10-Q 1 cohn20210331_10q.htm FORM 10-Q cohn20200630_10q.htm
 

 

Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


  

FORM 10-Q


 

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

 

For the quarterly period ended March 31, 2021

 

or

 

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

 

For the transition period from                      to                     

 

Commission File Number: 001-32026 

 


COHEN & COMPANY INC.

(Exact name of registrant as specified in its charter)


 

Maryland

16-1685692

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)



 

Cira Centre

2929 Arch Street,  Suite 1703

Philadelphia,  Pennsylvania

19104

(Address of principal executive offices)

(Zip Code)

 

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

Not applicable 

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


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒    Yes    ☐  No

 

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

 

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



 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐  

Smaller reporting company



 

Emerging growth company

 

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

 

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

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

COHN

 

The NYSE American Stock Exchange

 

As of May 4, 2021 there were 1,327,037, shares of common stock ($0.01 par value per share) of Cohen & Company Inc. (“Common Stock”) outstanding.

 

 

 

 

 

Cohen & Company Inc. 

FORM 10-Q

INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2021

  



 

 

 

 

Page 

PART I. FINANCIAL INFORMATION

 



 

 

Item 1.

Financial Statements (Unaudited)

5



 

 

 

Consolidated Balance Sheets—March 31, 2021 and December 31, 2020

5



 

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss)—Three Months Ended March 31, 2021 and 2020

6



 

 

 

Consolidated Statements of Changes in Equity—Three Months Ended March 31, 2021 and 2020

7



 

 

 

Consolidated Statements of Cash Flows—Three Months Ended March 31, 2021 and 2020

8



 

 

 

Notes to Consolidated Financial Statements (Unaudited)

9



 

 

Item 2.

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

59



 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

82



 

 

Item 4.

Controls and Procedures

83



 

Part II. OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

84



 

 

Item 1A.

Risk Factors

84



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

85



 

 

Item 6.

Exhibits

86



 

Signatures

87

 

 

 

 

 

Forward-Looking Statements 

 

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

 

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

 

 

integration of operations;

 

business strategies;

 

growth opportunities;

 

competitive position;

 

market outlook;

 

expected financial position;

 

expected results of operations;

 

future cash flows;

 

financing plans;

 

plans and objectives of management;

 

tax treatment of the business combinations;

 

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;

 

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

 

our role as asset manager and sponsor in our SPAC franchise

 

fair value of assets; and

 

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

 

These forward-looking statements represent our intentions, plans, expectations, assumptions, and beliefs about future events and are subject to risks, uncertainties, and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties, and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You should consider the areas of risk and uncertainty described above and discussed under “Item 1A — Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Actual results may differ materially as a result of various factors, some of which are outside our control, including the following:

 

 

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

 

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;

 

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

 

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

 

losses due to unidentified or unanticipated risks;

 

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

 

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

 

the ability to attract and retain personnel;

 

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

 

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

 

unanticipated market closures due to inclement weather or other disasters;

 

the volume of trading in securities including collateralized securities transactions;

 

the liquidity in capital markets;

 

the creditworthiness of our correspondents, trading counterparties, and banking and margin customers;

 

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

 

competitive conditions in each of our business segments;

 

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

 

our continued membership in the FICC;

 

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

 

the potential for litigation and other regulatory liability.

 

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

 

 

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;  “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 

 

ITEM 1. FINANCIAL STATEMENTS.

 

COHEN & COMPANY INC.

 

CONSOLIDATED BALANCE SHEETS 

(Dollars in Thousands) 

 

   

March 31, 2021

         
   

(unaudited)

   

December 31, 2020

 

Assets

               

Cash and cash equivalents

  $ 19,471     $ 41,996  

Receivables from brokers, dealers, and clearing agencies

    92,688       52,917  

Due from related parties

    603       2,812  

Other receivables

    5,736       3,929  

Investments-trading

    284,314       242,961  

Other investments, at fair value

    107,573       58,540  

Receivables under resale agreements

    7,299,538       5,716,343  

Investments in equity method affiliates

    9,136       13,482  
Deferred income taxes     6,778       7,397  

Goodwill

    109       109  

Right-of-use asset - operating leases

    5,807       6,063  

Other assets

    3,242       2,830  

Total assets

  $ 7,834,995     $ 6,149,379  
                 

Liabilities

               

Payables to brokers, dealers, and clearing agencies

  $ 219,946     $ 156,678  

Accounts payable and other liabilities

    34,167       46,251  

Accrued compensation

    11,179       14,359  

Trading securities sold, not yet purchased

    58,727       44,439  
Other investments sold, not yet purchased     5,490       7,415  

Securities sold under agreements to repurchase

    7,289,275       5,713,212  

Lease liability - operating leases

    6,276       6,531  

Redeemable financial instruments

    7,957       11,957  

Debt

    47,306       47,100  

Total liabilities

    7,680,323       6,047,942  
                 

Commitments and contingencies (See note 21)

               
                 

Stockholders' Equity:

               

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

    27       27  

Common Stock, $0.01 par value per share, 100,000,000 shares authorized, 1,327,037 and 1,325,529 shares issued and outstanding, respectively, including 291,064 and 286,566 unvested or restricted share awards, respectively

    13       13  

Additional paid-in capital

    65,351       65,031  

Accumulated other comprehensive loss

    (887 )     (821 )

Accumulated deficit

    (10,993 )     (20,341 )

Total stockholders' equity

    53,511       43,909  

Non-controlling interest

    101,161       57,528  

Total equity

    154,672       101,437  

Total liabilities and equity

  $ 7,834,995     $ 6,149,379  

( 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

COHEN & COMPANY INC. 

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

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

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

Revenues

               

Net trading

  $ 19,183     $ 18,561  

Asset management

    2,093       1,615  

New issue and advisory

    1,839       -  

Principal transactions and other income

    79,561       (2,406 )

Total revenues

    102,676       17,770  
                 

Operating expenses

               

Compensation and benefits

    26,647       14,134  

Business development, occupancy, equipment

    719       756  

Subscriptions, clearing, and execution

    2,790       2,580  

Professional fee and other operating

    1,994       1,782  

Depreciation and amortization

    81       80  

Impairment of goodwill

    -       7,883  

Total operating expenses

    32,231       27,215  
                 

Operating income (loss)

    70,445       (9,445 )
                 

Non-operating income (expense)

               

Interest expense, net

    (2,014 )     (2,605 )

Income (loss) from equity method affiliates

    (835 )     (107 )

Income (loss) before income tax expense (benefit)

    67,596       (12,157 )

Income tax expense (benefit)

    868       (372 )

Net income (loss)

    66,728       (11,785 )

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

    57,373       (8,683 )

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

  $ 9,355     $ (3,102 )

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

               

Income (loss) per common share-basic:

               

Basic income (loss) per common share

  $ 9.04     $ (2.70 )

Weighted average shares outstanding-basic

    1,034,287       1,146,879  

Income (loss) per common share-diluted:

               

Diluted income (loss) per common share

  $ 6.98     $ (2.70 )

Weighted average shares outstanding-diluted

    5,053,562       3,940,677  
                 

Dividends declared per common share

  $ -     $ -  
                 

Comprehensive income (loss)

               

Net income (loss)

  $ 66,728     $ (11,785 )

Other comprehensive income (loss) item:

               

Foreign currency translation adjustments, net of tax of $0

    (231 )     (100 )

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

    (231 )     (100 )

Comprehensive income (loss)

    66,497       (11,885 )

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

    57,212       (8,754 )

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

  $ 9,285     $ (3,131 )

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

COHEN & COMPANY INC. 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

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

(Unaudited)

 

   

Cohen & Company Inc.

                 
   

Three Months Ended March 31, 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

  $ 27     $ 13     $ 65,031     $ (20,341 )   $ (821 )   $ 43,909     $ 57,528     $ 101,437  

Net income

    -       -       -       9,355       -       9,355       57,373       66,728  

Other comprehensive income / (loss)

    -       -       -       -       (70 )     (70 )     (161 )     (231 )

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

    -       -       926       -       4       930       (930 )     -  

Equity-based compensation

    -       -       153       -       -       153       13,488       13,641  

Shares withheld for employee taxes

    -       -       (97 )     -       -       (97 )     (264 )     (361 )
Purchase and retirement of Common Stock     -       -       (662 )     -       -       (662 )     -       (662 )

Dividends/Distributions

    -       -       -       (7 )     -       (7 )     (11 )     (18 )
Investment of non-controlling interest of sponsor entities     -       -       -       -       -       -       23       23  
Distributions to non-controlling interest of sponsor entities     -       -       -       -       -       -       (25,885 )     (25,885 )

March 31, 2021

  $ 27     $ 13     $ 65,351     $ (10,993 )   $ (887 )   $ 53,511     $ 101,161     $ 154,672  

 

   

Cohen & Company Inc.

                 
   

Three Months Ended March 31, 2020

                 
                           

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, 2019

  $ 27     $ 12     $ 68,714     $ (34,519 )   $ (915 )   $ 33,319     $ 15,437     $ 48,756  

Net loss

    -       -       -       (3,102 )     -       (3,102 )     (8,683 )     (11,785 )

Other comprehensive income

    -       -       -       -       (29 )     (29 )     (71 )     (100 )

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

    -       -       (123 )     -       8       (115 )     115       -  

Equity-based compensation and vesting of shares

    -       -       46       -       -       46       112       158  

Shares withheld for employee taxes

    -       -       (15 )     -       -       (15 )     (39 )     (54 )

Dividends/Distributions

    -       -       -       (27 )     -       (27 )     (35 )     (62 )

March 31, 2020

  $ 27     $ 12     $ 68,622     $ (37,648 )   $ (936 )   $ 30,077     $ 6,836     $ 36,913  

 

   

  

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

COHEN & COMPANY INC. 

 

Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

Operating activities

               

Net income (loss)

  $ 66,728     $ (11,785 )

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

               

Equity-based compensation

    13,641       158  

Accretion of income on other investments, at fair value

    (3,000 )     (78 )

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

    (4,783 )     (40 )

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

    (74,406 )     2,735  
Realized loss / (gain) on other investments, sold not yet purchased     (202 )     -  
Change in unrealized loss / (gain) on other investments, sold not yet purchased     140       -  

(Income) / loss from equity method affiliates

    835       107  

Depreciation and amortization

    81       80  

Impairment of goodwill

    -       7,883  

Amortization of discount on debt

    206       166  

Deferred tax provision (benefit)

    619       (396 )

Change in operating assets and liabilities, net:

               

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

    23,497       (21,491 )

Change in receivables from / payables to related parties, net

    106       55  

(Increase) decrease in other receivables

    (1,807 )     29,618  

(Increase) decrease in investments-trading

    (41,353 )     (67,893 )

(Increase) decrease in receivables under resale agreement

    (1,583,195 )     1,485,564  

(Increase) decrease in other assets

    (47 )     5,645  

Increase (decrease) in accounts payable and other liabilities

    (12,381 )     61,079  

Increase (decrease) in accrued compensation

    (3,180 )     4,314  

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

    14,288       36,820  

(Increase) decrease in securities sold under agreement to repurchase

    1,576,063       (1,468,071 )

Net cash provided by (used in) operating activities

    (28,150 )     64,470  

Investing activities

               

Purchase of other investments, at fair value

    (35,279 )     (119 )
Purchase of investments - other investments sold, not yet purchased, at fair value     (4,442 )     -  

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

    46,740       2,309  
Sales and returns of principal - other investments sold, not yet purchased, at fair value     4,398       -  

Investment in equity method affiliate

    (268 )     (2,097 )

Purchase of furniture, equipment, and leasehold improvements

    (190 )     (63 )

Net cash provided by (used in) investing activities

    10,959       30  

Financing activities

               

Proceeds from draws on revolving credit facility

    -       17,500  

Proceeds from non-convertible debt

    -       4,500  

Repayment of debt

    -       (9,163 )

Repayments of redeemable financial instruments

    (4,000 )     -  

Cash used to net share settle equity awards

    (361 )     (54 )
Purchase and retirement of Common Stock     (662 )     -  
Proceeds from non-controlling interest investment     23       -  
Non-controlling interest distributions     (138 )     -  

Cohen & Company Inc. dividends

    (7 )     (62 )
Net cash provided by (used in) financing activities     (5,145 )     12,721  

Effect of exchange rate on cash

    (189 )     (71 )
Net increase (decrease) in cash and cash equivalents     (22,525 )     77,150  

Cash and cash equivalents, beginning of period

    41,996       8,304  
Cash and cash equivalents, end of period   $ 19,471     $ 85,454  

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

COHEN & COMPANY INC.

 

Notes to Consolidated Financial Statements

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

(Unaudited)

 

 

 

1. ORGANIZATION AND NATURE OF OPERATIONS

 

Organizational History 

 

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

 

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

 

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

 

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

 

The Company 

 

The Company is a financial services company specializing in fixed income markets and more recently, the SPAC markets. As of March 31, 2021, the Company had $2.41 billion in assets under management (“AUM”) of which 67.7% or $1.63 billion, was in collateralized debt obligations (“CDOs”). The remaining portion of AUM is from a diversified mix of Investment Vehicles (as defined herein).

 

In these financial statements, the “Company” refers to Cohen & Company Inc. and its subsidiaries on a consolidated basis. Cohen & Company, LLC or the “Operating LLC” refers to the main operating subsidiary of the Company.  “Cohen Brothers” refers to the pre-AFN Merger Cohen Brothers, LLC and its subsidiaries. “AFN” refers to the pre-merger Alesco Financial Inc. and its subsidiaries. When the term “Cohen & Company Inc.” is used, it is referring to the parent company itself. “JVB Holdings” refers to J.V.B. Financial Holdings, LP; “JVB” refers to J.V.B. Financial Group LLC, a broker-dealer subsidiary; “CCFEL” refers to Cohen & Company Financial (Europe) Limited, a subsidiary regulated by the Central Bank of Ireland in Ireland.

 

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

 

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

 

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.

 

● 

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, 2021 and 2020 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, 2020.

 

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, 2020.  

 

 

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A. Adoption of New Accounting Standards

 

In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under this guidance (subsequently updated with ASU 2018-19, ASU 2019-05, ASU 2019-11 and ASU 2020-02), the measurement of all expected credit losses for financial assets held at the reporting date is to be based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The Company’s adoption of the provisions of ASU 2016-13, effective January 1, 2020, did not have a material effect on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350):  Simplifying the Test for Goodwill Impairment. The amendments in this ASU eliminate Step 2 from the goodwill impairment test. The annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount.  An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  The Company adopted the provisions of ASU 2017-04, effective January 1, 2020.  The Company recorded an impairment of goodwill for the three months ended March 31, 2020.  See note 12.  This impairment charge was not the result of the adoption of ASU 2017-04. 

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.  The ASU modifies the disclosure requirements in Topic 820, by removing certain disclosure requirements related to the valuation hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The Company’s adoption of the provisions of ASU 2018-13, effective January 1, 2020, did not have an effect on the Company’s consolidated financial statements.

 

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810):  Target Improvements to Related Party Guidance for Variable Interest Entities.  The ASU made targeted changes to the related party consolidation guidance. The new guidance changes how entities evaluate decision-making fees under the variable interest entity guidance. To determine whether decision-making fees represent a variable interest, an entity will need to consider indirect interests held through related parties under common control on a proportionate basis under the new guidance, rather than in their entirety, as has been the case under current guidance. The guidance is effective in annual periods beginning after December 15, 2019 and interim periods within those fiscal years. The Company’s adoption of the provisions of ASU 2018-17, effective January 1, 2020, did not have an effect on the Company’s consolidated financial statements.

 

 

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606.  The ASU provides more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. It accomplishes this by allowing organizations to only present units of account in collaborative arrangements that are within the scope of the revenue recognition standard together with revenue accounted for under the revenue recognition standard.  The parts of the collaborative arrangement that are not in the scope of the revenue recognition standard should be presented separately from revenue accounted for under the revenue recognition.  The Company’s adoption of the provisions of ASU 2018-18, effective January 1, 2020, did not have an effect on the Company’s consolidated financial statements.

 

In November 2019, the FASB issued ASU 2019-08, Compensation – Stock Compensation (Topic (718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements– Share-Based Consideration Payable to a Customer.  This ASU requires companies to measure and classify (on the balance sheet) share-based payments to customers by applying the guidance in Topic 718, Compensation—Stock Compensation.  As a result, the amount recorded as a reduction in revenue would be measured based on the grant-date fair value of the share-based payment. The Company’s adoption of the provisions of ASU 2019-08, effective January 1, 2021 did not have an effect on the Company’s consolidated financial statements.

 

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, 2020, 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, 2020, did not have an effect on the Company’s consolidated financial statements.

 

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

  

B. Recent Accounting Developments 

 

In 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 October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, ReceivablesNonrefundable 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 cash reporting period. This ASU is effective for fiscal years beginning after December 15, 2021, including interim periods within fiscal years beginning after December 15, 2022.  The Company is currently evaluating the new guidance to determine the impact it may have on our 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 amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022.  The Company is currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements. 

 

 

 

 

C. Fair Value of Financial Instruments

 

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

 

 

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

 

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

 

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

 

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, 2021 and December 31, 2020, the fair value of the Company’s debt was estimated to be $68,170 and $62,496, respectively. The estimated fair value measurements of the debt are generally based on discounted cash flow models prepared by the Company’s management primarily using discount rates for similar instruments issued to companies with similar credit risks to the Company and are generally classified within level 3 of the value hierarchy.

 

Derivatives: These amounts are carried at fair value. Derivatives may be included as a component of investments-trading; trading securities sold, not yet purchased; and other investments, at fair value. 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 

 

COVID 19 / Impairment of Goodwill 

 

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

 

 

● 

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

 

● 

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

 

● 

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

 

The Company applied for and received a $2,166 loan under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act.  The Company carefully considered the eligibility requirements for PPP loans as well as supplemental guidance regarding the PPP beyond the applicable statute issued from time to time by government agencies and certain government officials. The Company was eligible for a PPP loan because it has fewer than 100 employees. Further, although the Company is public and listed on the NYSE American stock exchange, the Company’s market capitalization is small, and the Company believes that it did not have access to the public capital markets at the time. In part due to the PPP loan, the Company does not anticipate any significant workforce reduction or reductions in compensation levels in the near future. However, the Company will continue to carefully monitor revenue levels to assess whether compensatory or other cost-cutting measures might be necessary. On September 23, 2020, the Company applied for forgiveness of the PPP loan.  As of the date of this Quarterly Report on Form 10-Q, the Company had not received a notice of forgiveness with respect to the PPP loan. See note 17.

 

The 2020 Senior Notes 

 

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

 

Pursuant to the note purchase agreements, JKD Investor and RNCS each purchased a senior promissory note in the principal amount of $2,250 (for an aggregate investment of $4,500).  The senior promissory notes bear interest at a fixed rate of 12% per annum and mature on January 31, 2022.  On February 3, 2020, pursuant to the note purchase agreement, the Operating LLC used the proceeds received from the issuance of the senior promissory notes to repay in full all amounts outstanding under the senior promissory note, dated September 25, 2019, issued by the Company to Pensco Trust Company, Custodian fbo Edward E. Cohen IRA in the principal amount of $4,386 (the “Cohen IRA Note”).  The Cohen IRA Note was included as a portion of the 2019 Senior Notes outstanding as of December 31, 2020.  The Cohen IRA Note was fully paid and extinguished on February 3, 2020.  Subsequent to this repayment, $2,400 of the 2019 Senior Notes remain outstanding.  On September 25, 2020, the Company amended and restated the 2019 Senior Notes to extend the maturity date of the remaining $2,400 to September 25, 2021. See note 17 for details regarding the 2019 Notes. 

 

 

Insurance SPAC

 

The Operating LLC is the manager of Insurance Acquisition Sponsor, LLC (“IAS”) and Dioptra Advisors, LLC (“Dioptra” and, together with IAS, the “Insurance SPAC Sponsor Entities”).  The Insurance SPAC Sponsor Entities were sponsors of Insurance Acquisition Corp. ("Insurance SPAC"), a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses.

 

On June 29, 2020, Insurance SPAC entered into an Agreement and Plan of Merger (the “Insurance SPAC Merger Agreement”) with IAC Merger Sub, Inc., a Delaware corporation and direct wholly owned subsidiary of Insurance SPAC (“Insurance SPAC Merger Sub”), and Shift Technologies, Inc., a Delaware corporation (“SFT”).  On October 13, 2020, Insurance SPAC Merger Sub was merged (the “Insurance SPAC Merger”) with and into SFT. In connection with the Insurance SPAC Merger, the Insurance SPAC changed its name from “Insurance Acquisition Corp.” to “Shift Technologies, Inc.” and, on October 15, 2020, the Insurance SPAC’s NASDAQ trading symbol changed from "INSU" to “SFT.” The Insurance SPAC Merger was approved by the Insurance SPAC’s stockholders at a special meeting of stockholders held on October 13, 2020.

