sf-10q_20150630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2015

OR

¨

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                     to                    

Commission File Number: 001-09305

 

STIFEL FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

43-1273600

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

501 N. Broadway, St. Louis, Missouri  63102-2188

(Address of principal executive offices and zip code)

(314) 342-2000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“the Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer

x

 

 

Accelerated filer

¨

 

 

 

 

 

 

Non-accelerated filer

¨

 

(Do not check if smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

The number of shares outstanding of the registrant’s common stock, $0.15 par value per share, as of the close of business on August 3, 2015, was 69,432,970.

 

 

 

 


STIFEL FINANCIAL CORP.

Form 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

3

Consolidated Statements of Financial Condition as of June 30, 2015 (unaudited) and December 31, 2014

 

3

Consolidated Statements of Operations for the three and six months ended June 30, 2015 and June 30, 2014 (unaudited)

 

5

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and June 30, 2014 (unaudited)

 

6

Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and June 30, 2014 (unaudited)

 

7

Notes to Consolidated Financial Statements (unaudited)

 

9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

45

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

72

Item 4. Controls and Procedures

 

76

 

 

 

PART II – OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

79

Item 1A. Risk Factors

 

80

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

80

Item 6. Exhibits

 

81

Signatures

 

82

 

 

2


PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition

 

(in thousands)

 

June 30,

2015

 

 

December 31,

2014

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

641,937

 

 

$

689,782

 

Cash segregated for regulatory purposes

 

 

150

 

 

 

49,646

 

Receivables:

 

 

 

 

 

 

 

 

Brokerage clients, net

 

 

756,727

 

 

 

483,887

 

Brokers, dealers, and clearing organizations

 

 

835,433

 

 

 

651,074

 

Securities purchased under agreements to resell

 

 

242,944

 

 

 

55,078

 

Financial instruments owned, at fair value

 

 

944,813

 

 

 

786,855

 

Available-for-sale securities, at fair value

 

 

787,897

 

 

 

1,513,478

 

Held-to-maturity securities, at amortized cost

 

 

1,125,426

 

 

 

1,177,565

 

Loans held for sale, at lower of cost or market

 

 

183,991

 

 

 

121,939

 

Bank loans, net of allowance

 

 

2,420,326

 

 

 

2,065,420

 

Investments, at fair value

 

 

190,452

 

 

 

210,255

 

Fixed assets, net

 

 

159,365

 

 

 

124,246

 

Goodwill

 

 

886,011

 

 

 

795,026

 

Intangible assets, net

 

 

60,758

 

 

 

54,563

 

Loans and advances to financial advisors and other employees, net

 

 

250,512

 

 

 

197,757

 

Deferred tax assets, net

 

 

258,157

 

 

 

258,142

 

Other assets

 

 

394,643

 

 

 

283,438

 

Total Assets

 

$

10,139,542

 

 

$

9,518,151

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

3


STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition (continued)

 

(in thousands, except share and per share amounts)

 

June 30,

2015

 

 

December 31,

2014

 

 

 

(Unaudited)

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Short-term borrowings from banks

 

$

543,289

 

 

$

 

Payables:

 

 

 

 

 

 

 

 

Brokerage clients

 

 

449,834

 

 

 

321,496

 

Brokers, dealers, and clearing organizations

 

 

170,956

 

 

 

14,023

 

Drafts

 

 

59,579

 

 

 

75,198

 

Securities sold under agreements to repurchase

 

 

342,350

 

 

 

39,180

 

Bank deposits

 

 

4,313,937

 

 

 

4,790,081

 

Financial instruments sold, but not yet purchased, at fair value

 

 

566,726

 

 

 

587,265

 

Accrued compensation

 

 

228,277

 

 

 

359,050

 

Accounts payable and accrued expenses

 

 

411,843

 

 

 

302,320

 

Senior notes

 

 

450,000

 

 

 

625,000

 

Debentures to Stifel Financial Capital Trusts

 

 

82,500

 

 

 

82,500

 

Total liabilities

 

$

7,619,291

 

 

 

7,196,113

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock - $1 par value; authorized 3,000,000 shares; none issued

 

 

 

 

 

 

