UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

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: 001-32026

 

COHEN & COMPANY INC.

(Exact name of registrant as specified in its charter)

 

 



 

Maryland

16-1685692

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)



 

Cira Centre

2929 Arch Street, Suite 1703

Philadelphia, Pennsylvania

19104

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (215) 701-9555

Not applicable

(Former name, former address and former fiscal year, if changed since last report)



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 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      No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted  pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.



 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  

Smaller reporting company



 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

Securities registered pursuant to Section 12(b) of the Act:



 

 

 

 

 

Title of each class

 

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

 

COHN

 

The NYSE American Stock Exchange

As of October 29, 2019, there were 1,194,624 shares of common stock ($0.01 par value per share) of Cohen & Company Inc. (“Common Stock”) outstanding. 


 

Cohen & Company Inc. 

FORM 10-Q

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2019

 



 

 

 

 

Page 

 

PART I. FINANCIAL INFORMATION

 



 

 

Item 1.

Financial Statements (Unaudited)

6



 

 

 

Consolidated Balance Sheets—September 30, 2019 and December 31, 2018

6



 

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss)—Three and Nine Months Ended September 30, 2019 and 2018 

7



 

 

 

Consolidated Statements of Changes in Equity—Nine Months Ended September 30, 2019 and 2018

8



 

 

 

Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2019 and 2018

10



 

 

 

Notes to Consolidated Financial Statements (Unaudited)

11



 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

56



 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

83



 

 

Item 4.

Controls and Procedures

86



 

Part II. OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

87



 

 

Item 1A.

Risk Factors

87



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

87



 

 

Item 6.

Exhibits

88



 

Signatures 

89

2

 


 

Forward-Looking Statements



This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended or the Exchange Act. Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue,” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, level of activity, performance, or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.



These forward-looking statements are found at various places throughout this Quarterly Report on Form 10-Q and include information concerning possible or assumed future results of our operations, including statements about the following subjects:



·

integration of operations;

·

business strategies;

·

growth opportunities;

·

competitive position;

·

market outlook;

·

expected financial position;

·

expected results of operations;

·

future cash flows;

·

financing plans;

·

plans and objectives of management;

·

tax treatment of the business combinations;

·

fair value of assets; and

·

any other statements regarding future growth, future cash needs, future operations, business plans, future financial results, and any other statements that are not historical facts.



These forward-looking statements represent our intentions, plans, expectations, assumptions, and beliefs about future events and are subject to risks, uncertainties, and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties, and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You should consider the areas of risk and uncertainty described above and discussed under “Item 1A — Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Actual results may differ materially as a result of various factors, some of which are outside our control, including the following:

·

a decline in general economic conditions or the global financial markets;

·

losses caused by financial or other problems experienced by third parties;

·

losses due to unidentified or unanticipated risks;

·

losses (whether realized or unrealized) on our principal investments;

·

a lack of liquidity, i.e., ready access to funds for use in our businesses, including the availability of securities financing from our clearing agency and the Fixed Income Clearing Corporation the (“FICC”) or the availability at prohibitive or excess funding rates;

·

the ability to attract and retain personnel;

·

the ability to meet regulatory capital requirements administered by federal agencies;

·

an inability to generate incremental income from acquired, newly established or expanded businesses;

·

unanticipated market closures due to inclement weather or other disasters;

·

the volume of trading in securities including collateralized securities transactions;

·

the liquidity in capital markets;

·

the credit-worthiness of our correspondents, trading counterparties, and banking and margin customers;

·

changing interest rates and their impacts on U.S. residential mortgage volumes;

·

competitive conditions in each of our business segments;

·

the availability of borrowings under credit lines, credit agreements, warehouse agreements, and our facilities;

·

our continued membership in the FICC;

·

the potential misconduct or errors by our employees or by entities with whom we conduct business; and

·

the potential for litigation and other regulatory liability.

3

 


 



You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements concerning other matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Quarterly Report on Form 10-Q. Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances, or assumptions underlying such statements, or otherwise.

4

 


 

Certain Terms Used in this Quarterly Report on Form 10-Q

In this Quarterly Report on Form 10-Q, unless otherwise noted or as the context otherwise requires, the “Company,” “we,” “us,” and our refer to Cohen & Company Inc. (formerly Institutional Financial Markets, Inc.), a Maryland corporation, and its subsidiaries on a consolidated basis; and “Cohen & Company, LLC” (formerly IFMI, LLC) or the Operating LLC refer to the main operating subsidiary of the Company. 

JVB Holdings” refers to JVB Financial Holdings, L.P.; “JVB” refers to J.V.B. Financial Group, LLC, a broker-dealer subsidiary; “CCFL” refers to Cohen & Company Financial Limited (formerly known as EuroDekania Management LTD), a subsidiary regulated by the Financial Conduct Authority (formerly known as the Financial Services Authority) in the United Kingdom (the “FCA”); “CCFEL” refers to Cohen & Company Financial (Europe) Limited, a subsidiary regulated by the Central Bank of Ireland ( the “CBI”) and EuroDekania” refers to EuroDekania (Cayman) Ltd., a Cayman Islands exempted company that is externally managed by CCFL.

Securities Act”  refers to the Securities Act of 1933, as amended; and “Exchange Act” refers to the Securities Exchange Act of 1934, as amended.

5

 


 







PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS.

COHEN & COMPANY INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands) 

(



 

 

 

 

 



 

 

 

 

 



September 30, 2019

 

 

 



(unaudited)

 

December 31, 2018

Assets

 

 

 

 

 

Cash and cash equivalents

$

14,130 

 

$

14,106 

Receivables from brokers, dealers, and clearing agencies

 

99,283 

 

 

129,812 

Due from related parties

 

317 

 

 

793 

Other receivables 

 

5,949 

 

 

12,072 

Investments-trading

 

243,928 

 

 

301,235 

Other investments, at fair value

 

6,892 

 

 

13,768 

Receivables under resale agreements

 

7,052,919 

 

 

7,632,230 

Investment in equity method affiliates

 

3,410 

 

 

 -

Goodwill

 

7,992 

 

 

7,992 

Right-of-use asset - operating leases

 

7,460 

 

 

 -

Other assets

 

5,142 

 

 

3,621 

Total assets

$

7,447,422 

 

$

8,115,629 



 

 

 

 

 

Liabilities

 

 

 

 

 

Payables to brokers, dealers, and clearing agencies

$

130,004 

 

$

201,598 

Accounts payable and other liabilities

 

10,682 

 

 

11,452 

Accrued compensation

 

3,664 

 

 

5,254 

Trading securities sold, not yet purchased

 

90,016 

 

 

120,122 

Securities sold under agreements to repurchase

 

7,099,614 

 

 

7,671,764 

Deferred income taxes

 

