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 March 31, 2020

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: (215701-9555 

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 May 5, 2020, there were 1,246,710, 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

March 31, 2020

 



 

 

 

 

Page 

 

PART I. FINANCIAL INFORMATION

 



 

 

Item 1.

Financial Statements (Unaudited)

6



 

 

 

Consolidated Balance Sheets—March 31, 2020 and December 31, 2019

6



 

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss)—Three Months Ended March 31, 2020 and 2019 

7



 

 

 

Consolidated Statements of Changes in Equity—Three Months Ended March 31, 2020 and 2019

8



 

 

 

Consolidated Statements of Cash Flows—Three Months Ended March 31, 2020 and 2019

9



 

 

 

Notes to Consolidated Financial Statements (Unaudited)

10



 

 

Item 2.

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

54



 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

75



 

 

Item 4.

Controls and Procedures

78



 

Part II. OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

79



 

 

Item 1A.

Risk Factors

79



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

80



 

 

Item 6.

Exhibits

82



 

Signatures 

83

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, 2019. 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 or reductions in business volume due to impact of the COVID-19 pandemic;

·

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 of financing at prohibitive  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 creditworthiness 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 credit facilities;

·

our continued membership in the FICC;

·

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

3

 


 

·

the potential for litigation and other regulatory liability.



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., a wholly owned subsidiary of the Operating LLC; “JVB” refers to J.V.B. Financial Group, LLC, a wholly owned broker-dealer subsidiary of JVB Holdings; “CCFL” refers to Cohen & Company Financial Limited (formerly known as EuroDekania Management LTD), a wholly owned subsidiary of the Operating LLC 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 wholly owned subsidiary of the Operating LLC regulated by the Central Bank of Ireland ( the “CBI”) and EuroDekania” refers to EuroDekania (Cayman) Ltd., a Cayman Islands exempted company that was 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) 

(



 

 

 

 

 



 

 

 

 

 



March 31, 2020

 

 

 



(unaudited)

 

December 31, 2019

Assets

 

 

 

 

 

Cash and cash equivalents

$

85,454 

 

$

8,304 

Receivables from brokers, dealers, and clearing agencies

 

77,604 

 

 

96,132 

Due from related parties

 

411 

 

 

466 

Other receivables 

 

17,007 

 

 

46,625 

Investments-trading

 

375,745 

 

 

307,852 

Other investments, at fair value

 

10,057 

 

 

14,864 

Receivables under resale agreements

 

6,014,438 

 

 

7,500,002 

Investment in equity method affiliates

 

5,789 

 

 

3,799 

Goodwill

 

109 

 

 

7,992 

Right-of-use asset - operating leases

 

6,867 

 

 

7,155 

Other assets

 

3,059 

 

 

8,433 

Total assets

$

6,596,540 

 

$

8,001,624 



 

 

 

 

 

Liabilities

 

 

 

 

 

Payables to brokers, dealers, and clearing agencies

$

201,242 

 

$

241,261 

Accounts payable and other liabilities

 

81,781 

 

 

20,295 

Accrued compensation

 

8,360 

 

 

4,046 

Trading securities sold, not yet purchased

 

114,767 

 

 

77,947 

Securities sold under agreements to repurchase

 

6,066,372 

 

 

7,534,443 

Deferred income taxes

 

943 

 

 

1,339 

Lease liability - operating leases

 

7,391 

 

 

7,693 

Redeemable financial instruments

 

16,907 

 

 

16,983 

Debt

 

61,864 

 

 

48,861 

Total liabilities

 

6,559,627 

 

 

7,952,868 



 

 

 

 

 

Commitments and contingencies (See note 21)

 

 

 

 

 



 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

Voting Non-Convertible Preferred Stock, $0.001 par value per share, 60,000,000 shares authorized, 27,413,098 and 4,983,557 shares issued and outstanding, respectively

 

27 

 

 

27 

Common Stock, $0.01 par value per share, 100,000,000 shares authorized, 1,246,710 and 1,193,624 shares issued and outstanding, respectively, including 86,566 and 73,715 unvested or restricted share awards, respectively

