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, 2019

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, 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.



	September 30, 2019
Assets	Carrying Value		Level 1		Level 2		Total Estimated Fair Value
Cash and cash equivalents	$	251,033	$	251,033	$	—	$	251,033
Receivables from clearing brokers	27,835		—		27,835		27,835
Receivables from other broker-dealers	5,597		—		5,597		5,597
Notes receivables, net (1)	7,459		—		7,459		7,459
Other receivables, net	67,419		—		67,419		67,419
Insurance trailing commissions receivable	67,290		—		67,290		67,290
	$	426,633	$	251,033	$	175,600	$	426,633

Liabilities
Accrued compensation	$	36,871	$	—	$	36,871	$	36,871
Commissions and fees payable	106,004		—		106,004		106,004
Accounts payable and accrued liabilities (2)	34,677		—		34,677		34,677
Accrued interest	—		—		—		—
Notes payable, net (3)	315,898		—		333,145		333,145
	$	493,450	$	—	$	510,697	$	510,697

(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 $2,520.

(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	68,942		—		68,942		68,942
Insurance trailing commissions receivable	64,300				64,300		64,300
	$	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 September 30, 2019 and December 31, 2018:



	September 30, 2019
Assets	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
Certificates of deposit	$	289	$	289	$	—	$	—	$	289
Debt securities	627		—		627		—		627
U.S. treasury notes	711		—		711		—		711
Common stock and warrants	2,974		326		2,648		—		2,974
Total	$	4,601	$	615	$	3,986	$	—	$	4,601

Liabilities
Contingent consideration payable	$	2,520	$	—	$	—	$	2,520	$	2,520
Debt securities	29		—		29		—		29
Common stock and warrants	6		6		—		—		6
Total	$	2,555	$	6	$	29	$	2,520	$	2,555



	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 September 30, 2019 and December 31, 2018, approximately $3,599 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 September 30, 2019 and December 31, 2018, the fair values of the warrants were $959 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	290
Fair value of contingent consideration as of September 30, 2019	$	2,520

- 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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