1,100 

 

 

2,017 

Lease liability - operating leases

 

8,011 

 

 

 -

Redeemable financial instruments

 

18,540 

 

 

17,448 

Debt

 

46,091 

 

 

43,536 

Total liabilities

 

7,407,722 

 

 

8,073,191 



 

 

 

 

 

Commitments and contingencies (See note 20)

 

 

 

 

 



 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

Voting Non-Convertible Preferred Stock, $0.001 par value per share, 4,983,557 shares authorized, 4,983,557 shares issued and outstanding (see note 17)

 

 

 

Common Stock, $0.01 par value per share, 100,000,000 shares authorized, 1,217,624 and 1,204,196 shares issued and outstanding, respectively, including 73,715 and 93,479 unvested or restricted share awards, respectively

 

12 

 

 

12 

Additional paid-in capital

 

68,949 

 

 

68,591 

Accumulated other comprehensive loss

 

(1,009)

 

 

(908)

Accumulated deficit

 

(35,293)

 

 

(31,926)

Total stockholders' equity

 

32,664 

 

 

35,774 

Non-controlling interest

 

7,036 

 

 

6,664 

Total equity

 

39,700 

 

 

42,438 

Total liabilities and equity

$

7,447,422 

 

$

8,115,629 



See accompanying notes to unaudited consolidated financial statements.

6

 


 



COHEN & COMPANY INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Dollars in Thousands, except share or per share information)

(Unaudited)





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended September 30,

 

Nine Months Ended September 30,



2019

 

2018

 

2019

 

2018

Revenues

 

 

 

 

 

 

 

 

 

 

 

Net trading

$

8,479 

 

$

6,816 

 

$

25,873 

 

$

20,193 

Asset management

 

2,018 

 

 

2,818 

 

 

5,765 

 

 

7,827 

New issue and advisory

 

250 

 

 

 -

 

 

250 

 

 

873 

Principal transactions and other income

 

520 

 

 

2,603 

 

 

1,688 

 

 

4,872 

Total revenues

 

11,267 

 

 

12,237 

 

 

33,576 

 

 

33,765 



 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

.

 

 

 

 

 

 

Compensation and benefits

 

7,017 

 

 

7,177 

 

 

19,813 

 

 

18,960 

Business development, occupancy, equipment

 

770 

 

 

725 

 

 

2,476 

 

 

2,236 

Subscriptions, clearing, and execution

 

2,403 

 

 

2,433 

 

 

6,732 

 

 

6,418 

Professional fee and other operating

 

1,440 

 

 

1,483 

 

 

4,309 

 

 

4,604 

Depreciation and amortization

 

80 

 

 

63 

 

 

239 

 

 

176 

Total operating expenses

 

11,710 

 

 

11,881 

 

 

33,569 

 

 

32,394 



 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(443)

 

 

356 

 

 

 

 

1,371 



 

 

 

 

 

 

 

 

 

 

 

Non-operating income (expense)

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(1,536)

 

 

(2,185)

 

 

(5,329)

 

 

(6,205)

Income (loss) from equity method affiliates

 

(109)

 

 

 -

 

 

(365)

 

 

 -

Income (loss) before income tax expense (benefit)

 

(2,088)

 

 

(1,829)

 

 

(5,687)

 

 

(4,834)

Income tax expense (benefit)

 

(170)

 

 

(595)

 

 

(917)

 

 

(1,259)

Net income (loss)

 

(1,918)

 

 

(1,234)

 

 

(4,770)

 

 

(3,575)

Less: Net income (loss) attributable to the non-controlling interest

 

(702)

 

 

(583)

 

 

(1,942)

 

 

(1,530)

Net income (loss) attributable to Cohen & Company Inc.

$

(1,216)

 

$

(651)

 

$

(2,828)

 

$

(2,045)

Income (loss) per share data (see note 19)

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share-basic:

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per common share

$

(1.06)

 

$

(0.57)

 

$

(2.48)

 

$

(1.76)

Weighted average shares outstanding-basic

 

1,143,909 

 

 

1,145,323 

 

 

1,140,328 

 

 

1,163,572 

Income (loss) per common share-diluted:

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per common share

$

(1.06)

 

$

(0.57)

 

$

(2.48)

 

$

(1.76)

Weighted average shares outstanding-diluted

 

1,676,318 

 

 

1,677,732 

 

 

1,672,737 

 

 

1,695,981 



 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

$

 -

 

$

0.20 

 

$

0.40 

 

$

0.60 



 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(1,918)

 

$

(1,234)

 

$

(4,770)

 

$

(3,575)

Other comprehensive income (loss) item:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax of $0

 

(152)

 

 

(30)

 

 

(127)

 

 

(77)

Other comprehensive income (loss), net of tax of $0

 

(152)

 

 

(30)

 

 

(127)

 

 

(77)

Comprehensive income (loss)

 

(2,070)

 

 

(1,264)

 

 

(4,897)

 

 

(3,652)

Less: comprehensive income (loss) attributable to the non-controlling interest

 

(749)

 

 

(593)

 

 

(1,982)

 

 

(1,555)

Comprehensive income (loss) attributable to Cohen & Company Inc.

$

(1,321)

 

$

(671)

 

$

(2,915)

 

$

(2,097)



See accompanying notes to unaudited consolidated financial statements.

 

7

 


 

COHEN & COMPANY INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Dollars in Thousands, except share or per share information)

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Cohen & Company Inc.

 

 

 

 

 

 



 

Nine Months Ended September 30, 2019

 

 

 

 

 



 

 

Preferred Stock

 

 

Common Stock

 

Additional Paid-In Capital

 

 

Retained Earnings (Accumulated Deficit)

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Total Stockholders' Equity

 

 

Non-controlling Interest

 

 

Total Equity

December 31, 2018

 

$

 

$

12 

 

$

68,591 

 

$

(31,926)

 

$

(908)

 

$

35,774 

 

$

6,664 

 

$

42,438 

Net loss

 

 

 -

 

 

 -

 

 

 -

 

 

(1,202)

 

 

 -

 

 

(1,202)

 

 

(622)

 

 

(1,824)

Other comprehensive income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

Cumulative effect adjustment - adoption of ASU 2016-02

 

 

 -

 

 

 -

 

 

 -

 

 

(20)

 

 

 -

 

 

(20)

 

 

 -

 

 

(20)

Acquisition / (surrender) of additional units of consolidated subsidiary, net

 

 

 -

 

 

 -

 

 

133 

 

 

 -

 

 

(14)

 

 

119 

 

 

(119)

 

 

 -

Equity-based compensation and vesting of shares

 

 

 -

 

 

 -

 

 

117 

 

 

 -

 

 

 -

 

 

117 

 

 

55 

 

 

