XNAS:GLCH Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x                Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the quarterly period ended June 30, 2012

 

- or -

 

o                   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 014140

 

GLEACHER & COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

22-2655804

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

1290 Avenue of the Americas, New York, New York

 

10104

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (212) 273-7100

 

 

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 x  No o

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

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 x

 

 

 

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 in Rule 12b-2 of the Exchange Act). Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

125,077,022 shares of Common Stock were outstanding as of the close of business on August 1, 2012

 

 

 



Table of Contents

 

GLEACHER & COMPANY, INC. AND SUBSIDIARIES

 

FORM 10-Q

 

INDEX

 

 

 

 

Page

 

 

 

 

Part I

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

 

 

Consolidated Statements of Operations for the three and six months ended June 30, 2012 and June 30, 2011

1

 

 

 

 

 

 

Consolidated Statements of Financial Condition at June 30, 2012 and December 31, 2011

2

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and June 30, 2011

3

 

 

 

 

 

 

Notes to Consolidated Financial Statements

5

 

 

 

 

 

Item 2.

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

34

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

60

 

 

 

 

 

Item 4.

Controls and Procedures

65

 

 

 

 

Part II

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

66

 

 

 

 

 

Item 1A.

Risk Factors

67

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

69

 

 

 

 

 

Item 6.

Exhibits

70

 



Table of Contents

 

GLEACHER & COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

Part I — Financial Information

 

Item 1.  Financial Statements

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands, except for per share amounts)

 

2012

 

2011

 

2012

 

2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Principal transactions

 

$

7,891

 

$

16,460

 

$

29,211

 

$

61,801

 

Commissions

 

16,197

 

16,339

 

35,348

 

34,798

 

Investment banking

 

9,115

 

10,042

 

15,793

 

20,364

 

Investment (losses)/gains, net

 

(139

)

368

 

(7

)

(318

)

Interest income

 

11,558

 

14,884

 

30,762

 

29,952

 

Gain from bargain purchase — ClearPoint Funding, Inc. acquisition (Refer to Note 11)

 

 

 

 

2,330

 

Fees and other

 

3,527

 

1,341

 

6,404

 

2,465

 

Total revenues

 

48,149

 

59,434

 

117,511

 

151,392

 

Interest expense

 

3,502

 

3,055

 

8,121

 

5,624

 

Net revenues

 

44,647

 

56,379

 

109,390

 

145,768

 

Expenses (excluding interest):

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

32,606

 

37,286

 

76,325

 

96,374

 

Impairment of goodwill (Refer to Note 12)

 

21,096

 

 

21,096

 

 

Clearing, settlement and brokerage

 

8,695

 

5,284

 

21,688

 

10,071

 

Communications and data processing

 

3,160

 

3,279

 

6,479

 

6,494

 

Occupancy, depreciation and amortization

 

2,236

 

2,159

 

4,370

 

4,071

 

Business development

 

981

 

1,236

 

1,999

 

2,344

 

Other

 

7,624

 

4,719

 

14,466

 

9,270

 

Total expenses (excluding interest)

 

76,398

 

53,963

 

146,423

 

128,624

 

(Loss)/income from continuing operations before income taxes and discontinued operations

 

(31,751

)

2,416

 

(37,033

)

17,144

 

Income tax expense

 

29,058

 

1,164

 

28,492

 

7,293

 

(Loss)/income from continuing operations

 

(60,809

)

1,252

 

(65,525

)

9,851

 

(Loss)/income from discontinued operations, net of taxes (Refer to Note 24)

 

(23

)

(11,672

)

9

 

(13,066

)

Net loss

 

$

(60,832

)

$

(10,420

)

$

(65,516

)

$

(3,215

)

 

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

Basic (loss)/income per share

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.51

)

$

0.01

 

(0.55

)

$

0.08

 

Discontinued operations

 

 

(0.09

)

 

(0.11

)

Net (loss)/income per share

 

$

(0.51

)

$

(0.08

)

$

(0.55

)

$

(0.03

)

Diluted (loss)/income per share

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.51

)

$

0.01

 

(0.55

)

$

0.08

 

Discontinued operations

 

 

(0.09

)

 

(0.10

)

Net (loss)/income per share

 

$

(0.51

)

$

(0.08

)

$

(0.55

)

$

(0.02

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock:

 

 

 

 

 

 

 

 

 

Basic

 

119,564

 

124,061

 

119,176

 

123,825

 

Diluted

 

119,564

 

130,606

 

119,176

 

130,698

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1



Table of Contents

 

GLEACHER & COMPANY, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

 

 

June 30,

 

December 31,

 

(In thousands of dollars, except for share and per share amounts)

 

2012

 

2011

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

52,733

 

$

36,672

 

Cash and securities segregated for regulatory and other purposes

 

1,150

 

9,612

 

Securities purchased under agreements to resell

 

1,879,740

 

1,523,227

 

Receivables from:

 

 

 

 

 

Brokers, dealers and clearing organizations

 

31,582

 

58,776

 

Related parties

 

1,362

 

1,337

 

Others

 

16,218

 

16,161

 

Financial instruments owned, at fair value (includes financial instruments pledged of $762,817 and $1,553,610 at June 30, 2012 and December 31, 2011, respectively)

 

763,550

 

1,554,660

 

Investments

 

19,090

 

18,310

 

Office equipment and leasehold improvements, net

 

6,164

 

6,735

 

Goodwill

 

 

21,096

 

Intangible assets

 

4,064

 

4,311

 

Income taxes receivable

 

4,623

 

12,102

 

Deferred tax assets, net

 

581

 

30,766

 

Other assets

 

9,896

 

9,791

 

Total Assets

 

$

2,790,753

 

$

3,303,556

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Payables to:

 

 

 

 

 

Brokers, dealers and clearing organizations

 

$

500,882

 

$

1,108,664

 

Related parties

 

594

 

4,939

 

Others

 

3,676

 

3,243

 

Securities sold under agreements to repurchase

 

1,904,807

 

1,478,081

 

Securities sold, but not yet purchased, at fair value

 

110,333

 

184,996

 

Secured borrowings

 

46,718

 

213,611

 

Accrued compensation

 

15,540

 

26,274

 

Accounts payable and accrued expenses

 

11,536

 

18,223

 

Income taxes payable

 

3,770

 

3,979

 

Deferred tax liabilities

 

 

1,622

 

Subordinated debt

 

595

 

801

 

Total Liabilities

 

2,598,451

 

3,044,433

 

 

 

 

 

 

 

Commitments and Contingencies (Refer to Note 16)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Common stock; $.01 par value; authorized 200,000,000 shares, issued 133,769,219 and 133,714,786 shares; and outstanding 125,731,141 and 120,883,601 shares, at June 30, 2012 and December 31, 2011, respectively

 

1,337

 

1,337

 

Additional paid-in capital

 

452,299

 

463,497

 

Deferred compensation

 

124

 

161

 

Accumulated deficit

 

(251,403

)

(185,887

)

Treasury stock, at cost (8,038,078 shares and 12,831,185 shares, at June 30, 2012 and December 31, 2011, respectively)

