
 
(150,021
)
Cash dividends on common stock
 
 
 
 
 
 
 
 
 
 
 
 
(72,104
)
 
(72,104
)
Stock option exercises and other
972

 


 
24,141

 
(31
)
 
1,078

 
 
 
115

 
25,334

Share-based compensation


 
 
 
22,649

 
 
 
 
 
 
 
 
 
22,649

Excess tax benefits from share-based compensation
 
 
 
 
7,537

 
 
 
 
 
 
 
 
 
7,537

BALANCE — September 30, 2014
118,124

 
$
118

 
$
1,346,701

 
18,188

 
$
(655,822
)
 
$
1,296

 
$
371,079

 
$
1,063,372

See notes to unaudited condensed consolidated financial statements.

4



LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

 
 
Nine Months Ended September 30,
 
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
129,498

 
$
137,439

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
Noncash items:
 
 
 
 
Depreciation and amortization
 
70,618

 
61,451

Amortization of debt issuance costs
 
3,241

 
3,285

Share-based compensation
 
22,649

 
17,330

Loss on disposal of fixed assets
 
1,282

 
154

Excess tax benefits related to share-based compensation
 
(7,666
)
 
(1,919
)
Provision for bad debts
 
2,124

 
1,911

Deferred income tax provision
 
585

 
(9,850
)
Loss on extinguishment of debt
 

 
7,962

Net changes in estimated fair value of contingent consideration obligations
 

 
4,131

Loan forgiveness
 
20,326

 
1,001

Closure of NestWise
 

 
9,294

Other
 
2,057

 
731

Changes in operating assets and liabilities:
 
 
 
 
Cash and securities segregated under federal and other regulations
 
93,844

 
149,390

Receivables from clients
 
30,723

 
28,447

Receivables from product sponsors, broker-dealers and clearing organizations
 
(4,369
)
 
368

Receivables from others
 
(31,195
)
 
(14,472
)
Securities owned
 
(3,999
)
 
(1,373
)
Securities borrowed
 
(1,225
)
 
(1,168
)
Other assets
 
(8,534
)
 
625

Drafts payable
 
(59,876
)
 
(24,981
)
Payables to clients
 
17

 
(211,422
)
Payables to broker-dealers and clearing organizations
 
(4,842
)
 
(29,988
)
Accrued commission and advisory expenses payable
 
7,875

 
142

Accounts payable and accrued liabilities
 
(11,580
)
 
13,697

Income taxes receivable/payable
 
(22,187
)
 
(1,896
)
Unearned revenue
 
(4,922
)
 
1,666

Securities sold, but not yet purchased
 
(193
)
 
(48
)
Net cash provided by operating activities
 
$
224,251

 
$
141,907

 
 
 
 
 
Continued on following page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

5



LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
(In thousands)


 
 
Nine Months Ended September 30,
 
 
2014
 
2013
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Capital expenditures
 
$
(69,830
)
 
$
(40,787
)
Purchase of intangible assets
 
(9,000
)
 

Proceeds from disposal of fixed assets
 
7,123

 

Purchase of securities classified as held-to-maturity
 
(6,749
)
 
(2,495
)
Proceeds from maturity of securities classified as held-to-maturity
 
4,250

 
5,900

Deposits of restricted cash
 
(6,049
)
 
(1,500
)
Release of restricted cash
 
141

 
613

Purchases of minority interest investments
 

 
(2,500
)
Net cash used in investing activities
 
(80,114
)
 
(40,769
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Repayment of senior secured credit facilities
 
(8,129
)
 
(863,869
)
Proceeds from senior secured credit facilities
 

 
1,078,957

Payment of debt issuance costs
 

 
(2,461
)
Payment of contingent consideration
 
(3,300
)
 

Tax payments related to settlement of restricted stock units
 
(673
)
 

Repurchase of common stock
 
(150,021
)
 
(175,722
)
Dividends on common stock
 
(72,104
)
 
(48,672
)
Excess tax benefits related to share-based compensation
 
7,666

 
1,919

Proceeds from stock option exercises and other
 
25,334

 
28,189

Net cash (used in) provided by financing activities
 
(201,227
)
 
18,341

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
 
(57,090
)
 
119,479

CASH AND CASH EQUIVALENTS — Beginning of period
 
516,584

 
466,261

CASH AND CASH EQUIVALENTS — End of period
 
$
459,494

 
$
585,740

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
Interest paid
 
$
38,877

 
$
38,433

Income taxes paid
 
$
109,805

 
$
100,999

NONCASH DISCLOSURES:
 
 
 
 
Fixed assets acquired under build-to-suit lease
 
$
8,114

 
$
9,088

Discount on proceeds from senior secured credit facilities recorded as debt issuance costs
 
$

 
$
4,893

Pending settlement of treasury stock purchases
 
$

 
$
8,596

See notes to unaudited condensed consolidated financial statements.




6


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)