 

12 

 

 

12 

Additional paid-in capital

 

68,622 

 

 

68,714 

Accumulated other comprehensive loss

 

(936)

 

 

(915)

Accumulated deficit

 

(37,683)

 

 

(34,519)

Total stockholders' equity

 

30,042 

 

 

33,319 

Non-controlling interest

 

6,871 

 

 

15,437 

Total equity

 

36,913 

 

 

48,756 

Total liabilities and equity

$

6,596,540 

 

$

8,001,624 



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 March 31,

 



2020

 

2019

 

Revenues

 

 

 

 

 

 

Net trading

$

18,561 

 

$

8,724 

 

Asset management

 

1,615 

 

 

2,002 

 

Principal transactions and other income

 

(2,406)

 

 

414 

 

Total revenues

 

17,770 

 

 

11,140 

 



 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

Compensation and benefits

 

14,134 

 

 

6,364 

 

Business development, occupancy, equipment

 

756 

 

 

811 

 

Subscriptions, clearing, and execution

 

2,580 

 

 

2,273 

 

Professional fee and other operating

 

1,782 

 

 

1,679 

 

Depreciation and amortization

 

80 

 

 

81 

 

Impairment of goodwill

 

7,883 

 

 

 -

 

Total operating expenses

 

27,215 

 

 

11,208 

 



 

 

 

 

 

 

Operating income (loss)

 

(9,445)

 

 

(68)

 



 

 

 

 

 

 

Non-operating income (expense)

 

 

 

 

 

 

Interest expense, net

 

(2,605)

 

 

(1,854)

 

Income (loss) from equity method affiliates

 

(107)

 

 

(8)

 

Income (loss) before income tax expense (benefit)

 

(12,157)

 

 

(1,930)

 

Income tax expense (benefit)

 

(372)

 

 

(106)

 

Net income (loss)

 

(11,785)

 

 

(1,824)

 

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

 

(8,683)

 

 

(622)

 

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

$

(3,102)

 

$

(1,202)

 

Income (loss) per share data (see note 20)

 

 

 

 

 

 

Income (loss) per common share-basic:

 

 

 

 

 

 

Basic income (loss) per common share

$

(2.70)

 

$

(1.06)

 

Weighted average shares outstanding-basic

 

1,146,879 

 

 

1,133,166 

 

Income (loss) per common share-diluted:

 

 

 

 

 

 

Diluted income (loss) per common share

$

(2.70)

 

$

(1.06)

 

Weighted average shares outstanding-diluted

 

3,940,677 

 

 

1,665,575 

 



 

 

 

 

 

 

Dividends declared per common share

$

 -

 

$

0.20 

 



 

 

 

 

 

 

Comprehensive income (loss)

 

 

 

 

 

 

Net income (loss)

$

(11,785)

 

$

(1,824)

 

Other comprehensive income (loss) item:

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax of $0

 

(100)

 

 

 

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

 

(100)

 

 

 

Comprehensive income (loss)

 

(11,885)

 

 

(1,815)

 

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

 

(8,754)

 

 

(619)

 

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

$

(3,131)

 

$

(1,196)

 



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.

 

 

 

 

 

 



 

Three Months Ended March 31, 2020

 

 

 

 

 



 

 

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, 2019

 

$

27 

 

$

12 

 

$

68,714 

 

$

(34,519)

 

$

(915)

 

$

33,319 

 

$

15,437 

 

$

48,756 

Net loss

 

 

 -

 

 

 -

 

 

 -

 

 

(3,102)

 

 

 -

 

 

(3,102)

 

 

(8,683)

 

 

(11,785)

Other comprehensive income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(29)

 

 

(29)

 

 

(71)

 

 

(100)

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

 

 

 -

 

 

 -

 

 

(123)

 

 

 -

 

 

 

 

(115)

 

 

115 

 

 

 -

Equity-based compensation and vesting of shares

 

 

 -

 

 

 -

 

 

46 

 

 

 -

 

 

 -

 

 

46 

 

