Cohen & Company Inc. — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report; it does not provide standalone fourth-quarter results. Amounts below are U.S. dollars unless noted.
Business context
Cohen & Company is a financial services firm operating in Capital Markets, Asset Management, and Principal Investing. Its activities include fixed-income trading and repo financing, investment banking and advisory, management of investment vehicles, and investments related to SPACs. At year-end, AUM was approximately $2.36 billion; 52.6% was in legacy CDOs.
Key financial results
| Metric | FY 2021 | FY 2020 | Change |
|---|---|---|---|
| Total revenue | $146.4 million | $130.1 million | +12% |
| Operating income | $39.6 million | $42.3 million | -6% |
| Consolidated net income | $72.1 million | $38.5 million | +88% |
| Net income attributable to Cohen & Company Inc. | $11.3 million | $14.2 million | -21% |
| Basic / diluted EPS | $9.50 / $7.48 | $12.56 / $7.66 | Lower |
| Operating cash flow | $18.3 million | $41.4 million | Lower by $23.1 million |
| Cash and cash equivalents at year-end | $50.6 million | $42.0 million | +20% |
Revenue mix shifted substantially: net trading revenue declined 6% to $69.4 million; asset management revenue rose 25% to $10.9 million; new issue and advisory revenue increased to $28.7 million from $2.2 million; and principal transactions and other income fell 18% to $37.3 million. New issue growth principally reflected the Capital Markets advisory platform and origination activity.
Operating expenses rose 22% to $106.8 million, including compensation and benefits up 42% to $85.0 million. Higher expenses and lower trading and principal-investment revenue reduced operating income. Consolidated net income included $36.0 million of income from equity-method affiliates, much of it related to SPAC sponsor investments, and $2.1 million of PPP loan forgiveness income. The substantial non-controlling interest allocation meant parent-attributable earnings declined despite higher consolidated net income.
Operating margin was approximately 27% in 2021 versus 33% in 2020, calculated as operating income divided by revenue. Cash flow from investing activities was negative $22.5 million, while financing activities provided $13.2 million. Operating cash flow included volatile repo-related collateral deposits; cash collateral declined by $23.8 million during 2021, affecting reported operating cash flow.
Debt and liquidity
- Year-end debt carrying value was $43.4 million, compared with $47.1 million a year earlier. The filing also describes approximately $67.6 million of recourse debt at par. The carrying amount reflects discounts on junior subordinated notes.
- Material debt included $15.0 million of 8% convertible senior notes due March 2023 (with an extension option), $4.5 million of 12% senior notes, and junior subordinated notes with $48.1 million par value and variable rates. The 2019 senior notes were repaid in September 2021.
- Redeemable financial instruments totaled $8.0 million, down from $12.0 million. The Byline revolving facility commitment was $25 million; no amount was drawn at year-end. The company drew and repaid $17.5 million during 2021.
- Matched repo balances at year-end were approximately $3.18 billion of reverse repos and $3.17 billion of repos, versus $5.72 billion and $5.71 billion, respectively, in 2020. These short-term, collateralized balances are large relative to cash and equity and are not equivalent to unrestricted liquidity.
- Regulated broker-dealers reported $76.8 million of net or liquid capital against $1.7 million of stated minimum requirements. JVB held $106.4 million of equity, but regulatory, lender, and counterparty restrictions can constrain distributions and access to that capital.
Material changes, outlook, risks, and unusual items
- Business developments: Cohen & Company launched a commercial real estate lending platform and CRE joint venture, with up to $15 million of company equity commitment; $5.8 million was invested by year-end. It hired professionals to expand its investment banking and CRE capabilities.
- Repo exit: The company completed its wind-down of the GCF repo business in 2021, citing reduced spreads. It expected lower GCF and TBA volumes to continue for an indefinite period.
- AUM and CDO exposure: Total AUM fell 15% to $2.36 billion, driven mainly by CDO auctions, liquidations, manager removal, and collateral paydowns. CDO AUM declined to $1.24 billion from $2.06 billion. All managed CDOs had reached auction-call provisions, creating risk of further fee losses; no new securitization has been completed since 2008.
- SPAC concentration and valuation: SPAC-related gains were a major, volatile component of results. The company reported $48.2 million in equity-method investments and $56.0 million in other investments at fair value. Founder-share allocations and restricted securities may be reduced, remain illiquid, or lose value. Subsequent to year-end, the filing reported broad declines in SPAC and post-combination equities, with particular exposure to SFT, MILE, HLGN, WEJO, REE, PAYO, and PWP.
- Costs and one-time items: 2021 included $13.1 million of equity-based compensation related to the Metromile SPAC combination. 2020 included a $7.9 million JVB goodwill impairment; no such charge was recorded in 2021. PPP loan forgiveness contributed $2.1 million of 2021 non-operating income.
- Guidance: The filing provides no numerical earnings or revenue guidance. Management describes results as unpredictable and sensitive to market activity, interest rates, mortgage volumes, trading spreads, SPAC transaction flow, and investment valuations. Management stated available cash, trading assets, and borrowing capacity were expected to meet near-term operating needs, while warning that replacement or additional financing might not be available on acceptable terms.
- Dividend and equity issuance: The quarterly dividend was reinstated at $0.25 per share in July 2021. After year-end, the board declared a further $0.25 quarterly dividend and a $0.75 special dividend, payable in April 2022. The company issued 300,859 shares through its ATM program for $9.1 million net and repurchased 49,544 shares for $0.9 million in 2021.
- Legal matter: A trademark and business-name infringement lawsuit was filed in October 2021. The company said it intended to defend itself; the filing does not provide a clear estimate of potential damages or legal costs.
- Governance and controls: Daniel G. Cohen and the DGC Trust held substantial voting power; the company identified itself as a controlled company. Management concluded internal controls and disclosure controls were effective, but the auditor did not attest to internal control effectiveness. The independent auditor issued an unqualified opinion and reported no critical audit matters.
Investor verification priorities
- Reconcile consolidated earnings with the much lower $11.3 million attributable to the parent, including the effects of non-controlling interests and SPAC-related compensation.
- Assess the valuation, transfer restrictions, concentration, and post-year-end performance of SPAC-related investments, including equity-method holdings and founder-share allocations.
- Review liquidity available outside JVB, restrictions on transferring JVB capital, repo collateral and margin needs, and the company’s ability to meet upcoming debt maturities.
- Evaluate the durability of new issue and advisory revenue against rising compensation and the declining CDO fee base and AUM.
- Check progress and funding needs for the CRE joint venture, the Insurance SPAC III business-combination search, and the expected Metromile-Lemonade transaction.
- Track the trademark lawsuit, dividend sustainability, potential dilution from equity awards or Operating LLC unit redemptions, and the company’s deferred-tax-asset realizability.