Edgar Filing: LPL Financial Holdings Inc.

LPLA 2015.03.31 10-Q

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 March 31, 2015



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 April 27, 2015 was 96,103,531.

TABLE OF CONTENTS



Item Number	Page

PART I — FINANCIAL INFORMATION

1. Financial Statements (unaudited)

Condensed Consolidated Statements of Income (unaudited)	1

Condensed Consolidated Statements of Comprehensive Income (unaudited)	2

Condensed Consolidated Statements of Financial Condition (unaudited)	3

Condensed Consolidated Statements of Stockholders’ Equity (unaudited)	4

Condensed Consolidated Statements of Cash Flows (unaudited)	5

Notes to Condensed Consolidated Financial Statements (unaudited)	7

2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

3. Quantitative and Qualitative Disclosures About Market Risk	35

4. Controls and Procedures	39

PART II — OTHER INFORMATION	40

1. Legal Proceedings	40

1A. Risk Factors	40

2. Unregistered Sales of Equity Securities and Use of Proceeds	40

3. Defaults Upon Senior Securities	41

4. Mine Safety Disclosures	41

5. Other Information	41

6. Exhibits	42

SIGNATURES	43

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly, and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (“Exchange Act”), with the Securities and Exchange Commission (“SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public from the SEC’s internet site at http://www.sec.gov.

On our internet site, http://www.lpl.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual reports on Form 10-K, our proxy statements, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Hard copies of all such filings are available free of charge by request via email (investor.relations@lpl.com), telephone (617) 897-4574, or mail (LPL Financial Investor Relations at 75 State Street, 24th Floor, Boston, MA 02109). The information contained or incorporated on our website is not a part of this Quarterly Report on Form 10-Q.

When we use the terms “LPLFH,” “we,” “us,” “our” and the “Company,” we mean LPL Financial Holdings Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements in Item 2 - “Management's Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report on Form 10-Q regarding the Company's future financial and operating results, growth, business strategies, plans, liquidity, future share repurchases, and future dividends, including statements regarding 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 April 30, 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; the Company's success in integrating the operations of acquired businesses; execution of the Company's plans related to its Service Value Commitment initiative or restructuring initiatives, including the Company's ability to successfully transform and transition business processes to third-party service providers; the Company's success in negotiating and developing commercial arrangements with third-party service providers that will enable the Company to realize the service improvements and efficiencies expected to result from its Service Value Commitment initiative or restructuring initiatives; the performance of third-party service providers to which business processes are transitioned from the Company; the Company's ability to control operating risks, information technology systems risks, cybersecurity risks, and sourcing risks; and the other factors set forth in Part I, “Item 1A. Risk Factors” in the Company's 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 e

stimates 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.

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 March 31,
	2015		2014
REVENUES:
Commission	$	523,399	$	534,574
Advisory	342,112		327,253
Asset-based	120,632		114,674
Transaction and fee	101,695		89,985
Interest income, net of interest expense	4,578		4,761
Other	16,886		16,184
Total net revenues	1,109,302		1,087,431
EXPENSES:
Commission and advisory	741,247		744,543
Compensation and benefits	112,280		106,348
Promotional	35,692		27,183
Depreciation and amortization	26,066		22,281
Occupancy and equipment	20,882		22,081
Professional services	14,044		14,313
Brokerage, clearing and exchange	12,741		12,175
Communications and data processing	11,614		10,659
Restructuring charges	3,924		7,320
Other	32,122		20,141
Total operating expenses	1,010,612		987,044
Non-operating interest expense	14,015		12,840
Total expenses	1,024,627		999,884
INCOME BEFORE PROVISION FOR INCOME TAXES	84,675		87,547
PROVISION FOR INCOME TAXES	33,997		34,412
NET INCOME	$	50,678	$	53,135
EARNINGS PER SHARE (NOTE 12)
Earnings per share, basic	$	0.52	$	0.52
Earnings per share, diluted	$	0.52	$	0.51
Weighted-average shares outstanding, basic	96,551		101,279
Weighted-average shares outstanding, diluted	98,227		103,339

See notes to unaudited condensed consolidated financial statements.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)



	Three Months Ended March 31,
	2015			2014
NET INCOME	$	50,678		$	53,135
Other comprehensive income, net of tax:
Unrealized gain on cash flow hedges, net of tax expense of $287 and $675 for the three months ended March 31, 2015 and 2014, respectively	452			1,062
Reclassification adjustment for realized gain on cash flow hedges included in net income, net of tax expense of $85 and $0 for the three months ended March 31, 2015 and 2014, respectively	(135		)	—
Total other comprehensive income, net of tax	317			1,062
TOTAL COMPREHENSIVE INCOME	$	50,995		$	54,197

See notes to unaudited condensed consolidated financial statements.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

(Unaudited)

(Dollars in thousands, except par value)



