News Column

LPL FINANCIAL HOLDINGS INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 30, 2014

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 13,800 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 4,400 financial advisors who are affiliated and licensed with insurance companies that use our customized clearing, advisory platforms, and technology solutions. Fortigent Holdings Company, Inc. and its subsidiaries ("Fortigent") provide solutions and consulting services to RIAs, banks, and trust companies serving high-net-worth clients, while The Private Trust Company, N.A. ("PTC") manages trusts and family assets for high-net-worth clients. Our singular focus is to provide 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 we are 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. For over 20 years, we have served the independent advisor market. We currently support the largest independent advisor base and we believe we have the fourth largest overall advisor base in the United States based on the information available as of the date this Quarterly Report on Form 10-Q has been issued. Through our advisors, we are also one of the largest distributors of financial products in the United States. Our scale is a substantial competitive advantage and enables us to more effectively attract and retain advisors. Our unique business model allows us to invest in more resources for our advisors, increasing their revenues and creating a virtuous cycle of growth. We have 3,374 employees, with primary offices in Boston, Charlotte, and San Diego. 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 11,000 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. 21 -------------------------------------------------------------------------------- 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: Six Months Ended June 30, 2014 % of Total Total Net Sources of Revenue Primary Drivers (millions) Revenue % Recurring Advisor-driven Commission - Transactions revenue with - Brokerage asset $1,070 49% 43% ~85%-90% levels payout ratio Advisory - Advisory asset $658 30% 99% levels Asset-Based - Cash balances - Cash Sweep Fees - Interest rates - Sponsorship Fees - Client asset $233 11% 97% - Record Keeping levels - Number of accounts Transaction and Fee - Client activity



