Fair Value Measurements | 12 Months Ended |
Dec. 31, 2013 |
Fair Value Measurements [Abstract] | ' |
Fair Value Measurements | ' |
NOTE 6 – Fair Value Measurements |
We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, trading securities owned, available-for-sale securities, investments, trading securities sold, but not yet purchased, securities sold, but not yet purchased, and derivatives. |
We generally utilize third-party pricing services to value Level 1 and Level 2 available-for-sale investment securities, as well as certain derivatives designated as cash flow hedges. We review the methodologies and assumptions used by the third-party pricing services and evaluate the values provided, principally by comparison with other available market quotes for similar instruments and/or analysis based on internal models using available third-party market data. We may occasionally adjust certain values provided by the third-party pricing service when we believe, as the result of our review, that the adjusted price most appropriately reflects the fair value of the particular security. |
The following is a description of the valuation techniques and key inputs used to measure fair value on a recurring basis: |
Cash Equivalents |
Cash equivalents include highly liquid investments with original maturities of three months or less. Due to their short-term nature, the carrying amount of these instruments approximates the estimated fair value. Actively traded money market funds are measured at their net asset value, which approximates fair value. As such, we classify the estimated fair value of these instruments as Level 1. |
Financial Instruments Owned and Available-For-Sale Securities |
When available, the fair value of financial instruments are based on quoted prices in active markets and reported in Level 1. Level 1 financial instruments include highly liquid instruments with quoted prices, such as equity securities listed in active markets, corporate fixed income securities, and U.S. government securities. |
If quoted prices are not available, fair values are obtained from pricing services, broker quotes, or other model-based valuation techniques with observable inputs, such as the present value of estimated cash flows, and reported as Level 2. The nature of these financial instruments include instruments for which quoted prices are available but traded less frequently, instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Level 2 financial instruments include U.S. government agency securities, mortgage-backed securities, corporate fixed income securities infrequently traded, state and municipal securities, asset-backed securities, and equity securities not actively traded. |
We have identified Level 3 financial instruments to include certain corporate fixed income securities with unobservable pricing inputs, and certain state and municipal securities, which include auction rate securities (“ARS”). Level 3 financial instruments have little to no pricing observability as of the report date. These financial instruments do not have active two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. ARS are valued based upon our expectations of issuer redemptions and using internal discounted cash flow models that utilize unobservable inputs. |
Investments |
Investments in certain equity securities and mutual funds are valued based on quoted prices (unadjusted) in active markets and reported in Level 1. Investments in certain private equity securities and partnerships with unobservable inputs and ARS for which the market has been dislocated and largely ceased to function are reported as Level 3 assets. Investments in certain equity securities with unobservable inputs are valued using management’s best estimate of fair value, where the inputs require significant management judgment. ARS are valued based upon our expectations of issuer redemptions and are evaluated using internal models. |
Investments in partnerships and other investments include our general and limited partnership interests in investment partnerships and direct investments in non-public companies. The net assets of investment partnerships consist primarily of investments in non-marketable securities. The value of these investments is at risk to changes in equity markets, general economic conditions, and a variety of other factors. We estimate fair value for private equity investments based on our percentage ownership in the net asset value of the entire fund, as reported by the fund or on behalf of the fund, after indication that the fund adheres to applicable fair value measurement guidance. |
The valuation of these investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity, and long-term nature of these assets. As a result, these values cannot be determined with precision and the calculated fair value estimates may not be realizable in a current sale or immediate settlement of the instrument. |
For those funds where the net asset value is not reported by the fund, we derive the fair value of the fund by estimating the fair value of each underlying investment in the fund. In addition to using qualitative information about each underlying investment, as provided by the fund, we give consideration to information pertinent to the specific nature of the debt or equity investment, such as relevant market conditions, offering prices, operating results, financial conditions, exit strategy, and other qualitative information, as available. The lack of an independent source to validate fair value estimates, including the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. Commitments to fund additional investments in nonmarketable equity securities recorded at fair value were $12.4 million and $3.0 million at December 31, 2013 and 2012, respectively. |
Financial Instruments Sold, But Not Yet Purchased |
Financial instruments sold, but not purchased, recorded at fair value based on quoted prices in active markets and other observable market data include highly liquid instruments with quoted prices, such as U.S. government securities, corporate fixed income securities, and equity securities listed in active markets, which are reported as Level 1. |
If quoted prices are not available, fair values are obtained from pricing services, broker quotes, or other model-based valuation techniques with observable inputs, such as the present value of estimated cash flows, and reported as Level 2. The nature of these financial instruments include instruments for which quoted prices are available but traded less frequently, instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Level 2 financial instruments include U.S. government agency securities, certain equity securities not actively traded, certain corporate fixed income securities, and statement and municipal securities. |
Derivatives |
Derivatives are valued using quoted market prices when available or pricing models based on the net present value of estimated future cash flows. The valuation models used require market observable inputs, including contractual terms, market prices, yield curves, credit curves, and measures of volatility. We manage credit risk for our derivative positions on a counterparty-by-counterparty basis and calculate credit valuation adjustments, included in the fair value of these instruments, on the basis of our relationships at the counterparty portfolio/master netting agreement level. These credit valuation adjustments are determined by applying a credit spread for the counterparty to the total expected exposure of the derivative after considering collateral and other master netting arrangements. We have classified our interest rate swaps as Level 2. |
|
|
|
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 2012 are presented below: |
| | | | | | | | | | | | | | | | | | | | |
| 31-Dec-13 | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Cash equivalents | $ | 78,163 | | $ | 78,163 | | $ | - | | $ | - | | | | | | | | | |
Financial instruments owned: | | | | | | | | | | | | | | | | | | | | |
U.S. government agency securities | | 88,930 | | | - | | | 88,930 | | | - | | | | | | | | | |
U.S. government securities | | 10,594 | | | 10,594 | | | - | | | - | | | | | | | | | |
Corporate securities: | | | | | | | | | | | | | | | | | | | | |
Fixed income securities | | 483,987 | | | 23,413 | | | 458,535 | | | 2,039 | | | | | | | | | |
Equity securities | | 76,709 | | | 76,462 | | | 6 | | | 241 | | | | | | | | | |
State and municipal securities | | 141,274 | | | - | | | 141,274 | | | - | | | | | | | | | |
Total financial instruments owned | | 801,494 | | | 110,469 | | | 688,745 | | | 2,280 | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | |
U.S. government agency securities | | 1,072 | | | - | | | 1,072 | | | - | | | | | | | | | |
State and municipal securities | | 90,677 | | | - | | | 84,477 | | | 6,200 | | | | | | | | | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | |
Agency | | 183,987 | | | - | | | 183,987 | | | - | | | | | | | | | |
Commercial | | 211,246 | | | - | | | 211,246 | | | - | | | | | | | | | |
Non-agency | | 4,619 | | | - | | | 4,619 | | | - | | | | | | | | | |
Corporate fixed income securities | | 498,316 | | | 83,655 | | | 414,661 | | | - | | | | | | | | | |
Asset-backed securities | | 766,336 | | | - | | | 708,258 | | | 58,078 | | | | | | | | | |
Total available-for-sale securities | | 1,756,253 | | | 83,655 | | | 1,608,320 | | | 64,278 | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | | | | | |
Corporate equity securities | | 32,402 | | | 32,402 | | | - | | | - | | | | | | | | | |
Corporate preferred securities | | - | | | - | | | - | | | - | | | | | | | | | |
Mutual funds | | 16,994 | | | 16,994 | | | - | | | - | | | | | | | | | |
U.S. government securities | | - | | | - | | | - | | | - | | | | | | | | | |
Auction rate securities: | | | | | | | | | | | | | | | | | | | | |
Equity securities | | 56,693 | | | - | | | - | | | 56,693 | | | | | | | | | |
Municipal securities | | 10,939 | | | - | | | - | | | 10,939 | | | | | | | | | |
Other (1) | | 100,200 | | | 10 | | | 2,422 | | | 97,768 | | | | | | | | | |
Total investments | | 217,228 | | | 49,406 | | | 2,422 | | | 165,400 | | | | | | | | | |
| $ | 2,853,138 | | $ | 321,693 | | $ | 2,299,487 | | $ | 231,958 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Financial instruments sold, but not yet purchased | | | | | | | | | | | | | | | | | | | | |
U.S. government securities | $ | 253,221 | | $ | 253,221 | | $ | - | | $ | - | | | | | | | | | |
U.S. government agency securities | | 2,068 | | | - | | | 2,068 | | | - | | | | | | | | | |
Corporate securities: | | | | | | | | | | | | | | | | | | | | |
Fixed income securities | | 135,878 | | | 17,857 | | | 118,021 | | | - | | | | | | | | | |
Equity securities | | 90,015 | | | 86,933 | | | 3,082 | | | - | | | | | | | | | |
State and municipal securities | | 32 | | | - | | | 32 | | | - | | | | | | | | | |
Total financial instruments sold, but not yet purchased | | 481,214 | | | 358,011 | | | 123,203 | | | - | | | | | | | | | |
Securities sold, but not yet purchased | | - | | | - | | | - | | | - | | | | | | | | | |
Derivative contracts (2) | | 9,349 | | | - | | | 9,349 | | | - | | | | | | | | | |
| $ | 490,563 | | $ | 358,011 | | $ | 132,552 | | $ | - | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
(1) Includes $56.0 million of partnership interests, $22.5 million of private company investments, and $21.7 million of private equity and other investments. | | | | | | | | | |
(2) Included in accounts payable and accrued expenses in the consolidated statements of financial condition. | | | | | | | | | |
|
|
|
| | | | | | | | | | | | | | | | | | | | |
| 31-Dec-12 | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Cash equivalents | $ | 72,596 | | $ | 72,596 | | $ | - | | $ | - | | | | | | | | | |
Financial instruments owned: | | | | | | | | | | | | | | | | | | | | |
U.S. government agency securities | | 123,758 | | | - | | | 123,758 | | | - | | | | | | | | | |
U.S. government securities | | 3,573 | | | 3,573 | | | - | | | - | | | | | | | | | |
Corporate securities: | | | | | | | | | | | | | | | | | | | | |
Fixed income securities | | 396,878 | | | 66,795 | | | 329,500 | | | 583 | | | | | | | | | |
Equity securities | | 35,472 | | | 33,650 | | | 1,822 | | | - | | | | | | | | | |
State and municipal securities | | 203,927 | | | - | | | 203,927 | | | - | | | | | | | | | |
Total financial instruments owned | | 763,608 | | | 104,018 | | | 659,007 | | | 583 | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | |
U.S. government agency securities | | 1,113 | | | - | | | 1,113 | | | - | | | | | | | | | |
State and municipal securities | | 157,420 | | | - | | | 66,933 | | | 90,487 | | | | | | | | | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | |
Agency | | 684,848 | | | - | | | 684,848 | | | - | | | | | | | | | |
Commercial | | 260,974 | | | - | | | 260,974 | | | - | | | | | | | | | |
Non-agency | | 13,878 | | | - | | | 13,878 | | | - | | | | | | | | | |
Corporate fixed income securities | | 480,182 | | | 263,017 | | | 217,165 | | | - | | | | | | | | | |
Asset-backed securities | | 26,753 | | | - | | | 26,753 | | | - | | | | | | | | | |
Total available-for-sale securities | | 1,625,168 | | | 263,017 | | | 1,271,664 | | | 90,487 | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | | | | | |
Corporate equity securities | | 32,162 | | | 32,162 | | | - | | | - | | | | | | | | | |
Corporate preferred securities | | 56,970 | | | - | | | 56,970 | | | | | | | | | | | | |
Mutual funds | | 18,021 | | | 18,021 | | | - | | | - | | | | | | | | | |
U.S. government securities | | 7,069 | | | 7,069 | | | - | | | - | | | | | | | | | |
Auction rate securities: | | | | | | | | | | | | | | | | | | | | |
Equity securities | | 64,397 | | | - | | | - | | | 64,397 | | | | | | | | | |
Municipal securities | | 14,067 | | | - | | | - | | | 14,067 | | | | | | | | | |
Other (1) | | 43,748 | | | 1,620 | | | 4,831 | | | 37,297 | | | | | | | | | |
Total investments | | 236,434 | | | 58,872 | | | 61,801 | | | 115,761 | | | | | | | | | |
| $ | 2,697,806 | | $ | 498,503 | | $ | 1,992,472 | | $ | 206,831 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Financial instruments sold, but not yet purchased | | | | | | | | | | | | | | | | | | | | |
U.S. government securities | $ | 162,661 | | $ | 162,661 | | $ | - | | $ | - | | | | | | | | | |
U.S. government agency securities | | 15 | | | - | | | 15 | | | - | | | | | | | | | |
Corporate securities: | | | | | | | | | | | | | | | | | | | | |
Fixed income securities | | 150,698 | | | 46,274 | | | 104,424 | | | - | | | | | | | | | |
Equity securities | | 29,247 | | | 28,902 | | | 345 | | | - | | | | | | | | | |
State and municipal securities | | 87 | | | - | | | 87 | | | - | | | | | | | | | |
Total financial instruments sold, but not yet purchased | | 342,708 | | | 237,837 | | | 104,871 | | | - | | | | | | | | | |
Securities sold, but not yet purchased | | - | | | - | | | - | | | - | | | | | | | | | |
Derivative contracts (2) | | 19,934 | | | - | | | 19,934 | | | - | | | | | | | | | |
| $ | 362,642 | | $ | 237,837 | | $ | 124,805 | | $ | - | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
(1) Includes $21.5 million of partnership interests, $13.5 million of private equity investments, and $8.7 million of private company and other investments. | | | | | | | | | |
(2) Included in accounts payable and accrued expenses in the consolidated statements of financial condition. | | | | | | | | | |
|
|
The following table summarizes the changes in fair value carrying values associated with Level 3 financial instruments during the years ended December 31, 2013 and 2012 (in thousands): |
|
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2013 |
| Financial instruments Owned | | Available-for-sale securities | | Investments |
| Corporate Fixed Income Securities | | Equity Securities | | State & Municipal Securities | | Asset-Backed Securities | | Auction Rate Securities - Equity | | Auction Rate Securities - Municipal | | Other (1) |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2012 | $ | 583 | | $ | - | | $ | 90,487 | | $ | - | | $ | 64,397 | | $ | 14,067 | | $ | 37,297 |
Unrealized gains/(losses): | | | | | | | | | | | | | | | | | | | | |
Included in changes in net assets (2) | | 779 | | | 1,333 | | | - | | | -233 | | | 571 | | | 75 | | | 6,328 |
Included in OCI (3) | | - | | | - | | | -1,822 | | | - | | | - | | | - | | | - |
Realized gains/(losses) (2) | | 281 | | | - | | | 2,053 | | | - | | | - | | | - | | | 13 |
Purchases | | 10,261 | | | 11,717 | | | 5,000 | | | - | | | 75 | | | - | | | 50,914 |
Sales | | -6,888 | | | -208 | | | - | | | - | | | - | | | - | | | -6,801 |
Redemptions | | -1,349 | | | - | | | -32,000 | | | - | | | -8,350 | | | -3,203 | | | -2,584 |
Transfers: | | | | | | | | | | | | | | | | | | | | |
Into Level 3 | | 139 | | | - | | | 6,201 | | | 58,311 | | | - | | | - | | | 12,601 |
Out of Level 3 | | -1,767 | | | -12,601 | | | -63,719 | | | - | | | - | | | - | | | - |
Net change | | 1,456 | | | 241 | | | -84,287 | | | 58,078 | | | -7,704 | | | -3,128 | | | 60,471 |
Balance at December 31, 2013 | $ | 2,039 | | $ | 241 | | | 6,200 | | $ | 58,078 | | $ | 56,693 | | $ | 10,939 | | $ | 97,768 |
|
(1) Includes partnership interests, private company investments, and private equity investments. |
(2) Realized and unrealized gains/(losses) related to trading securities and investments are reported in other income in the consolidated statements of operations. |
(3) Unrealized gains/(losses) related to available-for-sale securities are reported in accumulated other comprehensive loss in the consolidated statements of financial condition. |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2012 | | | |
