# Fifth Third Securities, Inc. X-17A-5 (2021-02-26) — Broker-dealer annual report - Company: Fifth Third Securities, Inc. - Form: X-17A-5 - Filed: 2021-02-26 - Period: 2020-12-31 - Accession: 0000073956-21-000014 - CIK: 73956 - File #: 8-02428 - Material weakness: No - Auditor: Deloitte & Touche LLP - Auditor location: Cincinnati, OH - Contact: Christopher Stratmoen - Phone: 513-534-3170 - Signed by: Robert Corsarie, Robert Marcus, and Christopher Stratmoen (Head of Retail Brokerage, Managing Director of Capital Markets, and Financial & Operations Principal) Original filing: https://www.sec.gov/Archives/edgar/data/73956/000007395621000014/ftspublicrpt2020.pdf --- {0}------------------------------------------------ # Fifth Third Securities, Inc. (A Wholly-Owned Subsidiary of Fifth Third Bank, National Association) Financial Statement, Notes to Financial Statement as of and for the Year Ended December 31, 2020 and Report of Independent Registered Public Accounting Firm This report is deemed PUBLIC in accordance with Rule 17a-5(e)(3) under the Securities Exchange Act of 1934. {1}------------------------------------------------ #### **UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549** #### 0MB APPROVAL 0MB Number: 3235-0123 Expires: October 31, 2023 Estimated average burden hours **r res nse ......** 12.00 B-02428 **SEC FILE NUMBER** # **ANNUAL AUDITED REPORT FORM X-17A-5 PART Ill** **FACING PAGE** **Information Required of Brokers and Dealers Pursuant to Section 17 of the Securities Exchange Act of 1934 and Rule 17a-5 Thereunder** | REPORT FOR THE PERIOD BEGINNING O 1/01/2020 | AND ENDIN | |---------------------------------------------|-----------| | | | **MM/DD/YY** # **A. REGISTRANT IDENTIFICATION** NAME OF BROKER-DEALER: Fifth Third Securities, Inc. ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use P.O. Box No.) 38 Fountain Square Plaza | (No. and Street) | | | |------------------|---------|------------| | Cincinnati | OH | 45263 | | (City) | (State) | (Zip Code) | NAME AND TELEPHONE NUMBER OF PERSON TO CONTACT IN REGARD TO nns REPORT **Christopher Stratmoen 513-534-3170** **(Area Code - Telephone Number)** # **B. ACCOUNTANT IDENTIFICATION** INDEPENDENT PUBLIC ACCOUNTANT whose opinion is contained in this Report\* Deloitte & Touche, LLP. | (Name - if individual, state last. first, middle name) | | | | |--------------------------------------------------------|------------|---------|------------| | 250 East 5th Street | Cincinnati | OH | 45202 | | (Address) | (City) | (State) | (Zip Code) | | | | | | **CHECK ONE:** ! ./ I Certified Public Accountant Public Accountant B Accountant not resident in United States or any of its possessions. ## **FOR OFFICIAL USE ONLY** *\*Claims for exemption from the requirement that the annual report be covered by the opinion of an independent public accountant must be supported by a statement of facts and circumstances relied on as the basis for the exemption. See Section 240.17 a-5 (e)(2)* > **Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid 0MB control number.** **SEC 1410 (11-05)** **FIRM** 1.0. **NO.** **OFFICIAL USE ONLY** G**12/31/2020** ----------- **MM/DD/YY** {2}------------------------------------------------ - - - - - - - - - - - - - - - - - {3}------------------------------------------------ - - - - - - - - - - - - - - - - - {4}------------------------------------------------ | | Page | |---------------------------------------------------------------------------------------------------|------| | REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 1 | | STATEMENT OF FINANCIAL CONDITION AND NOTES TO THE FINANCIAL
STATEMENT AS OF DECEMBER 31, 2020: | | | Statement of Financial Condition | 2 | | Notes to Financial Statement | 3 | | | | {5}------------------------------------------------ ### **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** To the Board of Directors and Shareholder of Fifth Third Securities, Inc. Cincinnati, Ohio #### **Opinion of the Financial Statement** We have audited the accompanying statement of financial condition of Fifth Third Securities, Inc. (the "Company") as of December 31, 2020, and the related notes (collectively referred to as the "financial statement"). In our opinion, the financial statement presents fairly, in all material respects, the financial position of the Company as of December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. #### **Basis for Opinion** The financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statement. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that our audit of the financial statement provides a reasonable basis for our opinion. February 26, 2021 We have served as the Company's auditor since 1987. {6}------------------------------------------------ # **FIFTH THIRD SECURITIES, INC. (A Wholly-Owned Subsidiary of Fifth Third Bank, National Association) STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 2020** #### ASSETS: | Cash and cash equivalents | \$
62,194,476 | |--------------------------------------------------------------|---------------------| | Receivables from clearing broker-dealer, net | 458,490,857 | | Receivables from affiliated companies, net | 2,441,775 | | Other receivables | 48,081,875 | | Securities owned, at fair value | 539,400,374 | | Property and equipment, net | 421,950 | | Goodwill | 64,791,269 | | Intangible assets | 229,787 | | Deferred income taxes, net | 2,952,860 | | Other assets | 3,327,440 | | Total Assets | \$
1,182,332,663 | | LIABILITIES: | | | Accounts payable | \$
11,714 | | Payables to Parent Company, net | 12,191,880 | | Income tax payable to Parent Company or affiliated companies | 2,624,371 | | Securities sold, not yet purchased | 454,574,716 | | Accrued employee compensation and benefits | 31,223,838 | | Other liabilities | 10,971,425 | | Total Liabilities | \$
511,597,944 | | SHAREHOLDER'S EQUITY: | | | Capital stock, \$100 par value-authorized-17,375 shares, | | | issued and outstanding-7,619 shares | \$
761,900 | | Additional paid-in capital | 351,045,660 | | Retained earnings | 318,927,159 | | Total Shareholder's Equity | \$
670,734,719 | | Total Liabilities and Shareholder's Equity | \$
1,182,332,663 | | Refer to the Notes to Financial Statements. | | 2 {7}------------------------------------------------ # **FIFTH THIRD SECURITIES, INC. (A Wholly-Owned Subsidiary of Fifth Third Bank, National Association) NOTES TO FINANCIAL STATEMENT AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2020** # **1. ORGANIZATION AND NATURE OF BUSINESS** Fifth Third Securities, Inc. (the "Corporation") is a broker-dealer and Registered Investment Advisor, registered with the U.S. Securities & Exchange Commission (the "SEC"). The Corporation is a member of the Financial Industry Regulatory Authority (the "FINRA"). The Corporation is a whollyowned subsidiary of Fifth Third Bank, National Association (the "Parent Company"). The Parent Company is an indirect wholly-owned subsidiary of Fifth Third Bancorp (the "Bancorp"). The Corporation may enter into transactions with other subsidiaries of the Parent Company (the "affiliated companies") in the normal course of business. In its capacity as a broker-dealer, the Corporation executes principal transactions and agency transactions, and performs underwriting and investment banking services. The Corporation conducts business with other broker-dealers that are located throughout the United States on behalf of its customers and for its own proprietary accounts. The Corporation's customers are primarily located throughout the Midwestern and Southeastern United States. The Corporation clears all transactions on a fully-disclosed basis through a clearing broker-dealer. For customer accounts carried by the clearing broker-dealer, the clearing broker-dealer maintains and preserves all related books and records customarily kept by a clearing broker-dealer. The Corporation operates in a highly regulated industry. Applicable laws and regulations restrict permissible activities and investments. These policies require compliance with various financial and customer-related regulations. The consequences of noncompliance can include substantial monetary and non-monetary sanctions. In addition, the Corporation is also subject to comprehensive examinations and supervision by various governmental and self-regulatory agencies. These regulatory agencies generally have broad discretion to prescribe greater limitations on the operations of a regulated entity for the protection of investors or public interest. Furthermore, where the agencies determine that such operations are unsafe or unsound, fail to comply with applicable laws or are otherwise inconsistent with the laws and regulations or with the supervisory policies, greater restrictions may be imposed. # **2. SIGNIFICANT ACCOUNTING POLICIES** **Basis of Accounting** — The financial statements include the accounts of the Corporation, which is engaged in a single line of business as a securities broker-dealer comprised of several classes of services, including both principal and agency transactions, and underwriting and investment banking services. The accompanying financial statements are presented on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). {8}------------------------------------------------ **Use of Estimates** — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. **Income Taxes** — The Corporation is included in the consolidated federal income tax return filed by the Bancorp. As described in the tax sharing agreement between the Corporation and the Bancorp, federal income taxes are calculated as if the Corporation filed on a separate return basis and the amount of current tax or benefit calculated is either remitted to or received from the Bancorp. The amount of current and deferred taxes payable or refundable is recognized as of the date of the financial statements, utilizing currently enacted tax laws and rates. **Receivable from Clearing Broker-Dealer, Net** — Receivables from and payables to the clearing broker-dealer are recorded net and arise through the normal course of business pursuant to the clearing agreement between the Corporation and the clearing broker-dealer. Transactions are recorded at face value and no loss reserve is maintained due to negligible historical losses. **Goodwill** — Goodwill is required to be tested for impairment on an annual basis, which for the Corporation is September 30, and more frequently if events or circumstances indicate that there may be impairment. Impairment exists when a reporting unit's carrying amount of goodwill exceeds its implied fair value. The Corporation has determined that it is an entity-level reporting unit under U.S. GAAP. In testing goodwill for impairment, U.S. GAAP permits the Corporation to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In this qualitative assessment, the Corporation evaluates events and circumstances which may include, but are not limited to, the general economic environment, market conditions, the overall financial performance of the Corporation, the key financial performance metrics of the Corporation and events affecting the Corporation to determine if it is not more likely than not that the fair value of the Corporation is less than its carrying amount. If the quantitative impairment test is required or the decision to bypass the qualitative assessment is elected, the Corporation performs the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. A recognized impairment loss cannot be reversed in future periods even if the fair value of the reporting unit subsequently recovers. **Property and Equipment —** Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over estimated useful lives of two to thirty years. **Securities Owned, at Fair Value and Securities Sold, Not Yet Purchased** — Securities are classified as trading when bought and held principally for the purpose of selling them in the near term. The fair value of a security is determined based on quoted market prices. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments or discounted cash flow models that incorporate market inputs and assumptions including discount rates, prepayment speeds and loss rates. {9}------------------------------------------------ **Subsequent Events** — The Corporation has evaluated subsequent events through February 26, 2021 for the Financial Statements to determine if either recognition or disclosure of significant events or transactions is required. #### **Accounting and Reporting Developments — Standards Adopted in 2020** # *ASU 2017-04 – Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment* In January 2017, the FASB issued ASU 2017-04 which simplifies the test for goodwill impairment by removing the second step, which measures the amount of impairment loss, if any. Instead, the amended guidance states that an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, except that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This would apply to all reporting units, including those with zero or negative carrying amounts of net assets. The Corporation adopted the amended guidance on January 1, 2020. The amended guidance is applied prospectively to all goodwill impairment tests performed after the adoption date. # *ASU 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement* In August 2018, the FASB issued ASU 2018-13 which modifies the disclosure requirements for fair value measurements. The amendments remove the requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. The amendments also add new disclosure requirements regarding unrealized gains and losses from recurring Level 3 fair value measurements and the significant unobservable inputs used to develop Level 3 fair value measurements. The Corporation adopted the amended guidance on January 1, 2020 and the required disclosures are included in Note 9. # *ASU 2018-15: Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract* In August 2018, the FASB issued ASU 2018-15 which provides guidance on the accounting for implementation, setup, and other upfront costs incurred by customers in cloud computing arrangements that are accounted for as service contracts. The amendments require that implementation costs be evaluated for capitalization using the framework applicable to costs incurred to develop or obtain internal-use software. Those capitalized costs are to be expensed over the term of the cloud computing arrangement and presented in the same financial statement line items as the service contract and its associated fees. The Corporation adopted the amended guidance on January 1, 2020 on a prospective basis. ### **Accounting and Reporting Developments — Standards Issued but Not Yet Adopted** # *ASU 2019-12 – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes* In December 2019, the FASB issued ASU 2019-12 