Cohen & Company Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited figures are in thousands of dollars, except per-share data. The company provides fixed-income capital markets, asset management and principal-investment services, including a significant SPAC-related investment portfolio.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $23,465 | $6,584 | $31,937 | $119,326 |
| Operating income (loss) | $2,848 | $(19,118) | $(25,192) | $42,254 |
| Net income (loss), consolidated | $359 | $(17,744) | $(47,059) | $45,789 |
| Net income (loss) attributable to Cohen & Company Inc. | $(919) | $(3,429) | $(10,388) | $7,651 |
| Basic loss per common share | $(0.64) | $(2.61) | $(7.33) | $6.71 |
- Q3 revenue increased 256% year over year, but the parent company still recorded a loss. The Q3 operating margin was approximately 12%, compared with a loss in the prior-year quarter.
- Nine-month revenue fell 73%; the implied operating margin was approximately negative 79%, versus approximately positive 35% in 2021. The principal driver was principal transactions and other income, which swung to a $26.2 million loss from $47.8 million of income.
- Q3 net trading revenue declined 52% to $8.0 million. New issue and advisory revenue rose 50% to $13.2 million, and asset management revenue rose 86% to $3.5 million. The Q3 principal-investment loss was $1.2 million, compared with a $20.7 million loss a year earlier.
- For the nine months, net trading revenue declined 44% to $30.4 million; asset management revenue increased 25% to $7.2 million; and new issue and advisory revenue increased 78% to $20.5 million. Equity-method affiliate losses were $14.5 million, versus $7.5 million of income in 2021.
Cash, balance sheet and funding
- Cash and cash equivalents were $47.3 million at September 30, down from $50.6 million at December 31, 2021. Nine-month cash flows were $4.2 million provided by operating activities, $3.2 million provided by investing activities and $10.2 million used in financing activities; cash declined by $3.3 million overall.
- Total assets were $1.24 billion, versus $3.66 billion at year-end 2021. Receivables under resale agreements fell to $699.7 million from $3.18 billion, while repurchase-agreement liabilities fell to $749.7 million from $3.17 billion. The filing attributes lower repo balances to reduced mortgage-originator activity and counterparties obtaining financing directly.
- Reported debt was $28.9 million, down from $43.4 million. This excludes $7.96 million of redeemable financial instruments and the short-term repo liabilities noted above. The company had no borrowings outstanding under its $25 million Byline Bank facility at quarter-end; its $4.5 million senior note bears 10% interest and matures in January 2024, with an earlier repayment option for the holder after January 2023.
- Total equity was $105.6 million, down from $151.4 million at year-end. The company paid $1.50 per common share in dividends during the first nine months, including a special dividend; a further $0.25 quarterly dividend was declared after quarter-end.
- Management said available cash, the trading portfolio and related borrowing capacity were expected to meet near-term operating needs, while cautioning that future replacement or additional financing was uncertain. Cash includes $22.8 million of temporary counterparty collateral that the company says is not available for general operations.
Material changes, outlook and risks
- FGMC bankruptcy: First Guaranty Mortgage Corporation filed for bankruptcy on June 30, 2022, with a $269.2 million reverse-repo balance then outstanding. The company liquidated collateral and estimated $48.4 million remained on hand at September 30. It recorded a $4.8 million gross loss, including $4.6 million against net trading revenue and $0.2 million in professional fees; a $1.8 million incentive-compensation reversal reduced the net earnings impact to $3.1 million. The company does not expect a material recovery on its unsecured bankruptcy claim.
- SPAC and fair-value exposure: Management linked nine-month investment losses to significant declines in SPAC and post-combination SPAC equity prices and warned further declines could cause additional losses. Fair values may depend on estimates, including NAV-based measures, and may differ from amounts ultimately realized.
- Market and business risks: Rising interest rates and inflation can reduce fixed-income values, mortgage activity, new-issue volumes and transaction activity. Management also cited continuing fixed-income margin pressure, SPAC-market uncertainty, repo counterparty concentration, potential mortgage-originator defaults and liquidity or financing risk. A 100-basis-point upward yield-curve shock was estimated to produce a $1.3 million loss on net interest-sensitive assets.
- Business changes: The company completed the wind-down of its GCF repo business by year-end 2021. The $15 million 2017 convertible note was converted into Operating LLC units in March 2022; the conversion reduced debt but increased non-controlling interests and diluted the parent’s economic share of the Operating LLC.
- Tax and legal matters: Higher valuation allowances on deferred tax assets contributed to nine-month income-tax expense of $3.5 million despite the consolidated pretax loss. The company also revised certain December 2021 tax-related balances to correct an immaterial error. In a trademark dispute, the court dismissed the counterfeiting claim with prejudice in October 2022; the company intends to defend the remaining claims.
- The filing provides no quantified earnings or revenue guidance. Management emphasized that results are volatile and transaction-dependent. Disclosure controls were assessed as effective at September 30, 2022, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Progress and realized recoveries, if any, from FGMC collateral liquidation and bankruptcy proceedings.
- Subsequent valuation changes and liquidity of SPAC-related and other principal investments, including equity-method and NAV-based holdings.
- Repo and mortgage-originator exposures, collateral coverage, counterparty concentrations and the extent to which reported cash is available for general use.
- Ability to sustain dividends and meet debt, lease and regulatory-capital requirements amid volatile results and uncertain financing access.
- Whether tax valuation allowances, the remaining trademark litigation or other contingencies produce material changes in later periods.