Cohen & Company Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. All dollar amounts below are in millions unless stated otherwise. Cohen & Company is a financial services firm focused on fixed-income capital markets, asset management and principal investing, including SPAC-related investments.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Total revenue | $102.7 | $17.8 |
| Operating income (loss) | $70.4 | $(9.4) |
| Consolidated net income (loss) | $66.7 | $(11.8) |
| Net income (loss) attributable to Cohen & Company Inc. | $9.4 | $(3.1) |
| Operating cash flow | $(28.2) | $64.5 |
| Cash and cash equivalents, March 31 | $19.5 | $42.0 at December 31, 2020 |
| Total assets / total equity, March 31 | $7,835 / $155 | $6,149 / $101 at December 31, 2020 |
| Debt, March 31 | $47.3 | $47.1 at December 31, 2020 |
- Revenue rose $84.9 million, primarily from principal transactions and other income of $79.6 million. This included $73.2 million associated with MetroMile, $3.7 million associated with Shift Technologies (SFT), and $1.9 million from other SPAC equity.
- Net trading revenue was $19.2 million, up 3%; matched-book repo revenue increased to $11.3 million from $6.9 million. Asset-management revenue rose 30% to $2.1 million, while new-issue and advisory revenue was $1.8 million versus none reported in Q1 2020.
- Operating expenses increased 18% to $32.2 million. Compensation and benefits rose to $26.6 million, including $13.1 million of equity-based compensation related to the Insurance SPAC II/MetroMile transaction. The prior-year quarter included a $7.9 million goodwill impairment, with no comparable charge in Q1 2021.
- Reported operating margin was approximately 68.6%; it is not a reliable measure of recurring operating performance given the substantial SPAC-related fair-value income. Basic and diluted earnings per common share were $9.04 and $6.98, respectively; no common dividend was declared.
- Operating cash flow was negative despite reported earnings. Cash flow included substantial changes in matched-book reverse repos and repos; management cautions that temporary cash collateral affects cash and operating cash flow. Cash decreased $22.5 million during the quarter.
- Reverse-repo receivables were $7.30 billion and repo liabilities were $7.29 billion at quarter-end. These large, collateralized matched-book balances are not equivalent to unrestricted corporate liquidity. The $25 million Byline credit facility was undrawn, and management said available cash, trading investments and borrowing capacity should meet near-term operating needs.
Material changes versus the prior comparable period
- The company swung from a consolidated loss to substantial consolidated income, driven mainly by SPAC-related investment gains rather than a similar rise in core trading or fee revenue. Most consolidated net income was attributable to non-controlling interests; parent-attributable income was $9.4 million.
- Equity-based compensation increased by $13.5 million year over year, largely due to the February 2021 MetroMile business combination. The company said no further compensation expense is expected for those Insurance SPAC II employee units; any future Insurance SPAC III business combination could generate significant compensation expense.
- AUM was $2.41 billion at March 31, down from $2.77 billion at December 31, 2020 and $2.65 billion a year earlier. Company-sponsored CDO AUM was $1.63 billion, or 67.7% of total AUM.
- Cash fell from $42.0 million at year-end. The company repaid $4.0 million of redeemable financial instruments and repurchased 38,647 common shares for $0.7 million.
Outlook, risks, contingencies and unusual items
- The filing provides no specific revenue, earnings or other quantitative guidance. Management emphasizes that results are unpredictable and can vary significantly with financial-market conditions, trading volumes, interest rates, mortgage activity and investment valuations.
- Management expects JVB to operate GCF repo and TBA trading at lower volumes than before the pandemic for an indefinite period. This limits counterparty and liquidity risk but may reduce profitability. Fixed-income brokerage margins face continuing competitive pressure; management’s cost and diversification efforts may not offset it.
- Principal-investment results are exposed to SPAC-market activity, equity prices, liquidity and valuation uncertainty. A substantial portion of Q1 gains was recorded at fair value and may not be realized at those amounts. Restricted SFT and MetroMile shares carry additional price and sale restrictions.
- On April 12, 2021, SEC staff guidance raised the possibility that Insurance SPAC III warrants may need liability classification instead of equity treatment. A restatement could create costs, delay a business combination or increase the risk that the SPAC fails to complete one within its allotted period.
- COVID-19, market volatility, counterparty and funding concentration, margin calls, access to financing, regulatory capital requirements and key-person retention remain risks. The FICC is a significant funding source for GCF repo; gestation repo activity is concentrated among a limited number of counterparties.
- The $2.2 million PPP loan remained outstanding, and forgiveness had not been confirmed as of the filing. The company also had $2.4 million of 12% senior notes due September 2021 and a $15 million 8% convertible note due March 2022.
- JVB’s net capital was $72.3 million versus a $0.25 million minimum; CCFEL’s was $2.0 million versus a $0.68 million minimum. The company reported compliance with Byline facility financial covenants and had not drawn the facility.
- In the Visium litigation, a New York appellate court reversed the denial of defendants’ dismissal motion in December 2020; the New York Court of Appeals denied Visium leave to appeal on May 4, 2021. Visium had sought more than $1 billion in damages. The company also disclosed routine legal and regulatory matters.
- The quarterly dividend remained suspended. The company stated that future dividends are at board discretion and may not be reinstated.
Most important facts for investors to verify
- How much of the $79.6 million in principal transactions and other income is realized versus unrealized, and how sensitive the investment valuations are to market-price changes and restrictions.
- The attribution and sustainability of earnings: consolidated net income was $66.7 million, but only $9.4 million was attributable to the parent; assess non-controlling interests and SPAC-related compensation.
- Whether operating cash, usable liquidity and the undrawn Byline facility adequately cover funding needs, margin calls and upcoming debt maturities, given repo funding concentration and regulatory limits on subsidiary distributions.
- The outcome and financial impact of Insurance SPAC III’s warrant-accounting review, including any restatement, added costs or effect on completing a business combination.
- Progress on PPP loan forgiveness, repayment or refinancing of near-term debt, and any material developments in litigation or other contingencies.