which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also clarify {10}------------------------------------------------ and amend existing guidance for other areas of Topic 740. The amended guidance was adopted by the Corporation on January 1, 2021 either prospectively or retrospectively for the specific amendment based on the transition method prescribed by the FASB. The adoption of the amended guidance did not have a material impact on the Financial Statements. # **3. CASH AND SECURITIES SEGREGATED UNDER FEDERAL AND OTHER REGULATIONS** The Corporation operates under the provisions of Paragraph (k)(2)(i) and Paragraph (k)(2)(ii) of Rule 15c3-3 of the Securities Exchange Act of 1934, and accordingly, is exempt from the remaining provisions of that rule. Essentially, the requirements of these provisions provide that the Corporation does not carry customer accounts and promptly transmits all customer funds and securities to the issuer, carrier, or the Corporation's clearing broker-dealer. The Corporation offers a commission rebate program to certain clients and therefore maintains a Rule 15c3-3 bank account. As of December 31, 2020, the balance in this account was \$817,142, which exceeded amounts to be rebated to clients of \$33. The balance is included within cash and cash equivalents in the Statement of Financial Condition. # **4. SECURITIES TRANSACTIONS** Securities owned, at fair value and securities sold, not yet purchased are recorded at fair value, with related changes reflected in the Statement of Income for the period. Total securities at December 31, 2020 consist of the following: | | Securities | | | |-------------------------------------------------|------------|----------------------|-------------------------| | | | Owned, at fair value | Sold, not yet purchased | | | | | | | State and municipal obligations | \$ | 10,422,068 | — | | Corporate obligations | | 379,356,151 | 380,676,641 | | Money market investments | | 4,762,124 | — | | U.S. government, government sponsored agencies, | | | | | and agency obligations | | 83,622,610 | 62,886,273 | | Commercial paper and certificates of deposit | | 60,175,501 | 11,009,504 | | Stocks | | 1,061,920 | 2,298 | | | | | | | Total securities | \$ | 539,400,374 | 454,574,716 | Securities transactions and related revenues and expenses are recorded on a trade-date basis. # **5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK** The Corporation clears all of its transactions through a clearing broker-dealer on a fully-disclosed basis. The Corporation's exposure to credit risk associated with nonperformance of its customers in {11}------------------------------------------------ fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile trading markets, which may impair the customers' ability to satisfy their obligations to the Corporation. The Corporation does not anticipate nonperformance by customers in the above situations. The Corporation, through a clearing broker-dealer, seeks to control the aforementioned risks by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. The Corporation's clearing broker-dealer monitors required margin levels daily and, pursuant to such guidelines, requires the customer to deposit additional collateral or reduce positions, when necessary. The Corporation's policy is to monitor its market exposure and counterparty risk. In addition, the Corporation has a policy of reviewing, as considered necessary, the credit standing of each customer with whom it conducts business. The Corporation is engaged in various trading and brokerage activities in which counterparties primarily include broker-dealers, banks and other financial institutions. In the event counterparties do not fulfill their obligations, the Corporation may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the instrument. It is the Corporation's policy to review and monitor, as necessary, the credit standing of and exposure to each counterparty. {12}------------------------------------------------ | | | | Percentage of | | |-----------------------------------------------------|------------|-------------|------------------|--| | Securities owned, at fair value | Fair Value | | Total Securities | | | United States Treasuries | \$ | 80,694,593 | 95% | | | Corporate Obligation -
Raytheon | | 20,428,915 | 24% | | | Corporate Obligation -
Burlington Northern | | 20,291,070 | 24% | | | Corporate Obligation -
Emerson Electric Co. | | 18,778,172 | 22% | | | Corporate Obligation -
Roper Technologies | | 16,881,973 | 20% | | | Corporate Obligation -
Diageo Cap PLC | | 15,109,588 | 18% | | | Corporate Obligation -
Altria Group, Inc. | | 11,302,613 | 13% | | | Corporate Obligation -
Juniper Networks, Inc. | | 10,864,970 | 13% | | | Corporate Obligation -
American Express Company | | 10,720,397 | 13% | | | Corporate Obligation -
Johnson & Johnson | | 9,770,717 | 11% | | | Corporate Obligation -
Principal Financial Group | | 8,647,778 | 10% | | | Total Securities owned, at fair value | \$ | 223,490,786 | 263% | | At December 31, 2020, the Corporation had the following securities that exceeded 10% of total securities positions, which equals securities owned, at fair value less securities sold, not yet purchased: | | | | Percentage of | | |----------------------------------------------------|----|-------------|------------------|--| | Securities sold, not yet purchased | | Fair Value | Total Securities | | | United States Treasuries | \$ | 62,490,109 | 74% | | | Corporate Obligation -
Roper Technologies | | 16,589,738 | 20% | | | Corporate Obligation -
Williams Companies, Inc. | | 14,032,708 | 16% | | | Corporate Obligation -
Altria Group, Inc. | | 13,448,837 | 16% | | | Corporate Obligation -
CSX Corporation | | 13,120,110 | 15% | | | Corporate Obligation -
Enterprise Products | | 10,866,444 | 13% | | | Corporate Obligation -
Amgen, Inc. | | 10,368,835 | 12% | | | Corporate Obligation -
FLT JP Morgan Chase & Co | | 10,158,269 | 12% | | | Commercial Paper -
Institutional SECD | | 9,999,779 | 12% | | | Corporate Obligation -
Johnson & Johnson | | 8,867,226 | 10% | | | Total Securities sold, not yet purchased | \$ | 169,942,055 | 200% | | {13}------------------------------------------------ #### **6. INCOME TAXES** The Corporation is included in the consolidated federal income tax return filed by the Bancorp. Federal and state income taxes are calculated as if the Corporation files separate income tax returns. Deferred income taxes are comprised of the following temporary differences at December 31, 2020: | Deferred tax assets: | | |--------------------------------|-----------------| | Deferred compensation | \$
2,674,647 | | State deferred taxes | 457,662 | | Deferred income/expense | 116,442 | | Intangible assets | 37,774 | | Reserves | 7,753 | | Other | 82,055 | | Total deferred tax assets | 3,376,333 | | | | | Deferred tax liabilities: | | | Prepaid expenses | 423,473 | | | | | Total deferred tax liabilities | 423,473 | | | | | Total net deferred tax asset | \$
2,952,860 | The Corporation has determined that a valuation allowance is not needed against the deferred tax assets as of December 31, 2020. The Corporation considered all of the positive and negative evidence available to determine whether it is more likely than not that the deferred tax assets will ultimately be realized and, based upon that evidence, the Corporation believes it is more likely than not that the deferred tax assets recorded at December 31, 2020 will ultimately be realized. {14}------------------------------------------------ # **7. PROPERTY AND EQUIPMENT** Property and equipment at December 31, 2020, consisted of the following: | Furniture and equipment | \$
632,744 | |-----------------------------------|---------------| | Premises | 798,087 | | Software | 173,781 | | Leasehold improvements | 177,912 | | Land | 111,650 | | Property and equipment -
gross | 1,894,174 | | Accumulated depreciation | (1,472,224) | | Property and equipment -
net | \$
421,950 | #### **8. GOODWILL AND INTANGIBLE ASSETS** As of December 31, 2020, the Corporation had goodwill of \$64,791,269. The Corporation completed its most recent annual goodwill impairment test as of September 30, 2020 and determined that no impairment existed. As of December 31, 2020, the Corporation had finite-lived intangible assets of \$450,000 less accumulated amortization of \$220,213. Intangible assets include non-compete agreements that are amortized on a sum-of-years basis over 5 years and 10 months. ### **9. FAIR VALUE MEASUREMENTS** The Corporation measures certain financial assets and liabilities at fair value in accordance with U.S. GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument's fair value measurement. The three levels within the fair value hierarchy are described as follows: *Level 1* — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. *Level 2* — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs {15}------------------------------------------------ that are derived principally from or corroborated by observable market data by correlation or other means. *Level 3* — Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Corporation's own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include the Corporation's own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment. **Fair Value Measurements Using As of December 31, 2020 Level 1 Level 2 Level 3(a) Total Fair Value** ASSETS: Securities owned, at fair value State and municipal obligations \$ — 10,422,068 — 10,422,068 Corporate obligations — 379,356,151 — 379,356,151 Money market investments 4,762,124 — — 4,762,124 U.S. government, government sponsored agencies and agency obligations 80,694,593 2,928,017 — 83,622,610 Commercial paper and certificates of deposit — 60,175,501 — 60,175,501 Stocks 1,061,920 — — 1,061,920 Securities owned, at fair value 86,518,637 452,881,737 — 539,400,374 Derivative Assets Futures contracts 71,619 — — 71,619 Derivative assets 71,619 — — 71,619 Total assets \$ 86,590,256 452,881,737 — 539,471,993 LIABILITIES: Securities sold, not yet purchased Corporate obligations \$ — 380,676,641 — 380,676,641 U.S. government, government sponsored agencies and agency obligations 62,490,109 396,164 — 62,886,273 Commercial paper and certificates of deposit — 11,009,504 — 11,009,504 Stocks 2,298 — — 2,298 Securities sold, not yet purchased 62,492,407 392,082,309 — 454,574,716 Total liabilities \$ 62,492,407 392,082,309 — 454,574,716 The following table summarizes assets and liabilities measured at fair value on a recurring basis: *(a) During the year ended December 31, 2020, there were no transfers in or out of Level 3.* {16}------------------------------------------------ The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy. *Financial Instruments Measured at Level 1* — Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities within securities owned, at fair value include money market investments, U.S. government obligations and stocks, which are valued based on market transactions involving identical assets that are actively traded and exchange-traded derivatives valued using quoted prices. Level 1 securities within securities sold, not yet purchased include U.S. government obligations and stocks, which are valued based on market transactions involving identical securities that are actively traded. *Financial Instruments Measured at Level 2* — If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Level 2 securities within securities owned, at fair value include: state and municipal obligations valued based on bonds with similar characteristics; corporate obligations valued utilizing an Option Adjusted Spread model; U.S. government obligations valued utilizing a matrixbased approach and discounted cash flows; and commercial paper and certificates of deposits valued utilizing a matrix-based approach. Level 2 securities within securities sold, not yet purchased include: corporate obligations valued utilizing an Option Adjusted Spread model; U.S. government obligations valued utilizing a matrix-based approach and discounted cash flows; and commercial paper and certificates of deposits valued utilizing a matrix-based approach. *Financial Instruments Measured at Level 3* — In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. There were no securities included within Level 3 as of December 31, 2020. *Short-term Financial Assets and Liabilities* — The fair values of the receivable from the clearing broker and affiliated companies and the payable to the Parent Company approximate their carrying amounts because of the short maturities of the instruments. Similarly, due to the short-term nature of all other financial assets and liabilities, their carrying values approximate fair value. ### **10. DERIVATIVE FINANCIAL INSTRUMENTS** The Corporation may use free-standing derivative instruments to reduce certain risks related to interest rate volatility. These instruments, if any, are included within other assets and other liabilities. Instruments the Corporation may use include futures contracts and options on futures contracts that are based on Treasury notes and Treasury bonds. Futures contracts are contracts in which the buyer agrees to purchase, and the seller agrees to make delivery of, a specific financial instrument at a predetermined price or yield. As of December 31, 2020, the Corporation had options on futures contracts with a notional amount of \$66,300,000 and a positive fair value of \$71,619 recorded in other assets within the Statement of Financial Condition. Credit risks arise from the possible inability of counterparties to meet the terms of their contracts. The Corporation's exposure is limited to the replacement value of the contracts rather than the notional amounts. {17}------------------------------------------------ # **11. NET CAPITAL REQUIREMENTS** The Corporation is subject to the SEC Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. The Corporation uses the alternative method for calculating net capital, which requires maintaining minimum net capital equal to the greater of \$250,000 or 2% of aggregate debit balances, as defined. At December 31, 2020, the Corporation's net capital of \$426,242,342 exceeded its required net capital of \$250,000 by \$425,992,342. ## **12. GUARANTEES** The Corporation guarantees the collection of all margin account balances held by its clearing brokerdealer for the benefit of its customers. The Corporation is responsible for payment to the clearing broker-dealer for any loss, liability, damage, cost or expense incurred as a result of customers failing to comply with margin or margin maintenance calls on all margin accounts. The margin account balance held by the clearing broker-dealer as of December 31, 2020 was \$14,434,108. In the event of any customer default, the Corporation has rights to the underlying collateral provided. Given the existence of the underlying collateral provided as well as the negligible historical credit losses, the Corporation does not maintain any loss reserve. # **13. RELATED PARTY TRANSACTIONS** The Bancorp uses a centralized approach to cash management. Cash receipts and payments of trade payables and other disbursements are processed through a centralized cash management system by the Bancorp. All cash derived from or required for the Corporation's operations is applied to or against the payable to the Parent Company. The payable to the Parent Company of \$12,191,880 represents a net payable as the Corporation has the right and the intent to net settle the payable to and the receivable from the Parent Company. At December 31, 2020, the net payable relates to \$11,260,734 in general payables and \$1,605,393 in trade payables, which are decreased by \$673,122 in general receivables and \$1,125 of trade receivables. The receivable from affiliated companies of \$2,441,775 represents a net receivable as the Corporation has the right and the intent to net settle the payable to and the receivable from affiliated companies. At December 31, 2020, the net receivable relates to \$3,061,781 in general receivables, which are reduced by \$620,006 in general payables. H2C Securities, Inc., an affiliated broker-dealer, maintains a brokerage account with the Corporation who serves as an advisor for the account. Federal and certain state income taxes are filed on a consolidated basis with the Parent Company or other affiliated companies and are net settled with each entity. At December 31, 2020, the payables to the Parent Company or affiliated companies relating to income taxes were \$2,624,371. On November 1, 2020, the Corporation renewed their Pledge Agreement with the Parent Company. The previous Pledge Agreement expired on October 31, 2020. Under the Pledge Agreement, the Parent Company agreed to extend credit to the Corporation in the principal amount of \$250,000,000. Interest {18}------------------------------------------------ is paid monthly at the target Federal Funds Rate plus 3.375%, which was 3.625% at December 31, 2020. The note is due October 31, 2021 and is secured by certain securities owned by the Corporation. The Corporation had no outstanding borrowings on this note at December 31, 2020. The Corporation offers a brokerage sweep product that allows customers to sweep excess cash positions into an interest-bearing account at the Parent Company. The Bancorp has fidelity bonds with coverage that extends to the Corporation. The deductible on these bonds is \$7,500,000. As of December 31, 2020, the Corporation had \$60,785,638 cash on deposit with the Parent Company. # **14. COMMITMENTS AND CONTINGENCIES** The Corporation leases various offices under operating agreements to be paid in 2021 through 2022. In the normal course of business, the Corporation is subject to certain litigation. Management is of the opinion, based upon review of its issues, that settlements (if any) not specifically accrued for at December 31, 2020 will not materially impact the Corporation's Financial Statements. The Corporation serves as a remarketing agent for variable rate demand notes ("VRDNs"). The VRDNs pay interest to holders at a rate of interest that fluctuates based upon market demand. The VRDNs generally have long-term maturity dates, but can be tendered by the holder for purchase at par value upon proper advance notice. When the VRDNs are tendered, a remarketing agent generally finds another investor to purchase the VRDNs to keep the securities outstanding in the market. The Corporation acts as the remarketing agent to issuers on approximately \$385,370,000 of VRDNs as of December 31, 2020. As remarketing agent, FTS is responsible for actively remarketing VRDNs to other investors when they have been tendered. If another investor is not identified, FTS may choose to purchase the VRDNs into inventory at its discretion while it continues to remarket them. If FTS purchases the VRDNs into inventory, it can subsequently tender back the VRDNs to the issuer's trustee with proper advance notice. As of December 31, 2020, the Corporation did not hold any of these securities in its portfolio. The Corporation routinely enters into when-issued and firm underwriting commitments. At December 31, 2020, the Corporation had no outstanding underwriting commitments. As part of the acquisition of Coker Capital Securities, LLC (the "Subsidiary Company") on February 15, 2018, the Corporation agreed to pay the sellers additional compensation if the Subsidiary Company meets certain revenue thresholds annually, as of the acquisition date, through 2023. As of December 31, 2020, the Corporation has a reserve of \$1,027,000 for these estimated potential payments. This reserve is recorded in other liabilities within the Statement of Financial Condition. \*\*\*\*\*\* Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.