0001270436 Cohen & Co Inc. false --12-31 Q3 2022 0.001 0.001 50,000,000 50,000,000 27,413,098 27,413,098 27,413,098 27,413,098 0.01 0.01 100,000,000 100,000,000 1,716,942 1,716,942 1,697,443 1,697,443 288,059 366,293 0 0 0 0 0 0 0 0 3 1 0.33 1 30 30 0 0 4,832 4,642 190 3,079 0 10.00 8.00 6.78 6.40 49,614 1,489 0 2,250 15,000 17,500 25,000 6.0 7.0 10 10 10 Represents the interest rate in effect as of the last day of the reporting period. The holder of the 2017 Convertible Note may convert all or any part of the outstanding principal amount at any time prior to maturity into units of membership interests of the Operating LLC at a conversion price of $1.45 per unit, subject to customary anti-dilution adjustments. Units of membership interests in the Operating LLC not held by Cohen & Company Inc. may, with certain restrictions, be redeemed and exchanged into shares of the Cohen & Company Inc. common stock, par value $0.01 per share (“Common Stock”) on a ten-for-one basis. Therefore, the 2017 Convertible Note can be converted into Operating LLC units of membership interests and then redeemed and exchanged into Common Stock at an effective conversion price of $14.50. See note 20 to the Annual Report on Form 10-K for the year ended December 31, 2021. Effective March 20, 2022, the 2017 Note was converted into 10,344,827 units.December 31,2021. Effective March 20, 2022, the 2017 Note was converted into 10,344,827 units. Goodwill and intangible assets are allocated to the Capital Markets and Asset Management business segments as indicated in the table from above. As a practical expedient, the Company uses NAV (or its equivalent) to measure the fair value of its investments in the U.S. Insurance JV, the SPAC Fund and the CREO JV. The U.S. Insurance JV invests in USD denominated debt issued by small insurance and reinsurance companies. The SPAC Fund invests in equity securities of SPACs. The CREO JV invests in primarily multi-family commercial real estate mortgage-backed loans and below-investment grade rated tranches in CRE CLOs collateralized by mostly transitional commercial real estate mortgage-backed loans. See note 4. According to ASC 820, these investments are not categorized within the valuation hierarchy. The Operating LLC units of membership interest not held by Cohen & Company Inc. (that is, those held by the non-controlling interest) may be redeemed and exchanged into shares of the Company on a ten-for-one basis. The Operating LLC units of membership interests not held by Cohen & Company Inc. are redeemable, at the member’s option at any time, for (i) cash in an amount equal to the average of the per share closing prices of the Common Stock for the ten consecutive trading days immediately preceding the date the Company receives the member’s redemption notice, or (ii) at the Company’s option, one tenth of a share of the Common Stock, subject, in each case, to appropriate adjustment upon the occurrence of an issuance of additional shares of the Common Stock as a dividend or other distribution on the outstanding Common Stock, or a further subdivision or combination of the outstanding shares of the Common Stock. These units are not included in the computation of basic earnings per share. These units enter into the computation of diluted net income (loss) per common share when the effect is not anti-dilutive using the if-converted method. The CREO JV invests in primarily multi-family commercial real estate mortgage-backed loans and below-investment grade rated tranches in CRE CLOs collateralized by mostly transitional commercial real estate mortgage-backed loans. See note 4. 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Unrestricted Operating LLC membership units exchangeable into Cohen & Company Inc. shares 3,965,405 - 3,658,204 - 2017 Convertible Note Units - 1,034,483 298,851 - Restricted Common Stock 6,211 102,038 10,334 - Restricted Operating LLC units 1,963 77,540 4,087 - 3,973,579 1,214,061 3,971,476 - The SPAC Fund invests in equity interests of SPACs. 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 and such amounts are excluded in business segment reporting to the chief operating decision maker. The U.S. Insurance JV invests in USD denominated debt issued by small and medium sized insurance and reinsurance companies. Unallocated includes certain expenses incurred by indirect overhead and support departments (such as the executive, finance, legal, information technology, human resources, risk, compliance and other similar overhead and support departments). Some of the items not allocated include: (1) operating expenses (such as cash compensation and benefits, equity-based compensation expense, professional fees, travel and entertainment, consulting fees, and rent) related to support departments excluding certain departments that directly support the Capital Markets business segment; (2) interest expense on debt; and (3) income taxes. Management does not consider these items necessary for an understanding of the operating results of these business segments and such amounts are excluded in business segment reporting to the chief operating decision maker. An adjustment is included because the Company would have incurred a higher income tax expense or realized a higher income tax benefit, as applicable, if the Operating LLC units of membership interests had been converted at the beginning of the period. The junior subordinated notes listed represent debt the Company owes to the two trusts noted above. The total par amount owed by the Company to the trusts is $49,614. However, the Company owns the common stock of the trusts in a total par amount of $1,489. The Company pays interest (and at maturity, principal) to the trusts on the entire $49,614 junior notes outstanding. However, the Company receives back from the trusts the pro rata share of interest and principal on the common stock held by the Company. These trusts are VIEs and the Company does not consolidate them even though the Company holds the common stock. The Company carries the common stock on its balance sheet at a value of $0. The junior subordinated notes are recorded at a discount to par. 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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


  

FORM 10-Q


 

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

 

For the quarterly period ended September 30, 2022

 

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 November 1, 2022, there were 1,716,942 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

September 30, 2022

  



 

 

 

 

Page 

PART I. FINANCIAL INFORMATION

 



 

 

Item 1.

Financial Statements (Unaudited)

5



 

 

 

Consolidated Balance Sheets—September 30, 2022 and December 31, 2021

5



 

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss)—Three and Nine Months Ended September 30, 2022 and 2021

6



 

 

 

Consolidated Statements of Changes in Equity—Three and Nine Months Ended September 30, 2022 and 2021

7



 

 

 

Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2022 and 2021

9



 

 

 

Notes to Consolidated Financial Statements (Unaudited)

10



 

 

Item 2.

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

59



 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

94



 

 

Item 4.

