Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Assets and Liabilities

v3.19.1
Fair Value of Assets and Liabilities
3 Months Ended
Mar. 31, 2019
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 March 31, 2019 and December 31, 2018 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.
 
 
 
March 31, 2019
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
Total Estimated Fair Value
Cash and cash equivalents
 
$
167,847

 
$
167,847

 
$

 
$
167,847

Receivables from clearing brokers
 
42,059

 

 
42,059

 
42,059

Receivables from other broker-dealers
 
4,143

 

 
4,143

 
4,143

Notes receivables, net (1)
 
5,343

 

 
5,343

 
5,343

Other receivables, net
 
136,144

 

 
136,144

 
136,144

 
 
$
355,536

 
$
167,847

 
$
187,689

 
$
355,536

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Accrued compensation
 
$
18,743

 
$

 
$
18,743

 
$
18,743

Commissions and fees payable
 
105,121

 

 
105,121

 
105,121

Accounts payable and accrued liabilities (2)
 
39,824

 

 
39,824

 
39,824

Accrued interest
 
1,507

 

 
1,507

 
1,507

Notes payable, net (3)
 
261,237

 

 
276,465

 
276,465

 
 
$
426,432

 
$

 
$
441,660

 
$
441,660


(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 $2,342.
(3) Estimated fair value based on then current rates at which similar amounts of debt could be borrowed.



 
 
December 31, 2018
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
Total Estimated Fair Value
Cash and cash equivalents
 
$
182,693

 
$
182,693

 
$

 
$
182,693

Receivables from clearing brokers
 
24,068

 

 
24,068

 
24,068

Receivables from other broker-dealers
 
7,078

 

 
7,078

 
7,078

Notes receivables, net (1)
 
5,809

 

 
5,809

 
5,809

Other receivables, net
 
133,242

 

 
133,242

 
133,242

 
 
$
352,890

 
$
182,693

 
$
170,197

 
$
352,890

 
 

 

 

 

Liabilities
 

 

 

 

Accrued compensation
 
$
39,264

 
$

 
$
39,264

 
$
39,264

Commissions and fees payable
 
105,306

 

 
105,306

 
105,306

Accounts payable and accrued liabilities (2)
 
46,511

 

 
46,511

 
46,511

Accrued interest
 
123

 

 
123

 
123

Notes payable, net (3)
 
254,072

 

 
266,844

 
266,844

 
 
$
445,276

 
$

 
$
458,048

 
$
458,048


(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 $2,230.
(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 March 31, 2019 and December 31, 2018:

 
 
March 31, 2019
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
 Level 3
 
Total Estimated Fair Value
Certificates of deposit
 
$
191

 
$
191

 
$

 
$

 
$
191

Debt securities
 
2,348

 

 
2,348

 

 
2,348

U.S. treasury notes
 
800

 

 
800

 

 
800

Common stock and warrants
 
4,628

 
3,127

 
1,501

 

 
4,628

Total
 
$
7,967

 
$
3,318

 
$
4,649

 
$

 
$
7,967

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Contingent consideration payable
 
$
2,342

 
$

 
$

 
$
2,342

 
$
2,342

Debt securities
 
345

 

 
345

 

 
345

Common stock and warrants
 
4,752

 
4,752

 

 

 
4,752

Total
 
$
7,439

 
$
4,752

 
$
345

 
$
2,342

 
$
7,439



 
 
December 31, 2018
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
 Level 3
 
Total Estimated Fair Value
Certificates of deposit
 
$
426

 
$
426

 
$

 
$

 
$
426

Debt securities
 
1,447

 

 
1,447

 

 
1,447

U.S. treasury notes
 
794

 

 
794

 

 
794

Common stock and warrants
 
8,256

 
7,070

 
1,186

 

 
8,256

Total
 
$
10,923

 
$
7,496

 
$
3,427

 
$

 
$
10,923

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Contingent consideration payable
 
$
2,230

 
$

 
$

 
$
2,230

 
$
2,230

Debt securities
 
196

 

 
196

 

 
196

Common stock and warrants
 
2,379

 
2,379

 

 

 
2,379

Total
 
$
4,805

 
$
2,379

 
$
196

 
$
2,230

 
$
4,805




As of March 31, 2019 and December 31, 2018, approximately $6,489 and $9,763, 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 March 31, 2019 and December 31, 2018, the fair values of the warrants were $1,396 and $1,052, 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, 2017
 
$
2,104

Payments
 
(1,353
)
Change in fair value of contingent consideration
 
238

Fair value of contingent consideration in connection with KFG and FSFG acquisitions
 
1,241

Fair value of contingent consideration as of December 31, 2018
 
$
2,230

Change in fair value of contingent consideration
 
112

Fair value of contingent consideration as of March 31, 2019
 
$
2,342