Attachment - Transactions - Number of clients

revenue - Client (Investor) - Number of advisors

retained by Accounts - Number of accounts $182 8% 65% us - Advisor Seat and - Number of premium Technology technology subscribers Other - Margin account balances - Alternative $37 2% 30% investment transactions Total Net Revenue $2,180 100% 67% Total Recurring Revenue $1,463 67% Commission and Advisory Revenues. Commission and advisory revenues both represent advisor-generated revenue, generally 85-90% of which is paid to advisors. Commission Revenues. We generate two types of commission revenues: transaction-based sales commissions and trailing commissions. Transaction-based sales commission revenues, which occur whenever clients trade securities or purchase various types of investment products, primarily represent gross commissions generated by our advisors. The levels of transaction-based sales commission revenues can vary from period to period based on the overall economic environment, number of trading days in the reporting period, and investment activity of our advisors' clients. We earn trailing commission revenues (a commission that is paid over time, such as 12(b)-1 fees) primarily on mutual funds and variable annuities held by clients of our advisors. Trailing commission revenues are recurring in nature and are earned based on the market value of investment holdings in trail-eligible assets. Advisory Revenues. Advisory revenues primarily represent fees charged on our corporate RIA platform provided through LPL Financial LLC ("LPL Financial") to clients of our advisors based on the value of advisory assets. Advisory fees are typically billed to clients quarterly, in advance, and are recognized as revenue ratably during the quarter. The value of the assets in an advisory account on the billing date determines the amount billed, and accordingly, the revenues earned in the following three month period. The majority of our accounts are billed using values as of the last business day of each calendar quarter. Advisory revenues collected on our corporate RIA platform generally average 1.1% of the underlying assets, and can range anywhere from 0.5% to 3.0%. In addition, we support independent RIAs who conduct their advisory business through separate entities by establishing their own RIA ("Independent RIAs") pursuant to the Investment Advisers Act of 1940, rather than through LPL Financial. The assets held under these investment advisory accounts custodied with LPL Financial are included in our advisory and brokerage assets, net new advisory assets, and advisory assets under custody metrics. The advisory revenue generated by an Independent RIA is earned by the Independent RIA, and accordingly is not included in our advisory 22 -------------------------------------------------------------------------------- revenue. However, we charge administrative fees to Independent RIAs for clearing and custody of these assets based on the value of assets within these advisory accounts. The administrative fees collected on our Independent RIA platform vary and can reach a maximum of 0.6% of the underlying assets. Furthermore, we support certain financial advisors at broker-dealers affiliated with insurance companies through our customized advisory platforms and charge fees to these advisors based on the value of assets within these advisory accounts. Asset-Based Revenues. Asset-based revenues are comprised of fees from cash sweep programs, our sponsorship programs with financial product manufacturers, and omnibus processing and networking services. Pursuant to contractual arrangements, uninvested cash balances in our advisors' client accounts are swept into either insured deposit accounts at various banks or third-party money market funds, for which we receive fees, including administrative and recordkeeping fees based on account type and the invested balances. In addition, we receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales-force education and training efforts. Our omnibus processing and networking revenues represent fees paid to us in exchange for administrative and record-keeping services that we provide to clients of our advisors. Omnibus processing revenues are paid to us by mutual fund product sponsors and are based on the value of custodied assets in advisory accounts and the number of brokerage accounts in which the related mutual fund positions are held. Networking revenues on brokerage assets are correlated to the number of positions we administer and are paid to us by mutual fund and annuity product manufacturers. Transaction and Fee Revenues. Revenues earned from transactions and fees primarily consist of transaction fees and ticket charges, subscription fees, Individual Retirement Account ("IRA") custodian fees, contract and license fees, conference fees, and other client account fees. We charge fees to our advisors and their clients for executing certain transactions in brokerage and fee-based advisory accounts. We earn subscription fees for various services provided to our advisors and on IRA custodial services that we provide for their client accounts. We charge administrative fees to our advisors and fees to advisors who subscribe to our reporting services. We charge fees to financial product manufacturers for participating in our training and marketing conferences. In addition, we host certain advisor conferences that serve as training, sales, and marketing events, for which we charge a fee for attendance. Other Revenues. Other revenues include marketing allowances received from certain financial product manufacturers, primarily those who offer alternative investments, such as non-traded real estate investment trusts and business development companies, mark-to-market gains or losses on assets held by us for the advisors' non-qualified deferred compensation plan and our model portfolios, revenues from our Retirement Partners program, interest income from client margin accounts and cash equivalents, net of operating interest expense, and other items. Our Operating Expenses Production Expenses. Production expenses are comprised of the following: base payout amounts that are earned by and paid out to advisors based on commission and advisory revenues earned on each client's account (collectively, commission and advisory revenues earned by LPL Financial are referred to as gross dealer concessions, or "GDC"); production bonuses earned by advisors based on the levels of commission and advisory revenues they produce; the recognition of share-based compensation expense from equity awards granted to advisors and financial institutions based on the fair value of the awards at each reporting period; a mark-to-market gain or loss on amounts designated by advisors as deferred commissions in a non-qualified deferred compensation plan at each reporting period; and brokerage, clearing, and exchange fees. Our production payout ratio is calculated as production expenses, excluding brokerage, clearing, and exchange fees, divided by GDC. We characterize components of production payout, which consists of all production expenses except brokerage, clearing, and exchange fees, as either GDC sensitive or non-GDC sensitive. Base payout amounts and production bonuses earned by and paid to advisors are characterized as GDC sensitive because they are variable and highly correlated to the level of our commission and advisory revenues in a particular reporting period. Payout characterized as non-GDC sensitive includes share-based compensation expense from equity awards granted to advisors and financial institutions based on the fair value of the awards at each reporting period, and mark-to-market gains or losses on amounts designated by advisors as deferred commissions in a non-qualified deferred compensation plan. Non-GDC sensitive payout is 23 -------------------------------------------------------------------------------- correlated either to market movement or to the value of our stock. We believe that discussion of production payout, viewed in addition to, and not in lieu of, our production expenses, provides useful information to investors regarding our payouts to advisors. Compensation and Benefits Expense. Compensation and benefits expense includes salaries and wages and related employee benefits and taxes for our employees (including share-based compensation), as well as compensation for temporary employees and consultants. General and Administrative Expenses. General and administrative expenses include promotional, occupancy and equipment, professional services, communications and data processing, regulatory fees, and other expenses. General and administrative expenses also include expenses for our hosting of certain advisor conferences that serve as training, sales, and marketing events. Depreciation and Amortization Expense. Depreciation and amortization expense represents the benefits received for using long-lived assets. Those assets consist of intangible assets established through our acquisitions, as well as fixed assets, which include internally developed software, hardware, leasehold improvements, and other equipment. Restructuring Charges. Restructuring charges primarily represent expenses incurred as a result of our expansion of our Service Value Commitment announced in 2013 (see Note 3. Restructuring, within the notes to unaudited condensed consolidated financial statements). 24 -------------------------------------------------------------------------------- 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: June 30, 2014 2013 % Change Business Metrics Advisors 13,840 13,409 3.2 % Advisory and brokerage assets (in billions)(1) $ 465.4$ 396.7 17.3 % Advisory assets under custody (in billions)(2)(3) $ 167.3$ 132.4 26.4 % Net new advisory assets (in billions)(4) $ 8.7$ 6.7 29.9 % Insured cash account balances (in billions)(3) $ 16.1$ 16.9 (4.7 )% Money market account balances (in billions)(3) $ 6.7$ 8.7 (23.0 )% Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Financial Metrics Revenue growth from prior period 7.2 % 12.2 % 9.4 % 10.2 % Recurring revenue as a % of net revenue(5) 67.6 % 65.6 % 67.1 % 65.5 % Net income (in millions) $ 43.1$ 45.1$ 96.2$ 99.8 Earnings per share (diluted) $ 0.42$ 0.42$ 0.94$ 0.93 Non-GAAP Measures: Gross margin (in millions)(6) $ 328.7$ 305.8$ 659.5$ 610.9 Gross margin as a % of net revenue(6) 30.1 % 30.0 % 30.2 % 30.6 % Adjusted EBITDA (in millions) $ 128.2$ 131.0$ 269.7$ 267.0 Adjusted EBITDA as a % of net revenue 11.7 % 12.9 % 12.4 % 13.4 % Adjusted EBITDA as a % of gross margin(6) 39.0 % 42.9 % 40.9 % 43.7 % Adjusted Earnings (in millions) $ 61.8$ 65.9$ 132.8$ 134.0 Adjusted Earnings per share (diluted) $ 0.61$ 0.61



