Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Assets and Liabilities

v3.10.0.1
Fair Value of Assets and Liabilities
9 Months Ended
Sep. 30, 2018
Fair Value Disclosures [Abstract]  
Fair Value of Assets and Liabilities
Fair Value of Assets and Liabilities

Authoritative accounting guidance defines fair value, establishes a framework for measuring fair value, and establishes a fair value hierarchy which prioritizes the inputs to valuation techniques. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market or income approach are used to measure fair value.

The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.

Level 3 — Unobservable inputs which reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.
The following tables present the carrying values and estimated fair values at September 30, 2018 and December 31, 2017 of financial assets and liabilities, excluding financial instruments that are carried at fair value on a recurring basis, and information is provided on their classification within the fair value hierarchy. Such instruments are carried at amounts that approximate fair value due to their short-term nature and generally negligible credit risk.
 
 
 
September 30, 2018
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
Total Estimated Fair Value
Cash and cash equivalents
 
$
262,834

 
$
262,834

 
$

 
$
262,834

Receivables from clearing brokers
 
26,650

 

 
26,650

 
26,650

Receivables from other broker-dealers
 
1,472

 

 
1,472

 
1,472

Notes receivables, net (1)
 
6,520

 

 
6,520

 
6,520

Other receivables, net
 
130,507

 

 
130,507

 
130,507

 
 
$
427,983

 
$
262,834

 
$
165,149

 
$
427,983

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Accrued compensation
 
$
32,013

 
$

 
$
32,013

 
$
32,013

Commissions and fees payable
 
109,247

 

 
109,247

 
109,247

Accounts payable and accrued liabilities (2)
 
48,183

 

 
48,183

 
48,183

Accrued interest
 

 

 

 

Notes payable, net (3)
 
185,199

 

 
194,131

 
194,131

 
 
$
374,642

 
$

 
$
383,574

 
$
383,574


(1) Carrying value approximates fair value, which is determined based on a valuation technique to convert future cash payments or forgiveness transactions to a single discounted preset value amount.
(2) Excludes contingent consideration liabilities of $1,939.
(3) Estimated fair value based on then current rates at which similar amounts of debt could be borrowed.



 
 
December 31, 2017
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
Total Estimated Fair Value
Cash and cash equivalents
 
$
172,103

 
$
172,103

 
$

 
$
172,103

Receivables from clearing brokers
 
48,543

 

 
48,543

 
48,543

Receivables from other broker-dealers
 
2,822

 

 
2,822

 
2,822

Notes receivables, net (1)
 
47,369

 

 
47,369

 
47,369

Other receivables, net
 
60,707

 

 
60,707

 
60,707

 
 
$
331,544

 
$
172,103

 
$
159,441

 
$
331,544

 
 

 

 

 

Liabilities
 

 

 

 

Accrued compensation
 
$
33,343

 
$

 
$
33,343

 
$
33,343

Commissions and fees payable
 
67,221

 

 
67,221

 
67,221

Accounts payable and accrued liabilities (2)
 
38,374

 

 
38,374

 
38,374

Accrued interest
 
232

 

 
232

 
232

Notes payable, net (3)
 
96,849

 

 
99,129

 
99,129

 
 
$
236,019

 
$

 
$
238,299

 
$
238,299


(1) Carrying value approximates fair value, which is determined based on a valuation technique to convert future cash payments or forgiveness transactions to a single discounted preset value amount.
(2) Excludes contingent consideration liabilities of $2,104.
(3) Estimated fair value based on then current rates at which similar amounts of debt could be borrowed.
The following tables present the financial assets and liabilities measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017:

 
 
September 30, 2018
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
 Level 3
 
Total Estimated Fair Value
Certificates of deposit
 
$
602

 
$
602

 
$

 
$

 
$
602

Debt securities
 
1,694

 

 
1,694

 

 
1,694

Common stock and warrants
 
3,155

 
2,302

 
853

 

 
3,155

Total
 
$
5,451

 
$
2,904

 
$
2,547

 
$

 
$
5,451

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Contingent consideration payable
 
$
1,939

 
$

 
$

 
$
1,939

 
$
1,939

Debt securities
 
65

 

 
65

 

 
65

Common stock and warrants
 
1

 
1

 

 

 
1

Total
 
$
2,005

 
$
1

 
$
65

 
$
1,939

 
$
2,005



 
 
December 31, 2017
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
 Level 3
 
Total Estimated Fair Value
Certificates of deposit
 
$
568

 
$
568

 
$

 
$

 
$
568

Debt securities
 
1,918

 

 
1,918

 

 
1,918

Common stock and warrants
 
1,395

 
765

 
630

 

 
1,395

Total
 
$
3,881

 
$
1,333

 
$
2,548

 
$

 
$
3,881

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Contingent consideration payable
 
$
2,104

 
$

 
$

 
$
2,104

 
$
2,104

Debt securities
 
151

 

 
151

 

 
151

Common stock and warrants
 
80

 
80

 

 

 
80

Total
 
$
2,335

 
$
80

 
$
151

 
$
2,104

 
$
2,335




As of September 30, 2018 and December 31, 2017, approximately $4,631 and $3,265, respectively, of securities owned were deposited with clearing brokers and may be sold or hypothecated by the clearing brokers pursuant to clearing agreements with such clearing brokers. Securities sold, but not yet purchased, represents obligations of the Company’s subsidiaries to purchase the specified financial instrument at the then current market price. Accordingly, these transactions result in off-balance-sheet risk as the Company’s subsidiaries’ ultimate obligation to repurchase such securities may exceed the amount recognized in the consolidated statements of financial condition.

Debt securities and U.S. Treasury notes are valued based on recently executed transactions, market price quotations, and pricing models that factor in, as applicable, interest rates and bond default risk spreads.

Warrants are carried at a discount to fair value as determined by using the Black-Scholes option pricing model due to illiquidity. This model takes into account the underlying securities' current market values, the underlying securities' market volatility, the terms of the warrants, exercise prices and risk-free return rate. As of September 30, 2018 and December 31, 2017, the fair values of the warrants were $704 and $475, respectively, and are included in common stock and warrants (Level 2) above.

From time to time, Ladenburg receives common stock as compensation for investment banking services. These securities are restricted under applicable securities laws and may be freely traded only upon the effectiveness of a registration statement covering them or upon the satisfaction of the requirements of Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"), including the requisite holding period. Restricted common stock is classified as Level 2 securities.

Set forth below are changes in the carrying value of contingent consideration related to acquisitions, which is included in accounts payable and accrued liabilities:

Fair value of contingent consideration as of December 31, 2016
 
$
7,144

Payments
 
(5,021
)
Change in fair value of contingent consideration
 
(19
)
Fair value of contingent consideration as of December 31, 2017
 
$
2,104

Payments
 
(409
)
Change in fair value of contingent consideration
 
61

Fair value of contingent consideration as of March 31, 2018
 
$
1,756

Payments
 
(40
)
Change in fair value of contingent consideration
 
50

Fair value of contingent consideration as of June 30, 2018
 
$
1,766

Payments
 
(500
)
Change in fair value of contingent consideration
 
54

Fair value of contingent consideration in connection with KFG acquisition
 
619

Fair value of contingent consideration as of September 30, 2018
 
$
1,939