Common stock - $0.15 par value; authorized 97,000,000 shares; issued 69,338,091

   and 66,336,018 shares, respectively

 

 

10,401

 

 

 

9,950

 

Additional paid-in-capital

 

 

1,759,347

 

 

 

1,634,114

 

Retained earnings

 

 

781,377

 

 

 

716,305

 

Accumulated other comprehensive income

 

 

(30,656

)

 

 

(38,331

)

 

 

 

2,520,469

 

 

 

2,322,038

 

Treasury stock, at cost, 3,657 and 5 shares, respectively

 

 

(218

)

 

 

 

Total Shareholders’ Equity

 

 

2,520,251

 

 

 

2,322,038

 

Total Liabilities and Shareholders’ Equity

 

$

10,139,542

 

 

$

9,518,151

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

4


STIFEL FINANCIAL CORP.

Consolidated Statements of Operations

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except per share amounts)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions

 

$

183,771

 

 

$

164,371

 

 

$

364,073

 

 

$

336,614

 

Principal transactions

 

 

85,542

 

 

 

110,717

 

 

 

186,275

 

 

 

221,399

 

Investment banking

 

 

161,007

 

 

 

144,815

 

 

 

285,568

 

 

 

280,077

 

Asset management and service fees

 

 

119,936

 

 

 

94,231

 

 

 

233,805

 

 

 

183,401

 

Interest

 

 

43,852

 

 

 

46,114

 

 

 

86,588

 

 

 

88,950

 

Other income

 

 

13,741

 

 

 

8,745

 

 

 

25,541

 

 

 

13,983

 

Total revenues

 

 

607,849

 

 

 

568,993

 

 

 

1,181,850

 

 

 

1,124,424

 

Interest expense

 

 

10,098

 

 

 

8,888

 

 

 

23,117

 

 

 

17,562

 

Net revenues

 

 

597,751

 

 

 

560,105

 

 

 

1,158,733

 

 

 

1,106,862

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

409,998

 

 

 

355,268

 

 

 

765,691

 

 

 

702,257

 

Occupancy and equipment rental

 

 

48,346

 

 

 

43,237

 

 

 

92,516

 

 

 

84,019

 

Communications and office supplies

 

 

31,114

 

 

 

25,858

 

 

 

60,348

 

 

 

50,696

 

Commissions and floor brokerage

 

 

9,124

 

 

 

9,248

 

 

 

19,193

 

 

 

18,277

 

Other operating expenses

 

 

61,098

 

 

 

52,075

 

 

 

112,848

 

 

 

99,764

 

Total non-interest expenses

 

 

559,680

 

 

 

485,686

 

 

 

1,050,596

 

 

 

955,013

 

Income before income tax expense

 

 

38,071

 

 

 

74,419

 

 

 

108,137

 

 

 

151,849

 

Provision for income taxes

 

 

17,183

 

 

 

30,819

 

 

 

44,152

 

 

 

60,866

 

Net income

 

$

20,888

 

 

$

43,600

 

 

$

63,985

 

 

$

90,983

 

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.31

 

 

$

0.66

 

 

$

0.94

 

 

$

1.38

 

Diluted

 

 

0.27

 

 

 

0.58

 

 

 

0.82

 

 

 

1.20

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

68,370

 

 

 

66,302

 

 

 

68,189

 

 

 

66,167

 

Diluted

 

 

77,856

 

 

 

75,641

 

 

 

77,624

 

 

 

75,665

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

5


STIFEL FINANCIAL CORP.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income

 

$

20,888

 

 

$

43,600

 

 

$

63,985

 

 

$

90,983

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in unrealized gains/(losses) on available-for-sale

   securities 1, 2

 

 

(1,804

)

 

 

2,704

 

 

 

5,873

 

 

 

5,567

 

Changes in unrealized gains on cash flow

   hedging instruments 3

 

 

713

 

 

 

360

 

 

 

487

 

 

 

986

 

Foreign currency translation adjustment

 

 

5,293

 

 

 

1,732

 

 

 

1,315

 

 

 

2,068

 

Total other comprehensive income, net of tax

 

 

4,202

 

 

 

4,796

 

 

 

7,675

 

 

 

8,621

 

Comprehensive income

 

$

25,090

 

 

$

48,396

 

 

$

71,660

 

 

$

99,604

 

 

(1)

Net of tax benefit of $1.1 million and taxes of $1.7 million for the three months ended June 30, 2015 and 2014, respectively. Net of taxes of $4.8 million and $3.5 million for the six months ended June 30, 2015 and 2014, respectively.