 

112 

 

 

158 

Shares withheld for employee taxes

 

 

 -

 

 

 -

 

 

(15)

 

 

 -

 

 

 -

 

 

(15)

 

 

(39)

 

 

(54)

Dividends/Distributions

 

 

 -

 

 

 -

 

 

 -

 

 

(62)

 

 

 -

 

 

(62)

 

 

 -

 

 

(62)

March 31, 2020

 

$

27 

 

$

12 

 

$

68,622 

 

$

(37,683)

 

$

(936)

 

 

30,042 

 

$

6,871 

 

$

36,913 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Cohen & Company Inc.

 

 

 

 

 

 



Three Months Ended March 31, 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 







See accompanying notes to unaudited consolidated financial statements.









8

 


 



COHEN & COMPANY INC.

Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)







 

 

 

 

 



 

 

 

 

 



Three Months Ended March 31,



2020

 

2019

Operating activities

 

 

 

 

 

Net income (loss)

$

(11,785)

 

$

(1,824)

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

 

 

 

 

 

Equity-based compensation

 

158 

 

 

172 

Accretion of income on other investments, at fair value

 

(78)

 

 

(106)

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

 

(40)

 

 

(419)

(Income) / loss from equity method affiliates

 

107 

 

 

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

 

2,735 

 

 

171 

Depreciation and amortization

 

80 

 

 

81 

Impairment of goodwill

 

7,883 

 

 

 -

Amortization of discount on debt

 

166 

 

 

122 

Deferred tax provision (benefit)

 

(396)

 

 

(114)

Change in operating assets and liabilities, net:

 

 

 

 

 

(Increase) decrease in other receivables

 

29,618 

 

 

3,894 

(Increase) decrease in investments-trading

 

(67,893)

 

 

15,762 

(Increase) decrease in other assets

 

5,645 

 

 

258 

(Increase) decrease in receivables under resale agreement

 

1,485,564 

 

 

3,121,841 

Change in receivables from / payables to related parties, net

 

55 

 

 

168 

Increase (decrease) in accrued compensation

 

4,314 

 

 

(3,310)

Increase (decrease) in accounts payable and other liabilities

 

61,079 

 

 

233 

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

 

36,820 

 

 

(21,877)

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

 

(21,491)

 

 

(13,279)

Increase (decrease) in securities sold under agreements to repurchase

 

(1,468,071)

 

 

(3,111,051)

Net cash provided by (used in) operating activities

 

64,470 

 

 

(9,270)

Investing activities

 

 

 

 

 

Purchase of investments-other investments, at fair value

 

(119)

 

 

(408)

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

 

2,309 

 

 

5,091 

Investment in equity method affiliate

 

(2,097)

 

 

(3,775)

Purchase of furniture, equipment, and leasehold improvements

 

(63)

 

 

(20)

Net cash provided by (used in) investing activities

 

30 

 

 

888 

Financing activities

 

 

 

 

 

Proceeds from draws on revolving credit facility

 

17,500 

 

 

 -

Proceeds from non-convertible debt

 

4,500 

 

 

 -

Repayment of debt

 

(9,163)

 

 

 -

Proceeds from redeemable financial instruments

 

 -

 

 

1,268 

Cash used to net share settle equity awards

 

(54)

 

 

(128)

Purchase and retirement of Common Stock

 

 -

 

 

(65)

Proceeds from non-controlling interest investment

 

 -

 

 

2,550 

Cohen & Company Inc. dividends

 

(62)

 

 

(61)

Net cash provided by (used in) financing activities

 

12,721 

 

 

3,564 

Effect of exchange rate on cash

 

(71)

 

 

(5)

Net increase (decrease) in cash and cash equivalents

 

77,150 

 

 

(4,823)

Cash and cash equivalents, beginning of period

 

8,304 

 

 

14,106 

Cash and cash equivalents, end of period

$

85,454 

 

$

9,283 



See accompanying notes to unaudited consolidated financial statements.