1.    Organization and Description of the Company
LPL Financial Holdings Inc. ( LPLFH ), a Delaware holding corporation, together with its consolidated subsidiaries (collectively, the Company ) provides an integrated platform of brokerage and investment advisory services to independent financial advisors and financial advisors at financial institutions (collectively advisors ) in the United States of America. Through its custody and clearing platform, using both proprietary and third-party technology, the Company provides access to diversified financial products and services enabling its advisors to offer independent financial advice and brokerage services to retail investors (their clients ).
2 .    Summary of Significant Accounting Policies
Basis of Presentation — The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ( SEC ). These unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal recurring nature. The Company’s results for any interim period are not necessarily indicative of results for a full year or any other interim period.
The unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of results of income, comprehensive income, financial position, and cash flows in conformity with generally accepted accounting principles in the United States of America ( GAAP ). Accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the related notes for the year ended December 31, 2013 , contained in the Company’s Annual Report on Form 10-K as filed with the SEC.
The Company’s significant accounting policies are included in Note 2 . Summary of Significant Accounting Policies , in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. There have been no significant changes to these accounting policies during the first nine months of 2014.
Consolidation — These unaudited condensed consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments in which the Company exercises significant influence but does not exercise control and is not the primary beneficiary are accounted for using the equity method.
Use of Estimates — The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on the information that is currently available and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could vary from these estimates.
Reportable Segment — The Company's internal reporting is organized into two service channels: Independent Advisor Services and Institution Services. These service channels qualify as individual operating segments and are aggregated and viewed as one reportable segment due to their similar economic characteristics, products and services, production and distribution processes, and regulatory environment.
Fair Value of Financial Instruments — The Company’s financial assets and liabilities are carried at fair value or at amounts that, because of their short-term nature, approximate current fair value, with the exception of its held-to-maturity securities and indebtedness. The Company carries its held-to-maturity securities and indebtedness at amortized cost. The Company measures the implied fair value of its debt instruments using trading levels obtained from a third-party service provider. Accordingly, the debt instruments qualify as Level 2 fair value measurements. See Note 4 . Fair Value Measurements , for additional detail regarding the Company’s fair value measurements. As of September 30, 2014 , the carrying amount and fair value of the Company’s indebtedness was approximately $1,527.0 million and $1,513.1 million , respectively. As of December 31, 2013 , the carrying amount and fair value was approximately $1,535.1 million and $1,533.3 million , respectively.
Recently Issued Accounting Pronouncements
There are no recent accounting pronouncements that would impact the Company's condensed consolidated statements of income, comprehensive income, financial condition, or cash flows.

7


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


3 .    Restructuring
In February 2013, the Company committed to an expansion of its Service Value Commitment (the Program ), an ongoing effort to position the Company's people, processes, and technology for sustainable long-term growth while improving the service experience of its advisors and delivering efficiencies in its operating model. The Program is expected to be completed in 2015.
The Company estimates total charges in connection with the Program will approach $65.0 million . These expenditures are comprised of outsourcing and other related costs, technology transformation costs, employee severance obligations and other related costs, as well as non-cash charges for impairment of certain fixed assets related to internally developed software.
The following table summarizes the balance of accrued expenses and the changes in the accrued amounts for the Program as of and for the nine months ended September 30, 2014 (in thousands):
 
Accrued Balance at December 31, 2013
 
Costs
Incurred
 
Payments
 
Accrued Balance at September 30, 2014
 
 
Cumulative Costs Incurred to Date
 
Total
Expected
Restructuring
Costs
Outsourcing and other related costs
$
1,424

 
$
5,045

 
$
(6,106
)
 
$
363

 
 
$
20,326

 
$
26,000

Technology transformation costs
1,753

 
15,954

 
(14,252
)
 
3,455

 
 
25,223

 
27,000

Employee severance obligations and other related costs
820

 
4,363

 
(1,595
)
 
3,588

 
 
6,821

 
11,000

Asset impairments

 

 

 

 
 
842

 
1,000

Total
$
3,997

 
$
25,362

 
$
(21,953
)
 
$
7,406

 
 
$
53,212

 
$
65,000

4 .    Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Inputs used to measure fair value are prioritized within a three-level fair value hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1  — Quoted prices in active markets for identical assets or liabilities.
Level 2  — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3  — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
There have been no transfers of assets or liabilities between these fair value measurement classifications during the nine months ended September 30, 2014 .
The Company’s fair value measurements are evaluated within the fair value hierarchy, based on the nature of inputs used to determine the fair value at the measurement date. At September 30, 2014 , the Company had the following financial assets and liabilities that are measured at fair value on a recurring basis:
Cash Equivalents  — The Company’s cash equivalents include money market funds, which are short term in nature with readily determinable values derived from active markets.
Securities Owned and Securities Sold, But Not Yet Purchased  — The Company ' s trading securities consist of house account model portfolios established and managed for the purpose of benchmarking the performance of its fee-based advisory platforms and temporary positions resulting from the processing of client transactions. Examples of these securities include money market funds, U.S. treasury obligations, mutual funds, certificates of deposit, and traded equity and debt securities.
The Company uses prices obtained from independent third-party pricing services to measure the fair value of its trading securities. Prices received from the pricing services are validated using various methods including comparison to prices received from additional pricing services, comparison to available quoted market prices, and

8


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


review of other relevant market data including implied yields of major categories of securities. In general, these quoted prices are derived from active markets for identical assets or liabilities. When quoted prices in active markets for identical assets and liabilities are not available, the quoted prices are based on similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. For certificates of deposit and treasury securities, the Company utilizes market-based inputs, including observable market interest rates that correspond to the remaining maturities or the next interest reset dates. At September 30, 2014 , the Company did not adjust prices received from the independent third-party pricing services.
Other Assets  — The Company’s other assets include: (1) deferred compensation plan assets that are invested in money market and other mutual funds, which are actively traded and valued based on quoted market prices; (2) certain non-traded real estate investment trusts and auction rate notes, which are valued using quoted prices for identical or similar securities and other inputs that are observable or can be corroborated by observable market data; and (3) cash flow hedges, which are measured using quoted prices for similar cash flow hedges, taking into account counterparty credit risk and the Company's own non-performance risk.
Accounts Payable and Accrued Liabilities — The Company's accounts payable and accrued liabilities include contingent consideration liabilities that are measured using Level 3 inputs.
The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at September 30, 2014 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
At September 30, 2014:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
109,742

 
$

 
$

 
$
109,742

Securities owned — trading:
 
 
 
 
 
 
 
Money market funds
310

 

