LPL Financial Holdings Inc.
LPL Financial Holdings Inc. (Form: 10-Q, Received: 08/05/2015 17:08:59)


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 June 30, 2015
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 July 31, 2015 was 95,262,247 .




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 and plans, liquidity, future share repurchases, and future dividends, including statements regarding future resolution of regulatory matters and related costs, income projections based on changes in interest rates, and projected savings and anticipated improvements to the Company's operating model, services, and technology as a result of its Service Value Commitment initiative or restructuring initiatives, 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 August 5, 2015 . 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; execution of the Company's plans and its success in realizing the service improvements and efficiencies expected to result from its initiatives and programs, particularly its technological initiatives; the Company's success in negotiating and developing commercial arrangements with third-party services providers; the performance of third-party service providers on which the Company relies; 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 2014 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



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 June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
REVENUES:
 
 
 
 
 
 
 
 
Commission
 
$
509,689

 
$
535,177

 
$
1,033,088

 
$
1,069,751

Advisory
 
344,884

 
330,394

 
686,996

 
657,647

Asset-based
 
125,072

 
118,537

 
245,704

 
233,211

Transaction and fee
 
97,811

 
91,625

 
199,506

 
181,610

Interest income, net of interest expense
 
5,177

 
4,791

 
9,755

 
9,552

Other
 
8,028

 
12,205

 
24,914

 
28,389

Total net revenues
 
1,090,661

 
1,092,729

 
2,199,963

 
2,180,160

EXPENSES:
 
 
 
 
 
 
 
 

Commission and advisory
 
736,854

 
751,662

 
1,478,101

 
1,496,205

Compensation and benefits
 
112,337

 
104,821

 
224,617

 
211,169

Promotional
 
26,684

 
29,729

 
62,376

 
56,912

Depreciation and amortization
 
26,732

 
23,818

 
52,798

 
46,099

Occupancy and equipment
 
21,315

 
21,798

 
42,197

 
43,879

Professional services
 
14,529

 
15,715

 
28,573

 
30,028

Brokerage, clearing and exchange
 
13,536

 
12,329

 
26,277

 
24,504

Communications and data processing
 
11,107

 
10,463

 
22,721

 
21,122

Restructuring charges
 
4,492

 
9,225

 
8,416

 
16,545

Other
 
25,822

 
29,094

 
57,944

 
49,235

Total operating expenses
 
993,408

 
1,008,654

 
2,004,020

 
1,995,698

Non-operating interest expense
 
13,163

 
12,914

 
27,178

 
25,754

Total expenses
 
1,006,571

 
1,021,568

 
2,031,198

 
2,021,452

INCOME BEFORE PROVISION FOR INCOME TAXES
 
84,090

 
71,161

 
168,765

 
158,708

PROVISION FOR INCOME TAXES
 
33,848

 
28,070

 
67,845

 
62,482

NET INCOME
 
$
50,242

 
$
43,091

 
$
100,920

 
$
96,226

EARNINGS PER SHARE (NOTE 12)
 
 
 
 
 
 
 
 

Earnings per share, basic
 
$
0.52

 
$
0.43

 
$
1.05

 
$
0.96

Earnings per share, diluted
 
$
0.52

 
$
0.42

 
$
1.03

 
$
0.94

Weighted-average shares outstanding, basic
 
95,724

 
100,244

 
96,136

 
100,756

Weighted-average shares outstanding, diluted
 
97,239

 
102,029

 
97,715

 
102,672

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 June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
NET INCOME
 
$
50,242

 
$
43,091

 
$
100,920

 
$
96,226

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
Unrealized (loss) gain on cash flow hedges, net of tax expense of ($93), $251, $194, and $926 for the three and six months ended June 30, 2015 and 2014, respectively
 
(175
)
 
400

 
277

 
1,462

Reclassification adjustment for realized gain on cash flow hedges included in net income, net of tax expense of $143, $28, $228, and $28 for the three and six months ended June 30, 2015 and 2014, respectively
 
(228
)
 
(45
)
 
(363
)
 
(45
)
Total other comprehensive income, net of tax
 
(403
)
 
355

 
(86
)
 
1,417

TOTAL COMPREHENSIVE INCOME
 
$
49,839

 
$
43,446

 
$
100,834

 
$
97,643


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)

 
June 30,
2015
 
December 31, 2014
ASSETS
 
 
 
Cash and cash equivalents
$
547,320

 
$
412,332

Cash and securities segregated under federal and other regulations
399,875

 
568,930

Restricted cash
27,176

 
1,109

Receivables from:
 
 
 
Clients, net of allowance of $1,283 at June 30, 2015 and $1,245 at December 31, 2014
331,992

