Cohen & Co Inc 10-Q for FY2022 Q1
Cohen & Co Inc. (COHN)
About this 10-Q
Cohen & Co Inc filed this 10-Q on May 6, 2022, covering the quarter ended March 31, 2022 (FY2022 Q1).
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- -$682K
- compared with $102.68M a year earlier
- Net loss
- $7.61M
- compared with net income of $9.36M a year earlier
- Diluted EPS
- -$5.46
- compared with $6.98 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from to
Commission File Number:
COHEN & COMPANY INC.
(Exact name of registrant as specified in its charter)
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Registrant’s telephone number, including area code: (
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Securities registered pursuant to Section 12(b) of the Act:
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As of May 2, 2022, there were
FORM 10-Q
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2022
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| PART I. FINANCIAL INFORMATION |
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| Item 1. |
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Consolidated Balance Sheets—March 31, 2022 and December 31, 2021 |
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Consolidated Statements of Changes in Equity—Three Months Ended March 31, 2022 and 2021 |
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Consolidated Statements of Cash Flows—Three Months Ended March 31, 2022 and 2021 |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. |
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| Item 4. |
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| Part II. OTHER INFORMATION |
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| Item 1. |
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| Item 1A. |
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| Item 2. |
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| Item 6. |
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue,” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, level of activity, performance, or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.
These forward-looking statements are found at various places throughout this Quarterly Report on Form 10-Q and include information concerning possible or assumed future results of our operations, including statements about the following subjects:
| ● | integration of operations; |
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| ● | business strategies; |
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| ● | growth opportunities; |
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| ● | competitive position; |
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| ● | market outlook; |
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| ● | expected financial position; |
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| ● | expected results of operations; |
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| ● | future cash flows; |
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| ● | financing plans; |
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| ● | plans and objectives of management; |
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| ● | tax treatment of the business combinations; |
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| ● | the special purpose acquisition companies (SPACs) of which we are a sponsor including, INSU Acquisition III, a blank check company that will seek to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses; |
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| ● | our investments in both SPACs and SPAC sponsor entities, including through our SPAC Fund and SPAC Series Funds |
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| ● | our role as asset manager and sponsor in our SPAC franchise |
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| ● | fair value of assets; and |
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| ● | any other statements regarding future growth, future cash needs, future operations, business plans, future financial results, and any other statements that are not historical facts. |
These forward-looking statements represent our intentions, plans, expectations, assumptions, and beliefs about future events and are subject to risks, uncertainties, and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties, and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You should consider the areas of risk and uncertainty described above and discussed under “Item 1A — Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Actual results may differ materially because of various factors, some of which are outside our control, including the following:
| ● | a decline in general economic conditions or the global financial markets; |
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| ● | continuation of the COVID-19 pandemic or future outbreaks of COVID-19, the timing and effectiveness of vaccine distribution, and uncertainty surrounding the length and severity of future impacts on the global economy and on our business, liquidity, results of operations and financial condition; |
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| ● | economic uncertainty and capital markets disruption which have been significantly impacted by geopolitical instability due to the ongoing military conflict between Russia and Ukraine; | |
| ● | risks and liabilities due to our investments in the equity interests of SPACs and SPAC sponsor entities including the risk of increased regulation applicable to SPACs, risks regarding litigation in connection with the SPACs in which we invest and those which we sponsor, uncertainty of whether the SPACs in which we invest and those we sponsor will consummate a business combination, adverse impacts of COVID-19 on our SPAC franchise, significant competition for business opportunities in the SPAC industry, write-downs or write-offs with respect to the securities which we hold subsequent to the consummation of an initial business combination by the SPACs in which we invest and those which we sponsor, and the target of a SPAC being an early-stage and financially unstable company; |
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| ● | losses caused by financial or other problems experienced by third parties; |
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| ● | losses due to unidentified or unanticipated risks; |
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| ● | losses (whether realized or unrealized) on our principal investments; |
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| ● | a lack of liquidity, i.e., ready access to funds for use in our businesses; or the availability of financing at prohibitive rates; |
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| ● | the ability to attract and retain personnel; |
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| ● | the ability to meet regulatory capital requirements administered by federal agencies; |
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| ● | the ability to pay dividends | |
| ● | an inability to generate incremental income from acquired, newly established or expanded businesses; |
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| ● | unanticipated market closures due to inclement weather or other disasters; |
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| ● | the volume of trading in securities including collateralized securities transactions; |
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| ● | the liquidity in capital markets; |
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| ● | the creditworthiness of our correspondents, trading counterparties, and banking and margin customers; |
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| ● | changing interest rates and their impacts on U.S. residential mortgage volumes; |
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| ● | competitive conditions in each of our business segments; |
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| ● | the availability of borrowings under credit lines, credit agreements, warehouse agreements, and our credit facilities; |
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| ● | the potential misconduct or errors by our employees or by entities with whom we conduct business; and |
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| ● | the potential for litigation and other regulatory liability. |
Our Internet website is www.cohenandcompany.com and we make available on our website: our filings with the Securities and Exchange Commission (“SEC”), including annual reports, quarterly reports, current reports and any amendments to those filings. The reference to our website address does not constitute incorporation by reference of the information contained therein into this Form 10-Q. We also use our website to disseminate other material information to our investors (on the Home Page and in the “Investor Relations” section). Among other things, we post on our website our press releases and information about our public conference calls (including the scheduled dates, times and the methods by which investors and others can listen to those calls), and we make available for replay webcasts of those calls and other presentations for a limited time.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements concerning other matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Quarterly Report on Form 10-Q. Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances, or assumptions underlying such statements, or otherwise.
Certain Terms Used in this Quarterly Report on Form 10-Q
In this Quarterly Report on Form 10-Q, unless otherwise noted or as the context otherwise requires, the “Company,” “we,” “us,” and “our” refer to Cohen & Company Inc. (formerly Institutional Financial Markets, Inc.), a Maryland corporation, and its subsidiaries on a consolidated basis; and “Cohen & Company, LLC” (formerly IFMI, LLC) or the “Operating LLC” refer to the main operating subsidiary of the Company.
“JVB Holdings” refers to JVB Financial Holdings, L.P., a wholly owned subsidiary of the Operating LLC; “JVB” refers to J.V.B. Financial Group, LLC, a wholly owned broker-dealer subsidiary of JVB Holdings; "CCFESA" refers to Cohen & Company Financial Europe Limited 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 wholly owned subsidiary of the Operating LLC regulated by the Central Bank of Ireland ( the “CBI”).
“Securities Act” refers to the Securities Act of 1933, as amended; and “Exchange Act” refers to the Securities Exchange Act of 1934, as amended.
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
| March 31, 2022 | ||||||||
| (unaudited) | December 31, 2021 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Receivables from brokers, dealers, and clearing agencies | ||||||||
| Due from related parties | ||||||||
| Other receivables | ||||||||
| Investments-trading | ||||||||
| Other investments, at fair value | ||||||||
| Receivables under resale agreements | ||||||||
| Investments in equity method affiliates | ||||||||
| Deferred income taxes | ||||||||
| Goodwill | ||||||||
| Right-of-use asset - operating leases | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities | ||||||||
| Payables to brokers, dealers, and clearing agencies | $ | $ | ||||||
| Accounts payable and other liabilities | ||||||||
| Accrued compensation | ||||||||
| Trading securities sold, not yet purchased | ||||||||
| Other investments sold, not yet purchased | ||||||||
| Securities sold under agreements to repurchase | ||||||||
| Lease liability - operating leases | ||||||||
| Redeemable financial instruments | ||||||||
| Debt | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (See note 20) | ||||||||
| Stockholders' Equity: | ||||||||
| Voting Non-Convertible Preferred Stock, par value per share, shares authorized, shares issued and outstanding, respectively | ||||||||
| Common Stock, par value per share, shares authorized, and shares issued and outstanding, respectively, including and unvested or restricted share awards, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| Non-controlling interest | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
(
See accompanying notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands, except share or per share information)
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | ||||||||
| Net trading | $ | $ | ||||||
| Asset management | ||||||||
| New issue and advisory | ||||||||
| Principal transactions and other income (loss) | ( | ) | ||||||
| Total revenues | ( | ) | ||||||
| Operating expenses | ||||||||
| Compensation and benefits | ||||||||
| Business development, occupancy, equipment | ||||||||
| Subscriptions, clearing, and execution | ||||||||
| Professional fee and other operating | ||||||||
| Depreciation and amortization | ||||||||
| Total operating expenses | ||||||||
| Operating income (loss) | ( | ) | ||||||
| Non-operating income (expense) | ||||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Income (loss) from equity method affiliates | ( | ) | ( | ) | ||||
| Income (loss) before income tax expense (benefit) | ( | ) | ||||||
| Income tax expense (benefit) | ||||||||
| Net income (loss) | ( | ) | ||||||
| Less: Net income (loss) attributable to the non-convertible non-controlling interest of the Operating LLC | ( | ) | ||||||
| Enterprise net income (loss) | ( | ) | ||||||
| Less: Net income (loss) attributable to the convertible non-controlling interest of Cohen & Company Inc. | ( | ) | ||||||
| Net income (loss) attributable to Cohen & Company Inc. | $ | ( | ) | $ | ||||
| Income (loss) per share data (see note 19) | ||||||||
| Income (loss) per common share-basic: | ||||||||
| Basic income (loss) per common share | $ | ( | ) | $ | ||||
| Weighted average shares outstanding-basic | ||||||||
| Income (loss) per common share-diluted: | ||||||||
| Diluted income (loss) per common share | $ | ( | ) | $ | ||||
| Weighted average shares outstanding-diluted | ||||||||
| Dividends declared per common share | $ | $ | ||||||
| Comprehensive income (loss) | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Other comprehensive income (loss) item: | ||||||||
| Foreign currency translation adjustments, net of tax of | ( | ) | ( | ) | ||||
| Other comprehensive income (loss), net of tax of | ( | ) | ( | ) | ||||
| Comprehensive income (loss) | ( | ) | ||||||
| Less: comprehensive income (loss) attributable to the non-controlling interest | ( | ) | ||||||
| Comprehensive income (loss) attributable to Cohen & Company Inc. | $ | ( | ) | $ | ||||
See accompanying notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Dollars in Thousands, except share or per share information)
(Unaudited)
| Cohen & Company Inc. | ||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||
| Retained | Accumulated | |||||||||||||||||||||||||||||||
| Additional | Earnings | Other | Total | |||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In Capital | (Accumulated Deficit) | Comprehensive Income (Loss) | Stockholders' Equity | Non-controlling Interest | Total Equity | |||||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other comprehensive (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Acquisition / (surrender) of additional units of consolidated subsidiary, net | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Equity-based compensation | ||||||||||||||||||||||||||||||||
| Shares withheld for employee taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Dividends/distributions to convertible non-controlling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Convertible non-controlling interest investment | ||||||||||||||||||||||||||||||||
| Non-convertible non-controlling interest investment | ||||||||||||||||||||||||||||||||
| Non-convertible non-controlling interest distributions | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Cohen & Company Inc. | ||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||
| Retained | Accumulated | |||||||||||||||||||||||||||||||
| Additional | Earnings | Other | Total | |||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In Capital | (Accumulated Deficit) | Comprehensive Income (Loss) | Stockholders' Equity | Non-controlling Interest | Total Equity | |||||||||||||||||||||||||
| December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Acquisition / (surrender) of additional units of consolidated subsidiary, net | ( | ) | ||||||||||||||||||||||||||||||
| Equity-based compensation and vesting of shares | ||||||||||||||||||||||||||||||||
| Shares withheld for employee taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Purchase and retirement of Common Stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Dividends/distributions to convertible non-controlling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Non-convertible non-controlling interest investment | ||||||||||||||||||||||||||||||||
| Non-convertible non-controlling interest distributions | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating activities | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Equity-based compensation | ||||||||
| Accretion of income on other investments, at fair value | ( | ) | ||||||
| Loss (gain) on other investments, at fair value | ( | ) | ||||||
| Loss / (gain) on other investments, sold not yet purchased | ( | ) | ( | ) | ||||
| (Income) / loss from equity method affiliates | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of discount on debt | ||||||||
| Deferred tax provision (benefit) | ||||||||
| Change in operating assets and liabilities, net: | ||||||||
| Change in receivables from / payables to brokers, dealers, and clearing agencies | ( | ) | ||||||
| Change in receivables from / payables to related parties, net | ||||||||
| (Increase) decrease in other receivables | ( | ) | ( | ) | ||||
| (Increase) decrease in investments-trading | ( | ) | ( | ) | ||||
| (Increase) decrease in receivables under resale agreement | ( | ) | ||||||
| (Increase) decrease in other assets | ( | ) | ( | ) | ||||
| Increase (decrease) in accounts payable and other liabilities | ( | ) | ||||||
| Increase (decrease) in accrued compensation | ( | ) | ( | ) | ||||
| Increase (decrease) in trading securities sold, not yet purchased | ||||||||
| Increase (decrease) in securities sold under agreement to repurchase | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Investing activities | ||||||||
| Purchase of other investments, at fair value | ( | ) | ( | ) | ||||
| Purchase of investments - other investments sold, not yet purchased, at fair value | ( | ) | ( | ) | ||||
| Sales and returns of principal-other investments, at fair value | ||||||||
| Sales and returns of principal - other investments sold, not yet purchased, at fair value | ||||||||
| Investment in equity method affiliate | ( | ) | ( | ) | ||||
| Purchase of furniture, equipment, and leasehold improvements | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Financing activities | ||||||||
| Proceeds from debt | ||||||||
| Repayment of debt | ( | ) | ||||||
| Repayments of redeemable financial instruments | ( | ) | ||||||
| Cash used to net share settle equity awards | ( | ) | ( | ) | ||||
| Purchase and retirement of Common Stock | ( | ) | ||||||
| Cohen & Company Inc. dividends | ( | ) | ( | ) | ||||
| Convertible non-controlling interest distributions | ( | ) | ( | ) | ||||
| Non-convertible non-controlling interest investment | ||||||||
| Non-convertible non-controlling interest distributions | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate on cash | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
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 fixed income and SPAC markets. As of March 31, 2022, the Company had $
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; “JVB” refers to J.V.B. Financial Group LLC, a broker-dealer subsidiary; "CCFESA" refers to Cohen & Company Financial Europe Limited S.A., a majority owned subsidiary regulated by the Autorite de Controle Prudentiel et de Resolution ("ACPR") in France. “CCFL” refers to Cohen & Company Financial Limited (formerly known as EuroDekania Management LTD), a subsidiary formerly regulated by the Financial Conduct Authority (formerly known as Financial Services Authority) in the United Kingdom; “CCFEL” refers to Cohen & Company Financial (Europe) Limited, a subsidiary formerly regulated by the Central Bank of Ireland in Ireland.
The Company’s business is organized into the following business segments.
Capital Markets: The Company’s Capital Markets business segment consists primarily of fixed income sales, trading, matched book repurchase agreement (“repo”) financing, new issue placements in corporate and securitized products, and advisory services. The Company’s fixed income sales and trading group provides trade execution to corporate investors, institutional investors, mortgage originators, and other smaller broker-dealers. The Company specializes in a variety of products, including but not limited to: corporate bonds, asset backed securities (“ABS”), mortgage-backed securities (“MBS”), residential mortgage-backed securities (“RMBS”), CDOs, collateralized loan obligations (“CLOs”), collateralized bond obligations (“CBOs”), collateralized mortgage obligations (“CMOs”), municipal securities, to-be-announced securities (“TBAs”) and other forward agency MBS contracts, U.S. government bonds, U.S. government agency securities, brokered deposits and certificates of deposit (“CDs”) for small banks, and hybrid capital of financial institutions including trust preferred securities (“TruPS”), whole loans, residential transition loans, (“RTLs”), and other structured financial instruments. The Company also offers execution and brokerage services for equity products. The Company operates its capital markets activities primarily through its subsidiaries: JVB in the United States, and CCFESA in Europe. A division of JVB, Cohen & Company Capital Markets is the Company's full-service boutique investment banking platform focusing on SPAC advisory, capital markets advisory, and M&A advisory, with clients primarily in the financial technology (commonly referred to as "fintech") and SPAC spaces.
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, matched book repo, or 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; | |
| ● | Net interest income on the Company’s matched book repo financing activities; and |
| ● | New issue and advisory revenue comprised primarily of (i) new issue revenue associated with originating, arranging, or placing newly created financial instruments and (ii) revenue from advisory services. |
Asset Management
| ● | Asset management fees for the Company’s on-going asset management services provided to certain Investment Vehicles, which may include fees both senior and subordinate to the securities in the Investment Vehicle, and incentive management fees earned based on the performance of the various Investment Vehicles. |
Principal Investing
| ● | Gains and losses (unrealized and realized) and income and expense earned on securities classified as other investments at fair value 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, 2022 and 2021 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, 2021.
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, 2021.
CORRECTION OF AN IMMATERIAL ERROR IN PREVIOUSLY ISSUED FINANCIAL STATEMENTS
During the three months ended March 31, 2022, the Company determined that it had made an error when calculating its December 31, 2021, deferred tax asset and current tax payable related to its net operating loss carryforwards in certain local jurisdictions. Accordingly, the Company recorded an adjustment in that period and revised the December 31, 2021 balances presented herein. The below table shows the line items impacted and compares the amounts as previously stated to the revised amounts included in this report.
The balance sheet amounts shown below are as of December 31, 2021. The income statement amounts are for the year ended December 31, 2021.
| Balance Sheet | As Stated | Revised | Change | |||||||||
| Deferred income taxes | $ | $ | $ | |||||||||
| Accounts payable and other liabilities | ||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||||||
| Non-controlling interest | $ | $ | $ | |||||||||
| Income Statement | ||||||||||||
| Income tax expense (benefit) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net Income (loss) | ||||||||||||
| Net Income attributable to non-controlling interests | ||||||||||||
| Net income (loss) attributable to Cohen & Company, Inc. | $ | $ | $ | |||||||||
| Basic Earnings Per Share | $ | $ | $ | |||||||||
| Diluted Earnings Per Share | $ | $ | $ |
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Adoption of New Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU is intended to simplify accounting for income taxes. It removes specific exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. The Company’s adoption of the provisions of ASU 2019-12, effective January 1, 2021, did not have an effect on the Company’s consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This ASU clarifies certain accounting topics impacted by Topic 321 Investments-Equity Securities. These topics include measuring equity securities using the measurement alternative, how the measurement alternative should be applied to equity method accounting, and certain forward contracts and purchased options which would be accounted for under the equity method of accounting upon settlement or exercise. The Company’s adoption of the provisions of ASU 2020-01, effective January 1, 2021, did not have an effect on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. 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 LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period and will be in effect for a limited time through December 31, 2022. The Company’s adoption of the provisions of ASU 2020-04 and ASU 2021-01, effective March 12, 2020, did not have an effect on the Company’s consolidated financial statements.
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs. The 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 2020-10, Codification Improvements. The ASU affects a wide variety of Topics in the Codification. The 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 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.
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 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. This ASU is effective for fiscal years beginning after December 15, 2022, 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.
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.
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.
Receivables under resale agreements: Receivables under resale agreements are carried at their contracted resale price, have short-term maturities, and are repriced frequently or bear market interest rates and, accordingly, these contracts are at amounts that approximate fair value. The estimated fair value measurements of receivables under resale agreements are based on observations of actual market activity and are generally classified within level 2 of the valuation hierarchy.
Trading securities sold, not yet purchased: These amounts are carried at fair value. The fair value is based on quoted market prices of an active exchange, independent market quotations, market price quotations from third party pricing services, or valuation models when quotations are not available.
Securities sold under agreements to repurchase: The liabilities for securities sold under agreements to repurchase are carried at their contracted repurchase price, have short-term maturities, and are repriced frequently or bear market interest rates and accordingly, these contracts are carried at amounts that approximate fair value. The estimated fair value measurements of securities sold under agreements to repurchase are based on observations of actual market activity and are generally classified within level 2 of the valuation hierarchy.
Redeemable financial instruments: The liabilities for redeemable financial instruments are carried at their redemption value, which approximates fair value. The estimated fair value measurement of the redeemable financial instruments is classified within level 3 of the valuation hierarchy.
Debt: These amounts are carried at outstanding principal less unamortized discount and deferred financing costs. However, a substantial portion of the debt was assumed in the AFN Merger and recorded at fair value as of that date. As of March 31, 2022 and December 31, 2021, the fair value of the Company’s debt was estimated to be $
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 $
Pursuant to the DGC Trust’s governing documents, Daniel G. Cohen has the ability to acquire at any time any of the DGC Trust’s assets, including the units of membership interest, by substituting other property of an equivalent value without the approval or consent of any person, including any trustee or beneficiary of the DGC Trust. see Notes 16 and 23.