 

Upon the closing of the Insurance SPAC Merger, the Insurance SPAC Sponsor Entities held 375,000 shares of SFT’s Class A Common Stock, par value $0.0001 per share (“SFT Class A Common Stock”), and 187,500 warrants (“SFT Warrants”) to purchase an equal number of shares of SFT Class A Common Stock for $11.50 per share (such SFT Class A Common Stock and SFT Warrants, collectively, the “Placement Securities”) as a result of the 375,000 placement units which the Insurance SPAC Sponsor Entities had purchased in a private placement that occurred simultaneously with the Insurance SPAC’s initial public offering on March 22, 2019.  Further, upon the closing of the Insurance SPAC Merger, the Insurance SPAC Sponsor Entities collectively held an additional 4,497,525 shares of SFT Class A Common Stock as a result of its previous purchase of founder shares of the Insurance SPAC.  In general, when founder shares and placement shares are discussed as a group, the Company refers to them as "Sponsor Shares".  Of the 375,000 placement units, 122,665 were allocable to the Operating LLC.  Of the 4,497,525 founder shares, 2,019,721 were allocable to the Operating LLC.  

 

As of the closing of the Insurance SPAC Merger, the Company continued to consolidate the Insurance SPAC Sponsor Entities. Prior to the closing, the Company treated the consolidated Insurance SPAC Sponsor Entities’ investment in the Insurance SPAC as an equity method investment.  Effective upon the closing of the Insurance SPAC Merger:

 

 

1.

The Company determined the fair value of the Sponsor Shares held by the Insurance SPAC Sponsor Entities.

 

2.

The Company reclassified the equity method investment to other investments, at fair value and recorded principal transactions and other income for the difference between the fair value of the Sponsor Shares held by the Insurance SPAC Sponsor Entities and the equity method investment balance immediately prior to the merger closing.

 

3.

The Company then recorded non-controlling interest expense or compensation expense related to the Sponsor Shares distributable to the non-controlling interest holders in the Insurance SPAC Sponsor Entities. If the non-controlling interest holder was an employee of the Company, the Company recorded the expense as equity-based compensation expense. Otherwise, the expense was recorded by the Company as non-controlling interest expense.

 

Subsequent to the closing of the Insurance SPAC Merger, any change in the fair value of the shares held by the Insurance SPAC Sponsor Entities has been recorded as a component of principal transactions and other income.  The Company concurrently records a corresponding non-controlling interest entry related to the Sponsor Shares distributable to the non-controlling interest holders in the Insurance SPAC Sponsor Entities.  No adjustment is made to the equity-based compensation expense recorded as of the closing of the Insurance SPAC Merger.  Rather, all post-merger changes in value related to Sponsor Shares distributable to the non-controlling interest holders in the Insurance SPAC Sponsor Entities are recorded as non-controlling interest expense.  

 

During the three months ended March 31, 2021, the Insurance SPAC Sponsor Entities distributed all the unrestricted and restricted shares held to its members including the Operating LLC.  The portion of such SFT shares that was distributed to members other than the Operating LLC were treated as an in-kind non-controlling interest distribution.  Subsequent to that distribution, the Company will continue to record any change in the fair value of the SFT shares held by the Operating LLC as a component of principal transactions and other income.  However, no offsetting entry to non-controlling interest is necessary subsequent to the non-controlling interest distribution.  

 

Concurrently with the closing of the Insurance SPAC Merger, a subsidiary of the Operating LLC, INSU Pipe Sponsor, LLC, purchased 600,000 shares of SFT Class A Common Stock at a purchase price per share of $10.00 pursuant to a subscription agreement that such subsidiary executed at the time of the execution of the Insurance SPAC Merger Agreement. The Company's interest in INSU Pipe Sponsor LLC entitled it to an allocation of 350,000 shares of SFT Class A Common Stock.  During 2020, the Company consolidated INSU Pipe Sponsor, LLC and recorded principal transactions and other income for the full 600,000 shares and then non-controlling interest expense or income for the 250,000 shares not owned by the Company.  In December 2020, the shares of SFT Class A Common Stock were registered for sale and INSU Pipe Sponsor, LLC distributed the shares to the non-controlling interest holders resulting in INSU Pipe Sponsor, LLC being 100% owned by the Operating LLC.  INSU Pipe Sponsor, LLC was dissolved in the first quarter of 2021, and the Company's 350,000 shares of SFT class A common stock were transferred to the Operating LLC or other wholly owned subsidiaries of the Operating LLC. 

 

 

The following table details the impact of all the entries associated with the Insurance SPAC during the three months ended March 31, 2021.  This table excludes any tax impact.  

 

 

   

For the Three Months Ended March 31, 2021

 
   

Insurance SPAC Sponsor Entities

   

Operating LLC

   

Total

 

Principal transactions and other income

  $ 7,380     $ (3,718

)

  $ 3,662  

Equity-based compensation

    -       -       -  

Other operating

    (8

)

    -       (8

)

Income / (loss) from equity method affiliates

    -       -       -  

Net income / (loss)

    7,372       (3,718

)

    3,654  

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

    (3,560

)

    -       (3,560

)

Net income / (loss) - Operating LLC

    3,812       (3,718

)

    94  

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

    2,794       (2,725

)

    69  

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

  $ 1,018     $ (993

)

  $ 25  

 

As of March 31, 2021, the Operating LLC's total investment in SFT was $15,578 which is included as a component of other investments, at fair value.  This fair value is broken out as follows:

 

   

Operating

 

Description

 

LLC

 

Shares freely tradeable

  $ 2,208  

Shares that will become freely tradeable at such time SFT's stock price is greater than $12.00 per share for any period of 20 trading days out of 30 consecutive trading days

    3,349  

Shares that will become freely tradeable at such time SFT's stock price is greater than $13.50 per share for any period of 20 trading days out of 30 consecutive trading days

    3,345  

Shares that will become freely tradeable at such time SFT's stock price is greater than $15.00 per share for any period of 20 trading days out of 30 consecutive trading days

    3,340  

Shares that will become freely tradeable at such time SFT's stock price is greater than $17.00 per share for any period of 20 trading days out of 30 consecutive trading days

    3,336  

Total

  $ 15,578  

 

SFT's closing shares price on March 31, 2021 was $8.32 per share.  

 

 

INSU Acquisition Corp. II ("Insurance SPAC II")

 

The Operating LLC is the manager of Insurance Acquisition Sponsor II, LLC (“IAS II”) and Dioptra Advisors II, LLC (“Dioptra II” and, together with IAS II, the “Insurance SPAC II Sponsor Entities”). The Insurance SPAC II Sponsor Entities are sponsors of INSU Acquisition Corp. II (“Insurance SPAC II”), a blank check company that sought to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (each a “Insurance SPAC II Business Combination”). 

 

On November 24, 2020, Insurance SPAC II entered into an Agreement and Plan of Merger and Reorganization (the “Insurance SPAC II Merger Agreement”) with INSU II Merger Sub Corp., a Delaware corporation and direct wholly owned subsidiary of Insurance SPAC II (“Insurance SPAC II Merger Sub”), and MetroMile, Inc., a Delaware corporation (at the time, named MetroMile Operating Company) (“MetroMile”). The Insurance SPAC II Merger Agreement provided for, among other things, the acquisition of MetroMile by Insurance SPAC II pursuant to the proposed merger of Insurance SPAC II Merger Sub with and into MetroMile with MetroMile continuing as the surviving entity and a direct wholly owned subsidiary of Insurance SPAC II (the “Insurance SPAC II Merger”).  On February 9, 2021, the Insurance SPAC II Merger was consummated and Insurance SPAC II changed its name to MetroMile.    

 

Upon closing of the Insurance SPAC II Merger, the Insurance SPAC II Sponsor Entities received a total of 6,669,667 founder shares and 452,500 placement units.  

 

Each placement unit consists of one share of Insurance SPAC II Common Stock and one-third of one warrant (the “Insurance SPAC II Warrant”).  Each whole Insurance SPAC II Warrant entitles the holder to purchase one share of Insurance SPAC II common stock for $11.50 per share.  Of the 6,669,667 founders shares, (i) 1,569,333 founder shares were freely transferable and saleable at the closing as of the Insurance SPAC II Merger, (ii) 2,550,167 founder shares will become freely transferable and saleable at such time as MetroMile's stock price is greater than $15.00 per share for any period of 20 trading days out of 30 consecutive trading days; (iii) 2,550,167 founder shares will become freely transferable and saleable at such time as MetroMile's stock price is greater than $17.00 per share for any period of 20 trading days out of 30 consecutive trading days. 

 

As of the closing of the Insurance SPAC II Merger, the Company continued to consolidate the Insurance SPAC II Sponsor Entities. Prior to the closing, the Company treated the consolidated Insurance SPAC Sponsor Entities’ investment in the Insurance SPAC as an equity method investment.  Effective upon the closing of the Insurance SPAC Merger:

 

 

1.

The Company determined the fair value of the Sponsor Shares held by the Insurance SPAC Sponsor Entities;

 

2.

The Company reclassified the equity method investment to other investments, at fair value and recorded principal transactions and other income for the difference between the fair value of the Sponsor Shares held by the Insurance SPAC Sponsor Entities and the equity method investment balance immediately prior to the merger closing; and

 

3.

The Company then recorded non-controlling interest expense or compensation expense related to the Sponsor Shares distributable to the non-controlling interest holders in the Insurance SPAC Sponsor Entities. If the non-controlling interest holder was an employee, the Company recorded the expense as equity-based compensation expense. Otherwise, the expense was recorded as non-controlling interest expense.

 

Subsequent to the closing of the Insurance SPAC II Merger through April 16, 2021, any change in the fair value of the shares held by the Insurance SPAC Sponsor Entities had been recorded as a component of principal transactions and other income.  The Company concurrently records a corresponding non-controlling interest entry related to the Sponsor Shares distributable to the non-controlling interest holders in the Insurance SPAC Sponsor II Entities.  No adjustment is made to the equity-based compensation expense recorded as of the closing of the Insurance SPAC Merger.  Rather, all post-merger changes in value related to Sponsor Shares distributable to the non-controlling interest holders in the Insurance SPAC Sponsor Entities are recorded as non-controlling interest expense. 

 

On April 16, 2021, the Insurance SPAC II Sponsor Entities distributed all the unrestricted and restricted MetroMile shares held to its members including the Operating LLC  The portion of such MetroMile shares that was distributed to members other than the Operating LLC was treated as an in-kind non-controlling interest distribution.  Subsequent to that distribution, the Company will continue to record any change in the fair value of the MetroMile shares held by it as a component of principal transactions and other income.  However, no offsetting entry to non-controlling interest is necessary subsequent to the non-controlling interest distribution.  

 

 

The following table details the impact of all the entries associated with the Insurance SPAC II during the three months ended March 31, 2021.  This table excludes any tax impact.  

 

   

For the Three Months Ended March 31, 2021

 
   

Insurance SPAC II Sponsor Entities

   

Operating LLC

   

Total

 

Principal transactions and other income

  $ 73,193     $ -     $ 73,193  

Equity-based compensation

    (13,068

)

    -       (13,068

)

Other operating

    -       -       -  

Income / (loss) from equity method affiliates

    (107

)

    -       (107

)

Net income / (loss)

    60,018       -       60,018  

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

    (26,645

)

    -       (26,645

)

Net income / (loss) - Operating LLC

    33,373       -       33,373  

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

    24,459       -       24,459  

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

  $ 8,914     $ -     $ 8,914  

 

The Operating LLC's total investment in MetroMile of $72,914 as of March 31, 2021 is included as a component of other investments, at fair value in our consolidated balance sheet.  Offsetting this is $39,772 of non-controlling interest in our consolidated balance sheet related to shares of MetroMile held in consolidated entities that are distributable to the non-controlling interest holders.  Therefore, the Operating LLC's share of the consolidated investment in MetroMile as of March 31, 2021 was $33,142.  These values are broken out as follows:

 

   

Fair

   

Non-Controlling

   

Operating

 

Description

 

Value

   

Interest

   

LLC

 

Shares freely tradeable

  $ 21,145     $ (13,266 )     7,879  

Shares that will become freely tradeable at such time MetroMile's stock price is greater than $15.00 per share for any period of 20 trading days out of 30 consecutive trading days

    25,935       (13,279 )     12,656  

Shares that will become freely tradeable at such time MetroMile's stock price is greater than $17.00 per share for any period of 20 trading days out of 30 consecutive trading days

    25,834       (13,227 )     12,607  

Total

  $ 72,914     $ (39,772 )     33,142  

 

MetroMile's closing share price on March 31, 2021 was $10.29 per share. 

 

 

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 25,000,000 units (the “Insurance SPAC III Units”) in its initial public offering which included 3,200,000 units issued pursuant to the underwriters’ over-allotment option.

 

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 preinitial 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 founders 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.

 

As of March 31, 2021, the Company had a total equity method investment in Insurance SPAC III of $5,288, 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 $5,195, 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 was $93 as of March 31, 2021.  

 

In April 2021, the SEC issued guidance regarding how SPACs account for the warrants they issue.  This guidance may result in Insurance SPAC III, as well as most SPACs restating their previously issued financial statements. See Item 1a Risk Factors in this Quarterly Report on Form 10-Q.  

 

 

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,

 
   

2021

   

2020

 

Net realized gains (losses) - trading inventory

  $ 17,899     $ 10,443  

Net unrealized gains (losses) - trading inventory

    (11,554 )     (440 )

Net gains and losses

    6,345       10,003  
                 

Interest income- trading inventory

    1,756       2,477  

Interest income-receivables under resale agreements

    23,449       41,485  

Interest income

    25,205       43,962  
                 

Interest expense-securities sold under agreements to repurchase

    (12,176 )     (34,766 )

Interest expense-LegacyTexas Credit Facility

    -       (39 )

Interest expense-margin payable

    (191 )     (599 )

Interest expense

    (12,367 )     (35,404 )
                 

Net trading

  $ 19,183     $ 18,561  

 

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.  See note 17 for discussion of LegacyTexas Credit Facility. 

  

 

 

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

 

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

 

RECEIVABLES FROM BROKERS, DEALERS, AND CLEARING AGENCIES

(Dollars in Thousands)

 

   

March 31, 2021

   

December 31, 2020

 

Deposits with clearing agencies

  $ 250     $ 250  

Unsettled regular way trades, net

    -       2,961  

Receivables from clearing agencies

    92,438       49,706  

Receivables from brokers, dealers, and clearing agencies

  $ 92,688     $ 52,917  

 

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



PAYABLES TO BROKERS, DEALERS, AND CLEARING AGENCIES

(Dollars in Thousands)

 

   

March 31, 2021

   

December 31, 2020

 

Margin payable

  $ 168,386     $ 156,678  
Unsettled regular way trades, net     51,560       -  

Payables to brokers, dealers, and clearing agencies

  $ 219,946     $ 156,678  

   

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.  The balance at March 31, 2021 includes a $44,475 fail to deliver for a reverse repo transaction.  The transaction settled in April 2021.  

 

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

 

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

 

 

 

7. FINANCIAL INSTRUMENTS

 

Investments—Trading

 

Investments-trading consisted of the following.

 

INVESTMENTS - TRADING

(Dollars in Thousands)

 

   

March 31, 2021

   

December 31, 2020

 

U.S. government agency MBS and CMOs

  $ 199,911     $ 162,031  

U.S. government agency debt securities

    26,468       6,904  

RMBS

    12       14  

U.S. Treasury securities

    154       607  

ABS

    1       1  

SBA loans

    1,843       2,742  

Corporate bonds and redeemable preferred stock

    28,987       36,388  

Foreign government bonds

    584       659  

Municipal bonds

    4,448       19,400  

Certificates of deposit

    1,253       70  

Derivatives

    20,474       13,717  

Equity securities

    179       428  

Investments-trading

  $ 284,314     $ 242,961  

 

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, 2021

   

December 31, 2020

 

U.S. Treasury securities

  $ 10,150     $ 3,348  

Corporate bonds and redeemable preferred stock

    19,964       29,206  

Municipal bonds

    20       20  

Derivatives

    28,593       11,822  
Equity securities     -       43  

Trading securities sold, not yet purchased

  $ 58,727     $ 44,439  

 

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, 2021

 
   

Amortized

   

Carrying

   

Unrealized

 
   

Cost

   

Value

   

Gain / (Loss)

 

Equity securities

  $ 8,526     $ 32,368     $ 23,842  
Restricted equity securities     3,086       69,473       66,387  
Corporate bonds and redeemable preferred stock     479       476       (3 )
Subordinated Notes     1,485       1,485       -  

U.S. Insurance JV

    1,124       1,682       558  

SPAC Fund

    600       1,984       1,384  

Residential loans

    117       105       (12 )

Other investments, at fair value

  $ 15,417     $ 107,573     $ 92,156  

 

  

   

December 31, 2020

 
   

Amortized

   

Carrying

   

Unrealized

 
   

Cost

   

Value

   

Gain / (Loss)

 

Equity securities

  $ 12,519     $ 17,421     $ 4,902  
Restricted equity securities     3,086       34,172       31,086  
Corporate bonds and redeemable preferred stock     479       476       (3 )
Subordinated Notes     1,485       1,519       34  

RTLs

    2,243       2,300       57  

U.S. Insurance JV

    1,168       1,564       396  

SPAC Fund

    779       984       205  

Residential loans

    119       104       (15 )

Other investments, at fair value

  $ 21,878     $ 58,540     $ 36,662  

 

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, 2021

 
   

Cost

   

Carrying Value

   

Unrealized Gain / (Loss)

 

Derivatives

  $ 534     $ 294     $ 240  

Equity securities

    4,962       5,196       (234 )

Other investments sold, not yet purchased

  $ 5,496     $ 5,490     $ 6  

 

 

 

 

   

December 31, 2020

 
   

Cost

   

Carrying Value

   

Unrealized Gain / (Loss)

 

Derivatives

  $ 338     $ 233     $ 105  

Equity securities

    7,223       7,182       41  

Other investments sold, not yet purchased

  $ 7,561     $ 7,415     $ 146  

 

 

 

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, 2021 and 2020 of $79,189 and $(2,695), respectively. The Company recognized net gains (losses) related to changes in fair value of investments that are included as a component of other investments, sold not yet purchased during the three months ended March 31, 2021 and 2020 of $62 and $0, respectively.

 

Fair Value Measurements

 

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

 

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

 

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

 

 

1.

Quoted prices for similar assets or liabilities in active markets;

 

2.

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

 

3.

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

 

4.

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

 

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

 

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

 

Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the level 3 category. As a result, the unrealized gains and losses for assets and liabilities within the level 3 category 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, 2021 and December 31, 2020 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, 2021

(Dollars in Thousands)

 

                   

Significant

   

Significant

 
           

Quoted Prices in

   

Other Observable

   

Unobservable

 
           

Active Markets

   

Inputs

   

Inputs

 

Assets

 

Fair Value

   

(Level 1)

   

(Level 2)

   

(Level 3)

 

Investments-trading:

                               

U.S. government agency MBS and CMOs

  $ 199,911     $ -     $ 199,911     $ -  

U.S. government agency debt securities

    26,468       -       26,468       -  

RMBS

    12       -       12       -  

U.S. Treasury securities

    154       154       -       -  

ABS

    1       -       1       -  

SBA loans

    1,843       -       1,843       -  

Corporate bonds and redeemable preferred stock

    28,987       -       28,987       -  

Foreign government bonds

    584       -       584       -  

Municipal bonds

    4,448       -       4,448       -  

Certificates of deposit

    1,253       -       1,253       -  

Derivatives

    20,474       -       20,474       -  

Equity securities

    179       -       179       -  

Total investments - trading

  $ 284,314     $ 154     $ 284,160     $ -  
                                 

Other investments, at fair value:

                               

Equity securities

  $ 32,368     $ 32,368     $ -     $ -  

Restricted equity securities

    69,473       -       69,473       -  
Corporate bonds and redeemable preferred stock     476       -       476       -  
Subordinated Notes     1,485       -       1,485       -  

Residential loans

    105       -       105       -  
      103,907     $ 32,368     $ 71,539     $ -  

Investments measured at NAV (1)

    3,666                          
Total other investments, at fair value     107,573                          
                                 

Liabilities

                               

Trading securities sold, not yet purchased:

                               

U.S. Treasury securities

  $ 10,150     $ 10,150     $ -     $ -  

Corporate bonds and redeemable preferred stock

    19,964       -       19,964       -  

Municipal bonds

    20       -       20       -  

Derivatives

    28,593       -       28,593       -  
Equity securities     -       -       -       -  

Total trading securities sold, not yet purchased

  $ 58,727     $ 10,150     $ 48,577     $ -  
                                
Other investments, sold not yet purchased:                                
Derivatives   $ 294     $ 294     $ -     $ -  
Equity securities     5,196       5,196       -       -  
Total other investments sold, not yet purchased   $ 5,490     $ 5,490     $ -     $ -  

 

(1)

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

 

 

 

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS

December 31, 2020

(Dollars in Thousands)

 

                   

Significant

   

Significant

 
           

Quoted Prices in

   

Other Observable

   

Unobservable

 
           

Active Markets

   

Inputs

   

Inputs

 

Assets

 

Fair Value

   

(Level 1)

   

(Level 2)

   

(Level 3)

 

Investments-trading:

                               

U.S. government agency MBS and CMOs

  $ 162,031     $ -     $ 162,031     $ -  

U.S. government agency debt securities

    6,904       -       6,904       -  

RMBS

    14       -       14       -  

U.S. Treasury securities

    607       607       -       -  

ABS

    1       -       1       -  

SBA loans

    2,742       -       2,742       -  

Corporate bonds and redeemable preferred stock

    36,388       -       36,388       -  

Foreign government bonds

    659       -       659       -  

Municipal bonds

    19,400       -       19,400       -  

Certificates of deposit

    70       -       70       -  

Derivatives

    13,717       -       13,717       -  

Equity securities

    428       -       428       -  

Total investments - trading

  $ 242,961     $ 607     $ 242,354     $ -  
                                 

Other investments, at fair value:

                               

Equity Securities

  $ 17,421     $ 17,421     $ -     $ -  
Restricted Equity Securities     34,172       -       34,172       -  
Corporate bonds and redeemable preferred stock     476       -       476       -  
Subordinated notes     1,519       -       1,519       -  

RTLs

    2,300       -       2,300       -  

Residential loans

    104       -       104       -  
      55,992     $ 17,421     $ 38,571     $ -  

Investments measured at NAV (1)

    2,548                          

Total other investments, at fair value

  $ 58,540                          

Liabilities

                               

Trading securities sold, not yet purchased:

                               

U.S. Treasury securities

  $ 3,348     $ 3,348     $ -     $ -  

Corporate bonds and redeemable preferred stock

    29,206       -       29,206       -  

Municipal bonds

    20       -       20       -  

Derivatives

    11,822       -       11,822       -  
Equity securities     43       43       -       -  

Total trading securities sold, not yet purchased

  $ 44,439     $ 3,391     $ 41,048     $ -  
                                
Other investments, sold not yet purchased:                                
Derivatives   $ 233     $ 233     $ -     $ -  
Equity securities     7,182       7,182       -       -  
Total other investments sold, not yet purchased   $ 7,415     $ 7,415     $ -     $ -  
                                 

 

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

 

 

  

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.

