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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 June 30, 2016

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

 

INSTITUTIONAL FINANCIAL MARKETS, 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, 17th Floor

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).      Yes      No

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

 



 

 

 

Large accelerated filer

Accelerated filer



 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

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

As of July 31, 2016 there were 12,104,582 shares of common stock ($0.001 par value per share) of Institutional Financial Markets, Inc. outstanding. 

 



 


 

INSTITUTIONAL FINANCIAL MARKETS, INC. 

FORM 10-Q

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2016

 



 

 

 

 

Page 

 

PART I. FINANCIAL INFORMATION

 



 

 

Item 1.

Financial Statements (Unaudited)

6



 

 

 

Consolidated Balance Sheets—June 30, 2016 and December 31, 2015

6



 

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss)—Three and Six Months Ended June 30, 2016 and 2015

7



 

 

 

Consolidated Statement of Changes in Equity—Six Months Ended June 30, 2016

8



 

 

 

Consolidated Statements of Cash Flows—Six Months Ended June 30, 2016 and 2015

9



 

 

 

Notes to Consolidated Financial Statements (Unaudited)

10



 

 

Item 2.

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

48



 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

71



 

 

Item 4.

Controls and Procedures

73



 

Part II. OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

74



 

 

Item 1A.

Risk Factors

74



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

75



 

 

Item 6.

Exhibits

76



 

Signatures 

77

2

 


 

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,” “anticipate,” “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:

benefits, results, cost reductions and synergies resulting from the Company’s business combinations;

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;

returns on principal investments;

fair value of assets; and

any other statements regarding future growth, future cash needs, future operations, business plans and 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, 2015. Actual results may differ materially as a result of various factors, some of which are outside our control, including the following:

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

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, including on our collateralized loan obligation investments;

a lack of liquidity, i.e., ready access to funds for use in our businesses including the availability of securities financing from our clearing agency;

the ability to attract and retain personnel;

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

an inability to generate incremental income from acquired businesses;

unanticipated market closures due to inclement weather or other disasters;

the volume of trading in securities;

3

 


 

the liquidity in capital markets;

the credit-worthiness of our correspondents, trading counterparties, and our banking and margin customers;

the demand for investment banking services in Europe;

competitive conditions in each of our business segments;

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

the inability to close the previously announced sale of our European business;

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

the potential for litigation and other regulatory liability.



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

 

4

 


 

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: IFMI refers to Institutional Financial Markets, Inc., a Maryland corporation. The “Company,” “we,” “us,” and our refer to IFMI and its subsidiaries on a consolidated basis; “IFMI, LLC” (formerly Cohen Brothers, LLC) or the Operating LLC refer to IFMI, LLC the main operating subsidiary of the Company; Cohen Brothers refers to the pre-merger Cohen Brothers, LLC and its subsidiaries; AFN refers to the pre-merger Alesco Financial Inc. and its subsidiaries; Merger Agreement” refers to the Agreement and Plan of Merger among AFN, Alesco Financial Holdings, LLC, a wholly owned subsidiary of AFN, which we refer to as the Merger Sub,” and Cohen Brothers, dated as of February 20, 2009 and amended on June 1, 2009, August 20, 2009, and September 30, 2009; Merger” refers to the December 16, 2009 closing of the merger of Merger Sub with and into Cohen Brothers pursuant to the terms of the Merger Agreement, which resulted in Cohen Brothers becoming a majority owned subsidiary of the Company. When the term “IFMI” is used, it is referring to the parent company itself, Institutional Financial Markets, Inc.  “JVB Holdings” refers to JVB Financial Holdings, L.L.C.; “JVB” refers to JVB Financial Group, LLC, a broker dealer subsidiary; “CCFL” refers to Cohen & Company Financial Limited (formerly known as EuroDekania Management LTD), a subsidiary regulated by the Financial Conduct Authority (formerly known as the Financial Services Authority) in the United Kingdom; “EuroDekania” refers to EuroDekania (Cayman) Ltd., a Cayman Islands exempted company that is externally managed by CCFL.

Securities Act”  refers to the Securities Act of 1933, as amended; and “Exchange Act” refers to the Securities Exchange Act of 1934, as amended. In accordance with accounting principles generally accepted in the United States of America, or “U.S. GAAP,” the Merger was accounted for as a reverse acquisition, Cohen Brothers was deemed to be the accounting acquirer and all of AFN’s assets and liabilities were required to be revalued at fair value as of the acquisition date. Therefore, any financial information reported herein prior to the Merger is the historical financial information of Cohen Brothers.    As used throughout this filing, the terms, the “Company,” “we,” “us,” and “our” refer to the operations of Cohen Brothers and its consolidated subsidiaries prior to December 17, 2009 and the combined operations of the merged company and its consolidated subsidiaries from December 17, 2009 forward. AFN refers to the historical operations of Alesco Financial Inc. through to December 16, 2009, the date of the Merger, or the “Merger Date.”

5

 


 

PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS.

