55606547c3ec468

INSTITUTIONAL FINANCIAL MARKETS, INC.

Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)


	Six Months Ended June 30,
	2014		2013
Operating activities
Net income (loss)	$	(5,662)	$	(13,466)
Adjustments to reconcile net income / (loss) to net cash provided by (used in) operating activities:
Equity-based compensation		914		1,554
Realized loss / (gain) on other investments		57		130
Accretion of income on other investments, at fair value		(249)		-
Change in unrealized (gain) loss on other investments, at fair value		(1,973)		9,863
Depreciation and amortization		598		669
Amortization of discount on debt		677		442
Impairment of goodwill		3,121		-
(Income) / loss from equity method affiliates		(27)		(1,614)
Change in operating assets and liabilities, net:
(Increase) decrease in other receivables		698		994
(Increase) decrease in investments-trading		3,358		(736)
(Increase) decrease in other assets		(278)		(1,503)
(Increase) decrease in receivables under resale agreement		(6,580)		(31,334)
Change in receivables from / payables to related parties, net		82		(503)
Increase (decrease) in accrued compensation		(1,450)		(4,910)
Increase (decrease) in accounts payable and other liabilities		(3,485)		(3,460)
Increase (decrease) in trading securities sold, not yet purchased, net		5,235		30,195
Change in receivables from/ payables to brokers, dealers, and clearing agencies, net		(1,857)		(24,742)
Increase (decrease) in securities sold under agreement to repurchase		7,981		33,170
Increase (decrease) in deferred income taxes		-		(30)
Net cash provided by (used in) operating activities		1,160		(5,281)
Investing activities
Cash acquired from acquisition of Star Asia Manager, net		-		679
Purchase of investments-other investments, at fair value		(20,843)		(1,064)
Sales and returns of principal of other investments, at fair value		3,643		708
Proceeds from sale of Star Asia and related entities, net		19,924		-
Investment in equity method affiliates		-		(10)
Return from equity method affiliates		67		2,881
Purchase of furniture, equipment, and leasehold improvements		(127)		(548)
Net cash provided by (used in) investing activities		2,664		2,646
Financing activities
Repayment and repurchase of debt		(3,121)		(619)
Cash used to net share settle equity awards		(79)		(36)
PrinceRidge non-controlling interest redemptions, net		-		(317)
PrinceRidge mandatorily redeemable equity interest repayments		-		(86)
IFMI non-controlling interest distributions		(213)		(212)
IFMI dividends		(657)		(504)
Net cash provided by (used in) financing activities		(4,070)		(1,774)
Effect of exchange rate on cash		13		(175)
Net increase (decrease) in cash and cash equivalents		(233)		(4,584)

Cash and cash equivalents, beginning of period		13,161		14,500
Cash and cash equivalents, end of period	$	12,928	$	9,916

See accompanying notes to unaudited consolidated financial statements.

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INSTITUTIONAL FINANCIAL MARKETS, INC.

Notes to Consolidated Financial Statements

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

(Unaudited)

1. ORGANIZATION AND NATURE OF OPERATIONS

The Formation Transaction

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

The Company

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

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

Subsequent to the Merger, AFN was renamed Cohen & Company Inc. In January 2011, it was renamed again as Institutional Financial Markets, Inc. (“IFMI”). Effective January 1, 2010, the Company ceased to qualify as a real estate investment trust, or a REIT. The Company trades on the NYSE MKT LLC (formerly known as the NYSE Amex LLC) under the ticker symbol “IFMI.” The Company is a financial services company specializing in credit related fixed income investments. As of June 30, 2014, the Company had $4.8 billion in assets under management (“AUM”) of which 99% or $4.7 billion, was in collateralized debt obligations (“CDOs”).

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

On January 31, 2014, JVB merged into CCPR. In connection with this merger CCPRH changed its name from C&Co/PrinceRidge Holdings LP to J.V.B. Financial Group Holdings, LP and CCPR changed its name from C&Co/PrinceRidge LLC to J.V.B. Financial Group, LLC. Further, on January 31, 2014, CCPR began to do business under the JVB brand. Therefore, when discussing the operations of CCPR on or subsequent to January 31, 2014, CCPR is referred to it as JVB in this Quarterly Report on Form 10-Q.

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

Capital Markets: The Company’s Capital Markets business segment consists primarily of credit-related fixed income securities sales, trading, and financing, as well as new issue placements in corporate and securitized products and advisory services. The Company’s fixed income sales and trading group provides trade execution to corporate investors, institutional investors and other smaller broker-dealers. The Company specializes in a variety of products, including but not limited to: corporate bonds and loans, asset backed securities (“ABS”), mortgage backed securities (“MBS”), commercial mortgage backed securities (“CMBS”), residential mortgage backed securities (“RMBS”), CDOs, collateralized loan obligations (“CLOs”), collateralized bond obligations (“CBOs”), collateralized mortgage obligations (“CMOs”), municipal securities, to-be-announced securities (“TBAs”) contracts, Small Business

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Administration (“SBA”) loans, U.S. government bonds, U.S. government agency securities, brokered deposits and certificates of deposits (“CDs”) for small banks, hybrid capital of financial institutions including trust preferred securities (“TruPS”), whole loans, and other structured financial instruments. As of June 30, 2014, the Company carried out its capital market activities primarily through its subsidiaries: JVB in the United States and CCFL in Europe.

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

Principal Investing: The Company’s Principal Investing business segment is comprised of investments that it has made using its own capital, excluding investments that the Company makes to support its Capital Market business segment. Historically, the Company generally made principal investments in the entities which it managed. Beginning in the first quarter of 2014, the Company began investing in investments (primarily equity tranches of CLOs) which it does not manage. See note 6.

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

Capital Markets:

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

•new issue and advisory revenue comprised primarily of (i) origination fees for corporate debt issues originated by the Company; (ii) revenue from advisory services; and (iii) new issue revenue associated with arranging and placing the issuance of newly created debt, equity, and hybrid financial instruments;

Asset Management:

• asset management fees for the Company’s on-going asset management services provided to certain Investment Vehicles, which may include fees both senior and subordinate to the securities in the Investment Vehicle; and

•incentive management fees earned based on the performance of the various Investment Vehicles;

• income or loss from equity method affiliates;

Principal Investing:

•gains and losses (unrealized and realized) and income and expense earned on investments classified as other investments, at fair value; and

• income or loss from equity method affiliates.

2. BASIS OF PRESENTATION

The financial statements of the Company included herein were prepared in conformity with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim month periods. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six months ended June 30, 2014 and 2013 are not necessarily indicative of the results for the entire year or any subsequent interim period. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Capitalized terms used herein without definition have the meanings ascribed to them in the Annual Report on Form 10-K for the year ended December 31, 2013.

Certain prior period amounts have been reclassified to conform to the current period presentation.

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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Adoption of New Accounting Standards

In February 2013, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date, which requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of the following: (a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors; and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. Examples of obligations within the scope of this ASU include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The guidance in this ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments in this ASU should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the ASU’s scope that exist at the beginning of the entity’s fiscal year of adoption. An entity may elect to use hindsight for the comparative periods presented in the initial year of adoption (if it changed its accounting as a result of adopting the guidance) and shall disclose that fact. The use of hindsight would allow an entity to recognize, measure, and disclose obligations resulting from joint and several liability arrangements within the scope of this ASU in comparative periods using information available at adoption rather than requiring an entity to make judgments about what information it had in each of the prior periods to measure the obligation. Early adoption is permitted. The Company adopted the provisions of ASU 2013-04 effective January 1, 2014 and the adoption of the provisions did not have an effect on the Company’s consolidated financial position and results of operations.

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, which addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. When a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. For an equity method investment that is a foreign entity, the partial sale guidance in Section 830-30-40 still applies, specifically, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. However, this treatment does not apply to an equity method investment that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment. Additionally, the amendments in this ASU clarify that the sale of an investment in a foreign entity includes both (1) events that result in the loss of a controlling financial interest in a foreign entity (that is, irrespective of any retained investment) and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (sometimes referred to as a step acquisition). Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence of those events. For public entities, the ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The Company adopted the provisions of ASU 2013-05 effective January 1, 2014, and the adoption of the provisions did not have an effect on the Company’s consolidated financial statements or financial statement disclosures.

In June 2013, the FASB issued ASU No. 2013-08, Financial Services-Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, which changes the approach to the investment company assessment in Topic 946, clarifies the characteristics of an investment company, and provides comprehensive guidance for assessing whether an entity is an investment company. The amendments require an investment company to measure non-controlling ownership interests in other investment companies at fair value rather than using the equity method of accounting. The amendments also require the following additional disclosures: (a) the fact that the entity is an investment company and is applying the guidance in Topic 946, (b) information about changes, if any, in an entity’s status as an investment company, and (c) information about financial support provided or contractually required to be provided by an investment company to any of its investees. The amendments in this ASU are effective for an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited. The Company has investments in the equity securities of investment funds and other non-publicly traded entities that have the attributes of investment companies as currently described in FASB ASC 946-15-2. The Company adopted the provisions of this ASU effective January 1, 2014, and the adoption of the provisions did not have an effect on the Company’s consolidated financial position and results of operations.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides guidance on the

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presentation of unrecognized tax benefits. This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU is effective prospectively for reporting periods beginning after December 15, 2013, with early adoption permitted. The Company adopted the provisions of this ASU effective January 1, 2014, and the adoption of the provisions did not have an effect on the Company’s consolidated statements.

B. Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments. These determinations were based on available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop the estimates and, therefore, these estimates may not necessarily be indicative of the amount the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Refer to note 7 for a discussion of the fair value hierarchy with respect to investments-trading, other investments, at fair value and the derivatives held by the Company.

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

Investments-trading: These amounts are carried at fair value. The fair value is based on either quoted market prices of an active exchange, independent broker market quotations, market price quotations from third party pricing services, or valuation models when quotations are not available. See note 7 for disclosures about the categorization of the fair value measurements of investments-trading within the three level fair value hierarchy.

Other investments, at fair value: These amounts are carried at fair value. The fair value is based on quoted market prices of an active exchange, independent broker market quotations, or valuation models when quotations are not available. In the case of investments in alternative investment funds, fair value is generally based on the reported net asset value of the underlying fund. See note 7 for disclosures concerning the categorization of the fair value measurements of other investments, at fair value within the three level fair value hierarchy.

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

Trading securities sold, not yet purchased: These amounts are carried at fair value. The fair value is based on quoted market prices of an active exchange, independent market quotations, market price quotations from third party pricing services, or valuation models when quotations are not available. See note 7 for disclosures concerning the categorization of the fair value measurements of trading securities sold, not yet purchased within the three level fair value hierarchy.

Securities sold under agreement to repurchase: The liabilities for securities sold under agreement to repurchase are carried at their contracted repurchase price, have short-term maturities, and are repriced frequently with amounts normally due in one month or less and, accordingly, these contracts are at amounts that approximate fair value. The estimated fair value measurements of securities sold under agreement to repurchase are based on observations of actual market activity and are generally classified within level 2 of the fair value hierarchy.

Debt: These amounts are carried at outstanding principal less unamortized discount. However, a substantial portion of the debt was assumed in the Merger and recorded at fair value as of that date. As of June 30, 2014 and December 31, 2013, the fair value of the Company’s debt was estimated to be $40.5 million and $40.2 million, respectively. The estimated fair value measurements of the debt are generally based on discounted cash flow models prepared by the Company’s management primarily using discount rates for similar instruments issued to companies with similar credit risks to the Company and are generally classified within level 3 of the fair value hierarchy.

Derivatives: These amounts are carried at fair value. Derivatives may be included as a component of investments-trading; trading securities sold, not yet purchased; and other investments, at fair value. See notes 7 and 8. The fair value is generally based on quoted market prices on an exchange that is deemed to be active for derivative instruments such as foreign currency forward contracts. For derivative instruments, such as TBAs, the fair value is generally based on market price quotations from third party pricing

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services. See note 7 for disclosures concerning the categorization of the fair value measurements within the three level fair value hierarchy.

C. Recent Accounting Developments

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

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which replaces existing revenue recognition guidance in Topic 605, Revenue Recognition, replaces certain other industry-specific revenue recognition guidance, specifies the accounting for certain costs to obtain or fulfill a contract with a customer and provides recognition and measurement guidance in relation to sales of non-financial assets. The core principle of this ASU is to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU provides guidance on how to achieve this core principle, including how to identify contracts with customers and separate performance obligations in the contract, how to determine and allocate the transaction price to such performance obligations and how to recognize revenue when a performance obligation has been satisfied. The ASU is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2016 with early adoption prohibited. The Company will be required to apply the amendments in this ASU using one of the following two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within the ASU; or (ii) retrospective with the cumulative effect of initially applying the ASU recognized at the date of the initial application and providing certain additional disclosures as defined in the ASU. The Company will adopt the provisions of this ASU effective January 1, 2017 and is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase to Maturity Transactions, Repurchase Financings, and Disclosures, which changes the accounting for repurchase-to-maturity transactions which are repurchase agreements where the maturity of the security transferred as collateral matches the maturity of the repurchase agreement. According to the new guidance, all repurchase-to-maturity transactions will be accounted for as secured borrowing transactions in the same way as other repurchase agreements rather than as sales of a financial asset and forward commitment to repurchase. The amendments also change the accounting for repurchase financing arrangements which are transactions involving the transfer of a financial asset to a counterparty executed contemporaneously with a reverse repurchase agreement with the same counterparty. Under the new guidance, all repurchase financings will now be accounted for separately, which will result in secured lending accounting for the reverse repurchase agreement. The guidance also requires new disclosures about transfers that are accounted for as sales in transactions that are economically similar to repurchase agreements and increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2014 with early adoption prohibited. An entity will be required to present changes in accounting for all outstanding repurchase-to-maturity transactions and repurchase financing arrangements as a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The disclosures for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The Company will adopt the provisions of this ASU effective January 1, 2015 and is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.

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reporting entity should apply existing guidance in Topic 718, Compensation-Stock Compensation, as it relates to such awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015 with early adoption permitted using either of two methods: (i) prospective to all awards granted or modified after the effective date; or (ii) retrospective to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effective applying this ASU as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. The Company will adopt the provisions of this ASU effective January 1, 2016 and is currently evaluating the new guidance to determine the impact, if any, that it will have on the Company’s consolidated financial statements.

4. SALE OF STAR ASIA AND RELATED ENTITIES

On February 20, 2014, the Company completed the sale of all of its ownership interests in Star Asia Finance (“Star Asia”), Star Asia Japan Special Situations Fund (“Star Asia Special Situations Fund”), Star Asia Management Ltd. (“Star Asia Manager”), Star Asia Capital Management, LLC (“Star Asia Capital Management”), Star Asia Advisors Ltd. (“SAA Manager”), and Star Asia Partners Ltd. (“SAP GP”) (collectively, the “Star Asia Group”). The Company received an initial upfront payment of $20,043 and will receive contingent payments equal to 15% of certain revenues generated by Star Asia Manager, SAA Manager, SAP GP, Star Asia Capital Management, and certain affiliated entities for a period of at least four years.

As a result of the sale of the Star Asia Group, the Company recorded a gain of $78 in the first quarter of 2014 which is included as a component of principal transactions and other income in the consolidated income statement. The Company’s accounting policy is to record contingent payments receivable as income as they are earned. In the future, the Company will record any contingent income as a component of principal transactions and other income.

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

Amounts receivable from brokers, dealers, and clearing agencies consisted of the following at June 30, 2014 and December 31, 2013, respectively.



RECEIVABLES FROM BROKERS, DEALERS AND CLEARING AGENCIES
(Dollars in Thousands)

	June 30, 2014		December 31, 2013
Deposits with clearing organizations	$	1,348	$	1,428
Receivable from clearing organizations		295		418
Receivables from brokers, dealers, and clearing agencies	$	1,643	$	1,846

Receivable from clearing organizations represents un-invested cash held by the clearing organization, which includes cash proceeds from short sales.

Amounts payable to brokers, dealers, and clearing agencies consisted of the following at June 30, 2014 and December 31, 2013, respectively.



PAYABLES TO BROKERS, DEALERS AND CLEARING AGENCIES
(Dollars in Thousands)

	June 30, 2014		December 31, 2013
Unsettled regular way trades, net	$	7,949	$	5,600
Margin payable		20,682		25,111
Payables to brokers, dealers, and clearing agencies	$	28,631	$	30,711

Securities transactions are recorded on the trade date, as if they had settled. The related amounts receivable and payable for unsettled securities transactions are recorded net in receivables from or payables to brokers, dealers, and clearing agencies on the Company’s consolidated balance sheets. Effectively, all of the Company’s trading assets and deposits with clearing organizations serve as collateral for the margin payable. These assets are held by the Company’s clearing broker. The Company incurred interest on margin payable of $172 and $519 for the six months ended June 30, 2014 and 2013, respectively, and $106 and $222 for the three months ended June 30, 2014 and 2013, respectively.

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6. FINANCIAL INSTRUMENTS

Investments—Trading

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



INVESTMENTS - TRADING
(Dollars in Thousands)

	June 30, 2014		December 31, 2013
U.S. government agency MBS and CMOs (1)	$	7,112	$	13,520
U.S. government agency debt securities		42,806		32,213
RMBS		414		1,584
CMBS		137		-
U.S. Treasury securities		200		764
CLOs		1,931		186
Other ABS		541		268
SBA loans		9,168		27,719
Corporate bonds and redeemable preferred stock		27,949		23,562
Foreign government bonds		154		88
Municipal bonds		16,293		16,024
Exchange traded funds		-		6
Certificates of deposit		7,357		1,648
Equity securities		65		36
Investments-trading	$	114,127	$	117,618

(1)Includes TBAs. See note 8.

Trading Securities Sold, Not Yet Purchased

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



TRADING SECURITIES SOLD, NOT YET PURCHASED
(Dollars in Thousands)

	June 30, 2014		December 31, 2013
U.S. government agency MBS (1)	$	11	$	121
U.S. Treasury securities		40,514		38,066
Corporate bonds and redeemable preferred stock		14,189		10,679
Foreign government bonds		-		26
Municipal bonds		25		88
Certificates of deposit		-		524
Trading securities sold, not yet purchased	$	54,739	$	49,504

(1)Represents TBAs. See note 8.

The Company tries to manage its exposure to changes in interest rates for the interest rate sensitive securities it holds by entering into offsetting short positions for similar fixed rate securities.

The Company included the change in unrealized losses in the amount of $1,211 and $168 for the six months ended June 30, 2014 and 2013, respectively, in net trading revenue in the Company’s consolidated statements of operations.

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Other Investments, at fair value

The following table provides detail of the investments included within other investments, at fair value:



OTHER INVESTMENTS, AT FAIR VALUE
(Dollars in Thousands)

	June 30, 2014
	Cost		Carrying Value		Unrealized Gain(Loss)
CLOs	$	18,809	$	18,793	$	(16)
CDOs		217		39		(178)
Equity Securities:
EuroDekania		7,432		4,290		(3,142)
Tiptree Financial Partners, L.P. ("Tiptree")		5,561		2,705		(2,856)
Other securities		176		32		(144)
Total equity securities		13,169		7,027		(6,142)
Residential loans		138		587		449
Other investments, at fair value	$	32,333	$	26,446	$	(5,887)



	December 31, 2013
	Cost		Carrying Value		Unrealized Gain(Loss)
CDOs	$	217	$	35	$	(182)
Equity Securities:
EuroDekania		8,778		4,192		(4,586)
Star Asia (1)		23,304		17,104		(6,200)
Star Asia Special Situations Fund (1)		1,933		2,747		814
Tiptree		5,561		2,282		(3,279)
Other securities		176		33		(143)
Total equity securities		39,752		26,358		(13,394)
Residential loans		154		294		140
Foreign currency forward contracts		-		190		190
Other investments, at fair value	$	40,123	$	26,877	$	(13,246)

(1) On February 20, 2014, the Company completed the sale of the Company's ownership interests in the Star Asia Group. See note 4.

7. FAIR VALUE DISCLOSURES

Fair Value Option

The Company has elected to account for certain of its other financial assets at fair value under the fair value option provisions of FASB ASC 825, Financial Instruments (“FASB ASC 825”). The primary reason for electing the fair value option when it first became available in 2008, was to reduce the burden of monitoring the differences between the cost and the fair value of the Company’s investments, previously classified as available for sale securities, including the assessment as to whether the declines are temporary in nature and to further remove an element of management judgment. In addition, the election was made for certain investments that were previously required to be accounted for under the equity method because their fair value measurements were readily obtainable.

Such financial assets accounted for at fair value include:

•in general, securities that would otherwise qualify for available for sale treatment;

• in general, investments in equity method affiliates where the affiliate has all of the attributes in FASB ASC 946-10-15-2 (commonly referred to as investment companies); and

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• in general, investments in residential loans.

The changes in fair value (realized and unrealized gains and losses) of these instruments for which the Company has elected the fair value option are recorded in principal transactions and other income in the consolidated statements of operations. All of the investments for which the Company has elected the fair value option are included as a component of other investments, at fair value in the consolidated balance sheets. The Company recognized net gains (losses) of $1,916 and $ (9,993) related to changes in fair value of investments that are included as a component of other investments, at fair value during the six months ended June 30, 2014 and 2013, respectively. The Company recognized net gains (losses) of $1,010 and $ (4,595) related to changes in fair value of investments that are included as a component of other investments, at fair value during the three months ended June 30, 2014 and 2013, respectively.

Fair Value Measurements

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

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

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

1. Quoted prices for similar assets or liabilities in active markets;

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

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

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

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

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

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

A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain financial assets or liabilities. There were no transfers between level 1 and level 2 of the fair value hierarchy during the three and six months ended June 30, 2014 and 2013. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in or transfers out of the level 3 category as of the beginning of the quarter in which reclassifications occur.

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The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.



FAIR VALUE MEASUREMENTS ON A RECURRING BASIS
June 30, 2014
(Dollars in Thousands)
					Significant		Significant
			Quoted Prices in		Other Observable		Unobservable
			Active Markets		Inputs		Inputs
Assets:	Fair Value		(Level 1)		(Level 2)		(Level 3)
Investments-trading:
U.S. government agency MBS and CMOs	$	7,112	$	-	$	7,112	$	-
U.S. government agency debt securities		42,806		-		42,806		-
RMBS		414		-		414		-
CMBS		137		-		137		-
U.S. Treasury securities		200		200		-		-
CLOs		1,931		-		1,931		-
Other ABS		541		-		541		-
SBA loans		9,168		-		9,168		-
Corporate bonds and redeemable preferred stock		27,949		-		27,949		-
Foreign government bonds		154		-		154		-
Municipal bonds		16,293		-		16,293		-
Certificates of deposit		7,357		-		7,357		-
Equity securities		65		55		10		-
Total investments - trading	$	114,127	$	255	$	113,872	$	-

Other investments, at fair value
EuroDekania (1)	$	4,290	$	-	$	-	$	4,290
Tiptree (2)		2,705		-		2,705		-
Other equity securities		32		23		9		-
CLOs		18,793		-		-		18,793
CDOs		39		-		-		39
Residential loans		587		-		587		-
Total other investments, at fair value	$	26,446	$	23	$	3,301	$	23,122

Liabilities
Trading securities sold, not yet purchased:
U.S. government agency MBS	$	11	$	-	$	11	$	-
U.S. Treasury securities		40,514		40,514		-		-
Corporate bonds and redeemable preferred stock		14,189		-		14,189		-
Municipal bonds		25		-		25		-
Total trading securities sold, not yet purchased	$	54,739	$	40,514	$	14,225	$	-

(1)Hybrid Securities Fund—European.