$ 1.29$ 1.25

_______________

(1) 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 June 30, 2014 and 2013,

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): June 30, 2014 2013 Retirement plan assets(a) $ 73.0$ 52.1 Trust assets(b) $ 3.0$ 10.4



High-net-worth assets(c) $ 79.6$ 65.8

_______________________

(a) Retirement plan assets are held in retirement plans that are supported

by advisors licensed with LPL Financial. At June 30, 2014 and 2013, our

retirement plan assets represent assets that are custodied with 34 third-party providers and 27 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 $110.0 billion and $120.0 billion at June 30, 2014 and between $75.0



billion and $90.0 billion at June 30, 2013. 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. Since June 30, 2013, we began receiving reporting feeds from seven such providers, which accounted for $7.3 billion of the $20.9 billion increase in retirement plan assets. 25

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(b) Represents trust assets that are on the comprehensive wealth management

platform of the Concord Trust and Wealth Solutions division of LPL Financial ("Concord").



(c) Represents high-net-worth assets that are on the comprehensive platform of

performance reporting, investment research, and practice management services of Fortigent. (2) Advisory assets under custody are comprised of advisory assets under management in our corporate RIA platform and Independent RIA assets in advisory accounts custodied by us. See "Results of Operations" for a tabular presentation of advisory assets under custody. (3) Advisory assets under custody, insured cash account balances, and money



market account balances are components of advisory and brokerage assets.

(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, less account attrition and

funds withdrawn from advisory accounts. (5) Recurring revenue, which is a characterization of net revenue and a



statistical measure, is derived from sources such as advisory revenues,

asset-based revenues, trailing commission revenues, revenues related to

our cash sweep programs, interest earned on margin accounts, and

technology and service revenues, and is not meant as a substitute for net

revenues. (6) Gross margin is calculated as net revenues less production expenses. Because our gross margin amounts do not include any depreciation and



amortization expense, we consider our gross margin 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 GAAP results, 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. 26 --------------------------------------------------------------------------------



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 and six months ended June 30, 2014 and 2013 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Net income $ 43,091$ 45,091$ 96,226$ 99,808 Non-operating interest expense 12,914 12,667 25,754 24,827 Provision for income taxes 28,070 29,811 62,482 65,645 Amortization of intangible assets 9,696 9,768 19,412 19,544 Depreciation and amortization of fixed assets 14,122 10,477 26,687 20,475 EBITDA 107,893 107,814 230,561 230,299 EBITDA Adjustments: Employee share-based compensation expense(1) 5,426 4,486 10,537 8,448 Acquisition and integration related expenses(2) 733 3,282 1,092 3,726 Restructuring and conversion costs(3) 9,377 7,322 16,648 13,585 Debt extinguishment costs(4) - 7,968 - 7,968 Other(5) 4,770 173 10,838 2,939 Total EBITDA Adjustments 20,306 23,231 39,115 36,666 Adjusted EBITDA $ 128,199$ 131,045$ 269,676$ 266,965 __________________



(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. During the three and six months

ended June 30, 2013, approximately $2.2 million and $1.2 million, respectively, was recognized as a charge against earnings due to a net increase in the estimated fair value of contingent consideration.



(3) Represents organizational restructuring charges, conversion, and other

related costs primarily resulting from the expansion of our Service Value

Commitment. (4) Represents expenses incurred resulting from the early extinguishment and repayment of amounts outstanding under prior senior secured credit



facilities and the establishment of new senior secured credit facilities.

(5) Results for the three and six months ended June 30, 2014 include

approximately $3.9 million and $9.2 million, respectively, in parallel

rent, property tax, fixed asset disposals, and common area maintenance

expenses incurred in connection with our relocation to our San Diego

office building. Also included in the three and six months ended June 30,

2014 are $0.5 million in losses on equity investments. Results for the 27

-------------------------------------------------------------------------------- six months ended June 30, 2013 include $2.7 million of severance and termination benefits related to a change in management structure. Other amounts include certain excise and other taxes. 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 GAAP results 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. 28 -------------------------------------------------------------------------------- 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 and six months ended June 30, 2014 and 2013 (in thousands, except per share data): Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Net income $ 43,091$ 45,091$ 96,226$ 99,808 After-Tax: EBITDA Adjustments(1) Employee share-based compensation expense(2) 3,594 3,200 7,112 6,102 Acquisition and integration related expenses(3) 450 2,025 670 946 Restructuring and conversion costs 5,758 4,518 10,222 8,382 Debt extinguishment costs - 4,916 - 4,916 Other 2,929 106 6,655 1,813 Total EBITDA Adjustments 12,731 14,765 24,659 22,159 Amortization of intangible assets(1) 5,953 6,027 11,919 12,059 Adjusted Earnings $ 61,775$ 65,883$ 132,804$ 134,026 Adjusted Earnings per share(4) $ 0.61 $ 0.61 $ 1.29 $ 1.25 Weighted-average shares outstanding - diluted 102,029 107,695 102,672 107,465 __________________

