0001270436 Cohen & Co Inc. false --12-31 Q1 2023 0.001 0.001 50,000,000 50,000,000 27,413,098 27,413,098 27,413,098 27,413,098 0.01 0.01 100,000,000 100,000,000 1,819,866 1,819,866 1,774,342 1,774,342 302,235 341,059 0 0 0 0 3 1 0.33 1 30 30 0 0 0 10.00 8.80 9.31 49,614 1,489 0 2,250 15,000 17,500 25,000 6.0 7.0 10 10 10 3 0 The Operating LLC units of membership interest not held by Cohen & Company Inc. (that is, those held by the non-controlling interest) may be redeemed and exchanged into shares of the Company on a ten-for-one basis. The Operating LLC units of membership interests not held by Cohen & Company Inc. are redeemable, at the member’s option at any time, for (i) cash in an amount equal to the average of the per share closing prices of the Common Stock for the ten consecutive trading days immediately preceding the date the Company receives the member’s redemption notice, or (ii) at the Company’s option, one tenth of a share of the Common Stock, subject, in each case, to appropriate adjustment upon the occurrence of an issuance of additional shares of the Common Stock as a dividend or other distribution on the outstanding Common Stock, or a further subdivision or combination of the outstanding shares of the Common Stock. These units are not included in the computation of basic earnings per share. These units enter into the computation of diluted net income (loss) per common share when the effect is not anti-dilutive using the if-converted method. The junior subordinated notes listed represent debt the Company owes to the two trusts noted above. The total par amount owed by the Company to the trusts is $49,614. However, the Company owns the common stock of the trusts in a total par amount of $1,489. The Company pays interest (and at maturity, principal) to the trusts on the entire $49,614 junior notes outstanding. However, the Company receives back from the trusts the pro rata share of interest and principal on the common stock held by the Company. These trusts are VIEs and the Company does not consolidate them even though the Company holds the common stock. The Company carries the common stock on its balance sheet at a value of $0. The junior subordinated notes are recorded at a discount to par. When factoring in the discount, the yield to maturity of the junior subordinated notes as of March 31, 2023 on a combined basis was 19.87% assuming the variable rate in effect on the last day of the reporting period remains in effect until maturity Unallocated assets primarily include: (1) amounts due from related parties; (2) furniture and equipment, net; and (3) other assets that are not considered necessary for an understanding of business segment assets. Such amounts are excluded in business segment reporting to the chief operating decision maker. The CREO JV invests in primarily multi-family commercial real estate mortgage-backed loans and below-investment grade rated tranches in CRE CLOs collateralized by mostly commercial real estate mortgage-backed loans. See note 4. The SPAC Fund invests in equity interests of SPACs. Represents the interest rate in effect as of the last day of the reporting period. An adjustment is included because the Company would have incurred a higher income tax expense or realized a higher income tax benefit, as applicable, if the Operating LLC units of membership interests had been converted at the beginning of the period. The junior subordinated notes listed represent debt the Company owes to the two trusts noted above. The total par amount owed by the Company to the trusts is $49,614. However, the Company owns the common stock of the trusts in a total par amount of $1,489. The Company pays interest (and at maturity, principal) to the trusts on the entire $49,614 junior notes outstanding. However, the Company receives back from the trusts the pro rata share of interest and principal on the common stock held by the Company. These trusts are VIEs and the Company does not consolidate them even though the Company holds the common stock. The Company carries the common stock on its balance sheet at a value of $0. The junior subordinated notes are recorded at a discount to par. When factoring in the discount, the yield to maturity of the junior subordinated notes as of September 30, 2022 on a combined basis was 15.41% assuming the variable rate in effect on the last day of the reporting period remains in effect until maturity. Goodwill and intangible assets are allocated to the Capital Markets and Asset Management business segments as indicated in the table above. As a practical expedient, the Company uses NAV (or its equivalent) to measure the fair value of its investments in the U.S. Insurance JV, the SPAC Fund, and the CREO JV. The U.S. Insurance JV invests in USD denominated debt issued by small insurance and reinsurance companies. The SPAC Fund invests in equity securities of SPACs. The CREO JV invests in primarily multi-family commercial real estate mortgage-backed loans and below-investment grade rated tranches in CRE CLOs collateralized by mostly transitional commercial real estate mortgage-backed loans. See note 4. According to ASC 820, these investments are not categorized within the valuation hierarchy. The U.S. Insurance JV invests in USD denominated debt issued by small and medium size insurance and reinsurance companies. Potentially diluted securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows: Excludes remaining restricted units of Cohen & Company Inc. Common Stock. 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Table of Contents



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, 2023

 

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) 


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, 2023, there were 1,819,866 shares of common stock ($0.01 par value per share) of Cohen & Company Inc. ("Common Stock") outstanding.

 

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

 

 
 

Cohen & Company Inc. 

FORM 10-Q

INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2023

  



 

 

 

 

Page 

PART I. FINANCIAL INFORMATION

 



 

 

Item 1.

Financial Statements (Unaudited)

5



 

 

 

Consolidated Balance Sheets—March 31, 2023 and December 31, 2022

5



 

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss)—Three Months Ended March 31, 2023 and 2022

6



 

 

 

Consolidated Statements of Changes in Equity—Three Months Ended March 31, 2023 and 2022

7



 

 

 

Consolidated Statements of Cash Flows—Three Months Ended March 31, 2023 and 2022

9



 

 

 

Notes to Consolidated Financial Statements (Unaudited)

10



 

 

Item 2.

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

57



 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

81



 

 

Item 4.

Controls and Procedures

82



 

Part II. OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

83



 

 

Item 1A.

Risk Factors

83



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

84



 

 

Item 3. Defaults Upon Senior Securities 84
     
Item 4. Mine Safety Disclosures 84
     
Item 5. Other Information 84
     

Item 6.

Exhibits

85



 

Signatures

86

 

 

 

 

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;

 

our investments in both SPACs and SPAC sponsor entities, including through our SPAC Fund and SPAC Series Funds;

 

our role as asset manager and sponsor in our SPAC franchise;

 

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, 2022. Actual results may differ materially because of various factors, some of which are outside our control, including the following:

 

 

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

 

continuation of the COVID-19 pandemic or future outbreaks of COVID-19, the timing and effectiveness of vaccine distribution, and uncertainty surrounding the length and severity of future impacts on the global economy and on our business, liquidity, results of operations and financial condition;

  economic uncertainty and capital markets disruption, which have been significantly impacted by geopolitical instability due to the ongoing military conflict between Russia and Ukraine;
  losses and reduced transaction volumes as a result of increasing interest rates and inflation;
 

risks and liabilities due to our investments in the equity interests of SPACs and SPAC sponsor entities including the risk of increased regulation applicable to SPACs, risks regarding litigation in connection with the SPACs in which we invest and those which we sponsor, uncertainty of whether the SPACs in which we invest and those we sponsor will consummate a business combination, adverse impacts of COVID-19 on our SPAC franchise, significant competition for business opportunities in the SPAC industry, write-downs or write-offs with respect to the securities which we hold subsequent to the consummation of an initial business combination by the SPACs in which we invest and those which we sponsor, and the target of a SPAC being an early-stage and financially unstable company;

 

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; 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;

  the ability to pay dividends;
 

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;

 

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.

 

 

Our Internet website is www.cohenandcompany.com and we make available on our website our filings with the Securities and Exchange Commission (“SEC”), including annual reports, quarterly reports, current reports and any amendments to those filings. The reference to our website address does not constitute incorporation by reference of the information contained therein into this Form 10-Q. We also use our website to disseminate other material information to our investors (on the Home Page and in the “Investor Relations” section). Among other things, we post on our website our press releases and information about our public conference calls (including the scheduled dates, times and the methods by which investors and others can listen to those calls), and we make available for replay webcasts of those calls and other presentations for a limited time.

 

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.

 

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; "CCFESA" refers to Cohen & Company Financial (Europe) S.A., a majority owned subsidiary regulated by the Autorite de Controle Prudentiel et de Resolution ("ACPR") in France; and “CCFEL” refers to Cohen & Company Financial (Europe) Limited, a wholly owned subsidiary of the Operating LLC formerly regulated by the Central Bank of Ireland (the “CBI”).  

 

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

 

 

 

 

PART I. FINANCIAL INFORMATION 

 

ITEM 1. FINANCIAL STATEMENTS.

 

COHEN & COMPANY INC.

 

CONSOLIDATED BALANCE SHEETS 

(Dollars in Thousands) 

 

  

March 31, 2023

     
  

(unaudited)

  

December 31, 2022

 

Assets

        

Cash and cash equivalents

 $3,641  $29,101 

Receivables from brokers, dealers, and clearing agencies

  103,261   140,933 

Due from related parties

  767   787 

Other receivables

  6,639   9,527 

Investments-trading

  197,857   211,828 

Other investments, at fair value

  22,395   28,022 

Receivables under resale agreements

  381,813   437,692 

Investments in equity method affiliates

  9,240   8,929 

Deferred income taxes

  6,545   6,934 

Goodwill

  109   109 

Right-of-use asset - operating leases

  9,144   9,647 

Other assets

  3,814   3,546 

Total assets

 $745,225  $887,055 
         

Liabilities

        

Payables to brokers, dealers, and clearing agencies

 $106,639  $134,985 

Accounts payable and other liabilities

  8,999   11,439 

Due to related parties

  834   - 

Accrued compensation

  6,432   12,434 

Lease liability - operating leases

  9,920   10,447 

Trading securities sold, not yet purchased

  97,696   133,957 

Other investments sold, not yet purchased, at fair value

  73   78 

Securities sold under agreements to repurchase

  395,226   452,797 

Redeemable financial instruments

  7,868   7,868 

Debt

  29,173   29,024 

Total liabilities

  662,860   793,029 
         

Commitments and contingencies (See note 21)

          
         

Stockholders' Equity:

        

Voting Non-Convertible Preferred Stock, $0.001 par value per share, 50,000,000 shares authorized, 27,413,098 shares issued and outstanding

  27   27 

Common Stock, $0.01 par value per share, 100,000,000 shares authorized, 1,819,866 and 1,774,342 shares issued and outstanding, respectively, including 302,235 and 341,059 unvested or restricted share awards, respectively

  18   17 

Additional paid-in capital

  73,636   72,801 

Accumulated other comprehensive loss

  (957)  (955)

Accumulated deficit

  (28,382)  (25,151)

Total stockholders' equity

  44,342   46,739 

Non-controlling interest

  38,023   47,287 

Total equity

  82,365   94,026 

Total liabilities and equity

 $745,225  $887,055 

( 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

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,

 
  

2023

  

2022

 

Revenues

        

Net trading

 $8,210  $12,022 

Asset management

  2,025   1,889 

New issue and advisory

  900   3,770 

Principal transactions and other income (loss)

  (2,311)  (18,363)

Total revenues

  8,824   (682)
         

Operating expenses

        

Compensation and benefits

  10,537   13,879 

Business development, occupancy, equipment

  1,301   1,248 

Subscriptions, clearing, and execution

  2,125   1,941 

Professional fee and other operating

  2,200   1,996 

Depreciation and amortization

  144   132 

Total operating expenses

  16,307   19,196 
         

Operating income (loss)

  (7,483)  (19,878)
         

Non-operating income (expense)

        

Interest expense, net

  (1,592)  (1,351)

Income (loss) from equity method affiliates

  (395)  (12,104)

Income (loss) before income tax expense (benefit)

  (9,470)  (33,333)

Income tax expense (benefit)

  584   1,833 

Net income (loss)

  (10,054)  (35,166)

Less: Net income (loss) attributable to the non-convertible non-controlling interest of the Operating LLC

  97   (14,704)

Enterprise net income (loss)

  (10,151)  (20,462)

Less: Net income (loss) attributable to the convertible non-controlling interest of Cohen & Company Inc.

  (7,514)  (12,850)

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

 $(2,637) $(7,612)

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

        

Income (loss) per common share-basic:

        

Basic income (loss) per common share

 $(1.77) $(5.46)

Weighted average shares outstanding-basic

  1,489,515   1,394,954 

Income (loss) per common share-diluted:

        

Diluted income (loss) per common share

 $(1.77) $(5.46)

Weighted average shares outstanding-diluted

  5,487,483   1,394,954 
         

Comprehensive income (loss)

        

Net income (loss)

 $(10,054) $(35,166)

Other comprehensive income (loss) item:

        

Foreign currency translation adjustments, net of tax of $0

  45   (66)

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

  45   (66)

Comprehensive income (loss)

  (10,009)  (35,232)

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

  (7,382)  (27,601)

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

 $(2,627) $(7,631)

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

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, 2023

                 
   

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, 2022

  $ 27     $ 17     $ 72,801     $ (25,151 )   $ (955 )   $ 46,739     $ 47,287     $ 94,026  

Net (loss)

    -       -       -       (2,637 )     -       (2,637 )     (7,417 )     (10,054 )

Other comprehensive (loss)

    -       -       -       -       10       10       35       45  

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

    -       -       582       -       (12 )     570       (570 )     -  

Equity-based compensation

    -       1       299       -       -       300       789       1,089  

Shares withheld for employee taxes

    -       -       (46 )     -       -       (46 )     (118 )     (164 )

Dividends/distributions to convertible non-controlling interest

    -       -       -       (594 )     -       (594 )     (1,187 )     (1,781 )

Redemption of convertible non-controlling interest units

    -       -       -       -       -       -       (834 )     (834 )

Non-convertible non-controlling interest investment

    -       -       -       -       -       -       38       38  

Non-convertible non-controlling interest distributions

    -       -       -       -       -       -       -       -  

March 31, 2023

  $ 27     $ 18     $ 73,636     $ (28,382 )   $ (957 )   $ 44,342     $ 38,023     $ 82,365  

 

 

   

Cohen & Company Inc.

                 
   

Three Months Ended March 31, 2022

                 
   

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, 2021

  $ 27     $ 17     $ 72,006     $ (9,204 )   $ (905 )   $ 61,941     $ 89,492     $ 151,433  

Net income

    -       -       -       (7,612 )     -       (7,612 )     (27,554 )     (35,166 )

Other comprehensive loss

    -       -       -       -       (19 )     (19 )     (47 )     (66 )

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

    -       -       (292 )     -       4       (288 )     288       -  

Equity-based compensation and vesting of shares

    -       -       338       -       -       338       766       1,104  

Shares withheld for employee taxes

    -       -       (72 )     -       -       (72 )     (145 )     (217 )

Dividends/distributions to convertible non-controlling interest

    -       -       -       (1,481 )     -       (1,481 )     (3,475 )     (4,956 )

Convertible non-controlling interest investment

    -       -       -       -       -       -       15,000       15,000  

Non-convertible non-controlling interest investment

    -       -       -       -       -       -       6       6  

Non-convertible non-controlling interest distributions

    -       -       -       -       -       -       (5,660 )     (5,660 )

March 31, 2022

  $ 27     $ 17     $ 71,980     $ (18,297 )   $ (920 )   $ 52,807     $ 68,671     $ 121,478  

    

  

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

 

COHEN & COMPANY INC. 

 

Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2023

   

2022

 

Operating activities

               

Net income (loss)

  $ (10,054 )   $ (35,166 )

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

               

Equity-based compensation

    1,089       1,104  

Loss (gain) on other investments, at fair value

    2,603       18,718  

Loss (gain) on other investments, sold not yet purchased

    (5 )     (178 )

Noncash advisory fees received

    (492 )     -  

(Income) loss from equity method affiliates

    395       12,104  

Depreciation and amortization

    144       132  

Amortization of discount on debt

    149       204  

Deferred tax provision (benefit)

    389       1,464  

Change in operating assets and liabilities, net:

               

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

    9,326       (36,381 )

Change in receivables from / payables to related parties, net

    20       2,876  

(Increase) decrease in other receivables

    2,888       (2,236 )

(Increase) decrease in investments-trading

    13,971       (24,856 )

(Increase) decrease in receivables under resale agreements

    55,879       982,083  

(Increase) decrease in other assets

    187       (951 )

Increase (decrease) in accounts payable and other liabilities

    (4,364 )     23,933  

Increase (decrease) in accrued compensation

    (6,002 )     (11,468 )

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

    (36,261 )     65,968  

Increase (decrease) in securities sold under agreements to repurchase

    (57,571 )     (983,000 )

Net cash provided by (used in) operating activities

    (27,709 )     14,350  

Investing activities

               

Purchase of other investments, at fair value

    (363 )     (3,869 )

Purchase of other investments sold, not yet purchased, at fair value

    -       (4,178 )

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

    3,908       7,395  

Sales and returns of principal - other investments sold, not yet purchased, at fair value

    -       1,239  

Investment in equity method affiliate

    (736 )     (438 )

Distribution from equity method affiliate

    1       -  

Purchase of furniture, equipment, and leasehold improvements

    (96 )     (298 )

Net cash provided by (used in) investing activities

    2,714       (149 )

Financing activities

               

Proceeds from debt

    -       2,250  

Repayment of debt

    -       (2,250 )

Cash used to net share settle equity awards

    (164 )     (217 )

Cohen & Company Inc. dividends

    (215 )     (54 )

Convertible non-controlling interest distributions

    (215 )     (142 )

Non-convertible non-controlling interest investment

    38       6  

Non-convertible non-controlling interest distributions

    -       (1,775 )

Net cash provided by (used in) financing activities

    (556 )     (2,182 )

Effect of exchange rate on cash

    91       (76 )

Net increase (decrease) in cash and cash equivalents

    (25,460 )     11,943  

Cash and cash equivalents, beginning of period

    29,101       50,567  

Cash and cash equivalents, end of period

  $ 3,641     $ 62,510  

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

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 “AFN Merger”) with a subsidiary of Alesco Financial Inc. (“AFN”), a publicly traded real estate investment trust.

 

As a result of the AFN 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 AFN 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 AFN 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 an expanding range of capital markets and asset management services. As of March 31, 2023, the Company had $2.16 billion in assets under management (“AUM”) of which $1.03 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-AFN 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, LP, 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. "CCFESA" refers to Cohen & Company Financial (Europe) S.A., a majority owned subsidiary regulated by the Autorite de Controle Prudentiel et de Resolution ("ACPR") in France. “CCFEL” refers to Cohen & Company Financial (Europe) Limited, a subsidiary formerly regulated by the Central Bank of Ireland (the "CBI").  

 

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 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, 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 operates its capital markets activities primarily through its subsidiaries: JVB in the United States and CCFESA in Europe. A division of JVB, Cohen & Company Capital Markets ("CCM") is the Company's full-service boutique investment bank, which focuses on M&A, capital markets, and SPAC advisory services.   

 

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 holds related to its SPAC franchise and other investments the Company has made for the purpose of earning an investment return rather than investments made to support the Company’s trading and other Capital Markets business segment activities.  These investments are included in the Company’s other investments, at fair value; other investments sold, not yet purchased; and investments in equity method affiliates in the Company’s consolidated balance sheets.

 

10

 

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;

 

● 

Revenue earned 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 and other investments sold, not yet purchased; and

 

● 

Income and loss earned on equity method investments.

 

 

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, 2023 and 2022 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, 2022.

 

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, 2022.  

 

11

 
 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A. Adoption of New Accounting Standards

 

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. Certain aspects of this topic were later enhanced and clarified in January 2021 when the FASB issued ASU 2021-01 Reference Rate Reform (Topic 848).  These ASUs 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 the London Interbank Offer Rate ("LIBOR or another reference rate expected to be discontinued.  This 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. In December 2022, FASB issued ASU 2022-06 (Topic 848) and deferred the sunset date from December 31, 2022 to December 31, 2024. The Company’s adoption of the provisions of ASU 2020-04 and ASU 2021-01, effective March 12, 2020, is on a prospective basis.  The adoption of this ASU did not have a material impact on the Company's consolidated financial statements. See note 20.  

 

In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, ReceivablesNonrefundable Fees and Other Costs.  This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. The Company’s adoption of the provisions of ASU 2020-08, effective January 1, 2022, did not have an effect on the Company’s consolidated financial statements.

 

In October 2020, the FASB issued ASU 2020-10, Codification Improvements.  This ASU affects a wide variety of Topics in the Codification. This ASU, among other things, contains amendments that improve consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section.  Many of the amendments arose because the FASB provided an option to give certain information either on the face of the financial statements or in the notes to financial statements and that option only was included in the Other Presentation Matters Section of the Codification. The option to disclose information in the notes to financial statements should have been codified in the Disclosure Section as well as the Other Presentation Matters Section (or other Section of the Codification in which the option to disclose in the notes to financial statements appears). The Company’s adoption of the provisions of ASU 2020-10, effective January 1, 2022, did not have an effect on the Company’s consolidated financial statements.

 

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40):  Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. The Company’s adoption of the provisions of ASU 2021-04, effective January 1, 2022, did not have an effect on the Company’s consolidated financial statements.

  

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The Company’s adoption of the provisions of ASU 2021-08, effective January 1, 2022, did not have an effect on the Company’s consolidated financial statements.

  

In October 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This ASU includes amendments that are expected to increase transparency in financial reporting by requiring business entities to disclose information about certain types of government assistance they receive. The amendments require the following annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy to other accounting guidance:  (i) information about the nature of the transactions and the related accounting policy used to account for the transactions; (ii) the line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item; and (iii) significant terms and conditions of the transactions, including commitments and contingencies. The Company’s adoption of the provisions of ASU 2021-10, effective January 1, 2022, did not have an effect on the Company’s consolidated financial statements.

  

In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings ("TDRs") and Vintage Disclosures.  The amendments in this ASU eliminate TDR recognition and measurement guidance and instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan.  The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.  The Company's adoption of the provisions of ASU 2022-02, effective January 1, 2023, did not have an effect on the Company’s consolidated financial statements.

  

B. Recent Accounting Developments 

 

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40):  Accounting for Convertible Instruments and Contracts in an Entity's Own Equity.  This ASU simplifies accounting for convertible instruments by removing major separation models currently required.  The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception.  The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. This ASU is effective for fiscal years beginning after December 15, 2023, 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. 

 

 

12

 

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. This ASU is effective for fiscal years beginning after December 15, 2023.  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 March 2023, the FASB issued ASU 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU responds to stakeholder feedback that the proportional amortization method provides investors and other allocators of capital with a better understanding of the returns from investments that are made primarily for the purpose of receiving income tax credits and other income tax benefits. This ASU is effective for fiscal years beginning after December 15, 2023.  Early adoption is permitted.  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; other investments sold, not yet purchased; and derivatives held by the Company. 

 

Cash and cash equivalents: Cash and cash equivalents are carried at historical cost, which is assumed to approximate fair value. The estimated fair value measurement of cash and 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.

 

Other investments 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 broker market quotations, 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 Company's debt was assumed in the AFN Merger and recorded at fair value as of that date. As of March 31, 2023 and December 31, 2022, the fair value of the Company’s debt was estimated to be $33,706 and $34,679, 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; other investments, at fair value; and other investments, sold not yet purchased. 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.

 

 

13

 

 

4. OTHER RECENT BUSINESS TRANSACTIONS OR EVENTS 

 

Conversion of the 2017 Convertible Note

 

On March 10, 2017, the Operating LLC issued to DGC Family Fintech Trust (the “DGC Trust”), a trust established by Daniel G. Cohen, a convertible senior secured promissory note in the aggregate principal amount of $15,000 (the "2017 Convertible Note").  On March 20, 2022, the DGC Trust elected to convert the 2017 Convertible Note into an aggregate of 10,344,827 units of membership interests in the Operating LLC at the conversion rate specified in the 2017 Convertible Note agreement of $1.45 per unit. As a result of such conversion, the 2017 Convertible Note was cancelled in its entirety.  These units of membership interests have the same conversion and redemption rights as the existing convertible non-controlling interest units of membership interests.  See note 20 to the Company's December 31, 2022 Annual Report filed on Form 10-K for additional information regarding the 2017 Convertible Note.  

 

Pursuant to the DGC Trust’s governing documents, Daniel G. Cohen has the ability to acquire at any time any of the DGC Trust’s assets, including the units of membership interest, by substituting other property of an equivalent value without the approval or consent of any person, including any trustee or beneficiary of the DGC Trust. See note 24.

 

The 2020 Senior Notes

 

On  January 31, 2020, the Operating LLC entered into a note purchase agreement (the “Original 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, Jr., the vice chairman of the Company’s board of directors and the Operating LLC’s board of managers, and his spouse.  The note purchased by the JKD Investor is herein referred to as the “JKD Note.”  Pursuant to the Original 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 bore interest at a fixed rate of 12% per annum and matured on January 31, 2022.

 

On January 31, 2022, the Operating LLC and JKD Investor entered into a note purchase agreement (the "2022 Purchase Agreement"), pursuant to which, among other things, on such date, (i) JKD Investor paid to the Operating LLC an additional $2,250 and (ii) in consideration for such funds, the Operating LLC issued to JKD Investor an amended and restated senior promissory note in the aggregate principal amount of $4,500 (the “Amended and Restated Note”), which Amended and Restated Note amended and restated the JKD Note in its entirety.  The 2022 Purchase Agreement contains customary representations and warranties on the part of each of JKD Investor and the Operating LLC. The Company used these proceeds to retire $2,250 of the 2020 Senior Notes held by RNCS.  See notes 16 and 24. 

 

 

14

 

INSU Acquisition Corp III ("Insurance SPAC III")

 

The Operating LLC was the manager of Insurance Acquisition Sponsor III, LLC (“IAS III”) and Dioptra Advisors III, LLC (together with IAS III, the “Insurance SPAC III Sponsor Entities”). The Insurance SPAC III Sponsor Entities were sponsors of INSU Acquisition Corp. III ("Insurance SPAC III"). On December 22, 2020, Insurance SPAC III completed the sale of 25,000,000 units (the “Insurance SPAC III Units”) in its initial public offering ("IPO"). Each Insurance SPAC III Unit consisted of one share of Insurance SPAC III's Class A common stock, par value $0.0001 per share (“Insurance SPAC III Common Stock”), and one-third of one Insurance SPAC III warrant (each, an “Insurance SPAC III Warrant”), where each whole Insurance SPAC III Warrant entitled the holder to purchase one share of Insurance SPAC III Common Stock for $11.50 per share. The Insurance SPAC III Units were sold in the IPO at an offering price of $10.00 per unit. Pursuant to its governing documents, if Insurance SPAC III failed to consummate a business combination within the first 24 months following the IPO, its corporate existence would cease except for the purposes of winding up its affairs and liquidating its assets.

 

The Operating LLC loaned to Insurance SPAC III approximately $71 to cover IPO expenses, which was repaid in full at the closing of the IPO. IAS III and its affiliates, including the Operating LLC, committed to loan Insurance SPAC III up to an additional $1,500 to cover operating and acquisition related expenses following the IPO, of which $960 was borrowed by Insurance SPAC III. See note 24.  The loans bore no interest, and if Insurance SPAC III consummated a business combination in the required timeframe, the loans were to be repaid from the funds held in Insurance SPAC III’s trust account. If Insurance SPAC III did not consummate a business combination in the required timeframe, no funds from Insurance SPAC III's trust account could be used to repay the loans. 

 

On November 18, 2022, Insurance SPAC III announced it would not consummate an initial business combination within the required time period and that it intended to dissolve and liquidate, effective as of the close of business on December 22, 2022, and redeem all of the Insurance SPAC III Common Stock and each Insurance SPAC III Warrant that were included in its IPO, at a per-share redemption price of approximately $10.09. As of the close of business on December 22, 2022, the Insurance SPAC III Common Stock and each Insurance SPAC Warrant were deemed cancelled and represented only the right to receive the redemption amount of $10.09 per share.

