LPL Financial Holdings
LPL Financial Holdings Inc. (Form: 10-Q, Received: 07/29/2016 16:45:16)

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, 2016
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 25, 2016 was 89,071,546 .




TABLE OF CONTENTS
Item Number
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




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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, 22nd 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, outlook, growth, plans, business strategies, liquidity, future indebtedness, future share repurchases, and future dividends, including statements regarding future resolution of regulatory matters, legal proceedings, and related costs, future revenues and expenses, and projected savings and anticipated improvements to the Company's operating model, services, and technology as a result of its initiatives and programs, 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 July 29, 2016 . 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; fluctuations in the number of retail investors served by the Company; effects of competition in the financial services industry and the success of the Company in attracting and retaining financial advisors and institutions; changes in the number of the Company's financial advisors and institutions, and their ability to market effectively financial products and services; changes in interest rates and fees payable by banks participating in the Company's cash sweep program, including the Company's success in negotiating agreements with current or additional counterparties; the Company's strategy in managing cash sweep program fees; changes in the growth and profitability of the Company’s fee-based business; the effect of current, pending, and future legislation, regulation, and regulatory actions, including the U.S. Department of Labor's final rule ("DOL Rule") and disciplinary actions imposed by federal and state securities regulators and self-regulatory organizations; the costs of settling and remediating issues related to pending or future regulatory matters; changes made to the Company’s offerings and services in response to current, pending, and future legislation, regulation, and regulatory actions, including the DOL Rule, and the effect that such changes may have on the Company’s gross profit streams and costs; execution of the Company’s capital management plans, including its compliance with the terms of its existing credit agreement; the price, the availability of shares, and the trading volumes of the Company’s common stock, which will affect the timing and size of future share repurchases by the Company; execution of the Company's plans and its success in realizing the expense savings and service improvements and efficiencies expected to result from its initiatives and programs, particularly its expense plans and technological initiatives; the Company's success in negotiating and developing commercial arrangements with third-party services providers; the performance of third-party service providers to which business processes are transitioned from the Company; the Company's ability to control operating risks, information technology systems risks, cybersecurity risks, and sourcing risks; and the other

ii


factors set forth in Part I, “Item 1A. Risk Factors” in the Company's 2015 Annual Report on Form 10-K, as may be amended or updated in the Company's Quarterly Reports on Form 10-Q. 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 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
We are a leader in the retail financial advice market, the nation's largest independent broker-dealer (based on total revenues, Financial Planning magazine June 1996-2016), 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 14,000 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 4,200 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 are one of the top five firms in terms of overall advisor base in the United States.
We believe that objective financial guidance is a fundamental need for everyone. We enable our advisors to focus on what they do best—create the personal, long-term relationships that are the foundation for turning life’s aspirations into financial realities. We do that through a singular focus on providing our advisors with the front-, middle-, and back-office support they need to serve the large and growing market for independent investment advice. We believe that LPL Financial is the only company that offers advisors the unique combination of an integrated technology platform, comprehensive self-clearing services, and open architecture access to a wide range of non-proprietary products, all delivered in an environment unencumbered by conflicts from product manufacturing, underwriting, and market-making.
We believe investors achieve better outcomes when working with a financial advisor. LPL makes it easy for advisors to do what is best for their clients, protecting advisors and investors while promoting independence and choice through access to a wide range of diligently evaluated non-proprietary products.
Executive Summary
Financial Highlights
Results for the second quarter of 2016 included net income of $47.8 million or $0.53 per share, which compares to $50.2 million , or $0.52 per share, in the second quarter of 2015 . Increased cash sweep revenue, lower advisor production bonuses, disciplined expense management, and lower share count all contributed to the earnings per share growth.
Asset Growth Trends
Net new advisory assets were $2.8 billion for the three months ended June 30, 2016 , compared to $4.3 billion in the same period in 2015. Uncertainty and volatility in the macro environment impacted market-sensitive asset valuations and offset most of the net new asset flows from the last twelve months, leaving total brokerage and advisory assets served at $488.0 billion as of June 30, 2016 , up from the June 30, 2015 balance of $485.7 billion .
As of June 30, 2016 , our advisory assets had grown to $196.1 billion from $186.8 billion as of June 30, 2015 and represented 40.2% of total brokerage and advisory assets served. Assets on our platform that serves independent RIAs that conduct their advisory business through separate entities (“Hybrid RIAs”) operating pursuant to the Investment Advisers Act of 1940 or through their respective states' investment advisory licensing rules, rather than through LPL Financial, had grown to $132.3 billion as of June 30, 2016 compared to $111.6 billion as of June 30, 2015 , and represented 27.1% of total brokerage and advisory assets served.
Gross Profit Trends
Second quarter gross profit, a non-GAAP measure, was $344.9 million , which was up from $340.3 million in the comparable period in 2015. Management presents gross profit, which is calculated as net revenues less production expenses, because we believe they can be useful to investors because they show the Company’s core operating performance before indirect costs that are general and administrative in nature. See footnote 6 to the Financial Metrics table within the "How We Evaluate Our Business" section for additional information on gross profit. Second quarter gross profit included an increase in cash sweep revenue from the impact of the increase in the target range for the federal funds effective rate announced in December 2015 and higher average cash

1


balances, partially offset by decreases in commissions and advisory revenues, net of the correlated reduction in production expense.
Regulatory-related charges
Regulatory-related charges decreased $1.2 million for the three months ended June 30, 2016 compared to the comparable period in 2015, as we experienced a lower level of charges and expenses related to known matters for the second quarter. We anticipate that the remaining half of 2016 will have a higher level of regulatory-related charges than the first half of 2016 due to recoveries we received in the first quarter; however, we expect 2016 regulatory-related charges to be meaningfully lower than 2015 levels.
Capital Management Activity
We paid $22.3 million of dividends to shareholders and did not conduct any share repurchases in the three months ended June 30, 2016 .
Our Sources of Revenue
Our revenues are derived primarily from fees and commissions from products and advisory services offered by our advisors to their clients, a substantial portion of which we pay out to our advisors, as well as fees we receive from our advisors for the use of our technology, custody, clearing, trust, and reporting platforms. We also generate asset-based revenues through our platform that provides our cash sweep programs and access to over 750 product providers that offer the following product lines:
• Alternative Investments
 
• Retirement Plan Products
• Annuities
 
• Separately Managed Accounts
• Exchange Traded Products
 
• Structured Products
• Insurance Based Products
 
• Unit Investment Trusts
• Mutual Funds
 
 
Under our self-clearing platform, we custody the majority of client assets invested in these financial products, for which we provide statements, transaction processing, and ongoing account management. In return for these services, mutual funds, insurance companies, banks, and other financial product manufacturers pay us fees based on asset levels or number of accounts managed. We also earn interest from margin loans made to our advisors’ clients.
We track recurring revenue, a characterization of net revenue and a statistical measure, which we define to include our revenues from asset-based fees, advisory fees, trailing commissions, cash sweep programs, and certain other fees that are based upon accounts and advisors. Because certain recurring revenues are associated with asset balances, they will fluctuate depending on the market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, recurring revenue is meaningful to us despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.

2


The table below summarizes the sources and drivers of our revenue:
 
 
 
Six Months Ended June 30, 2016
 
Sources of Revenue
Primary Drivers
Total
(millions)
% of Total Net Revenue
Total Recurring
(millions)
% Recurring
Advisor-driven revenue with ~85%-90% payout ratio
Commission
- Transactions
- Brokerage asset levels
$882
43.6%
$449
50.9%
Advisory
- Advisory asset levels
$642
31.7%
$639
99.5%
Attachment revenue
 retained by us
Asset-Based
- Cash Sweep Fees
- Sponsorship Fees
- Record Keeping
- Cash balances
- Interest rates
- Client asset levels
- Number of accounts

$274
13.5%
$268
97.8%
Transaction and Fee
- Transactions
- Client (Investor) Accounts
- Advisor Seat and Technology
- Client activity
- Number of clients
- Number of advisors
- Number of accounts
- Premium technology subscribers
$205
10.2%
$125
61.0%
Other
- Margin account balances
- Alternative investment transactions
$21
1.0%
$12
57.1%
 
Total Net Revenue
$2,024
100.0%
$1,493
73.8%
We regularly review various aspects of our operations and service offerings, including our policies, procedures, and platforms, in response to marketplace developments. We currently expect to implement changes to aspects of our operations and service offerings in order to position our advisors for long-term growth and to align with competitive and regulatory developments.
How We Evaluate Our Business
We focus on several key business and financial metrics in evaluating the success of our business relationships and our resulting financial position and operating performance. Our key business and financial metrics are as follows:
 
