Edgar Filing: LPL Financial Holdings Inc.

LPLA 2012.09.30 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 September 30, 2012



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-34963

LPL Financial Holdings Inc.

(Exact name of registrant as specified in its charter)



Delaware	20-3717839
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

75 State Street, Boston, MA 02109

(Address of Principal Executive Offices) (Zip Code)

(617) 423-3644

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

The number of shares of Common Stock, par value $0.001 per share, outstanding as of October 26, 2012 was 108,544,407.

TABLE OF CONTENTS



Item Number	Page

PART I — FINANCIAL INFORMATION

1. Financial Statements

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	27

3. Quantitative and Qualitative Disclosures About Market Risk	57

4. Controls and Procedures	60

PART II — OTHER INFORMATION	61

1. Legal Proceedings	61

1A. Risk Factors	61

2. Unregistered Sales of Equity Securities and Use of Proceeds	61

3. Defaults Upon Senior Securities	61

4. Mine Safety Disclosures	61

5. Other Information	61

6. Exhibits	61

SIGNATURES	63

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 (the “Exchange Act”), with the Securities and Exchange Commission (the "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”, the “firm” 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 strategy, projected costs, plans, liquidity and ability and plans to repurchase shares and pay future dividends, as well as any other statements that are not purely historical, constitute forward-looking statements. These forward-looking statements are based on the Company's historical performance and its plans, estimates and expectations as of October 31, 2012. 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 assets under custody; 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 payable by banks participating in the Company's cash sweep program, including the Company's success in negotiating agreements with current or additional counterparties; the Company's success in integrating the operations of acquired businesses; the effect of current, pending and future legislation, regulation and regulatory actions, including disciplinary actions imposed by self-regulatory organizations; and the other factors set forth in Part I, “Item 1A. Risk Factors” in the Company's 2011 Annual Report on Form 10-K. For example, the Company may be unable to successfully integrate the systems and operations related to our acquisitions of Concord Wealth Management, Fortigent Holdings Company, Inc. and Veritat Advisors Inc. and realize the expected synergies from these transactions. Except as required by law, the Company specifically disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this quarterly report, even if its estimates change, and you should not rely on those statements 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

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except per share data)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
REVENUES:
Commissions	$	442,129	$	438,294	$	1,353,025	$	1,350,053
Advisory fees	267,334		267,878		786,507		776,254
Asset-based fees	100,024		89,691		300,049		270,018
Transaction and other fees	84,730		78,476		238,196		220,980
Interest income, net of interest expense	4,629		5,036		14,139		15,288
Other	8,382		3,482		24,928		18,129
Total net revenues	907,228		882,857		2,716,844		2,650,722
EXPENSES:
Commissions and advisory fees	620,165		614,068		1,858,139		1,833,433
Compensation and benefits	91,309		77,337		273,355		242,889
Promotional	31,844		28,660		74,797		62,985
Depreciation and amortization	18,423		19,222		53,010		55,794
Professional services	15,672		10,656		46,992		33,309
Occupancy and equipment	13,914		13,637		42,418		41,556
Brokerage, clearing and exchange	9,938		9,818		29,007		28,868
Communications and data processing	10,249		9,235		28,945		26,823
Regulatory fees and expenses	6,979		6,441		21,416		19,385
Restructuring charges	1,211		7,684		4,962		13,035
Other	20,460		7,434		36,573		20,617
Total operating expenses	840,164		804,192		2,469,614		2,378,694
Non-operating interest expense	12,826		16,603		42,297		52,929
Loss on extinguishment of debt	—		—		16,524		—
Total expenses	852,990		820,795		2,528,435		2,431,623
INCOME BEFORE PROVISION FOR INCOME TAXES	54,238		62,062		188,409		219,099
PROVISION FOR INCOME TAXES	19,939		25,634		73,429		88,165
NET INCOME	$	34,299	$	36,428	$	114,980	$	130,934
EARNINGS PER SHARE (Note 12):
Basic	$	0.31	$	0.33	$	1.05	$	1.19
Diluted	$	0.31	$	0.32	$	1.02	$	1.15

See notes to unaudited condensed consolidated financial statements.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in thousands)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
NET INCOME	$	34,299	$	36,428	$	114,980	$	130,934
Other comprehensive income, net of tax:
Unrealized gain on interest rate swaps, net of tax expense of $0 and $304 for the three months ended September 30, 2012 and 2011, and $527 and $2,004 for the nine months ended September 30, 2012 and 2011, respectively	—		464		850		3,209
Total other comprehensive income, net of tax	—		464		850		3,209
TOTAL COMPREHENSIVE INCOME	$	34,299	$	36,892	$	115,830	$	134,143

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)



	September 30, 2012			December 31, 2011
ASSETS
Cash and cash equivalents	$	445,971		$	720,772
Cash and securities segregated under federal and other regulations	393,583			382,905
Receivables from:
Clients, net of allowance of $791 at September 30, 2012 and $716 at December 31, 2011	326,873			301,292
Product sponsors, broker-dealers and clearing organizations	135,442			143,493
Others, net of allowance of $6,918 at September 30, 2012 and $8,833 at December 31, 2011	210,926			187,408
Securities owned:
Trading — at fair value	7,158			6,290
Held-to-maturity	7,676			11,167
Securities borrowed	10,039			7,890
Income taxes receivable	1,517			—
Fixed assets, net of accumulated depreciation and amortization of $326,547 at September 30, 2012 and $305,143 at December 31, 2011	121,718			91,317
Debt issuance costs, net of accumulated amortization of $3,782 at September 30, 2012 and $19,197 at December 31, 2011	22,375			18,620
Goodwill	1,372,987			1,334,086
Intangible assets, net of accumulated amortization of $227,890 at September 30, 2012 and $198,139 at December 31, 2011	513,319			537,670
Other assets	106,993			73,416
Total assets	$	3,676,577		$	3,816,326
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Drafts payable	$	166,011		$	187,575
Payables to clients	406,022			456,719
Payables to broker-dealers and clearing organizations	37,799			34,755
Accrued commissions and advisory fees payable	107,724			109,715
Accounts payable and accrued liabilities	200,592			161,776
Income taxes payable	—			906
Unearned revenue	56,872			59,537
Securities sold, but not yet purchased — at fair value	60,097			161
Senior secured credit facilities	1,328,550			1,332,668
Deferred income taxes — net	119,626			127,766
Total liabilities	2,483,293			2,471,578
STOCKHOLDERS’ EQUITY:
Common stock, $.001 par value; 600,000,000 shares authorized; 115,431,259 shares issued at September 30, 2012 and 110,531,939 shares issued at December 31, 2011	115			110
Additional paid-in capital	1,216,756			1,137,723
Treasury stock, at cost — 6,228,440 shares at September 30, 2012 and 2,617,629 shares at December 31, 2011	(199,570		)	(89,037		)
Accumulated other comprehensive loss	—			(850		)
Retained earnings	175,983			296,802
Total stockholders’ equity	1,193,284			1,344,748
Total liabilities and stockholders’ equity	$	3,676,577		$	3,816,326