172 

Shares withheld for employee taxes

 

 

 -

 

 

 -

 

 

(87)

 

 

 -

 

 

 -

 

 

(87)

 

 

(41)

 

 

(128)

Purchase and retirement of Common Stock

 

 

 -

 

 

 -

 

 

(65)

 

 

 -

 

 

 -

 

 

(65)

 

 

 -

 

 

(65)

Investment in non-controlling interest

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,550 

 

 

2,550 

Dividends/Distributions

 

 

 -

 

 

 -

 

 

 -

 

 

(290)

 

 

 -

 

 

(290)

 

 

(106)

 

 

(396)

March 31, 2019

 

 

 

 

12 

 

 

68,689 

 

 

(33,438)

 

 

(916)

 

 

34,352 

 

 

8,384 

 

 

42,736 

Net loss

 

 

 -

 

 

 -

 

 

 -

 

 

(410)

 

 

 -

 

 

(410)

 

 

(618)

 

 

(1,028)

Other comprehensive income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

12 

 

 

12 

 

 

 

 

16 

Equity-based compensation and vesting of shares

 

 

 -

 

 

 -

 

 

130 

 

 

 -

 

 

 -

 

 

130 

 

 

62 

 

 

192 

Dividends/Distributions

 

 

 -

 

 

 -

 

 

 -

 

 

(229)

 

 

 -

 

 

(229)

 

 

(107)

 

 

(336)

June 30, 2019

 

 

 

 

12 

 

 

68,819 

 

 

(34,077)

 

 

(904)

 

 

33,855 

 

 

7,725 

 

 

41,580 

Net loss

 

 

 -

 

 

 -

 

 

 -

 

 

(1,216)

 

 

 -

 

 

(1,216)

 

 

(702)

 

 

(1,918)

Other comprehensive income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(105)

 

 

(105)

 

 

(47)

 

 

(152)

Equity-based compensation and vesting of shares

 

 

 -

 

 

 -

 

 

130 

 

 

 -

 

 

 -

 

 

130 

 

 

60 

 

 

190 

September 30, 2019

 

$

 

$

12 

 

$

68,949 

 

$

(35,293)

 

$

(1,009)

 

$

32,664 

 

$

7,036 

 

$

39,700 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



See accompanying notes to unaudited consolidated financial statements.

8

 


 



COHEN & COMPANY INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Dollars in Thousands, except share or per share information)

(Unaudited)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Cohen & Company Inc.

 

 

 

 

 

 



Nine Months Ended September 30, 2018

 

 

 

 

 

 



 

 

Preferred Stock

 

 

Common Stock

 

Additional Paid-In Capital

 

 

Retained Earnings (Accumulated Deficit)

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Total Stockholders' Equity

 

 

Non-controlling Interest

 

 

Total Equity

December 31, 2017

 

$

 

$

12 

 

$

69,202 

 

$

(28,497)

 

$

(850)

 

$

39,872 

 

$

8,284 

 

$

48,156 

Net loss

 

 

 -

 

 

 -

 

 

 -

 

 

(1,474)

 

 

 -

 

 

(1,474)

 

 

(677)

 

 

(2,151)

Other comprehensive income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

74 

 

 

74 

 

 

33 

 

 

107 

Acquisition / (surrender) of additional units of consolidated subsidiary, net

 

 

 -

 

 

 -

 

 

84 

 

 

 -

 

 

(7)

 

 

77 

 

 

(77)

 

 

 -

Equity-based compensation and vesting of shares

 

 

 -

 

 

 

 

86 

 

 

 -

 

 

 -

 

 

87 

 

 

38 

 

 

125 

Shares withheld for employee taxes

 

 

 -

 

 

 -

 

 

(51)

 

 

 -

 

 

 -

 

 

(51)

 

 

(24)

 

 

(75)

Purchase and retirement of Common Stock

 

 

 -

 

 

 -

 

 

(71)

 

 

 -

 

 

 -

 

 

(71)

 

 

 -

 

 

(71)

Dividends/Distributions

 

 

 -

 

 

 -

 

 

 -

 

 

(276)

 

 

 -

 

 

(276)

 

 

(106)

 

 

(382)

March 31, 2018

 

 

 

 

13 

 

 

69,250 

 

 

(30,247)

 

 

(783)

 

 

38,238 

 

 

7,471 

 

 

45,709 

Net loss

 

 

 -

 

 

 -

 

 

 -

 

 

80 

 

 

 -

 

 

80 

 

 

(270)

 

 

(190)

Other comprehensive income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(106)

 

 

(106)

 

 

(48)

 

 

(154)

Acquisition / (surrender) of additional units of consolidated subsidiary, net

 

 

 -

 

 

 -

 

 

(101)

 

 

 -

 

 

 

 

(92)

 

 

92 

 

 

 -

Equity-based compensation and vesting of shares

 

 

 -

 

 

 -

 

 

114 

 

 

 -

 

 

 -

 

 

114 

 

 

52 

 

 

166 

Shares withheld for employee taxes

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Purchase and retirement of Common Stock

 

 

 -

 

 

(1)

 

 

(248)

 

 

 -

 

 

 -

 

 

(249)

 

 

 -

 

 

(249)

Dividends/Distributions

 

 

 -

 

 

 -

 

 

 -

 

 

(236)

 

 

 -

 

 

(236)

 

 

(106)

 

 

(342)

June 30, 2018

 

 

 

 

12 

 

 

69,015 

 

 

(30,403)

 

 

(880)

 

 

37,749 

 

 

7,191 

 

 

44,940 

Net loss

 

 

 -

 

 

 -

 

 

 -

 

 

(651)

 

 

 -

 

 

(651)

 

 

(583)

 

 

(1,234)

Other comprehensive income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(20)

 

 

(20)

 

 

(10)

 

 

(30)

Acquisition / (surrender) of additional units of consolidated subsidiary, net

 

 

 -

 

 

 -

 

 

(122)

 

 

 -

 

 

12 

 

 

(110)

 

 

110 

 

 

 -

Equity-based compensation and vesting of shares

 

 

 -

 

 

 -

 

 

113 

 

 

 -

 

 

 -

 

 

113 

 

 

53 

 

 

166 

Shares withheld for employee taxes

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Purchase and retirement of Common Stock

 

 

 -

 

 

 -

 

 

(281)

 

 

 -

 

 

 -

 

 

(281)

 

 

 -

 

 

(281)

Dividends/Distributions

 

 

 -

 

 

 -

 

 

 

 

 

(230)

 

 

 -

 

 

(230)

 

 

(107)

 

 

(337)

September 30, 2018

 

$

 

$

12 

 

$

68,725 

 

$

(31,284)

 

$

(888)

 

$

36,570 

 

$

6,654 

 

$

43,224 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.