June 30,
 
 
Business Metrics
2016
 
2015
 
% Change
Brokerage and advisory assets served (in billions)(1)
$
488.0

 
$
485.7

 
0.5
 %
Advisory assets under custody (in billions)(1)(2)
$
196.1

 
$
186.8

 
5.0
 %
Net new advisory assets (in billions)(3)
$
4.8

 
$
9.5

 
(49.5
)%
Insured cash account balances (in billions)(1)
$
21.0

 
$
17.5

 
20.0
 %
Money market account balances (in billions)(1)
$
8.2

 
$
6.8

 
20.6
 %
Advisors(4)
14,193

 
14,130

 
0.4
 %
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Financial Metrics
2016
 
2015
 
2016
 
2015
Revenue (decrease) increase
(6.6
)%
 
(0.2
)%
 
(8.0
)%
 
0.9
%
Recurring revenue as a % of net revenue
73.8
 %
 
71.7
 %
 
73.8
 %
 
70.4
%
Pre-tax income (in millions)
$
79.7

 
$
84.1

 
$
164.3

 
$
168.8

Net income (in millions)
$
47.8

 
$
50.2

 
$
98.2

 
$
100.9

Earnings per share (diluted)
$
0.53

 
$
0.52

 
$
1.10

 
$
1.03

Non-GAAP Measures:(5)
 
 
 
 
 
 
 
Gross profit (in millions)(6)
$
344.9

 
$
340.3

 
$
700.6

 
$
695.6

Gross profit growth from prior period(6)
1.4
 %
 
3.5
 %
 
0.7
 %
 
5.5
%
Gross profit as a % of net revenue(6)
33.8
 %
 
31.2
 %
 
34.6
 %
 
31.6
%
_______________________________

3


(1)
Brokerage and advisory assets served are comprised of assets that are custodied, networked, and non-networked and reflect market movement in addition to new assets, inclusive of new business development and net of attrition. Insured cash account and money market account balances are also included in brokerage and advisory assets served. Set forth below are other client assets at June 30, 2016 and 2015 , including retirement plan assets and certain trust and high-net-worth assets, that are custodied with third-party providers and therefore excluded from brokerage and advisory assets (in billions):
 
June 30,
 
2016
 
2015
Retirement plan assets(a)
$
87.2

 
$
86.4

Trust assets
$
1.0

 
$
1.1

High-net-worth assets
$
88.0

 
$
92.8

_____________________________
(a)
Retirement plan assets are held in retirement plans that are supported by advisors licensed with LPL Financial. At June 30, 2016 and 2015 , our retirement plan assets represent those assets that are custodied with various third-party providers of retirement plan administrative services who provide reporting feeds. We estimate the total assets in retirement plans supported to be approximately $124 billion at June 30, 2016 . If we receive reporting feeds in the future from providers for whom we do not currently receive feeds, we intend to include and identify such additional assets in this metric. Such additional feeds since June 30, 2015 , accounted for $3.9 billion of the total retirement plan assets.
(2)
Advisory assets under custody are comprised of advisory assets under management in our corporate RIA platform and Hybrid RIA assets in advisory accounts custodied by us. See “Results of Operations” for a tabular presentation of advisory assets under custody.
(3)
Represents net new assets for the six months ended June 30, 2016 and 2015 consisting of funds deposited into new advisory accounts and additional funds deposited into existing advisory accounts that are custodied in our fee-based advisory platforms.
(4)
Advisors are defined as those independent financial advisors and financial advisors at financial institutions who are licensed to do business with our broker-dealer subsidiary.
(5)
Our management believes that presenting certain non-GAAP measures by excluding or including certain items can be helpful to investors and analysts who may wish to use some or all of this information to analyze our current performance, prospects, and valuation. Our management uses this non-GAAP information internally to evaluate operating performance and in formulating the budget for future periods. Our management believes that the non-GAAP measures and metrics discussed below are appropriate for evaluating the performance of the Company.
(6)
Gross profit is calculated as net revenues less production expenses. Production expenses consist of the following expense categories from our unaudited condensed consolidated statements of income: (i) commission and advisory and (ii) brokerage, clearing, and exchange. All other expense categories, including depreciation and amortization of fixed assets and amortization of intangible assets, are considered general and administrative in nature. Because our gross profit amounts do not include any depreciation and amortization expense, we consider our gross profit amounts to be non-GAAP measures that may not be comparable to those of others in our industry. We believe that gross profit amounts can be useful to investors because they show the Company’s core operating performance before indirect costs that are general and administrative in nature .
Legal & Regulatory Matters
As a regulated entity, we are subject to regulatory oversight and inquiries related to, among other items, our compliance and supervisory systems and procedures and other controls, as well as our disclosures, supervision, and reporting. The ongoing environment of additional regulation, increased regulatory compliance obligations, and enhanced regulatory enforcement has resulted in additional operational and compliance costs, as well as increased costs in the form of fines, restitution, and remediation related to regulatory matters. In the ordinary course of business, we periodically identify or become aware of purported inadequacies, deficiencies, and other issues. It is our policy to evaluate these matters for potential securities law or regulatory violations, and other potential compliance issues. It is also our policy to self-report known violations and issues as required by applicable law and regulation. When deemed probable that matters may result in financial losses, we accrue for those losses based on an estimate of possible fines, customer restitution, and losses related to the repurchase of sold securities and other losses, as applicable. Certain regulatory and other legal claims and losses may be covered through our wholly-

4


owned captive insurance subsidiary, which is chartered with the insurance commissioner in the state of Tennessee. Our ability to estimate such costs may vary based on the current stage of evaluation and status of discussion with regulators, as applicable. 
Our accruals, including those established through the captive insurance subsidiary, at June 30, 2016 include estimated costs for significant regulatory matters, generally relating to the adequacy of our compliance and supervisory systems and procedures and other controls, for which we believe losses are both probable and reasonably estimable. One of the matters relates to sales of certain securities over several years, and our accrual at June 30, 2016 includes an estimate for the loss we expect to incur in resolving this matter, including if we were to repurchase certain affected securities at their original sales prices. 
The outcome of regulatory matters could result in legal liability, regulatory fines, or monetary penalties in excess of our accruals and insurance, which could have a material adverse effect on our business, results of operations, cash flows, or financial condition. For more information on management’s loss contingency policies, see Note 8 . Commitments and Contingencies , within the notes to the unaudited condensed consolidated financial statements.
In April 2016, the U.S. Department of Labor issued a final rule (the “DOL Rule”): “Definition of the Term “Fiduciary”; Conflict of Interest Rule-Retirement Investment Advice.” The DOL Rule broadens the circumstances under which we may be considered a “fiduciary” with respect to certain accounts that are subject to the Employee Retirement Income Security Act, and the prohibited transaction rules under section 4975 of the Internal Revenue Code, including many employer-sponsored retirement plans and individual retirement accounts. The DOL Rule will likely affect the products and services we provide to these types of accounts and the compensation that we and our advisors receive in connection with such products and services, as well as our regulatory compliance and other costs and those of our advisors. In addition, the DOL Rule creates increased risk of private arbitration and litigation, including potential class action litigation, based on violations of the DOL Rule. We are continuing to analyze the potential effects of the DOL Rule on our business, including implications for both our revenues and expenses, and the broader financial services industry as of the date of this quarterly report.
Derivative Financial Instruments
In May 2013, we entered into a long-term contractual obligation (the "Agreement") with a third-party provider to enhance the quality and speed and reduce the cost of our 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 us. The Agreement provides that we settle the cost of our contractual obligation to the third-party provider each month in U.S. dollars. However, the Agreement provides that on each annual anniversary date of the signing of the Agreement, the price for services (as denominated in US dollars) is to be adjusted for the then-current exchange rate between the U.S. dollar and the Indian rupee. The Agreement provides that, once an annual adjustment is calculated, there are no further modifications to the amounts paid by us to the third-party provider for fluctuations in the exchange rate until the reset on the next anniversary date. The third-party provider bears the risk of currency movement from the date of signing the Agreement until the reset on the first anniversary of its signing, and during each period until the next annual reset. We bear the risk of currency movement at each annual reset date following the first anniversary.
We use derivative financial instruments consisting primarily of non-deliverable foreign currency contracts, all of which have been designated as cash flow hedges. Through these instruments, we believe we have mitigated foreign currency risk arising from a substantial portion of our contract obligation with the third-party provider arising from annual anniversary adjustments. We will continue to assess the effectiveness of our use of cash flow hedges to mitigate risk from foreign currency contracts.
See Note 5 . Derivative Financial Instruments , within the notes to the unaudited condensed consolidated financial statements for additional information regarding our derivative financial instruments.
Acquisitions, Integrations, and Divestitures
From time to time we undertake acquisitions or divestitures outside the ordinary course of business based on opportunities in the competitive landscape. These activities are part of our overall growth strategy, but can distort comparability when reviewing revenue and expense trends for periods presented. There have been no material acquisitions, integrations, or divestitures during the six months ended June 30, 2016 . See our 2015 Annual Report on Form 10-K for 2015 activity.