See notes to unaudited condensed consolidated financial statements.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(Amounts in thousands)



				Additional Paid-In Capital							Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders' Equity
	Common Stock						Treasury Stock
	Shares	Amount					Shares	Amount
BALANCE — December 31, 2010	108,715	$	109	$	1,051,722		—	$	—		$	(4,496	)	$	126,420		$	1,173,755
Net income and other comprehensive income, net of tax expense											3,209			130,934			134,143
Treasury stock purchases							2,618	(89,037		)							(89,037		)
Stock option exercises and other	1,652	1		8,746													8,747
Share-based compensation				12,530													12,530
Excess tax benefits from share-based compensation				57,277													57,277
BALANCE — September 30, 2011	110,367	$	110	$	1,130,275		2,618	$	(89,037	)	$	(1,287	)	$	257,354		$	1,297,415

BALANCE — December 31, 2011	110,532	$	110	$	1,137,723		2,618	$	(89,037	)	$	(850	)	$	296,802		$	1,344,748
Net income and other comprehensive income, net of tax expense											850			114,980			115,830
Issuance of common stock to settle restricted stock units (Note 11)	2,823	3		(3		)											—
Treasury stock purchases (Note 11)							3,610	(110,533		)							(110,533		)
Cash dividends on common stock														(235,799		)	(235,799		)
Stock option exercises and other	2,054	2		12,832													12,834
Share-based compensation	22			16,451													16,451
Excess tax benefits from share-based compensation				49,753													49,753
BALANCE — September 30, 2012	115,431	$	115	$	1,216,756		6,228	$	(199,570	)	$	—		$	175,983		$	1,193,284

See notes to unaudited condensed consolidated financial statements.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)



	Nine Months Ended September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	114,980		$	130,934
Adjustments to reconcile net income to net cash provided by operating activities:
Noncash items:
Depreciation and amortization	53,010			55,794
Amortization of debt issuance costs	3,470			3,818
Share-based compensation	16,451			12,530
Excess tax benefits related to share-based compensation	(49,753		)	(57,277		)
Provision for bad debts	1,221			1,111
Deferred income tax provision	(12,297		)	(5,953		)
Impairment of intangible assets	—			2,643
Loss on extinguishment of debt	16,524			—
Change in estimated fair value of contingent consideration obligations	9,882			933
Loan forgiveness	1,126			1,146
Other	665			2,267
Changes in operating assets and liabilities:
Cash and securities segregated under federal and other regulations	(10,678		)	105,789
Receivables from clients	(25,656		)	(11,301		)
Receivables from product sponsors, broker-dealers and clearing organizations	8,051			37,872
Receivables from others	(22,242		)	(20,908		)
Securities owned	(633		)	1,234
Securities borrowed	(2,149		)	(2,056		)
Other assets	(37,575		)	(1,150		)
Drafts payable	(21,564		)	(45,195		)
Payables to clients	(50,697		)	(4,547		)
Payables to broker-dealers and clearing organizations	3,044			10,954
Accrued commissions and advisory fees payable	(1,991		)	(21,092		)
Accounts payable and accrued liabilities	3,637			(25,196		)
Income taxes receivable/payable	47,330			193,230
Unearned revenue	(2,665		)	2,831
Securities sold, but not yet purchased	59,936			(4,665		)
Net cash provided by operating activities	$	101,427		$	363,746

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows - (Continued)

(Unaudited)

(Dollars in thousands)



	Nine Months Ended September 30,
	2012			2011
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	$	(32,534	)	$	(24,339	)
Purchase of securities classified as held-to-maturity	(2,914		)	(4,634		)
Proceeds from maturity of securities classified as held-to-maturity	6,350			4,000
Deposits of restricted cash	(67		)	(3,040		)
Release of restricted cash	6,800			18,923
Acquisitions (Note 3)	(43,684		)	(37,184		)
Purchases of minority interest investments	(1,575		)	—
Net cash used in investing activities	(67,624		)	(46,274		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior secured credit facilities	(1,354,118		)	(50,478		)
Proceeds from senior secured credit facilities	1,330,681			—
Payment of debt issuance costs	(4,431		)	—
Repurchase of common stock	(107,524		)	(89,037		)
Dividends on common stock	(235,799		)	—
Excess tax benefits related to share-based compensation	49,753			57,277
Proceeds from stock options and warrants exercised	12,834			8,747
Net cash used in financing activities	(308,604		)	(73,491		)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(274,801		)	243,981
CASH AND CASH EQUIVALENTS — Beginning of period	720,772			419,208
CASH AND CASH EQUIVALENTS — End of period	$	445,971		$	663,189
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	42,288		$	52,981
Income taxes paid	$	36,971		$	44,379
NONCASH DISCLOSURES:
Capital expenditures purchased through short-term credit	$	5,065		$	3,444
Fixed assets acquired under build-to-suit lease	$	5,599		$	—
Unrealized gain on interest rate swaps, net of tax expense	$	850		$	3,209
Discount on proceeds from senior secured credit facilities recorded as debt issuance costs	$	19,319		$	—
Pending settlement of treasury stock purchases	$	3,009		$	—

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”), formerly known as LPL Investment Holdings Inc., 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, the Company provides access to diversified financial products and services enabling its advisors to offer independent financial advice and brokerage services, using integrated technology, to retail investors (their “clients”).

2. Summary of Significant Accounting Policies

Basis of Presentation — Quarterly Reporting — 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. Certain reclassifications were made to previously reported amounts in the unaudited condensed consolidated financial statements and notes thereto to make them consistent with the current period presentation.

The unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of income, comprehensive income 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, 2011, contained in the Company’s Annual Report on Form 10-K as filed with the SEC. The Company has evaluated subsequent events up to and including the date these unaudited condensed consolidated financial statements were issued.

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.

Comprehensive Income — In accordance with Accounting Standards Update No. 2011-05, Comprehensive Income — Presentation of Comprehensive Income, adopted in the first quarter of 2012, the Company presents its unaudited condensed consolidated statements of comprehensive income separately and immediately following its unaudited condensed consolidated statements of income. The Company’s comprehensive income is composed of net income and the effective portion of the unrealized gains on financial derivatives in cash flow hedge relationships, net of related tax effects.

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. On an on-going basis, the Company evaluates estimates, including those related to revenue and related expense recognition, asset impairment, valuation of accounts receivable, valuation of financial derivatives, contingent consideration obligations, contingencies and litigation, valuation and recognition of share-based payments, dividends and income taxes. These accounting policies are stated in the notes to the audited consolidated financial statements for the year ended December 31, 2011, contained in the Annual Report on Form 10-K as filed with the SEC. 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 under different assumptions or conditions and the differences may be material to the unaudited condensed consolidated financial statements.

Reportable Segment — The Company’s internal reporting is organized into three service channels; Independent Advisor Services, Institution Services and Custom Clearing Services, which are designed to enhance the services provided to its advisors and financial institutions. These service channels qualify as individual operating segments, but are aggregated and viewed as one single reportable segment due to their similar economic

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

characteristics, products and services, production and distribution process, regulatory environment and quantitative thresholds.