INSTITUTIONAL FINANCIAL MARKETS, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)





 

 

 

 

 



 

 

 

 

 



June 30, 2016

 

 

 



(unaudited)

 

December 31, 2015

Assets

 

 

 

 

 

Cash and cash equivalents

$

7,683 

 

$

14,115 

Receivables from brokers, dealers, and clearing agencies

 

62,382 

 

 

39,812 

Due from related parties

 

69 

 

 

77 

Other receivables 

 

3,489 

 

 

4,079 

Investments-trading

 

143,202 

 

 

94,741 

Other investments, at fair value

 

9,860 

 

 

14,880 

Receivables under resale agreements

 

345,356 

 

 

128,011 

Goodwill

 

7,992 

 

 

7,992 

Other assets

 

4,552 

 

 

4,708 

Total assets

$

584,585 

 

$

308,415 



 

 

 

 

 

Liabilities

 

 

 

 

 

Payables to brokers, dealers, and clearing agencies

$

62,832 

 

$

55,779 

Due to related parties

 

50 

 

 

50 

Accounts payable and other liabilities

 

3,233 

 

 

3,362 

Accrued compensation

 

3,821 

 

 

3,612 

Trading securities sold, not yet purchased

 

69,853 

 

 

39,184 

Securities sold under agreement to repurchase

 

366,645 

 

 

127,913 

Deferred income taxes

 

3,771 

 

 

3,804 

Debt

 

29,048 

 

 

28,535 

Total liabilities

 

539,253 

 

 

262,239 



 

 

 

 

 

Commitments and contingencies (See Note 16)

 

 

 

 

 



 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

Voting Non-Convertible Preferred Stock, $0.001 par value per share, 4,983,557 shares authorized, 4,983,557 shares issued and outstanding

 

 

 

Common Stock, $0.001 par value per share, 100,000,000 shares authorized, 12,175,782 and 13,350,553 shares issued and outstanding, respectively, including 739,616 and 315,434 unvested or restricted share awards, respectively

 

12 

 

 

13 

Additional paid-in capital

 

69,308 

 

 

71,570 

Accumulated other comprehensive loss

 

(976)

 

 

(939)

Accumulated deficit

 

(30,343)

 

 

(30,889)

Total stockholders' equity

 

38,006 

 

 

39,760 

Non-controlling interest

 

7,326 

 

 

6,416 

Total equity

 

45,332 

 

 

46,176 

Total liabilities and equity

$

584,585 

 

$

308,415 



                                              See accompanying notes to unaudited consolidated financial statements.



6

 


 



INSTITUTIONAL FINANCIAL MARKETS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / (LOSS)

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

(Unaudited)



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,

 

Six Months Ended June 30,



2016

 

2015

 

2016

 

2015

Revenues

 

 

 

 

 

 

 

 

 

 

 

Net trading

$

11,285 

 

$

6,742 

 

$

21,487 

 

$

14,013 

Asset management

 

1,569 

 

 

2,260 

 

 

3,881 

 

 

4,558 

New issue and advisory

 

984 

 

 

651 

 

 

1,365 

 

 

2,149 

Principal transactions and other income

 

527 

 

 

1,398 

 

 

1,367 

 

 

3,125 

Total revenues

 

14,365 

 

 

11,051 

 

 

28,100 

 

 

23,845 



 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

8,388 

 

 

6,151 

 

 

16,928 

 

 

13,739 

Business development, occupancy, equipment

 

651 

 

 

824 

 

 

1,315 

 

 

1,642 

Subscriptions, clearing, and execution

 

1,502 

 

 

1,498 

 

 

3,024 

 

 

3,346 

Professional fee and other operating

 

1,542 

 

 

1,840 

 

 

3,205 

 

 

3,865 

Depreciation and amortization

 

72 

 

 

227 

 

 

154 

 

 

461 

Total operating expenses

 

12,155 

 

 

10,540 

 

 

24,626 

 

 

23,053 



 

 

 

 

 

 

 

 

 

 

 

Operating income / (loss)

 

2,210 

 

 

511 

 

 

3,474 

 

 

792 



 

 

 

 

 

 

 

 

 

 

 

Non-operating income / (expense)

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(992)

 

 

(991)

 

 

(1,982)

 

 

(1,967)

Income / (loss) before income tax expense / (benefit)

 

1,218 

 

 

(480)

 

 

1,492 

 

 

(1,175)

Income tax expense / (benefit)

 

17 

 

 

(15)

 

 

27 

 

 

46 

Net income / (loss)

 

1,201 

 

 

(465)

 

 

1,465 

 

 

(1,221)

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

 

371 

 

 

(120)

 

 

436 

 

 

(318)

Net income / (loss) attributable to IFMI

$

830 

 

$

(345)

 

$

1,029 

 

$

(903)

Income / (loss) per share data (see Note 17):

 

 

 

 

 

 

 

 

 

 

 

Income / (loss) per common share-basic:

 

 

 

 

 

 

 

 

 

 

 

Basic income / (loss) per common share

$

0.07 

 

$

(0.02)

 

$

0.08 

 

$

(0.06)

Weighted average shares outstanding-basic

 

11,905,694 

 

 

15,229,340 

 

 

12,588,649 

 

 

15,189,273 

Income / (loss) per common share-diluted:

 

 

 

 

 

 

 

 

 

 

 

Diluted income / (loss) per common share

$

0.07 

 

$

(0.02)

 

$

0.08 

 

$

(0.06)

Weighted average shares outstanding-diluted

 

17,291,623 

 

 

20,553,430 

 

 

17,984,359 

 

 

20,513,363 



 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

$

0.02 

 

$

0.02 

 

$

0.04 

 

$

0.04 



 

 

 

 

 

 

 

 

 

 

 

Comprehensive income / (loss):

 

 

 

 

 

 

 

 

 

 

 

Net income / (loss) (from above)

$

1,201 

 

$

(465)

 

$

1,465 

 

$

(1,221)

Other comprehensive income / (loss) item:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax of $0

 

(96)

 

 

146 

 

 

(126)

 

 

(92)

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

 

(96)

 

 

146 

 

 

(126)

 

 

(92)

Comprehensive income / (loss)

 

1,105 

 

 

(319)

 

 

1,339 

 

 

(1,313)

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

 

341 

 

 

(82)

 

 

396 

 

 

(342)

Comprehensive income / (loss) attributable to IFMI

$

764 

 

$

(237)

 

$

943 

 

$

(971)



                                                See accompanying notes to unaudited consolidated financial statements.

