Cohen & Company Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unless noted, figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions. The company provides capital markets, asset management and principal investing services.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $22.6m | $9.2m | $31.4m | $8.5m |
| Operating income (loss) | $7.0m | ($8.2m) | ($0.5m) | ($28.0m) |
| Net income (loss), consolidated | ($0.7m) | ($12.3m) | ($10.7m) | ($47.4m) |
| Net income (loss) attributable to Cohen & Company Inc. | ($6.6m) | ($1.9m) | ($9.2m) | ($9.5m) |
| Basic loss per common share | ($4.34) | ($1.30) | ($6.14) | ($6.71) |
- Q2 revenue drivers: Principal transactions and other income was $12.2m, versus a $6.6m loss a year earlier. Net trading revenue fell 29% to $7.4m; asset management revenue fell 15% to $1.6m; and new issue and advisory revenue fell 60% to $1.4m. Q2 operating margin was approximately 31%; the company nevertheless reported a net loss attributable to the parent, including $5.6m of income tax expense.
- Six-month revenue drivers: Total revenue increased 271%, primarily because principal transactions and other income improved by $34.8m year over year. Net trading revenue declined 30% to $15.6m and new issue and advisory revenue declined 68% to $2.3m. Asset management revenue was down 4% to $3.6m.
- Cash flow: Operating activities used $35.7m in the first half, compared with $5.6m provided in the prior-year period. Investing activities provided $22.9m and financing activities used $4.2m. Cash and cash equivalents declined $16.9m from year-end to $12.2m.
- Balance sheet and liquidity: Total assets were $856.1m and total equity $81.3m at June 30, versus $887.1m and $94.0m at December 31, 2022. Cash was $12.2m; receivables under resale agreements were $457.5m, largely matched by $457.4m of repurchase-agreement liabilities. Management said cash, trading assets and related borrowing capacity should meet near-term operating needs, while noting uncertainty about replacing or obtaining financing.
- Debt and capital: Reported debt was $29.3m, including $4.5m of 10% senior notes due January 2024 and junior subordinated notes carried at $24.8m after discount (aggregate par value $49.6m). The junior notes had reported rates of 9.30% and 9.31%; their combined estimated yield to maturity was 21.09%, assuming the period-end variable rate persists. The $7.9m redeemable instrument payable to JKD Investor is reported separately from debt. The Byline Bank facility commitment was reduced to $15m; $15m was drawn and repaid during the first half, with no balance outstanding at quarter-end. The facility matures in December 2023.
- Regulatory capital: JVB had $50.5m of net capital against a $0.25m minimum; CCFESA had $1.3m of net liquid capital against a $0.5m minimum. Capital withdrawals from broker-dealer subsidiaries are restricted.
- Assets under management: $2.07bn at June 30, down from $2.12bn at December 31, 2022; 50.1% was in company-sponsored CDOs.
Material changes and unusual items
- Effective April 1, the company began consolidating the SPAC Fund after other investors redeemed their interests, leaving its general partner as sole owner. Consolidation brought substantial assets and liabilities onto the balance sheet; $0.4m of investor redemptions remained payable at June 30 and was paid in July.
- Q2 principal transactions benefited from $9.4m of net gains on share forward arrangements and a $3.0m fair-value receivable for a bridge-loan exit fee. The bridge-loan principal was repaid in Q2; $1.1m of the exit fee was collected in July, while timing and manner of collection of the balance depended on a planned merger. These items make reported earnings sensitive to valuation and collection outcomes.
- The company recorded a $5.6m increase in deferred tax expense from a larger valuation allowance on tax-loss carryforwards, reflecting management’s reduced estimate of amounts likely to be realized amid recent losses and market conditions.
- The company recorded a further $1.5m loss in the first half related to collateral remaining from the FGMC bankruptcy. It said it did not expect a material recovery on its unsecured bankruptcy claim.
- Quarterly dividends of $0.25 per share were paid in April and June; a further $0.25 dividend was declared on August 2, payable September 1. The filing cautions that future dividends may be changed or discontinued.
Outlook, commentary and risks
The filing provides no quantified earnings or revenue guidance. Management emphasizes that results are unpredictable and depend on market conditions and transaction timing. It describes ongoing fixed-cost monitoring and efforts to diversify fixed-income trading, expand product lines, develop mortgage financing and build out its investment-banking business.
- Management cited lower fixed-income brokerage margins and volumes, increased competition, reduced mortgage activity amid higher interest rates, and weaker new-issue activity. CDO fee revenue faces structural runoff, and the company has not completed a new securitization since 2008.
- SPAC-related investments remain exposed to equity-price declines, unsuccessful business combinations, redemptions, regulation and litigation. Management warned that further declines in post-combination SPAC share prices could generate additional losses.
- Matched-book repo exposure is concentrated on the borrower side: gestation reverse repos involved eight counterparties at quarter-end. The company relies on collateral, matched maturities and counterparty credit reviews, but remains exposed to defaults, margin calls and funding disruption.
- Fair-value estimates, including some investments and share-forward arrangements, involve judgment and may differ from realizable sale values. A 100-basis-point yield-curve rise was estimated to reduce the value of net rate-sensitive assets by $1.25m. A 10% adverse equity-price move was estimated to reduce net equity-sensitive value by $1.22m.
- Other risks include limited access to cash held in regulated subsidiaries, upcoming debt and facility maturities, key-person dependence, and uncertainty in markets and financing availability. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter; it reported no material change to the risk factors in its 2022 Form 10-K.
Investor verification priorities
- Review the composition, valuation assumptions and subsequent realizability of the $9.4m share-forward gain and the $3.0m bridge-loan exit-fee receivable.
- Track cash generation, the use of trading and repo financing, broker-dealer capital restrictions, and the December 2023 Byline facility and January 2024 senior-note obligations.
- Assess the valuation allowance on tax assets, including the reported expected federal NOL and NCL carryforwards of $98.8m and $59.7m, respectively.
- Monitor SPAC and other principal-investment exposures, AUM and CDO runoff, and any further FGMC collateral losses or bankruptcy recoveries.
- Confirm dividend sustainability and review subsequent filings for updates on the bridge-fee collection, SPAC Fund consolidation and liquidity.