(2)

Amounts are net of reclassifications to earnings of realized gains of $1.9 million and $1.2 million for the three months ended June 30, 2015 and 2014, respectively. Amounts are net of reclassifications to earnings of realized gains of $1.9 million and $1.2 million for the six months ended June 30, 2015 and 2014, respectively.

(3)

Amounts are net of reclassifications to earnings of losses of $1.0 million and $1.6 million for the three months ended June 30, 2015 and 2014, respectively. Amounts are net of reclassifications to earnings of losses of $2.2 million and $3.3 million for the six months ended June 30, 2015 and 2014, respectively.

(4)

Net of taxes of $0.4 million and $0.2 million for the three months ended June 30, 2015 and 2014, respectively. Net of taxes of $0.3 million and $0.6 million for the six months ended June 30, 2015 and 2014, respectively

(5)

Net of taxes of $3.3 million and $1.1 million for the three months ended June 30, 2015 and 2014, respectively. Net of taxes of $0.8 million and $1.3 million for the six months ended June 30, 2015 and 2014, respectively

See accompanying Notes to Consolidated Financial Statements.

 

 

6


STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Six Months Ended June 30,

 

(in thousands)

 

2015

 

 

2014

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

63,985

 

 

$

90,983

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

14,899

 

 

 

14,306

 

Amortization of loans and advances to financial advisors and other employees

 

 

28,692

 

 

 

32,580

 

Amortization of premium on investment portfolio

 

 

2,222

 

 

 

3,118

 

Provision for loan losses and allowance for loans and advances to financial

   advisors and other employees

 

 

4,393

 

 

 

4,692

 

Amortization of intangible assets

 

 

3,673

 

 

 

8,204

 

Deferred income taxes

 

 

16,797

 

 

 

25,377

 

Excess tax benefits from stock-based compensation

 

 

(12,454

)

 

 

(17,208

)

Stock-based compensation

 

 

81,160

 

 

 

47,087

 

Gains on sale of investments

 

 

(4,941

)

 

 

(4,945

)

Other, net

 

 

(7,012

)

 

 

2,158

 

Decrease/(increase) in operating assets, net of assets acquired:

 

 

 

 

 

 

 

 

Cash segregated for regulatory purposes and restricted cash

 

 

49,496

 

 

 

4,265

 

Receivables:

 

 

 

 

 

 

 

 

Brokerage clients

 

 

(160,766

)

 

 

(27,219

)

Brokers, dealers, and clearing organizations

 

 

(150,642

)

 

 

(354,142

)

Securities purchased under agreements to resell

 

 

(187,866

)

 

 

2,866

 

Financial instruments owned, including those pledged

 

 

(100,353

)

 

 

(226,505

)

Loans originated as held for sale

 

 

(969,064

)

 

 

(490,705

)

Proceeds from mortgages held for sale

 

 

904,798

 

 

 

472,609

 

Loans and advances to financial advisors and other employees

 

 

(48,472

)

 

 

(37,632

)

Other assets

 

 

(27,769

)

 

 

(14,521

)

Increase/(decrease) in operating liabilities, net of liabilities assumed:

 

 

 

 

 

 

 

 

Payables:

 

 

 

 

 

 

 

 

Brokerage clients

 

 

128,338

 

 

 

4,769

 

Brokers, dealers, and clearing organizations

 

 

57,487

 

 

 

46,634

 

Drafts

 

 

(15,619

)

 

 

(6,161

)

Financial instruments sold, but not yet purchased

 

 

(20,539

)

 

 

204,129

 

Other liabilities and accrued expenses

 

 

(222,792

)

 

 

(180,887

)

Net cash used in operating activities

 

$

(572,349

)

 

$

(396,148

)

 

See accompanying Notes to Consolidated Financial Statements.