 

SBA Loans: SBA loans include loans and SBA interest only strips.  In the case of loans, the Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices, internal valuation models using observable inputs, or market price quotations from third party pricing services. The Company generally classifies these investments within level 2 of the valuation hierarchy. These valuations are based on a market approach. SBA interest only strips do not trade in an active market with readily available prices. Accordingly, the Company generally uses valuation models to determine fair value and classifies the fair value of the SBA interest only strips within level 2 or level 3 of the valuation hierarchy depending on whether the model inputs are observable or not. 

 

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.

 

Residential transition loans: The Company uses valuation models prepared by management which are based on an income approach. These models include estimates, and the valuations derived from them could differ materially from amounts realizable in an open market exchange. Fair values based on internal valuation models prepared by the Company’s management are generally classified within level 3 of the valuation hierarchy. 

 

 

Equity Securities: The fair value of equity securities that represent unrestricted investments in publicly traded companies (common or preferred shares, options, warrants, and other equity investments) are determined using the closing price of the security as of the reporting date. These are securities that are traded on a recognized liquid exchange and the Company classifies their fair value within level 1 of the valuation hierarchy.

 

Restricted Equity Securities:  Restricted equity securities are investments in publicly traded companies.  However, they are restricted for 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 this within level 2 of the valuation hierarchy.  However, 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.    

 

Derivatives 

 

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.

 

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 time frame, 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.

 

  

Level 3 Financial Assets and Liabilities

 

Financial Instruments Measured at Fair Value on a Recurring Basis

 

The following table presents additional information about assets measured at fair value on a recurring basis and for which the Company has utilized level 3 inputs to determine fair value.

 

 

 

LEVEL 3 ROLLFORWARD

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

Beginning of period

  $ -     $ 2,522  

Net trading

    -       (78 )

Gains & losses (1)

    -       (603 )

Accretion of income (1)

    -       78  

Purchases

    -       609  

Sales and returns of capital

    -       (2,973 )

Reclassification of RTLs

    -       5,278  

End of period

  $ -     $ 4,833  
                 

Change in unrealized gains / (losses) (2)

  $ -     $ (385 )

 

 

(1)

Gains and losses and accretion of income on other investments, at fair value are recorded as a component of principal transactions and other income in the consolidated statements of operations.

 

(2)

Represents the change in unrealized gains and losses for the period included in earnings for assets held at the end of the reporting period.

 

 



 

 

 

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, 2021 and December 31, 2020.

 

 

FAIR VALUE MEASUREMENTS OF INVESTMENTS IN CERTAIN ENTITIES

THAT CALCULATE NET ASSET VALUE PER SHARE (OR ITS EQUIVALENT)

(Dollars in Thousands)

 

   

Fair Value

   

Unfunded

   

Redemption

   

Redemption

 
   

March 31, 2021

   

Commitments

   

Frequency

   

Notice Period

 

Other investments, at fair value

                               

U.S. Insurance JV (a)

  $ 1,682     $ 1,567       N/A       N/A  

SPAC Fund (b)

    1,984       N/A    

Quarterly after 1 year lock up

   

90 days

 
    $ 3,666                          

 

   

Fair Value

   

Unfunded

   

Redemption

   

Redemption

 
   

December 31, 2020

   

Commitments

   

Frequency

   

Notice Period

 

Other investments, at fair value

                               

U.S. Insurance JV (a)

  $ 1,564     $ 1,567       N/A       N/A  

SPAC Fund (b)

    984       N/A    

Quarterly after 1 year lock up

   

90 days

 
    $ 2,548                          

 

 

(a)

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

 

(b)

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 whose collateral remain “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.

 

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, 2021 and December 31, 2020, the Company had no outstanding foreign currency forward contracts. 

 

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, 2021, the Company had open TBA and other forward MBS purchase agreements in the notional amount of $ 1,851,250 and open TBA and other forward MBS sale agreements in the notional amount of $ 1,958,500. At December 31, 2020, the Company had open TBA and other forward agency MBS purchase agreements in the notional amount of $1,706,834 and open TBA and other forward agency MBS sale agreements in the notional amount of $1,809,550.

 

Other Extended Settlement Trades

 

When the Company buys or sells a financial instrument that will not settle in the regular time frame, 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. At March 31, 2021, the Company had open forward purchase commitments of $0 and open forward sale commitments of $0.  At December 31, 2020, the Company had open forward purchase commitments of $365 and open forward sale commitments of $0.



 

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, 2021 and December 31, 2020.  

 

 

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, 2021

   

December 31, 2020

 

TBAs and other forward agency MBS

 

Investments-trading

  $ 20,474     $ 13,717  

Other extended settlement trades

 

Investments-trading

    -       -  

Foreign currency forward contracts

 

Other investments, at fair value

    -       -  

TBAs and other forward agency MBS

 

Trading securities sold, not yet purchased

    (28,593 )     (11,822 )

Other extended settlement trades

 

Trading securities sold, not yet purchased

    -       (233 )
        $ (8,119 )   $ 1,662  

 

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, 2021

   

Three Months Ended March 31, 2020

 

Foreign currency forward contracts

 

Revenue-principal transactions and other income

  $ -     $ -  

Other extended settlement trades

 

Revenue-net trading

    -       1  

TBAs and other forward agency MBS

 

Revenue-net trading

    2,609       (213 )
        $ 2,609     $ (212 )

 

 

 

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. Currently, the Company categorizes its matched book repo business into two major groups: gestation repo and GCF repo.

 

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 has 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 uses Bank of New York (“BONY”) as its settlement agent for its GCF repo matched book transactions.  The Company is 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 $25,000, which it entered into with Fifth Third Financial Bank, N.A. (“FT Financial”) on April 25, 2018.  The FT Financial line of credit arrangement was subsequently amended. In October 2020, the Company entered into a replacement credit agreement with Byline Bank. See note 17.   

 

Other Repo Transactions 

 

In addition to the Company’s matched book repo business, the Company may also enter into reverse repos to acquire securities to cover short positions or as an investment.  Additionally, the Company may enter into repos to finance the Company’s securities positions held in inventory.  These repo and reverse repo agreements are generally cleared on a bilateral or triparty basis; no clearing broker is involved.  These transactions are not matched.

 

Repo Information 

 

At March 31, 2021 and December 31, 2020, the Company held reverse repos of $7,299,538 and $5,716,343, respectively, and the fair value of collateral received under reverse repos was $7,408,403 and $5,885,656, respectively.  As of March 31, 2021 and December 31, 2020, the reverse repo balance was comprised of receivables collateralized by securities with 37 and 38 counterparties, respectively.    

 

At March 31, 2021 and December 31, 2020, the Company held repos of $7,289,275 and $5,713,212, respectively, and the fair value of securities and cash pledged as collateral under repos was $7,359,457 and $5,768,018, respectively. These amounts include collateral for reverse repos that were re-pledged as collateral for repos.

 

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.  The total committed amount at March 31, 2021 was $75,000.  The current termination date of this facility is October 15, 2021. It is expected that this facility will be renewed for successive 364-day periods provided that the Company continues its GCF repo business.    

 

The BONY lending facility is structured so that advances are generally repaid before the end of each business day.  However, if an advance is not repaid by the end of any business day, the advance is converted to an overnight loan.  Intraday loans accrue interest at an annual rate of 0.12%.  Interest is charged based on the number of minutes in a day the advance is outstanding.  Overnight loans are charged interest at the base rate plus 3% on a daily basis.  The base rate is the higher of the federal funds rate plus 0.50% or the prime rate in effect at that time.  For the three months ended March 31, 2021, and for the year ended December 31, 2020, the Company received no advances under the intraday lending facility.  

 

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 does not consider its GCF repo business to be concentrated because the Company’s reverse repo counterparties are comprised of a diverse group of financial institutions. On the supply side, the Company obtains a significant amount of its funds from the FICC.  If the FICC were to reduce its repo lending activities or make significant adverse changes to the cost of such lending, the Company may not be able to replace the FICC funding, or if the Company does so, it may be at a higher cost of funding.  Therefore, the Company considers its GCF repo 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, 2021 and December 31, 2020, the Company’s gestation reverse repos shown in the tables below represented balances from thirteen and eleven counterparties, respectively.  The Company also has a limited number of repo counterparties in the gestation repo business.  However, this is primarily a function of the limited number of reverse repo agreement counterparties with whom the Company conducts this business rather than a reflection of a limited supply of funds.  Therefore, the Company considers the gestation repo business to be concentrated on the demand side. 

 

 

The total net revenue earned by the Company on its matched book repo business (both gestation repo and GCF repo) was $11,281 and $6,868 for the three months ended March 31, 2021 and 2020, respectively.

 

 Detail 

 

The amounts in the table below are presented on a gross basis. 

 

As of March 31, 2021, the Company had outstanding reverse repos of $7,299,538 and repos of $7,289,275.  Included in these amounts are outstanding reverse repos of $ 2,951,224 and repos of $ 1,340,216 where the FICC was the Company’s counterparty to the transaction and which were subject to a master netting arrangement. 

 

As of December 31, 2020, the Company had outstanding reverse repos of $5,716,343 and repos of $5,713,212.  Included in these amounts are outstanding reverse repos of $99,750 and repos of $2,155,850, where the FICC was the Company’s counterparty to the transaction and which were subject to a master netting arrangement.  

 

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 14) are subject to master netting arrangements.

 

SECURED BORROWINGS

(Dollars in Thousands)

March 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

 

U.S. government agency MBS (GCF repo)

  $ 2,757,993     $ 1,070,047     $ 100,014     $ -     $ 3,928,054  

MBS (gestation repo)

    291,029       2,987,302       81,563       -       3,359,894  
SBA loans     1,327       -       -       -       1,327  
    $ 3,050,349     $ 4,057,349     $ 181,577     $ -     $ 7,289,275  

 

   

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

 

U.S. government agency MBS (GCF repo)

  $ 1,845,954     $ 1,843,803     $ 203,761     $ 42,840     $ 3,936,358  

MBS (gestation repo)

    289,534       2,992,080       81,566       -       3,363,180  
    $ 2,135,488     $ 4,835,883     $ 285,327     $ 42,840     $ 7,299,538  

 

 

 

SECURED BORROWINGS

(Dollars in Thousands)

December 31, 2020

 

   

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

 

U.S. government agency MBS (GCF repo)

  $ 1,946,890     $ 1,070,094     $ -     $ -     $ 3,016,984  

MBS (gestation repo)

    638,057       2,004,451       51,530       -       2,694,038  

SBA loans

    2,190       -       -       -       2,190  
    $ 2,587,137     $ 3,074,545     $ 51,530     $ -     $ 5,713,212  

 

   

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

 

U.S. government agency MBS (GCF repo)

  $ 871,805     $ 1,016,446     $ 1,091,609     $ 39,816     $ 3,019,676  

MBS (gestation repo)

    641,619       2,003,514       51,534       -       2,696,667  
    $ 1,513,424     $ 3,019,960     $ 1,143,143     $ 39,816     $ 5,716,343  

 

 

 

 

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 24.

 

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

 

INVESTMENTS IN EQUITY METHOD AFFILIATES

(Dollars in Thousands)

 

 

   

Insurance SPACS

   

SPAC Sponsor Entities

   

AOI

   

CK Capital

   

SPAC Series Funds

   

Total

 

January 1, 2021

  $ 9,807     $ 104     $ 3,016     $ 296     $ 259     $ 13,482  
Investments / advances     -       33       -       -       464       497  
Distributions / repayments     (3,958 )     -       -       -       (50 )     (4,008 )

Earnings / (loss) realized

    (561 )     (24 )     (97 )     (34 )     (119 )     (835 )

March 31, 2021

  $ 5,288     $ 113     $ 2,919     $ 262     $ 554     $ 9,136  

 

 

   

Insurance SPACS

   

SPAC Sponsor Entities

   

AOI

   

CK Capital

   

SPAC Series Funds

   

Total

 

January 1, 2020

  $ 3,222     $ -     $ 559     $ 18     $ -     $ 3,799  

Investments / advances

    -       -       2,097       -       -       2,097  

Distributions / repayments

    -       -       -       -       -       -  

Earnings / (loss) realized

    (306 )     -       (31 )     230       -       (107 )

March 31, 2020

  $ 2,916     $ -     $ 2,625     $ 248     $ -     $ 5,789  

 

 

The Insurance SPACs represent the Company's consolidated subsidiaries equity method investments in various insurance SPACs.  The SPAC Sponsor Entities represent equity method investments in sponsor entities for SPACs that are not sponsored by the Company.  Amersfoot Office Investment I Cooperatief U. A. (“AOI”) is a company based in the Netherlands that invests in real estate.  CK Capital Partners B.V. (“CK Capital”) is a company based in the Netherlands that manages investments in real estate.  See note 24.   Each of the SPAC Series Funds (as defined in Item 2, in the “Business Environment” section under the title “The SPAC Market”) invests in the membership interests of an individual sponsor entity.  The Company manages these funds and serves as the general partner.  The Company invests in the SPAC Series Funds itself and also receives an allocation of the founder shares from each series fund that the Company invests in connection with its role as the general partner and manager.  Amounts paid by the Company in connection with receiving its allocation of founder shares are included in the table above along with the SPAC Series Funds. 

 

As of March 31, 2021, the Company's equity method investments in SPAC Sponsor Entities and SPAC Series Funds entitle it to an allocation of approximately 5 million founder shares in total representing investments in 15 SPACs.  See note 4 for a discussion of the founders share allocations related to the Insurance SPACs.  

 

 

 

 

12.  GOODWILL

 

Goodwill consisted of the following.



GOODWILL

(Dollars in Thousands)

 

   

March 31, 2021

   

December 31, 2020

 

AFN

  $ 109     $ 109  

JVB

    -       -  

Goodwill

  $ 109     $ 109  

 

The Company measures its goodwill impairment on an annual basis or when events indicate that goodwill may be impaired.  The Company performs its annual impairment tests of AFN goodwill on October 1 of each year; and JVB goodwill on January 1 of each year. 

 

In the first quarter of 2020, the Company determined that the financial market volatility that resulted from the COVID-19 pandemic was a triggering event that required a reassessment of the goodwill related to JVB. See note 4. The Company concluded there was no triggering event for the goodwill related to AFN.

 

The Company performed a valuation of JVB as of March 31, 2020 by applying equal weighting to both the income approach and the market approach.  Under the guidance of FASB ASC 350, the Company determined that the fair value of JVB was less than the carrying value (including the goodwill).  As a result, the Company recognized an impairment loss of $7,883 in the three months ended March 31, 2020. The impairment loss is included in the consolidated statements of operations as impairment of goodwill and is reflected as a component of operating expense.

 

 

 

 

 

 

13.  LEASES

 

The Company leases office space and certain computer and related equipment and a vehicle under noncancelable operating leases.  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 in included business development, occupancy, and equipment expense.

 

As of March 31, 2021, all of the leases to which the Company was a party were operating leases.  The weighted average remaining term of the leases was 7.8 years.  The weighted average discount rate for the leases was 5.45%.

 

Maturities of operating lease liability payments consisted of the following.

 

FUTURE MATURITY OF LEASE LIABILITIES

(Dollars in Thousands)

 

   

As of March 31, 2021

 

2021 - remaining

  $ 741  

2022

    949  

2023

    963  

2024

    983  

2025

    983  

Thereafter

    3,128  

Total

    7,747  

Less imputed interest

    (1,471 )

Lease obligation

  $ 6,276  

 

During the three months ended March 31, 2021 and 2020, total cash payments of $383 and $403, respectively, were recorded as a reduction in the operating lease obligation.  No cash payments were made to acquire right of use assets. For the three months ended March 31, 2021  and 2020, rent expense, net of sublease income of $70 and $79, was $370 and $378 respectively.

 

 

 

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

 

Other receivables consisted of the following.

 

OTHER RECEIVABLES

(Dollars in Thousands)

 

   

March 31, 2021

   

December 31, 2020

 

Cash collateral due from counterparties

  $ 2,716     $ 225  

Asset management fees receivable

    776       879  

Accrued interest receivable and dividend receivable

    1,734       2,275  

Revenue share receivable

    161       125  

Other receivables

    349       425  

Other receivables

  $ 5,736     $ 3,929  

 

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 (see above). 

 

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 (see above).

 

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

 

Other assets consisted of the following.

 

OTHER ASSETS

(Dollars in Thousands)

 

   

March 31, 2021

   

December 31, 2020

 

Deferred costs

  $ 289     $ 248  

Prepaid expenses

    1,172       964  

Deposits

    385       398  

Miscellaneous other assets

    322       255  

Furniture, equipment, and leasehold improvements, net

    908       799  

Intangible assets

    166       166  

Other assets

  $ 3,242     $ 2,830  

 

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, 2020 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, 2021

   

December 31, 2020

 

Accounts payable

  $ 280     $ 162  
Redeemable financial instruments accrued interest     526       316  
Accrued income tax     249       99  

Accrued interest payable

    623       630  

Accrued interest on securities sold, not yet purchased

    331       435  

Payroll taxes payable

    740       1,048  

Counterparty cash collateral

    29,275       41,119  

Accrued expense and other liabilities

    2,143       2,442  

Accounts payable and other liabilities

  $ 34,167     $ 46,251  

 

 

The redeemable financial instrument accrued interest represents accrued interest on the JKD Capital Partners I LTD redeemable financial instrument.  See note 16.

 

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

 

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

  

 

 

15.  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, 2021

   

As of December 31, 2020

 

Cash and cash equivalents

  $ 144     $ 270  

Receivables

    -       2,112  

Other investments, at fair value

    72,914       36,395  

Investment in equity method affiliates

    5,287       9,805  

Non-controlling interest

    (44,967 )     (27,805 )

Investment in consolidated VIEs

  $ 33,378     $ 20,777  
                 

 

  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 $810 and $1,560 as of March 31, 2021 and December 31, 2020, respectively.

 

The Company’s Principal Investing Portfolio

 

Included in other investments, at fair value in the consolidated balance sheets are investments in several VIEs.  In each case, the Company determined it was not the primary beneficiary.  The maximum potential financial statement loss the Company would incur if the VIEs were to default on all their obligations would be the loss of the carrying value of these investments as well as any future investments the Company were to make.  As of  March 31, 2021, and December 31, 2020, there were $1,567 of unfunded commitments to VIEs that the Company has invested in.  Other than its investment in these entities, the Company did not provide financial support to these VIEs during the three months ended March 31, 2021 and 2020 and had no liabilities, contingent liabilities, or guarantees (implicit or explicit) related to these VIEs at March 31, 2021 and December 31, 2020.  See table below. 

 

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

 

The Company’s Trading Portfolio

 

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

 

The following table presents the carrying amounts of the assets in the Company’s consolidated balance sheets related to the Company’s variable interests in identified VIEs with the exception of (i) the two trust VIEs that hold the Company’s junior subordinated notes (see note 17) 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, 2021 and December 31, 2020.

 

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

(Dollars in Thousands)

 

   

As of March 31, 2021

   

As of December 31, 2020

 

Other Investments, at fair value

  $ 3,666     $ 2,548  
Investments in equity method affiliates     667       363  

Maximum exposure

  $ 4,333     $ 2,911  

  

 

 

16.  REDEEMABLE FINANCIAL INSTRUMENTS

 

Redeemable financial instruments consisted of the following.

 

REDEEMABLE FINANCIAL INSTRUMENTS

(Dollars in Thousands)

 

   

As of March 31, 2021

   

As of December 31, 2020

 

JKD Capital Partners I LTD

  $ 7,957     $ 7,957  

DGC Trust/CBF

    -       4,000  
    $ 7,957     $ 11,957  

 

 

JKD Capital Partners I LTD Amendment 

 

On October 3, 2016, the Operating LLC entered into an investment agreement (the “JKD Investment Agreement”), by and between Operating LLC and the JKD Investor, pursuant to which the JKD Investor agreed to invest up to $12,000 in the Operating LLC (the “JKD Investment”), $6,000 of which was invested upon the execution of the JKD Investment Agreement, an additional $1,000 was invested in January 2017, and an additional $1,268 was invested on January 9, 2019.  The JKD Investor is owned by Jack DiMaio, the vice chairman of the Company’s board of directors and the Operating LLC’s board of managers, and his spouse.