 

(10,055

)

(19,985

)

Total Stockholders’ Equity

 

192,302

 

259,123

 

Total Liabilities and Stockholders’ Equity

 

$

2,790,753

 

$

3,303,556

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2



Table of Contents

 

GLEACHER & COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

(In thousands of dollars)

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(65,516

)

$

(3,215

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Deferred income taxes (Refer to Note 18)

 

28,563

 

2,887

 

Impairment of goodwill (Refer to Note 12)

 

21,096

 

14,311

 

Amortization of stock-based compensation

 

4,495

 

9,326

 

Clawback of stock-based compensation awards subject to non-competition provisions

 

(1,579

)

 

Gain from bargain purchase — ClearPoint Funding, Inc. acquisition

 

 

(2,330

)

Depreciation and amortization

 

971

 

961

 

Amortization of intangible assets

 

247

 

1,528

 

Investment losses/(gains), net

 

7

 

318

 

Changes in operating assets and liabilities:

 

 

 

 

 

Cash and securities segregated for regulatory purposes

 

8,462

 

(3,900

)

Securities purchased under agreements to resell

 

(356,513

)

(216,516

)

Net receivable/payable from/to related parties

 

(4,387

)

971

 

Net receivable from others

 

376

 

394

 

Financial instruments owned, at fair value

 

791,110

 

86,341

 

Income taxes receivable/payable, net

 

6,884

 

(707

)

Other assets

 

(39

)

1,081

 

Net payable to brokers, dealers and clearing organizations

 

(580,588

)

(76,601

)

Securities sold under agreements to repurchase

 

426,726

 

191,449

 

Securities sold, but not yet purchased, at fair value

 

(74,663

)

41,541

 

Accounts payable and accrued expenses

 

(3,491

)

16

 

Accrued compensation

 

(10,734

)

(41,219

)

Drafts payable

 

1,065

 

(897

)

Net cash provided by operating activities

 

192,492

 

5,739

 

Cash flows from investing activities:

 

 

 

 

 

Payment to former stockholders of Gleacher Partners, Inc. (Refer to Note 26)

 

(4,373

)

 

Purchase of investments

 

(800

)

 

Purchases of office equipment and leasehold improvements

 

(400

)

(1,709

)

Return of capital — investments

 

 

1,772

 

ClearPoint acquisition — net cash acquired (Refer to Note 11)

 

 

626

 

Capital contribution — investments

 

 

(103

)

Net cash (used in)/provided by investing activities

 

(5,573

)

586

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from secured borrowings

 

859,125

 

373,039

 

Repayments of secured borrowings

 

(1,026,019

)

(357,293

)

Purchases of treasury stock

 

(1,151

)

(10,333

)

Payment for employee tax withholdings on stock-based compensation

 

(2,615

)

(5,441

)

Repayment of subordinated debt

 

(206

)

(108

)

Excess tax benefits related to stock-based compensation

 

8

 

238

 

Net cash (used in)/provided by financing activities

 

(170,858

)

102

 

Increase in cash and cash equivalents

 

16,061

 

6,427

 

Cash and cash equivalents at beginning of the period

 

36,672

 

40,009

 

Cash and cash equivalents at the end of the period

 

$

52,733

 

$

46,436

 

 

3



Table of Contents

 

GLEACHER & COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

NON CASH INVESTING AND FINANCING ACTIVITIES

 

During the six months ended June 30, 2012 and 2011, the Company issued approximately 6.9 million and 0.6 million shares out of treasury stock, net of forfeitures, respectively, for stock-based compensation exercises and vesting and distributions of deferred compensation related to the employee stock trust.

 

During the six months ended June 30, 2012 and 2011, the Company issued approximately 0.1 million and 2.3 million, respectively, shares of common stock for settlement of stock-based compensation awards.

 

The fair value of non-cash assets acquired and liabilities assumed in the ClearPoint Funding, Inc. acquisition on January 3, 2011 were $51.6 million and $49.9 million, respectively (Refer to Note 11).

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              Basis of Presentation

 

Gleacher & Company, Inc. (the “Parent” and together with its subsidiaries, the “Company”) is an independent investment bank that provides corporate and institutional clients with strategic and financial advisory services, including merger and acquisition, restructuring, recapitalization, and strategic alternative analysis.  The Company also provides capital raising, research-based investment analysis, and securities brokerage services, and, through its subsidiary ClearPoint Funding, Inc. (“ClearPoint”), engages in residential mortgage lending.  The Company offers a diverse range of products through its Investment Banking, Mortgage Backed Securities & Rates (“MBS & Rates,” formerly known as MBS/ABS & Rates), Credit Products (formerly known as Corporate Credit) and ClearPoint divisions.  The Company is incorporated under the laws of the State of Delaware.  The Company’s common stock is traded on the NASDAQ Global Market (“NASDAQ”) under the symbol “GLCH.”

 

Policies and Presentation

 

The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”).  The consolidated financial statements prepared in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.  Actual results could be different from these estimates.  In the opinion of management, all normal, recurring adjustments necessary for a fair statement of this interim financial information are contained in the accompanying consolidated financial statements.  The results for any interim period are not necessarily indicative of those for the full year.

 

The accompanying consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for Quarterly Reports on Form 10-Q and are unaudited.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted.  Reference should be made to the Company’s audited consolidated financial statements and notes within the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 for additional information, including a summary of the Company’s significant accounting policies.

 

Reclassification

 

Certain amounts in prior periods have been reclassified to conform to the current year presentation with no impact to previously reported net loss or stockholders’ equity.  This includes the prior period results of the Equities division, which is now being reported as discontinued operations.  Refer to Note 24 herein for additional information.  In addition, revenues earned on a riskless principal basis in the amount of $16.1 million and $34.2 million, respectively, for the three and six months ended June 30, 2011 have been reclassified from principal transactions to commission income in order to distinguish such revenues (commission equivalents) from revenues earned on financial instruments held in inventory.

 

Recent Accounting Pronouncements

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11 “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), which requires new disclosures about balance sheet offsetting and related arrangements.  For derivative financial assets and liabilities, the amendments require disclosure of gross asset and liability amounts, amounts offset on the balance sheet, and amounts subject to offsetting requirements but not offset in the balance sheet.  This guidance is effective for annual reporting periods beginning on or after January 1, 2013 and is to be applied retrospectively.  This guidance does not amend the existing guidance on when it is appropriate to offset, and since these amended principles require only additional disclosures, the adoption of ASU 2011-11 will not affect the Company’s financial condition, results of operations or cash flows.

 

In September 2011, the FASB issued ASU No. 2011-08 “Intangibles — Goodwill and Other:  Testing Goodwill for Impairment” (“ASU 2011-08”), in order to simplify how entities test goodwill for impairment.  ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in FASB Topic 350.  ASU 2011-08 is effective for

 

5



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.   The adoption of ASU 2011-08 did not have a material impact on the Company’s consolidated financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”), in order to improve the comparability, consistency, and transparency of financial reporting and to increase prominence of items reported in other comprehensive income.  The amendments in this ASU include the requirement that all non-owner changes in stockholders’ equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements, and eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, except for new presentation requirements about reclassification of items out of accumulated other comprehensive income which are currently deferred indefinitely.  ASU 2011-05 is not applicable to the Company as it has no items reported as other comprehensive income.

