Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Assets and Liabilities

Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2018

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

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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