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Note 20 - Debt
 12 Months Ended
Dec. 31, 2021
Notes to Financial Statements  
Debt Disclosure [Text Block]

20. DEBT

 

 

DETAIL OF DEBT

(Dollars in Thousands)

 

  

As of December 31,

        

Description

 

2021

  

2020

  

Interest Rate Terms

 

Interest (2)

 

Maturity

Non-convertible debt:

               

12.00% senior notes (the "2020 Senior Notes")

 $4,500  $4,500  

Fixed

  12.00% 

January 2024

12.00% senior notes (the "2019 Senior Notes")

  -   2,400  

Fixed

  12.00% 

September 2021

PPP Loan

  -   2,166  

Fixed

  1.00% 

May 2022

Contingent convertible debt:

               

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

  15,000   15,000  

Fixed

  8.00% 

March 2023

Less unamortized debt issuance costs

  (67)  (401)       
   14,933   14,599        

Junior subordinated notes (1):

               

Alesco Capital Trust I

  28,125   28,125  

Variable

  4.37% (1) 

July 2037

Sunset Financial Statutory Trust I

  20,000   20,000  

Variable

  4.13% (1) 

March 2035

Less unamortized discount

  (24,164)  (24,690)       
   23,961   23,435        
                

ByLine Bank

  -   -  

Variable

  N/A 

December 2023

FT Financial Bank, N.A. Credit Facility

  -   -  

Variable

  N/A 

N/A

Total

 $43,394  $47,100        

 

 

(1)

The junior subordinated notes listed represent debt the Company owes to the two trusts noted above. The total par amount owed by the Company to the trusts is $49,614.  However, the Company owns the common stock of the trusts in a total par amount of $1,489.  The Company pays interest (and at maturity, principal) to the trusts on the entire $49,614 junior notes outstanding. However, the Company receives back from the trusts the pro rata share of interest and principal on the common stock held by the Company.  These trusts are VIEs and the Company does not consolidate them even though the Company holds the common stock.  The Company carries the common stock on its balance sheet at a value of $0. The junior subordinated notes are recorded at a discount to par.  When factoring in the discount, the yield to maturity of the junior subordinated notes as of December 31, 2021 on a combined basis was 11.32% assuming the variable rate in effect on the last day of the reporting period remains in effect until maturity.

 

(2)

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



 

The 2020 Senior Notes 

 

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

 

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

 

On January 31, 2022, the Operating LLC and JKD Investor entered into a Note Purchase Agreement (the “2022 Purchase Agreement”), pursuant to which, among other things, on such date, (i) JKD Investor paid to the Operating LLC an additional $2,250 and (ii) in consideration for such funds, the Operating LLC issued to JKD Investor an Amended and Restated Senior Promissory Note in the aggregate principal amount of $4,500 (the “Amended and Restated Note”), which Amended and Restated Note amended and restated the JKD Note in its entirety.  The 2022 Purchase Agreement contains customary representations and warranties on the part of each of JKD Investor and the Operating LLC.

 

The Amended and Restated Note evidences Operating LLC’s obligation to repay to JKD (i) the original principal amount of $2,250 paid by JKD to the Operating LLC under the Original Purchase Agreement, plus (ii) the additional $2,250 paid by JKD to the Operating LLC under the 2022 Purchase Agreement.  Pursuant to the Amended and Restated Note, which is substantially identical to the JKD Note, the unpaid principal amount and all accrued but unpaid interest thereunder will be due and payable in full on January 31, 2024; provided, that, at any time after January 31, 2023 and prior to January 31, 2024, the holder of the Amended and Restated Note may, with at least 31 days’ prior written notice from the holder to the Operating LLC, declare the entire unpaid principal amount outstanding and all interest accrued and unpaid on the Amended and Restated Note to be immediately due and payable.

 

The Amended and Restated Note accrues interest on the unpaid principal amount from January 31, 2022 until maturity at a rate equal to 10% per year. Interest on the Amended and Restated Note is payable in cash quarterly on each January 1, April 1, July 1, and October 1, commencing on April 1, 2022. Under the Amended and Restated Note, upon the occurrence or existence of any “Event of Default” thereunder, the outstanding principal amount is (or in certain instances, at the option of the holder thereof, may be) immediately accelerated. Further, upon the occurrence of any “Event of Default” under the Amended and Restated Note and for so long as such Event of Default continues, all principal, interest and other amounts payable under the Amended and Restated Note will bear interest at a rate equal to 11% per year.  The Amended and Restated Note may not be prepaid in whole or in part prior to January 31, 2023. The Amended and Restated Note may, with at least 31 days’ prior written notice from the Operating LLC to the holder thereof, be prepaid in whole or in part at any time following January 31, 2023 without the prior written consent of the holder and without penalty or premium.

 

The Amended and Restated Note and the payment of all principal, interest and any other amounts payable thereunder are senior obligations of the Operating LLC and will be senior to any Indebtedness (as defined in the Amended and Restated Note) of the Operating LLC outstanding as of and issued following January 30, 2020 (the original issuance date of the JKD Note), except that the Amended and Restated Note ranks parri passu to the Convertible Senior Secured Promissory Note, dated March 10, 2017, issued by the Operating LLC to the DGC Family Fintech Trust in the aggregate principal amount of $15,000.  Pursuant to the Amended and Restated Note, following January 31, 2022, the Operating Company may not incur any Indebtedness that is a senior obligation to the Amended and Restated Note.

 

The 2019 Senior Notes 

 

On September 25, 2019, the Company amended and restated the previously outstanding 2013 Convertible Notes, which were scheduled to mature on September 25, 2019.  The material terms and conditions of the 2013 Convertible Notes remained substantially the same, except that (i) the maturity date thereof was changed from September 25, 2019 to September 25, 2020; (ii) the conversion feature in the 2013 Convertible Notes was removed; (iii) the interest rate thereunder was changed from 8% per annum (9% in the event of certain events of default) to 12% per annum (13% in the event of certain events of default); and (iv) the restrictions regarding prepayment were removed.  The post amendment notes are referred to herein as the “2019 Senior Notes” and the pre-amendment notes are referred to herein as the “2013 Convertible Notes.” On September 25, 2020, the 2019 Senior Notes were amended again to extend the maturity date from September 25, 2020 until September 25, 2021.  All other material terms and conditions of the 2019 Convertible Notes remained substantially the same.  The Company fully paid and extinguished the 2019 Notes on September 24, 2021.

 

The 2017 Convertible Note

 

On March 10, 2017, the Operating LLC entered into a Securities Purchase Agreement (the “2017 Convertible Note Purchase Agreement”), by and among the Operating LLC and DGC Family Fintech Trust, a trust established by Daniel G. Cohen. Daniel G. Cohen is the chairman of the Company’s board of directors and chairman of the board of managers of the Operating LLC.

 

Pursuant to the 2017 Convertible Note Purchase Agreement, the DGC Family Fintech Trust agreed to purchase from the Operating LLC, and the Operating LLC agreed to issue and to sell to the DGC Family Fintech Trust, a convertible senior secured promissory note (the “2017 Convertible Note”) in the aggregate principal amount of $15,000.  On March 10, 2017, the DGC Family Fintech Trust paid to the Operating LLC $15,000 in cash in consideration for the 2017 Convertible Note.  As required pursuant to ASC 470, the Company accounted for the 2017 Convertible Notes as conventional convertible debt and did not allocate any amount of the proceeds to the embedded equity option.

 

Under the 2017 Convertible Note Purchase Agreement, the Operating LLC and the DGC Family Fintech Trust offer customary indemnifications.  Further, the Operating LLC and the DGC Family Fintech Trust provide each other with customary representations and warranties, the Company provides limited representations and warranties to the DGC Family Fintech Trust, and each of the Operating LLC and the Company make customary affirmative covenants.