The 2020 Senior Notes
On January 31, 2022, the Operating LLC and JKD Investor entered into a Note Purchase Agreement. 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 $
New Commercial Real Estate Opportunities (“CREO”) JV
On September 3, 2021, the Company committed to invest up to $
The CREO JV was formed for the purposes of investing 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. “CRE CLO” means any pooling of commercial real estate mortgage-backed loans into a collateralized loan obligation.
The commercial real estate loans that will be funded by the CREO JV may be originated by the Company and the Company may earn origination fees in connection with such transactions. In addition, the Company may earn structuring fees in connection with structuring and consummating a CRE CLO consisting of a pooling of commercial real estate loans. The Company also may earn management fees as manager of any CRE CLOs based on the value of the assets consolidated into a CRE CLO (calculated in accordance with the terms of such CRE CLO), payable from the proceeds generated by and in accordance with the distribution waterfall of such CRE CLO.
The Company has elected the fair value option in accordance with the provisions of FASB ASC 820, Fair Value Measurements (“FASB ASC 820”) to account for its investment in the CREO JV. The investment is included in other investments at fair value, on the consolidated balance sheet and gains and losses (both realized and unrealized) are recognized in the consolidated statement of operations as a component of principal transactions and other income. Because the CREO JV has the attributes of investment companies as described in FASB ASC 946-15-2, the Company estimates the fair value of its investment using the net asset value (“NAV”) per share (or its equivalent) as of the reporting date in accordance with the “practical expedient” provisions related to investments in certain entities that calculate net asset value per share (or its equivalent) included in FASB ASC 820 for all entities. As of March 31, 2022, the Company's investment balance in the CREO was $
Wind Down of the Company's GCF Repo Business
Since 2017, the Company has carried out a matched book GCF repo business as a full netting member of the FICC Government Services Division. In October 2021, primarily due to reduced spreads in the repo market for GCF collateral, the Company decided to wind down this business. As of December 31, 2021, the wind down was completed and the GCF reverse repurchase agreements and repurchase agreements balances were reduced to zero. See note 10.
INSU Acquisition Corp III ("Insurance SPAC III")
The Operating LLC is 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 are sponsors of INSU Acquisition Corp. III ("Insurance SPAC III"). On December 22 2020, Insurance SPAC III completed the sale of
Each Insurance SPAC III Unit consists of share of Insurance SPAC III's Class A common stock, par value $
The Insurance SPAC III Sponsor Entities purchased an aggregate of
A total of $
The Insurance SPAC III Sponsor Entities collectively hold
The Operating LLC loaned to Insurance SPAC III approximately $
As of March 31, 2022, the Company had a total equity method investment in Insurance SPAC III of $
5. NET TRADING
Net trading consisted of the following in the periods presented.
| NET TRADING |
|||||
| (Dollars in Thousands) |
| Three Months Ended |
||||||||
| March 31, |
March 31, |
|||||||
| 2022 |
2021 |
|||||||
| Net realized gains (losses) - trading inventory |
$ | $ | ||||||
| Net unrealized gains (losses) - trading inventory |
( |
) | ( |
) | ||||
| Net gains and losses |
||||||||
| Interest income- trading inventory |
||||||||
| Interest income-receivables under resale agreements |
||||||||
| Interest income |
||||||||
| Interest expense-securities sold under agreements to repurchase |
( |
) | ( |
) | ||||
| Interest expense-margin payable |
( |
) | ( |
) | ||||
| Interest expense |
( |
) | ( |
) | ||||
| Net trading |
$ | $ | ||||||
Trading inventory includes investments classified as investments-trading as well as trading securities sold, not yet purchased. See note 7. Also, see note 10 for discussion of receivables under resale agreements and securities sold under agreements to repurchase. See note 6 for discussion of margin payable.
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, 2022 | December 31, 2021 | |||||||
| Deposits with clearing agencies | $ | $ | ||||||
| Unsettled regular way trades, net | ||||||||
| Receivables from clearing agencies | ||||||||
| Receivables from brokers, dealers, and clearing agencies | $ | $ | ||||||
Amounts payable to brokers, dealers, and clearing agencies consisted of the following.
| PAYABLES TO BROKERS, DEALERS, AND CLEARING AGENCIES | ||||||
| (Dollars in Thousands) |
| March 31, 2022 | December 31, 2021 | |||||||
| Margin payable | $ | $ | ||||||
| Payables to brokers, dealers, and clearing agencies | $ | $ | ||||||
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, 2022 | December 31, 2021 | |||||||
| U.S. government agency MBS and CMOs | $ | $ | ||||||
| U.S. government agency debt securities | ||||||||
| RMBS | ||||||||
| U.S. Treasury securities | ||||||||
| ABS | ||||||||
| Corporate bonds and redeemable preferred stock | ||||||||
| Foreign government bonds | ||||||||
| Municipal bonds | ||||||||
| Certificates of deposit | ||||||||
| Derivatives | ||||||||
| Equity securities | ||||||||
| Investments-trading | $ | $ | ||||||
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, 2022 | December 31, 2021 | |||||||
| U.S. government agency debt securities | $ | $ | ||||||
| U.S. Treasury securities | ||||||||
| Corporate bonds and redeemable preferred stock | ||||||||
| Derivatives | ||||||||
| Trading securities sold, not yet purchased | $ | $ | ||||||
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, 2022 | December 31, 2021 | |||||||
| Equity securities | $ | $ | ||||||
| Restricted equity securities | ||||||||
| Corporate bonds and redeemable preferred stock | ||||||||
| CREO | ||||||||
| U.S. Insurance JV | ||||||||
| SPAC Fund | ||||||||
| Residential loans | ||||||||
| Other investments, at fair value | $ | $ | ||||||
A total of $
Other investments, sold not yet purchased
Other investments, sold not yet purchased consisted of the following.
| OTHER INVESTMENTS SOLD, NOT YET PURCHASED | |||||||||
| (Dollars in Thousands) |
| March 31, 2022 | December 31, 2021 | |||||||
| Equity securities | $ | $ | ||||||
| Other investments sold, not yet purchased | $ | $ | ||||||
8. FAIR VALUE DISCLOSURES
Fair Value Option
The Company has elected to account for certain of its other financial assets at fair value under the fair value option provisions of FASB ASC 825. The primary reason for electing the fair value option was to reduce the burden of monitoring the differences between the cost and the fair value of the Company’s investments, previously classified as available for sale securities, including the assessment as to whether the declines are temporary in nature and to further remove an element of management judgment.
Such financial assets accounted for at fair value include:
| ● | securities that would otherwise qualify for available for sale treatment; | |
| ● | investments in equity method affiliates that have the attributes in FASB ASC 946-10-15-2 (commonly referred to as investment companies); and |
| ● | investments in residential loans. |
The changes in fair value (realized and unrealized gains and losses) of these instruments for which the Company has elected the fair value option are recorded in principal transactions and other income in the consolidated statements of operations. All of the investments for which the Company has elected the fair value option are included as a component of other investments, at fair value in the consolidated balance sheets.
The Company recognized net gains (losses) related to changes in fair value of investments that are included as a component of other investments, at fair value during the three months ended March 31, 2022 and 2021 of $(
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, 2022 and 2021 of $
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 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, 2022 and December 31, 2021 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, 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: | ||||||||||||||||
| U.S. government agency MBS and CMOs | $ | $ | $ | $ | ||||||||||||
| U.S. government agency debt securities | ||||||||||||||||
| RMBS | ||||||||||||||||
| U.S. Treasury securities | ||||||||||||||||
| ABS | ||||||||||||||||
| Corporate bonds and redeemable preferred stock | ||||||||||||||||
| Foreign government bonds | ||||||||||||||||
| Municipal bonds | ||||||||||||||||
| Derivatives | ||||||||||||||||
| Equity securities | ||||||||||||||||
| Total investments - trading | $ | $ | $ | $ | ||||||||||||
| Other investments, at fair value: | ||||||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||
| Restricted equity securities | ||||||||||||||||
| Corporate bonds and redeemable preferred stock | ||||||||||||||||
| Residential loans | ||||||||||||||||
| $ | $ | $ | ||||||||||||||
| Investments measured at NAV (1) | ||||||||||||||||
| Total other investments, at fair value | $ | |||||||||||||||
| Liabilities | ||||||||||||||||
| Trading securities sold, not yet purchased: | ||||||||||||||||
| U.S. government agency debt securities | $ | $ | $ | $ | ||||||||||||
| U.S. Treasury securities | ||||||||||||||||
| Corporate bonds and redeemable preferred stock | ||||||||||||||||
| Derivatives | ||||||||||||||||
| Total trading securities sold, not yet purchased | $ | $ | $ | $ | ||||||||||||
| | ||||||||||||||||
| Other investments, sold not yet purchased: | ||||||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||
| Total other investments sold, not yet purchased | $ | $ | $ | $ | ||||||||||||
| (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, 2021 | |||||||||||
| (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: | ||||||||||||||||
| U.S. government agency MBS and CMOs | $ | $ | $ | $ | ||||||||||||
| U.S. government agency debt securities | ||||||||||||||||
| RMBS | ||||||||||||||||
| U.S. Treasury securities | ||||||||||||||||
| ABS | ||||||||||||||||
| Corporate bonds and redeemable preferred stock | ||||||||||||||||
| Foreign government bonds | ||||||||||||||||
| Municipal bonds | ||||||||||||||||
| Certificates of deposit | ||||||||||||||||
| Derivatives | ||||||||||||||||
| Equity securities | ||||||||||||||||
| Total investments - trading | $ | $ | $ | $ | ||||||||||||
| Other investments, at fair value: | ||||||||||||||||
| Equity Securities | $ | $ | $ | $ | ||||||||||||
| Restricted Equity Securities | ||||||||||||||||
| Corporate bonds and redeemable preferred stock | ||||||||||||||||
| Residential loans | ||||||||||||||||
| $ | $ | $ | ||||||||||||||
| Investments measured at NAV (1) | ||||||||||||||||
| Total other investments, at fair value | $ | |||||||||||||||
| Liabilities | ||||||||||||||||
| Trading securities sold, not yet purchased: | ||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | $ | ||||||||||||
| Corporate bonds and redeemable preferred stock | ||||||||||||||||
| US Government Agency debt | ||||||||||||||||
| Derivatives | ||||||||||||||||
| Total trading securities sold, not yet purchased | $ | $ | $ | $ | ||||||||||||
| | ||||||||||||||||
| Other investments, sold not yet purchased: | ||||||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||
| Total other investments sold, not yet purchased | $ | $ | $ | $ | ||||||||||||
| (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.
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. 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.
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. 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.
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.
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.
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.
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.
Residential Loans: Management utilizes home price indices or market indications to value the residential loans. The Company classifies the fair value of these loans within level 2 in 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.
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.
Subordinated Notes: The Company uses recently executed transactions or third-party quotations from independent pricing services to arrive at the fair value of its investments in subordinated notes. 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.
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 enters into equity derivatives such as puts and short call options. 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.
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, 2022 and December 31, 2021.
| Fair Value | Unfunded | Redemption | Redemption | |||||
| March 31, 2022 | Commitments | Frequency | Notice Period | |||||
| Other investments, at fair value | ||||||||
| CREO (a) | $ | $ | N/A | N/A | ||||
| U.S. Insurance JV (b) | N/A | N/A | N/A | |||||
| SPAC Fund (c) | N/A | Quarterly after 1 year lock up | | |||||
| $ | ||||||||
| Fair Value | Unfunded | Redemption | Redemption | |||||||||||||
| December 31, 2021 | Commitments | Frequency | Notice Period | |||||||||||||
| Other investments, at fair value | ||||||||||||||||
| CREO (a) | $ | $ | N/A | N/A | ||||||||||||
| U.S. Insurance JV (b) | N/A | N/A | N/A | |||||||||||||
| SPAC Fund (c) | N/A | Quarterly after 1 year lock up | | |||||||||||||
| $ | ||||||||||||||||
| 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, 2022 and December 31, 2021, the Company had short call options representing a notional of $
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, 2022, the Company had open TBA and other forward MBS purchase agreements in the notional amount of $
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, 2022, and December 31, 2021, the Company had 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, 2022 and December 31, 2021, the Company had
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, 2022 and December 31, 2021.
| 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, 2022 | December 31, 2021 | |||||||
| TBAs and other forward agency MBS | Investments-trading | $ | $ | |||||||
| TBAs and other forward agency MBS | Trading securities sold, not yet purchased | ( | ) | ( | ) | |||||
| $ | $ | |||||||||
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) |
| Derivative Financial Instruments Not Designated as Hedging Instruments Under FASB ASC 815 | Income Statement Classification | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | ||||||
| TBAs and other forward agency MBS | Revenue-net trading | $ | $ | ||||||
| $ | $ | ||||||||
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. Until the fourth quarter 2021, the Company categorized its matched book repo business into two major groups: gestation repo and GCF repo. In the fourth quarter 2021, the Company wound down its GCF repo business.
Gestation Repo
Gestation repo involves entering into repo and reverse repo 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.
GCF Repo
In October 2017, the Company became a full netting member of the FICC’s Government Securities Division. As a full netting member of the FICC, the Company had access to the FICC’s GCF repo service that provides netting and settlement services for repo transactions where the underlying security is general collateral (primarily U.S. Treasuries and U.S. Agency securities). The Company began entering into matched book GCF repo transactions in November 2017. The borrowers (the reverse repo counterparties) are a diverse group of financial institutions including hedge funds, registered investment funds, REITs, and other similar counterparties. The lenders (the repo counterparties) are the FICC and other large financial institutions. The Company used Bank of New York (“BONY”) as its settlement agent for its GCF repo matched book transactions. The Company was considered self-clearing for this business. In connection with the Company’s full netting membership of the FICC, the Company agreed to establish and maintain a committed line of credit in a minimum amount of $
In October 2021, primarily due to reduced spreads in the repo market for GCF collateral, the Company decided to wind down this business which was completed by December 31, 2021. As of March 31, 2022, the carrying value of the Company's reverse repurchase agreements and repurchase agreements were zero.
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; clearing broker is involved. These transactions are not matched.
Repo Information
At March 31, 2022 and December 31, 2021, the Company held reverse repos of $
At March 31, 2022 and December 31, 2021, the Company held repos of $
Intraday and Overnight Lending Facility
In conjunction with the Company’s GCF repo business, on October 19, 2018, the Company and BONY entered into an intraday lending facility. The lending facility allows for BONY to advance funds to JVB in order to facilitate the settlement of GCF repo transactions. In conjunction with the wind down of the GCF Repo business, the Company terminated this facility during 2021.
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.
On the demand side, the Company did not consider its GCF repo business to be concentrated because the Company’s reverse repo counterparties were comprised of a diverse group of financial institutions. On the supply side, the Company obtained a significant amount of its funds from the FICC. Therefore, during the period the Company operated a GCF business, it considered that business to be concentrated from the supply side of the business.
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, 2022 and December 31, 2021, the Company’s gestation reverse repos shown in the tables below represented balances from
The total net revenue earned by the Company on its matched book repo business was $
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, 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) | $ | $ | $ | $ | ||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| 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) | $ | $ | $ | $ | $ | |||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| SECURED BORROWINGS | ||||||||||||||
| (Dollars in Thousands) | ||||||||||||||
| December 31, 2021 |
| 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) | $ | $ | $ | $ | $ | |||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| 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) | $ | $ | $ | $ | $ | |||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
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 cash flows. Any excess distributions would be considered as return of investments 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 23.
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) |
| Insurance SPACs | Dutch Real Estate Entities | Other SPAC Sponsor Entities | Total | |||||||||||||
| January 1, 2022 | $ | $ | $ | $ | ||||||||||||
| Investments / advances | ||||||||||||||||
| Distributions / repayments | ( | ) | ( | ) | ||||||||||||
| Reclasses to (from) | ( | ) | ( | ) | ||||||||||||
| Earnings / (loss) realized | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| March 31, 2022 | $ | $ | $ | $ | ||||||||||||
| Insurance SPACs | Dutch Real Estate Entities | Other SPAC Sponsor Entities | Total | |||||||||||||
| January 1, 2021 | $ | $ | $ | $ | ||||||||||||
| Investments / advances | ||||||||||||||||
| Distributions / repayments | ( | ) | ( | ) | ( | ) | ||||||||||
| Reclasses to (from) | ( | ) | ( | ) | ||||||||||||
| Earnings / (loss) realized | ( | ) | ( | ) | ||||||||||||
| December 31, 2021 | $ | $ | $ | $ | ||||||||||||
The Insurance SPACs represent the Company's consolidated subsidiaries equity method investments in various insurance SPACs. Dutch Real Estate Entities include: (i) Amersfoot Office Investment I Cooperatief U. A. (“AOI”) is a company based in the Netherlands that invests in real estate and (ii) CK Capital Partners B.V. (“CK Capital”) is a company based in the Netherlands that manages investments in real estate. See note 23.
Other SPAC Sponsor Entities include both indirect and direct investments in SPAC Sponsor Entities. Several of these Sponsor Entities are invested in SPACs that have completed their business combinations. Those Sponsor Entities hold restricted and unrestricted equity interests in the public post-merger entities. The following table shows the equity method balance included in other SPAC Sponsor Entities above broken out by the ultimate investee.
| OTHER SPAC SPONSOR ENTITIES | ||||||||||||
| MARCH 31, 2022 | ||||||||||||
| (Dollars in Thousands) |
| Entity | Ticker | Equity Method Carrying Value | |||
| Archer Aviation Inc. | ACHR | ||||
| Wejo Group Ltd. | WEJO | ||||
| Alpha Tau Medical Ltd. | DRTS | ||||
| Various other Sponsor Entities | |||||
| Total | $ | ||||
| OTHER SPAC SPONSOR ENTITIES | ||||||||||||
| DECEMBER 31, 2021 | ||||||||||||
| (Dollars in Thousands) |
| Entity | Ticker | Equity Method Carrying Value | |||
| Parella Weinberg Partners | PWP | $ | |||
| Archer Aviation Inc. | ACHR | ||||
| Wejo Group Ltd. | WEJO | ||||
| Heliogen, Inc. | HLGN | ||||
| Various other Sponsor Entities | |||||
| Total | $ | ||||
Over time, the Company expects these Sponsor Entities to either (a) liquidate their investments in these companies and distribute to the Company its allocable share of the cash proceeds or (b) to distribute the Company's allocable share of these equity investments in-kind to the Company. In either case, the final cash realized from these investments will be impacted by the performance of the public companies listed above until those investments are liquidated.
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 FASB 842, the company determines if an arrangement is a lease at the inception date of the contract. The Company determines if an arrangement is a lease at the inception date of the contract. The Company measures operating lease liabilities using an estimated incremental borrowing rate as there is no rate implicit in the Company’s operating lease arrangements. An incremental borrowing rate 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, 2022, all of the leases to which the Company was a party were operating leases. The weighted average remaining term of the leases was
Maturities of operating lease liability payments consisted of the following.
| FUTURE MATURITY OF LEASE LIABILITIES | ||
| (Dollars in Thousands) |
| As of March 31, 2022 | ||||
| 2022 - remaining | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | ||||
| Less imputed interest | ( | ) | ||
| Lease obligation | $ | |||
During the three months ended March 31, 2022 and 2021, total cash payments of $
13. OTHER RECEIVABLES, OTHER ASSETS, ACCOUNTS PAYABLE AND OTHER LIABILITIES
Other receivables consisted of the following.
| OTHER RECEIVABLES | ||||||
| (Dollars in Thousands) |
| March 31, 2022 | December 31, 2021 | |||||||
| Asset management fees receivable | $ | $ | ||||||
| Accrued interest receivable and dividend receivable | ||||||||
| Revenue share receivable | ||||||||
| Miscellaneous other receivables | ||||||||
| Other receivables | $ | $ | ||||||
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). No receivable for cash collateral related to repos exists as of March 31, 2022 or December 31, 2021.
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).
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. 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. 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, 2022 | December 31, 2021 | |||||||
| Deferred costs | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Deposits | ||||||||
| Miscellaneous other assets | ||||||||
| Furniture, equipment, and leasehold improvements, net | ||||||||
| Intangible assets | ||||||||
| Other assets | $ | $ | ||||||
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 notes 16 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2021 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, 2022 | December 31, 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Redeemable financial instruments accrued interest | ||||||||
| Accrued income tax | ||||||||
| Accrued interest payable | ||||||||
| Accrued interest on securities sold, not yet purchased | ||||||||
| Payroll taxes payable | ||||||||
| Counterparty cash collateral | ||||||||
| Accrued expense and other liabilities | ||||||||
| Accounts payable and other liabilities | $ | $ | ||||||
The redeemable financial instrument accrued interest represents accrued interest on the JKD Capital Partners I LTD 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 22.