 

9

 


 

COHEN & COMPANY INC.

Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)







 

 

 

 

 



 

 

 

 

 



Nine Months Ended September 30,



2019

 

2018

Operating activities

 

 

 

 

 

Net income (loss)

$

(4,770)

 

$

(3,575)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

Equity-based compensation

 

554 

 

 

457 

Accretion of income on other investments, at fair value

 

(368)

 

 

(1,330)

Realized loss (gain) on other investments, at fair value

 

1,451 

 

 

285 

(Income) / loss from equity method affiliates

 

365 

 

 

 -

Change in unrealized (gain) loss on other investments, at fair value

 

(2,330)

 

 

(3,421)

Depreciation and amortization

 

239 

 

 

176 

Amortization of discount on debt

 

396 

 

 

656 

Deferred tax provision (benefit)

 

(917)

 

 

(1,270)

Change in operating assets and liabilities, net:

 

 

 

 

 

(Increase) decrease in other receivables

 

6,141 

 

 

(1,025)

(Increase) decrease in investments-trading

 

57,307 

 

 

(17,205)

(Increase) decrease in other assets

 

(710)

 

 

(347)

(Increase) decrease in receivables under resale agreement

 

579,311 

 

 

(5,260,413)

Change in receivables from / payables to related parties, net

 

476 

 

 

96 

Increase (decrease) in accrued compensation

 

(1,590)

 

 

(95)

Increase (decrease) in accounts payable and other liabilities

 

(1,386)

 

 

10,800 

Increase (decrease) in trading securities sold, not yet purchased

 

(30,106)

 

 

(10,667)

Change in receivables from / payables to brokers, dealers, and clearing agencies

 

(41,065)

 

 

(5,042)

Increase (decrease) in securities sold under agreements to repurchase

 

(572,150)

 

 

5,291,321 

Net cash provided by (used in) operating activities

 

(9,152)

 

 

(599)

Investing activities

 

 

 

 

 

Purchase of investments-other investments, at fair value

 

(1,168)

 

 

(25,802)

Sales and returns of principal-other investments, at fair value

 

9,291 

 

 

13,092 

Investment in equity method affiliate

 

(3,775)

 

 

 -

Purchase of furniture, equipment, and leasehold improvements

 

(94)

 

 

(579)

Net cash provided by (used in) investing activities

 

4,254 

 

 

(13,289)

Financing activities

 

 

 

 

 

Proceeds from draws on revolving credit facility

 

2,159 

 

 

 -

Repayment  of convertible debt

 

 -

 

 

(1,461)

Proceeds from redeemable financial instruments

 

1,268 

 

 

 -

Payments for debt issuance costs

 

 -

 

 

(525)

Cash used to net share settle equity awards

 

(128)

 

 

(75)

Purchase and retirement of Common Stock

 

(65)

 

 

(601)

Proceeds from non-controlling interest investment

 

2,550 

 

 

 -

Non-controlling interest distributions

 

(213)

 

 

(319)

Cohen & Company Inc. dividends

 

(519)

 

 

(742)

Net cash provided by (used in) financing activities

 

5,052 

 

 

(3,723)

Effect of exchange rate on cash

 

(130)

 

 

(156)

Net increase (decrease) in cash and cash equivalents

 

24 

 

 

(17,767)

Cash and cash equivalents, beginning of period

 

14,106 

 

 

22,933 

Cash and cash equivalents, end of period

$

14,130 

 

$

5,166 



See accompanying notes to unaudited consolidated financial statements.

10

 


 

COHEN & COMPANY INC.

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and per share information)

(Unaudited)



1. ORGANIZATION AND NATURE OF OPERATIONS

Organizational History

Cohen Brothers, LLC (“Cohen Brothers”) was formed on October 7, 2004 by Cohen Bros. Financial, LLC (“CBF”). Cohen Brothers was established to acquire the net assets of CBF’s subsidiaries (the “Formation Transaction”): Cohen Bros. & Company, Inc.; Cohen Frères SAS; Dekania Investors, LLC; Emporia Capital Management, LLC; and the majority interest in Cohen Bros. & Toroian Investment Management, Inc. The Formation Transaction was accomplished through a series of transactions occurring between March 4, 2005 and May 31, 2005.

From its formation until December 16, 2009, Cohen Brothers operated as a privately-owned limited liability company. On December 16, 2009, Cohen Brothers completed its merger (the “Merger”) with a subsidiary of Alesco Financial Inc. (“AFN”), a publicly traded real estate investment trust.

As a result of the Merger, AFN contributed substantially all of its assets into Cohen Brothers in exchange for newly issued membership units directly from Cohen Brothers. In addition, AFN received additional Cohen Brothers membership interests directly from its members in exchange for AFN common stock. In accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), the Merger was accounted for as a reverse acquisition, and Cohen Brothers was deemed to be the accounting acquirer. As a result, all of AFN’s assets and liabilities were required to be revalued at fair value as of the acquisition date. The remaining membership interests of Cohen Brothers that were not held by AFN were included as a component of non-controlling interest in the consolidated balance sheets.

Subsequent to the Merger, AFN was renamed Cohen & Company Inc. In January 2011, it was renamed again as Institutional Financial Markets, Inc. (“IFMI”) and on September 1, 2017 it was renamed again as Cohen & Company Inc.  Effective January 1, 2010, the Company ceased to qualify as a REIT. 

The Company

The Company is a financial services company specializing in fixed income markets. As of September 30, 2019, the Company had $2.67 billion in assets under management (“AUM”) of which 82.4%, or $2.20 billion, was in collateralized debt obligations (“CDOs”). The remaining portion of AUM is from a diversified mix of Investment Vehicles (as defined herein).

In these financial statements, the “Company” refers to Cohen & Company Inc. and its subsidiaries on a consolidated basis. Cohen & Company, LLC or the “Operating LLC” refers to the main operating subsidiary of the Company.  “Cohen Brothers” refers to the pre-Merger Cohen Brothers, LLC and its subsidiaries. “AFN” refers to the pre-merger Alesco Financial Inc. and its subsidiaries. When the term “Cohen & Company Inc.” is used, it is referring to the parent company itself. “JVB Holdings” refers to J.V.B. Financial Holdings, LLC; “JVB” refers to J.V.B. Financial Group LLC, a broker-dealer subsidiary; “CCFL” refers to Cohen & Company Financial Limited (formerly known as EuroDekania Management LTD), a subsidiary regulated by the Financial Conduct Authority (formerly known as Financial Services Authority) in the United Kingdom; “CCFEL” refers to Cohen & Company Financial (Europe) Limited, a subsidiary regulated by the Central Bank of Ireland in Ireland; and “EuroDekania” refers to EuroDekania (Cayman) Ltd., a Cayman Islands exempted company that is externally managed by CCFL.

