Financial Instruments - Credit Losses (Notes)

6 Months Ended

Jun. 30, 2020

Credit Loss [Abstract]

Financial Instruments - Credit Losses

Financial Instruments - Credit Losses

On January 1, 2020, the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which replaces the incurred loss methodology with a current expected loss ("CECL") methodology. The Company elected the modified retrospective method which did not result in a cumulative-effect adjustment at the date of adoption.

The Company utilizes the practical expedient for securities borrowed and reverse repurchase agreements as these assets are secured by collateral when the amount of collateral is continually adjusted for fair value changes. No material historical losses have been reported on these assets. See footnote 8 for details.

As of June 30, 2020, the Company has $44.1 million of notes receivable. Notes receivable represents recruiting and retention payments generally in the form of upfront loans to financial advisers and key revenue producers as part of the Company's overall growth strategy. These notes generally amortize over a service period of 3 to 10 years from the initial date of the note or based on productivity levels of employees. All such notes are contingent on the employees' continued employment with the Company. The unforgiven portion of the notes becomes due on demand in the event the employee departs during the service period. At this point any uncollected portion of the notes gets reclassified into a defaulted notes category.

The allowance for uncollectibles is a valuation account that is deducted from the amortized cost basis of the defaulted notes balance to present the net amount expected to be collected. Balances are charged-off against the allowance when management deems the amount to be uncollectible.

The Company reserves 100% of the uncollected balance of defaulted notes which are five years and older and applies an expected loss rate to the remaining balance. The expected loss rate is based on historical collection rates of defaulted notes. The expected loss rate is adjusted for changes in environmental and market conditions such as changes in unemployment rates, changes in interest rates and other relevant factors. For the three and six months ended June 30, 2020 no adjustments were made to the expected loss rate for these factors. The Company will continuously monitor the effect of these factors on the expected loss rate and adjust it as necessary.

The allowance is measured on a collectible (pool) basis as the Company has determined that the entire defaulted portion of notes receivable has similar risk characteristics.

As of June 30, 2020, the uncollected balance of defaulted notes was $5.3 million and the allowance for uncollectibles was $3.9 million. The allowance for uncollectibles consisted of $2.9 million related to defaulted notes balances (five years and older) and $972,000 (under five years) using an expected loss rate of 40.9%.

The following table presents the disaggregation of defaulted notes by year of origination as of June 30, 2020:

(Expressed in thousands)
	As of June 30, 2020
2020	$	—
2019	555
2018	186
2017	762
2016	875
2015 and prior	2,931
Total	$	5,309

The following table presents activity in the allowance for uncollectibles of defaulted notes for the three and six months ended June 30, 2020:

(Expressed in thousands)
	For the Three Months Ended			For the Six Months Ended (1)
	June 30, 2020
Beginning balance	$	3,908		$	3,673
Additions and other adjustments	(5		)	230
Ending balance	$	3,903		$	3,903

(1) Beginning balance on January 1, 2020 upon adoption of ASU 2016-13