9

 


 

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 units of membership interests 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 units of 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 March 31, 2020, the Company had $2.65 billion in assets under management (“AUM”) of which 79.0%, or $2.10 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, residential transition loans, (“RTLs”), 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.

10

 


 

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 included in the Company’s other investments, at fair value and investments in equity method affiliates in the Company’s 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 three months ended March 31, 2020 and 2019 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, 2019.  

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, 2019.  

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 policySee note 10. 



11

 


 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Adoption of New Accounting Standards

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 13.  



In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  Under this guidance (subsequently updated with ASU 2018-19, ASU 2019-05, ASU 2019-11 and ASU 2020-02), the measurement of all expected credit losses for financial assets held at the reporting date is 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 Company’s adoption of the provisions of ASU 2016-13, effective January 1, 2020 did not have a material effect on the Company’s 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.  The Company adopted the provisions of ASU 2017-04, effective January 1, 2020.  The Company recorded an impairment of goodwill for the three months ended March 31, 2020.  See note 12.  This impairment charge was not the result of the adoption of ASU 2017-04. 



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 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 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.



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

12

 


 

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. The Company’s adoption of the provisions of ASU 2018-13, effective January 1, 2020 did not have an effect on the Company’s consolidated financial statements.

 

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810):  Target Improvements to Related Party Guidance for Variable Interest EntitiesThe 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. The Company’s adoption of the provisions of ASU 2018-17, effective January 1, 2020 did not have an effect on the Company’s consolidated financial statements.



In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606.  The ASU 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.  The Company’s adoption of the provisions of ASU 2018-18, effective January 1, 2020 did not have an effect on the Company’s consolidated financial statements.



In November 2019, the FASB issued ASU 2019-08, Compensation – Stock Compensation (Topic (718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements– Share-Based Consideration Payable to a Customer.  This ASU requires companies to measure and classify (on the balance sheet) share-based payments to customers by applying the guidance in Topic 718, Compensation—Stock Compensation.  As a result, the amount recorded as a reduction in revenue would be measured based on the grant-date fair value of the share-based payment. The Company’s adoption of the provisions of ASU 2018-18, effective January 1, 2020 did not have an effect on the Company’s consolidated financial statements.



In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the burden in accounting for reference rate reform by providing optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.  The ASU is intended to help stakeholders during the global market wide reference rate transition period and will be in effect for a limited time through December 31, 2022. The Company’s adoption of the provisions of ASU 2020-04, effective March 12, 2020 did not have an effect on the Company’s consolidated financial statements.



B. Recent Accounting Developments



In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):  Simplifying the Accounting for Income Taxes. This ASU is intended to simplify accounting for income taxes. It removes specific exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application.  This ASU is effective for fiscal years beginning after December 15, 2020 and interim period with 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 2020, the FASB issued ASU 2020-01,  Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815This ASU clarifies certain accounting certain topics impacted by Topic 321 Investments-Equity Securities. These topics include measuring equity securities using the measurement alternative, how the measurement alternative should be applied to equity method accounting, and certain forward contracts and purchased options which would be accounted for under the equity method of accounting upon settlement or exercise. This ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. 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

13

 


 

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 March 31, 2020, and December 31, 2019, the fair value of the Company’s debt was estimated to be $61,501 and $58,635, 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.





4. OTHER RECENT BUSINESS TRANSACTIONS OR EVENTS

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. 

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, 2018The LegacyTexas Credit Facility was amended on May 4,  2019 and again on September 25, 2019 and October 28, 2019The LegacyTexas Credit Facility supported the buying, aggregating, and distributing of RTLs performed by the business of ViaNova.