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 indebtedness. The Company carries its 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 5 for additional detail regarding the Company’s fair value measurements. As of September 30, 2012, the carrying amount and fair value of the Company’s indebtedness was approximately $1,328.6 million and $1,319.3 million, respectively. As of December 31, 2011, the carrying amount and fair value was approximately $1,332.7 million and $1,328.2 million, respectively.

Contingent Consideration — The Company may be required to pay future consideration to the former shareholders of acquired companies, depending upon the terms of the applicable purchase agreement, that is contingent upon the achievement of certain financial and operating targets. The fair value of the contingent consideration is determined using financial forecasts, which estimate the probability and timing of the financial targets being reached, and discounting the associated cash payments to their present value using a risk-adjusted rate of return. The estimated fair value of the contingent consideration on the acquisition date is included in the purchase price of the acquired company. At each reporting date, or whenever there are significant changes in underlying key assumptions, a review of these assumptions is performed and the contingent consideration liability is updated to its estimated fair value. If there are no significant changes in the assumptions, the quarterly determination of the fair value of contingent consideration reflects the implied interest for the passage of time. Changes in the estimated fair value of the contingent consideration obligation may result from changes in the terms of the contingent payments, changes in discount periods and rates and changes in probability assumptions with respect to the timing and likelihood of achieving the certain financial targets. Actual progress toward achieving the financial targets for the remaining measurement periods may be different than the Company's expectations of future performance. The change in the estimated fair value of contingent consideration has been classified as other expenses in the unaudited condensed consolidated statements of income.

Recently Issued Accounting Pronouncements — Recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2012, as compared to the recent accounting pronouncements described in the Company's 2011 Annual Report on Form 10-K, that are of significance, or potential significance, to the Company are discussed below.

In July 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2012-02, Intangibles—Goodwill and Other (Topic 350)—Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"), which updated guidance on the periodic testing of indefinite-lived intangible assets, other than goodwill, for impairment. This guidance will allow companies to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset, other than goodwill, is impaired in order to determine whether it is necessary to perform a quantitative impairment test. ASU 2012-02 will be effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company does not plan to early adopt ASU 2012-02; therefore, the ASU 2012-02 is effective for the Company beginning with the first quarter of fiscal year 2013. The Company does not anticipate the adoption of ASU 2012-02 to have a material impact on its results of operations, financial condition or cash flows.

3. Acquisitions

The Company completed several acquisitions in 2011 and 2012, including National Retirement Partners, Inc. ("NRP"), Concord Capital Partners ("Concord"), Fortigent Holdings Company, Inc. and Veritat Advisors, Inc. The pro forma results of operations and the results of operations for acquisitions since the acquisition dates have not been separately disclosed because the effects were not sufficiently significant to the consolidated financial statements, individually or in the aggregate. See Note 3 in the 2011 Annual Report on Form 10-K for further discussion of the NRP and Concord acquisitions.

Each of the purchase prices for NRP and Concord included initial cash payments, as well as future contingent consideration payments. In accordance with the acquisition agreements, the former owners have the right to receive certain future payments contingent upon achieving certain financial and operating targets. These contingent

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

consideration obligations are measured at fair value on a quarterly basis based on progress towards the defined milestones (see Note 5).

Fortigent Holdings Company, Inc.

On April 23, 2012, the Company acquired all of the outstanding common stock of Fortigent Holdings Company, Inc. and its wholly owned subsidiaries Fortigent, LLC, Fortigent Reporting Company, LLC and Fortigent Strategies Company, LLC (together, "Fortigent"). Fortigent is a leading provider of solutions and consulting services to registered investment advisors, banks and trust companies servicing high net worth clients. This strategic acquisition further enhances the Company's capabilities and offers an extension of the Company's existing services for wealth management advisors.

The Company paid $38.8 million at the closing of the transaction, net of cash acquired. As of September 30, 2012, $9.9 million remained in an escrow account to be paid to former shareholders of Fortigent in accordance with the terms of the stock purchase agreement. Such amount has been classified by the Company as restricted cash and is included in other assets on the unaudited condensed consolidated statements of financial condition. Goodwill resulting from this business combination is largely attributable to the existing workforce of Fortigent and synergies expected to arise after the Company's acquisition of Fortigent. The Company cumulatively incurred transaction costs associated with its acquisition of Fortigent totaling $1.2 million; $0.7 million of which were recorded during the nine months ended September 30, 2012 and are included in other expenses in the unaudited condensed consolidated statements of income.

Veritat Advisors, Inc.

On July 10, 2012, the Company acquired all of the outstanding common stock of Veritat Advisors, Inc. ("Veritat"). Veritat is a registered investment advisory firm that developed and utilizes a proprietary online financial planning platform designed to support advisors who serve the mass market. This strategic acquisition enhances the technological capabilities of the Company and increases the flexibility of its service offering, in light of its recently announced initiative to serve the mass market.

The Company paid $4.9 million at the closing of the transaction, net of cash acquired. Goodwill resulting from this acquisition is primarily attributable to synergies expected to arise after the Company's acquisition of Veritat. The Company incurred transaction costs associated with its acquisition of Veritat totaling $0.1 million during the nine months ended September 30, 2012 that are included in other expenses in the unaudited condensed consolidated statements of income.

The Company may be required to pay future consideration to the former Veritat shareholders that is contingent upon the achievement of certain financial targets and retention of key employees. The maximum aggregate amount of contingent payments is $20.9 million to be paid over the following measurement dates: December 31, 2013, June 30, 2015, June 30, 2017 and December 31, 2017 (together the "Measurement Dates"), if the financial targets are fully achieved and key employees retained.

The Company estimated the future payment of contingent consideration and fair value of the contingent consideration at the close of the transaction. A discounted cash flow methodology was used to determine the contingent consideration based on financial forecasts determined by management that include assumptions about growth in assets under management, earnings, employee retention and discount rates. The majority of the contingent consideration is based on a sliding scale of the financial targets. The financial targets are sensitive to advisor recruitment, market fluctuations and the ability of advisors to grow their business. The Company will evaluate the actual progress toward achieving the financial targets at least quarterly and adjust the estimated fair value of the contingent consideration based on the probability of achievement, with any changes in fair value recognized in earnings. As of September 30, 2012, the Company has estimated the amount of future payment of contingent consideration to be $12.5 million. Using a discounted cash flow methodology, the Company determined the fair value of the contingent consideration to be $8.4 million, which has been recorded within accounts payable and accrued liabilities on the unaudited condensed consolidated statements of financial condition. The Company will recognize the accretion of the contingent consideration in earnings each quarter as it approaches the Measurement Dates until all such dates have passed and payments made.

Including the estimated fair value of contingent consideration of $8.4 million, the total consideration for the

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

acquisition was approximately $13.3 million.

The Company is in the process of finalizing the purchase price allocations for Fortigent and Veritat; therefore, the provisional measures of goodwill, intangibles and fixed assets are subject to change.