 

 
310

Mutual funds
7,497

 

 

 
7,497

Equity securities
250

 

 

 
250

Debt securities

 
69

 

 
69

U.S. treasury obligations
4,800

 

 

 
4,800

Total securities owned — trading
12,857

 
69

 

 
12,926

Other assets
71,145

 
4,709

 

 
75,854

Total assets at fair value
$
193,744

 
$
4,778

 
$

 
$
198,522

Liabilities
 
 
 
 
 
 
 
Securities sold, but not yet purchased:
 
 
 
 
 
 
 
Equity securities
$
8

 
$

 
$

 
$
8

Debt securities

 
10

 

 
10

Total securities sold, but not yet purchased
8

 
10

 

 
18

Accounts payable and accrued liabilities

 

 
527

 
527

Total liabilities at fair value
$
8

 
$
10

 
$
527

 
$
545



9


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at December 31, 2013 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
At December 31, 2013:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
254,032

 
$

 
$

 
$
254,032

Securities owned — trading:
 

 
 

 
 

 
 

Money market funds
170

 

 

 
170

Mutual funds
7,291

 

 

 
7,291

Equity securities
103

 

 

 
103

U.S. treasury obligations
1,400

 

 

 
1,400

Total securities owned — trading
8,964

 

 

 
8,964

Other assets
47,539

 
3,072

 

 
50,611

Total assets at fair value
$
310,535

 
$
3,072

 
$

 
$
313,607

Liabilities
 
 
 
 
 
 
 
Securities sold, but not yet purchased:
 
 
 
 
 
 
 
Mutual funds
$
63

 
$

 
$

 
$
63

Equity securities
127

 

 

 
127

Debt securities

 
10

 

 
10

Certificates of deposit

 
11

 

 
11

Total securities sold, but not yet purchased
190

 
21

 

 
211

Accounts payable and accrued liabilities

 

 
39,293

 
39,293

Total liabilities at fair value
$
190

 
$
21

 
$
39,293

 
$
39,504

Changes in Level 3 Recurring Fair Value Measurements
As of December 31, 2013, the Company had a contingent consideration obligation related to the acquisition of National Retirement Partners, Inc. ( NRP ). This obligation was based on the achievement of certain revenue-based targets for the twelve-month period ended November 30, 2013, in aggregate for those advisors joining LPL Financial LLC ( LPL Financial ) subsequent to the NRP acquisition for whom retirement plans comprise a significant part of their business. As of December 31, 2013, the Company had finalized the determination of the amount of contingent consideration to be paid to the former shareholders of NRP, resulting in a total payment of $39.3 million , which was made on February 19, 2014.
The Company determines the fair value for its contingent consideration obligations using an income approach whereby the Company assesses the probability and timing of the achievement of the applicable milestones, which are based on contractually negotiated financial or operating targets that vary by acquisition transaction, such as revenues, gross margin, EBITDA, and assets under custody. The contingent payments are estimated using a probability weighted, multi-scenario analysis of expected future performance of the acquired businesses. The Company then discounts these expected payment amounts to calculate the fair value as of the valuation date. The Company's management evaluates the underlying projections and other related factors used in determining fair value each period and makes updates when there have been significant changes in management's expectations.
The principal significant unobservable input used in the valuations of the Company's contingent consideration obligations is a risk-adjusted discount rate. Whereas management's underlying projections adjust for market penetration and adoption rates, the discount rate is risk-adjusted for key factors such as advisor attrition, advisor recruitment, expenses and overhead costs, average client assets, revenue generation of client assets, and credit risk. An increase in the discount rate will result in a decrease in the fair value of contingent consideration. Conversely, a decrease in the discount rate will result in an increase in the fair value of contingent consideration.

10


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


5 .    Held-to-Maturity Securities
The Company holds certain investments in securities, primarily U.S. government notes, which are recorded at amortized cost because the Company has both the intent and the ability to hold these investments to maturity. Interest income is accrued as earned. Premiums and discounts are amortized using a method that approximates the effective yield method over the term of the security and are recorded as an adjustment to the investment yield.
The amortized cost, gross unrealized loss or gain, and fair value of securities held-to-maturity were as follows (in thousands):
 
September 30,
2014
 
December 31,
2013
Amortized cost
$
9,345

 
$
6,853

Gross unrealized loss
(28
)
 
(58
)
Fair value
$
9,317

 
$
6,795

At September 30, 2014 , the securities held-to-maturity were scheduled to mature as follows (in thousands):
 
Within one year
 
After one but within five years
 
After five but within ten years
 
Total
U.S. government notes — at amortized cost
$
3,849

 
$
4,996

 
$
500

 
$
9,345

U.S. government notes — at fair value
$
3,850

 
$
4,982

 
$
485

 
$
9,317

6 .    Derivative Financial Instruments
In May 2013, in conjunction with its Service Value Commitment program, the Company entered into a long-term contractual obligation (the Agreement ) with a third-party provider to enhance the quality, speed, and cost of processes by outsourcing certain functions. The Agreement enables the third-party provider to use the services of its affiliates in India to provide services to the Company and provides for the Company to settle the cost of its contractual obligation to the third-party provider in U.S. dollars each month. However, the Agreement provides that on each annual anniversary date of the signing of the Agreement, the price for services (denominated in U.S. dollars) is to be adjusted for the then-current exchange rate between the U.S. dollar ( USD ) and the Indian rupee ( INR ). The Agreement provides that, once an annual adjustment is calculated, there are no further modifications to the amounts paid by the Company to the third-party provider for fluctuations in the exchange rate between the USD and the INR until the reset on the next anniversary date of the signing of the Agreement.
The third-party provider bore the risk of currency movement from the date of signing the Agreement until the reset on the first anniversary of its signing, and bears such risk during each period until the next annual reset date. The Company bears the risk of currency movement at each of the annual reset dates following the first anniversary.
To mitigate foreign currency risk arising from these annual anniversary events, the Company entered into four non-deliverable foreign currency contracts, all of which have been designated as cash flow hedges. The first cash flow hedge, with a notional amount of 560.4 million INR, or $8.5 million , settled in June 2014. The Company received a settlement of $1.0 million that will be reclassified out of accumulated other comprehensive income and recognized in net income ratably over a 12-month period ending May 31, 2015 to match the timing of the underlying hedged item.
The details related to the remaining non-deliverable foreign currency contracts at September 30, 2014 are as follows (in millions, except foreign exchange rate):
 