 

Pursuant to the 2017 Convertible Note Purchase Agreement, the Company agreed to execute an amendment (the “LLC Agreement Amendment”) to the Amended and Restated Limited Liability Company Agreement of the Operating LLC dated as of December 16, 2009, by and among the Operating LLC and its members, as amended (the “LLC Agreement”) at such time in the future as all of the other members execute the LLC Agreement Amendment.  The LLC Agreement Amendment provides, among other things, that the board of managers will initially consist of Daniel G. Cohen, as chairman of the Operating LLC’s board of managers, Lester R. Brafman (the Company’s current chief executive officer), and Joseph W. Pooler, Jr. (the Company’s current executive vice president, chief financial officer, and treasurer).  The LLC Agreement Amendment also provides that Daniel G. Cohen will not be able to be removed from the Operating LLC’s board of managers or as chairman of the Operating LLC’s board of managers other than for cause or under certain limited circumstances.  On October 30, 2019, each of the members of Cohen & Company, LLC executed the LLC Agreement Amendment.  The outstanding principal amount under the 2017 Convertible Note is due and payable on March 10, 2022 provided that the Operating LLC may, in its sole discretion, extend the maturity date for an additional one-year period, in each case unless the 2017 Convertible Note is earlier converted (in the manner described below).   The Operating LLC intends to exercise its option to extend effective March 10, 2022.  

 

The 2017 Convertible Note accrues interest at a rate of 8% per year, payable quarterly. Provided that no event of default has occurred under the 2017 Convertible Note, if dividends of less than $0.20 per share are paid on the Common Stock in any fiscal quarter prior to an interest payment date, then the Operating LLC may pay one-half of the interest payable on such date in cash, and the remaining one-half of the interest otherwise payable will be added to the principal amount of the 2017 Convertible Note then outstanding. The 2017 Convertible Note contains customary “Events of Default.” Upon the occurrence or existence of any Event of Default under the 2017 Convertible Note, the outstanding principal amount is immediately accelerated in certain limited instances and may be accelerated in all other instances upon notice by the holder of the 2017 Convertible Note to the Operating LLC.  Further, upon the occurrence of any Event of Default under the 2017 Convertible Note and for so long as such Event of Default continues, all principal, interest, and other amounts payable under the 2017 Convertible Note will bear interest at a rate equal to 9% per year. The 2017 Convertible Note may not be prepaid in whole or in part prior to the maturity date without the prior written consent of the holder thereof (which may be granted or withheld in its sole discretion).  The 2017 Convertible Note is secured by the equity interests held by the Operating LLC in all of its subsidiaries.

 

At any time following March 10, 2017, all or any portion of the outstanding principal amount of the 2017 Convertible Note may be converted by the holder thereof into units of membership interests of the Operating LLC (“LLC Units”) at a conversion rate equal to $1.45 per unit, subject to customary anti-dilution adjustments.  Units of the Operating LLC not held by Cohen & Company Inc. may, with certain restrictions, be redeemed and exchanged into shares of the Company on a ten-for-one basis.  Therefore, the 2017 Convertible Note can be converted into Operating LLC units and then redeemed and exchanged into Common Stock at an effective conversion price of $14.50.  Under the 2017 Convertible Note Purchase Agreement, the Company submitted a proposal to the Company’s stockholders at its 2017 annual meeting of stockholders to approve the Company’s issuance, if any, of Common Stock upon any redemption of the LLC Units and the Company’s board of directors agreed to recommend that the Company’s stockholders vote to approve such proposal.  The proposal was approved at the Company’s 2017 annual meeting.

 

Following any conversion of the 2017 Convertible Note into LLC Units, the holder of such LLC Units will have the same rights of redemption, if any, held by the holders of LLC Units as set forth in the LLC Agreement; provided that the holder will have no such redemption rights with respect to such LLC Units if the Company’s board of directors determines in good faith that satisfaction of such redemption by the Company with shares of its Common Stock would (i) jeopardize or endanger the availability to the Company of its net operating loss and net capital loss carryforwards and certain other tax benefits under Section 382 of the Internal Revenue Code of 1986, or (ii) constitute a “Change of Control” under the Junior Subordinated Indenture, dated as of June 25, 2007, between the Company (formerly Alesco Financial Inc.) and Wells Fargo Bank, N.A., as trustee.

 

Under the 2017 Convertible Note, if following any conversion of the 2017 Convertible Note into LLC Units, for so long as the Company owns a number of LLC Units representing less than a majority of the voting control of the Operating LLC, each holder of any LLC Units issued as a result of the conversion of the 2017 Convertible Note (regardless of how such LLC Units were acquired by such holder) is obligated to grant and appoint the Company as such holder’s proxy and attorney-in-fact to vote (i) the number of LLC Units owned by each such holder that, if voted by the Company, would give the Company a majority of the voting control of the Operating LLC, or (ii) if such holder holds less than such number of LLC Units, all such holder’s LLC Units.  In connection with the amendment to the 2019 Senior Notes, on September 25, 2020, the Operating LLC and DGC Trust entered into Amendment No. 1 ( the "Amendment to the 2017 Convertible Note") to the 2017 Convertible Note to provide that the voting proxy as defined in the 2017 Convertible Note will be revoked without further action by any party, upon the earliest to occur of the following:  (i) a Notice Default (as defined in the 2017 Convertible Note); (ii) and Automatic Default (as defined in the 2017 Convertible Note); and (iii) if Daniel Cohen and/or his affiliates cease to beneficially own (as defined in Rule 13d-3 under the Exchange Act) a majority of the voting securities of the Company pursuant to the terms and conditions of the Amendment to the 2017 Convertible Note. All other material terms and conditions of the 2017 Note remained substantially the same.

 

PPP Loan

 

On May 1, 2020, the Company applied for and received a $2,166 loan (the "PPP Loan") under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act.  The Company carefully considered the eligibility requirements for PPP loans as well as supplemental guidance regarding the PPP beyond the applicable statute issued from time to time by government agencies and certain government officials. The Company was eligible for a PPP Loan because it had fewer than 100 employees at the time of the loan. Further, although the Company is public and listed on the NYSE American stock exchange, the Company’s market capitalization is small, and the Company believes that it did not have access to the public capital markets at the time.

 

The PPP Loan was evidenced by a promissory note between the Company and FT Financial. The PPP Loan bore interest at a fixed rate of 1% per year, with the first six months of interest deferred, had a term of two year and could be prepaid at any time without payment of any premium.  The PPP Loan was unsecured but guaranteed by the U.S. Small Business Association. On September 23, 2020, the Company applied for forgiveness of the PPP Loan.  On June 21, 2021, the Company received notification that the U.S. Small Business Administration, as administrator of the PPP, had approved the Company’s PPP Loan forgiveness application for $2,127 and all accrued interest on the PPP Loan, leaving the Company with a remaining PPP Loan balance of $39. The PPP Loan forgiveness was recorded to other non-operating income on the consolidated statements of operations and comprehensive income.  The Company repaid the remaining balance, plus accrued interest, on June 25, 2021, at which point the PPP Loan balance was reduced to zero. 

 

Byline Bank / FT Financial Line of Credit

 

Effective on April 25, 2018, the Company, the Operating LLC, and JVB Holdings, as guarantors, and JVB, as borrower, entered into a loan agreement (the “FT LOC”) with FT Financial Bank, N.A. ("FT Financial") as lender in the total amount of up to $25,000.  FT Financial was formerly known as MB Financial Bank, N.A.  In March 2020, the Company drew $17,500 under the FT LOC.  This amount was fully repaid (with accrued interest) on October 27, 2020.  

 

On October 28, 2020, (i) the Company entered into a loan agreement (the “Original Byline Loan Agreement”) with Byline Bank, as lender (“Byline Bank”), by and among the Byline Bank, and JVB as borrower, and C&Co PrinceRidge Holdings, LP (“C&Co.”), pursuant to which Byline Bank agreed to make loans at JVBs request from time to time in the aggregate amount of up to $7,500 and (ii) JVB and Byline Bank entered into a Revolving Note and Cash Subordination Agreement (the "Original Byline Note and Subordination Agreement"), pursuant to which, among other things, Byline Bank agreed to make loans at JVB’s request from time to time in the aggregate amount of up to $17,500.  The Company drew $17,500 under the Byline LOC during 2021 and repaid it in full during 2021.   The Company, and the Company’s subsidiaries, the Operating LLC and JVB Holdings, served as guarantors of both the $7,500 and $17,500 facilities.

 

On December 21, 2021, (i) JVB and Byline Bank entered into the Amended and Restated Revolving Note and Cash Subordination Agreement (the “Amended and Restated Byline Loan Agreement”), which amended and restated the Original Byline Loan Agreement in its entirety, and (ii) the Original Byline Note and Subordination Agreement was terminated by the parties thereto. Pursuant to the Amended and Restated Byline Loan Agreement, Byline Bank agreed to make loans to JVB, at JVB’s request from time to time, in the aggregate amount of up to $25,000. 

 

Loans (both principal and interest) made by Byline Bank to JVB under the Amended and Restated Byline Loan Agreement are scheduled to mature and become immediately due and payable in full on December 21, 2023. In addition, loans may be made until December 21, 2022.  Loans will bear interest at a per annum rate equal to LIBOR plus 6.0%, provided that in no event can the interest rate be less than 7.0%. JVB is required to pay on a quarterly basis an undrawn commitment fee at a per annum rate equal to 0.50% of the undrawn portion of Byline Bank’s $25,000 commitment. JVB is also required to pay on each anniversary of December 21, 2021, a commitment fee at a per annum rate equal to 0.50% of the $25,000 commitment.  JVB paid a commitment fee of $125 on December 21, 2021.

 

JVB may request a reduction in the $25,000 commitment in a minimum amount of $1,000 and multiples of $500 thereafter or such lesser amount as would bring the $25,000 loan commitment to the total principal amount of loans advanced under the Amended and Restated Byline Loan Agreement.  The obligations of JVB under the Amended and Restated Agreement are guaranteed by the Company, the Operating LLC and JVB Holdings (collectively, the “Guarantors”), and are secured by a lien on all of JVB Holdings’ property, including its 100% ownership interest in all of the outstanding membership interests of JVB.  Pursuant to the Amended and Restated Byline Loan Agreement, JVB and the Guarantors provide customary representations and warranties for a transaction of this type.

 

Also, effective December 22, 2021, the Company received approval from FINRA to treat draws under the Amended and Restated Byline Loan Agreement as qualified subordinated debt.  As such, draws may be treated as an increase in net capital for purposes of FINRA Rule 15(c) 3-1.

 

The Amended and Restated Byline Loan Agreement also includes customary covenants for a transaction of this type, including covenants limiting the indebtedness that can be incurred by JVB and JVB Holdings and restricting JVB’s ability to make certain loans and investments. Additionally, JVB may not permit its (i) net worth to be less than $80,000 at any time from December 22, 2021 through and including December 30, 2021, $85,000 from December 31, 2021 through and including December 30, 2022, and $90,000 from December 31, 2022 and thereafter; and (ii) excess net capital to be less than $40,000 at any time. Further, any loans outstanding under the Amended and Restated Byline Loan Agreement may not exceed 0.25 times JVB's tangible net worth.  As of December 31, 2021 no amounts are outstanding under the Byline LOC and the Company was in compliance with all of these financial covenants.

 

Pursuant to the Amended and Restated Byline Agreement, JVB may repay its existing outstanding indebtedness provided, however, that if the anticipated payment relates to the payment of any dividend by JVB, on the date such payment is made, and immediately after making such payment, the loans outstanding may not exceed $10,000.  The Amended and Restated Byline Loan Agreement contains customary events of default for a transaction of this type. If an event of default occurs and is continuing, then Byline Bank may declare and cause all or any part of the loans thereunder and all other liabilities outstanding under the Amended and Restated Byline Loan Agreement to become immediately due and payable.

 

In the financial statements and other footnotes, the term "Byline LOC" refers to either the Original Byline Note and Subordination Agreement or the Amended and Restated Byline Loan Agreement depending on which period of time it is referring to.  

 

LegacyTexas Bank 

 

In 2018, the Company formed a wholly owned subsidiary, ViaNova Capital Group LLC ("ViaNova"), for the purpose of building a residential transition loan ("RTL") business.  RTLs are small balance commercial loans that are secured by first lien mortgages used by professional investors and real estate developers to finance the purchase and rehabilitation of residential properties.  On November 20, 2018, ViaNova, as borrower, entered into a Warehousing Credit and Security Agreement (the “LegacyTexas Credit Facility”) with LegacyTexas Bank, as the lender, with an effective date of November 16, 2018, and amended on May 4, 2019 and September 25, 2019.  The LegacyTexas Credit Facility supported the purchasing, aggregating, and distribution of residential transition loans by ViaNova. 

 

On March 19, 2020, ViaNova received a notice of default from LegacyTexas Bank regarding the LegacyTexas Credit Facility, stating that ViaNova’s unrestricted cash balance was less than the amount required.  Also, on March 19, 2020, ViaNova received notice from LegacyTexas Bank that the Bank had suspended funding all “Alternative” loans for all of their clients, including the RTLs that are the subject of the LegacyTexas Credit Facility.   Since March 19, 2020, ViaNova has repaid all outstanding indebtedness under the LegacyTexas Credit Facility and stopped acquiring new RTLs.  On August 22, 2020, the Company sold its investment in ViaNova to the former managing director of ViaNova in exchange for the managing director's assumption of all of ViaNova's liabilities and a potential earn out of up to $500.  In conjunction with the sale, the Company transferred one RTL representing a par value of $2,300 and a fair value of $2,243 from ViaNova to JVB with a maturity date of January 1, 2021. The RTL was included in other investments, at fair value in the consolidated balance sheets as of December 31, 2020.  

 

Deferred Financing

 

The Company incurred $1,400 of deferred financing costs associated with the issuance of the 2017 Convertible Note and $670 of deferred financing costs associated with the issuance of the 2013 Convertible Notes.  These amounts were initially recorded as a discount on debt and are amortized to interest expense over the life of the notes under the effective interest method. 

 

 The Company also incurred $272 of deferred financing costs associated with the Byline Credit Facility.   These amounts were initially recorded as a component of other assets and are amortized to interest expense over the life of the line of credit using the straight-line method.  The Company recognized interest expense from deferred financing costs of $471, $626, and $509 for the years ended December 31, 2021, 2020, and 2019, respectively.

 

Interest Expense, Net 

 

Interest expense incurred is shown in the table below by instrument for the years ended 2021, 2020, and 2019. 

 

 

 

 

INTEREST EXPENSE

(Dollars in Thousands)

 

  

Year Ended December 31,

 
  

2021

  

2020

  

2019

 

Junior subordinated notes

 $2,601  $2,882  $3,457 

2020 Senior Notes

  540   496   - 

2017 Convertible Note

  1,534   1,505   1,472 

2013 Convertible Notes / 2019 Senior Notes

  211   336   615 

FT LOC / Byline LOC

  435   1,102   365 

Redeemable Financial Instrument - DGC Trust / CBF

  197   1,490   1,166 

Redeemable Financial Instrument - JKD Investor

  1,715   1,883   699 

Redeemable Financial Instrument - ViaNova Capital Group, LLC

  -   (105)  (190)
  $7,233  $9,589  $7,584 

 

The redeemable financial instrument – Via Nova Capital Group, LLC had a negative return during the periods presented.  Accordingly, the redemption value of the instrument is reduced, which is recorded as interest income.  See note 20.