 

In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurements:  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU 2011-04”), in order to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards (“IFRS”).  The amendments in this ASU include clarification of (i) the application of the highest and best use valuation premise concepts and specifies that such concepts are relevant only when measuring the fair value of nonfinancial assets, (ii) the requirement to measure certain instruments classified in stockholders’ equity at fair value, such as equity interests issued as consideration in a business combination and (iii) disclosure requirements regarding quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy.  In addition, ASU 2011-04 changes particular principles or requirements for measuring fair value or for disclosing information about fair value measurements, including (a) measuring the fair value of financial instruments that are managed within a portfolio by permitting entities to measure such financial instruments on a net basis if such entities manage such financial instruments on the basis of their net exposure, (b) clarifying that premiums or discounts related to size as a characteristic of the reporting entity’s holding (specifically, a blockage factor) rather than as a characteristic of the asset or liability (for example, a control premium) are not permitted in a fair value measurement and (c) the expansion of disclosures about fair value measurements, including the valuation processes of financial instruments categorized within Level 3 of the fair value hierarchy and sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any.  ASU 2011-04 is effective during interim and annual periods beginning after December 15, 2011.  The adoption of ASU 2011-04 did not have a material impact on the Company’s consolidated financial statements.  Refer to Note 8 which includes the disclosures as required by this ASU.

 

In April 2011, the FASB issued ASU No. 2011-03 “Transfers and Servicing:  Reconsideration of Effective Control for Repurchase Agreements” (“ASU 2011-03”), in order to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  The amendments in this ASU remove from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance implementation guidance related to that criterion.  ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011.  The adoption of ASU 2011-03 did not have a material impact on the Company’s consolidated financial statements.

 

In December 2010, the FASB issued ASU No. 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” (“ASU 2010-28”), in order to address questions about entities with reporting units with zero or negative carrying amounts as some entities concluded that Step 1 of the test is passed in those circumstances because the fair value of their reporting unit will generally be greater than zero.  For reporting units with zero or negative carrying amounts, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists, taking into consideration any adverse qualitative factors indicating that an impairment may exist.  ASU 2010-28 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of ASU 2010-28 did not have a material impact on the Company’s consolidated financial statements.

 

6



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.              (Loss)/Earnings Per Common Share

 

The Company calculates its basic and diluted (loss)/earnings per share in accordance with ASC 260, “Earnings Per Share.”  Basic (loss)/earnings per share is computed based upon weighted-average shares outstanding during the period.  Dilutive (loss)/earnings per share is computed consistently with the basic computation while giving effect to all dilutive potential common shares and common share equivalents that were outstanding during the period. The Company uses the treasury stock method to reflect the potential dilutive effect of unvested stock awards, warrants, and unexercised options.  The weighted average shares outstanding were calculated as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Weighted average shares for basic (loss)/earnings per share

 

119,564

 

124,061

 

119,176

 

123,825

 

Effect of dilutive common share equivalents

 

 

6,545

 

 

6,873

 

Weighted average shares and dilutive common share equivalents for dilutive (loss)/earnings per share

 

119,564

 

130,606

 

119,176

 

130,698

 

 

The Company was in a net loss position for the three and six months ended June 30, 2012 and therefore excluded approximately 9.5 million shares underlying stock options, 9.2 million shares of restricted stock, and 4.0 million shares underlying restricted stock units (“RSUs”) from its computation of dilutive loss per share because they were anti-dilutive.  For the three and six months ended June 30, 2011, the Company excluded approximately 9.1 million of shares underlying stock options and warrants, 3.2 million of shares of restricted stock and 0.5 million shares of shares underlying RSUs from its computation of dilutive earnings per share from continuing operations because they were antidilutive.

 

3.              Cash and Cash Equivalents

 

The Company has defined cash equivalents as highly liquid investments, with original maturities of less than 90 days that are not segregated for regulatory purposes or held for sale in the ordinary course of business.  At June 30, 2012 and December 31, 2011, cash equivalents were approximately $3.1 million and $10.3 million, respectively.

 

4.              Cash and Securities Segregated for Regulatory and Other Purposes

 

In November 2010, Gleacher & Company Securities, Inc. (“Gleacher Securities”) began self-clearing its trading activities in U.S. government securities (the “Rates business”) and is therefore subject to the Customer Protection rules under Rule 15c3-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  At June 30, 2012 and December 31, 2011, the Company segregated cash of $1.0 million and $4.0 million respectively, in a special reserve bank account for the exclusive benefit of customers pertaining to the results of the activities of the Company’s Rates business and outstanding checks issued to customers and vendors when the Company was previously conducting self-clearing in prior years.

 

Cash segregated also includes $0.2 million and $1.0 million of cash on deposit in connection with ClearPoint’s secured borrowings at June 30, 2012 and December 31, 2011, respectively.

 

At December 31, 2011, cash segregated also included approximately $4.6 million of cash received in connection with a working capital loan agreement between an unaffiliated borrower and certain lenders.  In connection with this agreement, a wholly-owned subsidiary of the Company, acting as agent, has a commitment to pay funding advances on behalf of the lenders with respect to any unfunded commitments drawn upon by the borrower under the working capital loan agreement.  An equal and offsetting liability is recorded within Accounts payable and accrued expenses within the Consolidated Statement of Financial Condition.

 

7



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.              Resale and Repurchase Agreements

 

Refer to Note 1 within the footnotes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 for a detailed discussion of accounting policies related to the Company’s resale and repurchase agreements.

 

At June 30, 2012 and December 31, 2011, the fair value of financial instruments received as collateral by the Company that it was permitted to deliver or repledge in connection with resale agreements was approximately $1.9 billion and $1.5 billion, respectively, substantially all of which was repledged in the form of repurchase agreements at June 30, 2012 and December 31, 2011.

 

The following tables provide detail on the composition of the outstanding repurchase agreements at June 30, 2012 and December 31, 2011:

 

 

 

June 30, 2012

 

(In thousands of dollars)

 

Overnight

 

< 30 days

 

30-90 days

 

> 90 days

 

On
Demand

 

Total

 

Collateral Type

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and federal agency obligations

 

$

523,737

 

$

300,046

 

$

750,012

 

$

 

$

331,012

 

$

1,904,807

 

 

 

 

December 31, 2011

 

(In thousands of dollars)

 

Overnight

 

< 30 days

 

30-90 days

 

> 90 days

 

On
Demand

 

Total

 

Collateral Type

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and federal agency obligations

 

$

1,204,641

 

$

 

$

 

$

 

$

273,440

 

$

1,478,081

 

 

6.              Receivables from and Payables to Brokers, Dealers, and Clearing Organizations

 

Amounts receivable from and payable to brokers, dealers and clearing organizations consists of the following:

 

(In thousands of dollars)

 

June 30,
2012

 

December 31,
2011

 

Deposits with clearing organizations

 

$

19,182

 

$

16,467

 

Receivable for unsettled trading activities

 

7,203

 

14,705

 

Receivable from clearing organizations

 

5,043

 

2,950

 

Fails to deliver

 

5

 

24,654

 

Underwriting and syndicate fees receivable

 

149

 

 

Total receivables

 

$

31,582

 

$

58,776

 

Payable to clearing organizations

 

500,882

 

1,093,518

 

Fails to receive

 

 

15,146

 

Total payables

 

$

500,882

 

$

1,108,664

 

 

Included within deposits with clearing organizations at June 30, 2012 and December 31, 2011 is a deposit with the Fixed Income Clearing Corporation (“FICC”) of approximately $18.4 million and $15.2 million, respectively, related to the Company’s self clearing activities associated with the Rates business.

 

8



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Securities transactions are recorded on their trade date as if they had settled.  The related amounts receivable and payable for unsettled securities transactions are recorded net, by clearing organization, in Receivables from or Payables to brokers, dealers and clearing organizations in the Consolidated Statements of Financial Condition.

 

The clearing organizations may re-hypothecate all securities held on behalf of the Company.

 

7.              Receivables from and Payables to Others

 

Amounts Receivable from and Payable to Others consist of the following:

 

(In thousands of dollars)

 

June 30,
2012

 

December 31,
2011

 

Investment banking and advisory fees receivable

 

$

8,573

 

$

1,713

 

Interest receivable

 

3,122

 

7,250

 

Principal paydowns — Agency mortgage-backed securities

 

2,085

 

4,468

 

Loans and advances

 

286

 

280

 

Management fees receivable

 

171

 

140

 

Others

 

1,981

 

2,310

 

Total receivables from others

 

$

16,218

 

$

16,161

 

Payable to employees for the Employee Investment Funds (Refer to Note 10)

 

$

938

 

$

972

 

Customer deposits held in escrow — ClearPoint

 

344

 

849

 

Draft payables

 

1,199

 

135

 

Others

 

1,195

 

1,287

 

Total payables to others

 

$

3,676

 

$

3,243

 

 

The Company maintains a group of “zero balance” bank accounts which are included in Payable to others on the Consolidated Statements of Financial Condition.  Drafts payable represent the balance in these accounts related to outstanding checks that have not yet been presented for payment at the bank.  The Company has sufficient funds on deposit to clear these checks, and these funds will be transferred to the “zero-balance” accounts upon presentment.

 

8.              Financial Instruments

 

Refer to Note 1 within the footnotes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, for a detailed discussion of accounting policies related to the Company’s financial instruments & investments, loans and derivative financial instruments.

 

The Company’s financial instruments are recorded within the Consolidated Statements of Financial Condition at fair value.  ASC 820 defines fair value as the price that would be received upon the sale of an asset or paid upon the transfer of a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

Level 1: Quoted prices in active markets that the Company has the ability to access at the reporting date, for identical assets or liabilities.

 

Level 2: Directly or indirectly observable prices in active markets for similar assets or liabilities; quoted prices for identical or similar items in markets that are not active; inputs other than quoted prices (e.g., interest rates, yield curves, credit risks, volatilities); or “market corroborated inputs.”

 

9



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Level 3: Unobservable inputs that reflect management’s own assumptions about the assumptions market participants would make.

 


** Prices are not adjusted for the effects, if any, of the Company holding a large block relative to the overall trading volume (referred to as a “blockage factor”).

 

The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

 

ASC 820 also provides (i) general guidance on determining fair value when markets are inactive including the use of judgment in determining whether a transaction in a dislocated market represents fair value, the inclusion of market participant risk adjustments when an entity significantly adjusts observable market data based on unobservable inputs, and the degree of reliance to be placed on broker quotes or pricing services as well as (ii) additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly declined and guidance on identifying circumstances that indicate a transaction is not orderly.

 

Fair Valuation Methodology

 

Cash Equivalents — These financial assets represent cash in banks or cash invested in highly liquid investments with original maturities less than 90 days that are not segregated for regulatory purposes or held for sale in the ordinary course of business.  These investments are valued at par, which represent fair value, and are considered Level 1.  Refer to Note 3 “Cash and Cash Equivalents” for additional information.

 

Financial Instruments Owned/Securities Sold But Not Yet Purchased — These financial instruments primarily consist of investments in fixed income securities, as well as holdings in equity securities.  The Company has no exposure to European sovereign debt.

 

Level 1 Cash Instruments

 

Level 1 cash instruments include U.S. government obligations and actively traded listed preferred stock and equity securities (if not subject to legal restriction on transfer).  These instruments are generally traded in active, quoted and highly liquid markets.

 

Level 2 Cash Instruments

 

Level 2 cash instruments include agency mortgage-backed securities, federal agency obligations, mortgage loans originated by ClearPoint for which the fair value option (“FVO”) has been elected and certain preferred stock, asset-backed and non-agency mortgage-backed securities.

 

In determining fair value for Level 2 financial instruments, management considers recent purchases or sales of the financial assets, benchmark securities and yields, discounted cash flow techniques, recently executed market transactions of comparable size, issuer spreads and bids/offers.  Fair value for ClearPoint’s loans is determined utilizing observable market factors and is principally based upon the fair value of the “to-be-announced” (“TBA”) forward securities market (refer to “Derivatives” below).

 

Level 3 Cash Instruments

 

Level 3 cash instruments primarily include non-agency commercial and residential mortgage backed securities positions.  In determining fair value for Level 3 financial instruments, management maximizes the use of market

 

10



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

observable information when available.  Management considers factors such as recent purchases or sales of the financial assets, discounted cash flow techniques, bids that were received, and various benchmarking techniques, including spread comparisons to other similar financial assets recently traded, or spreads to observable factors such as yield curves.  Management considers its valuation methodologies consistent with assumptions in how other market participants value certain financial assets.

 

Level 3 cash instruments also includes the Company’s investment in FA Technology Ventures, L.P. (“FATV” or “the Partnership”), further described below.

 

Derivatives — These financial instruments primarily consist of TBAs, forward sales and interest rate lock commitments (“IRLCs”).

 

TBAs and forward sales:  The Company utilizes derivatives for trading strategies and economic hedging strategies.  The Company economically hedges certain of its mortgage-backed and U.S. government securities trading, and the mortgage lending activities of ClearPoint, through the use of TBAs and forward sale agreements.  A TBA is a forward mortgage-backed security whose collateral remains “to-be-announced” until just prior to the trade settlement.  Forward sale agreements are entered into by ClearPoint and are valued based upon the TBA.  TBAs are traded in an active quoted market and therefore generally classified as Level 1.

 

IRLCs:  The Company enters into mortgage loan IRLCs in connection with its mortgage lending activities.  The fair value of the IRLCs are determined on an individual loan basis and are based on investor pricing tables stratified by product, note rate and term and considers the servicing release premium, expected loan origination fees and costs and loan pricing adjustments specific to each loan.  The Company also applies an estimated rate of closure based on historical experience in determining the notional amount of the loans expected to be funded.  All of these factors combined results in the classification of the IRLCs as Level 3.

 

Investments — These financial assets primarily represent the Company’s investment in FATV, a venture capital limited partnership which provides early stage growth capital to companies in the information and new energy technology sectors.  Valuation techniques applied by FATV GP LLC (the “General Partner”) to the underlying portfolio companies predominantly include consideration of comparable market transactions and the use of valuation models to determine the discounted value of estimated future cash flows, adjusted as appropriate for market and/or other risk factors.  In addition, from time to time, FATV holds equity securities in public companies which are valued based upon quoted market prices.  This investment is classified as Level 3 as the majority of the valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

 

Valuation Processes and Controls

 

Our sales and trading professionals in our revenue producing units are responsible for pricing our financial instruments.  The Company employs an independent control process in order to validate these prices.  This control process, which involves both the Company’s risk management and finance personnel, is designed to ensure that the values used for financial reporting are based on observable inputs wherever possible.  In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable.

 

Fair value is generally determined through a variety of factors, such as recent purchases or sales of the financial assets, bids that were received, and various benchmarking techniques, including spread comparisons to other similar assets recently traded or spreads to other observable factors such as yield curves.  The Company’s independent control process includes leveraging pricing information obtained from external data providers to assess the reasonableness of its marks, generally for the Company’s most highly liquid financial instruments, as this data tends to be generally reliable for positions that are actively traded.  For the Company’s less liquid financial instruments, the Company’s independent control process includes comparing month-end marks to recent trading activity, benchmarking price changes to observable market indices, reviewing benchmarking techniques and analyzing external pricing data for trends.  These independent procedures are critical to ensuring our financial instruments are properly valued.

 

11



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair Value Hierarchy

 

The following tables summarize the categorization of the financial instruments within the fair value hierarchy including those for which the Company accounts for under the FVO, at June 30, 2012:

 

 

 

Assets at Fair Value

 

(In thousands of dollars)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial instruments owned

 

 

 

 

 

 

 

 

 

Agency mortgage-backed securities

 

$

 

$

494,767

 

$

1,486

 

$

496,253

 

Federal agency obligations

 

 

103,228

 

 

103,228

 

Loans

 

 

65,048

 

 

65,048

 

U.S. government obligations

 

28,374

 

 

 

28,374

 

Corporate debt securities

 

 

26,578

 

 

26,578

 

Commercial mortgage-backed securities

 

 

6,255

 

5,682

 

11,937

 

Other debt obligations

 

 

8,060

 

2,553

 

10,613

 

Residential mortgage-backed securities

 

 

 

10,355

 

10,355

 

Preferred stock

 

7,887

 

 

 

7,887

 

Equity securities

 

573

 

25

 

112

 

710

 

Collateralized debt obligations

 

 

 

554

 

554

 

Derivatives

 

276

 

 

1,737

 

2,013

 

Investments

 

 

 

19,090

 

19,090

 

Total financial assets at fair value

 

$

37,110

 

$

703,961

 

$

41,569

 

$

782,640

 

 

 

 

Liabilities at Fair Value

 

(In thousands of dollars)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Securities sold but not yet purchased

 

 

 

 

 

 

 

 

 

U.S. Government obligations

 

$

100,204

 

$

 

$

 

$

100,204

 

Corporate debt securities

 

 

6,782

 

 

6,782

 

Preferred stock

 

2,057

 

 

 

2,057

 

Derivatives

 

1,288

 

 

 

1,288

 

Equity securities

 

2

 

 

 

2

 

Total financial liabilities at fair value

 

$

103,551

 

$

6,782

 

$

 

$

110,333

 

 

Included below is a discussion of the characteristics of the Company’s Level 2 and Level 3 holdings at June 30, 2012.  Unless otherwise stated, fair value of Level 2 assets are determined based upon observable third party information including recent trading activity, broker quotes and other relevant market data as noted above.  Fair  value for Level 3 assets are based predominantly on management’s own assumptions about the assumptions market  participants would make.

 

Financial Instruments Classified as Level 2

 

The Company’s agency mortgage-backed securities positions classified as Level 2, of approximately $494.8 million, have a weighted average loan size of approximately $0.2 million paying interest of 5.6%, with a weighted average FICO score of 726.  This portfolio has a weighted average coupon remitting payment of 4.5% and has a weighted average annualized constant prepayment rate of approximately 18.8%.  Fair value is determined through a combination of matrix pricing as well as the information noted in the preceding paragraph.

 

The Company’s net Level 2 U.S. Government and federal agency obligations of approximately $103.2 million have a weighted average coupon of 3.9% and a weighted average maturity of 2025.

 

The Company’s Level 2 loans of approximately $65.0 million (unpaid principal of approximately $62.6 million), which are related to the mortgage lending activities of ClearPoint and for which the FVO has been elected, have a weighted average loan size of approximately $0.2 million and has a weighted average coupon remitting payment of

 

12



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.9%.  Unrealized losses arising from fair value changes of approximately $0.4 million have been recorded within Principal transactions within the Consolidated Statements of Operations as of June 30, 2012.  There are no loans 90 days or more past due and no loans are in non-accrual status.  The loans are underwritten using standards prescribed by conventional mortgage lenders and loan buyers such as the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation.

 

The Company’s net holdings of corporate debt securities classified as Level 2 of approximately $19.8 million have a weighted average credit rating of BB, have a weighted average issuance year of 2010 and a weighted average maturity of 2017.

 

The Company’s Level 2 commercial mortgage backed securities of approximately $6.3 million are primarily senior tranches, have a weighted average credit rating of AA and a weighted average issuance year of 2006.

 

The Company’s other debt obligations reported as Level 2 include holdings of approximately $8.1 million asset backed securities, paying interest of 2.6%, with a weighted average credit rating of AA, and a weighted average vintage of 2010.

 

Financial Instruments Classified as Level 3

 

Non-Agency Residential Mortgage Backed Securities — Disclosure About Significant Unobservable Inputs

 

(Dollars in thousands)
Valuation Technique

 

Fair Value at
June 30, 2012

 

Unobservable Input

 

Range (Weighted Average)

 

Discounted cash flow

 

$

10,335

 

Default rate(1)

 

4%-17% (9%)

 

 

 

 

 

Prepayment rate(2)

 

1%-18% (6%)

 

 

 

 

 

Loss severity(1)

 

35%-75% (52%)

 

 

 

 

 

Discount rate(1)

 

6%-22% (9%)

 

 


(1)          Increases in this assumption would result in a lower fair value, whereas decreases in this assumption would result in a higher fair value.

(2)          Increases in this assumption would result in a higher fair value, whereas decreases in this assumption would result in a lower fair value.

 

Commercial Mortgage Backed Securities — Disclosure About Significant Unobservable Inputs

 

(Dollars in thousands)
Valuation Technique

 

Fair Value at
June 30, 2012

 

Unobservable Input

 

Range (Weighted Average)

 

Discounted cash flow

 

$

5,682

 

Default rate(1)

 

1%-30% (22%)

 

 

 

 

 

Prepayment rate(2)

 

0%-0% (0%)

 

 

 

 

 

Loss severity(1)

 

50%-50% (50%)

 

 

 

 

 

Discount rate(1)

 

1%-29% (22%)

 

 


(1)          Increases in this assumption would result in a lower fair value, whereas decreases in this assumption would result in a higher fair value.

(2)          Increases in this assumption would result in a higher fair value, whereas decreases in this assumption would result in a lower fair value.

 

13



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Other Debt Obligations — Disclosure About Significant Unobservable Inputs

 

(Dollars in thousands)
Valuation Technique

 

Fair Value at
June 30, 2012

 

Unobservable Input

 

Range (Weighted Average)

 

Comparable market data

 

$

2,553

(1)

Spread over benchmark(1)

 

-1.5 to -2.6 (-1.7)

 

 


(1)          Increases in this assumption would result in a higher fair value, whereas decreases in this assumption would result in a lower fair value.

 

Interest Rate Lock Commitments — Disclosure About Significant Unobservable Inputs

 

IRLCs are reported as derivatives and are classified Level 3.  The significant unobservable input is ClearPoint’s estimated rate of closure of 75.0%, representing the percentage of ClearPoint’s loan commitments expected to fund, which is based on historical experience.  A reduction in this unobservable input would result in a lower fair value for these financial instruments.

 

Refer to Note 9 for additional information.

 

Investments — Quantitative Disclosure About Significant Unobservable Inputs

 

The Company’s investments of approximately $19.1 million classified as Level 3, includes the Company’s investment in FATV of approximately $15.9 million.  Refer to Note 10 for additional information.

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted Average)

 

Market comparable companies

 

Enterprise value/Revenue multiple

 

0.9x — 8.8x (6.0x)

 

 

 

EBITA multiple

 

12.6x — 17.5x (15.1x)

 

 

 

Discount applied to multiples

 

0.0% - 43% (30%)

 

 

 

 

 

 

 

Discounted future exit value

 

EBITA multiple

 

7.4x

 

 

 

Discount applied to multiples

 

50%

 

 

An increase in the enterprise value/revenue, EBITA and revenue multiples would result in a higher fair value for these investments, whereas, an increase in the discounts applied to these multiples would reduce fair value.

 

Nonrecurring Fair Value Measurements — Quantitative Disclosure About Significant Unobservable Inputs

 

The Company’s assets measured at fair value on a nonrecurring basis solely relate to Goodwill arising from various business combinations which would be classified as Level 3 within the fair value hierarchy.  Refer to Note 12 for additional information.

 

14



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the categorization of the financial instruments within the fair value hierarchy including those for which the Company accounts for under the FVO at December 31, 2011:

 

 

 

Assets at Fair Value

 

(In thousands of dollars)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial instruments owned

 

 

 

 

 

 

 

 

 

Agency mortgage-backed securities

 

$

 

$

1,084,254

 

$

1,367

 

$

1,085,621

 

Loans

 

 

228,226

 

 

228,226

 

Federal agency obligations

 

 

158,774

 

 

158,774

 

Commercial mortgage-backed securities

 

 

 

38,154

 

38,154

 

Residential mortgage-backed securities

 

 

 

18,419

 

18,419

 

Corporate debt securities

 

 

14,524

 

 

14,524

 

U.S. Government obligations

 

5,789

 

 

 

5,789

 

Preferred stock

 

316

 

 

1,301

 

1,617

 

Equity securities

 

889

 

 

112

 

1,001

 

Collateralized debt obligations

 

 

 

647

 

647

 

Other debt obligations

 

 

 

192

 

192

 

Derivatives

 

 

 

1,696

 

1,696

 

Investments

 

 

 

18,310

 

18,310

 

Total financial assets at fair value

 

$

6,994

 

$

1,485,778

 

$

80,198

 

$

1,572,970

 

 

 

 

Liabilities at Fair Value

 

(In thousands of dollars)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Securities sold but not yet purchased

 

 

 

 

 

 

 

 

 

U.S. Government obligations

 

$

158,059

 

$

 

$

 

$

158,059

 

Corporate debt securities

 

 

12,254

 

 

12,254

 

Federal agency obligations

 

 

11,796

 

 

11,796

 

Preferred stock

 

184

 

 

730

 

914

 

Equity securities

 

2

 

 

 

2

 

Derivatives

 

1,971

 

 

 

1,971

 

Total financial liabilities at fair value

 

$

160,216

 

$

24,050

 

$

730

 

$

184,996

 

 

The Company reviews its financial instrument classification on a quarterly basis.  As the observability and strength of valuation attributes change, reclassifications of certain financial assets or liabilities may occur between levels.  The Company’s policy is to utilize an end-of-period convention for determining transfers in or out of Levels 1, 2 and 3.  During the three and six months ended June 30, 2012, there were no transfers between Levels 1 and 2.

 

15



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the changes in the Company’s Level 3 financial instruments for the three months ended June 30, 2012:

 

(In thousands of dollars)

 

Balance at March
31, 2012

 

Total gains or
(losses) (realized
and unrealized)
(1)

 

Purchases

 

Sales

 

Settlements

 

Transfers in
and/or out of
Level 3(2)

 

Balance at
June 30,
2012

 

Changes in
unrealized
gains/(losses)
on Level 3
assets still held
at the reporting
date (1)

 

Commercial mortgage-backed securities

 

$

27,850

 

$

(2,638

)

$

16,746

 

$

(34,171

)

$

(4

)

$

(2,101

)

$

5,682

 

$

(1,036

)

Residential mortgage-backed securities

 

26,603

 

(2,871

)

12,203

 

(24,878

)

(702

)

 

10,355

 

(882

)

Other debt obligations

 

318

 

(26

)

2,770

 

(504

)

(5

)

 

2,553

 

(15

)

Agency mortgage-backed securities

 

362

 

(361

)

1,750

 

(264

)

(1

)

 

1,486

 

(177

)

Collateralized debt obligations

 

585

 

(31

)

61

 

(61

)

 

 

554

 

(31

)

Equities

 

103

 

9

 

 

 

 

 

112

 

9

 

Investments

 

18,440

 

(150

)

800

 

 

 

 

19,090

 

(478

)

Derivatives

 

885

 

1,737

 

 

 

(885

)

 

1,737

 

1,737

 

Total

 

$

75,146

 

$

(4,331

)

$

34,330

 

$

(59,878

)

$

(1,597

)

$

(2,101

)

$

41,569

 

$

(873

)

 


(1)             Realized and unrealized gains/(losses) are reported in Principal transactions in the Consolidated Statements of Operations.

 

(2)             During the three months ended June 30, 2012, the Company transferred approximately $2.1 million of commercial mortgage backed securities from Level 3 to Level 2 due to price discovery resulting from Company trading activity occurring in close proximity to June 30, 2012.