(2)Diversified Holding Company.

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FAIR VALUE MEASUREMENTS ON A RECURRING BASIS
December 31, 2013
(Dollars in Thousands)
					Significant		Significant
			Quoted Prices in		Other Observable		Unobservable
			Active Markets		Inputs		Inputs
Assets:	Fair Value		(Level 1)		(Level 2)		(Level 3)
Investments-trading:
U.S. government agency MBS and CMOs	$	13,520	$	-	$	13,520	$	-
U.S. government agency debt securities		32,213		45		32,168		-
RMBS		1,584		-		1,584		-
U.S. Treasury securities		764		764		-		-
CLOs		186		-		-		186
Other ABS		268		-		268		-
SBA loans		27,719		-		27,719		-
Corporate bonds and redeemable preferred stock		23,562		2,973		20,589		-
Foreign government bonds		88		-		88		-
Municipal bonds		16,024		-		16,024		-
Exchange traded funds		6		6		-		-
Certificates of deposit		1,648		-		1,648		-
Equity securities		36		16		20		-
Total investments - trading	$	117,618	$	3,804	$	113,628	$	186

Other investments, at fair value
EuroDekania (1)	$	4,192	$	-	$	-	$	4,192
Star Asia (2)		17,104		-		-		17,104
Tiptree (3)		2,282		-		2,282		-
Star Asia Special Situations Fund (2)		2,747		-		-		2,747
Other equity securities		33		23		10		-
CDOs		35		-		-		35
Residential loans		294		-		294		-
Foreign currency forward contracts		190		190		-		-
Total other investments, at fair value	$	26,877	$	213	$	2,586	$	24,078

Liabilities
Trading securities sold, not yet purchased:
U.S. government agency MBS	$	121	$	-	$	121	$	-
U.S. Treasury securities		38,066		38,066		-		-
Corporate bonds and redeemable preferred stock		10,679		-		10,679		-
Foreign government bonds		26		-		26		-
Municipal bonds		88		-		88		-
Certificates of deposit		524		-		524		-
Total trading securities sold, not yet purchased	$	49,504	$	38,066	$	11,438	$	-

(1)Hybrid Securities Fund—European.

(2)Real Estate Fund—Asian.

(3)Diversified Holding Company.

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The following provides a brief description of the types of financial instruments the Company holds, the methodology for estimating fair value, and the level within the hierarchy of the estimate. The discussion that follows applies regardless of whether the instrument is included in investments-trading; other investments, at fair value; or trading securities sold, not yet purchased.

U.S. Government Agency MBS and CMOs: These are securities that are generally traded over-the-counter. The Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices or market price quotations from third party pricing services. These valuations are based on a market approach. This is considered a level 2 valuation in the hierarchy.

U.S. Government Agency Debt Securities: Callable and non-callable U.S. government agency debt securities are measured primarily based on quoted market prices obtained from third party pricing services. Non-callable U.S. government agency debt securities are generally classified within level 1 and callable U.S. government agency debt securities are classified within level 2 of the valuation hierarchy.

RMBS and CMBS: The Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices or market price quotations from third party pricing services. These valuations are based on a market approach. The Company generally classifies the fair value of these securities based on third party quotations within level 2 of the valuation hierarchy.

U.S. Treasury Securities: U.S. Treasury securities include U.S. Treasury bonds and notes and the fair values of the U.S. Treasury securities are based on quoted prices in active markets. Valuation adjustments are not applied. The Company classifies the fair value of these securities within level 1 of the valuation hierarchy.

CLOs, CDOs and ABS: CLOs, CDOs, and ABS are interests in securitizations. ABS may include, but are not limited to, securities backed by auto loans, credit card receivables, or student loans. Where the Company is able to obtain independent market quotations from at least two broker-dealers and where a price within the range of at least two broker-dealers is used or market price quotations from third party pricing services is used, these interests in securitizations will generally be classified as level 2 of the valuation hierarchy. These valuations are based on a market approach. The independent market quotations from broker-dealers are generally nonbinding. The Company seeks quotations from broker-dealers that historically have actively traded, monitored, issued, and been knowledgeable about the interests in securitizations. The Company generally believes that to the extent that it (1) receives two quotations in a similar range from broker-dealers knowledgeable about these interests in securitizations, and (2) believes the broker-dealers gather and utilize observable market information such as new issue activity in the primary market, trading activity in the secondary market, credit spreads versus historical levels, bid-ask spreads, and price consensus among market participants and sources, then classification as level 2 of the valuation hierarchy is appropriate. In the absence of two broker-dealer market quotations, a single broker-dealer market quotation may be used without corroboration of the quote in which case the Company generally classifies the fair value within level 3 of the valuation hierarchy.

If quotations are unavailable, prices observed by the Company for recently executed market transactions may be used or valuation models prepared by the Company’s management may be used, which are based on an income approach. These models prepared by the Company’s management include estimates and the valuations derived from them could differ materially from amounts realizable in an open market exchange. Each CLO and CDO position is evaluated independently taking into consideration available comparable market levels, underlying collateral performance and pricing, deal structures, and liquidity. Fair values based on internal valuation models prepared by the Company’s management are generally classified within level 3 of the valuation hierarchy.

Establishing fair value is inherently subjective (given the volatile and sometimes illiquid markets for certain interests in securitizations) and requires management to make a number of assumptions, including assumptions about the future of interest rates, discount rates and the timing of cash flows. The assumptions the Company applies are specific to each security. Although the Company may rely on internal calculations to compute the fair value of certain interest in securitizations, the Company requests and considers indications of fair value from third party pricing services to assist in the valuation process.

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

Corporate Bonds, Redeemable Preferred Stock, and Foreign Government Bonds: The Company uses recently executed transactions or third party quotations from independent pricing services to arrive at the fair value of its investments in corporate bonds, redeemable preferred stock, and foreign government bonds. These valuations are based on a market approach. The Company generally

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classifies the fair value of these bonds within level 2 of the valuation hierarchy. In instances where the fair values of securities are based on quoted prices in active markets (for example with redeemable preferred stock), the Company classifies the fair value of these securities within level 1 of the valuation hierarchy.

Municipal Bonds: Municipal bonds, which include obligations of U.S. states, municipalities, and political subdivisions, primarily include bonds or notes issued by U.S. municipalities. The Company generally values these securities using third party quotations such as market price quotations from third party pricing services. The Company generally classifies the fair value of these bonds within level 2 of the valuation hierarchy. The valuations are based on a market approach. In instances where the Company is unable to obtain reliable market price quotations from third party pricing services, the Company will use its own internal valuation models. In these cases, the Company will classify such securities as level 3 within the hierarchy until it is able to obtain third party pricing.

Exchange Traded Funds: Exchange traded funds are investment funds that trade in active markets, similar to public company stocks. The fair values of exchange traded funds are based on quoted prices in active markets. Valuation adjustments are not applied. The Company classifies the fair value of these securities within level 1 of the valuation hierarchy.

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

In some cases, the Company has owned options or warrants in newly publicly traded companies when the option or warrant itself is not publicly traded. In those cases, the Company used an internal valuation model and classified the investment within level 3 of the valuation hierarchy. The non-exchange traded equity options and warrants were measured using the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price, and maturity date. Once the securities underlying the options or warrants (not the options or warrants themselves) have quoted prices available in an active market, the Company attributes a value to the warrants using the Black-Scholes model based on the respective price of the options or warrants and the quoted prices of the securities underlying the options or warrants and key observable inputs. In this case, the Company will generally classify the options or warrants as level 2 within the valuation hierarchy because the inputs to the valuation model are now observable. If the option or warrant itself begins to trade on a liquid exchange, the Company will discontinue using a valuation model and will begin to use the public exchange price at which point it will be classified as level 1 in the valuation hierarchy.

Other equity securities represent investments in investment funds and other non-publicly traded entities. Substantially all of these other entities have the attributes of investment companies as described in FASB ASC 946-15-2. The Company estimates the fair value of these entities using the reported net asset value per share as of the reporting date in accordance with the “practical expedient” provisions related to investments in certain entities that calculate net asset value per share (or its equivalent) included in FASB ASC 820 for all entities except Star Asia. The Company generally classifies these estimates within either level 2 of the valuation hierarchy if its investment in the entity is currently redeemable or level 3 if its investment is not currently redeemable.

As described in more detail in note 4, the Company sold its investment in Star Asia Special Situations Fund on February 20, 2014 along with its investment in Star Asia and certain other related entities. According to ASC 820, when a sale is considered probable as of the measurement date at an amount other than the underlying net asset value (“NAV”) per share, the reporting entity should not use the practical expedient in determining fair value. Therefore, the Company determined the fair value of its investment in Star Asia Special Situations Fund as of December 31, 2013 by utilizing a valuation model that took into account the terms and conditions of the sale in February 2014.

Prior to the second quarter of 2013, the Company carried its investment in Tiptree based on the underlying net asset value per share of the fund in accordance with the “practical expedient” provisions discussed above and the Company classified the fair value estimate within level 3 of the valuation hierarchy. Beginning with the second quarter of 2013, the Company changed the way it calculates the fair value of its investment in Tiptree. During the second quarter of 2013, Tiptree completed a reorganization. As a result of that reorganization, the Company’s investment in Tiptree can be exchanged into shares of Tiptree Financial, Inc. based on a stated exchange ratio (which is generally fixed, but can be adjusted for certain events, such as stock dividends or stock splits). Tiptree Financial, Inc. is publicly traded over the counter. Therefore, beginning with the second quarter of 2013, the Company calculated the fair value of its investment in Tiptree by using the closing over the counter price for Tiptree Financial, Inc. and adjusting for the exchange ratio. Based on this pricing methodology, the Company began classifying the fair value of its investment in Tiptree as level 2 within the valuation hierarchy during the second quarter of 2013.

In the case of Star Asia, prior to December 31, 2013, the Company utilized a valuation model to determine fair value, which uses a market approach and generally classifies its investment within level 3 of the valuation hierarchy. Star Asia accounted for itself as an investment company as described in ASC 946, Financial Services—Investment Companies. As an investment company, Star

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Asia carries its assets at fair value and reports NAV per share to its investors. However, Star Asia issued subordinated debt securities in 2009 at a significant discount to par. Upon issuance, Star Asia did not elect the fair value option for these liabilities and was not required to do so under ASC 946. Over time, it was the Company’s assessment that the fair value of the subordinated debt securities had diverged from its carrying value. Because Star Asia’s published NAV was calculated using the amortized cost of these subordinated debt securities, the Company had concluded it would be appropriate to adjust Star Asia’s reported NAV to recalculate it as if Star Asia’s subordinated debt were recorded at fair value as opposed to its historical amortized cost. The Company estimated the fair value of Star Asia’s subordinated debt securities by projecting the remaining debt cash outflows and discounting them at an estimated market rate as of the reporting date, which was derived from similar non-investment grade long term subordinated debt issuances.

As described in more detail in note 4, the Company sold its investment in Star Asia on February 20, 2014 along with its investment in Star Asia Special Situations Fund and certain other related entities. Therefore, the Company determined the fair value of its investment in Star Asia as of December 31, 2013 by utilizing a valuation model that took into account the terms and conditions of the sale on February 20, 2014, as opposed to the valuation model described in the immediately preceding paragraph (which was used historically by the Company).

Residential Loans: Management utilizes home price indices to value the residential loans. Adjustments to the index imply a level 3 valuation. The methodology using an unadjusted index, which is considered an observable input, implies a level 2 valuation.

Certificates of Deposit: The fair value of certificates of deposit is estimated using valuations provided by third party pricing services. Certificates of deposit are generally categorized in level 2 of the valuation hierarchy.

Derivatives:

Foreign Currency Forward Contracts

Foreign currency forward contracts are exchange-traded derivatives which transact on an exchange that is deemed to be active. The fair value of the foreign currency forward contracts is based on current quoted market prices. Valuation adjustments are not applied. These are considered a level 1 value in the hierarchy. See note 8.

TBAs

The Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices or market price quotations from third party pricing services. TBAs are generally classified within level 2 of the fair value hierarchy. If there is limited transaction activity or less transparency to observe market based inputs to valuation models, TBAs are classified in level 3 of the fair value hierarchy. U.S. government agency MBS and CMOs include TBAs. Unrealized gains on TBAs are included in investments-trading on the Company’s consolidated balance sheets and unrealized losses on TBAs are included in trading securities sold, not yet purchased on the Company’s consolidated balance sheets. See note 8.

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Level 3 Financial Assets and Liabilities

Financial Instruments Measured at Fair Value on a Recurring Basis

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



LEVEL 3 INPUTS
Six Months Ended June 30, 2014
(Dollars in Thousands)

	December 31, 2013		Net trading		Gains and losses (5)		Transfers out of Level 3		Accretion of income ( 5)		Purchases		Sales and returns of capital		June 30, 2014		Change in unrealized gains /(losses) (1)
Assets:
Investments-trading
CLOs (2)	$	186	$	(3)	$	-	$	-	$	-	$	-	$	(183)	$	-	$	-
Total investments-trading	$	186	$	(3)	$	-	$	-	$	-	$	-	$	(183)	$	-	$	-

Other investments, at fair value:
Equity Securities:
EuroDekania (3)	$	4,192	$	-	$	1,444	$	-	$	-	$	-	$	(1,346)	$	4,290	$	1,444
Star Asia (4)		17,104		-		78		-		-		-		(17,182)		-		-
Star Asia Japan Special Situations Fund (4)		2,747		-		-		-		-		-		(2,747)		-		-
Total equity securities		24,043		-		1,522		-		-		-		(21,275)		4,290		1,444
CLOs (2)		-		-		6		-		249		20,819		(2,281)		18,793		(16)
CDOs		35		-		4		-		-		-		-		39		4
Total other investments, fair value	$	24,078	$	-	$	1,532	$	-	$	249	$	20,819	$	(23,556)	$	23,122	$	1,432

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

(2)Sales in investments-trading include $133 of an investment in a CLO that was reclassified from investments-trading to other investments, at fair value, which is included in purchases in other investments, at fair value as of June 30, 2014.

(3)Hybrid Securities Funds—European.

(4)Real Estate Funds—Asian.

(5) Recorded as a component of principal transactions and other income in the consolidated statement of operations.

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LEVEL 3 INPUTS
Six Months Ended June 30, 2013
(Dollars in Thousands)

	December 31, 2012		Net trading		Gains and losses (5)		Transfers out of Level 3		Accretion of income (5)		Purchases		Sales and returns of capital		June 30, 2013		Change in unrealized gains /(losses) (1)
Assets:
Investments-trading
CLOs	$	295	$	36	$	-	$	-	$	-	$	-	$	(110)	$	221	$	(74)
Total investments-trading	$	295	$	36	$	-	$	-	$	-	$	-	$	(110)	$	221	$	(74)

Other investments, at fair value:
Equity Securities:
EuroDekania (2)	$	2,054	$	-	$	(14)	$	-	$	-	$	-	$	-	$	2,040	$	(14)
Star Asia (3)		30,169		-		(9,234)		-		-		-		-		20,935		(9,234)
Tiptree (4)		2,834		-		-		(2,834)		-		-		-		-		-
Star Asia Special Situations Fund (3)		2,503		-		(30)		-		-		302		-		2,775		(30)
Total equity securities		37,560		-		(9,278)		(2,834)		-		302		-		25,750		(9,278)
CDOs		77		-		(19)		-		-		-		-		58		(19)
Total other investments, fair value	$	37,637	$	-	$	(9,297)	$	(2,834)	$	-	$	302	$	-	$	25,808	$	(9,297)

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

(2)Hybrid Securities Funds—European.

(3)Real Estate Funds—Asian.

(4)Diversified Holding Company.

(5) Recorded as a component of principal transactions and other income in the consolidated statement of operations.

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LEVEL 3 INPUTS
Three Months Ended June 30, 2014
(Dollars in Thousands)

	March 31, 2014		Net trading		Gains and losses (4)		Transfers out of Level 3		Accretion of income (4)		Purchases		Sales and returns of capital		June 30, 2014		Change in unrealized gains /(losses) (1)
Assets:
Investments-trading
CLOs (2)	$	134	$	19	$	-	$	-	$	-	$	-	$	(153)	$	-	$	-
Total investments-trading	$	134	$	19	$	-	$	-	$	-	$	-	$	(153)	$	-	$	-

Other investments, at fair value:
Equity Securities:
EuroDekania (3)	$	3,997	$	-	$	313	$	-	$	-	$	-	$	(20)	$	4,290	$	313
Total equity securities		3,997		-		313		-		-		-		(20)		4,290		313
CLOs (2)		7,109		-		6		-		205		13,754		(2,281)		18,793		(16)
CDOs		25		-		14		-		-		-		-		39		14
Total other investments, fair value	$	11,131	$	-	$	333	$	-	$	205	$	13,754	$	(2,301)	$	23,122	$	311

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

(3)Hybrid Securities Funds—European.

(4) Recorded as a component of principal transactions and other income in the consolidated statement of operations.

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LEVEL 3 INPUTS
Three Months Ended June 30, 2013
(Dollars in Thousands)

	March 31, 2013		Net trading		Gains and losses (5)		Transfers out of Level 3		Accretion of income (5)		Purchases		Sales and returns of capital		June 30, 2013		Change in unrealized gains /(losses) (1)
Assets:
Investments-trading
CLOs	$	259	$	72	$	-	$	-	$	-	$	-	$	(110)	$	221	$	(38)
Total investments-trading	$	259	$	72	$	-	$	-	$	-	$	-	$	(110)	$	221	$	(38)

Other investments, at fair value:
Equity Securities:
EuroDekania (2)	$	2,394	$	-	$	(354)	$	-	$	-	$	-	$	-	$	2,040	$	(354)
Star Asia (3)		24,136		-		(3,201)		-		-		-		-		20,935		(3,201)
Tiptree (4)		2,834		-		-		(2,834)		-		-		-		-		-
Star Asia Special Situations Fund (3)		2,848		-		(73)		-		-		-		-		2,775		(73)
Total equity securities		32,212		-		(3,628)		(2,834)		-		-		-		25,750		(3,628)
CDOs		82		-		(24)		-		-		-		-		58		(24)
Total other investments, fair value	$	32,294	$	-	$	(3,652)	$	(2,834)	$	-	$	-	$	-	$	25,808	$	(3,652)

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

(2)Hybrid Securities Funds—European.

(3)Real Estate Funds—Asian.

(4)Diversified Holding Company.

(5) Recorded as a component of principal transactions and other income in the consolidated statement of operations.

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The circumstances that would result in transferring certain financial instruments from level 2 to level 3 of the valuation hierarchy would typically include what the Company believes to be a decrease in the availability, utility, and reliability of observable market information such as new issue activity in the primary market, trading activity in the secondary market, credit spreads versus historical levels, bid-ask spreads, and price consensus among market participants and sources.

Investments-trading: During the six and three months ended June 30, 2014, there were no transfers into or out of level 3 of the valuation hierarchy. During the six and three months ended June 30, 2013, there were no transfers into or out of level 3 of the valuation hierarchy.

Other investments, at fair value: During the six and three months ended June 30, 2014, there were no transfers into or out of level 3 of the valuation hierarchy. During the six and three months ended June 30, 2013, the Company transferred $2,834 of its investment in Tiptree from level 3 to level 2 of the valuation hierarchy..

The following tables provide the quantitative information about level 3 fair value measurements as of June 30, 2014 and December 31, 2013, respectively:

QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS

(Dollars in Thousands)

Significant

Range of

Fair Value

Valuation

Unobservable

Weighted

Significant

June 30, 2014

Technique

Inputs

Average

Inputs

Assets

Other investments, at fair value

CLOs

18,793

Discounted Cash Flow Model

Yield

11.1%

9.7% - 12.7%

Duration (years)

4.5

3.5 - 5.0

Default rate

1.0%

1.0% - 3.5%

QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS

(Dollars in Thousands)

Significant

Range of

Fair Value

Valuation

Unobservable

Weighted

Significant

December 31, 2013

Technique

Inputs

Average

Inputs

Assets

Other investments, at fair value

Star Asia

17,104

Allocated sale price

Relative fair value of assets sold

77.3%

74.9% - 79.1%

Star Asia Special Situations Fund

2,747

Allocated sale price

Relative fair value of assets sold

12.4%

12.0% - 12.7%

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Sensitivity of Fair Value to Changes in Significant Unobservable Inputs

For recurring fair value measurements categorized within level 3 of the fair value hierarchy, the sensitivity of the fair value measurement to changes in significant unobservable inputs and interrelationships between those unobservable inputs (if any) are described below:

CLOs

With respect to the fair value measurement of CLOs for which the Company uses a discounted cash flow model, changes in yield, duration, and default rate would impact the fair value measurement.

•Equity investments in investment funds and other non-publicly traded entities.

With respect to the fair value measurement of investment funds and other non-publicly traded entities for which the Company uses the underlying net asset value per share to determine the fair value of the Company’s respective investment, a significant increase (decrease) in the net asset value per share, which is linked to the underlying financial performance of the respective entity, would result in a significantly higher (lower) fair value measurement.

• Equity investment in Star Asia and Star Asia Special Situations Fund

With respect to the Company’s investment in Star Asia and Star Asia Special Situations Fund as of December 31, 2013, the Company concluded it would be appropriate to base its fair value estimate on the terms and conditions of the sale of these assets which was completed in February 2014 (see note 4). As the sale involved multiple investments, the key assumption in the valuation is the relative fair value of Star Asia Special Situations Fund and Star Asia as compared to the total fair value of all the Star Asia Group entities sold.

Investments in Certain Entities That Calculate Net Asset Value Per Share (Or Its Equivalent)

The following table presents additional information about investments in certain entities that calculate net asset value per share (regardless of whether the “practical expedient” provisions of FASB ASC 820 have been applied) which are measured at fair value on a recurring basis at June 30, 2014 and December 31, 2013:

FAIR VALUE MEASUREMENTS OF INVESTMENTS IN CERTAIN ENTITIES

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

(dollars in thousands)

Fair Value June 30, 2014

Unfunded Commitments

Redemption Frequency

Redemption Notice Period

Other investments, at fair value

EuroDekania (a)

4,290

N/A

4,290

Fair Value December 31, 2013

Unfunded Commitments

Redemption Frequency

Redemption Notice Period

Other investments, at fair value

EuroDekania (a)

4,192

N/A

Star Asia (b)

17,104

N/A

Star Asia Special Situations Fund (c)

2,747

N/A

24,043

N/A – Not applicable.

(a)EuroDekania’s investment strategy is to make investments in hybrid capital securities that have attributes of debt and equity, primarily in the form of subordinated debt issued by insurance companies, banks and bank holding companies based primarily

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in Western Europe; widely syndicated leveraged loans issued by European corporations; CMBS, including subordinated interests in first mortgage real estate loans; and RMBS and other ABS backed by consumer and commercial receivables. The majority of the assets are denominated in Euros and U.K. Pounds Sterling. The fair value of the investment in this category has been estimated using the net asset value per share of the investment in accordance with the “practical expedient” provisions of FASB ASC 820.