  

In exchange for the JKD Investment, the Operating LLC agreed to pay to JKD Investor during the term of the JKD Investment Agreement an amount (“JKD Investment Return”) equal to 50% of the difference between (i) the revenues generated during a quarter by the activities of the Institutional Corporate Trading Business of JVB (as defined in the JKD Investment Agreement, as amended) and (ii) certain expenses incurred by such Institutional Corporate Trading Business (the “Institutional Corporate Trading Business Net Revenue”). This JKD Investment Return is recorded monthly as interest expense or (interest income) with the related accrued interest recorded in accounts payable and other accrued liabilities. If the return is negative in an individual quarter, it will reduce the balance of the JKD Investment.  Payments of the JKD Investment Return are made on a quarterly basis.  The term of the JKD Investment Agreement commenced on October 3, 2016 and will continue until a redemption (as described below) occurs, unless the JKD Investment Agreement is earlier terminated.

 

On March 6, 2019, the JKD Investor and the Operating LLC entered into an amendment to the JKD Investment Agreement (the “JKD Investment Agreement Amendment”), pursuant to which the term “JKD Investment Return” under the JKD Investment Agreement was amended as follows:

 

 

(a)

during the fourth quarter of 2018, an amount equal to 42% of the Institutional Corporate Trading Business Net Revenue and

 

(b)

commencing on January 1, 2019 and for each quarter during the remainder of the term of the JKD Investment Agreement, an amount equal to a percentage of the Institutional Corporate Trading Business Net Revenue, which percentage is based on the JKD Investor’s investment under the JKD Investment Agreement as a percentage of the total capital allocated to the Institutional Corporate Trading Business of JVB.

 

The JKD Investor may terminate the JKD Investment Agreement (i) upon 90 days’ prior written notice to the Operating LLC if the Operating LLC or its affiliates modify any of their policies or procedures governing the operation of their businesses or change the way they operate their business and such modification has a material adverse effect on the amounts payable to the JKD Investor pursuant to the JKD Investment Agreement or (ii) upon 60 days’ prior written notice to the Operating LLC if the employment of Lester Brafman, the Company’s chief executive officer, is terminated. The Operating LLC may terminate the JKD Investment Agreement, as amended, upon 60 days’ prior written notice to the JKD Investor if Mr. DiMaio ceases to control the day-to-day operations of the JKD Investor.

 

Upon a termination of the JKD Investment Agreement, as amended, the Operating LLC will pay to the JKD Investor an amount equal to the “Investment Balance” (as such term is defined in the JKD Investment Agreement, as amended) as of the day prior to such termination.

  

At any time following October 3, 2019, the JKD Investor or the Operating LLC may, upon two months’ notice to the other party, cause the Operating LLC to pay a redemption to the JKD Investor in an amount equal to the Investment Balance (as such term is defined in the JKD Investment Agreement, as amended) as of the day prior to such redemption.

 

If the Operating LLC or JVB sells JVB’s Institutional Corporate Trading Business to any unaffiliated third party, and such sale is not part of a larger sale of all or substantially all of the assets or equity securities of the Operating LLC or JVB, the Operating LLC will pay to the JKD Investor an amount equal to 25% of the net consideration paid to the Operating LLC in connection with such sale, after deducting certain amounts and certain expenses incurred by the Operating LLC or JVB in connection with such sale.

 

DGC Trust/ CBF Amendments 

 

Prior to September 30, 2019, the DGC Trust / CBF redeemable financial instruments were comprised of two separate agreements: the CBF Investment Agreement the DGC Trust Investment Agreement. 

 

The CBF Investment Agreement and the DGC Trust Investment Agreement were both amended on September 25, 2019, and again on December 4, 2019, with each amendment becoming effective October 1, 2019.  The amendments included the following amendments to each of the CBF Investment Agreement and the DGC Trust Investment Agreement:  

 

(a)

The term “Investment Amount” under the CBF Investment Agreement was reduced from $8,000 to $6,500 in exchange for a one-time payment of $1,500 from the Operating LLC to CBF.  The payment of $1,500 was made by the Operating LLC to CBF in October 2019.

(b)

The term “Investment Return” under the CBF Investment Agreement was amended to mean an annual return equal to:

 

 

 

● 

for the Annual Period ending on September 29, 2020, 3.75% of the Investment Amount, plus (x) 11.47% of any revenue of the GCF repo business (the “Revenue of the Business”) during such period between zero and $11,777 plus (y) 7.65% of any Revenue of the Business during such period in excess of $11,777. Prior to the second amendment, the Investment Return was with respect to any twelve-month period ending on September 29, 2020 (each an “Annual Period”) was 3.75% of the Investment Amount plus (x) 11.47% of the Revenue of the Business for any Annual Period in which the Revenue of the Business was greater than zero but less than or equal to $5,333, (y) $612 for any Annual Period in which the Revenue of the Business is greater than $5,333 but less than or equal to $8,000, or (z) 7.65% of the Revenue of the Business for any Annual Period in which the Revenue of the Business is greater than $8,000, and

 

● 

for any Annual Period following September 29, 2020, (x) for any Annual Period in which the Revenue of the Business is greater than zero, the greater of 20% of the Investment Amount or 15.29% of the Revenue of the Business, or (y) for any Annual Period in which the Revenue of the Business is zero or less than zero,  3.75% of the Investment Amount.

 

(c)

The term “Investment Return” under the DGC Trust Investment Agreement was amended to mean an annual return equal to:

 

 

● 

for the twelve-month period ending on September 29, 2020, 3.75% of the Investment Amount plus (x) 3.53% of any Revenue of the Business, during such period between zero and $11,177 plus (y) 2.35% of any Revenue of the Business during such period in excess of $11,177.  Prior to the second amendment, the Investment Return was 3.75% of the Investment Amount, as defined in the DGC Trust Investment Agreement, plus (x) 3.53% of the Revenue of the Business, for any Annual Period in which the Revenue of the Business is greater than zero  but less than or equal to $5,333 (y) $188 for any Annual Period in which the Revenue of the Business is greater than $5,333, but less than or equal to $8,000, or (z) 2.35% of the Revenue of the Business for any Annual Period in which the Revenue of the Business is greater than $8,000 and

 

● 

for any Annual Period following September 29, 2020, (x) for any Annual Period in which the Revenue of the Business is greater than zero, the greater of 20% of the Investment Amount or 4.71% of the Revenue of the Business, or (y) for any Annual Period in which the Revenue of the Business is zero or less than zero, 3.75% of the Investment Amount.

 

On September 25, 2020, the Operating LLC and CBF entered into Amendment No. 3 to CBF Investment Agreement, which amended the CBF Investment Agreement (i) to extend the date thereunder pursuant to which the Company or CBF could cause a redemption of the Investment Amount from September 27, 2020 to January 1, 2021, and (ii) to state that no such redemption by the Company could be in violation of any loan agreement to which the Company was then a party. 

 

On September 30, 2020, the Company redeemed the DGC Trust Investment Agreement in full by making payment of $2,000.

 

On October 9, 2020 and effective October 15, 2020, the Operating LLC entered into Amendment No. 4 to Investment Agreement, which further amended the CBF Investment Agreement to, among other things, (A) decrease the “Investment Amount” under the CBF Investment Agreement from $6,500 to $4,000 in exchange for a one-time payment of $2,500 from the Operating Company to CBF; and (B) provide that the term “Investment Return” (as defined in the CBF Investment Agreement) will mean an annual return equal to, (i) for any twelve-month period following September 29, 2020 (each, an “Annual Period”) in which the revenue of the business of JVB (“Revenue of the Business”), is greater than zero, the greater of 20% of the Investment Amount or 9.4% of the Revenue of the Business, or (ii) for any Annual Period in which the Revenue of the Business is zero or less than zero, 3.75% of the Investment Amount. Prior to the Investment Agreement Amendment, the term “Investment Return” under the CBF Investment Agreement was defined as (A) with respect to any Annual in which the Revenue of the Business was greater than zero, the greater of 20% of the Investment Amount or 15.2% of the Revenue of the Business, or (ii) for any Annual Period in which the Revenue of the Business was zero or less than zero, 3.75% of the Investment Amount.  The Company made the $2,500 payment to CBF on October 15, 2020. The Company made a $4,000 payment on March 30, 2021 to fully redeem the Investment Amount.

 

 

 

17. DEBT 

 

The Company had the following debt outstanding.

 

DETAIL OF DEBT

(Dollars in Thousands)

 

   

As of

   

As of

 

Interest

       

Description

 

March 31, 2021

   

December 31, 2020

 

Rate Terms

 

Interest (4)

 

Maturity

Non-convertible debt:

                         

12.00% senior note (the "2020 Senior Note")

  $ 4,500     $ 4,500  

Fixed

  12.00%  

January 2022

12.00% senior note (the "2019 Senior Note")

    2,400       2,400  

Fixed

  12.00%  

September 2021 (1)

PPP Loan     2,166       2,166   Fixed   1.00%   May 2022

Contingent convertible debt:

                         

8.00% convertible senior note (the "2017 Convertible Note")

    15,000       15,000  

Fixed

  8.00%  

March 2022 (2)

Less unamortized debt issuance costs

    (322 )     (401 )          
      14,678       14,599            

Junior subordinated notes (3):

                         

Alesco Capital Trust I

    28,125       28,125  

Variable

  4.21%  

July 2037

Sunset Financial Statutory Trust I

    20,000       20,000  

Variable

  4.35%  

March 2035

Less unamortized discount

    (24,563 )     (24,690 )          
      23,562       23,435            
                           
ByLine Bank     -       -   Variable   NA   October 2021
FT Financial Bank N.A. Credit Facility     -       -   Variable   NA   NA

Total

  $ 47,306     $ 47,100            

 

 

(1)

On September 25, 2019, the Company amended the previously outstanding 2013 Convertible Notes, which were scheduled to mature on September 25, 2019.  The material terms and conditions of the 2013 Convertible Notes remained substantially the same, except that (i) the maturity date changed from September 25, 2019 to September 25, 2020; (ii) the conversion feature in the 2013 Convertible Notes was removed; (iii) the interest rate changed from 8% per annum (9% in the event of certain events of default) to 12% per annum (13% in the event of certain events of default); and (iv) the restrictions regarding the prepayment were removed.  The post amendment notes are referred to herein as the “2019 Senior Notes” and the pre-amendment notes are referred to herein as the “2013 Convertible Notes.” On September 25, 2020, the 2019 Senior Notes were amended again to extend the maturity date from September 25, 2020 until September 25, 2021.

 

(2)

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, 2020.  

 

(3)

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, 2021 on a combined basis was 11.5% assuming the variable rate in effect on the last day of the reporting period remains in effect until maturity.

 

(4)

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



The 2020 Senior Notes 

 

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

 

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

 

The 2019 Senior Notes 

 

On September 25, 2019, the Company amended and restated the previously outstanding 2013 Convertible Notes, which were scheduled to mature on September 25, 2019.  The material terms and conditions of the 2013 Convertible Notes remained substantially the same, except that (i) the maturity date was changed from September 25, 2019 to September 25, 2020; (ii) the conversion feature in the 2013 Convertible Notes was removed; (iii) the interest rate was changed from 8% per annum (9% in the event of certain events of default) to 12% per annum (13% in the event of certain events of default); and (iv) the restrictions regarding prepayment were removed.  The post amendment notes are referred to herein as the “2019 Senior Notes” and the pre-amendment notes are referred to herein as the “2013 Convertible Notes”. On September 25, 2020, the 2019 Senior Notes were amended again to extend the maturity date from September 25, 2020 until September 25, 2021.  All other material terms and conditions of the 2019 Convertible Notes remained substantially the same.

 

 

The Amendment to the 2017 Convertible Note

 

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.

 

PPP Loan

 

On May 1, 2020, the Company qualified for and received a loan pursuant to the PPP ("PPP Loan") under the CARES Act and administered by the U.S. Small Business Association ("SBA"). The PPP Loan is evidenced by a promissory note between the Company and FT Financial. The PPP Loan bears interest at a fixed rate of 1.0% per year, with the first six months of interest deferred, has a term of two years and may be prepaid at any time without payment of any premium. The PPP Loan is unsecured but guaranteed by the SBA.

 

Under the terms of the CARES Act, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of the PPP Loan, with such forgiveness to be determined, subject to limitations, based on the use of the PPP Loan proceeds for payment of payroll costs and payments of mortgage interest, rent, and utilities.  The terms of any forgiveness may also be subject to further requirements in any regulations and guidelines the SBA may adopt.

 

In order to obtain forgiveness of the PPP Loan, the Company must submit a request and provide satisfactory documentation regarding its compliance with applicable requirements. While the Company currently believes that its use of the PPP Loan proceeds will meet the conditions for forgiveness under the PPP, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. The Company must repay any unforgiven principal amount of the PPP Loan, with interest, on a monthly basis following the deferral period.  On September 23, 2020, the Company applied for forgiveness of the PPP Loan. As of the date of this report, the Company had not received a notice of forgiveness.

 

The PPP Loan contains customary events of default relating to, among other things, payment defaults and breaches of representations, warranties, or covenants. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, or filing suit and obtaining judgment against the Company.


Byline Bank

 

On October 28, 2020 (the “Byline Effective Date”), the Company entered into a Loan Agreement (the “Byline Loan Agreement”) with Byline Bank, as lender (the “Lender”), by and among the Lender, the Company, as a guarantor, and the Company’s subsidiaries, the Operating LLC and J.V.B. Financial Group Holdings, LP (“Holdings LP”), as guarantors, and JVB as borrower, and C&Co PrinceRidge Holdings, LP (“C&Co.”), pursuant to which the Lender agreed to make loans at JVB’s request from time to time in the aggregate amount of up to $7.5 million.

 

In addition, on the Effective Date, JVB and the Lender entered into a Revolving Note and Cash Subordination Agreement (the “Byline Revolving Note and Cash Subordination Agreement,” and, together with the Byline Loan Agreement, the “Byline Credit Facility”), pursuant to which, among other things, the Lender agreed to make loans at JVB’s request from time to time in the aggregate amount of up to $17.5 million. The Byline Credit Facility replaced the previous outstanding facility with FT Bank (see the “FT Bank Credit Facility” below).

 

Loans (both principal and interest) made by the Lender to JVB under the Byline Loan Agreement and the Byline Revolving Note and Cash Subordination Agreement are scheduled to mature and become immediately due and payable in full on October 28, 2022.  In addition, loans may be made under the Byline Loan Agreement and the Byline Revolving Note and Cash Subordination Agreement until October 28, 2022 and October 28, 2021, respectively.

 

Loans under the Byline Credit Facility bear interest at a per annum rate equal to LIBOR plus 6.0%, provided that in no event can the interest rate be less than 7.0%. JVB is required to pay on a quarterly basis an undrawn commitment fee at a per annum rate equal to 0.50% of the undrawn portion of the Lender’s $25 million commitment under the Byline Credit Facility.  JVB is also required to pay on each anniversary of the Byline Effective Date a commitment fee at a per annum rate equal to 0.50% of the Lender’s $25 million commitment under the Byline Credit Facility. Pursuant to the terms of the Byline Credit Facility, JVB paid to the Lender a commitment fee of $250 on the Byline Effective Date.  Loans under the Byline Credit Facility must be used by JVB for working capital purposes and general liquidity of JVB. JVB may request a reduction in the Lender’s $25,000 commitment in a minimum amount of $1 million and multiples of $500 thereafter upon not less than five days’ prior notice to the Lender.  The obligations of JVB under the Byline Credit Facility are guaranteed by the Company, the Operating LLC and Holdings LP, and are secured by a lien on all of Holdings LP’s property, including its 100% ownership interest in all of the outstanding membership interests of JVB.  Pursuant to the Byline Credit Facility, JVB and the guarantors thereunder provide customary representations and warranties for a transaction of this type.

 

The Byline Credit Facility also includes customary covenants for a transaction of this type, including covenants limiting the indebtedness that can be incurred by JVB and Holdings LP and restricting JVB’s ability to make certain loans and investments. Additionally, JVB may not permit (i) JVB’s tangible net worth to be less than $80,000 at any time from October 29, 2020 through December 31, 2021, and $85,000 at any time thereafter; and (ii) JVB’s excess net capital to be less than $40,000 at any time. JVB and each guarantor under the Byline Credit Facility are also limited in their ability to repay certain of their existing outstanding indebtedness.  As of March 31, 2021, the Company was in compliance with all of the financial covenants.

 

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

 

As of March 31, 2021, the Company had not drawn on the Byline Credit Facility.

 

 

FT  Bank Credit Facility

 

The credit facility with FT Bank had a total borrowing capacity of $25,000.  It was comprised of a revolving credit facility (the “2019 FT Revolver”) which had a total borrowing capacity of $17,500 and a line of credit (the “2018 FT LOC”), which had a total borrowing capacity of $7,500.  Both were to mature on April 10, 2021.  However, the 2019 FT Revolver did not allow for additional draws after April 10, 2020.  During March 2020, the Company drew the full amount of $17,500 under the 2019 FT Revolver and that amount remained outstanding until the Company cancelled both revolving lines of credit and fully repaid the $17,500 outstanding balance plus accrued interest on October 27, 2020. The Company was in compliance with all covenants for all periods that the FT Revolver and FT LOC balances were outstanding. 

 

LegacyTexas Bank 

 

On November 20, 2018, ViaNova, as borrower, entered into a Warehousing Credit and Security Agreement (the “LegacyTexas Credit Facility”) with LegacyTexas Bank, as the lender, with an effective date of November 16, 2018, and amended on May 4, 2019 and September 25, 2019.  The LegacyTexas Credit Facility supported the purchasing, aggregating, and distribution of residential transition loans by ViaNova. 

 

On March 19, 2020, ViaNova received a notice of default from LegacyTexas Bank regarding the LegacyTexas Credit Facility, stating that ViaNova’s unrestricted cash balance was less than the amount required.  Also, on March 19, 2020, ViaNova received notice from LegacyTexas Bank that the Bank had suspended funding all “Alternative” loans for all of their clients, including the RTLs that are the subject of the LegacyTexas Credit Facility with LegacyTexas Bank.  As of March 19, 2020 ViaNova had repaid all outstanding indebtedness under the Agreement.  See note 4. 

 

See note 20 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of the Company’s other debt.

 

Interest Expense, net 

 

INTEREST EXPENSE

(Dollars in Thousands)

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

Junior subordinated notes

  $ 647     $ 821  

2020 Senior Notes

    133       89  

2017 Convertible Note

    375       371  

2013 Convertible Notes / 2019 Senior Notes

    71       119  

2018 FT LOC/2019 FT Revolver/Byline Credit Facility

    65       152  

Redeemable Financial Instrument - DGC Trust / CBF

    197       690  

Redeemable Financial Instrument - JKD Capital Partners I LTD

    526       440  

Redeemable Financial Instrument - ViaNova Capital Group, LLC

    -       (77 )
    $ 2,014     $ 2,605  

 

 

 

 

 

18. EQUITY 

 

Stockholders’ Equity

 

Common Equity: The following table reflects the activity for the three months ended March 31, 2021 related to the number of shares of unrestricted Common Stock that the Company had issued.

 

   

Common Stock

 
   

Shares

 

December 31, 2020

    1,038,963  

Vesting of shares

    56,502  

Shares withheld for employee taxes and retired

    (20,845 )
Repurchase and retirement of Common Stock     (38,647 )

March 31, 2021

    1,035,973  

 

Series E Voting Non-Convertible Preferred Stock: Each share of the Company’s Series E Voting Non-Convertible Preferred Stock (“Series E Preferred Stock”) has no economic rights but entitles the holders thereof to vote the Series E Preferred Stock on all matters presented to the Company’s stockholders.  For every ten shares of Series E Preferred Stock, the holders are entitled to one vote on any such matter.  Daniel G. Cohen, the Company’s chairman, is the sole holder of all 4,983,557 shares of Series E Preferred Stock issued and outstanding as of March 31, 2021. For a more detailed description of these shares see note 21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

Series F Voting Non-Convertible Preferred Stock:  On December 23, 2019, the Company’s board of directors adopted a resolution that reclassified 25,000,000 authorized but unissued shares of Preferred Stock, par value $0.001 per share, of the Company as a series of Preferred Stock designated as Series F Voting Non-Convertible Preferred Stock (“Series F Preferred Stock”).  Pursuant to the Securities Purchase Agreement (the “SPA”), dated December 30, 2019, by and among the Company, the Operating LLC, Daniel G. Cohen, and The DGC Family FinTech Trust (the “DGC Trust”), the Company issued 12,549,273 Series F Preferred Stock to Daniel G. Cohen and 9,880,268 Series F Preferred Stock to the DGC Trust. The Series F Preferred Stock have substantially the same rights as the Series E Preferred Stock.  The holders of the Series F Preferred Stock are not entitled to receive any dividends or distributions (whether in cash, stock or property of the Company).  The holders of Series F Preferred Stock and Common Stock are required to vote, together as a single class on all matters with respect to which a vote of the stockholders of the Company is required or permitted.  Each outstanding share of Series F Preferred Stock entitles the holder to one vote for every ten shares of Series F Preferred Stock on each matter submitted to the holders for their vote.  As of  March 31, 2021, there were 22,429,541 shares of Series F Preferred Stock issued and outstanding.  See Non-Controlling Interest/ - Securities Purchase Agreement – Purchase of IMXI shares below. For a more detailed description of these shares see note 21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

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 $0.001 per share (the “Series C Preferred Stock”), at a purchase price of $100.00 per Unit (the “Purchase Price”), subject to adjustment. The description and terms of the Rights are set forth in the Rights Agreement.