 

The following table summarizes the changes in the Company’s Level 3 financial instruments for the three months ended June 30, 2011:

 

(In thousands of dollars)

 

Balance at March
31, 2011

 

Total gains or
(losses) (realized
and unrealized)
(1)

 

Purchases

 

Sales

 

Settlements

 

Transfers in
and/or out of
Level 3 (2)

 

Balance at
June 30,
2011

 

Changes in
unrealized
gains/(losses)
on Level 3
assets still held
at the reporting
date (1)

 

Commercial mortgage-backed securities

 

$

68,247

 

$

(3,726

)

$

62,245

 

$

(66,737

)

$

(20

)

$

(3,650

)

$

56,359

 

$

(4,923

)

Residential mortgage-backed securities

 

32,385

 

(575

)

10,831

 

(13,731

)

(1,717

)

 

27,193

 

101

 

Other debt obligations

 

9,555

 

52

 

22,857

 

(16,186

)

(280

)

 

15,998

 

13

 

Agency mortgage-backed securities

 

2,430

 

(168

)

8,043

 

(2,292

)

 

 

8,013

 

(146

)

Collateralized debt obligations

 

7,135

 

6,566

 

3,766

 

(12,463

)

(12

)

(3,568

)

1,424

 

(63

)

Equities

 

60

 

 

 

 

 

 

60

 

 

Investments

 

16,883

 

(785

)

 

 

 

 

16,098

 

(149

)

Derivatives

 

685

 

574

 

 

 

(685

)

 

574

 

574

 

Total

 

$

137,380

 

$

1,938

 

$

107,742

 

$

(111,409

)

$

(2,714

)

$

(7,218

)

$

125,719

 

$

(4,593

)

 


(1)             Realized and unrealized gains/(losses) are reported in Principal transactions in the Consolidated Statements of Operations.

 

(2)             During the three months ended June 30, 2011, the Company transferred approximately $3.7 million of commercial mortgage backed securities and approximately $3.6 million of collateralized debt obligations from Level 3 to Level 2 due to price discovery resulting from Company trading activity occurring in close proximity to June 30, 2011.

 

16



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the changes in the Company’s Level 3 financial instruments for the six months ended June 30, 2012:

 

(In thousands of dollars)

 

Balance at
December 31,
2011

 

Total gains or
(losses)
(realized and
unrealized) (1)

 

Purchases

 

Sales

 

Settlements

 

Transfers in
and/or out of
Level 3(2)

 

Balance at
June 30,
2012

 

Changes in
unrealized
gains/(losses) on
Level 3 assets
still held at the
reporting date (1)

 

Commercial mortgage-backed securities

 

$

38,154

 

$

(6,081

)

$

10,108

 

$

(34,339

)

$

(59

)

$

(2,101

)

$

5,682

 

$

(1,253

)

Residential mortgage-backed securities

 

18,419

 

(1,403

)

11,067

 

(17,224

)

(504

)

 

10,355

 

(859

)

Other debt obligations

 

192

 

(16

)

6,357

 

(3,976

)

(4

)

 

2,553

 

(15

)

Agency mortgage-backed securities

 

1,367

 

(408

)

1,760

 

(1,232

)

(1

)

 

1,486

 

(208

)

Collateralized debt obligations

 

647

 

(93

)

61

 

(61

)

 

 

554

 

(93

)

Equities

 

112

 

 

 

 

 

 

112

 

 

Preferred stock

 

571

 

188

 

5,624

 

(6,383

)

 

 

 

 

Investments

 

18,310

 

(20

)

800

 

 

 

 

19,090

 

(153

)

Derivatives

 

1,696

 

2,622

 

 

 

(2,581

)

 

1,737

 

1,737

 

Total

 

$

79,468

 

$

(5,211

)

$

35,777

 

$

(63,215

)

$

(3,149

)

$

(2,101

)

$

41,569

 

$

(844

)

 


(1)             Realized and unrealized gains/(losses) are reported in Principal transactions in the Consolidated Statements of Operations.

 

(2)             During the six months ended June 30, 2012, the Company transferred approximately $2.1 million of commercial mortgage backed securities from Level 3 to Level 2 due to price discovery resulting from Company trading activity occurring in close proximity to June 30, 2012.

 

The following table summarizes the changes in the Company’s Level 3 financial instruments for the six months ended June 30, 2011:

 

(In thousands of dollars)

 

Balance at
December 31,
2010

 

Total gains or
(losses)
(realized and
unrealized) (1)

 

Purchases

 

Sales

 

Settlements

 

Transfers in
and/or out of
Level 3(2)

 

Balance at
June 30,
2011

 

Changes in
unrealized
gains/(losses) on
Level 3 assets
still held at the
reporting date (1)

 

Commercial mortgage-backed securities

 

$

46,571

 

$

10,966

 

$

115,451

 

$

(112,904

)

$

(75

)

$

(3,650

)

$

56,359

 

$

(4,687

)

Residential mortgage-backed securities

 

33,604

 

(147

)

11,909

 

(15,943

)

(2,230

)

 

27,193

 

92

 

Other debt obligations

 

5,843

 

57

 

30,698

 

(20,241

)

(359

)

 

15,998

 

4

 

Agency mortgage-backed securities

 

806

 

(236

)

8,043

 

(600

)

 

 

8,013

 

(180

)

Collateralized debt obligations

 

23,235

 

11,471

 

9,056

 

(38,244

)

(526

)

(3,568

)

1,424

 

(42

)

Equities

 

60

 

 

 

 

 

 

60

 

 

Investments

 

18,084

 

(1,471

)

 

 

(515

)

 

16,098

 

(425

)

Derivatives

 

 

1,259

 

 

 

(685

)

 

574

 

574

 

Total

 

$

128,203

 

$

21,899

 

$

175,157

 

$

(187,932

)

$

(4,390

)

$

(7,218

)

$

125,719

 

$

(4,664

)

 


(1)             Realized and unrealized gains/(losses) are reported in Principal transactions in the Consolidated Statements of Operations.

 

(2)             During the six months ended June 30, 2011, the Company transferred approximately $3.7 million of commercial mortgage backed securities and approximately $3.6 million of collateralized debt obligations from Level 3 to Level 2 due to price discovery resulting from Company trading activity occurring in close proximity to June 30, 2011.

 

17



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.                        Derivatives

 

The Company utilizes derivatives for trading strategies and economic hedging strategies to actively manage its market and liquidity exposures.  In addition, the Company enters into mortgage loan IRLCs in connection with its mortgage lending activities.  The following table summarizes the Company’s derivative instruments as of June 30, 2012 and December 31, 2011:

 

 

 

June 30, 2012

 

December 31, 2011

 

(In thousands of dollars)

 

Number
of
Contracts

 

Notional

 

Fair Value

 

Number
of
Contracts

 

Notional

 

Fair
Value

 

Purchase Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

TBA purchase agreements

 

4

 

$

41,250

 

$

100

 

1

 

$

589

 

$

 

U.S. treasury futures contracts

 

 

 

 

 

 

 

IRLCs

 

792

 

138,107

 

1,737

 

708

 

127,227

 

1,696

 

Total

 

796

 

179,357

 

$

1,837

 

709

 

$

127,816

 

$

1,696

 

Sale Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

TBA sale agreements

 

25

 

$

530,194

 

$

(1,100

)

17

 

$

371,000

 

$

(1,183

)

Forward sale agreements

 

1

 

2,180

 

(12

)

11

 

120,900

 

(788

)

U.S. treasury futures contracts

 

 

 

 

 

 

 

Total

 

26

 

$

532,374

 

$

(1,112

)

28

 

$

491,900

 

$

(1,971

)

 

Total gains/(losses) associated with these activities, which are recorded within Principal transactions within the Consolidated Statements of Operations were ($4.2) million and ($9.0) million, for the three months ended June 30, 2012 and 2011, respectively, and ($7.3) million and ($12.0) million, for the six months ended June 30, 2012 and 2011, respectively.

 

10.                 Investments

 

Refer to Note 1 within the footnotes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, for a detailed discussion of the accounting policies related to the Company’s investments included within the policy titled “Financial Instruments and Investments” and Note 8 herein for additional information regarding valuation techniques and inputs related to the Company’s investment in FATV.  The Company’s investment portfolio includes interests in publicly and privately held companies and private equity securities.  Information regarding these investments has been aggregated and is presented below.

 

(In thousands of dollars)

 

June 30,
2012

 

December 31,
2011

 

Fair Value

 

 

 

 

 

Investment in FATV

 

$

15,876

 

$

15,863

 

Employee Investment Funds, net of Company’s ownership interest

 

1,214

 

1,247

 

Other investment

 

2,000

 

1,200

 

Total Investments

 

$

19,090

 

$

18,310

 

 

Investment gains and losses are comprised of the following:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands of dollars)

 

2012

 

2011

 

2012

 

2011

 

Investments (realized and unrealized gains/(losses))

 

$

(139

)

$

368

 

$

(7

)

$

(318

)

 

18



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company has an investment in FATV of approximately $15.9 million at June 30, 2012 and December 31, 2011.  FATV’s primary purpose is to provide investment returns consistent with the risk of investing in venture capital.   FA Technology Ventures Corporation, a wholly-owned subsidiary of the Company, is the investment advisor to FATV.  There are no material open commitments to fund this portfolio at June 30, 2012.  At June 30, 2012 and December 31, 2011, total Partnership capital for all investors in FATV equaled $63.4 million and $63.7 million, respectively.  The Partnership was scheduled to end in July 2011, subject to extension by the vote of a majority of the limited partners, as provided in the limited partnership agreement applicable to the Partnership (the “Partnership Agreement”).  The term of the Partnership was extended pursuant to such provision and is now scheduled to terminate on July 19, 2013.  The Partnership is considered a variable interest entity. The Company is not the primary beneficiary, due to other investors’ level of investment in the Partnership.  Accordingly, the Company has not consolidated the Partnership in these consolidated financial statements, but has only recorded the fair value of its investment, which also represented the Company’s maximum exposure to loss in the Partnership at June 30, 2012 and December 31, 2011.  The Company’s share of management fee income derived from the Partnership for the three months ended June 30, 2012 and 2011 were $0.2 million and $0.2 million, respectively, and were $0.4 million and $0.3 million for the six months ended June 30, 2012 and 2011, respectively.

 

The Employee Investment Funds (“EIF”) are limited liability companies, established by the Company for the purpose of having select employees invest in private equity securities.  The EIF is managed by Broadpoint Management Corp., a wholly-owned subsidiary of the Company, which has contracted with FATV to act as an investment advisor with respect to funds invested in parallel with the Partnership.  The Company has consolidated EIF resulting in approximately $1.2 million and $1.2 million of Investments and a corresponding Payable to others being recorded in the Consolidated Statements of Financial Condition as of June 30, 2012 and December 31, 2011, respectively.  Management fees are not material.

 

Other investment is an investment in a privately held company.

 

11.                 Business Combinations

 

ClearPoint Funding, Inc. Acquisition

 

On January 3, 2011, the Company completed its acquisition of ClearPoint.  Pursuant to the related Stock Purchase Agreement, a newly formed subsidiary of the Company, Descap Mortgage Funding, LLC (“Descap LLC”), paid approximately $0.3 million of cash as transaction consideration for all of the issued and outstanding shares of capital stock of ClearPoint.  Descap LLC is also obligated to pay the former stockholder of ClearPoint no more than approximately $2.0 million payable in installments on the first, second and third anniversaries of the closing date, contingent upon the continued employment of the former stockholder and certain indemnification matters.  The Company recorded a bargain purchase gain of approximately $2.3 million, and no goodwill was recognized as the majority of the consideration payable to the former stockholder will be recognized as compensation expense for future services.

 

19



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The ClearPoint acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations.”  The following condensed statement of net assets acquired reflects the value assigned to ClearPoint’s net assets as of the acquisition date:

 

Condensed Statement of Net Asset Acquired
(In thousands of dollars)

 

January 3, 2011

 

Assets

 

 

 

Cash and cash equivalents

 

$

876

 

Loans

 

45,726

 

Derivative assets

 

1,117

 

Intangible assets*

 

803

 

Other assets

 

3,994

 

Total assets acquired

 

$

52,516

 

Liabilities

 

 

 

Secured borrowings

 

$

44,339

 

Accrued expenses and other liabilities

 

5,597

 

Total liabilities assumed

 

$

49,936

 

 

 

 

 

Net assets acquired

 

$

2,580

 

 


*Consists primarily of customer relationships with an estimated useful life of 8 years.

 

Pro forma information for the six months ended June 30, 2011 has not been provided given the proximity of the acquisition date to the beginning of the year.  Refer to Note 25 herein for additional information regarding ClearPoint’s financial information.

 

12.                 Goodwill and Intangible Assets

 

Refer to Note 1 within the footnotes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, for a detailed discussion of the accounting policy related to goodwill and intangible assets.

 

Goodwill

 

In connection with the preparation of the unaudited consolidated financial statements contained herein, the Company performed an interim goodwill impairment test which was triggered as a result of the Company’s market capitalization trading at levels significantly below book value during the three months ended June 30, 2012.  The Company determined that all of its remaining goodwill of approximately $21.1 million had been impaired, due to the duration and severity of the decline in the Company’s stock price in relation to its book value.

 

(In thousands of dollars)

 

Reporting Unit
MBS & Rates

 

Reporting Unit
Investment Banking

 

Total

 

Goodwill

 

 

 

 

 

 

 

Balance at December 31, 2011

 

$

17,364

 

$

3,732

 

$

21,096

 

Increases/(decreases)

 

 

 

 

Balance at March 31, 2012

 

17,364

 

3,732

 

21,096

 

Increases/(decreases)

 

(17,364

)

(3,732

)

(21,096

)

Balance at June 30, 2012

 

$

 

$

 

$

 

 

20



Table of Contents

 

GLEACHER & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Intangible Assets

 

(In thousands of dollars)

 

June 30,
2012

 

December 31,
2011

 

Intangible assets (amortizable):

 

 

 

 

 

MBS & Rates – Customer relationships