The Company’s business is organized into the following three business segments.

Capital Markets: The Company’s Capital Markets business segment consists primarily of fixed income sales, trading, matched book repurchase agreement (“repo”) financing, new issue placements in corporate and securitized products, and advisory services. The Company’s fixed income sales and trading group provides trade execution to corporate investors, institutional investors, mortgage originators, and other smaller broker-dealers. The Company specializes in a variety of products, including but not limited to: corporate bonds, asset backed securities (“ABS”), mortgage backed securities (“MBS”), residential mortgage backed securities (“RMBS”), CDOs, collateralized loan obligations (“CLOs”), collateralized bond obligations (“CBOs”), collateralized mortgage obligations (“CMOs”), municipal securities, to-be-announced securities (“TBAs”) and other forward agency MBS contracts, Small Business Administration (“SBA”) loans, U.S. government bonds, U.S. government agency securities, brokered deposits and certificates of deposit (“CDs”) for small banks, and hybrid capital of financial institutions including trust preferred securities (“TruPS”), whole loans, and other structured financial instruments. The Company also offers execution and brokerage services for equity products. The Company operates its capital markets activities primarily through its subsidiaries: JVB in the United States, and CCFL and CCFEL in Europe.

11

 


 

Asset Management: The Company’s Asset Management business segment manages assets within CDOs, managed accounts, joint ventures, and investment funds (collectively referred to as “Investment Vehicles”). A CDO is a form of secured borrowing. The borrowing is secured by different types of fixed income assets such as corporate or mortgage loans or bonds. The borrowing is in the form of a securitization, which means that the lenders are actually investing in notes backed by the assets. In the event of default, the lenders will have recourse only to the assets securing the loan. The Company’s Asset Management business segment includes its fee-based asset management operations, which include ongoing base and incentive management fees.

Principal Investing: The Company’s Principal Investing business segment is comprised of investments that the Company has made for the purpose of earning an investment return rather than investments made to support the Company’s trading, matched book repo, or other Capital Markets business segment activities.  These investments are a component of the Company’s other investments, at fair value and investment in equity method affiliates in our consolidated balance sheets.

The Company generates its revenue by business segment primarily through the following activities.

Capital Markets

·

Trading activities of the Company, which include execution and brokerage services, riskless trading activities as well as gains and losses (unrealized and realized) and income and expense earned on securities and derivatives classified as trading;

·

Net interest income on the Company’s matched book repo financing activities; and

·

New issue and advisory revenue comprised primarily of (i) new issue revenue associated with originating, arranging, or placing newly created financial instruments and (ii) revenue from advisory services.

Asset Management

·

Asset management fees for the Company’s on-going asset management services provided to certain Investment Vehicles, which may include fees both senior and subordinate to the securities in the Investment Vehicle, and incentive management fees earned based on the performance of the various Investment Vehicles.

Principal Investing

·

Gains and losses (unrealized and realized) and income and expense earned on securities classified as other investments, at fair value.

2. BASIS OF PRESENTATION

The financial statements of the Company included herein were prepared in conformity with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim month periods. All intercompany accounts and transactions have been eliminated in consolidation. The results for the nine months ended September 30, 2019 and 2018 are not necessarily indicative of the results for the entire year or any subsequent interim period. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  

Capitalized terms used herein without definition have the meanings ascribed to them in the Annual Report on Form 10-K for the year ended December 31, 2018.  

Effective June 1, 2019, the Company changed its accounting policy regarding the netting of reverse repurchase agreement and repurchase agreement transactions and updated prior periods balances to be consistent with this new accounting policy.  This change resulted in an increase in the reverse repurchase agreement and repurchase agreement amounts included in the consolidated balance sheet as of December 31, 2018 of $2,461,177.  No other amounts previously presented were impacted by this change.  See note 10. 



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Adoption of New Accounting Standards



In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers  (Topic 606).  Subsequent to that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2014-09 but they did not change the core principal of ASU 2014-09.  The new guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The Company adopted the new guidance on January 1, 2018 using the retrospective transition method. This ASU excludes from its scope revenue recognition related to items the Company records as a component of net trading and principal transactions

12

 


 

within its consolidated statements of operations and therefore this ASU had no impact on these items.  In terms of asset management and other revenue, the main impact of Topic 606 related to the timing of the recognition of incentive management fees in certain cases.  Prior to the adoption of Topic 606, the Company would recognize incentive fees when they were fixed and determinable.  Under Topic 606, the Company is required to recognize incentive fees when they are probable and there is not a significant chance of reversal in the future.  For the asset management contracts in place at the time of adoption, this change in policy did not result in any actual change in revenue that had already been recognized and therefore there was no transition adjustment necessary. 

In February 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10).  The amendments in ASU 2016-01, among other things, require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; require separate presentation of financial assets and liabilities by measurement category and form of financial asset; and eliminate the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The Company’s adoption of the provisions of ASU 2016-01, effective January 1, 2018 did not have an effect on the Company’s consolidated financial statements.



In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance (subsequently updated with ASU 2018-01, ASU 2018-10, ASU 2018-11,  ASU 2018-20, and ASU  2019-01), lessees will be required to recognize the following for all leases with the exception of short-term leases:  (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  Lessor accounting is largely unchanged.  The Company adopted the provisions of the new guidance effective January 1, 2019.  The Company recorded the following:  (a) a right of use asset of $8,416, (b) a lease commitment liability of $8,860, (c) a reduction in retained earnings from cumulative effect of adoption of $20, (d) an increase in other receivables of $18, and (e) a reduction in other liabilities of $406.  See note 12.



In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  The amendments in this ASU provide cash flow statement classification guidance on eight specific cash flow presentation issues with the objective of reducing existing diversity in practice.  The Company’s adoption of the provisions of ASU 2016-15, effective January 1, 2018 did not have an effect on the Company’s consolidated financial statements.



In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory.  The amendments in this ASU require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.  The amendments eliminate the exception of an intra-entity transfer of an asset other than inventory.  The Company’s adoption of the provisions of ASU 2016-16, effective January 1, 2018 did not have an effect on the Company’s consolidated financial statements.



In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805):    Clarifying the Definition of a Business.  The amendments in this ASU clarify the definition of a business and affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The Company’s adoption of the provisions of ASU 2017-01, effective January 1, 2018 did not have an effect on the Company’s consolidated financial statements.



In February 2017, the FASB issued ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20):  Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.  The amendments in this ASU clarify that a financial asset within the scope of this topic may include nonfinancial assets transferred within a legal entity to counterparty.  The amendments clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a  counterparty and derecognize each asset when a  counterparty obtains control of it. The Company’s adoption of the provisions of ASU 2017-05, effective January 1, 2018 did not have an effect on the Company’s consolidated financial statements.



