Financial Instruments - Credit Losses

6 Months Ended

Jun. 30, 2022

Credit Loss [Abstract]

Financial Instruments - Credit Losses

Financial Instruments - Credit Losses

The Company follows ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments". The Company can elect to use an approach to measure the allowance for credit losses using the fair value of collateral where the borrower is required to, and reasonably expected to, continually adjust and replenish the amount of collateral securing the instrument to reflect changes in the fair value of such collateral. The Company has elected to use this approach for securities borrowed, margin loans, and reverse repurchase agreements. No material historical losses have been reported on these assets. See note 9 for details.

As of June 30, 2022, the Company had $59.1 million of notes receivable ($54.0 million as of December 31, 2021). Notes receivable represent recruiting and retention payments generally in the form of upfront loans to financial advisors 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 the respective 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 is 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 market conditions such as changes in unemployment rates, changes in interest rates and other relevant factors. For the three months and six months ended June 30, 2022, no adjustments were made to the expected loss rates. 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 pool basis as the Company has determined that the entire defaulted portion of notes receivable has similar risk characteristics.

As of June 30, 2022, the uncollected balance of defaulted notes was $7.4 million and the allowance for uncollectibles was $5.1 million. The allowance for uncollectibles consisted of $3.4 million related to defaulted notes balances (five years and older) and $1.7 million related to defaulted notes balances (under five years).

The following table presents the disaggregation of defaulted notes by year of default as of June 30, 2022:

(Expressed in thousands)
	As of June 30, 2022
2022	$	578
2021	2,332
2020	568
2019	356
2018	138
2017 and prior	3,452
Total	$	7,424

The following table presents activity in the allowance for uncollectibles of defaulted notes for the three and six months ended

June 30, 2022 and 2021:

(Expressed in thousands)
	For the Three Months Ended June 30,				For the Six Months Ended June 30
	2022		2021		2022		2021
Beginning balance	$	5,247	$	4,766	$	4,923	$	4,234
Additions and other adjustments	(141)		(65)		183		467
Ending balance	$	5,106	$	4,701	$	5,106	$	4,701