 
365,390

Product sponsors, broker-dealers, and clearing organizations
164,033

 
177,470

Others, net of allowance of $10,751 at June 30, 2015 and $8,379 at December 31, 2014
314,805

 
291,449

Securities owned:
 

 
 

Trading — at fair value
11,986

 
13,466

Held-to-maturity — at amortized cost
8,599

 
8,594

Securities borrowed
5,603

 
5,035

Income taxes receivable
9,355

 
84

Fixed assets, net of accumulated depreciation and amortization of $304,879 at June 30, 2015 and $288,834 at December 31, 2014
237,116

 
214,154

Debt issuance costs, net of accumulated amortization of $13,190 at June 30, 2015 and $11,724 at December 31, 2014
11,775

 
13,241

Goodwill
1,365,838

 
1,365,838

Intangible assets, net of accumulated amortization of $323,673 at June 30, 2015 and $305,154 at December 31, 2014
411,097

 
430,704

Other assets
195,950

 
183,197

Total assets
$
4,042,520

 
$
4,050,993

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Drafts payable
$
133,579

 
$
180,099

Payables to clients
617,763

 
652,714

Payables to broker-dealers and clearing organizations
38,952

 
45,427

Accrued commission and advisory expenses payable
134,364

 
146,504

Accounts payable and accrued liabilities
304,883

 
289,426

Unearned revenue
82,991

 
64,482

Securities sold, but not yet purchased — at fair value
1,735

 
302

Senior secured credit facilities
1,693,838

 
1,634,258

Leasehold financing obligation
26,337

 

Deferred income taxes, net
64,990

 
66,181

Total liabilities
3,099,432

 
3,079,393

Commitments and contingencies
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

Common stock, $.001 par value; 600,000,000 shares authorized; 119,046,228 shares issued at June 30, 2015 and 118,234,552 shares issued at December 31, 2014
119

 
118

Additional paid-in capital
1,390,594

 
1,355,085

Treasury stock, at cost — 23,831,516 shares at June 30, 2015 and 21,089,882 shares at December 31, 2014
(897,270
)
 
(780,661
)
Accumulated other comprehensive income
851

 
937

Retained earnings
448,794

 
396,121

Total stockholders’ equity
943,088

 
971,600

Total liabilities and stockholders’ equity
$
4,042,520

 
$
4,050,993

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
 
Retained
Earnings
 
Total
Stockholders'
Equity
 
Common Stock
 
 
Treasury Stock
 
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
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
 
 
 
 
 
 
 
 
 
 
1,417

 
96,226

 
97,643

Issuance of common stock to settle restricted stock units, net
35

 
1

 


 
11

 
(600
)
 
 
 
 
 
(599
)
Treasury stock purchases
 
 
 
 
 
 
2,458

 
(125,010
)
 
 
 
 
 
(125,010
)
Cash dividends on common stock
 
 
 
 
 
 
 
 
 
 
 
 
(48,109
)
 
(48,109
)
Stock option exercises and other
884

 


 
21,572

 
(19
)
 
700

 
 
 
60

 
22,332

Share-based compensation


 
 
 
15,609

 
 
 
 
 
 
 
 
 
15,609

Excess tax benefits from share-based compensation
 
 
 
 
6,755

 
 
 
 
 
 
 
 
 
6,755

BALANCE — June 30, 2014
118,031

 
$
118

 
$
1,336,310

 
17,666

 
$
(631,115
)
 
$
1,532

 
$
361,747

 
$
1,068,592

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE — December 31, 2014
118,235

 
$
118

 
$
1,355,085

 
21,090

 
$
(780,661
)
 
$
937

 
$
396,121

 
$
971,600

Net income and other comprehensive income, net of tax expense
 
 
 
 
 
 
 
 
 
 
(86
)
 
100,920

 
100,834

Issuance of common stock to settle restricted stock units, net
116

 
1

 


 
41

 
(1,849
)
 
 
 
 
 
(1,848
)
Treasury stock purchases
 
 
 
 
 
 
2,731

 
(115,824
)
 
 
 
 
 
(115,824
)
Cash dividends on common stock
 
 
 
 
 
 
 
 
 
 
 
 
(48,274
)
 
(48,274
)
Stock option exercises and other
695

 


 
18,651

 
(30
)
 
1,064

 
 
 
27

 
19,742

Share-based compensation


 
 
 
15,850

 
 
 
 
 
 
 
 
 
15,850

Excess tax benefits from share-based compensation
 
 
 
 
1,008

 
 
 
 
 
 
 
 
 
1,008

BALANCE — June 30, 2015
119,046

 
$
119

 
$
1,390,594

 
23,832

 
$
(897,270
)
 
$
851

 
$
448,794

 
$
943,088

See notes to unaudited condensed consolidated financial statements.