(b)Star Asia’s investment strategy is to make investments in Asian real estate structured finance investments, including CMBS, corporate debt of REITs and real estate operating companies, whole loans, mezzanine loans, and other commercial real estate fixed income investments. On February 20, 2014, the Company completed the sale of the Company’s ownership interests in the Star Asia Group. See note 4. The Company determined the fair value of its investment in Star Asia as of December 31, 2013, by utilizing a valuation model that took into account the terms and conditions of the sale in February 2014. If the Company had used Star Asia’s unadjusted reported net asset value to determine its fair value, the carrying value of its investment in Star Asia would have been $30,261 as of December 31, 2013.

(c)The Star Asia Special Situations Fund’s investment strategy is to make investments in real estate and securities backed by real estate in Japan. The Star Asia Special Situations Fund is a closed end fund that does not allow investor redemptions. It has an initial life of three years which can be extended under certain circumstances for up to two years. As described in more detail in note 4, the Company sold its investment in Star Asia Special Situations Fund in February 2014 along with its investment in Star Asia and certain other related entities. According to ASC 820, when a sale is considered probable of the measurement date at an amount other than the underlying NAV per share, the reporting entity should not use the practical expedient in determining fair value. Therefore, the Company determined the fair value of its investment in Star Asia Special Situations Fund as of December 31, 2013, by utilizing a valuation model that took into account the terms and conditions of the sale in February 2014.

8. DERIVATIVE FINANCIAL INSTRUMENTS

FASB ASC 815, Derivatives and Hedging (“FASB ASC 815”), provides for optional hedge accounting. When a derivative is deemed to be a hedge and certain documentation and effectiveness testing requirements are met, reporting entities are allowed to record all or a portion of the change in the fair value of a designated hedge as an adjustment to other comprehensive income (“OCI”) rather than as a gain or loss in the statements of operations. To date, the Company has not designated any derivatives as hedges under the provisions included in FASB ASC 815.

Derivative financial instruments are recorded at fair value. If the derivative was entered into as part of the Company’s broker-dealer operations, it will be included as a component of investments-trading or trading securities sold, not yet purchased. If it is entered into to hedge for another financial instrument included in other investments, at fair value then the derivative will be included as a component of other investments, at fair value.

The Company may, from time to time, enter into derivatives to manage its risk exposures (i) arising from fluctuations in foreign currency rates with respect to the Company’s investments in foreign currency denominated investments; (ii) arising from the Company’s investments in interest rate sensitive investments; and (iii) arising from the Company’s facilitation of mortgage-backed trading. Derivatives entered into by the Company, from time to time, may include (i) foreign currency forward contracts and (ii) purchase and sale agreements of TBAs. TBAs are forward mortgage-backed securities whose collateral remain “to be announced” until just prior to the trade settlement. TBAs are accounted for as derivatives under FASB ASC 815 when either of the following conditions exists: (i) when settlement of the TBA trade is not expected to occur at the next regular settlement date (which is typically the next month) or (ii) a mechanism exists to settle the contract on a net basis. Otherwise, TBAs are recorded as a standard security trade. The settlement of these transactions is not expected to have a material effect on the Company’s consolidated financial statements.

Derivatives involve varying degrees of off-balance sheet risk, whereby changes in the level or volatility of interest rates or market values of the underlying financial instruments may result in changes in the value of a particular financial instrument in excess of its carrying amount. Depending on the Company’s investment strategy, realized and unrealized gains and losses are recognized in principal transactions and other income or in net trading in the Company’s consolidated statements of operations on a trade date basis.

The Company may, from time to time, enter into the following derivative instruments:

Foreign Currency Forward Contracts

The Company invests in foreign currency denominated investments that expose it to fluctuations in foreign currency rates, and, therefore, the Company may, from time to time, hedge such exposure by using foreign currency forward contracts. The Company carries the foreign currency forward contracts at fair value and includes them as a component of other investments, at fair value in the Company’s consolidated balance sheets. As of June 30, 2014, the Company had no outstanding foreign currency forward contracts.

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As of December 31, 2013, the Company had outstanding foreign currency forward contracts with a notional amount of 1.25 billion Japanese Yen.

TBAs

The Company trades U.S. government agency obligations. In connection with these activities, the Company may be required to maintain inventory in order to facilitate customer transactions. In order to mitigate exposure to market risk, the Company enters in to the purchase and sale of TBAs. The Company carries the TBAs at fair value and includes them as a component of investments—trading or trading securities sold, not yet purchased in the Company’s consolidated balance sheets. At June 30, 2014, the Company had open TBA sale agreements in the notional amount of $7,300 and open TBA purchase agreements in the notional amount of $13,638. At December 31, 2013, the Company had open TBA sale agreements in the notional amount of $66,300 and open TBA purchase agreements in the notional amount of $57,108.

The following table presents the Company’s derivative financial instruments and the amount and location of the fair value (unrealized gain / (loss)) recognized in the consolidated balance sheets as of June 30, 2014 and December 31, 2013, respectively.



DERIVATIVE FINANCIAL INSTRUMENTS-BALANCE SHEET INFORMATION
(Dollars in Thousands)

Derivative Financial Instruments Not Designated as Hedging Instruments Under FASB ASC 815	Balance Sheet Classification		June 30, 2014		December 31, 2013

TBAs	Investments-trading	$	20	$	188
Foreign currency forward contracts	Other investments, at fair value		-		190
TBAs	Trading securities sold, not yet purchased		(10)		(66)
		$	10	$	312

The following table presents the Company’s derivative financial instruments and the amount and location of the net gain (loss) recognized in the consolidated statement of operations:



DERIVATIVE FINANCIAL INSTRUMENTS-STATEMENT OF OPERATIONS INFORMATION
(Dollars in Thousands)

Derivative Financial Instruments Not Designated as Hedging Instruments Under FASB ASC 815	Income Statement Classification		Six Months Ended June 30, 2014		Six Months Ended June 30, 2013

Foreign currency forward contracts	Revenues-principal transactions and other income	$	(347)	$	(362)
TBAs	Revenues-net trading		1,227		2,017
		$	880	$	1,655



DERIVATIVE FINANCIAL INSTRUMENTS-STATEMENT OF OPERATIONS INFORMATION
(Dollars in Thousands)

Derivative Financial Instruments Not Designated as Hedging Instruments Under FASB ASC 815	Income Statement Classification		Three Months Ended June 30, 2014		Three Months Ended June 30, 2013

Foreign currency forward contracts	Revenues-principal transactions and other income	$	-	$	(362)
TBAs	Revenues-net trading		753		2,207
		$	753	$	1,845

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In addition to the above activities related to TBAs, the Company also enters into TBAs in order to assist clients (generally small to mid-size mortgage loan originators) in hedging the interest rate risk associated with the mortgages owned by the clients. In general, the Company will enter into a TBA purchase agreement with the client. Then, the Company will immediately enter into a TBA sale agreement with identical terms and settlement date with a separate counterparty. The Company seeks to profit through a small mark-up in the price of the transaction. The TBAs will match underlying terms and settlement dates. Because the Company has purchased and sold the same security, it is no longer exposed to market movements of the underlying TBA. The gain or loss on the transaction is recorded as a component of net trading in the consolidated statement of operations and is included in due to or due from broker in the consolidated balance sheet until it settles. As of June 30, 2014, the Company had unsettled TBA purchase contracts and offsetting TBA sale agreements with a market value of $411,421. The net profit on these transactions is recorded as a component of net trading revenue and is included as a component of TBA revenue in the table above. Any revenue on trades that have not yet settled is included as a component of due to or due from brokers, dealers, and clearing agencies.

9. COLLATERALIZED SECURITIES TRANSACTIONS

Securities purchased under agreements to resell (“reverse repurchase agreements” or “receivables under resale agreements”) or sales of securities under agreements to repurchase (“repurchase agreements”), principally U.S. government and federal agency obligations and MBS, are treated as collateralized financing transactions and are recorded at their contracted resale or repurchase amounts plus accrued interest. The resulting interest income and expense are included in net trading in the consolidated statements of operations.

In the case of reverse repurchase agreements, the Company generally takes possession of securities as collateral. Likewise, in the case of repurchase agreements, the Company is required to provide the counterparty with securities.

In certain cases a repurchase agreement and a reverse repurchase agreement may be entered into with the same counterparty. If certain requirements are met, the offsetting provisions included in FASB ASC 210, Balance Sheet (“FASB ASC 210”), allow (but do not require) the reporting entity to net the asset and liability on the balance sheet. It is the Company’s policy to present the assets and liabilities on a gross basis even if the conditions described in offsetting provisions included in FASB ASC 210 are met.

The Company classifies reverse repurchase agreements as a separate line item within the assets section of the Company’s consolidated balance sheets. The Company classifies repurchase agreements as a separate line item within the liabilities section of the Company’s consolidated balance sheets.

In the case of reverse repurchase agreements, if the counterparty does not meet its contractual obligation to return securities used as collateral, or does not deposit additional securities or cash for margin when required, the Company may be exposed to the risk of reacquiring the securities or selling the securities at unfavorable market prices in order to satisfy its obligations to its customers or counterparties. The Company’s policy to control this risk is monitoring the market value of securities pledged or used as collateral on a daily basis and requiring adjustments in the event of excess market exposure.

In the case of repurchase agreements, if the counterparty makes a margin call and the Company is unable or unwilling to meet the margin call, the counterparty can sell the securities to repay the obligation. The Company is at risk that the counterparty may sell the securities at unfavorable market prices and the Company may sustain significant loss. The Company controls this risk by monitoring its liquidity position to ensure it has sufficient cash or liquid securities to meet margin calls.

In the normal course of doing business, the Company enters into reverse repurchase agreements that permit it to re-pledge or resell the securities to others.

The Company enters into reverse repurchase agreements to acquire securities to cover short positions or as an investment. The Company enters into repurchase agreements to finance the Company’s securities positions held in inventory or to finance reverse repurchase agreements entered into as an investment.

At June 30, 2014 and December 31, 2013, the Company held reverse repurchase agreements of $35,975 and $29,395, respectively, and the fair value of securities received as collateral under reverse repurchase agreements was $38,398 and $29,575, respectively.

At June 30, 2014 and December 31, 2013, the Company had repurchase agreements of $36,729 and $28,748, respectively, and the fair value of securities pledged as collateral under repurchase agreements was $39,391 and $28,591, respectively. These amounts include collateral for reverse repurchase agreements that were re-pledged as collateral for repurchase agreements.

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As of June 30, 2014 and December 31, 2013, the Company’s reverse repurchase agreements and repurchase agreements were predominantly collateralized securities in the following asset classes: Agency Specified Pools, Agency Hybrid Arms, and Fixed Rate Agency CMOs.

10. GOODWILL

The following table presents goodwill:


GOODWILL
(Dollars in Thousands)

	June 30, 2014		December 31, 2013
Cira SCM, LLC	$	-	$	3,121
AFN		110		110
JVB		7,882		7,882
Goodwill	$	7,992	$	11,113

The Company measures its goodwill impairment on an annual basis or when events indicate that goodwill may be impaired. The Company first assesses qualitative factors to determine whether it is “more likely than not” that the fair value of a 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. Based on the results of the qualitative assessment, the Company then determines whether it needs to calculate the fair value of the reporting unit as part of the first step of the two-step goodwill impairment test. The Company performs its annual impairment test of: Cira SCM, LLC (“Cira SCM”) goodwill on July 1; AFN goodwill on October 1; and JVB on January 1.

The goodwill attributable to Cira SCM relates to Cohen Brothers’ acquisition of the 10% of Cira SCM that the Company did not already own in exchange for 189,901 membership units of Cohen Brothers, from a non-controlling interest partner in July 2007.

For its annual impairment test of Cira SCM, the Company first estimates the current fair value of the Cira SCM reporting unit. This fair value is compared to the book value of the goodwill and, if the fair value is less, then the goodwill is deemed impaired. The Company determines the fair value of the Cira SCM using a discounted cash flow analysis which is based on an income approach. During the six and three months ended June 30, 2014, the Company recognized an impairment charge of $3,121. The charge is included in the consolidated statements of operations as impairment of goodwill and is reflected as a component of operating expenses.

11. OTHER ASSETS AND ACCOUNTS PAYABLE AND OTHER LIABILITIES

Other assets included:



OTHER ASSETS
(Dollars in Thousands)

	June 30, 2014		December 31, 2013
Deferred costs	$	590	$	644
Note receivable		2,314		1,849
Prepaid expenses		2,306		2,226
Prepaid income taxes		48		146
Security deposits		2,472		2,492
Miscellaneous other assets		207		146
Cost method investment		235		235
Furniture, equipment, and leasehold improvements, net		1,606		2,054
Intangible assets		166		483
Equity method affiliates		-		(31)
Other assets	$	9,944	$	10,244

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Accounts payable and other liabilities included:



ACCOUNTS PAYABLE AND OTHER LIABILITIES
(Dollars in Thousands)

	June 30, 2014		December 31, 2013
Accounts payable	$	518	$	738
Rent payable		826		1,058
Accrued interest payable		325		376
Accrued interest on securities sold, not yet purchased		440		255
Payroll taxes payable		571		1,055
Other general accrued expenses		1,809		4,994
Accounts payable and other liabilities	$	4,489	$	8,476

12. INVESTMENTS IN EQUITY METHOD AFFILIATES

The Company has several investments that are accounted for under the equity method. Equity method accounting requires that the Company record its investment on the consolidated balance sheets and recognize its share of the affiliate’s net income as earnings each year. Investment in equity method affiliates is included as a component of other assets on the Company’s consolidated balance sheets.

The Company has certain equity method affiliates for which it has elected the fair value option. Those investees are excluded from the table below. Those investees are included as a component of other investments, at fair value in the consolidated balance sheets. All gains and losses (unrealized and realized) from securities classified as other investments, at fair value in the consolidated balance sheets are recorded as a component of principal transactions and other income in the consolidated statements of operations.

In December, 2013, the Company acquired additional shares of EuroDekania bringing its ownership to 17% of EuroDekania’s outstanding shares and share equivalents. However, when the ownership interests of related parties are considered, the combined ownership percentage exceeds 20%. Accordingly, the Company concluded that with the recent purchase, its investment in EuroDekania should be considered an investment in an equity method affiliate. However, the Company continued its fair value election regarding EuroDekania. See notes 6 and 7.

During the three months ended June 30, 2014, the Company’s sole equity method investee (excluding equity method affiliates for which it had adopted the fair value option): Star Asia Opportunity, LLC (“Star Asia Opportunity”) was fully liquidated and the Company received a final distribution. On February 20, 2014, the Company completed the sale of the Company’s ownership interests in the Star Asia Group which includes Star Asia Capital Management, SAA Manager and affiliates from the table below.

The following table summarizes the activity and the earnings of the Company’s equity method affiliates.



INVESTMENTS IN EQUITY METHOD AFFILIATES
(Dollars in Thousands)

	Star		Star Asia
	Asia		Capital		SAA
	Opportunity		Management		Manager		Other		Total
January 1, 2014	$	17	$	(81)	$	12	$	21	$	(31)
Distributions / repayments		(17)		(15)		(25)		(10)		(67)
Earnings / (loss) realized		-		13		14		-		27
Sale (1)		-		83		(1)		(11)		71
June 30, 2014	$	-	$	-	$	-	$	-	$	-

(1)See note 4.

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The table below summarizes the combined financial information for all equity method investees held as of the indicated periods, including equity method investees for which the fair value option was elected. The aggregated summarized financial data below does not represent the Company’s proportionate share of equity method investees’ assets or earnings.



SUMMARY DATA OF EQUITY METHOD INVESTEES
(Dollars in Thousands)

		June 30, 2014		December 31, 2013
Total Assets	$	25,936	$	370,388

Liabilities	$	53	$	144,578
Equity attributable to the investees		25,793		225,810
Non-controlling interest		90		-
Total Liabilities & Equity	$	25,936	$	370,388



		Three Months Ended June 30,				Six Months Ended June 30,
		2014		2013		2014		2013

Net income / (loss)	$	1,813	$	8,590	$	8,950	$	(3,222)

Net income / (loss) attributable to the investees	$	1,807	$	8,789	$	8,921	$	(2,666)

See note 21 for information regarding transactions with the Company’s equity method investees.

13. VARIABLE INTEREST ENTITIES

FASB ASC 810, Consolidation (“FASB ASC 810”) contains the guidance surrounding the definition of variable interest entities (“VIEs”), the definition of VIEs, and the consolidation rules surrounding VIEs. In general, VIEs are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The Company has variable interests in VIEs through its management contracts and investments in various securitization entities including CLOs and CDOs.

Once it is determined that the Company holds a variable interest in a VIE, FASB ASC 810 requires that the Company perform a qualitative analysis to determine (i) which entity has the power to direct the matters that most significantly impact the VIE’s financial performance; and (ii) if the Company has the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The entity that has both of these characteristics is deemed to be the primary beneficiary and required to consolidate the VIE. This assessment must be done on an ongoing basis.

The Company classifies the VIEs it is involved with into two groups: (i) VIEs managed by the Company and (ii) VIEs managed by third parties. In the case of the VIEs that the Company has been involved with, the Company has generally concluded that the entity that manages the VIE has the power to direct the matters that most significantly impact the VIEs financial performance. This is not a blanket conclusion as it is possible for an entity other than the manager to have the power to direct such matters. However, for all the VIEs the Company is involved with as of June 30, 2014, the Company has drawn this conclusion.

In the case where the Company has an interest in a VIE managed by a third party, the Company has concluded that it is not the primary beneficiary because the Company does not have the power to direct its activities. In the case of an interest in a VIE managed by the Company, the Company performs an additional qualitative analysis to determine if its interest (including any investment as well as any management fees that qualify as variable interests) could absorb losses or receive benefits that could potentially be significant to the VIE. This analysis considers the most optimistic and pessimistic scenarios of potential economic results that could reasonably be experienced by the VIE. Then, the Company compares the benefits it would receive (in the optimistic scenario) or the losses it would absorb (in the pessimistic scenario) as compared to all benefits and losses absorbed by the VIE in the aggregate. If the benefits or losses absorbed by the Company were significant as compared to total benefits and losses absorbed by all variable interest holders, then the Company would conclude it is the primary beneficiary.

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As of June 30, 2014, the Company had variable interests in various securitization VIEs, but determined that it is not the primary beneficiary thereof, and, therefore, the Company is not consolidating the securitization VIEs. The maximum potential financial statement loss the Company could incur if the securitization vehicles were to default on all of their obligations is (i) the loss of value of the interests in securitizations that the Company holds in its inventory at the time, and (ii) any management fee receivables in the case of managed VIEs. The Company did not provide financial support to these VIEs during the six and three months ended June 30, 2014 and 2013 and had no liabilities, contingent liabilities, guarantees (implicit or explicit) related to these VIEs at June 30, 2014 and December 31, 2013.

The table below presents the carrying amounts of the assets in the Company’s consolidated balance sheets that relate to the Company’s variable interest in identified VIEs with the exception of (i) the two trusts VIEs that hold the Company’s junior subordinated notes (see note 14), and (ii) any security that represents an interest in a VIE that is included in investments-trading or securities sold but not yet purchased in the Company’s consolidated balance sheets. The table below shows the Company’s maximum exposure to loss associated with these identified nonconsolidated VIEs in which it held variable interests at June 30, 2014 and December 31, 2013.



NON-CONSOLIDATED VARIABLE INTEREST ENTITIES
(Dollars in Thousands)

	June 30, 2014

	Other Receivable		Other Investments, at fair value		Maximum Exposure to loss in non-consolidated VIEs
Managed VIEs	$	2,137	$	-	$	2,137
Third party managed VIEs		91		18,832		18,923
Total	$	2,228	$	18,832	$	21,060

	December 31, 2013

	Other Receivable		Other Investments, at fair value		Maximum Exposure to loss in non-consolidated VIEs
Managed VIEs	$	2,239	$	-	$	2,239
Third party managed VIEs		84		35		119
Total	$	2,323	$	35	$	2,358

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14. DEBT

The Company had the following debt outstanding:



DETAIL OF DEBT
(Dollars in Thousands)

Description	Current Outstanding Par			June 30, 2014		December 31, 2013		Interest Rate Terms	Interest (4)		Maturity
Convertible senior notes:
10.50% contingent convertible senior notes (the "New Notes")	$	-		$	-	$	3,115	10.50%	10.50	%	May 2014 (1)
8.00% convertible senior notes (the "8.0% Convertible Notes")		8,248			8,248		8,248	8.00%	8.00	%	September 2018 (2)
	$	8,248			8,248		11,363
Junior subordinated notes:
Alesco Capital Trust I	$	28,125	(3)		11,087		10,697	4.23%	4.23	%	July 2037
Sunset Financial Statutory Trust I		20,000	(3)		7,895		7,614	4.38%	4.38	%	March 2035
	$	48,125			18,982		18,311
Total				$	27,230	$	29,674

(1)On May 20, 2014, the Company redeemed the entire $3,121 aggregate principal amount of the New Notes outstanding.

(2) The holders of the 8.0% Convertible Notes may convert all or any part of the outstanding principal amount of the 8.0% Convertible Notes at any time prior to maturity into shares of the Company’s common stock at a conversion price of $3.00 per share, subject to customary anti-dilution adjustments.

(3)The outstanding par represents the total par amount of the junior subordinated notes held by two separate trusts. The Company does not consolidate these trusts. The Company holds $1,489 par value of these junior subordinated notes, comprised of $870 par value of junior subordinated notes related to Alesco Capital Trust I and $619 par value of junior subordinated notes related to Sunset Financial Statutory Trust I. These notes have a carrying value of $0. Therefore, the net par value held by third parties is $48,125.

(4)Represents the interest rate as of the last day of the reporting period.

Refer to note 17 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, for a discussion of the Company’s debt.

15. EQUITY

Stockholders’ Equity

Common Equity: The following table reflects the activity for the six months ended June 30, 2014 related to the number of shares of unrestricted common stock that the Company had issued as of June 30, 2014:


			Common Stock
			Shares
December 31, 2013			14,398,579
Shares issued in connection with the redemption of Operating LLC units			186,342
Vesting of shares			393,818
Shares withheld for employee taxes			(31,426)
June 30, 2014			14,947,313

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In connection with the acquisition of JVB Holdings in January 2011, the Company issued 559,020 restricted units of the Operating LLC to certain of the former owners of JVB Holdings who remained employees of JVB Holdings. As of December 31, 2013, there were 186,342 restricted units outstanding. These units vested over a three year period (of which all three years have elapsed) and were treated as compensation for future service. In January 2014, the remaining 186,342 restricted units of the Operating LLC vested, and the holders of these vested Operating LLC membership units elected to redeem these units. The Company, at its discretion, issued 186,342 shares of IFMI common stock to the JVB Holdings sellers in exchange for these vested membership units. As of June 30, 2014, there were no restricted units outstanding.

Acquisition and Surrender of Additional Units of the Operating LLC, net: Effective January 1, 2011, IFMI and the Operating LLC entered into a Unit Issuance and Surrender Agreement (the “UIS Agreement”) which was approved by IFMI’s Board of Directors and the board of managers of the Operating LLC. In an effort to maintain a 1:1 ratio of IFMI’s common stock to the number of membership units IFMI holds in the Operating LLC, the UIS Agreement calls for the issuance of additional membership units of the Operating LLC to IFMI when IFMI issues its common stock to employees under existing equity compensation plans. In certain cases, the UIS Agreement calls for IFMI to surrender units to the Operating LLC when certain restricted shares are forfeited by the employee or repurchased.

During the six months ended June 30, 2014, IFMI received units of the Operating LLC. The following table displays the amount of units received (net of surrenders) by IFMI pursuant to the UIS Agreement, as a result of the vesting and redemption of membership units of the Operating LLC by certain former owners of JVB Holdings for IFMI common stock.


			Operating LLC
			Membership Units
Units related to UIS Agreement			347,751
Units received from certain former owners of JVB Holdings			186,342
Total			534,093

The Company recognized a net increase in additional paid in capital of $250 and a net decrease in accumulated other comprehensive income of $14 with an offsetting decrease in non-controlling interest of $236 in connection with the acquisition and surrender of additional units of the Operating LLC. The following schedule presents the effects of changes in IFMI’s ownership interest in the Operating LLC on the equity attributable to IFMI for the six months ended:



	June 30, 2014		June 30, 2013
Net income / (loss) attributable to IFMI	$	(4,221)	$	(9,202)
Transfers (to) from the non-controlling interest:
Increase / (decrease) in IFMI's paid in capital for the
acquisition / (surrender) of additional units in consolidated
subsidiary, net		250		634
Changes from net income / (loss) attributable to IFMI and transfers (to) from the non-controlling interest:	$	(3,971)	$	(8,568)

16. NET CAPITAL REQUIREMENTS

The U.S. broker-dealer subsidiaries of the Company are subject to the net capital provision of Rule 15c3-1 under the Exchange Act, which requires the maintenance of minimum net capital, as defined therein. In January 2014, the Company merged CCPR into JVB, resulting in the Company having one broker-dealer subsidiary in the United States operating under the JVB brand.

As of June 30, 2014, JVB’s adjusted net capital was $9,728, which exceeded the minimum requirements by $9,466.

CCFL, a subsidiary of the Company regulated by the Financial Conduct Authority (formerly known as the Financial Services Authority) in the United Kingdom, is subject to the net liquid capital provision of the Financial Services and Markets Act 2000, GENPRU 2.140R to 2.1.57R, relating to financial prudence with regards to the European Investment Services Directive and the European Capital Adequacy Directive, which requires the maintenance of minimum liquid capital, as defined therein. As of June 30, 2014, the total minimum required net liquid capital was $1,982, and net liquid capital in CCFL was $3,049, which exceeded the minimum requirements by $1,067 and was in compliance with the net liquid capital provisions.

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17. EARNINGS / (Loss) PER COMMON SHARE

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



EARNINGS / (LOSS) PER COMMON SHARE
(Dollars in Thousands, except share or per share information)

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Net income / (loss) attributable to IFMI	$	(2,123)	$	(4,702)	$	(4,221)	$	(9,202)
Add/ (deduct): Income / (loss) attributable to non-controlling interest attributable to Operating LLC membership units exchangeable into IFMI shares (1)		(734)		(2,158)		(1,441)		(4,249)
Add / (deduct): Adjustment (2)		(11)		8		(43)		(6)
Net income / (loss) on a fully converted basis	$	(2,868)	$	(6,852)	$	(5,705)	$	(13,457)

Weighted average common shares outstanding - Basic		15,105,751		11,658,512		14,987,079		11,504,613
Unrestricted Operating LLC membership units exchangeable into IFMI shares (1)		5,324,140		5,324,090		5,324,137		5,324,090
Weighted average common shares outstanding - Diluted (3)		20,429,891		16,982,602		20,311,216		16,828,703

Net income / (loss) per common share - Basic	$	(0.14)	$	(0.40)	$	(0.28)	$	(0.80)

Net income / (loss) per common share - Diluted	$	(0.14)	$	(0.40)	$	(0.28)	$	(0.80)

(1)The Operating LLC membership units not held by IFMI (that is, those held by the non-controlling interest for the six and three months ended June 30, 2014 and 2013) may be redeemed and exchanged into shares of the Company on a one-to-one basis. The 4,983,557 Operating LLC membership units held by Daniel G. Cohen, the Vice Chairman of the Company’s Board of Directors and of the board of managers of the Operating LLC, President and Chief Executive Officer of the Company’s European Business, and the President of CCFL, are redeemable at Mr. Cohen’s option, at any time, for (i) cash in an amount equal to the average of the per share closing prices of the Company’s common stock for the ten consecutive trading days immediately preceding the date the Company receives Mr. Cohen’s redemption notice, or (ii) at the Company’s option, one share of the Company’s common stock, subject, in each case, to appropriate adjustment upon the occurrence of an issuance of additional shares of the Company’ common stock as a dividend or other distribution on the Company’s outstanding common stock, or a further subdivision or combination of the outstanding shares of the Company’s common stock. The Operating LLC membership units held by other members of the Operating LLC have the same redemption rights as described above. These membership units are not included in the computation of basic earnings per share. These membership units enter into the computation of diluted net income / (loss) per common share when the effect is dilutive using the if-converted method.

(2)An adjustment is included for the following: (i) if the Operating LLC membership units had been converted at the beginning of the period, the Company would have incurred a higher income tax expense or realized a higher income tax benefit, as applicable; and (ii) to adjust the non-controlling interest amount to be consistent with the weighted average share calculation.

(3)For the six months ended June 30, 2014 and 2013, weighted average common shares outstanding excludes a total of 145,966 and 344,834 shares, respectively, representing restricted Operating LLC membership units, restricted IFMI common stock, and restricted units of IFMI common stock which would be anti-dilutive because of the Company’s net loss. For the three months ended June 30, 2014 and 2013, weighted average common shares outstanding excludes a total of 71,418 shares and 371,778 shares respectively, representing restricted Operating LLC membership units, restricted IFMI common stock, and restricted units of IFMI common stock which would be anti-dilutive because of the Company’s net loss. For the six and three months ended June 30, 2014, weighted average common shares outstanding also excludes 2,749,167 shares from the assumed conversion of the 8.0% Convertibles Notes because the inclusion of the converted shares would be anti-dilutive.

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18. COMMITMENTS AND CONTINGENCIES

Legal and Regulatory Proceedings

The Company’s former U.S. broker-dealer subsidiary, Cohen & Company Securities, LLC (“CCS”), and one of its registered investment adviser subsidiaries, CIRA SCM, are parties to litigation that was commenced on June 7, 2013 in the Supreme Court of the State of New York under the caption Northern Rock (Asset Management) PLC v. Societe Generale Corporate and Investment Banking, Cohen & Company Securities, et al. Northern Rock (Asset Management) PLC (“Northern Rock”), the plaintiff, served the Summons with Notice on Defendants on October 3, 2013, and, on November 12, 2013, Northern Rock filed its complaint alleging fraud, fraudulent inducement, fraudulent concealment, breach of contract, negligent misrepresentation, and unjust enrichment in connection with Northern Rock’s investment in Kleros Preferred Funding VIII, Ltd., a CDO. The relief sought by Northern Rock under these various legal theories includes damages, rescission, and disgorgement, as well as costs and attorneys’ fees. CCS and CIRA SCM filed a motion to dismiss the complaint in lieu of an answer on January 27, 2014. Northern Rock filed its opposition on March 4, 2014. The Company intends to defend the action vigorously.

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

Pennsylvania Income Tax Assessment

In October, 2013, the Company received an assessment from the Pennsylvania Department of Revenue in the amount of $4,683 (including penalties) related to a subsidiary of AFN for the 2009 tax year. The assessment denied this subsidiary’s Keystone Opportunity Zone (“KOZ”) credit for that year. The Company filed an administrative appeal of this assessment with the Pennsylvania Department of Revenue which was denied in June 2014. The Company intends to file an appeal with the Pennsylvania Board of Finance and Revenue. If the Pennsylvania Board of Finance and Revenue were to uphold the assessment, the Company could then seek relief in Pennsylvania Commonwealth Court. The Company has evaluated the assessment in accordance with the provisions of ASC 740 and determined not to record any reserve for this assessment.

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19. SEGMENT AND GEOGRAPHIC INFORMATION

Segment Information

The Company operates within three business segments: Capital Markets, Asset Management, and Principal Investing. See note 1.

The Company’s business segment information for the six and three months ended June 30, 2014 and 2013 was prepared using the following methodologies and generally represents the information that is relied upon by management in its decision making processes:

(a) Revenues and expenses directly associated with each business segment are included in determining net income / (loss) by segment.

(b) Indirect expenses (such as general and administrative expenses including executive and indirect overhead costs) not directly associated with specific business segments are not allocated to the business segments’ statements of operations. Accordingly, the Company presents segment information consistent with internal management reporting. See notes (1) in the tables below for more detail on unallocated items. The following tables present the financial information for the Company’s segments for the periods indicated:



SEGMENT INFORMATION
Statement of Operations Information
Six Months Ended June 30, 2014

	Capital		Asset		Principal		Segment		Unallocated
	Markets		Management		Investing		Total		(1)		Total
Net trading	$	13,549	$	-	$	-	$	13,549	$	-	$	13,549
Asset management		-		7,643		-		7,643		-		7,643
New issue and advisory		2,718		-		-		2,718		-		2,718
Principal transactions and other income		523		778		2,211		3,512		-		3,512
Total revenues		16,790		8,421		2,211		27,422		-		27,422
Total operating expenses		17,139		6,706		47		23,892		6,882		30,774
Operating income / (loss)		(349)		1,715		2,164		3,530		(6,882)		(3,352)
Interest expense		-		-		-		-		(2,238)		(2,238)
Income / (loss) from equity method affiliates		-		27		-		27		-		27
Income / (loss) before income taxes		(349)		1,742		2,164		3,557		(9,120)		(5,563)
Income tax expense / (benefit)		-		-		-		-		99		99
Net income / (loss)		(349)		1,742		2,164		3,557		(9,219)		(5,662)
Less: Net income / (loss) attributable to the
non-controlling interest		-		-		-		-		(1,441)		(1,441)
Net income / (loss) attributable to IFMI	$	(349)	$	1,742	$	2,164	$	3,557	$	(7,778)	$	(4,221)

Other statement of operations data
Depreciation and amortization (included in
total operating expense)	$	410	$	45	$	-	$	455	$	143	$	598

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SEGMENT INFORMATION
Statement of Operations Information
Six Months Ended June 30, 2013

	Capital		Asset		Principal		Segment		Unallocated
	Markets		Management		Investing		Total		(1)		Total
Net trading	$	24,689	$	-	$	-	$	24,689	$	-	$	24,689
Asset management		-		8,917		-		8,917		-		8,917
New issue and advisory		1,567		-		-		1,567		-		1,567
Principal transactions and other income		144		898		(8,455)		(7,413)		-		(7,413)
Total revenues		26,400		9,815		(8,455)		27,760		-		27,760
Total operating expenses		28,536		5,613		162		34,311		6,419		40,730
Operating income / (loss)		(2,136)		4,202		(8,617)		(6,551)		(6,419)		(12,970)
Interest expense		(109)		(7)		-		(116)		(1,948)		(2,064)
Income / (loss) from equity method affiliates		-		332		1,282		1,614		-		1,614
Income / (loss) before income taxes		(2,245)		4,527		(7,335)		(5,053)		(8,367)		(13,420)
Income tax expense / (benefit)		(42)		-		-		(42)		88		46
Net income / (loss)		(2,203)		4,527		(7,335)		(5,011)		(8,455)		(13,466)
Less: Net income / (loss) attributable to the
non-controlling interest		(15)		-		-		(15)		(4,249)		(4,264)
Net income / (loss) attributable to IFMI	$	(2,188)	$	4,527	$	(7,335)	$	(4,996)	$	(4,206)	$	(9,202)

Other statement of operations data
Depreciation and amortization (included in
total operating expense)	$	390	$	131	$	-	$	521	$	148	$	669

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SEGMENT INFORMATION
Statement of Operations Information
Three Months Ended June 30, 2014

	Capital		Asset		Principal		Segment		Unallocated
	Markets		Management		Investing		Total		(1)		Total
Net trading	$	6,620	$	-	$	-	$	6,620	$	-	$	6,620
Asset management		-		3,386		-		3,386		-		3,386
New issue and advisory		2,388		-		-		2,388		-		2,388
Principal transactions and other income		158		397		1,286		1,841		-		1,841
Total revenues		9,166		3,783		1,286		14,235		-		14,235
Total operating expenses		8,186		4,588		-		12,774		3,121		15,895
Operating income / (loss)		980		(805)		1,286		1,461		(3,121)		(1,660)
Interest expense		-		-		-		-		(1,109)		(1,109)
Income / (loss) from equity method affiliates		-		-		1		1		-		1
Income / (loss) before income taxes		980		(805)		1,287		1,462		(4,230)		(2,768)
Income tax expense / (benefit)		-		-		-		-		89		89
Net income / (loss)		980		(805)		1,287		1,462		(4,319)		(2,857)
Less: Net income / (loss) attributable to the
non-controlling interest		-		-		-		-		(734)		(734)
Net income / (loss) attributable to IFMI	$	980	$	(805)	$	1,287	$	1,462	$	(3,585)	$	(2,123)

Other statement of operations data
Depreciation and amortization (included in
total operating expense)	$	184	$	8	$	-	$	192	$	75	$	267

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SEGMENT INFORMATION
Statement of Operations Information
Three Months Ended June 30, 2013

	Capital		Asset		Principal		Segment		Unallocated
	Markets		Management		Investing		Total		(1)		Total
Net trading	$	11,630	$	-	$	-	$	11,630	$	-	$	11,630
Asset management		-		4,155		-		4,155		-		4,155
New issue and advisory		572		-		-		572		-		572
Principal transactions and other income		89		388		(3,100)		(2,623)		-		(2,623)
Total revenues		12,291		4,543		(3,100)		13,734		-		13,734
Total operating expenses		14,021		2,681		83		16,785		2,847		19,632
Operating income / (loss)		(1,730)		1,862		(3,183)		(3,051)		(2,847)		(5,898)
Interest expense		(55)		(4)		-		(59)		(976)		(1,035)
Income / (loss) from equity method affiliates		-		122		(27)		95		-		95
Income / (loss) before income taxes		(1,785)		1,980		(3,210)		(3,015)		(3,823)		(6,838)
Income tax expense / (benefit)		(17)		-		-		(17)		51		34
Net income / (loss)		(1,768)		1,980		(3,210)		(2,998)		(3,874)		(6,872)
Less: Net income / (loss) attributable to the
non-controlling interest		(12)		-		-		(12)		(2,158)		(2,170)
Net income / (loss) attributable to IFMI	$	(1,756)	$	1,980	$	(3,210)	$	(2,986)	$	(1,716)	$	(4,702)

Other statement of operations data
Depreciation and amortization (included in
total operating expense)	$	193	$	93	$	-	$	286	$	73	$	359

(1)Unallocated includes certain expenses incurred by indirect overhead and support departments (such as the executive, finance, legal, information technology, human resources, risk, compliance, and other similar overhead and support departments). Some of the items not allocated include: (1) operating expenses (such as cash compensation and benefits, equity-based compensation expense, professional fees, travel and entertainment, consulting fees, and rent) related to support departments excluding certain departments that directly support the Capital Markets business segment; (2) interest expense on debt; and (3) income taxes. Management does not consider these items necessary for an understanding of the operating results of these business segments and such amounts are excluded in business segment reporting to the Chief Operating Decision Maker.



Balance Sheet Data
As of June 30, 2014

	Capital		Asset		Principal		Segment		Unallocated
	Markets		Management		Investing		Total		(1)		Total
Total Assets	$	176,519	$	3,893	$	26,652	$	207,064	$	7,650	$	214,714

Included within total assets:
Investment in equity method affiliates	$	-	$	-	$	-	$	-	$	-	$	-
Goodwill (2)	$	7,937	$	55	$	-	$	7,992	$	-	$	7,992
Intangible assets (2)	$	166	$	-	$	-	$	166	$	-	$	166

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Balance Sheet Data
As of June 30, 2013

	Capital		Asset		Principal		Segment		Unallocated
	Markets		Management		Investing		Total		(1)		Total
Total Assets	$	310,458	$	8,888	$	28,707	$	348,053	$	9,629	$	357,682

Included within total assets:
Investment in equity method affiliates	$	-	$	(69)	$	17	$	(52)	$	-	$	(52)
Goodwill (2)	$	7,937	$	3,176	$	-	$	11,113	$	-	$	11,113
Intangible assets (2)	$	332	$	302	$	-	$	634	$	-	$	634

(1)Unallocated assets primarily include (1) amounts due from related parties; (2) furniture and equipment, net; and (3) other assets that are not considered necessary for an understanding of business segment assets and such amounts are excluded in business segment reporting to the Chief Operating Decision Maker.

(2)Goodwill and intangible assets as of June 30, 2014 and 2013 are allocated to the Capital Markets and Asset Management business segments as indicated in the table from above.

Asset management total operating expenses include an impairment charge of $3,121 for the six and three months ended June 30, 2014 related to the impairment of goodwill attributable to Cira SCM.

Geographic Information

The Company conducts its business activities through offices in the following locations: (1) United States; (2) United Kingdom and other; and (3) for the period prior to February 20, 2014, Asia. Total revenues by geographic area are summarized as follows:



GEOGRAPHIC DATA
(Dollars in Thousands)

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Total Revenues:
United States	$	12,600	$	9,812	$	23,289	$	21,209
United Kingdom & Other		1,635		3,140		4,009		5,496
Asia		-		782		124		1,055
Total	$	14,235	$	13,734	$	27,422	$	27,760

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

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20. SUPPLEMENTAL CASH FLOW DISCLOSURE

Interest paid by the Company on its debt was $1,569 and $1,522 for the six months ended June 30, 2014 and 2013, respectively.

The Company paid income taxes of $28 and $281 for the six months ended June 30, 2014 and 2013, respectively. The Company received $24 and $19 income tax refunds for the six months ended June 30, 2014 and 2013, respectively.

For the six months ended June 30, 2014, the Company had the following significant non-cash transactions that are not reflected on the statement of cash flows:

• The Company acquired additional units of the Operating LLC pursuant to the UIS Agreement and in connection with the redemption of vested Operating LLC units by IFMI. The Company recognized a net increase in additional paid-in capital of $250, a net decrease of $14 in accumulated other comprehensive income, and a decrease of $236 in non-controlling interest. See note 14.

For the six months ended June 30, 2013, the Company had the following significant non-cash transactions that are not reflected on the statement of cash flows:

• The Company recognized a net increase in additional paid-in capital of $634, a net decrease of $25 in accumulated other comprehensive income, and a decrease of $609 in non-controlling interest as a result of additional units of the Operating LLC issued to IFMI as a result of the UIS agreement and redemption of vested Operating LLC units by IFMI.

• In connection with Star Asia Manager repurchasing its outstanding equity units held by Star Asia Mercury LLC (formerly Mercury Partners, LLC) and, as a result, the Company obtaining 100% voting control of Star Asia Manager on March 1, 2013 (the “Star Asia Manager Repurchase Transaction”), the Company reclassified $705 from investment in equity method affiliates and re-allocated it to certain balance sheet accounts to reflect Star Asia Manager becoming a consolidated subsidiary of the Company. See note 4 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. On February 20, 2014, the Company completed the sale of the Company’s ownership interests in the Star Asia Group, including Star Asia Manager. See note 4.

21. RELATED PARTY TRANSACTIONS

The Company has identified the following related party transactions for the six and three months ended June 30, 2014 and 2013. The transactions are listed by related party and, unless otherwise noted in the text of the description, the amounts are disclosed in the tables at the end of this section.

Transactions between the Star Asia Group and the Company

Star Asia Manager serves as external manager of Star Asia and Star Asia Special Purpose Vehicle (“Star Asia SPV”) (see paragraphs A-1 and E-3 below). The Company owned 50% of Star Asia Manager prior to the Star Asia Manager Repurchase Transaction. Following the March, 2013 Star Asia Manager Repurchase Transaction, the Company owned 100% of Star Asia Manager and included Star Asia Manager in its consolidated financial statements (see note 4). Prior to March 1, 2013, Star Asia Manager had been identified as a related party because it was an equity method investee of the Company. The Company had recognized its share of the income or loss of Star Asia Manager as income or loss from equity method affiliates in the consolidated statements of operations during the pre-acquisition period. Income or loss recognized under the equity method is disclosed in the table at the end of this section.

Effective February 20, 2014, the Company sold its interest in Star Asia, Star Asia Special Situations Fund, Star Asia Capital Management, Star Asia Manager, SAA Manager, and SAP GP. The Company recognized a gain on the sale in amount of $78, which is included as a component of principal transactions and other income in the Company’s consolidated statements of operations.

Prior to February 20, 2014, the Star Asia Group entities were identified as related parties. The amounts with respect to the transactions identified below are summarized in a table at the end of this section.

1. Star Asia invests primarily in Asian commercial real estate structured finance products, including CMBS, corporate debt of REITs and real estate operating companies, whole loans, mezzanine loans and other commercial real estate fixed income investments, and in real property in Japan. As of December 31, 2013, the Company directly owned approximately 28% of Star Asia’s outstanding shares. Star Asia had been identified as a related party because in the absence of the fair value option of FASB ASC 825, Star Asia would have been treated as an equity method affiliate, and because Daniel G. Cohen, the Vice Chairman of the Company’s Board of Directors and of the board of managers of the Operating LLC, President and Chief Executive Officer of the Company’s European Business, and President of CCFL (formerly the Company’s Chairman and Chief Executive Officer) was a member of Star Asia’s

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board of directors until the sale of the entity on February 20, 2014. The Company, through Star Asia Manager, had an asset management contract with Star Asia. Gains or losses recognized from its investment for the six and three months ended June 30, 2013 are disclosed as part of principal transactions in the tables at the end of this section. Amounts earned from the management contract are disclosed as part of management fee revenue in the tables at the end of this section.

2. Star Asia Capital Management serves as the external manager of Star Asia Opportunity (see paragraph E-4 below) and the Company owned 33% of Star Asia Capital Management as of December 31, 2013. Star Asia Capital Management had been identified as a related party because it was an equity method investee of the Company. The Company recognized its share of the income or loss of Star Asia Capital Management as income or loss from equity method affiliates in the consolidated statements of operations. Income or loss recognized under the equity method is disclosed in the table at the end of this section. On February 20, 2014, the Company completed the sale of its interests in the Star Asia Group, including Star Asia Capital Management.

3. In December 2012, the Company, along with two other parties, sponsored the creation of a new investment fund. The Star Asia Special Situations Fund, which primarily invests in real estate and securities backed by real estate in Japan. The Star Asia Special Situations Fund is a closed-end fund that does not offer investor redemptions. It has an initial life of three years, which can be extended under certain circumstances for a total of two years. The Star Asia Special Situations Fund consummated its closing on December 20, 2012. As of December 31, 2013, the Company owned approximately 2% of the Star Asia Special Situations Fund. The Star Asia Special Situations Fund had been identified as a related party because in the absence of the fair value option of FASB ASC 825, the Company’s investment in the Star Asia Special Situations Fund would be treated as an equity method affiliate of the Company. Gains and losses recognized from its investment are disclosed as part of principal transactions in the tables at the end of this section.

During the three months ended March 31, 2013, the Company made an additional investment of $302 in the Star Asia Special Situations Fund. See notes 6 and 7. On February 20, 2014, the Company completed the sale of its interest in the Star Asia Group, including the Star Asia Special Situations Fund.

4. SAA Manager serves as the external manager of the Star Asia Special Situations Fund. The Company owned 33% of SAA Manager as of December 31, 2013. SAA Manager had been identified as a related party because it is an equity method investee of the Company. The Company did not elect the fair value option for its investment in SAA Manager. Income or loss recognized under the equity method is disclosed in the table at the end of this section. On February 20, 2014, the Company completed the sale of its interest in the Star Asia Group, including SAA Manager.

5. SAP GP serves as the general partner for the Star Asia Special Situations Fund. As of December 31, 2013, Company owned 33% of SAP GP. SAP GP has been identified as a related party because it is an equity method investee of the Company. The Company did not elect the fair value option for its investment in SAP GP. Income or loss recognized under the equity method is disclosed in the table at the end of this section. Since its inception during the fourth quarter of 2012 and through its sale on February 20, 2014, the Company had not made an investment or recognized any income or loss under the equity method.

B. Cohen Bros. Financial, LLC (“CBF”) and EBC 2013 Family Trust (“EBC”)

In September 2013, EBC, as an assignee of CBF, made a $4,000 investment in the Company. Daniel G. Cohen is a trustee of EBC. The Company issued $2,400 in principal amount of the 8.0% Convertible Notes to EBC. See paragraph D listed below and notes 4 and 17 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The Company incurred interest expense on this debt which is disclosed as part of interest expense incurred in the tables at the end of this section.

CBF has been identified as a related party because (i) CBF is a non-controlling interest of the Company and (ii) CBF is wholly owned by Mr. Cohen.

C. The Bancorp, Inc.

The Bancorp, Inc. (“TBBK”) is identified as a related party because Mr. Cohen is TBBK’s Chairman.

TBBK maintained deposits for the Company in the amount of $74 and $52 as of June 30, 2014 and December 31, 2013, respectively. These amounts are not disclosed in the tables at the end of this section.

As part of the Company’s broker-dealer operations, the Company from time to time purchases securities from third parties and sells those securities to TBBK. The Company may purchase securities from TBBK and ultimately sell those securities to third parties. In either of the cases listed above, the Company includes the trading revenue earned (i.e. the gain or loss realized, or commission earned) by the Company for the entire transaction in the amounts disclosed as part of net trading in the table at the end of this section.

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From time to time, the Company will enter into repurchase agreements with TBBK as its counterparty. As of June 30, 2014 and December 31, 2013, the Company had repurchase agreements in the amount of $15,911 and $6,445, respectively, with TBBK as its counterparty. This is included as a component of securities sold under agreement to repurchase in the consolidated balance sheet. The Company incurred interest expense related to repurchase agreements with TBBK as its counterparty in the amount of $191 and $85 for the six and three months ended June 30, 2014, respectively, and $93 and $74 for the six and three months ended June 30, 2013, respectively, which was included as a component of net trading revenue in the Company’s consolidated statements of operations. These amounts are not disclosed in the tables at the end this section.

D. Investment in IFMI by Mead Park Capital Partners LLC (“Mead Park Capital”)

In September 2013, Mead Park Capital made a $9,746 investment in the Company. The Company issued $5,848 in principal amount of the 8.0% Convertible Notes to Mead Park Capital. Mead Park Capital is a vehicle advised by Mead Park Advisors LLC (“Mead Park”) (a registered investment advisor) and controlled by Jack J. DiMaio Jr., Chief Executive Officer and founder of Mead Park. In connection with the September 25, 2013 closing of the transactions contemplated by the definitive agreements relating to Mead Park Capital’s investment in the Company, Messrs. DiMaio and Ricciardi were elected to the Company’s Board of Directors. Mr. DiMaio was also named the Chairman of the Company’s Board of Directors. See notes 4 and 17 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The Company incurred interest expense on this debt which is disclosed as part of interest expense incurred in the table at the end of this section.

E. Investment Vehicles and Other

The entities below are identified as related parties. Amounts with respect to the transactions identified below are summarized in a table at the end of this section.

1. EuroDekania invests primarily in hybrid capital securities of European bank and insurance companies, CMBS, RMBS and widely syndicated leverage loans. EuroDekania’s investments are denominated in Euros or British Pounds Sterling. As of June 30, 2014 and December 31, 2013, the Company directly owned approximately 17% of EuroDekania’s outstanding shares. On December 18, 2013, as a cost savings measure, EuroDekania was restructured from a Guernsey closed end fund to a Cayman Islands exempted company. The Company has determined EuroDekania has been identified as a related party because Daniel G. Cohen was a member of EuroDekania’s board of directors from its inception through December 18, 2013, and (ii) in the absence of the fair value option of FASB ASC 825, EuroDekania would be treated as an equity method affiliate. The Company has a management contract with and an investment in EuroDekania. Gains or losses recognized from its investment and dividends received are disclosed as part of principal transactions in the tables at the end of this section. Amounts earned from its management contract are disclosed as part of management fee revenue in the tables at the end of this section.

2. The Deep Value GP and Deep Value GP II served as the general partners for the Deep Value funds. The Deep Value GP and the Deep Value GP II are collectively referred to as the “Deep Value GPs.” Prior to their liquidation in 2013, the Company owned 50% of the Deep Value GP and 40% of the Deep Value GP II. The Deep Value GP and the Deep Value GP II have been identified as related parties because the Deep Value GPs are equity method affiliates of the Company. During the third quarter of 2013, the Company received its final liquidating distribution from the Deep Value GP. During the fourth quarter of 2013, the Company received its final liquidating distribution from Deep Value GP II. Income or loss recognized under the equity method is disclosed in the table at the end of this section.

3. Star Asia SPV is a Delaware limited liability company formed in 2010. It was formed to create a pool of assets that would provide collateral to investors who participated in Star Asia’s 2010 rights offering. The investors in Star Asia’s rights offering also received equity interests in Star Asia SPV. Star Asia SPV purchased certain assets from Star Asia and the equity interest holders of Star Asia SPV receive investment returns on the assets held in the Star Asia SPV up to an agreed upon maximum. Returns above that agreed upon maximum are remitted back to Star Asia. During the second quarter of 2013, the Company received its investment return up to an agreed upon maximum from Star Asia SPV and the Company no longer has an ownership interest in the entity. Star Asia SPV has been identified as a related party because it was an equity method investee of the Company. Income or loss recognized under the equity method is disclosed in the table at the end of this section.

4. Star Asia Opportunity is a Delaware limited liability company formed in July 2011 to partially finance the acquisition of seven real estate properties in Japan. As of December 31, 2013, the Company directly owned approximately 28% of Star Asia Opportunity’s outstanding equity interests. During the second quarter of 2014, the Company received its final liquidating distribution from Star Asia Opportunity. Star Asia Opportunity has been identified as a related party because it was an equity method investee of the Company. The Company recognized its share of the income or loss of Star Asia Opportunity as income or loss from equity method affiliates in the consolidated statements of operations. Income or loss recognized under the equity method is disclosed in the table at the end of this section.

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

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RELATED PARTY TRANSACTIONS
Six Months Ended June 30, 2014
(Dollars in Thousands)

		Management fee revenue		Net trading			Principal transactions		Income / (loss) from equity method affiliates	Interest expense incurred
TBBK	$	-	$	23	$	$	-	$	-	$	-
Star Asia (1)		125		-			-		-		-
Star Asia Capital Management (1)		-		-			-		13		-
SAA Manager (1)		-		-			-		14		-
EuroDekania		-		-			1,444		-		-
EBC		-		-			-		-		111
Mead Park Capital		-		-			-		-		270
	$	125	$	23	$	$	1,444	$	27	$	381

(1) Effective February 20, 2014, the Company sold its interest in these entities. See note A from above and note 4.



RELATED PARTY TRANSACTIONS
Six Months Ended June 30, 2013
(Dollars in Thousands)

		Management fee revenue		Net trading			Principal transactions		Income / (loss) from equity method affiliates	Interest expense incurred
TBBK		-		401			-		-		-
Star Asia (1)		1,069		-			(9,234)		-		-
Star Asia Manager (1) (2)		-		-			-		158		-
Star Asia SPV		-		-			-		1,287		-
Star Asia Opportunity		-		-			-		(5)		-
Star Asia Capital Management (1)		-		-			-		71		-
Star Asia Special Situations Fund (1)		-		-			(30)		-		-
SAA Manager (1)		-		-			-		109		-
EuroDekania		-		-			381		-		-
Deep Value GPs		-		-			-		(6)		-
	$	1,069	$	401	$	$	(8,883)	$	1,614	$	-

(1)

Effective February 20, 2014, the Company sold its interest in this entity. See paragraph A from above and note 4.

(2) Beginning March 1, 2013, Star Asia Manager was consolidated by the Company as a result of the Star Asia Manager Repurchase Transaction. Prior to March 1, 2013, Star Asia Manager was treated as an equity method investment. See paragraph A above.

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RELATED PARTY TRANSACTIONS
Three Months Ended June 30, 2014
(Dollars in Thousands)

		Management fee revenue		Net trading			Principal transactions		Income / (loss) from equity method affiliates	Interest expense incurred
TBBK	$	-	$	1	$	$	-	$	-	$	-
Star Asia Opportunity		-		-			-		1		-
EuroDekania		-		-			313		-		-
EBC		-		-			-		-		56
Mead Park Capital		-		-			-		-		136
	$	-	$	1	$	$	313	$	1	$	192



RELATED PARTY TRANSACTIONS
Three Months Ended June 30, 2013
(Dollars in Thousands)

		Management fee revenue		Net trading			Principal transactions		Income / (loss) from equity method affiliates	Interest expense incurred
TBBK	$	-	$	375	$	$	-	$	-	$	-
Star Asia (1)		792		-			(3,201)		-		-
Star Asia SPV		-		-			-		(27)		-
Star Asia Opportunity		-		-			-		1		-
Star Asia Capital Management (1)		-		-			-		37		-
Star Asia Special Situations Fund (1)		-		-			(73)		-		-
SAA Manager (1)		-		-			-		86		-
EuroDekania		-		-			41		-		-
Deep Value GPs		-		-			-		(2)		-
	$	792	$	375	$	$	(3,233)	$	95	$	-

(1)

Effective February 20, 2014, the Company sold its interest in this entity. See paragraph A from above and note 4.

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

F. Directors and Employees

In addition to the employment agreements the Company has entered into with Daniel G. Cohen, its Vice Chairman; Lester R. Brafman, its Chief Executive Officer; and Joseph W. Pooler, Jr., its Chief Financial Officer, the Company has entered into its standard indemnification agreement with each of its directors and executive officers.

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22. DUE FROM / DUE TO RELATED PARTIES

The following table summarizes the outstanding due from / to related parties. These amounts may result from normal operating advances or from timing differences between the transactions disclosed in note 21 and final settlement of those transactions in cash. All amounts are primarily non-interest bearing.



DUE FROM/DUE TO RELATED PARTIES
(Dollars in Thousands)

	June 30, 2014		December 31, 2013
EuroDekania	$	-	$	18
Star Asia and related entities (1)		-		450
CBF		-		4
Employees		349		411
Due from Related Parties	$	349	$	883

(1) Related entities include Star Asia Capital Management and SAA Manager.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of the consolidated financial condition and results of operations of Institutional Financial Markets, Inc. and its majority owned subsidiaries (collectively, “we,” “us,” “our,” or the “Company”) should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including fair value of financial instruments. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

All amounts in this disclosure are in thousands (except share and per share data) unless otherwise noted.

Overview

We are a financial services company specializing in credit-related fixed income investments. We were founded in 1999 as an investment firm focused on small-cap banking institutions, but have grown to provide an expanding range of capital markets, investment banking, and asset management solutions to institutional investors, corporations, and other small broker dealers. We are organized into three business segments: Capital Markets, Asset Management, and Principal Investing.

• Capital Markets: Our Capital Markets business segment consists primarily of credit-related fixed income sales, trading, and financing, as well as new issue placements in corporate and securitized products, and advisory services. Our fixed income sales and trading group provides trade execution to corporate investors, institutional investors, and other smaller broker-dealers. We specialize in a variety of products, including but not limited to: corporate bonds, ABS, MBS, CMBS, RMBS, CDOs, CLOs, CBOs, CMOs, municipal securities, TBAs, SBA loans, U.S. government bonds, U.S. government agency securities, brokered deposits and CDs for small banks, and hybrid capital of financial institutions including TruPS, whole loans, and other structured financial instruments. We also offer execution and brokerage services for equity products. We carry out our capital market activities primarily through our subsidiaries: JVB in the United States and CCFL in Europe.

•Asset Management: Our Asset Management business segment manages assets within CDOs, permanent capital vehicles, managed accounts, and investment funds (collectively, “Investment Vehicles”). A CDO is a form of secured borrowing. The borrowing is secured by different types of fixed income assets such as corporate or mortgage loans or bonds. The borrowing is in the form of a securitization, which means that the lenders are actually investing in notes backed by the assets. In the event of default, the lenders will have recourse only to the assets securing the loan. Our Asset Management business segment includes our fee-based asset management operations, which include ongoing base and incentive management fees. As of June 30, 2014, we had approximately $4.8 billion in AUM of which 99%, or $4.7 billion, was in CDOs.

• Principal Investing: Our Principal Investing business segment is comprised of investments that we have made using our own capital excluding investments we make to support our Capital Markets business segment. Historically, we generally made principal investments in the entities we managed. Beginning in the first quarter of 2014, we began investing our capital in investments (primarily equity tranches of CLOs) which we do not manage. Such investments will become an increasingly important part of our business going forward. Our focus on CLO equity leverages our strengths in structured credit and leveraged finance. During the six months ended June 30, 2014, we invested $18,541 in the equity tranches of seven separate CLOs (excluding one CLO acquired and sold during the period). These investments are a component of our other investments, at fair value in our consolidated balance sheet.

We generate our revenue by business segment primarily through:

Capital Markets:

•our trading activities, which include execution and brokerage services, securities lending activities, riskless trading activities, as well as gains and losses (unrealized and realized) and income and expense earned on securities classified as trading;

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•new issue and advisory revenue comprised of (a) origination fees for corporate debt issues originated by us; (b) revenue from advisory services; and (c) new issue revenue associated with arranging and placing the issuance of newly created debt, equity, and hybrid financial instruments;

Asset Management:

• asset management fees for our ongoing asset manager services provided to various Investment Vehicles, which may include fees both senior and subordinate to the securities issued by the Investment Vehicle;

•incentive management fees earned based on the performance of the various Investment Vehicles; and

• income or loss from equity method affiliates

Principal Investing:

•gains and losses (unrealized and realized) and income and expense earned on investments classified as other investments, at fair value; and

• income or loss from equity method affiliates.

Business Environment

Our business is materially affected by economic conditions in the financial markets, political conditions, broad trends in business and finance, changes in volume and price levels of securities transactions, and changes in interest rates, all of which can affect our profitability and are unpredictable and beyond our control. These factors may affect the financial decisions made by investors and companies, including their level of participation in the financial markets and their willingness to participate in corporate transactions. Severe market fluctuations or weak economic conditions could continue to reduce our trading volume and revenues, could negatively affect our ability to generate new issue and advisory revenue, and could adversely affect our profitability.

The markets remain uneven and vulnerable to changes in investor sentiment. We believe the general business environment will continue to be challenging for the remainder of 2014.

A portion of our revenues is generated from net trading activity. We engage in proprietary trading for our own account, provide securities financing for our customers, as well as execute “riskless” trades with a customer order in hand resulting in limited market risk to us. The inventory of securities held for our own account, as well as held to facilitate customer trades, and our market making activities are sensitive to market movements.

A portion of our revenues is generated from new issue and advisory engagements. The fees charged and volume of these engagements are sensitive to the overall business environment. During the first quarter of 2014, we stopped providing investment banking and advisory services to special purpose acquisition companies (“SPACs”) in our U.S. broker-dealer, JVB. We will continue to earn new issue and advisory revenue in JVB primarily related to new issues of structured products and as part of our European operations conducted by CCFL.

A portion of our revenues is generated from management fees. Our ability to charge management fees and the amount of those fees is dependent upon the underlying investment performance and stability of the Investment Vehicles. If these types of investments do not provide attractive returns to investors, the demand for such instruments will likely fall, thereby reducing our opportunity to earn new management fees or maintain existing management fees. As of June 30, 2014, 99% of our existing AUM are CDOs. The creation of CDOs and permanent capital vehicles has depended upon a vibrant securitization market. Since 2008, volumes within the securitization market have dropped significantly and have not recovered since that time. Consequently, we have been unable to complete a new securitization since 2008.

A portion of our revenues is generated from our principal investing activities. Therefore, our revenues are impacted by the underlying performance of these investments. As of June 30, 2014, we had $26,446 of other investments, at fair value representing our principal investment portfolio. Our results of operations and financial condition will be significantly impacted by the financial results of these investments.

Margin Pressures in Corporate Bond Brokerage Business

Performance in the financial services industry in which we operate is highly correlated to the overall strength of the economy and financial market activity. Overall market conditions are a product of many factors beyond our control and can be unpredictable. These factors may affect the financial decisions made by investors, including the level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors including the volatility of the equity and fixed income markets, the level and shape of the various yield curves, and the volume and value of trading in securities.

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Since 2010, both margins and volumes in certain products and markets within the corporate bond brokerage business have decreased materially as competition has increased and general market activity has declined. Further, we continue to expect that competition will increase over time, resulting in continued margin pressure.

Our response to this margin compression has included: (i) building a diversified securitized product trading platform; (ii) expanding our European capital markets business; (iii) acquiring new product lines; and (iv) monitoring our fixed costs. Our cost-cutting initiatives are ongoing. However, there can be no certainty that these efforts will be sufficient. If insufficient, we will likely see a decline in profitability. In furtherance of our cost cutting objectives, we completed the combination of our two U.S. broker-dealers (see Consolidation of CCPR and JVB below) in January 2014.

Legislation Affecting the Financial Services Industry

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act contains a variety of provisions designed to regulate financial markets, including credit and derivative transactions. Many aspects of the Dodd-Frank Act are subject to rulemaking that will take effect over the next several years, thus making it difficult to assess the impact on the financial industry, including us, at this time. The Dodd-Frank Act establishes enhanced compensation and corporate governance oversight for the financial services industry, provides a specific framework for payment, clearing and settlement regulation, and empowers the SEC to adopt regulations requiring new fiduciary duties and other more stringent regulation of broker-dealers, investment companies, and investment advisers. We will continue to monitor all applicable developments in the implementation of the Dodd-Frank Act and expect to adapt successfully to any new applicable legislative and regulatory requirements.

Recent Events

Consolidation of CCPR and JVB

Effective January 31, 2014, we merged CCPR and JVB. The merged broker-dealer subsidiary will operate going forward under the JVB brand. In connection with this merger, we reduced our workforce by approximately 20% by eliminating certain redundant and non-core business lines.

Sale of Star Asia and Other Related Entities

On February 20, 2014, we completed the sale of all of our ownership interests in Star Asia, Star Asia Special Situations Fund, Star Asia Manager, Star Asia Capital Management, SAA Manager, and SAP GP (collectively, the “Star Asia Group”). In consideration of the sale of the Star Asia Group, we received an initial upfront payment of $20,043 and we will receive contingent payments equal to 15% of certain revenues generated by Star Asia Manager, SAA Manager, SAP GP, Star Asia Capital Management, and certain affiliated entities for a period of at least four years. See note 4 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.

Consolidated Results of Operations

This section provides a comparative discussion of our consolidated results of operations for the specified periods. The period-to-period comparisons of financial results are not necessarily indicative of future results.

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Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013

The following table sets forth information regarding our consolidated results of operations for the six months ended June 30, 2014 and 2013.


INSTITUTIONAL FINANCIAL MARKETS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)

	Six Months Ended June 30,				Favorable / (Unfavorable)
	2014		2013		$ Change		% Change
Revenues

Net trading	$	13,549	$	24,689	$	(11,140)		(45)%
Asset management		7,643		8,917		(1,274)		(14)%
New issue and advisory		2,718		1,567		1,151		73%
Principal transactions and other income		3,512		(7,413)		10,925		147%
Total revenues		27,422		27,760		(338)		(1)%

Operating expenses

Compensation and benefits		15,538		26,018		10,480		40%
Business development, occupancy, equipment		2,037		2,842		805		28%
Subscriptions, clearing, and execution		4,251		4,666		415		9%
Professional fee and other operating		5,229		6,535		1,306		20%
Depreciation and amortization		598		669		71		11%
Impairment of goodwill		3,121		-		(3,121)		NM
Total operating expenses		30,774		40,730		9,956		24%

Operating income / (loss)		(3,352)		(12,970)		9,618		74%

Non-operating income / (expense)

Interest expense		(2,238)		(2,064)		(174)		(8)%
Income / (loss) from equity method affiliates		27		1,614		(1,587)		(98)%
Income / (loss) before income taxes		(5,563)		(13,420)		7,857		59%
Income tax expense (benefit)		99		46		(53)		(115)%
Net income / (loss)		(5,662)		(13,466)		7,804		58%
Less: Net (loss) / income attributable to the non-controlling interest		(1,441)		(4,264)		(2,823)		(66)%
Net income / (loss) attributable to IFMI	$	(4,221)	$	(9,202)	$	4,981		54%

Revenues

Revenues decreased by $338, or 1%, to $27,422 for the six months ended June 30, 2014 from $27,760 for the six months ended June 30, 2013. As discussed in more detail below, the change was comprised of (i) a decrease of $11,140 in net trading; (ii) a decrease of $1,274 in asset management revenue; (iii) an increase of $1,151 in new issue and advisory revenue; and (iv) an increase of $10,925 in principal transactions and other income.

Net Trading

Net trading revenue decreased by $11,140, or 45%, to $13,549 for the six months ended June 30, 2014 from $24,689 for the six months ended June 30, 2013. The following table provides detail on net trading revenue by operation:

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NET TRADING
(dollars in thousands)

	June 30, 2014		June 30, 2013		Change
US Capital Markets (JVB and CCPR)	$	13,505	$	22,218	$	(8,713)
CCFL		44		2,471		(2,427)
Total	$	13,549	$	24,689	$	(11,140)

The amounts shown as US Capital Markets include the results of CCPR and JVB. JVB and CCPR were merged in January 2014. The decline in revenue in the US Capital Markets was primarily due to the elimination of overlapping product groups and revenue-generating personnel in connection with the merger of JVB and CCPR and the general weakness in the fixed income trading markets in the first half of 2014; especially for smaller broker dealers. The decrease in revenue in CCFL was primarily due to a decrease in overall volumes.