	March 31, 2015			December 31, 2014
ASSETS
Cash and cash equivalents	$	484,694		$	412,332
Cash and securities segregated under federal and other regulations	516,350			568,930
Restricted cash	16,960			1,109
Receivables from:
Clients, net of allowance of $1,258 at March 31, 2015 and $1,245 at December 31, 2014	324,458			365,390
Product sponsors, broker-dealers and clearing organizations	172,713			177,470
Others, net of allowance of $9,520 at March 31, 2015 and $8,379 at December 31, 2014	318,199			291,449
Securities owned:
Trading — at fair value	16,290			13,466
Held-to-maturity	9,350			8,594
Securities borrowed	7,893			5,035
Income taxes receivable	—			84
Fixed assets, net of accumulated depreciation and amortization of $288,538 at March 31, 2015 and $288,834 at December 31, 2014	209,194			214,154
Debt issuance costs, net of accumulated amortization of $12,457 at March 31, 2015 and $11,724 at December 31, 2014	12,508			13,241
Goodwill	1,365,838			1,365,838
Intangible assets, net of accumulated amortization of $314,137 at March 31, 2015 and $305,154 at December 31, 2014	420,633			430,704
Other assets	183,639			183,197
Total assets	$	4,058,719		$	4,050,993
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Drafts payable	$	170,212		$	180,099
Payables to clients	629,936			652,714
Payables to broker-dealers and clearing organizations	44,658			45,427
Accrued commission and advisory expenses payable	131,329			146,504
Accounts payable and accrued liabilities	291,248			289,426
Income taxes payable	25,308			—
Unearned revenue	80,262			64,482
Securities sold, but not yet purchased — at fair value	77			302
Senior secured credit facilities	1,641,548			1,634,258
Deferred income taxes, net	64,583			66,181
Total liabilities	3,079,161			3,079,393
Commitments and contingencies
STOCKHOLDERS’ EQUITY:
Common stock, $.001 par value; 600,000,000 shares authorized; 118,490,826 shares issued at March 31, 2015 and 118,234,552 shares issued at December 31, 2014	118			118
Additional paid-in capital	1,367,426			1,355,085
Treasury stock, at cost — 21,792,887 shares at March 31, 2015 and 21,089,882 shares at December 31, 2014	(811,895		)	(780,661		)
Accumulated other comprehensive income	1,254			937
Retained earnings	422,655			396,121
Total stockholders’ equity	979,558			971,600
Total liabilities and stockholders’ equity	$	4,058,719		$	4,050,993

See notes to unaudited condensed consolidated financial statements.

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											1,062		53,135			54,197
Issuance of common stock to settle restricted stock units, net	34	1				11		(585		)						(584		)
Treasury stock purchases						1,923		(100,000		)						(100,000		)
Cash dividends on common stock													(24,097		)	(24,097		)
Stock option exercises and other	545			13,747		(9	)	316					(3		)	14,060
Share-based compensation				8,287												8,287
Excess tax benefits from share-based compensation				4,415												4,415
BALANCE — March 31, 2014	117,691	$	118	$	1,318,823	17,141		$	(606,474	)	$	1,177	$	342,605		$	1,056,249

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											317		50,678			50,995
Issuance of common stock to settle restricted stock units, net	110					38		(1,752		)						(1,752		)
Treasury stock purchases						680		(30,014		)						(30,014		)
Cash dividends on common stock													(24,156		)	(24,156		)
Stock option exercises and other	146			4,176		(15	)	532					12			4,720
Share-based compensation				7,193												7,193
Excess tax benefits from share-based compensation				972												972
BALANCE — March 31, 2015	118,491	$	118	$	1,367,426	21,793		$	(811,895	)	$	1,254	$	422,655		$	979,558

See notes to unaudited condensed consolidated financial statements.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)



	Three Months Ended March 31,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	50,678		$	53,135
Adjustments to reconcile net income to net cash provided by operating activities:
Noncash items:
Depreciation and amortization	26,066			22,281
Amortization of debt issuance costs	733			1,080
Share-based compensation	7,193			8,287
Excess tax benefits related to share-based compensation	(1,156		)	(4,444		)
Provision for bad debts	469			330
Deferred income tax provision	(1,800		)	—
Loan forgiveness	8,529			6,436
Other	4,761			175
Changes in operating assets and liabilities:
Cash and securities segregated under federal and other regulations	52,580			51,039
Receivables from clients	40,919			33,289
Receivables from product sponsors, broker-dealers and clearing organizations	4,757			27,950
Receivables from others	(35,723		)	(19,356		)
Securities owned	(2,875		)	(3,593		)
Securities borrowed	(2,858		)	(1,162		)
Other assets	(3,599		)	(27,431		)
Drafts payable	(9,887		)	(14,323		)
Payables to clients	(22,778		)	(555		)
Payables to broker-dealers and clearing organizations	(769		)	(12,533		)
Accrued commission and advisory expenses payable	(15,175		)	(9,909		)
Accounts payable and accrued liabilities	3,475			(55,701		)
Income taxes receivable/payable	26,548			24,889
Unearned revenue	15,780			5,578
Securities sold, but not yet purchased	(225		)	325
Net cash provided by operating activities	$	145,643		$	85,787

Continued on following page

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows - Continued

(Unaudited)

(In thousands)



	Three Months Ended March 31,
	2015			2014
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	$	(13,918	)	$	(23,012	)
Proceeds from disposal of fixed assets	—			1,000
Purchase of securities classified as held-to-maturity	(1,506		)	—
Proceeds from maturity of securities classified as held-to-maturity	750			2,000
Deposits of restricted cash	(15,908		)	—
Release of restricted cash	57			132
Net cash used in investing activities	(30,525		)	(19,880		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving credit facility	10,000			—
Repayment of senior secured credit facilities	(2,710		)	(2,709		)
Payment of contingent consideration	—			(3,300		)
Tax payments related to settlement of restricted stock units	(1,752		)	(584		)
Repurchase of common stock	(30,014		)	(100,000		)
Dividends on common stock	(24,156		)	(24,097		)
Excess tax benefits related to share-based compensation	1,156			4,444
Proceeds from stock option exercises and other	4,720			14,060
Net cash used in financing activities	(42,756		)	(112,186		)
NET INCREASE (DECREASE) CASH AND CASH EQUIVALENTS	72,362			(46,279		)
CASH AND CASH EQUIVALENTS — Beginning of period	412,332			516,584
CASH AND CASH EQUIVALENTS — End of period	$	484,694		$	470,305
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	8,175		$	13,047
Income taxes paid	$	9,449		$	9,531
NONCASH DISCLOSURES:
Capital expenditures included in accounts payable and accrued liabilities	$	6,535		$	9,526
Fixed assets acquired under build-to-suit lease	$	—		$	8,114

See notes to unaudited condensed consolidated financial statements.