4



LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

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

 
 
Six Months Ended June 30,
 
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
100,920

 
$
96,226

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Noncash items:
 
 
 
 
Depreciation and amortization
 
52,798

 
46,099

Amortization of debt issuance costs
 
1,466

 
2,160

Share-based compensation
 
15,850

 
15,609

Excess tax benefits related to share-based compensation
 
(1,855
)
 
(6,842
)
Provision for bad debts
 
1,269

 
860

Deferred income tax provision
 
(1,157
)
 
792

Loan forgiveness
 
17,904

 
12,950

Other
 
4,414

 
1,262

Changes in operating assets and liabilities:
 
 
 
 
Cash and securities segregated under federal and other regulations
 
169,055

 
104,126

Receivables from clients
 
33,360

 
19,271

Receivables from product sponsors, broker-dealers, and clearing organizations
 
13,437

 
729

Receivables from others
 
(42,935
)
 
(17,773
)
Securities owned
 
1,240

 
(1,929
)
Securities borrowed
 
(568
)
 
(2,448
)
Other assets
 
(16,404
)
 
(25,853
)
Drafts payable
 
(46,520
)
 
(42,807
)
Payables to clients
 
(34,951
)
 
(17,639
)
Payables to broker-dealers and clearing organizations
 
(6,475
)
 
(11,323
)
Accrued commission and advisory expenses payable
 
(12,140
)
 
1,078

Accounts payable and accrued liabilities
 
16,472

 
(36,777
)
Income taxes receivable/payable
 
(7,416
)
 
(18,420
)
Unearned revenue
 
18,509

 
(2,739
)
Securities sold, but not yet purchased
 
1,433

 
(131
)
Net cash provided by operating activities
 
$
277,706

 
$
116,481

 
 
 
 
 
Continued on following page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Capital expenditures
 
$
(31,876
)
 
$
(45,923
)
Proceeds from disposal of fixed assets
 

 
1,059

Purchase of securities classified as held-to-maturity
 
(1,506
)
 

Proceeds from maturity of securities classified as held-to-maturity
 
1,500

 
3,500

Deposits of restricted cash
 
(26,676
)
 

Release of restricted cash
 
609

 
138

Net cash used in investing activities
 
(57,949
)
 
(41,226
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Net proceeds from revolving credit facility
 
65,000

 

Repayment of senior secured credit facilities
 
(5,420
)
 
(5,419
)
Payment of contingent consideration
 

 
(3,300
)
Tax payments related to settlement of restricted stock units
 
(1,848
)
 
(599
)
Repurchase of common stock
 
(115,824
)
 
(125,010
)
Dividends on common stock
 
(48,274
)
 
(48,109
)
Excess tax benefits related to share-based compensation
 
1,855

 
6,842

Proceeds from stock option exercises and other
 
19,742

 
22,332

Net cash used in financing activities
 
(84,769
)
 
(153,263
)
NET INCREASE (DECREASE) CASH AND CASH EQUIVALENTS
 
134,988

 
(78,008
)
CASH AND CASH EQUIVALENTS — Beginning of period
 
412,332

 
516,584

CASH AND CASH EQUIVALENTS — End of period
 
$
547,320

 
$
438,576

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
Interest paid
 
$
25,457

 
$
25,973

Income taxes paid
 
$
77,282

 
$
83,855

NONCASH DISCLOSURES:
 
 
 
 
Capital expenditures included in accounts payable and accrued liabilities
 
$
7,082

 
$
12,904

Fixed assets acquired under build-to-suit lease
 
$

 
$
8,114

Finance obligation related to real estate projects

 
$
26,337

 
$


5



LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

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


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, 2014 , 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, 2014 . There have been no significant changes to these accounting policies during the first six months of 2015 .
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 are aggregated and viewed as one operating segment, and therefore, one reportable segment due to their similar economic characteristics, products and services, production and distribution processes, and regulatory environment.
Restricted Cash
Restricted cash primarily represents cash restricted for use by the Company’s captive insurance subsidiary.

7


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


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 June 30, 2015 , the carrying amount and fair value of the Company’s indebtedness was approximately $1,693.8 million and $1,698.6 million , respectively. As of December 31, 2014 , the carrying amount and fair value was approximately $1,634.3 million and $1,620.8 million , respectively.
Leasehold Financing Obligation
The Company is involved with the construction of a building in Fort Mill, South Carolina and has determined that it has substantially all of the risks of ownership during construction of the leased property. Accordingly, from an accounting perspective, the Company is deemed to be the owner of the construction project. As such, the Company records an asset for the amount of the total project costs and an amount related to the value attributed to the building under construction in fixed assets, net and the related financing obligation in leasehold financing obligations on the unaudited condensed consolidated statement of financial condition. Once construction is complete, the Company determines if the asset qualifies for sale-leaseback accounting treatment.
Recently Issued Accounting Pronouncements
There are no recently issued accounting pronouncements that would materially impact the Company's condensed consolidated statements of income, comprehensive income, financial condition, or cash flows.
3 .    Restructuring
In February 2013, the Company committed to an expansion of its Service Value Commitment initiative (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 following table summarizes the balance of accrued expenses and the changes in the accrued amounts for the Program as of and for the six months ended June 30, 2015 (in thousands):
 
Accrued Balance at December 31, 2014
 
Costs
Incurred
 
Payments
 
Accrued Balance at June 30, 2015
 
 
Cumulative Costs Incurred to Date
 
Total
Expected
Restructuring
Costs
Outsourcing and other related costs
$

 
$
1,298

 
$
(1,298
)
 
$

 
 
$
22,786

 
$
23,500

Technology transformation costs
4,458

 
297

 
(4,000
)
 
755

 
 
30,215

 
30,300

Employee severance obligations and other related costs
1,999

 
1,837

 
(1,794
)
 
2,042

 
 
10,722

 
13,400

Asset impairments

 

 

 

 
 
842

 
842

Total
$
6,457

 
$
3,432

 
$
(7,092
)
 
$
2,797

 
 
$
64,565

 
$
68,042

In February 2015, the Company committed to a course of action to restructure the business of its subsidiary, Fortigent Holdings Company, Inc. (together with its subsidiaries, “Fortigent”). The Company acquired Fortigent, which provides outsourced wealth management solutions, in April 2012. The intention of the restructuring plan is to migrate Fortigent’s operations from Rockville, Maryland to the Company’s office in Charlotte, North Carolina, simplify and improve the efficiency of Fortigent’s existing service offerings, and position Fortigent to capitalize on the Company's future technology investments and service offerings for financial institutions and advisors focused on high-net-worth clients.

8


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


The following table summarizes the balance of accrued expenses and the changes in the accrued amounts for the Fortigent restructuring as of and for the six months ended June 30, 2015 (in thousands):
 
Costs
Incurred
 
Payments
 
Non-cash
 
Accrued Balance at June 30, 2015
 
 
Cumulative Costs Incurred to Date
 
Total
Expected
Restructuring
Costs
Employee severance obligations and other related costs
$
2,219

 
$
(639
)
 
$

 
$
1,580

 
 
$
2,219

 
$
4,500

Relocation and related costs
1,758

 
(1,188
)
 

 
570

 
 
1,758

 
2,000

Lease restructuring charges

 

 

 

 
 

 
1,300

Asset impairments
433

 
(433
)
 

 

 
 
433

 
1,200

Total
$
4,410

 
$
(2,260
)
 
$

 
$
2,150

 
 
$
4,410

 
$
9,000

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 six months ended June 30, 2015 .
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 June 30, 2015 , 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 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 June 30, 2015 , 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

9


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


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 June 30, 2015 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
8,234

 
$

 
$

 
$
8,234

Securities owned — trading:
 
 
 
 
 
 
 
Money market funds
262

 

 

 
262

Mutual funds
7,333

 

 

 
7,333

Equity securities
60

 

 

 
60

Debt securities

 
21

 

 
21

U.S. treasury obligations
4,310

 

 

 
4,310

Total securities owned — trading
11,965

 
21

 

 
11,986

Other assets
98,804

 
4,100

 

 
102,904

Total assets at fair value
$
119,003

 
$
4,121

 
$

 
$
123,124

Liabilities
 
 
 
 
 
 
 
Securities sold, but not yet purchased:
 
 
 
 
 
 
 
Equity securities
$
42

 
$

 
$

 
$
42

Debt securities

 
1,693

 

 
1,693

Total securities sold, but not yet purchased
42

 
1,693

 

 
1,735

Accounts payable and accrued liabilities

 

 
527

 
527

Total liabilities at fair value
$
42

 
$
1,693

 
$
527

 
$
2,262



10


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, 2014 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
22,592

 
$

 
$

 
$
22,592

Securities owned — trading:
 

 
 

 
 

 
 

Money market funds
293

 

 

 
293

Mutual funds
7,570

 

 

 
7,570

Equity securities
224

 

 

 
224

Debt securities

 
1,379

 

 
1,379

U.S. treasury obligations
4,000

 

 

 
4,000

Total securities owned — trading
12,087

 
1,379

 

 
13,466

Other assets
75,540

 
5,058

 

 
80,598

Total assets at fair value
$
110,219

 
$
6,437

 
$

 
$
116,656

Liabilities
 
 
 
 
 
 
 
Securities sold, but not yet purchased:
 
 
 
 
 
 
 
Mutual funds
$
13

 
$

 
$

 
$
13

Equity securities
279

 