Controls and Procedures

95



 

Part II. OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

96



 

 

Item 1A.

Risk Factors

96



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

97



 

 

Item 6.

Exhibits

98



 

Signatures

99

 

 

 

 

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, including through our SPAC Fund and SPAC Series Funds

 

our role as asset manager and sponsor in our SPAC franchise

 

fair value of assets; and

 

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

 

These forward-looking statements represent our intentions, plans, expectations, assumptions, and beliefs about future events and are subject to risks, uncertainties, and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties, and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You should consider the areas of risk and uncertainty described above and discussed under “Item 1A — Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Actual results may differ materially because of various factors, some of which are outside our control, including the following:

 

 

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

 

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

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

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

 

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

 

losses due to unidentified or unanticipated risks;

 

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

 

a lack of liquidity, i.e., ready access to funds for use in our businesses; or the availability of financing at prohibitive rates;

 

the ability to attract and retain personnel;

 

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

  the ability to pay dividends;
 

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

 

unanticipated market closures due to inclement weather or other disasters;

 

the volume of trading in securities including collateralized securities transactions;

 

the liquidity in capital markets;

 

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

 

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

 

competitive conditions in each of our business segments;

 

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

  the ability of the Company to collect its outstanding reverse repo balance from First Guaranty Mortgage Corporation; 
 

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

 

the potential for litigation and other regulatory liability.

 

 

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

 

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

 

Certain Terms Used in this Quarterly Report on Form 10-Q 

 

In this Quarterly Report on Form 10-Q, unless otherwise noted or as the context otherwise requires, the “Company,” “we,” “us,” and “our” refer to Cohen & Company Inc. (formerly Institutional Financial Markets, Inc.), a Maryland corporation, and its subsidiaries on a consolidated basis; and “Cohen & Company, LLC” (formerly IFMI, LLC) or the “Operating LLC” refer to the main operating subsidiary of the Company. 

 

JVB Holdings” refers to JVB Financial Holdings, L.P., a wholly owned subsidiary of the Operating LLC; “JVB” refers to J.V.B. Financial Group, LLC, a wholly owned broker-dealer subsidiary of JVB Holdings; "CCFESA" refers to Cohen & Company Financial Europe Limited S.A., a majority owned subsidiary regulated by the Autorite de Controle Prudentiel et de Resolution ("ACPR") in France; “CCFEL” refers to Cohen & Company Financial (Europe) Limited, a wholly owned subsidiary of the Operating LLC formerly regulated by the Central Bank of Ireland ( the “CBI”).  

 

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

 

 

 

 

PART I. FINANCIAL INFORMATION 

 

ITEM 1. FINANCIAL STATEMENTS.

 

COHEN & COMPANY INC.

 

CONSOLIDATED BALANCE SHEETS 

(Dollars in Thousands) 

 

   

September 30, 2022

         
   

(unaudited)

   

December 31, 2021

 

Assets

               

Cash and cash equivalents

  $ 47,287     $ 50,567  

Receivables from brokers, dealers, and clearing agencies

    121,922       68,392  

Due from related parties

    1,764       4,581  

Other receivables

    20,739       3,203  

Investments-trading

    271,823       223,865  

Other investments, at fair value

    37,726       56,033  

Receivables under resale agreements

    699,658       3,175,645  

Investments in equity method affiliates

    13,466       48,238  

Deferred income taxes

    8,173       11,513  

Goodwill

    109       109  

Right-of-use asset - operating leases

    9,980       10,273  

Other assets

    3,466       3,885  

Total assets

  $ 1,236,113     $ 3,656,304  
                 

Liabilities

               

Payables to brokers, dealers, and clearing agencies

  $ 132,412     $ 160,896  

Accounts payable and other liabilities

    28,506       22,819  

Accrued compensation

    19,325       22,577  

Trading securities sold, not yet purchased

    152,079       62,512  

Other investments sold, not yet purchased, at fair value

    910       2,488  

Securities sold under agreements to repurchase

    749,673       3,171,415  

Lease liability - operating leases

    10,739       10,813  

Redeemable financial instruments

    7,957       7,957  

Debt

    28,879       43,394  

Total liabilities

    1,130,480       3,504,871  
                 

Commitments and contingencies (See note 21)

                 
                 

Stockholders' Equity:

               

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

    27       27  

Common Stock, $0.01 par value per share, 100,000,000 shares authorized, 1,716,942 and 1,697,443 shares issued and outstanding, respectively, including 288,059 and 366,293 unvested or restricted share awards, respectively

    17       17  

Additional paid-in capital

    72,460       72,006  

Accumulated other comprehensive loss

    (1,005 )     (905 )

Accumulated deficit

    (21,793 )     (9,204 )

Total stockholders' equity

    49,706       61,941  

Non-controlling interest

    55,927       89,492  

Total equity

    105,633       151,433  

Total liabilities and equity

  $ 1,236,113     $ 3,656,304  

( 

 

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 September 30,

   

Nine Months Ended September 30,

 
   

2022

   

2021

   

2022

   

2021

 

Revenues

                               

Net trading

  $ 7,966     $ 16,599     $ 30,365     $ 54,181  

Asset management

    3,456       1,856       7,243       5,787  

New issue and advisory

    13,235       8,838       20,486       11,527  

Principal transactions and other income (loss)

    (1,192 )     (20,709 )     (26,157 )     47,831  

Total revenues

    23,465       6,584       31,937       119,326  
                                 

Operating expenses

                               

Compensation and benefits

    15,227       20,577       41,320       61,414  

Business development, occupancy, equipment

    1,234       869       3,777       2,375  

Subscriptions, clearing, and execution

    2,112       2,581       6,025       7,745  

Professional fee and other operating

    1,905       1,585       5,593       5,280  

Depreciation and amortization

    139       90       414       258  

Total operating expenses

    20,617       25,702       57,129       77,072  
                                 

Operating income (loss)

    2,848       (19,118 )     (25,192 )     42,254  
                                 

Non-operating income (expense)

                               

Interest expense, net

    (1,346 )     (1,731 )     (3,803 )     (5,527 )