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 three 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 company.

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 March 31, 2015, the carrying amount and fair value of the Company’s indebtedness was approximately $1,641.5 million and $1,644.8 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.

Recently Issued Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03, Interest—Imputation of Interest, which simplifies the presentation of debt issuance costs on the balance sheet by presenting debt issuance costs as a direct deduction from the carrying amount of the related debt liability. ASU 2015-03 will become effective for the Company beginning January 1, 2016 and early adoption is permitted. The Company does not anticipate the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements.

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 Company estimates total charges in connection with the Program will approach $68.0 million. These expenditures are comprised of outsourcing and other related costs, technology transformation costs, employee severance obligations and other related costs, as well as non-cash charges for impairment of certain fixed assets related to internally developed software.

The following table summarizes the balance of accrued expenses and the changes in the accrued amounts for the Program as of and for the three months ended March 31, 2015 (in thousands):



	Accrued Balance at December 31, 2014		Costs Incurred		Payments			Accrued Balance at March 31, 2015		Cumulative Costs Incurred to Date		Total Expected Restructuring Costs
Outsourcing and other related costs	$	—	$	755	$	(755	)	$	—	$	22,243	$	23,500
Technology transformation costs	4,458		117		(4,305		)	270		30,035		30,300
Employee severance obligations and other related costs	1,999		1,100		(147		)	2,952		9,985		13,400
Asset impairments	—		—		—			—		842		842
Total	$	6,457	$	1,972	$	(5,207	)	$	3,222	$	63,105	$	68,042

On February 24, 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.

In connection with this restructuring, the Company estimates total charges in connection with this restructuring will approach $9.0 million. These expenditures are comprised of employee severance obligations and other related costs, relocation and related costs, lease restructuring charges, as well as non-cash charges for impairment of certain intangible assets.

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 Program as of and for the three months ended March 31, 2015 (in thousands):



	Costs Incurred		Payments			Non-cash			Accrued Balance at March 31, 2015		Cumulative Costs Incurred to Date		Total Expected Restructuring Costs
Employee severance obligations and other related costs	$	965	$	(69	)	$	—		$	896	$	965	$	4,500
Relocation and related costs	278		—			—			278		278		2,000
Lease restructuring charges	—		—			—			—		—		1,300
Asset impairments	433		—			(433		)	—		433		1,200
Total	$	1,676	$	(69	)	$	(433	)	$	1,174	$	1,676	$	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 three months ended March 31, 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 March 31, 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 March 31, 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 using quoted prices for

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 March 31, 2015 (in thousands):



	Level 1		Level 2		Level 3		Total
At March 31, 2015:
Assets
Cash equivalents	$	13,463	$	—	$	—	$	13,463
Securities owned — trading:
Money market funds	262		—		—		262
Mutual funds	7,231		—		—		7,231
Equity securities	167		—		—		167
Debt securities	—		13		—		13
U.S. treasury obligations	8,617		—		—		8,617
Total securities owned — trading	16,277		13		—		16,290
Other assets	91,593		5,711		—		97,304
Total assets at fair value	$	121,333	$	5,724	$	—	$	127,057
Liabilities
Securities sold, but not yet purchased:
Equity securities	$	55	$	—	$	—	$	55
Debt securities	—		22		—		22
Total securities sold, but not yet purchased	55		22		—		77
Accounts payable and accrued liabilities	—		—		527		527
Total liabilities at fair value	$	55	$	22	$	527	$	604

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
At December 31, 2014:
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):



	March 31, 2015		December 31, 2014
Amortized cost	$	9,350	$	8,594
Gross unrealized gain (loss)	13		(14		)
Fair value	$	9,363	$	8,580

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

At March 31, 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	$	4,100	$	4,750	$	500	$	9,350
U.S. government notes — at fair value	$	4,102	$	4,753	$	508	$	9,363

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 that will be reclassified out of accumulated other comprehensive income and recognized in net income ratably over a 12-month period ending May 31, 2015 to match the timing of the underlying hedged item.

The details related to the remaining non-deliverable foreign currency contracts at March 31, 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 #2	6/2/2015	560.4	69.35	$	8.1
Cash flow hedge #3	6/2/2016	560.4	72.21	7.8
Cash flow hedge #4	6/2/2017	560.4	74.20	7.5
Total hedged amount				$	23.4

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):



	March 31, 2015		December 31, 2014
Cash flow hedges	$	1,916	$	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.

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., 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):



		March 31, 2015				December 31, 2014
Senior Secured Credit Facilities	Maturity	Balance		Interest Rate		Balance		Interest Rate
Revolving Credit Facility	9/30/2019	$	120,000	4.15	%	$	110,000	4.75	%
Senior secured term loans:
Term Loan A	9/30/2019	459,375		2.68	%	459,375		2.67	%
Term Loan B	3/29/2019	1,062,173		3.25	%	1,064,883		3.25	%
Total borrowings		1,641,548				1,634,258
Less current portion		130,839				120,839
Long-term borrowings — net of current portion		$	1,510,709			$	1,513,419

As of March 31, 2015, the Company also had $21.5 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 March 31, 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 $200.0 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 March 31, 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 $8.8 million for the three months ended March 31, 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 arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, the

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 March 31, 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 March 31, 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 March 31, 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 potential liabilities, including 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 March 31, 2015, these self-insurance liabilities are included in accounts payable and accrued liabilities in the condensed consolidated balance sheet. Self-insurance related charges are included in other expenses in the condensed consolidated statement of income for the three months ended March 31, 2015.

