| Fair Value of Financial Instruments | FAIR VALUE OF FINANCIAL INSTRUMENTS Based on the nature of the Company's business and its role as a "dealer" in the securities industry or as a manager of alternative asset management funds, the fair values of its financial instruments are determined internally. The Company's processes are designed to ensure that the fair values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, unobservable inputs are developed based on an evaluation of all relevant empirical market data, including prices evidenced by market transactions, interest rates, credit spreads, volatilities and correlations and other security-specific information. Valuation adjustments related to illiquidity or counterparty credit risk are also considered. In estimating fair value, the Company may utilize information provided by third-party pricing vendors to corroborate internally-developed fair value estimates. The Company employs specific control processes to determine the reasonableness of the fair value of its financial instruments. The Company's processes are designed to ensure that the internally-estimated fair values are accurately recorded and that the data inputs and the valuation techniques used are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. Individuals outside of the trading departments perform independent pricing verification reviews as of each reporting date. The Company has established parameters which set forth when the fair value of securities is independently verified. The selection parameters are generally based upon the type of security, the level of estimation risk of a security, the materiality of the security to the Company's consolidated financial statements, changes in fair value from period to period, and other specific facts and circumstances of the Company's securities portfolio. In evaluating the initial internally-estimated fair values made by the Company's traders, the nature and complexity of securities involved (e.g., term, coupon, collateral, and other key drivers of value), level of market activity for securities, and availability of market data are considered. The independent price verification procedures include, but are not limited to, analysis of trade data (both internal and external where available), corroboration to the valuation of positions with similar characteristics, risks and components, or comparison to an alternative pricing source, such as a discounted cash flow model. The Company's valuation committees, comprised of members of senior management and risk management, provide oversight and overall responsibility for the internal control processes and procedures related to fair value measurements. The following is a description of the valuation techniques used to measure fair value. Cash Equivalents Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market funds are measured at their net asset value and classified as Level I. Financial Instruments and Other Inventory Positions The Company records financial instruments and other inventory positions owned and financial instruments and other inventory positions sold, but not yet purchased at fair value on the consolidated statements of financial condition with unrealized gains and losses reflected on the consolidated statements of operations. Equity Securities Exchange traded equity securities are valued based on quoted prices from the exchange for identical assets or liabilities as of the period-end date. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized as Level I. Non-exchange traded equity securities are measured primarily using broker quotations, prices observed for recently executed market transactions and internally-developed fair value estimates based on observable inputs and are categorized within Level II of the fair value hierarchy. Convertible Securities Convertible securities are valued based on observable trades, when available, and therefore are generally categorized as Level II. Corporate Fixed Income Securities Fixed income securities include corporate bonds which are valued based on recently executed market transactions of comparable size, internally-developed fair value estimates based on observable inputs, or broker quotations. Accordingly, these corporate bonds are categorized as Level II. Taxable Municipal Securities Taxable municipal securities are valued using recently executed observable trades or market price quotations and therefore are generally categorized as Level II. Tax-Exempt Municipal Securities Tax-exempt municipal securities are valued using recently executed observable trades or market