Income (loss) from equity method affiliates

    618       2,857       (14,530 )     7,512  

Other non-operating income

    -       -       -       2,127  

Income (loss) before income tax expense (benefit)

    2,120       (17,992 )     (43,525 )     46,366  
                                 

Income tax expense (benefit)

    1,761       (248 )     3,534       577  

Net income (loss)

    359       (17,744 )     (47,059 )     45,789  

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

    (109 )     (3,094 )     (18,980 )     17,837  

Enterprise net income (loss)

    468       (14,650 )     (28,079 )     27,952  

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

    1,387       (11,221 )     (17,691 )     20,301  

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

  $ (919 )   $ (3,429 )   $ (10,388 )   $ 7,651  

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

                               

Income (loss) per common share-basic:

                               

Basic income (loss) per common share

  $ (0.64 )   $ (2.61 )   $ (7.33 )   $ 6.71  

Weighted average shares outstanding-basic

    1,428,883       1,314,554       1,417,358       1,140,149  

Income (loss) per common share-diluted:

                               

Diluted income (loss) per common share

  $ (0.64 )   $ (3.46 )   $ (7.33 )   $ 5.31  

Weighted average shares outstanding-diluted

    1,428,883       4,170,321       1,417,358       5,212,247  
                                 

Comprehensive income (loss)

                               

Net income (loss)

  $ 359     $ (17,744 )   $ (47,059 )   $ 45,789  

Other comprehensive income (loss) item:

                               

Foreign currency translation adjustments, net of tax of $0

    (127 )     (65 )     (392 )     (134 )

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

    (127 )     (65 )     (392 )     (134 )

Comprehensive income (loss)

    232       (17,809 )     (47,451 )     45,655  

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

    1,184       (14,404 )     (36,958 )     38,043  

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

  $ (952 )   $ (3,405 )   $ (10,493 )   $ 7,612  

 

 

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.

                 
   

Nine Months Ended September 30, 2022

                 
   

Preferred Stock

   

Common Stock

    Additional Paid-In Capital    

Retained Earnings (Accumulated Deficit)

   

Accumulated Other Comprehensive Income (Loss)

   

Total Stockholders' Equity

   

Non-controlling Interest

   

Total Equity

 
                                                                 
                                                                 

December 31, 2021

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

Net (loss)

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

Other comprehensive (loss)

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

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

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

Equity-based compensation

    -       -       338       -       -       338       766       1,104  

Shares withheld for employee taxes

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

Dividends/distributions to convertible non-controlling interest

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

Convertible non-controlling interest investment

    -               -       -       -       -       15,000       15,000  

Non-convertible non-controlling interest investment

    -       -       -       -       -       -       6       6  

Non-convertible non-controlling interest distributions

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

March 31, 2022

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

Net (loss)

    -       -       -       (1,857 )     -       (1,857 )     (10,395 )     (12,252 )

Other comprehensive (loss)

    -       -       -       -       (53 )     (53 )     (146 )     (199 )

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

    -       -       (89 )     -       1       (88 )     88       -  

Equity-based compensation

    -       -       287       -       -       287       795       1,082  

Shares withheld for employee taxes

    -       -       (4 )     -       -       (4 )     (13 )     (17 )

Dividends/distributions to convertible non-controlling interest

    -       -       -       (362 )     -       (362 )     (1,060 )     (1,422 )

Non-convertible non-controlling interest investment

    -       -       -       -       -       -       3       3  

Non-convertible non-controlling interest distributions

    -       -       -       -       -       -       (2,640 )     (2,640 )

June 30, 2022

  $ 27     $ 17     $ 72,174     $ (20,516 )   $ (972 )   $ 50,730     $ 55,303     $ 106,033  

Net income (loss)

    -       -       -       (919 )     -       (919 )     1,278       359  

Other comprehensive (loss)

    -       -       -       -       (33 )     (33 )     (94 )     (127 )

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

    -       -       -       -       -       -       -       -  

Equity-based compensation

    -       -       286       -       -       286       793       1,079  

Shares withheld for employee taxes

    -       -       -       -       -       -       -       -  

Dividends/distributions to convertible non-controlling interest

    -       -       -       (358 )     -       (358 )     (1,000 )     (1,358 )

Non-convertible non-controlling interest investment

    -       -       -       -       -       -       -       -  

Non-convertible non-controlling interest distributions

    -       -       -       -       -       -       (353 )     (353 )

September 30, 2022

  $ 27     $ 17     $ 72,460     $ (21,793 )   $ (1,005 )   $ 49,706     $ 55,927     $ 105,633  

 

 

   

Cohen & Company Inc.

                 
   

Nine Months Ended September 30, 2021

                 
   

Preferred Stock

   

Common Stock

   

Additional Paid-In Capital

   

Retained Earnings (Accumulated Deficit)

   

Accumulated Other Comprehensive Income (Loss)

   

Total Stockholders' Equity

   

Non-controlling Interest

   

Total Equity

 
                                                                 
                                                                 

December 31, 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 loss

    -       -       -       -       (70 )     (70 )     (28 )     (98 )

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

    -       -       926       -       4       930       (930 )     -  

Equity-based compensation and vesting of shares

    -       -       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 to convertible non-controlling interest

    -       -       -       (7 )     -       (7 )     (144 )     (151 )

Non-convertible non-controlling interest investment

    -       -       -       -       -       -       23       23  

Non-convertible non-controlling interest distributions

    -       -       -       -       -       -       (25,885 )     (25,885 )

March 31, 2021

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

Net income (loss)

    -       -       -       1,725       -       1,725       (4,920 )     (3,195 )

Other comprehensive income

    -       -       -       -       7       7       22       29  

Common stock issued, net

    -       1       2,672       -       -       2,673       -       2,673  

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

    -       -       1,449       -       (18 )     1,431       (1,431 )     -  

Equity-based compensation and vesting of shares

    -       -       145       -       -       145       382       527  

Purchase and retirement of Common Stock

    -       -       (7 )     -       -       (7 )     -       (7 )

