Cohen & Co Inc. - Quarter Report: 2011 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2011

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

For the transition period from to

Commission File Number: 001-32026

INSTITUTIONAL FINANCIAL MARKETS, INC.

(Exact name of registrant as specified in its charter)


Maryland		16-1685692
(State or other jurisdiction of Incorporation or organization)		(IRS Employer Identification Number)

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

Registrant’s telephone number, including area code: (215) 701-9555

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). x Yes ¨ No

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

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

As of August 2, 2011 there were 14,127,693 shares of common stock ($0.001 par value per share) of Institutional Financial Markets, Inc. outstanding.

INSTITUTIONAL FINANCIAL MARKETS, INC.

FORM 10-Q

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2011


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)		1

	Consolidated Balance Sheets—June 30, 2011 and December 31, 2010		1

	Consolidated Statements of Operations—Three and Six Months Ended June 30, 2011 and 2010		2

	Consolidated Statements of Changes in Stockholders’ Equity—Six Months Ended June 30, 2011 and Year Ended December 31, 2010		3

	Consolidated Statements of Cash Flows—Six Months Ended June 30, 2011 and 2010		4

	Notes to Consolidated Financial Statements (Unaudited)		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		56

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		87

Item 4.	Controls and Procedures		88

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings		90

Item 1A.	Risk Factors		90

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		91

Item 6.	Exhibits		92

Signatures			93

Forward Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

While we cannot predict all of the risks and uncertainties, they include, but are not limited to, those described in “Item 1A—Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Quarterly Report on Form 10-Q and include information concerning possible or assumed future results of our operations, including statements about the following subjects:

•

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

•

integration of operations;

•

business strategies;

•

growth opportunities;

•

competitive position;

•

market outlook;

•

expected financial position;

•

expected results of operations;

•

future cash flows;

•

financing plans;

•

plans and objectives of management;

•

tax treatment of the business combinations;

•

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

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You should consider the areas of risk and uncertainty described above and discussed under “Item 1A—Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 as well as the fact that we may not realize the anticipated growth opportunities of acquiring a majority ownership interest in PrinceRidge Holdings LP. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of this Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements concerning other matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Quarterly Report on Form 10-Q. Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

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

In this Quarterly Report on Form 10-Q, unless otherwise noted or as the context otherwise requires: “IFMI” refers to Institutional Financial Markets, Inc. (formerly Cohen & Company Inc.), a Maryland corporation. The “Company,” “we,”

“us,” and “our” refers to IFMI and its subsidiaries on a consolidated basis; “IFMI, LLC” (formerly Cohen Brothers, LLC), or the “Operating LLC” refers to the main operating subsidiary of the Company; “Cohen Brothers” refers to the pre-merger Cohen Brothers, LLC and its subsidiaries; “AFN” refers to the pre-merger Alesco Financial Inc. and its subsidiaries; “Merger Agreement” refers to the Agreement and Plan of Merger among AFN, Alesco Financial Holdings, LLC, a wholly owned subsidiary of AFN that we refer to as the “Merger Sub,” and Cohen Brothers, dated as of February 20, 2009 and amended on June 1, 2009, August 20, 2009 and September 30, 2009; “Merger” refers to the December 16, 2009 closing of the merger of Merger Sub with and into Cohen Brothers pursuant to the terms of the Merger Agreement, which resulted in Cohen Brothers becoming a majority owned subsidiary of the Company. When the term, “IFMI” is used, it is referring to the parent company itself, Institutional Financial Markets, Inc.

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

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

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

INSTITUTIONAL FINANCIAL MARKETS, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

(unaudited)


	June 30, 2011			December 31, 2010

Assets
Cash and cash equivalents	$	50,160		$	43,946
Restricted cash		1,856			4,507
Due from related parties		450			966
Other receivables		7,282			6,033
Investments-trading		166,865			189,015
Other investments, at fair value		42,561			46,551
Receivables under resale agreements		158,099			—
Goodwill		11,176			3,231
Other assets		17,284			12,498

Total assets	$	455,733		$	306,747


Liabilities
Payables to brokers, dealers, and clearing agencies	$	38,450		$	45,469
Due to related parties		7			34
Accounts payable and other liabilities		17,148			13,165
Accrued compensation		13,404			17,358
Trading securities sold, not yet purchased		52,291			17,820
Securities sold under agreement to repurchase		178,998			69,816
Deferred income taxes		8,663			8,889
Debt		42,140			44,688

Total liabilities		351,101			217,239

Commitments and contingencies (See Note 21)

Temporary Equity:
Redeemable non-controlling interest		15,471			—

Permanent Equity:
Stockholders’ Equity:
Preferred Stock, $0.001 par value per share, 50,000,000 shares authorized:
Series A Voting Convertible Preferred Stock, $0.001 par value per share, 1 share authorized, no shares issued and outstanding		—			—
Series B Voting Non-Convertible Preferred Stock, $0.001 par value per share, 4,983,557 shares authorized, 4,983,557 shares issued and outstanding		5			5
Series C Junior Participating Preferred Stock, $0.001 par value per share, 10,000 shares authorized, no shares issued and outstanding		—			—
Common Stock, $0.001 par value per share, 100,000,000 shares authorized, 14,238,177 and 10,533,084 shares issued, respectively; 14,187,777 and 10,482,684 shares outstanding, respectively, including 3,456,447 and 162,226 unvested restricted share awards, respectively		11			10
Additional paid-in capital		64,134			58,954
Retained earnings		2,296			6,382
Accumulated other comprehensive loss		(458	)		(665	)
Treasury stock at cost (50,400 shares of Common Stock)		(328	)		(328	)

Total stockholders’ equity		65,660			64,358
Non-controlling interest		23,501			25,150

Total permanent equity		89,161			89,508

Total liabilities and equity	$	455,733		$	306,747

See accompanying notes to unaudited consolidated financial statements.

INSTITUTIONAL FINANCIAL MARKETS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Revenues
Net trading	$	16,240		$	19,690		$	43,514		$	42,458
Asset management		5,255			6,244			11,225			13,014
New issue and advisory		1,131			1,405			1,240			2,073
Principal transactions and other income		831			8,472			(208	)		19,999

Total revenues		23,457			35,811			55,771			77,544

Operating expenses
Compensation and benefits		21,433			23,272			43,421			50,403
Business development, occupancy, equipment		1,835			1,338			3,274			2,721
Subscriptions, clearing, and execution		2,727			1,653			5,542			3,208
Professional fees and other operating		5,137			4,216			9,152			8,987
Depreciation and amortization		503			628			973			1,271

Total operating expenses		31,635			31,107			62,362			66,590

Operating income / (loss)		(8,178	)		4,704			(6,591	)		10,954

Non operating income / (expense)
Interest expense		(1,447	)		(1,829	)		(2,929	)		(3,822	)
Gain on repurchase of debt		—			—			—			886
Gain on sale of management contracts		—			836			—			971
Income / (loss) from equity method affiliates		4,435			(122	)		4,530			(108	)

Income/ (loss) before income tax expense / (benefit)		(5,190	)		3,589			(4,990	)		8,881
Income tax expense / (benefit)		(133	)		392			(346	)		1,123

Net income / (loss)		(5,057	)		3,197			(4,644	)		7,758
Less: Net income / (loss) attributable to the non-controlling interest		(1,686	)		1,137			(1,648	)		2,783

Net income / (loss) attributable to IFMI	$	(3,371	)	$	2,060		$	(2,996	)	$	4,975


Income per share data (see note 20):

Income / (loss) per common share-basic:
Income / (loss) per common share	$	(0.31	)	$	0.20		$	(0.28	)	$	0.48

Weighted average shares outstanding-basic		10,901,448			10,428,498			10,860,702			10,373,278

Income / (loss) per common share-diluted:
Income / (loss) per common share	$	(0.31	)	$	0.20		$	(0.28	)	$	0.48

Weighted average shares outstanding-diluted		16,185,004			15,712,054			16,144,258			15,656,834

Dividends declared per common share	$	0.05		$	—		$	0.10		$	—

See accompanying notes to unaudited consolidated financial statements.

INSTITUTIONAL FINANCIAL MARKETS, INC.

Consolidated Statement of Changes in Equity

(Dollars in Thousands)

(Unaudited)


	Institutional Financial Markets, Inc.
	Preferred Stock Class A $ Amount		Preferred Stock Class B $ Amount		Common Stock $ Amount		Additional Paid-In Capital			Retained Earnings/ (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Treasury Stock (1)			Total Stockholder’s Equity			Non-controlling Interest			Total Permanent Equity			Redeemable non-controlling interest (Temporary Equity)			Total Comprehensive Income/Loss
Balance at December 31, 2009	$	—	$	—	$	10	$	57,411		$	(170	)	$	(582	)	$	(328	)	$	56,341		$	21,310		$	77,651		$	—

Comprehensive income / (loss):
Net income		—		—		—		—			7,595			—			—			7,595			3,620			11,215			—		$	11,215
Other comprehensive loss		—		—		—		—			—			(83	)		—			(83	)		(43	)		(126	)		—			(126	)


Total comprehensive income/ (loss)																				7,512			3,577			11,089			—		$	11,089
Conversion of Series A Preferred Stock to Series B Preferred Stock		—		5		—		(5	)		—			—			—			—			—			—			—
Equity-based compensation and vesting of shares		—		—		—		1,658			—			—			—			1,658			847			2,505			—
Shares withheld for employee taxes		—		—		—		(110	)		—			—			—			(110	)		(56	)		(166	)		—
Dividends/Distributions		—		—		—		—			(1,043	)		—						(1,043	)		(528	)		(1,571	)		—

Balance at December 31, 2010	$	—	$	5	$	10	$	58,954		$	6,382		$	(665	)	$	(328	)	$	64,358		$	25,150		$	89,508		$	—

Comprehensive income / (loss):
Net loss		—		—		—		—			(2,996	)		—			—			(2,996	)		(1,595	)		(4,591	)		(53	)	$	(4,644	)
Other comprehensive income		—		—		—		—			—			234			—			234			120			354			—			354

Total comprehensive income/ (loss)																				(2,762	)		(1,475	)		(4,237	)		(53	)	$	(4,290	)
Acquisition of additional units of consolidated subsidiary		—		—		—		972			—			(27	)		—			945			(945	)		—			—
Shares issued in acquisition of JVB Financial Holdings, LLC		—		—		1		1,531			—			—			—			1,532			—			1,532			—
Acquisition of PrinceRidge Partners, LLC and PrinceRidge Holdings, LP		—		—		—		—			—			—			—			—			—			—			18,879
Equity-based compensation and vesting of shares		—		—		—		2,710			—			—			—			2,710			1,315			4,025			181
Shares withheld for employee taxes		—		—		—		(33	)		—			—			—			(33	)		(16	)		(49	)		—
Partnership withdrawal		—		—		—		—			—			—			—			—			—			—			(3,536	)
Dividends/Distributions		—		—		—		—			(1,090	)		—			—			(1,090	)		(528	)		(1,618	)		—

Balance at June 30, 2011	$	—	$	5	$	11	$	64,134		$	2,296		$	(458	)	$	(328	)	$	65,660		$	23,501		$	89,161		$	15,471

(1)	50,400 shares of the Company’s Common Stock.

See accompanying notes to unaudited consolidated financial statements.

INSTITUTIONAL FINANCIAL MARKETS, INC.

Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)


	Six Months Ended June 30,
	2011			2010
Operating activities
Net income / (loss)	$	(4,644	)	$	7,758
Adjustments to reconcile net income / (loss) to net cash provided by (used in) operating activities:
Gain on repurchase of debt		—			(886	)
Gain on sale of management contracts		—			(971	)
Equity-based compensation		4,206			1,821
Realized loss / (gain) on other investments, at fair value		1,480			8,309
Change in unrealized (gain) / loss on other investments		(358	)		(27,728	)
Depreciation and amortization		973			1,271
(Income) / loss from equity method affiliates		(4,530	)		108
Change in operating assets and liabilities, net:
(Increase) decrease in other receivables		699			(1,562	)
(Increase) decrease in investments-trading, net		96,577			33,426
(Increase) decrease in other assets, net		(42	)		(4,302	)
(Increase) decrease in receivables under resale agreement		589			(9,916	)
Change in receivables from / payables to related parties, net		565			205
(Increase) decrease in restricted cash		2,769			(22,185	)
Increase (decrease) in accrued compensation		(6,243	)		12,171
Increase (decrease) in accounts payable and other liabilities		(2,693	)		(216	)
Increase (decrease) in trading securities sold, not yet purchased, net		(8,631	)		(16,233	)
Change in receivables from / payables to brokers, dealers, and clearing agencies, net		(15,337	)		(17,857	)
Increase (decrease) in securities sold under agreement to repurchase		(49,438	)		3,466
Increase (decrease) in deferred income taxes		(226	)		(276	)

Net cash provided by (used in) operating activities		15,716			(33,597	)


Investing activities
Cash paid for acquisition of JVB Financial Holdings, L.L.C., net of cash acquired		(14,956	)		—
Cash acquired from acquisition of PrinceRidge Partners, LLC and PrinceRidge Holdings, LP		2,149			—
Purchase of investments-other investments, at fair value		(1,708	)		(3,170	)
Proceeds from sale of management contracts		—			971
Sales and return of principal of other investments, at fair value		3,965			14,522
Investment in equity method affiliates		(432	)		(4,916	)
Return from equity method affiliates		5,820			2,692
Purchase of furniture, equipment, and leasehold improvements		(302	)		(575	)

Net cash provided (used in) investing activities		(5,464	)		9,524


Financing activities
Repayment and repurchase of debt		(2,620	)		(14,065	)
Cash used to net share settle equity awards		(49	)		(160	)
Distributions to non-controlling interest		(528	)		—
Dividends		(1,090	)		—

Net cash used in financing activities		(4,287	)		(14,225	)

Effect of exchange rate on cash		249			(449	)

Net increase (decrease) in cash and cash equivalents		6,214			(38,747	)
Cash and cash equivalents, beginning of period		43,946			69,692

Cash and cash equivalents, end of period	$	50,160		$	30,945

See accompanying notes to unaudited consolidated financial statements.

INSTITUTIONAL FINANCIAL MARKETS, INC.

Notes to Consolidated Financial Statements

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

(Unaudited)

1. ORGANIZATION AND NATURE OF OPERATIONS

The Formation Transaction

Cohen Brothers, LLC (“Cohen Brothers”) was formed on October 7, 2004 by Cohen Bros. Financial, LLC (“CBF”). Cohen Brothers was formed 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. & Tororian 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 above 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 received 10,343,347 or 66.2% of the membership interests in Cohen Brothers. Of the 66.2% of Cohen Brothers received by AFN in connection with the Merger, 38.5% was received in the form of units issued directly by Cohen Brothers. The remaining 27.7% was acquired by AFN from Cohen Brothers members in exchange for the issuance of AFN common stock to those members. The remaining 5,283,556 membership interests or 33.8% of Cohen Brothers was held by Daniel Cohen (31.9% or 4,983,557 membership interests) and other members (1.9% or 299,999 membership interests). Each of Mr. Cohen’s membership units is redeemable at Mr. Cohen’s option, at any time on or after January 1, 2013, for (i) cash in 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 the issuance of additional shares of the Company’s 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 membership units held by the other members have the same redemption rights as described for Mr. Cohen except that the members holding these units may elect to redeem their shares at any time.

Therefore, the members of Cohen Brothers at the time of the Merger received 61.5% of the total ownership interests in the combined entity (33.8% remained as members of Cohen Brothers and 27.7% exchanged their interest in Cohen Brothers for AFN 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 primarily because the owners of Cohen Brothers at the time of the Merger received the majority interest in the merged entity as previously described. As a result, all of AFN’s assets and liabilities were required to be revalued at fair value as of the acquisition date. The financial statements presented herein include the operations of the merged entity from December 17, 2009 forward.

Subsequent to the Merger, AFN was renamed Cohen & Company Inc. In January 2011, it was renamed again as Institutional Financial Markets, Inc. (“IFMI”). As used in these consolidated financial statements, the term “the Company” refers to the combined operations of the merged company and its consolidated subsidiaries subsequent to December 17, 2009. “AFN” refers to the historical operations of Alesco Financial Inc. through the December 16, 2009 Merger date. When the term “IFMI” is used, it is referring to the parent company itself, Institutional Financial Markets, Inc. Subsequent to the Merger, Cohen Brothers changed its name to IFMI, LLC and functions as the main operating majority-owned subsidiary of the Company, and in these statements it is referred to as the “Operating LLC.”

Effective January 1, 2010, the Company ceased to qualify as a REIT. The Company now trades on the NYSE Amex LLC under the ticker symbol “IFMI.” The Company, through its subsidiaries, is an investment firm specializing in credit related fixed income investments. As of June 30, 2011, the Company had $9.3 billion in assets under management (“AUM”).

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

Capital Markets: The Company’s Capital Markets segment consists of credit-related fixed income securities sales, trading, and financing as well as new issue placements in corporate and securitized products and advisory services revenue. The Company’s fixed income sales and trading group provides trade execution to corporate and institutional investors. The Company specializes in the following products: corporate bonds and loans, asset backed securities (“ABS”), mortgage backed securities (“MBS”), collateralized loan obligations (“CLOs”), collateralized debt obligations, collateralized bond obligations, commercial mortgage backed securities (“CMBS”), residential mortgage backed securities (“RMBS”), Small Business Administration (“SBA”) loans, U.S. government bonds, U.S. government agency securities, brokered deposits and CDs for small banks, hybrid capital of financial institutions including trust preferred securities (“TruPS”), whole loans, and other structured financial instruments. The Company also offers execution and brokerage services for cash equity and derivative products. The Company carries out its capital market activities primarily through its subsidiaries: JVB Financial Holdings, L.L.C., a Florida limited liability Company (“JVB”), PrinceRidge Holdings LP (“PrinceRidge”), and EuroDekania Management, LTD.

Asset Management: The Company serves the needs of client investors by managing assets within investment funds, managed accounts, permanent capital vehicles, and collateralized debt obligations (collectively referred to as “Investment Vehicles”). A collateralized debt obligation 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. The lender will have recourse only to the assets securing the loan. The Company’s Asset Management segment includes its fee based asset management operations which include ongoing base and incentive management fees.

Principal Investing: The Company’s Principal Investing segment is comprised primarily of its investments in certain Investment Vehicles it manages.

The Company generates its revenue by 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 the issuance of newly created debt, equity and hybrid financial instruments;

Asset Management:

•

asset management fees for the Company’s on-going services as asset manager charged and earned by managing Investment Vehicles, which may include fees both senior and subordinated to the securities in the Investment Vehicle;

•

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

Principal Investing:

•

gains and losses (unrealized and realized) and income and expense earned on securities (primarily seed capital investments in certain Investment Vehicles the Company manages) 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 periods. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six months ended June 30, 2011 and 2010 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, 2010.

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, 2010.

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

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Adoption of New Accounting Standards

Goodwill Impairment Testing

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”), which is intended to address entities with reporting units with zero or negative carrying amounts. The provisions of this ASU amend the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. ASU 2010-28 requires entities to consider whether there are any adverse qualitative factors indicating that an impairment may exist. ASU 2010-28 is effective for fiscal years and interim periods within those years beginning after December 15, 2010. Early adoption is permitted. The Company’s adoption of the new guidance on performing Step 2 of the goodwill impairment test as of January 1, 2011 did not have an effect on the Company’s consolidated financial statements.

Disclosure of Supplementary Pro Forma Information for Business Combinations

In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”), which is intended to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendment affects any public entity as defined by FASB Accounting Standards Codification (“ASC”) 805, Business Combinations (“FASB ASC 805”) that enters into business combinations that are material on an individual or aggregate basis. The comparative financial statements should present and disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual period beginning on or after December 15, 2010. Early adoption is permitted. The Company’s adoption of the new guidance as of January 1, 2011 did not have an impact to its financial statements as it pertains only to supplemental pro forma disclosures.

B. Recent Accounting Developments

In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements (“ASU 2011-03”), which revises the criteria for assessing effective control for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The determination of whether the transfer of a financial asset subject to a repurchase agreement is a sale is based, in part, on whether the entity maintains effective control over the financial asset. ASU 2011-03 removes from the assessment of effective control: the criterion requiring the transferor to have the ability to repurchase or redeem the financial asset on substantially the agreed terms, even in the event of default by the transferee, and the related requirement to demonstrate that the transferor possesses adequate control to fund substantially all the cost of purchasing replacement financial assets. The amendments in ASU 2011-03 will be effective for interim and annual reporting periods beginning on or after December 15, 2011, early adoption is prohibited, and the amendments will be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The Company will adopt the provisions of ASU 2011-03 effective January 1, 2012, and is currently evaluating the effect of the adoption on the Company’s consolidated financial position and results of operations.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements. The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. The amendments result in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. The guidance provided in ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company will adopt the provisions of ASU 2011-04 effective January 1,

2012, and is currently evaluating the effect of the adoption on the Company’s consolidated financial position and results of operations.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income, (“ASU 2011-05”) which requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The standard does not change the items that must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011. Since ASU 2011-05 impacts presentation only, it will have no effect on the Company’s financial condition, results of operations or cash flows.

C. Fair Value of Financial Instruments

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

Cash and cash equivalents: Both restricted and unrestricted cash are carried at historical cost which is assumed to approximate fair value.

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, or valuation models when quotations are not available.

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

Receivables under resale agreements: Receivables under resale agreements are carried at their contracted resale price, have short-term maturities (one year or less), and are repriced frequently or bear market interest rates and, accordingly, these contracts are at amounts that approximate fair value.

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, or valuation models when quotations are not available.

Securities sold under agreement to repurchase: The liability for securities sold under agreement to repurchase are carried at their contracted repurchase price, and are very short-term in nature, and are repriced frequently with amounts normally due in one month or less and, accordingly, these contracts are at amounts that approximate fair value.

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, 2011 and December 31, 2010, the fair value of the Company’s debt was estimated to be $44.5 million and $43.1 million, respectively.

Derivatives: These amounts are carried at fair value. Derivatives are included as a component of investments-trading and other investments, at fair value. See notes 8 and 9. The fair value is based on quoted market prices on an exchange that is deemed to be active.

4. ACQUISITIONS

PrinceRidge

On May 31, 2011, the Operating LLC, PrinceRidge Partners, LLC, a Delaware limited liability company (“PrinceRidge GP”), and PrinceRidge (together with PrinceRidge GP, the “PrinceRidge Entities”), completed the transactions contemplated by the Contribution Agreement (the “Contribution Agreement”), dated April 19, 2011, by and among the Operating LLC and the PrinceRidge Entities. The Operating LLC contributed $45,000 which was comprised of cash, amounts payable , and all of the equity ownership interests in Cohen & Company Capital Markets, LLC (“CCCM”), a broker dealer comprising a substantial part of the Operating LLC’s capital markets segment, to PrinceRidge in exchange for a 69.9% interest (consisting of equity and profit interests) in each of the PrinceRidge Entities.

Although the transaction is subject to final Financial Industry Regulatory Authority (“FINRA”) approval, FINRA does allow for the change in ownership to occur in advance of final approval so long as it does not object within 30 days after the initial regulatory filing. FINRA did not object, so the transaction was closed effective May 31, 2011.

However, notwithstanding this rule, the transactions contemplated by the Contribution Agreement remain subject to final approval of FINRA. Each of CCCM and The PrinceRidge Group LLC (“ The PrinceRidge Group”), a broker-dealer wholly owned by PrinceRidge, have filed continuing membership applications with FINRA in connection with the change in ownership that was effectuated at both broker-dealers as a result of the consummation of the transaction. Through the date of this filing, neither CCCM nor the PrinceRidge Group has received notice from FINRA objecting to the transactions contemplated by the Contribution Agreement.

The final closing of the transactions contemplated by the Contribution Agreement will occur following receipt of the final FINRA approval. From an accounting perspective, the acquisition was recorded effective May 31, 2011. If FINRA ultimately does not approve the transaction, the parties have agreed to unwind the transaction pursuant to separate termination agreement. If this were to occur, the impact of the termination agreement will be recorded as a sale and a gain or loss may be recognized at that time.

Upon the closing of the transactions, the limited liability company agreement of PrinceRidge GP and the limited partnership agreement of PrinceRidge were amended and restated and IFMI, LLC was admitted as a member of PrinceRidge GP and a limited partner in PrinceRidge. The management of PrinceRidge is vested exclusively in PrinceRidge GP. Except as otherwise provided by the limited liability company agreement of PrinceRidge GP or law, the business and affairs of PrinceRidge GP will be managed under the direction of the Board of Managers of PrinceRidge GP. Following the closing of the transactions contemplated by the Contribution Agreement, PrinceRidge GP’s Board of Managers is comprised of five members: three IFMI, LLC appointees currently, Daniel G. Cohen, Walter Beach and Lance Ullom, all of whom are currently serving on the Company’s Board of Directors and two appointees by the individuals that were members of PrinceRidge GP prior to the transaction, currently John Costas and Michael Hutchins.

The above transaction was accounted for under the acquisition method in accordance with U.S. GAAP. Accordingly, the transaction was accounted for as an acquisition by the Operating LLC of the PrinceRidge Entities. The effective date of the acquisition transaction with the PrinceRidge Entities for accounting purposes was May 31, 2011. The results of operations of the PrinceRidge Entities are included in the Company’s statements of operations beginning June 1, 2011.

The PrinceRidge Entities contributed $1,429 of revenue and $536 of net loss to the Company for the six and three months ended June 30, 2011 (excluding the results of CCCM, which effective May 31, 2011 was a wholly-owned subsidiary of PrinceRidge Holdings). The following unaudited pro forma summary presents consolidated information of the Company as if the acquisition had occurred on January 1, 2009:


	Pro forma Year ended December 31,
	2010		2009
Revenue	$	150,294	$	92,963
Earnings (loss) attributable to IFMI	$	5,097	$	(13,501	)

The following table summarizes the amounts of identified assets acquired and liabilities assumed at the acquisition date of May 31, 2011.


	Total Estimated Fair Value as of Acquisition Date
Assets acquired:
Cash and cash equivalents	$	2,149
Receivables from brokers, dealers, and clearing agencies		9,382
Other receivables		1,815
Investments-trading		42,407
Receivables under resale agreements		158,688
Other assets		4,730
Liabilities assumed:


	Total Estimated Fair Value as of Acquisition Date
Accrued compensation		(1,725	)
Accounts payable and other liabilities		(2,500	)
Trading securities sold, not yet purchased		(38,605	)
Securities sold under agreement to repurchase		(158,620	)

Fair value of existing PrinceRidge net assets		17,721
Purchase Price (1)	$	18,879

Excess of Purchase price over net fair value		1,158
Less amount allocated to intangible asset (2)		(166	)

Goodwill (3)	$	992

(1)	The purchase price represents the fair value of the redeemable non-controlling interest retained by the members of PrinceRidge other than the Operating LLC. This was determined as follows:


Fair value of existing PrinceRidge net assets:	$	17,721
Contribution to PrinceRidge by the Operating LLC:	$	45,000

Total net fair value of PrinceRidge:	$	62,721
Portion of PrinceRidge not owned by Operating LLC:		30.1	%

Fair value of redeemable non-controlling interest retained by Principals	$	18,879

See note 16 for a description of the redeemable non-controlling interest.