price quotations and therefore are generally categorized as Level II. Certain illiquid tax-exempt municipal securities are valued using market data for comparable securities (e.g., maturity and sector) and management judgment to infer an appropriate current yield or other model-based valuation techniques deemed appropriate by management based on the specific nature of the individual security and therefore are categorized as Level III. Short-Term Municipal Securities Short-term municipal securities include variable rate demand notes and other short-term municipal securities. Variable rate demand notes and other short-term municipal securities are valued using recently executed observable trades or market price quotations and therefore are generally categorized as Level II. Asset-Backed Securities Asset-backed securities are valued using recently executed observable trades, when available, and therefore are generally categorized as Level II. Certain asset-backed securities are valued using models where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data. Accordingly, these asset-backed securities are categorized as Level II. U.S. Government Agency Securities U.S. government agency securities include agency debt bonds and mortgage bonds. Agency debt bonds are valued by using either direct price quotes or price quotes for comparable bond securities and are categorized as Level II. Mortgage bonds include bonds secured by mortgages, mortgage pass-through securities, agency collateralized mortgage-obligation ("CMO") securities and agency interest-only securities. Mortgage pass-through securities, CMO securities and interest-only securities are valued using recently executed observable trades or other observable inputs, such as prepayment speeds and therefore are generally categorized as Level II. Mortgage bonds are valued using observable market inputs, such as market yields on spreads over U.S. treasury securities, or models based upon prepayment expectations. These securities are categorized as Level II. U.S. Government Securities U.S. government securities include highly liquid U.S. treasury securities which are generally valued using quoted market prices and therefore are categorized as Level I. The Company does not transact in securities of countries other than the U.S. government. Derivative Contracts Derivative contracts include interest rate swaps, interest rate locks, and U.S. treasury bond futures. These instruments derive their value from underlying assets, reference rates, indices or a combination of these factors. The majority of the Company's interest rate derivative contracts, including both interest rate swaps and interest rate locks, are valued using market standard pricing models based on the net present value of estimated future cash flows. The valuation models used do not involve material subjectivity as the methodologies do not entail significant judgment and the pricing inputs are market observable, including contractual terms, yield curves and measures of volatility. These instruments are classified as Level II within the fair value hierarchy. Certain interest rate locks transact in less active markets and are valued using valuation models that include the previously mentioned observable inputs and certain unobservable inputs that require significant judgment, such as the premium over the Municipal Market Data ("MMD") curve. These instruments are classified as Level III. Investments The Company's investments valued at fair value include equity investments in private companies and mutual funds held by a grantor trust for the Company's nonqualified deferred compensation plan. Investments in private companies are valued based on an assessment of each underlying security, considering rounds of financing, the financial condition and operating results of the private company, third-party transactions and market-based information, including comparable company transactions, trading multiples (e.g., multiples of revenue and earnings before interest, taxes, depreciation and amortization ("EBITDA")), discounted cash flow analyses and changes in market outlook, among other factors. These securities are categorized based on the lowest level of input that is significant to the fair value measurement. Certain underlying securities, as well as investments in mutual funds, are valued based on quoted prices from the exchange for identical assets as of the period-end date. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized as Level I. See Note 9 and Note 15 to our consolidated financial statements for additional information about the Company's nonqualified deferred compensation plan. The following table summarizes the valuation of the Company's financial instruments by pricing observability levels defined in FASB Accounting Standards Codification Topic 820, "Fair Value Measurement" ("ASC 820") as of June 30, 2024: Counterparty and Cash Collateral (Amounts in thousands) Level I Level II Level III Netting (1) Total Assets Financial instruments and other inventory positions owned: Corporate securities: Equity securities $ 15 $ 3,425 $ — $ — $ 3,440 Convertible securities — 127,669 — — 127,669 Fixed income securities — 5,608 — — 5,608 Municipal securities: Taxable securities — 36,086 — — 36,086 Tax-exempt securities — 140,474 270 — 140,744 Short-term securities — 18,012 — — 18,012 Asset-backed securities — 33,115 — — 33,115 U.S. government agency securities — 36,768 — — 36,768 U.S. government securities 7,318 — — — 7,318 Derivative contracts — 38,807 2,655 (31,977) 9,485 Total financial instruments and other inventory positions owned 7,333 439,964 2,925 (31,977) 418,245 Cash equivalents 115,208 — — — 115,208 Investments at fair value (2) 56,585 — 195,834 — 252,419 Total assets $ 179,126 $ 439,964 $ 198,759 $ (31,977) $ 785,872 Liabilities Financial instruments and other inventory positions sold, but not yet purchased: Corporate securities: Equity securities $ 33,558 $ — $ — $ — $ 33,558 Fixed income securities — 3,079 — — 3,079 U.S. government agency securities — 4,193 — — 4,193 U.S. government securities 73,752 — — — 73,752 Derivative contracts — 33,521 2,974 (33,083) 3,412 Total financial instruments and other inventory positions sold, but not yet purchased $ 107,310 $ 40,793 $ 2,974 $ (33,083) $ 117,994 (1) Represents cash collateral and the impact of netting on a counterparty basis. The Company had no securities posted as collateral to its counterparties. (2) Includes noncontrolling interests of $183.3 million attributable to unrelated third-party ownership in consolidated alternative asset management funds. The following table summarizes the valuation of the Company's financial instruments by pricing observability levels defined in ASC 820 as of December 31, 2023: Counterparty and Cash Collateral (Amounts in thousands) Level I Level II Level III Netting (1) Total Assets Financial instruments and other inventory positions owned: Corporate securities: Equity securities $ 388 $ — $ — $ — $ 388 Convertible securities — 131,375 — — 131,375 Fixed income securities — 1,645 — — 1,645 Municipal securities: Taxable securities — 25,744 — — 25,744 Tax-exempt securities — 135,886 2,869 — 138,755 Short-term securities — 7,122 — — 7,122 Asset-backed securities — 8,149 — — 8,149 U.S. government agency securities — 104,418 — — 104,418 U.S. government securities 5,895 — — — 5,895 Derivative contracts — 52,611 5,834 (47,379) 11,066 Total financial instruments and other inventory positions owned 6,283 466,950 8,703 (47,379) 434,557 Cash equivalents 343,856 — — — 343,856 Investments at fair value (2) 61,601 — 224,280 — 285,881 Total assets $ 411,740 $ 466,950 $ 232,983 $ (47,379) $ 1,064,294 Liabilities Financial instruments and other inventory positions sold, but not yet purchased: Corporate securities: Equity securities $ 53,857 $ — $ — $ — $ 53,857 Fixed income securities — 2,230 — — 2,230 U.S. government agency securities — 48,268 — — 48,268 U.S. government securities 40,437 — — — 40,437 Derivative contracts — 47,032 7,962 (50,806) 4,188 Total financial instruments and other inventory positions sold, but not yet purchased $ 94,294 $ 97,530 $ 7,962 $ (50,806) $ 148,980 (1) Represents cash collateral and the impact of netting on a counterparty basis. The Company had no securities posted as collateral to its counterparties. (2) Includes noncontrolling interests of $211.1 million attributable to unrelated third-party ownership in consolidated alternative asset management funds. The carrying values of the Company's cash, receivables and payables either from or to brokers, dealers and clearing organizations, and short-term financings approximate fair value due to either their liquid or short-term nature. The Company's Level III assets were $198.8 million (including noncontrolling interests of $153.3 million) and $233.0 million (including noncontrolling interests of $177.0 million), or 25.3 percent and 21.9 percent of financial instruments measured at fair value at June 30, 2024 and December 31, 2023, respectively. There were $8.7 million and $13.2 million of transfers of financial assets out of Level III for the three and six months ended June 30, 2024, respectively, and $14.7 million