Other Commitments

As of March 31, 2015, the Company had received collateral primarily in connection with client margin loans with a market value of approximately $349.8 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

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

to secure client obligations related to options positions. As of March 31, 2015 there were no restrictions that materially limited the Company's ability to re-pledge, loan, or sell the remaining $318.4 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 March 31, 2015 and December 31, 2014, respectively.

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.

On February 18, 2015, the Board of Directors declared a cash dividend of $0.25 per share on the Company's outstanding common stock. The dividend of $24.2 million in the aggregate was paid on March 16, 2015 to all stockholders of record as of March 2, 2015.

On February 10, 2014, the Board of Directors declared a cash dividend of $0.24 per share on the Company's outstanding common stock. The dividend of $24.1 million in the aggregate was paid on March 10, 2014 to all stockholders of record as of February 24, 2014.

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 March 31, 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 March 31,
					2015					2014
Approval Date	Authorized Repurchase Amount		Amount Remaining at March 31, 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	—		—	—		—		616,788	52.00		32.1
October 1, 2014	$	150.0	62.9		679,772	44.15		30.0		—	—		—
			$	62.9	679,772	$	44.15	$	30.0	1,923,076	$	52.00	$	100.0

_________________________


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

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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 tenth 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 (the “2010 Plan”), which provides for the granting of stock options, warrants, restricted stock awards, restricted stock units, and other equity-based compensation. The 2010 Plan serves as the successor to the 2005 Stock Option Plan for Incentive Stock Options, the 2005 Stock Option Plan for Non-qualified Stock Options, the 2008 Advisor and Institution Incentive Plan, the 2008 Stock Option Plan and the Director Restricted Stock Plan (collectively, the “Predecessor Plans”). Upon adoption of the 2010 Plan, awards were no longer made under the Predecessor Plans; however, awards previously granted under the Predecessor Plans remain outstanding until exercised or forfeited.

There are 12,055,945 shares authorized for grant under the 2010 Plan. As of March 31, 2015, there were 5,241,049 shares reserved for issuance upon exercise or conversion of outstanding awards granted under the 2010 Plan.

Stock Options and Warrants

The following table presents the weighted-average assumptions used in the Black-Scholes valuation model by the Company in calculating the fair value of its employee, officer, and director stock options that have been granted during the three months ended March 31, 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	$	8.82

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 three months ended March 31, 2015:



Expected life (in years)	6.74
Expected stock price volatility	25.69		%
Expected dividend yield	2.27		%
Risk-free interest rate	1.69		%
Fair value of options	$	14.53

The following table summarizes the Company’s stock option and warrant activity for the three months ended March 31, 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	1,100,197		45.55
Exercised	(146,559	)	28.49
Forfeited	(179,731	)	37.65
Outstanding — March 31, 2015	7,061,317		$	33.68	6.70	$	71,898
Exercisable — March 31, 2015	4,101,683		$	29.24	5.45	$	59,952

The following table summarizes information about outstanding stock options and warrants at March 31, 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
$2.38	17,382	$	2.38	0.17	17,382	$	2.38
$15.84 - $23.02	1,255,407	21.41		4.20	1,255,407	21.41
$23.41 - $30.00	1,517,035	28.11		5.51	1,015,575	27.80
$31.60 - $32.33	1,431,890	31.89		7.40	773,151	31.93
$34.01 - $39.60	1,111,875	34.59		5.91	831,396	34.48
$45.55 - $54.81	1,727,728	48.70		9.58	208,772	54.81
	7,061,317	$	33.68	6.70	4,101,683	$	29.24

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 $4.1 million and $3.8 million during the three months ended March 31, 2015 and 2014, respectively, which is included in compensation and benefits expense on the unaudited condensed consolidated statements of income. As of March 31, 2015, total unrecognized compensation cost related to non-vested stock options granted to employees, officers, and directors was $24.1 million, which is expected to be recognized over a weighted-average period of 2.20 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 $0.6 million and $3.2 million during the three months ended March 31, 2015 and 2014, 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 March 31, 2015, total unrecognized compensation cost related to non-vested stock options and warrants granted to advisors and financial institutions was $6.4 million, which is expected to be recognized over a weighted-average period of 2.13 years.

Restricted Stock

The following summarizes the Company’s activity in its restricted stock awards and restricted stock units for the three months ended March 31, 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	—		—		180,121		43.50
Vested	(7,910	)	31.60		(109,715	)	38.99
Forfeited	—		—		(24,768	)	49.53
Nonvested at March 31, 2015	25,724		$	46.22	592,363		$	43.94

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 $2.0 million and $1.2 million of share-based compensation related to the vesting of these restricted stock awards and restricted stock units during the three months ended March 31, 2015 and 2014, respectively, which is included in compensation and benefits expense on the unaudited condensed consolidated statements of income. As of March 31, 2015, total unrecognized compensation cost for restricted stock awards and restricted stock units granted to employees, officers, and directors was $15.5 million, which is expected to be recognized over a weighted-average remaining period of 2.35 years.

In the second quarter of 2014, the Company began granting restricted stock units to its advisors and to financial institutions. The Company recognizes share-based compensation for restricted stock units granted to its advisors and to financial institutions based on the fair value of the awards at each reporting period. The Company recognized share-based compensation of $0.4 million related to the vesting of these restricted stock units during the three months ended March 31, 2015, which is classified within commission and advisory expense on the unaudited condensed consolidated statements of income. As of March 31, 2015, total unrecognized compensation cost for restricted stock units granted to advisors and financial institutions was $3.4 million, which is expected to be recognized over a weighted-average remaining period of 2.12 years.

12. Earnings Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if dilutive potential shares of common stock had been issued. The calculation of basic and diluted earnings per share for the three months ended March 31, 2015 and 2014 is as follows (in thousands, except per share data):



	Three Months Ended March 31,
	2015		2014
Net income	$	50,678	$	53,135

Basic weighted-average number of shares outstanding	96,551		101,279
Dilutive common share equivalents	1,676		2,060
Diluted weighted-average number of shares outstanding	98,227		103,339

Basic earnings per share	$	0.52	$	0.52
Diluted earnings per share	$	0.52	$	0.51

The computation of diluted earnings per share excludes stock options, warrants, and restricted stock units that are anti-dilutive. For the three months ended March 31, 2015 and 2014, stock options, warrants, and restricted stock units representing common share equivalents of 1,595,614 shares and 941,406 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 40.1% and 39.3% for the three months ended March 31, 2015 and 2014, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

14. Related Party Transactions

The Company has related party transactions with TPG Capital, one of the Company's significant stockholders, as well as certain portfolio companies of TPG Capital. During the three months ended March 31, 2015 and 2014 the Company recognized revenue for services provided to these portfolio companies of $0.3 million and $0.1 million, respectively. During the three months ended March 31, 2015 and 2014, the Company incurred expenses for services provided by TPG Capital or these portfolio companies of $1.2 million and $0.2 million, respectively. As of March 31, 2015 and 2014, receivables from related parties were $0.2 million and $0.1 million, respectively. As of March 31, 2015 and 2014, payables to related parties were $0.2 million and less than $0.1 million, respectively.

On February 12, 2014, the Company entered into a share repurchase agreement with an investment fund associated with TPG Capital, pursuant to which the Company repurchased 1.9 million shares of its common stock at a price of $52.00 per share, for total consideration of $100.0 million.

15. Net Capital and Regulatory Requirements

The Company operates in a highly regulated industry. Applicable laws and regulations restrict permissible activities and investments and require compliance with various financial and customer-related regulations. The 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 $153.0 million with a minimum net capital requirement of $6.5 million as of March 31, 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 March 31, 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 April 28, 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 May 21, 2015 to stockholders of record on May 11, 2015.

On April 28, 2015, the Company's Board of Directors approved an increase in the Company's share repurchase plan by $200.0 million.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

******

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 14,000 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 4,300 financial advisors who are affiliated and licensed with insurance companies that use our customized clearing, advisory platforms, and technology solutions.

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 leading financial products, all delivered in an environment unencumbered by conflicts from product manufacturing, underwriting, or market-making.

We are a leading financial services provider to independent advisors, RIAs, financial institutions, and retirement plan business. We are a market leader with the largest independent advisor base, and we believe we have the fourth-largest overall advisor base in the United States. Through our advisors, we are also one of the largest distributors of financial products and services in the United States.

Executive Summary

Asset Growth Trends

Net new advisory assets, which exclude the impact of market movement, were $5.2 billion for the three months ended March 31, 2015, primarily driven by strong advisor productivity and the continued addition of hybrid registered investment advisors ("Hybrid RIAs").

Assets under custody on our Hybrid RIA platform, which provides an integrated offering of technology, clearing, compliance, and custody services to Hybrid RIAs grew 50.6% to $104.8 billion as of March 31, 2015, representing 342 Hybrid RIA firms, compared to $69.6 billion and 265 Hybrid RIA firms as of March 31, 2014.

Gross Profit Growth

Key contributors to growth of our first quarter gross profit included a $38.3 billion increase in total advisory and brokerage assets since March 31, 2014, and 372 net new advisors added since March 31, 2014.

Gross profit is calculated as net revenues less production expenses. 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.

Cash Sweep Program Performance

Revenue generated from the Company's cash sweep programs declined 10.4% to $21.5 million in the first quarter of 2015 compared to $24.0 million in the prior year period. This decline was primarily driven by the insured cash account ("ICA") program fee decreasing by 13 basis points from the step-down in bank contracts, offset by 4 basis points of improvement in average effective federal funds rate and $1.0 billion increase in cash sweep balances.

Capital Management Activity

We spent $30.0 million in the first quarter of 2015 to buy back 0.7 million shares of our common stock, at an average price per share of $44.15. Since our initial public offering in 2010, we have spent $812.4 million to repurchase 21.8 million shares, at an average price per share of $37.22, through March 31, 2015.

Our Board of Directors declared a quarterly cash dividend of $0.25 per share of the Company's common stock, to be paid on May 21, 2015, to all shareholders of record as of May 11, 2015.

The Company’s Board of Directors also approved an additional $200.0 million of share repurchase capacity.

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 of over 25,000 financial products from a broad range of product manufacturers. 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. These asset balances, specifically related to advisory and asset-based revenues, have a correlation of approximately 60% to the fluctuations of the overall market, as measured by the S&P 500 index. 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.