In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718):  Improvements to Nonemployee Share-Based Payment Accounting.  The amendments in this ASU expand the scope of Topic 718, which previously only included share-based payments to employees, to include share-based payments issued to nonemployees for goods or services.  Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The Company’s adoption of the provisions of ASU 2018-07, effective January 1, 2019 did not have an effect on the Company’s consolidated financial statements.



In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs, Premium Amortization on Purchased Callable Debt Securities (Sub-Topic 310-20).  The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium.  Specifically, the amendments require the premium to be amortized to the earliest call date.  The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to

13

 


 

maturity.  The Company’s adoption of the provisions of ASU 2017-08, effective January 1, 2019 did not have an effect on the Company’s consolidated financial statements.



In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this ASU provide guidance on determining those changes to the terms and conditions of share-based payment awards that require an entity to apply modification accounting.  The Company’s adoption of the provisions of ASU 2017-09, effective January 1, 2018 did not have an effect on the Company’s consolidated financial statements.



In August 2017, the FASB issued ASU 2017-12, Derivative and Hedging – Targeted Improvements to Accounting for Hedging Activities (Topic 815).   The amendments in this ASU refine and expand hedge accounting for both financial and commodity risks and contain provisions to create more transparency and clarify how economic results are presented. The Company’s adoption of the provisions of ASU 2017-12, effective January 1, 2019 did not have an effect on the Company’s consolidated financial statements.



In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  The amendments in this ASU provide the option to reclassify stranded tax effects within accumulated other comprehensive income (“AOCI”) to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act (or portion thereof) is recorded. The Company’s adoption of the provisions of ASU 2018-02, effective January 1, 2019 did not have an effect on the Company’s consolidated financial statements.

B. Recent Accounting Developments



In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date to be based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years.  The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.



In January 2017, the FASB issued ASU 2017-04, Intangibles  – Goodwill and Other (Topic 350):  Simplifying the Test for Goodwill Impairment. The amendments in this ASU eliminate Step 2 from the goodwill impairment test. The annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount.  An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  This ASU is effective for fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017 and should be applied on a prospective basis. The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.



In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework –Changes to the Disclosure Requirements for Fair Value Measurement.  The ASU modifies the disclosure requirements in Topic 820, by removing certain disclosure requirements related to the valuation hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. Early adoption is permitted.  The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.



In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810):  Target Improvements to Related Party Guidance for Variable Interest Entities The ASU made targeted changes to the related party consolidation guidance. The new guidance changes how entities evaluate decision-making fees under the variable interest entity guidance. To determine whether decision-making fees represent a variable interest, an entity will need to consider indirect interests held through related parties under common control on a proportionate basis under the new guidance, rather than in their entirety, as has been the case under current guidance. The guidance is effective in annual periods beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.



14

 


 

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606.  The ASU also provides more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. It accomplishes this by allowing organizations to only present units of account in collaborative arrangements that are within the scope of the revenue recognition standard together with revenue accounted for under the revenue recognition standard.  The parts of the collaborative arrangement that are not in the scope of the revenue recognition standard should be presented separately from revenue accounted for under the revenue recognition.  This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.

C. Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments. These determinations were based on available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop the estimates and, therefore, these estimates may not necessarily be indicative of the amount the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Refer to note 8 for a discussion of the valuation hierarchy with respect to investments-trading; other investments, at fair value; and derivatives held by the Company. 



Cash equivalents: Cash equivalents are carried at historical cost, which is assumed to approximate fair value. The estimated fair value measurement of cash equivalents is classified within level 1 of the valuation hierarchy.

Investments-trading: These amounts are carried at fair value. The fair value is based on either quoted market prices of an active exchange, independent broker market quotations, market price quotations from third party pricing services, or valuation models when quotations are not available.

Other investments, at fair value: These amounts are carried at fair value. The fair value is based on quoted market prices of an active exchange, independent broker market quotations, or valuation models when quotations are not available. In the case of investments in alternative investment funds, fair value is generally based on the reported net asset value of the underlying fund.

Receivables under resale agreements: Receivables under resale agreements are carried at their contracted resale price, have short-term maturities, and are repriced frequently or bear market interest rates and, accordingly, these contracts are at amounts that approximate fair value. The estimated fair value measurements of receivables under resale agreements are based on observations of actual market activity and are generally classified within level 2 of the valuation hierarchy.

Trading securities sold, not yet purchased: These amounts are carried at fair value. The fair value is based on quoted market prices of an active exchange, independent market quotations, market price quotations from third party pricing services, or valuation models when quotations are not available.

Securities sold under agreements to repurchase: The liabilities for securities sold under agreements to repurchase are carried at their contracted repurchase price, have short-term maturities, and are repriced frequently or bear market interest rates and accordingly, these contracts are carried at amounts that approximate fair value. The estimated fair value measurements of securities sold under agreements to repurchase are based on observations of actual market activity and are generally classified within level 2 of the valuation hierarchy.

Redeemable financial instruments:  The liabilities for redeemable financial instruments are carried at their redemption value, which approximates fair value. The estimated fair value measurement of the redeemable financial instruments is classified within level 3 of the valuation hierarchy. 

Debt: These amounts are carried at outstanding principal less unamortized discount and deferred financing costs. However, a substantial portion of the debt was assumed in the Merger and recorded at fair value as of that date. As of September 30, 2019 and December 31, 2018, the fair value of the Company’s debt was estimated to be $53,835 and $50,159, respectively. The estimated fair value measurements of the debt are generally based on discounted cash flow models prepared by the Company’s management primarily using discount rates for similar instruments issued to companies with similar credit risks to the Company and are generally classified within level 3 of the value hierarchy.

Derivatives: These amounts are carried at fair value. Derivatives may be included as a component of investments-trading; trading securities sold, not yet purchased; and other investments, at fair value. See notes 8 and 9. The fair value is generally based on quoted market prices on an exchange that is deemed to be active for derivative instruments such as foreign currency forward contracts and Eurodollar futures.  For derivative instruments, such as TBAs and other extended settlement trades, the fair value is generally based on market price quotations from third party pricing services.





15

 


 

4. NEW BUSINESS



U.S. Insurance JV



On May 16, 2018, the Company committed to invest up to $3,000 in a newly formed joint venture (the “U.S. Insurance JV”) with an outside investor who committed to invest approximately $63,000 of equity in the U.S. Insurance JV.  The U.S. Insurance JV was formed for the purposes of investing in debt issued by small and medium sized U.S. and Bermuda insurance and reinsurance companies and is managed by the Company. The Company is required to invest 4.5% of the total equity of the U.S. Insurance JV with an absolute limit of $3,000. The U.S. Insurance JV may use leverage to grow its assets.

