Cohen & Company Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Amounts below are in U.S. dollars unless otherwise stated. The company provides capital markets, asset management and principal investing services.
Key financial results
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $8.824 million | $(0.682) million |
| Operating income (loss) | $(7.483) million | $(19.878) million |
| Net income (loss) | $(10.054) million | $(35.166) million |
| Net loss attributable to Cohen & Company Inc. | $(2.637) million; $(1.77) per basic and diluted share | $(7.612) million; $(5.46) per share |
| Cash from operating activities | $(27.709) million | $14.350 million |
| Cash and cash equivalents | $3.641 million at March 31 | $29.101 million at December 31, 2022 |
| Total assets / total equity | $745.225 million / $82.365 million | $887.055 million / $94.026 million at December 31, 2022 |
| Debt, carrying value | $29.173 million | $29.024 million at December 31, 2022 |
The company did not report a conventional profit margin. Calculated operating margin was approximately negative 84.8% of Q1 revenue. The filing cautions that quarterly results are volatile and not necessarily indicative of full-year results.
Business drivers and changes versus prior year
- Revenue improved by $9.506 million year over year, mainly because principal transactions and other income improved by $16.052 million, from a loss of $18.363 million to a loss of $2.311 million. Principal investing nevertheless remained loss-making.
- Net trading revenue fell 32% to $8.210 million. Matched-book repo revenue declined to $4.381 million from $9.772 million, and mortgage trading recorded a $0.469 million loss versus $1.477 million of revenue.
- New issue and advisory revenue declined 76% to $0.900 million, including lower commercial real estate and U.S. insurance origination revenue. Asset management revenue rose 7% to $2.025 million; AUM was $2.157 billion, of which 47.9% was in company-sponsored CDOs.
- Operating expenses decreased 15% to $16.307 million, primarily as cash compensation and benefits fell. Interest expense rose to $1.592 million from $1.351 million; equity-method losses narrowed to $0.395 million from $12.104 million.
- Operating cash flow was negative $27.709 million, compared with positive $14.350 million a year earlier. The company attributes the outflow to working-capital and trading-related movements as well as earnings items. Investing activities provided $2.714 million; financing activities used $0.556 million.
Liquidity, financing and significant items
- Cash declined $25.460 million during the quarter. Management said cash, the trading portfolio and related borrowing capacity should meet near-term operating needs, while acknowledging uncertainty about replacing or obtaining financing.
- Repo financing was substantial: $395.226 million of repurchase obligations and $381.813 million of reverse-repurchase receivables at quarter-end. These transactions are short-term and collateralized; the gestation repo business is concentrated among a limited number of reverse-repo counterparties (eight at quarter-end).
- Reported debt includes a $4.500 million senior note bearing 10% interest and junior subordinated notes with $49.614 million par value, recorded at a substantial discount. The senior note matures in January 2024, and its holder may require repayment on 31 days’ notice. The junior notes have variable rates; the filing estimates a combined yield to maturity of 19.87% at quarter-end using then-current rates.
- A $25 million Byline Bank credit facility was available, with no amount outstanding at March 31, 2023. JVB reported $48.388 million of net capital against a $0.250 million minimum; CCFESA reported $1.432 million of net liquid capital against a $0.522 million minimum. The filing notes restrictions on distributing capital from regulated subsidiaries.
- The company recorded an additional $1.165 million loss in Q1 related to the bankruptcy of First Guaranty Mortgage Corporation (FGMC), reflecting a decline in the fair value of remaining mortgage collateral of $11.164 million. It does not expect material recovery on its unsecured bankruptcy claim.
- All remaining SPAC Fund investors submitted redemption notices effective March 31. The fund still held certain illiquid SPV investments; if liquidation proceeds are insufficient, it may need new investment, financing, or further asset sales. Effective April 1, 2023, the company’s consolidated general partner became the fund’s sole owner and the company began consolidating the fund.
- The board declared a $0.25-per-share quarterly dividend in Q1, paid April 5, 2023, and declared another $0.25 dividend payable June 2, 2023. The filing states dividends may be reduced or discontinued.
Outlook, risks and other disclosures
- No quantitative earnings or revenue guidance was provided. Management describes results as unpredictable and sensitive to market activity, interest rates, mortgage volumes, transaction closings and investment valuations.
- Management cites continued fixed-income brokerage margin pressure, competition, higher interest rates and inflation, reduced mortgage activity, SPAC market weakness, and potential losses on SPAC-related and other principal investments as key risks. Fair values may rely on estimates and may differ from eventual sale prices.
- Liquidity risks include margin calls, repo counterparties’ creditworthiness, access to financing and limitations on moving capital out of broker-dealer subsidiaries. Management states it had maintained sufficient liquidity to meet margin calls to date, but gives no assurance about future ability to do so.
- The company remained in violation of one covenant on Alesco Capital Trust I junior subordinated notes; it says the violation restricts issuance of certain subordinated or pari passu debt and is not expected to materially affect operations or future financing. Routine legal and regulatory matters were disclosed; management did not expect them to have a material adverse effect.
- Disclosure controls and procedures were concluded effective as of March 31, 2023; no material change in internal control over financial reporting was reported during the quarter.
Most important facts for investors to verify
- Whether the sharp decline in cash and negative operating cash flow reflect temporary repo and trading balance movements or a sustained liquidity need; assess cash available for general use and subsidiary distribution restrictions.
- Near-term repayment and refinancing plans for the $4.5 million senior note, alongside the high effective cost and LIBOR transition exposure of the junior subordinated notes.
- Valuation, recoverability and liquidity of SPAC-related, CREO JV and other principal investments, including the SPAC Fund’s redemption obligations and post-quarter consolidation.
- Performance and concentration of the matched-book repo business, including collateral quality, counterparty exposure and remaining FGMC collateral.
- Whether operating losses, lower new-issue activity and fixed-income margin pressure continue, and whether the quarterly dividend remains supported by cash and regulatory capital needs.