Cohen & Company Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report; it does not provide a distinct Q4-only financial summary. Unless noted, figures below are in millions of dollars. The company operates Capital Markets, Asset Management, and Principal Investing businesses.
Financial performance and position
| Metric | FY2022 / Dec. 31, 2022 | FY2021 / Dec. 31, 2021 |
|---|---|---|
| Total revenue | $44.4 | $146.4 |
| Operating income (loss) | ($28.0) | $39.6 |
| Net income (loss), consolidated | ($58.7) | $74.0 |
| Net income (loss) attributable to Cohen & Company Inc. | ($13.4) | $11.8 |
| Basic loss per common share | ($9.43) | Basic EPS $9.95 |
| Operating cash flow | ($23.5) | $18.3 |
| Cash and cash equivalents | $29.1 | $50.6 |
| Total assets / total liabilities | $887.1 / $793.0 | $3,656.3 / $3,504.9 |
| Total equity | $94.0 | $151.4 |
| Assets under management (AUM) | $2,116.3 | $2,358.2 |
Revenue fell 70% year over year. Net trading revenue was $40.0 million, down 42%; asset management revenue was $9.0 million, down 18%; and new issue and advisory revenue was $24.7 million, down 14%. Principal transactions and other income swung to a loss of $29.3 million from income of $37.3 million. Operating expenses declined 32% to $72.4 million, chiefly as compensation and benefits fell 41% to $50.3 million. The operating margin was approximately negative 63% (operating loss divided by revenue).
Equity-method affiliates generated a $20.9 million loss, compared with $36.0 million of income in 2021. Net interest expense declined to $5.0 million from $7.2 million. The filing reports a $4.8 million income tax expense, including a $4.6 million deferred tax expense, mainly reflecting a larger valuation allowance against tax-loss carryforwards.
Cash declined by $21.5 million during 2022. Investing activities provided $13.8 million, while financing activities used $11.5 million. Cash flows from operations included significant changes in repo and other working-capital balances; the company cautions that temporary cash collateral makes operating cash flow and cash balances volatile. At year-end, repo receivables were $437.7 million and repo obligations were $452.8 million, sharply below 2021 levels of $3,175.6 million and $3,171.4 million. These are secured financing balances, not a like-for-like measure of general corporate liquidity.
Balance-sheet debt was $29.0 million, net of discount, versus $43.4 million in 2021; the filing separately cites $52.6 million of recourse indebtedness at par. Redeemable financial instruments were $7.9 million. Broker/dealer payables were $135.0 million, primarily margin financing, and the filing says the company relies heavily on Pershing for clearing and margin financing. JVB and CCFESA reported combined regulatory net capital of $48.1 million against $0.8 million of stated minimum requirements. The company reported $11.9 million of future operating lease payments.
Material changes and unusual items
- Capital Markets net trading revenue declined to $40.0 million from $69.4 million. Matched-book repo revenue fell to $30.6 million from $46.1 million; mortgage revenue fell to $1.1 million from $6.9 million.
- Public-equity and SPAC-related valuation losses drove much of the deterioration in principal investing. The filing reports $30.6 million of net principal transaction losses, including losses associated with Heliogen, Rubicon, Shift, Lemonade, and other SPAC-related holdings.
- Insurance SPAC III failed to complete a business combination and liquidated in December 2022. The company recorded a $5.9 million equity-method loss, including write-offs of advances and investments; $4.8 million was allocated to non-controlling interests.
- A reverse-repo counterparty, First Guaranty Mortgage Corporation, filed for bankruptcy in June 2022. The company recorded a $5.454 million gross loss, partly offset by a $1.753 million reversal of accrued incentive compensation, for a net earnings impact of $3.701 million. It did not expect a material recovery on its unsecured bankruptcy claim.
- The $15 million 2017 convertible note held by the DGC Trust was converted into 10.3 million Operating LLC units in March 2022. The company also refinanced $2.25 million of senior notes with a related-party lender; the outstanding $4.5 million note bears 10% interest and matures in January 2024.
- The company paid $1.75 per common share in 2022, including a special $0.75 dividend. It declared a further $0.25 quarterly dividend in March 2023. No common shares were repurchased in 2022.
- The filing corrected an immaterial error in 2021 deferred taxes and current tax payable. The auditor issued an unqualified opinion on the financial statements and reported no critical audit matters.
Outlook, commentary, and risks
The filing gives no quantified revenue, earnings, or cash-flow guidance. Management says results are unpredictable and highly sensitive to financial-market activity, interest rates, mortgage volumes, transaction closings, trading conditions, and investment valuations. It says cash resources, trading assets, and related borrowing capacity are expected to meet near-term operating needs, while also noting uncertainty about replacing or obtaining financing.
Management highlighted higher rates and inflation, which reduced mortgage activity, equity financing and business-combination volumes, and new-issue activity. It intends to improve Capital Markets performance, diversify fixed-income activities, expand products and capabilities, and control costs; there is no assurance these efforts will succeed. CDO AUM and related fees face continued runoff, and no new securitization had been completed since 2008. AUM decreased about 10% year over year.
Key risks include volatile and illiquid markets; further SPAC-related losses and restrictions on selling certain holdings; concentrated gestation-repo counterparties and mortgage-originator credit exposure; clearing and margin dependence; substantial competition and pricing pressure; funding, debt-service, and regulatory-capital constraints; personnel retention; valuation uncertainty; and regulatory, litigation, cybersecurity, and related-party conflicts. The company reported management assessed internal controls as effective at year-end, but its auditor did not attest to that assessment.
Investor verification priorities
- Reconcile the $58.7 million consolidated net loss with the $13.4 million loss attributable to the parent, including non-controlling-interest allocations and SPAC-related compensation/accounting effects.
- Review the composition, valuation methods, liquidity, and sale restrictions of principal investments, especially SPAC-related shares and the FlipOs investment; assess whether subsequent prices or realizations support reported fair values.
- Examine the FGMC bankruptcy claim, collateral liquidation, recorded loss, and any subsequent recovery, as well as the concentration and credit quality of remaining repo counterparties.
- Assess liquidity beyond reported cash, including restricted or temporary repo collateral, JVB capital-distribution limits, margin financing, debt maturities, and access to Pershing and Byline facilities.
- Verify the sustainability of the quarterly dividend given the 2022 loss, cash outflow, debt obligations, and dependence on distributions from the Operating LLC.
- Review the $6.9 million net deferred tax asset and valuation allowance, the $96.0 million federal NOL, and the $70.5 million net capital loss carryforward, including expiry and realization assumptions.
- Assess governance and related-party arrangements, including Daniel G. Cohen’s voting control, related-party financing, and SPAC relationships and potential conflicts.