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:
| As of March 31, 2022 | As of December 31, 2021 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Receivables | ||||||||
| Other investments, at fair value | ||||||||
| Investment in equity method affiliates | ||||||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Investment in consolidated VIEs | $ | $ | ||||||
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 certain obligations 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 commitment was $
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, 2022, and December 31, 2021, there were $
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 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, 2022 and December 31, 2021.
| CARRYING VALUE OF VARIABLE INTERESTS IN NON-CONSOLIDATED VARIABLE INTEREST ENTITIES | ||||||||
| (Dollars in Thousands) |
| As of March 31, 2022 | As of December 31, 2021 | |||||||
| Other investments, at fair value | $ | $ | ||||||
| Investments in equity method affiliates | ||||||||
| Maximum exposure | $ | $ | ||||||
15. REDEEMABLE FINANCIAL INSTRUMENTS
Redeemable financial instruments consisted of the following.
| REDEEMABLE FINANCIAL INSTRUMENTS |
|||||
| (Dollars in Thousands) |
| As of March 31, 2022 |
As of December 31, 2021 |
|||||||
| JKD Capital Partners I LTD |
$ | $ | ||||||
| $ | $ | |||||||
16. DEBT
The Company had the following debt outstanding.
| DETAIL OF DEBT | |||||||||||||
| (Dollars in Thousands) |
| As of | As of | Interest | |||||||||||
| Description | March 31, 2022 | December 31, 2021 | Rate Terms | Interest (3) | Maturity | ||||||||
| Non-convertible debt: | |||||||||||||
| 10.00% senior note (the "2020 Senior Notes") | $ | $ | Fixed |
| January 2024 | ||||||||
| Contingent convertible debt: | |||||||||||||
| 8.00% convertible senior note (the "2017 Convertible Note") | Fixed |
| March 2023 (1) | ||||||||||
| Less unamortized debt issuance costs | ( | ) | |||||||||||
| Junior subordinated notes (2): | |||||||||||||
| Alesco Capital Trust I | Variable |
| July 2037 | ||||||||||
| Sunset Financial Statutory Trust I | Variable |
| March 2035 | ||||||||||
| Less unamortized discount | ( | ) | ( | ) | |||||||||
| ByLine Bank | Variable | NA | December 2023 | ||||||||||
| Total | $ | $ | |||||||||||
| (1) | The holder of the 2017 Convertible Note may convert all or any part of the outstanding principal amount at any time prior to maturity into units of membership interests of the Operating LLC at a conversion price of $ |
| (2) | 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 However, the Company owns the common stock of the trusts in a total par amount of The Company pays interest (and at maturity, principal) to the trusts on the entire $ | |
| (3) | 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, pursuant to which, among other things, on such date, (i) JKD Investor paid to the Operating LLC an additional $
The Amended and Restated Note evidences Operating LLC’s obligation to repay to JKD (i) the original principal amount of paid by JKD to the Operating LLC under the Original Purchase Agreement, plus (ii) the additional $2,250 paid by JKD 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
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 Family Fintech Trust, a trust established by Daniel G. Cohen.
Pursuant to the 2017 Convertible Note Purchase Agreement, the DGC Family Fintech Trust agreed to purchase from the Operating LLC, and the Operating LLC agreed to issue and to sell to the DGC Family Fintech Trust, a convertible senior secured promissory note (the “2017 Convertible Note”) in the aggregate principal amount of On March 10, 2017, the DGC Family Fintech 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 Notes 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 Family Fintech Trust offered customary indemnifications. Further, the Operating LLC and the DGC Family Fintech Trust provided each other with customary representations and warranties, the Company provided limited representations and warranties to the DGC Family Fintech 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 provides, among other things, that the board of managers will 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 provides that Daniel G. Cohen will 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 may, in its sole discretion, extend the maturity date for an additional one-year period, in each case unless the 2017 Convertible Note is earlier converted (in the manner described below). Effective on March 10, 2020, the Operating LLC exercised its option to extend effective March 10, 2022.
The 2017 Convertible Note accrued interest at a rate of
At any time following March 10, 2017, all or any portion of the outstanding principal amount of the 2017 Convertible Note may be converted by the holder thereof into units of membership interests of the Operating LLC (“LLC Units”) at a conversion rate equal to $
Following any conversion of the 2017 Convertible Note into LLC Units, the holder of such LLC Units will have the same rights of redemption, if any, held by the holders of LLC Units as set forth in the LLC Agreement; provided that the holder will have no such redemption rights with respect to such LLC Units if the Company’s board of directors determines in good faith that satisfaction of such redemption by the Company with shares of its Common Stock would (i) jeopardize or endanger the availability to the Company of its net operating loss and net capital loss carryforwards and certain other tax benefits under Section 382 of the Internal Revenue Code of 1986, or (ii) constitute a “Change of Control” under the Junior Subordinated Indenture, dated as of June 25, 2007, between the Company (formerly Alesco Financial Inc.) and Wells Fargo Bank, N.A., as trustee.
Under the 2017 Convertible Note, if following any conversion of the 2017 Convertible Note into LLC Units, for so long as the Company owns a number of LLC Units representing less than a majority of the voting control of the Operating LLC, each holder of any LLC Units issued as a result of the conversion of the 2017 Convertible Note (regardless of how such LLC Units were acquired by such holder) is obligated to grant and appoint the Company as such holder’s proxy and attorney-in-fact to vote (i) the number of LLC Units owned by each such holder that, if voted by the Company, would give the Company a majority of the voting control of the Operating LLC, or (ii) if such holder holds less than such number of LLC Units, all such holder’s LLC Units. In connection with the amendment to the 2019 Senior Notes, on September 25, 2020, the Operating LLC and DGC Trust entered into Amendment No. 1 ( the "Amendment to the 2017 Convertible Note") to the 2017 Convertible Note to provide that the voting proxy as defined in the 2017 Convertible Note will be revoked without further action by any party, upon the earliest to occur of the following: (i) a Notice Default (as defined in the 2017 Convertible Note); (ii) and Automatic Default (as defined in the 2017 Convertible Note); and (iii) if Daniel Cohen and/or his affiliates cease to beneficially own (as defined in Rule 13d-3 under the Exchange Act) a majority of the voting securities of the Company pursuant to the terms and conditions of the Amendment to the 2017 Convertible Note. All other material terms and conditions of the 2017 Note remained substantially the same.
On March 20, 2022, the DGC Trust elected to convert the Note into an aggregate of
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 interests may cause the Operating LLC to redeem such units of membership interests at any time for, at the Company’s option, (A) cash or (B) one share of the Company’s common stock, par value $
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 interests, 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.
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 JVBs request from time to time in the aggregate amount of up to $
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
Loans (both principal and interest) made by Byline Bank to JVB under the Amended and Restated Byline Loan Agreement are scheduled to mature and become immediately due and payable in full on December 21, 2023. In addition, loans may be made until December 21, 2022. Loans will bear interest at a per annum rate equal to LIBOR plus provided that in no event can the interest rate be less than JVB is required to pay on a quarterly basis an undrawn commitment fee at a per annum rate equal to
JVB may request a reduction in the $25,000 commitment in a minimum amount of $
Effective December 22, 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.
The Amended and Restated Byline Loan Agreement also includes customary covenants for a transaction of this type, including covenants limiting the indebtedness that can be incurred by JVB and JVB Holdings and restricting JVB’s ability to make certain loans and investments. Additionally, JVB may not permit its (i) net worth to be less than $
Pursuant to the Amended and Restated Byline Agreement, JVB may repay its existing outstanding indebtedness 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 may not exceed $
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, | ||||||||
| 2022 | 2021 | |||||||
| Junior subordinated notes | $ | $ | ||||||
| 2020 Senior Notes | ||||||||
| 2017 Convertible Note | ||||||||
| 2013 Convertible Notes / 2019 Senior Notes | ||||||||
| Byline Credit Facility | ||||||||
| Redeemable Financial Instrument - DGC Trust / CBF | ||||||||
| Redeemable Financial Instrument - JKD Capital Partners I LTD | ||||||||
| $ | $ | |||||||
17. EQUITY
Stockholders’ Equity
Common Equity: The following table reflects the activity for the three months ended March 31, 2022 related to the number of shares of unrestricted Common Stock that the Company had issued.
| Common Stock | ||||
| Shares | ||||
| December 31, 2021 | ||||
| Vesting of shares | ||||
| Shares withheld for employee taxes and retired | ( | ) | ||
| Repurchase and retirement of Common Stock | ||||
| March 31, 2022 | ||||
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 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
Series F Voting Non-Convertible Preferred Stock: On December 23, 2019, the Company’s board of directors adopted a resolution that reclassified
Stockholder Rights Plan
On March 10, 2020, the Company entered into a new Section 382 Rights Agreement (the “Rights Agreement”) with Computershare Inc., as rights agent (the “Rights Agent”). The Rights Agreement provided for a distribution of one preferred stock purchase right (each, a “Right,” and collectively, the “Rights”) for each share of the Company’s Common Stock outstanding to stockholders of record at the close of business on March 20, 2020 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company a unit (a “Unit”) consisting of one ten-thousandth of a share of the Company’s Series C Junior Participating Preferred Stock, par value $
Initially, the Rights will be attached to all Common Stock certificates representing shares then outstanding or, in the case of uncertificated shares of Common Stock registered in book entry form (“Book Entry Shares”) by notation in book entry (which certificates for Common Stock and Book Entry Shares shall be deemed also to be certificates for Rights), and no separate Rights certificates will be distributed.
Subject to certain exceptions specified in the Rights Agreement, the Rights will separate from the Common Stock and a “Distribution Date” will occur upon the earlier of (i) 10 days following a public announcement that a person or group of affiliated or associated persons has become an “Acquiring Person” (as defined below) (the “Stock Acquisition Date”) and (ii) 10 business days following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person. Pursuant to the Rights Agreement, an “Acquiring Person” means any person or entity who or which, together with all affiliates and associates of such person or entity, is the beneficial owner of
Pursuant to the Rights Agreement, an “Exempted Person” is any person or entity who, together with all affiliates and associates of such person or entity, was or could become, as of March 10, 2020, the beneficial owner of Common Stock and/or other securities exercisable for shares of Common Stock representing
In addition, the Rights Agreement defines the term “Exempted Person” to also include any person or entity who, together with all affiliates and associates of such person or entity, is the beneficial owner of Common Stock and/or other securities exercisable for shares of Common Stock representing 4.95% or more of the shares of Common Stock outstanding, and whose beneficial ownership would not, as determined by the Company’s board of directors, jeopardize or endanger the availability of the Company of its deferred tax assets. However, any such person or entity will cease to be an Exempted Person if (x) such person or entity ceases to beneficially own 4.95% or more of the shares of the then outstanding Common Stock or (y) the Company’s board of directors makes a contrary determination with respect to the effect of such person’s or entity’s beneficial ownership (together with all affiliates and associates of such person) with respect to the availability to the Company of its deferred tax assets.
Pursuant to the Rights Agreement, a purchaser, assignee or transferee of the shares of Common Stock (or options or warrants exercisable for Common Stock) from an Exempted Person will not be considered an Exempted Person, except that a transferee from the estate of an Exempted Person who receives Common Stock as a bequest or inheritance from an Exempted Person will be an Exempted Person so long as such transferee continues to be the beneficial owner of 4.95% or more of the then outstanding shares of Common Stock.
The Rights are not exercisable until the Distribution Date and will expire on the earliest of (i) the close of business on December 31, 2023, (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement, (iii) the time at which the Rights are exchanged pursuant to the Rights Agreement, (iv) the repeal of Section 382 of the Code or any successor statute if the Company’s board of directors determines that the Rights Agreement is no longer necessary or desirable for the preservation of certain tax benefits, and (v) the beginning of a taxable year of the Company to which the Company’s board of directors determines that certain tax benefits may not be carried forward. At no time will the Rights have any voting power.
Except as otherwise determined by the Company’s board of directors, only shares of Common Stock issued prior to the Distribution Date will be issued with Rights.
Pursuant to the Rights Agreement, in the event that a person or entity becomes an Acquiring Person, each other holder of a Right will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of the Company), having a value equal to two times the exercise price of the Right. The exercise price is the Purchase Price times the number of Units associated with each Right (initially, one). For example, at an exercise price of $100.00 per Right, each Right not owned by an Acquiring Person (or by certain related parties) following an event set forth in the preceding paragraph would entitle its holder to purchase $
Notwithstanding any of the foregoing, following the occurrence of a person or entity becoming an Acquiring Person (the “Flip-In Event”), all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by such Acquiring Person will be null and void.
In the event that, at any time following the Stock Acquisition Date, (i) the Company engages in a merger or other business combination transaction in which the Company is not the surviving corporation; (ii) the Company engages in a merger or other business combination transaction in which the Company is the surviving corporation and the Common Stock is changed or exchanged; or (iii)
However, Rights are not exercisable following the occurrence of a Flip-In Event until such time as the Rights are no longer redeemable by the Company as set forth below.
The Purchase Price payable, and the number of Units of Series C Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Series C Preferred Stock, (ii) if holders of the Series C Preferred Stock are granted certain rights or warrants to subscribe for Series C Preferred Stock or convertible securities at less than the current market price of the Series C Preferred Stock, or (iii) upon the distribution to holders of the Series C Preferred Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends) or of subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustments in the Purchase Price will be required until cumulative adjustments amount to at least
At any time after the Stock Acquisition Date, the Company may exchange all or part of the Rights (other than Rights owned by an Acquiring Person) for Common Stock at an exchange ratio equal to (i) a number of shares of Common Stock per Right with a value equal to the spread between the value of the number of shares of Common Stock for which the Rights may then be exercised and the Purchase Price or (ii) if prior to the acquisition by the Acquiring Person of 50% or more of the then outstanding shares of Common Stock, one share of Common Stock per Right (subject to adjustment).
At any time until ten days following the Stock Acquisition Date, the Company may redeem the Rights in whole, but not in part, at a price of $
Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. While the distribution of the Rights will not be taxable to shareholders or to the Company, stockholders may, depending upon the circumstances, recognize taxable income in the event that the Rights become exercisable for Common Stock (or other consideration) of the Company as set forth above or in the event the Rights are redeemed.
Acquisition and Surrender of Additional Units of the Operating LLC, net: Effective January 1, 2011 and revised effective May 27, 2021, Cohen & Company Inc. and the Operating LLC entered into a Unit Issuance and Surrender Agreement (the “UIS Agreement”), that was approved by the board of directors of Cohen & Company Inc. and the board of managers of the Operating LLC. In an effort to maintain a 1:10 ratio of Common Stock to the number units of membership interests Cohen & Company Inc. holds in the Operating LLC, the UIS Agreement calls for the issuance of additional units of membership interests of the Operating LLC to Cohen & Company Inc. when Cohen & Company Inc. issues its Common Stock to employees under existing equity compensation plans or issues its Common Stock in a public or private offering. In certain cases, the UIS Agreement calls for Cohen & Company Inc. to surrender units to the Operating LLC when certain restricted shares are forfeited by the employee or repurchased by the Company.
During the three months ended March 31, 2022, 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 | ||||
| Units surrendered from retirement of Common Stock | ||||
| Total | ||||
The Company recognized a net decrease in additional paid in capital of $
| Three Months Ended | Three Months Ended | |||||||
| March 31, 2022 | March 31, 2021 | |||||||
| Net income / (loss) attributable to Cohen & Company Inc. | $ | ( | ) | $ | ||||
| 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 | ( | ) | ||||||
| Changes from net income / (loss) attributable to Cohen & Company Inc. and transfers (to) from the non-controlling interest | $ | ( | ) | $ | ||||
Repurchases of Shares and Retirement of Treasury Stock
On December 21, 2020, the Company entered into a letter agreement (the “December 2020 Letter Agreement”). The December 2020 Letter Agreement was entered into with Piper Sandler & Co. (the "Agent"). The December 2020 Letter Agreement authorized the Agent to use reasonable efforts to purchase, on the Company’s behalf, up to an aggregate maximum amount of $
During the three months ended March 31, 2021, the Company repurchased
All of the purchases above were completed using cash on hand.
Equity Distribution Agreement
On December 1, 2020, the Company entered into an Equity Distribution Agreement (the “Equity Agreement”) with Northland Securities, Inc. (trade name Northland Capital Markets), as sales agent (the “Sales Agent”), relating to the issuance and sale from time to time by the Company (the “ATM Program”), through the Sales Agent, of shares of the Company's Common Stock, having an aggregate offering price of up to $
On June 7, 2021, the Company entered into a letter agreement (the “Equity Distribution Letter Agreement”) with the Sales Agent, pursuant to which the Sales Agent agreed to use its best efforts to, commencing on June 5, 2021, sell on the Company’s behalf up to $
The Equity Agreement includes customary representations, warranties and covenants by the Company and customary obligations of the parties and termination provisions. The Company has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Sales Agent may be required to make with respect to any of those liabilities. The Company will pay the Sales Agent for sales of its common stock a commission of
The offering of the Common Stock pursuant to the Equity Agreement will terminate upon the sale of all of the Shares pursuant to the Equity Agreement, unless sooner terminated in accordance with the terms and conditions of the Equity Agreement.
During the three months ended March 31, 2021
Detail of Non-Controlling Interest
ROLLFORWARD OF NON-CONTROLLING INTERESTS
(Dollars in Thousands)
| Operating LLC | Insurance SPAC III Sponsor Entities | Other Consolidated Subsidiaries | Total | |||||||||||||
| December 31, 2021 | $ | $ | $ | $ | ||||||||||||
| Non-controlling interest share of (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other comprehensive (loss) | ( | ) | ( | ) | ||||||||||||
| Acquisition / (surrender) of additional units of consolidated subsidiary | ||||||||||||||||
| Equity-based compensation | ||||||||||||||||
| Shares withheld for employee taxes | ( | ) | ( | ) | ||||||||||||
| Investment of convertible non-controlling interest of Cohen & Company Inc. | ||||||||||||||||
| Investment of non-convertible non-controlling interest of Operating LLC | ||||||||||||||||
| Distributions to convertible non-controlling interest of Cohen & Company Inc. | ( | ) | ( | ) | ||||||||||||
| Distributions to non-convertible non-controlling interest of Operating LLC | ( | ) | ( | ) | ||||||||||||
| March 31, 2022 | $ | $ | $ | $ | ||||||||||||
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, 2021, for a discussion of the Company’s non-controlling interests.
18. 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, 2022, JVB's minimum required net capital was $
19. 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, | ||||||||
| 2022 | 2021 | |||||||
| Net income / (loss) attributable to Cohen & Company Inc. | $ | ( | ) | $ | ||||
| Add: Net income (loss) attributable to the convertible non-controlling interest of Cohen & Company Inc. | - | |||||||
| Add: Interest expense incurred on dilutive convertible notes | ||||||||
| Add / (deduct): Adjustment (2) | ( | ) | ||||||
| Net income / (loss) on a fully converted basis | $ | ( | ) | $ | ||||
| Weighted average common shares outstanding - Basic | ||||||||
| Unrestricted Operating LLC membership units exchangeable into Cohen & Company, Inc. shares (1) | ||||||||
| Restricted units or shares | ||||||||
| Shares issuable upon conversion of dilutive convertible notes | ||||||||
| Weighted average common shares outstanding - Diluted (3) | ||||||||
| Net income / (loss) per common share - Basic | $ | ( | ) | $ | ||||
| Net income / (loss) per common share - Diluted | $ | ( | ) | $ | ||||
| (1) | The Operating LLC units of membership interest not held by Cohen & Company Inc. (that is, those held by the non-controlling interest) may be redeemed and exchanged into shares of the Company on a -for-one basis. The Operating LLC units of membership interests not held by Cohen & Company Inc. are redeemable, at the member’s option at any time, for (i) cash in an amount equal to the average of the per share closing prices of the Common Stock for the ten consecutive trading days immediately preceding the date the Company receives the member’s redemption notice, or (ii) at the Company’s option, one tenth of a share of the Common Stock, subject, in each case, to appropriate adjustment upon the occurrence of an issuance of additional shares of the Common Stock as a dividend or other distribution on the outstanding Common Stock, or a further subdivision or combination of the outstanding shares of the Common Stock. These units are not included in the computation of basic earnings per share. These units enter into the computation of diluted net income (loss) per common share when the effect is not anti-dilutive using the if-converted method. |
| (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 Operating LLC units of membership interests 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, | ||||||||
| 2022 | 2021 | |||||||
| Unrestricted Operating LLC membership units exchangeable into Cohen & Company, Inc. shares | ||||||||
| 2017 Convertible Note Units | ||||||||
| Restricted Common Stock | ||||||||
| Restricted Operating LLC units | ||||||||
20. COMMITMENTS AND CONTINGENCIES
Legal and Regulatory Proceedings
On October 8, 2021, Cohen & Company, Ltd., an Ohio limited liability company, as plaintiff, filed a complaint with the United States District Court, Eastern District of Pennsylvania, under the caption Cohen & Company, Ltd. v. Cohen & Company Inc., alleging that Cohen & Company, Inc., as defendant, has been using the “Cohen & Company” trademark and business name, which allegedly infringes and unfairly competes with the plaintiff’s registered trademarks “Cohen & Company” and “Cohen & Co,” in violation of applicable federal and state trademark laws and regulations. Pursuant to the complaint, the plaintiff has demanded that the defendant be permanently enjoined from using the “Cohen & Company” trademark and business name in connection with its business, pay to the plaintiff statutory damages, attorneys’ fees and costs and other damages, and pay over to plaintiff all gains, profits and advantages realized by the defendant from its allegedly unlawful acts and omissions. As of the date of this Quarterly Report on Form 10-Q, the Company has been served with the complaint and filed a partial motion to dismiss the complaint on April 18, 2022. The Company intends to vigorously defend itself against the allegations set forth therein.
