Cohen & Co Inc. (filing registrant: Institutional Financial Markets, Inc.) — Q3 2015 Form 10-Q
Business context and reporting period. The filing is for the quarter and nine months ended September 30, 2015. The registrant describes a fixed-income financial-services business with Capital Markets, Asset Management, and Principal Investing segments. It reported $3.94 billion of assets under management, 97.8% in CDOs. Amounts below are in millions of dollars unless noted.
Financial performance and position
- Q3 revenue: $12.927 million, up 23% from $10.552 million a year earlier. Net trading revenue rose 32% to $8.333 million; new issue and advisory revenue was $2.119 million versus $0.286 million. Asset management revenue fell 15% to $2.332 million, and principal transactions and other income declined to $0.143 million from $1.199 million.
- Q3 earnings: Operating income was $0.558 million versus an operating loss of $0.583 million; operating margin was approximately 4.3% versus negative 5.5%. Net loss attributable to IFMI was $0.533 million, or $0.03 per share, compared with a $1.255 million loss, or $0.08 per share. Interest expense was $0.984 million.
- Nine-month revenue: $36.772 million, down 3% from $37.974 million. Net trading revenue increased 12% to $22.346 million and new issue/advisory revenue increased 42% to $4.268 million. Asset management revenue decreased 31% to $6.890 million; principal transactions and other income fell 36% to $3.268 million.
- Nine-month earnings: Operating income was $1.350 million versus an operating loss of $3.935 million; operating margin was approximately 3.7% versus negative 10.4%. Net loss attributable to IFMI was $1.436 million, or $0.09 per share, compared with a $5.476 million loss, or $0.36 per share. The prior-year period included a $3.121 million goodwill impairment charge.
- Cash flow: Nine-month operating cash use was $7.980 million, investing cash provided was $10.504 million, and financing cash used was $1.250 million. Cash increased $1.126 million to $13.379 million. Investing proceeds primarily reflected $10.625 million from sales and returns of principal on other investments.
- Balance sheet and liquidity: At September 30, total assets were $386.292 million, total liabilities $332.082 million, and total equity $54.210 million. Cash was $13.379 million. Resale-agreement receivables were $128.730 million and repurchase-agreement liabilities were $128.685 million; substantially all repurchase obligations were due within 30 days. Management said cash, trading investments, and related borrowing capacity should meet near-term operating needs.
- Debt and capital: Debt carrying value was $28.711 million; estimated fair value was $33.7 million. Debt included $8.248 million of 8% convertible notes due September 2018 and junior subordinated notes. JVB exceeded its minimum net-capital requirement by $24.402 million; CCFL exceeded its minimum net-liquid-capital requirement by $0.824 million.
- Dividends: The filing reports $0.02 per common share declared for Q3 and $0.06 for the first nine months. The board subsequently declared a $0.02-per-share dividend payable November 27, 2015.
Material changes and management commentary
- Trading and new-issue/advisory revenue improved, while asset-management fees continued to shrink as CDO collateral balances declined through maturities, repayments, defaults, and completed auctions. The company said it had not completed a securitization since 2008 and did not expect to complete future securitizations; it expected asset-management revenue to continue declining.
- Management attributed lower nine-month operating expenses partly to cost reductions and the absence of the prior-year goodwill impairment. Headcount fell from 118 to 93 year over year. Q3 professional and other operating expenses rose $0.951 million, with management citing legal and professional costs related to strategic transactions and other legal matters.
- The proposed sale of European operations to an entity controlled by vice chairman Daniel G. Cohen, for approximately $8.7 million (including $4.75 million upfront and up to $3.95 million over four years), remained pending. The closing deadline and intercompany-payables settlement date had been extended to December 31, 2015; FCA approval and other closing conditions remained outstanding. The business being sold generated $5.145 million of nine-month revenue and a $1.463 million operating loss, excluding Munda CLO I. Munda management revenue was to be retained for IFMI’s benefit under a trust arrangement.
- On October 16, 2015, the company entered a termination and release agreement with Mead Park Capital and related parties: 2 million company shares were transferred back to the company, and the company paid $4 million. The agreement also included specified rights for Christopher Ricciardi concerning certain future securities issuances and board nominations through October 16, 2016.
Risks, contingencies, and unusual items
- Results depend on trading volumes, market liquidity and volatility, investment values, counterparties, and access to securities financing. Management cautioned that trading gains may not recur and that fair values—particularly Level 3 CLO estimates—may differ from realizable sale prices. Level 3 CLO investments were valued at $14.448 million.
- A 100-basis-point parallel increase in the yield curve was estimated to reduce net interest-sensitive asset value by $6.586 million; a 100-basis-point decrease was estimated to increase it by $6.638 million. A 100-basis-point change in three-month LIBOR would change annual cash interest by approximately $0.481 million.
- Repurchase and clearing arrangements require collateral and may involve margin calls; a failure to meet them could disrupt financing or trading. The company reported no prior inability to meet a margin call but gave no assurance about future access to liquidity.
- Pending matters include litigation involving former broker-dealer and investment-adviser subsidiaries and a Pennsylvania tax assessment of $4.683 million plus interest for 2009. The company had appealed the assessment and recorded no reserve. Routine legal and regulatory matters were also disclosed.
- The European sale is a related-party transaction and had experienced repeated closing extensions. The filing states that the registrant’s disclosure controls were effective as of September 30, 2015, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the European operations sale closed by the extended December 31, 2015 deadline, obtained FCA approval, and produced the anticipated consideration and intercompany settlement.
- Whether operating cash outflows, repo financing needs, and available liquidity remained manageable after quarter-end.
- How much further CDO-related asset-management revenue and AUM declined, and whether trading and new-issue revenue offset that contraction.
- Whether CLO valuation assumptions, impairment charges, and investment returns changed materially after September 30.
- The status and potential exposure of the Pennsylvania tax appeal and ongoing litigation, and the implications of the October 16 related-party settlement.
- The filing metadata names Institutional Financial Markets, Inc., while the request identifies Cohen & Co Inc.; verify the issuer identity and any subsequent name or corporate changes when matching this filing to a security.