Cohen & Company Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Unless stated otherwise, dollar amounts below are in millions. The company is a financial-services firm operating in Capital Markets, Asset Management and Principal Investing, with a growing SPAC franchise.
Financial performance and position
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Total revenue | $130.1 | $49.7 | Up 162% |
| Operating income | $42.3 | $4.0 | Operating margin about 32.5%, versus 8.1% |
| Net income (loss) | $38.5 | $(3.6) | Includes a substantial non-controlling interest |
| Net income (loss) attributable to Cohen & Company Inc. | $14.2 | $(2.1) | Basic EPS $12.56, versus $(1.81) |
| Net trading revenue | $73.6 | $38.2 | Up 93%; matched-book repo contributed $34.0 |
| Asset management revenue | $8.8 | $7.6 | CDO fees fell to $3.4; other fees rose to $5.4 |
| Principal transactions and other income | $45.5 | $2.1 | Includes $40.6 from the Shift SPAC transaction and related valuation changes |
| Operating cash flow | $41.4 | $(15.5) | Included a $31.6 increase in temporary repo-related cash collateral |
| Cash and cash equivalents at year-end | $42.0 | $8.3 | Increase of $33.7 |
| Total assets / total equity at year-end | $6,149.4 / $101.4 | $8,001.6 / $48.8 | Assets mainly reflect large, matched repo balances |
| Debt carrying value | $47.1 | $48.9 | Filing separately describes about $72.2 of recourse indebtedness at par |
Year-end AUM was $2.77 billion, broadly flat with 2019. CDO AUM declined to $2.06 billion from $2.20 billion; other Investment Vehicles increased to $712 million. CDOs represented 74.3% of AUM.
Material changes and unusual items
- Revenue growth was driven by net trading and SPAC-related principal income. The Shift business combination generated $40.6 million of principal transactions and other income in 2020; reported gains include fair-value estimates and are not necessarily realized cash proceeds.
- Operating expenses rose 92% to $87.8 million. Compensation and benefits increased to $59.9 million, including $11.7 million of equity-based compensation recognized when the Shift merger closed.
- The company recorded a $7.9 million goodwill impairment for JVB after COVID-related market volatility and reduced GCF repo and TBA activity. Management said it expected lower volumes in both businesses for an indefinite period.
- An $8.9 million deferred tax benefit helped reported net income. The benefit followed a reduction in the valuation allowance on tax assets; realization depends on future taxable income and management may revise the allowance.
- COVID-19 led JVB to reduce leverage and repo and TBA volumes because of counterparty-risk and liquidity concerns. The company received a $2.2 million PPP loan and had applied for forgiveness; forgiveness had not been confirmed by the filing date.
- Capital Markets remained exposed to intense competition and margin pressure. Matched-book repo revenue rose to $34.0 million, but management identified funding concentration and reduced activity as risks.
Liquidity, debt and outlook
Management said cash, the trading portfolio and related borrowing capacity were expected to meet near-term operating needs, while cautioning that replacement or additional financing might not be available on acceptable terms. The company reported $42.0 million of cash, but $41.1 million was cash collateral subject to return and not available for general operations. The Byline facility provided up to $25 million of borrowing capacity and was undrawn at year-end. Regulatory net capital at JVB and CCFEL totaled $68.8 million, compared with $1.0 million of stated minimum requirements; capital withdrawal restrictions apply.
Debt includes $15.0 million of 8% convertible notes due March 2022, $4.5 million of 12% senior notes due January 2022, $2.4 million of 12% senior notes due September 2021, a $2.2 million PPP loan and junior subordinated notes. The filing reports $11.96 million of redeemable financial instruments, including $7.96 million associated with JKD and $4.0 million with CBF. The company notified CBF after year-end that it intended to redeem the remaining $4.0 million around March 31, 2021. Interest expense increased to $9.6 million from $7.6 million.
No quantified earnings guidance is provided. Management said it expected to continue developing its SPAC franchise, subject to rapidly changing market conditions, and reported hiring investment-banking professionals in early 2021. The filing also notes the risk that legacy CDO assets and related fees will continue to decline; no new securitization has been completed since 2008.
Risks, contingencies and governance
- JVB faced a lawsuit seeking more than $1 billion in damages. The appellate court reversed the denial of dismissal and dismissed the complaint in December 2020; the plaintiff sought leave to appeal in January 2021.
- SPAC investments and sponsor interests may be illiquid or lose their value. At year-end, $34.2 million of other investments comprised restricted post-business-combination SPAC shares; their sale may depend on registration or price hurdles.
- The company’s Common Stock is subject to concentrated control and related-party considerations. Daniel G. Cohen and the DGC Trust together held substantial voting influence through common and preferred shares; the filing states that Cohen & Company Inc. controlled the Operating LLC’s voting interest while holding only 27.04% of its economic interest at year-end.
- Dividends were suspended in 2019 and none were declared for 2020. The company repurchased 121,181 shares during 2020.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
Most important facts for investors to verify
- How much of 2020 earnings and principal-investment gains are recurring or realized, particularly the Shift-related gain and the tax benefit.
- The value, transfer restrictions and potential liquidity of Shift and other SPAC-related holdings, including subsequent market prices and disposals.
- Current cash available for operations after excluding returnable repo collateral, and the ability to fund margin calls and meet debt maturities.
- The status and terms of the PPP forgiveness application, CBF redemption, and remaining related-party financing.
- The outcome of the Visium plaintiff’s request for leave to appeal and any material developments in other legal or regulatory matters.
- Whether reduced repo and TBA activity, declining legacy CDO fees, and ongoing competition affect future profitability and cash generation.