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.
21. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates within 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, 2022
| Capital |
Asset |
Principal |
Segment |
Unallocated |
||||||||||||||||||||
| Markets |
Management |
Investing |
Total |
(1) |
Total |
|||||||||||||||||||
| Net trading |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Asset management |
||||||||||||||||||||||||
| New issue and advisory |
||||||||||||||||||||||||
| Principal transactions and other income |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Total revenues |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Compensation |
||||||||||||||||||||||||
| Other Operating Expense |
||||||||||||||||||||||||
| Total operating expenses |
||||||||||||||||||||||||
| Operating income (loss) |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Interest income (expense) |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Income (loss) from equity method affiliates |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Other non-operating income |
||||||||||||||||||||||||
| Income (loss) before income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Income tax expense (benefit) |
||||||||||||||||||||||||
| Net income (loss) |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Less: Net income (loss) attributable to the non-controlling interest |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Net income (loss) attributable to Cohen & Company Inc. |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | ||||||||||||
| Other statement of operations data |
||||||||||||||||||||||||
| Depreciation and amortization (included in total operating expense) |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| SEGMENT INFORMATION Statement of Operations Information |
||||||||||||||||||
| Three Months Ended March 31, 2021 |
| Capital |
Asset |
Principal |
Segment |
Unallocated |
||||||||||||||||||||
| Markets |
Management |
Investing |
Total |
(1) |
Total |
|||||||||||||||||||
| Net trading |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Asset management |
||||||||||||||||||||||||
| New issue and advisory |
||||||||||||||||||||||||
| Principal transactions and other income |
( |
) | ||||||||||||||||||||||
| Total revenues |
||||||||||||||||||||||||
| Compensation |
||||||||||||||||||||||||
| Other Operating Expense |
||||||||||||||||||||||||
| Total operating expenses |
||||||||||||||||||||||||
| Operating income (loss) |
( |
) | ||||||||||||||||||||||
| Interest (expense) income |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Income (loss) from equity method affiliates |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Income (loss) before income taxes |
( |
) | ||||||||||||||||||||||
| Income tax expense (benefit) |
||||||||||||||||||||||||
| Net income (loss) |
( |
) | ||||||||||||||||||||||
| Less: Net income (loss) attributable to the non-controlling interest |
( |
) | ||||||||||||||||||||||
| Net income (loss) attributable to Cohen & Company Inc. |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||
| Other statement of operations data |
||||||||||||||||||||||||
| Depreciation and amortization (included in total operating expense) |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| BALANCE SHEET DATA |
|||||||||||||||||||
| As of March 31, 2022 |
|||||||||||||||||||
| (Dollars in Thousands) |
|||||||||||||||||||
| Capital |
Asset |
Principal |
Segment |
Unallocated |
||||||||||||||||||||
| Markets |
Management |
Investing |
Total |
(1) | Total |
|||||||||||||||||||
| Total Assets |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Included within total assets: |
||||||||||||||||||||||||
| Investments in equity method affiliates |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Goodwill (2) |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Intangible assets (2) |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| BALANCE SHEET DATA |
||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||
| (Dollars in Thousands) |
| Capital |
Asset |
Principal |
Segment |
Unallocated |
||||||||||||||||||||
| Markets |
Management |
Investing |
Total |
(1) | Total |
|||||||||||||||||||
| Total Assets |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Included within total assets: |
||||||||||||||||||||||||
| Investments in equity method affiliates |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Goodwill (2) |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Intangible assets (2) |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (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) United Kingdom and Other. Total revenues by geographic area are summarized as follows.
| GEOGRAPHIC DATA |
||||||
| (Dollars in Thousands) |
| Three Months Ended March 31, |
||||||||
| 2022 |
2021 |
|||||||
| Total Revenues: |
||||||||
| United States |
$ | ( |
) | $ | ||||
| Europe & Other |
||||||||
| Total |
$ | ( |
) | $ | ||||
Long-lived assets attributable to an individual country, other than the United States, are not material.
22. SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid by the Company on its debt and redeemable financial instruments was $
The Company paid income taxes of $
For the three months ended March 31, 2022, the Company had the following significant non-cash transactions that are reflected on the statement of cash flows:
| ● | The Company net surrendered units of membership interests in the Operating LLC. The Company recognized a net decrease in additional paid-in capital of $ | |
| ● | The Company recorded a $ | |
| ● | The Company recorded an accrual of $ | |
| ● | The Company recorded a decrease in equity method affiliates of $ | |
| ● | The Company recorded a decrease in other investments at fair value of $ | |
| ● | The Company recorded an increase in other investments at fair value of $ |
For the three months ended March 31, 2021, 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 interests in the Operating LLC. The Company recognized a net increase in additional paid-in capital of $ | |
| ● | The Company recorded a decrease of $ | |
| ● | The Company recorded a decrease of $ | |
| ● | The Company recorded a decrease in other investments at fair value of $ |
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, | ||||||||
| 2022 | 2021 | |||||||
| Collateral deposit end of period | $ | $ | ||||||
| Less: Collateral deposit beginning of period | ||||||||
| Impact to cash flow from operations | $ | $ | ( | ) | ||||
23. RELATED PARTY TRANSACTIONS
The Company has identified the following related party transactions for the three months ended March 31, 2022 and 2021. 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. The Bancorp, Inc. (“TBBK”)
TBBK is identified as a related party because Daniel G. Cohen was chairman of TBBK through October 31, 2021. Thereafter, TBBK will no longer be treated as a related party to the Company.
As part of the Company’s broker-dealer operations, the Company from time to time purchases securities from third parties and sells those securities to TBBK. The Company may purchase securities from TBBK and ultimately sell those securities to third parties. In either of the cases listed above, the Company includes the trading revenue earned (i.e. the gain or loss realized, or commission earned) by the Company for the entire transaction in the as part of net trading in the table. For the three months ending March 31, 2022 and March 31, 2021, the Company earned no trading revenue from transactions with TBBK.
From time to time, the Company will enter into repo agreements with TBBK as its counterparty. As of March 31, 2022 and December 31, 2021, the Company had
B. Daniel G. Cohen/Cohen Bros. Financial, LLC (“CBF”)/ EBC 2013 Family Trust (“EBC”)
CBF has been identified as a related party because (i) CBF is a non-controlling interest holder of the Company and (ii) CBF is wholly owned by Daniel G. Cohen. On September 29, 2017, CBF also invested $
EBC has been identified as a related party because Daniel G. Cohen is a trustee of EBC and has sole voting power with respect to all shares of the Company held by EBC. In September 2013, EBC, as an assignee of CBF, made a $
C. 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 $
On January 31, 2020, JKD Investor purchased $
D. 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 Note into an aggregate of
E. 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.
F. FinTech Masala, LLC
The Company engaged Betsy Cohen on behalf of FinTech Masala, LLC as a consultant to provide certain services related to the Insurance SPAC II. The Company agreed to pay a consultant fee of $
The Company engaged Betsy Cohen on behalf of FinTech Masala, LLC as a consultant to provide certain services related to the Insurance SPAC III. The Company agreed to pay a consultant fee of $
G. Investment Vehicle and Other
FlipOs (previously Stoa USA, Inc.)
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
Insurance SPAC II
Prior to February 9, 2021, the date of the Insurance SPAC II Merger, Insurance SPAC II was considered a related party as it was an equity method investment of the Company. The Operating LLC, was the manager of the Insurance SPAC II Sponsor Entities and the Company consolidated the Insurance SPAC II Sponsor Entities. Prior to the Insurance SPAC II Merger, the Company owned
Insurance SPAC III
Insurance SPAC III is a related party as it is an equity method investment of the Company. The Operating LLC is the manager of the Insurance SPAC III Sponsor Entities and the Company consolidates the Insurance SPAC III Sponsor Entities. As of March 31, 2022 , the Company owns 47.3% of the equity in Insurance SPAC III Sponsor Entities. Income earned, or loss incurred on the equity method investment in 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 $
The Operating LLC loaned to Insurance SPAC III approximately $
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. As of March 31, 2022, the Company owned
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, 2022, the Company owned
CREO JV
CREO JV is considered a related party because it is an equity method investment. 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. As of March 31, 2022, the Company owned
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 SPAC. The Company has had the following transactions with various sponsors of SPACs that are related parties and which the Company does not consolidate.
Fintech Acquisition Corp. IV ("FTAC IV") was a SPAC. The sponsor of Fintech Acquisition Corp. IV ("FTAC IV Sponsor") is a related party as it is an equity method investment of the Company. The Company made a sponsor investment in FTAC IV Sponsor, receiving a final allocation of
Fintech Acquisition Corp. V ("FTAC V") is a SPAC. The sponsor of Fintech Acquisition Corp. 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
Fintech Acquisition Corp. VI ("FTAC VI") is a SPAC. The sponsor of Fintech Acquisition Corp. 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 will 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
FTAC Olympus Acquisition Corp ("FTAC Olympus") was a SPAC. The sponsor of FTAC Olympus Acquisition Corp. ("FTAC Olympus Sponsor") is a related party as it is an equity method investment of the Company. The Company made a sponsor investment in FTAC Olympus Sponsor, receiving a final allocation of
FTAC Athena Acquisition Corp. ("FTAC Athena") is a SPAC. The sponsor of FTAC Athena Acquisition Corp. ("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 will 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
FTAC Hera Acquisition Corp. ("FTAC Hera") is a SPAC. The sponsors of FTAC Hera Acquisition Corp. ("FTAC Hera Sponsors") 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 Sponsors whereby the Operating LLC will provide personnel to serve as the chief financial officer as well as other accounting and administrative services to FTAC Hera Sponsors for a period not longer than 24 months. As consideration for these services, the Company received an allocation of
FTAC Parnassus Acquisition Corp. ("FTAC Parnassus") is a SPAC. The sponsors of FTAC Parnassus Acquisition Corp. ("FTAC Parnassus Sponsors") 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 Sponsors whereby the Operating LLC will provide personnel to serve as the chief financial officer as well as other accounting and administrative services to FTAC Parnassus Sponsors for a period not longer than 24 months. As consideration for these services, the Company received an allocation of
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, 2022, the Company owned
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, 2022 | March 31, 2021 | |||||||
| Asset management | ||||||||
| SPAC Fund | $ | $ | ||||||
| Other SPAC Entities | ||||||||
| U.S. Insurance JV | ||||||||
| $ | $ | |||||||
| Principal transactions and other income | ||||||||
| Insurance SPAC II | $ | $ | ||||||
| Insurance SPAC III | ||||||||
| FlipOS | ( | ) | ||||||
| Other SPAC Entities | ||||||||
| SPAC Fund | ( | ) | ||||||
| U.S. Insurance JV | ||||||||
| CREO | ||||||||
| $ | ( | ) | $ | |||||
| Income (loss) from equity method affiliates | ||||||||
| Dutch Real Estate Entities | $ | ( | ) | $ | ( | ) | ||
| Insurance SPAC II | ( | ) | ||||||
| Insurance SPAC III | ( | ) | ( | ) | ||||
| Other SPAC Entities | ( | ) | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | |||
| Operating expense (income) | ||||||||
| Duane Morris | $ | $ | ||||||
| FinTech Masala, LLC | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| Interest expense (income) | ||||||||
| CBF | $ | $ | ||||||
| DGC Trust | ||||||||
| EBC | ||||||||
| JKD Investor | ||||||||
| $ | $ | |||||||
The following related party transactions are non-routine and are not included in the tables above.
H. 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
The Company leases 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. The lease agreement automatically renews each in June unless it is terminated with 120 days' notice. The Company recorded $
24. 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 23 and final settlement of those transactions in cash. All amounts are primarily non-interest bearing.
| DUE FROM/DUE TO RELATED PARTIES | ||||||
| (Dollars in Thousands) |
| March 31, 2022 | December 31, 2021 | |||||||
| CK Capital | $ | $ | ||||||
| U.S. Insurance JV | ||||||||
| Insurance SPAC III | ||||||||
| SPAC Fund | ||||||||
| Employee & other | ||||||||
| Due from related parties | $ | $ | ||||||
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of the consolidated financial condition and results of operations of Cohen & Company Inc. and its majority owned subsidiaries (collectively, “we,” “us,” “our,” or the “Company”) should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including fair value of financial instruments. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
All amounts in this disclosure are in thousands (except share and unit and per share and per unit data) except where noted.
Overview
We are a financial services company specializing in fixed income markets. We were founded in 1999 as an investment firm focused on small-cap banking institutions, but have grown to provide an expanding range of capital markets and asset management services. We are organized into three business segments: Capital Markets, Asset Management, and Principal Investing.
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Capital Markets: Our 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. Our fixed income sales and trading group provides trade execution to corporate investors, institutional investors, mortgage originators, and other smaller broker-dealers. We specialize in a variety of products, including but not limited to: corporate bonds, ABS, MBS, RMBS, CDOs, CLOs, CBOs, CMOs, municipal securities, TBAs and other forward agency MBS contracts, U.S. government bonds, U.S. government agency securities, brokered deposits and CDs for small banks, and hybrid capital of financial institutions including TruPS, whole loans, and other structured financial instruments. We also offer execution and brokerage services for equity products. We carry out our capital markets activities primarily through our subsidiaries: JVB in the United States and CCFESA in Europe. A division of JVB, Cohen & Company Capital Markets is our full-service boutique investment banking platform focusing on SPAC advisory, capital markets advisory, and M&A advisory, with clients primarily in the financial technology (commonly referred to as "fintech") and SPAC spaces. |
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Asset Management: Our Asset Management business segment manages assets within CDOs, managed accounts, joint ventures, and investment funds (collectively, “Investment Vehicles”). A CDO is a form of secured borrowing. The borrowing is secured by different types of fixed income assets such as corporate or mortgage loans or bonds. The borrowing is in the form of a securitization, which means that the lenders are actually investing in notes backed by the assets. In the event of default, the lenders will have recourse only to the assets securing the loan. Our Asset Management business segment includes our fee-based asset management operations, which include on-going base and incentive management fees. As of March 31, 2022, we had approximately $2.27 billion in assets under management (“AUM”) of which 51.8% was in CDOs. A substantial portion of our asset management revenue is earned from the management of CDOs. We have not completed a new securitization since 2008. As a result, our asset management revenue has declined from its historical highs as the assets of the CDOs decline due to maturities, repayments, auction call redemptions, and defaults. Our ability to complete securitizations in the future will depend upon, among other things, our asset origination capacity and success, our ability to arrange warehouse financing to originate assets, our willingness and capacity to fund required amounts to obtain warehouse financing and securitized financings, and the demand in the markets for such securitizations. The remaining portion of our AUM is from a diversified mix of other Investment Vehicles that were more recently formed. |
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Principal Investing: Our Principal Investing business segment is comprised of investments that we hold related to our SPAC franchise and other investments have made for the purpose of earning an investment return rather than investments to support our trading, matched book repo, or other Capital Markets business segment activities. These investments are a component of our other investments, at fair value, other investments sold, not yet purchased, and investments in equity method affiliates in our consolidated balance sheet. |
We generate our revenue by business segment primarily through the following activities.
Capital Markets:
| ● |
Our trading activities, which include execution and brokerage services, securities lending activities, riskless trading activities, as well as gains and losses (unrealized and realized) and income and expense earned on securities and derivatives classified as trading or trading securities sold, not yet purchased; |
| ● |
Net interest income on our matched book repo financing activities; and |
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| ● |
New issue and advisory revenue comprised primarily of (a) new issue revenue associated with originating, arranging, or placing newly created financial instruments and (b) revenue from advisory services. |
Asset Management:
| ● |
Asset management fees for our on-going asset management services provided to certain Investment Vehicles, which may include fees both senior and subordinate to the securities issued in the Investment Vehicle; and |
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| ● |
Incentive management fees earned based on the performance of Investment Vehicles. |
Principal Investing:
| ● |
Gains and losses (unrealized and realized) and income and expense earned on securities classified as other investments, at fair value and other investments sold, not yet purchased. |
|
| ● | Income and loss earned on equity method investments. |
Business Environment
Our business in general and our Capital Markets business segment in particular, do not produce predictable earnings. Our results can vary dramatically from year to year and quarter to quarter. Our business is materially affected by economic conditions in the financial markets, political conditions, broad trends in business and finance, the housing and mortgage markets, changes in volume and price levels of securities transactions, and changes in interest rates, including overnight funding rates, all of which can affect our profitability and are unpredictable and beyond our control. These factors may affect the financial decisions made by investors and companies, including their level of participation in the financial markets and their willingness to participate in corporate transactions. Severe market fluctuations or weak economic conditions could reduce our trading volume and revenues, negatively affect our ability to generate new issue and advisory revenue, and adversely affect our profitability. As a general rule, our trading business benefits from increased market volatility. Increased volatility usually results in increased activity from our clients and counterparties. However, periods of extreme volatility may at times result in clients reducing their trading volumes, which would negatively impact our results. Also, periods of extreme volatility may result in large fluctuations in securities valuations and we may incur losses on our holdings. Also, our mortgage group’s business benefits when mortgage volumes increase, and may suffer when mortgage volumes decrease. Among other things, mortgage volumes are significantly impacted by changes in interest rates.
In addition, as a smaller firm, we are exposed to intense competition. Although we provide financing to our customers, larger firms have a much greater capability to provide their clients with financing, giving them a competitive advantage. We are much more reliant upon our employees’ relationships, networks, and abilities to identify and capitalize on market opportunities. Therefore, our business may be significantly impacted by the addition or loss of key personnel. We try to address these challenges by (i) focusing our business on clients and asset classes that are underserved by the large firms, (ii) continuing to monitor our fixed costs to enhance operating leverage and limit our losses during periods of low volumes, and (iii) attempting to hire and retain entrepreneurial and effective traders, investment bankers, and salespeople. Our business environment is rapidly changing. New risks and uncertainties emerge continuously and it is not possible for us to predict all the risks we will face. This may negatively impact our operating performance.
A portion of our revenue is generated from net trading activity. We engage in proprietary trading for our own account, provide securities financing for our customers, and execute “riskless” trades with a customer order in hand resulting in limited market risk to us. The inventory of securities held for our own account, as well as held to facilitate customer trades, and our market making activities are sensitive to market movements. A portion of our revenue is generated from new issue and advisory engagements. The fees charged and volume of these engagements are sensitive to the overall business environment. We provide investment banking and advisory services in Europe through our subsidiary CCFESA and new issue and advisory services in the U.S. through our subsidiary JVB. A division of JVB, Cohen & Company Capital Markets is our full-service boutique investment banking platform focusing on SPAC advisory, capital markets advisory, and M&A advisory, with clients primarily in the financial technology (commonly referred to as "fintech") and SPAC spaces. Currently, our primary source of new issue and advisory revenue is from originating assets for our U.S. and European insurance asset management business, and from investment banking and advisory services through our Cohen & Company Capital Markets platform.
A portion of our revenue is generated from management fees. Our ability to charge management fees and the amount of those fees is dependent upon the underlying investment performance and stability of the Investment Vehicles. If these types of investments do not provide attractive returns to investors, the demand for such instruments will likely fall, thereby reducing our opportunity to earn new management fees or maintain existing management fees. As of March 31, 2022, 51.8% of our existing AUM were in CDOs. The creation of CDOs has depended upon a vibrant securitization market. Since 2008, volumes within the securitization market have dropped significantly and have not fully recovered since that time. We have not completed a new securitization since 2008. The remaining portion of our AUM is from a diversified mix of other Investment Vehicles most of which were more recently formed.