(2)	The intangible asset of $166 represents the estimated value of the broker-dealer license which was allocated to the Capital Markets operating segment.

(3)	Goodwill recognized as of the acquisition date was allocated to the Capital Markets operating segment.

The allocation of the purchase price to the consolidated assets and liabilities of the PrinceRidge Entities results in goodwill of $992. The goodwill is not deductible for tax purposes. The goodwill was allocated to the Capital Markets operating segment.

Acquisition of JVB Financial Holdings, L.L.C.

On September 14, 2010, the Company entered into a Purchase and Contribution Agreement (the “Purchase Agreement”) with JVB the sellers listed in the Purchase Agreement (the “Sellers”) and certain employees of JVB (the “Management Employees”) pursuant to which the Sellers agreed to sell all of the equity interests in JVB to the Operating LLC and JVB would become a wholly owned subsidiary of the Operating LLC. On January 13, 2011, the Company and the Operating LLC completed its acquisition of JVB. As contemplated by the Purchase Agreement, the Sellers sold all of the outstanding equity interests in JVB to the Operating LLC and JVB is now a wholly owned subsidiary of the Operating LLC.

The purchase price consisted of $5,646 in cash, 313,051 shares of IFMI common stock and 559,020 restricted membership units in the Operating LLC plus a cash amount equal to JVB’s tangible net worth. In addition, the Company agreed to pay $2,482 to certain of the Sellers who will remain employees (“Management Employees”) in three equal installments, one on each of the first three anniversaries of the closing date of the acquisition, contingent upon each individual’s continued employment at each payment date. Upon the closing of the acquisition, an escrow of $484 was established for the payment of any adjustments to the purchase price based on the final tangible net worth of JVB as of the closing of the transaction and particular indemnities, and $384 was withheld for payment to the Sellers only if a specific revenue target is achieved at the end of the first year of operation following the closing of the transaction. All of the restricted membership units in the Operating LLC were delivered to Management Employees and will vest in three equal installments on each of the first three anniversaries of the closing date, subject to the terms and conditions contained in each employee’s employment agreement. Once vested, the holder of the restricted membership units in the Operating LLC may require that the Operating LLC redeem such restricted membership units for cash or, at the Company’s option, shares of the common stock of the Company.

The above transaction was accounted under the acquisition method in accordance with U.S. GAAP. Accordingly, the transaction was accounted for as an acquisition by the Operating LLC of JVB. The effective date of the merger transaction with JVB for accounting purposes was January 1, 2011. JVB’s results of operations are included in the Company’s statements of operations beginning January 1, 2011.

JVB contributed $8,863 of revenue and $160 of net loss to the Company for the six months ended June 30, 2011 and $3,974 of revenue and $377 of net loss to the Company for three months ended June 30, 2011. The following unaudited pro forma summary presents consolidated information of the Company as if the acquisition had occurred on January 1, 2009


	Pro forma Year ended December 31,
	2010		2009
Revenue	$	150,361	$	110,589
Earnings (loss) attributable to IFMI	$	7,727	$	(8,330	)

The following table summarizes the calculation of the fair value of consideration transferred by the Company to acquire JVB:


Equity consideration:
Shares of IFMI issued (1)		313,051
Multiplied by (2)	$	4.89

Value of stock consideration	$	1,531	$	1,531
Cash consideration (3)				14,956
Contingent payments due (4)				326

Total purchase price			$	16,813

(1)	Excludes 559,020 units of the Operating LLC issued to certain JVB Sellers that will remain employees of JVB. These units vest over a 3 year period and will be treated as compensation for future service and not part of the purchase price.

(2)	Represents the closing price of IFMI shares on January 13, 2011.

(3)

When closing the transaction, payment was made based on an estimate of JVB’s tangible net worth. However, a mechanism exists in the contract whereby the Company owes additional funds or can recapture funds to the extent JVB’s tangible net worth differed from the amount estimated. The amount of cash consideration represents actual cash

paid at closing of $15,044 less $88 receivable from escrowed proceeds for the tangible net worth adjustment. Also, cash consideration excludes $2,482 to be paid over time to certain JVB Sellers that will remain employees of JVB. The amount is contingent upon the individuals remaining employees. It is earned ratably over a three-year period. If the employee terminates employment during the three year period, any unearned portion is refundable to the Company. It will be treated as compensation for future services and not part of the purchase price.

(4)

Represents contingent payments due to JVB Sellers based on performance targets. A specific business unit of JVB is required to earn a minimum amount of revenue within 12 months of the business combination in order for this amount to be due to the owners of JVB. If that threshold is met, the owners of JVB will receive an additional payment of $384 which the Company will treat as contingent consideration. Accordingly, the Company should determine the fair value of this arrangement and record a liability equal to the fair value as of the date of the business combination. The Company has determined that the fair value of this obligation is $326. The Company will carry this liability at fair value and any future adjustments in fair value will be recognized in earnings.

The following table summarizes the amounts of identified assets acquired and liabilities assumed at the acquisition date as of January 1, 2011.


	Total Estimated Fair Value as of Acquisition Date
Assets acquired:
Cash and cash equivalents	$	91
Restricted cash		100
Investments-trading		31,935
Other assets (1)		1,107
Liabilities assumed:
Payables to brokers, dealers, and clearing agencies		(17,655	)
Accounts payable and other liabilities		(1,221	)
Trading securities sold, not yet purchased		(4,497	)

Fair value of net assets acquired		9,860
Purchase price for net assets acquired	$	16,813

Goodwill (2)	$	6,953

(1)	Other assets are comprised of a purchase accounting adjustment for $166 which represents the estimated value of the broker-dealer license. The intangible asset of $166 related to the broker-dealer license was allocated to the Capital Markets operating segment.

(2)	Goodwill recognized as of the acquisition date was allocated to the Capital Markets operating segment.

The allocation of the purchase price to the consolidated assets and liabilities of JVB resulted in goodwill of $6,953 (which is the difference between the fair value of JVB’s net assets and the purchase price paid by the Company). The goodwill is not deductible for tax purposes. The goodwill was allocated to the Capital Markets operating segment.

In accordance with ASC 805, Business Combinations, the Company has one year from the closing of the transaction, referred to as the measurement period, to finalize the accounting for the business combinations referred to above. During the measurement period, the Company may retrospectively adjust provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date, if known, would have affected the measurement of the amounts recognized as of that date. Any measurement period adjustments would be reflected as an adjustment to the asset or liability with an offsetting entry to goodwill.

5. SALE OF STRATEGOS DEEP VALUE FUNDS ASSET MANAGEMENT RIGHTS AND OTHER ASSET MANAGEMENT RIGHTS

On March 29, 2011, the Company sold its investment advisory agreements relating to advisory services to a series of closed-end, distressed debt funds, known as the Strategos Deep Value funds and certain separately managed accounts to a new entity owned by two former Company employees, known as Strategos Capital Management, LLC (the “Buyer”). The Buyer has received or will receive certain services, intellectual property, books and records, software, data and rights to the “Strategos” name. The Strategos portfolio management team joined the new entity. The Company changed the name of its wholly owned subsidiary that previously served as the investment advisor from Strategos Capital Management, LLC to Cira SCM, LLC (“Cira SCM”).

The Company retained its ownership in the general partners of the existing Strategos Deep Value funds and its rights to incentive fees from the existing Strategos Deep Value funds.

Pursuant to the terms of the purchase agreement, the Buyer will pay a purchase price equal to 10% of all revenue, net of certain expenses, earned by the Buyer between March 29, 2011 and December 31, 2014 and will assume substantially all of the expenses of managing the Deep Value funds and the separately managed accounts. In addition, in the first quarter of 2015, the Company will have a one-time option to purchase a right to receive 10% of all revenue earned and collected thereafter related to the Buyer’s fixed income and fixed income related financial services businesses for a purchase price in an amount equal to 20% of revenue earned and collected by the Buyer for the period commencing on January 1, 2014, and ending on December 31, 2014.

In the event the Company exercises its option, the Buyer has the option at December 31, 2015, and each subsequent calendar quarter thereafter to re-purchase the 10% share for a purchase price in an amount equal to 30% of revenue earned and collected by Buyer for the four most recently completed quarters. In connection with the transaction, the Company has entered into an agreement to employ the Buyer to render advice and assistance to the Company with respect to certain securitization vehicles it continues to manage. The assets under management with respect to these certain collateralized debt obligations were $3.5 billion as of June 30, 2011. As compensation, Buyer will receive 10% of all asset management fees received by the Company related to the Company’s ongoing management of the collateralized debt obligations.

See note 11.

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

The Company held restricted cash of $1,856 and $4,507 as of June 30, 2011 and December 31, 2010, respectively. Of the $1,856 of restricted cash held at June 30, 2011, the Company had $184 of restricted cash on deposit related to outstanding foreign currency forward contracts, $500 of restricted cash held with counterparties of repurchase agreement transactions, and $1,172 of restricted cash on deposit with clearing brokers. Of the $4,507 of restricted cash held at December 31, 2010, the Company had $1,266 of restricted cash on deposit related to outstanding foreign currency forward contracts and EuroDollar futures contracts, $2,448 of restricted cash held with counterparties of repurchase agreement transactions, and $793 of restricted cash on deposit with clearing brokers.

There were no amounts receivable from brokers, dealers and clearing agencies as of June 30, 2011 and December 31, 2010.

PAYABLES TO BROKERS, DEALERS, AND CLEARING AGENCIES

(Dollars in Thousands)


	June 30, 2011		December 31, 2010
Unsettled regular way trades, net	$	35,763	$	14,927
Margin payable		2,687		30,542

Payables to brokers, dealers, and clearing agencies	$	38,450	$	45,469

Securities transactions are recorded on a 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. The Company incurred interest on margin payable of $983 and $112 for the six months ended June 30, 2011 and 2010, respectively, and $358 and $18 for the three months ended June 30, 2011 and 2010, respectively.

7. FINANCIAL INSTRUMENTS

Investments — Trading

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

INVESTMENTS — TRADING

(Dollars in Thousands)


	June 30, 2011
Security Type	Cost		Carrying Value			Unrealized Gain / (Loss)
U.S. government agency mortgage-backed securities and collateralized mortgage obligations (1)	$	56,816	$	58,776		$	1,960
Residential mortgage-backed securities		12,666		12,797			131
Commercial mortgage-backed securities		4,425		4,528			103
U.S. Treasury securities		10,209		10,182			(27	)
Interests in securitizations (2)		6,916		7,400			484
Small Business Administration (“SBA”) loans		7,963		8,116			153
Corporate bonds and redeemable preferred stock		49,055		48,975			(80	)
Municipal bonds		10,555		10,574			19
Certificates of deposit		5,401		5,419			18
Equity securities		70		98			28

Investments-trading	$	164,076	$	166,865		$	2,789


	December 31, 2010
Security Type	Cost		Carrying Value			Unrealized Gain / (Loss)
U.S. government agency mortgage-backed securities and collateralized mortgage obligations (1)	$	111,587	$	110,665		$	(922	)
Residential mortgage-backed securities		1,238		1,237			(1	)
Commercial mortgage-backed securities		4,300		4,279			(21	)
U.S. Treasury securities		2,116		1,888			(228	)
Interests in securitizations (2)		3,236		4,500			1,264
Small Business Administration (“SBA”) loans		33,270		33,212			(58	)
Corporate bonds and redeemable preferred stock		17,234		16,837			(397	)
Certificates of deposit		15,159		15,239			80
Equity securities		1,270		1,192			(78	)
Eurodollar futures		—		(34	)		(34	)

Investments-trading	$	189,410	$	189,015		$	(395	)

(1)	Includes “to-be-announced” securities (“TBAs”). See note 9.

(2)	Primarily comprised of collateralized debt obligations and collateralized loan obligations.

Trading Securities Sold, Not Yet Purchased

The following table shows the cost and carrying value of all trading securities sold, not yet purchased as of the periods indicated:

TRADING SECURITIES SOLD, NOT YET PURCHASED

(Dollars in Thousands)


	June 30, 2011
Security Type	Cost		Carrying Value		Unrealized Gain / (Loss)
U.S. government agency mortgage-backed securities (1)	$	278	$	282	$	(4	)
U.S. Treasury securities		20,900		20,936		(36	)
Corporate bonds		30,984		30,938		46
Municipal bonds		101		110		(9	)
Certificates of deposit		25		25		—

Total	$	52,288	$	52,291	$	(3	)


	December 31, 2010
Security Type	Cost		Carrying Value		Unrealized Gain / (Loss)
U.S. government agency mortgage-backed securities (1)	$	—	$	374	$	(374	)
U.S. Treasury securities		17,360		17,130		230
Corporate bonds		212		213		(1	)
Certificates of deposit		98		96		2
Equity securities		6		7		(1	)

Total	$	17,676	$	17,820	$	(144	)

(1)	Represents TBAs. See note 9.

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 recognized $1,248 and $6,691 of net trading gains for the six months ended June 30, 2011 and 2010, respectively, that relate to investments-trading and trading securities sold, not yet purchased still held at June 30, 2011 and 2010, respectively.

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, 2011
Security Type	Cost		Carrying Value			Unrealized Gain /(Loss)
Interests in securitizations (1)	$	217	$	105		$	(112	)
Equity Securities:
EuroDekania		7,792		3,410			(4,382	)
Star Asia		23,094		35,761			12,666
Tiptree Financial Partners, L.P.(2)		5,561		2,551			(3,010	)
Other securities		319		317			(2	)

Total equity securities		36,766		42,039			5,273

Residential loans		304		276			(28	)
Foreign currency forward contracts		—		141			141

Other investments, at fair value	$	37,287	$	42,561		$	5,274


	December 31, 2010
Security Type	Cost		Carrying Value			Unrealized Gain / (Loss)
Interests in securitizations (1)	$	217	$	105		$	(112	)
Equity Securities:
EuroDekania		7,259		1,258			(6,001	)
Star Asia		23,344		38,025			14,681
MFCA (2)		5,561		2,480			(3,081	)
Deep Value (3)		—		28			28
Duart Fund		4,500		4,277			(223	)
Other securities		342		567			225

Total equity securities		41,006		46,635			5,629

Residential loans		336		303			(33	)
Foreign currency forward contracts		—		(492	)		(492	)

Other investments, at fair value	$	41,559	$	46,551		$	4,992

(1)	Represents an interest in a collateralized debt obligation.

(2)

In June 2011, MFCA was merged into Tiptree Financial Partners, L.P. The Company exchanged 1,000,200 shares of MFCA for 111,133 shares of Tiptree Financial Partners, L.P. Tiptree Financial Partners, L.P., a Delaware limited partnership, is a diversified financial services holding company organized in 2007 that primarily focuses on the acquisition of majority control equity interests in financial services businesses. It is externally managed by Tricadia Capital, a New York based U.S. Securities and Exchange Commission registered investment advisor. The value of the Tiptree shares received equaled the value of the MFCA shares tendered. Accordingly, there was no gain or loss recorded on this transaction. The Company did not consider this exchange a realization event and carried over its cost basis in its investment in MFCA to its cost basis in its investment in Tiptree Financial Partners.

(3)

The Company originally invested $14,506 in Deep Value. The remaining investment represented accumulated unrealized appreciation on this investment. The investment in Deep Value was, at all times during 2009, 2010 and the six months ended June 30, 2011, carried at its estimated fair value. However, for the purposes of the table above and determining the cost basis, the Company treated the redemptions during the year ended December 31, 2010 as first representing a return of investment and second representing a redemption of net appreciation. As of June 30, 2011, Deep Value completed its liquidation.

8. FAIR VALUE DISCLOSURES

Fair Value Option

The Company has elected to account for certain of its other financial assets at fair value under the fair value option provisions of FASB ASC 825, Financial Instruments (“FASB ASC 825”). The primary reasons for electing the fair value option when it first became available in 2008, were 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);

•

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 losses of $(768) and net gains of $16,825 related to changes in fair value of investments for which it had elected the fair value option during the six months ended June 30, 2011 and 2010, respectively. The Company recognized net gains of $1,544 and $6,026 related to changes in fair value of investments for which it had elected the fair value option during the three months ended June 30, 2011 and 2010, 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 1

Financial 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 2

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

Quoted prices for similar assets or liabilities in active markets;

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

Pricing models whose inputs are observable for substantially the full term of the asset or liability; or

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

Level 3

Financial assets and liabilities 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, 2011 and 2010. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the quarter in which reclassifications occur.

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, 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

(Dollars in Thousands)


	June 30, 2011 Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Investments-trading:
U.S. government agency mortgage-backed securities and collateralized mortgage obligations	$	58,776	$	—	$	50,157	$	8,619
Residential mortgage-backed securities		12,797		—		11,324		1,473
Commercial mortgage-backed securities		4,528		—		3,181		1,347
U.S. Treasury securities		10,182		10,182		—		—
Interests in securitizations (1)		7,400		—		109		7,291
SBA loans		8,116		—		8,116		—
Corporate bonds and redeemable preferred stock		48,975		—		48,975		—
Municipal bonds		10,574		—		10,574		—
Certificates of deposit		5,419		—		5,418		1
Equity securities		98		—		—		98

Total investments-trading	$	166,865	$	10,182	$	137,854	$	18,829


Other investments, at fair value:
Equity Securities:
Other Investment Vehicles
EuroDekania (2)		3,410		—		—		3,410
Star Asia (3)		35,761		—		—		35,761
Tiptree Financial Partners L.P. (4)		2,551		—		—		2,551

		41,722		—		—		41,722
Other		317		52		—		265

Total equity securities		42,039		52		—		41,987
Interests in securitizations (1)		105		—		—		105
Residential loans		276		—		—		276
Foreign currency forward contracts		141		141		—		—

Total other investments, at fair value	$	42,561	$	193	$	—	$	42,368

Liabilities:
Trading securities sold, not yet purchased:
U.S. government agency mortgage-backed securities	$	282	$	—	$	282	$	—
U.S. Treasury securities		20,936		20,936		—		—
Corporate bonds		30,938		—		30,938		—
Municipal bonds		110		—		110		—
Certificates of deposit		25		—		25		—

Total trading securities sold, not yet purchased	$	52,291	$	20,936	$	31,355	$	—

(1)	Primarily comprised of collateralized debt obligations and collateralized loan obligations.

(2)	Hybrid Securities Fund — European

(3)	Real Estate Fund — Asian

(4)	MFCA, a tax exempt fund was merged into Tiptree Financial Partners, L.P. in June 2011. Tiptree Financial Partners, L.P. is a diversified fund. See note 7.

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS

(Dollars in Thousands)


	December 31, 2010 Fair Value			Quoted Prices in Active Markets (Level 1)			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Investments-trading:
U.S. government agency mortgage-backed securities and collateralized mortgage obligations	$	110,665		$	—		$	41,780	$	68,885
Residential mortgage-backed securities		1,237			—			1,237		—
Commercial mortgage-backed securities		4,279			—			4,279		—
U.S. Treasury securities		1,888			1,888			—		—
Interests in securitizations (1)		4,500			—			—		4,500
SBA loans		33,212			—			33,212		—
Corporate bonds and redeemable preferred stock		16,837			—			16,837		—
Certificates of deposit		15,239			—			15,239		—
Equity securities		1,192			1,192			—		—
Eurodollar futures		(34	)		(34	)		—		—

Total investments-trading	$	189,015		$	3,046		$	112,584	$	73,385


Other investments, at fair value:
Equity Securities:
Other Investment Vehicles
EuroDekania (2)		1,258			—			—		1,258
Star Asia (3)		38,025			—			—		38,025
MFCA (4)		2,480			—			—		2,480

		41,763			—			—		41,763

Investment Funds
Deep Value (5)		28			—			—		28
Duart Fund (5)		4,277			—			4,277		—

		4,305			—			4,277		28
Other		567			67			—		500

Total equity securities		46,635			67			4,277		42,291
Interests in securitizations (1)		105			—			—		105
Residential loans		303			—			—		303
Foreign currency forward contracts		(492	)		(492	)		—		—

Total other investments, at fair value	$	46,551		$	(425	)	$	4,277	$	42,699

Liabilities:
Trading securities sold, not yet purchased:
U.S. government agency mortgage-backed securities	$	374		$	—		$	374	$	—
U.S. Treasury securities		17,130			17,130			—		—
Corporate bonds		213			—			213		—
Certificates of deposit		96			—			96		—
Equity securities		7			7			—		—

Total trading securities sold, not yet purchased	$	17,820		$	17,137		$	683	$	—

(1)	Primarily comprised of collateralized debt obligations and collateralized loan obligations.

(2)	Hybrid Securities Fund — European

(3)	Real Estate Fund — Asian

(4)	Tax Exempt Fund

(5)	Real Estate Funds

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.

U.S. Government Agency Mortgage-Backed Securities and Collateralized Mortgage Obligations: These are securities which 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. In instances where the securities are either new issuances or experience illiquidity, such as collateralized mortgage obligations, including agency inverse interest-only securities, principal only, and fixed interest only amongst others, the Company may use its own internal valuation models, which are based on an income approach. In some cases, the new issuances are senior in nature and fairly liquid, however due to the fact it is a new issuance, it is difficult to obtain third party pricing and the Company uses internal models to determine fair value. In these cases, the Company will classify such an issuance as Level 3 within the hierarchy until it is able to obtain third party pricing. Fair values based on internal valuation models prepared by the Company’s management are generally classified within Level 3 of the valuation hierarchy.

Residential Mortgage-Backed Securities and Commercial Mortgage-Backed Securities: 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. These quotes generally represent indicative levels at which a party may be willing to enter into a transaction. The Company generally classifies the fair value of these securities within Level 2 of the valuation hierarchy. In instances where the securities are new issuances or experience illiquidity, the Company may use its own internal valuation models, which are based on an income approach. Fair values based on internal valuation models prepared by the Company’s management are generally classified within Level 3 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.

Interests in Securitizations: 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, 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 interests in securitizations. The Company generally believes that to the extent (1) it receives two quotations in a similar range from broker-dealers knowledgeable about interests in securitizations, and (2) the Company 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, valuation models prepared by the Company’s management are used, which are based on an income approach. These models include estimates and the valuations derived from them could differ materially from amounts realizable in an open market exchange. Fair values based on internal valuation models prepared by the Company’s management are generally classified within Level 3 of the valuation hierarchy.

SBA Loans: 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. The Company generally classifies these investments within Level 2 of the valuation hierarchy. These valuations are based on a market approach

Corporate Bonds and Redeemable Preferred Stock: 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 and redeemable preferred stock. These valuations are based on a market approach. The Company generally classifies the fair value of these bonds within Level 2 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.

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 hierarchy. In some cases, the Company owns options or warrants in publicly traded companies when the option or warrant itself is not publicly traded. In those cases, the Company uses an internal valuation model and classifies the investment within Level 3 of 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 if its investment in the entity is currently redeemable or Level 3 if its investment is not currently redeemable. In the case of Star Asia, the Company utilizes a series of valuation models to determine fair value, which use both the market and income based approaches and generally classifies its investment within Level 3.

Residential Loans: Valuation models prepared by the Company’s management are used. These valuation models are based on the market approach. These models include estimates and the valuations derived from them could differ materially from amounts realizable in an open market exchange. Fair values based on internal valuation models prepared by the Company’s management are generally classified within Level 3 of the valuation hierarchy.

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 fair value hierarchy. However, in instances where the certificates of deposit are new issuances, or the payments of certificate of deposit are linked to an index, it may be difficult to obtain third party pricing and, in these cases, the Company uses internal models to determine fair value and the fair value is generally classified within Level 3 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. These are considered a Level 1 value in the hierarchy. See note 9.

EuroDollar Futures

EuroDollar futures are exchange-traded derivatives which transact on an exchange that is deemed to be active. The fair value of the EuroDollar futures contracts is based on current quoted market prices. These are considered a Level 1 value in the hierarchy. See note 9.

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 value models, TBAs are classified in Level 3 of the fair value hierarchy. U.S. government agency mortgage-backed securities and collateralized mortgage obligations 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 9.

Trading Securities Sold, Not Yet Purchased: The securities are valued using quoted active market prices of the securities sold and are generally categorized within Level 1 or 2 of the valuation hierarchy depending on the type of investment sold. For a discussion of the valuation methodology used for U.S. government agency mortgage-backed securities, refer to “U.S. Government Agency Mortgage-Backed Securities and Collateralized Mortgage Obligations.” For a discussion of the valuation methodology used for U.S. Treasury securities, refer to “U.S. Treasury Securities.” For a discussion of the valuation methodology for corporate bonds, refer to “Corporate Bonds and Redeemable Preferred Stock.” For a discussion of the valuation methodology for municipal bonds, refer to “Municipal Bonds.” For a discussion of the valuation methodology for certificates of deposit, refer to “Certificates of Deposit.” For a discussion of the valuation methodology for equity securities, refer to “Equity Securities.” For a discussion of the valuation methodology for TBAs, refer to “Derivatives-TBAs.”

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 for the six and three months ended June 30, 2011 and 2010.

LEVEL 3 INPUTS

Six Months Ended June 30, 2011

(Dollars in Thousands)


	January 1, 2011		Net realized/unrealized gains / (losses) included in income					Transfers in and/or (out), net of Level 3				Sales (1)			June 30, 2011		Unrealized gains/(losses) still held at the end of the period (2)
	January 1, 2011		Net trading		Principal transactions and other income / (loss)			Transfers in and/or (out), net of Level 3		Purchases		Sales (1)			June 30, 2011
Assets:
Investments-trading:
U.S. government agency mortgage-backed securities and collateralized mortgage obligations	$	68,885	$	452	$	—		$	4,332	$	20,599	$	(85,649	)	$	8,619	$	602
Residential mortgage-backed securities		—		—		—			—		1,473		—			1,473		—
Commercial mortgage-backed securities		—		114		—			—		1,233		—			1,347		114
Interests in securitizations (3)		4,500		6,238		—			—		8,101		(11,548	)		7,291		340
Certificates of deposit		—		3		—			—		761		(763	)		1		2
Equity securities		—		30		—			—		70		(2	)		98		30

Total investments-trading	$	73,385	$	6,837	$	—		$	4,332	$	32,237	$	(97,962	)	$	18,829	$	1,088

Other investments, at fair value:
Equity Securities:
Other Investment Vehicles
EuroDekania (4)	$	1,258	$	—	$	1,619		$	—	$	533	$	—		$	3,410	$	1,619
Star Asia (5)		38,025		—		(2,014	)		—		226		(476	)		35,761		(2,014	)
Tiptree Financial Partners, L.P. (6)		2,480		—		71			—		—		—			2,551		71

		41,763		—		(324	)		—		759		(476	)		41,722		(324	)

Investment Funds
Deep Value (7)		28		—		(9	)		—		—		(19	)		—		—

		28		—		(9	)		—		—		(19	)		—		—

Other		500		—		(212	)		—		36		(59	)		265		(212	)

Total equity securities		42,291		—		(545	)		—		795		(554	)		41,987		(536	)
Interests in securitizations (3)		105		—		—			—		—		—			105		—
Residential loans		303		—		5			—		—		(32	)		276		5

Total other investments, at fair value	$	42,699	$	—	$	(540	)	$	—	$	795	$	(586	)	$	42,368	$	(531	)

(1)	Includes return of principal/capital of interests in securitizations and investment funds. The sale of $476 attributable to Star Asia represents the transfer of 54,452 shares of Star Asia to an employee for services rendered during 2010. See note 23.

(2)	Represents the amount of total gains or losses for the period, included in earnings, relating to assets classified as Level 3 that were still held at the end of the period.

(3)	Primarily comprised of collateralized debt obligations and collateralized loan obligations.

(4)	Hybrid Securities Funds — European

(5)	Real Estate Funds — Asian

(6)	MFCA, a tax exempt fund, was merged into Tiptree Financial Partners, L.P. in June 2011. Tiptree Financial Partners, L.P. is a diversified fund. See note 7.

(7)	Real Estate Funds

LEVEL 3 INPUTS

Six Months Ended June 30, 2010

(Dollars in Thousands)


	January 1, 2010		Net realized/unrealized gains / (losses) included in income						Transfers in and/or (out), net of Level 3		Purchases and (Sales), net (1)			June 30, 2010		Unrealized gains/(losses) still held at the end of the period (2)
	January 1, 2010		Net trading			Principal transactions and other income / (loss)			Transfers in and/or (out), net of Level 3		Purchases and (Sales), net (1)			June 30, 2010
Assets:
Investments-trading:
U.S. government agency mortgage-backed securities and collateralized mortgage obligations	$	—	$	(68	)	$	—		$	7,281	$	(156	)	$	7,057	$	(68	)
Interests in securitizations (3)		9,110		7,130			—			—		(396	)		15,844		7,650
TruPS (4)		3,380		5,322			—			—		(8,702	)		—		—

Total investments-trading	$	12,490	$	12,384		$	—		$	7,281	$	(9,254	)	$	22,901	$	7,582

Other investments, at fair value:
Equity Securities:
Other Investment Vehicles
EuroDekania (5)	$	451	$	—		$	23		$	—	$	—		$	474	$	23
Star Asia (6)		14,058		—			13,748			—		3,225			31,031		13,748
MFCA (7)		2,380		—			70			—		—			2,450		70

		16,889		—			13,841			—		3,225			33,955		13,841

Investment Funds
Brigadier (8)		—		—			(81	)		4,216		(3,721	)		414		(3,802	)
Deep Value (9)		19,236		—			2,377			—		(4,275	)		17,338		2,377

		19,236		—			2,296			4,216		(7,996	)		17,752		(1,425	)

Other		98		—			(39	)		—		—			59		(39	)

Total equity securities		36,223		—			16,098			4,216		(4,771	)		51,766		12,377
Interests in securitizations (3)		2,380		—			3,266			—		(5,277	)		369		199
Residential loans		260		—			44			—		(41	)		263		44

Total other investments, at fair value	$	38,863	$	—		$	19,408		$	4,216	$	(10,089	)	$	52,398	$	12,620

(1)	Includes return of principal/capital of interests in securitizations and investment funds.

(2)	Represents the amount of total gains or losses for the period, included in earnings, relating to assets classified as Level 3 that were still held at the end of the period.

(3)	Primarily comprised of collateralized debt obligations and collateralized loan obligations.

(4)

The fair value of investments in TruPS was estimated using valuation models prepared by the Company’s management and was classified as Level 3 of the valuation hierarchy. These valuation models were based on an income approach. These investment securities generally did not trade in an active market and, therefore, observable price quotations were not available. Fair value was determined based on discounted cash flow models using current interest rates, estimates of the term of the particular contract, specific issuer information, including estimates of comparable market credit spreads and other market data.

(5)	Hybrid Securities Funds — European

(6)	Real Estate Funds — Asian

(7)	Tax Exempt Funds

(8)	Multi-Strategy Credit Funds

(9)	Real Estate Funds

LEVEL 3 INPUTS

Three Months Ended June 30, 2011

(Dollars in Thousands)


	March 31, 2011		Net realized/unrealized gains / (losses) included in income						Transfers in and/or (out), net of Level 3				Sales (1)			June 30, 2011		Unrealized gains/(losses) still held at the end of the period (2)
	March 31, 2011		Net trading			Principal transactions and other income / (loss)			Transfers in and/or (out), net of Level 3		Purchases		Sales (1)			June 30, 2011
Assets:

Investments-trading:
U.S. government agency mortgage-backed securities and collateralized mortgage obligations	$	12,206	$	1,024		$	—		$	—	$	7,283	$	(11,894	)	$	8,619	$	706
Residential mortgage-backed securities		—		—			—			—		1,473		—			1,473		—
Commercial mortgage-backed securities		—		114			—			—		1,233		—			1,347		114
Interests in securitizations (3)		1,857		1,000			—			—		7,016		(2,582	)		7,291		44
Certificates of deposit		393		—			—			—		—		(392	)		1		—
Equity securities		74		(46	)		—			—		70		—			98		(46	)

Total investments-trading	$	14,530	$	2,092		$	—		$	—	$	17,075	$	(14,868	)	$	18,829	$	818

Other investments, at fair value:
Equity Securities:
Other Investment Vehicles
EuroDekania (4)	$	2,033	$	—		$	844		$	—	$	533	$	—		$	3,410	$	844
Star Asia (5)		35,094		—			667			—		—		—			35,761		667
Tiptree Financial Partners, L.P.(6)		2,511		—			40			—		—		—			2,551		40

		39,638		—			1,551			—		533		—			41,722		1,551

Investment Funds
Deep Value (7)		28		—			(9	)		—		—		(19	)		—		—

		28		—			(9	)		—		—		(19	)		—		—

Other		553		—			(265	)		—		36		(59	)		265		(265	)

Total equity securities		40,219		—			1,277			—		569		(78	)		41,987		1,286
Interests in securitizations (3)		105		—			—			—		—		—			105		—
Residential loans		287		—			3			—		—		(14	)		276		3

Total other investments, at fair value	$	40,611	$	—		$	1,280		$	—	$	569	$	(92	)	$	42,368	$	1,289

(1)	Includes return of principal/capital of interests in securitizations and investment funds.

(2)	Represents the amount of total gains or losses for the period, included in earnings, relating to assets classified as Level 3 that were still held at the end of the period.

(3)	Primarily comprised of collateralized debt obligations and collateralized loan obligations.

(4)	Hybrid Securities Funds — European

(5)	Real Estate Funds — Asian

(6)	MFCA, a tax exempt fund, was merged into Tiptree Financial Partners, L.P. in June 2011. Tiptree Financial Partners, L.P. is a diversified fund. See note 7.

(7)	Real Estate Funds

LEVEL 3 INPUTS

Three Months Ended June 30, 2010

(Dollars in Thousands)


	March 31, 2010		Net realized/unrealized gains / (losses) included in income						Transfers in and/or (out), net of Level 3		Purchases and (Sales), net (1)			June 30, 2010		Unrealized gains/(losses) still held at the end of the period (2)
	March 31, 2010		Net trading			Principal transactions and other income / (loss)			Transfers in and/or (out), net of Level 3		Purchases and (Sales), net (1)			June 30, 2010
Assets:
Investments-trading:
U.S. government agency mortgage-backed securities and collateralized mortgage obligations	$	—	$	(68	)	$	—		$	7,281	$	(156	)	$	7,057	$	(68	)
Interests in securitizations (3)		17,056		2,683			—			—		(3,895	)		15,844		2,009
TruPS (4)		4,372		2,638			—			—		(7,010	)		—		—

Total investments-trading	$	21,428	$	5,253		$	—		$	7,281	$	(11,061	)	$	22,901	$	1,941

Other investments, at fair value:
Equity Securities:
Other Investment Vehicles
EuroDekania (5)	$	452	$	—		$	22		$	—	$	—		$	474	$	22
Star Asia (6)		24,347		—			4,793			—		1,891			31,031		4,793
MFCA (7)		2,380		—			70			—		—			2,450		70

		27,179		—			4,885			—		1,891			33,955		4,885

Investment Funds
Brigadier (8)		—		—			(81	)		4,216		(3,721	)		414		(3,802	)
Deep Value (9)		19,121		—			1,095			—		(2,878	)		17,338		1,095

		19,121		—			1,014			4,216		(6,599	)		17,752		(2,707	)

Other		75		—			(16	)		—		—			59		(16	)

Total equity securities		46,375		—			5,883			4,216		(4,708	)		51,766		2,162
Interests in securitizations (3)		1,575		—			3,170			—		(4,376	)		369		(30	)
Residential loans		267		—			18			—		(22	)		263		18

Total other investments, at fair value	$	48,217	$	—		$	9,071		$	4,216	$	(9,106	)	$	52,398	$	2,150

(1)	Includes return of principal/capital of interests in securitizations and investment funds.

(2)	Represents the amount of total gains or losses for the period, included in earnings, relating to assets classified as Level 3 that were still held at the end of the period.

(3)	Primarily comprised of collateralized debt obligations and collateralized loan obligations.

(4)

(5)	Hybrid Securities Funds — European

(6)	Real Estate Funds — Asian

(7)	Tax Exempt Funds

(8)	Multi-Strategy Credit Funds

(9)	Real Estate Funds

The circumstances that would result in transferring certain financial instruments from Level 2 to Level 3 in the fair value 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.

During 2009, the liquidity and transparency surrounding structured credit products, such as interests in securitizations, continued to diminish. The absence of new issue activity in the primary market led to a continually decreasing level of transparency, as seasoned secondary issuances could not be analyzed on a comparative basis relative to new issuances. In addition, diminished trading activity in the secondary market also led the Company to believe that broker-dealer quotations may not be based on observable and reliable market information. The Company has maintained this assessment during 2011 and has not transferred any of these assets out of Level 3.

Investments-trading: During the six months ended June 30, 2011, there was a transfer of $4,332 into Level 3 related to one security. In this case, as of December 31, 2010, the Company was able to obtain a reliable quote from a third party pricing service. During the first half of 2011, the Company was unable to obtain a reliable quote and relied upon an internal valuation model. During the three months ended June 30, 2011, there were no transfers into or out of Level 3. During the six and three months ended June 30, 2010, the transfers into Level 3 reflect the transfer from Level 2 of the Company’s investments in certain U.S. government agency collateralized mortgage obligations, specifically agency inverse interest only securities, due to the fact that these securities were not very liquid, pricing discovery was challenging and there was decreased observability of inputs.

Other investments, at fair value: During the six and three months ended June 30, 2011 and 2010, there were no transfers in to or out of Level 3. During the six and three months ended June 30, 2010, the transfers in to Level 3 reflect the transfer from Level 2 of our investment fund, Brigadier, due to the fact that the investment was not currently redeemable. In the first half of 2010, the Brigadier fund determined it would liquidate. Effective for the second quarter of 2010, the Brigadier fund ceased permitting redemptions until final liquidation. Therefore, no investor requested redemptions were allowed. The Brigadier fund completed its liquidation during the fourth quarter of 2010. The fund distributed 90% of its net asset value to its unit holders during the second quarter of 2010, and the remaining 10% was distributed upon the completion of the final audit and settlement of expenses of the fund in the fourth quarter of 2010.

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, 2011 and December 31, 2010.

FAIR VALUE MEASUREMENTS OF INVESTMENTS IN CERTAIN ENTITIES

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

Fair Value at
June 30, 2011
(dollars in
thousands)

Unfunded
Commitments

Redemption
Frequency
(if Currently
Eligible)

Redemption
Notice Period

Other Investment Vehicles:

EuroDekania (a)

3,410

N/A

Star Asia (b)

35,761

N/A

Tiptree Financial Partners, L.P. (c)

2,551

N/A

41,722

FAIR VALUE MEASUREMENTS OF INVESTMENTS IN CERTAIN ENTITIES

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

Fair Value at
December 31, 2010
(dollars in
thousands)

Unfunded
Commitments

Redemption
Frequency
(if Currently
Eligible)

Redemption
Notice Period

Other Investment Vehicles:

EuroDekania (a)

1,258

N/A

Star Asia (b)

38,025

N/A

MFCA (c)

2,480

N/A

41,763

Investment Funds:

Deep Value (d)

—

N/A

Duart Fund (e)

4,277

—

Quarterly

90 days

4,305

—

Total

46,068

—

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 in Western Europe (“EuroTruPS”); widely syndicated leveraged loans by European corporate loans; CMBS, including subordinated interests in first mortgage real estate loans (“B-Notes”); 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. The fair value of the investment in this category has been estimated using a series of internal valuation models that use both the market and income approach. 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 $42,069 as of June 30, 2011 and $44,760 as of December 31, 2010.

(c)

MFCA’s investment strategy was to make direct and indirect investments in certain securities whose interest payments are exempt from U.S. federal income taxes consisting of long-term obligations issued by or on behalf of non-profit institutions and state authorities in the healthcare, education, cultural, philanthropic, research, service/advocacy, infrastructure and housing sectors. The fair value of the investment in MFCA had been estimated using the net asset value per share of the investment in accordance with the “practical expedient” provisions of FASB ASC 820. The Company did not manage MFCA. Therefore, the Company used the latest reported net asset value from the third party manager. From time to time, this may have been one quarter in arrears. In June 2011, MFCA was merged into Tiptree Financial Partners, L.P. The investment strategy of Tiptree Financial Partners, L.P. is currently focused on investing in (a) specialty finance companies; (b) alternative asset management companies, and (c) diversified credit assets and related equity interests. Tiptree primarily seeks to acquire majority ownership interests in its investees. 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.

(d)

Deep Value’s investment strategy was to make investments in securities secured by, or related to, residential and commercial real estate including RMBS, equity and debt investments in collateralized debt obligations that were collateralized mainly by RMBS, senior and subordinated mortgage notes, preference shares and whole loans secured by or related to residential real estate and other related securities and derivatives referencing the foregoing. The fund could also invest in CMBS and other securities and debt secured by or relating to commercial real estate. This was a closed-end fund that did not allow redemptions. The expected term of the fund was three years, with two optional one-year extensions. As of June 30, 2011, Deep Value liquidated all of its investments and distributed all of its remaining cash. The fair value of the investment in this category was estimated using the net asset value per share of the investments in accordance with the “practical expedient” provisions of FASB ASC 820.

(e)

The Duart Fund is a specialized deep value and special situations investment opportunity fund. The Duart Fund’s investment strategy is to make investments primarily in a portfolio of long and short positions in public and private real estate equity securities, equity-linked securities, or debt securities (including, but not limited to, convertible debt, debt

with warrants, warrants, and credit default swaps that relate to real estate securities) and partnership or fund interests in the real estate industry globally. The Duart Fund allows quarterly redemptions upon 90 days notice. Effective December 31, 2010, the Company submitted a redemption notice to the Duart Fund to redeem 100% of its capital. The Company received its redemption of $3,821 in April 2011. The fair value of the investment in this category was estimated using the net asset value per share of the investment in accordance with the “practical expedient” provisions of FASB ASC 820.

The Company did not have any assets measured at fair value on a non-recurring basis as of June 30, 2011. The following table presents information about the Company’s assets measured at fair value on a non-recurring basis as of December 31, 2010 aggregated by the level in the fair value hierarchy within which the measurements fell:

FAIR VALUE MEASUREMENTS ON A NON-RECURRING BASIS

(Dollars in Thousands)


	December 31, 2010 Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Goodwill (Cira SCM. LLC)	$	3,121	$	—	$	—	$	3,121

The Company determined the fair value of its goodwill related to the Cira SCM, LLC (“Cira SCM”) acquisition using a discounted cash flow model, which is based on an income approach. This value was determined in accordance with its annual impairment test performed in 2010. An impairment charge of $5,607 was recorded during the third quarter of 2010. See notes 5 and 11 for discussion of the goodwill related to Cira SCM.

9. 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 in the consolidated statements of operations and are included within investments-trading, other investments, at fair value, and trading securities sold, not yet purchased.

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; (iii) arising from the Company’s investments in floating rate 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; (ii) EuroDollar futures; and (iii) purchase and sale agreements of “to-be-announced” securities (“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, 2011 and December 31, 2010, the

Company had 190 outstanding foreign currency forward contracts with a notional amount of 12.5 million Japanese Yen per contract.

EuroDollar Futures

The Company invests in floating rate investments that expose it to fluctuations in interest and, therefore, the Company may, from time to time, hedge such exposure using EuroDollar futures. The Company carries the EuroDollar futures contracts at fair value and includes them as a component of investments-trading in the Company’s consolidated balance sheets. As of June 30, 2011, the Company had no outstanding EuroDollar future contracts. As of December 31, 2010, the Company had 87 outstanding EuroDollar futures contracts with a notional amount of $1 million per contract and a duration of three months.

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, 2011, the Company had entered into seven open TBA sale agreements in the notional amount of $83,150 and five open TBA purchase agreements in the notional amount of $4,144. At December 31, 2010, the Company had entered into four open TBA sale agreements in the notional amount of $157,500 and one open TBA purchase agreement in the notional amount of $50,000.

The following table presents the Company’s derivative financial instruments and the amount and location of the fair value recognized in the consolidated balance sheets as of June 30, 2011 and December 31, 2010.

DERIVATIVE FINANCIAL INSTRUMENTS-BALANCE SHEET INFORMATION

(Dollars in Thousands)


Derivative Financial Instruments Not Designated as Hedging Instruments under FASB ASC 815:	Balance Sheet Classification	Unrealized Gain / (Loss) as of June 30, 2011			Unrealized Gain / (Loss) as of December 31, 2010
Foreign currency forward contracts	Other investments, at fair value	$	141		$	492
EuroDollar futures contracts	Investments-trading		—			(34	)
TBAs	Investments-trading		943			1,473
TBAs	Trading securities, sold not yet purchased		(1	)		(374	)

		$	1,083		$	1,557

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 for the six and three months ended June 30, 2011 and 2010:

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, 2011			Six Months Ended June 30, 2010
Foreign currency forward contracts	Revenues — principal transactions and other income / (loss)	$	(219	)	$	(514	)
EuroDollar futures contracts	Revenues — net trading		(2	)		(54	)
TBAs	Revenues — net trading		(7,970	)		—

		$	(8,191	)	$	(568	)


Derivative Financial Instruments Not Designated as Hedging Instruments under FASB ASC 815:	Income Statement Classification	Three Months Ended June 30, 2011			Three Months Ended June 30, 2010
Foreign currency forward contracts	Revenues — principal transactions and other income / (loss)	$	(922	)	$	(815	)
EuroDollar futures contracts	Revenues — net trading		(64	)		(54	)
TBAs	Revenues — net trading		(8,113	)		—

		$	(9,099	)	$	(869	)

10. 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, SBA loans and mortgage-backed securities, are treated as collateralized financing transactions and are recorded at their contracted resale or repurchase amounts plus accrued interest. 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, 2011, the Company held reverse repurchase agreements of $158,099 and the fair value of securities received as collateral under reverse repurchase agreements was $168,838. At December 31, 2010, the Company did not hold reverse repurchase agreements. Substantially all of the collateral for reverse repurchase agreements was re-pledged as collateral for repurchase agreements.

At June 30, 2011 and December 31, 2010, the Company had repurchase agreements of $178,998 and $69,816, respectively, and the fair value of securities pledged as collateral under repurchase agreements was $191,842 and $75,562, respectively. These amounts include collateral for reverse repurchase agreements that were re-pledged as collateral for repurchase agreements.

11. GOODWILL

The following table presents goodwill as of June 30, 2011 and December 31, 2010:


	June 30, 2011		December 31, 2010
Cira SCM	$	3,121	$	8,728
Impairment of goodwill		—		(5,607	)

		3,121		3,121
AFN acquisition		110		110
JVB acquisition		6,953		—
PrinceRidge acquisition		992		—

Total	$	11,176	$	3,231

The goodwill attributable to AFN relates to the acquisition of AFN in December 2009. The goodwill attributable to JVB relates to the acquisition of JVB in January 2011. The goodwill attributable to PrinceRidge relates to the acquisition of PrinceRidge on May 31, 2011. See note 4.

The Company measures its goodwill for impairment on an annual basis or when events indicate that goodwill may be impaired. Any impairment loss is reflected as a component of operating expenses in the consolidated statements of operations. The Company performs its annual impairment test of goodwill: July 1^st for Cira SCM, October 1^st for AFN, January 1^st for JVB and May 31^st for PrinceRidge.

Cira SCM goodwill

The goodwill attributable to Cira SCM relates to the Company’s acquisition of the 10% of Cira SCM that the Company did not already own in exchange for 189,901 membership units of the Company, from a noncontrolling interest partner in July 2007. During the third quarter of 2010, the Company determined that an impairment charge should be recorded related to the goodwill allocated to Cira SCM. The Company recognized an impairment charge of $5,607 in the third quarter of 2010.

Effective March 29, 2011, the Company sold its investment advisory agreements relating to advisory services to the Strategos Deep Value funds and certain separately managed accounts to the Buyer (see note 5). Prior to the sale, the Company received the advisory services revenue related to these contracts and incurred the compensation and other expenses related to providing these services. Subsequent to the sale, the Company is entitled to receive 10% of the revenue (net of certain expenses excluding compensation) derived from these contracts and bears none of the expenses related to providing these services. The Company sold its interest in the investment advisory agreements, but retained its ownership in the general partners of the Strategos Deep Value funds and its rights to incentive fees from the Strategos Deep Value funds. See note 5.

The Company deemed the sale a triggering event and tested the goodwill related to Cira SCM for impairment. For its 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 reporting unit using a discounted cash flow analysis. The Company determined that after the sale to the Buyer during the first quarter of 2011, there was no impairment to the goodwill related to Cira SCM.

During the second quarter of 2011, the Company received an incentive fee from the Strategos Deep Value funds related to a second fund which was liquidated. The Company deemed this event to be a triggering event as well, and tested the Cira SCM goodwill for impairment. The Company concluded that the goodwill was not impaired as of June 30, 2011.

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. The Company elected the fair value option for its investments in MFCA effective January 1, 2008 and effective with the ownership increase in Star Asia in March 2010 which qualified it for equity method treatment, the Company continued its fair value election regarding

Star Asia. See notes 7 and 8. Prior to this increase, Star Asia had been treated as an available for sale security for which the fair value option had been elected.

As of June 30, 2011, and December 31, 2010, the Company had five equity method investees (excluding equity method affiliates for which it had adopted the fair value option): (i) Star Asia Manager; (ii) Deep Value GP; (iii) Deep Value GP II; (iv) Star Asia SPV; and (v) Duart Capital. The following table summarizes the activity and the earnings of the Company’s equity method affiliates.

INVESTMENT IN EQUITY METHOD AFFILIATES

(Dollars in Thousands)


	Investment in
	Star Asia Manager			Deep Value GP			Deep Value GP II		Star Asia SPV			Duart Capital			Total
Balance at January 1, 2011	$	202		$	269		$	31	$	1,604		$	—		$	2,106
Investments / advances		—			—			—		6			666			672
Distributions/repayments		(250	)		(4,522	)		—		(1,048	)		—			(5,820	)
Earnings / (loss) realized		511			4,368			4		313			(666	)		4,530

Balance at June 30, 2011	$	463		$	115		$	35	$	875		$	—		$	1,488

During the second quarter of 2011, another Deep Value fund for which Deep Value GP served as the general partner was substantially liquidated. In conjunction with this liquidation and distribution of funds to investors, the Deep Value GP recognized an incentive fee earned in the amount of $8,719 in the second quarter of 2011. The Company owns 50% of the Deep Value GP. Therefore, the Company’s share of this incentive fee was $4,359 and was included as a component of income from equity method affiliates. This incentive fee is included in the earnings / (loss) realized line item of the $4,368 in the table above.

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

SUMMARY DATA OF EQUITY METHOD INVESTEES

(unaudited)

(Dollars in Thousands)


	June 30, 2011		December 31, 2010
Total Assets	$	4,405,050	$	436,720

Liabilities		3,977,794	$	151,969
Equity attributable to the investees		377,403		283,684
Non-controlling interest		49,853		1,067

Liabilities & Equity	$	4,405,050	$	436,720


	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Net income	$	17,783	$	15,126	$	1,952	$	25,921

Net income attributable to the investees	$	18,207	$	14,996	$	2,666	$	25,819

See note 24 for information regarding transactions with the Company’s equity method investees.

13. OTHER ASSETS AND ACCOUNTS PAYABLE AND OTHER LIABILITIES

Other assets include deferred financing costs, deferred solicitations costs, prepaid expenses, security deposits, miscellaneous other assets, cost method investments, furniture, equipment and leasehold improvements, net, intangible assets, and investments in private partnerships and limited liability companies that are valued using the equity method of accounting.

Other assets at June 30, 2011 and December 31, 2010 included:


	June 30, 2011		December 31, 2010
Deferred financing costs	$	448	$	282
Deferred solicitation costs		130		496
Prepaid expenses		5,916		3,710
Security deposits		2,860		2,022
Miscellaneous other assets		1,110		1,147
Cost method investment		250		250
Furniture, equipment and leasehold improvements, net		4,544		2,279
Intangible assets		538		206
Equity method affiliates		1,488		2,106

Other assets	$	17,284	$	12,498

Accounts payable and other liabilities include accounts payable, rent payable, payroll tax liabilities, severance payable, accrued interest payable, accrued income taxes, guarantee liabilities related to Alesco XIV (see note 21), deferred income, withdrawal payable to the partner related to the redeemable non-controlling interest and other general accrued expenses. See Note 16.

Accounts payable and other liabilities at June 30, 2011 and December 31, 2010 included:


	June 30, 2011		December 31, 2010
Accounts payable	$	2,515	$	1,169
Rent payable		1,392		829
Accrued interest payable		670		709
Income and payroll taxes payable		1,195		1,567
Severance payable		16		150
Guarantee liability		1,084		1,084
Deferred income		3,264		4,400
Withdrawal payable to the partner		3,522		—
Other general accrued expenses		3,490		3,257

Accounts payable and other liabilities	$	17,148	$	13,165

14. VARIABLE INTEREST ENTITIES

FASB ASC 810, Consolidation (“FASB ASC 810”) contains the guidance surrounding the definition of variable interest entities (“VIEs”), the definition of variable interests, 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 collateralized loan obligations and collateralized debt obligations.

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, 2011, 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 will perform 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 total. 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.

As of June 30, 2011, the Company has variable interests in various securitizations but it has determined that it is not the primary beneficiary and, therefore, is not consolidating the securitization VIEs. The maximum potential financial statement loss the Company would incur if the securitization vehicles were to default on all of their obligations would be (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 has not provided financial support to these VIEs during the six and three months ended June 30, 2011 and 2010 and has no liabilities, contingent liabilities, or guarantees (implicit or explicit) related to these VIEs at June 30, 2011 and December 31, 2010.

The following table 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 the two trust VIEs that hold the Company’s junior subordinated notes (see note 15) and the Company’s maximum exposure to loss associated with these identified nonconsolidated VIEs in which it holds variable interests at June 30, 2011 and December 31, 2010.

NON-CONSOLIDATED VARIABLE INTEREST ENTITIES

(Dollars in Thousands)


	June 30, 2011
	Carrying Amount						Maximum Exposure to loss in non-consolidated VIEs
	Other Receivables		Investments- Trading		Other Investments, at Fair Value		Maximum Exposure to loss in non-consolidated VIEs
Managed VIEs	$	2,023	$	—	$	—	$	2,023
Third party managed VIEs		274		7,400		105		7,779

Total	$	2,297	$	7,400	$	105	$	9,802


	December 31, 2010
	Carrying Amount						Maximum Exposure to loss in non-consolidated VIEs
	Other Receivables		Investments- Trading		Other Investments, at Fair Value		Maximum Exposure to loss in non-consolidated VIEs
Managed VIEs	$	2,087	$	100	$	—	$	2,187
Third party managed VIEs		143		4,400		105		4,648

Total	$	2,230	$	4,500	$	105	$	6,835

15. DEBT

The Company had the following debt outstanding as of June 30, 2011 and December 31, 2010, respectively:

DETAIL OF DEBT

(Dollars in Thousands)


Description	Current Outstanding Par			June 30, 2011		December 31, 2010		Interest Rate Terms			Weighted Average Interest Rate @ 06/30/2011			Weighted Average Contractual Maturity
2010 Credit Facility	$	4,356		$	4,356	$	6,976		6.00	%		6.00	%	September 2012
Contingent convertible senior notes		19,506	(2)		19,240		19,104		7.63	%		7.63	%	May 2027 (1)
Junior subordinated notes		49,614	(3)		17,075		17,160		7.38	%		7.38	%	August 2036
Subordinated notes payable		1,469			1,469		1,448		12.00	%(4)		12.00	%	June 2013

Total				$	42,140	$	44,688

(1)

The Company may redeem all or part of the notes for cash on or after May 20, 2012, at a redemption price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest and additional interest, if any, to, but excluding, the redemption date. The holders of the notes may require the Company to repurchase all or a portion of their notes for cash on May 15, 2012, May 15, 2017 and May 15, 2022 for a repurchase price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest and additional interest, if any, to, but excluding, the repurchase date. The holders of the notes are required to provide notice to the Company of their plan to redeem the notes at any time during the 30 days prior to May 15, 2012, May 15, 2017, and May 15, 2022. See note 2 immediately below.

(2)

On June 20, 2011, the Company commenced an offer to exchange, at the election of each holder, any and all of the Company’s outstanding 7.625% Contingent Convertible Senior Notes due 2027 (the “Old Notes”). In July 2011, $7,621 aggregate principal amount of the Company’s Old Notes tendered for exchange, representing approximately 39% of the principal amount of the Old Notes outstanding. The Company issued $7,621 aggregate principal amount of a new series of 10.50% Contingent Convertible Senior Notes due 2027 (the “New Notes”) in exchange for the $7,621 aggregate principal of the Old Notes that were tendered. A total of $11,885 principal amount of the Old Notes remained outstanding after the completion of the Company’s exchange offer. The first date at which holders of the New Notes can require the Company to repurchase the New Notes is May 15, 2014. See note 26.

(3)

The outstanding par represents the total par amount of the junior subordinated notes held by two separate VIE trusts. The Company does not consolidate these trusts. The Company holds $1,489 par value of these junior subordinated notes. These notes held by the Company have a carrying value of $0. Therefore, the net par value held by third parties is $48,125.

(4)	Comprised of 9% paid currently and 3% paid in kind.

Refer to note 18 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 for a discussion of the Company’s debt.

The Company has granted its bank lenders a security interest in certain securities that are currently included in other investments, at fair value with a carrying value of $35,902 as of June 30, 2011 and certain investments in equity method affiliates with a carrying value of $875 as of June 30, 2011.

16. REDEEMABLE NON-CONTROLLING INTEREST

The redeemable non-controlling interest represents the equity interests of PrinceRidge which are not owned by the Company. The members of PrinceRidge have the right to withdraw from PrinceRidge and require PrinceRidge to redeem the interests for cash over a contractual payment period. The Company has concluded these interests should be treated as temporary equity under Accounting Series Release 268 (“ASR 268”). These interests will be shown outside of the permanent equity of IFMI in its consolidated balance sheet as redeemable non-controlling interests.

In June 2011, one partner withdrew from PrinceRidge and, therefore, the Company reclassified $3,536 from redeemable non-controlling interest to accounts payable and other liabilities. Per the terms of the operating agreement, PrinceRidge must redeem the partner’s equity interests over a five year period. The amount actually due to the withdrawing partner will fluctuate over time based on the operating results of PrinceRidge. The carrying value of the liability owed to the withdrawing partner will be recorded at the amount owed as of each balance sheet date. Any increases or decreases in the amount owed will be recorded as interest income or expense and will be included in the non operating section of the consolidated statement of operations. As of June 30, 2011, the withdrawal payable to partner was $3,522. See note 13.

17. STOCKHOLDERS’ EQUITY

Common Equity

The following table reflects the activity for the six months ended June 30, 2011 related to the number of shares of unrestricted common stock that the Company had issued as of June 30, 2011:


	Common Stock Shares
Balance at December 31, 2010 (1)		10,370,858
Shares issued in acquisition of JVB Financial Holdings, LLC		313,051
Vesting of shares		111,274
Shares withheld for employee taxes		(13,453	)

Balance at June 30, 2011 (1)		10,781,730

(1)	Includes 50,400 shares of the Company’s common stock held as treasury stock.

Acquisition of Additional Units of the Operating LLC

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. In addition, when the Operating LLC acquired JVB, IFMI issued common stock to the former owners as part of the consideration for the acquisition. As a result, the Operating LLC issued an equal number of units to IFMI. During the six months ended June 30, 2011, the Company acquired 606,983 additional units of the Operating LLC pursuant to the UIS Agreement and as a result of the JVB acquisition. The Company recognized an increase in additional paid in capital of $972 and an increase in accumulated other comprehensive loss of $27 with an offsetting decrease in non-controlling interest of $945.

The following schedule presents the effects of changes in IFMI’s ownership interest in the Operating LLC on the equity attributable to IFMI:


	June 30, 2011			June 30, 2010
Net income / (loss) attributable to IFMI	$	(2,996	)	$	4,975
Transfers (to) from the non-controlling interest:
Increase in IFMI’s paid in capital for the acquisition of additional units of consolidated subsidiary		972			—

Changes from net income attributable to IFMI and transfers (to) from non-controlling interest	$	(2,024	)	$	4,975

18. INCOME TAXES

The Company recorded a tax benefit for the six and three months ended June 30, 2011 of $346 and $133, respectively. This benefit realized was a result of the book loss during the first six months as well as a result of changes in the Company’s

state apportionment as a result of its acquisition of JVB and PrinceRidge. The combined impact of these two acquisitions resulted in a reduction in the Company’s state effective rate. Because the Company has a net deferred tax liability, the reduction in the state effective rate reduces this liability and results in a tax benefit to the Company. This tax benefit was recorded as a discrete item in the first half of 2011.

See note 21 to the December 31, 2010 consolidated financial statements of the Company as filed in the Form 10-K for a more complete description of the Company’s tax attributes and unrecognized tax benefits.

19. 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 Securities Exchange Act of 1934, which requires the maintenance of minimum net capital, as defined therein. As applied to the Company’s U.S. broker-dealer subsidiaries, Cohen & Company Securities, LLC (“CCS”), CCCM and, JVB, the rule required net capital of $100, $363, and $105, respectively, as of June 30, 2011. JVB was acquired by the Company in January 2011. As of June 30, 2011, CCS’s adjusted net capital was $6,895, which exceeded the minimum requirement by $6,795. As of June 30, 2011, CCCM’s adjusted net capital was $34,174, which exceeded the minimum requirements by $33,811. As of June 30, 2011, JVB’s adjusted net capital was $4,022, which exceeded the minimum requirements by $3,917. The PrinceRidge Group was acquired by the Company on May 31, 2011. As of June 30, 2011, The PrinceRidge Group had net capital of $4,783, which exceeded the minimum requirement of $250 by $4,533.

EuroDekania Management Limited, a subsidiary of the Company regulated by 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, 2011, the total minimum required net liquid capital was $1,989, and net liquid capital in EuroDekania Management Limited was $7,419 which exceeded the minimum requirements by $5,430 in compliance with the net liquid capital provisions.

20. EARNINGS / (LOSS) PER COMMON SHARE

The following table presents a reconciliation of basic and diluted earnings / (loss) per common share for the periods indicated. Membership units that may be issued in connection with the vesting of a restricted unit issued pursuant to the Amended and Restated Cohen Brothers, LLC 2009 Equity Award Plan (the “2009 Equity Award Plan”) have been excluded from the diluted weighted average shares outstanding calculations because of the obligations of Mr. Daniel G. Cohen, our chairman and chief executive officer, under the Equity Plan Funding Agreement to transfer to (1) the Operating LLC the number of Operating LLC membership units or shares of the Company’s Common Stock equal to the number of Operating LLC membership units to be issued by the Operating LLC to the participants in the 2009 Equity Award Plan in connection with vesting of an Operating LLC restricted unit, or (2) the Company the number of shares of the Company’s Common Stock equal to the number of Operating LLC membership units to be issued by the Operating LLC to the participants in the 2009 Equity Award Plan in connection with the vesting of an Operating LLC restricted unit. See note 24 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

EARNINGS / (LOSS) PER COMMON SHARE

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


	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Net income / (loss) attributable to IFMI	$	(3,371	)	$	2,060		$	(2,996	)	$	4,975
Add: Income / (loss) attributable to the non-controlling interest attributable to Operating LLC membership units exchangeable into IFMI shares (1)		(1,633	)		1,137			(1,595	)		2,783
Add (deduct): Adjustment for income tax benefit (expense) (2)		6			(85	)		150			(242	)

Net income / (loss) on a fully converted basis	$	(4,998	)	$	3,112		$	(4,441	)	$	7,516


Weighted average common shares outstanding – Basic		10,901,448			10,428,498		10,860,702			10,373,278
Unrestricted Operating LLC membership units exchangeable into IFMI shares (1)		5,283,556			5,283,556		5,283,556			5,283,556
Restricted Operating LLC membership units exchangeable into IFMI shares (3)		—			—		—			—
Restricted stock of IFMI shares (4) (5)		—			—		—			—

Weighted average common shares outstanding – Diluted		16,185,004			15,712,054		16,144,258			15,656,834


Net income / (loss) per common share-Basic	$	(0.31	)	$	0.20	$	(0.28	)	$	0.48


Net income / (loss) per common share-Diluted	$	(0.31	)	$	0.20	$	(0.28	)	$	0.48

(1)

The Operating LLC membership units not held by IFMI (that is, those held by the non-controlling interest for the three and six months ended June 30, 2011 and 2010) may be redeemed and exchanged into shares of the Company on a one-to-one basis. These units are not included in the computation of basic earnings per share. These units enter into the computation of diluted net income / (loss) per common share because they are not anti-dilutive using the if-converted method.

(2)	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.

(3)

Restricted Operating LLC membership units do not participate in the earnings of the Company until the restricted Operating LLC membership units vest, therefore, such restricted Operating LLC membership units are included as incremental shares in the diluted calculation pursuant to the treasury stock method as long as the effect is dilutive.

(4)

Excludes shares of restricted stock that are considered participating securities since such shares participate in all of the earnings of the Company in the computation of basic earnings per share, and therefore, such shares of restricted stock are not included as incremental shares in the diluted calculation.

(5)

Due to the net loss for the three and six months ended June 30, 2011, the weighted average shares calculations exclude the effect of (i) restricted Operating LLC membership units exchangeable into IFMI shares of 0 and 3,613 for the three and six months ended June 30, 2011, respectively; and (ii) restricted stock of IFMI shares of 37,288 and 25,852 for the three and six months ended June 30, 2011, respectively.

21. COMMITMENTS AND CONTINGENCIES

Legal and Regulatory Proceedings

One of the Company’s U.S. broker-dealer subsidiaries, CCS, is a party to litigation commenced on January 12, 2009 in the United States District Court for the Northern District of Illinois (the “Illinois Court”) under the caption Frederick J. Grede, not individually, but as Liquidation Trustee and Representative of the Estate of Sentinel Management Group, Inc. v. Delores E. Rodriguez, Barry C. Mohr, Jr., Jacques de Saint Phalle, Keefe, Bruyette & Woods, Inc., and Cohen & Company Securities, LLC. The plaintiff in this case is the Liquidation Trustee (the “Liquidation Trustee”) for the Estate of Sentinel Management Group, Inc. (“Sentinel”), which filed a bankruptcy petition in August 2007. The Liquidation Trustee alleges that CCS sold Sentinel securities, mainly collateralized debt obligations that the Liquidation Trustee contends were unsuitable for Sentinel and that CCS violated Section 10(b) of the Exchange Act and Rule 10b-5. The Liquidation Trustee also seeks relief under the Illinois Blue Sky Law, the Illinois Consumer Fraud Act, the United States Bankruptcy Code, and under common law theories of negligence and unjust enrichment. The relief sought by the Liquidation Trustee under these various legal theories includes damages, rescission, disgorgement, and recovery of allegedly voidable transactions under the Bankruptcy Code, as well as costs and attorneys’ fees. The Company is vigorously defending the claims. By order dated July 8, 2009, the Illinois Court dismissed the Liquidation Trustee’s Illinois Consumer Fraud Act claim. Discovery is ongoing with respect to the remaining claims. No contingent liability was recorded in the Company’s consolidated financial statements related to this litigation.

CCS is also party to litigation commenced on May 21, 2009 in the Illinois Court under the caption Frederick J. Grede, not individually, but as Liquidation Trustee of the Sentinel Liquidation Trust, Assignee of certain claims v. Keefe, Bruyette & Woods, Inc., Cohen & Company Securities, LLC., Delores E. Rodriguez, Barry C. Mohr, Jr., and Jacques de Saint Phalle. The plaintiff in this case is the Liquidation Trustee of the Sentinel Liquidation Trust, which emerged from the bankruptcy of Sentinel, filed in August 2007. The Liquidation Trustee, purportedly as the assignee of claims of Sentinel’s customers, alleges

that, by recommending that Sentinel purchase securities, mainly collateralized debt obligations, that the trustee deems to have been unsuitable for Sentinel’s customer accounts, CCS aided and abetted breaches of fiduciary duties purportedly owed by Sentinel and its head trader to Sentinel’s customers, in violation of Illinois common law. The complaint also alleges claims under common law theories of negligence and unjust enrichment. The Company will vigorously defend all claims. CCS filed a motion to dismiss the Liquidation Trustee’s complaint on July 21, 2009; that motion was dismissed “as moot” on March 29, 2011. Neither the court nor the Liquidation Trustee has taken any action since that time. No contingent liability was recorded in the Company’s consolidated financial statements related to this litigation.

During 2010, CCS reached an agreement with the FINRA staff to settle allegations concerning certain mark-ups that, following a routine examination, the FINRA staff alleged were impermissible. Without admitting or denying the allegations, CCS consented to a Letter of Acceptance, Waiver and Consent (the “AWC”) that, among other things, (i) alleged violations of NASD Rules 2110, 2440 and 3010; (ii) censured CCS; (iii) ordered CCS to pay restitution of $899 plus interest; (iv) ordered CCS to pay a $50 fine; and (v) directed CCS to review its supervisory systems and procedures. The AWC was approved by FINRA in November 2010.

As a result of the AWC, the Company recorded a net expense of $662 during the second half of 2010. The net expense of $662 was comprised of two entries: (i) the Company recorded additional expense of $1,070 as a component of professional services, subscriptions, and other operating expenses, representing the restitution of $899, the fine of $50, and $121 of interest charges; and (ii) the Company recorded a reduction in compensation and benefits expense of $408, representing the intended recapture by the Company of incentive compensation previously paid employees related to the three transactions.

The Operating LLC and its registered investment advisor subsidiary, Cohen & Company Financial Management, LLC (f/k/a Cohen Bros. Financial Management, LLC) are also named in a lawsuit originally filed on August 6, 2009 in the Supreme Court of the State of New York, County of Kings, captioned Riverside National Bank of Florida v. Taberna Capital Management, LLC, Trapeza Capital Management, LLC, Cohen & Company Financial Management, LLC f/k/a Cohen Bros. Financial Management LLC, FTN Financial Capital Markets, Keefe, Bruyette & Woods, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Bank of America Corporation, as successor in interest to Merrill Lynch & Co., JP Morgan Chase, Inc, JP Morgan Securities, Citigroup Global Markets., Credit Suisse (USA) LLC, ABN AMRO, Cohen & Company, Morgan Keegan & Co., Inc., SunTrust Robinson Humphrey, Inc., The McGraw-Hill Companies, Inc., Moody’s Investors Services, Inc. and Fitch Ratings, Ltd. The plaintiff, Riverside National Bank of Florida (“Riverside”), alleges that offering memoranda issued in connection with certain interests in securitizations it purchased failed to disclose alleged ratings agencies’ conflicts of interest. Riverside alleges, among other things, common law fraud, negligent misrepresentation and breaches of certain alleged duties. On September 28, 2009, after a demand was made defendants to change venue, plaintiff filed a stipulation with the Supreme Court of the State of New York, County of Kings, consenting to changing the place of trial from County of Kings to County of New York. The Company is vigorously defending the claims. On December 11, 2009, the defendants filed motions to dismiss the complaint on several grounds. On April 16, 2010, Riverside was closed by the Office of the Comptroller of the Currency. Subsequently, the Federal Deposit Insurance Corporation (the “FDIC”) was named receiver of the bank. By letter dated April 19, 2010, Riverside requested a 30 day extension for the oral argument on the defendants’ motions to dismiss which was originally scheduled for May 12, 2010. On May 4, 2010, the FDIC filed a motion to substitute as plaintiff and for an order staying the litigation for 90 days which was subsequently granted. On June 3, 2010, the defendants removed the action to the United States District Court for the Southern District of New York where the case is captioned Federal Deposit Insurance Corporation v. The McGraw-Hill Companies, Inc. et al., 10 Civ. 04421 (DAB). On June 25, 2010, Judge Deborah Batts signed an order providing that defendants are to re-file their motions to dismiss by August 24. 2010. On August 20, 2010, Judge Batts signed an order adjourning the proceedings for an additional 90 days at the request of the FDIC. Since that time, the Court, at the request of the FDIC, has further adjourned the proceedings to April 29, 2011. On April 22, 2011, the FDIC filed a Notice of Dismissal Without Prejudice dismissing the action. No contingent liability was recorded in the Company’s consolidated financial statements related to this litigation.

On April 13, 2011, Cohen Legacy, LLC, as successor in interest to Alesco Loan Holdings Trust, received a complaint titled Massachusetts Mutual Life Insurance Company v. JPMorgan Chase Bank, N.A; J.P Morgan Mortgage Acquisition Corporation; J.P. Morgan Securities LLC; J.P Morgan Acceptance Corporation I; David M. Duzyk; Louis Schioppo, Jr.; William A. King; EMC Mortgage Corporation; Structured Asset Mortgage Investments II Inc.; Bear Stearns Asset Backed Securities I LLC; Cohen Legacy, LLC; Jeffrey L. Verschleiser; Michael B. Nierenberg; Jeffrey Mayer; Thomas F. Marano; Joseph T. Jurkowski, Jr.; Matthew E. Perkins; Samuel L. Molinaro, Jr.; WAMU Asset Acceptance Corporation; WAMU Capital Corporation; Washington Mutual Mortgage Securities Corporation; Richard Careaga; David Beck; Diane Novak; Thomas Green; and Rolland Jurgens. The action is pending in the U.S. District Court for the District of Massachusetts and alleges that certain residential mortgage-backed securities (“RMBS”) were sold to the plaintiff pursuant to public filings and offering

materials that contained untrue statements and omissions of material facts in violation of the Massachusetts Uniform Securities Act. The plaintiff has stated that it will seek statutory damages, including interest, or will make or arrange a tender of the RMBS before entry of judgment. The Company will vigorously defend the claims. On July 1, 2011, Cohen Legacy, LLC along with the other defendants, filed motions to dismiss the complaint. The motions are pending before the district court.

In addition to the matters set forth above, the Company is a party to various routine legal proceedings and regulatory inquiries arising out of the ordinary course of the Company’s business. Management believes that none of these routine legal proceedings will have a material adverse effect on the Company’s financial condition. However, the Company may incur legal fees in connection with these legal proceedings and regulatory matters which will be expensed as incurred.

Non-Profit Preferred Funding I (“NPPF I”) Arrangement with Merrill Lynch Portfolio Management, Inc.

On December 27, 2007, Merrill Lynch Portfolio Management, Inc. (the “NPPF I Trustor”) and the trustee of the NPPF I collateralized debt obligation entered into a loan agreement whereby the NPPF I Trustor made an initial $3,000 advance to the NPPF I collateralized debt obligation so that additional funds would be available for the most junior collateralized debt obligation certificate holders in future distributions of collateralized debt obligation waterfall payments. At each waterfall payment date, the advance is repaid in full and the NPPF I Trustor re-advances a scheduled amount to the collateralized debt obligation trust. The scheduled amounts will decrease by $300 on each distribution date through September 15, 2012. The advance does not bear interest. The Company is not a party to this agreement and is not obligated to provide reimbursement for any outstanding advances to NPPF I Trustor. As of June 30, 2011, the outstanding advance between NPPF I Trustor and Merrill Lynch Portfolio Management, Inc. was $900.

As an accommodation to the NPPF I Trustor, the Company agreed to pay 6% simple interest on the advance via a side letter agreement entered into on December 27, 2007 between the Company and the NPPF I Trustor. The Company is only obligated to pay interest on outstanding advances. The side letter will terminate on the earlier of the payment in full of all advances and December 2014. The Company accounts for the interest on the outstanding advances as a reduction to revenue since these interest payments are deemed a direct reduction of the Company’s on-going revenue that otherwise would have been earned for the duration of the trust. The reduction in revenue earned by the Company for the six months ended June 30, 2011 and 2010 was $14 and $49, respectively, and for the three months ended June 30, 2011 and 2010 was $31 and $23, respectively. The potential additional liability the Company would have, assuming the $900 advance (as of June 30, 2011) to the NPPF I Trust remained outstanding through December 2014 would be approximately $189.

The Company sold the NPPF I management contract during the first quarter of 2009. However, the Company retained this obligation.

Alesco XIV Guarantee

AFN invested in a collateralized debt obligation (Alesco XIV) in which Assured Guaranty (“Assured”) was providing credit support to the senior interests in securitizations. Alesco XIV made a loan (the “Guaranteed Loan”) to a particular borrower and AFN entered into an arrangement with Assured whereby AFN agreed to make payments to Assured upon the occurrence of both (i) a loss on the Guaranteed Loan; and (ii) a loss suffered by Assured on its overall credit support arrangement to Alesco XIV security holders. This arrangement is accounted for as a guarantee by the Company. At the Merger Date, the Company recorded a liability of $1,084 related to this arrangement which is included in accounts payable and other liabilities in the Company’s consolidated balance sheet. This amount does not represent the expected loss; rather it represents the Company’s estimate of the fair value of its guarantee (i.e. the amount it would have to pay a third party to assume this obligation). This arrangement is being accounted for as a guarantee. The value will be adjusted under certain limited circumstances such as: (i) when the guarantee is extinguished; or (ii) if payment of amounts under the guarantee become probable and estimable. The maximum potential loss to the Company on this arrangement is $8,750. Under certain circumstances, Assured can require the Company to post liquid collateral.

FundCore Finance Group Venture

In January 2011, the Company entered into an arrangement with FundCore Finance Group to create a commercial real estate conduit lender. The Company’s $25 million capital commitment, combined with the warehouse financing, will be used to originate, fund, and eventually securitize commercial real estate fixed rate loans. Warehouse financing has not yet been obtained and the Company has not yet funded any of this commitment.

22. 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, 2011 and 2010 is 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 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 segments’ statements of operations. Accordingly, the Company presents segment information consistent with internal management reporting. See note (1) in the table below for more detail on unallocated items. Effective with the third quarter of 2010, the Company reclassified certain personnel and operating expenses from its asset management segment to its principal investing segment. All prior periods presented have been reclassified to conform with the current period presentation. Effective with the second quarter of 2011, the Company modified its policy and began recording direct overhead costs that only benefit a particular segment in that segment. As a result of this policy change, the Company reclassified certain overhead costs that directly support its capital markets segment from its unallocated segment to its capital markets segment. The following tables present the financial information for the Company’s segments for the periods indicated.


