See accompanying notes to unaudited consolidated financial statements.
See accompanying notes to unaudited consolidated financial statements.
See accompanying notes to unaudited consolidated financial statements.
See accompanying notes to unaudited consolidated financial statements.
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.
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.
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, Receivables—Nonrefundable 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.
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.
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.
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.
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).
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.
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.
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 | |
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.
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 |
| | | | | | | | | | 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. |
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. |
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.
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.
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/A | Not 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.
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 | |
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.
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 | |
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.
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.
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.
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.
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 | |
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.
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. |
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.
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.
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.
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 | |
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 | ) |
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.
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.
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.
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 | |
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.
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 | |
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 | |
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.
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 | |
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.
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.
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.
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.
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.
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.