Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2014

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 June 30, 2014:



	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)	0 - 10%	3.6%
		Prepayment rates (4)	1 - 15%	4.3%
		Loss severity (3)	50 - 100%	58.3%
		Valuation yields (3)	3 - 8%	4.8%
Derivative contracts:
Interest rate locks	Discounted cash flow	Premium over the MMD curve (1)	27 - 41 bps	39.2 bps
Investments at fair value:
Warrants in public and private companies	Black-Scholes option pricing model	Liquidity discount rates (1)	30 - 40%	34.3%
Warrants in private companies	Black-Scholes option pricing model	Stock volatility factors of comparable companies (2)	22 - 85%	40.6%
Equity securities in private companies	Market approach	Revenue multiple (2)	2 - 7 times	3.7 times
		EBITDA multiple (2)	9 - 12 times	9.3 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)	0 - 34 bps	14.2 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 FASB Accounting Standards Codification Topic 820, "Fair Value Measurement" ("ASC 820") as of June 30, 2014:



							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	$	36,713	$	19,262	$	—	$	—		$	55,975
Convertible securities	—		94,496		—		—			94,496
Fixed income securities	—		27,344		—		—			27,344
Municipal securities:
Taxable securities	—		237,126		—		—			237,126
Tax-exempt securities	—		466,231		1,306		—			467,537
Short-term securities	—		151,477		732		—			152,209
Asset-backed securities	—		4,593		129,126		—			133,719
U.S. government agency securities	—		245,365		—		—			245,365
U.S. government securities	8,185		—		—		—			8,185
Derivative contracts	94		414,316		627		(367,922		)	47,115
Total financial instruments and other inventory positions owned:	44,992		1,660,210		131,791		(367,922		)	1,469,071

Cash equivalents	1,318		—		—		—			1,318

Investments at fair value	29,919		—		58,567		—			88,486
Total assets	$	76,229	$	1,660,210	$	190,358	$	(367,922	)	$	1,558,875

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Equity securities	$	96,733	$	229	$	—	$	—		$	96,962
Fixed income securities	—		9,974		—		—			9,974
U.S. government agency securities	—		49,009		—		—			49,009
U.S. government securities	345,756		—		—		—			345,756
Derivative contracts	1,379		394,699		10,846		(390,339		)	16,585
Total financial instruments and other inventory positions sold, but not yet purchased:	$	443,868	$	453,911	$	10,846	$	(390,339	)	$	518,286


(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, 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.

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 held at the beginning or end of the periods presented:



	Balance at												Realized		Unrealized			Balance at
	March 31,								Transfers		Transfers		gains/		gains/			June 30,
(Dollars in thousands)	2014		Purchases			Sales			in		out		(losses) (1)		(losses) (1)			2014
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Fixed income securities	$	100	$	—		$	(100	)	$	—	$	—	$	—	$	—		$	—
Municipal securities:
Tax-exempt securities	1,433		—			—			—		—		—		(127		)	1,306
Short-term securities	656		—			(25		)	—		—		6		95			732
Asset-backed securities	107,399		119,064			(101,878		)	—		—		4,678		(137		)	129,126
Derivative contracts	64		—			—			—		—		—		563			627
Total financial instruments and other inventory positions owned:	109,652		119,064			(102,003		)	—		—		4,684		394			131,791

Investments at fair value	60,954		—			(2,358		)	—		—		2,358		(2,387		)	58,567
Total assets	$	170,606	$	119,064		$	(104,361	)	$	—	$	—	$	7,042	$	(1,993	)	$	190,358

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Derivative contracts	$	5,479	$	(8,343	)	$	—		$	—	$	—	$	8,343	$	5,367		$	10,846
Total financial instruments and other inventory positions sold, but not yet purchased:	$	5,479	$	(8,343	)	$	—		$	—	$	—	$	8,343	$	5,367		$	10,846

(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/(loss) on the consolidated statements of operations.