A substantial portion of our asset management revenue is earned from the management of CDOs. As a result, our asset management revenue has declined from its historical highs as the assets of the CDOs decline due to maturities, repayments, auction call redemptions, and defaults. Our ability to complete securitizations in the future will depend upon, among other things, our asset origination capacity and success, our ability to arrange warehouse financing to originate assets, our willingness and capacity to fund required amounts to obtain warehouse financing and securitized financings, and the demand in the markets for such securitizations.
A portion of our revenues is generated from our principal investing activities. Therefore, our revenues are impacted by the overall market supply and demand of these investments as well as the individual performance of each investment. Our principal investments are included within other investments, at fair value, other investments sold, not yet purchased, and investments in equity method affiliates in our consolidated balance sheets. More recently, a significant component of our principal investment revenue has come from SPAC related equity investments, primarily in entities that have been the result of sponsored SPAC business combinations or related party sponsored SPAC business combinations. Access to these investments is reliant on a robust SPAC market. Performance of the resulting principal investments can be materially impacted by overall performance of the equity markets. See note 7 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
The SPAC Market
Beginning in 2018, we began sponsoring a series of SPACs. Each sponsored SPAC either completed or seeks to complete a business combination with a company involved in the insurance market. In addition, we invest in other SPACs at various stages of their business life cycle. Beginning in 2019, these SPAC activities have become a significant portion of our Principal Investing business segment. In August 2018, we invested in and became the general partner of a newly formed investment fund (the “SPAC Fund”), which was created for the purpose of investing in the equity interests of SPACs and SPAC sponsor entities including SPACs sponsored by us, our affiliates, and third parties. As a complement to the SPAC Fund, we established and became manager of two newly formed umbrella limited liability companies (the “SPAC Series Funds”) that issue a separate series of interest for each investment portfolio, which typically consists of investments in the sponsor entities of individual SPACs. Generally, when a SPAC acquires or merges with a privately held target company, the target company winds up owning a majority of the resulting outstanding equity of the SPAC so the transaction is accounted for as a reverse merger. Private companies utilize reverse mergers with SPACs as a method of going public as an alternative to a traditional IPO. All of our business activity related to SPACs is highly sensitive to the volume of activity in the SPAC market. Volumes could be negatively impacted if target companies no longer see SPACs as an attractive alternative thereby reducing the number of suitable potential business combination targets. Also, investor demand for SPACs would be negatively impacted if the stock of SPACs that successfully complete a business combination underperform the market. If volumes of SPAC activity decline, our results of operations will likely be significantly negatively impacted.
Equity prices of SPACs and post business combination SPACs declined significantly during the first quarter of 2022. We are exposed to public equity prices of SPACs and post business combination SPACs both through our other investments, at fair value and investments in equity method affiliates. As a result, we recorded significant principal transaction losses and equity method losses during the three months ended March 31, 2022. Continued declines in the equity prices of these companies will result in further losses for us.
Margin Pressures in Fixed Income Brokerage Business
Performance in the financial services industry in which we operate is highly correlated to the overall strength of the economy and financial market activity. Overall market conditions are a product of many factors beyond our control and can be unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors including the volatility of the equity and fixed income markets, the level and shape of the various yield curves, and the volume and value of trading in securities.
Margins and volumes in certain products and markets within the fixed income brokerage business continue to decrease materially as competition has increased and general market activity has declined. Further, we continue to expect that competition will increase over time, resulting in continued margin pressure.
Our response to this margin compression has included: (i) building a diversified fixed income trading platform; (ii) acquiring or building out new product lines and expanding existing product lines; (iii) building a hedging execution and funding operation to service mortgage originators; and (iv) monitoring our fixed costs. Our cost management initiatives are ongoing. However, there can be no certainty that these efforts will be sufficient. If insufficient, we will likely see a decline in profitability.
U.S. Housing Market
In recent years, our mortgage group has grown in significance to our Capital Markets segment and our company overall. The mortgage group primarily earns revenue by providing hedging execution, securities financing, and trade execution services to mortgage originators and other investors in mortgage-backed securities. Therefore, this group’s revenue is highly dependent on the volume of mortgage originations in the U.S. Origination activity is highly sensitive to interest rates, the U.S. job market, housing starts, sale activity of existing housing stock, as well as the general health of the U.S. economy. In addition, any new regulation that impacts U.S. government agency mortgage-backed security issuance activity, residential mortgage underwriting standards, or otherwise impacts mortgage originators will impact our business. We have no control over these external factors and there is no effective way for us to hedge against these risks. Our mortgage group’s volumes and profitability will be highly impacted by these external factors.
COVID 19 / Impairment of Goodwill
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread throughout the United States. The spread of COVID-19 has caused significant volatility in domestic and international markets. There is on-going uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies. While we cannot fully assess the impact COVID-19 will have on all of our operations at this time, there are certain impacts that we have identified:
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The volatility of the financial markets experienced since March 2020 as a result of the COVID-19 pandemic, has caused us to operate JVB at a lower level of leverage than prior to the pandemic. Specifically, JVB has reduced the size of its GCF repo operations and the volume of its TBA trading. We have determined that at our pre-pandemic levels in these businesses, we were exposed to a higher level of counterparty credit risk than we should have and were experiencing too much volatility in our available liquidity to conservatively meet capital requirements and margin calls in these businesses. We expect JVB to operate at lower volumes in both these businesses for an indefinite period of time, which could unfavorably impact the operating profitability of JVB. |
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The financial market volatility, as well as the reduction in volumes in the GCF repo and TBA businesses, that resulted from COVID-19 required us to reassess the goodwill we had recorded related to JVB under the guidance of ASC 350. We determined that the fair value of JVB was less than the carrying value (including the goodwill). As a result, we recorded an impairment loss of $7,883 during 2020. See note 12 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q. See discussion below regarding wind down of GCF repo business. |
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JVB’s mortgage group’s operations are centered on serving the financial needs of mortgage originators and institutions that invest in mortgage-backed securities. Prolonged high unemployment could eventually impact mortgage originations and demand for and supply of mortgage-backed securities, which may have a significant unfavorable impact on the revenue earned by JVB’s mortgage group. |
In 2021, medical professionals developed COVID-19 vaccines and governments began to distribute them globally, which is expected to reduce virus spread and further aid economic recovery. Despite broad improvements in the global fight against the COVID-19 virus, we will likely be impacted by the pandemic in other ways which we cannot reliably determine. We will continue to monitor market conditions and respond accordingly. In April 2020, we applied for and received a $2,166 loan under the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. On June 21, 2021, we received notification that the U.S. Small Business Administration, as administrator of the PPP, had approved the our PPP Loan forgiveness application for $2,127 and all accrued interest on the PPP Loan, leaving us with a remaining PPP Loan balance of $39. The PPP Loan forgiveness was recorded to other non-operating income on the consolidated statements of operations and comprehensive income. We repaid the remaining balance plus accrued interest on June 25, 2021, at which point the PPP Loan balance was reduced to zero.
Recent Events
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").
The 2017 Convertible Note was originally scheduled to mature on March 10, 2022; however in accordance with the terms and conditions of the 2107 Convertible Note agreement, effective on March 10, 2022, the Operating LLC exercised its right to extend the maturity date from March 10, 2022 to March 10, 2023. 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 same conversion and redemption rights as the existing convertible non-controlling interest units. See note 21 to the Company's December 31, 2021 Annual Report filed on Form 10-K.
The 2020 Senior Notes
On January 31, 2022, the Operating LLC and JKD Investor entered into a 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 an Amended and Restated Senior Promissory Note in the aggregate principal amount of $4,500 (the “Amended and Restated Note”), which Amended and Restated Note amended and restated the JKD Note in its entirety. The 2022 Purchase Agreement contains customary representations and warranties on the part of each of JKD Investor and the Operating LLC. We used these proceeds to retire $2,250 of existing 2020 Senior Notes held by RNCS. See note 16 to our consolidated financial statements included this Quarterly Report on Form 10-Q
New Commercial Real Estate Opportunities (“CREO”) JV
On September 3, 2021, we committed to invest up to $15,000 of equity in a newly formed joint venture (the “CREO JV”) with an outside investor who committed to invest approximately $435,000 of equity in the CREO JV. We are required to invest 7.5% of the total equity of the CREO JV with an absolute limit of $15,000. The CREO JV is managed by us.
The CREO JV was formed for the purposes of investing 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. “CRE CLO” means any pooling of commercial real estate mortgage-backed loans into a collateralized loan obligation.
The commercial real estate loans that will be funded by the CREO JV may be originated by us and we may earn origination fees earned in connection with such transactions. In addition, the Company may earn structuring fees in connection with structuring and consummating a CRE CLO consisting of a pooling of commercial real estate loans. We also may earn management fees as manager of any CRE CLOs based on the value of the assets consolidated into a CRE CLO (calculated in accordance with the terms of such CRE CLO), payable from the proceeds generated by and in accordance with the distribution waterfall of such CRE CLO.
We have elected the fair value option in accordance with the provisions of FASB ASC 820, Fair Value Measurements (“FASB ASC 820”) to account for our investment in the CREO JV. The investment is included in other investments at fair value, on the consolidated balance sheet and gains and losses (both realized and unrealized) are recognized in the consolidated statement of operations as a component of principal transactions and other income. Because the CREO JV has the attributes of investment companies as described in FASB ASC 946-15-2, we estimate the fair value of our investment using the net asset value (“NAV”) per share (or its equivalent) as of the reporting date in accordance with the “practical expedient” provisions related to investments in certain entities that calculate net asset value per share (or its equivalent) included in FASB ASC 820 for all entities. As of March 31, 2022, our investment balance in the CREO was $6,617.
Wind Down of the Company's GCF Repo Business
The Company has carried out a matched book GCF repo business as a full netting member of the FICC Government Services Division since 2017. In October 2021, primarily due to reduced spreads in the repo market for GCF collateral, the Company decided to wind down this business. As of December 31, 2021, the wind down was completed and the GCF reverse repurchase agreements and repurchase agreements balances were reduced to zero. See note 10 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
Each Insurance SPAC III Unit consists 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 entitles 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, for gross proceeds of $250,000 (before underwriting discounts and commissions and offering expenses). Pursuant to the underwriting agreement in the IPO, Insurance SPAC III granted the underwriters in the IPO (the “Insurance SPAC III Underwriters”) a 45-day option to purchase up to 3,270,000 additional Insurance SPAC III Units solely to cover over-allotments, if any; and on December 21, 2020, the Insurance SPAC III Underwriters notified the Company that they were partially exercising the over-allotment option for 3,200,000 Insurance SPAC III units and waiving the remainder of the over-allotment option. Immediately following the completion of the IPO, there were an aggregate of 34,100,000 shares of Insurance SPAC III Common Stock issued and outstanding. If the Insurance SPAC III fails to consummate a business combination within the first 24 months following the IPO, its corporate existence will cease except for the purposes of winding up its affairs and liquidating its assets.
The Insurance SPAC III Sponsor Entities purchased an aggregate of 575,000 of placement units in Insurance SPAC III in a private placement that occurred simultaneously with the IPO for an aggregate of $5,750, or $10.00 per placement unit. Each placement unit consists of one share of Insurance SPAC III Common Stock and one-third of one warrant (the “Insurance SPAC III Placement Warrant”). The Insurance SPAC III placement units are identical to the Insurance SPAC III Units sold in the IPO except (i) the shares of Insurance SPAC III Common Stock issued as part of the placement units and the Insurance SPAC III Warrants will not be redeemable by Insurance SPAC III, (ii) the Insurance SPAC III Warrants may be exercised by the holders on a cashless basis, and (iii) the shares of Insurance SPAC III Common Stock issued as part of the placement units, together with the Insurance SPAC III Warrants, are entitled to certain registration rights. Subject to certain limited exceptions, the placement units (including the underlying Insurance SPAC III Warrants and Insurance SPAC III Common Stock and the shares of Insurance SPAC III Common Stock issuable upon exercise of the Insurance SPAC III Warrants) will not be transferable, assignable or salable until 30 days after the completion of the Insurance SPAC III’s initial business combination.
A total of $250,000 of the net proceeds from the private placement and the IPO (including approximately $10,600 of the deferred underwriting commission from the IPO) were placed in a trust account. Except for the withdrawal of interest to pay taxes (or dissolution expenses if a business combination is not consummated), none of the funds held in the trust account will be released until the earlier of (i) the completion of Insurance SPAC III’s initial business combination, (ii) in connection with a stockholder vote to amend Insurance SPAC III’s amended and restated certificate of incorporation (A) to modify the substance or timing of Insurance SPAC III’s obligation to redeem 100% of its public shares if it does not complete an initial business combination within 24 months from the completion of the IPO or (B) with respect to any other provision relating to stockholders’ rights or pre-initial business combination activity, or (iii) the redemption of all of Insurance SPAC III’s public shares issued in the IPO if the Insurance SPAC III is unable to consummate an initial business combination within 24 months from the completion of the IPO. If Insurance SPAC III does not complete a business combination within the first 24 months following the IPO, the placement units will expire worthless.
The Insurance SPAC III Sponsor Entities collectively hold 8,525,000 founder shares in Insurance SPAC III. Subject to certain limited exceptions, the founder shares will not be transferable or salable except (a) with respect to 25% of such shares, until consummation of a business combination, and (b) with respect to additional 25% tranches of such shares, when the closing price of Insurance SPAC III Common Stock exceeds $12.00, $13.50, and $17.00, respectively, for 20 out of any 30 consecutive trading days following the consummation of a business combination. Certain non-controlling interests in the Insurance SPAC III Sponsor Entities, including executive and key employees of the Operating LLC, purchased membership interests in the Insurance SPAC III Sponsor Entities and, in addition to having an interest in Insurance SPAC III’s placement units discussed above, have an interest in Insurance SPAC III’s founder shares through such membership interests in the Insurance SPAC III Sponsor Entities. The number of the Insurance SPAC III’s founder shares in which such non-controlling interests in the Insurance SPAC III Sponsor Entities, including such executives and key employees of the Operating LLC, have an interest in through the Insurance SPAC III Sponsor Entities will not be finally and definitively determined until consummation of a business combination. The number of Insurance SPAC III’s founder shares currently allocated to the Operating LLC is 4,267,500, but such number of founder shares will also not be finally and definitively determined until the consummation of a business combination.
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. Insurance Acquisition Sponsor III and its affiliates, including the Operating LLC, have 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 $810 was borrowed by Insurance SPAC III as of March 31, 2022. In April 2022, the Operating LLC advanced an additional $150 to Insurance SPAC III. See note 24. These loans will bear no interest and, if the Insurance SPAC III consummates a business combination in the required timeframe, the loans are to be repaid from the funds held in Insurance SPAC III’s trust account. If Insurance SPAC III does not consummate a business combination in the required timeframe, no funds from Insurance SPAC III's trust account can be used to repay the loans.
As of March 31, 2022, we had a total equity method investment in Insurance SPAC III of $3,954, which was included as a component of investment in equity method affiliates in our consolidated balance sheet. Partially offsetting this amount was non-controlling interest of $4,511, which was included as a component of non-controlling interest in our consolidated balance sheet. Therefore, the net carrying value of our investment in Insurance SPAC III (excluding its advances under our loan agreement) was $(557) as of March 31, 2022.
Consolidated Results of Operations
This section provides a comparative discussion of our consolidated results of operations for the specified periods. The period-to-period comparisons of financial results are not necessarily indicative of future results.
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
The following table sets forth information regarding our consolidated results of operations for the three months ended March 31, 2022 and 2021.
| COHEN & COMPANY INC. |
|||||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS |
|||||||||||
| (Dollars in Thousands) |
|||||||||||
| (Unaudited) |
| Three Months Ended March 31, |
Favorable / (Unfavorable) |
|||||||||||||||
| 2022 |
2021 |
$ Change |
% Change |
|||||||||||||
| Revenues |
||||||||||||||||
| Net trading |
$ | 12,022 | $ | 19,183 | $ | (7,161 | ) | (37 | %) | |||||||
| Asset management |
1,889 | 2,093 | (204 | ) | (10 | %) | ||||||||||
| New issue and advisory |
3,770 | 1,839 | 1,931 | 105 | % | |||||||||||
| Principal transactions and other income (loss) |
(18,363 | ) | 79,561 | (97,924 | ) | (123 | %) | |||||||||
| Total revenues |
(682 | ) | 102,676 | (103,358 | ) | (101 | %) | |||||||||
| Operating expenses |
||||||||||||||||
| Compensation and benefits |
13,879 | 26,647 | 12,768 | 48 | % | |||||||||||
| Business development, occupancy, equipment |
1,248 | 719 | (529 | ) | (74 | %) | ||||||||||
| Subscriptions, clearing, and execution |
1,941 | 2,790 | 849 | 30 | % | |||||||||||
| Professional fee and other operating |
1,996 | 1,994 | (2 | ) | 0 | % | ||||||||||
| Depreciation and amortization |
132 | 81 | (51 | ) | (63 | %) | ||||||||||
| Total operating expenses |
19,196 | 32,231 | 13,035 | 40 | % | |||||||||||
| Operating income / (loss) |
(19,878 | ) | 70,445 | (90,323 | ) | (128 | %) | |||||||||
| Non-operating income / (expense) |
||||||||||||||||
| Interest expense, net |
(1,351 | ) | (2,014 | ) | 663 | 33 | % | |||||||||
| Income / (loss) from equity method affiliates |
(12,104 | ) | (835 | ) | (11,269 | ) | (1,350 | %) | ||||||||
| Income / (loss) before income taxes |
(33,333 | ) | 67,596 | (100,929 | ) | (149 | %) | |||||||||
| Income tax expense / (benefit) |
1,833 | 868 | (965 | ) | (111 | %) | ||||||||||
| Net income / (loss) |
(35,166 | ) | 66,728 | (101,894 | ) | (153 | %) | |||||||||
| Less: Net income (loss) attributable to the non-convertible non-controlling interest |
(14,704 | ) | 29,970 | 44,674 | 149 | % | ||||||||||
| Enterprise net income / (loss) |
(20,462 | ) | 36,758 | (57,220 | ) | (156 | %) | |||||||||
| Less: Net income (loss) attributable to the convertible non-controlling interest |
(12,850 | ) | 27,403 | 40,253 | 147 | % | ||||||||||
| Net income / (loss) attributable to Cohen & Company Inc. |
$ | (7,612 | ) | $ | 9,355 | (16,967 | ) | (181 | %) | |||||||
Revenues
Revenues decreased by $103,358 or 101% to ($682) for the three months ended March 31, 2022 from $102,676 for the three months ended March 31, 2021. As discussed in more detail below, the change was comprised of (i) a decrease of $7,161 in net trading revenue; (ii) a decrease of $204 in asset management revenue; (iii) an increase in new issue and advisory of $1,931 ; and (iv) a decrease of $97,924 in principal transactions and other income.
Net Trading
Net trading revenue decreased by $7,161 or 37%, to $12,022 for the three months ended March 31, 2022 from $19,183 for the three months ended March 31, 2021. The following table shows the detail by group.
| NET TRADING |
|||||||||
| (Dollars in Thousands) |
| Three Months Ended March 31, |
||||||||||||
| 2022 |
2021 |
Change |
||||||||||
| Mortgage |
$ | 1,477 | $ | 2,550 | $ | (1,073 | ) | |||||
| Matched book repo |
9,772 | 11,281 | (1,509 | ) | ||||||||
| High yield corporate |
976 | 3,331 | (2,355 | ) | ||||||||
| Investment grade corporate |
430 | 8 | 422 | |||||||||
| Wholesale and other |
(633 | ) | 2,013 | (2,646 | ) | |||||||
| Total |
$ | 12,022 | $ | 19,183 | $ | (7,161 | ) | |||||
Our net trading revenue includes unrealized gains on our trading investments as of the applicable measurement date that may never be realized due to changes in market or other conditions not in our control. This may adversely affect the ultimate value realized from these investments. In addition, our net trading revenue also includes realized gains on certain proprietary trading positions. Our ability to derive trading gains from such trading positions is subject to overall market conditions. Due to volatility and uncertainty in the capital markets, the net trading revenue recognized may not be indicative of future results. Furthermore, from time to time, some of the assets included in the investments-trading line of our consolidated balance sheets represent level 3 valuations within the FASB valuation hierarchy. Level 3 assets are carried at fair value based on estimates derived using internal valuation models and other estimates. See notes 7, 8, and 9 to our consolidated financial statements included in this Quarterly Report on Form 10-Q. The fair value estimates made by us may not be indicative of the final sale price at which these assets may be sold. We consider our matched book repo business to be subject to significant concentration risk. See note 10 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
Asset Management
Our AUM equals the sum of (1) the gross assets included in CDOs that we have sponsored and manage; plus (2) the NAV of investment funds we manage; plus the NAV or gross assets of other accounts we manage. Our calculation of AUM may differ from the calculations used by other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset managers. This definition of AUM is not necessarily identical to a definition of AUM that may be used within our investment agreements.
| As of March 31, |
As of December 31, |
|||||||||||||||
| 2022 |
2021 |
2021 |
2020 |
|||||||||||||
| Company sponsored CDOs |
$ | 1,174,830 | $ | 1,631,839 | $ | 1,239,988 | $ | 2,057,178 | ||||||||
| Other Investment Vehicles (1) |
1,091,816 | 777,304 | 1,118,162 | 712,028 | ||||||||||||
| Assets under management (2) |
$ | 2,266,646 | $ | 2,409,143 | $ | 2,358,150 | $ | 2,769,206 | ||||||||
(1) Other Investment Vehicles represent any investment vehicles that are not company sponsored CDOs.