  

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 4.95% or more of the shares of Common Stock then outstanding, but does not include the Company or any “Exempted Person” (as defined below). Until the Distribution Date, (i) the Rights will be evidenced by the Common Stock certificates and will be transferred with and only with such Common Stock certificates, (ii) new Common Stock certificates after the Record Date will contain a notation incorporating the Rights Agreement by reference, and (iii) the surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate.

  

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 4.95% or more of the shares of Common Stock outstanding as of March 10, 2020. However, any such person or entity will no longer be deemed to be an Exempted Person and shall be deemed an Acquiring Person under the Rights Agreement if such person or entity, together with all affiliates and associates of such person or entity, becomes the beneficial owner (and so long as such person continues to be the beneficial owner of 4.95% or more of the then outstanding shares of Common Stock) of additional shares of Common Stock, except (x) pursuant to equity compensation awards granted to such person or entity by the Company or options or warrants outstanding and beneficially owned by such person or entity as of March 10, 2020, or as a result of an adjustment to the number of shares of Common Stock represented by such equity compensation award pursuant to the terms thereof; or (y) as a result of a stock split, stock dividend or the like. In addition, any person or entity who, together with all affiliates and associates of such person or entity, becomes 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 then outstanding as a result of a purchase by the Company or any of its subsidiaries of shares of Common Stock will also be an “Exempted Person.” However, any such person will no longer be deemed to be an Exempted Person and will be deemed to be an Acquiring Person if such person, together with all affiliates and associates of such person, becomes the beneficial owner, at any time after the date such person became the beneficial owner of 4.95% or more of the then outstanding shares of Common Stock, of additional shares of Common Stock, except if such additional securities are acquired (x) pursuant to the exercise of options or warrants to purchase Common Stock outstanding and beneficially owned by such person as of the date such person

 

became the beneficial owner of 4.95% or more of the then outstanding shares of Common Stock or as a result of an adjustment to the number of shares of Common Stock for which such options or warrants are exercisable pursuant to the terms thereof, or (y) as a result of a stock split, stock dividend or the like.

  

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 $200.00 worth of Common Stock (or other consideration, as noted above) for $100.00. If the Common Stock at the time of exercise had a market value per share of $20.00, the holder of each valid Right would be entitled to purchase ten (10) shares of Common Stock for $100.00.

  

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) 50% or more of the Company’s assets, cash flow or earning power is sold or transferred, each holder of a Right (except Rights which have previously been voided as set forth above) will thereafter have the right to receive, upon exercise of the Right, common stock of the acquiring company having a value equal to two times the exercise price of the Right.

  

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 1% of the Purchase Price. No fractional Units will be issued and, in lieu thereof, an adjustment in cash will be made based on the market price of the Series C Preferred Stock on the last trading date prior to the date of exercise.

  

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 $0.001 per Right. Immediately upon the action of the Company’s board of directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $0.001 redemption price.

  

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, 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. 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, 2021, 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

 

Units related to UIS Agreement

    356,570  
Units surrendered from retirement of Common Stock     (386,470 )

Total

    (29,900 )

 

The Company recognized a net increase in additional paid in capital of $926 and a net increase in AOCI of $4 with an offsetting decrease in non-controlling interest of  $930 in connection with the acquisition and surrender of additional units of the Operating LLC. The following schedule presents the effects of changes in Cohen & Company Inc.’s ownership interest in the Operating LLC on the equity attributable to Cohen & Company Inc. for the three months ended March 31, 2021 and 2020.

 

 

   

Three Months Ended

   

Three Months Ended

 
   

March 31, 2021

   

March 31, 2020

 

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

  $ 9,355     $ (3,102 )

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

    926       (123 )

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

  $ 10,281     $ (3,225 )

 

Repurchases of Shares and Retirement of Treasury Stock 

 

On December 21, 2020, August 31, 2020 and March 19, 2018, the Company entered into letter agreements (the “December 2020 Letter Agreement”, the "August 2020 Letter Agreement" and the “2018 Letter Agreement,” respectively and, together, the "10b5-1 Plan").  The December 2020 Letter Agreement and the August 2020 Letter Agreement were entered into with Piper Sandler & Co. and the 2018 Letter Agreement was entered into with Sandler O'Neill & Partners, L.P. (which, following a merger with Piper Jaffray, became Piper Sandler & Co. (the “Agent”)). The agreements authorized the Agent to use reasonable efforts to purchase, on the Company’s behalf, up to an aggregate maximum of $2,000 of Common Stock on any day that the NYSE American Stock Exchange was open for business. The December 2020 Letter Agreement became effective December 23, 2020 and is in effect until December 31, 2021.  The August 2020 Letter Agreement was in effect from August 31, 2020 until August 31, 2021 or until an aggregate purchase price of $2,000 shares had been purchased, which occurred on November 19, 2020. The 2018 Letter was in effect from March 19, 2018 until March 19, 2019.  Pursuant to the 10b5-1 Plan, purchases of Common Stock may be made in public and private transactions and must comply with Rule 10b-18 under the Exchange Act.  The 10b5-1 Plan was designed to comply with Rule 10b5-1 under the Exchange Act. 

 

During the three months ended March 31, 2021, the Company repurchased 38,647 shares in the open market pursuant to the 10b5-1 Plan for a total purchase price of $662. All of the purchases were completed using cash on hand.

 

During the three months ended March 31, 2020, no shares were repurchased by the Company.

 

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 $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. In accordance with the applicable rules of the Securities and Exchange Commission (the “SEC”), the Company was permitted to sell an aggregate of up to $9,318 in Shares under the Equity Agreement, which represented one-third of the value of the Common Stock held by non-affiliates as of March 5, 2021.

 

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 2.5% of the gross offering proceeds of the Shares sold through the Sales Agent pursuant to the Equity Agreement.

 

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.


As of  March 31, 2021, no shares had been sold under the Equity Agreement.

 

 

Non-Controlling Interest

 

 

ROLLFORWARD OF NON-CONTROLLING INTERESTS

(Dollars in Thousands)

 

   

Operating LLC

   

Insurance SPAC Sponsor Entities

   

Insurance SPAC II Sponsor Entities

   

Insurance SPAC III Sponsor Entities

   

SPAC Sponsor Series LLC

   

Vellar GP

   

Total

 

December 31, 2020

  $ 29,723     $ 16,686     $ 4,295     $ 5,416     $ -     $ 1,408     $ 57,528  

Non-controlling interest share of income / (loss)

    27,403       3,559       26,646       (229 )     (1 )     (5 )     57,373  

OCI

    (161 )     -       -       -       -       -       (161 )

Acquisition / (surrender) of additional units of consolidated subsidiary

    (930 )     -       -       -       -       -       (930 )

Equity-based compensation

    420       -       13,068       -       -       -       13,488  

Shares withheld for employee taxes

    (264 )     -       -       -       -       -       (264 )

Dividends/distributions

    (11 )                                             (11 )

Contributions

    -       -       -       8       15               23  

Distributions

    -       (20,245 )     (4,237 )     -       -       (1,403 )     (25,885 )

March 31, 2021

  $ 56,180     $ -     $ 39,772     $ 5,195     $ 14     $ -     $ 101,161  

 

 

 

 

19. NET CAPITAL REQUIREMENTS

 

JVB is subject to the net capital provision of Rule 15c3-1 under the Exchange Act, which requires the maintenance of minimum net capital, as defined therein.  As of March 31, 2021,  JVB's minimum required net capital was $250, and actual net capital was $72,342, which exceeded the minimum requirements by $72,092.  

 

CCFEL, a subsidiary of the Company regulated by the Central Bank of Ireland (“CBI”), is subject to certain regulatory capital requirements in accordance with the Capital Requirements Regulation 575/2013 and applicable CBI requirements.  As of March 31, 2021, the total minimum required net capital was $ 684, and actual net capital in CCFEL was $ 1,975, which exceeded the minimum requirements by $ 1,291 and CCFEL was in compliance with the net liquid capital provisions.

 

 

 

20. EARNINGS / (LOSS) PER COMMON SHARE

 

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

 

EARNINGS / (LOSS) PER COMMON SHARE

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

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

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

  $ 9,355     $ (3,102 )
Add/ (deduct): Income / (loss) attributable to non-controlling interest attributable to Operating LLC membership (1)     27,403       (8,523 )
Add: Interest expense incurred on dilutive convertible notes     289       -  
Add / (deduct): Adjustment (2)     (1,751 )     966  

Net income / (loss) on a fully converted basis

  $ 35,296     $ (10,659 )
                 

Weighted average common shares outstanding - Basic

    1,034,287       1,146,879  

Unrestricted Operating LLC membership units exchangeable into Cohen & Company, Inc. shares (1)

    2,838,132       2,793,798  

Restricted units or shares

    146,660       -  

Shares issuable upon conversion of dilutive convertible notes

    1,034,483       -  

Weighted average common shares outstanding - Diluted (3)

    5,053,562       3,940,677  
                 

Net income / (loss) per common share - Basic

  $ 9.04     $ (2.70 )
                 

Net income / (loss) per common share - Diluted

  $ 6.98     $ (2.70 )

 

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

(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,

 
   

2021

   

2020

 

2017 Convertible Note

    -       1,034,483  

Restricted Common Stock

    -       30,466  

Restricted Operating LLC units

    -       15,424  
      -       1,080,373  



 

 

21. COMMITMENTS AND CONTINGENCIES

 

Legal and Regulatory Proceedings

 

The Company’s U.S. broker-dealer subsidiary, JVB is a party to litigation commenced on August 7, 2019, in the Supreme Court of the State of New York under the caption VA Management, LP v. Odeon Capital Group LLC; Janney Montgomery Scott LLC; C&Co/PrinceRidge LLC; and JVB Financial Group LLC.  The plaintiff, VA Management, LP (f/k/a Visium Asset Management, LP) (“Visium”), alleges that the defendants, as third party broker-dealers, aided and abetted Visium’s portfolio managers’ breaches of their fiduciary duties by assisting in carrying out a fraudulent “mismarking scheme.”  Visium is seeking in excess of $1 billion in damages from the defendants including disgorgement of the compensation paid to Visium’s portfolio managers, restitution of and damages for the investigative and legal fees, administrative wind down costs, and regulatory penalties paid by Visium as a result of the “mismarking scheme,” direct and consequential damages for the destruction of Visium’s business, including lost profits and lost enterprise value, and attorneys’ fees and costs.  JVB and the other defendants filed a motion to dismiss the complaint in lieu of an answer on October 16, 2019.  On April 29, 2020, the Court issued a ruling denying the motions to dismiss filed by each of the defendants.  On May 20, 2020, JVB filed a Notice of Appeal with the Appellate Division of the Supreme Court, First Department. The other defendants also appealed. On July 13, 2020, JVB and the other defendants filed a joint appellate brief. On August 12, 2020, plaintiff filed its opposition brief. On August 21, 2020, JVB and the other defendants filed a joint reply brief. On December 10, 2020, the Appellate Division of the Supreme Court, First Department reversed the Court’s decision and granted the defendants motion to dismiss.  On January 11, 2021, Visium filed with the Court of Appeals of New York State a Motion for Leave to Appeal the decision of the Appellate Division.  On January 22, 2021, the defendants filed a joint Opposition to Motion for Leave to Appeal.  On May 4, 2021, the Court of Appeals denied the Motion for Leave to Appeal.  

 

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

 

 

 

 

22. SEGMENT AND GEOGRAPHIC INFORMATION 

 

Segment Information

 

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

 

 

 

SEGMENT INFORMATION

Statement of Operations Information

Three Months Ended March 31, 2021

 

   

Capital

   

Asset

   

Principal

   

Segment

   

Unallocated

         
   

Markets

   

Management

   

Investing

   

Total

    (1)    

Total

 

Net trading

  $ 19,183     $ -     $ -     $ 19,183     $ -     $ 19,183  

Asset management

    -       2,093       -       2,093       -       2,093  
New issue and advisory     1,839       -       -       1,839       -       1,839  

Principal transactions and other income

    (1 )     160       79,402       79,561       -       79,561  

Total revenues

    21,021       2,253       79,402       102,676       -       102,676  

Salaries/Wages

    9,397       1,456       13,287       24,140       2,507       26,647  

Other Operating Expense

    3,630       399       19       4,048       1,536       5,584  

Impairment of goodwill

    -       -       -       -       -       -  

Total operating expenses

    13,027       1,855       13,306       28,188       4,043       32,231  

Operating income (loss)

    7,994       398       66,096       74,488       (4,043 )     70,445  

Interest income (expense)

    (65 )     -       -       (65 )     (1,949 )     (2,014 )

Income (loss) from equity method affiliates

    -       (133 )     (702 )     (835 )     -       (835 )

Income (loss) before income taxes

    7,929       265       65,394       73,588       (5,992 )     67,596  

Income tax expense (benefit)

    -       -       -       -       868       868  

Net income (loss)

    7,929       265       65,394       73,588       (6,860 )     66,728  

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

    -       (5 )     29,975       29,970       27,403       57,373  

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

  $ 7,929     $ 270     $ 35,419     $ 43,618     $ (34,263 )   $ 9,355  
                                                 

Other statement of operations data

                                               

Depreciation and amortization (included in total operating expense)

  $ 1     $ 1     $ -     $ 2     $ 79     $ 81  

 

SEGMENT INFORMATION

Statement of Operations Information

Three Months Ended March 31, 2020

 

   

Capital

   

Asset

   

Principal

   

Segment

   

Unallocated

         
   

Markets

   

Management

   

Investing

   

Total

    (1)    

Total

 

Net trading

  $ 18,561     $ -     $ -     $ 18,561     $ -     $ 18,561  

Asset management

    -       1,615       -       1,615       -       1,615  
New issue and advisory     -       -       -       -       -       -  

Principal transactions and other income

    9       116       (2,531 )     (2,406 )     -       (2,406 )

Total revenues

    18,570       1,731       (2,531 )     17,770       -       17,770  

Salaries/Wages

    11,910       1,117       -       13,027       1,107       14,134  

Other Operating Expense

    3,277       477       50       3,804       1,394       5,198  

Impairment of goodwill

    7,883       -       -       7,883       -       7,883  

Total operating expenses

    23,070       1,594       50       24,714       2,501       27,215  

Operating income (loss)

    (4,500 )     137       (2,581 )     (6,944 )     (2,501 )     (9,445 )

Interest (expense) income

    (75 )     -       -       (75 )     (2,530 )     (2,605 )

Income (loss) from equity method affiliates

    -       200       (307 )     (107 )     -       (107 )

Income (loss) before income taxes

    (4,575 )     337       (2,888 )     (7,126 )     (5,031 )     (12,157 )

Income tax expense (benefit)

    -       -       -       -       (372 )     (372 )

Net income (loss)

    (4,575 )     337       (2,888 )     (7,126 )     (4,659 )     (11,785 )

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

    -       -       (160 )     (160 )     (8,523 )     (8,683 )

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

  $ (4,575 )   $ 337     $ (2,728 )   $ (6,966 )   $ 3,864     $ (3,102 )
                                                 

Other statement of operations data

                                               

Depreciation and amortization (included in total operating expense)

  $ 4     $ 1     $ -     $ 5     $ 75     $ 80  

 

 

 

 

 

BALANCE SHEET DATA

 

As of March 31, 2021

 

(Dollars in Thousands)

 

 

   

Capital

   

Asset

   

Principal

   

Segment

   

Unallocated

         
   

Markets

   

Management

   

Investing

   

Total

    (1)    

Total

 

Total Assets

  $ 7,692,486     $ 1,529     $ 116,949     $ 7,810,964     $ 24,031     $ 7,834,995  
                                                 

Included within total assets:

                                               
Investments in equity method affiliates   $ -     $ -     $ 9,136     $ 9,136     $ -     $ 9,136  

Goodwill (2)

  $ 54     $ 55     $ -     $ 109     $ -     $ 109  

Intangible assets (2)

  $ 166     $ -     $ -     $ 166     $ -     $ 166  

 

 

BALANCE SHEET DATA

December 31, 2020

(Dollars in Thousands)

 

   

Capital

   

Asset

   

Principal

   

Segment

   

Unallocated

         
   

Markets

   

Management

   

Investing

   

Total

    (1)    

Total

 

Total Assets

  $ 6,049,599     $ 1,540     $ 72,292     $ 6,123,431     $ 25,948     $ 6,149,379  
                                                 

Included within total assets:

                                               

Investments in equity method affiliates

  $ -     $ -     $ 13,482     $ 13,482     $ -     $ 13,482  

Goodwill (2)

  $ 54     $ 55     $ -     $ 109     $ -     $ 109  

Intangible assets (2)

  $ 166     $ -     $ -     $ 166     $ -     $ 166  

 

(1)

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

(2)

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

 

Geographic Information

 

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

 

 

 

GEOGRAPHIC DATA

(Dollars in Thousands)

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

Total Revenues:

               

United States

  $ 100,895     $ 16,942  

Europe & Other

    1,781       828  

Total

  $ 102,676     $ 17,770  

 

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

 

 

 

23. SUPPLEMENTAL CASH FLOW DISCLOSURE

 

Interest paid by the Company on its debt and redeemable financial instruments was $1,585 and $2,060 for the three months ended March 31, 2021 and 2020, respectively.

 

The Company paid income taxes of $102 and $4 for the three months ended March 31, 2021 and 2020, respectively. The Company received no income tax refunds for three months ended March 31, 2021 and 2020. respectively.

 

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 $926, a net increase of $4 in AOCI, and an decrease of $930 in non-controlling interest.  

 

● 

The Company recorded a decrease of $2,103 in due from related party, a corresponding increase of $701 in other investments at fair value, and a corresponding decrease of $1,402 to non-controlling interest, all as a result of a $2,103 in-kind distribution of incremental LP interests, from the 2020 performance fee earned, to all the members of Vellar GP, including the Company.
  ●  The Company recorded a decrease of  $3,958  in equity method affiliates and a $279 decrease in other investments, at fair value resulting from the completion of the Insurance SPAC II Merger.
  ●  The Company recorded a decrease in other investments at fair value of $20,119 resulting from an in-kind distribution relating to the Insurance SPAC Merger.

 

For the three months ended March 31, 2020, 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 decrease in additional paid-in capital of $123, a net increase of $8 in AOCI, and a increase of $115 in non-controlling interest.  See note 18.

 

● 

The investment return related to certain of the Company’s redeemable financial instruments was negative within certain quarterly periods.  According to the terms of those agreements, the redemption value of the instrument is reduced in those cases.  Accordingly, the Company recorded interest income and reduced the balance of redeemable financial instruments by $76. See note 16.

  

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 14. 

 

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:

 

   

For the Three Months Ended March 31,

 
   

2021

   

2020

 

Collateral deposit end of period

  $ 29,275     $ 74,692  

Less: Collateral deposit beginning of period

    41,119       9,524  

Impact to cash flow from operations

  $ (11,844 )   $ 65,168  

 

 

 

24. RELATED PARTY TRANSACTIONS

 

The Company has identified the following related party transactions for the three months ended March 31, 2021 and 2020. 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 is chairman of TBBK.

 

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 amounts disclosed as part of net trading in the table at the end of this section. 

 

From time to time, the Company will enter into repo agreements with TBBK as its counterparty.  As of March 31, 2021 and December 31, 2020, the Company had no repo agreements with TBBK as counterparty.  For the three months ended March 31, 2021, and 2020, the Company incurred no interest expense related to repos with TBBK as its counterparty.

 

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 $8,000 of the $10,000 total investment in the Company’s Redeemable Financial Instrument – DGC Trust / CBF pursuant to the CBF Investment Agreement.  The Company incurred interest expense on this instrument, which is disclosed as part of interest expense incurred in the table at the end of this section.  In March 2021 and October 2020, payments of $4,000 and $2,500, respectively, were made by the Company to CBF, which fully extinguished the redeemable financial instrument balance.  See notes 16 and 17.

 

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 $4,000 investment in the Company.  The Company issued $2,400 in principal amount of the 2013 Convertible Notes and $1,600 of Common Stock to EBC. See note 20 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.  On September 25, 2019, the 2013 Convertible Notes were amended and restated by the 2019 Senior Notes.  On September 25, 2020 the 2019 Senior Notes were amended again to extend their maturity date until September 25, 2021.  See note 17. The Company incurred interest expense on this debt, which is disclosed as part of interest expense incurred in the table at the end of this section.