 

 

7


STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows (continued)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

(in thousands)

 

2015

 

 

2014

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Proceeds from:

 

 

 

 

 

 

 

 

Maturities, calls, sales, and principal paydowns of available-for-sale securities

 

$

728,809

 

 

$

245,570

 

Calls and principal paydowns of held-to-maturity securities

 

 

52,903

 

 

 

46,240

 

Sale or maturity of investments

 

 

50,912

 

 

 

33,737

 

Sale of other real estate owned

 

 

-

 

 

 

131

 

Increase in bank loans, net

 

 

(356,580

)

 

 

(357,654

)

Payments for:

 

 

 

 

 

 

 

 

Purchase of available-for-sale securities

 

 

(199

)

 

 

(132,703

)

Purchase of held-to-maturity securities

 

 

-

 

 

 

(7,959

)

Purchase of investments

 

 

(30,283

)

 

 

(37,116

)

Purchase of fixed assets

 

 

(32,309

)

 

 

(12,107

)

Acquisitions, net of cash acquired

 

 

18,456

 

 

 

(7,922

)

Net cash provided by/(used in) investing activities

 

 

431,709

 

 

 

(229,783

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings from banks

 

 

327,568

 

 

 

312,300

 

Increase in securities sold under agreements to repurchase

 

 

303,170

 

 

 

25,771

 

Decrease in bank deposits, net

 

 

(476,144

)

 

 

(9,667

)

Increase/(decrease) in securities loaned

 

 

99,446

 

 

 

(15,003

)

Excess tax benefits from stock-based compensation

 

 

12,454

 

 

 

17,208

 

Issuance of common stock for stock option exercises

 

 

245

 

 

 

114

 

Repayment of senior notes

 

 

(175,000

)

 

 

 

Extinguishment of subordinated debt

 

 

-

 

 

 

(3,131

)

Net cash provided by financing activities

 

 

91,739

 

 

 

327,592

 

Effect of exchange rate changes on cash

 

 

1,056

 

 

 

2,069

 

Decrease in cash and cash equivalents

 

 

(47,845

)

 

 

(296,270

)

Cash and cash equivalents at beginning of period

 

 

689,782

 

 

 

716,560

 

Cash and cash equivalents at end of period

 

$

641,937

 

 

$

420,290

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

20,073

 

 

$

16,968

 

Cash paid for income taxes, net of refunds

 

 

31,951

 

 

 

31,594

 

Noncash financing activities:

 

 

 

 

 

 

 

 

Unit grants, net of forfeitures

 

 

105,448

 

 

 

116,475

 

Shares surrendered into treasury

 

 

223

 

 

 

 

Issuance of common stock for acquisitions

 

 

80,981

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

8


STIFEL FINANCIAL CORP.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

NOTE 1 – Nature of Operations and Basis of Presentation

Nature of Operations

Stifel Financial Corp. (the “Parent”), through its wholly owned subsidiaries, principally Stifel, Nicolaus & Company, Incorporated (“Stifel”), Stifel Bank & Trust (“Stifel Bank”), Stifel Nicolaus Europe Limited (“SNEL”), Century Securities Associates, Inc. (“CSA”), Keefe, Bruyette & Woods, Inc. (“KBW”), Sterne, Agee and Leach Inc. (“SALI”), Sterne Agee Financial Services, Inc. (“SAFS”), Miller Buckfire & Co. LLC (“Miller Buckfire”), 1919 Investment Counsel & Trust Co., National Association (“1919 Investment Counsel”), Stifel Trust Company, National Association, and Ziegler Capital Management, LLC (“ZCM”), is principally engaged in retail brokerage; securities trading; investment banking; investment advisory; retail, consumer, and commercial banking; and related financial services. We have offices throughout the United States and several European cities. Our major geographic area of concentration is throughout the United States, with a growing presence in the United Kingdom and Europe. Our company’s principal customers are individual investors, corporations, municipalities, and institutions.

Basis of Presentation

The consolidated financial statements include Stifel Financial Corp. and its wholly owned subsidiaries, principally Stifel Nicolaus and Stifel Bank. All material intercompany balances and transactions have been eliminated. Unless otherwise indicated, the terms “we,” “us,” “our,” or “our company” in this report refer to Stifel Financial Corp. and its wholly owned subsidiaries.

