Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2013

Information about Significant Unobservable Inputs used in Fair Value Measurement

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 December 31, 2013:



	Valuation			Weighted
	Technique	Unobservable Input	Range	Average
Assets:
Financial instruments and other inventory positions owned:
Municipal securities:
Tax-exempt securities	Discounted cash flow	Debt service coverage ratio (2)	5 - 69%	22.2%
Short-term securities	Discounted cash flow	Expected recovery rate (% of par) (2)	77 - 80%	79.6%
Asset-backed securities:
Collateralized by residential mortgages	Discounted cash flow	Credit default rates (3)	2 - 8%	4.7%
		Prepayment rates (4)	2 - 8%	5.3%
		Loss severity (3)	52 - 100%	69.4%
		Valuation yields (3)	4 - 8%	6.0%
Derivative contracts:
Interest rate locks	Discounted cash flow	Premium over the MMD curve (1)	3 - 49 bps	20.2 bps
Investments at fair value:
Warrants in public and private companies	Black-Scholes option pricing model	Liquidity discount rates (1)	30 - 40%	33.5%
Warrants in private companies	Black-Scholes option pricing model	Stock volatility factors of comparable companies (2)	28 - 97%	56.0%
Equity securities in private companies	Market approach	Revenue multiple (2)	2 - 7 times	3.2 times
		EBITDA multiple (2)	12 times	12.0 times

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Derivative contracts:
Interest rate locks	Discounted cash flow	Premium over the MMD curve (1)	1 - 15 bps	9.1 bps

Sensitivity of the fair value to changes in unobservable inputs:


(1)	Significant increase/(decrease) in the unobservable input in isolation would result in a significantly lower/(higher) fair value measurement.


(2)	Significant increase/(decrease) in the unobservable input in isolation would result in a significantly higher/(lower) fair value measurement.


(3)	Significant changes in any of these inputs in isolation could result in a significantly different fair value. Generally, a change in the assumption used for credit default rates is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally inverse change in the assumption for valuation yields.


(4)	The potential impact of changes in prepayment rates on fair value is dependent on other security-specific factors, such as the par value and structure. Changes in the prepayment rates may result in directionally similar or directionally inverse changes in fair value depending on whether the security trades at a premium or discount to the par value.

Valuation of Financial Instruments by Pricing Observability Levels

The following table summarizes the valuation of the Company’s financial instruments by pricing observability levels defined in ASC 820 as of December 31, 2013:



							Counterparty
							and Cash
							Collateral
(Dollars in thousands)	Level I		Level II		Level III		Netting (1)			Total
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Equity securities	$	39,711	$	14,386	$	—	$	—		$	54,097
Convertible securities	—		80,784		—		—			80,784
Fixed income securities	—		10,002		100		—			10,102
Municipal securities:
Taxable securities	—		232,379		—		—			232,379
Tax-exempt securities	—		459,432		1,433		—			460,865
Short-term securities	—		61,964		656		—			62,620
Asset-backed securities	—		12		119,799		—			119,811
U.S. government agency securities	—		304,737		—		—			304,737
Derivative contracts	19		351,589		691		(313,666		)	38,633
Total financial instruments and other inventory positions owned:	39,730		1,515,285		122,679		(313,666		)	1,364,028

Cash equivalents	101,629		—		—		—			101,629

Investments at fair value	20,690		—		49,240		—			69,930
Total assets	$	162,049	$	1,515,285	$	171,919	$	(313,666	)	$	1,535,587

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Equity securities	$	69,205	$	—	$	—	$	—		$	69,205
Fixed income securities	—		24,021		—		—			24,021
U.S. government agency securities	—		120,084		—		—			120,084
U.S. government securities	291,320		—		—		—			291,320
Derivative contracts	1,889		324,065		6,643		(324,394		)	8,203
Total financial instruments and other inventory positions sold, but not yet purchased:	$	362,414	$	468,170	$	6,643	$	(324,394	)	$	512,833


(1)	Represents cash collateral and the impact of netting on a counterparty basis. The Company had no securities posted as collateral to its counterparties.

The following table summarizes the valuation of the Company’s financial instruments by pricing observability levels defined in ASC 820 as of December 31, 2012:



							Counterparty
							and Cash
							Collateral
(Dollars in thousands)	Level I		Level II		Level III		Netting (1)			Total
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Equity securities	$	3,180	$	13,298	$	—	$	—		$	16,478
Convertible securities	—		44,978		—		—			44,978
Fixed income securities	—		33,668		—		—			33,668
Municipal securities:
Taxable securities	—		164,059		—		—			164,059
Tax-exempt securities	—		416,760		1,429		—			418,189
Short-term securities	—		67,672		656		—			68,328
Asset-backed securities	—		24		116,171		—			116,195
U.S. government agency securities	—		304,259		—		—			304,259
U.S. government securities	4,966		—		—		—			4,966
Derivative contracts	—		595,486		827		(555,838		)	40,475
Total financial instruments and other inventory positions owned:	8,146		1,640,204		119,083		(555,838		)	1,211,595

Cash equivalents	51,346		—		—		—			51,346

Investments at fair value	5,810		—		33,245		—			39,055
Total assets	$	65,302	$	1,640,204	$	152,328	$	(555,838	)	$	1,301,996

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Equity securities	$	25,362	$	1,728	$	—	$	—		$	27,090
Convertible securities	—		1,015		—		—			1,015
Fixed income securities	—		19,314		—		—			19,314
Municipal securities:
Short-term securities	—		60		—		—			60
U.S. government agency securities	—		73,724		—		—			73,724
U.S. government securities	231,043		—		—		—			231,043
Derivative contracts	—		569,764		5,218		(570,027		)	4,955
Total financial instruments and other inventory positions sold, but not yet purchased:	$	256,405	$	665,605	$	5,218	$	(570,027	)	$	357,201


(1)	Represents cash collateral and the impact of netting on a counterparty basis. The Company had no securities posted as collateral to its counterparties.

Changes in Fair Value Associated with Level III Financial Instruments

The following tables summarize the changes in fair value associated with Level III financial instruments during the years ended December 31, 2013 and 2012:



	Balance at													Realized		Unrealized			Balance at
	December 31,								Transfers		Transfers			gains/		gains/			December 31,
(Dollars in thousands)	2012		Purchases			Sales			in		out			(losses) (1)		(losses) (1)			2013
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Fixed income securities	$	—	$	100		$	—		$	—	$	—		$	—	$	—		$	100
Municipal securities:
Tax-exempt securities	1,429		1			—			—		—			—		3			1,433
Short-term securities	656		—			—			—		—			—		—			656
Asset-backed securities	116,171		227,634			(238,860		)	—		—			17,105		(2,251		)	119,799
Derivative contracts	827		5			(2,382		)	—		—			2,377		(136		)	691
Total financial instruments and other inventory positions owned:	119,083		227,740			(241,242		)	—		—			19,482		(2,384		)	122,679

Investments at fair value	33,245		16,825			(10,358		)	—		(619		)	5,949		4,198			49,240
Total assets	$	152,328	$	244,565		$	(251,600	)	$	—	$	(619	)	$	25,431	$	1,814		$	171,919

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Derivative contracts	$	5,218	$	(5,702	)	$	457		$	—	$	—		$	5,232	$	1,438		$	6,643
Total financial instruments and other inventory positions sold, but not yet purchased:	$	5,218	$	(5,702	)	$	457		$	—	$	—		$	5,232	$	1,438		$	6,643

(1)

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 reported in investment banking revenues or investment income on the consolidated statements of operations.



	Balance at													Realized			Unrealized			Balance at
	December 31,								Transfers		Transfers			gains/			gains/			December 31,
(Dollars in thousands)	2011		Purchases			Sales			in		out			(losses) (1)			(losses) (1)			2012
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Fixed income securities	$	2,815	$	1,995		$	(4,594	)	$	—	$	—		$	(118	)	$	(98	)	$	—
Municipal securities:
Tax-exempt securities	3,135		1,550			(2,997		)	266		—			(1,156		)	631			1,429
Short-term securities	175		650			—			—		—			—			(169		)	656
Asset-backed securities	53,088		125,844			(69,623		)	38		—			487			6,337			116,171
Derivative contracts	—		—			—			—		—			—			827			827
Total financial instruments and other inventory positions owned:	59,213		130,039			(77,214		)	304		—			(787		)	7,528			119,083

Investments at fair value	21,341		15,003			(2,394		)	—		(266		)	1,595			(2,034		)	33,245
Total assets	$	80,554	$	145,042		$	(79,608	)	$	304	$	(266	)	$	808		$	5,494		$	152,328

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Convertible securities	$	1,171	$	—		$	—		$	—	$	(1,171	)	$	—		$	—		$	—
Fixed income securities	900		(897		)	—			—		—			(49		)	46			—
Derivative contracts	3,594		(6,549		)	—			—		—			6,549			1,624			5,218
Total financial instruments and other inventory positions sold, but not yet purchased:	$	5,665	$	(7,446	)	$	—		$	—	$	(1,171	)	$	6,500		$	1,670		$	5,218

(1)