Non-convertible non-controlling interest investment

    -       -       -       -       -       -       2,506       2,506  

Non-convertible non-controlling interest distributions

    -       -       -       -       -       -       (30,769 )     (30,769 )

June 30, 2021

  $ 27     $ 14     $ 69,610     $ (9,268 )   $ (898 )   $ 59,485     $ 66,951     $ 126,436  

Net income (loss)

    -       -       -       (3,429 )     -       (3,429 )     (14,315 )     (17,744 )

Other comprehensive income

    -       -       -       -       24       24       (89 )     (65 )

Common stock issued, net

    -       2       6,401       -       -       6,403       -       6,403  

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

    -       -       (4,398 )     -       5       (4,393 )     4,393       -  

Equity-based compensation and vesting of shares

    -       -       182       -       -       182       392       574  

Shares withheld for employee taxes

                    (5 )                     (5 )     (12 )     (17 )

Purchase and retirement of Common Stock

    -       -       (187 )     -       -       (187 )     -       (187 )

Dividends/distributions to convertible non-controlling interest

                            (332 )             (332 )     (714 )     (1,046 )

Non-convertible non-controlling interest investment

    -       -       -       -       -       -       7,023       7,023  

Non-convertible non-controlling interest distributions

    -       -       -       -       -       -       (4,215 )     (4,215 )

September 30, 2021

  $ 27     $ 16     $ 71,603     $ (13,029 )   $ (869 )   $ 57,748     $ 59,414     $ 117,162  

    

  

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

 

COHEN & COMPANY INC. 

 

Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

 

   

Nine Months Ended September 30,

 
   

2022

   

2021

 

Operating activities

               

Net income (loss)

  $ (47,059 )   $ 45,789  

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

               

Equity-based compensation

    3,265       14,742  

Accretion of income on other investments, at fair value

    -       -  

Loss (gain) on other investments, at fair value

    26,451       (46,259 )

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

    525       (782 )

(Income) loss from equity method affiliates

    14,530       (7,512 )

Depreciation and amortization

    414       258  

Amortization of discount on debt

    485       638  

Deferred tax provision (benefit)

    3,340       (318 )

Other non-operating income - forgiveness of debt

          (2,127 )

Change in operating assets and liabilities, net:

               

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

    (82,014 )     (56,864 )

Change in receivables from / payables to related parties, net

    2,817       (187 )

(Increase) decrease in other receivables

    (17,536 )     (11,039 )

(Increase) decrease in investments-trading

    (47,958 )     54,278  

(Increase) decrease in receivables under resale agreements

    2,475,987       (1,224,811 )

(Increase) decrease in other assets

    780       (5,271 )

Increase (decrease) in accounts payable and other liabilities

    5,647       6,949  

Increase (decrease) in accrued compensation

    (3,252 )     10,060  

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

    89,567       5,181  

Increase (decrease) in securities sold under agreements to repurchase

    (2,421,742 )     1,214,306  

Net cash provided by (used in) operating activities

    4,247       (2,969 )

Investing activities

               

Purchase of other investments, at fair value

    (8,651 )     (88,012 )

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

    (5,994 )     (56,243 )

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

    15,791       87,614  

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

    3,054       53,951  

Investment in equity method affiliate

    (617 )     (1,537 )

Distribution from equity method affiliate

    75       -  

Purchase of furniture, equipment, and leasehold improvements

    (482 )     (679 )

Net cash provided by (used in) investing activities

    3,176       (4,906 )

Financing activities

               

Proceeds from debt

    2,250       -  

Repayment of debt

    (2,250 )     (2,400 )

Repayments of redeemable financial instruments

    -       (4,000 )

Cash used to net share settle equity awards

    (234 )     (378 )

Proceeds from issuance of Common Stock

    -       9,076  

Purchase and retirement of Common Stock

    -       (856 )

Cohen & Company Inc. dividends

    (2,201 )     (339 )

Convertible non-controlling interest distributions

    (5,535 )     (725 )

Non-convertible non-controlling interest investment

    9       9,552  

Non-convertible non-controlling interest distributions

    (2,236 )     (1,926 )

Net cash provided by (used in) financing activities

    (10,197 )     8,004  

Effect of exchange rate on cash

    (506 )     (295 )

Net increase (decrease) in cash and cash equivalents

    (3,280 )     (166 )

Cash and cash equivalents, beginning of period

    50,567       41,996  

Cash and cash equivalents, end of period

  $ 47,287     $ 41,830  

 

 

 

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 and SPAC markets. As of September 30, 2022, the Company had $2.15 billion in assets under management (“AUM”) of which 53.8% or $1.16 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; "CCFESA" refers to Cohen & Company Financial Europe Limited S.A., a majority owned subsidiary regulated by the Autorite de Controle Prudentiel et de Resolution ("ACPR") in France. “CCFL” refers to Cohen & Company Financial Limited (formerly known as EuroDekania Management LTD), a subsidiary formerly regulated by the Financial Conduct Authority (formerly known as Financial Services Authority) in the United Kingdom; “CCFEL” refers to Cohen & Company Financial (Europe) Limited, a subsidiary formerly regulated by the Central Bank of Ireland in Ireland.

 

The Company’s business is organized into the following 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, U.S. government bonds, U.S. government agency securities, brokered deposits and certificates of deposit (“CDs”) for small banks, and hybrid capital of financial institutions including trust preferred securities (“TruPS”), whole loans, and other structured financial instruments. The Company also offers execution and brokerage services for equity products. The Company operates its capital markets activities primarily through its subsidiaries: JVB in the United States, and CCFESA in Europe.  A division of JVB, Cohen & Company Capital Markets is the Company's full-service boutique investment banking platform focusing on SPAC advisory, capital markets advisory, and M&A advisory, with clients primarily in the financial technology (commonly referred to as "fintech") and SPAC spaces.  

