Cohen & Co Inc. quarterly report, Q2 FY2020

Cohen & Company Inc. — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020. Financial amounts below are in U.S. dollars, thousands, unless stated otherwise. The company is a fixed-income financial services firm with Capital Markets, Asset Management and Principal Investing segments.

Financial performance and position

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Total revenue	$24,119	$11,169	$41,889	$22,309
Operating income (loss)	$7,926	$518	$(1,519)	$450
Net income (loss)	$3,269	$(1,028)	$(8,516)	$(2,852)
Net income (loss) attributable to Cohen & Company Inc.	$901	$(410)	$(2,201)	$(1,612)
Basic earnings (loss) per common share	$0.78	$(0.36)	$(1.91)	$(1.42)

Q2 operating margin was approximately 32.9%, versus 4.6% a year earlier; parent-attributable net margin was approximately 3.7%, versus negative 3.7%.
Q2 net trading revenue rose to $20.0 million from $8.7 million, led by matched-book repo revenue of $7.9 million versus $2.3 million. Principal transactions and other income was $2.4 million, including a $2.0 million Q2 gain associated with IMXI.
For the first half, net trading revenue increased 122% to $38.6 million. Asset-management revenue fell 12% to $3.3 million, while principal transactions and other income fell to $15,000 from $1.2 million.
First-half results included a $7.9 million goodwill impairment associated with JVB. Compensation and benefits increased 99% to $25.5 million, and net interest expense rose 50% to $5.7 million.
Cash and cash equivalents were $235.0 million at June 30, versus $8.3 million at year-end. However, $218.7 million represented counterparty cash collateral that the company said was not available for general operations and must be returned when required. First-half operating cash flow was $209.2 million, including a $209.2 million increase in this collateral; it should not be read as freely available operating cash.
Total assets were $6.08 billion and total equity was $40.4 million. Assets and liabilities included $5.50 billion of reverse repos and $5.52 billion of repos, respectively. Debt was $64.2 million, compared with $48.9 million at year-end; redeemable financial instruments totaled another $16.9 million.
Matched-book repo balances declined from year-end: reverse repos were $5.50 billion versus $7.50 billion, and repos were $5.52 billion versus $7.53 billion.

Material changes versus comparable periods

Q2 revenue more than doubled year over year, primarily due to stronger trading, with operating income and parent-attributable results turning positive. First-half revenue also rose 88%, but the goodwill impairment, higher expenses, financing costs and equity-method losses contributed to a larger consolidated net loss.
Capital Markets drove the improvement. The company also reported lower asset-management fees year to date, reflecting lower performance fees and declining CDO assets.
JVB goodwill declined from $7.9 million at December 31, 2019 to zero at June 30 after the impairment. Total equity fell from $48.8 million to $40.4 million.
The company drew $17.5 million on its FT revolver, issued $4.5 million of 12% senior notes, and received a $2.166 million PPP loan. It repaid $4.386 million of a 2019 senior note and $4.777 million under ViaNova’s LegacyTexas facility.

Outlook, risks and unusual items

Management said COVID-19 market volatility led JVB to reduce leverage, GCF repo operations and TBA trading to manage counterparty risk, liquidity volatility, capital requirements and margin calls. It expected lower volumes in these businesses for an indefinite period, potentially reducing profitability.
Management warned that COVID-19 could make fundraising more difficult, reduce asset-management fees or AUM, and hurt mortgage-related revenue if unemployment remains high. It reported that PriDe III closed in July with investor commitments exceeding €375 million.
The 2019 Senior Notes had $2.4 million outstanding and were due September 2020. The $17.5 million FT revolver matures in April 2021; additional draws were no longer permitted after April 10, 2020, and the company said it was seeking to extend the draw period and maturity. Management said current cash and credit sources should fund near-term needs but cautioned that replacement or additional financing was uncertain.
The dividend remained suspended; the company said the suspension was expected to save approximately $1.341 million annually. No common-stock repurchases occurred in the period.
The company received a $2.166 million PPP loan. Forgiveness was not assured, and any unforgiven balance must be repaid. Management said it did not anticipate near-term significant workforce or compensation reductions, while continuing to monitor costs.
Insurance Acquisition Corporation, sponsored by the company, agreed to merge with Shift Technologies. Closing was subject to conditions and was not assured. The company expected to recognize principal transaction revenue based partly on sponsor-share values if the merger closes, but also described potential write-offs if it does not.
JVB is defending litigation seeking more than $1 billion in damages related to alleged assistance with a portfolio mismarking scheme. The court denied defendants’ motions to dismiss; an appeal was filed and discovery was proceeding. The filing does not state a clear quantified loss estimate for this matter.
Filing-text inconsistency: The financial statements report $7.883 million of goodwill impairment for the six months ended June 30 and none as a Q2 operating-expense line item, while a risk-factor passage describes a $7.9 million impairment in the three months ended June 30. Verify the recognition period against the underlying filing and disclosures.

Most important facts for investors to verify

How much of reported cash is operationally available after excluding counterparty collateral and other restrictions.
Renewal or refinancing of the September 2020 senior-note maturity and April 2021 FT credit facilities, including covenant compliance and borrowing availability.
Whether reduced JVB repo and TBA activity persists, and the resulting effect on revenue, liquidity and regulatory capital.
The valuation and realizability of trading and principal-investment gains, including IMXI-related gains and any future Insurance SPAC/Shift transaction proceeds.
Developments in the litigation seeking more than $1 billion, and any associated legal costs or potential exposure.
The resolution of the PPP loan forgiveness application and the filing’s inconsistent description of the goodwill impairment period.