Settlement Date
 
Hedged Notional Amount (INR)
 
Contractual INR/USD Foreign Exchange Rate
 
Hedged Notional Amount (USD)
Cash flow hedge #2
6/2/2015
 
560.4

 
69.35

 
$
8.1

Cash flow hedge #3
6/2/2016
 
560.4

 
72.21

 
7.8

Cash flow hedge #4
6/2/2017
 
560.4

 
74.20

 
7.5

Total hedged amount
 
 
 
 
 
 
$
23.4


11


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The fair value of the derivative instruments, included in other assets in the unaudited condensed consolidated statements of financial condition, were as follows (in thousands):
 
September 30,
2014
 
December 31,
2013
Cash flow hedges
$
1,549

 
$
187

7 .    Goodwill and Other Intangible Assets
Goodwill and intangible assets were a result of various acquisitions. See Note 9 . Goodwill and Other Intangible Assets , in the Company's 2013 Annual Report on Form 10-K for a discussion of the components of goodwill and additional information regarding intangible assets.
8 .    Debt
Senior Secured Credit Facilities — On May 13, 2013, the Company entered into the First Amendment and Incremental Assumption Agreement ( Credit Agreement ) with its wholly owned subsidiary, LPL Holdings, Inc., and other parties thereto. The Credit Agreement amended the Company ' s previous credit agreement, which was dated March 29, 2012. See Note 17. Subsequent Events , for details regarding the amendment of the Credit Agreement.
The Credit Agreement provides for a term loan A ( Term Loan A ), a term loan B ( Term Loan B ), and a revolving credit facility ( Revolving Credit Facility ). Term Loan A had an initial principal amount of $459.4 million maturing on March 29, 2017; Term Loan B had an initial principal amount of $1,083.9 million maturing on March 29, 2019; and the Revolving Credit Facility has a borrowing capacity of $250.0 million maturing on March 29, 2017.
At the time the Company entered into the Credit Agreement, all mandatory payments required under Term Loan A were prepaid, with the remaining principal and accrued interest due upon maturity. Term Loan B includes quarterly payments at an annual rate of 1.0% of principal per year, with the remaining principal and accrued interest due upon maturity.
Borrowings under Term Loan A and Term Loan B bear interest at a base rate equal to a LIBOR based rate (the “Eurodollar Rate”) plus the applicable interest rate margin, or an alternative base rate (“ABR”) plus the applicable interest rate margin. The Eurodollar Rate with respect to Term Loan B shall in no event be less than 0.75%. The ABR is equal to the greatest of (a) the prime rate in effect on such day; (b) the effective federal funds rate in effect on such day plus 0.50%; (c) the Eurodollar Rate plus 1.00%; or (d) solely in the case of Term Loan B, 1.75%. The Company may repay outstanding loans under its Credit Agreement at any time without premium or penalty, other than customary breakage costs with respect to Eurodollar Rate loans.
As of September 30, 2014 , borrowings under the term loans bore interest at the Eurodollar Rate with an applicable interest rate margin of 2.50% . The Company’s outstanding borrowings were as follows (dollars in thousands):
 
 
 
September 30, 2014
 
 
December 31, 2013
 
 
 
Maturity
 
 
Balance
 
Interest
Rate    
 
 
 
Balance
 
Interest
Rate    
 
Senior secured term loans:
 
 
 
 
 
 
 
 
 
 
 
Term Loan A
3/29/2017
 
$
459,375

 
2.65
%
(1)
 
$
459,375

 
2.67
%
(3)
Term Loan B
3/29/2019
 
1,067,592

 
3.25
%
(2)
 
1,075,721

 
3.25
%
(4)
Total borrowings
 
 
1,526,967

 
 
 
 
1,535,096

 
 
 
Less current portion
 
 
10,839

 
 
 
 
10,839

 
 
 
Long-term borrowings — net of current portion
 
 
$
1,516,128

 
 
 
 
$
1,524,257

 
 
 
_____________________
(1)
As of September 30, 2014 , the Eurodollar Rate for Term Loan A was 0.15% .
(2)
As of September 30, 2014 , the elected LIBOR was less than 0.75% ; as a result, the Eurodollar Rate for Term Loan B was 0.75% .
(3)
As of December 31, 2013 , the Eurodollar Rate for Term Loan A was 0.17% .
(4)
As of December 31, 2013 , the elected LIBOR was less than 0.75% ; as a result, the Eurodollar Rate for Term Loan B was 0.75% .