(2) In some cases, accounts we manage may employ leverage. In some cases, our fees are based on gross assets and in some cases on net assets. Finally, in the case of the CREO JV and the SPAC Series Funds there are no management fees earned. AUM included herein is calculated using either gross or net assets of each managed account or CDO based on whichever serves as the basis for our management fees. In the case where no management fees are earned, the net assets are included.
Asset management fees decreased by $204, or 10%, to $1,889 for the three months ended March 31, 2022 from $2,093 for the three months ended March 31, 2021, as discussed in more detail below. The following table provides a more detailed comparison of the two periods.
| ASSET MANAGEMENT |
|||||||||
| (Dollars in Thousands) |
| Three Months Ended March 31, |
||||||||||||
| 2022 |
2021 |
Change |
||||||||||
| CDOs |
$ | 494 | $ | 790 | $ | (296 | ) | |||||
| Other |
1,395 | 1,303 | 92 | |||||||||
| Total |
$ | 1,889 | $ | 2,093 | $ | (204 | ) | |||||
CDOs
A significant portion of our asset management revenue is earned from the management of CDOs. As a result, our asset management revenue has declined from its historical highs as the assets of the CDOs decline due to maturities, repayments, auction call redemptions, and defaults. Our ability to complete securitizations in the future will depend upon, among other things, our asset origination capacity and success, our ability to arrange warehouse financing to originate assets, our willingness and capacity to fund required amounts to obtain warehouse financing and securitized financings, and the demand in the markets for such securitizations. Asset management fees from CDOs declined mainly due to a decline in AUM due to CDO auctions, our removal as manager of one CDO, and principal paydowns of collateral. Asset management fees from other remained flat.
New Issue and Advisory
New issue and advisory revenue increased by $1,931 to $3,770 for the three months ended March 31, 2022, as compared to $1,839 for the three months ended March 31, 2021. The following table summarizes new issue revenue by business line.
| Three Months Ended March 31, |
||||||||||||
| 2022 |
2021 |
Change |
||||||||||
| Cohen & Company Capital Markets |
$ | 1,533 | $ | - | $ | 1,533 | ||||||
| Commercial Real Estate Originations |
1,037 | - | 1,037 | |||||||||
| US Insurance Originations |
1,200 | 750 | 450 | |||||||||
| Europe Insurance Originations |
- | 1,089 | (1,089 | ) | ||||||||
| Total |
$ | 3,770 | $ | 1,839 | $ | 1,931 | ||||||
Our revenue earned from new issue and advisory has been, and we expect will continue to be, volatile. We earn revenue from a limited number of engagements. Therefore, a small change in the number of engagements can result in large fluctuations in the revenue recognized. Further, even if the number of engagements remains consistent, the average revenue per engagement can fluctuate considerably. Finally, our revenue is generally earned when an underlying transaction closes (rather than on a monthly or quarterly basis). Therefore, the timing of underlying transactions increases the volatility of our revenue recognition.
In addition, we often incur certain costs related to new issue engagements. These costs are included as a component of either subscriptions, clearing and execution, or professional fees and other and will generally be recognized in the same period that the related revenue is recognized.
Cohen & Company Capital Markets, a division of JVB, is our full-service boutique investment banking platform focusing on SPAC advisory, capital markets advisory, and M&A advisory, which generates new issue placement and advisory revenue from clients primarily in the financial technology (commonly referred to as "fintech") and SPAC spaces, further expanding our SPAC capabilities. In addition, we generate new issue revenue by originating new assets for the U.S. Insurance JV, CREO JV, and for our PriDe funds in Europe.
Principal Transactions and Other Income (Loss)
Principal transactions and other income (loss) decreased by $97,924, or 123%, to ($18,363) for the three months ended March 31, 2022, as compared to $79,561 for the three months ended March 31, 2021. The following table summarizes principal transactions and other income by category.
| PRINCIPAL TRANSACTIONS & OTHER INCOME |
|||||||||
| (Dollars in Thousands) |
| Three Months Ended March 31, |
||||||||||||
| 2022 |
2021 |
Change |
||||||||||
| SFT |
$ | (2,053 | ) | $ | 3,662 | $ | (5,715 | ) | ||||
| MILE |
(2,185 | ) | 73,193 | (75,378 | ) | |||||||
| IMXI |
- | (123 | ) | 123 | ||||||||
| WEJO |
(1,617 | ) | - | (1,617 | ) | |||||||
| REE |
(3,470 | ) | - | (3,470 | ) | |||||||
| ML |
(122 | ) | - | (122 | ) | |||||||
| BKSY |
(93 | ) | - | (93 | ) | |||||||
| HLGN |
(8,248 | ) | - | (8,248 | ) | |||||||
| PAYO |
(807 | ) | - | (807 | ) | |||||||
| PWP |
(254 | ) | - | (254 | ) | |||||||
| SPAC Fund |
(55 | ) | 478 | (533 | ) | |||||||
| US Insurance JV |
80 | 163 | (83 | ) | ||||||||
| CREO JV |
80 | - | 80 | |||||||||
| Other principal investments |
180 | 1,926 | (1,746 | ) | ||||||||
| Total principal transactions |
(18,564 | ) | 79,299 | (97,863 | ) | |||||||
| IIFC revenue share |
114 | 159 | (45 | ) | ||||||||
| All other income / (loss) |
87 | 103 | (16 | ) | ||||||||
| Other income |
201 | 262 | (61 | ) | ||||||||
| Principal transactions and other income (loss) |
$ | (18,363 | ) | $ | 79,561 | $ | (97,924 | ) | ||||
Principal Transactions
For all investments discussed below, see note 8 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for information about how we determine the value of these instruments.
SFT is a publicly traded company. The shares of SFT we hold are comprised of both unrestricted and restricted shares and are carried at fair value. As of the beginning of 2021, we held most of our SFT shares in the Insurance SPAC Sponsor Entities, which were not wholly owned subsidiaries of the Operating LLC. As of March 31, 2022, all SFT shares held by us were held by the Operating LLC. See non-controlling interest discussion below.
MetroMile is a publicly traded company. The shares of MILE we hold are comprised of restricted shares and are carried at fair value. As of the beginning of 2021, we held most of our MILE shares in the Insurance SPAC II Sponsor Entities, which were not wholly owned subsidiaries of the Operating LLC. As of March 31, 2022, all MILE shares held by us were held by the Operating LLC. See compensation and non-controlling interest discussions below.
IMXI represents equity positions of International Money Express, Inc. (NASDAQ: IMXI), a publicly traded company that resulted from the merger of Intermex Holdings, LLC and FinTech Acquisition Corp. II. As of March 31, 2022, we hold no investment in IMXI. This investment was carried at fair value.
WEJO represents equity positions of Wejo Group, Ltd. (NASDAQ: WEJO), a publicly traded company that closed its business combination with Virtuoso Acquisition Corp. As of March 31, 2022, we have no investment in WEJO carried at fair value and included as a component of other investment's at fair value. We have investments in the sponsor of WEJO that are accounted for as equity method affiliates. See Income / (loss) from Equity Method Affiliates below and note 11 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
REE represents equity positions of REE Automotive Ltd. (NASDAQ: REE), a publicly traded company that closed its business combination with 10X Capital Venture Acquisition Corp. As of March 31, 2022, we have a total investment in REE carried at fair value of $1,805 which is included as a component of other investments at fair value.
ML represents equity positions of MoneyLion, Inc. (NYSE: ML), a publicly traded company that closed its business combination with Fusion Acquisition Corp. As of March 31, 2022, we have a total investment in ML carried at fair value of $201 which is included as a component of other investments at fair value.
BKSY represents equity positions of Blacksky Technologies, Inc that closed its business combination with Osprey Technologies Acquisition Corp. As of March 31, 2022, we have a total investment in BKSY carried at fair value of $68 which is included as a component of other investments at fair value.
Heliogen, Inc. (NYSE: HLGN) is a public company that closed its business combination with Athena Technology Acquisition Corp. As of March 31, 2022, we have a total investment in HLGN carried at fair value of $9,642 which is included as a component of other investments at fair value. We also have investments in the sponsor of HLGN that are accounted for as equity method affiliates. See Income / (loss) from Equity Method Affiliates below and note 11 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
Payoneer Global, Inc. (NASDAQ: PAYO) is a public company that closed its business combination with FTAC Olympus Acquisition Corp. SPAC. As of March 31, 2022, we have a total investment in PAYO carried at fair value of $1,243 which is included as a component of other investments at fair value.
Parella Weinberg Partners (NASDAQ: PWP) is a public company that closed its business combination with FTAC IV Acquisition Corp. SPAC. As of March 31, 2022, we have a total investment in PWP carried at fair value of $714 which is included as a component of other investments at fair value.
The SPAC Fund invests in the equity of SPACs. We carry our investment in the fund at its reported NAV.
The US Insurance JV invests in insurance company debt. We carry our investment in the fund at its reported NAV.
CREO JV invests in commercial real estate debt. We carry our investment in the fund at its reported NAV.
Other principal investments consist of realized and unrealized gains and losses from other investments reported at fair value.
Other Income
Other income / (loss) is comprised of an ongoing revenue share arrangement as well as other miscellaneous operating income items. The revenue share arrangement noted in the table above entitles us to a percentage of revenue earned by IIFC. The IIFC revenue share arrangement expires at the earlier of (i) the dissolution of IIFC or (ii) when we have earned a cumulative $20,000 in revenue share payments. To date, we have earned $3,955. Also, in any particular year, the revenue share earned by us cannot exceed $2,000.
Operating Expenses
Operating expenses decreased by $13,035, or 40%, to $19,196 for the three months ended March 31, 2022 from $32,231 for the three months ended March 31, 2021. As discussed in more detail below, the change was comprised of (i) a decrease of $12,768 in compensation and benefits; (ii) an increase of $529 in business development, occupancy, and equipment; (iii) a decrease of $849 in subscriptions, clearing, and execution; (iv) an increase of $2 of professional fee and other operating; and (v) an increase of $51 of depreciation and amortization.
Compensation and Benefits
Compensation and benefits decreased by $12,768, or 48%, to $13,879 for the three months ended March 31, 2022 from $26,647 for the three months ended March 31, 2021.
| COMPENSATION AND BENEFITS |
|||||||||
| (Dollars in Thousands) |
| Three Months Ended March 31, |
||||||||||||
| 2022 |
2021 |
Change |
||||||||||
| Cash compensation and benefits |
$ | 12,775 | $ | 13,006 | $ | (231 | ) | |||||
| Equity-based compensation |
1,104 | 13,641 | (12,537 | ) | ||||||||
| Total |
$ | 13,879 | $ | 26,647 | $ | (12,768 | ) | |||||
Cash compensation and benefits in the table above was primarily comprised of salary, incentive compensation, and benefits. Cash compensation and benefits decreased by $231 to $12,775 for the three months ended March 31, 2022 from $13,006 for the three months ended March 31, 2021. The decrease was due to an increase a decrease in incentive compensation that is tied to revenues and operating profitability, partially offset by increases related to the continued build out of the Cohen and Company Capital Markets team. Our total headcount increased from 98 at March 31, 2021 to 115 at March 31, 2022.
Equity-based compensation decreased by $12,537, to $1,104 for the three months ended March 31, 2022, as compared to $13,641 for the three months ended March 31, 2021. The decrease was due to equity compensation related to Insurance SPAC II recognized upon the completion of the merger between Insurance SPAC II and MILE recorded in three months ended March 31, 2021.
Business Development, Occupancy, and Equipment
Business development, occupancy, and equipment increased by $529, or 74%, to $1,248 for the three months ended March 31, 2022 from $719 for the three months ended March 31, 2021. This increase was comprised of an increase in business development of $250 and an increase in occupancy and equipment of $279. Business development increased primarily due to increased travel costs. Occupancy costs increased due to additional rent for additional space in our New York office.
Subscriptions, Clearing, and Execution
Subscriptions, clearing, and execution decreased by $849, or 30%, to $1,941 for the three months ended March 31, 2022 from $2,790 for the three months ended March 31, 2021. The decrease was comprised of a decrease in clearing and execution costs of $1,089 partially offset by an increase in subscriptions of $240. The decrease in clearing and execution was the result of new issue costs and GCF repo clearing costs recognized in the three months ended March 31, 2021.
Professional Fee and Other Operating Expenses
Professional fee and other operating expenses increased by $2, or 0%, to $1,996 for the three months ended March 31, 2022 from $1,994 for the three months ended March 31, 2021.
Depreciation and Amortization
Depreciation and amortization increased by $51, or 63%, to $132 for the three months ended March 31, 2022 from $81 for the three months ended March 31, 2021.
Non-Operating Income and Expense
Interest Expense, net
Interest expense, net decreased by $663, to $1,351 for the three months ended March 31, 2022 from $2,014 for the three months ended March 31, 2021.
| INTEREST EXPENSE |
|||||||||
| (Dollars in Thousands) |
| Three Months Ended March 31, |
||||||||||||
| 2022 |
2021 |
Change |
||||||||||
| Junior subordinated notes |
$ | 657 | $ | 647 | $ | 10 | ||||||
| 2020 Senior Notes |
119 | 133 | (14 | ) | ||||||||
| 2013 Convertible Notes / 2019 Senior Notes |
- | 71 | (71 | ) | ||||||||
| 2017 Convertible Note |
327 | 375 | (48 | ) | ||||||||
| 2018 FT LOC/2019 FT Revolver/Byline Credit Facility |
72 | 65 | 7 | |||||||||
| Redeemable Financial Instrument - DGC Trust / CBF |
- | 197 | (197 | ) | ||||||||
| Redeemable Financial Instrument - JKD Capital Partners I LTD |
176 | 526 | (350 | ) | ||||||||
| $ | 1,351 | $ | 2,014 | $ | (663 | ) | ||||||
See notes 15 and 16 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
Income / (loss) from Equity Method Affiliates
Income / (loss) from equity method affiliates decreased by $11,269 to ($12,104) for the three months ended March 31, 2022 from ($835) for the three months ended March 31, 2021. See note 11 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
| Three Months Ended March 31, |
||||||||||||
| 2022 |
2021 |
Change |
||||||||||
| Insurance SPACs |
$ | (589 | ) | $ | (560 | ) | $ | (29 | ) | |||
| Dutch Real Estate Entities |
(8 | ) | (133 | ) | 125 | |||||||
| Other SPAC Sponsor Entities |
(11,507 | ) | (142 | ) | (11,365 | ) | ||||||
| Total |
$ | (12,104 | ) | $ | (835 | ) | $ | (11,269 | ) | |||
SPAC Sponsor Entities includes both indirect and direct investments in SPAC Sponsor Entities. Several of these Sponsor Entities are invested in SPACs that have completed their business combinations. Those Sponsor Entities hold restricted and unrestricted equity interests in the public post-merger entities. We account for our investments in Sponsor Entities under the equity method of accounting. If the Sponsor Entity distributes SPAC shares to us, we account for those SPAC shares as a component of other investments, at fair value. The following table shows the equity method balance included in other SPAC Sponsor Entities above broken out by the ultimate public company investee.
| Three Months Ended March 31, |
||||||||||||
| 2022 |
2021 |
Change |
||||||||||
| HLGN |
$ | (10,558 | ) | $ | (1 | ) | $ | (10,557 | ) | |||
| WEJO |
(1,048 | ) | (9 | ) | (1,039 | ) | ||||||
| DTRS |
1,309 | - | 1,309 | |||||||||
| ACHR |
(149 | ) | - | (149 | ) | |||||||
| Other |
(1,061 | ) | (132 | ) | (929 | ) | ||||||
| Total |
$ | (11,507 | ) | $ | (142 | ) | $ | (11,365 | ) | |||
During the three months ended March 31, 2022, our share of the HLGN shares held by the Sponsor Entity were distributed to us. Accordingly, as of March 31, 2022, we have no equity method investment in the Sponsor Entity of HLGN. However, we hold HLGN shares as a component of other investments, at fair value as of March 31, 2022. See Principal Transactions above and note 8 to our consolidated financial statements included in this Quarterly Report on Form 10-K.
The shares of WEJO held by the Sponsor Entity are restricted. The Sponsor Entity we invest in holds shares of WEJO. We expect this Sponsor Entity to either (a) liquidate this investment and distribute to us our allocable proceeds or (b) distribute to us our allocable shares of WEJO in-kind. In either case, the final cash realized from this investment will be impacted by the performance of this investment until it is liquidated. The remaining equity method balance in the Sponsor Entity of WEJO was $1,505 as of March 31, 2022. We also held investments in WEJO shares as component of other investments, at fair value during the three months ended March 31, 2022. See Principal Transactions above and note 8 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
Alpha Tau Medical, Ltd. (NASDAQ: DTRS) is a public company. The Sponsor Entity in which we invest in holds restricted shares of DTRS. We expect this Sponsor Entity to either (a) liquidate this investment and distribute to us our allocable proceeds or (b) distribute to us our allocable shares of DTRS in-kind. In either case, the final cash realized from this investment will be impacted by the performance of this investment until it is liquidated. As of March 31, 2022, our equity method investment in the Sponsor Entity which holds DTRS shares was $1,309.
Archer Aviation (NYSE: ACHR) is a public company. The Sponsor Entity we invest in holds restricted shares of ACHR. We expect this Sponsor Entity to either (a) liquidate this investment and distribute to us our allocable proceeds or (b) distribute to us our allocable shares of ACHR in-kind. In either case, the final cash realized from this investment will be impacted by the performance of this investment until it is liquidated. As of March 31, 2022, our equity method investment in the Sponsor Entity which holds ACHR shares was $579.
Income Tax Expense / (Benefit)
The income tax expense / (benefit) increased by $965 to income tax expense / (benefit) of $1,833 for the three months ended March 31, 2022 from $868 for the three months ended March 31, 2021. The increase was primarily due to an increase in the valuation allowance related to our NOL carryforward assets recorded in the three months ended March 31, 2022. This increase of the valuation allowance was recorded as the result the conversion of the 2017 convertible notes which occurred in March. This conversion resulted in a dilution of the parent company's share of the operating LLC which reduced the expected amount of future income available to utilize these carryforward assets.
Our provision for income taxes fluctuates due to several factors mostly attributable to our legal structure summarized as follows:
It is important to note that when evaluating our income tax expense or benefit (especially compared to other companies' expense or benefit) that substantially all of our operations occur in the Operating LLC. There are some local taxes and foreign taxes to which the Operating LLC or its subsidiaries are subject to, but the Operating LLC is generally treated as a pass-through entity and is not subject to U.S. federal or state income tax. Therefore, the members of the Operating LLC receive allocations of its income and are subject to U.S. federal and state taxes. For the current period, Cohen and Company, Inc. owned 31.43% 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 and Company, Inc. incurs tax obligations on this, the related tax expense is recognized in these consolidated financial statements. However, the remaining 68.57% that is allocated to the non-controlling members of the Operating LLC is subject to taxation on the members' tax returns. That tax obligation is not included in these consolidated financial statements.
We also have significant valuation allowances applied against our carryforward (NOL and NCL) deferred tax assets as well as our tax over book basis in the Operating LLC. Valuation allowances are applied to deferred tax assets when management determines that the assets may not be fully realized. This determination requires significant judgement and is primarily based on management's expectations regarding the generation of future taxable income. ASC 740 indicates that all available evidence should be considered when assessing the need for and the appropriate level of a valuation allowance. All available evidence includes historical information supplemented by all currently available information about future years. Our earnings are very volatile which makes this determination especially difficult. Although we will make adjustments to these valuations allowances throughout the year as appropriate, our actual results for any particular fiscal year provide the best evidence of our ability to generate future taxable income. We give more weight to the full year results in making our estimates of future taxable income as compared to quarterly earnings which are even more volatile than our annual results. Therefore, we may have significant adjustments to our valuation allowances (and therefore our income tax expenses or benefit) which may be recorded in the fourth quarter of any particular fiscal year.