As of and for the six months ended June 30, 2011	Capital Markets			Asset Management		Principal Investing			Segment Total			Unallocated (1)			Total
Summary statement of operations
Net trading	$	43,514		$	—	$	—		$	43,514		$	—		$	43,514
Asset management		—			11,225		—			11,225			—			11,225
New issue and advisory		1,240			—		—			1,240			—			1,240
Principal transactions and other income		174			920		(1,302	)		(208	)		—			(208	)

Total revenues		44,928			12,145		(1,302	)		55,771			—			55,771
Total operating expenses		38,187			3,317		157			41,661			20,701			62,362

Operating income / (loss)		6,741			8,828		(1,459	)		14,110			(20,701	)		(6,591	)
Income / (loss) from equity method affiliates		—			4,359		171			4,530			—			4,530
Other non operating income / (expense)		13			—		—			13			(2,942	)		(2,929	)

Income / (loss) before income taxes		6,754			13,187		(1,288	)		18,653			(23,643	)		(4,990	)
Income tax expense / (benefit)		—			—		—			—			(346	)		(346	)

Net income / (loss)		6,754			13,187		(1,288	)		18,653			(23,297	)		(4,644	)
Less: Net income / (loss) attributable to the non-controlling interest		(53	)		—		—			(53	)		(1,595	)		(1,648	)

Net income / (loss) attributable to IFMI	$	6,807		$	13,187	$	(1,288	)	$	18,706		$	(21,702	)	$	(2,996	)

Other statement of operations data:
Depreciation and amortization (included in total operating expense)	$	145		$	7	$	—		$	152		$	821		$	973

Balance sheet data:
Total assets (2) (3)	$	370,731		$	21,553	$	44,020		$	436,304		$	19,429		$	455,733

Investment in equity method affiliates (included in total assets)	$	—		$	—	$	1,488		$	1,488		$	—		$	1,488


As of and for the six months ended June 30, 2010	Capital Markets			Asset Management		Principal Investing			Segment Total			Unallocated (1)			Total
Summary statement of operations
Net trading	$	42,458		$	—	$	—		$	42,458		$	—		$	42,458
Asset management		—			13,014		—			13,014			—			13,014
New issue and advisory		2,073			—		—			2,073			—			2,073
Principal transactions and other income		(60	)		372		19,687			19,999			—			19,999

Total revenues		44,471			13,386		19,687			77,544			—			77,544
Total operating expenses		30,120			8,168		244			38,532			28,058			66,590

Operating income / (loss)		14,351			5,218		19,443			39,012			(28,058	)		10,954
Income / (loss) from equity method affiliates		—			—		(108	)		(108	)		—			(108	)
Other non operating income / (expense)		—			971		—			971			(2,936	)		(1,965	)

Income / (loss) before income taxes		14,351			6,189		19,335			39,875			(30,994	)		8,881
Income tax expense / (benefit)		—			—		—			—			1,123			1,123

Net income / (loss)		14,351			6,189		19,335			39,875			(32,117	)		7,758
Less: Net income / (loss) attributable to the non-controlling interest		—			—		—			—			2,783			2,783

Net income / (loss) attributable to IFMI	$	14,351		$	6,189	$	19,335		$	39,875		$	(34,900	)	$	4,975

Other statement of operations data:
Depreciation and amortization (included in total operating expense)	$	—		$	385	$	—		$	385		$	886		$	1,271

Balance sheet data:
Total assets (2) (3)	$	182,707		$	18,957	$	55,690		$	257,354		$	40,858		$	298,212

Investment in equity method affiliates (included in total assets)	$	—		$	—	$	2,616		$	2,616		$	—		$	2,616


For the three months ended June 30, 2011	Capital Markets			Asset Management		Principal Investing			Segment Total			Unallocated (1)			Total
Summary statement of operations
Net trading	$	16,240		$	—	$	—		$	16,240		$	—		$	16,240
Asset management		—			5,255		—			5,255			—			5,255
New issue and advisory		1,131			—		—			1,131			—			1,131
Principal transactions and other income		156			342		333			831			—			831

Total revenues		17,527			5,597		333			23,457			—			23,457
Total operating expenses		18,733			1,040		102			19,875			11,760			31,635

Operating income / (loss)		(1,206	)		4,557		231			3,582			(11,760	)		(8,178	)
Income / (loss) from equity method affiliates		—			4,359		76			4,435			—			4,435
Other non operating income / (expense)		13			—		—			13			(1,460	)		(1,447	)

Income / (loss) before income taxes		(1,193	)		8,916		307			8,030			(13,220	)		(5,190	)
Income tax expense / (benefit)		—			—		—			—			(133	)		(133	)

Net income / (loss)		(1,193	)		8,916		307			8,030			(13,087	)		(5,057	)
Less: Net income / (loss) attributable to the non-controlling interest		(53	)		—		—			(53	)		(1,633	)		(1,686	)

Net income / (loss) attributable to IFMI	$	(1,140	)	$	8,916	$	307		$	8,083		$	(11,454	)	$	(3,371	)

Other statement of operations data:
Depreciation and amortization (included in total operating expense)	$	116		$	3	$	—		$	119		$	384		$	503


For the three months ended June 30, 2010	Capital Markets			Asset Management		Principal Investing			Segment Total			Unallocated (1)			Total
Summary statement of operations
Net trading	$	19,690		$	—	$	—		$	19,690		$	—		$	19,690
Asset management		—			6,244		—			6,244			—			6,244
New issue and advisory		1,405			—		—			1,405			—			1,405
Principal transactions and other income		(68	)		174		8,366			8,472			—			8,472

Total revenues		21,027			6,418		8,366			35,811			—			35,811
Total operating expenses		15,975			4,594		122			20,691			10,416			31,107

Operating income / (loss)		5,052			1,824		8,244			15,120			(10,416	)		4,704
Income / (loss) from equity method affiliates		—			—		(122	)		(122	)		—			(122	)
Other non operating income / (expense)		—			836		—			836			(1,829	)		(993	)

Income / (loss) before income taxes		5,052			2,660		8,122			15,834			(12,245	)		3,589
Income tax expense / (benefit)		—			—		—			—			392			392

Net income / (loss)		5,052			2,660		8,122			15,834			(12,637	)		3,197
Less: Net income / (loss) attributable to the non-controlling interest		—			—		—			—			1,137			1,137

Net income / (loss) attributable to IFMI	$	5,052		$	2,660	$	8,122		$	15,834		$	(13,774	)	$	2,060

Other statement of operations data:
Depreciation and amortization (included in total operating expense)	$	—		$	191	$	—		$	191		$	437		$	628

(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 related to support departments excluding certain departments that directly support the capital markets 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 segments and such amounts are excluded in segment reporting to the Chief Operating Decision Maker.

(2)	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 segment assets and such amounts are excluded in segment reporting to the Chief Operating Decision Maker.

(3)	Goodwill and intangible assets as of June 30, 2011 and 2010 are allocated to the Capital Markets and Asset Management segments as indicated in the table listed below.

As of June 30, 2011:


	Capital Markets		Asset Management		Principal Investing		Segment Total		Unallocated		Total
Goodwill	$	8,000	$	3,176	$	—	$	11,176		—	$	11,176
Intangible assets (included in other assets)	$	538		—		—		538		—	$	538

As of June 30, 2010:


	Capital Markets		Asset Management		Principal Investing		Segment Total		Unallocated		Total
Goodwill	$	55	$	8,783	$	—	$	8,838		—	$	8,838
Intangible assets (included in other assets)	$	40	$	178	$	—	$	218		—	$	218

Geographic Information

The Company conducts its business activities through offices in the following locations: (1) United States and (2) United Kingdom and other. Total revenues by geographic area are summarized as follows:

GEOGRAPHIC INFORMATION

(Dollars in Thousands)


	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010

Total Revenues:
United States	$	21,057	$	29,813	$	49,246	$	67,508
United Kingdom & Other		2,400		5,998		6,525		10,036

	$	23,457	$	35,811	$	55,771	$	77,544

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

23. SUPPLEMENTAL CASH FLOW DISCLOSURE

Interest paid by the Company on its debt was $2,878 and $3,296 for the six months ended June 30, 2011 and 2010, respectively.

The Company paid income taxes of $56 and $2,287 for the six months ended June 30, 2011 and 2010, respectively, and received income tax refunds of $105 and $873 for the six months ended June 30, 2011 and 2010, respectively.

In the first half of 2011, the Company had the following significant non-cash transactions which are not reflected on the statement of cash flows:

•

During the first half of 2011, the Company acquired additional units of the Operating LLC pursuant to the Unit Issuance and Surrender Agreement (the “UIS Agreement”) which was entered into between IFMI and the Operating LLC in December 2010 and became effective January 1, 2011. 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. In addition, the Company acquired additional units of the Operating LLC in connection with the JVB acquisition. The Company recognized an increase in additional paid-in capital of $972, an increase of $27 in accumulated other comprehensive loss and a decrease of $945 in non-controlling interest. See note 17.

•

During the first quarter of 2011, the Company transferred 54,452 shares of Star Asia in the amount of $476 to an employee for services rendered during 2010.

•

In connection with the consummation of the JVB acquisition in January 2011 (see note 4), the Company acquired the net assets of JVB for approximately $16,813, consisting of $14,956 in cash and 313,051 shares of the Company’s Common Stock for stock consideration of $1,531 and contingent payments due of $326.

•

In connection with the consummation of the PrinceRidge acquisition on May 31, 2011 (see note 4), the Company made a contribution of $45,000, consisting of cash, amounts payable, and all of the equity ownership interests of CCCM in exchange for a 69.9% interest (consisting of equity and profit interests) in the PrinceRidge Entities.

The remaining 30.1% interest in PrinceRidge not owned by the Company at the acquisition date represented a redeemable non-controlling interest of $18,879.

In the first half of 2010, the Company had no significant non-cash transactions which are not reflected on the statement of cash flows.

24. RELATED PARTY TRANSACTIONS

The Company has identified the following related party transactions for the six and three months ended June 30, 2011 and 2010. The transactions are listed by related party and the amounts are disclosed in tables at the end of this section.

A. RAIT

RAIT Financial Trust (“RAIT”) is a publicly traded REIT. It was identified as a related party for periods prior to 2011 because (1) the chairman and chief executive officer of the Company was a trustee of RAIT until his resignation from that position on February 26, 2010 (and was formerly the chief executive officer of RAIT from December 2006 to February 2009); and (2) the chairman of RAIT until her resignation from that position effective December 31, 2010 is the mother of the chairman and chief executive officer of the Company.

Prior to 2011, the Company identified the following as related party transactions with RAIT:

1. Shared Services Agreement

The Company had a shared services agreement with RAIT whereby RAIT reimbursed the Company for costs incurred by the Company for administrative and occupancy costs related to RAIT. The Company received payments under this agreement which are disclosed for the six and three months ended June 30, 2010 as shared services in the tables at the end of this section. The payments were recorded as a reduction in the related expense.

2. RAIT Shares

During the first quarter of 2010, the Company sold all of the shares it held in RAIT. As of December 31, 2009, the Company held 510,434 shares of RAIT with a carrying value of $669 and a cumulative life to date unrealized loss of $8,950. Gains or losses recognized on these shares are disclosed as part of the gain / (loss) in the table at the end of this section.

3. Securities sold to and purchased from RAIT

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 RAIT. Or, the Company may purchase securities from RAIT and ultimately sell those securities to a third party. In either case, the Company includes the trading revenue earned (i.e. the gain or loss realized) by the Company for the entire transaction in the amounts disclosed for the six and three months ended June 30, 2010 as part of net trading in the table at the end of this section.

B. Cohen Bros. Financial, LLC (“CBF”)

CBF has been identified as a related party because (i) CBF is a noncontrolling interest of the Company; and (ii) CBF is wholly owned by the chairman and Chief Executive Officer of the Company.

Beginning in October 2008, the Company began receiving a monthly advisory fee for consulting services provided by the Company to CBF. The fee is recognized as a component of asset management revenue in the consolidated statements of operations. This fee is disclosed as management fee revenue in the tables at the end of this section.

C. The Bancorp, Inc.

The Bancorp, Inc. (“TBBK”) is identified as a related party because (i) TBBK’s chairman is the Company’s chairman and chief executive officer.

TBBK maintained deposits for the Company in the amount of $45 and $147 as of June 30, 2011 and December 31, 2010, respectively.

As part of the Company’s broker-dealer operations, the Company from time to time purchases securities from third parties and sell those securities to TBBK. The Company may purchase securities from TBBK and ultimately sell those securities to a third party. In either of the cases listed above, the Company includes the trading revenue earned (i.e. the gain or loss realized) 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.

D. Investment Vehicles and Other

The following 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. Brigadier, formed by the Company in May 2006, was a series of investment funds that primarily earned investment returns by investing in various fixed income and credit market related investments and securities through its master fund. Brigadier had a single master fund and two feeder funds. One feeder fund was referred to as the onshore feeder fund and was designed for investors that were non tax exempt U.S. tax payers. Foreign and U.S. tax-exempt investors invested through a second feeder fund referred to as the offshore feeder fund. In the first half of 2010, the Brigadier fund determined it would liquidate. Effective beginning in the second quarter of 2010, the Brigadier fund had ceased permitting redemptions until final liquidation. The Brigadier fund completed its liquidation during the fourth quarter of 2010. The fund distributed 90% of its NAV to unit holders during the second quarter of 2010, with the remaining 10% distributed in the fourth quarter of 2010 upon the completion of final audits and settlement of expenses of the fund. The Company was the general partner and made an initial investment in the onshore feeder fund. The Company continued to treat the onshore feeder fund as an equity method investment even though it owned a majority of the interests as the fund completed its liquidation during 2010. Brigadier had been identified as a related party because in the absence of the fair value option of FASB ASC 825, the Brigadier onshore feeder fund would be treated as an equity method affiliate of the Company. The Company had a management contract with and an investment in Brigadier. Amounts earned from its management contract are disclosed as part of management fee revenue in the tables at the end of this section. Gains and losses recognized from its investment are disclosed as part of gain / (loss) in the tables at the end of this section.

2. Star Asia invests primarily in Asian commercial real estate structured finance products, including CMBS, corporate debt of REITs and real estate operating companies, B notes, mezzanine loans and other commercial real estate fixed income investments. As of June 30, 2011 and December 31, 2010, the Company directly owned approximately 27% of Star Asia’s outstanding shares. Star Asia has been identified as a related party because in the absence of the fair value option of FASB ASC 825, Star Asia would be treated as an equity method affiliate and the chairman and chief executive officer of the Company is a member of Star Asia’s board of directors. The Company has an investment in Star Asia. Dividends received on that investment are disclosed as part of dividend income in the tables at the end of this section. Gains or losses recognized from its investment are disclosed as part of gain / (loss) in the tables at the end of this section.

3. EuroDekania invests primarily in hybrid capital securities of European bank and insurance companies, CMBS, RMBS and widely syndicated leverage loans. As of June 30, 2011 and December 31, 2010, the Company directly owned approximately 10% and 5%, respectively, of EuroDekania’s outstanding shares. EuroDekania has been identified as a related party because the chairman and chief executive officer of the Company is a member of EuroDekania’s board of directors. The Company has a management contract with and an investment in EuroDekania. Dividends received on that investment are disclosed as part of dividend income in the tables at the end of this section. Gains or losses recognized from its investments are disclosed as part of the gain / (loss) 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.

As part of the Company’s broker-dealer operations, the Company from time to time purchases securities from third parties and sell those securities to EuroDekania. Or, the Company may purchase securities from EuroDekania and ultimately sell those securities to a third party. In either case, the Company includes the trading revenue earned (i.e. the gain or loss realized) 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.

4. Star Asia Manager serves as external manager of Star Asia and Star Asia SPV (see D-9. listed below) and the Company owns 50% of Star Asia Manager. Star Asia Manager has been identified as a related party because it is an equity method investee of the Company. The Company recognizes 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. Income or loss recognized under the equity method is disclosed in the table at the end of this section.

5. MFCA primarily invested in securities that were exempt from U.S. federal income taxes. Prior to June 23, 2011 the Company owned approximately 3% of MFCA’s outstanding shares. On June 23, 2011, MFCA became a wholly owned

subsidiary of Tiptree Financial Partners, L.P. The Company exchanged its 1,000,200 shares of MFCA for 111,133 shares of Tiptree Financial Partners, L.P. As of June 30, 2011, the Company owned approximately 1% of Tiptree Financial Partners, L.P. which is not deemed a related party to the Company. Prior to MFCA’s merger with Tiptree Financial Partners, L.P., MFCA had been identified as a related party because: (i) in the absence of the fair value option of FASB ASC 825, MFCA would have been treated as an equity method affiliate of the Company; (ii) the chairman and chief executive officer of the Company was the former chairman of MFCA’s board and served as a member of the board until June 22, 2011; and (iii) the president of the Company served as vice chairman of MFCA’s board until March 18, 2009. In March 2009, the board of directors of MFCA assigned the management contract to an unrelated third party. The Company had a management contract with MFCA. The Company had an investment in MFCA and had a shared services arrangement with MFCA. Dividends received on that investment are disclosed as part of dividend income in the tables at the end of this section. Gains or losses recognized from its investment are disclosed as part of gain / (loss) 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. Payments received under the shared services arrangement are disclosed as part of shared services (paid) / received in the tables at the end of this section.

6. Cohen Financial Group, Inc. (“CFG”) had been identified as a related party because it was a member of the Company prior to the Merger. CFG filed a Certificate of Dissolution with the Secretary of State of the State of Delaware on December 16, 2009, and is in process of completing the liquidation process. From time to time, the Company advanced CFG funds for normal operating purposes; these amounts were treated as due from related party in the consolidated balance sheets.

7. The Deep Value GP serves as the general partner for the feeder funds of Strategos Deep Value Mortgage Funds (in the case of the first master fund) and as the general partner of the master fund itself (in the case of a second master fund). The Deep Value GP II serves as the general partner for the offshore feeder fund (in the case of a third master fund). The Deep Value GP and the Deep Value GP II are collectively referred to as the “Deep Value GPs.” The Company owns 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. Income or loss recognized under the equity method is disclosed in the table at the end of this section. The Company previously served as the investment advisor to these funds and sold these advisory contracts in March 2011. See note 5.

8. Deep Value is a series of closed-end distressed debt funds. Deep Value raises capital from investors, and earns investment returns by investing in a diversified portfolio of asset backed securities consisting primarily of residential mortgage-backed securities and other real estate related securities, as well as other U.S. real estate related assets and related securities. As of June 30, 2011, the first Deep Value fund was completely liquidated. As of December 31, 2010, the Company owned approximately 33% of the first Deep Value onshore feeder fund and 9% of the first Deep Value offshore feeder fund. Deep Value (as a group) has been identified as a related party because in the absence of the fair value option of FASB ASC 825, the onshore and offshore feeders in which the Company has an investment would be treated as equity method affiliates of the Company. The Company had a management contract with and an investment in Deep Value. Amounts earned from its management contract are disclosed as part of management fee revenue in the tables at the end of this section. Gains or losses recognized from its investment are disclosed as part of gain / (loss) in the tables at the end of this section The Company previously served as the investment advisor to these funds and sold these advisory contracts in March 2011. See note 5.

9. 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 SPV up to an agreed upon maximum. Returns above that agreed upon maximum are remitted back to Star Asia. The Company directly owned approximately 31% and 30% of Star Asia SPV’s outstanding shares as of June 30, 2011 and December 31, 2010, respectively. Star Asia SPV has been identified as a related party because it is 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.

10. Duart Capital is a Delaware limited liability company formed in 2010. The Company directly owned 20% of Duart Capital’s outstanding equity interests as of June 30, 2011 and December 31, 2010. Duart Capital has been identified as a related party because it is an equity method investee of the Company. Duart Capital also serves as the investment manager of the Duart Fund (see below). The Company did not elect the fair value option for its investment in Duart Capital. Income or loss recognized under the equity method is disclosed in the table at the end of this section.

11. The Duart Fund is a specialized deep value and special situations opportunity fund formed in September 2010. The Duart Fund’s investment objective is to provide superior absolute returns by investing primarily in a portfolio of long and short positions in public and private real estate equity securities, equity-linked securities, or debt securities (including, but not

limited to, convertible debt, debt with warrants, warrants, and credit default swaps that related to real estate securities) and partnership or fund interests in the real estate markets. Effective December 31, 2010, the Company submitted a redemption notice to the Duart Fund to redeem 100% of its capital. The Company received its redemption in April 2011. The Duart Fund had been identified as a related party because in the absence of the fair value option of FASB ASC 825, the onshore feeder fund in which the Company had an investment was treated as an equity method affiliate of the Company. Gains or losses recognized from its investment are disclosed as part of the gain / (loss) in the tables 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 during the six and three months ended June 30, 2011 and 2010, respectively, which are described above. Amounts shown as shared services (paid) / received are included as a component of operating expense in the Company’s consolidated statements of operations:

RELATED PARTY TRANSACTIONS

Six months ended June 30, 2011

(Dollars in Thousands)


						Principal transactions and other income / (loss)					Income/(loss) from equity			Shared Services
	Management fee revenue		Net trading			Dividend income		Gain/ (Loss)			method affiliates			(Paid) / Received
CBF	$	138	$	—		$	—	$	—		$	—		$	—
TBBK		—		315			—		—			—			—
Star Asia		—		—			—		(2,014	)		—			—
Star Asia Manager		—		—			—		—			511			—
Star Asia SPV		—		—			—		—			313			—
EuroDekania		333		(101	)		—		1,619			—			—
MFCA		—		—			32		71			—			9
DEKU		—		—			—		—			—			—
Deep Value		452		—			—		(9	)		4,372			—
Duart Fund		—		—			—		(456	)		—			—
Duart Capital		—		—			—		—			(666	)		—

Total	$	923	$	214		$	32	$	(789	)	$	4,530		$	9

RELATED PARTY TRANSACTIONS

Three months ended June 30, 2011

(Dollars in Thousands)


					Principal transactions and other income / (loss)					Income/(loss) from equity			Shared Services
	Management fee revenue		Net trading		Dividend income		Gain/ (Loss)			method affiliates			(Paid) / Received
CBF	$	71	$	—	$	—	$	—		$	—		$	—
TBBK		—		315		—		—			—			—
Star Asia		—		—		—		667			—			—
Star Asia Manager		—		—		—		—			291			—
Star Asia SPV		—		—		—		—			40			—
EuroDekania		167		—		—		844			—			—
MFCA		—		—		—		40			—			4
DEKU		—		—		—		—			—			—
Deep Value		—		—		—		(9	)		4,371			—
Duart Fund		—		—		—		(1	)		—			—
Duart Capital		—		—		—		—			(267	)		—

Total	$	238	$	315	$	—	$	1,541		$	4,435		$	4

RELATED PARTY TRANSACTIONS

Six months ended June 30, 2010

(Dollars in Thousands)


					Principal transactions and other income / (loss)				Income/(loss) from equity			Shared Services
	Management fee revenue		Net Trading		Dividend income		Gain/ (Loss)		method affiliates			(Paid) / Received
Brigadier	$	54	$	—	$	—	$	60	$	—		$	—
RAIT		—		134		—		387		—			(5	)
CBF		130		—		—		—		—			—
Star Asia		—		—		—		13,748		—			—
Star Asia Manager		—		—		—		—		405			—
Star Asia SPV		—		—		—		—		80			—
EuroDekania		333		—		—		23		—			—
MFCA		—		—		30		70		—			9
Deep Value		1,511		—		—		2,377		15			—
Duart Capital		—		—		—		—		(608	)		—

Total	$	2,028	$	134	$	30	$	16,665	$	(108	)	$	4

RELATED PARTY TRANSACTIONS

Three months ended June 30, 2010

(Dollars in Thousands)


					Principal transactions and other income / (loss)					Income/(loss) from equity			Shared Services
	Management fee revenue		Net Trading		Dividend income		Gain/ (Loss)			method affiliates			(Paid) / Received
Brigadier	$	14	$	—	$	—	$	(81	)	$	—		$	—
RAIT		—		4		—		—			—			(3	)
CBF		62		—		—		—			—			—
Star Asia		—		—		—		4,793			—			—
Star Asia Manager		—		—		—		—			229			—
Star Asia SPV		—		—		—		—			80			—
EuroDekania		167		—		—		22			—			—
MFCA		—		—		30		70			—			5
Deep Value		774		—		—		1,095			6			—
Duart Capital		—		—		—		—			(437	)		—

Total	$	1,017	$	4	$	30	$	5,899		$	(122	)	$	2

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

E. Additional Investment in Star Asia

In March 2010, the Company purchased 2,279,820 common shares of Star Asia for $1,334 and 1,139,910 units of Star Asia SPV for $4,058 (a total of $5,392) directly from Star Asia as part of a rights offering.

In June 2010, the Company received an in-kind distribution of $55 in the form of 109,890 shares of Star Asia from the Company’s equity method affiliate, Star Asia SPV.

F. Directors and Employees

In addition to the employment agreements the Company has entered into with its chairman, its president and its chief financial officer, the Company has entered into its standard indemnification agreement with each of its directors and executive officers.

G. Other

From time to time, the Company’s U.S. broker-dealer subsidiaries provided certain brokerage services to its employees in the ordinary course of doing business. The Company recognized immaterial amounts of revenue from these activities for the six and three months ended June 30, 2011 and 2010.

25. 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 24 and final settlement of those transactions in cash. All amounts are non-interest bearing.

DUE FROM/DUE TO RELATED PARTIES

(Dollars in Thousands)


	June 30, 2011		December 31, 2010
RAIT	$	(a)	$	53
Deep Value		—		465
Deep Value GP		10		15
Deep Value GP II		59		59
Star Asia Manager		30		64
Cohen Brothers Financial, LLC		189		310
Employees		162		—

Total Due from Related Parties	$	450	$	966

Cohen Financial Group, Inc.	$	—	$	26
Employees and Other		7		8

Total Due to Related Parties	$	7	$	34

(a)	Effective January 1, 2011, RAIT is no longer considered a related party, and, therefore any amounts due from or due to RAIT are included as component of other receivables in the consolidated balance sheets.

26. SUBSEQUENT EVENT

Exchange Offer of Contingent Convertible Senior Notes

On June 20, 2011, the Company commenced an offer to exchange, at the election of each holder, any and all of the Company’s outstanding 7.625% Contingent Convertible Senior Notes due 2027 (the “Old Notes”). Under the terms and subject to the conditions of the Exchange Offer, for each validly tendered and accepted $1,000 principal amount of the Old Notes, an eligible holder received $1,000 principal amount of a new series of 10.50% Contingent Convertible Senior Notes due 2027 (the “New Notes”). The Exchange Offer expired on July 19, 2011. The purpose of the offer was to improve the Company’s financial flexibility by extending the first date at which holders of the Old Notes can require the Company to repurchase the Old Notes from May 15, 2012 to May 15, 2014.

In July 2011, $7,621 aggregated principal amount of the Old Notes were tendered for exchange, representing approximately 39% of the principal amount of the Old Notes outstanding. In accordance with the terms of the Exchange Offer, the Company issued $7,621 aggregate principal amount of a new series of 10.50% Contingent Convertible Senior Notes due 2027 in exchange for the $7,621 aggregate principal amount of the Old Notes that were tendered. The Company also paid in cash all accrued and unpaid interest on the Old Notes tendered and accepted in the Exchange Offer to, but not including, the settlement date. The Company recognized a loss on extinguishment of debt of $104 in July 2011.

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, 2010.

“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 an investment firm specializing in credit-related fixed income investments. We began operations, through our predecessors, in 1999 as an investment firm focused on small and mid-cap banks, but have grown over the past years into a more diversified fixed income specialty investment firm. We are organized into three business segments: Capital Markets, Asset Management, and Principal Investing.

•

Capital Markets: Our Capital Markets business segment consists of credit-related fixed income sales, trading and financing, as well as new issue placements in corporate and securitized products and advisory services revenue. Our fixed income sales and trading group provides trade execution to corporate and institutional investors. We specialize in the following products: corporate bonds and loans, ABS, MBS, CLOs, collateralized bond obligations, CMBS, RMBS, SBA loans, U.S. government bonds, U.S. government agency securities, broker 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 cash equity and derivative products. As more fully discussed below, on May 31, 2011, we completed the interim closing of our acquisition of PrinceRidge pursuant to which we contributed the equity interests in a subsidiary comprising a substantial part of our Capital Markets segment to PrinceRidge in exchange for a majority of the equity interests in PrinceRidge. As a result of the interim closing, a substantial portion of our Capital Markets segment is conducted through PrinceRidge.

•

Asset Management: We manage assets within investment funds, managed accounts, permanent capital vehicles, and collateralized debt obligations (collectively, “investment vehicles”). A collateralized debt obligation 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. The lenders have recourse only to the assets securing the loan. Our Asset Management business segment includes our fee-based asset management operations which include on-going base and incentive management fees. As of June 30, 2011, we had approximately $9.3 billion in assets under management (“AUM”).

•

Principal Investing: Our Principal Investing business segment is comprised primarily of our seed capital investments in investment vehicles we manage.

We generate our revenue by business segment primarily through:

Capital Markets:

•

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

•

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 the issuance of newly created debt, equity, and hybrid financial instruments;

Asset Management:

•

asset management fees for our on-going services as asset manager charged and earned by managing investment vehicles, which may include fees both senior and subordinated to the securities issued by the investment vehicle; and

•

incentive management fees earned based on the performance of the various investment vehicles;

Principal Investing:

•

gains and losses (unrealized and realized) and income and expense earned on securities, primarily seed capital investments in vehicles we manage, 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 which are unpredictable and beyond our control. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. Severe market fluctuations or weak economic conditions could ultimately reduce our trading volume and revenues and adversely affect our profitability.

A portion of our revenues are 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 are generated from new issue and advisory engagements. The fees charged and volume of these engagements are sensitive to the overall business environment.

A portion of our revenues are 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.

A portion of our revenues are generated from principal investing activities. Therefore, our revenues are impacted by the underlying operating results of these investments. As of June 30, 2011, we had $42,561 of other investments, at fair value representing our principal investment portfolio. Of this amount, $41,722 or 98% is comprised of investments in three separate investment funds and permanent capital vehicles: Star Asia, EuroDekania, and Tiptree Financial Partners, L.P. Furthermore, the investment in Star Asia is our largest single principal investment and has a fair value of $35,761 representing 84% of the total amount of other investments, at fair value. Star Asia seeks to invest 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. Therefore, our results of operations and financial condition will be significantly impacted by the financial results of these investments and, in the case of Star Asia, the Japanese real estate market in general. Our investment in Star Asia and our principal investing revenue was impacted by the earthquake, tsunami, and nuclear disaster in Japan that occurred during the first quarter of 2011. See “Revenues – Principal Transactions and Other Income” below.

Margin Pressures in Corporate Bond Brokerage Business

During 2010 and the first half of 2011, margins earned in certain products and markets within the corporate bond brokerage business have decreased materially as competition has increased and financial markets have recovered from the recent credit crisis. Further, we 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) building out our European capital markets business; (iii) adding smaller customers; (iv) making greater use of electronic trading platforms; and (v) acquiring new product lines, such as the acquisition of JVB and PrinceRidge (see discussion below). We believe these efforts will help insulate us from the reduction in margins in the corporate bond brokerage business. However, there can be no certainty that we will be successful in these efforts. If unsuccessful, we will likely see a decline in the profitability of our capital markets segment.

Recent 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. 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 or Transactions

PrinceRidge

On May 31, 2011, we completed the transactions contemplated by the Contribution Agreement, whereby we acquired a 69.9% interest in PrinceRidge. We contributed $45,000 which was comprised of cash, amounts payable, and the equity ownership interests in Cohen & Company Capital Markets, LLC (“CCCM”), a broker-dealer comprising a substantial part of our capital markets segment, to PrinceRidge in exchange for a 69.9% interest (consisting of equity and profit interests) in PrinceRidge. The transactions contemplated by the Contribution Agreement remain subject to the final approval of FINRA. See Note 4 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

Exchange Offer of Contingent Convertible Senior Notes Due 2027

On June 20, 2011, we commenced an offer to exchange, at the election of each holder, any and all of our outstanding 7.625% Contingent Convertible Senior Notes due 2027 (the “Old Notes”). Under the terms and subject to the conditions of the Exchange Offer, for each validly tendered and accepted $1,000 principal amount of the Old Notes, an eligible holder received $1,000 principal amount of a new series of 10.50% Contingent Convertible Senior Notes due 2027 (the “New Notes”). The Exchange Offer expired on July 19, 2011. The purpose of the offer was to improve the Company’s financial flexibility by extending the first date at which holders of the Old Notes can require us to repurchase the Old Notes from May 15, 2012 to May 15, 2014.

In July 2011, $7,621 aggregate principal amount of the Old Notes were tendered for exchange, representing approximately 39% of the principal amount of the Old Notes outstanding. In accordance with the terms of the Exchange Offer, we issued $7,621 aggregate principal amount of New Notes exchange for the $7,621 aggregate principal amount of the Old Notes that were tendered. We also paid in cash all accrued and unpaid interest on the Old Notes tendered and accepted in the Exchange Offer to, but not including, the settlement date. We recognized a loss on extinguishment of debt of $104 in July 2011. See notes 15 and 26 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

Consolidated Results of Operations

The following 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.

Six Months Ended June 30, 2011 compared to the Six Months Ended June 30, 2010

The following table sets forth information regarding our consolidated results of operations for the six months ended June 30, 2011 and 2010.

INSTITUTIONAL FINANCIAL MARKETS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands)

(Unaudited)


	Six months ended June 30,						Favorable/(Unfavorable)
	2011			2010			$ Change			% Change
Revenues
Net trading	$	43,514		$	42,458		$	1,056			2	%
Asset management		11,225			13,014			(1,789	)		(14	)%
New issue and advisory		1,240			2,073			(833	)		(40	)%
Principal transactions and other income		(208	)		19,999			(20,207	)		(101	)%

Total revenues		55,771			77,544			(21,773	)		(28	)%

Operating expenses
Compensation and benefits		43,421			50,403			6,982			14	%
Business development, occupancy, equipment		3,274			2,721			(553	)		(20	)%
Subscriptions, clearing, and execution		5,542			3,208			(2,334	)		(73	)%
Professional fees and other operating		9,152			8,987			(165	)		(2	)%
Depreciation and amortization		973			1,271			298			23	%

Total operating expenses		62,362			66,590			4,228			6	%

Operating income / (loss)		(6,591	)		10,954			(17,545	)		(160	)%

Non operating income / (expense)
Interest expense		(2,929	)		(3,822	)		893			23	%
Gain on repurchase of debt		—			886			(886	)		(100	)%
Gain on sale of management contracts		—			971			(971	)		(100	)%
Income / (loss) from equity method affiliates		4,530			(108	)		4,638			N/M

Income before income tax expense / (benefit)		(4,990	)		8,881			(13,871	)		(156	)%
Income tax expense / (benefit)		(346	)		1,123			1,469			131	%

Net income / (loss)		(4,644	)		7,758			(12,402	)		(160	)%
Less: Net income/ (loss) attributable to the noncontrolling interest		(1,648	)		2,783			4,431			159	%

Net income / (loss) attributable to IFMI	$	(2,996	)	$	4,975		$	(7,971	)		(160	)%

N/M = Not Meaningful

Revenues

Revenues decreased by $21,773, or 28%, to $55,771 for the six months ended June 30, 2011 from $77,544 for the six months ended June 30, 2010. As discussed in more detail below, the change was comprised of decreases of $20,207 in principal transactions and other income, $1,789 in asset management revenue and $833 in new issue and advisory revenue, partially offset by an increase of $1,056 in net trading revenue.

Net Trading

Net trading revenue increased $1,056, or 2%, to $43,514 for the six months ended June 30, 2011 from $42,458 for the six months ended June 30, 2010.

Net trading revenue for the six months ended June 30, 2011 includes $8,861 of net trading revenue from JVB which was acquired in January 2011 and $1,414 of incremental net trading revenue from the acquisition of PrinceRidge which was acquired on May 31, 2011. Excluding the increase in net trading revenue from JVB and PrinceRidge, the remaining decrease in net trading revenue for the six months ended June 30, 2011 was primarily the result of (i) lower trading volumes and (ii) reduction in comparable results due to increases in the value of certain leveraged credit products recognized in the 2010 period.

Our net trading revenue includes unrealized gains on our trading investments, as of the applicable measurement date, which may never be realized due to changes in market or other conditions not in our control that may adversely affect the ultimate value realized from our trading investments. In addition, our net trading revenue also includes realized gains on certain proprietary trading positions that were sold during the six months ended June 30, 2011. Our ability to derive trading gains from trading positions is subject to market conditions. Due to volatility and uncertainty in the capital markets, the net trading revenue recognized during the six months ended June 30, 2011 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 7 and 8 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q. The fair value estimates made by us may not be indicative of the final sale price at which these assets may be sold.

Asset Management

Assets Under Management

AUM refers to our assets under management and equals the sum of: (1) the gross assets included in collateralized debt obligations that we have sponsored and manage; plus (2) the gross assets accumulated and temporarily financed in warehouse facilities during the accumulation phase of the securitization process, which gross assets are intended to be included in collateralized debt obligations; plus (3) the NAV of the permanent capital vehicles and investment funds we manage; plus (4) the NAV of other managed accounts.

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. Our AUM measure includes, for instance, certain AUM for which we charge either no fees or nominal fees which are generally related to our assets in the accumulation phase. 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)


	As of June 30,				As of December 31,
	2011		2010		2010		2009		2008
Company sponsored collateralized debt obligations (1)	$	9,152,574	$	13,791,804	$	9,730,374	$	15,569,780	$	23,486,862
Other managed assets (2)		—		—		—		—		177,447
Permanent capital vehicles		157,319		172,066		171,028		161,984		324,764
Investment funds		—		252,368		129,027		243,894		301,675
Managed accounts (3)		34,989		270,436		288,608		230,285		—

Assets under management (end of period) (4)	$	9,344,882	$	14,486,674	$	10,319,037	$	16,205,943	$	24,290,748

Average assets under management — company sponsored collateralized debt obligations	$	9,417,654	$	14,567,781	$	12,199,716	$	17,524,608	$	30,005,018

(1)

AUM for company sponsored collateralized debt obligations does not include the assets of the Alesco X —XVII securitizations as of June 30, 2011 and December 31, 2010 since we ceased being the manager of such assets on July 29, 2010. The assets of the Alesco X — XVII securitizations are included in the amounts for 2009 and 2008.

(2)	Includes assets in the accumulation phase as well as other assets managed for third parties or affiliates.

(3)	Represents client funds managed pursuant to separate account arrangements. Subsequent to March 28, 2011, certain separate account arrangements were excluded due to the sale to the Buyer. See note 5 to our consolidated financial statements include in Item 1 in this Quarterly Report on Form 10-Q.

(4)	AUM for company sponsored collateralized debt obligations, other managed assets, permanent capital vehicles, investment funds and other managed accounts represents total AUM at the period indicated.

Asset management fees decreased by $1,789, or 14%, to $11,225 for the six months ended June 30, 2011 from $13,014 for the six months ended June 30, 2010, 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, 2011		June 30, 2010		Change
Collateralized debt obligations and related service agreements	$	9,595	$	10,087	$	(492	)
Investment funds and other		1,630		2,927		(1,297	)

Total	$	11,225	$	13,014	$	(1,789	)

Collateralized Debt Obligations

Asset management revenue from company-sponsored collateralized debt obligations decreased $492 to $9,595 for the six months ended June 30, 2011 from $10,087 for the six months ended June 30, 2010. The following table summarizes the periods presented by asset class:

FEES EARNED BY ASSET CLASS

(dollars in thousands)


	June 30, 2011		June 30, 2010		Change
Trust preferred securities and insurance company debt — U.S.	$	5,953	$	6,118	$	(165	)
High grade and mezzanine ABS		1,190		1,546		(356	)
Trust preferred securities and insurance company debt — Europe		1,581		1,558		23
Broadly syndicated loans — Europe		871		865		6

Total	$	9,595	$	10,087	$	(492	)

Asset management fees for TruPS and insurance company debt of United States companies decreased primarily because the average AUM in this asset class declined as a result of greater levels of deferrals and defaults of the underlying assets. In addition, on July 29, 2010, we entered into a Master Transaction Agreement pursuant to which we sold to a third party collateral management rights and responsibilities arising after the sale relating to the Alesco X through XVII securitizations. In connection with the Master Transaction Agreement, we entered into a three-year Services Agreement under which we will provide certain services to the third party purchaser. In addition, the Master Transaction Agreement calls for additional payments to be made to us on a quarterly basis through February 23, 2017 if the management fees earned by the third party exceed certain thresholds. The assets of the Alesco X through XVII securitizations are not included in our AUM disclosed in the table above for the period ended June 30, 2011 because we are no longer the manager. However, we continue to generate revenue through the Services Agreement related to these securitizations.

Substantially all of our TruPS trusts have stopped paying subordinated management fees. However, we will begin accruing the subordinated asset management fees again if payments resume and, in our estimate, continued payment by the trusts is reasonably assured. If payments resume in the future, but we are unsure of continued payment, we will recognize the subordinated asset management fee as payments are received and will not accrue the fee on a monthly basis.

Asset management fees for high grade and mezzanine ABS declined primarily because the average AUM in this asset class declined due to defaults of the underlying assets and liquidations of certain collateralized debt obligations.

Asset management fees for TruPS and insurance company debt of European companies and asset management fees for broadly syndicated loans — Europe increased primarily because of positive exchange rate fluctuations.

Investment Funds and Other

Our asset management revenue from investment funds is comprised of fees from the management of Deep Value and prior to 2011 the fees from the management of Brigadier.


	June 30, 2011		June 30, 2010		Change
Deep Value	$	452	$	1,511	$	(1,059	)
Brigadier		—		54		(54	)
Separate accounts and other		1,178		1,362		(184	)

Total	$	1,630	$	2,927	$	(1,297	)

The decrease in Deep Value revenue was primarily because the first Deep Value fund substantially completed its liquidation process during the third quarter of 2010 and distributed any remaining cash it had to its investors during the first half of 2011, and, therefore less management fees generated by Deep Value were earned by us. In addition, on March 29, 2011, we sold our investment advisory agreements relating to the Deep Value funds to a new entity owned by two former Company employees referred to as the Buyer in which we will only be entitled to 10% of all revenue, net of certain expenses, earned by the Buyer between March 29, 2011 and December 31, 2014. This revenue sharing arrangement will be recorded as

a component of principal transactions and other revenue going forward. See notes 5 and 11 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

The decrease in Brigadier revenue was due to a decrease in base management fee revenue of $54. Effective beginning in the second quarter of 2010, the Brigadier fund ceased permitting redemptions pending its final liquidation which was completed during the fourth quarter of 2010. We ceased charging management fees effective April 30, 2010.

The net decrease of $184 from separate accounts and other was primarily comprised of a decrease in managed accounts fees. On March 29, 2011, we also sold, our investment advisory agreements relating to certain managed accounts to the Buyer in which we will only be entitled to 10% of all revenue, net of certain expenses, earned by the Buyer between March 29, 2011 and December 31, 2014 and, therefore, it is likely that less management fees generated by these managed accounts will be earned by us in the future. See notes 5 and 11 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

New Issue and Advisory Revenue

New issue and advisory revenue decreased by $833, or 40%, to $1,240 for the six months ended June 30, 2011 as compared to $2,073 for the same period in 2010. The decrease is primarily attributable to a decreased number of new issue and advisory engagements that closed during 2011 as compared to 2010, including the arrangement or placement of newly created debt, equity, and hybrid financial instruments.

Principal Transactions and Other Income

Principal transactions and other income decreased by $20,207, or 101%, to a loss of $208 for the six months ended June 30, 2011, as compared to income of $19,999 for the six months ended June 30, 2010.

Principal Transactions & Other Income

(dollars in thousands)


	June 30, 2011			June 30, 2010			Change
Change in fair value of other investments, at fair value	$	(1,122	)	$	19,419		$	(20,541	)
Foreign currency		7			(180	)		187
Dividend, interest, and other income		907			760			147

Total	$	(208	)	$	19,999		$	(20,207	)

The decrease in the change in fair value of other investments of $20,541 is comprised of the following:


	June 30, 2011			June 30, 2010		Change
EuroDekania		1,619			23		1,596
Star Asia		(2,014	)		13,748		(15,762	)
RAIT		—			387		(387	)
Brigadier		—			60		(60	)
Tiptree Financial Partners, L.P. (MFCA in 2010)		71			70		1
Deep Value		(9	)		2,377		(2,386	)
Duart Fund		(456	)		—		(456	)
Other		(333	)		2,754		(3,087	)

Total	$	(1,122	)	$	19,419	$	(20,541	)

During the second quarter of 2011, we acquired 353,244 additional shares of EuroDekania at an amount less than the underlying NAV of EuroDekania. Accordingly, this investment resulted in a gain. Of the total gain recorded in 2011, $323 represented unrealized gains recognized on the newly purchased shares and $1,296 represented unrealized gains recognized on the shares owned in both periods. We carry our investment in EuroDekania at the underlying NAV of the fund.

During the first quarter of 2010 we acquired Star Asia shares in a rights offering at an amount less than the underlying NAV of Star Asia. Accordingly, this investment resulted in a gain. During the second quarter of 2010 we also purchased 551,166 shares directly from unrelated third parties for $1,837 and received 109,890 shares as an in-kind distribution of $55 from Star Asia SPV (which was the price for which Star Asia SPV had acquired the shares from third party investors through a tender offer). All of these purchases, including the tender offer, were made at amounts below Star Asia’s NAV. For the six months ended June 30, 2010, the change in fair value of our investment in Star Asia was comprised of approximately $8,821 from our investment in the Star Asia rights offering at a discount to NAV, $3,757 from our purchases of shares and receipt of shares from Star Asia SPV during the second quarter at amounts below NAV, and $1,170 from the changes in the underlying NAV of Star Asia.

During the first half of 2011, certain of Star Asia’s investments were impacted by the earthquake, tsunami, and nuclear disaster in Japan that occurred during the first quarter of 2011. For the six months ended June 30, 2011, the change in fair value of our investment in Star Asia was comprised of (i) a reduction in value of $4,150 resulting from the reduction in value of certain of Star Asia’s investments that were impacted by the earthquake, tsunami, and nuclear disaster in Japan; partially offset by (ii) an increase in value of $770 resulting from changes fluctuations in the Yen as compared to the U.S. dollar; (iii) an increase in value of $346 from remaining changes in the investments and underlying NAV of Star Asia; and (iv) an increase in value of $1,020 due to the purchase of shares of Star Asia from a third party at a discount to NAV during the first quarter of 2011.

RAIT is a publicly traded company, so changes in the value of our investment correspond with changes in the public share price. We sold our investment in RAIT during the first quarter of 2010.

We carried our investment in Brigadier at the NAV of the underlying fund. During the fourth quarter of 2010, the Brigadier fund completed its liquidation.

In June 2011, MFCA became a wholly owned subsidiary of Tiptree Financial Partners, L.P. We exchanged the 1,000,200 shares of MFCA for 111,133 shares of Tiptree Financial Partners, L.P. See note 7 to the consolidated financial statements. We carry our investment in Tiptree at the NAV of the underlying fund. We carried our investment in MFCA at the NAV of the underlying fund.

We carry our investment in the Duart Fund at the NAV of the underlying fund. Effective December 31, 2010, we submitted a redemption notice to the Duart Fund to redeem 100% of our capital. We received our redemption in April 2011.

As of June 30, 2011, Deep Value completed its liquidation. We carried our investment in Deep Value at the NAV of the underlying fund. The fund was substantially liquidated in the fourth quarter of 2010; the 2011 change in NAV was primarily attributable to wind down costs of the fund.

The change in other investments was primarily due to a decrease of $3,277 related to certain investments in securitizations that were sold for a gain during 2010 and a decrease in other miscellaneous investments of $105, partially offset by an increase of $295 related to decreased net realized and unrealized losses on Japanese Yen-based forward contracts

put in place to partially hedge fluctuations in the investment value of Star Asia. We receive payments under certain asset management contracts in Euros or U.K. Pounds Sterling; however, our functional currency is the U.S. Dollar. The foreign currency fluctuations are due to changes in the exchange rates between Euros, U.K. Pounds Sterling and U.S. Dollars in the related periods. We have not hedged our foreign currency exposure related to management fees paid in Euros or U.K. Pounds Sterling to date.

Operating Expenses

Operating expenses decreased by $4,228, or 6%, to $62,362 for the six months ended June 30, 2011 from $66,590 for the six months ended June 30, 2010. The change was due to decreases of $6,982 in compensation and benefits, and $298 in depreciation and amortization, partially offset by increases of $553 in business development, occupancy, equipment, $2,334 in subscriptions, clearing and execution, and $165 in professional fees and other operating.

Compensation and Benefits

Compensation and benefits decreased by $6,982, or 14%, to $43,421 for the six months ended June 30, 2011 from $50,403 for the six months ended June 30, 2010.

COMPENSATION AND BENEFITS

(dollars in thousands)


	June 30, 2011		June 30, 2010		Change
Cash compensation and benefits	$	37,995	$	48,582	$	(10,587	)
Equity-based compensation		5,426		1,821		3,605

Total	$	43,421	$	50,403	$	(6,982	)

Cash compensation and benefits in the table above is primarily comprised of salary, incentive compensation and benefits. The decrease in cash compensation and benefits is primarily a result of the decrease in incentive compensation which is tied to revenue and operating profitability. We incurred an expense of $3,000 for cash compensation owed to our President, Christopher Ricciardi, as a result of the amendment of his employment agreement. This expense partially offset the decline in cash compensation due to decreased incentive based compensation. Our total headcount increased from 151 at June 30, 2010 to 264 at June 30, 2011, including 58 employees of JVB as of June 30, 2011 and 83 employees of PrinceRidge as of June 30, 2011.

Compensation and benefits includes equity-based compensation which increased $3,605, or 198%, to $5,426 for the six months ended June 30, 2011 from $1,821 for the six months ended June 30, 2010.

For the six months ended June 30, 2010, compensation and benefits includes equity-based compensation of $1,218 related to restricted units granted under the Cohen Brothers, LLC 2009 Equity Award Plan, and $603 related to restricted shares of our Common Stock. For the six months ended June 30, 2011, compensation and benefits includes equity-based compensation of $504 related to restricted units granted under the Cohen Brothers, LLC 2009 Equity Award Plan, $424 related to partnership units granted in connection with the JVB acquisition, $107 related to membership units of PrinceRidge and $4,391 related to restricted shares of our Common Stock. Included in the $4,391 related to restricted shares of our Common Stock for the 2011 period is $1,800 of expense attributable to an award of 360,000 restricted shares granted during the first half of 2011 to our president, Mr. Christopher Ricciardi. The award was modified during the second quarter of 2011 pursuant to an amended employment agreement entered into with Mr. Ricciardi. The modification converted the restricted stock award from equity treatment to liability treatment. During the second quarter of 2011, we reclassified a total of $1,221 from total equity, comprised of $823 from additional paid in capital and $398 from non-controlling interest, to accrued compensation in the liability section of the Company’s consolidated balance sheet. Since the liability treatment of the restricted stock award requires it to be revalued at the end of each reporting period, we may record additional reclassifications between total equity and accrued compensation liability in future periods and may also record additional compensation.

Business Development, Occupancy and Equipment

Business development, occupancy, and equipment increased by $553, or 20%, to $3,274 for the six months ended June 30, 2011 from $2,721 for the six months ended June 30, 2010. The increase was primarily due to increases in rent expense of $279, in business development expenses, such as promotion, advertising, travel and entertainment of $107 and other expenses associated with occupancy and equipment of $167. The increase in rent expense is primarily due to the office space we assumed when we acquired JVB and PrinceRidge.

Subscriptions, Clearing and Execution

Subscriptions, clearing, and execution increased by $2,334, or 73%, to $5,542 for the six months ended June 30, 2011 from $3,208 for the six months ended June 30, 2010. The increase included an increase of $690 in subscriptions primarily due to an increase in headcount as noted in the discussion of compensation above, and an increase of $1,644 in clearing and execution composed of $811 related to the acquisition of JVB, $102 related to the acquisition of PrinceRidge, $352 related to our equity derivatives business and $379 relating to other increases in clearing and execution costs.

Professional Fees and Other Operating Expenses

Professional fees and other operating expenses increased by $165, or 2%, to $9,152 for the six months ended June 30, 2011 from $8,987 for the six months ended June 30, 2010. The increase included an increase of $604 in legal and professional fees and an increase of $354 in other costs, partially offset by a decrease in consulting fees of $374 and a decrease in recruiting fees of $419.

Depreciation and Amortization

Depreciation and amortization decreased by $298, or 23%, to $973 for the six months ended June 30, 2011 from $1,271 for the six months ended June 30, 2010. The decline was primarily due to a decrease in amortization expense on certain intangible assets that were fully amortized prior to January 1, 2011.

Non-Operating Income and Expense

Interest Expense, net

Interest expense decreased by $893, or 23%, to $2,929 for the six months ended June 30, 2011 from $3,822 for the six months ended June 30, 2010. This decrease of $893 was comprised of (a) a decrease of $283 of interest incurred on our bank debt; (b) a decrease of $89 of interest incurred on the convertible senior notes; (c) a decrease of $32 of interest incurred on the junior subordinated notes; and (d) a decrease of $476 of interest incurred on subordinated notes payable; and (e) an increase of $13 of interest income related to the amount owed to a withdrawing partner of PrinceRidge (see note 16). The decrease in interest expense of $283 on bank debt was primarily due to the fact that the amount of bank debt outstanding during the six months ended June 30, 2011 and the interest rate at which we borrowed was lower as compared to the comparable period in 2010. The decrease in interest expense of $89 on the convertible senior notes was due to the fact that we had repurchased $6,644 notional amount of convertible senior notes from unrelated third parties at various times during 2010. The decrease in interest expense of $32 on the junior subordinated notes was primarily due to the amortization of the discount. The decrease in interest expense of $476 on subordinated notes payable was due to the fact that CCS repurchased a total of $8,081 principal amount of subordinated notes payable during the third quarter of 2010.

Gain on Repurchase of Debt

In March 2010, we repurchased $5,144 notional amount of contingent convertible senior notes from an unrelated third party for $4,115. The notes had a carrying value of $5,001 resulting in a gain from repurchase of debt of $886 which was included as a separate component of non-operating income / (expense) in our consolidated statements of operations.

We did not repurchase any debt in the six month period ended June 30, 2011.

Gain on Sale of Management Contracts

The gain on sale of management contracts decreased $971, or 100%, to $0 for the six months ended June 30, 2011 from $971 for the six months ended June 30, 2010. The gain of $971 in the 2010 period represented contingent payments we received based on the amount of subordinated fees received by an unrelated third party under the three CLO management contracts we sold in February 2009 that comprised substantially all of our middle market loans-U.S. (Emporia) business line. During 2010, we reached the maximum limit of additional fees we could receive under these contracts, and therefore, we no longer record any additional gain on these contracts in future periods.

Income / (Loss) from Equity Method Affiliates

Income from equity method affiliates increased by $4,638 to $4,530 for the six months ended June 30, 2011 from a loss of $108 for the six months ended June 30, 2010. Income or loss from equity method affiliates represents our share of the related entities’ earnings. As of June 30, 2010 and 2011, we had five equity method investees: (1) Star Asia Manager; (2) Deep Value GP; (3) Deep Value GP II; (4) Star Asia SPV; and (5) Duart Capital. See notes 12 and 24 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

During the second quarter of 2011 another Deep Value fund for which Deep Value GP served as the general partner was substantially liquidated. In conjunction with the liquidation and distribution of funds to investors, the Deep Value GP recognized its incentive fee earned in the amount of $8,719. We own 50% of the Deep Value GP. Therefore, our share of this incentive fee was $4,359 and was included as a component of income from equity method affiliates during the six months ended June 30, 2011.

Income Tax Expense / (Benefit)

Income tax expense decreased by $1,469 to an income tax benefit of $346 for the six months ended June 30, 2011 from income tax expense of $1,123 for the six months ended June 30, 2010. The benefit realized by us during the six months ended June 30, 2011 was a result of the book loss during the first six months ended June 30, 2011 as well as a result of changes in the Company’s state apportionment as a result of our acquisition of JVB and PrinceRidge. The combined impact of these two acquisitions resulted in a reduction in the Company’s state effective tax rate. Because the Company has a net deferred tax liability, the reduction in the state effective rate reduces this liability and results in a tax benefit to us. This tax benefit was recorded as a discrete item in the first half of 2011.

The tax expense during the six months ended June 30, 2010 was the result of state, local, and foreign taxes accrued.

We do not currently recognize federal income taxes expense due to the existence of the Company’s net operating loss carry forwards and valuation allowances offsetting the related deferred tax assets. See note 21 to the December 31, 2010 consolidated financial statements of the Company’s Annual Report on Form 10-K for a more complete description of the Company’s tax attributes and unrecognized tax benefits.

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, 2011 and 2010 was comprised of the 32.5% non-controlling interest and 33.8% non-controlling interest, respectively, 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 includes 30.1% of redeemable non-controlling interest related to partnership interests in PrinceRidge other than interests held by us for the 2011 period:

Summary calculation of non-controlling interest - Six Months Ended June 30, 2011


	Wholly owned subsidiaries			Majority owned subsidiaries			Total Operating LLC			IFMI			Consolidated
Net loss before tax	$	(4,784	)	$	(206	)	$	(4,990	)	$	—		$	(4,990	)
Income tax benefit		—			—			(35	)		(311	)		(346	)

Net income / (loss) after tax		(4,784	)		(206	)		(4,955	)		311			(4,644	)
Majority owned subsidiary non-controlling interest					(53	)		(53	)

Net loss attributable to the Operating LLC		(4,784	)		(153	)		(4,902	)
Operating LLC non-controlling interest %								32.5	%

Operating LLC non-controlling interest								(1,595	)
Majority owned subsidiary non-controlling interest								(53	)

Total non-controlling interest							$	(1,648	)

Summary calculation of non-controlling interest - Six Months Ended June 30, 2010


	Wholly owned subsidiaries		Majority owned subsidiaries		Total Operating LLC			IFMI			Consolidated
Net income before tax	$	8,881	$	—	$	8,881		$	—		$	8,881
Income tax expense		—		—		649			474			1,123

Net income / (loss) after tax		8,881		—		8,232			(474	)		7,758
Majority owned subsidiary non-controlling interest				—		—

Net income attributable to the Operating LLC		8,881		—		8,232
Operating LLC non-controlling interest %						33.8	%

Operating LLC non-controlling interest						2,783
Majority owned subsidiary non-controlling interest						—

Total non-controlling interest					$	2,783

Three Months Ended June 30, 2011 compared to the Three Months Ended June 30, 2010

The following table sets forth information regarding our consolidated results of operations for the three months ended June 30, 2011 and 2010.

INSTITUTIONAL FINANCIAL MARKETS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands)

(Unaudited)


	Three months ended June 30,						Favorable/ (Unfavorable)
	2011			2010			$ Change			% Change
Revenues
Net trading	$	16,240		$	19,690		$	(3,450	)		(18	)%
Asset management		5,255			6,244			(989	)		(16	)%
New issue and advisory		1,131			1,405			(274	)		(20	)%
Principal transactions and other income		831			8,472			(7,641	)		(90	)%

Total revenues		23,457			35,811			(12,354	)		(34	)%

Operating expenses
Compensation and benefits		21,433			23,272			1,839			8	%
Business development, occupancy, equipment		1,835			1,338			(497	)		(37	)%
Subscriptions, clearing, and execution		2,727			1,653			(1,074	)		(65	)%
Professional fees and other operating		5,137			4,216			(921	)		(22	)%
Depreciation and amortization		503			628			125			20	%

Total operating expenses		31,635			31,107			(528	)		(2	)%

Operating income / (loss)		(8,178	)		4,704			(12,882	)		(274	)%

Non operating income / (expense)
Interest expense		(1,447	)		(1,829	)		382			(21	)%
Gain on sale of management contracts		—			836			(836	)		(100	)%
Income / (loss) from equity method affiliates		4,435			(122	)		4,557			N/M

Income before income tax expense / (benefit)		(5,190	)		3,589			(8,779	)		(245	)%
Income tax expense / (benefit)		(133	)		392			525			134	%

Net income / (loss)		(5,057	)		3,197			(8,254	)		(258	)%
Less: Net income / (loss) attributable to the non-controlling interest		(1,686	)		1,137			2,823			248	%

Net income / (loss) attributable to IFMI	$	(3,371	)	$	2,060		$	(5,431	)		(264	)%

N/M = Not Meaningful

Revenues

Revenues decreased by $12,354, or 34%, to $23,457 for the three months ended June 30, 2011 from $35,811 for the three months ended June 30, 2010. As discussed in more detail below, the change was comprised of decreases of $7,641 in principal transactions and other income, $3,450 in net trading revenue, $989 in asset management revenue and $274 in new issue and advisory revenue.

Net Trading

Net trading revenue decreased $3,450, or 18%, to $16,240 for the three months ended June 30, 2011 from $19,690 for the three months ended June 30, 2010.

Net trading revenue for the three months ended June 30, 2011 includes $3,972 of net trading revenue from JVB which was acquired in January 2011 and $1,414 of incremental net trading revenue from the acquisition of PrinceRidge which was acquired on May 31, 2011. Excluding the increase in net trading revenue from JVB and PrinceRidge, the remaining decrease in net trading revenue for the three months ended June 30, 2011 was primarily the result of (i) lower trading volumes and (ii) reduction in comparable results due to increases in the value of certain leveraged credit products recognized in the 2010 period.

Our net trading revenue includes unrealized gains on our trading investments, as of the applicable measurement date, which may never be realized due to changes in market or other conditions not in our control that may adversely affect the ultimate value realized from our trading investments. In addition, our net trading revenue also includes realized gains on certain proprietary trading positions that were sold during the three months ended June 30, 2011. Our ability to derive trading gains from trading positions is subject to market conditions. Due to volatility and uncertainty in the capital markets, the net trading revenue recognized during the three months ended June 30, 2011 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 7 and 8 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q. The fair value estimates made by us may not be indicative of the final sale price at which these assets may be sold.

Asset Management

Asset management fees decreased by $989, or 16%, to $5,255 for the three months ended June 30, 2011 from $6,244 for the three months ended June 30, 2010, 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, 2011		June 30, 2010		Change
Collateralized debt obligations and related service agreements	$	4,828	$	4,743	$	85
Investment funds and other		427		1,501		(1,074	)

Total	$	5,255	$	6,244	$	(989	)

Collateralized Debt Obligations

Asset management revenue from company-sponsored collateralized debt obligations increased by $85 to $4,828 for the three months ended June 30, 2011 from $4,743 for the three months ended June 30, 2010. The following table summarizes the periods presented by asset class:

FEES EARNED BY ASSET CLASS

(dollars in thousands)


	June 30, 2011		June 30, 2010		Change
Trust preferred securities and insurance company debt — U.S.	$	2,984	$	2,863	$	121
High grade and mezzanine ABS		588		720		(132	)
Trust preferred securities and insurance company debt — Europe		811		746		65
Broadly syndicated loans — Europe		445		414		31

Total	$	4,828	$	4,743	$	85

Asset management fees for TruPS and insurance company debt of United States companies increased primarily due to the additional payments made to us during the quarter attributable to management fees earned by a third party related to the Alesco X through XVII securitizations that exceeded certain thresholds for the three months ended June 30, 2011, partially offset by the decrease in the average AUM in this asset class which declined as a result of greater levels of deferrals and defaults of the underlying assets. On July 29, 2010, we entered into a Master Transaction Agreement pursuant to which we sold to a third party collateral management rights and responsibilities arising after the sale relating to the Alesco X through XVII securitizations. In connection with the Master Transaction Agreement, we entered into a three-year Services Agreement under which we will provide certain services to the third party purchaser. In addition, the Master Transaction Agreement calls for additional payments to be made to us on a quarterly basis through February 23, 2017 if the management fees earned by the third party exceed certain thresholds. The assets of the Alesco X through XVII securitizations are not included in our AUM disclosed in the table above for the period ended June 30, 2011 because we are no longer the manager. However, we continue to generate revenue through the Services Agreement related to these securitizations.

Asset management fees for TruPS and insurance company debt of European companies and asset management fees for broadly syndicated loans — Europe increased because there was an increase in average AUM for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010 for which we earned asset management fees as well as a result of exchange rate fluctuations. These contracts are usually paid in currency other than the U.S. dollar.

Investment Funds and Other

Our asset management revenue from investment funds is comprised of fees from the management of Deep Value and prior to 2011 the fees from the management of Brigadier.


	June 30, 2011		June 30, 2010		Change
Deep Value	$	—	$	774	$	(774	)
Brigadier		—		14		(14	)
Separate Accounts and other		427		713		(286	)

Total	$	427	$	1,501	$	(1,074	)

2011, we sold our investment advisory agreements relating to the Deep Value funds to the Buyer in which we will only be entitled to 10% of all revenue, net of certain expenses, earned by the Buyer between March 29, 2011 and December 31, 2014. This revenue sharing arrangement will be recorded as a component of principal transactions and other revenue going forward. See notes 5 and 11 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

The decrease in Brigadier revenue was due to a decrease in base management fee revenue of $14. Effective beginning in the second quarter of 2010, the Brigadier fund ceased permitting redemptions pending its final liquidation which was completed during the fourth quarter of 2010. We ceased charging management fees effective April 30, 2010.

The net decrease in separate accounts and other of $286 was primarily comprised of a decrease in managed accounts fees. On March 29, 2011, we also sold, through our subsidiary, our investment advisory agreements relating to certain managed accounts to the Buyer in which we will only be entitled to 10% of all revenue, net of certain expenses, earned by the Buyer between March 29, 2011 and December 31, 2014 and, therefore, it is likely that less management fees generated by these managed accounts will be earned by us in the future. See notes 5 and 11 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

New Issue and Advisory Revenue

New issue and advisory revenue decreased by $274, or 20%, to $1,131 for the three months ended June 30, 2011 as compared to $1,405 for the same period in 2010. The decrease is primarily attributable to a decreased number of new issue and advisory engagements that closed during the second quarter of 2011 as compared to the second quarter of 2010, including the arrangement or placement of newly created debt, equity, and hybrid financial instruments.

Principal Transactions and Other Income

Principal transactions and other income decreased by $7,641, or 90%, to $831 for the three months ended June 30, 2011, as compared to $8,472 for the three months ended June 30, 2010.

Principal Transactions & Other Income

(dollars in thousands)


	June 30, 2011		June 30, 2010			Change
Change in fair value of other investments, at fair value	$	418	$	8,249		$	(7,831	)
Foreign currency		131		(128	)		259
Dividend, interest, and other income		282		351			(69	)

Total	$	831	$	8,472		$	(7,641	)

The decrease in the change in fair value of other investments of $7,831 is comprised of the following:


	June 30, 2011			June 30, 2010			Change
EuroDekania		844			22			822
Star Asia		667			4,793			(4,126	)
Brigadier		—			(81	)		81
Tiptree Financial Partners, L.P. (MFCA in 2010)		40			70			(30	)
Deep Value		(9	)		1,095			(1,104	)
Duart Fund		(1	)		—			(1	)
Other miscellaneous		(1,123	)		2,350			(3,473	)

Total	$	418		$	8,249		$	(7,831	)

During the second quarter of 2011, we acquired 353,244 additional shares of EuroDekania at an amount less than the underlying NAV of EuroDekania. Accordingly, this investment resulted in a gain. Of the total gain recorded in the second quarter of 2011, $323 represented unrealized gains recognized on the newly purchased shares and $521 represented gains recognized on the shares owned in both periods. We carry our investment in EuroDekania at the underlying NAV of the fund.

During the second quarter of 2010, we purchased 551,166 shares of Star Asia directly from unrelated third parties for $1,837 and received 109,890 shares as an in-kind distribution of $55 from Star Asia SPV (which was the price for which Star Asia SPV had acquired the shares from third party investors through a tender offer). All of these purchases, including the tender offer, were made at amounts below Star Asia’s net asset value. For the three months ended June 30, 2010, the change in fair value of our investment in Star Asia was comprised of $3,757 from our purchases of shares and receipt of shares from Star Asia SPV during the second quarter at amounts below net asset value and $1,036 from changes in the underlying NAV of Star Asia.

During the first half of 2011, certain of Star Asia’s investments were impacted by the earthquake, tsunami, and nuclear disaster in Japan that occurred during the first quarter of 2011. For the three months ended June 30, 2011, the change in fair value of our investment in Star Asia was comprised of (i) a reduction in value of $2,250 resulting from the reduction in value of certain of Star Asia’s investments that were impacted by the earthquake, tsunami, and nuclear disaster in Japan; partially offset by (ii) an increase in value of $1,970 resulting from changes in fluctuations in the Yen as compared to the U.S. dollar; and (iii) an increase in value of $947 from remaining changes in the investments and underlying NAV of Star Asia.

We carried our investment in Brigadier at the NAV of the underlying fund. During the fourth quarter of 2010, the Brigadier fund completed its liquidation.

As of June 30, 2011, Deep Value completed its liquidation. We carried our investment in Deep Value at the NAV of the underlying fund. The fund was substantially liquidated in the fourth quarter of 2010; the 2011 change in net asset value was primarily attributable to wind down costs of the fund.

The change in other miscellaneous investments was primarily due to a decrease of $3,055 related to certain investments in securitizations sold during 2010, a decrease of $107 related to net realized and unrealized losses on Japanese Yen-based forward contracts put in place to partially hedge fluctuations in the investment value of Star Asia and a decrease in other of $311.

We receive payments under certain asset management contracts in Euros or U.K. Pounds Sterling; however, our functional currency is the U.S. Dollar. The foreign currency fluctuations are due to changes in the exchange rates between

Euros, U.K. Pounds Sterling and U.S. Dollars in the related periods. We have not hedged our foreign currency exposure related to management fees paid in Euros or U.K. Pounds Sterling to date.

Operating Expenses

Operating expenses increased by $528, or 2%, to $31,635 for the three months ended June 30, 2011 from $31,107 for the three months ended June 30, 2010. The change was due to increases of $1,074 in subscriptions, clearing, and execution, $921 in professional fees and other operating expenses, and $497 in business development, occupancy, equipment, partially offset by decreases of $1,839 in compensation and benefits and $125 in depreciation and amortization.

Compensation and Benefits

Compensation and benefits decreased by $1,839, or 8%, to $21,433 for the three months ended June 30, 2011 from $23,272 for the three months ended June 30, 2010.

COMPENSATION AND BENEFITS

(dollars in thousands)


	June 30, 2011		June 30, 2010		Change
Cash compensation and benefits	$	18,196	$	22,251	$	(4,055	)
Equity-based compensation		3,237		1,021		2,216

Total	$	21,433	$	23,272	$	(1,839	)

Cash compensation and benefits in the table above is primarily comprised of salary, incentive compensation and benefits. The decrease in cash compensation and benefits is primarily a result of the decrease in incentive compensation which is tied to revenue and operating profitability. We incurred an expense of $3,000 for cash compensation owed to our President, Christopher Ricciardi, as a result of the amendment of his employment agreement. This expense partially offset the decline in cash compensation due to decreased incentive based compensation. Our total headcount increased from 151 at June 30, 2010 to 264 at June 30, 2011, including 58 employees of JVB as of June 30, 2011, and 83 employees of PrinceRidge as of June 30, 2011.

Compensation and benefits includes equity-based compensation which increased $2,216, or 217%, to $3,237 for the three months ended June 30, 2011 from $1,021 for the three months ended June 30, 2010.

For the three months ended June 30, 2010, compensation and benefits includes equity-based compensation of $667 related to the amortization of restricted units granted under the Cohen Brothers, LLC 2009 Equity Award Plan, and $354 related to restricted shares of our Common Stock. For the three months ended June 30, 2011, compensation and benefits includes equity-based compensation of $342 related to the amortization of restricted units granted under the Cohen Brothers, LLC 2009 Equity Award Plan, $228 related to membership units granted in connection with the JVB acquisition, $107 related to partnership units of PrinceRidge and $2,560 related to restricted shares of our Common Stock. Included in the $2,560 related to restricted shares of our Common Stock for the 2011 period is $1,643 of expense attributable to an award of 360,000 restricted shares granted during the first half of 2011 to our president, Mr. Christopher Ricciardi. The award was modified during the second quarter of 2011 pursuant to an amended employment agreement entered into with Mr. Ricciardi. The modification converted the restricted stock award from equity treatment to liability treatment. During the second quarter of 2011, we reclassified a total of $1,220 from total equity, comprised of $823 from additional paid in capital and $398 from non-controlling interest, to accrued compensation in the liability section of the Company’s consolidated balance sheet. Since the liability treatment of the restricted stock award requires it to be revalued at the end of each reporting period, we may record additional reclassifications between total equity and accrued compensation liability in future periods and may also record additional compensation.

Business Development, Occupancy and Equipment

Business development, occupancy, and equipment increased by $497, or 37%, to $1,835 for the three months ended June 30, 2011 from $1,338 for the three months ended June 30, 2010. The increase was primarily due to an increases in rent expense of $145, in business development expenses, such as promotion, advertising, travel and entertainment of $168 and other expenses associated with occupancy and equipment of $184. The increase in rent expense is primarily due to the office space we assumed when we acquired JVB and PrinceRidge.

Subscriptions, Clearing and Execution

Subscriptions, clearing, and execution increased by $1,074, or 65% to $2,727 for the three months ended June 30, 2011 from $1,653 for the three months ended June 30, 2010. The increase included an increase of $232 in subscriptions primarily due to an increase in headcount as noted in the discussion of compensation above, and an increase of $842 in clearing and execution composed of $443 related to the acquisition of JVB, $102 related to the acquisition of PrinceRidge, $202 related to our equity derivatives business and $95 relating to other increases in clearing and execution costs.

Professional Fees and Other Operating Expenses

Professional fees and other operating expenses increased by $921, or 22%, to $5,137 for the three months ended June 30, 2011 from $4,216 for the three months ended June 30, 2010. The increase included an increase of $935 in legal and

professional fees and an increase of $177 in other costs, partially offset by a decrease in consulting fees of $65, and a decrease in recruiting fees of $126.

Depreciation and Amortization

Depreciation and amortization decreased by $125, or 20%, to $503 for the three months ended June 30, 2011 from $628 for the three months ended June 30, 2010. The decline was primarily due to a decrease in amortization expense on certain intangible assets that were fully amortized prior to January 1, 2011.

Non-Operating Income and Expense

Interest Expense

Interest expense decreased by $382, or 21%, to $1,447 for the three months ended June 30, 2011 from $1,829 for the three months ended June 30, 2010. This decrease of $382 was comprised of (a) a decrease of $106 of interest incurred on our bank debt; (b) a decrease of $19 of interest incurred on the junior subordinated notes; and (c) a decrease of $244 of interest incurred on subordinated notes payable; and (d) an increase of $13 of interest income related to the amount owed to a withdrawing partner of PrinceRidge (see note 16). The decrease in interest expense of $106 on bank debt was primarily due to the fact that the amount of bank debt outstanding during the three months ended June 30, 2011 and the interest rate at which we borrowed was lower as compared to the comparable period in 2010. The decrease in interest expense of $244 on subordinated notes payable was due to the fact that CCS repurchased a total of $8,081 principal amount of subordinated notes payable during the third quarter of 2010.

Gain on Sale of Management Contracts

The gain on sale of management contracts decreased $836, or 100%, to $0 for the three months ended June 30, 2011 from $836 for the three months ended June 30, 2010. The gain of $836 in the 2010 period represented contingent payments we received based on the amount of subordinated fees received by an unrelated third party under the three CLO management contracts we sold in February 2009 that comprised substantially all of our middle market loans-U.S. (Emporia) business line. During 2010, we reached the maximum limit of additional fees we could receive under these contracts, and therefore, we no longer record any additional gain on these contracts in future periods.

Income/ (Loss) from Equity Method Affiliates

Income from equity method affiliates increased by $4,557 to $4,435 for the three months ended June 30, 2011 from a loss of $122 for the three months ended June 30, 2010. Income or loss from equity method affiliates represents our share of the related entities’ earnings. As of June 30, 2010 and 2011, we had five equity method investees: (1) Star Asia Manager; (2) Deep Value GP; (3) Deep Value GP II; (4) Star Asia SPV; and (5) Duart Capital. See notes 12 and 24 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

During the second quarter of 2011, another Deep Value fund for which Deep Value GP served as the general partner was substantially liquidated. In conjunction with the liquidation and distribution of funds to investors, the Deep Value GP recognized its incentive fee earned in the amount of $8,719. We own 50% of the Deep Value GP. Therefore, our share of this incentive fee was $4,359 and was included as a component of income from equity method affiliates during the three months ended June 30, 2011.

Income Tax Expense

Income tax expense decreased by $525 to an income tax benefit of $133 for the three months ended June 30, 2011 from income tax expense of $392 for the three months ended June 30, 2010. The benefit realized by us during the three months ended June 30, 2011 was a result of the book loss during the second quarter of 2011 as well as a result of changes in the Company’s state apportionment as a result of our acquisition of JVB and PrinceRidge. The combined impact of these two acquisitions resulted in a reduction in the Company’s state effective tax rate. Because the Company has a net deferred tax liability, the reduction in the state effective rate reduces this liability and results in a tax benefit to us. This tax benefit was recorded as a discrete item in the first half of 2011.

Net Income Attributable to the Non-controlling Interest

Net income attributable to the non-controlling interest for the three months ended June 30, 2011 and 2010 was comprised of the 32.5% non-controlling interest and 33.8% non-controlling interest, respectively, related to member interests in the Operating LLC other than interests held by us for the relevant periods. In addition, net income attributable to the noncontrolling interest also includes 30.1% of redeemable non-controlling interest related to partnership interests in PrinceRidge other than interests held by us for the 2011 period:

Summary calculation of non-controlling interest - Three Months Ended June 30, 2011


	Wholly owned subsidiaries			Majority owned subsidiaries			Total Operating LLC			IFMI			Consolidated
Net loss before tax	$	(4,984	)	$	(206	)	$	(5,190	)	$	—		$	(5,190	)
Income tax benefit		—			—			(120	)		(13	)		(133	)

Net income / (loss) after tax		(4,984	)		(206	)		(5,070	)		13			(5,057	)
Majority owned subsidiary non-controlling interest					(53	)		(53	)

Net loss attributable to the Operating LLC		(4,984	)		(153	)		(5,017	)
Operating LLC non-controlling interest %								32.5	%

Operating LLC non-controlling interest								(1,633	)
Majority owned subsidiary non-controlling interest								(53	)

Total non-controlling interest							$	(1,686	)

Summary calculation of non-controlling interest - Three Months Ended June 30, 2010


	Wholly owned subsidiaries		Majority owned subsidiaries		Total Operating LLC			IFMI			Consolidated
Net income before tax	$	3,589	$	—	$	3,589		$	—		$	3,589
Income tax expense		—		—		225			167			392

Net income / (loss) after tax		3,589		—		3,364			(167	)		3,197
Majority owned subsidiary non-controlling interest				—		—

Net income attributable to the Operating LLC		3,589		—		3,364
Operating LLC non-controlling interest %						33.8	%

Operating LLC non-controlling interest						1,137
Majority owned subsidiary non-controlling interest						—

Total non-controlling interest					$	1,137

Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet potential cash requirements including ongoing commitments to repay debt borrowings, 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. Since January 2010, we significantly expanded our government trading operations leading to a greater amount of securities owned as well as greater balances of securities purchased under agreements to resell and securities sold under agreements to repurchase.

As a holding company that does not conduct business operations in its own right, substantially all of the assets of the Company are comprised of our majority ownership interest in the Operating LLC. Substantially all of the Operating LLC’s net assets as well as net income are subject to restrictions on paying distributions to us. In addition, approximately $20.0 million

of the Operating LLC’s cash and $59.6 million of net assets are subject to withdrawal restrictions as a result of its investment in PrinceRidge. Distributions from PrinceRidge are governed by the PrinceRidge partnership agreement. In general, the agreement calls for annual distributions equal to one half of the net income of PrinceRidge. However, the board of PrinceRidge GP can decide to forgo these distributions or to pay distributions in excess of this amount with the unanimous vote of the board. The board of PrinceRidge GP is comprised of five members. Three members are appointed by us and two are appointed by the individuals that were members of PrinceRidge GP prior to our investment. Our ability to pay dividends to our stockholders will be dependent on distributions we receive from the Operating LLC and subject to the Operating LLC’s Operating Agreement. The amount and timing of distributions by the Operating LLC will be at the discretion of the Operating LLC’s board of managers.

During the third quarter of 2010, our board of directors initiated a dividend of $0.05 per quarter. However, our board of directors has the power to decide to increase, reduce, or eliminate this quarterly dividend in the future. The board’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.

On August 8, 2011, our board of directors declared a cash dividend of $0.05 per share, which will be paid on our common stock on September 6, 2011 to stockholders of record on August 23, 2011. 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.

We filed a Registration Statement on Form S-3 on April 29, 2010, which was declared effective by the SEC on May 24, 2010. This registration statement enables us to offer and sell, in the aggregate, up to $300,000 of debt securities, preferred stock (either separately or represented by depositary shares), or common stock (including, if applicable, any associated preferred stock purchase rights, subscription rights, stock purchase contracts, stock purchase units and warrants, as well as units that include any of these securities). The debt securities, preferred stock, subscription rights, stock purchase contracts, stock purchase units and warrants may be convertible into or exercisable or exchangeable for common stock or preferred stock of IFMI. We may offer and sell these securities separately or together, in any combination with other securities. The registration statement provides another source of liquidity in addition to the alternatives already in place. The net proceeds from a sale of our securities may be used for our operations and for other general corporate purposes, including, but not limited to, capital expenditures, repayment or refinancing of borrowings, working capital, investments and acquisitions.

Cash Flows

We have four primary uses for capital:

(1) To fund the expansion of our Capital Markets segment: Through June 2011, we expanded our Capital Markets segment by expanding our offices, hiring additional sales and trading professionals and launching new initiatives to expand on our existing capabilities, acquiring JVB and PrinceRidge, as well as increasing our investments in trading securities. We believe that we are better capitalized and able to utilize more leverage in our Capital Markets business and therefore expand our operations to other credit-related fixed income areas to deepen our product capabilities. We believe the prudent use of capital to facilitate client orders will increase trading volume and profitability.

(2) To fund investments: Our investments take several forms, including investments in securities and “sponsor investments” in permanent capital vehicles or investment funds. 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 or 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, 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, 2011 and December 31, 2010, we maintained cash and cash equivalents of $50,160 and $43,946, respectively. We generated cash from or used cash for the following activities:

SUMMARY CASH FLOW INFORMATION

(dollars in thousands)


	Six Months Ended June 30,
	2011			2010
Cash flow from operating activities	$	15,716		$	(33,597	)
Cash flow from investing activities		(5,464	)		9,524
Cash flow from financing activities		(4,287	)		(14,225	)
Effect of exchange rate on cash		249			(449	)

Net cash flow		6,214			(38,747	)
Cash and cash equivalents, beginning		43,946			69,692

Cash and cash equivalents, ending	$	50,160		$	30,945

See the statement of cash flows in our consolidated financial statements. We believe our cash available on hand as well as our investment in our trading portfolio will provide sufficient liquidity to meet the cash needs of our ongoing operating needs.

Six Months Ended June 30, 2011

As of June 30, 2011, our cash and cash equivalents were $50,160, representing a net increase of $6,214 from December 31, 2010. The increase was attributable to the cash provided by operating activities of $15,716 and the effect of the increase in the exchange rate on cash of $249, partially offset by the cash used for investing activities of $5,464, and the cash used for financing activities of $4,287.

The cash provided by operating activities of $15,716 was comprised of (a) net outflows of $7,940 related to working capital fluctuations primarily comprised of net outflows of $6,243 related to a decrease in accrued compensation payable offset by other working capital fluctuations; (b) $26,529 of net cash inflows from investments in our overall net 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 and restricted cash on deposit which is related to various trading activities as well as the unrealized gains and losses on the investments-trading and trading securities sold, but not yet purchased; and (c) a decrease in cash generated from other earnings items of $2,873 (which represents net income or loss adjusted for the following non-cash operating items: realized and unrealized gains and losses on other investments, income or loss from equity method affiliates, equity-based compensation, and depreciation and amortization).

The cash used in investing activities of $5,464 was comprised of (a) cash proceeds from the return of principal of $3,872 which was comprised of $3,821 from our investment in the Duart Fund, $19 from the final liquidation of the first Deep Value fund and $32 from our investments in certain residential loans; (b) cash received of $93 from the sale of certain investments in securitizations that were classified as other investments, at fair value on the consolidated balance sheets; (c) cash of $5,820 we received from equity method affiliates Deep Value GP, Star Asia Manager and Star Asia SPV; (d) the cash acquired in the acquisition of PrinceRidge of $2,149; offset by (e) the cash consideration paid, net of cash acquired, for the acquisition of JVB of $14,956; (f) the investment of $432 in equity method affiliates related to Duart Capital and Star Asia SPV; (f) the purchase of other investments, at fair value of $1,708, specifically the purchase of additional shares of Star Asia in the amount of $226 directly from unrelated third parties during the first quarter of 2011, the purchase of additional shares of EuroDekania in the amount of $533 and the purchase of other investments, which consisted primarily of the Japanese Yen currency forward contract, of $949; and (g) the purchase of additional furniture and leasehold improvements of $302 related to the New York and Philadelphia offices and the EuroDekania Management Limited office in the United Kingdom.

The cash used in financing activities of $4,287 was comprised of (a) the repayment of $2,620 of outstanding borrowings on our secured credit facility entered into on July 29, 2010 between our subsidiary, Dekania Investors, LLC and T.D. Bank, N.A., (the “2010 Credit Facility”); (b) distributions to the noncontrolling interest holders of $528; (c) dividends to the Company’s stockholders of $1,090; and (d) $49 for the payment of the employees’ tax obligations to taxing authorities related to the vesting of equity based awards and the surrender of 13,453 shares of the Company’s Common Stock. The total shares withheld were based on the value of the restricted stock award on the applicable vesting date as determined by the Company’s closing stock price. These net share settlements reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.

Six Months Ended June 30, 2010

As of June 30, 2010, our cash and cash equivalents were $30,945, representing a net decrease of $38,747 from December 31, 2009. The decrease was attributable to the cash used for operating activities of $33,597, the cash used for financing activities of $14,225, and the effect of the decrease in the exchange rate on cash of $449, partially offset by the cash provided by investing activities of $9,524.

The cash used for operating activities of $33,597 was comprised of (a) net inflows of $6,020 related to working capital fluctuations; (b) $29,299 of net cash outflows from overall net trading activities comprised of our investments-trading, trading securities sold, not yet purchased, receivables under resale agreements, securities sold under agreement to repurchase, and receivables and payables from brokers, dealers, and clearing agencies and restricted cash on deposit which is related to various trading activities, as well as the unrealized gains and losses on the investments-trading and trading securities sold, but not yet purchased; and (c) a reduction in cash earnings of $10,318 (which represents net income or loss adjusted for the following non-cash operating items: gain on repurchase of debt, gain on sale of management contracts, realized and unrealized gains and losses on other investments, income or loss from equity method affiliates, equity-based compensation, and depreciation and amortization).

The cash provided by investing activities of $9,524 was comprised of (a) cash proceeds from the return of principal of $5,982, which is comprised of $4,275 from our investment in the Deep Value fund and $1,707 from our investments in certain interests in securitizations and residential loans; (b) cash received from the sale of other investments of $8,540 (which includes $3,454 from the sale of a single investment in securitizations, $1,056 from the sale of RAIT common stock, $3,721 from the

redemption of 90% of our investment in the Brigadier hedge fund and $309 from the sale of other investments); (c) cash received from sale of management contracts of $971; as well as (d) cash of $2,692 we received as a return of investment from equity method affiliates; partially offset by (e) the investment of $4,916 we made in various equity method affiliates; (f) the purchase of additional shares of Star Asia in the amount of $1,334 related to the Star Asia’s rights offering, as well as $1,836 for the purchase of shares directly from unrelated third parties during the second quarter of 2010; and (g) the purchase of additional furniture and leasehold improvements of $575 related to our New York office and the EuroDekania Management Limited office in the United Kingdom.

The cash used in financing activities of $14,225 was comprised of (a) the repayment of $9,950 of outstanding borrowings on our bank debt; (b) the repurchase of $5,144 notional amount of contingent convertible senior notes for $4,115; and (c) the repurchase of 24,744 shares of the Company’s Common Stock for $160 for the payment of the employees’ tax obligations to taxing authorities related to the vesting of equity based awards. The total shares withheld were based on the value of the restricted stock award on the applicable vesting date as determined by the Company’s closing stock price. These net share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.

Regulatory Capital Requirements

Five of our majority owned subsidiaries include licensed securities dealers in the United States and the United Kingdom. As broker-dealers, our subsidiaries, CCS, CCCM, JVB and PrinceRidge Group, are subject to Uniform Net Capital Rule, Rule 15c3-1 under the Exchange Act, and our international subsidiary, EuroDekania Management Limited, is subject to the regulatory supervision and requirements of the FSA in the United Kingdom. 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, 2011, which amounted to $2,807 were as follows:

MINIMUM NET CAPITAL REQUIREMENTS

(dollars in thousands)


United States	$	818
United Kingdom		1,989

Total	$	2,807

We operate with more than the minimum regulatory capital requirement in our licensed broker-dealers and at June 30, 2011, total net capital, or equivalent as defined by local statutory regulations in our licensed broker-dealers amounted to $57,293.

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 10 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 contains events of default in cases where we breach our obligations under the 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, 2011 and the twelve months ended December 31, 2010 for securities purchased under agreements to resell and securities sold under agreements to repurchase.


	Six Months Ended June 30,			Twelve Months Ended December 31,
	2011			2010
Securities Purchased Under Agreements to Resell
Period End	$	158,099		$	—
Monthly Average		N/A	⁽¹⁾		31,215
Maximum month end		158,099			89,475
Securities Sold Under Agreements to Repurchase
Period End	$	178,998		$	69,816
Monthly Average		102,050			28,622
Maximum month end		178,998			96,365

⁽¹⁾	Securities purchased under agreements to resell were only outstanding for the month ended June 30, 2011.

Fluctuations in the balance of our repurchase agreements from period to period and intraperiod are dependent on business activity in those periods. The general growth in outstanding repurchase activity in 2011 and 2010 is reflective of supporting our overall business growth, particularly the continued expansion of our sales and trading platform. The fluctuations in the balances of our securities purchased under agreements to resell over the periods presented is impacted in any given period 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

We have four sources of debt financing other than securities financing arrangements: (1) the 2010 Credit Facility; (2) contingent convertible senior notes; (3) junior subordinated notes payable to two special purpose trusts: (a) Alesco Capital Trust I, and (b) Sunset Financial Statutory Trust I; and (4) unsecured subordinated financing.

As of June 30, 2011, $4,356 was drawn, $50 was committed for one letter of credit, and there was no availability to borrow additional funds under the 2010 Credit Facility. As of June 30, 2011, we were in compliance with the covenants in our debt financing documents. See note 15 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 long-term indebtedness and other financing as of June 30, 2011 and December 31, 2010, respectively:

DETAIL OF DEBT FINANCING SOURCES

(dollars in thousands)


	As of June 30, 2011
Description	Current Outstanding Par			Carrying Value		Interest Rate Terms			Weighted Average Interest @ 06/30/2011			Weighted Average Contractual Maturity
2010 Credit Facility	$	4,356		$	4,356		6.0	%		6.0	%	September 2012
Contingent convertible senior notes		19,506	⁽²⁾		19,240		7.6	%		7.6	%	May 2027⁽¹⁾
Junior subordinated notes ⁽³⁾		49,614			17,075		7.4	%		7.4	%	August 2036
Subordinated notes payable		1,469			1,469		12.0	%		12.0	%	June 2013

Total				$	42,140


	As of December 31, 2010
Description	Current Outstanding Par			Carrying Value		Interest Rate Terms			Weighted Average Interest @ 12/31/2010			Weighted Average Contractual Maturity
2010 Credit Facility	$	6,976		$	6,976		6.0	%		6.0	%	September 2012
Contingent convertible senior notes		19,506	⁽²⁾		19,104		7.6	%		7.6	%	May 2027⁽¹⁾
Junior subordinated notes ⁽³⁾		49,614			17,160		7.4	%		7.4	%	August 2036
Subordinated notes payable		1,448			1,448		12.0	%		12.0	%	June 2013

Total				$	44,688

(1)

We may redeem all or part of the notes for cash on or after May 20, 2012, at a redemption price equal to 100% of the principal amount of the notes, plus accrued interest and additional interest, if any, to, but excluding, the redemption date. The holders of the notes may require us to repurchase all or a portion of their notes for cash on May 15, 2012, May 15, 2017 and May 15, 2022 for a repurchase price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest and additional interest, if any, to, but excluding, the repurchase date. The holders of the notes are required to provide notice to us of their plan to redeem the notes at any time during the 30 days prior to May 15, 2012, May 15, 2017, or May 15, 2022.

(2)

On June 20, 2011, we commenced an offer to exchange, at the election of each holder, any and all of our outstanding 7.625% Contingent Convertible Senior Notes due 2027 (the “Old Notes”). In July 2011, $7,621 aggregate principal amount of our Old Notes were tendered for exchange, representing approximately 39% of the principal amount of the Old Notes outstanding. We issued $7,621 aggregate principal amount of a new series of 10.50% Contingent Convertible Senior Notes due 2027 (the “New Notes”) in exchange for the $7,621 aggregate principal amount of the Old Notes that were tendered. A total of $11,885 principal amount of the Old Notes remained outstanding after the completion of the exchange offer. The first date at which holders of the New Notes can require us to repurchase the New Notes is May 15, 2014. See notes 15 and 26 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

(3)	We own $1,489 in par amount of common stock of the two trusts which hold the junior subordinated notes. Therefore, on a net basis, there is par outstanding to third parties in the amount of $48,125.

Off Balance Sheet Arrangements

AFN invested in a collateralized debt obligation (Alesco XIV) in which Assured Guaranty (“Assured”) was providing credit support to the senior interests in securitizations. Alesco XIV made a loan (the “Guaranteed Loan”) to a particular borrower and AFN entered into an arrangement with Assured whereby AFN agreed to make payments to Assured upon the occurrence of both (i) a loss on the Guaranteed Loan; and (ii) a loss suffered by Assured on its overall credit support arrangement to Alesco XIV security holders. This arrangement is accounted for as a guarantee by us. Upon completion of the Merger, we recorded a liability of $1,084 related to this arrangement which is included in accounts payable and other liabilities in the Company’s consolidated balance sheet. This amount does not represent the expected loss; rather it represents our estimate of the fair value of our guarantee (i.e. the amount we would have to pay a third party to assume this obligation). This arrangement is being accounted for as a guarantee. The value will be adjusted under certain limited circumstances such as: (i) when the guarantee is extinguished; or (ii) if payment of amounts under the guarantee become probable and estimable. The maximum potential loss to us on this arrangement is $8,750. Under certain circumstances, Assured can require us to post liquid collateral.

In January 2011, we entered into an arrangement with FundCore Finance Group to create a commercial real estate conduit lender. Our $25 million capital commitment is contingent upon FundCore obtaining appropriate warehouse financing. To date, FundCore has not obtained this financing, so we have not invested any capital to date.

Contractual Obligations

The following table summarizes our significant contractual obligations as of June 30, 2011 and the future periods in which such obligations are expected to be settled in cash. Our bank debt, junior subordinated notes and subordinated notes payable are assumed to be repaid on their respective maturity dates. Since the following table is as of June 30, 2011, and prior to the issuance of the New Notes in the exchange offer, the following table does not take into account the effects of the exchange offer. Accordingly, $19,506 aggregate principal amount of the Old Notes are assumed to be repaid on May 15, 2012, which represents the earliest date that the holders of the Old Notes may require us to repurchase the notes for cash.

Excluded from the table are obligations that are short-term in nature, including trading liabilities and repurchase agreements. In addition, excluded from the table is an unrecognized tax benefit of $1,231 because we cannot make a reasonably reliable estimate of the period of cash settlement. See note 18 to our consolidated financial statements included in Item 1 to this Quarterly Report on Form 10Q for further information about the unrecognized tax benefit.

CONTRACTUAL OBLIGATIONS

As of June 30, 2011

(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	$	12,310	$	2,952	$	5,152	$	3,790	$	416
Maturity of 2010 Credit Facility (1)		4,356		4,356		—		—		—
Interest on 2010 Credit Facility (2)		161		160		1		—		—
Maturity of convertible senior notes (3)		19,506		19,506		—		—		—
Interest on convertible senior notes (3)		1,549		1,549		—		—		—
Maturities on junior subordinated notes		49,614		—		—		—		49,614
Interest on junior subordinated notes (4)		55,746		3,659		4,656		4,275		43,156
Maturities of subordinated notes payable (5)		1,559		—		1,559		—		—
Interest on subordinated notes payable (6)		270		133		137		—		—

Total	$	145,071	$	32,315	$	11,505	$	8,065	$	93,186

(1)	Quarterly principal payments of $1,162 are due, and all unpaid principal is due and payable on September 30, 2012.

(2)

Interest on the 2010 Credit Facility includes the finance charge on one letter of credit and interest on all outstanding debt as of June 30, 2011, which is variable. The interest rate of 6.00% as of June 30, 2011 was used to compute the contractual interest payment in each period noted. Fluctuations in actual interest rates may result in different interest payments than noted above.

(3)	Assumes the Old Notes are repurchased May 15, 2012. Interest includes amounts payable during the period the contingent convertible senior notes were outstanding at an annual rate of 7.625% for the Old Notes.

(4)

The interest on the junior subordinated notes related to the Alesco Capital Trust is based on a fixed interest rate of 9.50% through to July 30, 2012, and an assumed variable rate of 4.246% based on a 90-day LIBOR rate as of June 30, 2011 plus 4.00% calculated from July 30, 2012 through to maturity. The interest on the junior subordinated notes related to the Sunset Capital Trust is variable. The interest rate of 4.396% (based on a 90-day LIBOR rate as of June 30, 2011 plus 4.15%) was used to compute the contractual interest payment in each period noted.

(5)

The subordinated notes payable mature on June 20, 2013 and bear interest at an annual rate of 12% (9% is payable in cash and 3% is paid in-kind semiannually on May 1 and November 1). Maturities include in-kind interest of $154. All accrued in-kind interest is added to the unpaid principal balance of the subordinated notes payable on each May 1 and November 1, and thereafter the increased principal balance accrues interest at the annual rate of 12%.

(6)	Represents the cash interest payable on the outstanding balance of the subordinated notes payable 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.

effective for interim and annual reporting periods beginning on or after December 15, 2011, early adoption is prohibited, and the amendments will be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. We will adopt the provisions of ASU 2011-03 effective January 1, 2012, and are currently evaluating the effect of the adoption on the Company’s consolidated financial position and results of operations.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements. The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. The amendments result in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. The guidance provided in ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. We will adopt the provisions of ASU 2011-04 effective January 1, 2012, and are currently evaluating the effect of the adoption on the Company’s consolidated financial position and results of operations.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income (“ASU 2011-05”), which requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The standard does not change the items that must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. ASU 2011-05 effective for interim and annual periods beginning after December 15, 2011. Since ASU 2011-05 impacts presentation only, we expect that it will have no effect on the Company’s financial condition, results of operations or cash flows.

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, 2010. 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 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, 2011, 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, 2010.

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:

Fixed Income Securities: We hold the following securities: U.S. treasury securities, U.S. government agency MBS, collateralized mortgage obligations (“CMOs”), non-government MBS, corporate bonds, redeemable preferred stock, municipal bonds, certificates of deposits, Small Business Administration (“SBA”) loans, residential loans, whole loans, 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 to-be-announced securities (“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, 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 cannot be quantified.

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, 2011, we would incur a loss of $3,676 if the yield curve rises 100 bps across all maturities and a gain of $2,658 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 which is denominated in Euros and another permanent capital vehicle for which our investment is denominated in U.S. Dollars, but for which the underlying net assets are primarily based in Japanese Yen. The fair values of these investments are subject to change as the spot foreign exchange rate between these currencies and the U.S. Dollar (our functional currency) fluctuates. We may 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, 2011 our equity price sensitivity was $4,204 and our foreign exchange currency sensitivity was $964.

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 and demand of 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, 2011, a 100 bps change in three month LIBOR would result in a change in our annual cash paid for interest in the amount of $200. 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 $1,506.

How we manage these risks

We will 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.

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 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, 2011. 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, 2011.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company is currently in the process of integrating controls of JVB with the controls of IFMI. The Company expects to have this integration complete by the end of 2011.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

Incorporated by reference to the headings titled “Legal and Regulatory Proceedings in Note 21 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, 2010, which could materially and adversely affect our business, financial condition and results of operations. 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. Other than as set forth below, 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, 2010.

The PrinceRidge transaction is subject to final FINRA approval that, if not obtained , will result in the unwinding of the PrinceRidge transaction. Unwinding the PrinceRidge transaction could negatively affect us. In addition, FINRA may impose conditions on final approval of the PrinceRidge transaction, which may diminish the anticipated benefits of the PrinceRidge transaction.

While the Interim Closing in the PrinceRidge transaction has been completed, the PrinceRidge transaction is subject to final FINRA approval. If final FINRA approval is not obtained, the PrinceRidge transaction will be unwound. In addition, FINRA may attempt to condition its approval on the imposition of conditions that could have a material adverse effect on our operating results or the value of our common stock.

If the PrinceRidge transaction is unwound, we may be subject to a number of material risks, including the following:

•

we may not realize the benefits expected of the PrinceRidge transaction, including a potentially enhanced competitive and financial position;

•

clients, vendors and others may believe that we cannot compete in the marketplace as effectively without the PrinceRidge transaction or otherwise remain uncertain about our future prospects in the absence of the PrinceRidge transaction and may to seek to change existing business relationships with us;

•

the market price of our common stock may decline to the extent that the current market price of our stock reflects a market assumption that the final FINRA approval of the PrinceRidge transaction will be obtained and that the related benefits and synergies will be realized, or as a result of the market’s lack of confidence in our business without PrinceRidge;

•

our current and prospective employees may experience uncertainty about their future roles with us, which may adversely affect our ability to attract and retain key management and other personnel;

•

the costs related to the PrinceRidge transaction, such as legal, accounting and some financial advisory fees, will have been paid, and we will incur additional costs in unwinding the transaction; and

•

our business may suffer as a result of having the focus of our management directed toward unwinding the PrinceRidge transaction instead of our core business and other opportunities that might be beneficial to us.

The realization of any of these risks by us may materially and adversely affect our business, financial results, financial condition and/or stock price.

FINRA may impose conditions on final approval of the PrinceRidge transaction, which may diminish the anticipated benefits of the PrinceRidge transaction.

We have incurred significant transaction costs, and may incur additional transaction costs, which may diminish the anticipated benefits of the PrinceRidge transaction.

We have incurred, and will continue to incur, costs associated with the PrinceRidge transaction, including integrating the operations of the two companies. Substantially all transaction costs incurred, or to be incurred, by the two companies have been or will be charged to operations and will not be included as a component of the purchase price for purposes of purchase accounting. Unanticipated costs may be incurred in the integration of the businesses of the two companies. Although we believe that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, will offset incremental transaction and PrinceRidge transaction-related costs over time, this net benefit may not be achieved in the near term, or at all.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities


Period	Total Number of Shares Purchased (1)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Program (2)
April 1, 2011 to April 30, 2011		1,309	$	4.45		—	$	47,303,874
May 1, 2011 to May 31, 2011		—		—		—		47,303,874
June 1, 2011 to June 30, 2011		11,246		3.45		—		47,303,874

Total		12,555	$	3.55		—

(1)

We repurchased an aggregate of 12,555 shares other than as part of a publicly announced plan or program. We repurchased these securities in connection with our stock compensation plans which allow participants to use shares to satisfy certain tax liabilities arising from the vesting of restricted stock.

(2)	On August 3, 2007, our board of directors authorized us to repurchase up to $50 million of our common stock from time to time in open market purchases or privately negotiated transactions.

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 will have the power to determine its policy regarding the payment of dividends, which may 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.

In addition, the Company’s ability to pay dividends will be dependent on distributions it receives from the Operating LLC. The amount and timing of distributions by the Operating LLC will be at the discretion of the Operating LLC’s board of managers and may be impacted by restrictions imposed by the 2010 Credit Facility entered into on July 29, 2010 and subject to the provisions of the Operating LLC operating agreement. In addition, approximately $20.0 million of the Operating LLC’s cash and $59.6 million of net assets are subject to withdrawal restrictions as a result of investment in PrinceRidge. Distributions from PrinceRidge are governed by the PrinceRidge partnership agreement. In general, the agreement calls for annual distributions equal to one half of the net income of PrinceRidge. However, the board of PrinceRidge GP can decide to forgo these distributions or to pay distributions in excess of this amount with a unanimous vote of the board. The board of PrinceRidge GP is comprised of five members. Three members are appointed by us and two are appointed by the individuals that were members of PrinceRidge GP prior to our investment.

Item 6.

Exhibits


Exhibit No.		Description

2.1		Contribution Agreement, dated as of April 19, 2011, by and among IFMI, LLC, PrinceRidge Partners LLC and PrinceRidge Holdings LP (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 25, 2011).

10.1		Amendment No. 1 to the Limited Liability Company Agreement of IFMI, LLC, dated as of June 20, 2011.**

10.2		Amended and Restated Employment Agreement, dated as of April 19, 2011, by and among Institutional Financial Markets, Inc., IFMI, LLC and Christopher Ricciardi.**

10.3		Executive Agreement, dated as of May 31, 2011, by and among Institutional Financial Markets, Inc., IFMI, LLC, PrinceRidge Holdings LP and John Costas.**

10.4		Executive Agreement, dated as of May 31, 2011, by and among Institutional Financial Markets, Inc., IFMI, LLC, PrinceRidge Holdings LP and Daniel G. Cohen (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on June 6, 2011).

10.5		Fourth Amended and Restated Limited Liability Company Agreement of PrinceRidge Partners LLC, dated as of May 31, 2011 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 6, 2011).

10.6		Fourth Amended and Restated Limited Partnership Agreement of PrinceRidge Holdings LP, dated as of May 31, 2011 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 6, 2011).

10.7		Termination and Separation Agreement, dated as of May 31, 2011, by and among IFMI, LLC, PrinceRidge Partners LLC, and PrinceRidge Holdings LP (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on June 6, 2011).

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, 2011 and December 31, 2010, (ii) the Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010, (iii) the Consolidated Statement of Changes in Stockholders’ Equity for the Twelve Months Ended December 31, 2010 and the Six Months Ended June 30, 2011, (iv) the Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010; and (v) Notes to Consolidated Financial Statements.***

*	Data required by FASB Accounting Standards Codification 260, “Earnings per Share,” is provided in note 20 to our consolidated financial statements included in Item 1 in this Quarterly Report on Form 10-Q.

**	Filed herewith.

***	Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, 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/ DANIEL G. COHEN
		Daniel G. Cohen
Date: August 11, 2011		Chairman of the Board and Chief Executive Officer

	Institutional Financial Markets, Inc.

	By:	/s/ JOSEPH W. POOLER, JR.
		Joseph W. Pooler, Jr.
Date: August 11, 2011		Executive Vice President, Chief Financial Officer and Treasurer