 

Asset Management: The Company’s Asset Management business segment manages assets within CDOs, managed accounts, joint ventures, and investment funds (collectively referred to as “Investment Vehicles”). A CDO is a form of secured borrowing. The borrowing is secured by different types of fixed income assets such as corporate or mortgage loans or bonds. The borrowing is in the form of a securitization, which means that the lenders are actually investing in notes backed by the assets. In the event of default, the lenders will have recourse only to the assets securing the loan. The Company’s Asset Management business segment includes its fee-based asset management operations, which include ongoing base and incentive management fees.

 

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

 

10

 

The Company generates its revenue by business segment primarily through the following activities.

 

Capital Markets

 

 

● 

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

 

● 

Net interest income on the Company’s matched book repo financing activities; and

 

● 

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

 

Asset Management

 

 

● 

Asset management fees for the Company’s on-going asset management services provided to certain Investment Vehicles, which may include fees both senior and subordinate to the securities in the Investment Vehicle, and incentive management fees earned based on the performance of the various Investment Vehicles.

 

Principal Investing

 

 

● 

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

 

● 

Income and loss earned on equity method investments.

 

 

2. BASIS OF PRESENTATION

 

The financial statements of the Company included herein were prepared in conformity with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim month periods. All intercompany accounts and transactions have been eliminated in consolidation. The results for the nine months ended September 30, 2022 and 2021 are not necessarily indicative of the results for the entire year or any subsequent interim period. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

 

Capitalized terms used herein without definition have the meanings ascribed to them in the Annual Report on Form 10-K for the year ended December 31, 2021.  

 

CORRECTION OF AN IMMATERIAL ERROR IN PREVIOUSLY ISSUED FINANCIAL STATEMENTS

 

During the three months ended March 31, 2022, the Company determined that it had made an error when calculating its December 31, 2021, deferred tax asset and current tax payable related to its net operating loss carryforwards in certain local jurisdictions.  Accordingly, the Company recorded an adjustment in that period and revised the December 31, 2021 balances presented herein.  The below table shows the line items impacted and compares the amounts as previously stated to the revised amounts included in Item 1 of this report.  

 

The balance sheet amounts shown below are as of December 31, 2021.  The income statement amounts are for the year ended December 31, 2021.  

 

Balance Sheet

    As Stated       Revised       Change  

Deferred income taxes

  $ 9,468     $ 11,513     $ 2,045  

Accounts payable and other liabilities

    22,701       22,819       118  

Accumulated deficit

    (9,730 )     (9,204 )     526  

Non-controlling interest

  $ 88,091     $ 89,492     $ 1,401  
                         

Income Statement

                       

Income tax expense (benefit)

  $ (1,614 )   $ (3,541 )   $ (1,927 )

Net Income (loss)

    72,111       74,038       1,927  

Net Income attributable to non-controlling interests

    60,829       62,230       1,401  

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

  $ 11,282     $ 11,808     $ 526  
                         

Basic Earnings Per Share

  $ 9.50     $ 9.95     $ 0.45  

Diluted Earnings Per Share

  $ 7.48     $ 7.83     $ 0.35  

 

11

 
 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A. Adoption of New Accounting Standards

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):  Simplifying the Accounting for Income Taxes. This ASU is intended to simplify accounting for income taxes. It removes specific exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application.  The Company’s adoption of the provisions of ASU 2019-12, effective January 1, 2021, did not have an effect on the Company’s consolidated financial statements.

 

In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.  This ASU clarifies certain accounting topics impacted by Topic 321 Investments-Equity Securities. These topics include measuring equity securities using the measurement alternative, how the measurement alternative should be applied to equity method accounting, and certain forward contracts and purchased options which would be accounted for under the equity method of accounting upon settlement or exercise. The Company’s adoption of the provisions of ASU 2020-01, effective January 1, 2021, did not have an effect on the Company’s consolidated financial statements.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. Certain aspects of this topic were later enhanced and clarified in January 2021 when the FASB issued ASU 2021-01 Reference Rate Reform (Topic 848).  These ASUs provides temporary optional guidance to ease the burden in accounting for reference rate reform by providing optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.  The ASU is intended to help stakeholders during the global market-wide reference rate transition period and will be in effect for a limited time through December 31, 2022. The Company’s adoption of the provisions of ASU 2020-04 and ASU 2021-01, effective March 12, 2020, did not have an effect on the Company’s consolidated financial statements.

 

In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, 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 each reporting period. The Company’s adoption of the provisions of ASU 2020-08, effective January 1, 2022, did not have an effect on the Company’s consolidated financial statements.

 

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

 

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

  

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

  

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

  

B. Recent Accounting Developments 

 

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

 

In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings ("TDRs") and Vintage Disclosures.  The amendments in this ASU eliminate TDR recognition and measurement guidance and instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan.  The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.  The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements. 

 

12

 

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

 

C. Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

Other investments sold, not yet purchased:  These amounts are carried at fair value. The fair value is based on quoted market prices of an active exchange, independent broker market quotations, or valuation models when quotations are not available.

 

Receivables under resale agreements: Receivables under resale agreements are carried at their contracted resale price, have short-term maturities, and are repriced frequently or bear market interest rates and, accordingly, these contracts are at amounts that approximate fair value. The estimated fair value measurements of receivables under resale agreements are based on observations of actual market activity and are generally classified within level 2 of the valuation hierarchy.

 

Trading securities sold, not yet purchased: These amounts are carried at fair value. The fair value is based on quoted market prices of an active exchange, independent market quotations, market price quotations from third party pricing services, or valuation models when quotations are not available.

 

Securities sold under agreements to repurchase: The liabilities for securities sold under agreements to repurchase are carried at their contracted repurchase price, have short-term maturities, and are repriced frequently or bear market interest rates and accordingly, these contracts are carried at amounts that approximate fair value. The estimated fair value measurements of securities sold under agreements to repurchase are based on observations of actual market activity and are generally classified within level 2 of the valuation hierarchy.

 

Redeemable financial instruments: The liabilities for redeemable financial instruments are carried at their redemption value, which approximates fair value. The estimated fair value measurement of the redeemable financial instruments is classified within level 3 of the valuation hierarchy. 