5


Economic Overview and Impact of Financial Market Events
Our business is directly and indirectly sensitive to several macroeconomic factors and the state of financial markets, particularly in the United States. In the U.S., economic data continues to point to fairly steady, but still below-trend, economic growth. According to the most recent estimate by the Bureau of Economic Analysis, real gross domestic product (“GDP”) growth slowed to a 1.1% annualized rate in the first quarter of 2016, putting the overall growth rate over the last four quarters at 2.1%. More recent data point to GDP tracking to above 2% for the second quarter of 2016. A largely healthy labor market, a relatively strong but cautious U.S. consumer, and low interest rates have all been supportive of growth. In addition, stabilizing oil prices have helped manufacturing to rebound modestly, while services sector activity remains steady. Nevertheless, a lack of support from global growth continues to be a concern and increased uncertainty from the surprising outcome of the U.K.’s June 23, 2016 referendum vote in favor of leaving the European Union and the upcoming election in the U.S. may be causing some businesses to delay committing to major projects pending greater clarity. While prospective growth of 2-3% is modest by historical standards, such a growth rate would still be above the Congressional Budget Office’s potential GDP growth rate, and therefore could be enough to continue to slowly tighten the labor market, to push wages higher, and to increase the probability of the Fed raising rates later this year.
Equity markets saw a marked decline in volatility over most of the second quarter compared to a volatile prior quarter, and market-based measures of financial stress were steadily declining heading into June, when uncertainty about the potential outcome of the U.K.’s referendum vote began to appear in some markets. Despite a sharp two-day decline in equity markets following the actual outcome of the vote, stocks rebounded into quarter end, and the S&P 500 finished the quarter with a gain, although the price index still sat below its May 21, 2015 all-time high. Throughout the quarter, however, fund flow data and investor sentiment surveys indicated continued caution among retail investors. Advancing equities have done little to satisfy the market’s appetite for quality bonds and treasury yields at the longer end of the curve continued to push lower through most of the quarter, including a sharp decline following the outcome of the U.K. referendum vote. Several factors have worked together to keep rates low, including low rates abroad, well-contained inflation, a slower prospective rate hike path from the Fed, and a tempered appetite for risk. Market-based measures of inflation have also remained contained. Although credit spreads have narrowed and equities have risen, long-term interest rates have remained extraordinarily low.
Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Fed policy. In particular, low short-term rates can weigh on the profitability of our cash sweep program, due to the fee compression needed to keep our rates competitive. Low interest rates and the prospect of rising rates over the long term can also have an impact on demand for fixed and variable annuity products. While the Fed, at its March meeting, had reduced its projection of the number of 0.25% rate hikes that it expected by the end of 2016 from four to two, there continued to be a meaningful difference between the Fed’s and the market’s expectations of the future path of the Fed’s key policy rate, both in 2016 and longer term. The Fed continued to exhibit its resolve to raise rates twice in 2017 at its April meeting and in post-meeting speeches by Fed members, but its plan was delayed by an unusually weak May Employment Situation report from the U.S. Department of Labor and derailed by the outcome of the U.K. referendum, with market-implied expectations of the next rate hike getting pushed back as far as 2018 by the end of the quarter. Although these events may contribute to rates remaining low for longer than previously expected, the Fed continues to emphasize that its policy path will be data dependent and has presented a generally positive picture of the U.S. economy while acknowledging risks from abroad.

6


Results of Operations
The following table and discussion below presents an analysis of our results of operations for the three and six months ended June 30, 2016 and 2015 . Where appropriate, we have identified specific events and changes that affect comparability or identification or monitoring of trends, and where possible and practical, have quantified the impact of such items.
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2016
 
2015
 
% Change
 
2016
 
2015
 
% Change
Revenues
(In thousands)
Commission
$
445,755

 
$
509,689

 
(12.5
)%
 
$
882,482

 
$
1,033,088

 
(14.6
)%
Advisory
322,955

 
344,884

 
(6.4
)%
 
642,387

 
686,996

 
(6.5
)%
Asset-based
137,797

 
125,072

 
10.2
 %
 
274,048

 
245,704

 
11.5
 %
Transaction and fee
101,824

 
97,811

 
4.1
 %
 
204,514

 
199,506

 
2.5
 %
Interest income, net of interest expense
5,238

 
5,177

 
1.2
 %
 
10,568

 
9,755

 
8.3
 %
Other
5,612

 
8,028

 
(30.1
)%
 
10,487

 
24,914

 
(57.9
)%
Total net revenues     
1,019,181

 
1,090,661

 
(6.6
)%
 
2,024,486

 
2,199,963

 
(8.0
)%
Expenses
 
 
 
 

 
 
 
 
 
 
Production
674,289

 
750,390

 
(10.1
)%
 
1,323,889

 
1,504,378

 
(12.0
)%
Compensation and benefits
105,773

 
112,337

 
(5.8
)%
 
219,828

 
224,617

 
(2.1
)%
General and administrative
107,308

 
99,457

 
7.9
 %
 
211,981

 
213,811

 
(0.9
)%
Depreciation and amortization
18,749

 
17,196

 
9.0
 %
 
37,711

 
33,625

 
12.2
 %
Amortization of intangible assets
9,509

 
9,536

 
(0.3
)%
 
19,034

 
19,173

 
(0.7
)%
Restructuring charges

 
4,492

 
(100.0
)%
 

 
8,416

 
(100.0
)%
Total operating expenses     
915,628

 
993,408

 
(7.8
)%
 
1,812,443

 
2,004,020

 
(9.6
)%
Non-operating interest expense
23,804

 
13,163

 
80.8
 %
 
47,694

 
27,178

 
75.5
 %
Income before provision for income taxes    
79,749

 
84,090

 
(5.2
)%
 
164,349

 
168,765

 
(2.6
)%
Provision for income taxes     
31,900

 
33,848

 
(5.8
)%
 
66,108

 
67,845

 
(2.6
)%
Net income     
$
47,849

 
$
50,242

 
(4.8
)%
 
$
98,241

 
$
100,920

 
(2.7
)%
 

7


Revenues
Commission Revenues
We generate two types of commission revenues: sales-based commissions and trailing commissions. Sales-based commission revenues, which occur whenever clients trade securities or purchase various types of investment products, primarily represent gross commissions earned by our advisors. The levels of sales-based commission revenues can vary from period to period based on the overall economic environment, number of trading days in the reporting period, and investment activity of our advisors' clients. Trailing commission revenues are recurring in nature and are earned based on the market value of investment holdings in trail eligible assets. We earn trailing commission revenues (a commission that is paid over time, such as 12(b)-1 fees) primarily on mutual funds and variable annuities held by clients of our advisors.
The following table sets forth our commission revenue, by product category, included in our unaudited condensed consolidated statements of income (in thousands):
 
Three Months Ended June 30,
 
 
 
2016
 
2015
 
$ Change
 
% Change
Variable annuities
$
173,421

 
$
203,380

 
$
(29,959
)
 
(14.7
)%
Mutual funds
135,770

 
158,063

 
(22,293
)
 
(14.1
)%
Alternative investments
9,098

 
31,987

 
(22,889
)
 
(71.6
)%
Fixed annuities
53,623

 
36,092

 
17,531

 
48.6
 %
Equities
20,706

 
23,475

 
(2,769
)
 
(11.8
)%
Fixed income
21,279

 
24,071

 
(2,792
)
 
(11.6
)%
Insurance
19,980

 
20,024

 
(44
)
 
(0.2
)%
Group annuities
11,686

 
12,391

 
(705
)
 
(5.7
)%
Other
192

 
206

 
(14
)
 
(6.8
)%
Total commission revenue     
$
445,755

 
$
509,689

 
$
(63,934
)
 
(12.5
)%
The following table sets forth our commission revenue, by sales-based and trailing commission revenue (in thousands):
 
Three Months Ended June 30,
 
 
 
2016
 
2015
 
$ Change
 
% Change

Sales-based
$
218,266

 
$
262,792

 
$
(44,526
)
 
(16.9
)%
Trailing
227,489

 
246,897

 
(19,408
)
 
(7.9
)%
Total commission revenue
$
445,755

 
$
509,689

 
$
(63,934
)
 
(12.5
)%
The decrease in commission revenue for the three months ended June 30, 2016 compared with the same period in 2015 , was primarily due to a decrease in sales-based activity for variable annuities, alternative investments, and mutual funds. Significant market volatility and investor uncertainty in the low interest rate environment led to a decline in demand for variable annuities and mutual funds. Alternative investment sales commissions were primarily challenged by marketplace uncertainties in response to regulatory changes.
Trailing revenues are recurring in nature and the decrease in revenue for the period reflects a decrease in the market value of the underlying assets.
The significant market volatility and investor uncertainty in the low interest rate environment in the current quarter shifted investors' focus from portfolio growth to income streams with minimal risk to principal. This led to the increase in sales of fixed annuities, which pay guaranteed rates of interest and can appeal to investors wary of market volatility.