(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% and 3.3%, net of the federal tax benefit, for the periods ended June 30, 2014 and 2013, respectively, except as noted below. (2) Represents the after-tax expense of non-qualified stock options for which we receive a tax deduction upon exercise, restricted stock awards and



restricted stock units for which we receive a tax deduction upon vesting,

and the full expense 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. Share-based compensation expense

for vesting of incentive stock options was $0.7 million and $1.1 million

for the three months ended June 30, 2014 and 2013, respectively, and $1.7 million and $2.3 million for the six months ended June 30, 2014 and 2013, respectively. (3) Represents the after-tax expense of acquisition and related costs for which we receive a tax deduction. In addition, the results for the six



months ended June 30, 2013 include a reduction of expense of $3.8 million

relating to the fair value of contingent consideration for the stock

acquisition of Concord Capital Partners, Inc., that is not deductible for

tax purposes. (4) 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 June 30, Six Months Ended June 30, 2014 2013 2014 2013 Earnings per share - diluted $ 0.42 $ 0.42 $ 0.94 $ 0.93 After-Tax: EBITDA Adjustments per share 0.13 0.14 0.24 0.21 Amortization of intangible assets per share 0.06 0.05 0.11 0.11 Adjusted Earnings per share $ 0.61 $ 0.61 $ 1.29 $ 1.25 Service Value Commitment The Program In February 2013, we committed to an expansion of our Service Value Commitment (the "Program"), an ongoing 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, 29 -------------------------------------------------------------------------------- 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. The Program is expected to be completed in 2015, and we estimate total charges of $65.0 million for technology transformation costs, outsourcing and other related costs, employee severance obligations and other related costs, and non-cash charges for impairment of certain fixed assets related to internally developed software. We expect to incur approximately $30.3 million of expense during 2014, of which we had incurred $15.7 million as of June 30, 2014, consisting of: $4.4 million for outsourcing and other services such as parallel processing provided by outside consultants; $9.8 million for the implementation of foundational changes to our technology platform and outsourcing of our disaster recovery facilities; and $1.6 million for employee severance and termination benefits related to positions that were outsourced in the first half of 2014 within accounting, data reconciliation, operations, and insurance processing. We remain focused on the next wave of outsourced functions in the remainder of 2014, including additional opportunities in compliance and back office processing activities. By 2015, we expect annual pre-tax savings to approach $30.0 million. See Note 3. Restructuring, within the notes to unaudited condensed consolidated financial statements for additional information regarding the Program. Derivative Financial Instruments During the second quarter of 2013, and in conjunction with the Program, we entered into a long-term contractual obligation (the "Agreement") with a third-party provider to enhance the quality, speed, and cost of our processes by outsourcing certain functions. The Agreement enables the third-party provider to use the services of its affiliates in India to provide services to us. The Agreement provides that we settle the cost of our contractual obligation to the third-party provider each month in U.S. dollars. However, the Agreement provides that on each annual anniversary date, the price for services (as denominated in U.S. dollars) is to be adjusted for the then-current exchange rate between the U.S. dollar and the Indian rupee. 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 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 the risk 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 to $14.0 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. These instruments are operating effectively as intended and our use of them has 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 six months ended June 30, 2014. See our 2013 Annual Report on Form 10-K for 2013 activity. Economic Overview and Impact of Financial Market Events Our business is directly and indirectly sensitive to several macro-economic 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. In the second quarter of 2014, the Federal Reserve reaffirmed its view that a highly accommodative stance on monetary policy remains appropriate. In determining how long to maintain the current 0.0% to 0.25% target range for the federal funds rate, the Federal Reserve stated that it will assess both realized and expected progress toward its objectives of maximum employment and 2.0% inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Federal Reserve continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the 30 -------------------------------------------------------------------------------- federal funds effective rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Federal Reserve's 2.0% longer-run goal, and provided that longer-term inflation expectations remain well anchored. As a result of the accommodative monetary policy, interest rates, including the rate on overnight funds, remain low on a historical basis. The average federal funds effective rate was 9 basis points in the second quarter of 2014, a decrease from the average of 12 basis points in the second quarter of 2013. The low interest rate environment continued to pressure our revenues from our cash sweep programs and continued to diminish investor demand for fixed income securities and fixed annuities. Another macro-economic factor affecting our business is the valuation of equity securities across the various markets in the United States. The S&P 500 index closed the quarter at 1,960, up 4.7% from its close on March 31, 2014, finished up for the sixth consecutive quarter, and posted its best second-quarter gain since 2009. Investor confidence grew as the economic background continued to improve despite the reduction in the Federal Reserve's bond-buying program. This helped to lift stock valuations and prompted individual investors to put money into the market at the strongest pace in years. As a result, our advisors maintained strong productivity in the first half 2014. While the equity markets improved, lingering economic worries remain about Federal Reserve monetary policy, U.S. and global growth rates, geopolitical concerns, and policy uncertainty in Washington, D.C. 31 -------------------------------------------------------------------------------- Results of Operations The following discussion presents an analysis of our results of operations for the three and six months ended June 30, 2014 and 2013. Where appropriate, we have identified specific events and changes that affect comparability or identification or monitoring of trends, and where possible and practical, have quantified the impact of such items. Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 % Change 2014 2013 % Change (In thousands) Revenues Commission $ 535,177$ 508,399 5.3 % $ 1,069,751$ 993,971 7.6 % Advisory 330,394 298,094 10.8 % 657,647 579,320 13.5 % Asset-based 118,537 107,505 10.3 % 233,211 211,271 10.4 % Transaction and fee 91,625 88,631 3.4 % 181,610 178,009 2.0 % Other 16,996 16,291 4.3 % 37,941 31,145 21.8 % Net revenues 1,092,729 1,018,920 7.2 % 2,180,160 1,993,716 9.4 % Expenses Production 763,991 713,115 7.1 % 1,520,709 1,382,838 10.0 % Compensation and benefits 104,821 98,227 6.7 % 211,169 197,007 7.2 % General and administrative 106,799 84,470 26.4 % 201,176 162,241 24.0 % Depreciation and amortization 23,818 20,245 17.6 % 46,099 40,019 15.2 % Restructuring charges 9,225 7,332 25.8 % 16,545 13,369 23.8 % Total operating expenses 1,008,654 923,389 9.2 % 1,995,698 1,795,474 11.2 % Non-operating interest expense 12,914 12,667 1.9 % 25,754 24,827 3.7 % Loss on extinguishment of debt - 7,962 (100.0 )% - 7,962 (100.0 )% Total expenses 1,021,568 944,018 8.2 % 2,021,452 1,828,263 10.6 % Income before provision for income taxes 71,161 74,902 (5.0 )% 158,708 165,453 (4.1 )% Provision for income taxes 28,070 29,811 (5.8 )% 62,482 65,645 (4.8 )% Net income $ 43,091$ 45,091 (4.4 )% $ 96,226$ 99,808 (3.6 )% 32

