# PERFORMANCE TRUST CAPITAL PARTNERS, LLC X-17A-5 (2020-02-28) — Broker-dealer annual report
- Company: PERFORMANCE TRUST CAPITAL PARTNERS, LLC
- Form: X-17A-5
- Filed: 2020-02-28
- Period: 2019-12-31
- Accession: 0000920788-20-000002
- CIK: 920788
- File #: 8-47035
- Material weakness: No
- Auditor: RSM US LLP
- Auditor location: Chicago, IL
- Contact: Ryan Gazda
- Phone: 312-521-1111
- Signed by: Jason Carver (Chief Financial Officer)
Original filing: https://www.sec.gov/Archives/edgar/data/920788/000092078820000002/final19pubfin.pdf
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Consolidated Statement of Financial Condition December 31, 2019
Filed as PUBLIC information pursuant to Rule 17a-5(d) under the Securities Exchange Act of 1934.
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UNITED ST ATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
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# **ANNUAL AUDITED REPORT FORM X-17A-5 PARTlll**
SEC FILE NUMBER B-47035
FACING PAGE Information Required of Brokers and Dealers Pursuant to Section 17 of the Securities Exchange Act of 1934 and Rule l 7a-5 Thereunder
| REPORT FOR THE PERIOD BEGINNING 01 /01/19 | | AND ENDING 12/31/19 | ~~~~~~~~~~- |
|-----------------------------------------------------------------------------------------|----------------------------------------------------------|---------------------|--------------------------------|
| | MM/DD/YY | | MM/DD/YY |
| | A. REGISTRANT IDENTIFICATION | | |
| NAME oF BROKER-DEALER: Performance Trust Capital Partners, LLC | | | OFFICIAL USE ONLY |
| ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use P.O. Box No.) | | | FIRM 1.0. NO. |
| 500 West Madison, Suite 450 | | | |
| | (No. and Street) | | |
| Chicago | lL | | 60661 |
| (City) | (State) | | (Zip Code) |
| NAME AND TELEPHONE NUMBER OF PERSON TO CONTACT IN REGARD TO THIS REPORT
Jason Carver | | | (312) 521-1114 |
| | | | (Arca Code - Telephone Number) |
| | B. ACCOUNTANT IDENTIFICATION | | |
| INDEPENDENT PUBLIC ACCOUNTANT whose opinion is contained in this Report* | | | |
| RSM US LLP | | | |
| | (Name - lft11d/l>td11al, state last, first, middle name) | | |
| One South Wacker Drive, Suite 800 | Chicago | IL | 60606 |
| (Address) | (City) | (State) | (Zip Code) |
| CHECK ONE: | | | |
| l/'lcertified 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 240.17a-5(e)(2)*
> Potential persons who are to respond to the collection of information contained in this form are not required to respond u n I ess the form displays a currently valid OM B control number.
SEC 1410 (11-05)
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#### **OATH OR AFFIRMATION**
| | I, _J_a_so_n_c_a_rv_e_r ________________________ , swear (or affirm) that, to the best of |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| my knowledge and belief the accompanying financial statement and supporting schedules pertaining to the firm of
Performance Trust Capital Partners, LLC | |
| of December 31 | -----------------------------------------~ , as
are true and correct. I further swear (or affirm) that |
| classified solely as that of a customer, except as follows: | neither the company nor any partner, proprietor, principal officer or director has any proprietary interest in any account |
| DONNA R ARIMURA
Official Seal
Notary Public - State of lllfnols
My Commission Expires Jan 13, 2024
CD&MTk1~J,LMl)
I
Notary Public | .C--
heif Financial Officer
Title |
| This report** contains (check all applicable boxes):
0
(a) Facing Page.
0
(b) Statement of Financial Condition.
of Comprehensive Income (as defined in §210.1-02 of Regulation S-X).
n
(d) Statement of Changes in Financial Condition.
D (e) Statement of Changes in Stockholders' Equity or Partners' or Sole Proprietors' Capital.
D (f) Statement of Changes in Liabilities Subordinated to Claims of Creditors.
§ (g) Computation of Net Capital.
(h) Computation for Determination of Reserve Requirements Pursuant to Rule l 5c3-3.
(i) Information Relating to the Possession or Control Requirements Under Rule 15c3-3.
D U) A Reconciliation, including appropriate explanation of the Computation ofNet Capital Under Rule l 5c3-
Computation for Determination of the Reserve Requirements Under Exhibit A of Rule l 5c3-3.
consolidation.
0 (I) An Oath or Affirmation.
D (m) A copy of the SIPC Supplemental Report. | O (c) Statement of Income (Loss) or, if there is other comprehensive income in the period(s) presented, a Statement
l and the
O (k) A Reconciliation between the audited and unaudited Statements of Financial Condition with respect to methods of
D (n) A report describing any material inadequacies found to exist or found to have existed since the date of the previous audit. |
*\*\*For conditions of confidential treatment of certain portions of this filing, see section 240. l 7a-5(e)(3).*
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#### **Contents**
| Report of Independent Registered Public Accounting Firm | 1 |
|---------------------------------------------------------|------|
| Consolidated Financial Statement | |
| Consolidated Statement of Financial Condition | 2 |
| Notes to Consolidated Financial Statement | 3-12 |
| | |
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# Report of Independent Registered Public Accounting Firm
RSMUSLLP
To the Member and Equity Owners of Performance Trust Capital Partners, LLC
#### Opinion on the Financial Statements
We have audited the accompanying consolidated statement of financial condition of Performance Trust Capital Partners, LLC (the Company) as of December 31, 2019, and the related notes to the consolidated financial statement (collectively, 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, 2019, in conformity with accounting principles generally accepted in the United States of America.
# Basis for Opinion
This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's 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 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
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 provides a reasonable basis for our opinion.
We have served as the Company's auditor since 2005.
Chicago, Illinois February 27, 2020
THE POWER OF BEING UNDERSTOOD AUDIT I TAX I CONSULTING
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#### Consolidated Statement of Financial Condition December 31, 2019
| Assets | |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|
| Cash
Receivables from clearing broker
Receivables from repo counterparties
Receivables from affiliates and employees
Securities owned, at fair value (includes pledged securities of \$148, 138,585)
Prepaid expenses
Other assets | \$
5,168,347
4,920,506
3,288,054
7,222,914
975,430,910
2,169,075
7,371,118 |
| Total assets | \$
1,005,570,924 |
| Liabilities and Member's Equity | |
| Liabilities
Payable to clearing broker
Securities sold under agreements to repurchase
Line of credit
Accrued compensation and benefits
Accrued distributions | \$ 667,942,297
142,227,000
20,000,000
50,954,959
19,555,675 |
| Accounts payable, accrued expenses and other liabilities | 10,551,234 |
| Member's equity | 911,231, 165
94,339,759 |
| Total liabilities and member's equity | \$
1,005,570,924 |
| | |
See Notes to Consolidated Financial Statement.
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#### Note 1. Nature of Business and Significant Accounting Policies
Organization and nature of business: Performance Trust Capital Partners, LLC (the "Company''), an Illinois limited liability company, was formed on October 6, 2006, and is a wholly owned subsidiary of PT Financial Companies LLC (the "Parent"). The Company was formed for the purpose of conducting business as an introducing broker-dealer and a registered investment advisor in fixed income securities. Its customers are comprised primarily of banks and other financial institutions located throughout the United States. The Company is registered with the Securities and Exchange Commission ("SEC") as a broker-dealer and registered investment advisor and is a member of the Financial Industry Regulatory Authority ("FINRA").
In 2018, the Company started consolidating PT Capital Partners Limited ("PTCPL"), a wholly owned subsidiary. PT Capital Partners Limited was incorporated in Hong Kong on June 12, 2017. It was granted its Type 1 - Dealing in Securities license on November 8, 2018 by The Securities and Futures Commissions in Hong Kong. PT Capital Partners Limited was formed for the purposes of conducting business as an introducing broker-dealer in fixed income securities to customers comprised of institutional investors and financial institutions located throughout Asia. Effective September 1, 2019, through a distribution to the Parent, PTCPL became a wholly owned subsidiary of the Parent and is no longer consolidated in these financial statements.