8


The following table sets forth our commission revenue, by product category, included in our unaudited condensed consolidated statements of income (in thousands):
 
Six Months Ended June 30,
 
 
 
2016
 
2015
 
$ Change
 
% Change
Variable annuities
$
345,107

 
$
395,732

 
$
(50,625
)
 
(12.8
)%
Mutual funds
269,504

 
309,216

 
(39,712
)
 
(12.8
)%
Alternative investments
16,901

 
90,680

 
(73,779
)
 
(81.4
)%
Fixed annuities
105,688

 
71,199

 
34,489

 
48.4
 %
Equities
41,325

 
50,808

 
(9,483
)
 
(18.7
)%
Fixed income
41,946

 
48,058

 
(6,112
)
 
(12.7
)%
Insurance
38,214

 
41,713

 
(3,499
)
 
(8.4
)%
Group annuities
23,443

 
25,383

 
(1,940
)
 
(7.6
)%
Other
354

 
299

 
55

 
18.4
 %
Total commission revenue     
$
882,482

 
$
1,033,088

 
$
(150,606
)
 
(14.6
)%
The following table sets forth our commission revenue, by sales-based and trailing commission revenue (in thousands):
 
Six Months Ended June 30,
 
 
 
2016
 
2015
 
$ Change
 
% Change

Sales-based
$
433,080

 
$
546,259

 
$
(113,179
)
 
(20.7
)%
Trailing
449,402

 
486,829

 
(37,427
)
 
(7.7
)%
Total commission revenue
$
882,482

 
$
1,033,088

 
$
(150,606
)
 
(14.6
)%
The decrease in commission revenue for the six months ended June 30, 2016 compared with the same period in 2015 , was primarily due to a decrease in sales-based activity for alternative investments, variable annuities, and mutual funds. Alternative investment sales commissions were primarily challenged by marketplace uncertainties in response to regulatory changes. Significant market volatility and investor uncertainty in the low interest rate environment led to a decline in demand for variable annuities and mutual funds.
Trailing revenues are recurring in nature and the decrease in revenue for the period reflects a decrease in the market value of the underlying assets.
The significant market volatility and investor uncertainty in the low interest rate environment during the six months of the year shifted investors' focus from portfolio growth to income streams with minimal risk to principal. This led to the increase in sales of fixed annuities, which pay guaranteed rates of interest and can appeal to investors wary of market volatility.
Advisory Revenues
Advisory revenues primarily represent fees charged on our corporate RIA platform provided through LPL Financial LLC (“LPL Financial”) to clients of our advisors based on the value of their advisory assets. Advisory fees are billed to clients on either a calendar quarter or non-calendar quarter basis, depending on their choice, at the beginning of that period, and are recognized as revenue ratably during the quarter. The value of the assets in an advisory account on the billing date determines the amount billed, and accordingly, the revenues earned in the following three month period. The majority of our accounts are billed in advance using values as of the last business day of each calendar quarter. Advisory revenues collected on our corporate RIA platform are proposed by the advisor and agreed to by the client and average 1.1% of the underlying assets, and can range anywhere from 0.5% to 3.0%.
We also support Hybrid RIAs, through our Hybrid RIA platform, which allows advisors to engage us for technology, clearing, and custody services, as well as access to the capabilities of our investment platforms. Most financial advisors associated with Hybrid RIAs carry their brokerage license with LPL Financial and access our fully-integrated brokerage platform under standard terms, although some financial advisors associated with Hybrid RIAs do not carry a brokerage license with us. The assets held under a Hybrid RIA's investment advisory accounts custodied with LPL Financial are included in our brokerage and advisory assets, net new advisory assets, and

9


advisory assets under custody metrics. However, the advisory revenue generated by a Hybrid RIA is earned by the Hybrid RIA, and accordingly is not included in our advisory revenue. We charge separate fees to Hybrid RIAs for technology, clearing, administrative, and custody services. The administrative fees collected on our Hybrid RIA platform vary and can reach a maximum of 0.6% of the underlying assets.
Furthermore, we support certain financial advisors at broker-dealers affiliated with insurance companies through our customized advisory platforms and charge fees to these advisors based on the value of assets within these advisory accounts.
The following table summarizes all activity in advisory assets under our custody (in billions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Balance - Beginning of period
$
189.5

 
$
183.7

 
$
187.2

 
$
175.8

Net new advisory assets
2.8

 
4.3

 
4.8

 
9.5

Market impact
3.8

 
(1.2
)
 
4.1

 
1.5

Balance - End of period
$
196.1

 
$
186.8

 
$
196.1

 
$
186.8

Net new advisory assets for the three and six months ended June 30, 2016 and 2015 had a limited impact on advisory fee revenue for those respective periods. Rather, net new advisory assets are a primary driver of future advisory fee revenue and have resulted primarily from recruiting of new advisors to our Hybrid RIA platform and the continued shift by our existing advisors from brokerage towards more advisory business. With advisory fees for the period calculated based on the ending market value of the immediately preceding period, revenues for any particular quarter are primarily driven by each of the prior quarter's month-end advisory assets under management. The decrease in advisory revenue for the three and six months ended June 30, 2016 compared with the same period in 2015 is due to a shift of advisors to our Hybrid RIA platform that more than offset the net new advisory assets.
Assets on our Hybrid RIA platform have been growing rapidly through the recruiting of new advisors and the transition of existing advisors onto that platform. This continued shift of advisors to our Hybrid RIA platform has caused the growth in advisory revenue to appear to lag behind the rate of growth of advisory assets under custody, as we earn the administrative and other fees discussed above as opposed to earning advisory fees.
The following table summarizes the composition of total advisory assets under our custody as of June 30, 2016 and 2015 (in billions):
 
 
June 30,
 
 
 
 
 
 
2016
 
2015
 
$ Change

 
% Change

Advisory assets under management(1)
 
$
121.6

 
$
126.3

 
$
(4.7
)
 
(3.7
)%
Hybrid RIA assets in advisory accounts custodied by LPL Financial
 
74.5

 
60.5

 
14.0

 
23.1
 %
Total advisory assets under custody
 
$
196.1

 
$
186.8

 
$
9.3

 
5.0
 %
_______________________________
(1)
Consists of advisory assets under management on our corporate advisory platform.

10


Asset-Based Revenues
Asset-based revenues are comprised of our sponsorship programs with financial product manufacturers, omnibus processing and networking services, and fees from our cash sweep program. We receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales education and training efforts. Omnibus processing revenues are paid to us by mutual fund product sponsors and are based on the value of custodied assets in advisory accounts and the number of brokerage accounts in which the related mutual fund positions are held. Networking revenues on brokerage assets are correlated to the number of positions we administer and are paid to us by mutual fund and annuity product manufacturers. Pursuant to contractual arrangements, uninvested cash balances in our advisors’ client accounts are swept into either insured cash accounts at various banks or third-party money market funds, for which we receive fees, including administrative and recordkeeping fees based on account type and the invested balances.
Asset-based revenues for the three months ended June 30, 2016 increased to $137.8 million , or 10.2% from $125.1 million for the three months ended June 30, 2015 . The increase is due primarily to increased revenues from our cash sweep program. Cash sweep revenue increased to $40.9 million for the three months ended June 30, 2016 from $22.6 million for the three months ended June 30, 2015 due to the impact of the increase in the target range for the federal funds effective rate and an increase in average assets in our cash sweep program as investors increased the balances of their assets held in cash in response to the volatility in the financial markets. As of June 30, 2016 , our cash sweep balances had grown to $29.2 billion from $24.3 billion as of June 30, 2015 , with average cash sweep balances of $29.3 billion and $24.1 billion during the three months ended June 30, 2016 and 2015 , respectively. The increase in cash sweep revenue was partially offset by a 5.4% decrease in other asset-based revenues, due in part to lower average billable assets.
Asset-based revenues for the six months ended June 30, 2016 increased to $274.0 million , or 11.5% , from $245.7 million compared with the same period in 2015 . The increase is due primarily to increased revenues from our cash sweep program. Cash sweep revenues increased to $84.3 million for the six months ended June 30, 2016 from $44.1 million for the six months ended June 30, 2015 due to the impact of the increase in the target range for the federal funds effective rate and an increase in average assets in our cash sweep program as investors increased the balances of their assets held in cash in response to the volatility in the financial markets. Our average assets in our cash sweep assets have grown to $30.1 billion from $24.5 billion an increase of 22.9% for the six months ended June 30, 2016 and 2015 , respectively. The increase in cash sweep revenue was partially offset by a 5.9% decrease in other asset-based revenues, due in part to lower average billable assets. As a result of contractual repricing, if the federal funds effective rate remains the same, we expect the average yield for our insured cash account program to be lower in the six months ending December 31, 2016 than the six months ended June 30, 2016 .
Transaction and Fee Revenues
Transaction revenues primarily include fees we charge to our advisors and their clients for executing certain transactions in brokerage and fee-based advisory accounts. Fee revenues primarily include Individual Retirement Account (“IRA”) custodian fees, contract and licensing fees, and other client account fees. In addition, we host certain advisor conferences that serve as training, education, sales, and marketing events, for which we charge a fee for attendance.
Transaction and fee revenues increased for the three and six months ended June 30, 2016 compared to the same periods in 2015 , primarily due to higher transaction volumes in trades in advisory accounts that generate transaction-based revenue.
Interest Income, net of Interest Expense
We earn interest income, net from client margin accounts and cash equivalents. Period over period variances correspond to changes in the average balances of assets in margin accounts and cash equivalents.
Other Revenues
Other revenues primarily include marketing allowances received from certain financial product manufacturers, primarily those who offer alternative investments, such as non-traded real estate investment trusts and business development companies, mark-to-market gains and losses on assets held by us for the advisor non-qualified deferred compensation plan and our model research portfolios, and other miscellaneous revenues.
Other revenues decreased for the three months ended June 30, 2016 compared to the same period in 2015 primarily due to decreases in alternative investment marketing allowances of $4.4 million associated with a decline

11


in related sales due to marketplace uncertainties in response to regulatory changes, which were offset by a gain of $1.9 million in realized and unrealized gains/losses on approximately $120.3 million of assets held in our advisor non-qualified deferred compensation plan. The primary driver of this increase was due to market performance on the underlying investment allocations chosen by advisors in the plan.
Other revenues decreased for the six months ended June 30, 2016 compared to the same period in 2015 primarily due to decreases in alternative investment marketing allowances of $13.9 million associated with a decline in related sales due to marketplace uncertainties in response to regulatory changes.
Expenses
Production Expenses
Production expenses are comprised of the following: base payout amounts that are earned by and paid out to advisors and institutions based on commission and advisory revenues earned on each client's account (collectively, commission and advisory revenues earned by LPL Financial are referred to as gross dealer concessions, or “GDC”); production bonuses earned by advisors and institutions based on the levels of commission and advisory revenues they produce; the recognition of share-based compensation expense from equity awards granted to advisors and financial institutions based on the fair value of the awards at each reporting period; the deferred commissions and advisory fee expenses associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors; and brokerage, clearing, and exchange fees.
The following table details the production expenses included in our unaudited condensed consolidated statements of income for the periods indicated (dollars in thousands):
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2016
 
2015
 
$ Change
 
% Change
 
2016
 
2015
 
$ Change
 
% Change
Commission and advisory
$
660,680

 
$
736,854

 
$
(76,174
)
 
(10.3
)%
 
$
1,296,691

 
$
1,478,101

 
$
(181,410
)
 
(12.3
)%
Brokerage, clearing and exchange
13,609

 
13,536

 
73

 
0.5
 %
 
27,198

 
26,277

 
921

 
3.5
 %
Total Production Expenses    
$
674,289

 
$
750,390

 
$
(76,101
)
 
(10.1
)%
 
$
1,323,889

 
$
1,504,378

 
$
(180,489
)
 
(12.0
)%
The decrease in production expenses for the three and six months ended June 30, 2016 compared with 2015 correlates with the changes in our commission and advisory revenues during the same periods.
Our production payout ratio is calculated as production expenses, excluding brokerage, clearing, and exchange fees, divided by GDC. We calculate GDC as the sum of our commission and advisory revenues, as set forth on our unaudited condensed consolidated statements of income. The following table shows the components of our production payout and total payout ratios, each of which is a statistical or operating measure:
 
Three Months Ended June 30,
 
Change
 
Six Months Ended June 30,
 
Change
 
2016
 
2015
 
 
2016
 
2015
 
Base payout rate(1)
83.20
%
 
83.43
%
 
(23 bps)
 
82.86
%
 
83.44
%
 
(58 bps)
Production based bonuses
2.44
%
 
2.56
%
 
(12 bps)
 
2.07
%
 
2.17
%
 
(10 bps)
GDC sensitive payout
85.64
%
 
85.99
%
 
(35 bps)
 
84.93
%
 
85.61
%
 
(68 bps)
Non-GDC sensitive payout(2)
0.31
%
 
0.23
%
 
8 bps
 
0.11
%
 
0.32
%
 
(21 bps)
Total Payout Ratio
85.95
%
 
86.22
%
 
(27 bps)
 
85.04
%
 
85.93
%
 
(89 bps)
_______________________________
(1)
Our production payout ratio is calculated as production expenses (which consists of the following expense categories from our unaudited condensed consolidated statements of income: (i) commission and advisory and (ii) brokerage, clearing, and exchange), excluding brokerage, clearing, and exchange fees, divided by GDC (see description above).
(2)
Production Non-GDC Sensitive Payout includes share-based compensation expense from equity awards granted to advisors and financial institutions and mark-to-market gains or losses on amounts designated by advisors as deferred.
The decline in our total payout ratio, a statistical or operating measure, for the three months ended June 30, 2016 compared to the same period in 2015 was primarily driven by the ongoing movement of advisors to our Hybrid RIA platform, a decrease in our production bonuses correlating to lower sales in the quarter, and lower advisor stock-based compensation following declines in our stock price.
The decline in our total payout ratio, a statistical or operating measure, for the six months ended June 30, 2016 compared with the same period in 2015 was primarily driven by the ongoing movement of advisors to our Hybrid RIA platform, a decrease in our production bonuses correlating to lower sales during the period, and lower advisor stock-based compensation following declines in our stock price. Production based bonuses are based on qualified levels of commission and advisory revenues produced by advisors during a calendar year. As a result, we expect production based bonuses to be higher in the six months ending December 31, 2016 than the six months ended June 30, 2016 .
Compensation and Benefits Expense
Compensation and benefits expense includes salaries and wages and related employee benefits and taxes for our employees (including share-based compensation), as well as compensation for temporary employees and consultants.
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Average Number of Employees
3,325
 
3,356
 
(0.9)%
 
3,368
 
3,357
 
0.3%
The decrease in compensation and benefits expense for the three months ended June 30, 2016 compared with the same period in 2015 was primarily driven by lower bonus-related expenses and an increase in capitalized salary and benefits associated with technology projects.
The decrease in compensation and benefits expense for the six months ended June 30, 2016 compared with the same period in 2015 was primarily driven by lower bonus-related expenses and an increase in capitalized salary and benefits associated with technology projects.
General and Administrative Expenses
General and administrative expenses include promotional, occupancy and equipment, professional services, communications and data processing, and other expenses. Promotional expenses include costs related to our hosting of certain advisor conferences that serve as training, sales, and marketing events, as well as business development costs related to recruiting, such as transition assistance and amortization related to forgivable loans issued to advisors. Included in other expenses are the estimated costs of the investigation, settlement and resolution of regulatory matters, licensing fees, insurance, broker-dealer regulator fees, and other miscellaneous expenses.
The following table details the general and administrative expenses included in our unaudited condensed consolidated statements of income for the periods indicated (dollars in thousands):
 
Three Months Ended June 30,
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
 
2016
 
2015
 
$ Change
 
% Change
Promotional
$
34,717

 
$
26,684

 
$
8,033

 
30.1
 %
 
$
70,401

 
$
62,376

 
$
8,025

 
12.9
 %
Occupancy and equipment
21,980

 
21,315

 
665

 
3.1
 %
 
43,817

 
42,197

 
1,620

 
3.8
 %
Professional services
14,984

 
14,529

 
455

 
3.1
 %
 
32,139

 
28,573

 
3,566

 
12.5
 %
Communications and data processing
10,971

 
11,107

 
(136
)
 
(1.2
)%
 
21,468

 
22,721

 
(1,253
)
 
(5.5
)%
Other
24,656

 
25,822

 
(1,166
)
 
(4.5
)%
 
44,156

 
57,944

 
(13,788
)
 
(23.8
)%
Total General and Administrative Expenses
$
107,308

 
$
99,457

 
$
7,851

 
7.9
 %
 
$
211,981

 
$
213,811

 
$
(1,830
)
 
(0.9
)%
The increase in general and administrative expenses for the three months ended June 30, 2016 compared with the same period in 2015 was primarily driven by increases in business development and promotional expenses