| | | | Available-for-sale securities | | Investments | | | |
| Corporate Fixed Income Securities (1) | | State & Municipal Securities | | Corporate Fixed Income Securities | | Auction Rate Securities - Equity | | Auction Rate Securities - Municipal | | Other(2) | | | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2011 | $ | 3,742 | | $ | 66,896 | | $ | 12,000 | | $ | 103,176 | | $ | 11,729 | | $ | 37,033 | | | |
Unrealized gains/(losses): | | | | | | | | | | | | | | | | | | | | |
Included in changes in net assets (3) | | 42 | | | - | | | - | | | 21 | | | -207 | | | 2,290 | | | |
Included in OCI (4) | | - | | | -1,779 | | | - | | | - | | | - | | | - | | | |
Realized gains/(losses) (3) | | 282 | | | 230 | | | - | | | - | | | - | | | 2,267 | | | |
Purchases | | 27,337 | | | 47,840 | | | - | | | 3,400 | | | 6,750 | | | 1,672 | | | |
Sales | | -25,663 | | | - | | | - | | | - | | | - | | | -5,965 | | | |
Redemptions | | -443 | | | -22,700 | | | -12,000 | | | -42,200 | | | -4,205 | | | - | | | |
Transfers: | | | | | | | | | | | | | | | | | | | | |
Into Level 3 | | 2,687 | | | - | | | - | | | - | | | - | | | - | | | |
Out of Level 3 | | -7,401 | | | - | | | - | | | - | | | - | | | - | | | |
Net change | | -3,159 | | | 23,591 | | | -12,000 | | | -38,779 | | | 2,338 | | | 264 | | | |
Balance at December 31, 2012 | $ | 583 | | $ | 90,487 | | $ | - | | $ | 64,397 | | $ | 14,067 | | $ | 37,297 | | | |
(1) Included in financial instruments owned in the consolidated statement of financial condition. |
(2) Includes partnership interests, private company investments, and private equity investments. |
(3) Realized and unrealized gains/(losses) related to trading securities and investments are reported in other income in the consolidated statements of operations. |
(4) Unrealized gains/(losses) related to available-for-sale securities are reported in accumulated other comprehensive loss in the consolidated statements of financial condition. |
|
The results included in the table above are only a component of the overall investment strategies of our company. The table above does not present Level 1 or Level 2 valued assets or liabilities. The changes to our company’s Level 3 classified instruments were principally a result of: unrealized gains and losses, and redemptions of ARS at par during the year ended December 31, 2013. |
During the year ended December 31, 2013, financial instruments owned and investments acquired as part of the KBW merger that are classified as Level 3 totaled $54.1 million. The changes in unrealized gains/(losses) recorded in earnings for the year ended December 31, 2013, relating to Level 3 assets still held at December 31, 2013, were immaterial. |
The following table summarizes quantitative information related to the significant unobservable inputs utilized in our company’s Level 3 recurring fair value measurements as of December 31, 2013. |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Valuation technique | | Unobservable input | | Range | | Weighted average | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | |
Asset-backed securities | | Discounted cash flow | | Discount rate | | 5.7% - 11.1% | | 7.7% | | | | | | | | | | | | |
| | | | Workout period | | 1 - 4 years | | 3.4 years | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | | | | | |
Auction rate securities | | | | | | | | | | | | | | | | | | | | |
Equity securities | | Discounted cash flow | | Discount rate | | 2.9% - 12.7% | | 7.2% | | | | | | | | | | | | |
| | | | Workout period | | 1 - 3 years | | 2.4 years | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Municipal securities | | Discounted cash flow | | Discount rate | | 0.1% - 10.8% | | 6.5% | | | | | | | | | | | | |
| | | | Workout period | | 1 -4 years | | 2.6 years | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Other | | | | | | | | | | | | | | | | | | | | |
Investments in partnerships | | Market approach | | Revenue multiple | | 1.7-4.0 | | 2.6 | | | | | | | | | | | | |
| | | | EBITDA multiple | | 4.5-9.9 | | 7.7 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Private equity investments | | Market approach | | Revenue multiple | | 0.5-3.0 | | 1.8 | | | | | | | | | | | | |
| | | | EBITDA multiple | | 4.3-11.3 | | 7.8 | | | | | | | | | | | | |
|