Set forth below is a reconciliation of assets acquired and liabilities assumed during the nine months ended September 30, 2012 (in thousands):



	Fortigent			Veritat			Total
Goodwill	$	28,067		$	10,834		$	38,901
Accounts receivable	3,548			—			3,548
Other assets	2,310			—			2,310
Intangibles	5,400			—			5,400
Fixed assets(1)	6,275			4,180			10,455
Accounts payable and accrued liabilities	(4,803		)	(67		)	(4,870		)
Deferred income taxes — net	(2,031		)	(1,599		)	(3,630		)
Net assets acquired	$	38,766		$	13,348		$	52,114

________________________________


(1)	Fixed assets acquired from Fortigent and Veritat relate primarily to internally developed software, which are being amortized over 5 years.

Set forth below is supplemental cash flow information for the nine months ended September 30, 2012 (in thousands):



	Fortigent		Veritat		Total
Cash payments, net of cash acquired	$	28,866	$	4,918	$	33,784
Cash paid to escrow	9,900		—		9,900
Contingent consideration	—		8,430		8,430
Total purchase price	$	38,766	$	13,348	$	52,114

The Company preliminarily allocated the estimated purchase price of Fortigent for intangibles to specific amortizable intangible asset categories as follows (dollars in thousands):



	Weighted Average Amortization Period (in years)	Amount Assigned
Client relationships	9.4	$	4,200
Trade names	10.0	1,200
Total intangible assets acquired from Fortigent		$	5,400

4. Restructuring

Consolidation of UVEST Financial Services Group, Inc.

On March 14, 2011, the Company committed to a corporate restructuring plan to consolidate the operations of UVEST Financial Services Group, Inc. ("UVEST") with LPL Financial LLC ("LPL Financial"). The restructuring plan was effected to enhance the Company’s service offering, while also generating efficiencies. In connection with the consolidation, certain registered representatives associated with UVEST moved to LPL Financial through a transfer of their licenses. The Company completed the transfers in December 2011. Following the transfer of registered representatives and client accounts to LPL Financial, all registered representatives and client accounts are associated with LPL Financial and all of the Company’s securities business is done through a single broker-dealer. UVEST has withdrawn its registration with the Financial Industry Regulatory Authority ("FINRA") effective

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

July 16, 2012 and is no longer subject to net capital filing requirements.

The Company estimates total expenditures associated with the initiative to be approximately $31.1 million over the course of the restructuring plan. These expenditures are comprised of advisor retention and related benefits, contract penalties, technology costs, non-cash charges for the impairment of intangible assets resulting from advisor attrition and other expenses principally relating to the conversion and transfer of registered representatives and client accounts from UVEST to LPL Financial.

The following table summarizes the balance of accrued expenses and the changes in the accrued amounts as of and for the nine months ended September 30, 2012 (in thousands):



	Accrued Balance at December 31, 2011		Costs Incurred		Payments			Non-cash			Accrued Balance at September 30, 2012		Cumulative Costs Incurred to Date		Total Expected Restructuring Costs(1)
Conversion and transfer costs	$	1,076	$	3,307	$	(4,383	)	$	—		$	—	$	12,485	$	14,160
Contract penalties	8,832		—		(8,270		)	—			562		8,642		8,642
Advisor retention and related benefits	250		908		(196		)	(712		)	250		1,697		5,513
Asset impairments	—		—		—			—			—		2,776		2,776
Total	$	10,158	$	4,215	$	(12,849	)	$	(712	)	$	812	$	25,600	$	31,091

________________________________

(1)

At September 30, 2012, total expected restructuring costs exclude approximately $11.0 million of internally developed software related to the corporate restructuring initiative that is expected to be capitalized with a useful life ranging from three to five years, and with expense being recorded as depreciation and amortization within the unaudited condensed consolidated statements of income. As of September 30, 2012, approximately $14.1 million has been spent on development activities of which approximately $10.7 million has been capitalized, with the remainder included in costs incurred.

5. 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 fair value measurement classifications during the nine months ended September 30, 2012.

The Company’s fair value measurements are evaluated within the fair value hierarchy, based on the nature of inputs used to determine the fair value at the measurement date. At September 30, 2012, 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.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Securities Owned and Securities Sold, But Not Yet Purchased — The Company’s trading securities consist of house account model portfolios 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. treasuries, mutual funds, certificates of deposit, traded equity securities 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 September 30, 2012, the Company did not adjust prices received from the independent third-party pricing services.

Other Assets — The Company’s other assets include deferred compensation plan assets that are invested in money market funds and mutual funds which are actively traded and valued based on quoted market prices in active markets.

Contingent Consideration Liabilities — The contingent consideration liabilities, which are included in accounts payable and accrued liabilities in the unaudited condensed consolidated statements of financial condition, result from the Company's acquisitions of NRP, Concord and Veritat.

Interest Rate Swap — The Company’s interest rate swap, which matured on June 30, 2012, was not traded on a market exchange; therefore, the fair value was determined using models which included assumptions about the London Interbank Offered Rate (“LIBOR”) yield curve at interim reporting dates as well as counterparty credit risk and the Company’s own non-performance risk. Accordingly, the Company has classified the interest rate swap as a Level 2 measurement within the fair value hierarchy. At December 31, 2011, the interest rate swap is included in accounts payable and accrued liabilities in the unaudited condensed consolidated statements of financial condition.

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 September 30, 2012 (in thousands):



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value Measurements
At September 30, 2012:
Assets
Cash equivalents	$	264,064	$	—	$	—	$	264,064
Securities owned — trading:
Money market funds	307		—		—		307
Mutual funds	5,722		—		—		5,722
Equity securities	59		—		—		59
Debt securities	—		170		—		170
U.S. treasury obligations	900		—		—		900
Total securities owned — trading	6,988		170		—		7,158
Other assets	28,005		—		—		28,005
Total assets at fair value	$	299,057	$	170	$	—	$	299,227
Liabilities
Securities sold, but not yet purchased:
Mutual funds	$	59,711	$	—	$	—	$	59,711
Equity securities	67		—		—		67
Debt securities	—		72		—		72
Certificates of deposit	—		247		—		247
Total securities sold, but not yet purchased	59,778		319		—		60,097
Contingent consideration obligations	—		—		34,416		34,416
Total liabilities at fair value	$	59,778	$	319	$	34,416	$	94,513

Changes in Level 3 Recurring Fair Value Measurements

The contingent consideration obligations result from the Company's 2011 acquisitions of NRP and Concord, and 2012 acquisition of Veritat, and represent future amounts that the Company may be required to pay upon the achievement of certain financial and operating targets. The contingent consideration obligations are recorded at their estimated fair value with any changes in fair value recognized in earnings. Fair value measurements are based on significant inputs unobservable in the market and thus represent Level 3 measurements.

The contingent consideration obligation related to the acquisition of NRP is based on the achievement of certain revenue-based targets for the year ended December 31, 2013 (the "Measurement Period"), in aggregate for those advisors who joined LPL Financial from NRP and for advisors joining LPL Financial subsequent to the NRP acquisition for whom retirement plans comprise a significant part of their business. As a result of greater than expected recruitment of new advisors who serve retirement plans, which is expected to continue throughout the Measurement Period, the Company revised its revenue estimates during the third quarter of 2012 and made certain changes in the probability assumptions with respect to the likelihood of achieving the revenue targets. The revisions, combined with implied interest, resulted in a $15.3 million increase in the fair value of the contingent consideration obligation related to NRP during the nine months ended September 30, 2012 and are recorded in other expenses in the unaudited condensed consolidated statements of income.

The contingent consideration obligation related to the acquisition of Concord is based on the achievement of targeted levels of gross margin from both the acquired Concord business and from revenue synergies arising from cross-selling opportunities between Concord and the Company for the twelve month period ending June 30, 2014. Gross margin is calculated as net revenues less commissions and advisory fees and brokerage, clearing and exchange expense and accordingly, the Company considers it to be a non-GAAP measure. The Company revised

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

the amount and timing of gross margin estimates and made certain changes in the probability assumptions with respect to the likelihood of achieving these estimates as a result of delays in the timing of the expected realization of revenue synergies between Concord and the Company. The revision, offset by implied interest, resulted in a $5.4 million decrease in the fair value of the contingent consideration obligation related to Concord during the nine months ended September 30, 2012 and is recorded in other expenses in the unaudited condensed consolidated statements of income.

Set forth below is a reconciliation of the contingent consideration for the nine months ended September 30, 2012 (in thousands):



Fair value at December 31, 2011	$	16,104
Issuance of contingent consideration	8,430
Change in estimated fair value of contingent consideration obligations	9,882
Fair value at September 30, 2012	$	34,416

The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at December 31, 2011 (in thousands):



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value Measurements
At December 31, 2011:
Assets
Cash equivalents	$	575,243	$	—	$	—	$	575,243
Securities owned — trading:
Money market funds	262		—		—		262
Mutual funds	4,966		—		—		4,966
Equity securities	47		—		—		47
Debt securities	—		115		—		115
Certificates of deposit	900		—		—		900
Total securities owned — trading	6,175		115		—		6,290
Other assets	21,400		—		—		21,400
Total assets at fair value	$	602,818	$	115	$	—	$	602,933
Liabilities
Securities sold, but not yet purchased:
Equity securities	$	134	$	—	$	—	$	134
Debt securities	—		2		—		2
Certificates of deposit	—		25		—		25
Total securities sold, but not yet purchased	134		27		—		161
Contingent consideration obligations	—		—		16,104		16,104
Interest rate swap	—		1,377		—		1,377
Total liabilities at fair value	$	134	$	1,404	$	16,104	$	17,642

6. Held-to-Maturity Securities

The Company holds certain investments in securities including 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 Company discloses the fair value of its securities held-to-maturity using quoted prices in active markets, which is a Level 1 fair value measurement.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The amortized cost, gross unrealized gains and fair value of securities held-to-maturity were as follows (in thousands):



	Amortized Cost		Gross Unrealized Gains		Fair Value
At September 30, 2012:
U.S. government notes	$	7,676	$	7	$	7,683

At December 31, 2011:
U.S. government notes	$	11,167	$	27	$	11,194

At September 30, 2012, the securities held-to-maturity were scheduled to mature within one year.

7. Goodwill and Intangible Assets

A summary of the activity in goodwill is presented below (in thousands):



Balance at December 31, 2011	$	1,334,086
Acquisition of Fortigent (Note 3)	28,067		(1	)
Acquisition of Veritat (Note 3)	10,834		(1	)
Balance at September 30, 2012	$	1,372,987

________________________________


(1)	This is a provisional amount and is subject to change (see Note 3).

The components of intangible assets as of September 30, 2012 and December 31, 2011 are as follows (dollars in thousands):



	Weighted Average Life Remaining (in years)	Gross Carrying Value		Accumulated Amortization			Net Carrying Value
At September 30, 2012:
Definite-lived intangible assets:
Advisor and financial institution relationships	13.0	$	450,164	$	(151,365	)	$	298,799
Product sponsor relationships	13.3	230,916		(73,100		)	157,816
Client relationships	11.4	19,110		(3,375		)	15,735
Trade names	9.6	1,200		(50		)	1,150
Total definite-lived intangible assets		$	701,390	$	(227,890	)	$	473,500
Indefinite-lived intangible assets:
Trademark and trade name							39,819
Total intangible assets							$	513,319

At December 31, 2011:
Definite-lived intangible assets:
Advisor and financial institution relationships	13.7	$	450,164	$	(132,503	)	$	317,661
Product sponsor relationships	14.0	230,916		(63,710		)	167,206
Client relationships	12.9	14,910		(1,926		)	12,984
Total definite-lived intangible assets		$	695,990	$	(198,139	)	$	497,851
Indefinite-lived intangible assets:
Trademark and trade name							39,819
Total intangible assets							$	537,670

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Total amortization expense of intangible assets was $10.0 million and $9.9 million for the three months ended September 30, 2012 and 2011, respectively, and $29.8 million and $29.1 million for the nine months ended September 30, 2012 and 2011, respectively. Amortization expense for each of the fiscal years ended December 31, 2012 through 2016 and thereafter is estimated as follows (in thousands):



2012 - remainder	$	9,791
2013	39,006
2014	38,680
2015	37,775
2016	37,619
Thereafter	310,629
Total	$	473,500

8. 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. 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.

The effective tax rates were 36.8% and 41.3% for the three months ended September 30, 2012 and 2011, respectively, and 39.0% and 40.2% for the nine months ended September 30, 2012 and 2011, respectively. For the three and nine months ended September 30, 2012, the Company's effective tax rate was impacted by two matters related to its stock acquisition of Concord that together lowered the rate by approximately 3.0% for the three months ended September 30, 2012: a change in the fair value of contingent consideration that is not recognizable for tax purposes and the recognition of a deferred tax asset and related income tax benefit from pre-acquisition net operating losses that were recorded during the quarter.

9. Indebtedness

Senior Secured Credit Facilities — On March 29, 2012, the Company entered into a Credit Agreement (the “Credit Agreement”) with its wholly owned subsidiary, LPL Holdings, Inc., the other Credit Parties signatory thereto, the Several Lenders signatory thereto, and Bank of America, N.A. as Administrative Agent, Collateral Agent, Letter of Credit Issuer, and Swingline Lender. The Credit Agreement refinanced and replaced the Company’s Third Amended and Restated Credit Agreement, dated as of May 24, 2010 (the "Original Credit Agreement").

Pursuant to the Credit Agreement, the Company established a Term Loan A of $735.0 million maturing on March 29, 2017 (the "Term Loan A"), a Term Loan B of $615.0 million maturing on March 29, 2019 (the "Term Loan B") and a revolving credit facility with borrowing capacity of $250.0 million maturing on March 29, 2017 (the "Revolving Credit Facility"). In connection with the Credit Agreement, the Company incurred $23.7 million in costs that are capitalized as debt issuance costs in the unaudited condensed consolidated statements of financial condition.

The Revolving Credit Facility was undrawn at September 30, 2012 and at closing. As of September 30, 2012, the Revolving Credit Facility was being used to support the issuance of $31.3 million of irrevocable letters of credit for the construction of the Company's future San Diego office building, the Company's subsidiary The Private Trust Company N.A. ("PTC") and other items.