12


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


As of September 30, 2014 , the Revolving Credit Facility was being used to support the issuance of $21.5 million of irrevocable letters of credit for the construction of the Company's San Diego office building and other items, with an applicable interest rate margin of 2.50% . The remaining available balance of $228.5 million was undrawn at September 30, 2014 .
The Credit Agreement subjects the Company to certain financial and non-financial covenants. As of September 30, 2014 , the Company was in compliance with such covenants.
Bank Loans Payable — The Company maintains three uncommitted lines of credit. Two of the lines have unspecified limits, which are primarily dependent on the Company’s ability to provide sufficient collateral. The third line has a $200.0 million limit, and allows for both collateralized and uncollateralized borrowings. The lines have not been utilized in 2014 , but were utilized in 2013 ; however, there were no balances outstanding at September 30, 2014 or December 31, 2013 .
The following summarizes borrowing activity in the revolving and uncommitted line of credit facilities (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Average balance
$

 
$
80

 
$

 
$
4,637

Weighted-average interest rate
%
 
1.50
%
 
%
 
1.80
%
9 .    Commitments and Contingencies
Leases  — The Company leases office space and equipment under various operating leases. These leases are generally subject to scheduled base rent and maintenance cost increases, which are recognized on a straight-line basis over the period of the leases. Total rental expense for all operating leases was approximately $6.5 million and $4.8 million for the three months ended September 30, 2014 and 2013 , respectively, and $23.5 million and $14.7 million for the nine months ended September 30, 2014 and 2013 , respectively.
In March 2014 the Company entered into a lease agreement for additional office space in Charlotte, North Carolina with a lease commencement date of March 1, 2014 and an expiration date of February 28, 2017 . Future minimum payments for this lease commitment are $0.2 million , $1.0 million , $1.1 million , and $0.2 million , for the years 2014, 2015, 2016, and 2017, respectively.
Service Contracts  — The Company is party to certain long-term contracts for systems and services that enable back office trade processing and clearing for its product and service offerings.
Guarantees  — The Company occasionally enters into certain types of contracts that contingently require it to indemnify certain parties against third-party claims. The terms of these obligations vary and, because a maximum obligation is not explicitly stated, the Company has determined that it is not possible to make an estimate of the amount that it could be obligated to pay under such contracts.
The Company’s subsidiary, LPL Financial, provides guarantees to securities clearing houses and exchanges under their standard membership agreements, which require a member to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearing houses and exchanges, all other members would be required to meet any shortfall. The Company’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, the potential requirement for the Company to make payments under these agreements is remote. Accordingly, no liability has been recognized for these transactions.
Loan Commitments  — From time to time, LPL Financial makes loans to its advisors, primarily to newly recruited advisors to assist in the transition process, which may be forgivable. Due to timing differences, LPL Financial may make commitments to issue such loans prior to actually funding them. These unfunded commitments are generally contingent upon certain events occurring, including but not limited to the advisor joining LPL Financial. LPL Financial had no such significant unfunded commitments at September 30, 2014 .

13


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


Legal Proceedings & Regulatory Matters — The Company maintains insurance coverage for certain legal proceedings, including those involving client claims. With respect to client claims, the estimated losses on the majority of pending matters are less than the applicable deductibles of the insurance policies. The Company is also subject to extensive regulation and supervision by U.S. federal and state agencies and various self-regulatory organizations. The Company and its advisors periodically engage with such agencies and organizations, in the context of examinations or otherwise, to respond to inquiries, informational requests, and investigations. From time to time, such engagements result in regulatory complaints or other matters, the resolution of which can include fines and other remediation.
In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings and regulatory matters when it is both probable that a loss has been incurred and the amount of loss can be reasonably estimated. Where it is not probable that a loss has been incurred, but at least reasonably possible that a loss has been incurred, a disclosure of fact is made when the underlying loss or range of losses can also be reasonably estimated. Assessing the probability of a loss occurring and the amount of any loss related to a legal proceeding or regulatory matter is inherently difficult, requiring significant and complex judgments. The Company's assessment process considers a variety of factors and assumptions, which may include the procedural status of the matter and any recent developments; prior experience and the experience of others in similar matters; the size and nature of potential exposures; available defenses; the progress of fact discovery; the opinions of counsel and experts regarding potential exposures; potential opportunities for settlement and the status of any settlement discussions; and potential insurance coverage and indemnification, if available. The Company monitors these matters for new developments and re-assesses the likelihood that a loss will occur and the estimated range or amount of loss, if those amounts can be reasonably determined. Due to these considerations, the Company may have exposure to losses that are not yet predictable or cannot yet be reasonably estimated in amounts that exceed those that have been accrued.
As of September 30, 2014 , the Company had accrued a liability of $23.0 million for potential remediation of regulatory matters. As of September 30, 2014 , management believes, based on available information and consideration the factors above, that the results of pending legal proceedings and regulatory matters, in the aggregate, will not have a material adverse effect on the Company’s financial condition, but may be material to operating results for any particular period.
Other Commitments  — As of September 30, 2014 , the Company had received collateral primarily in connection with client margin loans with a market value of approximately $379.8 million , which it can re-pledge, loan, or sell. Of these securities, approximately $31.9 million were client-owned securities pledged to the Options Clearing Corporation as collateral to secure client obligations related to options positions. As of September 30, 2014 there were no restrictions that materially limited the Company's ability to re-pledge, loan, or sell the remaining $347.9 million of client collateral.
Trading securities on the unaudited condensed consolidated statements of financial condition includes $2.4 million and $1.4 million pledged to clearing organizations at September 30, 2014 and December 31, 2013 , respectively.
Brokerage, clearing, and custody services are provided by LPL Financial on a fully disclosed basis. LPL Financial also has a multi-year agreement to provide its investment advisory programs, platforms, technology, and additional processing and related services to the advisors of the broker-dealer subsidiary of a large global insurance company and the clients of such advisors at specified service levels. Failures by LPL Financial to meet certain specified service levels may result in service level credits against future fees payable by or give rise to a termination right for such broker-dealer. Termination fees may be payable by a terminating or breaching party depending on the specific cause of termination.