 

7

 


 

INSTITUTIONAL FINANCIAL MARKETS, INC.

Consolidated Statement of Changes in Equity

(Dollars in Thousands)

(Unaudited)

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Institutional Financial Markets, Inc.

 

 

 

 

 

 



 

 

Preferred Stock $ Amount

 

 

Common Stock $ Amount

 

Additional Paid-In Capital

 

 

Retained Earnings / (Accumulated Deficit)

 

 

Accumulated Other Comprehensive Income / (Loss)

 

 

Total Stockholders' Equity

 

 

Non-controlling Interest

 

 

Total Equity

December 31, 2015

 

$

 

$

13 

 

$

71,570 

 

$

(30,889)

 

$

(939)

 

$

39,760 

 

$

6,416 

 

$

46,176 

Net income

 

 

 -

 

 

 -

 

 

 -

 

 

1,029 

 

 

 -

 

 

1,029 

 

 

436 

 

 

1,465 

Other comprehensive income/ (loss)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(86)

 

 

(86)

 

 

(40)

 

 

(126)

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

 

 

 -

 

 

 -

 

 

(552)

 

 

 -

 

 

49 

 

 

(503)

 

 

503 

 

 

 -

Equity-based compensation and vesting of shares

 

 

 -

 

 

 

 

549 

 

 

 -

 

 

 -

 

 

550 

 

 

231 

 

 

781 

Shares withheld for employee taxes

 

 

 -

 

 

 -

 

 

(20)

 

 

 -

 

 

 -

 

 

(20)

 

 

(8)

 

 

(28)

Purchase and retirement  of common stock

 

 

 -

 

 

(2)

 

 

(2,239)

 

 

 -

 

 

 -

 

 

(2,241)

 

 

 -

 

 

(2,241)

Dividends/Distributions

 

 

 -

 

 

 -

 

 

 -

 

 

(483)

 

 

 -

 

 

(483)

 

 

(212)

 

 

(695)

June 30, 2016

 

$

 

$

12 

 

$

69,308 

 

$

(30,343)

 

$

(976)

 

 

38,006 

 

$

7,326 

 

$

45,332 



 See accompanying notes to unaudited consolidated financial statements.

   





 

8

 


 

INSTITUTIONAL FINANCIAL MARKETS, INC.

Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)





 

 

 

 

 



Six Months Ended June 30,



2016

 

2015

Operating activities

 

 

 

 

 

Net income / (loss)

$

1,465 

 

$

(1,221)

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

 

 

 

 

 

Equity-based compensation

 

781 

 

 

790 

Accretion of income on other investments, at fair value

 

(755)

 

 

(1,332)

Realized loss / (gain) on other investments

 

1,742 

 

 

1,965 

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

 

(1,174)

 

 

(1,611)

Depreciation and amortization

 

154 

 

 

461 

Amortization of discount on debt

 

513 

 

 

581 

Deferred tax provision / (benefit)

 

(33)

 

 

42 

(Increase) decrease in other receivables

 

590 

 

 

3,122 

(Increase) decrease in investments-trading

 

(48,461)

 

 

18,242 

(Increase) decrease in other assets

 

165 

 

 

470 

(Increase) decrease in receivables under resale agreement

 

(217,345)

 

 

(71,071)

Change in receivables from / payables to related parties, net

 

 

 

325 

Increase (decrease) in accrued compensation

 

209 

 

 

(2,103)

Increase (decrease) in accounts payable and other liabilities

 

(121)

 

 

(1,290)

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

 

30,669 

 

 

26,910 

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

 

(15,517)

 

 

(52,151)

Increase (decrease) in securities sold under agreement to repurchase

 

238,732 

 

 

70,861 

Net cash provided by (used in) operating activities

 

(8,378)

 

 

(7,010)

Investing activities

 

 

 

 

 

Purchase of investments-other investments, at fair value

 

(237)

 

 

(232)

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

 

5,444 

 

 

8,841 

Purchase of furniture, equipment, and leasehold improvements

 

(163)

 

 

(95)

Net cash provided by (used in) investing activities

 

5,044 

 

 

8,514 

Financing activities

 

 

 

 

 

Cash used to net share settle equity awards

 

(28)

 

 

 -

Purchase and retirement of common stock

 

(2,241)

 

 

 -

IFMI non-controlling interest distributions

 

(212)

 

 

(213)

IFMI dividends

 

(483)

 

 

(609)

Net cash provided by (used in) financing activities

 

(2,964)

 

 

(822)

Effect of exchange rate on cash

 

(134)

 

 

(57)

Net increase (decrease) in cash and cash equivalents

 

(6,432)

 

 

625 

Cash and cash equivalents, beginning of period

 

14,115 

 

 

12,253 

Cash and cash equivalents, end of period

$

7,683 

 

$

12,878 



       See accompanying notes to unaudited consolidated financial statements.

9

 


 

INSTITUTIONAL FINANCIAL MARKETS, INC.

Notes to Consolidated Financial Statements

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

(Unaudited)

                                                                                      

1. ORGANIZATION AND NATURE OF OPERATIONS

The Formation Transaction

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.