	Balance at											Realized			Unrealized			Balance at
	March 31,							Transfers		Transfers		gains/			gains/			June 30,
(Dollars in thousands)	2013		Purchases		Sales			in		out		(losses) (1)			(losses) (1)			2013
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Convertible securities	$	—	$	2,559	$	(2,308	)	$	870	$	—	$	9		$	178		$	1,308
Fixed income securities	—		100		—			—		—		—			—			100
Municipal securities:
Tax-exempt securities	1,431		—		—			—		—		—			2			1,433
Short-term securities	656		—		—			—		—		—			—			656
Asset-backed securities	107,654		162,754		(123,422		)	—		—		5,573			(1,163		)	151,396
Derivative contracts	2,372		710		(896		)	—		—		186			15,507			17,879
Total financial instruments and other inventory positions owned:	112,113		166,123		(126,626		)	870		—		5,768			14,524			172,772

Investments at fair value	41,653		10,000		—			—		—		—			1,914			53,567
Total assets	$	153,766	$	176,123	$	(126,626	)	$	870	$	—	$	5,768		$	16,438		$	226,339

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Derivative contracts	$	399	$	—	$	745		$	—	$	—	$	(745	)	$	(145	)	$	254
Total financial instruments and other inventory positions sold, but not yet purchased:	$	399	$	—	$	745		$	—	$	—	$	(745	)	$	(145	)	$	254

(1)

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:



	Balance at												Realized			Unrealized			Balance at
	December 31,								Transfers		Transfers		gains/			gains/			June 30,
(Dollars in thousands)	2013		Purchases			Sales			in		out		(losses) (1)			(losses) (1)			2014
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Fixed income securities	$	100	$	—		$	(100	)	$	—	$	—	$	—		$	—		$	—
Municipal securities:
Tax-exempt securities	1,433		—			—			—		—		—			(127		)	1,306
Short-term securities	656		—			(25		)	—		—		6			95			732
Asset-backed securities	119,799		151,790			(150,621		)	—		—		9,184			(1,026		)	129,126
Derivative contracts	691		2,614			—			—		—		(2,614		)	(64		)	627
Total financial instruments and other inventory positions owned:	122,679		154,404			(150,746		)	—		—		6,576			(1,122		)	131,791

Investments at fair value	49,240		10,000			(2,358		)	—		—		2,358			(673		)	58,567
Total assets	$	171,919	$	164,404		$	(153,104	)	$	—	$	—	$	8,934		$	(1,795	)	$	190,358

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Derivative contracts	$	6,643	$	(16,751	)	$	—		$	—	$	—	$	16,751		$	4,203		$	10,846
Total financial instruments and other inventory positions sold, but not yet purchased:	$	6,643	$	(16,751	)	$	—		$	—	$	—	$	16,751		$	4,203		$	10,846

(1)



	Balance at												Realized		Unrealized			Balance at
	December 31,								Transfers		Transfers		gains/		gains/			June 30,
(Dollars in thousands)	2012		Purchases			Sales			in		out		(losses) (1)		(losses) (1)			2013
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Convertible securities	$	—	$	2,559		$	(2,308	)	$	870	$	—	$	9	$	178		$	1,308
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		196,496			(170,569		)	—		—		16,295		(6,997		)	151,396
Derivative contracts	827		5			(134		)	—		—		43		17,138			17,879
Total financial instruments and other inventory positions owned:	119,083		199,161			(173,011		)	870		—		16,347		10,322			172,772

Investments at fair value	33,245		15,362			—			—		—		4		4,956			53,567
Total assets	$	152,328	$	214,523		$	(173,011	)	$	870	$	—	$	16,351	$	15,278		$	226,339

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Derivative contracts	$	5,218	$	(5,650	)	$	405		$	—	$	—	$	5,232	$	(4,951	)	$	254
Total financial instruments and other inventory positions sold, but not yet purchased:	$	5,218	$	(5,650	)	$	405		$	—	$	—	$	5,232	$	(4,951	)	$	254

(1)