12


associated with advisor transition assistance and broker training and education, partially offset by reduced travel expenses and lower costs of the investigation, settlement, and resolution of regulatory matters, which are included in other expenses. We will host our annual national advisor conference in the third quarter of 2016 and expect promotional expenses to be higher in the three months ending September 30, 2016 compared to the three months ended June 30, 2016 as a result.
The decrease in general and administrative expenses for the six months ended June 30, 2016 compared with the same period in 2015 was primarily driven by lower costs of the investigation, settlement, and resolution of regulatory matters, which are included in other expenses, partially offset by an increase in professional services, including non-capitalized costs related to service and technology enhancements and increases in business development and promotional expenses associated with advisor transition assistance and broker training and education.
Depreciation and Amortization Expense
Depreciation and amortization expense represents the benefits received for using long-lived assets. Those assets consist of fixed assets, which include internally developed software, hardware, leasehold improvements, and other equipment.
The increase in depreciation and amortization of $1.6 million and $4.1 million for the three and six months ended June 30, 2016 compared with the same period in 2015 , respectively, was primarily due to increases in internally developed and purchased software.
Amortization of Intangible assets
Amortization of intangible assets is consistent over prior periods and represents the benefits received for using long-lived assets, which consist of intangible assets established through our acquisitions.
Restructuring Charges
The restructuring charges for the three and six months ended June 30, 2015 primarily represent expenses incurred as a result of our Service Value Commitment initiative, which was completed in 2015. These charges relate primarily to consulting fees paid to support our technology transformation as well as employee severance obligations and other related costs and non-cash charges for impairment. Also included in the 2015 restructuring charges are expenses incurred as part of the restructuring of our subsidiary, Fortigent Holdings Company, Inc. (together with its subsidiaries, "Fortigent"), which was completed in 2015.
Non-Operating Interest Expense
Non-operating interest expense results from our senior secured credit facilities. Period over period variances correspond to an increase in interest rate and changes in the level of outstanding indebtedness relating to these facilities.
Provision for Income Taxes
We estimate our full-year effective income tax rate at the end of each reporting period. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The tax rate in any quarter can be affected positively and negatively by adjustments that are required to be reported in the quarter in which resolution of the item occurs. The effective income tax rates reflect the impact of state taxes, settlement contingencies, and expenses that are not deductible for tax purposes.
Our effective tax rate was 40.0% and 40.3% for the three months ended June 30, 2016 and 2015 , respectively.
Our effective tax rate was 40.2% and 40.2% for the six months ended June 30, 2016 and 2015 , respectively.
Liquidity and Capital Resources
Senior management establishes our liquidity and capital policies. These policies include senior management’s review of short- and long-term cash flow forecasts, review of capital expenditures, and daily monitoring of liquidity for our subsidiaries. Decisions on the allocation of capital are based upon, among other things, projected profitability and cash flow, risks of the business, regulatory capital requirements, and future liquidity needs for strategic activities. Our Treasury Department assists in evaluating, monitoring, and controlling the business activities that impact our financial condition, liquidity and capital structure and maintains relationships with various lenders. The objectives of these policies are to support the executive business strategies while ensuring ongoing and sufficient liquidity.

13


A summary of changes in our cash flow is provided as follows (in thousands):
 
Six Months Ended June 30,
 
2016
 
2015
Net cash flows provided by (used in):
 
 
 
Operating activities
$
154,637

 
$
251,030

Investing activities
(56,118
)
 
(31,273
)
Financing activities
(77,282
)
 
(84,769
)
Net increase in cash and cash equivalents
21,237

 
134,988

Cash and cash equivalents — beginning of period
724,529

 
412,332

Cash and cash equivalents — end of period
$
745,766

 
$
547,320

Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our capacity for additional borrowing.
Net cash provided by operating activities includes changes in operating asset and liability balances related to settlement and funding of client transactions, receivables from product sponsors, and accrued commission and advisory expenses due to our advisors. Operating assets and liabilities that arise from the settlement and funding of transactions by our advisors’ clients are the principal drivers of changes to our net cash from operating activities and can fluctuate significantly from day to day and period to period depending on overall trends and clients' behaviors.
The change in cash flows provided by operating activities for the six months ended June 30, 2016 compared to the same period in 2015 was primarily attributable to a decrease in cash provided by cash segregated under federal and other regulations, an increase in cash used in receivables from product sponsors and advisor loans as well as a decrease in cash provided by accounts payable and accrued liabilities, partially offset by increases in cash provided by payables to clients and payables to broker-dealers and clearing organizations.
The change in cash flows used in investing activities for the six months ended June 30, 2016 as compared to the same period in 2015 was primarily attributable to an increase in capital expenditures related to the construction of the Company's new campus in Fort Mill, South Carolina and the increase in capital expenditure for technology to support growth.
The change in the cash flows used in financing activities for the six months ended June 30, 2016 compared to the same period in 2015 was primarily attributable to a decrease in repurchases of our common stock under our repurchase programs approved by our board of directors (the "Board of Directors" or "Board") partially offset by decreases in proceeds from our revolving credit facility, and a decrease in proceeds from stock option exercises.
We believe that based on current levels of operations and anticipated growth, cash flow from operations, together with other available sources of funds, which include three uncommitted lines of credit available and the revolving credit facility established through our senior secured credit agreement, will be adequate to satisfy our working capital needs, the payment of all of our obligations, and the funding of anticipated capital expenditures for the foreseeable future. In addition, we have certain capital adequacy requirements related to our registered broker-dealer subsidiary and bank trust subsidiary and have met all such requirements and expect to continue to do so for the foreseeable future. We regularly evaluate our existing indebtedness, including refinancing thereof, based on a number of factors, including our capital requirements, future prospects, contractual restrictions, the availability of refinancing on attractive terms, and general market conditions. See the Risks Related to our Debt section within Part I, “Item 1A. Risk Factors” in our 2015 Annual Report on Form 10-K for more information about the risks associated with our debt obligations and their potential effect on our liquidity.
Share Repurchases
The Board of Directors has approved several share repurchase programs pursuant to which we may repurchase issued and outstanding shares of our common stock. Purchases may be effected in open market or privately negotiated transactions, including transactions with our affiliates, with the timing of purchases and the amount of stock purchased generally determined at our discretion within the constraints of our senior secured credit agreement and general operating needs. See Note 9 . Stockholders' Equity , within the notes to the unaudited condensed consolidated financial statements for additional information regarding our share repurchases.

14


Dividends
The payment, timing, and amount of any dividends are subject to approval by our Board as well as certain limits under our credit facilities. See Note 9 . Stockholders' Equity , within the notes to the unaudited condensed consolidated financial statements for additional information regarding our dividends.
Operating Capital Requirements
Our primary requirement for working capital relates to funds we loan to our advisors’ clients for trading conducted on margin and funds we are required to maintain for regulatory capital and reserves based on the requirements of our regulators and clearing organizations, which also consider client balances and trading activities. We have several sources of funds that enable us to meet increases in working capital requirements that relate to increases in client margin activities and balances. These sources include cash and cash equivalents on hand, cash and securities segregated under federal and other regulations, and proceeds from re-pledging or selling client securities in margin accounts. When an advisor's client purchases securities on margin or uses securities as collateral to borrow from us on margin, we are permitted, pursuant to the applicable securities industry regulations, to repledge, loan, or sell securities, up to 140% of the client's margin loan balance, that collateralize those margin accounts. As of June 30, 2016 , we had approximately $212.9 million of client margin loans, collateralized with securities having a fair value of approximately $298.1 million that we can re-pledge, loan, or sell. Of these securities, approximately $34.5 million were client-owned securities pledged to the Options Clearing Corporation as collateral to secure client obligations related to options positions. As of June 30, 2016 there were no restrictions that materially limited our ability to re-pledge, loan, or sell the remaining $263.6 million of client collateral.
Our other working capital needs are primarily related to advisor loans and timing associated with receivables and payables, which we have satisfied in the past from internally generated cash flows.
Notwithstanding the self-funding nature of our operations, we may sometimes be required to fund timing differences arising from the delayed receipt of client funds associated with the settlement of client transactions in securities markets. These timing differences are funded either with internally generated cash flow or, if needed, with funds drawn on our uncommitted lines of credit at our broker-dealer subsidiary LPL Financial, or under our revolving credit facility.
Our registered broker-dealer, LPL Financial, is subject to the SEC’s Uniform Net Capital Rule, which requires the maintenance of minimum net capital. LPL Financial computes net capital requirements under the alternative method, which requires firms to maintain minimum net capital, as defined, equal to the greater of $250,000 or 2.0% of aggregate debit balances arising from client transactions. At June 30, 2016 , LPL Financial's excess net capital was $103.0 million .
LPL Financial's ability to pay dividends greater than 10% of its excess net capital during any 35 day rolling period requires approval from the Financial Industry Regulatory Authority ("FINRA"). In addition, payment of dividends is restricted if LPL Financial's net capital would be less than 5.0% of aggregate customer debit balances.
LPL Financial also acts as an introducing broker for commodities and futures. Accordingly, its trading activities are subject to the National Futures Association's (“NFA”) financial requirements and it is required to maintain net capital that is in excess of or equal to the greatest of NFA's minimum financial requirements. The NFA was designated by the Commodity Futures Trading Commission as LPL Financial's primary regulator for such activities. Currently, the highest NFA requirement is the minimum net capital calculated and required pursuant to the SEC's Uniform Net Capital Rule.
Our subsidiary, The Private Trust Company, N.A. (“PTC”), is also subject to various regulatory capital requirements. Failure to meet the respective minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC's operations.
Debt and Related Covenants
We are party to a debt agreement with our wholly-owned subsidiary, LPL Holdings, Inc., and other parties thereto (the "Credit Agreement"). See Note 7 . Debt , within the notes to the unaudited condensed consolidated financial statements for further detail.
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:
incur additional indebtedness;

