Institutional Financial Markets, Inc. (formerly Cohen & Company Inc.) — FY2012 Form 10-K
Reporting period: Year ended December 31, 2012; filed March 7, 2013. The filing is for Institutional Financial Markets, Inc. (NYSE MKT: IFMI), not a standalone Cohen & Co. quarterly filing. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Business context
IFMI provides credit-related fixed-income brokerage and trading, investment banking and advisory, asset management, and principal-investing services. Its three segments are Capital Markets, Asset Management, and Principal Investing. At year-end, assets under management were $6.326 billion, including $6.052 billion in company-sponsored CDOs (about 95.7% of AUM). The company reported no new securitizations from 2009 through 2012.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Total revenue | $95.240 million | $100.331 million |
| Operating income (loss) | $0.295 million | ($18.165 million) |
| Net income (loss), consolidated | ($2.041 million) | ($16.727 million) |
| Net income (loss) attributable to IFMI | ($0.968 million) | ($9.388 million) |
| Basic and diluted EPS | ($0.09) | ($0.88) |
| Operating cash flow | $14.748 million | ($6.299 million) |
| Cash and cash equivalents at year-end | $14.500 million | $18.221 million |
| Total assets | $341.001 million | $420.590 million |
| Balance-sheet debt, carrying value | $25.847 million | $37.167 million |
| Total permanent equity | $75.788 million | $77.408 million |
Operating margin was approximately 0.3%, compared with negative 18.1% in 2011. Consolidated net margin was approximately negative 2.1%, versus negative 16.7%. The 2012 cash decrease was $3.721 million: operating activities provided $14.748 million and investing activities provided $9.110 million, while financing activities used $27.717 million.
Outstanding debt had $56.588 million aggregate par value at year-end, versus $25.847 million carrying value. This included $8.121 million of 10.50% convertible notes, $48.125 million net par value of junior subordinated notes, and $0.342 million of subordinated notes payable. The convertible notes’ earliest holder put date was May 15, 2014; the subordinated notes payable matured in June 2013. Cash dividends were $0.08 per common share in 2012, down from $0.20 in 2011.
Changes versus prior year
- Revenue fell 5% to $95.240 million. Net trading revenue decreased 5% to $69.486 million, principally due to weaker PrinceRidge and other capital-markets securitized-product trading; JVB and CCFL trading revenue increased.
- Asset-management revenue rose 7% to $23.172 million, despite AUM declining about 21.5% to $6.326 billion. Higher European TruPS and loan fees, including a one-time final Xenon fee, contributed to the increase.
- Principal transactions and other income moved from $1.881 million of income to a $2.439 million loss, mainly reflecting $6.284 million of fair-value losses on investments. Star Asia accounted for a $7.274 million loss, including $5.504 million from foreign exchange.
- Operating expenses declined 20% to $94.945 million, including compensation and benefits down 20% to $62.951 million. Headcount fell from 237 to 197. Operating results improved substantially, but the company still recorded a net loss.
- Cash declined from $18.221 million to $14.500 million. Financing uses included debt repayments, dividends, and cash payments to acquire or redeem minority interests in PrinceRidge; IFMI’s ownership of PrinceRidge increased from about 70% to 98%.
Outlook, risks and unusual items
- Management said the business environment would remain challenging in 2013. It cited lower corporate-bond brokerage margins and volumes, intense competition, and continued weakness in securitization markets. No numerical earnings or revenue guidance was provided.
- AUM and fee income remain exposed to collateral defaults, deferrals, downgrades, and CDO liquidations. Subordinated fees on all managed bank TruPS and ABS structures had fallen to zero; only 25 CDOs generated management fees in 2012. The filing says 13 of 19 ABS deals had liquidated and one was in liquidation.
- Fair-value and concentration risk is material: $37.6 million, or 98%, of the $38.3 million principal-investment portfolio was in four vehicles; Star Asia alone was $30.2 million, or 79% of the portfolio. Star Asia’s reported carrying value used a management valuation model and was below its unadjusted reported NAV.
- Interest-rate sensitivity analysis estimated a $6.284 million loss from a 100-basis-point rise in the yield curve at year-end. The company also faces currency exposure, particularly to the Japanese yen, and reported no yen hedge outstanding at year-end.
- Trading and funding rely on repurchase agreements, margin, and clearing relationships. Year-end repurchase obligations were $70.273 million; counterparties can demand additional collateral, and the obligations are full recourse. Cash and liquid funding access may be strained by market disruption or trading losses.
- The company accrued $4.357 million for the Sentinel litigation settlement, including the present value of a future $2.25 million payment; it guaranteed that payment, due by September 1, 2013. The initial $3 million payment was made in January 2013. A separate U.S. Bank fee dispute remained pending, with no clear damages value in the filing.
- An Alesco XIV guarantee had a recorded fair-value liability of $1.084 million and maximum potential exposure of $8.750 million; liquid collateral may be required in certain circumstances. The company also reported a $321,000 unfunded commitment to the Star Asia Special Situations Fund.
- Management identified its internal controls as effective at December 31, 2012; the auditor did not provide an attestation on internal control effectiveness. The financial statement audit opinion was unqualified.
Most important facts for investors to verify
- Whether lower expenses can be sustained and Capital Markets revenue stabilizes despite continuing margin pressure.
- How much of 2012 asset-management revenue was recurring, particularly after the Xenon exit and expiry of the Alesco X–XVII services agreement in February 2013.
- The liquidity plan for the May 2014 put date on $8.121 million of 10.50% notes, and the repayment of remaining short-term subordinated notes.
- The valuation, liquidity, and currency exposure of Star Asia and the concentration of principal investments.
- Final payment and dismissal status for the Sentinel settlement, and developments in the U.S. Bank litigation and Alesco XIV guarantee.
- Whether the quarterly $0.02 dividend can be maintained; the filing states the board may reduce or eliminate future dividends.