On March 19, 2020, ViaNova received a notice of default from LegacyTexas Bank regarding the LegacyTexas Credit Facility, stating that ViaNova’s unrestricted cash balance was less than the amount required.  Also, on March 19, 2020, ViaNova received notice from LegacyTexas Bank that the Bank had suspended funding all “Alternative” loans for all of their clients, including the RTL loans that are the subject of the LegacyTexas Credit Facility with LegacyTexas Bank.  Since March 19, 2020 ViaNova has repaid all outstanding indebtedness under the LegacyTexas Credit Facility.   ViaNova stopped acquiring new RTLs and does not intend to

14

 


 

acquire any new RTLs in the future.  As of March 31, 2020, the Company had four RTLs and several interest strips representing a par value of $3,034 and a fair value of $2,956, including the fair value of interest strips held.  These RTLs and interest strips are included as a component of investments-trading (see note 7).  The Company intends to opportunistically sell these RTLs if possible or allow them to mature.  The latest maturity date of the RTLs is January 9, 2021.   



COVID 19 / Impairment of Goodwill



In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread throughout the United States. The spread of COVID-19 has caused significant volatility in domestic and international markets. There is on-going uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies.  While the Company cannot fully assess the impact COVID-19 will have on all of its operations at this time, there are certain impacts that the Company has identified:



·

The unprecedented volatility of the financial markets experienced in March 2020, has caused the Company to operate JVB at a lower level of leverage than prior to the pandemic.  Specifically, JVB has reduced the size of its GCF repo operations and the volume of its TBA trading.  The Company determined that at its pre-pandemic levels in these businesses, it was exposed to a higher level of counterparty credit risk than it should have and was experiencing too much volatility in its available liquidity to conservatively meet capital requirements and margin calls in these businesses.  The Company expects JVB to operate at lower volumes in both these businesses for an indefinite period of time, which could unfavorably impact the operating profitability of JVB. 

·

The financial market volatility, as well as the reduction in volumes in the GCF repo and TBA businesses, that resulted from COVID-19 required the Company to reassess the goodwill it had recorded related to JVB under the guidance of ASC 350.  The Company determined that the fair value of JVB was less than the carrying value (including the goodwill).  As a result, the Company recorded an impairment loss of $7,883 in the three months ended March 31, 2020.  See note 12. 

·

The Company expects that its asset management segment will also be adversely impacted by the pandemic.  While it is difficult to determine the extent of the impact at this time, the Company expects that raising capital for new funds may become more challengingIn addition, lower returns earned by funds will adversely impact the Company’s asset management fees and investors’ need for liquidity may result in reductions in AUM. 

·

JVB’s mortgage group’s operations are centered on serving the financial needs of mortgage originators and institutions that invest in mortgage backed securities.  Prolonged high unemployment will most likely impact mortgage originations and demand for and supply of mortgage backed securities, which may have a significant unfavorable impact on the revenue earned by JVB’s mortgage group. 



The Company will likely be impacted by the pandemic in other ways which the Company cannot yet determine.  The Company will continue to monitor market conditions and respond accordingly. 



Subsequent to March 31, the Company has applied for and received a $2.2 million loan under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. See note 26. 



The 2020 Senior Notes

On January 31, 2020, the Operating LLC entered into a Note Purchase Agreement with JKD Capital Partners I LTD, a New York corporation (“JKD Investor”), and RN Capital Solutions LLC, a Delaware limited liability company (“RNCS”).  The JKD Investor is owned by Jack DiMaio, the vice chairman of the Company’s board of directors and the Operating LLC’s board of managers, and his spouse.



Pursuant to the Note Purchase Agreement, JKD Investor and RNCS each purchased a Senior Promissory Note in the principal amount of $2,250 (for an aggregate investment of $4,500).  The Senior Promissory Notes bear interest at a fixed rate of 12% per annum and mature on January 31, 2022.  On February 3, 2020, pursuant to the Note Purchase Agreement, the Operating LLC used the proceeds received from the issuance of the Senior Promissory Notes to repay in full all amounts outstanding under the Senior Promissory Note, dated September 25, 2019, issued by the Company to Pensco Trust Company, Custodian fbo Edward E. Cohen IRA in the principal amount of $4,386 (the “Cohen IRA Note”).  The Cohen IRA Note is included as a portion of the 2019 Senior Notes outstanding as of December 31, 2019.  The Cohen IRA Note was fully paid and extinguished on February 3, 2020.  Subsequent to this repayment, $2,400 of the 2019 Senior Notes remain outstanding.  See note 17. 



