Cohen & Company Inc. — Q2 2019 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2019; financial statements are unaudited. Cohen & Company is a fixed-income financial services firm with Capital Markets, Asset Management and Principal Investing segments. Amounts below are in millions of dollars unless otherwise stated. At quarter-end, assets under management were $2.80 billion, of which 82.7% was in company-sponsored CDOs.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $11.17 | $12.19 | $22.31 | $21.53 |
| Operating income | $0.52 | $1.38 | $0.45 | $1.02 |
| Operating margin | 4.6% | 11.3% | 2.0% | 4.7% |
| Net income (loss), consolidated | ($1.03) | ($0.19) | ($2.85) | ($2.34) |
| Net income (loss) attributable to Cohen & Company Inc. | ($0.41) | $0.08 | ($1.61) | ($1.39) |
| Basic and diluted loss per share | ($0.36) | $0.07 | ($1.42) | ($1.19) |
- Q2 revenue fell 8%, although net trading revenue increased 21% to $8.67 million. Higher matched-book repo revenue and wholesale/other trading were offset by lower asset-management and principal-investing revenue; no new issue or advisory revenue was recorded.
- For the first half, revenue rose 4%, led by a 30% increase in net trading revenue to $17.39 million. Asset-management revenue declined 25% to $3.75 million; new issue and advisory revenue was zero, versus $0.87 million a year earlier. Principal transactions and other income fell 49% to $1.17 million.
- Operating expenses were $10.65 million in Q2, down 2%, but $21.86 million for the first half, up 7%. First-half compensation increased 9% to $12.80 million.
- Net interest expense was $1.94 million for Q2 and $3.79 million for the first half, down 12% and 6%, respectively, from comparable 2018 periods. The first-half equity-method loss of $0.26 million related to the Insurance SPAC.
- Cash and cash equivalents were $13.08 million at June 30, down from $14.11 million at year-end. Operating cash flow was negative $8.61 million; investing cash flow was positive $3.50 million and financing cash flow positive $4.10 million. The operating cash use reflected trading and collateralized financing movements, including reductions in repo balances.
- Total assets were $6.47 billion and total equity $41.58 million. Reverse-repurchase receivables were $6.05 billion and repurchase liabilities $6.10 billion. The company adopted gross presentation for repo and reverse-repo transactions effective June 1, 2019; the change increased the December 31, 2018 comparative repo balances by $2.46 billion. Balance-sheet comparisons should be read with this presentation change in mind.
- Reported debt was $45.00 million, compared with $43.54 million at year-end; redeemable financial instruments were $18.64 million. The $6.79 million 2013 convertible notes mature in September 2019. The company also had $1.21 million drawn under ViaNova’s LegacyTexas facility, which matures in November 2019.
Changes, outlook, risks and notable items
- Management said earnings are not predictable and may vary materially with market conditions, trading activity, interest rates, mortgage volumes and securities valuations. It cited continuing margin and volume pressure in some fixed-income brokerage products and expects competition to intensify.
- Asset-management fees remain exposed to declining CDO assets, maturities, repayments, redemptions and defaults. The company has not completed a new securitization since 2008. Management reported that EuroDekania was winding down and expected liquidation in the second half of 2019.
- Management stated that available cash, trading assets and borrowing capacity should meet near-term operating needs, but noted uncertainty about replacing financing or obtaining additional financing on favorable terms. Repo funding is concentrated: the FICC provides nearly all GCF repo funding, while gestational repo activity relies on a limited number of counterparties. Repo and clearing arrangements require collateral and are full-recourse obligations.
- At June 30, JVB’s adjusted net capital exceeded its minimum by $53.27 million; CCFL and CCFEL also reported capital above their applicable minimums. The company disclosed no material changes to previously reported risk factors and described routine legal and regulatory matters that management did not expect to materially affect results.
- The Insurance SPAC completed its IPO in March 2019, raising gross proceeds of $150.65 million before offering costs. It must complete a business combination within 18 months of the IPO or liquidate. CCFEL received Irish regulatory authorization in April 2019; related contract novations to its French branch were completed July 1, after quarter-end.
- The board had declared a $0.20-per-share quarterly dividend for Q2. On August 2, 2019, after the reporting period, the company announced suspension of the quarterly dividend, citing expected annual cash savings of approximately $1.34 million to support new initiatives and improve its financial position. Resumption is not assured.
- Interest-rate sensitivity disclosure: a 100-basis-point parallel increase in the yield curve was estimated to cause a $2.22 million loss on net interest-rate-sensitive assets; a 100-basis-point change in three-month LIBOR was estimated to change annual cash interest by $0.49 million.
Important facts for investors to verify
- Whether net trading gains and matched-book repo revenue can be sustained, particularly given FICC funding concentration and collateral requirements.
- The timing and terms for repayment, refinancing or conversion of the 2013 convertible notes due September 2019, and the funding and repayment outlook for ViaNova’s facility.
- Whether declining CDO assets and lower performance fees continue to pressure asset-management revenue, and whether new investment initiatives generate meaningful fees or returns.
- The liquidity impact of the dividend suspension, ongoing operating cash use, redeemable instruments and other contractual obligations.
- The impact of the repo gross-presentation accounting change when comparing balance-sheet amounts with prior periods.