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Revenues

Commission Revenues The following table sets forth our commission revenue, by product category, included in our unaudited condensed consolidated statements of income for the three months ended June 30, 2014 and 2013 (in thousands): Three Months Ended June 30, 2014 2013 $ Change % Change Variable annuities $ 206,708$ 206,081$ 627 0.3 % Mutual funds 154,207 146,395 7,812 5.3 % Alternative investments 50,692 46,397 4,295 9.3 % Fixed annuities 42,831 23,178 19,653 84.8 % Equities 26,511 29,104 (2,593 ) (8.9 )% Fixed income 22,443 22,314 129 0.6 % Insurance 17,910 21,515 (3,605 ) (16.8 )% Group annuities 13,611 13,073 538 4.1 % Other 264 342 (78 ) (22.8 )% Total commission revenue $ 535,177$ 508,399$ 26,778 5.3 % The following table sets forth our commission revenue, by sales-based and trailing commission revenue, for the three months ended June 30, 2014 and 2013 (in thousands): Three Months Ended June 30, 2014 2013 $ Change % Change Sales-based $ 303,232$ 304,654$ (1,422 ) (0.5 )% Trailing 231,945 203,745 28,200 13.8 % Total commission revenue $ 535,177$ 508,399$ 26,778 5.3 % Commission revenue increased by $26.8 million, or 5.3%, for the three months ended June 30, 2014 compared with the same period in 2013, due primarily to an increase in sales-based activity for fixed annuities and alternative investments, and increases in trailing revenues for mutual funds and variable and group annuities. Such growth reflects improved investor engagement and strong market conditions, resulting in the increase of the underlying assets. Fixed annuity sales-based commissions have risen, despite historically low interest rates, as investors have sought income streams with minimal risk to principal. Commissions from fixed annuities also include commissions earned on indexed annuities. The increase in commission revenues associated with alternative investments during the periods presented reflects investors' preferences for diversification, as income-producing alternative strategies have continued to grow in popularity and investors have sought to diversify their risk exposure away from traditional fixed income and equity assets. 33 --------------------------------------------------------------------------------



The following table sets forth our commission revenue, by product category, included in our unaudited condensed consolidated statements of income for the six months ended June 30, 2014 and 2013 (dollars in thousands):

Six Months Ended June 30, 2014 2013 $ Change % Change Variable annuities $ 404,904$ 408,523$ (3,619 ) (0.9 )% Mutual funds 302,962 287,298 15,664 5.5 % Alternative investments 106,374 86,808 19,566 22.5 % Fixed annuities 89,557 41,772 47,785 114.4 % Equities 55,621 56,460 (839 ) (1.5 )% Fixed income 44,427 44,462 (35 ) (0.1 )% Insurance 37,322 41,868 (4,546 ) (10.9 )% Group annuities 28,221 26,210 2,011 7.7 % Other 363 570 (207 ) (36.3 )% Total commission revenue $ 1,069,751$ 993,971$ 75,780 7.6 % The following table sets forth our commission revenue, by sales-based and trailing commission revenue, for the six months ended June 30, 2014 and 2013 (dollars in thousands): Six Months Ended June 30, 2014 2013 $ Change % Change Sales-based $ 615,252$ 597,516$ 17,736 3.0 % Trailing 454,499 396,455 58,044 14.6 % Total commission revenue $ 1,069,751$ 993,971$ 75,780 7.6 % Commission revenue increased by $75.8 million, or 7.6%, for the six months ended June 30, 2014 compared with the same period in 2013. We attribute this growth to the same factors that impacted our quarterly performance for most product categories, which are described above. Advisory Revenues The following table summarizes the activity within our advisory assets under custody for the three and six months ended June 30, 2014 and 2013 (in billions): Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013



Balance - Beginning of period $ 158.0$ 130.2 $

151.6 $ 122.1 Net new advisory assets 4.2 3.7 8.7 6.7 Market impact and other 5.1 (1.5 ) 7.0 3.6 Balance - End of period $ 167.3$ 132.4$ 167.3$ 132.4 Net new advisory assets for the three and six months ended June 30, 2014 and 2013 have only a limited impact on advisory fee revenue for those respective periods, given the comparatively large assets at the beginning of each period. Rather, net new advisory assets are anticipated to be a larger driver of advisory revenue in future reporting periods. Net new advisory assets were $4.2 billion for the three months ended June 30, 2014, resulting from the continued shift by our existing advisors from brokerage towards more advisory business. Advisory revenue for a particular quarter is predominately driven by the prior quarter-end advisory assets under management. Advisory revenues increased by $32.3 million, or 10.8%, for the three months ended June 30, 2014 compared to the same period in 2013. The growth in advisory revenue is due to net new advisory assets resulting from increased investor engagement and strong advisor productivity, newly recruited advisors that were added in the first quarter of 2014, as well as market gains as represented by higher levels of the S&P 500 index on 34 -------------------------------------------------------------------------------- the applicable billing dates in 2014 compared to 2013. The S&P 500 index closed at 1,872 on March 31, 2014, which is a 19.3% increase over the close of 1,569 on March 31, 2013. The Independent RIA model has continued to attract advisors as they seek the freedom to run their business in a manner that best enables them to meet their clients' needs. This continued shift of advisors to the Independent RIA platform (for which we custody assets but do not earn advisory revenues for managing such assets) has caused the rate of revenue growth of advisory assets under management to lag behind the rate of growth of advisory assets under custody. Advisory revenues do not include fees for advisory services charged by Independent RIA advisors to their clients. Accordingly, there is no corresponding payout. However, there are administrative fees charged to Independent RIA advisors including custody and clearing fees, based on the value of assets. Advisory revenues increased by $78.3 million, or 13.5%, for the six months ended June 30, 2014 compared with the same period in 2013. This growth is attributable to the same net new advisory asset flows and shift of advisors toward more advisory business that has impacted our quarterly performance, and to a positive market impact for the six months ended June 30, 2014. The following table summarizes the composition of our advisory assets under custody as of June 30, 2014 and 2013 (in billions): June 30, 2014 2013 $ Change % Change Advisory assets under management $ 124.2$ 106.4$ 17.8 16.7 % Independent RIA assets in advisory accounts custodied by LPL Financial 43.1 26.0 17.1 65.8 % Total advisory assets under custody $ 167.3$ 132.4 $



34.9 26.4 %

Growth of the Independent RIA assets in advisory accounts custodied by LPL Financial has outpaced the growth in advisory assets under management. This growth is consistent with the industry trend as more advisors shift their business toward the Independent RIA model. Asset-Based Revenues Asset-based revenues increased by $11.0 million, or 10.3%, to $118.5 million for the three months ended June 30, 2014 compared with the same period in 2013. Revenues for sponsorship programs and record-keeping services, which are largely based on underlying asset values, increased due to the impact of the higher average market indices on the value of such underlying assets and net new sales of eligible assets. The S&P 500 index for the three months ended June 30, 2014 averaged 1,900, an increase of 18.1% over the average in the prior-year period. Asset-based revenues also include revenues from our cash sweep programs, which decreased by $6.2 million, or 20.1%, to $24.8 million for the three months ended June 30, 2014 from $31.0 million for the three months ended June 30, 2013. The decrease in our cash sweep revenues is a result of fee compression resulting from contract repricing, a year-over-year 3 basis point decline in the average federal funds effective rate to 0.09% for the three months ended June 30, 2014, and a decrease of 1.3% in average assets in our cash sweep programs, which were $23.4 billion and $23.7 billion for the three months ended June 30, 2014 and 2013, respectively. Asset-based revenues increased by $21.9 million, or 10.4%, to $233.2 million for the six months ended June 30, 2014 compared with the same period in 2013. Revenues for record-keeping services and from product sponsors, which are each largely based on underlying asset values, increased due to the impact of the higher average market indices on the value of such underlying assets and net new sales of eligible assets. The S&P 500 index for the six months ended June 30, 2014 averaged 1,868, an increase of 19.5% over the average in the prior year period. Asset-based revenues also include revenues from our cash sweep programs, which decreased by $13.8 million, or 22.0%, to $48.8 million for the six months ended June 30, 2014 from $62.5 million for the six months ended June 30, 2013. The decrease is due to fee compression that resulted from a repricing of certain contracts that underlie our cash sweep programs. Average assets in our cash sweep programs were $23.8 billion and $23.4 billion for the six months ended June 30, 2014 and 2013, respectively. Transaction and Fee Revenues Transaction and fee revenues increased by $3.0 million, or 3.4%, for the three months ended June 30, 2014 compared with the same period in 2013, primarily due to the timing of one of our advisor conferences and increase in the number of advisors. 35 -------------------------------------------------------------------------------- Transaction and fee revenues increased by $3.6 million, or 2.0%, for the six months ended June 30, 2014 compared with the same period in 2013, due to a 2.8% increase in the average number of advisors and an increase in client retirement accounts. Other Revenues Other revenues increased $0.7 million, or 4.3%, to $17.0 million for the three months ended June 30, 2014 compared with the same period in 2013. The primary contributor to such increase for the three months ended June 30, 2014 was alternative investment marketing allowances received from product sponsor programs, which increased by $1.5 million compared to the same period in 2013, driven primarily by increased sales of alternative investments. Other revenue includes gains or losses on assets held for the advisor non-qualified deferred compensation plan. Losses were $0.3 million for the three months ended June 30, 2014, compared to gains of $1.4 million for the three months ended June 30, 2013. The gains or losses on assets held for the advisor non-qualified deferred compensation plan were offset by increases or decreases in non-GDC sensitive production expenses as noted below. Other revenues increased $6.8 million, or 21.8%, to $37.9 million for the six months ended June 30, 2014 compared to 2013. The primary contributor to such increase for the six months ended June 30, 2014 was direct investment marketing allowances received from product sponsor programs, which increased by $6.1 million compared to the same period in 2013, driven primarily by increased sales of alternative investments. Other revenue includes gains or losses on assets held for the advisor non-qualified deferred compensation plan. Gains were $2.5 million for the six months ended June 30, 2014, compared to gains of $2.7 million for the same period in 2013. The gains or losses on assets held for the advisor non-qualified deferred compensation plan were offset by the increases or decreases in non-GDC sensitive production expenses as noted below. Expenses Production Expenses The following table shows our production payout ratio for the three and six months ended June 30, 2014 and 2013: Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 Change 2014 2013 Change Base payout rate 84.01 % 84.06 % (5 bps) 83.99 % 83.97 % 2 bps Production based bonuses 2.64 % 2.47 % 17 bps 2.17 % 2.10 % 7 bps GDC sensitive payout 86.65 % 86.53 % 12 bps 86.16 % 86.07 % 9 bps Non-GDC sensitive payout 0.19 % 0.47 % (28 bps) 0.46 % 0.45 % 1 bps Total Payout Ratio 86.84 % 87.00 % (16 bps) 86.62 % 86.52 % 10 bps Production expenses increased by $50.9 million, or 7.1%, for the three months ended June 30, 2014 compared with the same period in 2013. The increase correlates with our commission and advisory revenues, which increased by 7.3% during the same period. Our GDC sensitive payout ratio was 86.65% for the three months ended June 30, 2014, compared to 86.53% for the prior-year period. The base payout rate decreased by 5 basis points in part due to the growth of our advisory platform, which on average has a lower base rate than our brokerage platform. The decrease in non-GDC sensitive payout is attributable to decreased advisor share-based compensation for the three months ended June 30, 2014 compared to the same period in 2013 correlating to market movement in our stock and the advisor non-qualified deferred compensation plan as noted above. Production expenses increased by $137.9 million, or 10.0%, for the six months ended June 30, 2014 compared with the same period in 2013. The increase correlates with our commission and advisory revenues, which increased by 9.8% during the same period. Our production payout was 86.62% for the six months ended June 30, 2014, compared to 86.52% for the prior year period. The increase in non-GDC sensitive payout ratio is attributable to increased advisor share-based compensation for the six months ended June 30, 2014 compared to the same period in 2013 correlating to market movement in our stock and production expenses related to the advisor non-qualified deferred compensation plan as noted above. 36 -------------------------------------------------------------------------------- Compensation and Benefits Expense Compensation and benefits expense increased by $6.6 million, or 6.7%, for the three months ended June 30, 2014 compared with the same period in 2013. This was primarily driven by a 10.2% increase in our average number of full-time employees from 3,015 for the three months ended June 30, 2013 to 3,323 for the three months ended June 30, 2014, to support business growth and investments in staffing related to service and compliance. Compensation and benefits expense increased by $14.2 million, or 7.2%, for the six months ended June 30, 2014 compared with the same period in 2013. Our average number of full-time employees increased 10.6% from 2,972 for the six months ended June 30, 2013 to 3,288 for the six months ended June 30, 2014, due to higher staffing levels to support investments in staffing related to service and compliance and increased levels of advisor and client activities. General and Administrative Expenses General and administrative expenses increased by $22.3 million, or 26.4%, to $106.8 million for the three months ended June 30, 2014 compared with the same period in 2013. The primary drivers behind the increase were increases of $11.6 million for professional fees, $4.9 million for business development and promotional expenses, and $3.9 million for parallel rent, property tax, fixed asset disposals, and common area maintenance expenses incurred in connection with the relocation to our San Diego office building. The increase in professional fees include the costs of the investigation, settlement, and remediation of several regulatory matters. General and administrative expenses increased by $38.9 million, or 24.0%, to $201.2 million for the six months ended June 30, 2014 compared with the same period in 2013. The primary drivers behind the increase were increases of $15.9 million for professional fees, $8.4 million for business development and promotional expenses, and $9.2 million for parallel rent, property tax, fixed asset disposals, and common area maintenance expenses incurred in connection with the relocation to our San Diego office building. Depreciation and Amortization Expense For the three and six months ended June 30, 2014, depreciation and amortization increased by $3.6 million, or 17.6%, and $6.1 million, or 15.2%, respectively, compared with the same periods in 2013. The increases were due primarily to capital assets placed into service during the latter half of 2013 related to the San Diego office building and capitalized software. Restructuring Charges Restructuring charges increased by $1.9 million, or 25.8%, and $3.2 million, or 23.8%, for the three and six months ended June 30, 2014, respectively, compared with the same periods in 2013. These charges relate primarily to consulting fees paid to support our technology transformation as well as employee severance obligations and other related costs and non-cash charges for impairment incurred through our expansion of our Service Value Commitment. Refer to Note 3. Restructuring, within the notes to unaudited condensed consolidated financial statements for additional details regarding this matter. Interest Expense Interest expense represents non-operating interest expense for our senior secured credit facilities. Interest expense increased $0.2 million, or 1.9%, and $0.9 million, or 3.7%, for the three and six months ended June 30, 2014, respectively, compared with the same periods in 2013. The increase in interest expense for the 2014 periods is primarily due to the increase in outstanding indebtedness following the amendment to the credit agreement in May 2013. Loss on Extinguishment of Debt Losses from the extinguishment of debt totaled $8.0 million for the six months ended June 30, 2013. In May 2013, we refinanced and amended our previous credit agreement and effectively increased our borrowing by approximately $236.1 million, with net proceeds used primarily for working capital requirements and other general corporate purposes. Accordingly, we wrote off $8.0 million of unamortized debt issuance costs that had no future economic benefit related to our prior credit agreement. Refer to Note 8. Debt, within the notes to unaudited condensed consolidated financial statements for additional details regarding this matter. 37