15


create liens;
enter into sale and leaseback transactions;
engage in mergers or consolidations;
sell or transfer assets;
pay dividends and distributions or repurchase our capital stock;
make investments, loans or advances;
prepay certain subordinated indebtedness;
engage in certain transactions with affiliates;
amend material agreements governing certain subordinated indebtedness; and
change our lines of business.
Credit Agreement EBITDA, a non-GAAP measure, is defined in, and calculated by management in accordance with, the Credit Agreement as “Consolidated EBITDA”, which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense, tax expense, depreciation and amortization, and adjusted to exclude certain non-cash charges and other adjustments and gains. We present Credit Agreement EBITDA because we believe that it can be a useful financial metric in understanding our debt capacity and covenant compliance. However, Credit Agreement EBITDA is not a measure of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of profitability or liquidity. In addition, our Credit Agreement-defined EBITDA measure can differ significantly from adjusted EBITDA calculated by other companies, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, and capital investments.
Set forth below is a reconciliation from our net income to Credit Agreement EBITDA for the three months ended June 30, 2016 (in thousands):
Net income
$
47,849

Non-operating interest expense
23,804

Provision for income taxes
31,900

Depreciation and amortization
18,749

Amortization of intangible assets
9,509

EBITDA
131,811

Credit Agreement Adjustments:
 
Employee share-based compensation expense(1)
4,721

Advisor share-based compensation expense(2)
376

Other(3)
6,062

Credit Agreement EBITDA
$
142,970

_______________________________
(1)
Represents share-based compensation for equity awards granted to employees, officers, and directors. Such awards are measured based on the grant-date fair value and recognized over the requisite service period of the individual awards, which generally equals the vesting period.
(2)
Represents share-based compensation for stock options and warrants awarded to advisors and to financial institutions based on the fair value of the awards at each reporting period.
(3)
Represents other items that are adjustable in accordance with our Credit Agreement to arrive at Credit Agreement EBITDA including employee severance costs, employee signing costs, employee retention or completion bonuses, and other non-recurring costs.

16


Our Credit Agreement prohibits us from paying dividends and distributions or repurchasing our capital stock except for limited purposes. In addition, our financial covenant requirements include a total leverage ratio test and an interest coverage ratio test. Under our total leverage ratio test, we covenant not to allow the ratio of our consolidated total debt (as defined) to Credit Agreement EBITDA reflecting financial covenants in our Credit Agreement to exceed certain prescribed levels set forth in the Credit Agreement. Under our interest coverage ratio test, we covenant not to allow the ratio of our Credit Agreement EBITDA to our consolidated interest expense (as defined in the Credit Agreement) to be less than certain prescribed levels set forth in the Credit Agreement. Each of our financial ratios is measured at the end of each fiscal quarter.
As of June 30, 2016 we were in compliance with all of our covenant requirements. Our covenant requirements and actual ratios were as follows:
Financial Ratio
Covenant Requirement
 
Actual
Ratio
Leverage Test (Maximum)
5.0
 
3.7

Interest Coverage (Minimum)
3.0
 
6.9

Off-Balance Sheet Arrangements
We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet the needs of our advisors’ clients. These arrangements include firm commitments to extend credit. For information on these arrangements, see Note 8 . Commitments and Contingencies and Note 15 . Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk , within the notes to the unaudited condensed consolidated financial statements.
Contractual Obligations
We are involved in a build-to-suit lease arrangement in Fort Mill, South Carolina, under which we serve as the construction agent on behalf of the landlord. Under such arrangement, we have obligations to fund cost over-runs in our capacity as the construction agent, and accordingly have determined that under lease accounting standards we bear substantially all of the risks and rewards of ownership as measured under GAAP. We are therefore required to report the landlord's costs of construction on our balance sheet as a fixed asset during the construction period as if we owned such asset. As of June 30, 2016 , we have recorded $91.6 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. See Note 2 . Summary of Significant Accounting Policies within the notes to the unaudited condensed consolidated financial statements for further detail as well as Risks Related to Our Business Generally section within Part I, "Item 1A. Risk Factors" in our 2015 Annual Report on Form 10-K for more information about the risks associated with this real estate development project.
During the six months ended June 30, 2016  there have been no material changes in our contractual obligations, other than in the ordinary course of business or as noted above, from those disclosed in our 2015 Annual Report on Form 10-K. See Note 7 . Debt and Note 8 . Commitments and Contingencies , within the notes to the unaudited condensed consolidated financial statements, as well as the Contractual Obligations section within Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2015 Annual Report on Form 10-K, for further detail on operating lease obligations and obligations under noncancelable service contracts.
Fair Value of Financial Instruments
We use fair value measurements to record certain financial assets and liabilities at fair value and to determine fair value disclosures. See Note 3 . Fair Value Measurements, within the notes to the unaudited condensed consolidated financial statements for a detailed discussion regarding our fair value measurements.
Critical Accounting Policies and Estimates
In the notes to our consolidated financial statements and in “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2015 Annual Report on Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of operations and financial condition. There have been no material changes to those policies that we consider to be significant since the filing of our 2015 Annual Report on Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to GAAP.

17


Recently Issued Accounting Pronouncements
Refer to Note 2 . Summary of Significant Accounting Policies , within the notes to the unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to us.

18



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,
 
 
2016
 
2015
 
2016
 
2015
REVENUES
 
 
 
 
 
 
 
 
Commission
 
$
445,755

 
$
509,689

 
$
882,482

 
$
1,033,088

Advisory
 
322,955

 
344,884

 
642,387

 
686,996

Asset-based
 
137,797

 
125,072

 
274,048

 
245,704

Transaction and fee
 
101,824

 
97,811

 
204,514

 
199,506

Interest income, net of interest expense
 
5,238

 
5,177

 
10,568

 
9,755

Other
 
5,612

 
8,028

 
10,487

 
24,914

Total net revenues
 
1,019,181

 
1,090,661

 
2,024,486

 
2,199,963

EXPENSES
 
 
 
 
 
 
 
 

Commission and advisory
 
660,680

 
736,854

 
1,296,691

 
1,478,101

Compensation and benefits
 
105,773

 
112,337

 
219,828

 
224,617

Promotional
 
34,717

 
26,684

 
70,401

 
62,376

Depreciation and amortization
 
18,749

 
17,196

 
37,711

 
33,625

Amortization of intangible assets
 
9,509

 
9,536

 
19,034

 
19,173

Occupancy and equipment
 
21,980

 
21,315

 
43,817

 
42,197

Professional services
 
14,984

 
14,529

 
32,139

 
28,573

Brokerage, clearing, and exchange
 
13,609

 
13,536

 
27,198

 
26,277

Communications and data processing
 
10,971

 
11,107

 
21,468

 
22,721

Restructuring charges
 

 
4,492

 

 
8,416

Other
 
24,656

 
25,822

 
44,156

 
57,944

Total operating expenses

915,628

 
993,408

 
1,812,443

 
2,004,020

Non-operating interest expense
 
23,804


13,163

 
47,694


27,178

INCOME BEFORE PROVISION FOR INCOME TAXES
 
79,749

 
84,090

 
164,349

 
168,765

PROVISION FOR INCOME TAXES
 
31,900


33,848

 
66,108


67,845

NET INCOME
 
$
47,849

 
$
50,242

 
$
98,241

 
$
100,920

EARNINGS PER SHARE (NOTE 11)
 
 
 
 
 
 
 
 

Earnings per share, basic
 
$
0.54

 
$
0.52

 
$
1.10

 
$
1.05

Earnings per share, diluted
 
$
0.53

 
$
0.52

 
$
1.10

 
$
1.03

Weighted-average shares outstanding, basic
 
89,019

 
95,724

 
88,992

 
96,136

Weighted-average shares outstanding, diluted
 
89,699

 
97,239

 
89,669

 
97,715

See notes to unaudited condensed consolidated financial statements.