14


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


10 .    Stockholders' Equity
Dividends
The payment, timing, and amount of any dividends are subject to approval by the Board of Directors as well as certain limits under the Company's credit facilities. Cash dividends per share of common stock and total cash dividends paid on a quarterly basis were as follows for the periods indicated (in millions, except per share data):
 
2014
 
2013
 
Dividend per Share
 
Total Cash Dividend
 
Dividend per Share
 
Total Cash Dividend
First quarter
$
0.24

 
$
24.1

 
$
0.135

 
$
14.4

Second quarter
$
0.24

 
$
24.0

 
$
0.135

 
$
14.4

Third quarter
$
0.24

 
$
24.0

 
$
0.19

 
$
19.9

Share Repurchases
The Board of Directors has approved several share repurchase programs pursuant to which the Company may repurchase its issued and outstanding shares of common stock from time to time. Repurchased shares are included in treasury stock on the unaudited condensed consolidated statements of financial condition. Purchases may be effected in open market or privately negotiated transactions, including transactions with affiliates, with the timing of purchases and the amount of stock purchased generally determined at the discretion of the Company's management within the constraints of the Credit Agreement and general liquidity needs.
For the three months ended September 30, 2014 and 2013 , the Company had the following activity under its approved share repurchase programs (in millions, except share and per share data):
 
 
 
 
 
 
Three Months Ended September 30,
 
 
 
 
 
 
2014
 
2013
Approval Date
 
Authorized Repurchase Amount
 
Amount Remaining at September 30, 2014
 
Shares Purchased
 
Weighted-Average Price Paid Per Share
 
Total Cost
 
Shares Purchased
 
Weighted-Average Price Paid Per Share
 
Total Cost
September 27, 2012
 
$
150.0

 
$

 

 
$

 
$

 
759,786

 
$
38.40

 
$
29.2

May 28, 2013
 
$
200.0

 

 

 

 

 
2,566,630

 
37.94

 
97.3

February 10, 2014
 
$
150.0

 
67.9

 
531,426

 
47.06

 
25.0

 

 

 

 
 
 
 
$
67.9

 
531,426

 
$
47.06

 
$
25.0

 
3,326,416

 
$
38.04

 
$
126.5

For the nine months ended September 30, 2014 and 2013 , the Company had the following activity under its approved share repurchase programs (in millions, except share and per share data):
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
2014
 
2013
Approval Date
 
Authorized Repurchase Amount
 
Amount Remaining at September 30, 2014
 
Shares Purchased
 
Weighted Average Price Paid Per Share
 
Total Cost
 
Shares Purchased
 
Weighted Average Price Paid Per Share
 
Total Cost
September 27, 2012
 
$
150.0

 
$

 

 
$

 
$

 
2,343,651

 
$
37.10

 
$
87.0

May 28, 2013
 
$
200.0

 

 
1,306,288

 
52.00

 
67.9

 
2,566,630

 
37.94

 
97.3

February 10, 2014
 
$
150.0

 
67.9

 
1,683,424

 
48.77

 
82.1

 

 

 

 
 
 
 
$
67.9

 
2,989,712

 
$
50.18

 
$
150.0

 
4,910,281

 
$
37.54

 
$
184.3

See Note 14 . Related Party Transactions , for details regarding the repurchase of shares from related parties.

15


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


11 .    Share-Based Compensation
Certain employees, advisors, institutions, officers, and directors of the Company participate in various long-term incentive plans, which provide for granting stock options, warrants, restricted stock awards, and restricted stock units. Stock options and warrants generally vest in equal increments over a three - to five -year period and expire on the ten th   anniversary following the date of grant. Restricted stock awards and restricted stock units generally vest over a two - to four -year period.
On November 17, 2010, the Company adopted a 2010 Omnibus Equity Incentive Plan (the 2010 Plan ), which provides for the granting of stock options, warrants, restricted stock awards, restricted stock units, and other equity-based compensation. The 2010 Plan serves as the successor to the 2005 Stock Option Plan for Incentive Stock Options, the 2005 Stock Option Plan for Non-qualified Stock Options, the 2008 Advisor and Institution Incentive Plan, the 2008 Stock Option Plan and the Director Restricted Stock Plan (collectively, the Predecessor Plans ). Upon adoption of the 2010 Plan, awards were no longer made under the Predecessor Plans; however, awards previously granted under the Predecessor Plans remain outstanding until exercised or forfeited.
There are 12,055,945 shares authorized for grant under the 2010 Plan. As of September 30, 2014 , there were 6,292,812 shares reserved for issuance upon exercise or conversion of outstanding awards granted under the 2010 Plan.
Stock Options and Warrants
The following table presents the weighted-average assumptions used in the Black-Scholes valuation model by the Company in calculating the fair value of its employee, officer, and director stock options that have been granted during the nine months ended September 30, 2014 :
Expected life (in years)
 
6.02

Expected stock price volatility
 
44.25
%
Expected dividend yield
 
1.77
%
Risk-free interest rate
 
2.17
%
Fair value of options
 
$
20.51

The fair value of each stock option or warrant awarded to advisors and financial institutions is estimated on the date of the grant and revalued at each reporting period using the Black-Scholes valuation model with the following weighted-average assumptions used during the nine months ended September 30, 2014 :
Expected life (in years)
 
5.86

Expected stock price volatility
 
33.70
%
Expected dividend yield
 
2.08
%
Risk-free interest rate
 
1.92
%
Fair value of options
 
$
21.73


16


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following table summarizes the Company’s stock option and warrant activity for the nine months ended September 30, 2014 :
 
 
Number of
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Term
(Years)
 
Aggregate
Intrinsic
Value
(In thousands)
Outstanding — December 31, 2013
 
7,016,521

 
$
28.45

 
 
 
 
Granted
 
748,353

 
54.21

 
 
 
 