The fair value of certain Level 3 assets was determined using various methodologies as appropriate, including NAVs of underlying investments, third-party pricing vendors, broker quotes and market and income approaches. These inputs are evaluated for reasonableness through various procedures, including due diligence reviews of third-party pricing vendors, variance analyses, consideration of current market environment, and other analytical procedures. |
The fair value for our auction-rate securities was determined using an income approach based on an internally developed discounted cash flow model. The discounted cash flow model utilizes two significant unobservable inputs: discount rate and workout period. The discount rate was calculated using credit spreads of the underlying collateral or similar securities. The workout period was based on an assessment of publicly available information on efforts to re-establish functioning markets for these securities and our company’s own redemption experience. Significant increases in any of these inputs in isolation would result in a significantly lower fair value. On an ongoing basis, management verifies the fair value by reviewing the appropriateness of the discounted cash flow model and its significant inputs. |
General and limited partnership interests in investment partnerships totaled $56.0 million and $21.5 million at December 31, 2013 and 2012, respectively. The general and limited partnership interests in investment partnerships were primarily valued based upon NAVs received from third-party fund managers. The various partnerships are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the funds to utilize pricing/valuation information, including independent appraisals, from third-party sources. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third-party source or fund management may conclude that the valuations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments. |
Direct investments in private equity companies totaled $8.2 million and $13.5 million at December 31, 2013 and 2012, respectively. Direct investments in private equity companies may be valued using the market approach or the income approach, or a combination thereof, and were valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third-party financing, changes in valuations of comparable peer companies, the business environment of the companies, market indices, assumptions relating to appropriate risk adjustments for nonperformance and legal restrictions on disposition, among other factors. The fair value derived from the methods used are evaluated and weighted, as appropriate, considering the reasonableness of the range of values indicated. Under the market approach, fair value may be determined by reference to multiples of market-comparable companies or transactions, including earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. Under the income approach, fair value may be determined by discounting the cash flows to a single present amount using current market expectations about those future amounts. Unobservable inputs used in a discounted cash flow model may include projections of operating performance generally covering a five-year period and a terminal value of the private equity direct investment. For securities utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation could result in a significantly lower (higher) fair value measurement. For securities utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation could result in a significantly higher (lower) fair value measurement. |
Transfers Within the Fair Value Hierarchy |
We assess our financial instruments on a quarterly basis to determine the appropriate classification within the fair value hierarchy. Transfers between fair value classifications occur when there are changes in pricing observability levels. Transfers of financial instruments among the levels are deemed to occur at the beginning of the reporting period. There were $81.2 million of transfers of financial assets from Level 2 to Level 1 during the year ended December 31, 2013, primarily related to tax-exempt securities for which market trades were observed that provided transparency into the valuation of these assets. There were $35.8 million of transfers of financial assets from Level 1 to Level 2 during the year ended December 31, 2013, primarily related to tax-exempt securities for which there were low volumes of recent trade activity observed. There were $7.2 million of transfers of financial assets from Level 3 to Level 2 during the year ended December 31, 2013, related to equity and corporate fixed income securities and state and municipal securities for which market trades were observed that provided transparency into the valuation of these assets. There were $0.1 million of transfers of financial assets into Level 3 during the year ended December 31, 2013. |