 

Debt: These amounts are carried at outstanding principal less unamortized discount and deferred financing costs. However, a substantial portion of the debt was assumed in the AFN Merger and recorded at fair value as of that date. As of September 30, 2022 and December 31, 2021, the fair value of the Company’s debt was estimated to be $32,039 and $54,284, respectively. The estimated fair value measurements of the debt are generally based on discounted cash flow models prepared by the Company’s management primarily using discount rates for similar instruments issued to companies with similar credit risks to the Company and are generally classified within level 3 of the value hierarchy.

 

Derivatives: These amounts are carried at fair value. Derivatives may be included as a component of investments-trading; trading securities sold, not yet purchased; other investments, at fair value; and other investments, sold not yet purchased. The fair value is generally based on quoted market prices on an exchange that is deemed to be active for derivative instruments such as foreign currency forward contracts and Eurodollar futures.  For derivative instruments, such as TBAs and other extended settlement trades, the fair value is generally based on market price quotations from third party pricing services.

 



 

 

 

4. OTHER RECENT BUSINESS TRANSACTIONS OR EVENTS 

 

Conversion of the 2017 Convertible Note

 

On March 10, 2017, the Operating LLC issued to DGC Family Fintech Trust (the “DGC Trust”), a trust established by Daniel G. Cohen, a convertible senior secured promissory note in the aggregate principal amount of $15,000 (the "2017 Convertible Note").  On March 20, 2022, the DGC Trust elected to convert the 2017 Convertible Note into an aggregate of 10,344,827 units of membership interests in the Operating LLC at the conversion rate specified in the 2017 Convertible Note agreement of $1.45 per unit. As a result of such conversion, the 2017 Convertible Note was cancelled in its entirety.  These units of membership interests have the same conversion and redemption rights as the existing convertible non-controlling interest units of membership interests.  See note 21 to the Company's December 31, 2021 Annual Report filed on Form 10-K for additional information regarding the 2017 Convertible Note.  

 

Pursuant to the DGC Trust’s governing documents, Daniel G. Cohen has the ability to acquire at any time any of the DGC Trust’s assets, including the units of membership interest, by substituting other property of an equivalent value without the approval or consent of any person, including any trustee or beneficiary of the DGC Trust. See Notes 16 and 24.

 

The 2020 Senior Notes

 

On January 31, 2022, the Operating LLC and JKD Investor entered into a Note Purchase Agreement.  On  January 31, 2020, the Operating LLC entered into a Note Purchase Agreement (the “Original Purchase Agreement”) with JKD Capital Partners I LTD, a New York corporation (“JKD Investor”), and RN Capital Solutions LLC, a Delaware limited liability company (“RNCS”).  The JKD Investor is owned by Jack DiMaio, Jr., the vice chairman of the Company’s board of directors and the Operating LLC’s board of managers, and his spouse.  The note purchased by the JKD Investor is herein referred to as the “JKD Note.”  

 

Pursuant to the Original Purchase Agreement, JKD Investor and RNCS each purchased a senior promissory note in the principal amount of $2,250 (for an aggregate investment of $4,500).  The senior promissory notes bore interest at a fixed rate of 12% per annum and matured on  January 31, 2022, pursuant to which, among other things, on such date, (i) JKD Investor paid to the Operating LLC an additional $2,250 and (ii) in consideration for such funds, the Operating LLC issued to JKD Investor an Amended and Restated Senior Promissory Note in the aggregate principal amount of $4,500 (the “Amended and Restated Note”), which Amended and Restated Note amended and restated the JKD Note in its entirety.  The 2022 Purchase Agreement contains customary representations and warranties on the part of each of JKD Investor and the Operating LLC.  The Company used these proceeds to retire $2,250 of existing 2020 Senior Notes held by RNCS.  See note 16 and 24. 

 

New Commercial Real Estate Opportunities (CREO) JV

 

On September 3, 2021, the Company committed to invest up to $15,000 of equity in a newly formed joint venture (the “CREO JV”) with an outside investor who committed to invest approximately $435,000 of equity in the CREO JV.  The Company is required to invest 7.5% of the total equity of the CREO JV with an absolute limit of $15,000. The CREO JV is managed by the Company.

 

The CREO JV was formed for the purposes of investing in primarily multi-family commercial real estate mortgage-backed loans and below-investment-grade rated tranches in CRE CLOs collateralized by mostly transitional commercial real estate mortgage-backed loans. “CRE CLO” means any pooling of commercial real estate mortgage-backed loans into a collateralized loan obligation.

 

The commercial real estate loans that will be funded by the CREO JV  may be originated by the Company and the Company may earn origination fees in connection with such transactions. In addition, the Company may earn structuring fees in connection with structuring and consummating a CRE CLO consisting of a pooling of commercial real estate loans. The Company also may earn management fees as manager of any CRE CLOs based on the value of the assets consolidated into a CRE CLO (calculated in accordance with the terms of such CRE CLO), payable from the proceeds generated by and in accordance with the distribution waterfall of such CRE CLO.

 

The Company has elected the fair value option in accordance with the provisions of FASB ASC 820, Fair Value Measurements (“FASB ASC 820”) to account for its investment in the CREO JV.  The investment is included in other investments at fair value, on the consolidated balance sheet and gains and losses (both realized and unrealized) are recognized in the consolidated statement of operations as a component of principal transactions and other income.  Because the CREO JV has the attributes of investment companies as described in FASB ASC 946-15-2, the Company estimates the fair value of its investment using the net asset value (“NAV”) per share (or its equivalent) as of the reporting date in accordance with the “practical expedient” provisions related to investments in certain entities that calculate net asset value per share (or its equivalent) included in FASB ASC 820 for all entities. As of  September 30, 2022, the Company's investment balance in the CREO was $6,818.

 

Wind Down of the Company's GCF Repo Business

 

Since 2017, the Company has carried out a matched book GCF repo business as a full netting member of the FICC Government Services Division.  In October 2021, primarily due to reduced spreads in the repo market for GCF collateral, the Company decided to wind down this business.  As of December 31, 2021, the wind down was completed and the GCF reverse repurchase agreements and repurchase agreements balances were reduced to zero. See note 10. 