Exercised
 
(960,961
)
 
25.12

 
 
 
 
Forfeited
 
(376,378
)
 
35.19

 
 
 
 
Outstanding — September 30, 2014
 
6,427,535

 
$
31.56

 
6.63
 
$
93,163

Exercisable — September 30, 2014
 
3,319,409

 
$
27.10

 
5.42
 
$
62,892

The following table summarizes information about outstanding stock options and warrants at September 30, 2014 :
 
 
Outstanding
 
Exercisable
Range of Exercise Prices
 
Total
Number of
Shares
 
Weighted-
Average
Remaining
Life
(Years)
 
Weighted-
Average
Exercise
Price
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
$2.38
 
17,382

 
0.67
 
$
2.38

 
17,382

 
$
2.38

$15.84 - $23.02
 
1,313,120

 
4.71
 
21.42

 
1,250,803

 
21.34

$23.41 - $30.00
 
1,631,196

 
5.97
 
28.11

 
926,796

 
27.62

$31.60 - $32.33
 
1,624,929

 
7.90
 
31.87

 
493,184

 
31.94

$34.01 - $39.60
 
1,162,060

 
6.40
 
34.58

 
625,729

 
34.50

$45.89 - $54.81
 
678,848

 
9.44
 
54.26

 
5,515

 
54.81

 
 
6,427,535

 
6.63
 
$
31.56

 
3,319,409

 
$
27.10

The Company recognizes share-based compensation for stock options awarded to employees, officers, and directors based on the grant date fair value over the requisite service period of the award, which generally equals the vesting period. The Company recognized share-based compensation related to the vesting of these awards of $3.8 million and $2.5 million during the three months ended September 30, 2014 and 2013 , respectively, and $11.4 million and $9.8 million during the nine months ended September 30, 2014 and 2013 , respectively, which is included in compensation and benefits expense on the unaudited condensed consolidated statements of income. As of September 30, 2014 , total unrecognized compensation cost related to non-vested stock options granted to employees, officers, and directors was $25.3 million , which is expected to be recognized over a weighted-average period of 2.28 years.
The Company recognizes share-based compensation for stock options and warrants awarded to its advisors and to financial institutions based on the fair value of the awards at each reporting period. The Company recognized share-based compensation of $1.1 million and $1.6 million during the three months ended September 30, 2014 and 2013 , respectively, and $5.9 million and $5.9 million for during the nine months ended September 30, 2014 and 2013 , respectively, related to the vesting of stock options and warrants awarded to its advisors and financial institutions, which is classified within commission and advisory expense on the unaudited condensed consolidated statements of income. As of September 30, 2014 , total unrecognized compensation cost related to non-vested stock options and warrants granted to advisors and financial institutions was $12.2 million , which is expected to be recognized over a weighted-average period of 2.52 years.

17


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


Restricted Stock
The following summarizes the Company’s activity in its restricted stock awards and restricted stock units for the nine months ended September 30, 2014 :
 
 
Restricted Stock Awards
 
Restricted Stock Units
 
 
Number of
Shares
 
Weighted-Average
Grant-Date
Fair Value
 
Number of
Shares
 
Weighted-Average
Grant-Date
Fair Value
Nonvested at December 31, 2013
 
39,153

 
$
33.20

 
256,684

 
$
32.12

  Granted
 
15,846

 
49.22

 
376,582

 
48.94

  Vested
 
(9,300
)
 
32.26

 
(39,419
)
 
31.44

  Forfeited
 
(4,550
)
 
32.96

 
(49,401
)
 
38.92

Nonvested at September 30, 2014
 
41,149

 
$
39.60

 
544,446

 
$
43.19

The Company recognizes share-based compensation for restricted stock awards and restricted stock units granted to its employees, officers, and directors based on the grant date fair value over the requisite service period of the award, which generally equals the vesting period. The Company recognized $1.7 million and $0.6 million of share-based compensation related to the vesting of these restricted stock awards and restricted stock units during the three months ended September 30, 2014 and 2013 , respectively, and $4.4 million and $1.6 million during the nine months ended September 30, 2014 and 2013 , respectively, which is included in compensation and benefits expense on the unaudited condensed consolidated statements of income. As of September 30, 2014 , total unrecognized compensation cost for restricted stock awards and restricted stock units granted to employees, officers, and directors was $13.0 million , which is expected to be recognized over a weighted-average remaining period of 2.29 years.
In the second quarter of 2014, the Company began granting restricted stock units to its advisors and to financial institutions. The Company recognizes share-based compensation for restricted stock units granted to its advisors and to financial institutions based on the fair value of the awards at each reporting period. The Company recognized share-based compensation of $0.4 million and $0.6 million related to the vesting of these restricted stock units during the three and nine months ended September 30, 2014 , which is classified within commission and advisory expense on the unaudited condensed consolidated statements of income. As of September 30, 2014 , total unrecognized compensation cost for restricted stock units granted to advisors and financial institutions was $4.3 million , which is expected to be recognized over a weighted-average remaining period of 2.62 years.