The table below summarizes the sources of our revenue, the primary drivers of each revenue source, and the percentage of each revenue source that represents recurring revenue:



			Three Months Ended March 31, 2015
	Sources of Revenue	Primary Drivers	Total (millions)	% of Total Net Revenue	% Recurring
Advisor-driven revenue with ~85%-90% payout ratio	Commission	- Transactions - Brokerage asset levels	$523	47%	46%
Advisor-driven revenue with ~85%-90% payout ratio	Advisory	- Advisory asset levels	$342	31%	99%
Attachment revenue retained by us	Asset-Based - Cash Sweep Fees - Sponsorship Fees - Record Keeping	- Cash balances - Interest rates - Client asset levels - Number of accounts	$121	11%	98%
	Transaction and Fee - Transactions - Client (Investor) Accounts - Advisor Seat and Technology	- Client activity - Number of clients - Number of advisors - Number of accounts - Number of premium technology subscribers	$102	9%	62%
	Other	- Margin account balances - Alternative investment transactions	$21	2%	26%
	Total Net Revenue		$1,109	100%
	Total Recurring Revenue		$767	69%

How We Evaluate Our Business

We focus on several business and key financial metrics in evaluating the success of our business relationships and our resulting financial position and operating performance. Our business and key financial metrics are as follows:



	March 31,
	2015		2014		% Change
Business Metrics
Advisors(1)	14,098		13,726		2.7	%
Advisory and brokerage assets (in billions)(2)	$	485.4	$	447.1	8.6	%
Advisory assets under custody (in billions)(2)(3)	$	183.7	$	158.0	16.3	%
Net new advisory assets (in billions)(4)	$	5.2	$	4.4	18.2	%
Insured cash account balances (in billions)(2)	$	17.7	$	16.6	6.6	%
Money market account balances (in billions)(2)	$	6.9	$	7.1	(2.8	)%



	Three Months Ended March 31,
	2015			2014
Financial Metrics
Revenue growth from prior period	2.0		%	11.6		%
Recurring revenue as a % of net revenue	69.2		%	66.6		%
Net income (in millions)	$	50.7		$	53.1
Earnings per share (diluted)	$	0.52		$	0.51
Non-GAAP Measures:
Gross profit (in millions)(5)	$	355.3		$	330.7
Gross profit growth from prior period	7.4		%	8.4		%
Gross profit as a % of net revenue	32.0		%	30.4		%
Adjusted EBITDA (in millions)	$	135.1		$	141.5
Adjusted EBITDA as a % of net revenue	12.2		%	13.0		%
Adjusted EBITDA as a % of gross profit	38.0		%	42.8		%
Adjusted Earnings (in millions)	$	63.2		$	71.0
Adjusted Earnings per share (diluted)	$	0.64		$	0.69

________________________________


(1)	Advisors are defined as those independent financial advisors and financial advisors at financial institutions who are licensed to do business with the Company's broker-dealer subsidiary.

(2)

Advisory and brokerage assets are comprised of assets that are custodied, networked, and non-networked and reflect market movement in addition to new assets, inclusive of new business development and net of attrition. Set forth below are other client assets at March 31, 2015 and 2014, including retirement plan assets, and certain trust and high-net-worth assets, that are custodied with third-party providers and therefore excluded from advisory and brokerage assets (in billions):



	March 31,
	2015		2014
Retirement plan assets(a)	$	85.4	$	71.0
Trust assets(b)	$	2.5	$	11.2
High-net-worth assets(c)	$	94.3	$	74.9

_____________________________

(a)

Retirement plan assets are held in retirement plans that are supported by advisors licensed with LPL Financial. At March 31, 2015 and 2014, our retirement plan assets represent assets that are custodied with 37 third-party providers and 34 third-party providers, respectively, of retirement plan administrative services who provide reporting feeds. We estimate the total assets in retirement plans supported to be between $120.0 billion and $130.0 billion at March 31, 2015 and between $105.0 billion and $115.0 billion at March 31, 2014. 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 March 31, 2014, accounted for $0.6 billion of the $14.4 billion increase in retirement plan assets.


(b)	Represents trust assets that are on the wealth management platform of the Concord Trust and Wealth Solutions division of LPL Financial.


(c)	Represents high-net-worth assets that are on the platform of performance reporting, investment research, and practice management services of Fortigent.


(3)	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.


(4)	Represents net new advisory assets consisting of funds from new accounts and additional funds deposited into existing advisory accounts that are custodied in our fee-based advisory platforms.


(5)	Gross profit is calculated as net revenues less production expenses. 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.

Adjusted EBITDA

Adjusted EBITDA is defined as EBITDA (net income plus interest expense, income tax expense, depreciation, and amortization), further adjusted to exclude certain non-cash charges and other adjustments set forth below. We present Adjusted EBITDA because we consider it an important measure of our performance. Adjusted EBITDA is a useful financial metric in assessing our operating performance from period to period by excluding certain items that we believe are not representative of our core business, such as certain material non-cash items and other adjustments.

We believe that Adjusted EBITDA, viewed in addition to, and not in lieu of, our reported financial results under GAAP, provides useful information to investors regarding our performance and overall results of operations for the following reasons:


•	because non-cash equity grants made to employees, officers, and directors at a certain price and point in time do not necessarily reflect how our business is performing at any particular time, share-based compensation expense is not a key measure of our operating performance; and


•	because costs associated with acquisitions and the resulting integrations, debt refinancing, and restructuring and conversions costs can vary from period to period and transaction to transaction, expenses associated with these activities are not considered a key measure of our operating performance.

We use Adjusted EBITDA:


•	as a measure of operating performance;


•	for planning purposes, including the preparation of budgets and forecasts;


•	to allocate resources to enhance the financial performance of our business;


•	to evaluate the effectiveness of our business strategies;


•	in communications with our Board of Directors (the “Board”) concerning our financial performance; and


•	as a factor in determining employee and executive bonuses.