15

 


 

5. NET TRADING



Net trading consisted of the following in the periods presented.







 

 

 

 

 

 

NET TRADING

(Dollars in Thousands)



 

 

 

 

 

 



 

Three Months Ended

 



 

March 31, 2020

 

 

March 31, 2019

 

Net realized gains (losses) - trading inventory

$

10,443 

 

$

6,295 

 

Net unrealized gains (losses) - trading inventory

 

(440)

 

 

559 

 

Net gains and losses

 

10,003 

 

 

6,854 

 



 

 

 

 

 

 

Interest income- trading inventory

 

2,477 

 

 

1,615 

 

Interest income - residential transition loans

 

 -

 

 

15 

 

Interest income-receivables under resale agreements

 

41,485 

 

 

37,483 

 

Interest income

 

43,962 

 

 

39,113 

 



 

 

 

 

 

 

Interest expense-securities sold under agreements to repurchase

 

(34,766)

 

 

(36,381)

 

Interest expense-LegacyTexas Credit Facility

 

(39)

 

 

(5)

 

Interest expense-margin payable

 

(599)

 

 

(857)

 

Interest expense

 

(35,404)

 

 

(37,243)

 



 

 

 

 

 

 

Net trading

$

18,561 

 

$

8,724 

 



Trading inventory includes investments classified as investments-trading as well as trading securities sold, not yet purchased.  See note 7



During 2019, RTLs were accounted for at lower of cost or market and included as a component of other assets and the interest income related to those loans was shown separately in the table above.  Effective January 1, 2020, in connection with the adoption of ASC 326, the Company began accounting for RTLs at fair value and including them as a component of investments-trading. Therefore, income earned on RTLs is included in interest income-trading inventory in the table above effective January 1, 2020.     



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 17 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)



 

 

 

 

 

 



 

March 31, 2020

 

December 31, 2019

Deposits with clearing agencies

 

$

250 

 

$

250 

Unsettled regular way trades, net

 

 

11,260 

 

 

12,170 

Receivables from clearing agencies

 

 

66,094 

 

 

83,712 

    Receivables from brokers, dealers, and clearing agencies

 

$

77,604 

 

$

96,132 



 

 

 

 

 

 

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











 

 

 

 

 

 

PAYABLES TO BROKERS, DEALERS, AND CLEARING AGENCIES

(Dollars in Thousands)



 

 

 

 

 

 



 

March 31, 2020

 

December 31, 2019

Margin payable

 

$

201,242 

 

$

208,441 

Due to clearing agent

 

 

 -

 

 

32,820 

    Payables to brokers, dealers, and clearing agencies

 

$

201,242 

 

$

241,261 



 

 

 

 

 

 



16

 


 

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



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.  Substantially 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.



Due to clearing agent represents amounts due to Bank of New York under the Company’s intra-day and overnight lending facility supporting the GCF matched repo business. See note 10.

 

7. FINANCIAL INSTRUMENTS

Investments—Trading

Investments-trading consisted of the following.







 

 

 

 

 

 



 

 

 

 

 

 

INVESTMENTS - TRADING

(Dollars in Thousands)



 

 

 

 

 

 



 

March 31, 2020

 

December 31, 2019

U.S. government agency MBS and CMOs

 

$

218,767 

 

$

196,146 

U.S. government agency debt securities

 

 

4,791 

 

 

14,680 

RMBS

 

 

14 

 

 

15 

U.S. Treasury securities

 

 

6,065 

 

 

11,105 

ABS

 

 

 

 

100 

SBA loans

 

 

26,073 

 

 

27,634 

Corporate bonds and redeemable preferred stock

 

 

31,877 

 

 

38,503 

Foreign government bonds

 

 

626 

 

 

844 

Municipal bonds

 

 

25,121 

 

 

13,737 

Certificates of deposit

 

 

3,575 

 

 

841 

Derivatives

 

 

55,780 

 

 

3,686 

Equity securities

 

 

99 

 

 

561 

Residential transition loans

 

 

2,956 

 

 

 -

    Investments-trading

 

$

375,745 

 

$

307,852 



Trading Securities Sold, Not Yet Purchased

Trading securities sold, not yet purchased consisted of the following.