 

14

 

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 pre-initial business combination activity, or (iii) the redemption of all of Insurance SPAC III’s public shares issued in the IPO if the Insurance SPAC III is unable to consummate an initial business combination within 24 months from the completion of the IPO. If Insurance SPAC III does not complete a business combination within the first 24 months following the IPO, the placement units will expire worthless.

 

The Insurance SPAC III Sponsor Entities collectively hold 8,525,000 founder shares in Insurance SPAC III.  Subject to certain limited exceptions, the founder shares will not be transferable or salable except (a) with respect to 25% of such shares, until consummation of a business combination, and (b) with respect to additional 25% tranches of such shares, when the closing price of Insurance SPAC III Common Stock exceeds $12.00, $13.50, and $17.00, respectively, for 20 out of any 30 consecutive trading days following the consummation of a business combination. Certain non-controlling interests in the Insurance SPAC III Sponsor Entities, including executive and key employees of the Operating LLC, purchased membership interests in the Insurance SPAC III Sponsor Entities and, in addition to having an interest in Insurance SPAC III’s placement units discussed above, have an interest in Insurance SPAC III’s founder shares through such membership interests in the Insurance SPAC III Sponsor Entities. The number of the Insurance SPAC III’s founder shares in which such non-controlling interests in the Insurance SPAC III Sponsor Entities, including such executives and key employees of the Operating LLC, have an interest in through the Insurance SPAC III Sponsor Entities will not be finally and definitively determined until consummation of a business combination. The number of Insurance SPAC III’s founder shares currently allocated to the Operating LLC is 4,267,500, but such number of founder shares will also not be finally and definitively determined until the consummation of a business combination.

 

The Operating LLC loaned to Insurance SPAC III approximately $71 to cover IPO expenses, which was repaid in full at the closing of the IPO. Insurance Acquisition Sponsor III and its affiliates, including the Operating LLC, have also committed to loan Insurance SPAC III up to an additional $1,500 to cover operating and acquisition related expenses following the IPO, of which $960 was borrowed by Insurance SPAC III as of  September 30, 2022. See notes 24 and 25.  These loans will bear no interest and, if Insurance SPAC III consummates a business combination in the required timeframe, the loans are to be repaid from the funds held in Insurance SPAC III’s trust account. If Insurance SPAC III does not consummate a business combination in the required timeframe, no funds from Insurance SPAC III's trust account can be used to repay the loans. 

 

As of  September 30, 2022, the Company had a total equity method investment in Insurance SPAC III of $3,401, which was included as a component of investment in equity method affiliates in its consolidated balance sheet.  Partially offsetting this amount was non-controlling interest of $4,210, which was included as a component of non-controlling interest in the Company's consolidated balance sheet.  Therefore, the net carrying value of the Company's investment in Insurance SPAC III (excluding its advances under its loan agreement) was $(809) as of September 30, 2022.  

 

15

 
 

5. NET TRADING 

 

Net trading consisted of the following in the periods presented.



NET TRADING

(Dollars in Thousands)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

   

September 30,

   

September 30,

 
   

2022

   

2021

   

2022

   

2021

 

Net realized gains (losses) - trading inventory

  $ 922     $ 2,056     $ 10,649     $ 17,171  

Net unrealized gains (losses) - trading inventory

    742       1,871       (5,448 )     (2,216 )

Net gains and losses

    1,664       3,927       5,201       14,955  
                                 

Interest income- trading inventory

    478       1,291       2,314       4,756  

Interest income-reverse repos

    11,831       19,586       39,831       58,977  

Interest income

    12,309       20,877       42,145       63,733  
                                 

Interest expense-repos

    (9,455 )     (10,140 )     (24,676 )     (30,527 )

Interest expense-margin payable

    (848 )     (168 )     (1,456 )     (561 )

Interest expense

    (10,303 )     (10,308 )     (26,132 )     (31,088 )
                                 

Other trading revenue

    4,296       2,103       9,151       6,581  
                                 

Net trading

  $ 7,966     $ 16,599     $ 30,365     $ 54,181  

  

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

  

16

 

 

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

 

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

 

RECEIVABLES FROM BROKERS, DEALERS, AND CLEARING AGENCIES

(Dollars in Thousands)

 

   

September 30, 2022

   

December 31, 2021

 

Deposits with clearing agencies

  $ 250     $ 250  

Unsettled regular way trades, net

    -       2,827  

Receivables from clearing agencies

    121,672       65,315  

Receivables from brokers, dealers, and clearing agencies

  $ 121,922     $ 68,392  

 

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



PAYABLES TO BROKERS, DEALERS, AND CLEARING AGENCIES

(Dollars in Thousands)

 

   

September 30, 2022

   

December 31, 2021

 

Unsettled regular way trades, net

  $ 2,431     $ -  

Margin payable

    129,981       160,896  

Payables to brokers, dealers, and clearing agencies

  $ 132,412     $ 160,896  



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

 

Securities transactions that settle in the regular way are recorded on the trade date, as if they had settled. The related amounts receivable and payable for unsettled securities transactions are recorded net in receivables from or payables to brokers, dealers, and clearing agencies on the Company’s consolidated balance sheets. 

 

Receivables from clearing agencies are primarily comprised of cash received by the Company upon execution of short trades that is restricted from withdrawal by the clearing agent.

 

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

 

17

 

 

7. FINANCIAL INSTRUMENTS

 

Investments—Trading

 

Investments-trading consisted of the following.