The Company

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

As a result of the Merger, AFN contributed substantially all of its assets into Cohen Brothers in exchange for newly issued membership units 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 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 membership interests of Cohen Brothers that were not held by AFN were included as a component of non-controlling interest in the consolidated balance sheet.

Subsequent to the Merger, AFN was renamed Cohen & Company Inc. In January 2011, it was renamed again as Institutional Financial Markets, Inc. (“IFMI”). Effective January 1, 2010, the Company ceased to qualify as a real estate investment trust, or a REIT. The Company trades on the NYSE MKT LLC (formerly known as the NYSE Amex LLC) under the ticker symbol “IFMI.” The Company is a financial services company specializing in fixed income markets. As of June 30, 2016, the Company had $3.84 billion in assets under management (“AUM”) of which 95.5%,  or $3.67 billion, was in collateralized debt obligations (“CDOs”).

In these financial statements, the “Company” refers to IFMI and its subsidiaries on a consolidated basis. “IFMI, LLC” (formerly Cohen Brothers, LLC) or the “Operating LLC” refers to the main operating subsidiary of the Company.  “Cohen Brothers” refers to the pre-Merger Cohen Brothers, LLC and its subsidiaries. “AFN” refers to the pre-merger Alesco Financial Inc. and its subsidiaries. When the term “IFMI” is used, it is referring to the parent company itself, Institutional Financial Markets, Inc. “JVB Holdings” refers to J.V.B. Financial Holdings, L.L.C. “JVB” refers to J.V.B. Financial Group LLC, a broker dealer subsidiary. “CCFL” refers to Cohen & Company Financial Limited (formerly known as EuroDekania Management LTD), a subsidiary regulated by the Financial Conduct Authority (formerly known as Financial Services Authority) in the United Kingdom. “EuroDekania” refers to EuroDekania (Cayman) Ltd., a Cayman Islands exempted company that is externally managed by CCFL.

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

Capital Markets: The Company’s Capital Markets business segment consists primarily of fixed income sales, trading, matched book repo financing, new issue placements in corporate and securitized products, and advisory services. The Company’s fixed income sales and trading group provides trade execution to corporate investors, institutional investors, mortgage originators, and other smaller broker-dealers. The Company specializes in a variety of products, including but not limited to: corporate bonds, asset backed securities (“ABS”), mortgage backed securities (“MBS”), residential mortgage backed securities (“RMBS”), CDOs, collateralized loan obligations (“CLOs”), collateralized bond obligations (“CBOs”), collateralized mortgage obligations (“CMOs”), municipal securities, to-be-announced securities (“TBAs”) and other forward agency MBS contracts, Small Business Administration (“SBA”) loans, U.S. government bonds, U.S. government agency securities, brokered deposits and certificates of deposit (“CDs”) for small banks, and hybrid capital of financial institutions including trust preferred securities (“TruPS”), whole loans, and other structured financial instruments. The Company also offers execution and brokerage services for equity products. The Company carries out its capital market activities primarily through its subsidiaries: JVB in the United States and CCFL in Europe. See note 4 regarding the potential sale of European operations. 

Principal Investing:  The Company’s Principal Investing business segment is comprised of investments that the Company has made using its own capital excluding investments the Company makes to support our Capital Markets business segment.  These investments are a component of our other investments, at fair value in our consolidated balance sheet. 

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Asset Management: The Company’s Asset Management business segment manages assets within CDOs, permanent capital vehicles, managed accounts, 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.

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, securities lending activities, riskless trading activities as well as gains and losses (unrealized and realized) and income and expense earned on securities and derivatives classified as trading; and

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

Principal Investing

Gains and losses (unrealized and realized) and income and expense earned on securities classified as other investments, at fair value.

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 Vehicles, and incentive management fees earned based on the performance of the various Investment Vehicles.

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 six months ended June 30, 2016 and 2015 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, 2015.  

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, 2015.  



Upon adoption of the provisions of ASU 2015-03, the Company reclassified its deferred financing costs as of December 31, 2015.  This resulted in a reduction in other assets of $410 and a reduction in debt of $410.  See note 3.  Certain other prior period amounts have been reclassified to conform to the current period presentation. 



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Adoption of New Accounting Standards

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which changes the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations.  The guidance in this ASU raises the threshold for a disposal to qualify as a discontinued operation and certain other disposals that do not meet the definition of a discontinued operation. Under the new provisions, only disposals representing a strategic shift in operations – that is or will have a major effect on an entity’s operations and financial results should be presented as a discontinued operation.  Examples include a disposal of a major line of business, a major geographical area, a major equity method investment, or other major parts of an entity.  The new provisions also require new disclosures related to individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following the disposal date and retained equity method investments in a discontinued operation.  The provisions of this ASU are effective for annual periods beginning on or after December 15, 2014 and interim periods within that year.  The ASU is applied prospectively.  Early adoption was permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued.  The Company’s adoption of the provisions of ASU 2014-08 effective January 1, 2015 did not have an effect on the Company’s consolidated financial position, results of operations, or cash flows.

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In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase to Maturity Transactions, Repurchase Financings, and Disclosures, which changes the accounting for repurchase-to-maturity transactions that are repurchase agreements where the maturity of the security transferred as collateral matches the maturity of the repurchase agreement. According to the new guidance, all repurchase-to-maturity transactions will be accounted for as secured borrowing transactions in the same way as other repurchase agreements rather than as sales of a financial asset and forward commitment to repurchase.  The amendments also change the accounting for repurchase financing arrangements that are transactions involving the transfer of a financial asset to a counterparty executed contemporaneously with a reverse repurchase agreement with the same counterparty.  Under the new guidance, all repurchase financings will now be accounted for separately, which will result in secured lending accounting for the reverse repurchase agreement.  The guidance also requires new disclosures about transfers that are accounted for as sales in transactions that are economically similar to repurchase agreements and increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2014 with early adoption prohibited.  An entity will be required to present changes in accounting for all outstanding repurchase-to-maturity transactions and repurchase financing arrangements as a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The disclosures for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015.  The Company’s adoption of the provisions of ASU 2014-11 effective January 1, 2015 did not have an effect on the Company’s consolidated financial position, results of operations, or cash flows.   See note 9.



In June 2014, the FASB issued ASU No. 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target could be Achieved After the Requisite Service Period, which requires a performance target that affects vesting and that could be achieved after the requisite service period be accounted for as a performance condition rather than as a non-vesting condition that affects the grant-date fair value of the award.  A reporting entity should apply existing guidance in Topic 718, Compensation-Stock Compensation, as it relates to such awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015 with early adoption permitted using either of two methods: (i) prospective to all awards granted or modified after the effective date; or (ii) retrospective to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying this ASU as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements.  The Company’s adoption of the provisions of ASU 2014-12 effective January 1, 2016 did not have an effect on the Company’s consolidated financial position, results of operations, or cash flows.



In August 2014, the FASB issued ASU No. 2014-13, Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity, which provides a measurement alternative for an entity that consolidates collateralized financing entities.  A collateralized financing entity is a variable interest entity with nominal or no equity that holds financial assets and issues beneficial interests in those financial assets.  The beneficial interests, which are financial liabilities of the collateralized financing entity, have contractual recourse only to the related assets of the collateralized financing entity. If elected, the alternative method results in the reporting entity measuring both the financial assets and financial liabilities of the collateralized financing entity using the more observable of the two fair value measurements, which effectively removes measurement differences between the financial assets and financial liabilities of the collateralized financing entity previously recorded as net income (loss) attributable to non-controlling and other beneficial interests and as an adjustment to appropriated retained earnings. The reporting entity continues to measure its own beneficial interests in the collateralized financing entity (other than those that represent compensation for services) at fair value.  The ASU is effective for annual periods and interim periods with those annual periods beginning after December 15, 2015.  A reporting entity may apply the ASU using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the annual period of adoption.  A reporting entity may also apply the ASU retrospectively to all relevant prior periods beginning with the annual period in which ASU No. 2009-17, Consolidation (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, was adopted. Early adoption is permitted.    The Company’s adoption of the provisions of ASU 2014-13 effective January 1, 2016 did not have an effect on the Company’s consolidated financial position, results of operations, or cash flows.



In November 2014, the FASB issued ASU No. 2014-16, Derivatives and Hedging (Topic 815):  Determining whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity, which clarifies that an entity must consider all relevant terms and features when evaluating the nature of the host contract. Additionally, the amendments state that no one term or feature would define the host contract’s economic characteristics and risks. Instead, the economic characteristics and risks of the hybrid financial instrument as a whole would determine the nature of the host contract. The amendments in this ASU are effective for entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company’s adoption of the provisions of ASU 2014-16 effective January 1, 2016 did not have an effect on the Company’s consolidated financial position, results of operations, or cash flows.

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In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, which eliminates from U.S. GAAP the requirement of extraordinary items to be separately classified on the income statement.  The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  A reporting entity may apply the amendments prospectively.  A reporting entity may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption was permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  The Company’s adoption of the provisions of ASU 2015-01 effective January 1, 2016 did not have an effect on the Company’s consolidated financial position, results of operations, or cash flows.



In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810)Amendments to the Consolidation Analysis, which makes targeted amendments to the current consolidation guidance and ends the deferral granted to investment companies from applying the VIE guidance.  The revised consolidation guidance, among other things, (i) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, and (iii) modifies the consolidation analysis of reporting entities that are involved with VIEs through fee arrangements and related party  relationships.  The Company’s adoption of the provisions of ASU 2015-02 effective January 1, 2016 did not have an effect on the Company’s consolidated financial position, results of operations, or cash flows. However, the Company previously treated its management contracts with certain securitization entities that are VIEs as a variable interest.  Therefore, the Company disclosed certain information related to these interests in its variable interest entity footnote.  Upon adoption of this ASU, these management contracts are not considered variable interests.  Therefore, in cases where the Company’s only interest in certain VIEs was its management contract, the Company is no longer required to include certain disclosures related to those variable interest entities. See note 11.



In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement for debt issuance costs are not affected by the amendments in this update.  The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  Early adoption of these amendments was permitted for financial statements that have not been previously issued. An entity should apply the new guidance on a retrospective basis, and the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance.  Upon adoption of the provisions of ASU 2015-03 effective January 1, 2016, the Company reclassified its deferred financing costs as of December 31, 2015.  This resulted in a reduction in other assets of $410 and a reduction in debt of $410 in the Company’s consolidated balance sheet as of December 31, 2015.



In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820) – Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent).  Reporting entities are permitted to use net asset value (“NAV”) as a practical expedient to measure the fair value of certain investments.  Under current U.S. GAAP, investments that use the NAV practical expedient to measure fair value are categorized within the fair value hierarchy as level 2 or level 3 investments depending on their redemption attributes, which has led to diversity in practice.  This ASU will remove the requirement to categorize within the fair value hierarchy all investments that use the NAV practical expedient for fair value measurement purposes.  Furthermore, the ASU will remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV practical expedient.  Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The ASU is effective for fiscal years beginning after December 15, 2015 and interim periods with those fiscal years.  The ASU must be applied retrospectively to all prior periods presented.  The Company’s adoption of ASU 2015-07 effective January 1, 2016 did not have an effect on the Company’s consolidated financial position, results of operations, or cash flows.  However, as a result of this adoption, the Company no longer classifies its investment in EuroDekania (for which it uses the practical expedient) within the fair value hierarchy.  See note 7. 



In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments, which includes amendments that eliminate the requirement to restate prior period financial statements for measurement period adjustments following a business combination.  The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified.  The prior period impact of the adjustment should be either presented separately on the face of the income statement or disclosed in the notes to the financial statements.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years.  The Company’s adoption of the provisions of ASU 2015-16 effective January 1, 2016 did not have an effect on the Company’s consolidated financial position, results of operations, or cash flows.

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B. Recent Accounting Developments



In February 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10).  The revised guidance makes the following changes: (i) requires equity investments with readily determinable fair value (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) allows an entity to choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (iii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment and when a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (iv) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (v) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (vi) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (vii) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (viii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (ix) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For non-public entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently evaluating the impact of these amendments on the presentation in its consolidated financial statements.



In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).   Under the new guidance, lessees will be required to recognize the following for all leases with the exception of short-term leases:  (i) a lease liability, which is  a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  Lessor accounting is largely unchanged.  Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.  The ASU is effective for entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal year.  Early application is permitted.  The Company is currently evaluating this new guidance to determine the impact it may have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815):    Contingent Put and Call Options in Debt Instruments.  This ASU clarifies what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. This ASU is effective for fiscal years beginning after December 15, 2016.  Early adoption is permitted and if adopted on an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. The Company is currently evaluating this new guidance to determine the impact it may have on its consolidated financial statements.



In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.  This ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. If an entity  has an available-for-sale equity security that becomes qualified for the equity method of accounting it should recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.

This ASU is effective for fiscal years beginning after December 15, 2016 and should be applied prospectively upon the effective date to increases in the level of ownership interest or degree of influence that result.  Early adoption is permitted.  The Company is currently evaluating this new guidance to determine the impact it may have on its consolidated financial statements.



In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and

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adding additional illustrative examples to assist in the application of the guidanceThe effective date for this guidance is for fiscal years beginning after December 15, 2017, including interim reporting periods therein, which is the same as the effective date and transition date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The Company is currently evaluating the new guidance to determine the impact it may have on the Company’s consolidated financial statements.



In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.  This ASU simplifies several aspects of the accounting for share-based payment award transactions including:  (i) income tax consequences; (ii) classification of awards as either equity or liabilities; and (iii) classification on the statement of cash flows.  The effective date for this ASU is for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact it may have on the Company’s consolidated financial statements.



In  April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606):   Identifying Performance Obligations and Licensing.  The amendments in this ASU affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective.  The amendments provide further guidance on identifying performance obligations and also improve the operability and understandability of the licensing implementation guidance.  The amendments do not change the core principal of the guidance in Topic 606.  The effective date and transition requirements for the amendment are the same as the effective date and transition requirements in Topic 606.  Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. The Company is currently evaluating the new guidance to determine the impact it may have on the Company’s consolidated financial statements.



In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606):    Narrow Scope Improvements and Practical ExpedientsThe amendments in the ASU affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective.  The amendments, among other things: (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4)  provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application; and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption.  The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606.  Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein.  The Company is currently evaluating the new guidance to determine the impact it may have on the Company’s consolidated financial statements.



In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years.  The Company is currently evaluating the new guidance to determine the impact it may have on the Company’s 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 7 for a discussion of the fair value hierarchy with respect to investments-trading; other investments, at fair value; and the derivatives held by the Company. 



Cash and cash equivalents: Cash is 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.

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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. See note 7 for disclosures about the categorization of the fair value measurements of investments-trading within the three level fair value hierarchy.

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. See note 7 for disclosures concerning the categorization of the fair value measurements of other investments, at fair value within the three level fair value hierarchy.

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 fair value 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. See note 7 for disclosures concerning the categorization of the fair value measurements of trading securities sold, not yet purchased within the three level fair value hierarchy.

Securities sold under agreement to repurchase: The liabilities for securities sold under agreement to repurchase are carried at their contracted repurchase price, have short-term maturities, and are repriced frequently with amounts normally due in one month or less and, accordingly, these contracts are at amounts that approximate fair value. The estimated fair value measurements of securities sold under agreement to repurchase are based on observations of actual market activity and are generally classified within level 2 of the fair value 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 Merger and recorded at fair value as of that date. As of June 30, 2016 and December 31, 2015, the fair value of the Company’s debt was estimated to be $34,453 and $35,200, 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 fair value hierarchy.

Derivatives: These amounts are carried at fair value. Derivatives may be included as a component of investments-trading; trading securities sold, not yet purchased; and other investments, at fair value. See notes 7 and 8. 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, the fair value is generally based on market price quotations from third party pricing services. See note 7 for disclosures concerning the categorization of the fair value measurements within the three level fair value hierarchy.





4. DISPOSITIONS



Sale of European Operations- Update

Although the Company believes that, given the passage of time, there is a very low probability of this transaction closing in the future, given the potential value to the Company of the proposed transaction if it were to close and based on C&Co Europe Acquisition LLC’s indication that it continues to evaluate its options, the Company has decided not to exercise its right to terminate the transaction at this time.  The Company will continue to evaluate the probability of closing and its right to terminate the transaction. 

16

 


 

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

Amounts receivable from brokers, dealers, and clearing agencies consisted of the following at June 30, 2016 and December 31, 2015.  





 

 

 

 

 

 



 

 

 

 

 

 

RECEIVABLES FROM BROKERS, DEALERS, AND CLEARING AGENCIES

(Dollars in Thousands)



 

 

 

 

 

 



 

June 30, 2016

 

December 31, 2015

Deposits with clearing agencies

 

$

750 

 

$

864 

Unsettled regular way trades, net

 

 

 -

 

 

4,367 

Receivables from clearing agencies

 

 

61,632 

 

 

34,581 

    Receivables from brokers, dealers, and clearing agencies

 

$

62,382 

 

$

39,812 

 



Amounts payable to brokers, dealers, and clearing agencies consisted of the following at June 30, 2016 and December 31, 2015.  





 

 

 

 

 

 



 

 

 

 

 

 

PAYABLES TO BROKERS, DEALERS, AND CLEARING AGENCIES

(Dollars in Thousands)



 

 

 

 

 

 



 

June 30, 2016

 

December 31, 2015

Unsettled regular way trades, net

 

$

1,039 

 

$

 -

Margin payable

 

 

61,793 

 

 

55,779 

    Payables to brokers, dealers, and clearing agencies

 

$

62,832 

 

$

55,779 



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 sheet.



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 agency.



Margin payable represents borrowings from clearing agencies to finance the Company’s trading inventory.  Effectively, all of the Company’s trading assets and deposits with clearing agencies serve as collateral for the margin payable.  These assets are held by the Company’s clearing agency.  The Company incurred interest on margin payable of $379 and $279 for the six months June 30, 2016 and 2015, respectively, $153 and $157 for the three months ended June 30, 2016 and 2015, respectively.

17

 


 

6. FINANCIAL INSTRUMENTS

Investments—Trading

The following table provides detail of the investments classified as investments-trading as of the periods indicated.







 

 

 

 

 

 



 

 

 

 

 

 

INVESTMENTS - TRADING

(Dollars in Thousands)



 

 

 

 

 

 



 

June 30, 2016

 

December 31, 2015

U.S. government agency MBS and CMOs

 

$

6,702 

 

$

3,225 

U.S. government agency debt securities

 

 

13,972 

 

 

12,737 

RMBS

 

 

94 

 

 

98 

U.S. Treasury securities

 

 

2,667 

 

 

1,355 

Other ABS

 

 

18 

 

 

2,048 

SBA loans

 

 

36,161 

 

 

29,931 

Corporate bonds and redeemable preferred stock

 

 

37,767 

 

 

19,873 

Foreign government bonds

 

 

78 

 

 

 -

Municipal bonds

 

 

31,243 

 

 

24,053 

Certificates of deposit

 

 

1,451 

 

 

263 

Derivatives

 

 

13,049 

 

 

1,158 

    Investments-trading

 

$

143,202 

 

$

94,741 



Trading Securities Sold, Not Yet Purchased

The following table provides detail of the trading securities sold, not yet purchased as of the periods indicated.







 

 

 

 

 

 



 

 

 

 

 

 

TRADING SECURITIES SOLD, NOT YET PURCHASED

(Dollars in Thousands)



 

 

 

 

 

 



 

June 30, 2016

 

December 31, 2015

U.S. Treasury securities

 

$

29,111 

 

$

12,050 

Corporate bonds and redeemable preferred stock

 

 

28,792 

 

 

25,851 

Municipal bonds

 

 

20 

 

 

20 

Derivatives

 

 

11,930 

 

 

1,181 

Equity securities

 

 

 -

 

 

82 

    Trading securities sold, not yet purchased

 

$

69,853 

 

$

39,184 



The Company tries to manage 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.

The Company included the change in unrealized gains (losses) in the amount of $ (57) and $ (14) for the six months ended June 30, 2016 and 2015, respectively, in net trading revenue in the Company’s consolidated statements of operations.

18

 


 

Other Investments, at fair value

The following tables provide detail of the investments included within other investments, at fair value.





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

OTHER INVESTMENTS, AT FAIR VALUE

(Dollars in Thousands)



 

 

 

 

 

 

 

 

 



 

June 30, 2016



 

Amortized Cost

 

Carrying Value

 

Unrealized Gain / (Loss)

CLOs

 

$

10,047 

 

$

8,028 

 

$

(2,019)

CDOs

 

 

193 

 

 

30 

 

 

(163)

Equity Securities:

 

 

 

 

 

 

 

 

 

EuroDekania

 

 

4,969 

 

 

1,318 

 

 

(3,651)

Other securities

 

 

176 

 

 

54 

 

 

(122)

Total equity securities

 

 

5,145 

 

 

1,372 

 

 

(3,773)

Residential loans

 

 

87 

 

 

359 

 

 

272 

Foreign currency forward contracts

 

 

 -

 

 

71 

 

 

71 

    Other investments, at fair value

 

$

15,472 

 

$

9,860 

 

$

(5,612)



 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

December 31, 2015



 

Amortized Cost

 

Carrying Value

 

Unrealized Gain / (Loss)

CLOs

 

$

14,877 

 

$

11,569 

 

$

(3,308)

CDOs

 

 

193 

 

 

34 

 

 

(159)

Equity Securities:

 

 

 

 

 

 

 

 

 

EuroDekania

 

 

5,300 

 

 

2,502 

 

 

(2,798)

Tiptree

 

 

1,009 

 

 

353 

 

 

(656)

Other securities

 

 

176 

 

 

43 

 

 

(133)

Total equity securities

 

 

6,485 

 

 

2,898 

 

 

(3,587)

Residential loans

 

 

111 

 

 

383 

 

 

272 

Foreign currency forward contracts

 

 

 -

 

 

(4)

 

 

(4)

    Other investments, at fair value

 

$

21,666 

 

$

14,880 

 

$

(6,786)

















7. 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 Accounting Standards Codification (“ASC”) 825. The primary reason for electing the fair value option, when it first became available in 2008, 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. In addition, the election was made for certain investments that were previously required to be accounted for under the equity method because their fair value measurements were readily obtainable.