Net Income / (Loss) Attributable to the Non-Convertible Non-controlling Interest
Net income / (loss) attributable to the non-controlling interest for the three months ended March 31, 2022 and 2021 was comprised of the non-controlling interest related to member interests in consolidated subsidiaries of the Operating LLC other than interests held by us for the relevant periods. These interests are not convertible into Common Stock.
| SUMMARY CALCULATION OF NON-CONVERTIBLE NON-CONTROLLING INTEREST |
|||||||||||||||
| For the Three Months Ended March 31, 2022 |
| Three Months Ended March 31, |
||||||||||||
| 2022 |
2021 |
Change |
||||||||||
| Insurance SPAC Sponsor Entities |
$ | - | $ | 3,559 | $ | 3,559 | ||||||
| Insurance II SPAC Sponsor Entities |
- | 26,646 | 26,646 | |||||||||
| Insurance III SPAC Sponsor Entities |
(297 | ) | (229 | ) | 68 | |||||||
| SPAC Pipe Entities |
(2,082 | ) | - | 2,082 | ||||||||
| Other SPAC Sponsor Investor |
(12,325 | ) | (1 | ) | 12,324 | |||||||
| Other |
- | (5 | ) | (5 | ) | |||||||
| Total |
$ | (14,704 | ) | $ | 29,970 | $ | 44,674 | |||||
Insurance SPAC Sponsor Entities, Insurance SPAC II Sponsor Entities, and Insurance SPAC III Sponsor Entities are the Sponsor Entities formed by us for these SPACs. SPAC Pipe Entities are entities which themselves invest in Pipe's (Private Investment in Public Equity) of post business combination SPACs. Other SPAC Sponsor Investor represents an entity which we consolidate but do not wholly own that invests in other SPAC Sponsor Entities.
Net Income / (Loss) Attributable to the Convertible Non-controlling Interest
Net income / (loss) attributable to the non-controlling interest for the three months ended March 31, 2022 and 2021 was comprised of the non-controlling interest related to member interests in the Operating LLC other than interests held by us for the relevant periods. These interests are convertible into Common Stock. See note 21 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
| SUMMARY CALCULATION OF CONVERTIBLE NON-CONTROLLING INTEREST |
|||||||||||||||
| For the Three Months Ended March 31, 2022 |
| Total Operating LLC |
Cohen & |
|||||||||||
| Consolidated |
Company Inc. |
Consolidated |
||||||||||
| Net income / (loss) before tax |
$ | (33,333 | ) | $ | - | $ | (33,333 | ) | ||||
| Income tax expense / (benefit) |
111 | 1,722 | 1,833 | |||||||||
| Net income / (loss) after tax |
(33,444 | ) | (1,722 | ) | (35,166 | ) | ||||||
| Other consolidated subsidiary non-controlling interest |
(14,704 | ) | ||||||||||
| Net income / (loss) attributable to the Operating LLC |
(18,740 | ) | ||||||||||
| Average effective Operating LLC non-controlling interest % (1) |
68.57 | % | ||||||||||
| Operating LLC non-controlling interest |
(12,850 | ) | ||||||||||
| SUMMARY CALCULATION OF NON-CONTROLLING INTEREST |
|||||||||||||||
| For the Three Months Ended March 31, 2021 |
| Total Operating LLC |
Cohen & |
|||||||||||
| Consolidated |
Company Inc. |
Consolidated |
||||||||||
| Net income / (loss) before tax |
$ | 67,596 | $ | - | $ | 67,596 | ||||||
| Income tax expense / (benefit) |
237 | 631 | 868 | |||||||||
| Net income / (loss) after tax |
67,359 | (631 | ) | 66,728 | ||||||||
| Other consolidated subsidiary non-controlling interest |
29,970 | |||||||||||
| Net income / (loss) attributable to the Operating LLC |
37,389 | |||||||||||
| Average effective Operating LLC non-controlling interest % (1) |
73.29 | % | ||||||||||
| Operating LLC non-controlling interest |
27,403 | |||||||||||
| (1) |
Because earnings are recognized unevenly throughout the year and the non-controlling interest percentage may change during the period, the average effective non-controlling interest percentage may not equal the percentage at the end of any period or the simple average of the beginning and ending percentages. |
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements including ongoing commitments to repay debt borrowings, make interest payments on outstanding borrowings, fund investments, and support other general business purposes. In addition, our United States and French broker-dealer subsidiaries are subject to certain regulatory requirements to maintain minimum levels of net capital. Historically, our primary sources of funds have been our operating activities and general corporate borrowings. In addition, our trading operations have generally been financed by use of collateralized securities financing arrangements as well as margin loans.
Certain subsidiaries of the Operating LLC have restrictions on the withdrawal of capital and otherwise in making distributions and loans. JVB is subject to net capital restrictions imposed by the SEC and FINRA that require certain minimum levels of net capital to remain in this subsidiary. In addition, these restrictions could potentially impose notice requirements or limit our ability to withdraw capital above the required minimum amounts (excess capital) whether through a distribution or a loan. CCFESA is subject to the regulations of the ACPR. ACPR imposes minimum capital requirements. See note 25 to our consolidated financial statements included in our Annual Report for the year ended December 31, 2021 on Form 10-K.
See Liquidity and Capital Resources – Contractual Obligations below.
During the third quarter of 2010, our board of directors initiated a dividend of $0.50 per quarter, which was paid regularly through December 31, 2011. Beginning in 2012, our board of directors declared a dividend of $0.20 per quarter, which was paid regularly through the first quarter of 2019. Each time a cash dividend was declared by our board of directors, a pro rata distribution was made to the other members of the Operating LLC upon payment of dividends to our stockholders.
On July 29, 2021, our board of directors reinstated our quarterly dividend declaring a cash dividend of $0.25 per share. We have paid a quarterly cash dividend of $0.25 regularly since that date. In addition to our routine quarterly distribution, on March 8, 2022, our board of directors declared a special cash dividend of $0.75 per share. On May 5, 2022, our board of directors declared a quarterly dividend of $0.25 per share payable on June 3, 2022 to shareholders of record on May 20, 2022.
During the three months ended March 31, 2021, we repurchased 38,647 shares of Common Stock in the open market pursuant to the December 2020 Letter Agreement for a total purchase price of $662. During the three months ended March 31, 2022, no shares were repurchased. All of the repurchases were completed using cash on hand. The December 2020 Letter Agreement expired on December 31, 2021.
On December 1, 2020, the Company entered into an Equity Distribution Agreement (the “Equity Agreement”) with Northland Securities, Inc. (trade name Northland Capital Markets), as sales agent (the “Sales Agent”), relating to the issuance and sale from time to time by the Company (the “ATM Program”), through the Sales Agent, of shares of the Company's Common Stock, having an aggregate offering price of up to $75,000 (collectively the “Shares”). Sales of the Shares, if any, under the Equity Agreement will be made in sales deemed to be “at-the-market offerings” as defined in Rule 415 under the Securities Act as agreed with the Sales Agent.
On June 7, 2021, the Company entered into a letter agreement (the “Equity Distribution Letter Agreement”) with the Sales Agent, pursuant to which the Sales Agent agreed to use its best efforts to, commencing on June 5, 2021, sell on the Company’s behalf up to $7,966 of the Shares in the open market pursuant to the terms and conditions of the Equity Distribution Agreement and the Equity Distribution Letter Agreement, and the Company agreed not to take any action that would cause the sales of the Shares under the Letter Agreement not to comply with Rule 10b5-1 or Regulation M under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Equity Distribution Letter Agreement was entered into in connection with the ATM Program and is designed to comply with Rule 10b5-1 under the Exchange Act.
No shares were sold under the ATM Program during the three months ended March 31, 2021 or 2022.
During the three months ended March 31, 2022 and 2021, we had the following other significant financing transactions. This excludes non-cash transactions. See note 22 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
During the three months ended March 31, 2022:
| ● |
We issued a new 2020 Senior Note for $2,250 and used the proceeds to pay off an existing 2020 Senior Note. | |
| ● | We made distributions to the non-convertible non-controlling interest of $1,775. |
During the three months ended March 31, 2021:
| ● | We repaid $4,000 of redeemable financial instruments. |
Cash Flows
We have seven primary uses for capital:
| (1) | To fund the operations of our Capital Markets business segment. Our Capital Markets business segment utilizes capital (i) to fund securities inventory to facilitate client trading activities; (ii) for risk trading on the firm’s own account; (iii) to fund our collateralized securities lending activities; (iv) for temporary capital needs associated with underwriting activities; (v) to fund business expansion into existing or new product lines including additional capital dedicated to our mortgage group as well as our matched book repo business; and (vi) to fund any operating losses incurred. |
| (2) | To fund the expansion of our Asset Management business segment. We generally grow our assets under management by sponsoring new Investment Vehicles. The creation of a new Investment Vehicle often requires us to invest a certain amount of our own capital to attract outside capital to manage. Also, these new Investment Vehicles often require warehouse and other third party financing to fund the acquisition of investments. Finally, we generally will hire employees to manage new Investment Vehicles and will operate at a loss for a startup period. |
| (3) | To fund investments. We make principal investments (including sponsor and other investments in SPACs) to generate returns. We may need to raise additional debt or equity financing in order to ensure we have the capital necessary to take advantage of attractive investment opportunities. |
| (4) | To fund mergers or acquisitions. We may opportunistically use capital to acquire other asset managers, individual asset management contracts, or financial services firms. To the extent our liquidity sources are insufficient to fund our future merger or acquisition activities, we may need to raise additional funding through an equity or debt offering. No assurances can be given that additional financing will be available in the future, or that if available, such financing will be on favorable terms. |
| (5) | To fund potential dividends and distributions. We sometimes pay quarterly and special dividends. When we pay a dividend, a pro rata distribution is paid to the other members of the Operating LLC upon the payment of any dividends to stockholders of Cohen & Company Inc. |
| (6) | To fund potential repurchases of Common Stock. The Company has opportunistically repurchased Common Stock in private transactions as well as through its 10b5-1 Plan. See note 17 to our consolidated financial statements included in this Quarterly Report on Form 10-Q. |
| (7) | To pay off debt as it matures: The Company has indebtedness that must be repaid as it matures. See note 16 to our consolidated financial statements included in this Quarterly Report on Form 10-Q. |
If we are unable to raise sufficient capital on economically favorable terms, we may need to reduce the amount of capital invested for the uses described above, which may adversely impact earnings and our ability to pay future dividends, if any.
As of March 31, 2022 and December 31, 2021, we maintained cash and cash equivalents of $ 62,510 and $ 50,567, respectively. We generated cash from or used cash for the following activities.
| SUMMARY CASH FLOW INFORMATION |
||||||
| (Dollars in Thousands) |
| . | Three Months Ended March 31, |
||||||||
| 2022 |
2021 |
||||||||
| Cash flow from operating activities | $ | 14,350 | $ | (28,150 | ) | ||||
| Cash flow from investing activities | (149 | ) | 10,959 | ||||||
| Cash flow from financing activities | (2,182 | ) | (5,145 | ) | |||||
| Effect of exchange rate on cash | (76 | ) | (189 | ) | |||||
| Net cash flow |
11,943 | (22,525 | ) | ||||||
| Cash and cash equivalents, beginning | 50,567 | 41,996 | |||||||
| Cash and cash equivalents, ending |
$ | 62,510 | $ | 19,471 | |||||
See the statement of cash flows in our consolidated financial statements. We believe our available cash and cash equivalents, as well as our investment in our trading portfolio and related borrowing capacity, will provide sufficient liquidity to meet the cash needs of our ongoing operations in the near term.
Three Months Ended March 31, 2022
As of March 31, 2022, our cash and cash equivalents were $ 62,510, representing an increase of $ 11,943 from December 31, 2021. The increase was attributable to cash provided by operating activities of $ 14,350, cash used in investing activities of $ 149, cash used in financing activities of $ 2,182, and a decrease in cash caused by the change in exchange rates of $ 76.
The cash provided by operating activities of $ 14,350 was comprised of (a) net cash inflows of $ 12,154 related to working capital fluctuations; (b) net cash inflows of $ 3,814 from trading activities comprised of our investments-trading, trading securities sold, not yet purchased, receivables under resale agreements, securities sold under agreements to repurchase, and receivables and payables from brokers, dealers, and clearing agencies, as well as the changes in unrealized gains and losses on the investments-trading and trading securities sold, but not yet purchased; and (c) net cash outflows from other earnings items of $ 1,618 (which represents net income or loss adjusted for the following non-cash operating items: other income / (expense), realized and unrealized gains and losses and accretion of income on other investments, income from equity method affiliates, equity based compensation, depreciation and amortization, deferred taxes, and amortization of discount on debt).
The cash used in investing activities of $ 149 was comprised of (a) $3,869 of purchases of other investments, at fair value; (b) $4,178 of purchases of other investments sold, not yet purchased, at fair value; (c) $438 of investments in equity method affiliates, (d) $298 of purchases of furniture, equipment, and leasehold improvements; partially offset by (e) $7,395 of sales and returns of principal of other investments, at fair value and (f) $1,239 of sales and returns of principal of other investments sold, not yet purchased, at fair value.
The cash used in financing activities of $ 2,182 was comprised of (a) $2,250 used to repay debt, (b) $219 used to net settle equity awards, (c) $54 used to pay dividends, (d) $142 used to pay distributions to the convertible non-controlling interest; and (e) $1,775 of distributions to the non-convertible non-controlling interest; partially offset by (f) $2,250 in proceeds from issuance of debt and (g) $6 in non-convertible non-controlling interest investments.
Three Months Ended March 31, 2021
As of March 31, 2021, our cash and cash equivalents were $ 19,471, representing an decrease of $ 22,525 from December 31, 2020. The decrease was attributable to cash used in operating activities of $ 28,150, cash provided by investing activities of $ 10,959, cash used in financing activities of $ 5,145, and the decrease in cash caused by the change in exchange rates of $ 189.
The cash used in operating activities of $ 28,150 was comprised of (a) net cash outflows of $ 17,309 related to working capital fluctuations; (b) net cash outflows of $ 10,700 from trading activities comprised of our investments-trading, trading securities sold, not yet purchased, receivables under resale agreements, securities sold under agreements to repurchase, and receivables and payables from brokers, dealers, and clearing agencies, as well as the changes in unrealized gains and losses on the investments-trading and trading securities sold, but not yet purchased; and (c) net cash outflows from other earnings items of $ 141 (which represents net income or loss adjusted for the following non-cash operating items: other income / (expense), realized and unrealized gains and losses and accretion of income on other investments, income from equity method affiliates, equity based compensation, depreciation and amortization, deferred taxes, and amortization of discount on debt).
The cash provided by investing activities of $ 10,959 was comprised of (a) $46,740 of sales and returns of principal of other investments, at fair value; (b) $4,398 of sales and returns of principal on other investments sold, not yet purchased; partially offset by (c) $35,279 of purchases of other investments, at fair value; (d) $4,442 of purchase of other investments sold, not yet purchased, at fair value; (e) $268 of investments in equity method affiliates; and (f) $190 of purchases of furniture, equipment, and leasehold improvements.
The cash used in financing activities of $ 5,145 was comprised of (a) $4,000 of repayments of redeemable financial instruments; (b) $361 in cash used to net settle equity awards; (c) $662 of purchases and retirements of Common Stock; (d) $138 of non-controlling interest distributions; (e) $7 of dividends paid on vested Common Stock; partially offset by $23 in proceeds from non-controlling interest contributions.
Note Regarding Collateral Deposits and Impact on Operating Cash Flow
As part of our matched book repo operations, we enter into reverse repos with counterparties whereby we lend money and receive securities as collateral. In accordance with ASC 860, the collateral securities are not recorded in our consolidated balance sheets. However, from time to time we will hold cash instead of securities as collateral for these transactions. When we are provided cash as collateral for reverse repo transactions, we will make an entry to increase our cash and cash equivalents and to increase our other liabilities for the amount of cash received. There are two main reasons we may receive collateral in the form of cash as opposed to securities. First, when the value of the collateral securities we have in our possession decline, we will require the counterparty to provide us with additional collateral. We will accept either cash or additional liquid securities. Often, our counterparties will provide us with cash as they may not have liquid securities readily available. Second, from time to time, our counterparties require a portion of the collateral securities in our possession returned to them for operating purposes. In such instances, the counterparty may not have substitute liquid securities available and will often provide us with cash as collateral instead. It is important to note that when we receive cash as collateral, it is temporary in nature and we have an obligation to return that cash when the counterparty provides substitute liquid securities as collateral or otherwise satisfies their associated reverse repo obligation. We are generally required to return any cash collateral the same business day that we receive substitute securities. The amount of cash we receive as collateral for our repo operations is volatile and therefore, both our cash and cash equivalents balance and our cash provided by and used in operations are volatile as they are both impacted. These amounts can be large and should be taken into account when analyzing our cash flow from operations.
The following table shows the impact of changes in these collateral deposits had on our cash flows in each period presented:
| Three Months Ended March 31, |
||||||||
| 2022 |
2021 |
|||||||
| Collateral deposit end of period |
$ | 40,465 | $ | 29,275 | ||||
| Less: Collateral deposit beginning of period |
17,320 | 41,119 | ||||||
| Impact to cash flow from operations |
$ | 23,145 | $ | (11,844 | ) | |||
Regulatory Capital Requirements
We have two subsidiaries that are licensed securities dealers: JVB in the United States and CCFESA in France. As a U.S. broker-dealer, JVB is subject to the Uniform Net Capital Rule in Rule 15c3-1 under the Exchange Act. Our French-based subsidiary, CCFESA, is subject to the regulatory supervision and requirements of the ACPR. The amount of net assets that these subsidiaries may distribute is subject to restrictions under these applicable net capital rules. These subsidiaries have historically operated in excess of minimum net capital requirements. Our minimum capital requirements at March 31, 2022 were as follows.
| MINIMUM NET CAPITAL REQUIREMENTS |
|||
| (Dollars in Thousands) |
| United States |
$ | 250 | ||
| Europe |
534 | |||
| Total |
$ | 784 |
We operate with more than the minimum regulatory capital requirement in our licensed broker-dealers and at March 31, 2022, total net capital, or the equivalent as defined by the relevant statutory regulations, in our licensed broker-dealers totaled $57,945. See note 18 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q. In addition, our licensed broker-dealers are generally subject to capital withdrawal notification and restrictions.
Restrictions of Distributions of Capital from JVB
As of March 31, 2022, our total equity on a consolidated basis was $121,478. However, the total equity of JVB was $96,970. Of the $24,508 in equity outside of JVB, $11,506 represents non-convertible non-controlling interests comprised mainly of the non-controlling interests of Insurance SPAC III Sponsor Entities and other consolidated subsidiaries which cannot be utilized by the Operating LLC for other purposes.
From time to time, we may need to take distributions of income (and potentially returns of capital) from JVB to satisfy the cash needs as a result of the losses incurred outside of JVB or to satisfy other obligations that come due outside of JVB. However, we are subject to significant limitations on our ability to make distributions from JVB. These limitations include limitations imposed by FINRA under rule 15c3-1 (described immediately above) and limitations under our line of credit with Byline Bank (see note 16 to our consolidated financial statements included in this Quarterly Report on Form 10-Q). Furthermore, counterparties to JVB have their own internal counterparty credit requirements. The specific requirements are not generally shared with us. However, if we take too much in capital distributions from JVB (beyond its net income), we may not be able to trade with certain counterparties which may cause JVB’s operations to deteriorate.
Securities Financing
We maintain repurchase agreements with various third-party institutional investors. There is no maximum limit as to the amount of securities that may be transferred pursuant to these agreements, and transactions are approved on a case-by-case basis. The repurchase agreements do not include substantive provisions other than those covenants and other customary provisions contained in standard master repurchase agreements. The repurchase agreements generally require us to transfer additional securities to the counterparty in the event the value of the securities then held by the counterparty in the margin account falls below specified levels and contain events of default in cases where we breach our obligations under the agreement. We receive margin calls from our repurchase agreement counterparties from time to time in the ordinary course of business. To date, we have maintained sufficient liquidity to meet margin calls, and we have always been able to satisfy a margin call, however, no assurance can be given that we will be able to satisfy requests from our counterparties to post additional collateral in the future. See note 10 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.
If there were an event of default under the repurchase agreements, we would give our counterparty the option to terminate all repurchase transactions existing with us and make any amount due from us to the counterparty payable immediately. Repurchase obligations are full recourse obligations to us. If we were to default under a repurchase obligation, the counterparty would have recourse to our other assets if the collateral was not sufficient to satisfy the obligation in full. Most of our repurchase agreements are entered into as part of our matched book repo business.