 

 
279

Debt securities

 
10

 

 
10

Total securities sold, but not yet purchased
292

 
10

 

 
302

Accounts payable and accrued liabilities

 

 
527

 
527

Total liabilities at fair value
$
292

 
$
10

 
$
527

 
$
829

Level 3 Recurring Fair Value Measurements
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. 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.
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 gain or loss, and fair value of securities held-to-maturity were as follows (in thousands):
 
June 30,
2015
 
December 31,
2014
Amortized cost
$
8,599

 
$
8,594

Gross unrealized gain (loss)
2

 
(14
)
Fair value
$
8,601

 
$
8,580


11


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


At June 30, 2015 , 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
$
4,098

 
$
4,001

 
$
500

 
$
8,599

U.S. government notes — at fair value
$
4,103

 
$
4,004

 
$
494

 
$
8,601

6 .    Derivative Financial Instruments
In May 2013, in conjunction with its Service Value Commitment initiative, 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 , which was reclassified out of accumulated other comprehensive income and recognized in net income ratably over the 12-month period ending May 31, 2015 to match the timing of the underlying hedged item. The second cash flow hedge, with a notional amount of 560.4 million INR, or $8.1 million , settled in June 2015. The Company received a settlement of $0.7 million , which will be reclassified out of accumulated other comprehensive income and recognized in net income ratably over a 12-month period ending May 31, 2016 to match the timing of the underlying hedged item.
The details related to the remaining non-deliverable foreign currency contracts at June 30, 2015 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 #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
 
 
 
 
 
 
$
15.3

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):
 
June 30,
2015
 
December 31,
2014
Cash flow hedges
$
914

 
$
1,179

7 .    Goodwill and Other Intangible Assets
Goodwill and intangible assets were a result of various acquisitions. See Note 8 . Goodwill and Other Intangible Assets , in the Company's 2014 Annual Report on Form 10-K for a discussion of the components of goodwill and additional information regarding intangible assets.

12


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


8 .    Debt
Senior Secured Credit Facilities — In October 2014, the Company entered into the Second Amendment, Extension and Incremental Assumption Agreement (“Credit Agreement”) with its wholly owned subsidiary, LPL Holdings, Inc., and the other parties thereto. The Credit Agreement includes a term loan A (“Term Loan A”), a term loan B (“Term Loan B”), and a revolving credit facility (“Revolving Credit Facility”), which has a borrowing capacity of $400.0 million .
The Company’s outstanding borrowings were as follows (dollars in thousands):
 
 
 
 
June 30, 2015
 
December 31, 2014
Senior Secured Credit Facilities
 
Maturity
 
 
Balance
 
Interest
Rate    
 
 
Balance
 
Interest
Rate    
Revolving Credit Facility
 
9/30/2019
 
$
175,000

 
3.87
%
 
$
110,000

 
4.75
%
Senior secured term loans:
 
 
 
 
 
 
 
 
 
 
Term Loan A
 
9/30/2019
 
459,375

 
2.69
%
 
459,375

 
2.67
%
Term Loan B
 
3/29/2019
 
1,059,463

 
3.25
%
 
1,064,883

 
3.25
%
Total borrowings
 
 
 
1,693,838

 
 
 
1,634,258

 
 
Less current portion
 
 
 
185,839

 
 
 
120,839

 
 
Long-term borrowings — net of current portion
 
 
 
$
1,507,999

 
 
 
$
1,513,419

 
 
As of June 30, 2015 , the Company also had $18.0 million of irrevocable letters of credit, with an applicable interest rate margin of 2.50% , which were supported by the Revolving Credit Facility.
The Credit Agreement subjects the Company to certain financial and non-financial covenants. As of June 30, 2015 , 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 million limit, and allows for both collateralized and uncollateralized borrowings. The lines have not been utilized in 2015 and were not utilized in 2014 ; therefore, there were no balances outstanding at June 30, 2015 or December 31, 2014 .
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 $6.6 million and $8.2 million for the three months ended June 30, 2015 and 2014 , respectively, and $13.2 million and $17.0 million for the six months ended June 30, 2015 and 2014 , respectively.
Service and Development Contracts  
The Company is party to certain long-term contracts for systems and services that enable back office trade processing and clearing for its product and service offerings.
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