of transfers of financial assets out of Level III for the six months ended June 30, 2023. Transfers out of Level III are primarily due to unobservable inputs becoming observable. At June 30, 2024, the Company's Level I investments at fair value included $26.4 million of equity securities subject to contractual sale restrictions, of which $2.6 million will expire in the third quarter of 2024 and $4.5 million will expire in the fourth quarter of 2024. The sales restrictions on the remaining equity securities are in effect during certain trading windows so long as the securities are owned. The following tables summarize the changes in fair value associated with Level III financial instruments held at the beginning or end of the periods presented: Level III Assets Liabilities (Amounts in thousands) Tax-Exempt Municipal Securities Derivative Contracts Investments at Derivative Contracts Balance at March 31, 2024 $ 276 $ 2,754 $ 217,693 $ 4,571 Purchases — — 10,055 — Sales — — (30,000) — Settlements — (101) — (1,168) Transfers in — — — — Transfers out — — (8,689) — Total realized and unrealized gains/(losses) (6) 2 6,775 (429) Balance at June 30, 2024 $ 270 $ 2,655 $ 195,834 $ 2,974 Balance at March 31, 2023 $ 3,896 $ 442 $ 201,443 $ 3,777 Purchases — — 6,188 — Sales — — — — Settlements — 25 — (2,429) Transfers in — — — — Transfers out — — — — Total realized and unrealized gains/(losses) (6) 860 1,206 (618) Balance at June 30, 2023 $ 3,890 $ 1,327 $ 208,837 $ 730 Unrealized gains/(losses) for assets/liabilities held at: June 30, 2024 $ (6) $ 1,472 $ (16,678) $ 418 June 30, 2023 $ (6) $ 950 $ 1,206 $ 21 Level III Assets Liabilities (Amounts in thousands) Tax-Exempt Municipal Securities Derivative Contracts Investments at Derivative Contracts Balance at December 31, 2023 $ 2,869 $ 5,834 $ 224,280 $ 7,962 Purchases — — 12,055 — Sales (1,901) — (30,000) — Settlements — (2,842) — (3,156) Transfers in — — — — Transfers out — — (13,219) — Total realized and unrealized gains/(losses) (698) (337) 2,718 (1,832) Balance at June 30, 2024 $ 270 $ 2,655 $ 195,834 $ 2,974 Balance at December 31, 2022 $ 3,887 $ 4,756 $ 191,845 $ 1,082 Purchases — — 19,136 — Sales — — (6,747) — Settlements — (2,328) — (1,353) Transfers in — — — — Transfers out — — (14,691) — Total realized and unrealized gains/(losses) 3 (1,101) 19,294 1,001 Balance at June 30, 2023 $ 3,890 $ 1,327 $ 208,837 $ 730 Unrealized gains/(losses) for assets/liabilities held at: June 30, 2024 $ 3 $ 1,449 $ (17,512) $ 142 June 30, 2023 $ 3 $ 1,108 $ 10,272 $ 572 Realized and unrealized gains/(losses) related to financial instruments, with the exception of customer matched-book derivatives, are reported in institutional brokerage on the consolidated statements of operations. Realized and unrealized gains/(losses) related to customer matched-book derivatives are reported in investment banking. Realized and unrealized gains/(losses) related to investments are principally reported in investment income/(loss) on the consolidated statements of operations. The following table summarizes quantitative information about the significant unobservable inputs used in the fair value measurement of the Company's Level III financial instruments as of June 30, 2024: Valuation Weighted Technique Unobservable Input Range Average (1) Assets Tax-exempt municipal securities Discounted cash flow Expected recovery rate (% of par) (3) 0 - 25% 13.4% Derivative contracts Discounted cash flow Premium over the MMD curve in basis points ("bps") (3) 1 - 40 bps 10.5 bps Investments at fair value (2) Market approach Revenue multiple (3) 0.8 - 9 times 6.0 times EBITDA multiple (3) 11 - 15 times 13.0 times Market comparable valuation multiple (3) 0.9 - 2 times 1.3 times Discounted cash flow Discount rate (4) 19 - 25% 21.0% Liabilities Derivative contracts Discounted cash flow Premium over the MMD curve in bps (4) 0.4 - 37 bps 9.3 bps (1) Unobservable inputs were weighted by the relative fair value of the financial instruments. (2) As of June 30, 2024, the Company had $195.8 million of Level III investments at fair value, of which $53.2 million, or 27.2 percent, was valued based on a recent round of independent financing. (3) There is uncertainty in the determination of fair value. Significant increase/(decrease) in the unobservable input in isolation would have resulted in a significantly higher/(lower) fair value measurement. (4) There is uncertainty in the determination of fair value. Significant increase/(decrease) in the unobservable input in isolation would have resulted in a significantly lower/(higher) fair value measurement. |