 

C. The Edward E. Cohen IRA 

 

On August 28, 2015, $4,386 in principal amount of the 2013 Convertible Notes originally issued to Mead Park Capital in September 2013 was purchased by Pensco Trust Company, Custodian fbo Edward E. Cohen, of which Edward E. Cohen is the benefactor.  Edward E. Cohen is the father of Daniel G. Cohen.  On September 25, 2019, the 2013 Convertible Notes were amended and restated by the 2019 Senior Notes. See note 17 for a description of amendments related to the 2019 Senior Notes and 2013 Convertible Notes.  The Company incurred interest expense on this debt, which is disclosed as part of interest expense incurred in the table at the end of this section. $4,386 of the 2019 Senior Notes were fully repaid on February 3, 2020.  See note 17 and note 20 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

D. JKD Investor 

 

The JKD Investor is an entity owned by Jack J. DiMaio, the vice chairman of the board of directors and vice chairman of the Operating LLC’s board of managers and his spouse.  On October 3, 2016, JKD Investor invested $6,000 in the Operating LLC.  Additional investments were made in January 2017 and January 2019 in the amounts of $1,000 and $1,268 respectively.  See note 16. The interest expense incurred on this investment is disclosed in the table at the end of this section. 

 

On January 31, 2020, JKD Investor purchased $2,250 of the 2020 Senior Notes.  See note 17.  The Company incurred interest expense on this debt, which is disclosed as part of interest expense incurred in the tale at the end of this section.

 

E. DGC Trust 

 

DGC 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.  The Company considers DGC Trust a related party because it was established by Daniel G. Cohen. 

 

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.  See note 17.

 

 

On September 29, 2017, the DGC Trust invested $2,000 of the $10,000 total investment in the Company’s Redeemable Financial Instrument – DGC Trust / CBF pursuant to the DGC Trust Investment Agreement.  See notes 19 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and note 16 herein.  Interest incurred on this instrument is disclosed in the tables at the end of this section.  The Company redeemed the DGC Trust Redeemable Financial Instrument in full by making payment of $2,000 on September 30, 2020.

 

F.  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. 

 

G. FinTech Masala, LLC

 

FinTech Masala, LLC (formerly Bezuco Capital, LLC) is a related party because Betsy Cohen, the mother of Daniel G. Cohen, is a member of FinTech Masala, LLC.  Daniel G. Cohen is also a member of 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. The Company agreed to pay a consultant fee of $1 per month, which commenced July 1, 2019 and continued through the Insurance SPAC Merger.  Betsy Cohen made a $2 investment in the Insurance SPAC Sponsor Entities in March 2019 which is included as a component of non-controlling interest in the consolidated balance sheet at December 31, 2020.  The expense incurred by the Company for the consulting services provided by FinTech Masala, LLC are included within professional fees and operating expense in the consolidated income statement and are disclosed in the table below. 

 

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 $1 per month, which commenced on October 1, 2020, and continued through February 2021.  Betsy Cohen made a $1 investment in the Insurance SPAC II Sponsor Entities which is included as a component of non-controlling interest in the consolidated balance sheet at December 31, 2020.  The expense incurred by the Company for the consulting services provided by FinTech Masala, LLC is included within professional fees and operating expense in the consolidated income statement and are disclosed in the table below. 

 

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 $1 per month, which commenced on December 1, 2020, and continues through  (i) the date that is thirty days following the closing of the Insurance SPAC III ’s Initial Business Combination and (ii) the date on which the Company or Betsy Cohen terminates the consulting agreement.  Betsy Cohen made a $1 investment in the Insurance SPAC III Sponsor Entities which is included as a component of non-controlling interest in the consolidated balance sheets.  The expense incurred by the Company for the consulting services provided by FinTech Masala, LLC is included within professional fees and operating expense in the consolidated income statement and are disclosed in the table below. 

 

H. Investment Vehicle and Other 

 

Stoa USA, Inc.

 

Stoa USA, Inc. is an equity method investment because Daniel Cohen is a director.  In March 2021, the Operating LLC made a $67k investment in Stoa USA, Inc.  This amount is not included in the table below.

 

CK Capital and AOI 

 

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

 

Insurance SPAC

 

Prior to October 13, 2020, the date of the Insurance SPAC Merger, the Insurance SPAC 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 Sponsor Entities and the Company consolidated the Insurance SPAC Sponsor Entities. Prior to the Insurance SPAC Merger, the Company owned 26.5% of the equity in the Insurance SPAC. Income earned or losses incurred on equity method investment in the Insurance SPAC is included in the tables below. The Operating LLC and the Insurance SPAC entered into an administrative services agreement, dated March 19, 2019, pursuant to which the Operating LLC and the Insurance SPAC agreed that, commencing on the date that the Insurance SPAC’s securities were first listed on the NASDAQ Capital Market through the earlier of the Insurance SPAC’s consummation of a business combination and its liquidation, the Insurance SPAC would pay the Operating LLC $10 per month for certain office space, utilities, secretarial support, and administrative services. Revenue earned by the Company from such administrative services agreement is included as part of principal transactions and other income in the tables below.  The Company also agreed to lend the Insurance SPAC $750 for operating and acquisition related expenses, of which $650 was actually borrowed by the Insurance SPAC from the Company. On October 13, 2020 in connection with the Insurance SPAC Merger, the Insurance SPAC made a payment of $650 to the Company extinguishing this loan balance in full.  See note 4. 

 

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 46.1% of the equity in Insurance SPAC II.    Income earned, or loss incurred on the equity method investment in Insurance SPAC II is included in the table below.  The Operating LLC and Insurance SPAC II entered into an administrative services agreement, dated September 2, 2020, pursuant to which the Operating LLC and Insurance SPAC II  agreed that, commencing on the date that Insurance SPAC II’s securities were first listed on the NASDAQ Capital Market through the earlier of Insurance SPAC II’s consummation of a business combination and its liquidation, Insurance SPAC II would pay the Operating LLC $20 per month for certain office space, utilities, secretarial support, and administrative services.  Revenue earned by the Company from such administrative services agreement is included as part of principal transactions and other income in the tables below.  The Company also agreed to lend Insurance SPAC up to $750 for operating and acquisition related expenses; no amounts were borrowed from the Company and the lending agreement is no longer in place effective with the Insurance SPAC II Merger.  See note 4.

 

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, 2020, the non-controlling interest invested $5,775 in Insurance SPAC III Sponsor Entities and owns 49.5% 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 $20 per month for certain office space, utilities, and shared personnel support as may be requested by Insurance SPAC III.  Revenue earned by the Company from the administrative services agreement is included as part of principal transactions and other income in the tables below. The Company also agreed to lend Insurance SPAC III $810 for operating and acquisition related expenses as a sponsor of Insurance SPAC III; no amounts have been borrowed as of March 31, 2021. See note 4.

 

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, 2021, the Company owned 1.9% of the equity of the SPAC Fund. 

 

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, 2021, the Company owned 4.85% of the equity of the U.S. Insurance JV.

 

SPAC Series Funds

 

The SPAC Series Funds are considered related parties because they are equity method investments of the Company.  From time to time, the Company many also invest directly in the same sponsor entity that a SPAC Series Fund invests in.  As of March 31, 2021, the Company owned 0.61% in SPAC Series Funds.  Income earned or loss incurred on the equity method investment in the SPAC Series Funds is included in the tables below.  

 

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. III ("FTAC III") was a SPAC.  The sponsor of FTAC III ("FTAC III Sponsor") is a related party because Daniel G. Cohen is the manager of the FTAC III Sponsor.   In December 2018, the Operating LLC entered into an agreement with FTAC III Sponsor whereby the Company provided certain accounting and administrative services and in exchange the Company received 23,300 founders shares of FTAC III.  The revenue earned on this arrangement is disclosed in the tables below.

 

Fintech Acquisition Corp. IV ("FTAC IV") is 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 an initial allocation of 130,000 founders shares of Fintech Acquisition IV stock for $1.  In addition, on September 29, 2020, the Operating LLC entered into a letter agreement with FTAC IV 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 IV Sponsor for a period not longer than 24 months.  As consideration for these services, the Company received an allocation of an additional 30,000 founders shares of Fintech Acquisition IV stock to the Operating LLC and recorded an equity method investment of $40 for the valuation of these services. The revenue earned from these services is recorded in the table below.

 

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 140,000 founder shares.  On December 14, 2020, the Operating LLC entered into a letter agreement with FTAC V 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 V Sponsor for a period not longer than 24 months.  As consideration for these services, the Company received an allocation of 35,000 founders shares of FTAC V stock to the Operating LLC and recorded an equity method investment of $40 for the valuation of these services. The revenue earned from these services is recorded in the table below.

 

FTAC Olympus Acquisition Corp ("FTAC Olympus") is 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 an initial allocation of 600,000 founders shares of FTAC Olympus stock for $2.  In addition, on September 8, 2020, the Operating LLC entered into a letter agreement with FTAC Olympus 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 Olympus Sponsor for a period not longer than 24 months.  As consideration for these services, the Company received an allocation of an additional 30,000 founders shares of FTAC Olympus stock to the Operating LLC and recorded an equity method investment of $40 for the valuation of these services. The revenue earned from these services is recorded in the table below.

 

 

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

 

   

Three Months Ended

 
   

March 31, 2021

   

March 31, 2020

 
                 

Asset management

               

SPAC Fund

    215       (47 )
SPAC Series Funds     319       -  

U.S. Insurance JV

    91       90  
    $ 625     $ 43  

Principal transactions and other income

               

Insurance SPAC

    -       30  

Insurance SPAC II

    40       -  

Insurance SPAC III

    60       -  

FTAC III Sponsor

    -       3  
FTAC Sponsor IV     5       -  
FTAC Sponsor V     5       -  

FTAC Olympus Sponsor

    5       -  

SPAC Fund

    478       (59 )

U.S. Insurance JV

    162       (167 )
    $ 755     $ (193 )

Income (loss) from equity method affiliates

               

AOI

    (98 )     (30 )

CK Capital

    (34 )     230  

Insurance SPAC II

    (107 )     (307 )
Insurance SPAC III     (454 )     -  
SPAC Sponsor Entities     (21 )     -  
SPAC Series Funds     (121 )     -  
    $ (835 )   $ (107 )
                 

Operating expense (income)

               

Duane Morris

    398       319  

FinTech Masala, LLC

    (8 )     (11 )
    $ 390     $ 308  

Interest expense (income)

               
CBF     197       528  
DGC Trust     375       533  
EBC     71       72  
Edward E. Cohen IRA     -       48  
JKD Investor     592       484  
    $ 1,235     $ 1,665  
                

 

 

 

 

 

The following related party transactions are non-routine and are not included in the tables above.

 

K.  Directors and Employees

 

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

 

The Company maintains a 401(k) savings plan covering substantially all of its employees.  The Company matches 50% of employee contributions for all participants not to exceed 3% of their salary.  Contributions made on behalf of the Company were $95 and $98 for the three months ended March 31, 2021 and 2020 respectively.  

 

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 expired in June 2020 and was subsequently amended to extend for a period of one year through June 2021.  The Company recorded $24 of rent expense related to this office space for the three months ended March 31, 2021 and 2020, respectively.

 

 

 

25. DUE FROM / DUE TO RELATED PARTIES

 

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

 

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

 

DUE FROM/DUE TO RELATED PARTIES

(Dollars in Thousands)

 

   

March 31, 2021

   

December 31, 2020

 
                 
CK Capital   $ -     $ 147  
U.S. Insurance JV     75       78  
SPAC Fund     225       2,255  
Employee & other     303       332  

Due from related parties

  $ 603     $ 2,812  

 

 

 

 

 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, 2020.

 

“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.

 

 

● 

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, SBA loans, 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 CCFEL in Europe.

 

● 

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, 2021, we had approximately $2.41 billion in assets under management (“AUM”) of which 67.7% 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.  

 

● 

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

 

● 

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

 

Asset Management:

 

 

● 

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

 

● 

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

 

Principal Investing:

 

 

● 

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

  ●  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 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 CCFEL and new issue services in the U.S. through our subsidiary JVB. Currently, our primary source of new issue revenue is from originating assets for our U.S. and European insurance asset management business.

 

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, 2021,  67.7% 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 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.  

 

 

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; (iv) becoming a full netting member of the FICC enabling us to expand our matched book repo business; and (v) 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:

 

 

● 

The unprecedented volatility of the financial markets experienced since March 2020, 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.  

 

● 

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 in the three months ended March 31, 2020.  See note 12.  

 

● 

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, the Company applied for and received a $2,166 loan under the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act.  See "Recent Events" below for additional information regarding this loan.  

 

 

Recent Events

 

The 2020 Senior Notes 

 

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

 

Pursuant to the note purchase agreement, JKD Investor and RNCS each purchased a senior promissory note in the principal amount of $2,250 (for an aggregate investment of $4,500).  The senior promissory notes bear interest at a fixed rate of 12% per annum and mature on January 31, 2022.  On February 3, 2020, pursuant to the note purchase agreement, the Operating LLC used the proceeds received from the issuance of the senior promissory notes to the JKD Investor and RNCS to repay in full all amounts outstanding under the senior promissory note, dated September 25, 2019, issued by the Company to Pensco Trust Company, Custodian fbo Edward E. Cohen IRA in the principal amount of $4,386 (the “Cohen IRA Note”).  The Cohen IRA Note was included as a portion of the 2019 Senior Notes (as defined below) outstanding as of December 31, 2019.  The Cohen IRA Note was fully paid and extinguished on February 3, 2020.  Subsequent to this repayment, $2,400 of the 2019 Senior Notes remain outstanding and are held by EBC.  On September 25, 2020, the 2019 Senior Notes were amended to extend the maturity date of the remaining $2,400 to September 25, 2021.  See note 17 to our financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the 2019 Senior Notes and the senior promissory notes issued to the JKD Investor and RNCS. 

 

CARES Act

 

On March 27, 2020, the United States enacted the CARES Act. The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. The CARES Act includes significant business tax provisions that, among other things, include the removal of certain limitations on utilization of net operating losses, increase the loss carryback period for certain losses to five years, and increase the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. We do not expect the CARES Act to have a significant impact on our tax obligations.

 

Paycheck Protection Program 

 

In April 2020, we applied for and received a $2,166 loan under the PPP. We have carefully considered the eligibility requirements for PPP loans as well as supplemental guidance regarding the PPP beyond the applicable statute issued from time to time by government agencies and certain government officials. We were eligible to receive a PPP loan because we have fewer than 100 employees. Further, although we are a publicly traded company and are listed on the NYSE American stock exchange, our market capitalization is small relative to many other publicly traded companies, and we believed that we did not have access to the public capital markets at the time we applied for and received a loan under the PPP. In part due to the PPP loan, we do not anticipate any significant workforce reduction or reductions in compensation levels in the near future. On September 23, 2020, we applied for forgiveness of the PPP loan.  As of the date of this report, we have not heard back regarding the forgiveness of the PPP loan.  See note 18 to our financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the loan we received under the PPP.

 

 

Insurance SPAC

 

The Operating LLC is the manager of Insurance Acquisition Sponsor, LLC (“IAS”) and Dioptra Advisors , LLC (“Dioptra” and, together with IAS, the “Insurance SPAC Sponsor Entities”).  The Insurance SPAC Sponsor Entities were sponsors of Insurance Acquisition Corp. ("Insurance SPAC"), a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses.

 

On June 29, 2020, Insurance SPAC entered into an Agreement and Plan of Merger (the “Insurance SPAC Merger Agreement”) with IAC Merger Sub, Inc., a Delaware corporation and direct wholly owned subsidiary of Insurance SPAC (“Insurance SPAC Merger Sub”), and Shift Technologies, Inc., a Delaware corporation (“SFT”).  On October 13, 2020, Insurance SPAC Merger Sub was merged (the “Insurance SPAC Merger”) with and into SFT. In connection with the Insurance SPAC Merger, the Insurance SPAC changed its name from “Insurance Acquisition Corp.” to “Shift Technologies, Inc.” and, on October 15, 2020, the Insurance SPAC’s NASDAQ trading symbol changed from "INSU" to “SFT.” The Insurance SPAC Merger was approved by the Insurance SPAC’s stockholders at a special meeting of stockholders held on October 13, 2020.

 

Upon the closing of the Insurance SPAC Merger, the Insurance SPAC Sponsor Entities held 375,000 shares of SFT’s Class A Common Stock, par value $0.0001 per share (“SFT Class A Common Stock”), and 187,500 warrants (“SFT Warrants”) to purchase an equal number of shares of SFT Class A Common Stock for $11.50 per share (such SFT Class A Common Stock and SFT Warrants, collectively, the “Placement Securities”) as a result of the 375,000 placement units which the Insurance SPAC Sponsor Entities had purchased in a private placement that occurred simultaneously with the Insurance SPAC’s initial public offering on March 22, 2019.  Further, upon the closing of the Insurance SPAC Merger, the Insurance SPAC Sponsor Entities collectively held an additional 4,497,525 shares of SFT Class A Common Stock as a result of its previous purchase of founder shares of the Insurance SPAC.  In general, when founder shares and placement shares are discussed as a group, we refer to them as "Sponsor Shares".  Of the 375,000 placement units, 122,665 were allocable to us.  Of the 4,497,525 founder shares, 2,019,721 were allocable to us.  

 

As of the closing of the Insurance SPAC Merger, we continued to consolidate the Insurance SPAC Sponsor Entities. Prior to the closing, we treated the consolidated Insurance SPAC Sponsor Entities’ investment in the Insurance SPAC as an equity method investment.  Effective upon the closing of the Insurance SPAC Merger:

 

1.  We determined the fair value of the Sponsor Shares held by the Insurance SPAC Sponsor Entities.

2.  We reclassified the equity method investment to other investments, at fair value and recorded principal transactions and other income for the difference between the fair value of the Sponsor Shares held by the Insurance SPAC Sponsor Entities and the equity method investment balance immediately prior to the merger closing; and

3.  We then recorded non-controlling interest expense or compensation expense related to the Sponsor Shares distributable to the non-controlling interest holders in the Insurance SPAC Sponsor Entities.  If the non-controlling interest holder was our employee, we recorded the expense as equity-based compensation expense.  Otherwise, the expense was recorded by us as non-controlling interest expense.  

 

Subsequent to the closing of the Insurance SPAC Merger, any change in the fair value of the shares held by the Insurance SPAC Sponsor Entities has been recorded as a component of principal transactions and other income.  We concurrently record a corresponding non-controlling interest entry related to the Sponsor Shares distributable to the non-controlling interest holders in the Insurance SPAC Sponsor Entities.  No adjustment is made to the equity-based compensation expense recorded as of the closing of the Insurance SPAC Merger.  Rather, all post-merger changes in value related to Sponsor Shares distributable to the non-controlling interest holders in the Insurance SPAC Sponsor Entities are recorded as non-controlling interest expense.  

 

During the three months ended March 31, 2021, the Insurance SPAC Sponsor Entities distributed all the unrestricted and restricted shares held to its members including us.  The portion of such SFT shares that was distributed to members other than us was treated as an in-kind non-controlling interest distribution.  Subsequent to that distribution, we continue to record any change in the fair value of the SFT shares held by us as a component of principal transactions and other income.  However, no offsetting entry to non-controlling interest is necessary subsequent to the non-controlling interest distribution.  

 

Concurrently with the closing of the Insurance SPAC Merger, a subsidiary of the Operating LLC, INSU Pipe Sponsor, LLC, purchased 600,000 shares of SFT Class A Common Stock at a purchase price per share of $10.00 pursuant to a subscription agreement that such subsidiary executed at the time of the execution of the Insurance SPAC Merger Agreement. Our interest in INSU Pipe Sponsor LLC entitled us to an allocation of 350,000 shares of SFT Class A Common Stock.  During 2020, we consolidated INSU Pipe Sponsor, LLC and recorded principal transactions and other income for the full 600,000 shares and then non-controlling interest expense or income for the 250,000 shares not owned by us.  In December 2020, the shares of SFT Class A Common Stock were registered for sale and INSU Pipe Sponsor, LLC distributed the shares to the non-controlling interest holders resulting in INSU Pipe Sponsor, LLC being 100% owned by the Operating LLC.  INSU Pipe Sponsor, LLC was dissolved in the first quarter of 2021, and our 350,000 shares of SFT Class A common stock transferred to the Operating LLC or other wholly owned subsidiaries of the Operating LLC. 

 

 

The following table details the impact of all the entries associated with the Insurance SPAC during the three months ended March 31, 2021.  This table excludes any tax impact.  

 

   

For the Three Months Ended March 31, 2021

 
   

Insurance SPAC Sponsor Entities

   

Operating LLC

   

Total

 

Principal transactions and other income

  $ 7,380     $ (3,718 )   $ 3,662  

Equity-based compensation

    -       -       -  

Other operating

    (8 )     -       (8 )

Income / (loss) from equity method affiliates

    -       -       -  

Net income / (loss)

    7,372       (3,718 )     3,654  

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

    (3,560 )     -       (3,560 )

Net income / (loss) - Operating LLC

    3,812       (3,718 )     94  

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

    2,794       (2,725 )     69  

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

  $ 1,018     $ (993 )   $ 25  

 

As of March 31, 2021, the Operating LLC's total investment in SFT is $15,578, which is included as a component of other investments, at fair value.  These values are broken out as follows:

 

 

   

Operating

 

Description

 

LLC

 

Shares freely tradeable

  $ 2,208  

Shares that will become freely tradeable at such time SFT's stock price is greater than $12.00 per share for any period of 20 trading days out of 30 consecutive trading days

    3,349  

Shares that will become freely tradeable at such time SFT's stock price is greater than $13.50 per share for any period of 20 trading days out of 30 consecutive trading days

    3,345  

Shares that will become freely tradeable at such time SFT's stock price is greater than $15.00 per share for any period of 20 trading days out of 30 consecutive trading days

    3,340  

Shares that will become freely tradeable at such time SFT's stock price is greater than $17.00 per share for any period of 20 trading days out of 30 consecutive trading days

    3,336  

Total

  $ 15,578  

 

SFTs closing share price on March 31, 2021 was $8.32 per share.  See note 4 to our financial statements included in this Quarterly Report on Form 10-Q.  

 

 

INSU Acquisition Corp. II ("Insurance SPAC II")

 

The Operating LLC is the manager of Insurance Acquisition Sponsor II, LLC (“IAS II”) and Dioptra Advisors II, LLC (“Dioptra II” and, together with IAS II, the “Insurance SPAC II Sponsor Entities”). The Insurance SPAC II Sponsor Entities are sponsors of INSU Acquisition Corp. II (“Insurance SPAC II”), a blank check company that sought to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (each a “Insurance SPAC II Business Combination”). 

 

On November 24, 2020, Insurance SPAC II entered into an Agreement and Plan of Merger and Reorganization (the “Insurance SPAC II Merger Agreement”) with INSU II Merger Sub Corp., a Delaware corporation and direct wholly owned subsidiary of Insurance SPAC II (“Insurance SPAC II Merger Sub”), and MetroMile, Inc., a Delaware corporation (at the time, named MetroMile Operating Company) (“MetroMile”). The Insurance SPAC II Merger Agreement provided for, among other things, the acquisition of MetroMile by Insurance SPAC II pursuant to the proposed merger of Insurance SPAC II Merger Sub with and into MetroMile with MetroMile continuing as the surviving entity and a direct wholly owned subsidiary of Insurance SPAC II (the “Insurance SPAC II Merger”).  On February 9, 2021, the Insurance SPAC II Merger was consummated and Insurance SPAC II changed its name to MetroMile.    

 

Upon closing of the Insurance SPAC II Merger, the Insurance SPAC II Sponsor Entities received a total of 6,669,667 founder shares and 452,500 placement units.  

 

Each placement unit consists of one share of Insurance SPAC II Common Stock and one-third of one warrant (the “Insurance SPAC II Warrant”).  Each whole Insurance SPAC II Warrant entitles the holder to purchase one share of Insurance SPAC II common stock for $11.50 per share.  Of the 6,669,667 founders shares, (i) 1,569,333 founder shares were freely transferable and saleable at the closing as of the Insurance SPAC II Merger, (ii) 2,550,167 founder shares will become freely transferable and saleable at such time as MetroMile's stock price is greater than $15.00 per share for any period of 20 trading days out of 30 consecutive trading days; (iii) 2,550,167 founder shares will become freely transferable and saleable at such time as MetroMile's stock price is greater than $17.00 per share for any period of 20 trading days out of 30 consecutive trading days. 

 

As of the closing of the Insurance SPAC II Merger, we continued to consolidate the Insurance SPAC II Sponsor Entities. Prior to the closing, we treated the consolidated Insurance SPAC Sponsor Entities’ investment in the Insurance SPAC as an equity method investment.  Effective upon the closing of the Insurance SPAC Merger:

 

1.  We determined the fair value of the Sponsor Shares held by the Insurance SPAC Sponsor Entities.

2.  We reclassified the equity method investment to other investments, at fair value and recorded principal transactions and other income for the difference between the fair value of the Sponsor Shares held by the Insurance SPAC Sponsor Entities and the equity method investment balance immediately prior to the merger closing; and

3.  We then recorded non-controlling interest expense or compensation expense related to the Sponsor Shares distributable to the non-controlling interest holders in the Insurance SPAC Sponsor Entities.  If the non-controlling interest holder was an employee, we recorded the expense as equity-based compensation expense.  Otherwise, the expense was recorded as non-controlling interest expense.  

 

Subsequent to the closing of the Insurance SPAC II Merger through April 16, 2021, any change in the fair value of the shares held by the Insurance SPAC Sponsor Entities has been recorded as a component of principal transactions and other income.  We concurrently record a corresponding non-controlling interest entry related to the Sponsor Shares distributable to the non-controlling interest holders in the Insurance SPAC Sponsor II Entities.  No adjustment is made to the equity-based compensation expense recorded as of the closing of the Insurance SPAC Merger.  Rather, all post-merger changes in value related to Sponsor Shares distributable to the non-controlling interest holders in the Insurance SPAC Sponsor Entities are recorded as non-controlling interest expense. 

 

On April 16, 2021, the Insurance SPAC II Sponsor Entities distributed all the unrestricted and restricted MetroMile shares held to its members including the Operating LLC.  The portion of such MetroMile shares that was distributed to members other than the Operating LLC was treated as an in-kind non-controlling interest distribution.  Subsequent to that distribution, we continue to record any change in the fair value of the MetroMile shares held by us as a component of principal transactions and other income.  However, no offsetting entry to non-controlling interest is necessary subsequent to the non-controlling interest distribution.  

 

 

The following table details the impact of all the entries associated with the Insurance SPAC II during the three months ended March 31, 2021.  This table excludes any tax impact.  

 

   

For the Three Months Ended March 31, 2021

 
   

Insurance SPAC II Sponsor Entities

   

Operating LLC

   

Total

 

Principal transactions and other income

  $ 73,193     $ -     $ 73,193  

Equity-based compensation

    (13,068 )     -       (13,068 )

Other operating

    -       -       -  

Income / (loss) from equity method affiliates

    (107 )     -       (107 )

Net income / (loss)

    60,018       -       60,018  

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

    (26,645 )     -       (26,645 )

Net income / (loss) - Operating LLC

    33,373       -       33,373  

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

    24,459       -       24,459  

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

  $ 8,914     $ -     $ 8,914  

 

The Operating LLC's total investment in MetroMile of $72,914 is included as a component of other investments, at fair value in our consolidated balance sheet.  Offsetting this is $39,772 of non-controlling interest in our consolidated balance sheet related to shares of MetroMile held in consolidated entities that are distributable to the non-controlling interest holders.  Therefore, the Operating LLC's share of the consolidated investment in MetroMile as of March 31, 2021 was $33,142. These values are broken out as follows:

 

 

   

Fair

   

Non-Controlling

   

Operating

 

Description

 

Value

   

Interest

   

LLC

 

Shares freely tradeable

  $ 21,145     $ (13,266 )     7,879  

Shares that will become freely tradeable at such time MetroMile's stock price is greater than $15.00 per share for any period of 20 trading days out of 30 consecutive trading days

    25,935       (13,279 )     12,656  

Shares that will become freely tradeable at such time MetroMile's stock price is greater than $17.00 per share for any period of 20 trading days out of 30 consecutive trading days

    25,834       (13,227 )     12,607  

Total

  $ 72,914     $ (39,772 )     33,142  

 

MetroMile's closing share price on March 31, 2021 was $10.29 per share.   See note 4 to our financial statements included in this Quarterly Report on Form 10-K.  

 

 

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 25,000,000 units (the “Insurance SPAC III Units”) in its initial public offering which included 3,200,000 units issued pursuant to the underwriters’ over-allotment option.

 

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 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 preinitial 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 founders shares in which such non-controlling interests in 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 the 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.

 

As of March 31, 2021, we had a total equity method investment in Insurance SPAC III of $5,288, 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 $5,195, 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 was $93 as of March 31, 2021.  See note 4 to our financial statements included in this Quarterly Report on Form 10-Q.  

 

In April 2021, the SEC issued guidance regarding how SPACs account for the warrants they issue.  This guidance may result in Insurance SPAC III, as well as most SPACs restating their previously issued financial statements. See Item 1a Risk Factors in this Quarterly Report on Form 10-Q.  

 

 

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, 2021 Compared to the Three Months Ended March 31, 2020

 

The following table sets forth information regarding our consolidated results of operations for the three months ended March 31, 2021 and 2020.  

 

  

COHEN & COMPANY INC.

CONSOLIDATED  STATEMENTS OF OPERATIONS

(Dollars in Thousands)

(Unaudited)

 

   

Three Months Ended March 31,

   

Favorable / (Unfavorable)

 
   

2021

   

2020

   

$ Change

   

% Change

 

Revenues

                               
Net trading   $ 19,183     $ 18,561     $ 622       3 %
Asset management     2,093       1,615       478       30 %
New issue and advisory     1,839       -       1,839       NM  
Principal transactions and other income     79,561       (2,406 )     81,967       3407 %
Total revenues     102,676       17,770       84,906       478 %
                                 

Operating expenses

                               
Compensation and benefits     26,647       14,134       (12,513 )     (89 )%
Business development, occupancy, equipment     719       756       37       5 %
Subscriptions, clearing, and execution     2,790       2,580       (210 )     (8 )%
Professional fee and other operating     1,994       1,782       (212 )     (12 )%
Depreciation and amortization     81       80       (1 )     (1 )%
Impairment of goodwill     -       7,883       7,883       100 %
Total operating expenses     32,231       27,215       (5,016 )     (18 )%
                                 
Operating income / (loss)     70,445       (9,445 )     79,890       846 %
                                 

Non-operating income / (expense)

                               
                                 
Interest expense, net     (2,014 )     (2,605 )     591       23 %
Income / (loss) from equity method affiliates     (835 )     (107 )     (728 )     (680 )%
Income / (loss) before income taxes     67,596       (12,157 )     79,753       656 %
Income tax expense / (benefit)     868       (372 )     (1,240 )     (333 )%
Net income / (loss)     66,728       (11,785 )     78,513       666 %
Less: Net income (loss) attributable to the non-controlling interest     57,373       (8,683 )     (66,056 )     (761 )%
Net income / (loss) attributable to Cohen & Company Inc.   $ 9,355     $ (3,102 )     12,457       402 %

 

Revenues

 

Revenues increased by $84,906 or 478% to $102,676 for the three months ended March 31, 2021 from $17,770 for the three months ended March 31, 2020. As discussed in more detail below, the change was comprised of (i) an increase of $622 in net trading revenue; (ii) an increase of $478 in asset management revenue; (iii) an increase in new issue and advisory of $1,839 ; and (iv) an increase of $81,967 in principal transactions and other income.

 

 

Net Trading

 

Net trading revenue increased by $622 or 3%, to $19,183 for the three months ended March 31, 2021 from $18,561 for the three months ended March 31, 2020.  The following table shows the detail by group.

 

 

 

NET TRADING

(Dollars in Thousands)

 

   

Three Months Ended March 31,

 
   

2021

   

2020

   

Change

 
Mortgage   $ 2,550     $ 3,035     $ (485 )
Matched book repo     11,281       6,868       4,413  
High yield corporate     3,331       (1,877 )     5,208  
Investment grade corporate     8       9,958       (9,950 )
Wholesale and other     2,013       577       1,436  

Total

  $ 19,183     $ 18,561     $ 622  

 

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,

 
   

2021

   

2020

   

2020

   

2019

 

Company sponsored CDOs

  $ 1,631,839     $ 2,095,350     $ 2,057,178     $ 2,197,208  

Other Investment Vehicles (1)

    777,304       555,823       712,028       559,382  

Assets under management (2)

  $ 2,409,143     $ 2,651,173     $ 2,769,206     $ 2,756,590  

 

(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.  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. 

 

 

Asset management fees increased by $478, or 30%, to $2,093 for the three months ended March 31, 2021 from $1,615 for the three months ended March 31, 2020, 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,

 
   

2021

   

2020

   

Change

 
CDOs   $ 790     $ 969     $ (179 )
Other     1,303       646       657  

Total

  $ 2,093     $ 1,615     $ 478  

 

CDOs

 

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.

 

Asset management fees from company sponsored CDOs decreased by $179 to $790 for the three months ended March 31, 2021 from $969 for the three months ended March 31, 2020. The following table summarizes the periods presented by asset class.

 

FEES EARNED BY ASSET CLASS

(Dollars in Thousands)

 

   

Three Months Ended March 31,

 
   

2021

   

2020

   

Change

 
TruPS and insurance company debt - U.S.   $ 684     $ 768     $ (84 )
TruPS and insurance company debt - Europe     106       97       9  
Broadly syndicated loans - Europe     -       104       (104 )

Total

  $ 790     $ 969     $ (179 )

 

The reduction in asset management fees for TruPS and insurance company debt – U.S. was a result of average AUM declining due to principal repayments on the assets in these securitizations as well as the termination of our management contract for Alesco Preferred Funding IX, without cause effective March 15, 2021.  The increase in asset management fees for TruPS and insurance company debt – Europe was a result of changes in foreign exchange rates.  Asset management fees for broadly syndicated loans – Europe consist of a single CLO.  During August 2019, this CLO liquidated.  No future revenue will be earned on this CLO.

 

Other

 

Other asset management revenue increased by $657 to $1,303 for the three months ended March 31, 2021 from $646 for the three months ended March 31, 2020.  The increase was primarily due to an increase in AUM during the three months ended March 31, 2021 as compared to the same period in 2020.

 

 

Principal Transactions and Other Income

 

Principal transactions and other income increased by $81,967, or 3407%, to $79,561 for the three months ended March 31, 2021, as compared to ($2,406) for the three months ended March 31, 2020.  The following table summarizes principal transactions and other income by category.

 

 

 

PRINCIPAL TRANSACTIONS & OTHER INCOME

(Dollars in Thousands)

 

   

Three Months Ended March 31,

 
   

2021

   

2020

   

Change

 
SFT   $ 3,662     $ -     $ 3,662  
MetroMile     73,193       -       73,193  
Other SPAC equity     1,867       -       1,867  
CLO investments     -       (525 )     525  
IMXI     (123 )     (1,751 )     1,628  
SPAC Fund     478       (59 )     537  
Other principal investments     222       (263 )     485  

Total principal transactions

    79,299       (2,598 )     81,897  
                         
IIFC revenue share     159       116       43  
All other income / (loss)     103       76       27  

Other income

    262       192       70  
                         

Total principal transactions and other income

  $ 79,561     $ (2,406 )   $ 81,967  

 

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. 

 

SFTis a publicly traded company.  The shares of SFT we hold are comprised of both unrestricted and restricted shares and are carried at fair value.  See note 4 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for discussion of sale restrictions on these shares.  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.  During the three months ended March 31, 2021, the Insurance SPAC Sponsor Entities distributed all shares of SFT it previously held to its members (which included the operating LLC).  As of March 31, 2021, 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 both unrestricted and restricted shares and are carried at fair value.  See note 4 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for discussion of sale restrictions on these shares.  The MetroMile shares held by us are held by Insurance SPAC II Sponsor Entities which were not wholly owned subsidiaries of the Operating LLC.  See compensation and non-controlling interest discussions below.  

 

Other SPAC equity represents equity investments in publicly traded SPACs carried at fair value. 

 

The CLO investments represent investments in the most junior tranche of certain CLOs.  These investments were carried at fair value.  These investments were fully liquidated in 2020.  

 

IMXI represents unrestricted and restricted 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.   This investment is carried at fair value. 

 

The SPAC Fund invests in the equity of SPACs.  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 $3,338.  Also, in any particular year, the revenue share earned by us cannot exceed $2,000. 

 

Operating Expenses

 

Operating expenses increased by $5,016, or 18%, to $32,231 for the three months ended March 31, 2021 from $27,215 for the three months ended March 31, 2020. As discussed in more detail below, the change was comprised of (i) an increase of $12,513 in compensation and benefits; (ii) a decrease of $37 in business development, occupancy, and equipment; (iii) an increase of $210 in subscriptions, clearing, and execution; (iv) an increase of $212 of professional fee and other operating; (v) an increase of $1 of depreciation and amortization; and (vi) a decrease of $7,883 due to an impairment charge recognized in the three months ended March 31, 2020.  

 

 

Compensation and Benefits

 

Compensation and benefits increased by $12,513, or 89%, to $26,647 for the three months ended March 31, 2021 from $14,134 for the three months ended March 31, 2020.

 

COMPENSATION AND BENEFITS

(Dollars in Thousands)

 

   

Three Months Ended March 31,

 
   

2021

   

2020

   

Change

 
Cash compensation and benefits   $ 13,006     $ 13,976     $ (970 )
Equity-based compensation     13,641       158       13,483  

Total

  $ 26,647     $ 14,134     $ 12,513  

 

Cash compensation and benefits in the table above was primarily comprised of salary, incentive compensation, and benefits.  Cash compensation and benefits decreased by $970 to $13,006 for the three months ended March 31, 2021 from $13,976 for the three months ended March 31, 2020.  The decrease was due to a decrease in incentive compensation that is tied to revenue and operating profitability.  Our total headcount increased from 95 at March 31, 2020 to 98 at March 31, 2021.  

 

Equity-based compensation increased by $13,483 to $13,641 for the three months ended March 31, 2021, as compared to $158 for the three months ended March 31, 2020.  Of the $13,641 of equity compensation recognized in 2021, $13,068 was due to equity-based compensation related to the issuance of membership units of the Insurance SPAC II Sponsor Entities to employees of the Company.  This expense was recognized upon the completion of the merger between Insurance SPAC II and MetroMile on February 9, 2021.  No further equity-based compensation expense will be recognized related to membership units of the Insurance SPAC Sponsor II Entities in the future.  Following the business combination, going forward, the membership units of the Insurance SPAC II Sponsor Entities held by employees will be treated as part of the non-controlling interest.  

 

The Insurance SPAC III Sponsor Entities have also issued membership units to employees of the Company.  If Insurance SPAC III  successfully completes a business combination, the Company will also recognize significant equity compensation expense related to these issuances.  The amount of future equity-based compensation expense that will be recognized if this business combination is completed will be dependent upon the total number of founders shares ultimately allocable to employees and the value of the shares upon the completion of the business combination.  See note 4 to our consolidated financial statements included in this Quarterly Report on Form 10-Q. 

 

The remaining $573 of equity-based compensation recognized during the three months ended March 31, 2021 relates to restricted grants of the Company's Common Stock and Operating LLC units.  This amount was an increase of $415 as compared to $158 from the prior year.  This increase was due to a higher grant date fair value and a higher volume of issuances during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.  

 

Business Development, Occupancy, and Equipment

 

Business development, occupancy, and equipment decreased by $37, or 5%, to $719 for the three months ended March 31, 2021 from $756 for the three months ended March 31, 2020.  This decrease was comprised of a decrease in business development of $29 and a decrease in occupancy and equipment of $8. 

 

Subscriptions, Clearing, and Execution 

 

Subscriptions, clearing, and execution increased by $210, or 8%, to $2,790 for the three months ended March 31, 2021 from $2,580 for the three months ended March 31, 2020.  The increase was comprised of an increase in clearing and execution costs of $402 partially offset by a decrease in subscriptions of $192.  

 

Professional Fee and Other Operating Expenses

 

Professional fee and other operating expenses increased by $212, or 12%, to $1,994 for the three months ended March 31, 2021 from $1,782 for the three months ended March 31, 2020. The increase was comprised of an increase in other operating expense of $222; partially offset by a decrease in professional fees of $10. 

 

Depreciation and Amortization

 

Depreciation and amortization increased by $1, or 1%, to $81 for the three months ended March 31, 2021 from $80 for the three months ended March 31, 2020

 

 

Non-Operating Income and Expense

 

Interest Expense, net 

 

Interest expense, net decreased by $591, to $2,014 for the three months ended March 31, 2021 from $2,605 for the three months ended March 31, 2020.  

 

INTEREST EXPENSE

(Dollars in Thousands)

 

   

Three Months Ended March 31,

 
   

2021

   

2020

   

Change

 

Junior subordinated notes

  $ 647     $ 821     $ (174 )

2020 Senior Notes

    133       89       44  

2013 Convertible Notes / 2019 Senior Notes

    71       119       (48 )

2017 Convertible Note

    375       371       4  

2018 FT LOC/2019 FT Revolver/Byline Credit Facility

    65       152       (87 )

Redeemable Financial Instrument - DGC Trust / CBF

    197       690       (493 )

Redeemable Financial Instrument - JKD Capital Partners I LTD

    526       440       86  

Redeemable Financial Instrument - ViaNova Capital Group, LLC

    -       (77 )     77  
    $ 2,014     $ 2,605     $ (591 )

 

See notes 16 and 17 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 $728 to ($835) for the three months ended March 31, 2021 from ($107) for the three months ended March 31, 2020.  See note 11 to our consolidated financial statements included in this Quarterly Report on Form 10-Q. 

 

   

Three Months Ended March 31,

 
   

2021

   

2020

   

Change

 
Insurance SPAC I   $ -     $ (306 )   $ 306  
Insurance SPAC II     (107 )     -       (107 )
Insurance SPAC III     (454 )     -       (454 )
Other SPAC Sponsor Entities     (143 )     -       (143 )
AOI     (97 )     (31 )     (66 )
CK Capital     (34 )     230       (264 )

Total

  $ (835 )   $ (107 )   $ (728 )

 

Income Tax Expense / (Benefit) 

 

The income tax expense / (benefit) increased by $1,240 to income tax expense / (benefit) of $868 for the three months ended March 31, 2021 from ($372) for the three months ended March 31, 2020.  The increase in expense is primarily due to foreign and local current taxes incurred as well as a reduction in our deferred tax asset related to our net operating loss carryforwards.  This reduction is a result of us expecting to utilize a portion of the loss carryforward in 2021.  