|
|
|
Fair Value of Financial Instruments |
The following reflects the fair value of financial instruments, as of December 31, 2013 and 2012, whether or not recognized in the consolidated statements of financial condition at fair value (in thousands). |
|
| | | | | | | | | | | | | | | | | | | | |
| 31-Dec-13 | | 31-Dec-12 | | | | | | | | | |
| Carrying value | | Estimated fair value | | Carrying value | | Estimated fair value | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 716,560 | | $ | 716,560 | | $ | 403,941 | | | 403,941 | | | | | | | | | |
Restricted cash | | 4,268 | | | 4,268 | | | 4,414 | | | 4,414 | | | | | | | | | |
Cash segregated for regulatory purposes | | 35 | | | 35 | | | 128,031 | | | 128,031 | | | | | | | | | |
Securities purchased under agreements to resell | | 225,075 | | | 225,075 | | | 158,695 | | | 158,695 | | | | | | | | | |
Financial instruments owned | | 801,494 | | | 801,494 | | | 763,608 | | | 763,608 | | | | | | | | | |
Available-for-sale securities | | 1,756,253 | | | 1,756,253 | | | 1,625,168 | | | 1,625,168 | | | | | | | | | |
Held-to-maturity securities | | 1,312,115 | | | 1,305,959 | | | 708,008 | | | 715,274 | | | | | | | | | |
Loans held for sale | | 109,110 | | | 109,110 | | | 214,531 | | | 214,531 | | | | | | | | | |
Bank loans | | 1,404,353 | | | 1,420,068 | | | 815,937 | | | 834,188 | | | | | | | | | |
Investments | | 217,228 | | | 217,228 | | | 236,434 | | | 236,434 | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Securities sold under agreements to repurchase | $ | 263,809 | | $ | 263,809 | | $ | 140,346 | | $ | 140,346 | | | | | | | | | |
Bank deposits | | 4,663,323 | | | 4,072,038 | | | 3,346,133 | | | 3,368,643 | | | | | | | | | |
Financial instruments sold, but not yet purchased | | 481,214 | | | 481,214 | | | 342,708 | | | 342,708 | | | | | | | | | |
Securities sold, but not yet purchased | | - | | | - | | | - | | | - | | | | | | | | | |
Derivative contracts (1) | | 9,349 | | | 9,349 | | | 19,934 | | | 19,934 | | | | | | | | | |
Senior notes (2) | | 325,000 | | | 328,635 | | | 325,000 | | | 338,475 | | | | | | | | | |
Non-recourse debt (2) | | - | | | - | | | 58,992 | | | 58,992 | | | | | | | | | |
Debentures to Stifel Financial Capital Trusts | | 82,500 | | | 72,201 | | | 82,500 | | | 66,545 | | | | | | | | | |
Liabilities subordinated to claims of general creditors | | 3,131 | | | 3,122 | | | 5,318 | | | 5,204 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
(1) Included in accounts payable and accrued expenses in the consolidated statements of financial condition. | | | | | | | | | |
(2) Included in corporate debt in the consolidated statements of financial condition. | | | | | | | | | |
|
The following table presents the estimated fair values of financial instruments not measured at fair value on a recurring basis (in thousands): |
|
| | | | | | | | | | | | | | | | | | | | |
| 31-Dec-13 | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | | | | | |
Cash | $ | 638,397 | | $ | 638,397 | | $ | - | | $ | - | | | | | | | | | |
Restricted cash | | 4,268 | | | 4,268 | | | - | | | - | | | | | | | | | |
Cash segregated for regulatory purposes | | 35 | | | 35 | | | - | | | - | | | | | | | | | |
Securities purchased under agreements to resell | | 225,075 | | | 225,075 | | | - | | | - | | | | | | | | | |
Held-to-maturity securities | | 1,305,959 | | | - | | | 1,073,953 | | | 232,006 | | | | | | | | | |
Loans held for sale | | 109,110 | | | - | | | 109,110 | | | - | | | | | | | | | |
Bank loans | | 1,420,068 | | | - | | | 1,420,068 | | | - | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Securities sold under agreements to repurchase | $ | 263,809 | | $ | 747 | | $ | 263,062 | | $ | - | | | | | | | | | |
Bank deposits | | 4,072,038 | | | - | | | 4,072,038 | | | - | | | | | | | | | |
Senior notes | | 328,635 | | | 328,635 | | | - | | | - | | | | | | | | | |
Non-recourse debt | | - | | | - | | | - | | | - | | | | | | | | | |
Debentures to Stifel Financial Capital Trusts | | 72,201 | | | - | | | - | | | 72,201 | | | | | | | | | |