Quarterly repayments of the principal for Term Loan A will total 5.0% per year for years one and two, and 10.0% per year for years three, four, and five, with the remaining principal due upon maturity. Quarterly repayments of the principal for Term Loan B will total 1.0% per year with the remaining principal due upon maturity. Any outstanding principal under the Revolving Credit Facility will be due upon maturity.

Borrowings under the Credit Agreement bear interest at a base rate equal to either one, two, three, six, nine or twelve-month LIBOR (the "Eurodollar Rate") plus the applicable margin, or an alternative base rate (“ABR”) plus

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

the applicable margin. The ABR is equal to the greatest of (a) the prime rate in effect on such day, (b) the effective federal funds rate in effect on such day plus 0.50%, (c) the Eurodollar Rate plus 1.00% and (d) solely in the case of Term Loan B, 2.00%. The Company may voluntarily repay outstanding loans under its Credit Agreement at any time without premium or penalty, other than customary breakage costs with respect to LIBOR loans and with the exception of certain repricing transactions in respect of the Term Loan B consummated before March 29, 2013, which will be subject to a premium of 1.0% of the principal amount of Term Loan B subject to such repricing transaction.

The Credit Agreement subjects the Company to certain financial and non-financial covenants. As of September 30, 2012, the Company was in compliance with such covenants.

The applicable margin for borrowings with respect to the (a) Term Loan A is currently 1.50% for base rate borrowings and 2.50% for LIBOR borrowings; and (b) Term Loan B is currently 2.00% for base rate borrowings and 3.00% for LIBOR borrowings. The LIBOR rate with respect to the Term Loan B shall in no event be less than 1.00%. The applicable margin for borrowings under the Revolving Credit Facility is currently 1.50% for base rate borrowings and 2.50% for LIBOR borrowings with a commitment fee of 0.50%.

On March 29, 2012, the Company used proceeds from borrowings under the Credit Agreement to repay all outstanding principal borrowings under the Original Credit Agreement. Accordingly, in the first quarter of 2012, the Company accelerated the recognition of $16.5 million of debt issuance costs related to borrowings under the Original Credit Agreement, which has been recorded as loss on extinguishment of debt within the unaudited condensed consolidated statements of income. Prior to the repayment, the Original Credit Agreement consisted of three term loan tranches: a $302.5 million term loan facility with a maturity of June 18, 2013 (the "2013 Term Loans"), a $476.9 million term loan facility with a maturity of June 25, 2015 (the "2015 Term Loans") and a $553.2 million term loan facility with a maturity of June 28, 2017 (the "2017 Term Loans"). The Original Credit Agreement also subjected the Company to certain financial and non-financial covenants. As of December 31, 2011 the Company was in compliance with all such covenants.

The Original Credit Agreement included a revolving credit facility of $163.5 million, which had a maturity date of June 28, 2013, with a commitment fee of 0.75%. Borrowings were priced at LIBOR + 3.50%. Such facility had no outstanding balance at December 31, 2011 and has been replaced by the Revolving Credit Facility.

The applicable margin for borrowings under the Original Credit Agreement with respect to the (a) 2013 Term Loans was 0.75% for base rate borrowings and 1.75% for LIBOR borrowings, (b) 2015 Term Loans was 1.75% for base rate borrowings and 2.75% for LIBOR borrowings, and (c) 2017 Term Loans was 2.75% for base rate borrowings and 3.75% for LIBOR borrowings. The LIBOR Rate with respect to the 2015 Term Loans and the 2017 Term Loans had a floor of 1.50%.

Bank Loans Payable — The Company maintains three uncommitted lines of credit. Two of the lines have an unspecified limit, and are primarily dependent on the Company’s ability to provide sufficient collateral. The other line has a $150.0 million limit and allows for both collateralized and uncollateralized borrowings. Certain lines were utilized in 2012 and 2011; however, there were no balances outstanding at September 30, 2012 or December 31, 2011.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The Company’s outstanding borrowings were as follows (dollars in thousands):



		September 30, 2012					December 31, 2011
	Maturity	Balance		Interest Rate			Balance		Interest Rate
Senior secured term loans:
Hedged with an interest rate swap(1)	6/28/2013	$	—				$	65,000	2.33	%	(4)
Unhedged:
2013 Term Loans	6/28/2013	—					237,489		2.05	%	(5)
2015 Term Loans	6/25/2015	—					476,935		4.25	%	(6)
2017 Term Loans	6/28/2017	—					553,244		5.25	%	(7)
Term Loan A	3/29/2017	716,625		2.72	%	(2)	—
Term Loan B	3/29/2019	611,925		4.00	%	(3)	—
Total borrowings		1,328,550					1,332,668
Less current borrowings (maturities within 12 months)		42,900					13,971
Long-term borrowings — net of current portion		$	1,285,650				$	1,318,697

____________


(1)	The Company had an interest rate swap with a notional balance of $65.0 million that matured on June 30, 2012.


(2)	As of September 30, 2012, the variable interest rate for Term Loan A is based on the one-month LIBOR of 0.22%, plus the applicable interest rate margin of 2.50%.


(3)	As of September 30, 2012, the variable interest rate for Term Loan B is based on the greater of the one-month LIBOR of 0.22% or 1.00%, plus the applicable interest rate margin of 3.00%.


(4)	As of December 31, 2011, the variable interest rate for the hedged portion of the 2013 Term Loans is based on the three-month LIBOR of 0.58%, plus the applicable interest rate margin of 1.75%.


(5)	As of December 31, 2011, the variable interest rate for the unhedged portion of the 2013 Term Loans is based on the one-month LIBOR of 0.30%, plus the applicable interest rate margin of 1.75%.


(6)	As of December 31, 2011, the variable interest rate for the unhedged portion of the 2015 Term Loans is based on the greater of the one-month LIBOR of 0.30% or 1.50%, plus the applicable interest rate margin of 2.75%.


(7)	As of December 31, 2011, the variable interest rate for the unhedged portion of the 2017 Term Loans is based on the greater of the one-month LIBOR of 0.30% or 1.50%, plus the applicable interest rate margin of 3.75%.

The combined average balance outstanding in the uncommitted line of credit facilities was approximately eleven thousand dollars and $0.4 million for the three months ended September 30, 2012 and 2011, respectively, and $0.1 million for the nine months ended September 30, 2012 and 2011, respectively. The weighted-average interest rate was 4.50% and 1.00% for the three months ended September 30, 2012 and 2011, respectively, and 1.63% and 1.00% for the nine months ended September 30, 2012 and 2011, respectively.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The minimum calendar year payments and maturities of the senior secured borrowings as of September 30, 2012 are as follows (in thousands):



2012 — remainder	$	10,725
2013	42,900
2014	70,463
2015	79,650
2016	79,650
Thereafter	1,045,162
Total	$	1,328,550

10. Commitments and Contingencies

Leases — The Company leases certain 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.

Service Contracts — The Company is party to certain long-term contracts for systems and services that enable back office trade processing and clearing for its product and service offerings.

Future minimum payments under leases, lease commitments and other noncancellable contractual obligations with remaining terms greater than one year as of September 30, 2012, are as follows (in thousands):



2012 - remainder	$	6,893
2013	27,339
2014	28,497
2015	27,461
2016	27,319
Thereafter	264,726
Total(1)	$	382,235

____________


(1)	Minimum payments have not been reduced by minimum sublease rental income of $5.2 million due in the future under noncancellable subleases.

Included in the schedule of future minimum payments above is a fifteen-year lease commitment that was executed in December 2011 for the Company's future San Diego office building with a lease commencement date of May 1, 2014. Future minimum payments for this lease commitment are $9.6 million, $14.8 million, $15.4 million and $236.8 million for the years 2014, 2015, 2016 and thereafter, respectively.

Total rental expense for all operating leases was approximately $5.0 million and $4.2 million for the three months ended September 30, 2012 and 2011, respectively, and $14.1 million and $12.9 million for the nine months ended September 30, 2012 and 2011, respectively.

Guarantees — The Company occasionally enters into certain types of contracts that contingently require it to indemnify certain parties against third-party claims. The terms of these obligations vary and, because a maximum obligation is not explicitly stated, the Company has determined that it is not possible to make an estimate of the amount that it could be obligated to pay under such contracts.

The Company’s subsidiary, LPL Financial, provides guarantees to securities clearing houses and exchanges under their standard membership agreements, which require a member to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearing houses and exchanges, all other members would be required to meet any shortfall. The Company’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, the potential requirement for the Company to make payments under these agreements is remote. Accordingly, no liability has been recognized for these transactions.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Loan Commitments — From time to time, LPL Financial makes loans to its advisors which may be forgivable, primarily to newly signed advisors to assist in the transition process. Due to timing differences, LPL Financial may make commitments to issue such loans prior to actually funding them. These commitments are generally contingent upon certain events occurring, including but not limited to the advisor joining LPL Financial. LPL Financial had no significant unfunded commitments at September 30, 2012.

Litigation — The Company has been named as a defendant in various legal actions, substantially all of which are arbitrations. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, the Company cannot predict with certainty what the eventual loss or range of loss related to such matters will be. The Company recognizes a legal liability when it believes it is probable a liability has occurred and the amount can be reasonably estimated. If some amount within a range of loss appears at the time to be a better estimate than any other amount within the range, the Company accrues that amount. When no amount within the range is a better estimate than any other amount, however, the Company accrues the minimum amount in the range.

The Company records legal reserves and related insurance recoveries for significant or unusual cases on a gross basis.

The Company is subject to and maintains insurance coverage for claims and lawsuits in the ordinary course of business, such as customer complaints or disclosures about risks with securities purchased, as well as various arbitrations and other litigation matters. With respect to these matters, the estimated losses on the majority of pending matters are less than the applicable deductibles of the insurance policies, and matters with estimated losses in excess of the applicable deductibles are not, in the aggregate, material.

Defense costs are expensed as incurred and classified as professional services within the unaudited condensed consolidated statements of income. When there is indemnification or insurance, the Company may engage in defense or settlement and subsequently seek reimbursement for such matters. In connection with various acquisitions, and pursuant to the purchase and sale agreements, the Company has received third-party indemnification for certain legal proceedings and claims. Some of these matters have been defended and paid directly by the indemnifying party.

The Company believes, based on the information available at this time, after consultation with counsel, consideration of insurance, if any, and indemnifications provided by the third-party indemnitors, that the outcomes of any legal proceedings will not have a material adverse impact on the unaudited condensed consolidated statements of income, comprehensive income, financial condition or cash flows.

Regulatory — On July 20, 2012, the Internal Revenue Service (the “IRS”) issued a Notice of Proposed Adjustment (the “Notice”) asserting that the Company is subject to a penalty with respect to an alleged untimely deposit of withholding taxes related to the exercise of certain non-qualified stock options in connection with the Company's initial public offering in 2010. The Company has been engaged in discussions with the IRS regarding the Notice. As a result of these discussions, the Company believes the outcome will not be material to its unaudited condensed consolidated statements of income, comprehensive income, financial condition or cash flows. The Company has recorded an estimate of the probable loss within other expense in the unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2012 and within accounts payable and accrued liabilities in the unaudited condensed consolidated statement of financial condition as of September 30, 2012.

Other Commitments — As of September 30, 2012, LPL Financial had received collateral primarily in connection with client margin loans with a market value of approximately $353.4 million, which it can sell or re-pledge. Of this amount, approximately $42.3 million has been pledged or sold as of September 30, 2012; $23.1 million was pledged with client-owned securities to the Options Clearing Corporation ("OCC") as collateral to secure client obligations related to options positions, and $19.2 million was loaned to the National Securities Clearing Corporation ("NSCC") through participation in its Stock Borrow Program. Additionally, approximately $140.5 million are held at banks in connection with unutilized secured margin lines of credit; these securities may be used as collateral for loans from these banks. The remainder of $170.6 million has not been re-pledged or sold, and as of

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2012 there are no restrictions that materially limit the Company's ability to re-pledge or sell the remaining $311.1 million of client collateral.

As of December 31, 2011, LPL Financial had received collateral primarily in connection with client margin loans with a market value of approximately $350.2 million, which it can sell or repledge. Of this amount, approximately $32.7 million has been pledged or sold as of December 31, 2011; $18.4 million was pledged with client-owned securities to the OCC as collateral to secure client obligations related to options positions, and $14.3 million was loaned to the NSCC through participation in its Stock Borrow Program. Additionally, approximately $145.0 million are held at banks in connection with unutilized secured margin lines of credit; these securities may be used as collateral for loans from these banks. The remainder of $172.5 million had not been re-pledged or sold, and as of December 31, 2011 there are no restrictions that materially limited the Company's ability to re-pledge or sell the remaining $317.5 million of client collateral.

Trading securities on the unaudited condensed consolidated statements of financial condition includes $0.9 million pledged to clearing organizations at September 30, 2012 and December 31, 2011, respectively.

LPL Financial provides brokerage, clearing and custody services on a fully disclosed basis; offers its investment advisory programs and platforms; and provides technology and additional processing and related services to the advisors of the broker-dealer subsidiary of a large global insurance company and their clients under a multi-year agreement. Termination fees may be payable by a terminating or breaching party depending on the specific cause of termination.

11. Stockholders' Equity

Share-Based Compensation

The Company's stock incentive plan provides for granting stock options to certain employees, officers and advisors, warrants to certain financial institutions and restricted stock to non-employee directors. Beginning in the third quarter of 2012, certain employees participate in the 2012 Employee Stock Purchase Plan. 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 cliff vest after a two-year period.

The Company recognizes share-based compensation expense for stock options awarded to employees and officers, and restricted stock awarded to non-employee directors, based on the grant date fair value over the requisite service period of the award, which generally equals the vesting period. The Company recognized share-based compensation related to the vesting of these awards of $4.3 million and $3.8 million during the three months ended September 30, 2012 and 2011, respectively, and $12.8 million and $10.9 million during the nine months ended September 30, 2012 and 2011, respectively, which is included in compensation and benefits on the unaudited condensed consolidated statements of income. As of September 30, 2012, total unrecognized compensation cost related to non-vested share-based compensation arrangements granted was $42.2 million, which is expected to be recognized over a weighted-average period of 3.44 years.

The Company recognizes share-based compensation expense for stock options and warrants awarded to its advisors and financial institutions based on the fair value of the awards at each interim reporting period. The Company recognized share-based compensation of $2.9 million and $1.4 million during the nine months ended September 30, 2012 and 2011, respectively, related to the vesting of stock options and warrants awarded to its advisors and financial institutions, which is classified within commissions and advisory fee expense on the unaudited condensed consolidated statements of income. As of September 30, 2012, total unrecognized compensation cost related to non-vested share-based compensation arrangements granted was $10.0 million for advisors and financial institutions, which is expected to be recognized over a weighted-average period of 3.15 years.

On May 8, 2012, the Company awarded 22,092 shares of common stock in conjunction with the acquisition of Fortigent, at a price of $33.95 per share, which resulted in share-based compensation expense of $0.8 million during the nine months ended September 30, 2012.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

2008 Nonqualified Deferred Compensation Plan

On November 19, 2008, the Company established an unfunded, unsecured deferred compensation plan to permit employees and former employees who held non-qualified stock options issued under the 2005 Stock Option Plan for Incentive Stock Options and 2005 Stock Option Plan for Non-qualified Stock Options that were to expire in 2009 and 2010, to receive stock units under the 2008 Nonqualified Deferred Compensation Plan ("Deferred Compensation Plan"). On February 22, 2012, the Company distributed 1,673,556 shares, net of shares withheld to satisfy withholding tax requirements, pursuant to the terms of the Deferred Compensation Plan. Distributions to participants were made in the form of whole shares of common stock equal to the number of stock units allocated to the participant's account, with fractional shares paid out in cash. Participants authorized the Company to withhold shares from their distribution of common stock to satisfy their withholding tax obligations. Accordingly on February 22, 2012, the Company repurchased 1,149,896 shares and paid $37.5 million of cash consideration related to tax withholdings. The repurchase of shares was executed under the share repurchase program approved by the Board of Directors on August 16, 2011.

Dividends

On March 30, 2012, the Company's Board of Directors approved a special dividend of $2.00 per share to common stockholders. The dividend of $222.6 million was paid on May 25, 2012 to stockholders of record as of May 15, 2012.

On July 30, 2012, the Board of Directors declared a cash dividend of $0.12 per share on the Company's outstanding common stock. The dividend of $13.2 million was paid on August 30, 2012 to stockholders of record as of August 15, 2012.

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.

For the three months ended September 30, 2012 and 2011, the Company had the following activity under its approved share repurchase plans (in millions, except share and per share data):



					2012					2011
Approval Date	Authorized Repurchase Amount		Amount Remaining at September 30, 2012		Shares Purchased	Weighted Average Price Paid Per Share		Total Cost		Shares Purchased	Weighted Average Price Paid Per Share		Total Cost
May 25, 2011	$	80.0	$	—	—	$	—	$	—	13,869	$	34.47	$	0.5
August 16, 2011	$	70.0	$	—	186,190	$	27.56	$	5.1	319,906	$	28.11	$	9.0
May 25, 2012	$	75.0	$	25.5	1,719,739	$	28.79	$	49.5	—	$	—	$	—
September 27, 2012	$	150.0	$	150.0	—	$	—	$	—	—	$	—	$	—
			$	175.5	1,905,929	$	28.67	$	54.6	333,775	$	28.37	$	9.5

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the nine months ended September 30, 2012 and 2011, the Company had the following activity under its approved share repurchase plans (in millions, except share and per share data):



					2012					2011
Approval Date	Authorized Repurchase Amount		Amount Remaining at September 30, 2012		Shares Purchased	Weighted Average Price Paid Per Share		Total Cost		Shares Purchased	Weighted Average Price Paid Per Share		Total Cost
May 25, 2011	$	80.0	$	—	—	$	—	$	—	2,297,723	$	34.84	$	80.0
August 16, 2011	$	70.0	$	—	1,891,072	$	32.27	$	61.0	319,906	$	28.11	$	9.0
May 25, 2012	$	75.0	$	25.5	1,719,739	$	28.79	$	49.5	—	$	—	$	—
September 27, 2012	$	150.0	$	150.0	—	$	—	$	—	—	$	—	$	—
			$	175.5	3,610,811	$	30.61	$	110.5	2,617,629	$	34.01	$	89.0

12. Earnings Per Share

Prior to February 22, 2012, the Company was required to calculate earnings per share using the two-class method by allocating a portion of its earnings to employees who held stock units containing non-forfeitable rights to dividends or dividend equivalents under its Deferred Compensation Plan. Basic earnings per share was computed by dividing income less earnings attributable to employees that held stock units under the Deferred Compensation Plan by the basic weighted average number of shares outstanding. Diluted earnings per share was computed in a manner similar to basic earnings per share, except the weighted average number of shares outstanding was increased to include the dilutive effect of outstanding stock options, warrants and other stock-based awards. After the distribution of shares on February 22, 2012 pursuant to the Deferred Compensation Plan, the two-class method was no longer applicable.

A reconciliation of the income used to compute basic and diluted earnings per share for the three and nine months ended September 30, 2012 and 2011 is as follows (in thousands):



	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2012		2011			2012		2011
Basic earnings per share:
Net income, as reported	$	34,299	$	36,428		$	114,980	$	130,934
Allocation of undistributed earnings to stock units	—		(465		)	—		(1,676		)
Net income, for computing basic earnings per share	$	34,299	$	35,963		$	114,980	$	129,258
Diluted earnings per share:
Net income, as reported	$	34,299	$	36,428		$	114,980	$	130,934
Allocation of undistributed earnings to stock units	—		(451		)	—		(1,618		)
Net income, for computing diluted earnings per share	$	34,299	$	35,977		$	114,980	$	129,316

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

A reconciliation of the weighted average number of shares outstanding used to compute basic and diluted earnings per share for the three and nine months ended September 30, 2012 and 2011 is as follows (in thousands):



	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2012	2011	2012	2011
Basic weighted average number of shares outstanding	110,213	107,835	109,997	108,559
Dilutive common share equivalents	1,664	3,338	2,439	3,924
Diluted weighted average number of shares outstanding(1)	111,877	111,173	112,436	112,483

________________________________


(1)	Included within the weighted average share count for the three and nine months ended September 30, 2012, are approximately 850,000 shares resulting from the distribution pursuant to the Deferred Compensation Plan (see Note 11) that were not included in the weighted average share count for the three and nine months ended September 30, 2011.

Basic and diluted earnings per share for the three and nine months ended September 30, 2012 and 2011 are as follows:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2012		2011		2012		2011
Basic earnings per share	$	0.31	$	0.33	$	1.05	$	1.19
Diluted earnings per share	$	0.31	$	0.32	$