13


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


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 June 30, 2015 .
Legal & Regulatory Matters
Assessing the probability of a loss occurring and the amount of any loss related to a legal proceeding or regulatory matter is inherently difficult. The Company exercises significant and complex judgments to make certain estimates presented in its consolidated financial statements, and there are particular uncertainties and complexities involved when assessing the potential outcomes of legal proceedings and regulatory matters. The Company's assessment process considers a variety of factors and assumptions, which may include the procedural status of the matter and any recent developments; prior experience and the experience of others in similar matters; the size and nature of potential exposures; available defenses; the progress of fact discovery; the opinions of counsel and experts; potential opportunities for settlement and the status of any settlement discussions; as well as the potential for insurance coverage and indemnification, if available. The Company monitors these factors and assumptions for new developments and re-assesses the likelihood that a loss will occur and the estimated range or amount of loss, if those amounts can be reasonably determined. The Company has established an accrual for those legal proceedings and regulatory matters for which a loss is both probable and the amount can be reasonably estimated. The Company’s accruals at June 30, 2015 , include estimated costs for regulatory matters generally relating to the adequacy of the Company’s compliance and supervisory systems and procedures and other controls, for which the Company believes losses are both probable and reasonably estimable. When it is not probable 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. The Company estimates that, as of June 30, 2015 , exposure to those losses could range from $0 to $8 million in excess of the accrued liability, if any, related to those matters. Due to the inherent unpredictability of such matters, the Company may have exposure to losses that are not yet predictable or cannot yet be reasonably estimated in addition to those amounts that have been accrued or disclosed.
Third-Party Insurance
The Company maintains third-party insurance coverage for certain legal proceedings, including those involving client claims. With respect to client claims, the estimated losses on many of the 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.
Self-Insurance Liabilities
The Company has self-insurance for certain potential liabilities, including various errors and omissions liabilities, through a wholly-owned captive insurance subsidiary. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated by considering, in part, historical claims experience, severity factors, and other actuarial assumptions. The estimated accruals for these potential liabilities could be significantly affected if future occurrences and claims differ from such assumptions and historical trends. As of June 30, 2015 , these self-insurance liabilities are included in accounts payable and accrued liabilities in the unaudited condensed consolidated balance sheet. Self-insurance related charges are included in other expenses in the unaudited condensed consolidated statements of income for the three and six months ended June 30, 2015 .
Other Commitments
As of June 30, 2015 , the Company had received collateral primarily in connection with client margin loans with a market value of approximately $354.5 million , which it can re-pledge, loan, or sell. Of these securities, approximately $31.4 million were client-owned securities pledged to the Options Clearing Corporation as collateral

14


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


to secure client obligations related to options positions. As of June 30, 2015 there were no restrictions that materially limited the Company's ability to re-pledge, loan, or sell the remaining $323.1 million of client collateral.
Trading securities on the unaudited condensed consolidated statements of financial condition includes $4.3 million and $4.0 million pledged to clearing organizations at June 30, 2015 and December 31, 2014 , respectively.
The Company is involved in a build-to-suit lease arrangement in Fort Mill, South Carolina, under which it serves as the construction agent on behalf of the landlord. Under such arrangement, the Company has obligations to fund cost over-runs in its capacity as the construction agent, and accordingly has determined that under lease accounting standards it bears substantially all of the risks and rewards of ownership as measured under GAAP. The Company is therefore required to report the landlord's costs of construction on its balance sheet as a fixed asset during the construction period as if the Company owned such asset. As of June 30, 2015 , the Company has recorded $26.3 million in fixed assets in connection with this arrangement and an equal and off-setting leasehold financing obligation on the unaudited condensed consolidated statement of financial condition.
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):
 
2015
 
2014
 
Dividend per Share
 
Total Cash Dividend
 
Dividend per Share
 
Total Cash Dividend
First quarter
$
0.25

 
$
24.2

 
$
0.24

 
$
24.1

Second quarter
$
0.25

 
$
24.1

 
$
0.24

 
$
24.0

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 June 30, 2015 and 2014 , the Company had the following activity under its approved share repurchase programs (in millions, except share and per share data):
 
 
 
 
 
 
Three Months Ended June 30,
 
 
 
 
 
 
2015
 
2014
Approval Date
 
Authorized Repurchase Amount
 
Amount Remaining at June 30, 2015
 
Shares Purchased
 
Weighted-Average Price Paid Per Share
 
Total Cost(1)
 
Shares Purchased
 
Weighted-Average Price Paid Per Share
 
Total Cost(1)
February 10, 2014
 
$
150.0

 
$

 

 
$

 
$

 
535,210

 
$
46.73

 
$
25.0

October 1, 2014
 
$
150.0

 
$

 
1,513,490

 
$
41.60

 
$
63.0

 

 
$

 
$

April 28, 2015
 
$
200.0

 
$
177.2

 
537,922

 
$
42.48

 
$
22.8

 

 
$

 
$

 
 
 
 
$
177.2

 
2,051,412

 
$
41.83

 
$
85.8

 
535,210

 
$
46.73

 
$
25.0

_________________________
(1)
Included in the total cost of shares purchased is a commission fee of $0.02 per share.

15


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


For the six months ended June 30, 2015 and 2014 , the Company had the following activity under its approved share repurchase programs (in millions, except share and per share data):
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
2015
 