Liabilities subordinated to claims of general creditors | | 3,122 | | | - | | | - | | | 3,122 | | | | | | | | | |
|
|
|
| | | | | | | | | | | | | | | | | | | | |
| 31-Dec-12 | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | | | | | |
Cash | $ | 331,345 | | $ | 331,345 | | $ | - | | $ | - | | | | | | | | | |
Restricted cash | | 4,414 | | | 4,414 | | | - | | | - | | | | | | | | | |
Cash segregated for regulatory purposes | | 128,031 | | | 128,031 | | | - | | | - | | | | | | | | | |
Securities purchased under agreements to resell | | 158,695 | | | 154,688 | | | 4,007 | | | - | | | | | | | | | |
Held-to-maturity securities | | 715,274 | | | - | | | 487,775 | | | 227,499 | | | | | | | | | |
Loans held for sale | | 214,531 | | | - | | | 214,531 | | | - | | | | | | | | | |
Bank loans | | 834,188 | | | - | | | 834,188 | | | - | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Securities sold under agreements to repurchase | $ | 140,346 | | $ | 140,346 | | $ | - | | $ | - | | | | | | | | | |
Bank deposits | | 3,368,643 | | | - | | | 3,368,643 | | | - | | | | | | | | | |
Senior notes | | 338,475 | | | 338,475 | | | - | | | - | | | | | | | | | |
Non-recourse debt | | 58,992 | | | - | | | 58,992 | | | - | | | | | | | | | |
Debentures to Stifel Financial Capital Trusts | | 66,545 | | | - | | | - | | | 66,545 | | | | | | | | | |
Liabilities subordinated to claims of general creditors | | 5,204 | | | - | | | - | | | 5,204 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
|
The following, as supplemented by the discussion above, describes the valuation techniques used in estimating the fair value of our financial instruments as of December 31, 2013 and 2012. |
|
Financial Assets |
Securities Purchased Under Agreements to Resell |
Securities purchased under agreements to resell are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The carrying values at December 31, 2013 and 2012 approximate fair value due to the short-term nature. |
Held-to-Maturity Securities |
The estimated fair value, included in the above table, is determined using several factors; however, primary weight is given to discounted cash flow modeling techniques that incorporated an estimated discount rate based upon recent observable debt security issuances with similar characteristics. |
Bank Loans |
The fair values of mortgage loans and commercial loans were estimated using a discounted cash flow method, a form of the income approach. Discount rates were determined considering rates at which similar portfolios of loans would be made under current conditions and considering liquidity spreads applicable to each loan portfolio based on the secondary market. |
Financial Liabilities |
Securities Sold Under Agreements to Repurchase |
Securities sold under agreements to repurchase are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The carrying values at December 31, 2013 and 2012 approximate fair value due to the short-term nature. |
Bank Deposits |
The fair value for demand deposits is equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate money market and savings accounts approximate their fair values at the reporting date as these are short-term in nature. The fair value of other interest-bearing deposits, including certificates of deposit, was calculated by discounting the future cash flows using discount rates based on the expected current market rates for similar products with similar remaining terms. |
Senior Notes |
The fair value of our senior notes is estimated based upon quoted market prices. |
Non-Recourse Debt |
The fair value of our non-recourse debt is based on the discounted value of contractual cash flows. We have assumed a discount rate based on the coupon achieved in our 6.7% senior notes due 2022. |
Debentures to Stifel Financial Capital Trusts |
The fair value of our trust preferred securities is based on the discounted value of contractual cash flows. We have assumed a discount rate based on the coupon achieved in our 6.7% senior notes due 2022. |
Liabilities Subordinated to Claims of General Creditors |
The fair value of subordinated debt was measured using the interest rates commensurate with borrowings of similar terms. |
|
These fair value disclosures represent our best estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected losses, current economic conditions, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates. |
|