The insurance company debt that will be funded by the U.S. Insurance JV may be originated by the Company and there may be origination fees earned in connection with such transactions. The Company will also earn management fees as manager of the U.S. Insurance JV.  The Company is entitled to a quarterly base management fee, an annual incentive fee (if certain return hurdles are met), and an additional incentive fee upon the liquidation of the portfolio (if certain return hurdles are met).

The Company has elected the fair value option in accordance with the provisions of FASB ASC 820, Fair Value Measurements (“FASB ASC 820”) to account for its investment in the U.S. Insurance JV.  The investment is included in other investments at fair value on the consolidated balance sheets and gains and losses (both realized and unrealized) are recognized in the consolidated statement of operations as a component of principal transactions and other income.  Because the U.S. Insurance JV has the attributes of investment companies as described in FASB ASC 946-15-2, the Company will estimate the fair value of its investment using the net asset value (“NAV”) per share (or its equivalent) as of the reporting date in accordance with the “practical expedient” provisions related to investments in certain entities that calculate net asset value per share (or its equivalent) included in FASB ASC 820 for all entities. See note 8.

SPAC Fund



On August 6, 2018, the Company invested in and became the general partner of a newly formed partnership (the “SPAC Fund”) for the purposes of investing in the equity interests of special purpose acquisition companies (“SPACs”).  The Company is the manager of the SPAC Fund.  The Company has invested $630 in the SPAC Fund. The Company is entitled to a quarterly base management fee based on a percentage of the NAV of the SPAC Fund and an annual incentive allocation based on the actual returns earned by the SPAC Fund.

The Company has elected the fair value option in accordance with the provisions of FASB ASC 820 to account for its investment in the SPAC Fund.  The investment is included in other investments, at fair value on the consolidated balance sheets and gains and losses (both realized and unrealized) are recognized in the statement of operations as a component of principal transactions and other revenue.  Because the SPAC Fund has the attributes of investment companies as described in FASB ASC 946-15-2, the Company will estimate the fair value of its investment using the NAV per share (or its equivalent) as of the reporting date in accordance with the “practical expedient” provisions related to investments in certain entities that calculate net asset value per share (or its equivalent) included in FASB ASC 820 for all entities. See note 7. 

ViaNova Capital Group LLC

In 2018, the Company formed a wholly-owned subsidiary, ViaNova Capital Group LLC (“ViaNova”), for the purpose of building a residential transition loan (“RTL”) business.  RTLs are small balance commercial loans that are secured by first lien mortgages used by professional investors and real estate developers to finance the purchase and rehabilitation of residential properties.  The business of ViaNova includes buying, aggregating, and distributing these loans to produce superior risk-adjusted returns through the pursuit of opportunities overlooked by commercial banks. The Company consolidates ViaNova. 

 On November 20, 2018, ViaNova entered into a Warehousing Credit and Security Agreement with LegacyTexas Bank (the “LegacyTexas Credit Facility”) with an effective date of November 16, 2018 The LegacyTexas Credit Facility was amended on May 4,  2019 and again on September 25, 2019 The LegacyTexas Credit Facility supports the buying, aggregating, and distributing of residential loans performed by the business of ViaNova. See Notes 5, 13, and 16.

Insurance Acquisition Corporation (the “Insurance SPAC”)

The Company is the sponsor of the Insurance SPAC, a blank check company that will seek to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (each a “Business Combination”).

On March 22, 2019, the Insurance SPAC completed the sale of 15,065,000 units (the “SPAC Units”) in its initial public offering (the “IPO”). Each SPAC Unit consists of one share of the SPAC’s Class A common stock, par value $0.0001 per share (“SPAC Common Stock”), and one-half of one warrant (each, a “SPAC Warrant”), where each whole SPAC Warrant entitles the holder to purchase one share of Common Stock for $11.50 per share. The SPAC Units were sold in the IPO at an offering price of $10.00 per SPAC Unit, for gross proceeds of $150,650 (before underwriting discounts and commissions and offering expenses).  Pursuant to the underwriting agreement in the IPO, the Insurance SPAC granted the underwriters in the IPO (the “Underwriters”) a

16

 


 

45-day option to purchase up to 1,965,000 additional SPAC Units solely to cover over-allotments, if any (the “Over-Allotment Option”); and on March 21, 2019, the Underwriters exercised the Over-Allotment Option in full.  Immediately following the completion of the IPO, there were an aggregate of 20,653,333 shares of SPAC Common Stock issued and outstanding.

If the Insurance SPAC fails to consummate a Business Combination within the first 18 months following the IPO, its corporate existence will cease except for the purposes of winding up its affairs and liquidating its assets.

The Operating LLC is the manager and a member of each of two entities: Insurance Acquisition Sponsor, LLC and Dioptra Advisors, LLC (together, the “Sponsor Entities”). The Sponsor Entities purchased 375,000 of the Insurance SPAC’s placement units in a private placement that occurred simultaneously with the IPO for an aggregate purchase price of $3,750, or $10.00 per placement unit.  Each placement unit consists of one share of SPAC Common Stock and one-half of one warrant (the “Placement Warrant”).  The placement units are identical to the SPAC Units sold in the IPO except (i) the shares of SPAC Common Stock issued as part of the placement units and the Placement Warrants will not be redeemable by the Insurance SPAC, (ii) the Placement Warrants may be exercised by the holders on a cashless basis, (iii) the shares of SPAC Common Stock issued as part of the placement units, together with the Placement Warrants, are entitled to certain registration rights, and (iv) for so long as they are held by the IPO underwriter, the placement units will not be exercisable more than five years following the effective date of the registration statement filed by the Insurance SPAC in connection with the IPO. Subject to certain limited exceptions, the placement units (including the underlying Placement Warrants and SPAC Common Stock and the shares of SPAC Common Stock issuable upon exercise of the Placement Warrants) will not be transferable, assignable, or salable until 30 days after the completion of our Business Combination.

The Sponsor Entities raised $2,550 from third-party investors and the remaining investment in the private placement was made by the Company.  Certain of the third-party investors are related parties of the Company.  The Company consolidates the Sponsor Entities and treats its investment in the Insurance SPAC as an equity method investment.  The $2,550 raised from third party investors is treated as non-controlling interest.  See note 11. 

The proceeds from the placement units were added to the net proceeds from the IPO to be held in a trust account. If the Insurance SPAC does not complete a Business Combination within the first 18 months following the IPO, the proceeds from the sale of the Placement Units will be used to fund the redemption of the SPAC Common Stock sold as part of the SPAC Units in the IPO (subject to the requirements of applicable law) and the Placement Warrants will expire worthless.