Such financial assets accounted for at fair value include:

securities that would otherwise qualify for available for sale treatment;

investments in equity method affiliates where the affiliate has all of 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

19

 


 

the consolidated balance sheets. The Company recognized net gains (losses) of $(568) and $(354) related to changes in fair value of investments that are included as a component of other investments, at fair value during the six months ended June 30, 2016 and 2015, respectively.  The Company recognized net gains (losses) of $(304) and $(38) 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 June 30, 2016 and 2015, 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 fair value hierarchy. The 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 hierarchy under FASB ASC 820 are described below.

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

Level  2Financial assets and liabilities whose values 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, 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 3Financial assets and liabilities whose values 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 fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

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

A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain financial assets or liabilities.  There were no transfers between level 1 and level 2 of the fair value hierarchy during the six months ended June 30, 2016 and 2015Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in or transfers out of the level 3 category as of the beginning of the quarter in which reclassifications occur.

20

 


 



The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS

June 30, 2016

(Dollars in Thousands)



 

 

 

 

Significant

 

Significant



 

 

Quoted Prices in

 

Other Observable

 

Unobservable



 

 

Active Markets

 

Inputs

 

Inputs

Assets

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Investments-trading:

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency MBS and CMOs

$

6,702 

 

$

 -

 

$

6,702 

 

$

 -

U.S. government agency debt securities

 

13,972 

 

 

 -

 

 

13,972 

 

 

 -

RMBS

 

94 

 

 

 -

 

 

94 

 

 

 -

U.S. Treasury securities

 

2,667 

 

 

2,667 

 

 

 -

 

 

 -

Other ABS

 

18 

 

 

 -

 

 

18 

 

 

 -

SBA loans

 

36,161 

 

 

 -

 

 

36,161 

 

 

 -

Corporate bonds and redeemable preferred stock

 

37,767 

 

 

 -

 

 

37,767 

 

 

 -

Foreign government bonds

 

78 

 

 

 -

 

 

78 

 

 

 -

Municipal bonds

 

31,243 

 

 

 -

 

 

31,243 

 

 

 -

Certificates of deposit

 

1,451 

 

 

 -

 

 

1,451 

 

 

 -

Derivatives

 

13,049 

 

 

 -

 

 

13,049 

 

 

 -

Total investments - trading

$

143,202 

 

$

2,667 

 

$

140,535 

 

$

 -



 

 

 

 

 

 

 

 

 

 

 

Other investments, at fair value:

 

 

 

 

 

 

 

 

 

 

 

Other equity securities

$

54 

 

$

35 

 

$

19 

 

$

 -

CLOs

 

8,028 

 

 

 -

 

 

 -

 

 

8,028 

CDOs

 

30 

 

 

 -

 

 

 -

 

 

30 

Residential loans

 

359 

 

 

 -

 

 

359 

 

 

 -

Foreign currency forward contracts

 

71 

 

 

71 

 

 

 -

 

 

 -

Total 

 

8,542 

 

$

106 

 

$

378 

 

$

8,058 

EuroDekania (1)

 

1,318 

 

 

 

 

 

 

 

 

 

Total other investments, at fair value

$

9,860 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Trading securities sold, not yet purchased:

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

29,111 

 

$

29,111 

 

$

 -

 

$

 -

Corporate bonds

 

28,792 

 

 

 -

 

 

28,792 

 

 

 -

Municipal bonds

 

20 

 

 

 -

 

 

20 

 

 

 -

Derivatives

 

11,930 

 

 

 -

 

 

11,930 

 

 

 -

Total trading securities sold, not yet purchased

$

69,853 

 

$

29,111 

 

$

40,742 

 

$

 -



(1)Hybrid Securities Fund—European.

 

21

 


 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS

December 31, 2015

(Dollars in Thousands)



 

 

 

 

Significant

 

Significant



 

 

Quoted Prices in

 

Other Observable

 

Unobservable



 

 

Active Markets

 

Inputs

 

Inputs

Assets

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Investments-trading:

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency MBS and CMOs

$

3,225 

 

$

 -

 

$

3,225 

 

$

 -

U.S. government agency debt securities

 

12,737 

 

 

 -

 

 

12,737 

 

 

 -

RMBS

 

98 

 

 

 -

 

 

98 

 

 

 -

U.S. Treasury securities

 

1,355 

 

 

1,355 

 

 

 -

 

 

 -

Other ABS

 

2,048 

 

 

 -

 

 

2,048 

 

 

 -

SBA loans

 

29,931 

 

 

 -

 

 

29,931 

 

 

 -

Corporate bonds and redeemable preferred stock

 

19,873 

 

 

 -

 

 

19,873 

 

 

 -

Municipal bonds

 

24,053 

 

 

 -

 

 

24,053 

 

 

 -

Certificates of deposit

 

263 

 

 

 -

 

 

263 

 

 

 -

Derivatives

 

1,158 

 

 

 -

 

 

1,158 

 

 

 -

Total investments - trading

$

94,741 

 

$

1,355 

 

$

93,386 

 

$

 -