Our clearing agencies provide securities financing arrangements including margin arrangements and securities borrowing and lending arrangements. These arrangements generally require us to transfer additional securities or cash to the clearing agency in the event the value of the securities then held by the clearing agency in the margin account falls below specified levels and contain events of default in cases where we breach our obligations under such agreements. An event of default under the clearing agreement would give our counterparty the option to terminate our clearing arrangement. Any amounts owed to the clearing agency would be immediately due and payable. These obligations are recourse to us. Furthermore, a termination of our clearing arrangements would result in a significant disruption to our business and would have a significant negative impact on our dealings and relationship with our customers. The following table presents our period end balance, average monthly balance, and maximum balance at any month end during the three months ended March 31, 2022 and the twelve months ended December 31, 2021 for receivables under resale agreements and securities sold under agreements to repurchase.
| For the Three Months Ended March 31, 2022 | For the Twelve Months Ended December 31, 2021 | |||||||
| Receivables under resale agreements |
||||||||
| Period end |
2,193,562 | 3,175,645 | ||||||
| Monthly average |
2,716,251 | 5,750,146 | ||||||
| Maximum month end |
3,006,658 | 7,299,538 | ||||||
| Securities sold under agreements to repurchase |
||||||||
| Period end |
2,188,415 | 3,171,415 | ||||||
| Monthly average |
2,711,530 | 5,745,838 | ||||||
| Maximum month end |
3,002,514 | 7,289,275 | ||||||
Fluctuations in the balance of our repurchase agreements from period to period and intra-period are dependent on business activity in those periods. The fluctuations in the balances of our receivables under resale agreements over the periods presented were impacted by our clients’ desires to execute collateralized financing arrangements through the repurchase market or other financing products. Average balances and period end balances will fluctuate based on market and liquidity conditions and we consider such intra-period fluctuations as typical for the repurchase market. Month-end balances may be higher or lower than average period balances. See note 4 and 10 regarding wind down of GCF repo business.
Debt Financing
See note 16 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q for a discussion of the Company’s outstanding debt.
| DETAIL OF DEBT |
|||||||||||||
| (Dollars in Thousands) |
| As of |
As of |
Interest |
|||||||||||
| Description |
March 31, 2022 |
December 31, 2021 |
Rate Terms |
Interest (3) |
Maturity |
||||||||
| Non-convertible debt: |
|||||||||||||
| 10.00% senior note (the "2020 Senior Notes") |
$ | 4,500 | $ | 4,500 | Fixed |
10.00% |
January 2024 |
||||||
| Contingent convertible debt: |
|||||||||||||
| 8.00% convertible senior note (the "2017 Convertible Note") |
- | 15,000 | Fixed |
8.00% |
March 2023 (1) |
||||||||
| Less unamortized debt issuance costs |
- | (67 | ) | ||||||||||
| - | 14,933 | ||||||||||||
| Junior subordinated notes (2): |
|||||||||||||
| Alesco Capital Trust I |
28,125 | 28,125 | Variable |
4.30% |
July 2037 |
||||||||
| Sunset Financial Statutory Trust I |
20,000 | 20,000 | Variable |
5.15% |
March 2035 |
||||||||
| Less unamortized discount |
(24,027 | ) | (24,164 | ) | |||||||||
| 24,098 | 23,961 | ||||||||||||
| ByLine Bank |
- | - | Variable |
NA |
December 2023 |
||||||||
| Total |
$ | 28,598 | $ | 43,394 | |||||||||
| (1) |
The holder of the 2017 Convertible Note may convert all or any part of the outstanding principal amount at any time prior to maturity into units of membership interests of the Operating LLC at a conversion price of $1.45 per unit, subject to customary anti-dilution adjustments. Units of membership interests in the Operating LLC not held by Cohen & Company Inc. may, with certain restrictions, be redeemed and exchanged into shares of the Cohen & Company Inc. common stock, par value $0.01 per share (“Common Stock”) on a ten-for-one basis. Therefore, the 2017 Convertible Note can be converted into Operating LLC units of membership interests and then redeemed and exchanged into Common Stock at an effective conversion price of $14.50. See note 20 to the Annual Report on Form 10-K for the year ended December 31, 2021. Effective March 20, 2022, the 2017 Note was converted into 10,344,827 units. |
| (2) |
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, 2022 on a combined basis was 11.91% assuming the variable rate in effect on the last day of the reporting period remains in effect until maturity. |
| (3) |
Represents the interest rate in effect as of the last day of the reporting period. |
Redeemable Financial Instruments
As of March 31, 2022 and December 31, 2021, we had a redeemable financial instrument payable to JKD Capital Partners I LTD. See note 16 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
Other than as described in note 9 (derivative financial instruments) and note 14 (variable interest entities) to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, there were no material off balance sheet arrangements as of March 31, 2022.
Contractual Obligations
The table below summarizes our significant contractual obligations as of March 31, 2022 and the future periods in which such obligations are expected to be settled in cash. We assumed that the 2017 Convertible Note is not converted prior to maturity. Our junior subordinated notes are assumed to be repaid on their respective maturity dates. Excluded from the table below are obligations that are short-term in nature, including trading liabilities (including derivatives) and repurchase agreements.
| CONTRACTUAL OBLIGATIONS |
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| March 31, 2022 | |||||||||||||||
| (Dollars in Thousands) |
| Payment Due by Period |
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| Total |
Less than 1 Year |
1-3 Years |
3-5 Years |
More than 5 Years |
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| Operating lease arrangements |
13,738 | 2,343 | 4,813 | 3,184 | 3,398 | |||||||||||||||
| Maturity of 2020 Senior Notes (1) |
4,500 | 4,500 | - | - | - | |||||||||||||||
| Interest on 2020 Senior Notes (1) |
923 | 435 | 488 | - | - | |||||||||||||||
| Maturities on junior subordinated notes |
48,125 | - | - | - | 48,125 | |||||||||||||||
| Interest on junior subordinated notes (2) |
32,122 | 2,238 | 4,477 | 4,477 | 20,930 | |||||||||||||||
| Redeemable Financial Instrument - JKD Capital Partners 1 (3) |
7,957 | 7,957 | - | - | - |
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| Other Operating Obligations (4) |
2,481 | 1,579 | 902 | - | - | |||||||||||||||
| $ | 109,846 | $ | 19,052 | $ | 10,680 | $ | 7,661 | $ | 72,453 | |||||||||||
| (1) | The 2020 Notes mature on January 31, 2024. However, any time after January 31, 2023, the holder can give us 31 days' notice and require full repayment. For purposes of the table above, we show the maturity on earlier date, but show the interest payments out to the stated maturity date. | |
| (2) |
The interest on the junior subordinated notes related to Alesco Capital Trust I is variable. The interest rate of 4.3% (based on a 90-day LIBOR rate in effect as of March 31, 2022 plus 4.00%) was used to compute the contractual interest payment in each period noted. The interest on the junior subordinated notes related to Sunset Financial Statutory Trust I is variable. The interest rate of 5.15% (based on a 90-day LIBOR rate in effect as of March 31, 2022 plus 4.15%) was used to compute the contractual interest payment in each period noted. |
| (3) |
Represents redemption value of the redeemable financial instruments as of the reporting period. The redeemable financial instruments do not have a fixed maturity date. The period shown above represents the first period the holder of these instruments has the ability to require redemption by us. |
| (4) |
Represents material operating contracts for various services. |
We believe that we will be able to continue to fund our current operations and meet our contractual obligations through a combination of existing cash resources and other sources of credit. Due to the uncertainties that exist in the economy, we cannot be certain that we will be able to replace existing financing or find sources of additional financing in the future.
Recent Accounting Pronouncements
The following is a list of recent accounting pronouncements that we believe will have a continuing impact on our financial statements going forward.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This ASU simplifies accounting for convertible instruments by removing major separation models currently required. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. This ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. We are currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements.
In 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. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements.
Critical Accounting Policies and Estimates
Our accounting policies are essential to understanding and interpreting the financial results reported in our condensed consolidated financial statements. The significant accounting policies used in the preparation of our condensed consolidated financial statements are summarized in note 3 to our consolidated financial statements and notes thereto found in our Annual Report on Form 10-K for the year ended December 31, 2021. Certain of those policies are considered to be particularly important to the presentation of our financial results because they require us to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. During the three months ended March 31, 2022, there were no material changes to matters discussed under the heading “Critical Accounting Policies and Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All amounts in this section are in thousands unless otherwise noted.
Market Risk
Market risk is the risk of economic loss arising from the adverse impact of market changes to the market value of our trading and investment positions. Market risk is inherent to both derivative and non-derivative financial instruments, and accordingly, the scope of our market risk management procedures extends beyond derivatives to include all market risk sensitive financial instruments. For purposes of analyzing the components of market risk, we have broken out our investment portfolio into three broad categories, plus debt, as described below.
Fixed Income Securities: We hold, from time to time, the following securities: U.S. Treasury securities, U.S. government agency MBS, U.S. government agency debt securities, CMOs, non-government MBS, corporate bonds, non-redeemable and redeemable preferred stock, municipal bonds, certificates of deposits, residential loans, whole loans, and unconsolidated investments in the middle and senior tiers of securitization entities and TruPS. We attempt to mitigate our exposure to market risk by entering into economic hedging transactions, which may include TBAs and other forward agency MBS contracts. The fixed income category can be broadly broken down into two subcategories: fixed rate and floating rate.
Floating rate securities are not in themselves particularly sensitive to interest rate risk. Because they generally accrue income at a variable rate, the movement in interest rates typically does not impact their fair value. Fluctuations in their current income due to variations in interest rates are generally not material to us. Floating rate fixed income securities are subject to other market risks such as default risk of the underlying issuer, changes in issuer’s credit spreads, prepayment rates, investor demand and supply of securities within a particular asset class or industry class of the ultimate obligor. The sensitivity to any individual market risk can be difficult to quantify.
The fair value of fixed rate securities is sensitive to changes in interest rates. However, fixed rate securities that have low credit ratings or represent junior interests in securitizations are not particularly interest rate sensitive. In general, when we acquire interest rate sensitive securities, we enter into an offsetting short position for a similar fixed rate security. Alternatively, we may enter into other interest rate hedging arrangements such as interest rate swaps or Eurodollar futures. We measure our net interest rate sensitivity by determining how the fair value of our net interest rate sensitive assets would change as a result of a 100 basis point (“bps”) adverse shift across the entire yield curve. Based on this analysis, as of March 31, 2022, we would incur a loss of $2,015 if the yield curve rises 100 bps across all maturities and a gain of $2,006 if the yield curve falls 100 bps across all maturities.
Equity Securities: We hold equity interests in the form of investments in investment funds, permanent capital vehicles, and equity instruments of publicly traded companies. These investments are subject to equity price risk. Equity price risk results from changes in the level or volatility of underlying equity prices, which affect the value of equity securities or instruments that in turn derive their value from a particular stock. We attempt to reduce the risk of loss inherent in our inventory of equity securities by closely monitoring those security positions. However, since we generally make investments in our investment funds and permanent capital vehicles in order to facilitate third party capital raising (and hence increase our AUM and asset management fees), we may be unwilling to sell these positions as compared to investments in unaffiliated third parties. Also, with our SPAC franchise, we have a large amount of restricted shares on our balance sheet. These investments are subject to equity price risk and we cannot sell them while they are restricted. Furthermore, there is limited ability for us to hedge this risk on a cost-effective basis. We measure our net equity price sensitivity and foreign currency sensitivity by determining how the net fair value of our equity price sensitive and foreign exchange sensitive assets would change as a result of a 10% adverse change in equity prices or foreign exchange rates. Based on this analysis, as of March 31, 2022, our equity price sensitivity was $3,856 and our foreign exchange currency sensitivity was $0.
Other Securities: These investments are primarily made up of residual interests in securitization entities. The fair value of these investments will fluctuate over time based on a number of factors including, but not limited to, liquidity of the investment type, the credit performance of the individual assets and issuers within the securitization entity, the asset class of the securitization entity and the relative supply of and demand for investments within that asset class, credit spreads in general, the transparency of valuation of the assets and liabilities of the securitization entity, and investors’ view of the accuracy of ratings prepared by the independent rating agencies. The sensitivity to any individual market risk cannot be quantified.
Debt: In addition to the risks noted above, we incur interest rate risk related to our debt obligations. We have debt that accrues interest at either variable rates or fixed rates. As of March 31, 2022, a 100 bps change in the three month LIBOR would result in a change in our annual cash paid for interest in the amount of $481. A 100 bps adverse change in the market yield to maturity would result in an increase in the fair value of the debt in the amount of $2,926 as of March 31, 2022.
Counterparty Risk and Settlement Risk
We are subject to counterparty risk primarily in two areas: (i) our collateralized securities transactions described in note 10 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q and (ii) our TBA and other forward agency MBS activities described in note 9 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q. With respect to the matched book repo financing activities, our risk is that the counterparty does not fulfill its obligation to repurchase the underlying security when it is due. In this case, we would typically liquidate the underlying security, which may result in a loss if the security has declined in value in relation to the balance due from the counterparty under the reverse repurchase agreement.
With respect to our TBA and other forward agency MBS activities, our risk is that the counterparty does not settle the TBA trade on the scheduled settlement date. In this case, we would have to execute the trade, which may result in a loss based on market movement in the value of the underlying trade between its initial trade date and its settlement date (which in the case of TBAs can be as long as 90 days). If we were to incur a loss under either of these activities, we have recourse to the counterparty pursuant to the underlying agreements.
Finally, we have general settlement risk in all of our regular way fixed income and equity trading activities. If a counterparty fails to settle a trade, we may incur a loss in closing out the position and would be forced to try to recover this loss from the counterparty. If the counterparty has become insolvent or does not have sufficient liquid assets to reimburse us for the loss, we may not get reimbursed.
How we manage these risks
Market Risk
We seek to manage our market risk by utilizing our underwriting and credit analysis processes that are performed in advance of acquiring any investment. In addition, we continually monitor our investments-trading and our trading securities sold, not yet purchased and our other investments on a daily basis. We perform an in-depth monthly analysis on all our investments and our risk committee meets on a monthly basis to review specific issues within our portfolio and to make recommendations for dealing with these issues. In addition, our broker-dealer has an assigned chief risk officer that reviews the firm’s positions and trading activities on a daily basis.
Counterparty Risk
We seek to manage our counterparty risk primarily through two processes. First, we perform a credit assessment of each counterparty to ensure the counterparty has sufficient equity, liquidity, and profitability to support the level of trading or lending we plan to do with them. Second, we may require counterparties to post cash or other liquid collateral (“margin”) to support changes in the market value of the underlying securities or trades on an ongoing basis.
In the case of collateralized securities financing transactions, we will generally lend less than the market value of the underlying security initially. The difference between the amount lent and the value of the security is referred to as the haircut. We will seek to maintain this haircut while the loan is outstanding. If the value of the security declines, we will require the counterparty to post margin to offset this decline. If the counterparty fails to post margin, we will sell the underlying security. The haircut serves as a buffer against market movements to prevent or minimize a loss.
In the case of TBA and other forward agency MBS activities, we sometimes require counterparties to post margin with us when the market value of the underlying TBA trade declines. If the counterparty fails to post margin, we will close out the underlying trade. In the case of TBA and other forward agency MBS activities, we will sometimes obtain initial margin or a cash deposit from the counterparty, which serves a purpose similar to the haircut as an additional buffer against losses. However, some of our TBA and other forward agency MBS activities are done without initial margin or cash deposits.
Risks Related to our Matched Book Repo Business
We have entered into repurchase and reverse repurchase agreements as part of our matched book repo business. In general, we will lend money to a counterparty after obtaining collateral securities from that counterparty pursuant to a reverse repurchase agreement. We will borrow money from another counterparty using those same collateral securities pursuant to a repurchase agreement. We seek to earn net interest income on these matched transactions.
In our gestation repo business, we will generally ensure that the maturity date of each reverse repurchase agreement matches the maturity date of the matched repurchase agreement. This largely eliminates funding risk and interest rate risk. If our repo side counterparties increase haircuts or interest rates, we can pass such a change onto our reverse repo counterparties or let the trade mature.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established and maintain disclosure controls and procedures that are designed to ensure that material information relating to the Company (and its consolidated subsidiaries) required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, who certify our financial reports and to other members of senior management and the Company’s board of directors.
Under the supervision and with the participation of our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2022. Based on that evaluation, the chief executive officer and the chief financial officer concluded that our disclosure controls and procedures were effective at March 31, 2022.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Incorporated by reference to the headings titled “Commitments and Contingencies” in note 20 to the consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.
In addition to the information set forth in this Quarterly Report on Form 10-Q, you should also carefully review and consider the risk factors contained in our other reports and periodic filings with the SEC, including without limitation the risk factors contained under the caption “Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, that could materially and adversely affect our business, financial condition, and results of operations. The risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. There have been no material changes in the significant factors that may affect our business and operations as described in “Item 1A—Risk Factors” of the Annual Report on 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Effective January 1, 2010, the Company ceased to qualify as a REIT and, therefore, is not required to make any dividends or other distributions to its stockholders. However, the Company’s board of directors has the power to decide to increase, reduce, or eliminate dividends in the future. The Company’s board of directors’ decision will depend on a variety of factors, including business, financial, and regulatory considerations as well as any limitations under Maryland law or imposed by any agreements governing indebtedness of the Company. There can be no assurances that such dividends will be maintained or increased and, if maintained or increased, will not subsequently be discontinued.
Certain subsidiaries of the Operating LLC have restrictions on the withdrawal of capital and otherwise in making distributions and loans. JVB is subject to net capital restrictions imposed by the SEC and FINRA that require certain minimum levels of net capital to remain in this subsidiary. In addition, these restrictions could potentially impose notice requirements or limit our ability to withdraw capital above the required minimum amounts (excess capital) whether through distribution or loan. CCFESA is regulated by the ACPR in France and must maintain certain minimum levels of capital. See note 18 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.
Issuer Purchases of Equity Securities
| Period |
Total Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Dollar Value of Shares that May Yet be Purchased under the Plans or Programs |
||||||||||||
| January 2022 |
$ | - | - | 34,704 | ||||||||||||
| February 2022 |
- | $ | - | - | 34,704 | |||||||||||
| March 2022 |
- | $ | - | - | 34,704 | |||||||||||
| Total |
- | - | ||||||||||||||
| Exhibit No. |
Description |
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| 10.1 | Note Purchase Agreement dated January 31, 2022, by and between Cohen & Company, LLC and JKD Capital Partners I LTD (incorporated by reference to exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 21, 2022). | ||
| 10.2 | Amended and Restated Senior Promissory Note, dated January 31, 2022, issued by Cohen & Company, LLC to JKD Capital Partners I LTD in the aggregate amount of $4,500,000 (incorporated by reference to exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on January 21, 2022). | ||
| 31.1 |
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| 101 |
Interactive data files pursuant to Rule 405 of Regulation S-T formatted inline XBRL: (i) the Consolidated Balance Sheets at March 31, 2022 and December 31, 2021, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended and 2021, (iii) the Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2022 and 2021, (iv) the Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021, and (v) Notes to Consolidated Financial Statements.** |
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| 104 | Cover Page Interactive Data File (formatted in inline XBRL and contained in Exhibit 101) | ||
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| * |
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Filed herewith. |
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Furnished herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Cohen & Company Inc. |
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By: |
/s/ LESTER R. BRAFMAN |
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Lester R. Brafman |
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| Date: May 6, 2022 |
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Chief Executive Officer |
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Cohen & Company Inc. |
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By: |
/s/ JOSEPH W. POOLER, JR. |
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Joseph W. Pooler, Jr. |
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| Date: May 6, 2022 |
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Executive Vice President, Chief Financial Officer, and Treasurer |
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Exhibit 31.1
SECTION 302 CEO CERTIFICATION
I, Lester R. Brafman, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of Institutional Financial Markets, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: May 6, 2022 |
Signed: |
/s/ LESTER R. BRAFMAN |
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Name: |
Lester R. Brafman |
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Title: |
Chief Executive Officer |
Exhibit 31.2
SECTION 302 CFO CERTIFICATION
I, Joseph W. Pooler, Jr., certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of Institutional Financial Markets, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: May 6, 2022 |
Signed: |
/s/ JOSEPH W. POOLER, JR. |
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Name: |
Joseph W. Pooler, Jr. |
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Title: |
Executive Vice President, Chief Financial Officer and Treasurer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Institutional Financial Markets, Inc. (the “Company”) for the three months ended March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lester R. Brafman, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: May 6, 2022 |
Signed: |
/s/ LESTER R. BRAFMAN |
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Name: |
Lester R. Brafman |
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Title: |
Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Institutional Financial Markets, Inc. (the “Company”) for the three months ended March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph W. Pooler, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: May 6, 2022 |
Signed: |
/s/ JOSEPH W. POOLER, JR. |
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Name: |
Joseph W. Pooler, Jr. |
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Title: |
Executive Vice President, Chief Financial Officer and Treasurer |