The Sponsor Entities collectively hold 5,103,333 founder shares of the Insurance SPAC.  Subject to certain limited exceptions, placement units held by the Sponsor Entities will not be transferable or salable until 30 days following a Business Combination, and founder shares held by the Sponsor Entities will not be transferable or salable except (a) with respect to 20% of such shares, until consummation of a Business Combination, and (b) with respect to additional 20% tranches of such shares, when the closing price of the Common Stock exceeds $12.00,  $13.50,  $15.00 and $17.00, respectively, for 20 out of any 30 consecutive trading days following the consummation of a Business Combination, in each case subject to certain limited exceptions.



CCFEL

In June 2018, in response to the uncertainty surrounding Brexit, the Company formed a new subsidiary, CCFEL (f/k/a Cohen & Company Financial (Ireland) Limited) in Ireland, for the purpose of seeking to become regulated to perform asset management and capital markets activities in Ireland and the European Union.  In April 2019, CCFEL received authorization from the CBI under the European Union (Markets in Financial Instruments) Regulations 2017 to provide investment services in respect of certain financial instruments including transferable securities, money-market instruments, units in collective investment undertakings and various option, futures, swaps, forward rate agreements, and other derivative contracts (“Financial Instruments”).  The services for which CCFEL received authorization include the receipt and transmission of orders in relation to Financial Instruments, the execution of orders on behalf of clients, portfolio management, investment advice and investment research, and financial analysis.  In addition, CCFEL applied for approval of a French branch, which approval was granted by the CBI and the branch was authorized by the French regulators in April 2019.  Following authorization of the French Branch of CCFEL, various contracts originally entered into by CCFL were novated to the French Branch of CCFEL.  The novation of contracts was completed on July 1, 2019.



17

 


 

5. NET TRADING



Net trading consisted of the following in the periods presented.







 

 

 

 

 

 

 

 

 

 

 

NET TRADING

(Dollars in Thousands)



 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

Nine Months Ended



 

September 30, 2019

 

 

September 30, 2018

 

 

September 30, 2019

 

 

September 30, 2018

Net realized gains (losses) - trading inventory

$

5,919 

 

$

1,627 

 

$

15,845 

 

$

9,420 

Net unrealized gains (losses) - trading inventory

 

(707)

 

 

3,302 

 

 

1,664 

 

 

5,503 

Net gains and losses

 

5,212 

 

 

4,929 

 

 

17,509 

 

 

14,923 



 

 

 

 

 

 

 

 

 

 

 

Interest income- trading inventory

 

1,517 

 

 

1,144 

 

 

5,192 

 

 

3,373 

Interest income - loans held for sale

 

43 

 

 

 -

 

 

90 

 

 

 -

Interest income-receivables under resale agreements

 

48,357 

 

 

24,470 

 

 

132,176 

 

 

50,118 

Interest income

 

49,917 

 

 

25,614 

 

 

137,458 

 

 

53,491 



 

 

 

 

 

 

 

 

 

 

 

Interest expense-securities sold under agreements to repurchase

 

(45,875)

 

 

(23,204)

 

 

(126,378)

 

 

(46,891)

Interest expense-LegacyTexas Credit Facility

 

(18)

 

 

 -

 

 

(47)

 

 

 -

Interest expense-margin payable

 

(757)

 

 

(523)

 

 

(2,669)

 

 

(1,330)

Interest expense

 

(46,650)

 

 

(23,727)

 

 

(129,094)

 

 

(48,221)



 

 

 

 

 

 

 

 

 

 

 

Net trading

$

8,479 

 

$

6,816 

 

$

25,873 

 

$

20,193 



Trading inventory includes investments classified as investments-trading as well as trading securities sold, not yet purchased.  See note 7 Loans held for sale represent mortgage loans acquired for resale.  See note 13.  Also, see note 10 for discussion of receivables under resale agreements and securities sold under agreements to repurchase.  See note 6 for discussion of margin payable.  See note 16 for discussion of LegacyTexas Credit Facility. 





6. RECEIVABLES FROM AND PAYABLES TO BROKERS, DEALERS, AND CLEARING AGENCIES

Amounts receivable from brokers, dealers, and clearing agencies consisted of the following.



 





 

 

 

 

 

 

RECEIVABLES FROM BROKERS, DEALERS, AND CLEARING AGENCIES

(Dollars in Thousands)



 

 

 

 

 

 



 

September 30, 2019

 

December 31, 2018

Deposits with clearing agencies

 

$

250 

 

$

250 

Unsettled regular way trades, net

 

 

12,076 

 

 

 -

Receivables from clearing agencies

 

 

86,957 

 

 

129,562 

    Receivables from brokers, dealers, and clearing agencies

 

$

99,283 

 

$

129,812 



 

 

 

 

 

 

Amounts payable to brokers, dealers, and clearing agencies consisted of the following.











 

 

 

 

 

 

PAYABLES TO BROKERS, DEALERS, AND CLEARING AGENCIES

(Dollars in Thousands)



 

 

 

 

 

 



 

September 30, 2019

 

December 31, 2018

Unsettled regular way trades, net

 

$

 -

 

$

5,822 

Margin payable

 

 

130,004 

 

 

195,776 

    Payables to brokers, dealers, and clearing agencies

 

$

130,004 

 

$

201,598 



 

 

 

 

 

 



Deposits with clearing agencies represent contractual amounts the Company is required to deposit with its clearing agents.



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Securities transactions that settle in the regular way are recorded on the trade date, as if they had settled. The related amounts receivable and payable for unsettled securities transactions are recorded net in receivables from or payables to brokers, dealers, and clearing agencies on the Company’s consolidated balance sheets.



Receivables from clearing agencies are primarily comprised of (i) cash received by the Company upon execution of short trades that is restricted from withdrawal by the clearing agent and (ii) cash deposited with the FICC to support the Company’s General Collateral Funding (“GCF”) matched book repo business.



Margin payable represents amounts borrowed from Pershing, LLC to finance the Company’s trading portfolio.  Effectively, all of the Company’s investments-trading and deposits with clearing agencies serve as collateral for the margin payable.  See note 5 for interest expense incurred on margin payable.

   

7. FINANCIAL INSTRUMENTS

Investments—Trading

Investments-trading consisted of the following.







 

 

 

 

 

 



 

 

 

 

 

 

INVESTMENTS - TRADING

(Dollars in Thousands)



 

 

 

 

 

 



 

September 30, 2019

 

December 31, 2018

U.S. government agency MBS and CMOs

 

$

131,548 

 

$

149,651 

U.S. government agency debt securities

 

 

24,298 

 

 

14,915 

RMBS

 

 

16 

 

 

21 

U.S. Treasury securities

 

 

20,523 

 

 

4,099 

ABS

 

 

100 

 

 

100 

SBA loans

 

 

9,633 

 

 

31,496 

Corporate bonds and redeemable preferred stock

 

 

34,146