Cohen & Company Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unless otherwise noted, financial amounts below are in millions of dollars. The company provides fixed-income capital markets, asset management and principal-investing services.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $21.856 | $11.267 | $63.745 | $33.576 |
| Operating income (loss) | $6.072 | $(0.443) | $4.553 | $0.007 |
| Consolidated net income (loss) | $3.343 | $(1.918) | $(5.173) | $(4.770) |
| Net income (loss) attributable to Cohen & Company Inc. | $1.655 | $(1.216) | $(0.546) | $(2.828) |
| Basic EPS | $1.44 | $(1.06) | $(0.47) | $(2.48) |
| Diluted EPS | $1.19 | $(1.06) | $(0.48) | $(2.48) |
- Revenue rose 94% year over year in Q3 and 90% for the nine-month period. Net trading revenue was the largest contributor: $16.957 million in Q3, up 100%, and $55.524 million year to date, up 115%.
- Q3 operating margin was approximately 27.8%, compared with negative 3.9% a year earlier; the nine-month operating margin was approximately 7.1%, versus approximately 0.02%. These are calculated from reported revenue and operating income.
- Q3 improvement reflected higher net trading revenue and $2.330 million of Q3 principal-transaction income from IMXI, partly offset by higher compensation and a $1.371 million equity-method loss. Asset-management revenue fell 19% in Q3 and 14% year to date.
- For the nine months, compensation and benefits rose to $36.423 million from $19.813 million, primarily because incentive compensation increased with revenue and operating profitability. A $7.883 million goodwill impairment and higher interest expense also weighed on year-to-date results.
- At September 30, total assets were $6,527.551 million, total liabilities $6,479.768 million, and total equity $47.783 million. Cash and cash equivalents were $129.266 million, but included $125.294 million of counterparty cash collateral that the company said was not available for general operations.
- Operating cash flow was $115.288 million for the nine months, versus cash used of $9.152 million in 2019. The 2020 figure included a $115.770 million inflow from increased counterparty cash collateral; excluding that inflow, operating cash flow would have been approximately negative $0.482 million. Investing cash flow was negative $10.747 million and financing cash flow was positive $16.270 million.
- Debt was $64.400 million, compared with $48.861 million at year-end 2019. Redeemable financial instruments were $14.457 million, down from $16.983 million. The $6.059 billion of repurchase-agreement liabilities largely funded matched-book repo activity and should be considered alongside $6.055 billion of resale-agreement receivables.
- Assets under management were $2.650 billion, down from $2.757 billion at December 31, 2019. Company-sponsored CDOs represented $2.051 billion, or about 77.4% of AUM.
Material changes and unusual items
- COVID-19 market volatility led JVB to reduce leverage, GCF repo operations and TBA trading. Management expected lower volumes in these businesses for an indefinite period, with potential adverse effects on profitability. The company recorded a $7.883 million goodwill impairment after concluding JVB’s fair value was below carrying value.
- Matched-book repo net revenue increased to $8.850 million in Q3 from $2.566 million and to $23.645 million year to date from $6.202 million. Management nevertheless cited significant funding concentration risk, including reliance on FICC, and counterparty, liquidity and margin-call risks.
- ViaNova, the residential transition loan business, stopped acquiring loans after a lender default notice and funding suspension. The company repaid its facility and sold ViaNova on August 22, 2020, with the buyer assuming its liabilities and a potential earn-out of up to $0.5 million. Cohen retained one loan with a fair value of $2.243 million.
- After quarter-end, Insurance SPAC merged with Shift Technologies on October 13, 2020. The company expected fair-value accounting for its retained SFT shares and warrants to generate principal-transaction revenue, with related amounts distributable to non-controlling holders; the filing does not provide a clear realized value for this subsequent event.
- Insurance SPAC II completed a $230 million IPO in September. Its sponsor investment could become worthless if it fails to complete a business combination within 18 months and cannot obtain an extension.
- The company applied for forgiveness of its $2.166 million PPP loan on September 23; forgiveness was not assured. The loan bears 1% interest and matures in May 2022 if not forgiven.
- The board had suspended quarterly dividends in 2019; no dividends were declared in the first nine months of 2020. The company repurchased 42,600 shares for $0.746 million during the nine-month period.
Debt, liquidity, outlook and risks
- Debt included $17.5 million drawn under the FT Financial revolving facility, $15.0 million of 8% convertible notes, $4.5 million of 12% senior notes due January 2022, $2.4 million of 12% senior notes extended to September 2021, and $2.166 million of PPP debt. Junior subordinated notes had a reported carrying value of $23.314 million.
- On October 28, 2020, the company entered a replacement credit facility with Byline Bank with commitments of up to $25 million. Borrowings carry interest at LIBOR plus 6%, subject to a 7% floor, and mature October 28, 2022. The facility includes tangible-net-worth and excess-net-capital covenants and restrictions on debt repayment.
- Management said available cash, trading-portfolio investments and borrowing capacity were expected to meet near-term operating needs, but cautioned that future financing may not be available or may not be available on favorable terms. Cash collateral is temporary and must be returned when required.
- Management gave no specific revenue or earnings guidance. It warned that results are unpredictable and sensitive to market conditions, trading activity, interest rates, mortgage volumes, competition, funding availability, and the performance and valuation of investments. Asset-management revenue also faces pressure from CDO runoff and reduced performance fees.
- JVB generated $16.922 million of pretax income for the nine months, while the rest of the company and parent had a combined pretax loss of $22.718 million. The company depends on distributions from JVB, which are restricted by regulatory-capital rules, lender covenants and counterparty requirements. JVB reported adjusted net capital of $71.092 million, $70.842 million above its minimum.
- JVB is defending a New York lawsuit seeking more than $1 billion from several broker-dealers, alleging assistance in a portfolio-manager mismarking scheme. The court denied defendants’ motions to dismiss; an appeal was pending and discovery proceeding. The company said it intends to defend the case. The filing does not provide a clear estimate of the company’s potential loss or legal exposure.
- The filing reported effective disclosure controls and procedures as of September 30, 2020, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported cash is freely usable after excluding counterparty collateral, and whether repo and clearing liquidity remains adequate under stress.
- JVB’s post-pandemic trading and repo volumes, profitability, capital needs and ability to make distributions to the parent.
- The status and potential financial impact of the more-than-$1 billion Visium-related litigation.
- Whether the PPP loan was forgiven and the actual accounting value, realized proceeds and non-controlling-interest allocation from the Shift/SFT securities.
- Debt repayment capacity, covenant compliance and the cost and availability of the replacement Byline facility.
- Whether CDO AUM runoff, fund performance and mortgage-market conditions continue to reduce recurring fee revenue.