We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, we have omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles. In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise noted) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2014 on file with the SEC.

Certain amounts from prior periods have been reclassified to conform to the current period’s presentation. The effect of these reclassifications on our company’s previously reported consolidated financial statements was not material.

There have been no material changes in our significant accounting policies, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

 

.

 

 

 

NOTE 2 – Recently Issued Accounting Guidance

Interest - Imputation of Interest

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). The guidance in ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted, and a retrospective approach is required. The guidance is not expected to have a material impact on our consolidated financial statements.

Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share

In May 2015, the FASB issued ASU No. 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” The guidance removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The guidance also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The guidance is effective for fiscal years beginning after December 15, 2015 and for interim periods within those years. The guidance shall be applied retrospectively for all periods presented. Early application is permitted. The guidance is not expected to have a material impact on our consolidated financial statements.

9


Consolidation

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” that amends the criteria for determining whether limited partnerships and similar entities are VIEs, clarifies when a general partner or asset manager should consolidate an entity and eliminates the indefinite deferral of certain aspects of VIE accounting guidance for investments in certain investment funds. Money market funds registered under Rule 2a-7 of the Investment Company Act and similar funds are exempt from consolidation under the new guidance. The new accounting guidance is effective beginning on January 1, 2016. Early adoption is permitted; however, we do not expect to adopt this new guidance early. The guidance is not expected to have a material impact on our consolidated financial statements.

Repurchase Agreements

In June 2014, the FASB issued ASU No. 2014-11, "Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures," ("ASU 2014-11") amending FASB Accounting Standards Codification Topic 860, "Transfers and Servicing." The amended guidance changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements.  The guidance also requires new disclosures for certain transfers accounted for as sales and collateral supporting transactions that are accounted for as secured borrowings. ASU 2014-11 is effective for annual and interim periods beginning after December 15, 2014, except for the disclosures related to secured borrowings, which are effective for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The adoption of ASU 2014-11 did not have a material impact on our results of operations or financial position.

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," ("ASU 2014-09") which supersedes current revenue recognition guidance, including most industry-specific guidance. ASU 2014-09 requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. The guidance also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue that is recognized. The guidance allows for either retrospective application to all periods presented or a modified retrospective approach where the guidance would only be applied to existing contracts in effect at the adoption date and new contracts going forward. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016; however, the FASB has issued a proposal to extend the effective date by one year. Early adoption is not permitted. We are currently evaluating the impact the new guidance will have on our consolidated financial statements.

Discontinued Operations

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” (“ASU 2014-08”) amending FASB ASC Topic 205-20, “Discontinued Operations,” (“ASC 205-20”). The amended guidance changes the criteria for reporting discontinued operations and requires new disclosures. ASU 2014-08 is effective for annual and interim periods beginning on or after December 15, 2014, and will be applied prospectively. The adoption of ASU 2014-08 did not have a material impact on our consolidated financial statements.

 

 

NOTE 3 – Receivables From and Payables to Brokers, Dealers, and Clearing Organizations

Amounts receivable from brokers, dealers, and clearing organizations at June 30, 2015 and December 31, 2014, included (in thousands):

 

 

 

June 30,

2015

 

 

December 31,

2014

 

Deposits paid for securities borrowed

 

$

480,240

 

 

$

445,542

 

Receivables from clearing organizations

 

 

320,601

 

 

 

198,079

 

Securities failed to deliver

 

 

34,592

 

 

 

7,453

 

 

 

$

835,433

 

 

$

651,074

 

 

Amounts payable to brokers, dealers, and clearing organizations at June 30, 2015 and December 31, 2014, included (in thousands):

 

 

 

June 30,

2015

 

 

December 31,

2014

 

Deposits received from securities loaned

 

$

104,138

 

 

$

4,215

 

Payable to clearing organizations

 

 

40,738

 

 

 

2,443

 

Securities failed to receive

 

 

26,080

 

 

 

7,365

 

 

 

$

170,956

 

 

$

14,023

 

10


 

Deposits paid for securities borrowed approximate the market value of the securities. Securities failed to deliver and receive represent the contract value of securities that have not been delivered or received on settlement date.

 

 

NOTE 4 – Fair Value Measurements

We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, financial instruments owned, available-for-sale securities, investments, financial instruments 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.

Following are descriptions of the valuation methodologies and key inputs used to measure financial assets and liabilities recorded at fair value. The descriptions include an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.

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 reported 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 is 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, mortgage-backed securities, and U.S. government securities.

If quoted prices are not available for identical instruments, 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 has 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 carried at fair value primarily include corporate equity securities, ARS, investments in mutual funds, U.S. government securities, and investments in public companies, private equity securities, and partnerships, which are classified as other in the following tables.

Corporate equity securities, mutual funds, and U.S. government securities are valued based on quoted prices in active markets and reported in Level 1.

ARS for which the market has been dislocated and largely ceased to function are reported as Level 3 assets. The methods used to value ARS are discussed above.

11


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 $11.3 million and $11.5 million at June 30, 2015 and December 31, 2014, 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 has 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 not actively traded, and corporate fixed income securities.

Derivatives

Derivatives are valued using quoted market prices for identical instruments 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.

 

12


Assets and liabilities measured at fair value on a recurring basis as of June 30, 2015, are presented below:

 

 

 

June 30, 2015

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

89,423

 

 

$

89,423

 

 

$

 

 

$

 

Financial instruments owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

 

29,280

 

 

 

29,280

 

 

 

 

 

 

 

U.S. government agency securities

 

 

151,895

 

 

 

 

 

 

151,895

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

259,968

 

 

 

 

 

 

259,968

 

 

 

 

Non-agency

 

 

16,377

 

 

 

 

 

 

15,707

 

 

 

670

 

Corporate securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

270,594

 

 

 

30,389

 

 

 

235,633

 

 

 

4,572

 

Equity securities

 

 

41,628

 

 

 

40,898

 

 

 

111

 

 

 

619

 

State and municipal securities

 

 

175,071

 

 

 

 

 

 

175,071

 

 

 

 

Total financial instruments owned

 

 

944,813

 

 

 

100,567

 

 

 

838,385

 

 

 

5,861

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

 

1,710

 

 

 

 

 

 

1,710

 

 

 

 

State and municipal securities

 

 

73,733

 

 

 

 

 

 

73,733

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

27,903

 

 

 

 

 

 

27,903

 

 

 

 

Commercial

 

 

36,654

 

 

 

 

 

 

36,654

 

 

 

 

Non-agency

 

 

2,934

 

 

 

 

 

 

2,934

 

 

 

 

Corporate fixed income securities

 

 

188,533

 

 

 

 

 

 

188,533

 

 

 

 

Asset-backed securities

 

 

456,430

 

 

 

 

 

 

456,430

 

 

 

 

Total available-for-sale securities

 

 

787,897

 

 

 

 

 

 

787,897

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate equity securities

 

 

54,126

 

 

 

51,157

 

 

 

7

 

 

 

2,962

 

Mutual funds

 

 

14,907

 

 

 

14,907

 

 

 

 

 

 

 

 

U.S. government securities

 

 

103

 

 

 

103

 

 

 

 

 

 

 

 

Auction rate securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

48,355

 

 

 

 

 

 

 

 

 

48,355

 

Municipal securities

 

 

1,324

 

 

 

 

 

 

 

 

 

1,324

 

Other 1

 

 

71,637

 

 

 

 

 

 

2,395

 

 

 

69,242

 

Total investments

 

 

190,452

 

 

 

66,167

 

 

 

2,402

 

 

 

121,883

 

 

 

$

2,012,585

 

 

$

256,157

 

 

$

1,628,684

 

 

$

127,744

 

 

1

Includes $51.2 million of partnership interests, $13.2 million of private company investments, and $4.8 million of private equity and other investments.

 

 

 

June 30, 2015

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments sold, but not yet purchased:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

236,053

 

 

$

236,053

 

 

$

 

 

$

 

U.S. government agency securities

 

 

5,061

 

 

 

 

 

 

5,061

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

70,715

 

 

 

 

 

 

70,715

 

 

 

 

 

Non-agency

 

 

163

 

 

 

 

 

 

163

 

 

 

 

Corporate securities: