Cohen & Company Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Unless otherwise noted, financial amounts are in thousands of dollars. The company operates in Capital Markets, Asset Management, and Principal Investing, with activities spanning fixed income, repo financing, investment banking, asset management, and SPAC-related investments.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $9,154 | $10,066 | $8,472 | $112,742 |
| Operating income (loss) | $(8,162) | $(9,073) | $(28,040) | $61,372 |
| Net income (loss) | $(12,252) | $(3,195) | $(47,418) | $63,533 |
| Net income (loss) attributable to Cohen & Company Inc. | $(1,857) | $1,725 | $(9,469) | $11,080 |
| Basic EPS | $(1.30) | $1.61 | $(6.71) | $10.52 |
- Revenue mix: Q2 net trading revenue fell 44% to $10,377; asset management revenue rose 3% to $1,898; new issue and advisory revenue increased to $3,481 from $850. Principal transactions and other income improved to a loss of $6,602 from a loss of $11,021.
- Six-month revenue: Net trading declined 40% to $22,399, asset management declined 4% to $3,787, and new issue and advisory rose 170% to $7,251. Principal transactions and other income swung to a loss of $24,965 from income of $68,540.
- Investment losses: Six-month principal transaction losses were principally fair-value losses on SPAC-related and other investments; equity-method affiliates recorded a $15,148 loss versus $4,655 income in the prior-year period. In 2021, large principal investment gains, notably in MILE, materially boosted results.
- Expenses: Six-month operating expenses decreased 29% to $36,512, mainly reflecting lower equity-based compensation and cash compensation. Q2 expenses declined 10% to $17,316. Compensation savings were partly offset by higher occupancy, business development, and equipment costs.
- Cash flow: For the six months, operating activities provided $5,641, investing activities provided $2,626, and financing activities used $8,486. Cash decreased $499 to $50,068. Operating cash flow benefited significantly from changes in repo-related balances and collateral deposits, so it should not be read as a stand-alone measure of earnings or recurring cash generation.
- Balance sheet and liquidity: Total assets were $2.271 billion, down from $3.656 billion at year-end 2021, largely alongside a reduction in reverse repos and related repo funding. Cash was $50,068. Of that, $27,884 represented counterparty cash collateral that the company said was not available for general operations. Reverse repo receivables were $1.792 billion and repurchase liabilities were $1.790 billion.
- Debt and capital: Reported debt was $28,737, down from $43,394, principally because the $15,000 convertible note was converted into Operating LLC units in March. Remaining reported debt included $4,500 of 10% senior notes due January 2024 and $24,237 carrying value of junior subordinated notes. A $25,000 Byline credit facility was undrawn at quarter-end. A separate $7,957 redeemable financial instrument was outstanding.
- Margins: The filing reports operating losses for both the quarter and first half of 2022; given the low and investment-sensitive revenue base, a single margin comparison may be misleading.
Material developments, outlook, and risks
- FGMC bankruptcy and reverse repo exposure: First Guaranty Mortgage Corporation filed for Chapter 11 on June 30, 2022. The company had a $269,228 reverse repo receivable. After quarter-end, it began liquidating collateral and reported $183,002 in cash proceeds, leaving $86,226 outstanding before subsequent interest. Management estimated collateral value exceeded the remaining balance and recorded no loss for the first half. A shortfall on final liquidation could result in a valuation reserve and loss in the second half of 2022; any shortfall could leave an unsecured claim against FGMC.
- Repo business: The company completed its wind-down of the GCF repo business by year-end 2021, citing reduced spreads. The remaining matched-book activity is primarily gestation repo, which management says is concentrated on the counterparty-demand side. Repo balances and associated collateral can fluctuate substantially.
- SPAC and market exposure: Management reported significant declines in SPAC and post-business-combination equity prices in the first half, producing principal transaction and equity-method losses. Further price declines could cause additional losses. The company also cites volatility, competition and margin pressure in fixed income, interest-rate-sensitive mortgage activity, illiquid investments, and counterparty and funding risks.
- Liquidity and distributions: Management stated that cash, the trading portfolio, and related borrowing capacity were expected to meet near-term operating needs, while cautioning that replacement or additional financing may not be available on favorable terms. Broker-dealer capital and other restrictions limit transfers of subsidiary capital. The company paid $1,843 in dividends during the first half, including regular and special distributions; the board declared a further $0.25-per-share quarterly dividend payable September 1, 2022.
- Other items: The company disclosed an immaterial correction to previously issued 2021 financial statements relating to deferred taxes and local tax payables. It is defending a trademark and business-name lawsuit and filed a partial motion to dismiss. No specific financial guidance was provided; management emphasized that earnings are unpredictable and may vary substantially by quarter.
Important facts for investors to verify
- Subsequent recovery and final collateral liquidation for the $269.2 million FGMC reverse repo, including whether any reserve or loss is recorded.
- Cash available for general use after excluding cash collateral and considering capital restrictions at broker-dealer subsidiaries.
- Fair values, liquidity, and concentration of SPAC-related holdings, equity-method investments, and other investments, including valuation assumptions for restricted securities.
- Sources of recurring revenue and the effect of GCF repo wind-down, declining CDO assets, fixed-income margin pressure, and SPAC-market activity.
- Debt and redemption terms, including the 2024 senior note, variable-rate junior subordinated notes, redeemable financial instrument, and availability and covenants of the undrawn Byline facility.
- Dividend sustainability given losses, subsidiary distribution constraints, and the company’s financing needs.