Business context and reporting period
The filing is the unaudited Form 10-Q for the quarter ended September 30, 2012, filed November 8, 2012. Although the request metadata names Cohen & Co Inc., the filing identifies the registrant as Institutional Financial Markets, Inc. (IFMI), formerly Cohen & Company. IFMI is a credit-focused investment firm with Capital Markets, Asset Management, and Principal Investing segments. It reported $6.3 billion of assets under management, 97% in CDOs.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise; the filing reports financial statements in thousands.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $28.1 | $20.9 | $71.9 | $76.6 |
| Operating income (loss) | $3.2 | $(7.8) | $(1.2) | $(14.4) |
| Net income (loss), consolidated | $3.0 | $(7.7) | $(6.1) | $(12.3) |
| Net income (loss) attributable to IFMI | $2.0 | $(4.0) | $(3.9) | $(7.0) |
| Diluted earnings (loss) per share | $0.18 | $(0.38) | $(0.37) | $(0.65) |
| Operating margin, approximate | 11.2% | (37.4)% | (1.7)% | (18.8)% |
- Q3 revenue rose 34% year over year, led by asset management revenue (+60%) and principal transactions and other income. Net trading revenue was slightly lower. A $1.7 million gain on sale of a cost-method investment contributed to Q3 results.
- For the first nine months, revenue fell 6%, primarily as net trading revenue declined 11% to $51.3 million. Operating expenses fell 20% to $73.1 million, helping reduce the operating loss. IFMI still reported a nine-month net loss.
- Nine-month asset management revenue increased 9% to $18.0 million. Growth included a one-time final fee on a European CDO; the company said it will earn no further fees on that CDO. Subordinated management fees on substantially all TruPS trusts remained suspended amid defaults and diversion of cash to senior notes.
- Nine-month principal transactions and other income was a $0.5 million loss, including $3.5 million in net fair-value losses on other investments. Star Asia valuation declined $3.4 million over the nine months.
- Nine-month cash from operating activities was $9.7 million, investing activities provided $4.2 million, and financing activities used $19.4 million. Cash decreased $5.3 million to $12.9 million. Management said cash and the trading portfolio were expected to meet near-term operating needs.
- At September 30, total assets were $447.6 million, total liabilities $375.3 million, and permanent equity $71.5 million. Debt carrying value was $25.6 million, down from $37.2 million at year-end 2011. The company had $8.1 million principal of 10.5% convertible notes, $17.3 million of junior subordinated notes, and $0.3 million of subordinated notes payable.
- Repurchase-agreement liabilities were $153.2 million, compared with $153.0 million of resale-agreement receivables. These financing balances fluctuate with trading activity and entail collateral and margin-call exposure.
Changes, outlook, risks, and unusual items
- Performance improved substantially in Q3 compared with the prior-year quarter, while nine-month revenue remained lower. Cost reductions, including lower compensation, professional fees, occupancy, and depreciation, were important to the improvement.
- AUM was $6.26 billion at September 30, down from $8.06 billion at December 31, 2011, principally reflecting the decline in company-sponsored CDO AUM. Management said it had not completed a new securitization since 2008 and described the business environment as challenging for the remainder of 2012. No numerical earnings or revenue guidance was provided.
- IFMI recorded a $4.36 million non-operating expense for the Sentinel litigation settlement. The agreed settlement called for an initial $3.0 million payment and a further $2.25 million payment; court approval had not yet been entered at the filing date. The company also disclosed a separate U.S. Bank lawsuit over trustee fees and said it intended to defend the case.
- After quarter-end, PrinceRidge agreed to repurchase equity interests from three departing employees for approximately $2.6 million cash plus notes totaling approximately $4.8 million. The repurchase was at an approximately 6% discount to their September 30 capital-account value; the Operating LLC then owned 98% of PrinceRidge. The filing said the remaining 2012 cash obligation for mandatorily redeemable interests was approximately $7.8 million.
- IFMI’s largest principal investment was Star Asia: $33.9 million fair value, or 86% of other investments at fair value. Its valuation uses internal models and an adjusted NAV; unadjusted NAV would have produced a materially higher value. The company also cited currency and illiquidity exposure.
- Management identified market volatility, declining corporate-bond brokerage margins, competition, defaults and prepayments in managed CDOs, financing and liquidity access, and uncertain litigation outcomes as risks. A 100-basis-point parallel yield-curve rise was estimated to reduce net fair value by $5.3 million. A 10% adverse move in equity prices or foreign exchange rates was estimated to affect value by $3.9 million and $3.4 million, respectively.
- Regulatory capital was above minimums at JVB, TPRG, and the UK subsidiary. CCS had a $3.0 million net-capital deficiency against a $3.4 million minimum, related to recording the Sentinel settlement in full; CCS had filed to withdraw its registrations. Management reported disclosure controls effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the registrant and security being analyzed: this filing is for Institutional Financial Markets, Inc. (IFMI), not a registrant named Cohen & Co Inc.
- Review the progress, payment timing, and final court approval of the Sentinel settlement, as well as developments in the U.S. Bank fee litigation and the Alesco XIV guarantee, whose stated maximum potential loss is $8.75 million.
- Assess whether operating cash generation and available financing can support near-term commitments, including the PrinceRidge repurchases, debt service, and possible holder repurchase of up to $8.1 million of convertible notes in May 2014.
- Evaluate the assumptions and liquidity of the $33.9 million Star Asia valuation, related Japanese-yen exposure, and concentration in CDO-related AUM and fee streams.
- Track whether cost savings and improved quarterly profitability persist, especially given nine-month losses, the one-time European CDO fee, the investment-sale gain, and continuing pressure on brokerage margins.