 

 

 

 

 

 



 

 

 

 

 

 

TRADING SECURITIES SOLD, NOT YET PURCHASED

(Dollars in Thousands)



 

 

 

 

 

 



 

March 31, 2020

 

December 31, 2019

U.S. Treasury securities

 

$

16,211 

 

$

16,827 

Corporate bonds and redeemable preferred stock

 

 

43,937 

 

 

58,083 

Municipal bonds

 

 

20 

 

 

20 

Derivatives

 

 

54,599 

 

 

3,017 

    Trading securities sold, not yet purchased

 

$

114,767 

 

$

77,947 



The Company manages its exposure to changes in interest rates for the interest rate sensitive securities it holds by entering into offsetting short positions for similar fixed rate securities. See note 5 for realized and unrealized gains recognized on investments-trading.



17

 


 

Other Investments, at fair value

Other investments, at fair value consisted of the following.





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

OTHER INVESTMENTS, AT FAIR VALUE

(Dollars in Thousands)



 

 

 

 

 

 

 

 

 



 

March 31, 2020



 

Amortized Cost

 

Carrying Value

 

Unrealized Gain / (Loss)

Equity securities

 

$

6,905 

 

$

5,457 

 

$

(1,448)

CLOs

 

 

2,557 

 

 

1,877 

 

 

(680)

U.S. Insurance JV

 

 

2,009 

 

 

2,017 

 

 

SPAC Fund

 

 

646 

 

 

609 

 

 

(37)

Residential loans

 

 

126 

 

 

97 

 

 

(29)

    Other investments, at fair value

 

$

12,243 

 

$

10,057 

 

$

(2,186)



 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

December 31, 2019



 

Amortized Cost

 

Carrying Value

 

Unrealized Gain / (Loss)

Equity securities

 

$

8,598 

 

$

9,352 

 

$

754 

CLOs

 

 

2,894 

 

 

2,522 

 

 

(372)

U.S. Insurance JV

 

 

2,048 

 

 

2,223 

 

 

175 

SPAC Fund

 

 

646 

 

 

668 

 

 

22 

Residential loans

 

 

129 

 

 

99 

 

 

(30)

    Other investments, at fair value

 

$

14,315 

 

$

14,864 

 

$

549 

 



8. FAIR VALUE DISCLOSURES

Fair Value Option

The Company has elected to account for certain of its other financial assets at fair value under the fair value option provisions of FASB ASC 825. The primary reason for electing the fair value option was to reduce the burden of monitoring the differences between the cost and the fair value of the Company’s investments, previously classified as available for sale securities, including the assessment as to whether the declines are temporary in nature and to further remove an element of management judgment.

Such financial assets accounted for at fair value include:

·

securities that would otherwise qualify for available for sale treatment;

·

investments in equity method affiliates that have the attributes in FASB ASC 946-10-15-2 (commonly referred to as investment companies); and

·

investments in residential loans.

The changes in fair value (realized and unrealized gains and losses) of these instruments for which the Company has elected the fair value option are recorded in principal transactions and other income in the consolidated statements of operations. All of the investments for which the Company has elected the fair value option are included as a component of other investments, at fair value in the consolidated balance sheets. The Company recognized net gains (losses) related to changes in fair value of investments that are included as a component of other investments, at fair value during the three months ended March 31, 2020 and 2019 of $(2,695) and $249 respectively

18

 


 

Fair Value Measurements

In accordance with FASB ASC 820, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level valuation hierarchy. The valuation hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). The three levels of the valuation hierarchy under FASB ASC 820 are described below.

Level 1            Financial assets and liabilities whose values are based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level  2            Financial assets and liabilities whose values are based on one or more of the following:

1.

Quoted prices for similar assets or liabilities in active markets;

2.

Quoted prices for identical or similar assets or liabilities in non-active markets;

3.