2014
Approval Date
 
Authorized Repurchase Amount
 
Amount Remaining at June 30, 2015
 
Shares Purchased
 
Weighted Average Price Paid Per Share
 
Total Cost(1)
 
Shares Purchased
 
Weighted Average Price Paid Per Share
 
Total Cost(1)
May 28, 2013
 
$
200.0

 
$

 

 
$

 
$

 
1,306,288

 
$
52.00

 
$
67.9

February 10, 2014
 
$
150.0

 
$

 

 
$

 
$

 
1,151,998

 
$
49.55

 
$
57.1

October 1, 2014
 
$
150.0

 
$

 
2,193,262

 
$
42.39

 
$
93.0

 

 
$

 
$

April 28, 2015
 
$
200.0

 
$
177.2

 
537,922

 
$
42.48

 
$
22.8

 

 
$

 
$

 
 
 
 
$
177.2

 
2,731,184

 
$
42.41

 
$
115.8

 
2,458,286

 
$
50.85

 
$
125.0

_________________________
(1)
Included in the total cost of shares purchased is a commission fee of $0.02 per share.
See Note 14 . Related Party Transactions , for details regarding the repurchase of shares from related parties in 2014.
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.
In November 2010, the Company adopted a 2010 Omnibus Equity Incentive Plan (as amended and restated in May 2015, 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 20,055,945 shares authorized for grant under the 2010 Plan. As of June 30, 2015 , there were 5,462,060 shares reserved for issuance upon exercise or conversion of outstanding awards granted under the 2010 Plan and 12,918,506 shares remaining available for future issuance.
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 and officer stock options that have been granted during the six months ended June 30, 2015 :
Expected life (in years)
 
5.30

Expected stock price volatility
 
25.78
%
Expected dividend yield
 
2.30
%
Risk-free interest rate
 
1.58
%
Fair value of options
 
$
8.83


16


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


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 six months ended June 30, 2015 :
Expected life (in years)
 
6.39

Expected stock price volatility
 
25.57
%
Expected dividend yield
 
2.32
%
Risk-free interest rate
 
2.05
%
Fair value of options
 
$
16.41

The following table summarizes the Company’s stock option and warrant activity for the six months ended June 30, 2015 :
 
 
Number of
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Term
(Years)
 
Aggregate
Intrinsic
Value
(In thousands)
Outstanding — December 31, 2014
 
6,287,410

 
$
31.59

 
 
 
 
Granted
 
1,117,634

 
$
45.58

 
 
 
 
Exercised
 
(663,522
)
 
$
28.11

 
 
 
 
Forfeited
 
(375,524
)
 
$
38.79

 
 
 
 
Outstanding — June 30, 2015
 
6,365,998

 
$
33.99

 
6.54
 
$
79,594

Exercisable — June 30, 2015
 
3,605,127

 
$
29.33

 
5.23
 
$
61,850

The following table summarizes information about outstanding stock options and warrants at June 30, 2015 :
 
 
Outstanding
 
Exercisable
Range of Exercise Prices
 
Total
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Life
(Years)
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
$18.04 - $23.02
 
1,150,974

 
$
21.39

 
3.94
 
1,150,974

 
$
21.39

$23.41 - $30.00
 
1,350,028

 
$
28.24

 
5.41
 
878,749

 
$
27.96

$31.60 - $32.33
 
1,199,189

 
$
31.88

 
7.17
 
631,094

 
$
31.91

$34.01 - $39.60
 
1,012,285

 
$
34.59

 
5.68
 
753,158

 
$
34.48

$45.55 - $54.81
 
1,653,522

 
$
48.61

 
9.34
 
191,152

 
$
54.70

 
 
6,365,998

 
$
33.99

 
6.54
 
3,605,127

 
$
29.33

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 $4.3 million and $3.8 million during the three months ended June 30, 2015 and 2014 , respectively, and $8.3 million and $7.6 million during the six months ended June 30, 2015 and 2014 , respectively, which is included in compensation and benefits expense on the unaudited condensed consolidated statements of income. As of June 30, 2015 , total unrecognized compensation cost related to non-vested stock options granted to employees, officers, and directors was $18.2 million , which is expected to be recognized over a weighted-average period of 1.98 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 June 30, 2015 and 2014 , respectively, and $1.8 million and $4.8 million for during the six months ended June 30, 2015 and 2014 ,

17


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


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 June 30, 2015 , total unrecognized compensation cost related to non-vested stock options and warrants granted to advisors and financial institutions was $6.2 million , which is expected to be recognized over a weighted-average period of 1.93 years.
Restricted Stock
The following summarizes the Company’s activity in its restricted stock awards and restricted stock units for the six months ended June 30, 2015 :
 
 
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, 2014
 
33,634

 
$
42.78

 
546,725

 
$
43.34

  Granted
 
31,847

 
$
41.42

 
325,032

 
$
42.06

  Vested
 
(18,832
)
 
$
37.66

 
(116,307
)
 
$
39.47

  Forfeited
 

 
$

 
(54,306
)
 
$
45.45

Nonvested at June 30, 2015
 
46,649

 
$
43.92

 
701,144

 
$
43.23

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 $2.4 million and $1.5 million of share-based compensation related to the vesting of these restricted stock awards and restricted stock units during the three months ended June 30, 2015 and 2014 , respectively, and $4.4 million and $2.7 million during the six months ended June 30, 2015 and 2014 , respectively, which is included in compensation and benefits expense on the unaudited condensed consolidated statements of income. As of June 30, 2015 , total unrecognized compensation cost for restricted stock awards and restricted stock units granted to employees, officers, and directors was $14.2 million , which is expected to be recognized over a weighted-average remaining period of 2.12 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 $0.7 million and $0.2 million related to the vesting of these restricted stock units during the three months ended June 30, 2015 and 2014 , respectively, and $1.1 million and $0.2 million during the six months ended June 30, 2015 and 2014 , respectively, which is classified within commission and advisory expense on the unaudited condensed consolidated statements of income. As of June 30, 2015 , total unrecognized compensation cost for restricted stock units granted to advisors and financial institutions was $8.1 million , which is expected to be recognized over a weighted-average remaining period of 2.49 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 is as follows (in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
50,242

 
$
43,091

 
$
100,920

 
$
96,226

 
 
 
 
 
 
 
 
Basic weighted-average number of shares outstanding
95,724

 
100,244

 
96,136

 
100,756

Dilutive common share equivalents
1,515

 
1,785

 
1,579

 
1,916

Diluted weighted-average number of shares outstanding
97,239

 
102,029

 
97,715

 
102,672

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.52

 
$
0.43

 
$
1.05

 
$
0.96

Diluted earnings per share
$
0.52

 
$
0.42

 
$
1.03

 
$
0.94

The computation of diluted earnings per share excludes stock options, warrants, and restricted stock units that are anti-dilutive. For the three months ended June 30, 2015 and 2014 , stock options, warrants, and restricted stock units representing common share equivalents of 2,499,426 shares and 1,510,813 shares, respectively, were anti-dilutive. For the six months ended June 30, 2015 and 2014 , stock options, warrants, and restricted stock units representing common share equivalents of 2,342,576 shares and 1,282,968 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 40.3% and 39.4% for the three months ended June 30, 2015 and 2014 . The change between periods is due to the release of accruals for uncertain tax positions in 2014 due to completion of state tax audits.
The effective tax rates for the six months ended June 30, 2015 and 2014 were 40.2% and 39.4% , respectively. The change between periods is due to the release of accruals for uncertain tax positions in 2014 due to completion of state tax audits and a decrease in the number of incentive stock options exercised in 2015 compared to the same period in 2014.
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, certain portfolio companies of TPG Capital, and the LPL Financial Foundation. During the six months ended June 30, 2015 and 2014 , the Company recognized revenue for services provided to these related parties of $0.6 million and $0.4 million , respectively. During the six months ended June 30, 2015 and 2014 , the Company incurred expenses for services provided by TPG Capital and certain of its portfolio companies of $2.3 million and $0.5 million , respectively. As of June 30, 2015 and 2014 , receivables from related parties were $0.2 million and $0.1 million , respectively, and payables to related parties were $0.3 million and less than $0.1 million , respectively.
In February 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 .

19


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


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 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 $136.0 million with a minimum net capital requirement of $6.4 million as of June 30, 2015 .
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 June 30, 2015 and December 31, 2014 , 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 July 31, 2015 , the Board of Directors declared a cash dividend of $0.25 per share on the Company's outstanding common stock to be paid on August 28, 2015 to stockholders of record on August 17, 2015 .

20


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

Business Overview
We are the nation's largest independent broker-dealer, a top custodian for registered investment advisors (“RIAs”), and a leading independent consultant to retirement plans. We provide an integrated platform of brokerage and investment advisory services to more than 14,100 independent financial advisors, including financial advisors at more than 700 financial institutions (our “advisors”) across the country, enabling them to provide their retail investors (“clients”) with objective financial advice through a lower conflict model. We also support approximately 4,300 financial advisors who are affiliated and licensed with insurance companies that use our customized clearing, advisory platforms, and technology solutions.
Through our advisors, we are one of the largest distributors of financial products and services in the United States, and we believe we have the fifth-largest overall advisor base in the United States.