18


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


12 .    Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if dilutive potential shares of common stock had been issued. The calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013 is as follows (in thousands, except per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
33,272

 
$
37,631

 
$
129,498

 
$
137,439

 
 
 
 
 
 
 
 
Basic weighted-average number of shares outstanding
100,052

 
104,271

 
100,519

 
105,670

Dilutive common share equivalents
1,782

 
1,434

 
1,865

 
1,264

Diluted weighted-average number of shares outstanding
101,834

 
105,705

 
102,384

 
106,934

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.33

 
$
0.36

 
$
1.29

 
$
1.30

Diluted earnings per share
$
0.33

 
$
0.36

 
$
1.26

 
$
1.29

The computation of diluted earnings per share excludes stock options, warrants, and restricted stock units that are anti-dilutive. For the three months ended September 30, 2014 and 2013 , stock options, warrants, and restricted stock units representing common share equivalents of 1,478,016 shares and 3,075,389 shares, respectively, were anti-dilutive. For the nine months ended September 30, 2014 and 2013 , stock options, warrants, and restricted stock units representing common share equivalents of 1,344,782 shares and 3,744,198 shares, respectively, were anti-dilutive.
13 .    Income Taxes
The Company’s effective income tax rate differs from the federal corporate tax rate of 35.0% , primarily as a result of state taxes, settlement contingencies, and expenses that are not deductible for tax purposes. These items resulted in effective tax rates of 40.0% and 38.6% for the three months ended September 30, 2014 and 2013 , respectively, and 39.5% and 39.4% for the nine months ended September 30, 2014 and 2013 , respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
14 .    Related Party Transactions
The Company has related party transactions with TPG Capital, one of the Company's significant stockholders, as well as certain portfolio companies of TPG Capital. During the nine months ended September 30, 2014 and 2013 the Company recognized revenue for services provided to these portfolio companies of $0.7 million and $0.4 million , respectively. During the nine months ended September 30, 2014 and 2013 , the Company incurred expenses for services provided by TPG Capital or these portfolio companies of $0.9 million and $0.4 million , respectively. As of September 30, 2014 and 2013 , receivables from related parties were $0.1 million . As of September 30, 2014 and 2013 , payables to related parties were $0.4 million and less than $0.1 million , respectively.
During the nine months ended September 30, 2013 , the Company incurred $0.8 million in expenses for services provided by Aplifi, Inc., a privately held technology company in which the Company held an equity interest until its sale in October 2013.
On February 12, 2014, the Company entered into a share repurchase agreement with an investment fund associated with TPG Capital, pursuant to which the Company repurchased 1.9 million shares of its common stock at a price of $52.00 per share, for total consideration of $100.0 million .
15 .    Net Capital and Regulatory Requirements
The Company operates in a highly regulated industry. Applicable laws and regulations restrict permissible activities and investments and require compliance with various financial and customer-related regulations. The

19


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


consequences of noncompliance can include substantial monetary and non-monetary sanctions. In addition, the Company is also subject to comprehensive examinations and supervision by various governmental and self-regulatory agencies. These regulatory agencies generally have broad discretion to prescribe greater limitations on the operations of a regulated entity for the protection of investors or public interest. Furthermore, where the agencies determine that such operations are unsafe or unsound, fail to comply with applicable law, or are otherwise inconsistent with the laws and regulations or with the supervisory policies, greater restrictions may be imposed.
The Company’s registered broker-dealer, LPL Financial, is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1 under the Exchange Act), which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirement may fluctuate on a daily basis. LPL Financial is a clearing broker-dealer and had net capital of $109.2 million with a minimum net capital requirement of $6.7 million and net capital in excess of the minimum requirement of $102.5 million as of September 30, 2014 .
The Company's subsidiary, The Private Trust Company N.A. ( PTC ), operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts to PTC's operations.
As of September 30, 2014 and December 31, 2013 , LPL Financial and PTC met all capital adequacy requirements to which they were subject.
16 .    Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk
LPL Financial’s client securities activities are transacted on either a cash or margin basis. In margin transactions, LPL Financial extends credit to the advisor's client, subject to various regulatory and internal margin requirements, collateralized by cash or securities in the client’s account. As clients write options contracts or sell securities short, LPL Financial may incur losses if the clients do not fulfill their obligations and the collateral in the clients’ accounts is not sufficient to fully cover losses that clients may incur from these strategies. To control this risk, LPL Financial monitors margin levels daily and clients are required to deposit additional collateral, or reduce positions, when necessary.
LPL Financial is obligated to settle transactions with brokers and other financial institutions even if its advisors' clients fail to meet their obligation to LPL Financial. Clients are required to complete their transactions on the settlement date, generally three business days after the trade date. If clients do not fulfill their contractual obligations, LPL Financial may incur losses. In addition, the Company occasionally enters into certain types of contracts to fulfill its sale of when, as, and if issued securities. When, as, and if issued securities have been authorized but are contingent upon the actual issuance of the security. LPL Financial has established procedures to reduce this risk by generally requiring that clients deposit cash or securities into their account prior to placing an order.
LPL Financial may at times hold equity securities that are recorded on the unaudited condensed consolidated statements of financial condition at market value. While long inventory positions represent LPL Financial’s ownership of securities, short inventory positions represent obligations of LPL Financial to deliver specified securities at a contracted price, which may differ from market prices prevailing at the time of completion of the transaction. Accordingly, both long and short inventory positions may result in losses or gains to LPL Financial as market values of securities fluctuate. To mitigate the risk of losses, long and short positions are marked-to-market daily and are continuously monitored by LPL Financial.
17 .    Subsequent Events
On October 1, 2014, the Company entered into the Second Amendment, Extension and Incremental Assumption Agreement ( Amended Credit Agreement ) with its wholly owned subsidiary, LPL Holdings, Inc., and other parties thereto, which amended the Company ' s Credit Agreement, dated May 13, 2013. The Amended Credit Agreement extends the maturity date of Term Loan A and the Revolving Credit Facility to September 30, 2019, and increases the Revolving Credit Facility borrowing capacity to $400.0 million .
On October 1, 2014, the Company's Board of Directors approved an increase in the Company's share repurchase plan by $150.0 million to a total of $217.9 million .

20


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


On October 28, 2014 , the Board of Directors declared a cash dividend of $0.24 per share on the Company's outstanding common stock to be paid on November 26, 2014 to stockholders of record on November 11, 2014 .
******

21


Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview