Cohen & Company Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparative figures are for 2020. Amounts below are in millions of dollars unless stated otherwise. The company operates Capital Markets, Asset Management and Principal Investing businesses, with activities in fixed-income markets and SPACs.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $6.6 | $21.9 | $119.3 | $63.7 |
| Operating income (loss) | $(19.1) | $6.1 | $42.3 | $4.6 |
| Net income (loss) | $(17.7) | $3.3 | $45.8 | $(5.2) |
| Net income (loss) attributable to Cohen & Company Inc. | $(3.4) | $1.7 | $7.7 | $(0.5) |
| Basic earnings (loss) per common share | $(2.61) | $1.44 | $6.71 | $(0.47) |
| Cash flow from operating activities | Not separately presented for the quarter | $(3.0) | $115.3 |
The filing does not present a conventional margin measure. Q3 revenue fell 70%, primarily as Principal Transactions and Other Income swung to a $20.7 million loss from $2.8 million of income. SPAC-related marks included losses of $14.3 million on MetroMile, $3.1 million on SFT and $5.8 million on other SPAC equity. New issue and advisory revenue rose to $8.8 million from $0.5 million, while net trading was broadly flat at $16.6 million.
For the nine-month period, revenue rose 87%. Principal Transactions and Other Income contributed $47.8 million, including $46.0 million related to MetroMile; new issue and advisory revenue was $11.5 million. Net trading revenue declined 2% to $54.2 million. The company reported $7.5 million of income from equity-method affiliates, compared with a $2.7 million loss in 2020. These results are substantially affected by volatile investment valuations and SPAC-related transactions.
Balance sheet, liquidity and capital
- At September 30, cash and cash equivalents were $41.8 million, total assets $7.42 billion, total liabilities $7.30 billion and total equity $117.2 million. Assets and liabilities included $6.94 billion of reverse-repurchase receivables and $6.93 billion of repurchase obligations, respectively.
- Reported debt was $43.2 million, down from $47.1 million at December 31, 2020. It included $15.0 million of 8% convertible notes due March 2022, $4.5 million of 12% senior notes due January 2022 and $23.8 million carrying value of junior subordinated notes. The company repaid $2.4 million of senior notes during the period.
- Cash from operations was $(3.0) million, investing cash flow $(4.9) million and financing cash flow $8.0 million; cash declined $0.2 million. Management cautions that repo-related cash collateral affects operating cash flow and reported cash: $40.5 million of collateral was included in cash but was not available for general operations.
- Management said available cash, the trading portfolio and related borrowing capacity should meet near-term operating needs, while cautioning that replacement or additional financing may not be available on favorable terms. JVB and CCFEL reported regulatory capital above minimum requirements; JVB actual net capital was $78.3 million versus a $0.26 million minimum, and CCFEL was $2.0 million versus a $0.9 million minimum.
Material changes, outlook and risks
- Operating expenses increased 63% in Q3 to $25.7 million; compensation and benefits rose 88% to $20.6 million. For the nine months, compensation increased 69% to $61.4 million, including $14.7 million of equity-based compensation, of which $13.1 million related to employee interests in the Insurance SPAC II sponsor entities. Headcount grew to 115 from 87 a year earlier.
- AUM was $2.24 billion, down from $2.77 billion at December 31, 2020. Company-sponsored CDO AUM declined to $1.25 billion from $2.06 billion; management cited CDO auctions, removal as manager of one CDO and collateral paydowns. The company has not completed a new securitization since 2008.
- In October 2021, after quarter-end, the company decided to wind down its GCF matched-book repo business, citing reduced spreads. Related reverse-repo and repo balances were approximately $3.61 billion and $3.60 billion at September 30; management expected them to reach zero before year-end.
- Also after quarter-end, the company drew $17.5 million under its Byline revolving facility on October 27, 2021, and said it intended to repay the draw after executing a new loan agreement. This financing action followed the September 30 reporting date.
- The company committed to invest up to $15 million in a newly formed commercial real estate joint venture; no investments had been made by September 30. Management anticipated potential origination, structuring and management fees, but provided no quantitative earnings guidance.
- The board reinstated a quarterly dividend of $0.25 per share in July; another $0.25 dividend was declared November 1, payable November 30. Dividend continuation is discretionary and subject to business, regulatory and financing constraints. The company also sold approximately 300,859 shares through its ATM program during the first nine months, raising $9.1 million net.
- Key risks include volatile fair values and SPAC investment performance, restrictions and hurdles affecting resale of sponsor shares, market and counterparty risk in repo and mortgage activity, funding and liquidity needs, fixed-income margin pressure, and dependence on key personnel. Management identified no material changes to the risk factors in its 2020 Form 10-K.
- Unusual items included $2.1 million of other non-operating income from forgiveness of the PPP loan. A trademark and unfair-competition complaint was filed against the company on October 8, 2021; the company said it had not been served as of the report date and intended to defend itself. In a separate Visium-related case seeking more than $1 billion, dismissal was upheld and further appeal was denied in May 2021.
Most important facts for investors to verify
- How much of nine-month earnings depends on SPAC and other fair-value gains, and how restricted-share valuation assumptions affect reported results.
- Whether the post-quarter $17.5 million Byline draw was repaid and what terms apply to replacement financing.
- Progress and realized costs of the GCF repo wind-down, including resulting effects on revenues, liquidity and capital.
- The maturity, refinancing or conversion outcome of the $15.0 million convertible notes due March 2022 and the $4.5 million senior notes due January 2022.
- Whether AUM, CDO-related fees, new issue and advisory activity, and dividends prove sustainable given the reported volatility and capital constraints.