Adjusted EBITDA is a non-GAAP measure and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Adjusted EBITDA is not a measure of net income, operating income, or any other performance measure derived in accordance with GAAP.

Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:


•	Adjusted EBITDA does not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments;


•	Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs;


•	Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and


•	Adjusted EBITDA can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments, limiting its usefulness as a comparative measure.

Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in our business. We compensate for these limitations by relying primarily on the GAAP results and using Adjusted EBITDA as supplemental information.

Set forth below is a reconciliation from our net income to Adjusted EBITDA, a non-GAAP measure, for the three months ended March 31, 2015 and 2014 (in thousands):



	Three Months Ended March 31,
	2015		2014
Net income	$	50,678	$	53,135
Non-operating interest expense	14,015		12,840
Provision for income taxes	33,997		34,412
Amortization of intangible assets	9,637		9,716
Depreciation and amortization of fixed assets	16,429		12,565
EBITDA	124,756		122,668
EBITDA Adjustments:
Employee share-based compensation expense(1)	6,158		5,111
Acquisition and integration related expenses(2)	85		359
Restructuring and conversion costs(3)	3,888		7,271
Other(4)	206		6,068
Total EBITDA Adjustments	10,337		18,809
Adjusted EBITDA	$	135,093	$	141,477

__________________


(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 acquisition and integration costs resulting from various acquisitions, including changes in the estimated fair value of future payments, or contingent consideration, required to be made to former shareholders of certain acquired entities.


(3)	Represents organizational restructuring charges, conversion, and other related costs primarily resulting from the expansion of our Service Value Commitment initiative. Results for the three months ended March 31, 2015 also include charges related to the restructuring of the business of the Company's subsidiary, Fortigent Holdings Company, Inc.


(4)	Results for the three months ended March 31, 2014 include approximately $5.3 million in parallel rent, property tax, common area maintenance expenses, and fixed asset disposals incurred in connection with our relocation to our San Diego office building.

Adjusted Earnings and Adjusted Earnings per share

Adjusted Earnings represents net income before: (a) employee share-based compensation expense, (b) amortization of intangible assets, (c) acquisition and integration related expenses, (d) restructuring and conversion costs, (e) debt extinguishment costs, and (f) other. Reconciling items are tax effected using the income tax rates in effect for the applicable period, adjusted for any potentially non-deductible amounts.

Adjusted Earnings per share represents Adjusted Earnings divided by weighted-average outstanding shares on a fully diluted basis.

We prepared Adjusted Earnings and Adjusted Earnings per share to eliminate the effects of items that we do not consider indicative of our core operating performance.

We believe that Adjusted Earnings and Adjusted Earnings per share, viewed in addition to, and not in lieu of, our reported financial results under GAAP, provide useful information to investors regarding our performance and overall results of operations for the following reasons:


•	because non-cash equity grants made to employees, officers, and directors at a certain price and point in time do not necessarily reflect how our business is performing, the related share-based compensation expense is not a key measure of our current operating performance;


•	because costs associated with acquisitions and related integrations, debt refinancing, and restructuring and conversions can vary from period to period and transaction to transaction, expenses associated with these activities are not considered a key measure of our operating performance; and

•

because amortization expenses can vary substantially from company to company and from period to period depending upon each company’s financing and accounting methods, the fair value and average expected life of acquired intangible assets and the method by which assets were acquired, the amortization of intangible assets obtained in acquisitions is not considered a key measure in comparing our operating performance.

We use Adjusted Earnings for internal management reporting and evaluation purposes. We also believe Adjusted Earnings and Adjusted Earnings per share are useful to investors in evaluating our operating performance because securities analysts use them as supplemental measures to evaluate the overall performance of companies, and our investor and analyst presentations, which are generally available to investors through our website, include references to Adjusted Earnings and Adjusted Earnings per share.

Adjusted Earnings and Adjusted Earnings per share are not measures of our financial performance under GAAP and should not be considered as an alternative to net income or earnings per share or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our profitability or liquidity.

Although Adjusted Earnings and Adjusted Earnings per share are frequently used by securities analysts and others in their evaluation of companies, they have limitations as analytical tools, and you should not consider Adjusted Earnings and Adjusted Earnings per share in isolation, or as substitutes for an analysis of our results as reported under GAAP. In particular you should consider:


•	Adjusted Earnings and Adjusted Earnings per share do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;


•	Adjusted Earnings and Adjusted Earnings per share do not reflect changes in, or cash requirements for, our working capital needs; and


•	other companies in our industry may calculate Adjusted Earnings and Adjusted Earnings per share differently than we do, limiting their usefulness as comparative measures.

Management compensates for the inherent limitations associated with using Adjusted Earnings and Adjusted Earnings per share through disclosure of such limitations, presentation of our financial statements in accordance with GAAP, and reconciliation of Adjusted Earnings to the most directly comparable GAAP measure, net income.

