Cohen & Company Inc. 10-Q Summary
Business Context and Reporting Period
Company: Cohen & Company Inc. (COHN)
Reporting Period: Quarterly period ended June 30, 2010 (Six months ended June 30, 2010)
Business Overview: An investment firm specializing in credit-related fixed income investments, organized into three segments: Capital Markets, Asset Management, and Principal Investing. As of June 30, 2010, the company managed approximately $14.5 billion in assets under management (AUM). The company ceased to qualify as a REIT effective January 1, 2010, and is taxed as a C corporation.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $77,544 | $37,365 |
| Net Income | $7,758 | $(10,359) |
| Net Income Attributable to Cohen & Company Inc. | $4,975 | $(10,348) |
| Operating Income | $10,954 | $(8,142) |
| Cash and Cash Equivalents (End of Period) | $30,945 | $17,063 |
| Total Debt (Carrying Value) | $47,198 | $61,961 |
| Net Cash Used in Operating Activities | $(33,597) | $12,230 |
| EPS (Basic & Diluted) | $0.48 | $(1.08) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 108% to $77.5 million, driven primarily by a 102% increase in Net Trading revenue ($42.5 million) and a significant swing in Principal Transactions and Other Income from a loss of $1.3 million to income of $20.0 million.
- Asset Management Decline: Asset management fees decreased 23% to $13.0 million, largely due to declines in fees from collateralized debt obligations (CDOs) caused by defaults and deferrals in underlying assets, and the liquidation of the Brigadier fund.
- Profitability Turnaround: The company reported net income of $7.8 million compared to a net loss of $10.4 million in the prior year period. This was aided by a $0.9 million gain on the repurchase of debt and improved trading results.
- Expense Increases: Total operating expenses rose 46% to $66.6 million, primarily due to a 48% increase in compensation and benefits ($50.4 million) linked to higher revenues and increased headcount (151 employees vs. 114).
- Debt Reduction: Total debt decreased by approximately $14.8 million, primarily due to the repayment of the 2009 Credit Facility and the repurchase of contingent convertible senior notes.
Guidance, Outlook, and Risks
- Subsequent Events: On July 29, 2010, the company sold collateral management rights for Alesco X through XVII securitizations ($3.8 billion AUM) and agreed to sell rights for Alesco I through IX ($3.0 billion AUM) to ATP Management LLC. This transaction affects 47% of the company's AUM. The company also entered into a new $14.6 million secured credit facility with TD Bank.
- Dividends: The Board declared a cash dividend of $0.05 per share on August 3, 2010. Future distributions depend on operating results and distributions from the subsidiary, Cohen Brothers.
- Legal Proceedings: The company is defending against litigation involving Sentinel Management Group (alleged unsuitable securities sales) and Riverside National Bank (alleged failure to disclose rating agency conflicts). No contingent liability has been recorded.
- Risk Factors: Key risks include the company's ability to comply with financial covenants in its debt agreements, which depend on generating substantial operating cash flows. Failure to comply could result in default and acceleration of debt repayment. Additionally, the company faces market risks related to the valuation of Level 3 assets (illiquid securities) and foreign currency fluctuations.
Investor Verification Checklist
- Level 3 Asset Valuations: Verify the assumptions and models used to value significant Level 3 assets (approx. $75 million in assets and liabilities), as these rely on unobservable inputs and internal models.
- Asset Management Fee Sustainability: Assess the impact of defaults and deferrals in the CDO portfolio on future asset management fee revenue, which declined significantly year-over-year.
- Debt Covenant Compliance: Monitor the company's ability to meet financial covenants under the new 2010 Credit Facility and existing notes, particularly given the reliance on operating cash flows.
- Legal Exposure: Track the status of the Sentinel and Riverside litigation to determine if any material contingent liabilities may arise.
- Noncontrolling Interest: Understand the impact of the 33.8% noncontrolling interest in Cohen Brothers on net income attributable to common shareholders.