 

INVESTMENTS - TRADING

(Dollars in Thousands)

 

   

September 30, 2022

   

December 31, 2021

 

U.S. government agency MBS and CMOs

  $ 146,940     $ 134,093  

U.S. government agency debt securities

    22,920       22,373  

RMBS

    7       9  

U.S. Treasury securities

    15,249       -  

ABS

    1       1  

Corporate bonds and redeemable preferred stock

    46,654       45,519  

Foreign government bonds

    196       467  

Municipal bonds

    4,220       18,841  

Certificates of deposit

    -       169  

Derivatives

    35,481       1,275  

Equity securities

    155       1,118  

Investments-trading

  $ 271,823     $ 223,865  

 

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)

 

   

September 30, 2022

   

December 31, 2021

 

U.S. government agency debt securities

  $ 1     $ 1  

U.S. Treasury securities

    74,309       29,513  

Corporate bonds and redeemable preferred stock

    43,910       32,574  

Derivatives

    33,859       424  

Trading securities sold, not yet purchased

  $ 152,079     $ 62,512  

 

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

 

18

 

Other Investments, at Fair Value

 

Other investments, at fair value consisted of the following.

 

OTHER INVESTMENTS, AT FAIR VALUE

(Dollars in Thousands)

 

   

September 30, 2022

   

December 31, 2021

 

Equity securities

  $ 21,186     $ 27,104  

Restricted equity securities

    5,182       17,078  

Corporate bonds and redeemable preferred stock

    476       476  

CREO

    6,818       5,830  

U.S. Insurance JV

    3,414       3,450  

SPAC Fund

    513       1,980  

Residential loans

    137       115  

Other investments, at fair value

  $ 37,726     $ 56,033  



A total of $11,941 and $15,563 of the amounts shown as other investments, at fair value above serve as collateral for the Company's margin loan payable as of  September 30, 2022 and December 31, 2021, respectively.  See note 6.  

 

 

Other Investments, Sold Not Yet Purchased, at Fair Value

 

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

 

OTHER INVESTMENTS SOLD, NOT YET PURCHASED

(Dollars in Thousands)

 

   

September 30, 2022

   

December 31, 2021

 

Equity securities

  $ 57     $ 2,488  

Equity derivatives

    853       -  

Other investments sold, not yet purchased

  $ 910     $ 2,488  

 

19

 
 

8. FAIR VALUE DISCLOSURES

 

Fair Value Option

 

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

 

Such financial assets accounted for at fair value include:

 

 

● 

securities that would otherwise qualify for available for sale treatment;

 

● 

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

 

● 

investments in residential 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 September 30, 2022 and 2021 of $(714) and $(20,977), respectively. 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 nine months ended September 30, 2022 and September 30, 2021 of $(26,451) and $46,259respectively.

 

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 September 30, 2022 and 2021 of $(782) and $6, 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 nine months ended September 30, 2022 and September 30, 2021 of $(525) and $782, respectively.

 

Fair Value Measurements

 

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

 

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

 

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

 

 

1.

Quoted prices for similar assets or liabilities in active markets;

 

2.

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

 

3.

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

 

4.

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

 

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

 

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

 

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

 

20

 

The following tables present information about the Company’s assets and liabilities measured at fair value as of September 30, 2022 and December 31, 2021 and indicates the valuation hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS

September 30, 2022

(Dollars in Thousands)

 

                   

Significant

   

Significant

 
           

Quoted Prices in

   

Observable

   

Unobservable

 
           

Active Markets

   

Inputs

   

Inputs

 

Assets

 

Fair Value

   

(Level 1)

   

(Level 2)

   

(Level 3)

 

Investments-trading:

                               

U.S. government agency MBS and CMOs

  $ 146,940     $ -     $ 146,940     $ -  

U.S. government agency debt securities

    22,920       -       22,920       -  

RMBS

    7       -       7       -  

U.S. Treasury securities

    15,249       15,249       -       -  

ABS

    1       -       1       -  

Corporate bonds and redeemable preferred stock

    46,654       -       46,654       -  

Foreign government bonds

    196       -       196       -  

Municipal bonds

    4,220       -       4,220       -  

Derivatives

    35,481       -       35,481       -  

Equity securities

    155       155       -       -  

Total investments - trading

  $ 271,823     $ 15,404     $ 256,419     $ -  
                                 

Other investments, at fair value:

                               

Equity securities

  $ 21,186       21,186     $ -     $ -  

Restricted equity securities

    5,182       -       5,182       -  

Corporate bonds and redeemable preferred stock

    476       -       476       -  

Residential loans

    137       -       137       -  
      26,981     $ 21,186     $ 5,795     $ -  

Investments measured at NAV (1)

    10,745                          

Total other investments, at fair value

  $ 37,726                          
                                 

Liabilities

                               

Trading securities sold, not yet purchased:

                               

U.S. government agency debt securities

  $ 1     $ -     $ 1     $ -  

U.S. Treasury securities

    74,309       74,309       -       -  

Corporate bonds and redeemable preferred stock

    43,910       -       43,910       -  

Derivatives

    33,859       -       33,859       -  

Total trading securities sold, not yet purchased

  $ 152,079     $ 74,309     $ 77,770     $ -  



                               

Other investments, sold not yet purchased:

                               

Equity securities

  $ 57     $ 57     $ -     $ -  

Equity derivatives

    853       -       853       -  

Total other investments sold, not yet purchased

  $ 910     $ 57     $ 853     $ -  

 

(1)

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

 

21

 

 

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS

December 31, 2021

(Dollars in Thousands)

 

                   

Significant

   

Significant

 
           

Quoted Prices in

   

Observable

   

Unobservable

 
           

Active Markets

   

Inputs

   

Inputs

 

Assets

 

Fair Value

   

(Level 1)

   

(Level 2)

   

(Level 3)

 

Investments-trading:

                               

U.S. government agency MBS and CMOs

  $ 134,093     $ -     $ 134,093     $ -  

U.S. government agency debt securities

    22,373       -       22,373       -  

RMBS

    9       -       9       -  

U.S. Treasury securities

    -       -       -       -  

ABS

    1       -       1       -  

Corporate bonds and redeemable preferred stock

    45,519       -       45,519       -  

Foreign government bonds

    467       -       467       -  

Municipal bonds

    18,841       -       18,841       -  

Certificates of deposit

    169       -       169       -  

Derivatives

    1,275       -       1,275       -  

Equity securities

    1,118       -       1,118       -  

Total investments - trading

  $ 223,865     $ -     $ 223,865