 

In order to provide for the disbursement of funds from the trust account, Insurance SPAC III instructed the trustee of the trust account to take all necessary actions to liquidate the securities held in the trust account. The proceeds of the trust account were held in a non-interest bearing account while awaiting disbursement to the holders of the public shares. Record holders received their pro rata portion of the proceeds of the trust account, less $100 of interest to pay dissolution expenses and net of taxes payable. Insurance SPAC III Sponsor Entities agreed to waive their redemption rights with respect to their outstanding shares of Class B common stock issued prior to the Insurance SPAC III IPO. There were no redemption rights or liquidating distributions with respect to each Insurance SPAC III Warrant, which expired and were rendered worthless.

 

As a result of the liquidation of Insurance SPAC III, the Company recorded an equity method loss of $5,896 for the year ended December 31, 2022, which included a write-off of the amounts advanced to Insurance SPAC III from the Operating LLC as well as amounts invested. Of this loss, $4,808 was allocated to the non-convertible non-controlling interests. Therefore, the net impact to the Operating LLC was $1,088. 

 

15

 
 

5. NET TRADING 

 

Net trading consisted of the following in the periods presented.



NET TRADING

(Dollars in Thousands)

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Net realized gains (losses) - trading inventory

 $12,642  $4,615 

Net unrealized gains (losses) - trading inventory

  (8,098)  (3,263)

Net gains and losses

  4,544   1,352 
         

Interest income- trading inventory

  735   1,091 

Interest income-reverse repos

  6,129   15,698 

Interest income

  6,864   16,789 
         

Interest expense-repos

  (5,454)  (7,661)

Interest expense-margin payable

  (1,450)  (193)

Interest expense

  (6,904)  (7,854)
         

Other trading revenue

  3,706   1,735 
         

Net trading

 $8,210  $12,022 

 

  

Trading inventory includes investments classified as investments-trading as well as trading securities sold, not yet purchased.  See note 7.  For discussion of margin payable, see note 6.  Other trading revenue includes revenue earned on our agency repo business (see note 10).

  

16

 

 

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, 2023

  

December 31, 2022

 

Deposits with clearing agencies

 $250  $250 

Unsettled regular way trades, net

  10,270   - 

Receivables from clearing agencies

  92,741   140,683 

Receivables from brokers, dealers, and clearing agencies

 $103,261  $140,933 

 

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



PAYABLES TO BROKERS, DEALERS, AND CLEARING AGENCIES

(Dollars in Thousands)

 

  

March 31, 2023

  

December 31, 2022

 

Unsettled regular way trades, net

 $-  $3,238 

Margin payable

  106,639   131,747 

Payables to brokers, dealers, and clearing agencies

 $106,639  $134,985 

 



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 cash received by the Company upon execution of short trades that is restricted from withdrawal by the clearing agent.

 

Margin payable represents amounts borrowed from Pershing, LLC and Cantor Fitzgerald to finance the Company’s trading portfolio. See note 5 for interest expense incurred on margin payable.  All of the Company's securities included in investments-trading and a portion of the Company's securities included in other investments, at fair value serve as collateral for this margin loan.  See note 7.  

 

17

 

 

7. FINANCIAL INSTRUMENTS

 

Investments—Trading

 

Investments-trading consisted of the following.

 

INVESTMENTS - TRADING

(Dollars in Thousands)

 

  

March 31, 2023

  

December 31, 2022

 

ABS

 $1  $1 

Certificates of deposit

  160   - 

Corporate bonds and redeemable preferred stock

  41,874   44,572 

Derivatives

  4,369   4,669 

Equity securities

  527   220 

Municipal bonds

  16,433   19,502 

Residential mortgage loans

  11,164   13,506 

RMBS

  8   7 

U.S. government agency debt securities

  19,737   19,683 

U.S. government agency MBS and CMOs

  101,699   97,276 

U.S. Treasury securities

  1,885   12,392 

Investments-trading

 $197,857  $211,828 

 

 

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, 2023

  

December 31, 2022

 

Corporate bonds and redeemable preferred stock

 $48,044  $61,310 

Derivatives

  6,193   1,177 

Equity securities

  26   51 

U.S. government agency debt securities

  -   32 

U.S. government agency MBS and CMOs

  1   1 

U.S. Treasury securities

  43,432   71,386 

Trading securities sold, not yet purchased

 $97,696  $133,957 

 

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.

 

18

 

Other Investments, at Fair Value

 

Other investments, at fair value consisted of the following.

 

OTHER INVESTMENTS, AT FAIR VALUE

(Dollars in Thousands)

 

  

March 31, 2023

  

December 31, 2022

 

Equity securities

 $9,824  $13,725 

Restricted equity securities

  3,039   3,135 

Corporate bonds and redeemable preferred stock

  476   476 

CREO JV

  5,316   6,568 

U.S. Insurance JV

  3,059   3,459 

SPAC Fund

  554   527 

Residential mortgage loans

  127   132 

Other investments, at fair value

 $22,395  $28,022 

 

A total of $814 and $1,673 of the amounts shown as other investments, at fair value above serve as collateral for the Company's margin loan payable as of March 31, 2023 and December 31, 2022, respectively.  See note 6.  

 

Other Investments Sold ,Not Yet Purchased, at Fair Value

 

Other investments, sold not yet purchased, at fair value consisted of the following.

 

OTHER INVESTMENTS SOLD, NOT YET PURCHASED, AT FAIR VALUE

(Dollars in Thousands)

 

  

March 31, 2023

  

December 31, 2022

 

Equity securities

 $73  $78 

Other investments sold, not yet purchased, at fair value

 $73  $78 

 

 

19

 
 

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 mortgage 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, 2023 and 2022 of $(2,603) and $(18,718), respectively. 

 

The Company recognized net gains (losses) related to changes in fair value of investments that are included as a component of other investments, sold not yet purchased during the three months ended March 31, 2023 and 2022 of $5 and $178, respectively. 

 

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 with values that 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 with values that 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 with values that 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 that may be 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.

 

20

 

The following tables present information about the Company’s assets and liabilities measured at fair value as of March 31, 2023 and December 31, 2022 and indicates the valuation hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS

March 31, 2023

(Dollars in Thousands)

 

          

Significant

  

Significant

 
      

Quoted Prices in

  

Observable

  

Unobservable

 
      

Active Markets

  

Inputs

  

Inputs

 

Assets

 

Fair Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

Investments-trading:

                

ABS

 $1  $-  $1  $- 

Certificate of Deposit

  160   -   160   - 

Corporate bonds and redeemable preferred stock

  41,874   -   41,874   - 

Derivatives

  4,369   -   4,369   - 

Equity securities

  527   417   110   - 

Municipal bonds

  16,433   -   16,433   - 

Residential mortgage loans

  11,164   -   11,164   - 

RMBS

  8   -   8   - 

U.S. government agency debt securities

  19,737   -   19,737   - 

U.S. government agency MBS and CMOs

  101,699   -   101,699   - 

U.S. Treasury securities

  1,885   1,885   -   - 

Total investments - trading

 $197,857  $2,302  $195,555  $- 
                 

Other investments, at fair value:

                

Equity securities

 $9,824  $9,824  $-  $- 

Restricted equity securities

  3,039   -   3,039   - 

Corporate bonds and redeemable preferred stock

  476   -   476   - 

Residential mortgage loans

  127   -   127   - 
   13,466  $9,824  $3,642  $- 

Investments measured at NAV (1)

  8,929             

Total other investments, at fair value

 $22,395             
                 

Liabilities

                

Trading securities sold, not yet purchased:

                

Corporate bonds and redeemable preferred stock

 $48,044  $-  $48,044  $- 

Derivatives

  6,193   -   6,193   - 

Equity securities

  26   26   -   - 

U.S. government agency MBS and CMOs

  1   -   1   - 

U.S. Treasury securities

  43,432   43,432   -   - 

Total trading securities sold, not yet purchased

 $97,696  $43,458  $54,238  $- 
                

Other investments, sold not yet purchased:

                

Equity securities

 $73  $73  $-  $- 

Total other investments sold, not yet purchased

 $73  $73  $-  $- 

 

 

(1)

As a practical expedient, the Company uses NAV (or its equivalent) to measure the fair value of its investments in the U.S. Insurance JV, the SPAC Fund, and the CREO JV. The U.S. Insurance JV invests in USD denominated debt issued by small insurance and reinsurance companies.  The SPAC Fund invests in equity securities of SPACs.  The CREO JV invests in primarily multi-family commercial real estate mortgage-backed loans and below-investment grade rated tranches in CRE CLOs collateralized by mostly transitional commercial real estate mortgage-backed loans. See note 4. According to ASC 820, these investments are not categorized within the valuation hierarchy.  

 

21

 

 

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS

December 31, 2022

(Dollars in Thousands)

 

          

Significant

  

Significant

 
      

Quoted Prices in

  

Observable

  

Unobservable

 
      

Active Markets

  

Inputs

  

Inputs

 

Assets

 

Fair Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

Investments-trading:

                

ABS

 $1  $-  $1  $- 

Corporate bonds and redeemable preferred stock

  44,572   -   44,572   - 

Derivatives

  4,669   -   4,669   - 

Equity securities

  220   220   -   - 

Municipal bonds

  19,502   -   19,502   - 

Residential mortgage loans

  13,506   -   13,506   - 

RMBS

  7   -   7   - 

U.S. government agency debt securities

  19,683   -   19,683   - 

U.S. government agency MBS and CMOs

  97,276   -   97,276   - 

U.S. Treasury securities

  12,392   12,392   -   - 

Total investments - trading

 $211,828  $12,612  $199,216  $- 
                 

Other investments, at fair value:

                

Equity Securities

 $13,725  $13,725  $-  $- 

Restricted Equity Securities

  3,135   -   3,135   - 

Corporate bonds and redeemable preferred stock

  476   -   476   - 

Residential mortgage loans

  132   -   132   - 
   17,468  $13,725  $3,743  $- 

Investments measured at NAV (1)

  10,554             

Total other investments, at fair value

 $28,022             
                 

Liabilities

                

Trading securities sold, not yet purchased:

                

Corporate bonds and redeemable preferred stock

 $61,310  $-  $61,310  $- 

Derivatives

  1,177   -   1,177   - 

Equity securities

  51   51   -   - 

U.S. Government Agency debt

  32   -   32   - 

U.S. government agency MBS and CMOs

  1   -   1   - 

U.S. Treasury securities

  71,386   71,386   -   - 

Total trading securities sold, not yet purchased

 $133,957  $71,437  $62,520  $- 
                

Other investments, sold not yet purchased:

                

Equity securities

 $78  $78  $-  $- 

Total other investments sold, not yet purchased

 $78  $78  $-  $- 

 

 

(1)

As a practical expedient, the Company uses NAV (or its equivalent) to measure the fair value of its investments in the U.S. Insurance JV, the SPAC Fund, and the CREO JV. The U.S. Insurance JV invests in USD denominated debt issued by small insurance and reinsurance companies.  The SPAC Fund invests in equity securities of SPACs.  The CREO JV invests in primarily multi-family commercial real estate mortgage-backed loans and below-investment grade rated tranches in CRE CLOs collateralized by mostly transitional commercial real estate mortgage-backed loans. See note 4. According to ASC 820, these investments are not categorized within the valuation hierarchy.  

 

22

 

  

The following provides a brief description of the types of financial instruments the Company holds, the methodology for estimating fair value, and the level within the valuation hierarchy of the estimate. The discussion that follows applies regardless of whether the instrument is included in investments-trading; other investments, at fair value; or trading securities sold, not yet purchased.

 

CLOs, CDOs, and ABS: CLOs, CDOs, and ABS are interests in securitizations. ABS may include, but are not limited to, securities backed by auto loans, credit card receivables, or student loans. When the Company is able to obtain independent market quotations from at least two broker-dealers and where a price within the range of at least two broker-dealers is used or market price quotations from third party pricing services is used, these interests in securitizations will generally be classified within level 2 of the valuation hierarchy. These valuations are based on a market approach. The independent market quotations from broker-dealers are generally nonbinding. The Company seeks quotations from broker-dealers that historically have actively traded, monitored, issued, and been knowledgeable about the interests in securitizations. The Company generally believes to the extent that it (i)  receives two quotations in a similar range from broker-dealers knowledgeable about these interests in securitizations and (ii)  considers the broker-dealers gather and utilize observable market information such as new issue activity in the primary market, trading activity in the secondary market, credit spreads versus historical levels, bid-ask spreads, and price consensus among market participants and sources, then classification within level 2 of the valuation hierarchy is appropriate. In the absence of two broker-dealer market quotations, a single broker-dealer market quotation may be used without corroboration of the quote in which case the Company generally classifies the fair value within level 3 of the valuation hierarchy.

 

If quotations are unavailable, prices observed by the Company for recently executed market transactions or valuation models prepared by the Company’s management may be used, which are based on an income approach. These models prepared by the Company’s management include estimates, and the valuations derived from them could differ materially from amounts realizable in an open market exchange. Each CLO and CDO position is evaluated independently taking into consideration available comparable market levels, underlying collateral performance and pricing, deal structures, and liquidity.  Fair values based on internal valuation models prepared by the Company’s management are generally classified within level 3 of the valuation hierarchy. 

 

Establishing fair value is inherently subjective (given the volatile and sometimes illiquid markets for certain interests in securitizations) and requires management to make a number of assumptions, including assumptions about the future of interest rates, discount rates, and the timing of cash flows. The assumptions the Company applies are specific to each security. Although the Company may rely on internal calculations to compute the fair value of certain interest in securitizations, the Company requests and considers indications of fair value from third party pricing services to assist in the valuation process.

 

Certificates of Deposit: The fair value of certificates of deposit is estimated using valuations provided by third party pricing services. The Company classifies the fair value of certificates of deposit within level 2 of the valuation hierarchy.

 

Corporate Bonds and Redeemable Preferred Stock: The Company uses recently executed transactions or third party quotations from independent pricing services to arrive at the fair value of its investments in corporate bonds and redeemable preferred stock. These valuations are based on a market approach. The Company generally classifies the fair value of these bonds within level 2 of the valuation hierarchy. In instances where the fair values of securities are based on quoted prices in active markets (for example with redeemable preferred stock), the Company classifies the fair value of these securities within level 1 of the valuation hierarchy.

 

Equity Securities: The fair value of equity securities that represent unrestricted investments in publicly traded companies (common or preferred shares, options, warrants, and other equity investments) are determined using the closing price of the security as of the reporting date. These are securities that are traded on a recognized liquid exchange and the Company classifies their fair value within level 1 of the valuation hierarchy.  The fair value of equity securities that represent investments in privately held companies are generally determined either (i) based on a valuation model or (ii) based on recently observed transactions in the same instrument or similar instrument that we hold.  These valuations are generally classified within either level 2 or level 3 of the valuation hierarchy.  

 

Equity Securities Without Readily Determinable Fair Value: From time to time, the Company invests in equity securities that do not have a readily determinable fair value that also do not qualify for equity method accounting or the practical expedient for investments in investment companies which are measured at NAV. In those cases, the Company utilizes the measurement alternative of ASC 321-10-35-2. This alternative allows the Company to carry the investment at cost minus impairment. If the Company observes a market transaction for identical or similar instrument, it will adjust the carrying value of the equity security. If the equity security is being measured at cost minus impairment, it will be included as a component of other assets. If the equity security is being measured at fair value, it will be included as a component of other investments, at fair value. When measured at fair value using an orderly observable market transaction, it will generally be classified as level 1 in the valuation hierarchy.

 

Restricted Equity Securities:  Restricted equity securities are investments in publicly traded companies.  However, they are restricted from re-sale until either (a) the share price trades above a certain threshold for a certain period of time; or (b) a certain period of time elapses or both. The Company determines the fair value by utilizing a model that starts with the publicly traded share price but then applies a discount based on a Monte Carlo simulation.  The inputs to this model are observable so the Company classifies these securities within level 2 of the valuation hierarchy.  The Company is not allowed to sell these shares during the restriction period and there is no certainty as to when these hurdles will be met or if they will be met at all.

 

Foreign Government Bonds: The fair value of foreign government bonds is estimated using valuations provided by third party pricing services and classifies the fair value within level 2 of the valuation hierarchy.

 

Municipal Bonds: Municipal bonds, which include obligations of U.S. states, municipalities, and political subdivisions, primarily include bonds or notes issued by U.S. municipalities. The Company generally values these securities using third party quotations such as market price quotations from third party pricing services. The Company generally classifies the fair value of these bonds within level 2 of the valuation hierarchy. The valuations are based on a market approach. In instances where the Company is unable to obtain reliable market price quotations from third party pricing services, the Company will use its own internal valuation models. In these cases, the Company will classify such securities as level 3 within the valuation hierarchy until it is able to obtain third party pricing.

 

Residential Mortgage Loans: The Company generally values these loans using a model. The model’s main inputs are current market quotations for pooled mortgage loan securities with similar characteristics. The Company considers the inputs to be observable and therefore classifies the fair value of these loans within level 2 of the valuation hierarchy.

 

RMBS: The Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices or market price quotations from third party pricing services. These valuations are based on a market approach. The Company generally classifies the fair value of these securities based on third party quotations within level 2 of the valuation hierarchy.

  

23

 

 

U.S. Government Agency Debt Securities: Callable and non-callable U.S. government agency debt securities are measured primarily based on quoted market prices obtained from third party pricing services. Non-callable U.S. government agency debt securities are generally classified within level 1 and callable U.S. government agency debt securities are classified within level 2 of the valuation hierarchy.

 

U.S. Government Agency MBS and CMOs: These are securities that are generally traded over-the-counter. The Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices or market price quotations from third party pricing services. These valuations are based on a market approach. The Company classifies the fair value of these securities within level 2 of the valuation hierarchy.

 

U.S. Treasury Securities: U.S. Treasury securities include U.S. Treasury bonds and notes and the fair values of the U.S. Treasury securities are based on quoted prices or market activity in active markets. Valuation adjustments are not applied. The Company classifies the fair value of these securities within level 1 of the valuation hierarchy.

 

Derivatives 

 

TBAs and Other Forward Agency MBS Contracts 

 

The Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices or market price quotations from third party pricing services. TBAs and other forward agency MBS contracts are generally classified within level 2 of the valuation hierarchy. If there is limited transaction activity or less transparency to observe market based inputs to valuation models, TBAs and other forward agency MBS contracts are classified within level 3 of the valuation hierarchy.  U.S. government agency MBS and CMOs include TBAs and other forward agency MBS contracts.  Unrealized gains on TBAs and other forward agency MBS contracts are included in investments-trading on the Company’s consolidated balance sheets and unrealized losses on TBAs and other forward agency MBS contracts are included in trading securities sold, not yet purchased on the Company’s consolidated balance sheets. See note 9.

 

Other Extended Settlement Trades 

 

When the Company buys or sells a financial instrument that will not settle in the regular timeframe, the Company will account for that purchase or sale on the settlement date rather than the trade date.  In those cases, the Company accounts for the transaction between trade date and settlement date as a derivative (as either a purchase commitment or sale commitment). The Company will record an unrealized gain or unrealized loss on the derivative for the difference between the fair value of the underlying financial instrument as of the reporting date and the agreed upon transaction price.  The Company will determine the fair value of the financial instrument using the methodologies described above.

 

Equity Derivatives

 

The Company may enter into equity derivatives which include listed options as well as other derivative transactions with an equity instrument as the underlying.  Listed options are traded on a recognized liquid exchange and the Company classifies their fair value within level 1 of the valuation hierarchy.  Other equity derivatives (where the underlying equity instrument is publicly traded but the derivative itself is not) are classified within level 2 of the valuation hierarchy.  

 

  

Foreign Currency Forward Contracts 

 

Foreign currency forward contracts are exchange-traded derivatives, which transact on an exchange that is deemed to be active.  The fair value of the foreign currency forward contracts is based on current quoted market prices.  Valuation adjustments are not applied.  These are classified within level 1 of the valuation hierarchy. See note 9.

 

24

 

Investments in Certain Entities that Calculate NAV Per Share (or its Equivalent)

 

The following table presents additional information about investments in certain entities that calculate NAV per share (regardless of whether the “practical expedient” provisions of FASB ASC 820 have been applied), which are measured at fair value on a recurring basis at March 31, 2023 and December 31, 2022.

 

  

Fair Value March 31, 2023

  

Unfunded Commitments

  

Redemption Frequency

  

Redemption Notice Period

 

Other investments, at fair value

                

CREO JV (a)

 $5,316  $10,065   N/A   N/A 

U.S. Insurance JV (b)

  3,059   N/A   N/A   N/A 

SPAC Fund (c)

  554   N/A  

Quarterly after 1 year lock up

  

30 days

 
  $8,929             

 

  

Fair Value December 31, 2022

  

Unfunded Commitments

  

Redemption Frequency

  

Redemption Notice Period

 

Other investments, at fair value

                

CREO JV (a)

 $6,568  $8,464   N/A   N/A 

U.S. Insurance JV (b)

  3,459   N/A   N/A   N/A 

SPAC Fund (c)

  527   N/A  

Quarterly after 1 year lock up

  

30 days

 
  $10,554             

  

 N/ANot Applicable
 (a)The CREO JV invests in primarily multi-family commercial real estate mortgage-backed loans and below-investment grade rated tranches in CRE CLOs collateralized by mostly commercial real estate mortgage-backed loans.  See note 4.
 

(b)

The U.S. Insurance JV invests in USD denominated debt issued by small and medium size insurance and reinsurance companies. 

 

(c)

The SPAC Fund invests in equity interests of SPACs.

 

 

 

9. DERIVATIVE FINANCIAL INSTRUMENTS

 

FASB ASC 815, Derivatives and Hedging (“FASB ASC 815”), provides for optional hedge accounting. When a derivative is deemed to be a hedge and certain documentation and effectiveness testing requirements are met, reporting entities can record all or a portion of the change in the fair value of a designated hedge as an adjustment to OCI rather than as a gain or loss in the statements of operations. To date, the Company has not designated any derivatives as hedges under the provisions included in FASB ASC 815.

 

All of the derivatives that the Company enters into contain master netting arrangements.  If certain requirements are met, the offsetting provisions included in FASB ASC 210, Balance Sheet (“ASC 210”), allow (but do not require) the reporting entity to net the asset and liability on the consolidated balance sheets. It is the Company’s policy to present the derivative assets and liabilities on a net basis if the conditions of ASC 210 are met.  However, in general the Company does not enter in offsetting derivatives with the same counterparties.  Therefore, in all periods presented, no derivatives are presented on a net basis. 

 

Derivative financial instruments are recorded at fair value. If the derivative was entered into as part of the Company’s broker-dealer operations, it will be included as a component of investments-trading or trading securities sold, not yet purchased. If it is entered into as a hedge for another financial instrument included in other investments, at fair value then the derivative will be included as a component of other investments, at fair value.

 

The Company may, from time to time, enter into derivatives to manage its risk exposures arising from (i) fluctuations in foreign currency rates with respect to the Company’s investments in foreign currency denominated investments; (ii) the Company’s investments in interest sensitive investments; and (iii) the Company’s facilitation of mortgage-backed trading. Derivatives entered into by the Company, from time to time, may include (a) foreign currency forward contracts; (b) purchase and sale agreements of TBAs and other forward agency MBS contracts; and (c) other extended settlement trades.

 

TBAs are forward contracts to purchase or sell MBS with collateral that remains “to be announced” until just prior to the trade settlement date. In addition to TBAs, the Company sometimes enters into forward purchases or sales of agency MBS where the underlying collateral has been identified.  These transactions are referred to as other forward agency MBS contracts.  TBAs and other forward agency MBS contracts are accounted for as derivatives by the Company under ASC 815.  The settlement of these transactions is not expected to have a material effect on the Company’s consolidated financial statements.

 

In addition to TBAs and other forward agency MBS contracts as part of the Company’s broker-dealer operations, the Company may from time to time enter into other securities or loan trades that do not settle within the normal securities settlement period. In those cases, the purchase or sale of the security or loan is not recorded until the settlement date.  However, from the trade date until the settlement date, the Company’s interest in the security is accounted for as a derivative as either a forward purchase commitment or forward sale commitment.  The Company will classify the related derivative either within investments-trading or other investments, at fair value depending on where it intends to classify the investment once the trade settles.

 

Derivatives involve varying degrees of off-balance sheet risk, whereby changes in the level or volatility of interest rates or market values of the underlying financial instruments may result in changes in the value of a particular financial instrument in excess of its carrying amount. Depending on the Company’s investment strategy, realized and unrealized gains and losses are recognized in principal transactions and other income or in net trading in the Company’s consolidated statements of operations on a trade date basis.

 

The Company may, from time to time, enter into the following derivative instruments.

 

Equity Derivatives

 

A significant portion of the Company’s equity holdings are carried at fair value.  The Company hedges a portion of this exposure by entering into equity derivatives such as puts and short call options from time to time.  These derivative positions are carried at fair value as a component of other investments, at fair value and other investments sold, not yet purchased in the Company’s consolidated balance sheets.  As of  March 31, 2023 and December 31, 2022, the Company had no options. From time to time, the Company may also enter into forward purchase commitments for equity securities.  

 

In addition, the Company may engage in advisory transactions that result in a receivable that can be paid in cash or a variable number of equity instruments.  In such instances, the Company would record the receivable as a component of other assets in its consolidated balance sheet and record the equity component as an embedded derivative.  All equity derivatives are carried at fair value as a component of other investments, at fair value or other investments sold, not yet purchased in the Company’s consolidated balance sheets. As of   March 31, 2023 and December 31, 2022, the Company had no embedded equity derivatives.  

 

The Company also hedges a portion of the exposure from these equity investments by entering into short trades.  These short trades are not treated as derivatives and are carried as a component of other investments sold, not yet purchased.  See Note 7.

 

TBAs and Other Forward Agency MBS Contracts 

 

The Company enters into TBAs and other forward agency MBS transactions for three main reasons.

 

 

(i)

The Company trades U.S. government agency obligations.  In connection with these activities, the Company may be required to maintain inventory in order to facilitate customer transactions.  In order to mitigate exposure to market risk, the Company may enter into the purchase and sale of TBAs and other forward agency MBS contracts.

 

(ii)

The Company also enters into TBAs and other forward agency MBS contracts in order to assist clients (generally small to mid-size mortgage loan originators) in hedging the interest rate risk associated with the mortgages owned by these clients.

 

(iii)

Finally, the Company may enter into TBAs and other forward agency MBS contracts on a speculative basis.

 

The Company carries the TBAs and other forward agency MBS contracts at fair value and includes them as a component of investments-trading or trading securities sold, not yet purchased in the Company’s consolidated balance sheets. At March 31, 2023, the Company had open TBA and other forward MBS purchase agreements in the notional amount of $ 691,500 and open TBA and other forward MBS sale agreements in the notional amount of $716,400. At December 31, 2022, the Company had open TBA and other forward agency MBS purchase agreements in the notional amount of $535,000 and open TBA and other forward agency MBS sale agreements in the notional amount of $556,780.

 

26

 

Other Extended Settlement Trades

 

When the Company buys or sells a financial instrument that will not settle in the regular timeframe, the Company will account for that purchase or sale on the settlement date rather than the trade date.  In those cases, the Company accounts for the transaction between trade date and settlement date as either a forward purchase commitment or a forward sale commitment, both considered derivatives.  The Company will record an unrealized gain or unrealized loss on the derivative for the difference between the fair value of the underlying financial instrument as of the reporting date and the agreed upon transaction price. As of  March 31, 2023  and  December 31, 2022, the Company had no open forward purchase or sales commitments.