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Provision for Income Taxes We estimate our full-year effective income tax rate at the end of each reporting period. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The tax rate in any quarter can be affected positively and negatively by adjustments that are required to be reported in the quarter in which resolution of the item occurs. The effective income tax rates reflect the impact of state taxes, settlement contingencies, and expenses that are not deductible for tax purposes. During the three months ended June 30, 2014, we recorded income tax expense of $28.1 million, compared with $29.8 million in the prior year period. Our effective income tax rate was 39.4% and 39.8% for the three months ended June 30, 2014 and 2013, respectively. During the six months ended June 30, 2014, we recorded income tax expense of $62.5 million, compared with $65.6 million in the prior year period. Our effective income tax rate was 39.4% and 39.7% for the six months ended June 30, 2014 and 2013, respectively. Liquidity and Capital Resources Senior management establishes our liquidity and capital policies. These policies include senior management's review of short- and long-term cash flow forecasts, review of monthly capital expenditures, and daily monitoring of liquidity for our subsidiaries. Decisions on the allocation of capital are based on, among other things, projected profitability and cash flow, risks of the business, regulatory capital requirements, and future liquidity needs for strategic activities. Our Treasury department assists in evaluating, monitoring, and controlling the business activities that impact our financial condition, liquidity, and capital structure and maintains relationships with various lenders. The objectives of these policies are to support the executive business strategies while ensuring ongoing and sufficient liquidity. A summary of changes in our cash flow is provided as follows (in thousands):


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