Our net trading revenue includes unrealized gains on our trading investments, as of the applicable measurement date, that may never be realized due to changes in market or other conditions not in our control. This may adversely affect the ultimate value realized from these investments. In addition, our net trading revenue also includes realized gains on certain proprietary trading positions. Our ability to derive trading gains from such trading positions is subject to overall market conditions. Due to volatility and uncertainty in the capital markets, the net trading revenue recognized during the six months ended June 30, 2014 may not be indicative of future results. Furthermore, some of the assets included in the Investments-trading line of our consolidated balance sheets represent level 3 valuations within the FASB fair value hierarchy. Level 3 assets are carried at fair value based on estimates derived using internal valuation models and other estimates. See notes 6 and 7 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q. The fair value estimates made by the Company may not be indicative of the final sale price at which these assets may be sold.

Asset Management

Assets Under Management

Our assets under management (“AUM”) equals the sum of: (1) the gross assets included in CDOs that we have sponsored and manage; plus (2) the NAV of the permanent capital vehicles and investment funds we manage; plus (3) the NAV of other accounts we manage.

Our calculation of AUM may differ from the calculations used by other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset managers. This definition of AUM is not necessarily identical to a definition of AUM that may be used in our management agreements.



ASSETS UNDER MANAGEMENT
(dollars in thousands)

	June 30,				December 31,
		2014		2013		2013		2012
Company sponsored CDOs (1)	$	4,739,364	$	5,893,537	$	5,377,187	$	6,051,678
Permanent capital vehicles (2)		-		113,591		109,977		145,326
Investment funds (3)		-		139,234		172,052		84,659
Managed accounts (4)		31,372		44,141		35,752		43,924
Assets under management (5)	$	4,770,736	$	6,190,503	$	5,694,968	$	6,325,587

(1)

Management fee income earned from Company sponsored CDOs is recorded as a component of asset management revenue.

(2)

Management fee income earned from funds managed in permanent capital vehicles is recorded as a component of asset management revenue.

(3)

Management fee income earned from investment funds is primarily comprised of fees earned by entities in which the Company has an equity method investment. Accordingly, the resulting revenue is accounted for within income from equity method affiliates.

(4)

Management fee income earned on managed accounts is recorded as a component of asset management revenue.

(5)

AUM for company sponsored CDOs, permanent capital vehicles, investment funds, and other managed accounts represents total AUM at the end of the period indicated.

(6)

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Asset management fees decreased by $1,274, or 14%, to $7,643 for the six months ended June 30, 2014 from $8,917 for the six months ended June 30, 2013, as discussed in more detail below. The following table provides a more detailed comparison of the two periods:



ASSET MANAGEMENT
(dollars in thousands)

	June 30, 2014		June 30, 2013		Change
CDO and related service agreements	$	6,425	$	7,222	$	(797)
Other		1,218		1,695		(477)
Total	$	7,643	$	8,917	$	(1,274)

CDOs

Asset management revenue from company-sponsored CDOs decreased by $797 to $6,425 for the six months ended June 30, 2014 from $7,222 for the six months ended June 30, 2013. The following table summarizes the periods presented by asset class:



FEES EARNED BY ASSET CLASS
(dollars in thousands)

	June 30, 2014		June 30, 2013		Change
TruPs and insurance company debt - U.S.	$	3,205	$	3,844	$	(639)
High grade and mezzanine ABS		222		487		(265)
TruPs and insurance company debt - Europe		1,303		1,289		14
Broadly syndicated loans - Europe		1,695		1,602		93
Total	$	6,425	$	7,222	$	(797)

Asset management fees for TruPS and insurance company debt – U.S. declined primarily because effective as of February 23, 2013, we no longer provide any services related to the Alesco X through XVII securitizations. On July 29, 2010, we entered into an agreement with a third party whereby we sold the management rights and responsibilities related to the Alesco X through XVII securitizations. In connection with this agreement, we entered into a services agreement under which we provided certain services to the third party purchaser. This services agreement expired on February 23, 2013. We will continue to receive certain incentive payments through February 23, 2017 if the management fees earned by the third party exceed certain thresholds. We will continue to recognize these incentive payments, if any, as earned. In May 2014, one securitization that we managed had a successful auction and terminated. We earned $270 and $361 in management fees during the six months ended June 30, 2014 and 2013 respectively. We no longer earn fees related to this securitization going forward.

Asset management fees for high grade and mezzanine ABS declined by $265 primarily because the average AUM in the remaining deals in this asset class declined due to defaults of the underlying assets, repayments of the underlying assets, and transfer of certain management contracts.

Asset management fees for TruPS and insurance company debt – Europe and for broadly syndicated loans – Europe remained relatively unchanged.

Other

Other asset management revenue decreased by $477 to $1,218 for the six months ended June 30, 2014 from $1,695 for the six months ended June 30, 2013. The decrease was comprised of (i) a decrease of $944 resulting from the sale of Star Asia Manager (see note 4 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q) partially offset by (ii) an increase of $467 in asset management revenue earned from separate accounts.

New Issue and Advisory Revenue

New issue and advisory revenue increased by $1,151, or 73%, to $2,718 for the six months ended June 30, 2014 from $1,567 for the six months ended June 30, 2013. During the first quarter of 2014, we stopped providing investment banking and advisory services

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to special purpose acquisition companies (“SPACs”) in our U.S. broker-dealer, JVB. While certain of the former employees of JVB’s SPAC investment banking and advisory group went to work for another firm, we entered into an agreement (the “Tail Agreement”) whereby we allowed such former employees to continue work on certain in process engagements with their new firm. As part of the Tail Agreement, we receive a certain share of the revenue earned by the new firm related to these engagements. In addition to revenue earned via the Tail Agreement, we may continue to earn new issue and advisory revenue in JVB primarily related to new issues of structured products and as part of our European operations conducted by CCFL. Of the $2,718 of new issue revenue recognized in the six months ended June 30, 2014, $1,889 represented revenue earned under the Tail Agreement. We do not expect revenue from the Tail Agreement to be significant going forward.

Our revenue earned from new issue and advisory has been, and we expect will continue to be, volatile. We earn revenue from a limited number of engagements. Therefore, a small change in the number of engagements can result in large fluctuations in the revenue recognized. Further, even if the number of engagements stays consistent, the average revenue per engagement can fluctuate considerably. Finally, our revenue is generally earned when an underlying transaction closes (rather than on a monthly or quarterly basis). Therefore, the timing of underlying transactions increases the volatility of our revenue recognition.

Principal Transactions and Other Income

Principal transactions and other income increased by $10,925 to $3,512 for the six months ended June 30, 2014, as compared to ($7,413) for the six months ended June 30, 2013. The following table summarizes principal transactions and other income by category:



PRINCIPAL TRANSACTIONS & OTHER INCOME
(dollars in thousands)

	June 30, 2014		June 30, 2013		Change
EuroDekania	$	1,444	$	381	$	1,063
Star Asia		-		(9,234)		9,234
Tiptree		423		(657)		1,080
Star Asia Special Situations Fund		-		(30)		30
Japanese Yen hedge		(347)		(362)		15
CLO investments		255		-		255
Other principal investments		315		314		1
Gain on sale of Star Asia Group		78		-		78
Total principal transactions		2,168		(9,588)		11,756
Other income		1,344		2,175		(831)
Total principal transactions and other income	$	3,512	$	(7,413)	$	10,925

Principal Transactions

EuroDekania is an investment company and we carry our investment at the NAV of the fund. Income recognized in each period is a result of changes in the underlying NAV of the fund.

Star Asia is an investment company and we carried our investment at the NAV of the fund. Income recognized in each period is a result of changes in the underlying NAV of the fund. Because of the sale of the Star Asia Group on February 20, 2014, we did not record a change in fair value on Star Asia during the period it was owned in 2014.

Effective June 30, 2013, we changed the way we calculate the fair value of our investment in Tiptree. Previously, we carried our investment at the underlying NAV of the fund. However, Tiptree completed a reorganization in the second half of 2013. As a result of the reorganization, our investment in Tiptree can be exchanged into shares of Tiptree Financial, Inc. based on a stated exchange ratio (which is generally fixed, but can be adjusted for certain events like stock dividends or stock splits). Tiptree Financial Inc. is publicly traded over the counter. Therefore, beginning June 30, 2013, we calculate the fair value of our investment in Tiptree by using the closing over the counter price for Tiptree Financial Inc. and adjusting for the exchange ratio. The loss recorded on our investment in Tiptree in the six months ended June 30, 2013 was a result of a decline in the underlying NAV of the fund. The income recorded for the six months ended June 30, 2014 was a result of an increase in the share price of Tiptree Financial, Inc.

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Star Asia Special Situations Fund is an investment company and we carried our investment in it at the NAV of the fund. The change in fair value during 2013 was based on a change in value of the underlying NAV of the fund. Because of the sale of the Star Asia Group on February 20, 2014, we did not record a change in fair value on Star Asia Special Situations Fund during the period it was owned in the first quarter of 2014.

Although the functional currency of Star Asia is U.S. Dollars, the value of our investment in Star Asia was impacted by the fact that Star Asia’s investments are primarily denominated in Japanese Yen and Star Asia itself did not hedge against currency fluctuations. Therefore, from time to time, we entered into a Japanese Yen currency hedge. From January 1, 2014 until the sale of the Star Asia Group on February 20, 2014, we had in place a Japanese Yen currency hedge which was terminated in conjunction with the sale of the Star Asia Group. We also had a Japanese Yen hedge in place during the six months ended June 30, 2013. The losses recognized above represent changes in the value of the hedge during those periods.

Beginning in the first quarter of 2014, we began investing our capital in investments (primarily equity tranches of CLOs) which we do not manage. Such investments may become an increasingly important part of our business going forward. Our focus on CLO equity leverages our strengths in structured credit and leveraged finance. During the six months ended June 30, 2014, we invested $18,541 in the equity tranches of seven separate CLOs (excluding one CLO acquired and sold during the period). The income of $255 recognized during the six months ended June 30, 2014 is comprised of: $249 of investment income, $22 of realized gain; partially offset by $16 of unrealized loss.

On February 20, 2014, we completed the sale of all of our ownership interests in the Star Asia Group. In consideration for the sale of the Star Asia Group, we received an initial upfront payment of $20,043 and will receive contingent payments equal to 15% of certain revenues generated by Star Asia Manager, SAA Manager, SAP GP, Star Asia Capital Management, and certain affiliated entities for a period of at least four years. As a result of the sale of the Star Asia Group, we recorded a gain of $78 in the first quarter of 2014 which is included in the table above. The gain is attributable to the Star Asia Group as a whole. It is calculated as the cash received of $20,043 less the combined carrying value of all the entities in the Star Asia Group of $19,965 at the time of the sale. The Company’s accounting policy is to record contingent payments receivable as income as they are earned. In the future, the Company will record any contingent income as a component of principal transactions and other income.

Other Income / (Loss)

Other income decreased by $831 to $1,344 for the six months ended June 30, 2014, as compared to $2,175 for the six months ended June 30, 2013. The decrease was comprised of (i) a decrease of $1,084 resulting from income recognized in the six months ended June 30, 2013 as a result of a guarantee liability being extinguished; (ii) a decrease of $137 relating to reduced revenue share income as well as changes in foreign currency gains and losses; partially offset by (iii) an increase of $390 relating to a note receivable.

Operating Expenses

Operating expenses decreased by $9,956, or 24%, to $30,774 for the six months ended June 30, 2014 from $40,730 for the six months ended June 30, 2013. As discussed in more detail below, the change was comprised of (i) a decrease of $10,480 in compensation and benefits; (ii) a decrease of $805 in business development, occupancy, and equipment; (iii) a decrease of $415 in subscriptions, clearing, and execution; (iv) a decrease of $1,306 of professional fee and other operating; (v) a decrease of $71 of depreciation and amortization; and (vi) an impairment charge of $3,121.

Compensation and Benefits

Compensation and benefits decreased by $10,480, or 40%, to $15,538 for the six months ended June 30, 2014 from $26,018 for the six months ended June 30, 2013.



COMPENSATION AND BENEFITS
(dollars in thousands)

	June 30, 2014		June 30, 2013		Change
Cash compensation and benefits	$	14,624	$	24,464	$	(9,840)
Equity-based compensation		914		1,554		(640)
Total	$	15,538	$	26,018	$	(10,480)

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Cash compensation and benefits in the table above is primarily comprised of salary, incentive compensation, and benefits. Cash compensation and benefits decreased by $9,840 to $14,624 for the six months ended June 30, 2014 from $24,464 for the six months ended June 30, 2013. This decrease was a result of a decrease in incentive compensation that is tied to revenue and operating profitability as well as the reduction in our headcount in connection with the merger of JVB and CCPR in January 2014. Our total headcount decreased from 204 at June 30, 2013 to 121 at June 30, 2014. From time to time, the Company pays employees severance when they are terminated without cause. These severance payments are included within cash compensation in the table above.

Equity-based compensation decreased by $640 to $914 for the six months ended June 30, 2014 from $1,554 for the six months ended June 30, 2013. This was primarily as a result of certain share grants becoming fully vested on or about December 31, 2013.

Business Development, Occupancy, and Equipment

Business development, occupancy, and equipment decreased by $805, or 28%, to $2,037 for the six months ended June 30, 2014 from $2,842 for the six months ended June 30, 2013. The decrease was comprised of a decrease of $408 in business development and a decrease in occupancy and equipment expenses of $397, primarily as a result of the reduction in headcount and offices in connection with the merger of CCPR and JVB.

Subscriptions, Clearing, and Execution

Subscriptions, clearing, and execution decreased by $415, or 9%, to $4,251 for the six months ended June 30, 2014 from $4,666 for the six months ended June 30, 2013. The decrease was due to a reduction in clearing and execution costs of $206, primarily as a result of lower trading volume, and a decrease in subscriptions of $209, primarily the result of cancellation of subscriptions in connection with the merger of CCPR and JVB.

Professional Fees and Other Operating Expenses

Professional fees and other operating expenses decreased by $1,306, or 20%, to $5,229 for the six months ended June 30, 2014 from $6,535 for the six months ended June 30, 2013. This is comprised of a decrease of $569 in professional fees and a decrease of $737 in other operating expenses. The decrease in professional fees was primarily due to a decrease in consulting expense. The decrease in other operating expense includes reduced regulatory and other expenses as a result of the reduction in headcount related to the merger of CCPR and JVB.

Depreciation and Amortization

Depreciation and amortization decreased by $71, or 11%, to $598 for the six months ended June 30, 2014 from $669 for the six months ended June 30, 2013.

Impairment of goodwill

We recorded an impairment charge of $3,121 in the six months ended June 30, 2014. See note 10 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

Non-Operating Income and Expense

Interest Expense

Interest expense increased by $174, or 8%, to $2,238 for the six months ended June 30, 2014 from $2,064 for the six months ended June 30, 2013. The increase was comprised of (i) an increase of $238 on our junior subordinated notes due to changes in their variable rate; (ii) an increase of $381 related to the issuance of the 8.0% Convertible Notes; partially offset by (iii) a decrease of $310 relating to our 10.50% Convertible Notes (“New Notes”) due to the repurchase of New Notes subsequent to June 30, 2013; (iv) a decrease of $109 in other interest expense primarily related to interest related to a legal settlement accrual incurred in the six months ended June 30, 2013; (v) and other decreases of $26. See note 14 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

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Income / (Loss) from Equity Method Affiliates

Income from equity method affiliates decreased by $1,587, or 98% to $27 for the six months ended June 30, 2014 from $1,614 for the six months ended June 30, 2013. Income or loss from equity method affiliates represents our share of the related entities’ earnings.



INCOME / (LOSS) FROM EQUITY METHOD AFFILIATES
(dollars in thousands)

	June 30, 2014		June 30, 2013		Change
Star Asia Manager	$	-	$	158	$	(158)
Deep Value GP II		-		(6)		6
SAA Manager		14		109		(95)
Star Asia Capital Management		13		71		(58)
Star Asia Opportunity		-		(5)		5
Star Asia SPV		-		1,287		(1,287)
Total	$	27	$	1,614	$	(1,587)

Effective June 30, 2014, we have no investments accounted for under the equity method. See notes 4, 12, and 21 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

Income Tax Expense / (Benefit)

The income tax expense / (benefit) increased by $53 to income tax expense / (benefit) of $99 for the six months ended June 30, 2014 from $46 for the six months ended June 30, 2013. The increase was a result of an increase in foreign taxes. See note 21 to our consolidated financial statements included in the Company’s 2013 Annual Report on Form 10-K for the year ended December 31, 2013 for a more complete description of the Company’s tax attributes and unrecognized tax benefits. Also, see note 18 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q regarding an income tax assessment received by the Company from the Commonwealth of Pennsylvania.

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

Net income / (loss) attributable to the non-controlling interest for the six months ended June 30, 2014 and 2013 was comprised of the non-controlling interest related to member interests in the Operating LLC other than interests held by us for the relevant periods. In addition, net income / (loss) attributable to the non-controlling interest also included non-controlling interest related to entities that were consolidated by the Operating LLC but not wholly owned.

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SUMMARY CALCULATION OF NON-CONTROLLING INTEREST
Six Months Ended June 30, 2014

			Majority				Total
	Wholly owned		owned		IFMI		Operating				Consolidated
	subsidiaries		subsidiaries		LLC		LLC		IFMI		IFMI
Net income / (loss) before tax	$	(5,563)	$	-	$	-	$	(5,563)	$	-	$	(5,563)
Income tax expense		-		-		99		99		-		99
Net income / (loss) after tax		(5,563)		-		(99)		(5,662)		-		(5,662)
Majority owned subsidiary non-controlling interest		-		-		-		-
Net loss attributable to Operating LLC		(5,563)		-		(99)		(5,662)
Average effective Operating LLC non-controlling interest (1)%								25.45%
Operating LLC non-controlling interest								(1,441)
Majority owned subsidiary non-controlling interest								-
Total non-controlling interest							$	(1,441)



SUMMARY CALCULATION OF NON-CONTROLLING INTEREST
Six Months Ended June 30, 2013

			Majority				Total
	Wholly owned		owned		IFMI		Operating				Consolidated
	subsidiaries		subsidiaries		LLC		LLC		IFMI		IFMI
Net income / (loss) before tax	$	(12,064)	$	(1,356)	$	-	$	(13,420)	$	-	$	(13,420)
Income tax expense		-		(42)		88		46		-		46
Net income / (loss) after tax		(12,064)		(1,314)		(88)		(13,466)		-		(13,466)
Majority owned subsidiary non-controlling interest		-		(15)		-		(15)
Net loss attributable to Operating LLC		(12,064)		(1,299)		(88)		(13,451)
Average effective Operating LLC non-controlling interest (1)%								31.59%
Operating LLC non-controlling interest								(4,249)
Majority owned subsidiary non-controlling interest								(15)
Total non-controlling interest							$	(4,264)

(1)Non-controlling interest is recorded on a monthly basis. Because earnings are recognized unevenly throughout the year and the non-controlling interest percentage may change during the period, the average effective non-controlling interest percentage may not equal the percentage at the end of any period or the simple average of the beginning and ending percentages.

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Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

The following table sets forth information regarding our consolidated results of operations for the three months ended June 30, 2014 and 2013 :



INSTITUTIONAL FINANCIAL MARKETS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)

	Three Months Ended June 30,				Favorable / (Unfavorable)
	2014		2013		$ Change		% Change
Revenues

Net trading	$	6,620	$	11,630	$	(5,010)		(43)%
Asset management		3,386		4,155		(769)		(19)%
New issue and advisory		2,388		572		1,816		317%
Principal transactions and other income		1,841		(2,623)		4,464		170%
Total revenues		14,235		13,734		501		4%

Operating expenses

Compensation and benefits		7,568		12,521		4,953		40%
Business development, occupancy, equipment		979		1,387		408		29%
Subscriptions, clearing, and execution		2,052		2,349		297		13%
Professional fee and other operating		1,908		3,016		1,108		37%
Depreciation and amortization		267		359		92		26%
Impairment of goodwill		3,121		-		(3,121)		NM
Total operating expenses		15,895		19,632		3,737		19%

Operating income / (loss)		(1,660)		(5,898)		4,238		72%

Non-operating income / (expense)

Interest expense		(1,109)		(1,035)		(74)		(7)%
Income / (loss) from equity method affiliates		1		95		(94)		(99)%
Income / (loss) before income taxes		(2,768)		(6,838)		4,070		60%
Income tax expense (benefit)		89		34		(55)		(162)%
Net income / (loss)		(2,857)		(6,872)		4,015		58%
Less: Net (loss) / income attributable to the non-controlling interest		(734)		(2,170)		(1,436)		(66)%
Net income / (loss) attributable to IFMI	$	(2,123)	$	(4,702)	$	2,579		55%

Revenues

Revenues increased by $501, or 4%, to $14,235 for the three months ended June 30, 2014 from $13,734 for the three months ended June 30, 2013. As discussed in more detail below, the change was comprised of (i) a decrease of $5,010 in net trading; (ii) a decrease of $769 in asset management revenue; (iii) an increase of $1,816 in new issue and advisory revenue; and (iv) an increase of $4,464 in principal transactions and other income.

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Net Trading

Net trading revenue decreased by $5,010, or 43%, to $6,620 for the three months ended June 30, 2014 from $11,630 for the three months ended June 30, 2013. The following table provides detail on net trading revenue by operation.



NET TRADING
(dollars in thousands)

	June 30, 2014		June 30, 2013		Change
US Capital Markets (JVB and CCPR)		6,606		9,949		(3,343)
CCFL		14		1,681		(1,667)
Total	$	6,620	$	11,630	$	(5,010)

The amounts shown as US Capital Markets include the results of CCPR and JVB. JVB and CCPR were merged in 2014. The decline in revenue in the US Capital Markets was primarily due to the elimination of overlapping product groups and revenue-generating personnel in connection with the merger of JVB and CCPR and the general weakness in the fixed income trading markets in first half of 2014. The decrease in revenue in CCFL was primarily due to a decrease in overall volumes.

Our net trading revenue includes unrealized gains on our trading investments, as of the applicable measurement date, that may never be realized due to changes in market or other conditions not in our control. This may adversely affect the ultimate value realized from these investments. In addition, our net trading revenue also includes realized gains on certain proprietary trading positions. Our ability to derive trading gains from such trading positions is subject to overall market conditions. Due to volatility and uncertainty in the capital markets, the net trading revenue recognized during the three months ended June 30, 2014 may not be indicative of future results. Furthermore, some of the assets included in the Investments-trading line of our consolidated balance sheets represent level 3 valuations within the FASB fair value hierarchy. Level 3 assets are carried at fair value based on estimates derived using internal valuation models and other estimates. See notes 6 and 7 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q. The fair value estimates made by the Company may not be indicative of the final sale price at which these assets may be sold.

Asset Management

Asset management fees decreased by $769, or 19%, to $3,386 for the three months ended June 30, 2014 from $4,155 for the three months ended June 30, 2013, as discussed in more detail below. The following table provides a more detailed comparison of the two periods:



ASSET MANAGEMENT
(dollars in thousands)

	June 30, 2014		June 30, 2013		Change
CDO and related service agreements	$	2,983	$	3,121	$	(138)
Other		403		1,034		(631)
Total	$	3,386	$	4,155	$	(769)

CDOs

Asset management revenue from company-sponsored CDOs decreased by $138 to $2,983 for the three months ended June 30, 2014 from $3,121 for the three months ended June 30, 2013. The following table summarizes the periods presented by asset class:

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FEES EARNED BY ASSET CLASS
(dollars in thousands)

	June 30, 2014		June 30, 2013		Change
TruPs and insurance company debt - U.S.	$	1,408	$	1,435	$	(27)
High grade and mezzanine ABS		74		240		(166)
TruPs and insurance company debt - Europe		653		633		20
Broadly syndicated loans - Europe		848		813		35
Total	$	2,983	$	3,121	$	(138)

Asset management fees for TruPS and insurance company debt – U.S. remained relatively unchanged. Effective as of February 23, 2013, we no longer provide any services related to the Alesco X through XVII securitizations. On July 29, 2010, we entered into an agreement with a third party pursuant to which we sold the management rights and responsibilities related to the Alesco X through XVII securitizations. In connection with this agreement, we entered into a services agreement under which we provided certain services to the third party purchaser. This services agreement expired on February 23, 2013. We will continue to receive certain incentive payments through February 23, 2017 if the management fees earned by the third party exceed certain thresholds. We will continue to recognize these incentive payments, if any, as earned. In May 2014, one securitization that we managed had a successful auction and terminated. We earned $101 and $178 in management fees during the three months ended June 30, 2014 and 2013 respectively. We no longer earn fees related to this securitization going forward.

Asset management fees for high grade and mezzanine ABS declined by $166 primarily because the average AUM in the remaining deals in this asset class declined due to defaults of the underlying assets, repayments of the underlying assets, and transfer of management contracts.

Asset management fees for TruPS and insurance company debt – Europe and for broadly syndicated loans – Europe remained relatively unchanged.

Other

Other asset management revenue decreased by $631 to $403 for the three months ended June 30, 2014 from $1,034 for the three months ended June 30, 2013. The decrease was comprised of (i) a decrease of $792 resulting from the sale of Star Asia Manager (see note 4 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q) partially offset by (ii) an increase of $161 in asset management revenue earned from separate accounts.

New Issue and Advisory Revenue

New issue and advisory revenue increased by $1,816 to $2,388 for the three months ended June 30, 2014 from $572 for the three months ended June 30, 2013. During the first quarter of 2014, we stopped providing investment banking and advisory services to special purpose acquisition companies (“SPACs”) in our U.S. broker-dealer, JVB. While certain of the former employees of JVB’s SPAC investment banking and advisory group went to work for another firm, we entered into the Tail Agreement whereby we allowed such former employees to continue work on certain in process engagements with their new firm. As part of the Tail Agreement, we receive a certain share of the revenue earned by the new firm related to these engagements. In addition to revenue earned via the Tail Agreement, we may continue to earn new issue and advisory revenue in JVB primarily related to new issues of structured products and as part of our European operations conducted by CCFL. Of the $2,388 of new issue revenue recognized in the three months ended June 30, 2014, $1,889 represented revenue earned under the Tail Agreement. We do not expect revenue from the Tail Agreement to be significant going forward.

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Principal Transactions and Other Income

Principal transactions and other income increased by $4,464 to $1,841 for the three months ended June 30, 2014, as compared to ($2,623) for the three months ended June 30, 2013.



PRINCIPAL TRANSACTIONS & OTHER INCOME
(dollars in thousands)

	June 30, 2014		June 30, 2013		Change
EuroDekania	$	313	$	41	$	272
Star Asia		-		(3,201)		3,201
Tiptree		373		(657)		1,030
Star Asia Special Situations Fund		-		(73)		73
Japanese Yen hedge		-		(362)		362
CLO investments		211		-		211
Other principal investments		319		59		260
Total principal transactions		1,216		(4,193)		5,409
Other income		625		1,570		(945)
Total principal transactions and other income	$	1,841	$	(2,623)	$	4,464

Principal Transactions

EuroDekania is an investment company and we carry our investment at the NAV of the fund. Income recognized in each period is a result of changes in the underlying NAV of the fund.

Although the functional currency of Star Asia is U.S. Dollars, the value of our investment in Star Asia was impacted by the fact that Star Asia’s investments are primarily denominated in Japanese Yen and Star Asia itself does not hedge against currency fluctuations. Therefore, from time to time, we entered into a Japanese Yen currency hedge. No Japanese Yen hedge was in place in the three month ended June 30, 2014 because the sale of the Star Asia Group was completed in February 20, 2014. A Japanese Yen hedge was in place for the three months ended June 30, 2013. The loss recognized above represents the change in the value of the hedge during that period.

Beginning in the first quarter of 2014, we began investing capital in investments (primarily equity tranches of CLOs) which we do not manage. Such investments may become an increasingly important part of our business going forward. Our focus on CLO equity leverages our strengths in structured credit and leveraged finance. During the three months ended June 30, 2014, we invested an additional $13,621 in the equity tranches of five separate CLOs. The income of $211 recognized during the three months ended June 30, 2014 is comprised of: $205 of investment income, $22 of realized gain; partially offset by $16 of unrealized loss.

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Other Income / (loss)

Other income decreased by $945 to $625 for the three months ended June 30, 2014, as compared to $1,570 for the three months ended June 30, 2013. The decrease was comprised of (i) a decrease of $1,084 resulting from income recognized in the three months ended June 30, 2013 as a result of a guarantee liability being extinguished; partially offset by (ii) an increase of $34 relating to increased revenue share income as well as changes in foreign currency gains and losses; and (iii) an increase of $105 relating to a note receivable.

Operating Expenses

Operating expenses decreased by $3,737, or 19%, to $15,895 for the three months ended June 30, 2014 from $19,632 for the three months ended June 30, 2013. As discussed in more detail below, the change was comprised of (i) a decrease of $4,953 in compensation and benefits; (ii) a decrease of $408 in business development, occupancy, and equipment; (iii) a decrease of $297 in subscriptions, clearing, and execution; (iv) a decrease of $1,108 of professional fee and other operating; (v) a decrease of $92 of depreciation and amortization; and (vi) an impairment charge of $3,121.

Compensation and Benefits

Compensation and benefits decreased by $4,953, or 40%, to $7,568 for the three months ended June 30, 2014 from $12,521 for the three months ended June 30, 2013.



COMPENSATION AND BENEFITS
(dollars in thousands)

	June 30, 2014		June 30, 2013		Change
Cash compensation and benefits	$	7,327	$	12,096	$	(4,769)
Equity-based compensation		241		425		(184)
Total	$	7,568	$	12,521	$	(4,953)

Cash compensation and benefits in the table above is primarily comprised of salary, incentive compensation, and benefits. Cash compensation and benefits decreased by $4,769 to $7,327 for the three months ended June 30, 2014, from $12,096 for the three months ended June 30, 2013. This decrease was a result of a decrease in incentive compensation that is tied to revenue and operating profitability as well as the reduction in our headcount in connection with the merger of JVB and CCPR in January 2014. Our total headcount decreased from 204 at June 30, 2013 to 121 at June 30, 2014. From time to time, the Company pays employees severance when they are terminated without cause. These severance payments are included within cash compensation in the table above.

Equity-based compensation decreased by $184 to $241 for the three months ended June 30, 2014 from $425 for the three months ended June 30, 2013. This was primarily as a result of certain share grants becoming fully vested on or about December 31, 2013.

Business Development, Occupancy, and Equipment

Business development, occupancy, and equipment decreased by $408, or 29%, to $979 for the three months ended June 30, 2014 from $1,387 for the three months ended June 30, 2013. The decrease was comprised of a decrease of $227 in business development and a decrease in occupancy and equipment expenses of $181, primarily as a result of the reduction in headcount and offices in connection with the merger of CCPR and JVB.

Subscriptions, Clearing, and Execution

Subscriptions, clearing, and execution decreased by $297, or 13%, to $2,052 for the three months ended June 30, 2014 from $2,349 for the three months ended June 30, 2013. The decrease was due to a reduction in clearing and execution costs of $118, primarily as a result of lower trading volume, and a decrease in subscriptions of $179, primarily the result of cancellation of subscriptions in connection with the merger of CCPR and JVB.

Professional Fees and Other Operating Expenses

Professional fees and other operating expenses decreased by $1,108, or 37%, to $1,908 for the three months ended June 30, 2014 from $3,016 for the three months ended June 30, 2013. The decrease was the result of (i) a decrease in professional fees of $639

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and a decrease in other operating expenses of $469. The decrease in professional fees was primarily due to a decrease in legal expenses. The decrease in other operating expense includes reduced regulatory and other expenses as a result of the reduction in headcount related to the merger of CCPR and JVB.

Depreciation and Amortization

Depreciation and amortization decreased by $92, or 26%, to $267 for the three months ended June 30, 2014 from $359 for the three months ended June 30, 2013.

Impairment of goodwill

We recorded an impairment charge of $3,121 in the three months ended June 30, 2014. See note 10 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

Non-Operating Income and Expense

Interest Expense

Interest expense increased by $74, or 7%, to $1,109 for the three months ended June 30, 2014 from $1,035 for the three months ended June 30, 2013. The increase was comprised of (i) an increase of $123 on our junior subordinated notes due to changes in their variable rate; (ii) an increase of $191 related to the issuance of the 8.0% Convertible Notes; partially offset by (iii) a decrease of $173 relating to our New Notes due to the repurchase of New Notes subsequent to June 30, 2013; (iv) a decrease of $55 in other interest expense primarily related to interest related to a legal settlement accrual incurred in the three months ended June 30, 2013; (v) and other decreases of $12. See note 14 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

Income / (Loss) from Equity Method Affiliates

Income from equity method affiliates decreased by $94, or 99% to $1 for the three months ended June 30, 2014 from $95 for the three months ended June 30, 2013. Income or loss from equity method affiliates represents our share of the related entities’ earnings.



INCOME / (LOSS) FROM EQUITY METHOD AFFILIATES
(dollars in thousands)

	June 30, 2014		June 30, 2013		Change
Deep Value GP II	$	-	$	(2)		2
SAA Manager		-		86		(86)
Star Asia Capital Management		-		37		(37)
Star Asia Opportunity		1		1		-
Star Asia SPV		-		(27)		27
Total	$	1	$	95	$	(94)

As of June 30, 2014, we have no investments accounted for under the equity method. See notes 4, 12, and 21 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

Income Tax Expense / (Benefit)

The income tax expense / (benefit) increased by $55 to income tax expense / (benefit) of $89 for the three months ended June 30, 2014 from income tax expense / (benefit) of $34 for the three months ended June 30, 2013. The increase was a result of an increase in foreign taxes. See note 21 to our consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for a more complete description of the Company’s tax attributes and unrecognized tax benefits. Also, see note 18 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q regarding an income tax assessment received by the Company from the Commonwealth of Pennsylvania.

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

Net income / (loss) attributable to the non-controlling interest for the three months ended June 30, 2014 and 2013 was comprised of the non-controlling interest related to member interests in the Operating LLC other than interests held by us for the relevant periods. In addition, net income / (loss) attributable to the non-controlling interest also included non-controlling interest related to entities that were consolidated by the Operating LLC but not wholly owned.

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SUMMARY CALCULATION OF NON-CONTROLLING INTEREST
Three Months Ended June 30, 2014

			Majority				Total
	Wholly owned		owned		IFMI		Operating				Consolidated
	subsidiaries		subsidiaries		LLC		LLC		IFMI		IFMI
Net income / (loss) before tax	$	(2,768)	$	-	$	-	$	(2,768)	$	-	$	(2,768)
Income tax expense		-		-		89		89		-		89
Net income / (loss) after tax		(2,768)		-		(89)		(2,857)		-		(2,857)
Majority owned subsidiary non-controlling interest		-		-		-		-
Net loss attributable to Operating LLC		(2,768)		-		(89)		(2,857)
Average effective Operating LLC non-controlling interest (1)%								25.69%
Operating LLC non-controlling interest								(734)
Majority owned subsidiary non-controlling interest								-
Total non-controlling interest							$	(734)



SUMMARY CALCULATION OF NON-CONTROLLING INTEREST
Three Months Ended June 30, 2013

			Majority				Total
	Wholly owned		owned		IFMI		Operating				Consolidated
	subsidiaries		subsidiaries		LLC		LLC		IFMI		IFMI
Net income / (loss) before tax	$	(5,781)	$	(1,057)	$	-	$	(6,838)	$	-	$	(6,838)
Income tax expense		-		(17)		51		34		-		34
Net income / (loss) after tax		(5,781)		(1,040)		(51)		(6,872)		-		(6,872)
Majority owned subsidiary non-controlling interest		-		(12)		-		(12)
Net loss attributable to Operating LLC		(5,781)		(1,028)		(51)		(6,860)
Average effective Operating LLC non-controlling interest (1)%								31.46%
Operating LLC non-controlling interest								(2,158)
Majority owned subsidiary non-controlling interest								(12)
Total non-controlling interest							$	(2,170)

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Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet potential cash requirements including ongoing commitments to repay debt borrowings, make interest payments on outstanding borrowings, fund investments, and support other general business purposes. In addition, our United States and United Kingdom broker-dealer subsidiaries are subject to certain regulatory requirements to maintain minimum levels of net capital. Historically, our primary sources of funds have been our operating activities and general corporate borrowings. In addition, our trading operations have generally been financed by use of collateralized securities financing arrangements as well as margin loans.

Certain subsidiaries of the Operating LLC have restrictions on the withdrawal of capital and otherwise in making distributions and loans. JVB is subject to net capital restrictions imposed by the SEC and FINRA that require certain minimum levels of net capital to remain in this subsidiary. In addition, these restrictions could potentially impose notice requirements or limit our ability to withdraw capital above the required minimum amounts (excess capital) whether through a distribution or a loan. CCFL is regulated by the Financial Conduct Authority (formerly known as the Financial Services Authority) in the United Kingdom (“FCA”) and must maintain certain minimum levels of capital. See note 16 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

See Liquidity and Capital Resources – Debt Financing and Liquidity and Capital Resources – Contractual Obligations below.

During the third quarter of 2010, our Board of Directors initiated a dividend of $0.05 per quarter, which was paid regularly through December 31, 2011. Beginning in 2012, the Company declared a dividend of $0.02 per quarter, which was paid regularly through the second quarter of 2014. The Company’s Board of Directors has the power to decide to increase, reduce, or eliminate dividends in the future. The Company’s Board of Director’s decision will depend on a variety of factors, including business, financial, and regulatory considerations as well as any limitations under Maryland law or imposed by any agreements governing indebtedness of the Company. There can be no assurances that such dividends will be maintained or increased and, if maintained or increased, will not subsequently be discontinued.

Each time a cash dividend was declared by our Board of Directors, a pro rata distribution was made to the other members of the Operating LLC upon the payment of dividends to stockholders of the Company.

On July 31, 2014, our Board of Directors declared a cash dividend of $0.02 per share, which will be paid on our common stock on August 29, 2014 to stockholders of record on August 15, 2014. A pro rata distribution will be made to the other members of the Operating LLC upon the payment of the dividends to stockholders of the Company.

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Cash Flows

We have four primary uses for capital:

(1) To fund the operations of our Capital Markets business segment: Our Capital Markets business segment utilizes capital (i) to fund securities inventory to facilitate client trading activities; (ii) for risk trading on our own account; (iii) to fund our collateralized securities lending activities; (iv) for temporary capital needs associated with underwriting activities; (v) to fund business expansion into existing or new product lines; and (vi) to fund any operating losses incurred.

(2) To fund principal investments for our principal investing segment: We make principal investments to generate attractive returns. We may need to raise additional debt or equity financing in order to ensure we have the capital necessary to take advantage of attractive investment opportunities.

(3) To fund mergers or acquisitions: We may opportunistically use capital to acquire other asset managers, individual asset management contracts, or financial services firms. To the extent our liquidity sources are insufficient to fund our future activities, we may need to raise additional funding through an equity or debt offering. No assurances can be given that additional financing will be available in the future, or that if available, such financing will be on favorable terms.

(4) To fund potential dividends and distributions: During the third quarter of 2010 and for each subsequent quarter through June 30, 2014, we have declared a dividend. A pro rata distribution has been paid to the other members of the Operating LLC upon the payment of any dividends to stockholders of IFMI.

If we are unable to raise sufficient capital on economically favorable terms, we may need to reduce the amount of capital invested for the uses described above, which may adversely impact earnings and our ability to pay dividends.

As of June 30, 2014 and December 31, 2013, we maintained cash and cash equivalents of $12,928 and $13,161, respectively. We generated cash from or used cash for the following activities:



SUMMARY CASH FLOW INFORMATION
(dollars in thousands)

	Six Months Ended
	June 30, 2014		June 30, 2013
Cash flow from operating activities	$	1,160	$	(5,281)
Cash flow from investing activities		2,664		2,646
Cash flow from financing activities		(4,070)		(1,774)
Effect of exchange rate on cash		13		(175)
Net cash flow		(233)		(4,584)
Cash and cash equivalents, beginning		13,161		14,500
Cash and cash equivalents, ending	$	12,928	$	9,916

See the statement of cash flows in our consolidated financial statements. We believe our available cash and cash equivalents, as well as our investment in our trading portfolio and related borrowing capacity, will provide sufficient liquidity to meet the cash needs of our ongoing operations in the near term.

Six Months Ended June 30, 2014

As of June 30, 2014, our cash and cash equivalents were $12,928, representing a decrease of $233 from December 31, 2013. The decrease was attributable to the cash provided by operating activities of $1,160, the cash provided by investing activities of $2,664, the cash used by financing activities of $4,070, and the increase in cash caused by change in exchange rates of $13.

The cash provided by operating activities of $1,160 was comprised of (a) net cash outflows of $4,433 related to working capital fluctuations (b) net cash inflows of $8,137 from trading activities comprised of our investments-trading, trading securities sold, not yet purchased, securities sold under agreement to repurchase, and receivables and payables from brokers, dealers, and clearing agencies, as well as the changes in unrealized gains and losses on the investments-trading and trading securities sold, but not yet purchased; and (c) net cash outflows from other earnings items of $2,544 (which represents net income or loss adjusted for the following non-cash operating items: other income / (expense), realized and unrealized gains and losses and accretion of income on other investments, income or loss from equity method affiliates, equity based compensation, depreciation and amortization, amortization of discount on debt, and impairment of goodwill).

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The cash provided by investing activities of $2,664 was comprised of (a) $19,924 of net proceeds from the sale of the Star Asia Group (see note 4 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q); (b) $3,643 of proceeds from distributions received, sales, and returns of principal from other investments, at fair value; (c) $67 in distributions received from equity method affiliates (see note 12 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q); net of (d) $20,843 of cash used to acquire other investments, at fair value and (e) $127 used to purchase furniture, fixtures, and leasehold improvements.

The cash used in financing activities of $4,070 was comprised of (a) $3,121 for the repayment of debt (see note 14 to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q); (b) $79 used to net settle equity awards; (c) $213 of distributions to non-controlling interests related to the Operating LLC; and (d) $657 in dividends to shareholders of IFMI.

Six Months Ended June 30, 2013

As of June 30, 2013, our cash and cash equivalents were $9,916, representing a net decrease of $4,584 from December 31, 2012. The decrease was attributable to the cash used by operating activities of $5,281, the cash provided by investing activities of $2,646, and the cash used by financing activities of $1,774, and the decrease in cash caused by change in exchange rates of $175.

The cash used by operating activities of $5,281 was comprised of (a) net cash outflows of $9,412 related to working capital fluctuations; (b) net cash inflows of $6,553 from trading activities comprised of our investments-trading, trading securities sold, not yet purchased, securities sold under agreement to repurchase, and receivables and payables from brokers, dealers, and clearing agencies, as well as the changes in unrealized gains and losses on the investments-trading and trading securities sold, but not yet purchased; and (c) a net cash outflows from other earnings items of $2,422 (which represents net income or loss adjusted for the following non-cash operating items: other income / (expense), realized and unrealized gains and losses and accretion of income on other investments, income or loss from equity method affiliates, equity based compensation, depreciation and amortization, amortization of discount on debt, and impairment of goodwill).

The cash provided by investing activities of $2,646 was comprised of (a) $679 of cash acquired due to the acquisition of Star Asia Manager in the Star Asia Manager Repurchase Transaction; (b) $708 of proceeds from sales and returns of principal from other investments, at fair value; (c) $2,881 in distributions received from equity method affiliates (see note 12 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q); net of (d) $1,064 of cash used to acquire other investments, at fair value which was comprised of $302 of additional investment in the Star Asia Special Situations Fund and $762 invested in a Japanese Yen currency hedge; (e) $10 of investment in equity method affiliates and (f) $548 used to purchase furniture, equipment and leasehold improvements.

The cash used in financing activities of $1,774 was comprised of (a) $619 repayment of debt which includes $272 related to the Star Asia Manager note payable and $347 related to our subordinated notes payable; (b) $36 used for the payment of employee tax obligations related to restricted stock vesting; (c) $317 of net redemptions for the redeemable non-controlling interest related to PrinceRidge; (d) $86 of repayments of mandatorily redeemable equity interests related to PrinceRidge; (e) $212 of distributions to non-controlling interests related to the Operating LLC; and (f) $504 in dividends to shareholders of IFMI.

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Regulatory Capital Requirements

We have two subsidiaries that are licensed securities dealers: JVB in the United States, and CCFL in the United Kingdom. As a U.S. broker-dealer, JVB is subject to the Uniform Net Capital Rule in Rule 15c3-1 under the Exchange Act, and our London-based subsidiary, CCFL, is subject to the regulatory supervision and requirements of the FCA. The amount of net assets that these subsidiaries may distribute is subject to restrictions under these applicable net capital rules. These subsidiaries have historically operated in excess of minimum net capital requirements. Our minimum capital requirements at June 30, 2014 were as follows:


MINIMUM NET CAPITAL REQUIREMENTS
(dollars in thousands)
United States	$	262
United Kingdom		1,982
Total	$	2,244

We operate with more than the minimum regulatory capital requirement in our licensed broker-dealers and at June 30, 2014, total net capital, or the equivalent as defined by the relevant statutory regulations, in our licensed broker-dealers totaled $12,777. See note 16 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

In addition, our licensed broker-dealers are generally subject to capital withdrawal notification and restrictions.

Securities Financing

We maintain repurchase agreements with various third party financial institutions. There is no maximum limit as to the amount of securities that may be transferred pursuant to these agreements, and transactions are approved on a case-by-case basis. The repurchase agreements do not include substantive provisions other than those covenants and other customary provisions contained in standard master repurchase agreements. The repurchase agreements generally require us to transfer additional securities to the counterparty in the event the value of the securities then held by the counterparty in the margin account falls below specified levels and contains events of default in cases where we breach our obligations under the agreement. We receive margin calls from our repurchase agreement counterparties from time to time in the ordinary course of business. To date, we have maintained sufficient liquidity to meet margin calls, and we have never been unable to satisfy a margin call, however, no assurance can be given that we will be able to satisfy requests from our counterparties to post additional collateral in the future. See note 9 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

If there were an event of default under the repurchase agreements, we would give our counterparty the option to terminate all repurchase transactions existing with us and make any amount due from us to the counterparty payable immediately. Repurchase obligations are full recourse obligations to us. If we were to default under a repurchase obligation, the counterparty would have recourse to our other assets if the collateral was not sufficient to satisfy the obligation in full.

The Company’s clearing brokers provide securities financing arrangements including margin arrangements and securities borrowing and lending arrangements. These arrangements generally require us to transfer additional securities or cash to the clearing broker in the event the value of the securities then held by the clearing broker in the margin account falls below specified levels and contain events of default in cases where we breach our obligations under such agreements.

An event of default under the clearing agreement would give our counterparty the option to terminate our clearing arrangement. Any amounts owed to the clearing broker would be immediately due and payable. These obligations are recourse to us. Furthermore, a termination of our clearing arrangements would result in a significant disruption to our business and would have a significant negative impact on our dealings and relationship with our customers.

The following table presents our period end balance, average monthly balance, and maximum balance at any month end during the six months ended June 30, 2014 and the twelve months ended December 31, 2013 for receivables under resale agreements and securities sold under agreements to repurchase.

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		Six Months Ended June 30, 2014		Twelve Months Ended December 31, 2013
Receivables under resale agreements
Period end	$	35,975	$	29,395
Monthly average		58,693		83,931
Maximum month end		79,411		101,444
Securities sold under agreements to repurchase
Period end	$	36,729	$	28,748
Monthly average		58,981		84,402
Maximum month end		78,784		103,806

Fluctuations in the balance of our repurchase agreements from period to period and intraperiod are dependent on business activity in those periods. The fluctuations in the balances of our receivables under resale agreements over the periods presented were impacted by our clients’ desires to execute collateralized financing arrangements through the repurchase market or other financing products.

Average balances and period end balances will fluctuate based on market and liquidity conditions and we consider such intraperiod fluctuations as typical for the repurchase market. Month-end balances may be higher or lower than average period balances.

Debt Financing

As of June 30, 2014, we had the folloiwng sources of debt financing other than securities financing arrangements: (1) convertible senior notes, comprised of 8.0% Convertible Notes; and (2) junior subordinated notes payable to the following two special purpose trusts: (a) Alesco Capital Trust I and (b) Sunset Financial Statutory Trust I.

See note 14 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q for a discussion of the Company’s outstanding debt.

The following table summarizes the Company’s long-term indebtedness and other financing outstanding:



DETAIL OF DEBT
(Dollars in Thousands)

Description	Current Outstanding Par			June 30, 2014		December 31, 2013		Interest Rate Terms	Interest (4)		Maturity
Convertible senior notes:
10.50% contingent convertible senior notes (the "New Notes")	$	-		$	-	$	3,115	10.50%	10.50	%	May 2014 (1)
8.00% convertible senior notes (the "8.0% Convertible Notes")		8,248			8,248		8,248	8.00%	8.00	%	September 2018 (2)
	$	8,248			8,248		11,363
Junior subordinated notes:
Alesco Capital Trust I	$	28,125	(3)		11,087		10,697	4.23%	4.23	%	July 2037
Sunset Financial Statutory Trust I		20,000	(3)		7,895		7,614	4.38%	4.38	%	March 2035
	$	48,125			18,982		18,311
Total				$	27,230	$	29,674

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(1)Represents the actual redemption date.

(2)

The holders of the 8.0% Convertible Notes may convert all or any part of the outstanding principal amount of the 8.0% Convertible Notes at any time prior to maturity into shares of the Company's company stock at a conversion price of $3.00 per share, subject to customary anti-dilution adjustments.

(3)The outstanding par represents the total par amount of the junior subordinated notes held by two separate VIE trusts. We do not consolidate these trusts. We hold $1,489 par value of these junior subordinated notes, comprised of $870 par value of junior subordinated notes related to Alesco Capital Trust I and $619 par value of junior subordinated notes related to Sunset Financial Statutory Trust I. These notes have a carrying value of $0. Therefore, the net par value held by third parties is $48,125.

(4)Represents the interest rate as of the last day of the reporting period.

Off-Balance Sheet Arrangements

There were no material off balance sheet arrangements as of June 30, 2014.

Contractual Obligations

The table below summarizes our significant contractual obligations as of June 30, 2014 and the future periods in which such obligations are expected to be settled in cash. We assumed that the 8.0% Convertible Notes are not converted prior to maturity. Our junior subordinated notes are assumed to be repaid on their respective maturity dates. Excluded from the table below are obligations that are short-term in nature, including trading liabilities and repurchase agreements.



CONTRACTUAL OBLIGATIONS
As of June 30, 2014
(Dollars in Thousands)

		Payment Due by Period
		Total		Less than 1 Year		1 - 3 Years		3 - 5 Years		More Than 5 Years
Operating lease arrangements	$	4,534	$	2,112	$	1,600	$	441	$	381
Maturity of 8.0% Convertible Notes (1)		8,248		-		-		8,248		-
Interest on 8.0% Convertible Notes (1)		2,831		669		1,338		824		-
Maturities on junior subordinated notes		48,125		-		-		-		48,125
Interest on junior subordinated notes (2)		45,844		2,066		4,132		4,132		35,514
	$	109,582	$	4,847	$	7,070	$	13,645	$	84,020

(1)Assumes the 8.0% Convertible Notes are not converted prior to maturity.

(2)The interest on the junior subordinated notes related to Alesco Capital Trust I is variable. The interest rate of 4.2307% (based on a 90-day LIBOR rate as of June 30, 2014 plus 4.00%) was used to compute the contractual interest payment in each period noted. The interest on the junior subordinated notes related to Sunset Financial Statutory Trust I is variable. The interest rate of 4.3807% (based on a 90-day LIBOR rate as of June 30, 2014 plus 4.15%) was used to compute the contractual interest payment in each period noted.

We believe that we will be able to continue to fund our current operations and meet our contractual obligations through a combination of existing cash resources and other sources of credit. Due to the uncertainties that exist in the economy, we cannot be certain that we will be able to replace existing financing or find sources of additional financing in the future.

Recent Accounting Pronouncements

The following is a list of recent accounting pronouncements that we believe will have a continuing impact on our financial statements going forward.

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that is or will have a major effect on an entity’s operations and financial results should be presented as a discontinued operation. Examples include a disposal of a major line of business, a major geographical area, a major equity method investment, or other major parts of an entity. The new provisions also require new disclosures related to individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following the disposal date and retained equity method investments in a discontinued operation. The provisions of this ASU are effective for annual periods beginning on or after December 15, 2014 and interim periods within that year. The ASU is applied prospectively. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued. We will adopt the provisions of this ASU effective January 1, 2015 and are currently evaluating the new guidance to determine the impact it may have to our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which replaces existing revenue recognition guidance in Topic 605, Revenue Recognition, replaces certain other industry-specific revenue recognition guidance, specifies the accounting for certain costs to obtain or fulfill a contract with a customer and provides recognition and measurement guidance in relation to sales of non-financial assets. The core principle of this ASU is to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU provides guidance on how to achieve this core principle, including how to identify contracts with customers and separate performance obligations in the contract, how to determine and allocate the transaction price to such performance obligations and how to recognize revenue when a performance obligation has been satisfied. The ASU is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2016 with early adoption prohibited. We will be required to apply the amendments in this ASU using one of the following two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within the ASU; or (ii) retrospective with the cumulative effect of initially applying the ASU recognized at the date of the initial application and providing certain additional disclosures as defined in the ASU. We will adopt the provisions of this ASU effective January 1, 2017 and are currently evaluating the new guidance to determine the impact it will have on our consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase to Maturity Transactions, Repurchase Financings, and Disclosures, which changes the accounting for repurchase-to-maturity transactions which are repurchase agreements where the maturity of the security transferred as collateral matches the maturity of the repurchase agreement. According to the new guidance, all repurchase-to-maturity transactions will be accounted for as secured borrowing transactions in the same way as other repurchase agreements rather than as sales of a financial asset and forward commitment to repurchase. The amendments also change the accounting for repurchase financing arrangements which are transactions involving the transfer of a financial asset to a counterparty executed contemporaneously with a reverse repurchase agreement with the same counterparty. Under the new guidance, all repurchase financings will now be accounted for separately, which will result in secured lending accounting for the reverse repurchase agreement. The guidance also requires new disclosures about transfers that are accounted for as sales in transactions that are economically similar to repurchase agreements and increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2014 with early adoption prohibited. An entity will be required to present changes in accounting for all outstanding repurchase-to-maturity transactions and repurchase financing arrangements as a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The disclosures for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. We will adopt the provisions of this ASU effective January 1, 2015 and are currently evaluating the new guidance to determine the impact it will have on our consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which requires a performance target that affects vesting and that could be achieved after the requisite service period be accounted for as a performance condition rather than as a non-vesting condition that affects the grant-date fair value of the award. A reporting entity should apply existing guidance in Topic 718, Compensation-Stock Compensation, as it relates to such awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015 with early adoption permitted using either of two methods: (i) prospective to all awards granted or modified after the effective date; or (ii) retrospective to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effective applying this ASU as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. We will adopt the provisions of this ASU effective January 1, 2016 and are currently evaluating the new guidance to determine the impact, if any, that it will have on our consolidated financial statements.

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Critical Accounting Policies and Estimates

Our accounting policies are essential to understanding and interpreting the financial results reported in our condensed consolidated financial statements. The significant accounting policies used in the preparation of our condensed consolidated financial statements are summarized in note 3 to the Company’s consolidated financial statements and notes thereto found in our Annual Report on Form 10-K for the year ended December 31, 2013. Certain of those policies are considered to be particularly important to the presentation of our financial results because they require us to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. During the six months ended June 30, 2014, there were no material changes to matters discussed under the heading “Critical Accounting Policies and Estimates” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

All amounts in this section are in thousands unless otherwise noted.

Market Risk

Market risk is the risk of economic loss arising from the adverse impact of market changes to the market value of our trading and investment positions. Market risk is inherent to both derivative and non-derivative financial instruments, and accordingly, the scope of our market risk management procedures extends beyond derivatives to include all market risk sensitive financial instruments. For purposes of analyzing the components of market risk, we have broken out our investment portfolio into three broad categories, plus debt:

Fixed Income Securities: We hold, from time to time, the following securities: U.S. Treasury securities, U.S. government agency MBS, U.S government agency debt securities, CMOs, non-government MBS, corporate bonds, non-redeemable and redeemable preferred stock, municipal bonds, certificates of deposits, SBA loans, residential loans, whole loans, and unconsolidated investments in the middle and senior tiers of securitization entities and TruPS. We attempt to mitigate our exposure to market risk by entering into economic hedging transactions, which may include TBAs. The fixed income category can be broadly broken down into two subcategories: fixed rate and floating rate.

Floating rate securities are not in themselves particularly sensitive to interest rate risk. Because they generally accrue income at a variable rate, the movement in interest rates typically does not impact their fair value. Fluctuations in their current income due to variations in interest rates are generally not material to us. Floating rate fixed income securities are subject to other market risks such as: default risk of the underlying issuer, changes in issuer’s credit spreads, prepayment rates, investor demand and supply of securities within a particular asset class or industry class of the ultimate obligor. The sensitivity to any individual market risk can be difficult to quantify.

The fair value of fixed rate securities is sensitive to changes in interest rates. However, fixed rate securities that have low credit ratings or represent junior interests in securitizations are not particularly interest rate sensitive. In general, when we acquire interest rate sensitive securities, we enter into an offsetting short position for a similar fixed rate security. Alternatively, we may enter into other interest rate hedging arrangements such as interest rate swaps or Eurodollar futures. We measure our net interest rate sensitivity by determining how the fair value of our net interest rate sensitive assets would change as a result of a 100 basis points (“bps”) adverse shift across the entire yield curve. Based on this analysis, as of June 30, 2014, we would incur a loss of $2,686 if the yield curve rises 100 bps across all maturities and a gain of $2,678 if the yield curve falls 100 bps across all maturities.

Equity Securities: We hold equity interests in the form of investments in investment funds, permanent capital vehicles, and equity instruments of publicly traded companies. These investments are subject to equity price risk. Equity price risk results from changes in the level or volatility of underlying equity prices, which affect the value of equity securities or instruments that in turn derive their value from a particular stock. We attempt to reduce the risk of loss inherent in our inventory of equity securities by closely monitoring those security positions. However, since we generally make investments in our investment funds and permanent capital vehicles in order to facilitate third party capital raising (and hence increase our AUM and asset management fees), we may be unwilling to sell these positions as compared to investments in unaffiliated third parties. We have one permanent capital vehicle investment that is denominated in Euros. The fair value of this investment is subject to change as the spot foreign exchange rate between these currencies and the U.S. Dollar (our functional currency) fluctuates. We may, from time to time, enter into foreign exchange rate derivatives to hedge all or a portion of this risk. We measure our net equity price sensitivity and foreign currency sensitivity by determining how the net fair value of our equity price sensitive and foreign exchange sensitive assets would change as a result of a 10% adverse change in equity prices or foreign exchange rates. Based on this analysis, as of June 30, 2014, our equity price sensitivity was $703 and our foreign exchange currency sensitivity was $429.

Other Securities: These investments are primarily made up of residual interests in securitization entities. The fair value of these investments will fluctuate over time based on a number of factors including, but not limited to: liquidity of the investment type, the credit performance of the individual assets and issuers within the securitization entity, the asset class of the securitization entity and the relative supply of and demand for investments within that asset class, credit spreads in general, the transparency of valuation of the assets and liabilities of the securitization entity, and investors’ view of the accuracy of ratings prepared by the independent rating agencies. The sensitivity to any individual market risk cannot be quantified.

Debt: In addition to the risks noted above, we incur interest rate risk related to our debt obligations. We have debt that accrues interest at either variable rates or fixed rates. As of June 30, 2014, a 100 bps change in the three month LIBOR would result in a change in our annual cash paid for interest in the amount of $481. A 100 bps adverse change in the market yield to maturity would result in an increase in the fair value of the debt in the amount of $3,466 as of June 30, 2014.

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Counterparty Risk and Settlement Risk:

We are subject to counterparty risk primarily in two areas: our collateralized securities transactions described in note 9 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q, and our TBA activities (where we enter into offsetting TBA trades in order to assist clients in hedging their mortgage portfolios) described in note 8 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q. With respect to the matched book repo financing activities, our risk is that the counterparty does not fulfill its obligation to repurchase the underlying security when it is due. In this case, we would typically liquidate the underlying security, which may result in a loss if the security has declined in value in relation to the balance due from the counterparty under the reverse repurchase agreement.

With respect to our TBA hedging activities, our risk is that the counterparty does not settle the TBA trade on the scheduled settlement date. In this case, we would have to execute the trade, which may result in a loss based on market movement in the value of the underlying trade between its initial trade date and its settlement date (which in the case of TBAs can be as long as 90 days). If we were to incur a loss under either of these activities, we have recourse to the counterparty pursuant to the underlying agreements.

Finally, we have general settlement risk in all of our regular way fixed income and equity trading activities. If a counterparty fails to settle a trade, we may incur a loss in closing out the position and would be forced to try to recover this loss from the counterparty. If the counterparty has become insolvent or does not have sufficient liquid assets to reimburse us for the loss, we may not get reimbursed.

How we manage these risks

Market Risk

We seek to manage our market risk by utilizing our underwriting and credit analysis processes that are performed in advance of acquiring any investment. In addition, we continually monitor our investments—trading and our trading securities sold, not yet purchased on a daily basis and our other investments on a monthly basis. We perform an in-depth monthly analysis on all our investments and our risk committee meets on a monthly basis to review specific issues within our portfolio and to make recommendations for dealing with these issues. In addition, each of our broker-dealers has an assigned chief risk officer that reviews the firm’s positions and trading activities on a daily basis.

Counterparty Risk

We seek to manage our counterparty risk through two major tools. First, we perform a credit assessment of each counterparty to ensure the counterparty has sufficient equity, liquidity, and profitability to support the level of trading or lending we plan to do with them. Second, we require counterparties to post cash or other liquid collateral (“margin”) in the case of changes in the market value of the underlying securities or trades on an ongoing basis.

In the case of collateralized securities financing transactions, we will generally lend less than the market value of the underlying security initially. The difference between the amount lent and the value of the security is referred to as the haircut. We will seek to maintain this haircut while the loan is outstanding. If the value of the security declines, we will require the counterparty to post margin to offset this decline. If the counterparty fails to post margin, we will sell the underlying security. The haircut serves as a buffer against market movements to prevent or minimize a loss.

In the case of TBA hedging, we also require counterparties to post margin with us in the case of the market value of the underlying TBA trade declining. If the counterparty fails to post margin, we will close out the underlying trade. In the case of TBA hedging, we will sometimes obtain initial margin or a cash deposit from the counterparty which serves a purpose similar to the haircut as an additional buffer against losses. However, some of our TBA hedging activities are done without initial margin or cash deposits.

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ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established and maintain disclosure controls and procedures that are designed to ensure that material information relating to the Company (and its consolidated subsidiaries) required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, who certify our financial reports and to other members of senior management and the Company’s Board of Directors.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2014. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective at June 30, 2014.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

Incorporated by reference to the headings titled “Legal and Regulatory Proceedings” in note 18 to the consolidated financial statements include in Item 1 in this Quarterly Report on Form 10-Q.

Item 1A.Risk Factors

In addition to the information set forth in this Quarterly Report on Form 10-Q, you should also carefully review and consider the risk factors contained in our other reports and periodic filings with the SEC, including without limitation the risk factors contained under the caption “Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 which could materially and adversely affect our business, financial condition, and results of operations. Other than set forth below, the risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. There have been no material changes in the significant factors that may affect our business and operations as described in “Item 1A—Risk Factors” of the Annual Report on 10-K for the year ended December 31, 2013.

Our investments in CLOs are subject to various risks, which may materially and adversely affect our results of operations and cash flows.

Our Principal Investment portfolio includes equity investments in CLO vehicles, which involves a number of significant risks. CLO vehicles are typically very highly levered and, therefore, the equity tranches in which we invest are subject to a higher degree of risk of total loss. In particular, investors in CLO vehicles indirectly bear risks of the underlying debt investments held by such CLO vehicles. We generally only have the right to receive payments from the CLO vehicles, and generally do not have direct rights against the underlying borrowers or the entity that sponsored the CLO vehicle. In addition, we have limited control of the administration and amendment of any CLO in which we invest.

While the CLO vehicles we target generally enable an investor to acquire interests in a pool of senior loans without the expenses associated with directly holding the same investments, the CLO will pay its expenses, including trustee and rating agency fees, prior to any distributions to the holder of the CLO Equity Although it is difficult to predict whether the prices of indices and securities underlying CLO vehicles will rise or fall, these prices (and, therefore, the prices of the CLO vehicles) will be influenced by the same types of political and economic events that affect issuers of securities and capital markets generally. The failure by a CLO vehicle in which we invest to satisfy financial covenants, including with respect to adequate collateralization and/or interest coverage tests, could lead to a reduction in its payments to us. In the event that a CLO vehicle fails certain tests, holders of debt senior to us may be entitled to additional payments that would, in turn, reduce the payments we would otherwise be entitled to receive. Separately, we may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting CLO vehicle or any other investment we may make.

The interests we have acquired in CLO vehicles are generally thinly traded or have only a limited trading market. CLO vehicles are typically privately offered and sold, even in the secondary market. As a result, investments in CLO vehicles may be characterized as illiquid securities. In addition, investing in CLO vehicles carry additional risks, including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) the fact that our investments in CLO equity will be subordinate to other classes of note tranches; and (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the CLO vehicle or unexpected investment results. Our total equity may also decline over time if our principal recovery with respect to CLO equity investments is less than the price that we paid for those investments.

If we are unable to manage any of these risks effectively, our results of operations and cash flows could be materially and adversely affected.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Effective January 1, 2010, the Company ceased to qualify as a REIT and, therefore, is not required to make any dividends or other distributions to its stockholders. However, the Company’s Board of Directors has the power to decide to increase, reduce, or eliminate dividends in the future. The Company’s Board of Director’s decision will depend on a variety of factors, including business, financial and regulatory considerations as well as any limitations under Maryland law or imposed by any agreements governing

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indebtedness of the Company. There can be no assurances that such dividends will be maintained or increased and, if maintained or increased, will not subsequently be discontinued.

Certain subsidiaries of the Operating LLC have restrictions on the withdrawal of capital and otherwise in making distributions and loans. JVB is subject to net capital restrictions imposed by the SEC and FINRA that require certain minimum levels of net capital to remain in this subsidiary. In addition, these restrictions could potentially impose notice requirements or limit our ability to withdraw capital above the required minimum amounts (excess capital) whether through distribution or loan. CCFL is regulated by the FCA in the United Kingdom and must maintain certain minimum levels of capital. See note 16 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

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Item 6.Exhibits



Exhibit No.	Description



11.1	Statement Regarding Computation of Per Share Earnings.*

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

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

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

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

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets at June 30, 2014 and December 31, 2013, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2014 and 2013, (iii) the Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2014, (iv) the Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014, and 2013, and (v) Notes to Consolidated Financial Statements.**

Data required by FASB Accounting Standards Codification 260, “Earnings per Share,” is provided in note 17 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q. Filed herewith. **Furnished herewith.

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SIGNATURES

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



	Institutional Financial Markets, Inc.

	By:	/s/ LESTER R. BRAFMAN

		Lester R. Brafman
Date: August 1, 2014		Chief Executive Officer

	Institutional Financial Markets, Inc.

	By:	/s/ JOSEPH W. POOLER, JR.

		Joseph W. Pooler, Jr.
Date: August 1, 2014		Executive Vice President, Chief Financial Officer and Treasurer


Maryland	16-1685692
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Cira Centre 2929 Arch Street, 17th Floor Philadelphia, Pennsylvania	19104
(Address of principal executive offices)	(Zip Code)


Large accelerated filer	◻	Accelerated filer	◻

Non-accelerated filer	◻ (Do not check if a smaller reporting company)	Smaller reporting company	☒



	Institutional Financial Markets, Inc.
			Preferred Stock $ Amount		Common Stock $ Amount	Additional Paid-In Capital			Retained Earnings / (Accumulated Deficit)		Accumulated Other Comprehensive Income / (Loss)		Total Stockholders' Equity		Non-controlling Interest		Total Equity
December 31, 2013		$	5	$	14	$	73,866	$	(21,754)	$	(636)	$	51,495	$	9,688	$	61,183
Net loss			-		-		-		(4,221)		-		(4,221)		(1,441)		(5,662)
Other comprehensive income/ (loss) (1)			-		-		-		-		66		66		24		90
Acquisition / (surrender) of additional units of consolidated subsidiary, net			-		-		250		-		(14)		236		(236)		-
Equity-based compensation and vesting of shares			-		1		673		-		-		674		241		915
Shares withheld for employee taxes			-		-		(57)		-		-		(57)		(22)		(79)
Dividends/Distributions			-		-		-		(657)		-		(657)		(213)		(870)
June 30, 2014		$	5	$	15	$	74,732	$	(26,632)	$	(584)	$	47,536	$	8,041	$	55,577


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PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	6

	Consolidated Balance Sheets—June 30, 2014 and December 31, 2013	6

	Consolidated Statements of Operations and Comprehensive Income (Loss)—Three and Six Months Ended June 30, 2014 and 2013	7

	Consolidated Statements of Changes in Equity—Six Months Ended June 30, 2014	8

	Consolidated Statements of Cash Flows—Six Months Ended June 30, 2014 and 2013	9

	Notes to Consolidated Financial Statements (Unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	52

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	79

Item 4.	Controls and Procedures	81

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings	82

Item 1A.	Risk Factors	82

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82

Item 6.	Exhibits	84

Signatures		85