19

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,
 
 
2016
 
2015
 
2016
 
2015
NET INCOME
 
$
47,849

 
$
50,242

 
$
98,241

 
$
100,920

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Unrealized gain (loss) on cash flow hedges, net of tax expense (benefit) of ($48), ($93), $48, and $194 for the three and six months ended June 30, 2016 and 2015, respectively
 
(76
)
 
(175
)
 
74

 
277

Reclassification adjustment for realized gain on cash flow hedges included in professional services in the condensed consolidated statements of income, net of tax expense of $93, $143, $156, and $228 for the three and six months ended June 30, 2016 and 2015, respectively
 
(148
)
 
(228
)
 
(248
)
 
(363
)
Total other comprehensive loss, net of tax
 
(224
)
 
(403
)
 
(174
)
 
(86
)
TOTAL COMPREHENSIVE INCOME
 
$
47,625

 
$
49,839

 
$
98,067

 
$
100,834


See notes to unaudited condensed consolidated financial statements.


20

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Unaudited)
(In thousands, except share data)

 
 
June 30,
2016
 
December 31, 2015
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
745,766

 
$
724,529

Cash and securities segregated under federal and other regulations
 
647,379

 
671,339

Restricted cash
 
34,799

 
27,839

Receivables from:
 
 
 
 
Clients, net of allowance of $1,630 at June 30, 2016 and $1,464 at December 31, 2015
 
306,937

 
339,089

Product sponsors, broker-dealers, and clearing organizations
 
199,350

 
161,224

Advisor loans, net of allowance of $697 at June 30, 2016 and $697 at December 31, 2015
 
167,774

 
148,978

Others, net of allowance of $12,241 at June 30, 2016 and $9,856 at December 31, 2015
 
183,787

 
180,161

Securities owned:
 
 
 
 
Trading — at fair value
 
10,986

 
11,995

Held-to-maturity — at amortized cost
 
10,866

 
9,847

Securities borrowed
 
14,143

 
6,001

Fixed assets, net of accumulated depreciation and amortization of $365,049 at June 30, 2016 and $328,880 at December 31, 2015
 
330,204

 
275,419

Goodwill
 
1,365,838

 
1,365,838

Intangible assets, net of accumulated amortization of $361,773 at June 30, 2016 and $342,740 at December 31, 2015
 
372,997

 
392,031

Other assets
 
217,158

 
206,771

Total assets
 
$
4,607,984

 
$
4,521,061

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Drafts payable
 
$
157,518

 
$
189,083

Payables to clients
 
768,886

 
747,421

Payables to broker-dealers and clearing organizations
 
59,181

 
48,032

Accrued commission and advisory expenses payable
 
125,943

 
129,512

Accounts payable and accrued liabilities
 
345,422

 
332,492

Income taxes payable
 
8,874

 
8,680

Unearned revenue
 
78,549

 
65,480

Securities sold, but not yet purchased — at fair value
 
131

 
268

Senior secured credit facilities, net of unamortized debt issuance cost of $24,355 at June 30, 2016 and $26,797 at December 31, 2015
 
2,181,843

 
2,188,240

Leasehold financing obligation
 
91,585

 
59,940

Deferred income taxes, net
 
36,062

 
36,303

Total liabilities
 
3,853,994

 
3,805,451

Commitments and contingencies (Note 8)
 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 

 
 

Common stock, $.001 par value; 600,000,000 shares authorized; 119,726,825 shares issued at June 30, 2016 and 119,572,352 shares issued at December 31, 2015
 
120

 
119

Additional paid-in capital
 
1,427,941

 
1,418,298

Treasury stock, at cost — 30,655,778 shares at June 30, 2016 and 30,048,027 shares at December 31, 2015
 
(1,195,949
)
 
(1,172,490
)
Accumulated other comprehensive income
 
379

 
553

Retained earnings
 
521,499

 
469,130

Total stockholders’ equity
 
753,990

 
715,610

Total liabilities and stockholders’ equity
 
$
4,607,984

 
$
4,521,061

See notes to unaudited condensed consolidated financial statements.

21

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, 2014
118,235

 
$
118

 
$
1,355,085

 
21,090

 
$
(780,661
)
 
$
937

 
$
396,121

 
$
971,600

Net income and other comprehensive income (loss), 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 (tax deficiency) 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

BALANCE — December 31, 2015
119,572

 
$
119

 
$
1,418,298

 
30,048

 
$
(1,172,490
)
 
$
553

 
$
469,130

 
$
715,610

Net income and other comprehensive income (loss), net of tax expense
 
 
 
 
 
 
 
 
 
 
(174
)
 
98,241

 
98,067

Issuance of common stock to settle restricted stock units, net
119

 
1

 


 
42

 
(883
)
 
 
 
 
 
(882
)
Treasury stock purchases
 
 
 
 
 
 
635

 
(25,013
)
 
 
 
 
 
(25,013
)
Cash dividends on common stock
 
 
 
 
 
 
 
 
 
 
 
 
(44,504
)
 
(44,504
)
Stock option exercises and other
36

 


 
876

 
(69
)
 
2,437

 
 
 
(1,368
)
 
1,945

Share-based compensation


 
 
 
10,117

 
 
 
 
 
 
 
 
 
10,117

Excess tax benefits (tax deficiency) from share-based compensation
 
 
 
 
(1,350
)
 
 
 
 
 
 
 
 
 
(1,350
)
BALANCE — June 30, 2016
119,727

 
$
120

 
$
1,427,941

 
30,656

 
$
(1,195,949
)
 
$
379

 
$
521,499

 
$
753,990

See notes to unaudited condensed consolidated financial statements.

22


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

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

 
 
Six Months Ended June 30,
 
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
98,241

 
$
100,920

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Noncash items:
 
 
 
 
Depreciation and amortization
 
37,711

 
33,625

Amortization of intangible assets
 
19,034

 
19,173

Amortization of debt issuance costs
 
2,881

 
1,466

Share-based compensation
 
10,117

 
15,850

Excess tax benefits related to share-based compensation
 
(10
)
 
(1,855
)
Provision for bad debts
 
2,162

 
1,269

Deferred income tax provision
 
(133
)
 
(1,157
)
Loan forgiveness
 
21,464

 
17,904

Other
 
(2,304
)
 
650

Changes in operating assets and liabilities:
 
 
 
 
Cash and securities segregated under federal and other regulations
 
23,960

 
169,055

Deposit of restricted cash related to captive insurance subsidiary
 
(10,625
)
 
(26,820
)
Release of restricted cash related to captive insurance subsidiary
 
2,220

 
144

Receivables from clients
 
31,987

 
33,360

Receivables from product sponsors, broker-dealers, and clearing organizations
 
(38,126
)
 
13,437

Advisor loans
 
(40,260
)
 
(34,910
)
Receivables from others
 
(6,011
)
 
(8,025
)
Securities owned
 
1,464

 
1,240

Securities borrowed
 
(8,142
)
 
(568
)
Other assets
 
(11,377
)
 
(16,404
)
Drafts payable
 
(31,565
)
 
(46,520
)
Payables to clients
 
21,464

 
(34,951
)
Payables to broker-dealers and clearing organizations
 
11,149

 
(6,475
)
Accrued commission and advisory expenses payable
 
(3,569
)
 
(12,140
)
Accounts payable and accrued liabilities
 
9,769

 
20,236

Income taxes receivable/payable
 
204

 
(7,416
)
Unearned revenue
 
13,069

 
18,509

Securities sold, but not yet purchased
 
(137
)
 
1,433

Net cash provided by operating activities
 
$
154,637

 
$
251,030

 
 
 
 
 
Continued on following page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

23

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
(In thousands)

 
 
Six Months Ended June 30,
 
 
2016
 
2015
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Capital expenditures
 
$
(56,542
)
 
$
(31,876
)
Purchase of securities classified as held-to-maturity
 
(4,020
)
 
(1,506
)
Proceeds from maturity of securities classified as held-to-maturity
 
3,000

 
1,500

Release of restricted cash
 
1,444

 
609

Net cash used in investing activities
 
(56,118
)
 
(31,273
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from revolving credit facility
 

 
363,000

Repayments of revolving credit facility
 

 
(298,000
)
Repayment of senior secured term loans
 
(8,838
)
 
(5,420
)
Tax payments related to settlement of restricted stock units
 
(882
)
 
(1,848
)
Repurchase of common stock
 
(25,013
)
 
(115,824
)
Dividends on common stock
 
(44,504
)
 
(48,274
)
Excess tax benefits related to share-based compensation
 
10

 
1,855

Proceeds from stock option exercises and other
 
1,945

 
19,742

Net cash used in financing activities
 
(77,282
)