The Company operates under the provisions of Paragraph (k)(2)(ii) of Rule 15c3-3 of the SEC and, accordingly, is exempt from the remaining provisions of the Rule. The requirement of Paragraph (k)(2)(ii) provides that the Company clear all transactions on behalf of customers on a fully disclosed basis with a clearing broker-dealer. The clearing broker-dealer, Pershing LLC (a subsidiary of The Bank of New York Mellon Corporation), carries all of the accounts of the customers and maintains and preserves all related books and records as are customarily kept by a clearing broker-dealer. The Company may obtain shortterm financing by borrowing from its clearing broker against its principal inventory positions, subject to collateral maintenance requirements.
A summary of the Company's significant accounting policies follows:
The Company follows Generally Accepted Accounting Principles (GAAP), as established by the Financial Accounting Standards Board (the FASB}, to ensure consistent reporting of the consolidated statement of financial condition.
Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary for the eight months ending August 31, 2019. All intercompany accounts and transactions have been eliminated during that time period.
Foreign currency: The Company translates the assets and liabilities of its wholly-owned subsidiary denominated in Hong Kong dollars to U.S. dollars at the appropriate spot rates as of December 31, 2019. The Company's functional currency is U.S. dollars.
Use of estimates: The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Securities and derivatives transactions: Securities and derivatives transactions and related revenues and expenses are recorded at fair value on a trade-date basis.
Receivables and payables for securities or derivatives transactions that have not reached their contractual settlement date are recorded in receivables from and payable to clearing broker(s) on the consolidated statement of financial condition.
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# Note 1. Nature of Business and Significant Accounting Policies (continued)
Contract assets and liabilities: Included within other assets on the consolidated statement of financial condition, the Company records accounts receivable from contracts with customers when a performance obligation has been satisfied and billed for, but amounts are still outstanding net of any allowances for doubtful accounts. All contract receivables at December 31, 2018 were collected during the year ended December 31, 2019 with the exception of \$0.04 million worth of receivables, which were uncollected but fully reserved for as of December 31, 2019. Receivables are short term in nature and related to different customers.
### Gross accounts receivables from contracts with customers:
| | 12/31/2019 | 12/31/2018 |
|-----------------------------------|---------------|---------------|
| Investment Banking Fees | \$
704,554 | \$
647,237 |
| Enterprise Shape Management Fees | 814,132 | 792,850 |
| Other Advisory Services | 1,508,149 | 1,761, 145 |
| Total Accounts Receivable (Gross) | \$ 3,026,835 | \$ 3,201,232 |
#### Allowance for doubtful accounts:
| | 12/31/2019 | | 12/31/2018 | |
|---------------------------------------|------------|---------|------------|--|
| Investment Banking Fees | \$ | 0 | \$
0 | |
| Enterprise Shape Management Fees | 110,719 | | 0 | |
| Other Advisory Services | 259,902 | | 0 | |
| Total Allowance for Doubtful Accounts | \$ | 370,621 | \$
0 | |
The timing of contract revenue recognition may differ from the timing of payment by the Company's customers. The Company records a receivable when revenue is recognized prior to payment and the Company has an unconditional right to payment.
Deferred revenue: When payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. Deferred revenue primarily relates to fees received relating to annual contracts for advisory services where the performance obligation has not yet been satisfied. Deferred revenue at December 31, 2019 and December 31, 2018 was approximately \$0.6 and \$0.5 million, respectively. All deferred revenue at December 31, 2018 was recognized as revenue during the year ended December 31, 2019.
Resale and repurchase agreements: Transactions involving securities sold under agreements to repurchase (repurchase agreements or repos) are accounted for as collateralized financing transactions. Repos are carried at their contract value on the consolidated statement of financial condition. Cash collateral held by the counterparties is included in receivables from repo counterparties in the consolidated statement of financial condition. Securities pledged as repo collateral are included in securities owned, at fair value in the consolidated statement of financial condition. Accrued interest on such transactions is included in accounts payable, accrued expenses, and other liabilities in the consolidated statement of financial condition.
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# Note 1. Nature of Business and Significant Accounting Policies (continued)
Income taxes: The Company is considered a pass-through entity for federal income taxation purposes and is therefore not subject to federal income tax, but the Company may be subject to certain state taxes. FASB guidance requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained "when challenged" or "when examined" by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. For the year ended December 31, 2019, management has determined that there are no material uncertain income tax positions. The Company files income tax returns in U.S. federal jurisdiction, and various states. The current and prior three tax years generally remain subject to examination by U.S. federal and most state tax authorities.
Leases: The Company recognizes and measures its leases in accordance with FASB Accounting Standards Codification ("ASC") 842- Leases. The Company is a lessee in several non-cancellable operating leases for office space in terms in excess of twelve months. The Company determines if an arrangement is a lease, or contains a lease, at inception of a contract and when terms of an existing contract are changed. The Company recognizes a lease liability and right of use asset at the commencement date of the lease for those leases with a lease term of greater than twelve months. The lease liability is initially and subsequently recognized based on the present value of its future lease payments using a discount rate of 6.5%. The Company's discount rate represents the Company's incremental borrowing rate as the Company's implicit rates of its leases are not readily determinable. The right of use asset is subsequently measured throughout the lease term at the amount of the remeasured lease liability (present value of the remaining lease payments) and amortized monthly. The Company has elected not to recognize right of use assets and liabilities for short-term leases that have a lease term of 12 months or less at lease commencement.
Subsequent events: The Company has performed an evaluation of subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.
The Company is currently evaluating the potential impact of the following new accounting standards issued:
#### Recent Accounting Pronouncements
In August, 2018, the FASB issued guidance Accounting Standards Updated ("ASU") 2018-13, Fair Value Measurements (Topic 820), which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. Early adoption is permitted. The Company expects to adopt the provisions of this guidance on January 1, 2020. The guidance is not expected to have a material impact on the Company's related fair value disclosures.
In June 2016, FASB issued ASU 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends several aspects of the measurement of credit losses on financial instruments, including replacing the existing incurred credit loss model and other models with the current expected credit losses ("CECL") model and amending certain aspects of accounting for purchased financial assets with deterioration in credit quality since origination. The Company evaluated this new guidance noting limited historical write-offs. Due to the short term nature of the Company's receivables that fall under this topic the Company believes the current method of reserving based on expected credit losses of aged receivables is not materially different than the proposed standard. Thus there was no material impact upon adoption at January 1, 2020.
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# Note 2. Receivables from and Payables to Clearing Brokers
Amounts receivable from and payable to clearing brokers at December 31, 2019 consist of the following:
| | Receivable | Payable |
|-----------------------------------------|-----------------|-------------------|
| Deposit with clearing broker | \$
500,000 | \$ |
| Receivable from clearing brokers (cash) | 3,368,712 | |
| Payable to clearing broker | | 673,620,740 |
| Open trade equity on futures contracts | 1,051,794 | |
| Open trade equity on TBA contracts | | 87,056 |
| Bond interest and principal receivable | | (5, 765,499) |
| | \$
4,920,506 | \$
667,942,297 |
The amount payable to the clearing broker relates to principal transactions and is collateralized by securities owned by the Company. The Company is required to maintain a \$500,000 deposit with its clearing broker-dealer.
The amount of open trade equity on TBA contracts is presented above as a net balance. As of December 31, 2019, the balance of open trade equity on TBA contracts was comprised of an asset of \$139,960 and a liability of \$227,016.
# Note 3. Fair Value Measurements
Fair value is 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. The Company utilizes valuation techniques to maximize the use of observable inputs and minimize the use of unobservable inputs. Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability. Assets and liabilities recorded at fair value are categorized within the fair value hierarchy based upon the level of judgment associated with the inputs used to measure their value. 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). The three levels of the fair value hierarchy are described below:
Level 1. Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.
Level 2. Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly, and the fair value is determined through the use of models or other valuation methodologies. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement.
Level 3. Inputs that are unobservable for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. The inputs into the determination of fair value are based upon the best information in the circumstances and may require significant management judgment or estimation.
The availability of observable inputs can vary for each financial instrument and is affected by a wide variety of factors, including, without limitation, the type of security, whether the security is a new issue, the liquidity of markets, and other characteristics particular to the security or instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.
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#### **Notes to Consolidated Financial Statement**
#### **Note 3. Fair Value Measurements (continued)**
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. 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 investment.
The following describes the valuation techniques used by the Company to measure different financial instruments at fair value and includes the level within the fair value hierarchy in which the financial instrument is categorized. The inputs or methodology used for valuing financial instruments are not necessarily an indication of the risks associated with investing in those instruments.
Actively traded listed futures and TBA contracts are valued based on quoted market prices and are categorized in Level 1 of the fair value hierarchy. To the extent the inputs are observable and timely, mortgage-backed securities, asset-backed securities and state and municipal bonds would be categorized in Level 2 of the fair value hierarchy; otherwise such securities would be categorized in Level 3. The fair values described herein are estimated using pricing models that discount the anticipated cash flows to present value assuming market discount rates of securities with similar characteristics. Such models use a variety of observable inputs, including but not limited to, prepayment speeds, estimated cash flows, spreads to the Treasury curve or other reference rates, underlying loans and collateral, credit rating, default rates, and loss severity rates.
The Company evaluates certificates of deposits held within its securities owned balance per the consolidated statement of financial condition at original plus accrued interest. The Company held no certificates of deposit as of December 31, 2019.
The following table presents the Company's fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of December 31, 2019:
| | | | | | Significant | |
|----------------------------------------|--------------------|----------------|-----------|------------|-------------|--|
| | | Quoted | | Other | | |
| | | Prices in | | Observable | | |
| | | Active Markets | | | Inputs | |
| | Total
(Level 1) | | | | (Level 2) | |
| Receivables from clearing broker: | | | | | | |
| Open trade equity on futures contracts | \$
1,051,794 | \$ | 1,051,794 | \$ | | |
| Payable to clearing broker: | | | | | | |
| Open trade equity on TBA contracts | \$
(87,056) | \$ | (87,056) | \$ | | |
| Securities owned: | | | | | | |
| Agency mortgage-backed securities | \$
774,810,559 | \$ | | \$ | 774,810,559 | |
| State and municipal obligations | 141,203,825 | | | | 141,203,825 | |
| Non-agency mortgage-backed securities | 59,416,526 | | | | 59,416,526 | |
| | \$
975,430,910 | \$ | | \$ | 975,430,910 | |
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#### Note 3. Fair Value Measurements (continued)
Substantially all of the Company's other assets and liabilities are also considered financial instruments, and are short-term or replaceable on demand. Therefore, their carrying amounts approximate their fair values.
The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Company's accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. There were no transfers among Levels 1, 2, and 3 during the year ended December 31, 2019.
# Note 4. Securities Sold Under Agreements to Repurchase
The Company has entered into master repurchase agreements to finance the purchase of securities in its investment portfolio. Repurchase agreements involve the sale and simultaneous agreement to repurchase the transferred assets or similar assets in the future. The amount borrowed generally is equal to the fair value of the assets pledged less an agreed-upon discount, referred to as a "haircut." Repurchase agreements entered into by the Company are accounted for as financings and require the repurchase of the transferred securities at the close of each borrowing. The Company maintains the beneficial interest in the specific investments pledged during the term of the repurchase agreement and receives the related principal and interest payments. In response to declines in fair value of pledged assets due to changes in market conditions or the publishing of monthly security paydown factors, lenders typically require the Company to fund cash margin accounts in order to re-establish the agreedupon collateral requirements, referred to as margin calls. The borrowings bear interest at a variable market rate and have an open maturity date.
As of December 31 , 2019, the fair value of securities posted as collateral under open repurchase agreements was approximately \$148.1 million. Due to the short duration of securities sold under agreements to repurchase and the nature of collateral involved, the risks associated with these transactions are considered minimal.
The following table provides a detail of the remaining contractual maturity of securities sold under agreements to repurchase as of December 31, 2019:
| | Overnight and | | | | |
|-------------------------------------------------|----------------|-------|--|----------------|--|
| | Continuous | Other | | Total | |
| Securities sold under agreements to repurchase: | | | | | |
| Agency mortgage-backed securities | \$ 142,227,000 | \$ | | \$ 142,227,000 | |
#### Note 5. Derivative Instruments
The Company uses derivative financial instruments to hedge market risk primarily due to exposure to fluctuations in interest rates in its securities inventory. These derivatives are recorded on the consolidated statement of financial condition in receivables from and payable to clearing broker(s). These financial instruments expose the Company to varying degrees of market and credit risk that may be in excess of the amounts recorded in the consolidated statement of financial condition.
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# Notes to Consolidated Financial Statement
# Note 5. Derivative Instruments (continued)
As of December 31, 2019 and for the year then ended, the Company's derivative activities had the following impact on the consolidated statement of financial condition:
#### Statement of Financial Condition:
| | | | | Notional | |
|------------------------------------|------------|-----------|-------|-------------|--|
| ilrul. | Fair Value | | Value | | |
| Receivables from clearing brokers: | | | | | |
| Interest rate futures contracts | \$ | 1,051,794 | \$ | 383,400,000 | |
| | | | | | |
| Payable to clearing broker: | | | | | |
| Open trade equity on TBA contracts | \$ | 87,056 | \$ | 323,308,595 | |
Open trade equity on TBA contracts are presented on a net basis. All other figures are presented gross and are not affected by offsetting.
During the year ended December 31, 2019, the total notional amount of futures contracts traded by the Company was approximately \$24.1 billion. The Company also traded total notional value of approximately \$65.7 billion of mortgage-backed TBA securities during the year.
For the year ended December 31, 2019, the monthly average number of derivative contracts bought and sold was approximately 19,000.
#### Note 6. Leases
The Company has obligations of a lease for office space with initial non-cancellable terms in excess of one year. The Company classifies these leases as operating leases. These operating leases may, or may not, contain renewal options. As the Company is not reasonably certain to exercise these renewal options, the optional periods are not included in determining the lease term and associated payments under these renewals are excluded from lease payments. Some of the Company's operating leases for office space require it to make variable payments for the Company's proportionate share of the building's property taxes, insurance and common area maintenance. These variable lease payments are not included in lease payments used to determine lease liability and are recognized as variable costs when incurred.
The amounts reported in other assets and accounts payable, accrued expenses and other liabilities in the consolidated statement of financial condition as of December 31, 2019 were as follows:
| Operating lease right of use asset: | \$4,567,786 |
|-------------------------------------|-------------|
| Operating lease liability: | \$4,635,279 |
The Company's operating lease liability was calculated as follows:
| Total undiscounted lease payments: | \$7,016,586 | |
|------------------------------------|-------------|--|
| Less imputed interest: | (2.381.307) | |
| Total lease liability: | \$4,635,279 | |
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# Note 6. Leases (continued)
The Company has entered into several operating leases that extend into periods beyond one year from the date of these consolidated financial statements. The future minimum lease commitments of lease liabilities under non-cancellable operating leases as of December 31, 2019 are as follows:
| Year ending December 31 : | | |
|---------------------------|----|------------|
| 2020 | \$ | 1,873,564 |
| 2021 | | 1,478, 154 |
| 2022 | | 1,364,602 |
| 2023 | | 590,063 |
| 2024 | | 0 |
| | \$ | 5,306,383 |
The Company leases certain office space from its parent. These leases are for an initial five-year term expiring in 2023. These leases have been classified as an operating lease and are included in the data presented above.
# Note 7. Retirement Plans
The Company participates in a profit sharing plan operated by the Parent for the benefit of substantially all employees of the Company.
# Note 8. Related-Party Transactions
The Company has a Services Agreement with the Parent dated January 1, 2012. Included in this agreement is the cost the Company pays to the Parent for the use of office space, furniture and equipment. The Company and the Parent borrow from one another, as necessary from time to time. As of December 31, 2019, the Parent owed the Company \$5,585,765, which is included in receivables from affiliates and employees in the consolidated statement of financial condition.
On June 1, 2019 (the Acquisition Date), Parent entered into a Closing Agreement whereby Parent acquired the net assets of the BSP Securities, LLC from Bank Street Partners, LLC. The Company entered into a Services Agreement with BSP Securities, LLC, covering compensation and noncompensation expenses paid by the Company, and relating to time spent and expenses incurred on, and as part of, ongoing engagements executed prior to the Acquisition Date. As of December 31, 2019, BSP Securities, LLC owed the Company \$1,349,423, which is included in receivables from affiliates and employees in the consolidated statement of financial condition.
As of December 31, 2019, the Company also had a receivable due from affiliates with a balance of \$161,943, which is included in receivables from affiliates and employees in the consolidated statement of financial condition.
From time to time, the Company may provide advances to its employees. On December 31, 2019, employees owed the Company \$125,783, which is included in receivables from affiliates and employees in the consolidated statement of financial condition.
Certain employees of the Company have consulting agreements with the Company.
The Company transacted in \$470 million of municipal securities with an affiliate in the ordinary course of business.
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# **Notes to Consolidated Financial Statement**
# **Note 9. Significant Risks and Concentrations of Risks**
The Company is subject to various risks including concentrations of credit, liquidity, market, and offbalance sheet risk. The Company attempts to manage these risks on a dynamic basis.
In the event a counterparty does not fulfill its obligations the Company may be exposed to credit risk. The Company is engaged in trading with broker-dealers, banks, and other financial institutions as well as brokerage activities executed on a principal or riskless-principal basis with customers. Under the terms of its clearing agreement, the Company is required to ensure the proper settlement of counterparty transactions. Customer credit risk is partially mitigated by the use of delivery-versus-payment accounts through custodians. It is the Company's policy to review, as necessary, the credit worthiness of each counterparty with which it conducts business.
Because the Company does not clear its own securities and futures transactions, it has established accounts with a clearing broker-dealer and a futures commission merchant (collectively, the "clearing brokers") for this purpose. This can and often does result in a concentration of credit risk with these firms. However, such risk is mitigated by the obligation of each clearing broker-dealer and futures commission merchant to comply with rules and regulations of the SEC or Commodity Futures Trading Commission ("CFTC"), respectively. The Company attempts to manage this risk by periodically reviewing collateral requirements and removing excess funds above the minimum requirement.
Market risk arises due to fluctuations in interest rates that may result in changes in the values of financial instruments. The Company manages its exposure to market risk resulting from trading activities through the use of derivatives transactions to hedge exposure in securities inventory. The Company prepares portfolio composition reports for review by the Company's risk management function.
The Company maintains accounts with financial institutions which, at times, may exceed Federal Deposit Insurance Corporation insurance limits. The Company has not incurred any losses on these accounts in the past and does not expect any such losses in the future.
#### **Note 10. Commitments and Contingent Liabilities**
In the ordinary course of business, the Company may be subject to various litigation and arbitration matters. Although the effects of these matters cannot be determined, the Company's management believes that their ultimate outcome will not have a material effect on the Company's financial condition.
The Company recorded a liability related to an obligation for unbilled fees for transactions not specified in contractual obligations. The Company estimated the liability to be \$400,000.
In the normal course of business, the Company acts as a principal in when-issued securities. Transactions relating to such commitments that were open as of December 31, 2019, and were subsequently settled had no material effect on the financial statements as of that date.
The Company maintained a debt financing agreement with a commercial bank throughout 2019. The agreement is for an unsecured, revolving line of credit, which matures on May 1, 2021 , for \$20 million. The line of credit was approved by FINRA as good regulatory capital on January 30, 2019. As of December 31 , 2019, the Company had drawn the full \$20 million on the line of credit.
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#### **Note 11. Indemnifications**
The Company has agreed to indemnify its clearing brokers for losses that the clearing brokers may sustain from the customer accounts introduced by the Company. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these agreements and has not recorded a contingent liability in the financial statements for these indemnifications.
In the normal course of business, the Company enters into contracts that contain a variety of representations and warranties that provide indemnifications under certain circumstances. The Company's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company assesses the risk of loss to be remote.
#### **Note 12. Regulatory Requirements**
The Company is subject to the SEC Uniform Net Capital Rule (SEC Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1 (and the rule also provides that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed 10 to 1 ). On December 31, 2019, the Company had net capital of \$92,480,543, which was \$89,956, 199 in excess of its required net capital of \$2,524,344. The Company's ratio of aggregate indebtedness to net capital was 0.41 to 1
Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.