Foreign Currency Forward Contracts 

 

The Company invests in foreign currency denominated investments that expose it to fluctuations in foreign currency rates, and, therefore, the Company may, from time to time, hedge such exposure by using foreign currency forward contracts.  The Company carries foreign currency forward contracts at fair value and includes them as a component of other investments, at fair value in the Company’s consolidated balance sheets.  As of March 31, 2023 and December 31, 2022, the Company had no outstanding foreign currency forward contracts. 

 

The following table presents the Company’s derivative financial instruments and the amount and location of the fair value (unrealized gain / (loss)) recognized in the consolidated balance sheets as of March 31, 2023 and December 31, 2022.  

 

 

DERIVATIVE FINANCIAL INSTRUMENTS-BALANCE SHEET INFORMATION

(Dollars in Thousands)

 

Derivative Financial Instruments Not Designated as Hedging Instruments Under FASB ASC 815

 

Balance Sheet Classification

 

March 31, 2023

  

December 31, 2022

 

TBAs and other forward agency MBS

 

Investments-trading

 $4,369  $4,669 

TBAs and other forward agency MBS

 

Trading securities sold, not yet purchased

  (6,193)  (1,177)
    $(1,824) $3,492 

 

The following tables present the Company’s derivative financial instruments and the amount and location of the net gain (loss) recognized in the consolidated statements of operations.

 

 

DERIVATIVE FINANCIAL INSTRUMENTS-STATEMENT OF OPERATIONS INFORMATION

(Dollars in Thousands)

 

    

Three Months Ended March 31,

 

Derivative Financial Instruments Not Designated as Hedging Instruments Under FASB ASC 815

 

Income Statement Classification

 

2023

  

2022

 

TBAs and other forward agency MBS

 

Revenue-net trading

 $388  $2,638 
    $388  $2,638 

 

27

 
 

10. COLLATERALIZED SECURITIES TRANSACTIONS

 

Matched Book Repo Business

 

The Company enters into repos and reverse repos as part of its matched book repo business.  In general, the Company will lend money to a counterparty after obtaining collateral securities from that counterparty pursuant to a reverse repo.  The Company will borrow money from another counterparty using the same collateral securities pursuant to a repo.  The Company seeks to earn net interest income on these transactions.  

 

Gestation Repo

 

For the periods presented, all of the Company's matched book repo business consisted of gestation repo transactions.  Gestation repo involves entering into repo and reverse repo transactions where the underlying collateral security represents a pool of newly issued mortgage loans. The borrowers (the reverse repo counterparties) are generally mortgage originators. The lenders (the repo counterparties) are a diverse group of the counterparties comprised of banks, insurance companies, and other financial institutions. The Company self-clears its gestation repo transactions.

 

Gestation trades can be structured in two ways:

 

On Balance Sheet: The Company executes a reverse repo with the borrower and a matching repo (with the same collateral and maturity date) with the lender. In this case the Company is a principal to each trade and is borrowing from one counterparty and lending to another and earning net interest margin. These transactions are referred to by the Company as on balance sheet gestation repo trades.

 

Agency Repo: Similar to the on balance sheet repo, the Company first executes a reverse repo with the borrower and a matching repo (with the same collateral and maturity date) with the lender. However, in this case, all three parties (i.e., borrower, lender, and the Company) simultaneously enter into an assignment agreement. The effect of this assignment is to remove the Company as principal to the reverse repo and repo and have the lender and borrower directly face each other in a repo trade. The Company receives a fee for its role in arranging the financing. These transactions are referred to by the Company as agency gestation repo trades.

 

Bankruptcy of Gestation Counterparty

 

As of June 30, 2022, the Company had an outstanding reverse repo balance with First Guaranty Mortgage Corporation (“FGMC”) totaling $269,228. Effective June 30, 2022, FGMC filed for bankruptcy. Subsequent to June 30, 2022, the Company issued a default notice to FGMC under the reverse repo. The Company took possession of the collateral and began liquidating it.

 

As of  March 31, 2023 and December 31, 2022, the Company had liquidated all of the collateral with the exception of $11,164 and $13,506 of residential mortgage loans, respectively. These loans are carried at fair value and are included in investments-trading in the consolidated balance sheets.

 

During the year ended December 31, 2022, the Company recorded a gross loss of $5,454 in connection with the FGMC reverse repo. Of the $5,454 loss, $5,244 was recorded as a reduction in net trading revenue and $210 was recorded in professional fees and other operating expense in the Company's statement of operations. The Company has filed an unsecured claim under the bankruptcy proceeding, related to this loss but does not expect to receive a material recovery. To the extent any recovery of this loss is received, the Company will recognize it on a cash basis as received, as a component of net trading revenue.  In connection with the loss, the Company recorded a reversal of accrued incentive compensation of $1,753 and, therefore, the net impact to the Company's earnings during the year ended December 31, 2022 was $3,701.

 

During the three months ended March 31, 2023, the Company recorded an additional loss of $1,165 which is included as a component of net trading revenue related to the decline in fair value of the remaining collateral.  As of March 31, 2023, the Company has remaining collateral related to the FGMC reverse repo of $11,164 carried at fair value as a component of investments-trading.  

 

Other Repo Transactions 

 

In addition to the Company’s matched book repo business, the Company may also enter into reverse repos to acquire securities to cover short positions or as an investment.  Additionally, the Company may enter into repos to finance the Company’s securities positions held in inventory.  These repo and reverse repo agreements are generally cleared on a bilateral or triparty basis; no clearing broker is involved. 

 

Repo Information 

 

As of  March 31, 2023 and December 31, 2022, the Company held reverse repos of $381,813 and $437,692, respectively, and the fair value of collateral received under reverse repos was $385,581 and $440,681, respectively.  

 

As of  March 31, 2023 and December 31, 2022, the Company held repos of $ 395,226 and $452,797, respectively, and the fair value of securities and cash pledged as collateral under repos was $396,600 and $454,770, respectively. These amounts include collateral for reverse repos that were re-pledged as collateral for repos.

 

Concentration 

 

In the matched book repo business, the demand for borrowed funds is generated by the reverse repo counterparty and the supply of funds is provided by the repo counterparty. 

 

28

 

The gestation repo business has been and continues to be concentrated as to reverse repurchase counterparties.  The Company conducts this business with a limited number of reverse repo counterparties.  As of March 31, 2023 and December 31, 2022, the Company’s gestation reverse repos shown in the tables below represented balances from 8 and 8 counterparties, respectively. The Company also has a limited number of repo counterparties in the gestation repo business.  However, this is primarily a function of the limited number of reverse repo agreement counterparties with whom the Company conducts this business rather than a reflection of a limited supply of funds.  Therefore, the Company considers the gestation repo business to be concentrated on the demand side. 

 

The total net revenue earned by the Company on its matched book repo business (net interest margin and fee revenue) was $4,381 for the three months ended March 31, 2023. The total net revenue earned by the Company on its matched book repo business was $9,772 for the three months ended March 31, 2022. 



Detail 

 

ASC 210 provides the option to present reverse repo and repo on a net basis if certain netting conditions are met.  The Company presents all repo and reverse repo transaction, as well as counterparty cash collateral (see note 13), on a gross basis even if the underlying netting conditions are met.  The amounts in the table below are presented on a gross basis.

 

The following tables summarize the remaining contractual maturity of the gross obligations under repos accounted for as secured borrowings segregated by the underlying collateral pledged as of each date shown.  All amounts as well as counterparty cash collateral (see note 13) are subject to master netting arrangements.

 

SECURED BORROWINGS

(Dollars in Thousands)

March 31, 2023

 

  

Repurchase Agreements

 
  

Remaining Contractual Maturity of the Agreements

 
  

Overnight and

  

Up to

   30 - 90  

Greater than

     

Collateral Type:

 

Continuous

  

30 days

  

days

  

90 days

  

Total

 

MBS (gestation repo)

 $-  $395,226  $-  $-  $395,226 
  $-  $395,226  $-  $-  $395,226 

 

  

Reverse Repurchase Agreements

 
  

Remaining Contractual Maturity of the Agreements

 
  

Overnight and

  

Up to

   30 - 90  

Greater than

     

Collateral Type:

 

Continuous

  

30 days

  

days

  

90 days

  

Total

 

MBS (gestation repo)

 $-  $381,813  $-  $-  $381,813 
  $-  $381,813  $-  $-  $381,813 

 

 

 

 

SECURED BORROWINGS

(Dollars in Thousands)

December 31, 2022

 

  

Repurchase Agreements

 
  

Remaining Contractual Maturity of the Agreements

 
  

Overnight and

  

Up to

  30 - 90  

Greater than

     

Collateral Type:

 

Continuous

  

30 days

  

days

  

90 days

  

Total

 

MBS (gestation repo)

 $-  $452,797  $-  $-  $452,797 
  $-  $452,797  $-  $-  $452,797 

 

  

Reverse Repurchase Agreements

 
  

Remaining Contractual Maturity of the Agreements

 
  

Overnight and

  

Up to

  30 - 90  

Greater than

     

Collateral Type:

 

Continuous

  

30 days

  

days

  

90 days

  

Total

 

MBS (gestation repo)

 $-  $437,692  $-  $-  $437,692 
  $-  $437,692  $-  $-  $437,692 

 

29

 
 

11.  INVESTMENTS IN EQUITY METHOD AFFILIATES  

 

Equity method accounting requires that the Company record its investments in equity method affiliates on the consolidated balance sheets and recognize its share of the equity method affiliates’ net income as earnings each reporting period. The Company elected to use the cumulative earnings approach for the distributions it receives from its equity method investments. Under the cumulative earnings approach, any distributions received up to the amount of cumulative earnings are treated as return on investment and classified in operating activities within the statement of cash flows. Any excess distributions would be considered as return of investment and classified in investing activities.

 

The Company has certain equity method affiliates for which it has elected the fair value option.  Those investees are excluded from the table below.  Those investees are included as a component of other investments, at fair value in the consolidated balance sheets.  All gains and losses (unrealized and realized) from securities classified as other investments, at fair value in the consolidated balance sheets are recorded as a component of principal transactions and other income in the consolidated statement of operations. See notes 8 and 24.

 

The following table summarizes the activity and earnings in the Company’s investments that are accounted for under the equity method.

 

INVESTMENTS IN EQUITY METHOD AFFILIATES

(Dollars in Thousands)

 

  

INSU Acquisition Corp. III

  

Dutch Real Estate Entities

  

SPAC Sponsor Entities and Other

  

Total

 

January 1, 2023

 $-  $5,530  $3,399  $8,929 

Investments / advances

  -   -   736   736 

Distributions / repayments

  -   -   (1)  (1)

Reclasses to (from)

  -   -   (29)  (29)

Earnings / (loss) realized

  -   142   (537)  (395)

March 31, 2023

 $-  $5,672  $3,568  $9,240 

 

  

INSU Acquisition Corp. III

  

Dutch Real Estate Entities

  

SPAC Sponsor Entities and Other

  

Total

 

January 1, 2022

 $4,543  $5,600  $38,095  $48,238 

Investments / advances

  1,355   -   1,259   2,614 

Distributions / repayments

  -   -   (77)  (77)

Reclasses to (from)

  -   -   (20,915)  (20,915)

Earnings / (loss) realized

  (5,898)  (70)  (14,963)  (20,931)

December 31, 2022

 $-  $5,530  $3,399  $8,929 

 

Dutch Real Estate Entities include: (i) Amersfoot Office Investment I Cooperatief U. A. (“AOI”), a company based in the Netherlands that invests in real estate, and (ii) CK Capital Partners B.V. (“CK Capital”), a company based in the Netherlands that manages investments in real estate.  See note 24.  INSU Acquisition Corp. III completed its $218 million IPO in December 2020 and was liquidated in December 2022 without completing a business combination within the required time period. See note 4.  The amounts included as SPAC Sponsor Entities and other represent the Company's investment in SPAC sponsor entities that have not yet completed a business combination.  If these SPAC sponsor entities are unsuccessful in completing a business combination and the underlying SPAC liquidates, the Company will likely receive no distributions in kind or in cash related to these investments and the remaining balances will be recorded as a component of loss from equity method investments in the consolidated statement of operations.

 

30

 
 

12.  LEASES

 

The Company leases office space, certain computer and related equipment, and a vehicle under noncancelable operating leases.  From time to time, the Company subleases office space to other tenants.  Under the requirements of ASC 842, the Company determines if an arrangement is a lease at the inception date of the contract. Then, the Company measures the lease liability using an incremental borrowing rate that was calculated for each operating lease based on the term of the lease, the U.S. Treasury term interest rate, and an estimated spread to borrow on a secured basis.

 

Rent expense is recognized on a straight-line basis over the lease term and is included in business development, occupancy, and equipment expense.

 

As of  March 31, 2023, all of the leases to which the Company was a party were operating leases.  The weighted average remaining term of the leases was 5.4 years.  The weighted average discount rate for the leases was 4.62%.

 

Maturities of operating lease liability payments consisted of the following.

 

FUTURE MATURITY OF LEASE LIABILITIES

(Dollars in Thousands)

 

  

As of March 31, 2023

 

2023 - remaining

 $2,033 

2024

  2,173 

2025

  1,797 

2026

  1,509 

2027

  1,517 

Thereafter

  2,251 

Total

  11,280 

Less imputed interest

  (1,360)

Lease obligation

 $9,920 

 

During the three months ended March 31, 2023 and 2022, total cash payments of $668  and  $535, respectively, were recorded as a reduction in the operating lease obligation.  No cash payments were made to acquire right of use assets. For the three months ended March 31, 2023, rent expense, net of sublease income of $26, was $630. For the three months ended March 31, 2022, rent expense, net of sublease income of $25, was $639.

 

31

 

 

13.  OTHER RECEIVABLES, OTHER ASSETS, ACCOUNTS PAYABLE AND OTHER LIABILITIES

 

Other receivables consisted of the following.

 

OTHER RECEIVABLES

(Dollars in Thousands)

 

  

March 31, 2023

  

December 31, 2022

 

Asset management fees receivable

 $1,019  $936 

New issue fee receivable

  -   167 

Cash collateral due from counterparties

  2,145   4,301 

Accrued interest receivable and dividend receivable

  2,047   2,561 

Revenue share receivable

  257   138 

Agency repo income receivable

  543   806 

Miscellaneous other receivables

  628   618 

Other receivables

 $6,639  $9,527 

 

Asset management fees receivable are of a routine and short-term nature.  These amounts are generally accrued monthly and paid on a monthly or quarterly basis.

 

New issue fee receivable represents fees due for new issue and advisory services. 

 

When the Company enters into a reverse repo, it obtains collateral in excess of the principal amount of the reverse repo.  The Company accepts collateral in the form of liquid securities or cash.  If the value of the securities the Company receives as collateral increases, the Company’s reverse repo counterparties may request a return of their collateral with a value equal to such increase.  In some cases, the Company will return to such reverse repo counterparties cash instead of securities.  In that case, the Company includes the cash returned as a component of other receivables (cash collateral due from counterparties). When the Company enters into repo transactions, the Company provides collateral to the Company’s repo counterparties in excess of the principal balance of the repo.  The Company’s counterparties accept collateral in the form of liquid securities or cash.  To the extent the Company provides the collateral in cash, the Company includes it as a component of other receivables (cash collateral due from counterparties). 

 

Accrued interest and dividends receivable represent interest and dividends accrued on the Company’s investment securities included as a component of investments-trading or other investments, at fair value. Interest payable on securities sold, not yet purchased is included as a component of accounts payable and other liabilities in the table entitled Accounts Payable and Other Liabilities below.

 

Revenue share receivable represents the amount due to the Company for the Company’s share of a revenue arrangement generated from an entity in which the Company receives a share of the entity’s revenue.

 

Agency repo income receivable represents income receivable on gestation repo trades.  See note 10.

 

Miscellaneous other receivables represent other receivables that are of a short-term nature.

 

Other assets consisted of the following.

 

OTHER ASSETS

(Dollars in Thousands)

 

  

March 31, 2023

  

December 31, 2022

 

Deferred costs

 $102  $133 

Prepaid expenses

  1,669   1,325 

Deposits

  453   450 

Furniture, equipment, and leasehold improvements, net

  1,424   1,472 

Intangible assets

  166   166 

Other assets

 $3,814  $3,546 

 

Deferred costs and prepaid expenses represent amounts paid for services that are being amortized over their expected period of use and benefit.  They are all routine and short-term in nature.  Deposits are amounts held by landlords or other parties which will be returned or offset upon satisfaction of a lease or other contractual arrangement.  See note 16 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2022 for further discussion of the firm’s furniture, equipment, and leasehold improvements.  Intangible assets represent the carrying value of the JVB broker-dealer license. 

 

32

 

Accounts payable and other liabilities consisted of the following.

 

 

ACCOUNTS PAYABLE AND OTHER LIABILITIES

(Dollars in Thousands)

 

  

March 31, 2023

  

December 31, 2022

 

Accounts payable

 $970  $891 

Redeemable financial instruments accrued interest

  207   - 

Accrued income tax

  145   70 

Accrued interest payable

  457   452 

Accrued interest on securities sold, not yet purchased

  847   1,561 

Payroll taxes payable

  711   1,565 

Counterparty cash collateral

  2,290   4,301 

Accrued expense and other liabilities

  3,372   2,599 

Accounts payable and other liabilities

 $8,999  $11,439 

 

 

The redeemable financial instrument accrued interest represents accrued interest on the JKD Investor redeemable financial instrument.  See note 15.

 

When the Company enters into a reverse repo, the Company obtains collateral in excess of the principal of the reverse repo.  The Company accepts collateral in the form of liquid securities or cash.  To the extent the Company receives cash collateral, the Company includes it as a component of other liabilities (counterparty cash collateral) in the table above. 

 

When the Company enters into repo transactions, the Company provides collateral to the Company’s repo counterparty in excess of the principal balance of the repo.  If the value of the securities the Company provides as collateral increases, the Company may request a return of its collateral with a value equal to such increase.  In some cases, the repo counterparty will return cash instead of securities.  In that case, the Company includes the cash returned as a component of other liabilities (counterparty cash collateral) in the table above.  See note 10 and 23.

  

33

 
 

14.  VARIABLE INTEREST ENTITIES

 

As a general matter, a reporting entity must consolidate a variable interest entity (“VIE”) when it is deemed to be the primary beneficiary.  The primary beneficiary is the entity that has both (a) the power to direct the matters that most significantly impact the VIE’s financial performance and (b) a significant variable interest in the VIE.

 

Consolidated VIEs

 

The Company determined it was the primary beneficiary of several VIEs and therefore, has consolidated them.  The following table provides certain information regarding the consolidated VIEs:

 

CARRYING VALUE OF CONSOLIDATED VARIABLE INTEREST ENTITES

(Dollars in Thousands)

 

  

As of March 31, 2023

  

As of December 31, 2022

 

Cash and cash equivalents

 $58  $19 

Other investments, at fair value

  -   - 

Investment in equity method affiliates

  60   23 

Non-controlling interest

  (37)  (15)

Investment in consolidated VIEs

 $81  $27 

 

The maximum potential loss the Company could incur related to the consolidated VIEs is the investment in consolidated VIEs shown in the table above plus the Company has to fund additional working capital to the equity method investees of certain of the consolidated VIEs.  The total amount of working capital borrowed was $0 and $0 as of  March 31, 2023 and December 31, 2022, respectively.

 

The Company’s Principal Investing Portfolio

 

Included in other investments, at fair value in the consolidated balance sheets are investments in several VIEs.  In each case, the Company determined it was not the primary beneficiary.  The maximum potential financial statement loss the Company would incur if the VIEs were to default on all their obligations would be the loss of the carrying value of these investments as well as any future investments the Company were to make.  As of  March 31, 2023 and December 31, 2022, there were $10,065 and $8,464, respectively, of unfunded commitments to VIEs in which the Company had invested.  Other than its investment in these entities, the Company did not provide financial support to these VIEs during the three months ended March 31, 2023 and 2022 and had no liabilities, contingent liabilities, or guarantees (implicit or explicit) related to these VIEs at March 31, 2023 and December 31, 2022.  See table below. 

 

For each investment management contract entered into by the Company, the Company assesses whether the entity being managed is a VIE and if the Company is the primary beneficiary.  Certain of the Investment Vehicles managed by the Company are VIEs.  Under the current guidance of ASU 2015-12, the Company has concluded that its asset management contracts are not variable interests.  Currently, the Company has no other interests in entities it manages that are considered variable interests and are considered significant.  Therefore, the Company is not the primary beneficiary of any VIEs that it manages.

 

The Company’s Trading Portfolio

 

From time to time, the Company may acquire an interest in a VIE through the investments it makes as part of its trading operations, which are included as investments-trading or securities sold, not yet purchased in the consolidated balance sheets.  Due to the high volume of trading activity in which the Company engages, the Company does not perform a formal assessment of each individual investment within its trading portfolio to determine if the investee is a VIE and if the Company is a primary beneficiary.  Even if the Company were to obtain a variable interest in a VIE through its trading portfolio, the Company would not be deemed to be the primary beneficiary for two main reasons: (a) the Company does not usually obtain the power to direct activities that most significantly impact any investee’s financial performance  and (b) a scope exception exists within the consolidation guidance for cases where the reporting entity is a broker-dealer and any control (either as the primary beneficiary of a VIE or through a controlling interest in a voting interest entity) was deemed to be temporary.  In the unlikely case that the Company obtained the power to direct activities and obtained a significant variable interest in an investee in its trading portfolio that was a VIE, any such control would be deemed to be temporary due to the rapid turnover of the Company’s trading portfolio. 

 

The following table presents the carrying amounts of the assets in the Company’s consolidated balance sheets related to the Company’s variable interests in identified VIEs with the exception of (i) the two trust VIEs that hold the Company’s junior subordinated notes (see note 16) and (ii) any security that represents an interest in a VIE that is included in investments-trading or securities sold, not yet purchased in the Company’s consolidated balance sheets. The table below shows the Company’s maximum exposure to loss associated with these identified nonconsolidated VIEs in which it holds variable interests at March 31, 2023 and December 31, 2022.

 

CARRYING VALUE OF VARIABLE INTERESTS IN NON-CONSOLIDATED VARIABLE INTEREST ENTITIES

(Dollars in Thousands)

 

  

As of March 31, 2023

  

As of December 31, 2022

 

Other investments, at fair value

 $8,929  $10,554 

Investments in equity method affiliates

  3,568   3,376 

Maximum exposure

 $12,497  $13,930 

  

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15.  REDEEMABLE FINANCIAL INSTRUMENTS

 

Redeemable financial instruments consisted of the following.

 

REDEEMABLE FINANCIAL INSTRUMENTS

(Dollars in Thousands)

 

  

As of March 31, 2023

  

As of December 31, 2022

 

JKD Capital Partners I LTD

 $7,868  $7,868 
  $7,868  $7,868 



On February 13, 2023, the Operating LLC and JKD Investor entered into Amendment No. 2 (the “JKD Amendment") to the Investment Agreement, dated October 3, 2016, as amended (the “ JKD Investment Agreement”). As a result of the JKD Amendment, effective as of January 1, 2023, the term “Team Expenses” (which expenses reduce the investment return amount payable to JKD Investor under the Investment Agreement) in the JKD Investment Agreement was amended to mean an amount equal to (i) $150,000 per calendar quarter (or $600,000 per year), plus (ii) any direct expenses (as described in the JKD Investment Agreement). Prior to the JKD Amendment, the term “Team Expenses” in the JKD Investment Agreement was defined to mean an amount equal to (i) $175,000 (or $700,000 per year) per calendar quarter, plus (ii) any such direct expenses.

 

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16. DEBT 

 

The Company had the following debt outstanding.

 

DETAIL OF DEBT

(Dollars in Thousands)

 

  

As of

  

As of

 

Interest

    

Description

 

March 31, 2023

  

December 31, 2022

 

Rate Terms

 

Interest (2)

 

Maturity

Non-convertible debt:

             

10.00% senior note (the "2020 Senior Notes")

 $4,500  $4,500 

Fixed

 

10.00%

 

January 2024

              

Junior subordinated notes: (1)

             

Alesco Capital Trust I

  28,125   28,125 

Variable

 

8.80%

 

July 2037

Sunset Financial Statutory Trust I

  20,000   20,000 

Variable

 

9.31%

 

March 2035

Less unamortized discount

  (23,452)  (23,601)     
   24,673   24,524      
              

Byline Bank

  -   - 

Variable

 

NA

 

December 2023

Total

 $29,173  $29,024      

 

 

(1)

The junior subordinated notes listed represent debt the Company owes to the two trusts noted above. The total par amount owed by the Company to the trusts is $49,614.  However, the Company owns the common stock of the trusts in a total par amount of $1,489.  The Company pays interest (and at maturity, principal) to the trusts on the entire $49,614 junior notes outstanding. However, the Company receives back from the trusts the pro rata share of interest and principal on the common stock held by the Company.  These trusts are VIEs and the Company does not consolidate them even though the Company holds the common stock.  The Company carries the common stock on its balance sheet at a value of $0. The junior subordinated notes are recorded at a discount to par.  When factoring in the discount, the yield to maturity of the junior subordinated notes as of March 31, 2023 on a combined basis was 19.87% assuming the variable rate in effect on the last day of the reporting period remains in effect until maturity.

 

(2)

Represents the interest rate in effect as of the last day of the reporting period.  



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The 2020 Senior Notes

 

On January 31, 2022, the Operating LLC and JKD Investor entered into a note purchase agreement (the "2022 Purchase Agreement"), pursuant to which, among other things, on such date, (i) JKD Investor paid to the Operating LLC an additional $2,250 and (ii) in consideration for such funds, the Operating LLC issued to JKD Investor an amended and restated senior promissory note in the aggregate principal amount of $4,500 (the “Amended and Restated Note”), which Amended and Restated Note amended and restated the JKD Note in its entirety.  The 2022 Purchase Agreement contains customary representations and warranties on the part of each of JKD Investor and the Operating LLC.  The Company used these proceeds to retire $2,250 of existing 2020 Senior Notes held by RNCS.

 

The Amended and Restated Note evidences Operating LLC’s obligation to repay to JKD Investor (i) the original principal amount of $2,250 paid by JKD Investor to the Operating LLC under the Original Purchase Agreement, plus (ii) the additional $2,250 paid by JKD Investor to the Operating LLC under the 2022 Purchase Agreement.  Pursuant to the Amended and Restated Note, which is substantially identical to the JKD Note, the unpaid principal amount and all accrued but unpaid interest thereunder will be due and payable in full on January 31, 2024; provided, that, at any time after January 31, 2023 and prior to January 31, 2024, the holder of the Amended and Restated Note may, with at least 31 days’ prior written notice from the holder to the Operating LLC, declare the entire unpaid principal amount outstanding and all interest accrued and unpaid on the Amended and Restated Note to be immediately due and payable.

 

The Amended and Restated Note accrues interest on the unpaid principal amount from January 31, 2022 until maturity at a rate equal to 10% per year. Interest on the Amended and Restated Note is payable in cash quarterly on each January 1, April 1, July 1, and October 1, commencing on April 1, 2022. Under the Amended and Restated Note, upon the occurrence or existence of any “Event of Default” thereunder, the outstanding principal amount is (or in certain instances, at the option of the holder thereof, may be) immediately accelerated. Further, upon the occurrence of any “Event of Default” under the Amended and Restated Note and for so long as such Event of Default continues, all principal, interest and other amounts payable under the Amended and Restated Note will bear interest at a rate equal to 11% per year.  The Amended and Restated Note could not be prepaid in whole or in part prior to January 31, 2023. The Amended and Restated Note may, with at least 31 days’ prior written notice from the Operating LLC to the holder thereof, be prepaid in whole or in part at any time following January 31, 2023 without the prior written consent of the holder and without penalty or premium.

 

The Amended and Restated Note and the payment of all principal, interest and any other amounts payable thereunder are senior obligations of the Operating LLC and will be senior to any Indebtedness (as defined in the Amended and Restated Note) of the Operating LLC outstanding as of and issued following January 30, 2020 (the original issuance date of the JKD Note).  Pursuant to the Amended and Restated Note, following January 31, 2022, the Operating Company may not incur any Indebtedness that is a senior obligation to the Amended and Restated Note.

 

The 2017 Convertible Note

 

On March 10, 2017, the Operating LLC entered into a securities purchase agreement (the “2017 Convertible Note Purchase Agreement”), by and among the Operating LLC and DGC Trust.

 

Pursuant to the 2017 Convertible Note Purchase Agreement, the DGC Trust agreed to purchase from the Operating LLC, and the Operating LLC agreed to issue and to sell to the DGC Trust, a convertible senior secured promissory note (the “2017 Convertible Note”) in the aggregate principal amount of $15,000.  On March 10, 2017, the DGC Trust paid to the Operating LLC $15,000 in cash in consideration for the 2017 Convertible Note.  As required pursuant to ASC 470, the Company accounted for the 2017 Convertible Note as conventional convertible debt and did not allocate any amount of the proceeds to the embedded equity option.

 

Under the 2017 Convertible Note Purchase Agreement, the Operating LLC and the DGC Trust offered customary indemnifications.  Further, the Operating LLC and the DGC Trust provided each other with customary representations and warranties, the Company provided limited representations and warranties to the DGC Trust, and each of the Operating LLC and the Company made customary affirmative covenants.

 

Pursuant to the 2017 Convertible Note Purchase Agreement, the Company agreed to execute an amendment (the “LLC Agreement Amendment”) to the Amended and Restated Limited Liability Company Agreement of the Operating LLC dated as of December 16, 2009, by and among the Operating LLC and its members, as amended (the “LLC Agreement”) at such time in the future as all of the other members execute the LLC Agreement Amendment.  The LLC Agreement Amendment provided, among other things, that the board of managers would initially consist of Daniel G. Cohen, as chairman of the Operating LLC’s board of managers, Lester R. Brafman (the Company’s current chief executive officer), and Joseph W. Pooler, Jr. (the Company’s current executive vice president, chief financial officer, and treasurer).  The LLC Agreement Amendment also provided that Daniel G. Cohen would not be able to be removed from the Operating LLC’s board of managers or as chairman of the Operating LLC’s board of managers other than for cause or under certain limited circumstances.  On October 30, 2019, each of the members of Cohen & Company, LLC executed the LLC Agreement Amendment.  The outstanding principal amount under the 2017 Convertible Note was due and payable on March 10, 2022 provided that the Operating LLC could, in its sole discretion, extend the maturity date for an additional one-year period, in each case unless the 2017 Convertible Note was earlier converted into units of membership interests in the Operating LLC at the conversion rate of $1.45 per unit. 

 

Effective March 10, 2020, the Operating LLC exercised its option to extend the 2017 Convertible Note's maturity date to March 10, 2022.  

 

On March 20, 2022, the DGC Trust elected to convert the 2017 Convertible Note into an aggregate of 10,344,827 units of membership interest in the Operating LLC at the conversion rate specified in the 2017 Convertible Note of $1.45 per unit. As a result of such conversion, the 2017 Convertible Note was cancelled in its entirety.

 

Pursuant to the terms and conditions of the Operating LLC’s Amended and Restated Limited Liability Company Agreement, dated December 16, 2009, as amended, a holder of LLC units of membership interest ("LLC Units") may cause the Operating LLC to redeem such LLC Units at any time for, at the Company’s option, (A) cash or (B) one share of the Company’s common stock, par value $0.01 per share (“Common Stock”), for every ten LLC Units  Accordingly, the LLC Units may be redeemed at any time by the DGC Trust into an aggregate of 1,034,482 shares of Common Stock.

 

Pursuant to the DGC Trust’s governing documents, Daniel G. Cohen has the ability to acquire at any time any of the DGC Trust’s assets, including the LLC Units, by substituting other property of an equivalent value without the approval or consent of any person, including any trustee or beneficiary of the DGC Trust.

 

37

 

Junior Subordinated Notes

 

The Company assumed $49,614 aggregate principal amount of junior subordinated notes outstanding at the time of the AFN Merger. The Company recorded the debt at fair value on the acquisition date. Any difference between the fair value of the junior subordinated notes on the AFN Merger date and the principal amount of debt is amortized into earnings over the estimated remaining life of the underlying debt as an adjustment to interest expense.

 

The junior subordinated notes are payable to two special purpose trusts:

 

1. Alesco Capital Trust I: $28,995 in aggregate principal amount issued in June 2007.  The notes mature on July 30, 2037 and may be called by the Company at any time. The notes accrue interest payable quarterly at a floating interest rate equal to LIBOR plus 400 basis points per annum through July 30, 2037. All principal is due at maturity. Alesco Capital Trust I simultaneously issued 870 shares of Alesco Capital Trust I’s common securities to the Company for a purchase price of $870, which constitutes all of the issued and outstanding common securities of Alesco Capital Trust I.

 

2. Sunset Financial Statutory Trust I (Sunset Financial Trust): $20,619 in aggregate principal amount issued in March 2005. The notes mature on March 30, 2035. The notes accrue interest payable quarterly at a floating rate of interest of 90-day LIBOR plus 415 basis points. All principal is due at maturity. Sunset Financial Trust simultaneously issued 619 shares of Sunset Financial Trust’s common securities to the Company for a purchase price of $619, which constitutes all of the issued and outstanding common securities of Sunset Financial Trust.

 

Alesco Capital Trust I and Sunset Financial Trust (collectively, the “Trusts”) described above are VIEs pursuant to variable interest provisions included in FASB ASC 810 because the holders of the equity investment at risk do not have adequate decision making ability over the Trusts’ activities. The Company is not the primary beneficiary of the Trusts as it does not have the power to direct the activities of the Trusts. The Trusts are not consolidated by the Company and, therefore, the Company’s consolidated financial statements include the junior subordinated notes issued to the Trusts as a liability, and the investment in the Trusts’ common securities as an asset. The common securities were deemed to have a fair value of $0 as of the AFN Merger date. These are accounted for as cost method investments; therefore, the Company does not adjust the value at each reporting period. Any income generated on the common securities is recorded as interest income, a component of interest expense, net, in the consolidated statement of operations.

 

The junior subordinated notes have several financial covenants. Since the AFN Merger, Cohen & Company Inc. has been in violation of one covenant of Alesco Capital Trust I. As a result of this violation, Cohen & Company Inc. is prohibited from issuing additional debt that is either subordinated to or pari passu with Alesco Capital Trust I debt. This violation does not prohibit Cohen & Company Inc. from issuing senior debt or the Operating LLC from issuing debt of any kind. Cohen & Company Inc. is in compliance with all other covenants of the junior subordinated notes. The Company does not consider this violation to have a material adverse impact on its operations or on its ability to obtain financing in the future.

 

The U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it will cease publication of the most commonly used U.S. dollar LIBOR tenors after June 30, 2023, though the less commonly used tenors ceased publication on December 31, 2021. U.S. federal banking agencies have issued guidance to strongly encourage institutions to cease entering into contracts that reference LIBOR by December 31, 2021. Central banks and regulators in the U.S. and other jurisdictions are working to implement the transition to suitable replacements for LIBOR.

 

The junior subordinated notes payable to both Alesco Capital Trust I and Sunset Financial Trust incur interest that is calculated based on LIBOR. The junior subordinated notes payable to Alesco Capital Trust I provide for the manner in which interest is calculable under such notes if LIBOR is no longer published. As a result, once LIBOR is no longer published, the interest payable under the junior subordinated notes payable to Alesco Capital Trust I will instead bear interest with reference to a floating rate equal to the “Base Rate,” which will be equal to the greater of (i) the "prime rate" for dollar denominated loans quoted by leading banks in the City of New York and (ii) the "Federal Funds Rate," which is calculated as the weighted average of the rate on overnight federal funds transactions with members of the Federal Reserve System only arranged by federal funds brokers, as published as of such day by the Federal Reserve Bank of New York, plus 0.50% per annum.

 

The junior subordinated notes payable to Sunset Financial Trust do not provide for the manner in which interest is calculable under such notes if LIBOR is no longer published. As a result, once LIBOR is no longer published, the interest payable under the junior subordinated notes payable to Sunset Financial Trust will be payable in accordance with the Adjustable Interest Rate (LIBOR) Act of 2021 (the “LIBOR Act”). The LIBOR Act was passed to provide a clear and uniform federal solution for transitioning existing U.S. law contracts that either lack or contain insufficient contractual provisions addressing the permanent cessation of LIBOR by providing for the transition to a replacement rate, which will be based on the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements, backed by U.S. Treasury securities.

 

38

 

Byline Bank

 

On October 28, 2020, (i) the Company entered into a loan agreement (the “Original Byline Loan Agreement”) with Byline Bank, as lender, and JVB, as borrower, by and among Byline Bank, the Company, the Operating LLC, JVB Holdings, JVB, and C&Co PrinceRidge Holdings, LP, pursuant to which Byline Bank agreed to make loans at JVB's request from time to time in the aggregate amount of up to $7,500 and (ii) JVB and Byline Bank entered into a Revolving Note and Cash Subordination Agreement (the "Original Byline Note and Subordination Agreement"), pursuant to which, among other things, Byline Bank agreed to make loans at JVB’s request from time to time in the aggregate amount of up to $17,500.  The Company drew $17,500 under the Original Byline Note and Subordination Agreement  during 2021 and repaid it in full during 2021. The Company and the Company’s subsidiaries, the Operating LLC and JVB Holdings, served as guarantors of both the $7,500 and $17,500 facilities.

 

On December 21, 2021, (i) JVB and Byline Bank entered into the Amended and Restated Revolving Note and Cash Subordination Agreement (the “Amended and Restated Byline Loan Agreement”), which amended and restated the Original Byline Loan Agreement in its entirety, and (ii) the Original Byline Note and Subordination Agreement was terminated by the parties thereto. Pursuant to the Amended and Restated Byline Loan Agreement, Byline Bank agreed to make loans to JVB, at JVB’s request from time to time, in the aggregate amount of up to $25,000. Effective December 21, 2021, the Company received approval from FINRA to treat draws under the Amended and Restated Byline Loan Agreement as qualified subordinated debt.  As such, draws may be treated as an increase in net capital for purposes of FINRA Rule 15(c) 3-1. 

 

On December 21, 2022, Byline Bank and JVB entered into the Second Amended and Restated Revolving Note and Cash Subordination Agreement (the “Second Amended and Restated Agreement”), which amended and restated the Amended and Restated Byline Loan Agreement in its entirety. The primary purposes of the amendment and restatement of the Amended and Restated Byline Loan Agreement were (i) to replace the provisions therein relating to London Interbank Offered Rate (LIBOR) with provisions relating to SOFR, and (ii) to extend the lending period and maturity date of the loans under the Amended and Restated Byline Loan Agreement by an additional year.  Effective December 22, 2022, the Company received approval from FINRA to treat draws under the Second Amended and Restated Agreement as qualified subordinated debt.  As such, draws may be treated as an increase in net capital for purposes of FINRA Rule 15(c) 3-1. 

 

Pursuant to the Second Amended and Restated Agreement, Byline Bank agreed to make loans to JVB, at JVB’s request from time to time, in the aggregate amount of up to $25,000.  Loans (both principal and interest) made by Byline Bank to JVB under the Second Amended and Restated Agreement are scheduled to mature and become immediately due and payable in full on December 21, 2024. In addition, loans may be made under the Second Amended and Restated Agreement until December 21, 2023.

 

Loans under the Second Amended and Restated Agreement will bear interest at a per annum rate equal to the Term SOFR Rate (as such term is defined in the Second Amended and Restated Agreement) plus 6.0%, provided that in no event can the interest rate be less than 7.0%. Under the Second Amended and Restated Agreement, JVB is required to pay on a quarterly basis an undrawn commitment fee at a per annum rate equal to 0.50% of the undrawn portion of Byline Bank's $25,000 commitment. JVB is also required to pay on each anniversary date of the Second Amended and Restated Agreement a commitment fee at a per annum rate equal to 0.50% of Byline Bank's $25,000 commitment under the Second Amended and Restated Agreement. Pursuant to the terms of the Second Amended and Restated Agreement, JVB paid to Byline Bank a commitment fee of $125.

 

JVB  may request a reduction in Byline Bank's $25,000 commitment in a minimum amount of $1,000 and multiples of $500 thereafter or such lesser amount as would bring the $25,000 loan commitment to the total principal amount of loans advanced under the Second Amended and Restated Agreement.

 

The obligations of JVB under the Second Amended and Restated Agreement are guaranteed by the Company, the Operating LLC, and JVB, and are secured by a lien on all JVB's property, including its 100% ownership interest in all the outstanding units of membership interests of JVB.  Pursuant to the Second Amended and Restated Agreement, Byline Bank and JVB provide customary representations and warranties for a transaction of this type.

 

The Second Amended and Restated Agreement also includes customary covenants for a transaction of this type, including covenants limiting the indebtedness that can be incurred by JVB and Holdings LP and restricting the JVB’s ability to make certain loans and investments. Additionally, under the Second Amended and Restated Agreement, JVB  may not permit its (A) net worth to be less than $85,000 at any time from December 22, 2022 through and including June 30, 2023, and $90,000 from July 1, 2023 and thereafter; and (B) excess net capital to be less than $40,000 at any time. Further, any loans outstanding under the Second Amended and Restated Agreement may not exceed 0.25 times the JVBs tangible net worth.

 

Pursuant to the Second Amended and Restated Agreement, JVB and the Operating LLC may repay their existing outstanding indebtedness under the Second Amended and Restated Agreement, provided, however, that if the anticipated payment relates to the payment of any dividend by JVB, on the date such payment is made, and immediately after making such payment, the loans outstanding under the Second Amended and Restated Agreement may not exceed $10,000.

 

The Second Amended and Restated Agreement contains customary events of default for a transaction of this type. If an event of default under the Second Amended and Restated Agreement occurs and is continuing, then Byline Bank  may declare and cause all or any part of the loans thereunder and all other liabilities outstanding under the Second Amended and Restated Agreement to become immediately due and payable.

 

As of  March 31, 2023 and 2022, no amounts were outstanding under the Amended and Restated Byline Loan Agreement or the Second Amended and Restated Agreement, and the Company was in compliance with all financial covenants thereunder.

 

 

39

 

In the financial statements and other footnotes set forth in this Quarterly Report on Form 10-Q, the term "Byline LOC" refers to either the Original Byline Note and Subordination Agreement or the Amended and Restated Byline Loan Agreement, depending on the applicable time period.  

 

Interest Expense, net 

 

INTEREST EXPENSE

(Dollars in Thousands)

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Junior subordinated notes

 $1,209  $657 

2020 Senior Notes

  111   119 

2017 Convertible Note

  -   327 

Byline LOC

  65   72 

Redeemable Financial Instrument - JKD Capital Partners I LTD

  207   176 
  $1,592  $1,351 

   

40

 

 

17. EQUITY 

 

Stockholders’ Equity

 

Common Equity: The following table reflects the activity for the three months ended March 31, 2023 related to the number of shares of unrestricted Common Stock that the Company had issued.

 

  

Common Stock

 
  

Shares

 

December 31, 2022

  1,433,283 

Vesting of shares

  102,824 

Shares withheld for employee taxes and retired

  (18,476)

March 31, 2023

  1,517,631 

 

Series E Voting Non-Convertible Preferred Stock: Each share of the Company’s Series E Voting Non-Convertible Preferred Stock (“Series E Preferred Stock”) has no economic rights but entitles the holders thereof to vote the Series E Preferred Stock on all matters presented to the Company’s stockholders.  For every ten shares of Series E Preferred Stock, the holders are entitled to one vote on any such matter.  Daniel G. Cohen, the Company’s chairman, is the sole holder of all 4,983,557 shares of Series E Preferred Stock issued and outstanding as of March 31, 2023. For a more detailed description of these shares see note 21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

Series F Voting Non-Convertible Preferred Stock:  On December 23, 2019, the Company’s board of directors adopted a resolution that reclassified 25,000,000 authorized but unissued shares of Preferred Stock, par value $0.001 per share, of the Company as a series of Preferred Stock designated as Series F Voting Non-Convertible Preferred Stock (“Series F Preferred Stock”).  Pursuant to the Securities Purchase Agreement, dated December 30, 2019, by and among the Company, the Operating LLC, Daniel G. Cohen, and the DGC Trust, the Company issued 12,549,273 Series F Preferred Stock to Daniel G. Cohen and 9,880,268 Series F Preferred Stock to the DGC Trust. The Series F Preferred Stock have substantially the same rights as the Series E Preferred Stock.  The holders of the Series F Preferred Stock are not entitled to receive any dividends or distributions (whether in cash, stock or property of the Company).  The holders of Series F Preferred Stock and Common Stock are required to vote, together as a single class on all matters with respect to which a vote of the stockholders of the Company is required or permitted.  Each outstanding share of Series F Preferred Stock entitles the holder to one vote for every ten shares of Series F Preferred Stock on each matter submitted to the holders for their vote.  As of  March 31, 2023, there were 22,429,541 shares of Series F Preferred Stock issued and outstanding.  For a more detailed description of these shares see note 21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

Cash Dividends

 

During the three months ended March 31, 2023, the Company declared a cash dividend of $0.25 per common share, which dividend was paid on April 5, 2023.  During the three months ended  March 31, 2022, the Company declared cash dividends of $1.00 per common share, which included a special cash dividend of $0.75 per share, which dividends were paid on April 5, 2022.

 

During the three months ended March 31, 2023, Cohen & Company Inc. received and surrendered units of the Operating LLC. The following table displays the amount of units surrendered (net of receipts) by Cohen & Company Inc.

 

  

Operating LLC

 
  

Membership Units

 

Other units related to UIS Agreement

  843,480 

Total

  843,480 

 

The Company recognized a net increase in additional paid in capital of $582 and a net decrease in AOCI of $12 with an offsetting decrease in non-controlling interest of $570 in connection with the acquisition and surrender of additional units of the Operating LLC during the three months ended March 31, 2023. The following schedule presents the effects of changes in Cohen & Company Inc.’s ownership interest in the Operating LLC on the equity attributable to Cohen & Company Inc. for the three months ended March 31, 2023 and 2022.

 

 

  

Three Months Ended

  

Three Months Ended

 
  

March 31, 2023

  

March 31, 2022

 

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

 $(2,637) $(7,612)

Transfers (to) from the non-controlling interest:

        

Increase / (decrease) in Cohen & Company Inc. paid in capital for the acquisition / (surrender) of additional units in consolidated subsidiary, net

  582   (292)

Changes from net income / (loss) attributable to Cohen & Company Inc. and transfers (to) from the non-controlling interest

 $(2,055) $(7,904)

 

 

41

 

 

Detail of Non-Controlling Interest

 

ROLLFORWARD OF NON-CONTROLLING INTERESTS

(Dollars in Thousands)

 

  

Operating LLC

  

Other Consolidated Subsidiaries

  

Total

 

December 31, 2022

 $47,270  $17  $47,287 

Non-controlling interest share of (loss)

  (7,514)  97   (7,417)

Other comprehensive (loss)

  35   -   35 

Acquisition / (surrender) of additional units of consolidated subsidiary

  (570)  -   (570)

Equity-based compensation

  789   -   789 

Shares withheld for employee taxes

  (118)  -   (118)

Investment in non-convertible non-controlling interest of Operating LLC

  -   38   38 

Distributions to convertible non-controlling interest of Cohen & Company Inc.

  (1,187)  -   (1,187)

Redemption of convertible non-controlling interest units

  (834)  -   (834)

March 31, 2023

 $37,871  $152  $38,023 

 

The Operating LLC non-controlling interest is included as convertible non-controlling interest in the consolidated statement of operations.  The other components on non-controlling interest are included as non-convertible non-controlling interest in the statement of operations.  See note 16.  See note 21 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for a discussion of the Company’s non-controlling interests.

 

42

 
 

18. INCOME TAXES 

 

Cohen & Company Inc. is treated as a C corporation for United States federal income tax purposes. A U.S. C corporation is subject to a federal tax rate of 21%.  The Company's effective tax rate is significantly different than this rate for the following reasons:

 

1.  Cohen & Company Inc. consolidates the Operating LLC but only owns a minority economic interest in the Operating LLC.  For the three months ended March 31, 2023, Cohen & Company Inc. owned 27.14% of the economic interests of the Operating LLC (on average) and is allocated the same percentage of income generated by the Operating LLC.  To the extent Cohen & Company Inc. incurs tax obligations on this, the related tax expense is recognized in these consolidated financial statements.  The remaining 72.86% that is allocated to the non-controlling members of the Operating LLC is subject to taxation on the members' tax returns.  

 

2. The Operating LLC itself consolidates certain pass-through entities.  Therefore, the income/(loss) of these entities are included in the Company's consolidated results but no tax expense/(benefit) related to the unowned portions is included.  

 

3.  There are state, local, and foreign taxes to which the Operating LLC or its subsidiaries are subject to, which are included in the effective tax rate.  

 

4.  The Company also has valuation allowances applied against its carryforward (net operating loss and net capital loss) deferred tax assets as well as its tax over book basis in the Operating LLC.  Valuation allowances are applied to deferred tax assets when management determines that the assets may not be fully realized.  This determination requires significant judgement and is primarily based on management's expectations regarding the generation of future taxable income.  ASC 740 indicates that all available evidence should be considered when assessing the need for and the appropriate level of a valuation allowance.  All available evidence includes historical information supplemented by all currently available information about future periods.  

 

43

 
 

19. NET CAPITAL REQUIREMENTS

 

JVB is subject to the net capital provision of Rule 15c3-1 under the Exchange Act, which requires the maintenance of minimum net capital, as defined therein.  As of March 31, 2023, JVB's minimum required net capital was $250, and actual net capital was $48,388, which exceeded the minimum requirements by $48,138.  CCFESA, a subsidiary of the Company, is regulated by the ACPR in France. CCFESA is subject to certain regulatory capital requirements in accordance with Articles L.533-2 et seq. of the French Financial and Monetary Code, implementing the new framework set out in the Investment Firm Regulation ("IFR") and the Investment Firm Directive ("IFD").  As of  March 31, 2023, the total minimum required net liquid capital was $522 and actual net liquid capital in CCFESA was $1,432, which exceeded the minimum requirement by $910. CCFEL cancelled its license with the CBI effective April 7, 2022.

 

44

 
 

20. EARNINGS / (LOSS) PER COMMON SHARE

 

The following table presents a reconciliation of basic and diluted earnings / (loss) per common share for the periods indicated.

 

EARNINGS / (LOSS) PER COMMON SHARE

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

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

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

 $(2,637) $(7,612)

Add: Net income (loss) attributable to the convertible non-controlling interest of Cohen & Company Inc.

  (7,514)  - 

Add: Interest expense incurred on dilutive convertible notes

  -   - 

Add / (deduct): Adjustment (2)

  435   - 

Net income / (loss) on a fully converted basis

 $(9,716) $(7,612)
         

Weighted average common shares outstanding - Basic

  1,489,515   1,394,954 

Unrestricted Operating LLC Units exchangeable into Cohen & Company Inc. shares (1)

  3,997,968   - 

Restricted units or shares

  -   - 

Shares issuable upon conversion of dilutive convertible notes

  -   - 

Weighted average common shares outstanding - Diluted (3)

  5,487,483   1,394,954 
         

Net income / (loss) per common share - Basic

 $(1.77) $(5.46)
         

Net income / (loss) per common share - Diluted

 $(1.77) $(5.46)

 

(1)

The LLC units not held by Cohen & Company Inc. (that is, those held by the non-controlling interest) may be redeemed and exchanged into shares of the Company on a ten-for-one basis. The LLC Units not held by Cohen & Company Inc. are redeemable, at the member’s option at any time, for (i) cash in an amount equal to the average of the per share closing prices of the Common Stock for the ten consecutive trading days immediately preceding the date the Company receives the member’s redemption notice, or (ii) at the Company’s option, one tenth of a share of the Common Stock, subject, in each case, to appropriate adjustment upon the occurrence of an issuance of additional shares of the Common Stock as a dividend or other distribution on the outstanding Common Stock, or a further subdivision or combination of the outstanding shares of the Common Stock. These LLC Units are not included in the computation of basic earnings per share.  These LLC Units enter into the computation of diluted net income (loss) per common share when the effect is not anti-dilutive using the if-converted method.

(2)

An adjustment is included because the Company would have incurred a higher income tax expense or realized a higher income tax benefit, as applicable, if the LLC Units had been converted at the beginning of the period.

(3)

Potentially diluted securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Unrestricted LLC Units exchangeable into Cohen & Company Inc. shares

  -   3,043,802 

2017 Convertible Note Units

  -   896,552 

Restricted Common Stock

  14,614   81,792 

Restricted Operating LLC units

  2,536   44,102 
   17,150   4,066,248 

 

45

 
 

21. COMMITMENTS AND CONTINGENCIES

 

Legal and Regulatory Proceedings

 

From time to time, the Company is a party to various routine legal proceedings, claims, and regulatory inquiries arising out of the ordinary course of the Company’s business. Management believes that the results of these routine legal proceedings, claims, and regulatory matters will not have a material adverse effect on the Company’s financial condition, or on the Company’s operations and cash flows. However, the Company cannot estimate the legal fees and expenses to be incurred in connection with these routine matters and, therefore, is unable to determine whether these future legal fees and expenses will have a material impact on the Company’s operations and cash flows. It is the Company’s policy to expense legal and other fees as incurred. 

 

46

  
 

22. SEGMENT AND GEOGRAPHIC INFORMATION 

 

The Company operates within three business segments: Capital Markets, Asset Management, and Principal Investing. See note 1.  The Company’s business segment information was prepared using the following methodologies and generally represents the information that is relied upon by management in its decision- making processes:  (a) revenues and expenses directly associated with each business segment are included in determining net income / (loss) by segment, and (b) indirect expenses (such as general and administrative expenses including executive and indirect overhead costs) not directly associated with specific business segments are not allocated to the business segments’ statements of operations.  Accordingly, the Company presents segment information consistent with internal management reporting. See note (1) in the table below for more detail on unallocated items. The following tables present the financial information for the Company’s segments for the periods indicated.

 

SEGMENT INFORMATION

Statement of Operations Information

Three Months Ended March 31, 2023

 

  

Capital

  

Asset

  

Principal

  

Segment

  

Unallocated

     
  

Markets

  

Management

  

Investing

  

Total

  

(1)

  

Total

 

Net trading

 $8,210  $-  $-  $8,210  $-  $8,210 

Asset management

  -   2,025   -   2,025   -   2,025 

New issue and advisory

  900   -   -   900   -   900 

Principal transactions and other income

  -   240   (2,551)  (2,311)  -   (2,311)

Total revenues

  9,110   2,265   (2,551)  8,824   -   8,824 

Compensation

  6,946   1,431   235   8,612   1,925   10,537 

Other Operating Expense

  3,649   568   218   4,435   1,335   5,770 

Total operating expenses

  10,595   1,999   453   13,047   3,260   16,307 

Operating income (loss)

  (1,485)  266   (3,004)  (4,223)  (3,260)  (7,483)

Interest income (expense)

  (65)  -   -   (65)  (1,527)  (1,592)

Income (loss) from equity method affiliates

  -   -   (395)  (395)  -   (395)

Other non-operating income

  -   -   -   -   -   - 

Income (loss) before income taxes

  (1,550)  266   (3,399)  (4,683)  (4,787)  (9,470)

Income tax expense (benefit)

  -   -   -   -   584   584 

Net income (loss)

  (1,550)  266   (3,399)  (4,683)  (5,371)  (10,054)

Less: Net income (loss) attributable to the non-convertible non-controlling interest of the Operating LLC

  -   114   (17)  97      97 

Enterprise net income (loss)

  (1,550)  152   (3,382)  (4,780)  (5,371)  (10,151)

Less: Net income (loss) attributable to the convertible non-controlling interest of Cohen & Company Inc.

  -   -   -   -   (7,514)  (7,514)

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

 $(1,550) $152  $(3,382) $(4,780) $2,143  $(2,637)
                         

Other statement of operations data

                        

Depreciation and amortization (included in total operating expense)

 $-  $2  $-  $2  $142  $144 

 

 

47

 

 

SEGMENT INFORMATION

Statement of Operations Information

Three Months Ended March 31, 2022

 

  

Capital

  

Asset

  

Principal

  

Segment

  

Unallocated

     
  

Markets

  

Management

  

Investing

  

Total

  

(1)

  

Total

 

Net trading

 $12,022  $-  $-  $12,022  $-  $12,022 

Asset management

  -   1,889   -   1,889   -   1,889 

New issue and advisory

  3,770   -   -   3,770   -   3,770 

Principal transactions and other income

  (1)  114   (18,476)  (18,363)  -   (18,363)

Total revenues

  15,791   2,003   (18,476)  (682)  -   (682)

Compensation

  9,862   1,450   195   11,507   2,372   13,879 

Other Operating Expense

  3,435   370   148   3,953   1,364   5,317 

Total operating expenses

  13,297   1,820   343   15,460   3,736   19,196 

Operating income (loss)

  2,494   183   (18,819)  (16,142)  (3,736)  (19,878)

Interest (expense) income

  (72)  -   -   (72)  (1,279)  (1,351)

Income (loss) from equity method affiliates

  -   -   (12,104)  (12,104)  -   (12,104)

Income (loss) before income taxes

  2,422   183   (30,923)  (28,318)  (5,015)  (33,333)

Income tax expense (benefit)

  -   -   -   -   1,833   1,833 

Net income (loss)

  2,422   183   (30,923)  (28,318)  (6,848)  (35,166)

Less: Net income (loss) attributable to the non-convertible non-controlling interest of the Operating LLC

  -   -   (14,704)  (14,704)  -   (14,704)

Enterprise net income (loss)

  2,422   183   (16,219)  (13,614)  (6,848)  (20,462)

Less: Net income (loss) attributable to the convertible non-controlling interest of Cohen & Company Inc.

  -   -   -   -   (12,850)  (12,850)

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

 $2,422  $183  $(16,219) $(13,614) $6,002  $(7,612)
                         

Other statement of operations data

                        

Depreciation and amortization (included in total operating expense)

 $-  $1  $-  $1  $131  $132 

 

48

 

 

 

 

BALANCE SHEET DATA

 

As of March 31, 2023

 

(Dollars in Thousands)

 

 

  

Capital

  

Asset

  

Principal

  

Segment

  

Unallocated

     
  

Markets

  

Management

  

Investing

  

Total

  (1)  

Total

 

Total Assets

 $690,095  $3,941  $31,693  $725,729  $19,496  $745,225 
                         

Included within total assets:

                        

Investments in equity method affiliates

 $-  $-  $9,240  $9,240  $-  $9,240 

Goodwill (2)

 $54  $55  $-  $109  $-  $109 

Intangible assets (2)

 $166  $-  $-  $166  $-  $166 

 

 

BALANCE SHEET DATA

December 31, 2022

(Dollars in Thousands)

 

  

Capital

  

Asset

  

Principal

  

Segment

  

Unallocated

     
  

Markets

  

Management

  

Investing

  

Total

  (1)  

Total

 

Total Assets

 $820,238  $5,679  $36,969  $862,886  $24,169  $887,055 
                         

Included within total assets:

                        

Investments in equity method affiliates

 $-  $-  $8,929  $8,929  $-  $8,929 

Goodwill (2)

 $54  $55  $-  $109  $-  $109 

Intangible assets (2)

 $166  $-  $-  $166  $-  $166 

 

(1)

Unallocated assets primarily include: (1) amounts due from related parties; (2) furniture and equipment, net; and (3) other assets that are not considered necessary for an understanding of business segment assets. Such amounts are excluded in business segment reporting to the chief operating decision maker.

(2)

Goodwill and intangible assets are allocated to the Capital Markets and Asset Management business segments as indicated in the table above.

 

Geographic Information

 

The Company conducts its business activities through offices in the following locations: (1) United States and (2) Europe.  Total revenues by geographic area are summarized as follows.

 

 

 

GEOGRAPHIC DATA

(Dollars in Thousands)

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Total Revenues:

        

United States

 $7,819  $(1,529)

Europe

  1,005   847 

Total

 $8,824  $(682)

 

Long-lived assets attributable to an individual country, other than the United States, are not material. 

 

49

 

 

23. SUPPLEMENTAL CASH FLOW DISCLOSURE

 

Interest paid by the Company on its debt and redeemable financial instruments was $1,227 and $1,551 for the three months ended March 31, 2023 and 2022, respectively.

 

The Company paid income taxes of $124 and $154 for the three months ended March 31, 2023 and 2022, respectively. The Company received income tax refunds of $0 for three months ended March 31, 2023 and 2022.

 

For the three months ended March 31, 2023, the Company had the following significant non-cash transactions that are not reflected on the statement of cash flows:

 

 

● 

The Company net surrendered units of membership interest in the Operating LLC.  The Company recognized a net increase in additional paid-in capital of $582, a net decrease of $12 in AOCI, and a decrease of $570 in non-controlling interest.  See note 17.

 

● 

The Company received equity shares in several public companies in exchange for advisory services.  The fair market value of the shares received was $492.  The Company included this in new issue and advisory revenue in the statement of operations.

 The Company recorded an accrual of $1,351 in accounts payable and other accrued liabilities for dividends and distributions declared on March 7, 2023, which were paid after March 31, 2023.
 The Company recorded an increase of $834 in due to related party and a decrease in equity for the redemption of LLC units by employees. See note 25.
 

● 

The Company recorded a decrease in equity method affiliates of $29 and an increase in other investments, at fair value of $29 resulting from an in-kind distribution from equity method affiliates.  

 

For the three months ended March 31, 2022, the Company had the following significant non-cash transactions that are not reflected on the statement of cash flows:

 

 

● 

The Company net surrendered units of membership interest in the Operating LLC.  The Company recognized a net decrease in additional paid-in capital of $292, a net increase of $4 in AOCI, and an increase of $288 in non-controlling interest.  See note 17.

 The Company recorded a $15,000 increase in convertible non-controlling interest and a $15,000 decrease in debt as a result of the DGC Trust's election to convert the 2017 Convertible Note into units of membership interest of the Operating LLC.
 The Company recorded an accrual of $4,760 in accounts payable and other accrued liabilities for dividends and distribution declared on March 7, 2022, which were paid after March 31, 2022.
 

● 

The Company recorded a decrease of $18,858 in equity method affiliates and an increase in other investments, at fair value of $18,858 resulting from an in-kind distribution from equity method affiliates.

 

● 

The Company recorded a decrease in other investments, at fair value of $3,885 and a corresponding decrease in non-controlling interest resulting from an in-kind distribution from a SPAC sponsor entity. 

 

● 

The Company recorded a increase in other investments, at fair value of $836 and a decrease in other investment, not sold of $836 resulting from an investment reclass.

  

As part of the Company's matched book repo operations, the Company enters into reverse repos with counterparties whereby it lends money and receives securities as collateral.  In accordance with ASC 860, the collateral securities are not recorded in the Company's consolidated balance sheets.  However, from time to time, the Company will hold cash instead of securities as collateral for these transactions.  When the Company is provided cash as collateral for reverse repo transactions, the Company will make an entry to increase its cash and cash equivalents and to increase its other liabilities for the amount of cash received.  There are two main reasons the Company  may receive collateral in the form of cash as opposed to securities.  First, when the value of the collateral securities the Company has in its possession declines, the Company will require the counterparty to provide it with additional collateral.  The Company will accept either cash or additional liquid securities.  Often, the Company's counterparties will provide it with cash as they may not have liquid securities readily available.  Second, from time to time, the Company's counterparties require a portion of the collateral securities in the Company's possession returned to them for operating purposes.  In such instances, the counterparty may not have substitute liquid securities available and will often provide the Company with cash as collateral instead.  It is important to note that when the Company receives cash as collateral, it is temporary in nature and the Company has an obligation to return that cash when the counterparty provides substitute liquid securities as collateral or otherwise satisfies their associated reverse repo obligation.  The Company is generally required to return any cash collateral the same business day that it receives substitute securities.  See note 13. 

 

The Company has no legal or contractual obligation to segregate this cash collateral held and therefore it is included as a component of its cash and cash equivalents in the Company's consolidated balance sheets.  However, it is not available for use in the Company's general operations as the Company must stand ready at all times to return the collateral held immediately once the reverse repo counterparty provides substitute liquid securities or the repo matures. 

 

The following table shows the impact of changes in these collateral deposits had on our cash flows in each period presented: 

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Collateral deposit end of period

 $2,290  $40,465 

Less: Collateral deposit beginning of period

  4,301   17,320 

Impact to cash flow from operations

 $(2,011) $23,145 

 

50

 
 

24. RELATED PARTY TRANSACTIONS

 

Certain defined terms in this footnote are defined the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.  The Company has identified the following related party transactions for the three months ended March 31, 2023 and 2022. The transactions are listed by related party and, unless otherwise noted in the text of the description, the amounts are disclosed in the tables at the end of this section.

 

 

A. JKD Investor 

 

The JKD Investor is an entity owned by Jack J. DiMaio, the vice chairman of the board of directors and vice chairman of the Operating LLC’s board of managers, and his spouse.  On October 3, 2016, JKD Investor invested $6,000 in the Operating LLC.  Additional investments were made in January 2017 and January 2019 in the amounts of $1,000 and $1,268, respectively.  See note 15. The interest expense incurred on this investment is disclosed in the table at the end of this section. 

 

On January 31, 2020, JKD Investor purchased $2,250 of the 2020 Senior Notes. On January 31, 2022, the Operating LLC and JKD Investor entered into the 2022 Note Purchase Agreement, pursuant to which, among other things, on such date, (i) JKD Investor paid to the Operating LLC an additional $2,250 and (ii) in consideration for such funds, the Operating LLC issued to JKD Investor the Amended and Restated Note in the aggregate principal amount of $4,500. See note 16. The Company incurred interest expense on this debt, which is disclosed as part of interest expense incurred in the tale at the end of this section.

 

B. DGC Trust 

 

DGC Trust has been identified as a related party because Daniel G. Cohen's children are the beneficiaries of the trust and the trust was established by Daniel G. Cohen, chairman of the Company’s board of directors and chairman of the Operating LLC board of managers.  Daniel G. Cohen does not have any voting or dispositive control of securities held in the interest of the trust.  

 

In March 2017, the 2017 Convertible Note was issued to the DGC Trust.  The Company incurred interest expense on the 2017 Convertible Note, which is disclosed as part of interest expense incurred in the table at the end of this section. On March 20, 2022, the DGC Trust elected to convert the 2017 Convertible Note into an aggregate of 10,344,827 units of membership interest in the Operating LLC at the conversion rate specified in the 2017 Convertible Note of $1.45 per unit. As a result of such conversion, the 2017 Convertible Note was cancelled in its entirety and a $15,000 investment in non-convertible controlling interest was recorded. See note 16.

 

51

 

C.  Duane Morris, LLP (“Duane Morris”)

 

Duane Morris is an international law firm and serves as legal counsel to the Company.  Duane Morris is considered a related party because a partner at Duane Morris is a member of the same household as a director of the Company.  Expense incurred by the Company for services provided by Duane Morris are included within professional fees and operating expense in the consolidated statements of operations and comprehensive income and are disclosed in the table below. 

 

D. Cohen Circle, LLC ("Cohen Circle"), formerly FinTech Masala, LLC

 

The Company engaged Betsy Cohen, as an agent of Cohen Circle, as a consultant to provide certain services related to Insurance SPAC III. The Company agreed to pay a consultant fee of $1 per month, which commenced on December 1, 2020 and continued through December 2022. In addition, Betsy Cohen made a $1 investment in the Insurance SPAC III Sponsor Entities, which was included as a component of non-controlling interest in the consolidated balance sheets.  The expense incurred by the Company for the consulting services provided by Cohen Circle is included within professional fees and operating expense in the consolidated statements of operations and comprehensive income and are disclosed in the table below. 

 

The Company has a sublease agreement as sub-lessor for certain office space with Cohen Circle. The Company received payments under this sublease agreement, which payments are recorded as a reduction in rent and utility expenses. This sublease agreement commenced on August 1, 2018 and has a term that automatically renews for one year periods if not cancelled by either party upon 90 days’ notice prior to the end of the then-existing term. The income earned pursuant to this sublease agreement is included as a reduction in rent expense in the consolidated statements of income and is disclosed in the table below.

 

E. Investment Vehicle and Other 

 

Stoa USA Inc. / FlipOS ("FlipOS") 

 

FlipOS is a related party because Daniel G. Cohen is a member of the board of directors of FlipOS. As of  March 31, 2023, the Company had made cumulative investments of $768 in FlipOS.  The fair value of these investments are included in other investments, at fair value on the consolidated balance sheets; any realized and unrealized gains on these investments are included in principle transactions and other income on the consolidated statements of operations and comprehensive income. The amounts are included in the table below.

 

CK Capital and AOI 

 

CK Capital and AOI are related parties as they are equity method investments of the Company.  In December 2019, the Company acquired a 45% interest in CK Capital.  The Company purchased this interest for $18 (of which $17 was paid to an entity controlled by Daniel G. Cohen).  In addition, in December 2019, the Company also acquired a 10% interest in AOI, a real estate holding company, for $1 from entities controlled by Daniel G. Cohen.  Income earned or loss incurred by the Company on the equity method investments in CK Capital and AOI is included in the tables below.  In accordance with the CK Capital shareholders agreement, the Company may receive fees for consulting services provided by the Company to CK Capital.  Any fees earned for such consulting services are included in principal transactions and other income in the table below.  See note 11.

 

52

 

 

Insurance SPAC III

 

Insurance SPAC III is a related party as it was an equity method investment of the Company.  The Operating LLC was the manager of the Insurance SPAC III Sponsor Entities and the Company consolidated the Insurance SPAC III Sponsor Entities. On November 18, 2022, Insurance SPAC III announced that, because it would not consummate an initial business combination within the time period required, it would dissolve and liquidate, effective as of the close of business on December 22, 2022. Prior to November 18, 2022, Insurance SPAC III Sponsor Entities owned 47.3% of the equity in Insurance SPAC III Sponsor Entities. Income earned or loss incurred on the equity method investment in the Insurance SPAC III is included in the table below.  The Operating LLC and Insurance SPAC III entered into an administrative services agreement, dated December 17, 2020, pursuant to which the Operating LLC and Insurance SPAC III agreed that, commencing on the date that Insurance SPAC III’s securities were first listed on the NASDAQ Capital Market through the earlier of Insurance SPAC III’s consummation of a business combination and its liquidation, Insurance SPAC III would pay the Operating LLC $20 per month for certain office space, utilities, and shared personnel support as requested by Insurance SPAC III.  Revenue earned by the Company from the administrative services agreement is included as part of principal transactions and other income in the tables below.

 

The Operating LLC loaned to Insurance SPAC III approximately $71 to cover IPO expenses, which was repaid in full at the closing of the IPO. IAS III and its affiliates, including the Operating LLC, also committed to loan Insurance SPAC III up to an additional $1,500 to cover operating and acquisition related expenses following the IPO, of which $960 was borrowed by Insurance SPAC III prior to November 18, 2022.  These loans bore no interest and, as the Insurance SPAC III failed to consummate a business combination in the required timeframe, the loans will not be repaid. The write off of the loans is included in equity method loss in 2022. 

 

SPAC Fund 

 

The SPAC Fund is considered a related party because it is an equity method investment of the Company.  The Company has an investment in and a management contract with the SPAC Fund.  Income earned or loss incurred on the investment is included as part of principal transactions and other income in the tables below.  Revenue earned on the management contract is included as part of asset management in the tables below. 

 

All of the remaining investors in the SPAC Fund submitted redemption notices effective March 31, 2023.  To date, the SPAC Fund has liquidated all of its investments except for certain illiquid investments in SPVs.  If there are insufficient cash proceeds from investment sales for the SPAC Fund to pay its full redemption obligation to its investors, it intends to fund the shortfall either through (i) proceeds from additional investment made by the general partner of the SPAC Fund or another investor; (ii) proceeds from financings; (iii) proceeds from the liquidation of all or part of the remaining investments in SPVs; or (iv) a combination of all of these.  Subsequent to March 31, 2023, the general partner of the SPAC Fund became the sole owner of the SPAC Fund and , therefore, effective April 1, 2023, began consolidating it.  The Company currently consolidates the general partner of the SPAC Fund and therefore will consolidate the SPAC Fund (with its remaining investments).  

 

U.S. Insurance JV 

 

U.S. Insurance JV is considered a related party because it is an equity method investment of the Company. The Company has an investment in and a management contract with the U.S. Insurance JV.  Income earned or loss incurred on the investment is included as part of principal transactions and other income in the tables below.  Revenue earned on the management contract is included as part of asset management and is shown in the tables below.  As of March 31, 2023, the Company owned 1.87% of the equity of the U.S. Insurance JV.

 

CREO JV

 

CREO JV is considered a related party because it is an equity method investment of the Company. The Company has an investment in and a management contract with CREO JV.  Income earned or loss incurred on the investment are included as part of principal transactions and other income in the tables below.  As of  March 31, 2023, the Company owned 7.5% of the equity of CREO JV.

 

Sponsor Entities of Other SPACs

 

In general, a SPAC is initially funded by a sponsor and that sponsor invests in and receives private placement and founders shares of the SPAC.  The sponsor  may be organized as a single legal entity or multiple entities under common control.  In either case, the entity (or entities) is referred to in this section as the sponsor of the applicable SPAC.  The Company has had the following transactions with various sponsors of SPACs that are related parties, which the Company does not consolidate.  

 

 

 

53

 

Fintech Acquisition Corp. V ("FTAC V") is a SPAC.  The sponsor of FTAC V ("FTAC V Sponsor") is a related party as it is an equity method investment of the Company.  The Company made a sponsor investment in FTAC V Sponsor, receiving an initial allocation of 140,000 founder shares.  On December 14, 2020, the Operating LLC entered into a letter agreement with FTAC V Sponsor whereby the Operating LLC would provide personnel to serve as the chief financial officer as well as other accounting and administrative services to FTAC V Sponsor for a period not longer than 24 months.  As consideration for these services, the Company received an allocation of 35,000 founders shares of FTAC V stock to the Operating LLC and recorded an equity method investment of $40 for the valuation of these services. The revenue earned on this arrangement is disclosed in Principal transactions and other income, Other SPAC Entities in the tables below.

 

Fintech Acquisition Corp. VI ("FTAC VI") is a SPAC.  The sponsor of FTAC VI ("FTAC VI Sponsor") is a related party as it is an equity method investment of the Company.  On June 26, 2021, the Operating LLC entered into a letter agreement with FTAC VI Sponsor whereby the Operating LLC would provide personnel to serve as the chief financial officer as well as other accounting and administrative services to FTAC VI Sponsor for a period not longer than 24 months.  As consideration for these services, the Company received an allocation of 35,000 founder shares of FTAC VI stock to the Operating LLC and recorded an equity method investment of $40 for the valuation of these services. The revenue earned on this arrangement is disclosed in Principal transactions and other income, Other SPAC Entities in the tables below.

 

FTAC Athena Acquisition Corp. ("FTAC Athena") is a SPAC.  The sponsor of FTAC Athena ("FTAC Athena Sponsor") is a related party as it is an equity method investment of the Company.  On February 26, 2021, the Operating LLC entered into a letter agreement with FTAC Athena Sponsor whereby the Operating LLC would provide personnel to serve as the chief financial officer as well as other accounting and administrative services to FTAC Athena Sponsor for a period not longer than 24 months.  As consideration for these services, the Company received an allocation of 35,000 founders shares of FTAC Athena stock to the Operating LLC and recorded an equity method investment of $40 for the valuation of these services. The revenue earned on this arrangement is disclosed in Principal transactions and other income, Other SPAC Entities in the tables below.

 

FTAC Hera Acquisition Corp. ("FTAC Hera") is a SPAC.  The sponsor of FTAC Hera ("FTAC Hera Sponsor") is a related party as it is an equity method investment of the Company.  On March 5, 2021, the Operating LLC entered into a letter agreement with FTAC Hera Sponsor whereby the Operating LLC would provide personnel to serve as the chief financial officer as well as other accounting and administrative services to FTAC Hera Sponsor for a period not longer than 24 months.  As consideration for these services, the Company received an allocation of 35,000 founders shares of FTAC Hera stock to the Operating LLC and recorded an equity method investment of $40 for the valuation of these services. The revenue earned on this arrangement is disclosed in Principal transactions and other income, Other SPAC Entities in the tables below.

 

FTAC Parnassus Acquisition Corp. ("FTAC Parnassus") is a SPAC.  The sponsor of FTAC Parnassus ("FTAC Parnassus Sponsor") is a related party as it is an equity method investment of the Company.  On March 15, 2021, the Operating LLC entered into a letter agreement with FTAC Parnassus Sponsor whereby the Operating LLC would provide personnel to serve as the chief financial officer as well as other accounting and administrative services to FTAC Parnassus Sponsor for a period not longer than 24 months.  As consideration for these services, the Company received an allocation of 35,000 founders shares of FTAC Parnassus stock to the Operating LLC and recorded an equity method investment of $40 for the valuation of these services. The revenue earned on this arrangement is disclosed in Principal transactions and other income, Other SPAC Entities in the tables below.

 

FTAC Zeus Acquisition Corp. ("FTAC Zeus") is a SPAC.  The sponsor of FTAC Zeus ("FTAC Zeus Sponsor") is a related party as it is an equity method investment of the Company.  On November 24, 2021, the Operating LLC entered into a letter agreement with FTAC Zeus Sponsor whereby the Operating LLC would provide personnel to serve as the chief financial officer as well as other accounting and administrative services to FTAC Zeus Sponsor for a period not longer than 24 months.  As consideration for these services, the Company received an allocation of 35,000 founders shares of FTAC Zeus stock to the Operating LLC and recorded an equity method investment of $40 for the valuation of these services. The revenue earned on this arrangement is disclosed in Principal transactions and other income, Other SPAC Entities in the tables below.

 

FTAC Emerald Acquisition Corp. ("FTAC Emerald") is a SPAC.  The sponsors of FTAC Emerald ("FTAC Emerald Sponsor") is a related party as it is an equity method investment of the Company.  On December 20, 2021, the Operating LLC entered into a letter agreement with FTAC Emerald Sponsor whereby the Operating LLC would provide personnel to serve as the chief financial officer as well as other accounting and administrative services to FTAC Emerald Sponsor for a period not longer than 24 months.  As consideration for these services, the Company received an allocation of 35,000 founders shares of FTAC Emerald stock to the Operating LLC and recorded an equity method investment of $40 for the valuation of these services. The revenue earned on this arrangement is disclosed in Principal transactions and other income, Other SPAC Entities in the tables below.

 

Other 

 

The Company invests in sponsor entities of SPACS, either directly or through its interest in the SPAC Series Funds, that are not otherwise affiliated with the Company but are considered related parties because they are accounted for under the equity method.  As of  March 31, 2023, the Company owned 5.15% of these entities in the aggregate. Income earned or loss incurred on the equity method investment in the Other SPAC Entities is in the tables below.

 

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The following tables display the routine transactions recognized in the consolidated statements of operations from the identified related parties that are described above.

 

  

Three Months Ended

 
  

March 31, 2023

  

March 31, 2022

 
         

Asset management

        

SPAC Fund

 $359  $282 

U.S. Insurance JV

  244   266 
  $603  $548 

Principal transactions and other income

        

Insurance SPAC III

 $-  $60 

Stoa USA Inc./FlipOS

  -   (308)

Other SPAC Entities

  15   25 

SPAC Fund

  28   (55)

U.S. Insurance JV

  103   80 

CREO JV

  349   80 
  $495  $(118)

Income (loss) from equity method affiliates

        

Dutch Real Estate Entities

 $142  $(8)

Insurance SPAC III

  -   (589)

Other SPAC Entities

  (537)  (11,507)
  $(395) $(12,104)
         

Operating expense (income)

        

Duane Morris

 $175  $142 

Cohen Circle

  (26)  (21)
  $149  $121 

Interest expense (income)

        

DGC Trust

 $-  $327 

JKD Investor

  318   271 
  $318  $598 

 

 The following related party transactions are not included in the tables above.

 

F.  Directors and Employees

 

The Company has entered into employment agreements with Daniel G. Cohen and Joseph W. Pooler, Jr., its chief financial officer.  The Company has entered into its standard indemnification agreement with each of its directors and executive officers.

 

The Company maintains a 401(k) savings plan covering substantially all of its employees.  The Company matches 50% of employee contributions for all participants not to exceed 3% of their salary.  Contributions made on behalf of the Company were $116 for the three months ended March 31, 2023.  Contributions made on behalf of the Company were $101 for the three months ended March 31, 2022.  

 

The Company leased office space from Zucker and Moore, LLC.  Zucker and Moore, LLC is partially owned by Jack DiMaio, Jr., the vice chairman of the Company’s board of directors.  This lease terminated on June 20, 2022. The Company recorded $24 of rent expense related to this office space for the three months ended March 31, 2022.

 

55

 
 

25. DUE FROM / DUE TO RELATED PARTIES

 

Amounts due to related parties related to redeemable financial instruments and outstanding debt are included as components of those balances in the consolidated balance sheets.  Also, interest or investment return owed on those balances are included as a component of accounts payable and other in the consolidated balance sheets.  Any investment made in an equity method affiliate for which the Company does not elect the fair value option is included as a component of investments in equity method affiliates in the consolidated balance sheets.  Any investment made in an equity method affiliate for which the Company elected the fair value option is included as a component of other investments, at fair value in the consolidated balance sheets.

 

The following table summarizes amounts due from / to related parties as of each date shown. These amounts may result from normal operating advances, employee advances, or from timing differences between the transactions disclosed in note 24 and final settlement of those transactions in cash. All amounts are primarily non-interest bearing.

 

DUE FROM RELATED PARTIES

(Dollars in Thousands)

 

  

March 31, 2023

  

December 31, 2022

 

U.S. Insurance JV

 $244  $261 

SPAC Fund

  489   294 

Employee & other

  34   232 

Due from related parties

 $767  $787 



 

 

DUE TO RELATED PARTIES

(Dollars in Thousands)

 

  

March 31, 2023

  

December 31, 2022

 

Employees - redemption of units

 $834  $- 
  $834  $- 

 

On February 1, 2023, Daniel G. Cohen, the Company’s executive chairman, in accordance with the Operating LLC operating agreement, redeemed 479,380 LLC Units for which the Company will pay to Mr. Cohen an aggregate of $420,896, or $0.878 per LLC Unit. The LLC Units were so redeemed by Mr. Cohen in order to fund certain tax liabilities incurred by Mr. Cohen in connection with the vesting, on January 31, 2023, of 967,830 restricted LLC Units that had been previously granted to Mr. Cohen under the 2020 Long-Term Incentive Plan.

 

On February 1, 2023, Lester Brafman, the Company’s chief executive officer, in accordance with the Operating LLC operating agreement, redeemed 470,330 LLC Units for which the Company will pay to Mr. Brafman an aggregate of $412,949, or $0.878 per LLC Unit. The LLC Units were so redeemed by Mr. Brafman in order to fund certain tax liabilities incurred by Mr. Brafman in connection with the vesting, on January 31, 2023, of 470,330 restricted LLC Units and 49,750 restricted shares of the Company’s common stock, all of which had been previously granted to Mr. Brafman under the 2020 Long-Term Incentive Plan.

 

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 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.



 

The following discussion and analysis of the consolidated financial condition and results of operations of Cohen & Company Inc. and its majority owned subsidiaries (collectively, “we,” “us,” “our,” or the “Company”) should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including fair value of financial instruments. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

 

All amounts in this disclosure are in thousands (except share, unit, per share, and per unit data) except where otherwise noted.

 

Overview

 

We are a financial services company specializing in an expanding range of capital markets and asset management services. We are organized into three business segments: Capital Markets, Asset Management, and Principal Investing.

 

 

● 

Capital Markets:  Our Capital Markets business segment consists primarily of fixed income sales, trading, gestation repo financing, new issue placements in corporate and securitized products, and advisory services. Our fixed income sales and trading group provides trade execution to corporate investors, institutional investors, mortgage originators, and other smaller broker-dealers. We specialize in a variety of products, including but not limited to: corporate bonds, ABS, MBS, RMBS, CDOs, CLOs, CBOs, CMOs, municipal securities, TBAs and other forward agency MBS contracts, U.S. government bonds, U.S. government agency securities, brokered deposits and CDs for small banks, and hybrid capital of financial institutions including TruPS, whole loans, and other structured financial instruments. We also offer execution and brokerage services for equity products. We carry out our capital markets activities primarily through our subsidiaries: JVB in the United States and CCFESA in Europe.  A division of JVB, Cohen & Company Capital Markets ("CCM") is our full-service boutique investment bank, which focuses on M&A, capital markets, and SPAC advisory services.  

 

● 

Asset Management:  Our Asset Management business segment manages assets within CDOs, managed accounts, joint ventures, and investment funds (collectively, “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. Our Asset Management business segment includes our fee-based asset management operations, which include on-going base and incentive management fees. As of March 31, 2023, we had approximately $2.2 billion in assets under management (“AUM”) of which 47.9% was in CDOs. A significant portion of our asset management revenue is earned from the management of CDOs.  We have not completed a new securitization since 2008.  As a result, our asset management revenue has declined from its historical highs as the assets of the CDOs decline due to maturities, repayments, auction call redemptions, and defaults.  Our ability to complete securitizations in the future will depend upon, among other things, our asset origination capacity and success, our ability to arrange warehouse financing to originate assets, our willingness and capacity to fund required amounts to obtain warehouse financing and securitized financings, and the demand in the markets for such securitizations.  The remaining portion of our AUM is from a diversified mix of other Investment Vehicles that were more recently formed.  

 

● 

Principal Investing: Our Principal Investing business segment is comprised of investments that we hold related to our SPAC franchise and other investments we have made for the purpose of earning an investment return rather than investments to support our Capital Markets business segment activities.  These investments are a component of our other investments, at fair value; other investments sold, not yet purchased; and investments in equity method affiliates in our consolidated balance sheet.  

 

We generate our revenue by business segment primarily through the following activities. 

 

Capital Markets: 

 

 

● 

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

 

● 

Revenue earned on our matched book repo financing activities; and

 

● 

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

 

Asset Management:

 

 

● 

Asset management fees for our on-going asset management services provided to certain Investment Vehicles, which may include fees both senior and subordinate to the securities issued in the Investment Vehicle; and

 

● 

Incentive management fees earned based on the performance of Investment Vehicles.

 

Principal Investing:

 

 

● 

Gains and losses (unrealized and realized) and income and expense earned on securities classified as other investments, at fair value and other investments sold, not yet purchased; and

  ●  Income and loss earned on equity method investments.

 

 

Business Environment

 

Our business in general and our Capital Markets business segment in particular do not produce predictable earnings.  Our results can vary dramatically from year to year and quarter to quarter.  Our business is materially affected by economic conditions in the financial markets, political conditions, broad trends in business and finance, the housing and mortgage markets, changes in volume and price levels of securities transactions, and changes in interest rates, including overnight funding rates, all of which can affect our profitability and are unpredictable and beyond our control. These factors may affect the financial decisions made by investors and companies, including their level of participation in the financial markets and their willingness to participate in corporate transactions. Severe market fluctuations or weak economic conditions could reduce our trading volume and revenues, negatively affect our ability to generate new issue and advisory revenue, and adversely affect our profitability. 

 

As a general rule, our trading business benefits from increased market volatility.  Increased volatility usually results in increased activity from our clients and counterparties.  However, periods of extreme volatility may at times result in clients reducing their trading volumes, which would negatively impact our results.  Also, periods of extreme volatility may result in large fluctuations in securities valuations and we may incur losses on our holdings.  Also, our mortgage group’s business benefits when mortgage volumes increase, and may suffer when mortgage volumes decrease.  Among other things, mortgage volumes are significantly impacted by changes in interest rates. In addition, as a smaller firm, we are exposed to intense competition.  Although we provide financing to our customers, larger firms have a much greater capability to provide their clients with financing, giving them a competitive advantage.  We are much more reliant upon our employees’ relationships, networks, and abilities to identify and capitalize on market opportunities.  Therefore, our business may be significantly impacted by the addition or loss of key personnel. 

 

We try to address these challenges by (i) focusing our business on clients and asset classes that are underserved by the large firms, (ii) continuing to monitor our fixed costs to enhance operating leverage and limit our losses during periods of low volumes, and (iii) attempting to hire and retain entrepreneurial and effective traders, investment bankers, and salespeople. Our business environment is rapidly changing.  New risks and uncertainties emerge continuously and it is not possible for us to predict all the risks we will face.  This may negatively impact our operating performance. 

 

A portion of our revenue is generated from net trading activity. We engage in proprietary trading for our own account, provide securities financing for our customers, and execute “riskless” trades with a customer order in hand resulting in limited market risk to us. The inventory of securities held for our own account, as well as held to facilitate customer trades, and our market making activities are sensitive to market movements. 

 

A portion of our revenue is generated from new issue and advisory engagements. The fees charged and volume of these engagements are sensitive to the overall business environment.  We provide origination services in Europe through our subsidiary CCFESA, and new issue and advisory services in the U.S. through our subsidiary JVB. A division of JVB, CCM is our full-service boutique investment bank, which focuses on M&A, capital markets, and SPAC advisory services.  Currently, our primary source of new issue and advisory revenue is from originating assets for our U.S. and European insurance asset management business including our U.S. Insurance JV and CREO JV, as well as from investment banking and advisory services through CCM.

 

A portion of our revenue is generated from management fees. Our ability to charge management fees and the amount of those fees is dependent upon the underlying investment performance and stability of the Investment Vehicles. If these types of investments do not provide attractive returns to investors, the demand for such instruments will likely fall, thereby reducing our opportunity to earn new management fees or maintain existing management fees.  As of March 31, 2023, 47.9% of our existing AUM were in CDOs. The creation of CDOs has depended upon a vibrant securitization market. Since 2008, volumes within the securitization market have dropped significantly and have not fully recovered since that time. We have not completed a new securitization since 2008. The remaining portion of our AUM is from a diversified mix of other Investment Vehicles most of which were more recently formed. 

 

All of the remaining investors in the SPAC Fund submitted redemption notices effective March 31, 2023.  To date, the SPAC Fund has liquidated all of its investments except for certain illiquid investments in SPVs.  If there are insufficient cash proceeds from investment sales for the SPAC Fund to pay its full redemption obligation to its investors, it intends to fund the shortfall either through (i) proceeds from additional investment made by the general partner of the SPAC Fund or another investor; (ii) proceeds from financings; (iii) proceeds from the liquidation of all or part of the remaining investments in SPVs; or (iv) a combination of all of these.  Subsequent to March 31, 2023 the general partner of the SPAC Fund will be the sole owner of the SPAC Fund and will consolidate it.  We currently consolidate the general partner of the SPAC Fund and therefore will consolidate the SPAC Fund (with its remaining investments) subsequent to March 31, 2023.  

 

A significant portion of our asset management revenue is earned from the management of CDOs.  As a result, our asset management revenue has declined from its historical highs as the assets of the CDOs decline due to maturities, repayments, auction call redemptions, and defaults.  Our ability to complete securitizations in the future will depend upon, among other things, our asset origination capacity and success, our ability to arrange warehouse financing to originate assets, our willingness and capacity to fund required amounts to obtain warehouse financing and securitized financings, and the demand in the markets for such securitizations.

 

A portion of our revenues is generated from our principal investing activities. Therefore, our revenues are impacted by the overall market supply and demand of these investments as well as the individual performance of each investment. Our principal investments are included within other investments, at fair value; other investments sold, not yet purchased; and investments in equity method affiliates in our consolidated balance sheets.  More recently, a significant component of our principal investment revenue has come from SPAC related equity investments, primarily in entities that have been the result of sponsored SPAC business combinations or related party sponsored SPAC business combinations.  Access to these investments is reliant on a robust SPAC market.  Performance of the resulting principal investments can be materially impacted by overall performance of the equity markets.  See note 7 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q. 

 

 

The SPAC Market

 

Beginning in 2018, we began sponsoring a series of SPACs.  Each sponsored SPAC either completed or was seeking to complete a business combination with a company involved in the insurance market.  In addition, we invest in other SPACs at various stages of their business life cycle.  Beginning in 2019, these SPAC activities have become a significant portion of our Principal Investing business segment. In August 2018, we invested in and became the general partner of a newly formed investment fund (the “SPAC Fund”), which was created for the purpose of investing in the equity interests of SPACs and SPAC sponsor entities including SPACs sponsored by us, our affiliates, and third parties. As a complement to the SPAC Fund, we established and became manager of two newly formed umbrella limited liability companies (the “SPAC Series Funds”) that issue a separate series of interest for each investment portfolio, which typically consists of investments in the sponsor entities of individual SPACs.  Generally, when a SPAC acquires or merges with a privately held target company, the target company winds up owning a majority of the resulting outstanding equity of the SPAC so the transaction is accounted for as a reverse merger.  Private companies utilize reverse mergers with SPACs as a method of going public as an alternative to a traditional IPO.  All of our business activity related to SPACs is highly sensitive to the volume of activity in the SPAC market.  Volumes could be negatively impacted if target companies no longer see SPACs as an attractive alternative thereby reducing the number of suitable potential business combination targets.  Also, investor demand for SPACs would be negatively impacted if the stock of SPACs that successfully complete a business combination underperform the market.  If volumes of SPAC activity decline, our results of operations will likely be significantly negatively impacted.  

 

Equity prices of SPACs and post business combination SPACs declined significantly during 2022.  We are exposed to public equity prices of SPACs and post business combination SPACs both through our other investments, at fair value and investments in equity method affiliates.  As a result, we recorded significant principal transaction losses and equity method losses during 2022 and the three months ended March 31, 2023.  Continued declines in the equity prices of these companies will result in further losses for us.  

 

Margin Pressures in Fixed Income Brokerage Business

 

Performance in the financial services industry in which we operate is highly correlated to the overall strength of the economy and financial market activity. Overall market conditions are a product of many factors beyond our control and can be unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors including the volatility of the equity and fixed income markets, the level and shape of the various yield curves, and the volume and value of trading in securities.

 

  

Margins and volumes in certain products and markets within the fixed income brokerage business continue to decrease materially as competition has increased and general market activity has declined. Further, we continue to expect that competition will increase over time, resulting in continued margin pressure.

 

Our response to this margin compression has included: (i) building a diversified fixed income trading platform; (ii) acquiring or building out new product lines and expanding existing product lines; (iii) building a hedging execution and funding operation to service mortgage originators; and (iv) monitoring our fixed costs. Our cost management initiatives are ongoing. However, there can be no certainty that these efforts will be sufficient. If insufficient, we will likely see a decline in profitability.

 

U.S. Housing Market

 

In recent years, our mortgage group has grown in significance to our Capital Markets segment and our company overall.  The mortgage group primarily earns revenue by providing hedging execution, securities financing, and trade execution services to mortgage originators and other investors in mortgage-backed securities.  Therefore, this group’s revenue is highly dependent on the volume of mortgage originations in the U.S.  Origination activity is highly sensitive to interest rates, the U.S. job market, housing starts, sale activity of existing housing stock, as well as the general health of the U.S. economy.  In addition, any new regulation that impacts U.S. government agency mortgage-backed security issuance activity, residential mortgage underwriting standards, or otherwise impacts mortgage originators will impact our business.  We have no control over these external factors and there is no effective way for us to hedge against these risks.  Our mortgage group’s volumes and profitability will be highly impacted by these external factors.

 

Rising Interest Rates and Inflation

 

During 2022, the U.S. Federal Reserve began a process of raising the federal funds rate and quantitative tightening to address rising inflation.  These actions have the effect of increasing interest rates, which negatively impacts our business in several ways: 

 

1.  Rising rates reduce the fair value of fixed income securities we hold on our balance sheet.
2. Rising rates have created instability in the equity markets, which has reduced equity financing and business combination volumes and negatively impacted CCM.
3.  Rising rates have reduced the volumes of new issue fixed income instruments, which has negatively impacted our CREO JV. 
4.  Rising rates significantly reduce mortgage activity.  Our mortgage group's profitability is mainly impacted by the volume of mortgage activity in the U.S. (both mortgages for new home purchases as well as refinancing).  Furthermore, our mortgage group engages in repo lending to mortgage originators.  Reduced mortgage volumes impose financial pressures on mortgage originators and may increase the risk that originators default on their repo obligations to us.  See Note 10 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
5.  Rising rates may ultimately push the U.S. into recession, which may further reduce overall transaction volumes in the financial markets negatively impacting our business generally.  

 

 

 

Recent Events

 

Conversion of the 2017 Convertible Note

 

On March 10, 2017, the Operating LLC issued to DGC Family Fintech Trust (the “DGC Trust”), a trust established by Daniel G. Cohen, a convertible senior secured promissory note in the aggregate principal amount of $15,000 (the "2017 Convertible Note"). On March 20, 2022, the DGC Trust elected to convert the 2017 Convertible Note into an aggregate of 10,344,827 LLC Units at the conversion rate specified in the 2017 Convertible Note agreement of $1.45 per unit. As a result of such conversion, the 2017 Convertible Note was cancelled in its entirety.  These LLC Units have the same conversion and redemption rights as the existing convertible non-controlling interest units.  See note 20 to the Company's December 31, 2022 Annual Report filed on Form 10-K.  

 

Pursuant to the DGC Trust’s governing documents, Daniel G. Cohen has the ability to acquire at any time any of the DGC Trust’s assets, including the units of membership interest, by substituting other property of an equivalent value without the approval or consent of any person, including any trustee or beneficiary of the DGC Trust. See Notes 16 and 24 to our consolidated financial statements included Item 1 of this Quarterly Report on Form 10-Q.
 

The 2020 Senior Notes

 

On January 31, 2020, the Operating LLC entered into a note purchase agreement (the “Original Purchase Agreement”) with the JKD Investor and RN Capital Solutions LLC, a Delaware limited liability company (“RNCS”). The JKD Investor is owned by Jack DiMaio, Jr., the vice chairman of the Company’s board of directors and the Operating LLC’s board of managers, and his spouse. The note purchased by the JKD Investor is herein referred to as the “JKD Note.” Pursuant to the Original 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 bore interest at a fixed rate of 12% per annum and matured on January 31, 2022. 

 

On January 31, 2022, the Operating LLC and JKD Investor entered into a note purchase agreement (the "2022 Purchase Agreement"), pursuant to which, among other things,  (i) JKD Investor paid to the Operating LLC an additional $2,250 and (ii) in consideration for such funds, the Operating LLC issued to JKD Investor an Amended and Restated Senior Promissory Note in the aggregate principal amount of $4,500 (the “Amended and Restated Note”), which Amended and Restated Note amended and restated the JKD Note in its entirety. The 2022 Purchase Agreement contains customary representations and warranties on the part of each of JKD Investor and the Operating LLC. We used these proceeds to retire $2,250 of the 2020 Senior Notes held by RNCS. See notes 16 and 24 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

 

 

INSU Acquisition Corp III ("Insurance SPAC III")

 

The Operating LLC was the manager of Insurance Acquisition Sponsor III, LLC (“IAS III”) and Dioptra Advisors III, LLC (together with IAS III, the “Insurance SPAC III Sponsor Entities”). The Insurance SPAC III Sponsor Entities were sponsors of INSU Acquisition Corp. III ("Insurance SPAC III"). On December 22, 2020, Insurance SPAC III completed the sale of 25,000,000 units (the “Insurance SPAC III Units”) in its initial public offering ("IPO").  Each Insurance SPAC III Unit consisted of one share of Insurance SPAC III's Class A common stock, par value $0.0001 per share (“Insurance SPAC III Common Stock”), and one-third of one Insurance SPAC III warrant (each, an “Insurance SPAC III Warrant”), where each whole Insurance SPAC III Warrant entitled the holder to purchase one share of Insurance SPAC III Common Stock for $11.50 per share. The Insurance SPAC III Units were sold in the IPO at an offering price of $10.00 per unit.  If Insurance SPAC III failed to consummate a business combination within the first 24 months following the IPO, its corporate existence would cease except for the purposes of winding up its affairs and liquidating its assets.

 

The Operating LLC loaned to Insurance SPAC III approximately $71 to cover its IPO expenses, which amount was repaid in full at the closing of the IPO. IAS III and its affiliates, including the Operating LLC, committed to loan Insurance SPAC III up to an additional $1,500 to cover operating and acquisition related expenses following the IPO, of which $960 was borrowed by Insurance SPAC III. See note 24. The loans bore no interest, and if the Insurance SPAC III consummated a business combination in the required time period, the loans were to be repaid from the funds held in Insurance SPAC III’s trust account. Pursuant to its governing documents ,if Insurance SPAC III did not consummate a business combination in the required time frame, no funds from Insurance SPAC III's trust account could be used to repay the loans.
 

On November 18, 2022, Insurance SPAC III announced it would not consummate an initial business combination within the required time period required and that it intended to dissolve and liquidate, effective as of the close of business on December 22, 2022, and redeem all of the Insurance SPAC III Common Stock and each Insurance SPAC III Warrant that were included in its IPO, at a per-share redemption price of approximately $10.09. As of the close of business on December 22, 2022, the Insurance SPAC III Common Stock and each Insurance SPAC Warrant were deemed cancelled and represented only the right to receive the redemption amount of $10.09 per share.
 

In order to provide for the disbursement of funds from the trust account, Insurance SPAC III instructed the trustee of the trust account to take all necessary actions to liquidate the securities held in the trust account. The proceeds of the trust account were held in a non-interest bearing account while awaiting disbursement to the holders of the public shares. Record holders received their pro rata portion of the proceeds of the trust account, less $100 of interest to pay dissolution expenses and net of taxes payable. Insurance SPAC III Sponsor Entities agreed to waive their redemption rights with respect to their outstanding shares of Class B common stock issued prior to the Insurance SPAC III IPO. There will be no redemption rights or liquidating distributions with respect to each Insurance SPAC III Warrant, which expired and were rendered worthless.


As a result of the liquidation of Insurance SPAC III, we recorded an equity method loss of $5,896 for the year ended December 31, 2022, which included a write-off of the amounts advanced to Insurance SPAC III from the Operating LLC as well as amounts invested. Of this loss, $4,808 was allocated to the non-convertible non-controlling interests. Therefore, the net impact to the Operating LLC was $1,088.

  

 

 

Consolidated Results of Operations

 

The following section provides a comparative discussion of our consolidated results of operations for the specified periods. The period-to-period comparisons of financial results are not necessarily indicative of future results.

 

 

 

Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

 

The following table sets forth information regarding our consolidated results of operations for the three months ended March 31, 2023 and 2022.  

 

  

COHEN & COMPANY INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands)

(Unaudited)

 

 

Three Months Ended March 31,

 

Favorable / (Unfavorable)

 
 

2023

 

2022

 

$ Change

 

% Change

 

Revenues

                       

Net trading

$ 8,210   $ 12,022   $ (3,812 )   (32 %)

Asset management

  2,025     1,889     136     7 %

New issue and advisory

  900     3,770     (2,870 )   (76 %)

Principal transactions and other income (loss)

  (2,311 )   (18,363 )   16,052     87 %

Total revenues

  8,824     (682 )   9,506     1,394 %
                         

Operating expenses

                       

Compensation and benefits

  10,537     13,879     3,342     24 %

Business development, occupancy, equipment

  1,301     1,248     (53 )   (4 %)

Subscriptions, clearing, and execution

  2,125     1,941     (184 )   (9 %)

Professional fee and other operating

  2,200     1,996     (204 )   (10 %)

Depreciation and amortization

  144     132     (12 )   (9 %)

Total operating expenses

  16,307     19,196     2,889     15 %
                         

Operating income / (loss)

  (7,483 )   (19,878 )   12,395     62 %
                         

Non-operating income / (expense)

                       
                         

Interest expense, net

  (1,592 )   (1,351 )   (241 )   (18 %)

Income / (loss) from equity method affiliates

  (395 )   (12,104 )   11,709     97 %

Income / (loss) before income taxes

  (9,470 )   (33,333 )   23,863     72 %

Income tax expense / (benefit)

  584     1,833     1,249     68 %

Net income / (loss)

  (10,054 )   (35,166 )   25,112     71 %

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

  97     (14,704 )   (14,801 )   (101 %)

Enterprise net income / (loss)

  (10,151 )   (20,462 )   10,311     50 %

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

  (7,514 )   (12,850 )   (5,336 )   (42 %)

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

$ (2,637 ) $ (7,612 )   4,975     65 %

 

Revenues

 

Revenues increased by $9,506, or 1394%, to $8,824 for the three months ended March 31, 2023, as compared to ($682) for the three months ended March 31, 2022. As discussed in more detail below, the change was comprised of (i) a decrease of $3,812 in net trading revenue; (ii) an increase of $136 in asset management revenue; (iii) a decrease in new issue and advisory of $2,870; and (iv) an increase of $16,052 in principal transactions and other income.

 

 

Net Trading

 

Net trading revenue decreased by $3,812, or 32%, to $8,210 for the three months ended March 31, 2023, as compared to  $12,022 for the three months ended March 31, 2022.  The following table shows the detail by trading group.

 

 

 

NET TRADING

(Dollars in Thousands)

 

   

Three Months Ended March 31,

 
   

2023

   

2022

   

Change

 

Mortgage

  $ (469 )   $ 1,477     $ (1,946 )

Matched book repo

    4,381       9,772       (5,391 )

High yield corporate

    1,483       976       507  

Investment grade corporate

    207       430       (223 )

Wholesale and other

    2,608       (633 )     3,241  

Total

  $ 8,210     $ 12,022     $ (3,812 )

 

Our net trading revenue includes unrealized gains on our trading investments as of the applicable measurement date that may never be realized due to changes in market or other conditions not in our control.  This may adversely affect the ultimate value realized from these investments. In addition, our net trading revenue also includes realized gains on certain proprietary trading positions. Our ability to derive trading gains from such trading positions is subject to overall market conditions. Due to volatility and uncertainty in the capital markets, the net trading revenue recognized may not be indicative of future results. Furthermore, from time to time, some of the assets included in the investments-trading line of our consolidated balance sheets represent level 3 valuations within the FASB valuation hierarchy. Level 3 assets are carried at fair value based on estimates derived using internal valuation models and other estimates. See notes 7, 8, and 9 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q. The fair value estimates made by us may not be indicative of the final sale price at which these assets may be sold.  We consider our matched book repo business to be subject to significant concentration risk.  See note 10 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

 

A loss of $1,165 related to the FGMC bankruptcy is included above in the mortgage group during the three months ended March 31, 2023.  See note 10 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.  

 

 

Asset Management

 

Our AUM equals the sum of the NAV or gross assets of the Investment Vehicles we manage based on whichever measurement serves as the basis for the calculation of our management fees. 

 

Our calculation of AUM may differ from the calculations used by other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset managers.  This definition of AUM is not necessarily identical to the definitions of AUM that may be used in our management agreements.

 

   

As of March 31,

   

As of December 31,

 
   

2023

   

2022

   

2022

   

2021

 

Company-sponsored CDOs

  $ 1,034,684     $ 1,174,830     $ 1,053,430     $ 1,239,988  

Other Investment Vehicles (1)

    1,122,205       1,091,816       1,062,897       1,118,162  

Assets under management (2)

  $ 2,156,889     $ 2,266,646     $ 2,116,327     $ 2,358,150  

 

(1) Other Investment Vehicles include any Investment Vehicle that is not a Company-sponsored CDO.

(2) In some cases, accounts we manage may employ leverage.  Further, in some cases, our fees are based on gross assets and in other cases, our fees are based on net assets.  Finally, in the case of the SPAC Series Funds there are no management fees earned.  AUM included herein is calculated using either gross or net assets of each managed account or CDO based on whichever serves as the basis for our management fees. In the case where no management fees are earned, the net assets are included.  

 

 

Asset management fees increased by $136, or 7%, to $2,025 for the three months ended March 31, 2023, as compared to $1,889 for the three months ended March 31, 2022, as discussed in more detail below. The following table provides a more detailed comparison of the two periods.

 

 

ASSET MANAGEMENT

(Dollars in Thousands)

 

   

Three Months Ended March 31,

 
   

2023

   

2022

   

Change

 

CDOs

  $ 417     $ 494     $ (77 )

Other

    1,608       1,395       213  

Total

  $ 2,025     $ 1,889     $ 136  

 

Asset management fees from CDOs decreased mainly due to paydowns of principal.  Asset management fees from other increased due to an increase in the fees earned from the PriDe and SPAC Funds, partially offset by a decrease in fees earned from the U.S. Insurance JV.  

 

 

New Issue and Advisory

 

New issue and advisory revenue decreased by $2,870 to $900 for the three months ended March 31, 2023, as compared to $3,770 for the three months ended March 31, 2022.  The following table summarizes new issue revenue by business line. 

 

   

Three Months Ended March 31,

 
   

2023

   

2022

   

Change

 

Cohen & Company Capital Markets

  $ 742     $ 1,533     $ (791 )

Commercial Real Estate Originations

    8       1,037       (1,029 )

U.S. Insurance Originations

    150       1,200       (1,050 )

Total

  $ 900     $ 3,770     $ (2,870 )

 

 

Our revenue earned from new issue and advisory has been, and we expect will continue to be, volatile. We earn revenue from a limited number of engagements. Therefore, a small change in the number of engagements can result in large fluctuations in the revenue recognized. Further, even if the number of engagements remains consistent, the average revenue per engagement can fluctuate considerably. Finally, our revenue is generally earned when an underlying transaction closes (rather than on a monthly or quarterly basis). Therefore, the timing of underlying transactions increases the volatility of our revenue recognition. In addition, we often incur certain costs related to new issue engagements.  These costs are included as a component of either subscriptions, clearing and execution, or professional fees and other and will generally be recognized in the same period that the related revenue is recognized. 

 

CCM, a division of JVB, is our full-service boutique investment bank, which focuses on M&A, capital markets, and SPAC advisory services.  In addition, we generate new issue revenue by originating new assets for the U.S. Insurance JV, CREO JV, and for our PriDe funds in Europe. 

 

 

Principal Transactions and Other Income (Loss)

 

Principal transactions and other income (loss) increased by $16,052, or 87%, to ($2,311) for the three months ended March 31, 2023, as compared to ($18,363) for the three months ended March 31, 2022.  The following table summarizes principal transactions and other income by category.

 

 

 

PRINCIPAL TRANSACTIONS & OTHER INCOME

(Dollars in Thousands)

 

   

Three Months Ended March 31,

 
   

2023

   

2022

   

Change

 

SFT

  $ (61 )   $ (2,053 )   $ 1,992  

LMND

    41       (2,185 )     2,226  

WEJO

    78       (1,617 )     1,695  

REE

    11       (3,470 )     3,481  

RBT

    (2,680 )     -       (2,680 )

HLGN

    (196 )     (8,248 )     8,052  

PAYO

    228       (807 )     1,035  

PWP

    (15 )     (254 )     239  

SPAC Fund

    28       (55 )     83  

U.S. Insurance JV

    103       80       23  

CREO JV

    349       80       269  

Stoa USA Inc. / FlipOS

    -       (308 )     308  

Other

    (469 )     273       (742 )

Total principal transactions

    (2,583 )     (18,564 )     15,981  
                         

IIFC revenue share

    257       114       143  

All other income / (loss)

    15       87       (72 )

Other income

    272       201       71  
                         

Principal transactions and other income (loss)

  $ (2,311 )   $ (18,363 )   $ 16,052  

 

Principal Transactions 

 

For all investments discussed below, see note 8 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for information about how we determine the value of these instruments. For several of the investments described below, we also had an investment in the same company that was accounted for under the equity method during the periods presented. See discussion of equity method income / (loss) below.

 

SFT represents equity positions in Shift Technologies, Inc. (NASDAQ: SFT), a publicly traded company that closed a business combination with Insurance SPAC.  As of March 31, 2023, we had total investments in SFT carried at fair value of $185, which was included as a component of other investments, at fair value.  

 

LMND represents equity positions in Lemonade, Inc. (NASDAQ: LMND), a publicly traded company that acquired Metromile, Inc. ("MILE"), which closed a business combination with Insurance SPAC II.  As of March 31, 2023, we had total investments in LMND carried at fair value of $299, which was included as a component of other investments, at fair value.  

 

WEJO represents equity positions of Wejo Group Ltd. (NASDAQ: WEJO), a publicly traded company that closed a business combination with Virtuoso Acquisition Corp. As of March 31, 2023, we had a total investment in WEJO carried at fair value of $179, which was included as a component of other investments, at fair value. 

 

REE represents equity positions of REE Automotive Ltd. (NASDAQ: REE), a publicly traded company that closed a business combination with 10X Capital Venture Acquisition Corp. As of March 31, 2023, we had a total investment in REE carried at fair value of $244, which was included as a component of other investments, at fair value.  

 

RBT represents equity positions of Rubicon Technologies, Inc. (NYSE: RBT), a publicly traded company that closed a business combination with Founder SPAC. As of March 31, 2023, we had a total investment in RBT carried at fair value of $1,371, which was included as a component of other investments, at fair value.

 

HLGN represents equity positions of Heliogen, Inc. (NYSE: HLGN), a publicly traded company that closed a business combination with Athena Technology Acquisition Corp.  As of March 31, 2023, we had a total investment in HLGN carried at fair value of $121, which was included as a component of other investments, at fair value.  

 

PAYO represents equity positions of Payoneer Global, Inc. (NASDAQ: PAYO), a publicly traded company that closed a business combination with FTAC Olympus Acquisition Corp.  As of March 31, 2023, we had a total investment in PAYO carried at fair value of $1,766 which was included as a component of other investments, at fair value.  

 

 

PWP represents equity positions of Perella Weinberg Partners (NASDAQ: PWP), a publicly traded company that closed a business combination with FTAC IV Acquisition Corp.  As of March 31, 2023, we had a total investment in PWP carried at fair value of $216, which was included as a component of other investments, at fair value.  

 

The SPAC Fund invests in the equity of SPACs. We carry our investment in the SPAC Fund at its reported NAV.  As of March 31, 2023, we had a total investment in the SPAC Fund carried at fair value of $554, which was included as a component of other investments, at fair value. All of the remaining investors in the SPAC Fund submitted redemption notices effective March 31, 2023.  To date, the SPAC Fund has liquidated all of its investments except for certain illiquid investments in SPVs.  If there are insufficient cash proceeds from investment sales for the SPAC Fund to pay its full redemption obligation to its investors, it intends to fund the shortfall either through (i) proceeds from additional investment made by the general partner of the SPAC Fund or another investor; (ii) proceeds from financings; (iii) proceeds from the liquidation of all or part of the remaining investments in SPVs; or (iv) a combination of all of these.  Subsequent to March 31, 2023 the general partner of the SPAC Fund will be the sole owner of the SPAC Fund and will consolidate it.  The Company currently consolidates the general partner of the SPAC Fund and therefore will consolidate the SPAC Fund (with its remaining investments) subsequent to March 31, 2023.  

 

The U.S. Insurance JV invests in insurance company debt.  We carry our investment in the U.S. Insurance JV at its reported NAV.  As of March 31, 2023, we had a total investment in the U.S. Insurance JV carried at fair value of $3,059, which was included as a component of other investments, at fair value. 

 

The CREO JV invests in commercial real estate debt.  We carry our investment in the CREO JV at its reported NAV.  As of March 31, 2023, we had a total investment in the CREO JV carried at fair value of $5,316, which was included as a component of other investments, at fair value. 

 

Stoa USA Inc. / FlipOS is a private company in which we own common equity. As of March 31, 2023, we had a total investment in Stoa USA Inc. / FlipOS carried at fair value of $6,770, which was included as a component of other investments, at fair value. See note 24 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q. 

 

Other principal investments consist of realized and unrealized gains and losses from other investments reported at fair value. 

 

Other Income (Loss)

 

Other income / (loss) is comprised of an ongoing revenue share arrangement as well as other miscellaneous operating income items. The revenue share arrangement noted in the table above entitles us to a percentage of revenue earned by IIFC.  The IIFC revenue share arrangement expires at the earlier of (i) the dissolution of IIFC or (ii) when we have earned a cumulative $20,000 in revenue share payments.  To date, we have earned $4,771.  Also, in any particular year, the revenue share earned by us cannot exceed $2,000. 

 

 

Operating Expenses

 

Operating expenses decreased by $2,889, or 15%, to $16,307 for the three months ended March 31, 2023, as compared to $19,196 for the three months ended March 31, 2022. As discussed in more detail below, the change was comprised of (i) a decrease of $3,342 in compensation and benefits; (ii) an increase of $53 in business development, occupancy, and equipment; (iii) an increase of $184 in subscriptions, clearing, and execution; (iv) an increase of $204 in professional fee and other operating; and (v) an increase of $12 in depreciation and amortization.

 

Compensation and Benefits

 

Compensation and benefits decreased by $3,342, or 24%, to $10,537 for the three months ended March 31, 2023, as compared to $13,879 for the three months ended March 31, 2022.

 

COMPENSATION AND BENEFITS

(Dollars in Thousands)

 

   

Three Months Ended March 31,

 
   

2023

   

2022

   

Change

 

Cash compensation and benefits

  $ 9,448     $ 12,775     $ (3,327 )

Equity-based compensation

    1,089       1,104       (15 )

Total

  $ 10,537     $ 13,879     $ (3,342 )

 

Cash compensation and benefits in the table above was primarily comprised of salary, incentive compensation, severance, employer portion of payroll taxes, and benefits.  Cash compensation and benefits decreased by $3,327 to $9,448 for the three months ended March 31, 2023, as compared to $12,775 for the three months ended March 31, 2022.  The decrease was due to a decrease in incentive compensation related to revenues, partially offset by increases related to the continued build out of the CCM team.  Our total headcount increased from 115 at March 31, 2022 to 121 at March 31, 2023.  

 

Equity-based compensation decreased by $15 to $1,089 for the three months ended March 31, 2023, as compared to $1,104 for the three months ended March 31, 2022.  

 

Business Development, Occupancy, and Equipment

 

Business development, occupancy, and equipment increased by $53, or 4%, to $1,301 for the three months ended March 31, 2023, as compared to $1,248 for the three months ended March 31, 2022.  This increase was comprised of an increase in business development of $13 and an increase in occupancy and equipment of $40.  

 

Subscriptions, Clearing, and Execution 

 

Subscriptions, clearing, and execution increased by $184, or 9%, to $2,125 for the three months ended March 31, 2023, as compared to $1,941 for the three months ended March 31, 2022. This increase was due to an increase of $34 in subscriptions and an increase of $150 in clearing and execution.  The increase in clearing and execution was due to an increase in ECN charges.  

 

Professional Fee and Other Operating Expenses

 

Professional fee and other operating expenses increased by $204, or 10%, to $2,200 for the three months ended March 31, 2023, as compared to $1,996 for the three months ended March 31, 2022. This increase was comprised of an increase in professional fees of $238, partially offset by a decrease in other operating expense of $34. Professional fees increased due to increased legal and tax preparation fees.  Other operating expense decreased due to lower regulatory costs.  

 

Depreciation and Amortization

 

Depreciation and amortization increased by $12, or 9%, to $144 for the three months ended March 31, 2023, as compared to $132 for the three months ended March 31, 2022. The increase was due to additional leasehold improvements at the Company's New York and California offices.  

 

 

Non-Operating Income and Expense

 

Interest Expense, net 

 

Interest expense, net increased by $241 to $1,592 for the three months ended March 31, 2023, as compared to $1,351 for the three months ended March 31, 2022.  

 

INTEREST EXPENSE

(Dollars in Thousands)

 

   

Three Months Ended March 31,

 
   

2023

   

2022

   

Change

 

Junior subordinated notes

  $ 1,209     $ 657     $ 552  

2020 Senior Notes

    111       119       (8 )

2017 Convertible Note

    -       327       (327 )

Byline LOC

    65       72       (7 )

Redeemable Financial Instrument - JKD Capital Partners I LTD

    207       176       31  
    $ 1,592     $ 1,351     $ 241  

 

See notes 15 and 16 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.  

 

 

Income / (Loss) from Equity Method Affiliates 

 

Income / (loss) from equity method affiliates increased by $11,709 to ($395) for the three months ended March 31, 2023, as compared to ($12,104) for the three months ended March 31, 2022.  See note 11 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q. 

 

   

Three Months Ended March 31,

 
   

2023

   

2022

   

Change

 

Insurance SPACs

  $ -     $ (589 )   $ 589  

Dutch Real Estate Entities

    142       (8 )     150  

SPAC Sponsor Entities and Other

    (537 )     (11,507 )     10,970  

Total

  $ (395 )   $ (12,104 )   $ 11,709  

 

SPAC Sponsor Entities includes both indirect and direct investments in SPAC Sponsor Entities.  Several of these SPAC Sponsor Entities are invested in SPACs that have completed their business combinations.  Those SPAC Sponsor Entities hold restricted and unrestricted equity interests in the public post-merger entities.  We account for our investments in SPAC Sponsor Entities under the equity method of accounting.  If the SPAC Sponsor Entity distributes SPAC shares to us, we account for those SPAC shares as a component of other investments, at fair value.  The following table shows the equity method balance included in SPAC Sponsor Entities and Other above broken out by the ultimate public company investee.  For several of the investments described below, we also had an investment in the same company accounted for at fair value as a component of other investments, at fair value during the periods presented. See discussion of principal transactions above.

 

   

Three Months Ended March 31,

 
   

2023

   

2022

   

Change

 

HLGN

  $ -     $ (10,610 )   $ 10,610  

WEJO

    -       (1,603 )     1,603  

DRTS

    (54 )     1,309       (1,363 )

Other

    (483 )     (603 )     120  

Total

  $ (537 )   $ (11,507 )   $ 10,970  

 

 

As of March 31, 2023, our equity method investment in the sponsor entity of the predecessor SPAC of HLGN was $0.  However, during the periods presented we held HLGN shares as a component of other investments, at fair value as of March 31, 2023.  See Principal Transactions above and note 8 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

 

As of March 31, 2023, our equity method investment in the sponsor entity of the predecessor SPAC of WEJO was $0.  However, during the periods presented we held WEJO shares as a component of other investments, at fair value as of March 31, 2023.  See Principal Transactions above and note 8 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

 

As of March 31, 2023, our equity method investment in the sponsor entity of the predecessor SPAC of DRTS was $325.  

 

The remaining investments in SPAC Sponsor Entities and Other represent investments in sponsor entities that have not yet completed a business combination and other equity method investments.  See note 11 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q

 

 

Income Tax Expense / (Benefit) 



We have significant carryforward tax assets. As of December 31, 2022, the Company had a federal net operating loss (“NOL”) of approximately $96,065, which will be available to offset future taxable income, subject to limitations described below. If not used, this NOL will begin to expire in 2028. The Company also had net capital losses (“NCLs”) in excess of capital gains of $70,457 as of December 31, 2022, which can be carried forward to offset future capital gains. If not used, this carryforward will begin to expire in 2023. ASC 746 requires that we record a valuation allowance against these assets so that the net asset recognized is, in management's judgment, more likely than not to be realized.

 

Income tax expense / (benefit) decreased by $1,249 to $584 for the three months ended March 31, 2023, as compared to $1,833 for the three months ended March 31, 2022. The decrease was primarily due to an increase in the valuation allowance related to our NOL carryforward assets recorded in the three months ended March 31, 2022.  This increase of the valuation allowance was recorded as the result of  the conversion of the 2017 Convertible Note, which occurred in March 2022.  This conversion resulted in dilution of  Cohen and Company, Inc.'s share of the Operating LLC, which reduced the expected amount of future income available to utilize these carryforward assets.  

 

Our provision for income taxes fluctuates due to several factors mostly attributable to our legal structure summarized as follows:

 

It is important to note that when evaluating our income tax expense or benefit (especially compared to other companies' expense or benefit) that substantially all of our operations occur in the Operating LLC.  There are some local taxes and foreign taxes to which the Operating LLC or its subsidiaries are subject, but the Operating LLC is generally treated as a pass-through entity and is not subject to U.S. federal or state income tax.  Therefore, the members of the Operating LLC receive allocations of its income and are subject to U.S. federal and state taxes.  For the current period, Cohen & Company Inc. was allocated 27.14% of the income generated by the Operating LLC.  To the extent Cohen & Company Inc. incurs tax obligations on this, the related tax expense is recognized in these consolidated financial statements.  However, the remaining 72.86% that was allocated to the non-controlling members of the Operating LLC is subject to taxation on the members' tax returns.  That tax obligation is not included in these consolidated financial statements.  

 

We also have significant valuation allowances applied against our carryforward (NOL and NCL) deferred tax assets as well as our tax over book basis in the Operating LLC.  Valuation allowances are applied to deferred tax assets when management determines that the assets may not be fully realized.  This determination requires significant judgement and is primarily based on management's expectations regarding the generation of future taxable income.  ASC 740 indicates that all available evidence should be considered when assessing the need for and the appropriate level of a valuation allowance.  All available evidence includes historical information supplemented by all currently available information about future years.  Our earnings are very volatile, which makes this determination especially difficult.  Although we will make adjustments to these valuation allowances throughout the year as appropriate, our actual results for any particular fiscal year provide the best evidence of our ability to generate future taxable income.  We give more weight to the full year results in making our estimates of future taxable income as compared to quarterly earnings, which are even more volatile than our annual results.  Therefore, we may have significant adjustments to our valuation allowances (and therefore our income tax expenses or benefit), which may be recorded in the fourth quarter of any particular fiscal year.  

 

 

Net Income / (Loss) Attributable to the Non-Convertible Non-controlling Interest

 

Net income / (loss) attributable to the non-convertible non-controlling interest for the three months ended March 31, 2023 and 2022 was comprised of the non-controlling interest related to member interests in consolidated subsidiaries of the Operating LLC other than interests held by us for the relevant periods.  These interests are not convertible into Common Stock.  

 

SUMMARY CALCULATION OF NON-CONVERTIBLE NON-CONTROLLING INTEREST

For the Three Months Ended March 31, 2023

 

   

Three Months Ended March 31,

 
   

2023

   

2022

   

Change

 

Insurance III SPAC Sponsor Entities

  $ -     $ (297 )   $ (297 )

SPAC PIPE Entities

    -       (2,082 )     (2,082 )

Other SPAC Sponsor Investor

    (17 )     (12,325 )     (12,308 )

GP of SPAC Fund

    114       -       (114 )

Total

  $ 97     $ (14,704 )   $ (14,801 )

 

Insurance SPAC III Sponsor Entities are the sponsor entities formed by us for the Insurance SPAC III.  SPAC PIPE Entities are entities that invest in PIPE's ("Private Investment in Public Equity") of post business combination SPACs.  Other SPAC Sponsor Investor represents an entity that we consolidate but do not wholly own that invests in other SPAC sponsor entities.  The GP of the SPAC Fund is consolidated by us but we do not wholly own it.  

 

Net Income / (Loss) Attributable to the Convertible Non-controlling Interest

 

Net income / (loss) attributable to the convertible non-controlling interest for the three months ended March 31, 2023 and 2022 was comprised of the non-controlling interest related to member interests in the Operating LLC other than interests held by us for the relevant periods. These interests are convertible into Common Stock.  See note 21 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.  

 

SUMMARY CALCULATION OF CONVERTIBLE NON-CONTROLLING INTEREST

For the Three Months Ended March 31, 2023

 

 

   

Total Operating LLC

   

Cohen &

         
   

Consolidated

   

Company Inc.

   

Consolidated

 

Net income / (loss) before tax

  $ (9,470 )   $ -     $ (9,470 )

Income tax expense / (benefit)

    746       (162 )     584  

Net income / (loss) after tax

    (10,216 )     162       (10,054 )

Other consolidated subsidiary non-controlling interest

    97                  

Net income / (loss) attributable to the Operating LLC

    (10,313 )                

Average effective Operating LLC non-controlling interest % (1)

    72.86 %                

Operating LLC non-controlling interest

  $ (7,514 )                
                         

 

SUMMARY CALCULATION OF NON-CONTROLLING INTEREST

For the Three Months Ended March 31, 2022

 

   

Total Operating LLC

   

Cohen &

         
   

Consolidated

   

Company Inc.

   

Consolidated

 

Net income / (loss) before tax

  $ (33,333 )   $ -     $ (33,333 )

Income tax expense / (benefit)

    111       1,722       1,833  

Net income / (loss) after tax

    (33,444 )     (1,722 )     (35,166 )

Other consolidated subsidiary non-controlling interest

    (14,704 )                

Net income / (loss) attributable to the Operating LLC

    (18,740 )                

Average effective Operating LLC non-controlling interest % (1)

    68.57 %                

Operating LLC non-controlling interest

    (12,850 )                
                         

  

  

(1)

Non-controlling interest is recorded on a quarterly basis. Because earnings are recognized unevenly throughout the year and the non-controlling interest percentage may change during the period, the average effective non-controlling interest percentage may not equal the percentage at the end of any period or the simple average of the beginning and ending percentages.



 

Liquidity and Capital Resources

 

Liquidity is a measurement of our ability to meet potential cash requirements including ongoing commitments to repay debt borrowings, make interest payments on outstanding borrowings, fund investments, and support other general business purposes. In addition, our United States and European broker-dealer subsidiaries are subject to certain regulatory requirements to maintain minimum levels of net capital. Historically, our primary sources of funds have been our operating activities and general corporate borrowings. In addition, our trading operations have generally been financed by use of collateralized securities financing arrangements as well as margin loans.

 

Certain subsidiaries of the Operating LLC have restrictions on the withdrawal of capital and otherwise in making distributions and loans. JVB is subject to net capital restrictions imposed by the SEC and FINRA that require certain minimum levels of net capital to remain in this subsidiary. In addition, these restrictions could potentially impose notice requirements or limit our ability to withdraw capital above the required minimum amounts (excess capital) whether through a distribution or a loan. CCFESA is subject to the regulations of the ACPR.  ACPR imposes minimum capital requirements.  See note 25 to our consolidated financial statements included in our Annual Report for the year ended December 31, 2022 on Form 10-K.

 

See Liquidity and Capital Resources – Contractual Obligations below.

 

During the third quarter of 2010, our board of directors initiated a dividend of $0.50 per quarter, which was paid regularly through December 31, 2011. Beginning in 2012, our board of directors declared a dividend of $0.20 per quarter, which was paid regularly through the first quarter of 2019.  Each time a cash dividend was declared by our board of directors, a pro rata distribution was made to the other members of the Operating LLC upon payment of dividends to our stockholders. 

 

On July 29, 2021, our board of directors reinstated our quarterly dividend declaring a cash dividend of $0.25 per share.  We have paid a quarterly cash dividend of $0.25 regularly since that date.  In addition to our routine quarterly distribution, on March 8, 2022, our board of directors declared a special cash dividend of $0.75 per share.  On May 4, 2023, our board of directors declared a quarterly dividend of $0.25 per share payable on June 2, 2023 to shareholders of record on May 18, 2023.

 

During the three months ended March 31, 2023 and 2022, we had the following other financing transactions in excess of $1,000.  This excludes non-cash transactions.  See note 23 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.  

 

During the three months ended March 31, 2023:

 

 

● 

We had no financing transactions in excess of $1,000.

 

During the three months ended March 31, 2022: 

 

  We issued a new 2020 Senior Note for $2,250 and used the proceeds to pay off an existing 2020 Senior Note.  
  We made distributions to the non-convertible non-controlling interest of $1,775.  

 

 

Cash Flows

 

We have seven primary uses for capital:

 

(1)

To fund the operations of our Capital Markets business segment. Our Capital Markets business segment utilizes capital (i) to fund securities inventory to facilitate client trading activities; (ii) for risk trading for our own account; (iii) to fund our collateralized securities lending activities; (iv) for temporary capital needs associated with underwriting activities; (v) to fund business expansion into existing or new product lines including additional capital dedicated to our mortgage group as well as our matched book repo business; and (vi) to fund any operating losses incurred.

(2)

To fund the expansion of our Asset Management business segment.  We generally grow our AUM by sponsoring new Investment Vehicles.  The creation of a new Investment Vehicle often requires us to invest a certain amount of our own capital to attract outside capital to manage.  Also, these new Investment Vehicles often require warehouse and other third-party financing to fund the acquisition of investments.  Finally, we generally will hire employees to manage new Investment Vehicles and will operate at a loss for a startup period.  

(3)

To fund investments. We make principal investments (including sponsor and other investments in SPACs) to generate returns.  We may need to raise additional debt or equity financing in order to ensure we have the capital necessary to take advantage of attractive investment opportunities.  

(4)

To fund mergers or acquisitions. We may opportunistically use capital to acquire other asset managers, individual asset management contracts, or financial services firms. To the extent our liquidity sources are insufficient to fund our future merger or acquisition activities, we may need to raise additional funding through an equity or debt offering. No assurances can be given that additional financing will be available in the future, or that if available, such financing will be on favorable terms.

(5)

To fund potential dividends and distributions. We sometimes pay dividends.  Each time a cash dividend was declared by our board of directors, a pro rata distribution was made to the other members of the Operating LLC upon payment of dividends to our stockholders.  

(6)

To fund potential repurchases of Common Stock.  We have opportunistically repurchased Common Stock in private transactions as well as through the 10b5-1 Plan.  

(7)

To pay off debt as it matures:  We have indebtedness that must be repaid as it matures. See note 16 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

  

If we are unable to raise sufficient capital on economically favorable terms, we may need to reduce the amount of capital invested for the uses described above, which may adversely impact earnings and our ability to pay dividends.

 

As of March 31, 2023 and December 31, 2022, we maintained cash and cash equivalents of $ 3,641 and $ 29,101, respectively. We generated cash from or used cash for the activities described below.

 

 

SUMMARY CASH FLOW INFORMATION

(Dollars in Thousands)

 

     

Three Months Ended March 31,

 
     

2023

   

2022

 
Cash flow from operating activities     $ (27,709 )   $ 14,350  
Cash flow from investing activities       2,714       (149 )
Cash flow from financing activities       (556 )     (2,182 )
Effect of exchange rate on cash       91       (76 )

Net cash flow

      (25,460 )     11,943  
Cash and cash equivalents, beginning       29,101       50,567  

Cash and cash equivalents, ending

    $ 3,641     $ 62,510  

 

See the statement of cash flows in our consolidated financial statements. We believe our available cash and cash equivalents, as well as our investment in our trading portfolio and related borrowing capacity, will provide sufficient liquidity to meet the cash needs of our ongoing operations in the near term.

 

 

Three Months Ended March 31, 2023

 

As of March 31, 2023, our cash and cash equivalents were $ 3,641, representing a decrease of $ 25,460 from December 31, 2022. The decrease was attributable to cash used in operating activities of $ 27,709, cash provided by investing activities of $ 2,714, cash used in financing activities of $ 556, and an increase in cash caused by the change in exchange rates of $ 91.

 

The cash used in operating activities of $ 27,709 was comprised of (a) net cash outflows of $ 7,271 related to working capital fluctuations; (b) net cash outflows of $ 14,656 from trading activities comprised of our investments-trading, trading securities sold, not yet purchased, receivables under resale agreements, securities sold under agreements to repurchase, and receivables and payables from brokers, dealers, and clearing agencies, as well as the changes in unrealized gains and losses on the investments-trading and trading securities sold, but not yet purchased; and (c)  net cash outflows from other earnings items of $ 5,782 (which represents net income or loss adjusted for the following non-cash operating items: other income / (expense), realized and unrealized gains and losses and accretion of income on other investments, income from equity method affiliates, equity based compensation, depreciation and amortization, deferred taxes, and amortization of discount on debt).

 

  

The cash provided by investing activities of $ 2,714 was comprised of (a) $3,908 in sales and returns of principal from other investments, at fair value; (b) $1 in distributions from equity method affiliates; partially offset by (c) $363 in cash used to purchase other investments, at fair value; (d) $736 in cash used to invest in equity method affiliates; and (e) $96 of cash used to purchase furniture and equipment.  

 

The cash used in financing activities of $ 556 was comprised of (a) $164 in cash used to net settle equity awards; (b) $215 in cash used to pay dividends; (c) $215 in convertible non-controlling interest distributions; partially offset by (d) $38 in investments received from non-controlling interests.  

 

Three Months Ended March 31, 2022

 

As of March 31, 2022, our cash and cash equivalents were $62,510, representing an increase of $11,943 from December 31, 2021. The increase was attributable to cash provided by operating activities of $14,350, cash used in investing activities of $149, cash used in financing activities of $2,182, and a decrease in cash caused by the change in exchange rates of $76.

 

The cash provided by operating activities of $14,350 was comprised of (a) net cash inflows of $12,154 related to working capital fluctuations; (b) net cash inflows of $3,814 from trading activities comprised of our investments-trading, trading securities sold, not yet purchased, receivables under resale agreements, securities sold under agreements to repurchase, and receivables and payables from brokers, dealers, and clearing agencies, as well as the changes in unrealized gains and losses on the investments-trading and trading securities sold, but not yet purchased; and (c)  net cash outflows from other earnings items of $1,618 (which represents net income or loss adjusted for the following non-cash operating items: other income / (expense), realized and unrealized gains and losses and accretion of income on other investments, income from equity method affiliates, equity based compensation, depreciation and amortization, deferred taxes, and amortization of discount on debt).

 

The cash used in investing activities of $149 was comprised of (a) $3,869 of purchases of other investments, at fair value; (b) $4,178 of purchases of other investments sold, not yet purchased, at fair value; (c) $438 of investments in equity method affiliates, (d) $298 of purchases of furniture, equipment, and leasehold improvements; partially offset by (e) $7,395 of sales and returns of principal of other investments, at fair value and (f) $1,239 of sales and returns of principal of other investments sold, not yet purchased, at fair value.  

 

The cash used in financing activities of $2,182 was comprised of (a) $2,250 used to repay debt, (b) $219 used to net settle equity awards, (c) $54 used to pay dividends, (d) $142 used to pay distributions to the convertible non-controlling interest; and (e) $1,775 of distributions to the non-convertible non-controlling interest; partially offset by (f) $2,250 in proceeds from issuance of debt and (g) $6 in non-convertible non-controlling interest investments.  

 

 

 

Note Regarding Collateral Deposits and Impact on Operating Cash Flow

 

As part of our matched book repo operations, we enter into reverse repos with counterparties whereby we lend money and receive securities as collateral.  In accordance with ASC 860, the collateral securities are not recorded in our consolidated balance sheets.  However, from time to time we will hold cash instead of securities as collateral for these transactions.  When we are provided cash as collateral for reverse repo transactions, we will make an entry to increase our cash and cash equivalents and to increase our other liabilities for the amount of cash received.  There are two main reasons we may receive collateral in the form of cash as opposed to securities.  First, when the value of the collateral securities we have in our possession decline, we will require the counterparty to provide us with additional collateral.  We will accept either cash or additional liquid securities.  Often, our counterparties will provide us with cash as they may not have liquid securities readily available.  Second, from time to time, our counterparties require a portion of the collateral securities in our possession returned to them for operating purposes.  In such instances, the counterparty may not have substitute liquid securities available and will often provide us with cash as collateral instead.  It is important to note that when we receive cash as collateral, it is temporary in nature and we have an obligation to return that cash when the counterparty provides substitute liquid securities as collateral or otherwise satisfies their associated reverse repo obligation.  We are generally required to return any cash collateral the same business day that we receive substitute securities.  The amount of cash we receive as collateral for our repo operations is volatile and therefore, both our cash and cash equivalents balance and our cash provided by and used in operations are volatile as they are both impacted. These amounts can be large and should be taken into account when analyzing our cash flow from operations.  

 

The following table shows the impact that changes in these collateral deposits had on our cash flows in each period presented:

 

   

Three Months Ended March 31,

 
   

2023

   

2022

 

Collateral deposit end of period

  $ 2,290     $ 40,465  

Less: Collateral deposit beginning of period

    4,301       17,320  

Impact to cash flow from operations

  $ (2,011 )   $ 23,145  

 

Regulatory Capital Requirements

 

We have two subsidiaries that are licensed securities dealers: JVB in the United States and CCFESA in France. As a U.S. broker-dealer, JVB is subject to the Uniform Net Capital Rule in Rule 15c3-1 under the Exchange Act. CCFESA is subject to the regulations of the ACPR. The amount of net assets that these subsidiaries may distribute is subject to restrictions under the applicable net capital rules. These subsidiaries have historically operated in excess of minimum net capital requirements. Our minimum capital requirements at March 31, 2023 were as follows.

  

  

MINIMUM NET CAPITAL REQUIREMENTS

(Dollars in Thousands)

 

    March 31, 2023  

United States

  $ 250  

Europe

    522  

Total

  $ 772  

 

We operate with more than the minimum regulatory capital requirement in our licensed broker-dealers and at March 31, 2023, total net capital, or the equivalent as defined by the relevant statutory regulations, in our licensed broker-dealers totaled $49,820. See note 18 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.  In addition, our licensed broker-dealers are generally subject to capital withdrawal notification and restrictions.

 

Restrictions of Distributions of Capital from JVB

 

As of March 31, 2023, our total equity on a consolidated basis was $82,365.  However, the total equity of JVB was $84,354.  Therefore, a net deficit of $1,989 exists outside of JVB.  

 

From time to time, we may need to take distributions of income (and potentially returns of capital) from JVB to satisfy the cash needs as a result of the losses incurred outside of JVB or to satisfy other obligations that come due outside of JVB.  However, we are subject to significant limitations on our ability to make distributions from JVB.  These limitations include limitations imposed by FINRA under rule 15c3-1 (described immediately above) and limitations under our line of credit with Byline Bank (see note 16 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q).  Furthermore, counterparties to JVB have their own internal counterparty credit requirements.  The specific requirements are not generally shared with us.  However, if we take too much in capital distributions from JVB (beyond its net income), we may not be able to trade with certain counterparties which may cause JVB’s operations to deteriorate. 

 

Securities Financing

 

We maintain repurchase agreements with various third-party institutions. There is no maximum limit as to the amount of securities that may be transferred pursuant to these agreements, and transactions are approved on a case-by-case basis. The repurchase agreements do not include substantive provisions other than those covenants and other customary provisions contained in standard master repurchase agreements. The repurchase agreements generally require us to transfer additional securities to the counterparty in the event the value of the securities then held by the counterparty in the margin account falls below specified levels and contain events of default in cases where we breach our obligations under the agreement. We receive margin calls from our repurchase agreement counterparties from time to time in the ordinary course of business. To date, we have maintained sufficient liquidity to meet margin calls, and we have always been able to satisfy a margin call, however, no assurance can be given that we will be able to satisfy requests from our counterparties to post additional collateral in the future. See note 10 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

 

If there were an event of default under a repurchase agreement, the counterparty would have the option to terminate all repurchase transactions existing with us and make any amount due from us to the counterparty payable immediately. Repurchase obligations are full recourse obligations to us. If we were to default under a repurchase obligation, the counterparty would have recourse to our other assets if the collateral was not sufficient to satisfy the obligation in full. Most of our repurchase agreements are entered into as part of our matched book repo business.

 

 

Our clearing brokers provide securities financing arrangements including margin arrangements and securities borrowing and lending arrangements. These arrangements generally require us to transfer additional securities or cash to the clearing broker in the event the value of the securities then held by the clearing broker in the margin account falls below specified levels and contain events of default in cases where we breach our obligations under such agreements. 

 

An event of default under the clearing agreement would give our counterparty the option to terminate our clearing arrangement. Any amounts owed to the clearing broker would be immediately due and payable. These obligations are recourse to us. Furthermore, a termination of any of our clearing arrangements would result in a significant disruption to our business and would have a significant negative impact on our dealings and relationship with our customers. 

 

The following table presents our period end balance, average monthly balance, and maximum balance at any month end during the three months ended March 31, 2023 and the twelve months ended December 31, 2022 for receivables under resale agreements and securities sold under agreements to repurchase.

 

    For the Three Months Ended March 31, 2023     For the Twelve Months Ended December 31, 2022  

Receivables under resale agreements

               

Period end

  $ 381,813     $ 437,692  

Monthly average

  $ 404,083     $ 1,628,141  

Maximum month end

  $ 412,801     $ 3,006,658  

Securities sold under agreements to repurchase

               

Period end

  $ 395,226     $ 452,797  

Monthly average

  $ 418,121     $ 1,649,310  

Maximum month end

  $ 427,144     $ 3,002,514  

 

Fluctuations in the balance of our repurchase agreements from period to period and intra-period are dependent on business activity in those periods. The fluctuations in the balances of our receivables under resale agreements over the periods presented were impacted by our clients' desires to execute collateralized financing arrangements through the repurchase market or other financing products.

 

Average balances and period end balances will fluctuate based on market and liquidity conditions and we consider such intra-period fluctuations as typical for the repurchase market. Month-end balances may be higher or lower than average period balances.  

 

 

Debt Financing

 

The following table summarizes our long-term indebtedness and other financing outstanding. See note 16 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q for a discussion of the Company’s outstanding debt.

 

  

DETAIL OF DEBT

(Dollars in Thousands)

 

   

As of

   

As of

 

Interest

       

Description

 

March 31, 2023

   

December 31, 2022

 

Rate Terms

 

Interest (2)

 

Maturity

Non-convertible debt:

                         

10.00% senior note (the "2020 Senior Notes")

  $ 4,500     $ 4,500  

Fixed

 

10.00%

 

January 2024

                           

Junior subordinated notes: (1)

                         

Alesco Capital Trust I

    28,125       28,125  

Variable

 

8.80%

 

July 2037

Sunset Financial Statutory Trust I

    20,000       20,000  

Variable

 

9.31%

 

March 2035

Less unamortized discount

    (23,452 )     (23,601 )          
      24,673       24,524            
                           

Byline Bank

    -       -  

Variable

 

NA

 

December 2023

Total

  $ 29,173     $ 29,024            

 

(1)

The junior subordinated notes listed represent debt the Company owes to the two trusts noted above. The total par amount owed by the Company to the trusts is $49,614.  However, the Company owns the common stock of the trusts in a total par amount of $1,489.  The Company pays interest (and at maturity, principal) to the trusts on the entire $49,614 junior notes outstanding. However, the Company receives back from the trusts the pro rata share of interest and principal on the common stock held by the Company.  These trusts are VIEs and the Company does not consolidate them even though the Company holds the common stock.  The Company carries the common stock on its balance sheet at a value of $0. The junior subordinated notes are recorded at a discount to par.  When factoring in the discount, the yield to maturity of the junior subordinated notes as of March 31, 2023 on a combined basis was 19.87% assuming the variable rate in effect on the last day of the reporting period remains in effect until maturity.

(2)

Represents the interest rate in effect as of the last day of the reporting period.  

 

 

Redeemable Financial Instruments 

 

As of March 31, 2023 and December 31, 2022, we had a redeemable financial instrument payable to JKD Investor.  See note 16 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

 

 

Off-Balance Sheet Arrangements

 

Other than as described in note 9 (derivative financial instruments) and note 14 (variable interest entities) to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, there were no material off balance sheet arrangements as of March 31, 2023. 



Contractual Obligations

 

The table below summarizes our significant contractual obligations as of March 31, 2023 and the future periods in which such obligations are expected to be settled in cash. Our junior subordinated notes are assumed to be repaid on their respective maturity dates. Excluded from the table below are obligations that are short-term in nature, including trading liabilities (including derivatives) and repurchase agreements. In addition, amortization of discount on debt is excluded.

 

 

CONTRACTUAL OBLIGATIONS

March 31, 2023

(Dollars in Thousands)

 

   

Payment Due by Period

 
   

Total

   

Less than 1 Year

   

1 - 3 Years

   

3 - 5 Years

   

More than 5 Years

 

Operating lease arrangements

  $ 11,248     $ 2,686     $ 3,662     $ 3,030     $ 1,870  

Maturity of 2020 Senior Notes (1)

    4,500       4,500       -       -       -  

Interest on 2020 Senior Notes (1)

    488       488       -       -       -  

Maturities on junior subordinated notes

    48,125       -       -       -       48,125  

Interest on junior subordinated notes (2)

    58,249       4,338       8,677       8,677       36,557  

Redeemable Financial Instrument - JKD Capital Partners 1 (3)

    7,868       7,868       -       -       -  

Other Operating Obligations (4)

    1,099       935       164       -       -  
    $ 131,577     $ 20,815     $ 12,503     $ 11,707     $ 86,552  

 

  (1) The 2020 Senior Notes mature on January 31, 2024.  However, any time after January 31, 2023, the holder can give us 31 days' notice and require full repayment.  For purposes of the table above, we show the maturity on the earlier date, but show the interest payments out to the stated maturity date.  
 

(2)

The interest on the junior subordinated notes related to Alesco Capital Trust I is variable. The interest rate of 8.80% (based on a 90-day LIBOR rate in effect as of March 31, 2023 plus 4.00%) was used to compute the contractual interest payment in each period noted. The interest on the junior subordinated notes related to Sunset Financial Statutory Trust I is variable. The interest rate of 9.31% (based on a 90-day LIBOR rate in effect as of March 31, 2023 plus 4.15%) was used to compute the contractual interest payment in each period noted.

 

(3)

Represents redemption value of the redeemable financial instruments as of the reporting period. The redeemable financial instruments do not have a fixed maturity date.  The period shown above represents the first period the holder of these instruments has the ability to require redemption by us.  

 

(4)

Represents material operating contracts for various services.  

 

 

We believe that we will be able to continue to fund our current operations and meet our contractual obligations through a combination of existing cash resources and other sources of credit. Due to the uncertainties that exist in the economy, we cannot be certain that we will be able to replace existing financing or find sources of additional financing in the future.

 

Recent Accounting Pronouncements

 

The following is a list of recent accounting pronouncements that we believe will have a continuing impact on our financial statements going forward.

 

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40):  Accounting for Convertible Instruments and Contracts in an Entity's Own Equity.  This ASU simplifies accounting for convertible instruments by removing major separation models currently required.  The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception.  The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. This ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.  We are currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements. 

 

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. This ASU is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. We are currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements.

 

In March 2023, the FASB issued ASU 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU responds to stakeholder feedback that the proportional amortization method provides investors and other allocators of capital with a better understanding of the returns from investments that are made primarily for the purpose of receiving income tax credits and other income tax benefits. This ASU is effective for fiscal years beginning after December 15, 2023.  Early adoption is permitted.  We are currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements.

 

Critical Accounting Policies and Estimates

 

Our accounting policies are essential to understanding and interpreting the financial results reported in our condensed consolidated financial statements. Our industry is subject to a number of highly complex accounting rules and requirements many of which place heavy burdens on management to make judgments relating to our business. The significant accounting policies used in the preparation of our condensed consolidated financial statements are summarized in note 3 to our consolidated financial statements and notes thereto found in our Annual Report on Form 10-K for the year ended December 31, 2022. Certain of those policies are considered to be particularly important to the presentation of our financial results because they require us to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. During the three months ended March 31, 2023, there were no material changes to matters discussed under the heading “Critical Accounting Policies and Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022.

 

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

All amounts in this section are in thousands unless otherwise noted.

 

Market Risk

 

Market risk is the risk of economic loss arising from the adverse impact of market changes to the market value of our trading and investment positions. Market risk is inherent to both derivative and non-derivative financial instruments, and, accordingly, the scope of our market risk management procedures extends beyond derivatives to include all market risk sensitive financial instruments. For purposes of analyzing the components of market risk, we have broken out our investment portfolio into three broad categories, plus debt, as described below.

 

Fixed Income Securities: We hold, from time to time, the following securities: U.S. Treasury securities, U.S. government agency MBS, U.S. government agency debt securities, CMOs, non-government MBS, corporate bonds, non-redeemable and redeemable preferred stock, municipal bonds, certificates of deposits, residential mortgage loans, whole loans, and unconsolidated investments in the middle and senior tiers of securitization entities and TruPS. We attempt to mitigate our exposure to market risk by entering into economic hedging transactions, which may include TBAs and other forward agency MBS contracts. The fixed income category can be broadly broken down into two subcategories: fixed rate and floating rate.

 

Floating rate securities are not in themselves particularly sensitive to interest rate risk. Because they generally accrue income at a variable rate, the movement in interest rates typically does not impact their fair value. Fluctuations in their current income due to variations in interest rates are generally not material to us. Floating rate fixed income securities are subject to other market risks such as default risk of the underlying issuer, changes in issuer’s credit spreads, prepayment rates, investor demand and supply of securities within a particular asset class or industry class of the ultimate obligor. The sensitivity to any individual market risk can be difficult to quantify.

 

The fair value of fixed rate securities is sensitive to changes in interest rates. However, fixed rate securities that have low credit ratings or represent junior interests in securitizations are not particularly interest rate sensitive. In general, when we acquire interest rate sensitive securities, we enter into an offsetting short position for a similar fixed rate security. Alternatively, we may enter into other interest rate hedging arrangements such as interest rate swaps or Eurodollar futures. We measure our net interest rate sensitivity by determining how the fair value of our net interest rate sensitive assets would change as a result of a 100 basis point (“bps”) adverse shift across the entire yield curve. Based on this analysis, as of March 31, 2023, we would incur a loss of $1,234 if the yield curve rises 100 bps across all maturities and a gain of $1,229 if the yield curve falls 100 bps across all maturities.

 

Equity Securities: We hold equity interests in both public and private entities. These investments are subject to equity price risk. Equity price risk results from changes in the level or volatility of underlying equity prices, which affect the value of equity securities or instruments that in turn derive their value from a particular stock. We also hold a significant amount of equity in public companies that recently completed a merger with a SPAC we sponsored or invested in. A significant portion of the equity we hold in these types of entities are subject to sale restrictions. We attempt to reduce the risk of loss inherent in our inventory of equity securities by closely monitoring those security positions or in some cases entering into derivatives trades to hedge this exposure. We also have had equity investments in entities where the investment is denominated in a foreign currency, or where the investment is denominated in U.S. Dollars but the investee primarily makes investments in foreign currencies. The fair values of these investments are subject to change as the spot foreign exchange rate between these currencies and the U.S. Dollar (our functional currency) fluctuates. We may, from time to time, enter into foreign exchange rate derivatives to hedge all or a portion of this risk. We measure our net equity price sensitivity and foreign currency sensitivity by determining how the net fair value of our equity price sensitive and foreign exchange sensitive assets would change as a result of a 10% adverse change in equity prices or foreign exchange rates. Based on this analysis, as of March 31, 2023, our equity price sensitivity was $1,276 and our foreign exchange currency sensitivity was $0.  

 

Other Securities: These investments are primarily made up of residual interests in securitization entities. The fair value of these investments will fluctuate over time based on a number of factors including, but not limited to, liquidity of the investment type, the credit performance of the individual assets and issuers within the securitization entity, the asset class of the securitization entity and the relative supply of and demand for investments within that asset class, credit spreads in general, the transparency of valuation of the assets and liabilities of the securitization entity, and investors’ view of the accuracy of ratings prepared by the independent rating agencies. The sensitivity to any individual market risk cannot be quantified.

 

Debt: In addition to the risks noted above, we incur interest rate risk related to our debt obligations. We have debt that accrues interest at either variable rates or fixed rates. As of March 31, 2023, a 100 bps change in the three month LIBOR would result in a change in our annual cash paid for interest in the amount of $481. A 100 bps adverse change in the market yield to maturity would result in an increase in the fair value of the debt in the amount of $2,031 as of March 31, 2023.  

 

Counterparty Risk and Settlement Risk

 

We are subject to counterparty risk primarily in two areas: (i) our collateralized securities transactions described in note 10 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q and (ii) our TBA and other forward agency MBS activities described in note 9 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q. With respect to the matched book repo financing activities, our risk is that the counterparty does not fulfill its obligation to repurchase the underlying security when it is due. In this case, we would typically liquidate the underlying security, which may result in a loss if the security has declined in value in relation to the balance due from the counterparty under the reverse repurchase agreement.

 

With respect to our TBA and other forward agency MBS activities, our risk is that the counterparty does not settle the TBA trade on the scheduled settlement date. In this case, we would have to execute the trade, which may result in a loss based on market movement in the value of the underlying trade between its initial trade date and its settlement date (which in the case of TBAs can be as long as 90 days). If we were to incur a loss under either of these activities, we have recourse to the counterparty pursuant to the underlying agreements.

 

Finally, we have general settlement risk in all of our regular way fixed income and equity trading activities. If a counterparty fails to settle a trade, we may incur a loss in closing out the position and would be forced to try to recover this loss from the counterparty. If the counterparty has become insolvent or does not have sufficient liquid assets to reimburse us for the loss, we may not get reimbursed.

 

 

How we manage these risks

 

Market Risk

 

We seek to manage our market risk by utilizing our underwriting and credit analysis processes that are performed in advance of acquiring any investment. In addition, we continually monitor our investments on a daily basis. We perform an in-depth monthly analysis on all our investments and our risk committee meets on a weekly basis to review specific issues within our portfolio and to make recommendations for dealing with these issues. In addition, our broker-dealer has an assigned chief risk officer that reviews the firm’s positions and trading activities on a daily basis.

 

Counterparty Risk

 

We seek to manage our counterparty risk primarily through two processes. First, we perform a credit assessment of each counterparty to ensure the counterparty has sufficient equity, liquidity, and profitability to support the level of trading or lending we plan to do with them. Second, we may require counterparties to post cash or other liquid collateral (“margin”) to support changes in the market value of the underlying securities or trades on an ongoing basis.

 

In the case of collateralized securities financing transactions, we will generally lend less than the market value of the underlying security initially. The difference between the amount lent and the value of the security is referred to as the haircut. We will seek to maintain this haircut while the loan is outstanding. If the value of the security declines, we will require the counterparty to post margin to offset this decline. If the counterparty fails to post margin, we will sell the underlying security. The haircut serves as a buffer against market movements to prevent or minimize a loss.

 

In the case of TBA and other forward agency MBS activities, we sometimes require counterparties to post margin with us when the market value of the underlying TBA trade declines. If the counterparty fails to post margin, we will close out the underlying trade. In the case of TBA and other forward agency MBS activities, we will sometimes obtain initial margin or a cash deposit from the counterparty, which serves a purpose similar to the haircut as an additional buffer against losses. However, some of our TBA and other forward agency MBS activities are done without initial margin or cash deposits.

 

Risks Related to our Matched Book Repo Business 

 

We have entered into repurchase and reverse repurchase agreements as part of our matched book repo business.  In general, we will lend money to a counterparty after obtaining collateral securities from that counterparty pursuant to a reverse repurchase agreement.  We will borrow money from another counterparty using those same collateral securities pursuant to a repurchase agreement.  We seek to earn net interest income on these matched transactions. 

 

In our gestation repo business, we will generally ensure that the maturity dates of our reverse repurchase agreements match the maturity dates of the matched repurchase agreements. Because our maturities are matched, we can pass along any changes in funding terms imposed upon us by our repurchase agreement counterparty to our reverse repurchase agreement counterparty. Therefore, we are not exposed to a great deal of interest rate or funding risk. The main risk we are exposed to is credit risk. We manage this risk by obtaining collateral in excess of the contractual repo balance and performing credit reviews of counterparties and updating them on a routine basis.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We have established and maintain disclosure controls and procedures that are designed to ensure that material information relating to the Company (and its consolidated subsidiaries) required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, who certify our financial reports, and to other members of senior management and the Company’s board of directors. Under the supervision and with the participation of our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2023. Based on that evaluation, the chief executive officer and the chief financial officer concluded that our disclosure controls and procedures were effective at March 31, 2023.  

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting during the quarter ended March 31, 2023 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

PART II. OTHER INFORMATION 

 

Item 1. Legal Proceedings

 

Incorporated by reference to the headings titled “Commitments and Contingencies” in note 21 to the consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

 

Item 1A. Risk Factors

 

In addition to the information set forth in this Quarterly Report on Form 10-Q, you should also carefully review and consider the risk factors contained in our other reports and periodic filings with the SEC, including without limitation the risk factors contained under the caption “Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, that could materially and adversely affect our business, financial condition, and results of operations. The risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. There have been no material changes in the significant factors that may affect our business and operations as described in “Item 1A—Risk Factors” of the Annual Report on 10-K for the year ended December 31, 2022.

 

Interest rate changes could affect our profitability.

 

The Company’s profitability may be adversely affected by inflation and inflationary expectations. Inflation has been rising at historically high rates, and the Federal Reserve has signaled that it will continue increasing the target federal funds effective rate.

 

Inflation and future expectations of inflation can negatively influence securities prices, including the fair value of fixed income securities we hold on our balance sheet.  Rising interest rates may create instability in the equity markets, reduce the volumes of new issue fixed income instruments, and significantly reduce mortgage activity, all of which negatively affects our profitability.  Additionally, the impact of inflation on the Company’s operating expenses may affect profitability to the extent that additional costs are not recoverable through increased prices of services offered by the Company.

 

 

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

 

 

 

Effective January 1, 2010, the Company ceased to qualify as a REIT and, therefore, is not required to make any dividends or other distributions to its stockholders. However, the Company’s board of directors has the power to decide to increase, reduce, or eliminate dividends in the future. The Company’s board of directors’ decision will depend on a variety of factors, including business, financial, and regulatory considerations as well as any limitations under Maryland law or imposed by any agreements governing indebtedness of the Company. There can be no assurances that such dividends will be maintained or increased and, if maintained or increased, will not subsequently be discontinued.

 

Certain subsidiaries of the Operating LLC have restrictions on the withdrawal of capital and otherwise in making distributions and loans. JVB is subject to net capital restrictions imposed by the SEC and FINRA that require certain minimum levels of net capital to remain in this subsidiary. In addition, these restrictions could potentially impose notice requirements or limit our ability to withdraw capital above the required minimum amounts (excess capital) whether through distribution or loan. CCFESA is regulated by the ACPR in France and must maintain certain minimum levels of capital. See note 19 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

 

Issuer Purchases of Equity Securities

 

Period

 

Total Number of Shares Purchased

   

Average Price Paid Per Share

   

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

   

Maximum Dollar Value of Shares that May Yet be Purchased under the Plans or Programs

 

January 1 thorugh January 31, 2023

          $ -       -       34,704  

February 1 through February 28, 2023

    -     $ -       -       34,704  

March 1 through March 31, 2023

    -     $ -       -       34,704  

Total

    -               -          

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

None

 

 

 

 

 

Item 6. Exhibits

 

Exhibit No.

Description

10.1 Amendment No. 2 to the Investment Agreement, dated February 13, 2023, by and between Cohen and Company, LLC and JKD Capital Partners I LTD (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 9, 2023). 
   

31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.*



 

31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.*



 

32.1

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.**



 

32.2

Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.**



 

101

Interactive data files pursuant to Rule 405 of Regulation S-T formatted inline XBRL: (i) the Consolidated Balance Sheets at March 31, 2023 and December 31, 2022, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2023 and 2022, (iii) the Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2023 and 2022, (iv) the Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022, and (v) Notes to Consolidated Financial Statements.**

   
104 Cover Page Interactive Data File (formatted in inline XBRL and contained in Exhibit 101)



 

*

 

Filed herewith.

**

 

Furnished herewith.

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  

 

Cohen & Company Inc.

 



 

 

 

 

By:

/s/ LESTER R. BRAFMAN

 

 

 

Lester R. Brafman

 

Date: May 5, 2023

 

Chief Executive Officer

 



 

 

 

Cohen & Company Inc.

 



 

 

 

 

By:

/s/ JOSEPH W. POOLER, JR.

 

 

 

Joseph W. Pooler, Jr.

 
Date: May 5, 2023

 

Executive Vice President, Chief Financial Officer, and Treasurer

 

 

 

86
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