COHN

Business Context and Reporting Period

Cohen & Company Inc. (COHN) is an investment firm specializing in credit-related fixed income investments, organized into three segments: Capital Markets, Asset Management, and Principal Investing. This Form 10-Q covers the quarterly period ended September 30, 2010. The company ceased to qualify as a Real Estate Investment Trust (REIT) effective January 1, 2010, and is now taxed as a C corporation. As of September 30, 2010, the company had approximately $10.6 billion in assets under management (AUM).

Key Financial Metrics

Note: The filing does not provide explicit margin percentages; however, operating expenses for the nine months ended September 30, 2010, were $95.9 million against revenues of $100.6 million.

Material Changes vs. Prior Comparable Period

• Revenue Growth: Total revenues for the nine months ended September 30, 2010, increased 63% to $100.6 million from $61.9 million in the prior year period. This was driven by a 77% increase in Net Trading revenue ($56.5 million) and a 360% increase in Principal Transactions and other income ($23.0 million).
• Asset Management Decline: Asset management fees decreased 20% to $19.1 million, primarily due to declines in AUM for collateralized debt obligations (CDOs) and the liquidation of the Brigadier fund.
• Goodwill Impairment: The company recorded a non-cash impairment charge of $5.6 million related to the Strategos reporting unit during the third quarter of 2010. This charge significantly impacted operating income for the quarter, resulting in an operating loss of $6.2 million.
• Profitability Turnaround: The company reported a net income of $7.6 million for the nine-month period, a significant improvement from the net loss of $10.8 million in the same period in 2009. This turnaround was aided by a $2.5 million gain on the repurchase of debt and $6.0 million in income from equity method affiliates.
• Cash Flow: Net cash used in operating activities was $30.5 million for the nine months ended September 30, 2010, compared to cash provided by operating activities of $13.3 million in the prior year. This shift was largely due to increased trading activity and working capital fluctuations.

Guidance, Outlook, Risks, and Unusual Items

• Acquisition of JVB Financial: On September 14, 2010, the company entered into an agreement to acquire JVB Financial Holdings, L.L.C. The transaction, expected to close in Q4 2010, involves a cash payment plus stock and restricted units. The company anticipates synergies but notes risks regarding integration and the realization of expected benefits.
• Sale of Management Contracts: The company sold collateral management rights for Alesco X through XVII securitizations ($3.8 billion AUM) to ATP Management, LLC, receiving $4.8 million upfront. Future revenue from this sale will be recognized over a three-year services agreement.
• Debt Repurchases: The company repurchased $8.1 million principal amount of subordinated notes and $5.1 million of contingent convertible senior notes, recognizing a total gain of $2.5 million.
• Legal and Regulatory Risks:
  • FINRA Settlement: The company reached an agreement in principle with FINRA regarding impermissible mark-ups in three transactions. This resulted in a net expense of $0.7 million (restitution, fines, and interest) and a recapture of $0.4 million in incentive compensation.
  • Litigation: The company is defending against lawsuits related to the sale of CDOs to Sentinel Management Group and Riverside National Bank (now FDIC). Management believes these actions will not have a material adverse effect.
• Forward-Looking Statements: The filing cautions that actual results may differ materially due to risks including market volatility, the ability to realize synergies from the JVB acquisition, and the performance of securitization assets.

Important Facts for Investor Verification

• Goodwill Impairment: Verify the assumptions used in the discounted cash flow analysis for the Strategos reporting unit that led to the $5.6 million impairment charge.
• Level 3 Valuations: A significant portion of the company's assets (approx. $121 million in trading investments and $43 million in other investments) are classified as Level 3 fair value measurements, relying on internal models and unobservable inputs.
• Debt Covenants: Confirm continued compliance with the financial covenants of the new 2010 Credit Facility (minimum net worth, cash flow coverage ratios), which could trigger default if not met.
• JVB Acquisition Closing: Monitor the closing of the JVB Financial acquisition and the associated regulatory approvals (FINRA).
• FINRA Settlement Finalization: Verify the final approval of the Letter of Acceptance, Waiver and Consent (AWC) with FINRA and any potential additional penalties.