The following table sets forth a reconciliation of net income to the non-GAAP measures Adjusted Earnings and Adjusted Earnings per share for the three months ended March 31, 2015 and 2014 (in thousands, except per share data):



	Three Months Ended March 31,
	2015		2014
Net income	$	50,678	$	53,135
After-Tax:
EBITDA Adjustments
Employee share-based compensation expense(1)	4,019		3,518
Acquisition and integration related expenses	52		220
Restructuring and conversion costs	2,387		4,464
Other	127		3,726
Total EBITDA Adjustments	6,585		11,928
Amortization of intangible assets	5,917		5,966
Adjusted Earnings	$	63,180	$	71,029
Adjusted Earnings per share(2)	$	0.64	$	0.69
Weighted-average shares outstanding — diluted	98,227		103,339

__________________

(1)

Generally, EBITDA Adjustments and amortization of intangible assets have been tax effected using a federal rate of 35.0% and the applicable effective state rate, which was 3.6%, net of the federal tax benefit, for the periods ended March 31, 2015 and 2014, except for the impact of incentive stock options granted to employees that qualify for preferential tax treatment and conversely for which we do not receive a tax deduction.


(2)	Represents Adjusted Earnings, a non-GAAP measure, divided by weighted-average number of shares outstanding on a fully diluted basis. Set forth below is a reconciliation of earnings per share on a fully diluted basis, as calculated in accordance with GAAP, to Adjusted Earnings per share:



	Three Months Ended March 31,
	2015		2014
Earnings per share — diluted	$	0.52	$	0.51
After-Tax:
EBITDA Adjustments per share	0.06		0.12
Amortization of intangible assets per share	0.06		0.06
Adjusted Earnings per share	$	0.64	$	0.69

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 regularly 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, the Company accrues for those losses based on an estimate of possible fines, customer restitution and/or losses related to the repurchase of sold securities and other losses, as applicable. The Company’s ability to estimate such costs may vary based on the current stage of evaluation and status of discussion with regulators, as applicable.

Our accruals at March 31, 2015 include estimated costs for significant 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. One of the matters relates to sales of certain securities over several years, and our accrual at March 31, 2015 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, 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 9. Commitments and Contingencies, to the condensed consolidated financial statements.

Our Service Value Commitment Initiative

The Program

Our Service Value Commitment initiative (the “Program”) is a multi-year effort to position us for sustainable long-term growth by improving the service experience of our advisors and delivering efficiencies in our operating model. We have assessed our information technology delivery, governance, organization and strategy, and committed to undertake a course of action to reposition our labor force and invest in technology, human capital, marketing, and other key areas to enable future growth.

As of March 31, 2015, we have incurred $63.1 million of costs related to outsourcing and other related costs, technology transformation costs, employee severance obligations, and other related costs, as well as non-cash charges for impairment of certain fixed assets related to internally developed software. The Program is expected to be completed in 2015, and we estimate total charges to be approximately $68.0 million, with expected annual pre-tax savings of approximately $32.0 million. See Note 3. Restructuring, within the notes to unaudited condensed consolidated financial statements for additional information regarding the Program.

Derivative Financial Instruments

In conjunction with the Program, 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 US 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 US 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.

Upon completion of the Program, we estimate annual costs for our long-term contractual obligation with the third-party provider to be approximately $10.0 million annually. We use derivative financial instruments consisting solely 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 6. Derivative Financial Instruments, within the notes to 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 three months ended March 31, 2015. See our 2014 Annual Report on Form 10-K for 2014 activity.

Economic Overview and Impact of Financial Market Events

Our business is directly and indirectly sensitive to several macroeconomic factors, primarily in the United States. One of these factors is the current and expected future level of short-term interest rates, particularly overnight rates. At its April policy meeting, the Federal Reserve’s policy making arm, the Federal Open Market Committee ("FOMC") reaffirmed its view that the current 0.0% to 0.25% target range for the federal funds rate remains appropriate. The FOMC stated that it expects the economy to grow at a moderate pace, labor markets to continue to improve, and inflation to stay low in the short term but to move toward the Federal Reserve’s 2% target in the medium term. The FOMC also underscored that it would take a balanced approach once it began to raise rates and that it could keep rates below what members would consider normal in the longer term if conditions warranted, even if inflation and labor markets were near levels consistent with its mandate.

As a result of the accommodative monetary policy, interest rates, including the rate on overnight funds have remained low on a historical basis, with the average federal funds effective rate for the first quarter of 2015 at 11 basis points. The low interest rate environment and fee compression, resulting from contract repricing in order to keep yields on our cash sweep programs competitive, has had a negative impact on profitability within our cash sweep programs, and fee compression has occurred in 2015 and is expected to increase further in 2016. Additionally, we have seen decreasing levels of demand for fixed and variable annuity products.

Our business is also affected by the performance of equity securities across the various markets in the United States. The S&P 500 index closed the quarter at 2,068, which remained relatively unchanged from its close on December 31, 2014, but exhibited higher volatility relative to prior periods by continuing a pattern of setting new highs with frequent pullbacks, which resulted in a 1.0% year-to-date gain through March 31, 2015. The volatility was attributable to several factors including the impact of lower oil prices, bad weather affecting consumer spending in parts of the country, strong dollar performance, corporate earnings expectations, the European Central Bank monetary easing program, and assurances from the Federal Reserve that, despite growing evidence of strength in the U.S. economy, it does not plan to act quickly in raising interest rates. While the market demonstrated impressive resilience and posted a modest gain in the first quarter, investors continue to contend with lingering economic worries about geopolitical uncertainty, Federal Reserve monetary policy, U.S. and global growth rates, and policy uncertainty in Washington, D.C.

Results of Operations

The following discussion presents an analysis of our results of operations for the three months ended March 31, 2015 and 2014. 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 March 31,
	2015		2014		% Change
	(In thousands)
Revenues
Commission	$	523,399	$	534,574	(2.1	)%
Advisory	342,112		327,253		4.5	%
Asset-based	120,632		114,674		5.2	%
Transaction and fee	101,695		89,985		13.0	%
Other	21,464