 

 

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

 

Net income / (loss) attributable to the non-controlling interest for the three months ended March 31, 2021 and 2020 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. In addition, net income / (loss) attributable to the non-controlling interest also included non-controlling interest related to entities that were consolidated by the Operating LLC but not wholly owned by us.

 

SUMMARY CALCULATION OF NON-CONTROLLING INTEREST

For the Three Months Ended March 31, 2021

 

   

Wholly Owned

   

Other Consolidated

   

Total Operating LLC

   

Cohen &

         
   

Subsidiaries

   

Subsidiaries

   

Consolidated

   

Company Inc.

   

Consolidated

 
Net income / (loss) before tax   $ 667     $ 66,929     $ 67,596             $ 67,596  
Income tax expense / (benefit)     237       -       237       631       868  

Net income / (loss) after tax

    430       66,929       67,359       (631 )     66,728  
Other consolidated subsidiary non-controlling interest     -       29,969       29,969                  

Net income / (loss) attributable to the Operating LLC

    430       36,960       37,390                  

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

                    73.29 %                
Operating LLC non-controlling interest                   $ 27,404                  

  

SUMMARY CALCULATION OF NON-CONTROLLING INTEREST

For the Three Months Ended March 31, 2020

 

   

Wholly Owned

   

Other Consolidated

   

Total Operating LLC

   

Cohen &

         
   

Subsidiaries

   

Subsidiaries

   

Consolidated

   

Company Inc.

   

Consolidated

 
Net income / (loss) before tax   $ (11,850 )   $ (307 )   $ (12,157 )   $ -     $ (12,157 )
Income tax expense / (benefit)     25       -       25       (397 )     (372 )

Net income / (loss) after tax

    (11,875 )     (307 )     (12,182 )     397       (11,785 )
Other consolidated subsidiary non-controlling interest     -       (160 )     (160 )                

Net income / (loss) attributable to the Operating LLC

    (11,875 )     (147 )     (12,022 )                

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

                    70.90 %                
Operating LLC non-controlling interest                   $ (8,523 )                

  

  

(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, United Kingdom, and Irish 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 Securities and Exchange Commission (“SEC”) and Financial Industry Regulatory Authority (“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. CCFEL is regulated by the Central Bank of Ireland (the “CBI”) and each must maintain certain minimum levels of capital. See note 19 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

 

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 August 2, 2019, we announced that we have decided to suspend our quarterly cash dividend. Suspending the $0.20 quarterly dividend is expected to save approximately $1,341 in cash annually. We currently intend to use the related annual cash savings to invest in new business initiatives and improve our financial position. Any future determination to declare and pay dividends will be made at the discretion of our board of directors, after taking into account a variety of factors, including business, financial, and regulatory considerations as well as any limitations under Maryland law or imposed by any agreements governing our indebtedness.  Going forward, the board of directors will re-assess our capital resources and may or may not determine to reinstate the dividend based on that assessment.

 

On December 21, 2020 and August 31, 2020, the Company entered into letter agreements (the “December 2020 Letter Agreement”, and the "August 2020 Letter Agreement”, respectively and, together, the "10b5-1 Plan").  The December 2020 Letter Agreement and the August 2020 Letter Agreement were entered into with Piper Sandler & Co.  The agreements authorized the Agent to use reasonable efforts to purchase, on the Company’s behalf, up to an aggregate purchase price of $2,000 of Common Stock on any day that the NYSE was open for business. The December 2020 Letter Agreement became effective December 23, 2020 and is in effect until December 31, 2021.  The August 2020 Letter Agreement was in effect from August 31, 2020 until August 31, 2021 or until an aggregate purchase price of $2,000 shares had been purchased, which occurred on November 10, 2020. Pursuant to the 10b5-1 Plan, purchases of Common Stock may be made in public and private transactions and must comply with Rule 10b-18 under the Exchange Act.  The 10b5-1 Plan was designed to comply with Rule 10b5-1 under the Exchange Act. 

 

During the three months ended March 31, 2021, we repurchased 38,647 shares in the open market pursuant to the 10b5-1 Plan for a total purchase price of $662. During the three months ended March 31, 2020, no shares were repurchased. All of the repurchases noted above were completed using cash on hand. 

 

During the three months ended March 31, 2021 and 2020, we had the following other significant financing transactions.  See notes 16, 17, and 18 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.  

 

During the three months ended March 31, 2021:

 

 

● 

We repaid $4,000 of redeemable financial instruments.  
 

● 

We made $25,885 of non-controlling interest distributions of which $25,758 were non-cash distributions.  

 

During the three months ended March 31, 2020

 

  We drew $17,500 on the FT Revolver.
 

● 

We raised $4,500 from the issuance of the 2020 Senior Notes. 

 

● 

We repaid $4,386 of the 2019 Senior Notes.

  ●  We repaid $4,777 of the LegacyTexas Credit Facility

 

 

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. During the third quarter of 2010 and for each subsequent quarter through March 31, 2020, the board of directors has declared a dividend. A pro rata distribution has been paid to the other members of the Operating LLC upon the payment of any dividends to stockholders of Cohen & Company Inc.  On August 2, 2019, we announced that we have decided to suspend our quarterly cash dividend.

(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 18 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 17 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, 2021 and December 31, 2020, we maintained cash and cash equivalents of $ 19,471 and $ 41,996, respectively. We generated cash from or used cash for the following activities.

 

 

SUMMARY CASH FLOW INFORMATION

(Dollars in Thousands)

 

.    

Three Months Ended March 31,

 
     

2021

   

2020

 
Cash flow from operating activities     $ (28,150 )   $ 64,470  
Cash flow from investing activities       10,959       30  
Cash flow from financing activities       (5,145 )     12,721  
Effect of exchange rate on cash       (189 )     (71 )

Net cash flow

      (22,525 )     77,150  
Cash and cash equivalents, beginning       41,996       8,304  

Cash and cash equivalents, ending

    $ 19,471     $ 85,454  

 

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, 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.  

 

Three Months Ended March 31, 2020

 

As of March 31, 2020, our cash and cash equivalents were $85,454, representing an increase of $77,150 from December 31, 2019. The increase was attributable to cash provided by operating activities of $64,470, cash provided by investing activities of $30, cash provided by financing activities of $12,721, and the decrease in cash caused by the change in exchange rates of $71.

 

The cash provided by operating activities of $64,470 was comprised of (a) net cash inflows of $100,315 related to working capital fluctuations; (b) net cash outflows of  $34,964 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 $881 (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, equity based compensation, depreciation and amortization, impairment of goodwill, and amortization of discount on debt).

 

The cash provided by investing activities of $30 was comprised of (a) $2,309 of cash received from sales and returns of principal from other investments, at fair value; partially offset by (b) $119 of cash used to purchase other investments, at fair value; (c) $2,097 of cash used for investments in equity method affiliates; and (d) $62 of cash used to purchase furniture and equipment. 

 

The cash provided by financing activities of $12,721 was comprised of (a) $17,500 proceeds from the 2019 FT Revolver and (b) $4,500 in proceeds from issuance of the 2020 Senior Notes; partially offset by (c) $9,163 of repayment of debt, (d) $54 of cash used to net settle equity awards, and (e) $62 in cash used to pay dividends on vested shares. 

 

 

 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:

 

   

For the Three Months Ended March 31,

 
   

2021

   

2020

 

Collateral deposit end of period

  $ 29,275     $ 74,692  

Less: Collateral deposit beginning of period

    41,119       9,524  

Impact to cash flow from operations

  $ (11,844 )   $ 65,168  

 

Regulatory Capital Requirements

 

We have two subsidiaries that are licensed securities dealers: JVB in the United States and CCFEL in Ireland. As a U.S. broker-dealer, JVB is subject to the Uniform Net Capital Rule in Rule 15c3-1 under the Exchange Act. Our Ireland-based subsidiary, CCFEL, is subject to the regulatory supervision and requirements of the CBI.  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, 2021 were as follows.

  

  

MINIMUM NET CAPITAL REQUIREMENTS

(Dollars in Thousands)

 

United States

    250  

Europe

    684  

Total

  $ 934  

 

We operate with more than the minimum regulatory capital requirement in our licensed broker-dealers and at March 31, 2021, total net capital, or the equivalent as defined by the relevant statutory regulations, in our licensed broker-dealers totaled $74,317. See note 19 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, 2021, our total equity on a consolidated basis was $154,672.  However, the total equity of JVB was $102,841.  Of the $51,831 in equity outside of JVB, $44,977 represents non-redeemable non-controlling interests comprised mainly of the non-controlling interests of Insurance SPAC II Sponsor Entities and Insurance SPAC III Sponsor Entities which can not 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 17 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, 2021 and the twelve months ended December 31, 2020 for receivables under resale agreements and securities sold under agreements to repurchase.

 

    For the Three Months Ended March 31, 2021     For the Twelve Months Ended December 31, 2020  

Receivables under resale agreements

               

Period end

    7,299,538       5,716,343  

Monthly average

    6,259,301       6,461,534  

Maximum month end

    7,299,538       8,945,403  

Securities sold under agreements to repurchase

               

Period end

    7,289,275       5,713,212  

Monthly average

    6,253,843       6,486,137  

Maximum month end

    7,289,275       8,960,197  

 

Fluctuations in the balance of our repurchase agreements from period to period and intra-period are dependent on business activity in those periods. The fluctuations in the balances of our receivables under resale agreements over the periods presented were impacted by our clients’ desires to execute collateralized financing arrangements through the repurchase market or other financing products.  Average balances and period end balances will fluctuate based on market and liquidity conditions and we consider such intra-period fluctuations as typical for the repurchase market. Month-end balances may be higher or lower than average period balances.

 

Debt Financing

 

The following table summarizes the Company’s long-term indebtedness and other financing outstanding.  See note 17 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, 2021

   

December 31, 2020

 

Rate Terms

 

Interest (4)

 

Maturity

Non-convertible debt:

                         

12.00% senior note (the "2020 Senior Note")

  $ 4,500     $ 4,500  

Fixed

  12.00%  

January 2022

12.00% senior note (the "2019 Senior Note")

    2,400       2,400  

Fixed

  12.00%  

September 2021 (1)

PPP Loan     2,166       2,166   Fixed   1.00%   May 2022

Contingent convertible debt:

                         

8.00% convertible senior note (the "2017 Convertible Note")

    15,000       15,000  

Fixed

  8.00%  

March 2022 (2)

Less unamortized debt issuance costs

    (322 )     (401 )          
      14,678       14,599            

Junior subordinated notes (3):

                         

Alesco Capital Trust I

    28,125       28,125  

Variable

  4.21%  

July 2037

Sunset Financial Statutory Trust I

    20,000       20,000  

Variable

  4.35%  

March 2035

Less unamortized discount

    (24,563 )     (24,690 )          
      23,562       23,435            
                           
ByLine Bank     -       -   Variable   NA   October 2021
FT Financial Bank N.A. Credit Facility     -       -   Variable   NA   NA

Total

  $ 47,306     $ 47,100            

 

(1)

On September 25, 2019, the Company amended the previously outstanding 2013 Convertible Notes, which were scheduled to mature on September 25, 2019.  The material terms and conditions of the 2013 Convertible Notes remained substantially the same, except that (i) the maturity date changed from September 25, 2019 to September 25, 2020; (ii) the conversion feature in the 2013 Convertible Notes was removed; (iii) the interest rate changed from 8% per annum (9% in the event of certain events of default) to 12% per annum (13% in the event of certain events of default); and (iv) the restrictions regarding the prepayment were removed.  The post amendment notes are referred to herein as the “2019 Senior Notes” and the pre-amendment notes are referred to herein as the “2013 Convertible Notes.” On September 25, 2020, the 2019 Senior Notes were amended again to extend the maturity date from September 25, 2020 until September 25, 2021.

(2)

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, 2020.  

(3)

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, 2021 on a combined basis was 11.50% assuming the variable rate in effect on the last day of the reporting period remains in effect until maturity.

(4)

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

 

Redeemable Financial Instruments 

 

We had the following sources of financing that we account for as redeemable financial instruments.  See note 16 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.

 

 

REDEEMABLE FINANCIAL INSTRUMENTS

(Dollars in thousands)

 

   

As of March 31, 2021

   

As of December 31, 2020

 
JKD Capital Partners I LTD   $ 7,957     $ 7,957  
DGC Trust / CBF     -       4,000  

Total

  $ 7,957     $ 11,957  

 

Off-Balance Sheet Arrangements

 

Other than as described in note 9 (derivative financial instruments) and note 15 (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, 2021



 

Contractual Obligations

 

The table below summarizes our significant contractual obligations as of March 31, 2021 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

March 31, 2021

(Dollars in Thousands)

 

                                         
   

Payment Due by Period

 
   

Total

   

Less than 1 Year

   

1 - 3 Years

   

3 - 5 Years

   

More than 5 Years

 

Operating lease arrangements

  $ 8,488     $ 1,327     $ 2,293     $ 2,002     $ 2,866  
Maturity of 2020 Senior Notes     4,500       4,500       -       -       -  
Interest on 2020 Senior Notes     586       586       -       -       -  

Maturity of EBC 2020 Senior Note

    2,400       2,400       -       -       -  

Interest on EBC 2020 Senior Note

    211       211       -       -       -  

Maturity of 2017 Convertible Note (1)

    15,000       15,000       -       -       -  

Interest on 2017 Convertible Note (1)

    1,427       1,427       -       -       -  

Maturities on junior subordinated notes

    48,125       -       -       -       48,125  

Interest on junior subordinated notes (2)

    31,690       2,052       4,105       6,157       19,376  

Redeemable Financial Instrument - JKD Capital Partners 1 (3)

    7,957       7,957       -       -       -  

Other Operating Obligations (4)

    2,384       1,446       937       1       -  
    $ 122,768     $ 36,906     $ 7,335     $ 8,160     $ 70,367  

 

 

(1)

Assumes the 2017 Convertible Note is not converted prior to maturity.  

 

(2)

The interest on the junior subordinated notes related to Alesco Capital Trust I is variable. The interest rate of 4.21% (based on a 90-day LIBOR rate in effect as of March 31, 2021 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 4.35% (based on a 90-day LIBOR rate in effect as of March 31, 2021 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 its consolidated financial statements. 

 

In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, ReceivablesNonrefundable 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 cash reporting period. This ASU is effective for fiscal years beginning after December 15, 2021, including interim periods within fiscal years beginning after December 15, 2022.  We are currently evaluating the new guidance to determine the impact it may have on our 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 amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022.  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, 2020. 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, 2021, 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, 2020.

 

 

 

 

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, SBA loans, 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, 2021, we would incur a loss of $3,051 if the yield curve rises 100 bps across all maturities and a gain of $3,042 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, 2021, our equity price sensitivity was $10,184 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, 2021, 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 $3,012 as of March 31, 2021.  

 

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.  However, in our GCF repo business, we may enter into a reverse repurchase agreement with a longer term than the matched repurchase agreement. When the maturity dates of the matched agreements are not the same, we are exposed to two risks:

 

 

1.

Interest rate risk:  We are taking risk that the interest rate we pay on the repurchase agreement may increase during the term of the reverse repurchase agreement.  If this happens, we may make lower net interest income or, in some cases, have a net loss on a matched trade.  

 

2.

Funding risk:  We are taking risk that the repurchase agreement counterparty may increase the haircut (i.e. demand higher levels of collateral) at the maturity date of the repurchase agreement or cease funding altogether.  

 

We manage these risks in the following ways:

 

 

1.

We monitor the weighted average maturity of our reverse repurchase agreements as compared to the weighted average maturity of our repurchase agreements on a daily basis.  We limit the difference between the weighted average maturities based on market conditions.

 

2.

We obtain a significantly higher haircut on our reverse repurchase agreements as compared to the required haircut on our repurchase agreements.  This excess haircut provides a cushion if the repurchase agreement counterparty were to increase its required haircut.  

 

3.

We limit the practice of having longer term reverse repurchase agreements as compared to matched repurchase agreements to high quality collateral types that are typically very liquid and have stable funding markets.  

 

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, 2021. 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, 2021.  

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

PART II. OTHER INFORMATION 

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

In addition to the information set forth in this Quarterly Report on Form 10-Q, you should also carefully review and consider the risk factors contained in our other reports and periodic filings with the SEC, including without limitation the risk factors contained under the caption “Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, 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, 2020.

 

Recent guidance from the SEC may require the warrants of Insurance SPAC III be accounted for as liabilities rather than as equity and may result in the restatement of the previously issued financial statements of  Insurance SPAC III.  

 

On April 12, 2021, the staff of the SEC issued a public statement entitled “Staff Statement on Accounting and Reporting Considerations for Warrants issued by Special Purpose Acquisition Companies (“SPACs”)” (the “Statement”). In the Statement, the SEC staff expressed its view that certain terms and conditions common to SPAC warrants may require the warrants to be classified as liabilities on the SPAC’s balance sheet as opposed to equity. Since issuance, the warrants of Insurance SPAC III were accounted for as equity on its balance sheets. As a result of the Statement, Insurance SPAC III is evaluating its accounting for warrants.  If Insurance SPAC III concludes that its warrants should be presented as liabilities with subsequent fair value remeasurement, it will then likely restate its previously issued financial statements.

 

A restatement of Insurance SPAC III’s financial statements may cause a delay for Insurance SPAC III in consummating a business combination and will force its management to focus time and effort on obtaining valuations for the warrants and restating its financials.  Any time management spends on a restatement cannot be spent on finding a suitable business combination target.  Because Insurance SPAC III must find a business combination target within a fixed period of time, this may increase the chance that Insurance SPAC III is unable to find a suitable target company causing it to liquidate and rendering our investment worthless.

 

Further, revised accounting may impact the target company in a business combination.  Treating the warrants as liabilities would be less desirable for most companies.  Therefore, target companies may demand changes to the warrant structure that could negatively impact our economic returns or could further reduce the likelihood that a successful business combination is completed within the limited timeframe allowed.   

 

Any future inquiries from the SEC or NYSE American as a result of a restatement of the financial statements of Insurance SPAC III would, regardless of the outcome, likely consume a significant amount of its resources in addition to those resources consumed in connection with the restatement itself.  A restatement of Insurance SPAC III’s financial statements would result in unanticipated costs and may result in a loss of some or all of the funds which we have invested in and may lend to Insurance SPAC III to cover its administrative costs.

 

If we are unable to complete a business transaction within the allotted time as a result of a restatement of Insurance SPAC III’s financial statements, this may result in potential loss of investor confidence. Such a loss in investor confidence could negatively affect our SPAC franchise and any other SPACs which we would sponsor in the future and could materially harm our business and results of operations. 

 

A restatement of Insurance SPAC IIIs financial statements may subject it to additional risks and uncertainties, including increased professional costs and the increased possibility of legal proceedings.

 

A restatement of Insurance SPAC III’s financial statements may subject it to additional risks and uncertainties, including, among others, increased professional fees and expenses and time commitment that may be required to address matters related to a restatement, and scrutiny of the SEC and other regulatory bodies which could cause investors to lose confidence in Insurance SPAC III’s reported financial information and could subject Insurance SPAC III to civil or criminal penalties or shareholder litigation. Insurance SPAC III could face monetary judgments, penalties or other sanctions that could have a material adverse effect on its business, financial condition and results of operations and could cause its stock price to decline.

 

 

 

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. CCFEL is regulated by the CBI in Ireland and must maintain certain minimum levels of capital. See note 19 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

 

Issuer Purchases of Equity Securities

 

Period

 

Total Number of Shares Purchased

   

Average Price Paid Per Share

   

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

   

Maximum Dollar Value of Shares that May Yet be Purchased under the Plans or Programs (1)

 

January 2021

    29,388     $ 16.93       29,388     $ 35,064  

February 2021

    7,289     $ 17.78       7,289     $ 34,934  

March 2021

    1,970     $ 17.72       1,970     $ 34,899  

Total

    38,647               38,647          

 

 

Item 6. Exhibits

 

Exhibit No.

Description

10.1

Amendment No. 3 to Employment Agreement, dated February 3, 2021, by and between Cohen & Company Inc. and Joseph W. Pooler, Jr. (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the SEC on February 5, 2021).



 

10.2

Form of Restricted Stock Award under Cohen & Company Inc. 2020 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.53 to the Companys Current Report on Form 10-K filed with the SEC on March 5, 2021).



 

10.3 Form of Indemnification Agreement by and between Cohen & Company, LLC and each of its directors and officers (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the SEC on March 12, 2021).
   

31.1

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



 

31.2

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



 

32.1

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



 

32.2

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



 

101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets at March 31, 2021 and December 31, 2020, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended and 2020, (iii) the Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2021 and 2020, (iv) the Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020, and (v) Notes to Consolidated Financial Statements.**



 

*

 

Filed herewith.

**

 

Furnished herewith.

 

 

 

SIGNATURES

 

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

  

 

Cohen & Company Inc.

 



 

 

 

 

By:

/s/ LESTER R. BRAFMAN

 

 

 

Lester R. Brafman

 

Date: May 6, 2021

 

Chief Executive Officer

 



 

 

 

Cohen & Company Inc.

 



 

 

 

 

By:

/s/ JOSEPH W. POOLER, JR.

 

 

 

Joseph W. Pooler, Jr.

 

Date: May 6, 2021

 

Executive Vice President, Chief Financial Officer, and Treasurer

 

 

 

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