Pricing models whose inputs are derived, other than quoted prices, are observable for substantially the full term of the asset or liability; or

4.

Pricing models whose inputs are derived principally from or corroborated by observable market data through   correlation or other means for substantially the full term of the asset or liability.

Level 3            Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the valuation hierarchy. In such cases, the level in the valuation hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the level 3 category. As a result, the unrealized gains and losses for assets and liabilities within the level 3 category presented in the tables below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.



The following tables present information about the Company’s assets and liabilities measured at fair value as of March 31, 2020 and December 31, 2019 and indicates the valuation hierarchy of the valuation techniques utilized by the Company to determine such fair value.

19

 


 







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS

March 31, 2020

(Dollars in Thousands)



 

 

 

 

Significant

 

Significant



 

 

Quoted Prices in

 

Other Observable

 

Unobservable



 

 

Active Markets

 

Inputs

 

Inputs

Assets

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Investments-trading:

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency MBS and CMOs

$

218,767 

 

$

 -

 

$

218,767 

 

$

 -

U.S. government agency debt securities

 

4,791 

 

 

 -

 

 

4,791 

 

 

 -

RMBS

 

14 

 

 

 -

 

 

14 

 

 

 -

U.S. Treasury securities

 

6,065 

 

 

6,065 

 

 

 -

 

 

 -

ABS

 

 

 

 -

 

 

 

 

 -

SBA loans

 

26,073 

 

 

 -

 

 

26,073 

 

 

 -

Corporate bonds and redeemable preferred stock

 

31,877 

 

 

 -

 

 

31,877 

 

 

 -

Foreign government bonds

 

626 

 

 

 -

 

 

626 

 

 

 -

Municipal bonds

 

25,121 

 

 

 -

 

 

25,121 

 

 

 -

Certificates of deposit

 

3,575 

 

 

 -

 

 

3,575 

 

 

 -

Derivatives

 

55,780 

 

 

 -

 

 

55,780 

 

 

 -

Equity securities

 

99 

 

 

 -

 

 

99 

 

 

 -

Residential transition loans

 

2,956 

 

 

 -

 

 

 -

 

 

2,956 

Total investments - trading

$

375,745 

 

$

6,065 

 

$

366,724 

 

$

2,956 



 

 

 

 

 

 

 

 

 

 

 

Other investments, at fair value:

 

 

 

 

 

 

 

 

 

 

 

Equity securities

$

5,457 

 

$

 -

 

$

5,457 

 

$

 -

CLOs

 

1,877 

 

 

 -

 

 

 -

 

 

1,877 

Residential loans

 

97 

 

 

 -

 

 

97 

 

 

 -



 

7,431 

 

$

 -

 

$

5,554 

 

$

1,877 

Investments measured at NAV (1)

 

2,626 

 

 

 

 

 

 

 

 

 

Total other investments, at fair value

$

10,057 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Trading securities sold, not yet purchased:

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

16,211 

 

$

16,211 

 

$

 -

 

$

 -

Corporate bonds and redeemable preferred stock

 

43,937 

 

 

 -

 

 

43,937 

 

 

 -

Municipal bonds

 

20 

 

 

 -

 

 

20 

 

 

 -

Derivatives

 

54,599 

 

 

 -

 

 

54,599 

 

 

 -

Total trading securities sold, not yet purchased

$

114,767 

 

$

16,211 

 

$

98,556 

 

$

 -



(1)

As a practical expedient, the Company uses NAV per share (or its equivalent)  to measure the fair value of its investments in the U.S. Insurance JV and the SPAC Fund.  The U.S. Insurance JV invests in debt issued by small and medium sized U.S. and Bermuda insurance and reinsurance companies.  The SPAC Fund invests in equity securities of SPACs.  According to ASC 820, these investments are not categorized within the valuation hierarchy.

20

 


 







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS

December 31, 2019

(Dollars in Thousands)



 

 

 

 

Significant

 

Significant



 

 

Quoted Prices in

 

Other Observable

 

Unobservable



 

 

Active Markets

 

Inputs

 

Inputs

Assets

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Investments-trading: