Cohen & Co. (filing registrant: Institutional Financial Markets, Inc.) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. Unless noted, dollar amounts are in thousands. The filing identifies the registrant as Institutional Financial Markets, Inc. (IFMI), not Cohen & Co. Inc.
Business context
IFMI is a fixed-income financial services company with Capital Markets, Asset Management, and Principal Investing segments. At quarter-end it reported $3.89 billion of assets under management, 95.6% of which was in CDOs. Management said it had not completed a new securitization since 2008 and did not expect to complete future securitizations.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $13,735 | $12,794 |
| Operating income | $1,264 | $281 |
| Operating margin | 9.2% | 2.2% |
| Net income (loss) | $264 | $(756) |
| Net income (loss) attributable to IFMI | $199 | $(558) |
| Basic and diluted EPS | $0.01 | $(0.04) |
| Net cash used in operating activities | $(7,130) | $(9,392) |
- Revenue rose 7%. Net trading increased 40% to $10,202, principally from corporate investment-grade and high-yield activity. Asset-management revenue was nearly unchanged at $2,312.
- New issue and advisory revenue fell 75% to $381; principal transactions and other income fell 51% to $840.
- Operating expenses were nearly flat at $12,471. Compensation and benefits increased 13% to $8,540, while several other expense categories declined. Headcount fell to 86 from 104 a year earlier.
- Operating margin improved to 9.2% from 2.2%; IFMI reported a return to positive attributable earnings from a prior-year loss.
Balance sheet, liquidity, and financing
- At March 31, 2016, cash and cash equivalents were $5,615, down from $14,115 at December 31, 2015. Total assets were $398,495 and total equity was $44,415.
- Reported debt was $28,796, comprising $8,248 par value of 8.0% convertible senior notes due September 2018 and junior subordinated notes. The notes are separate from short-term securities financing; repurchase agreements were $175,754 at quarter-end.
- Operating cash use of $7,130 reflected trading and related working-capital movements. Investing activities provided $1,187; financing activities used $2,554, including $2,176 for share repurchases and $244 for dividends.
- Management said available cash, trading-portfolio investments, and related borrowing capacity were expected to meet near-term operating needs. It also noted uncertainty about replacing existing financing or obtaining additional financing.
- Broker-dealer regulatory capital exceeded minimums: JVB had $25,749 adjusted net capital, and CCFL had $1,250 net liquid capital against a $1,116 minimum.
Material changes and notable items
- The European operations sale, agreed in 2014 for approximately $8,700, remained pending. The buyer, an entity controlled by director and executive Daniel G. Cohen, said in February 2016 it continued to evaluate the transaction; neither party had terminated the agreement. The business proposed for sale generated $966 revenue and an operating loss of $981 in Q1 2016, excluding Munda CLO I. The sale required customary conditions and FCA approval.
- On March 21, the Company repurchased 1,694,000 shares in two privately negotiated transactions at $1.25 per share for a total of $2,118. It also repurchased 65,680 shares under a Rule 10b5-1 plan for $58 during the quarter. The plan authorized purchases of up to $1,000 through December 15, 2016.
- The board declared a $0.02 per-share dividend for the quarter and, on May 3, 2016, declared another $0.02 dividend payable June 3. Future dividends are discretionary and may be reduced or stopped.
- Management reported $13,746 of other investments at fair value, including $10,925 of CLO investments valued using Level 3 inputs. The filing notes that model assumptions and market conditions can materially affect fair values and realized proceeds.
Outlook, risks, and contingencies
- No quantified earnings or revenue guidance was provided. Management expects asset-management revenue to continue declining over time as CDO balances run off through maturities, repayments, calls, and defaults.
- Management said trading revenue can be volatile and may include unrealized gains that are not ultimately realized. Market volatility, trading volumes, securities valuations, liquidity, counterparty credit, and key-person retention can affect results.
- A 100-basis-point rise in the yield curve was estimated to reduce net interest-sensitive asset values by $3,793; a 100-basis-point decline was estimated to increase them by $3,790. A 100-basis-point change in three-month LIBOR would change annual cash interest by $481.
- The Company is appealing a Pennsylvania tax assessment of $4,683 plus interest related to a 2009 tax year; it recorded no reserve. Management said routine legal and regulatory matters were not expected to materially affect financial condition, though future legal fees could not be estimated.
- Repurchase agreements and clearing arrangements require collateral and may create liquidity pressure if counterparties demand additional margin. Management reported no history of failing to meet margin calls, but gave no assurance it could meet future demands.
Important facts for investors to verify
- Whether the proposed European business sale closes, is amended, or is terminated, including its related-party terms and any effect on revenue and assets under management.
- Whether operating cash use and the quarter-end cash balance remain adequate as trading and collateral-financing needs fluctuate.
- The quality, valuation assumptions, and potential impairment of CLO and other fair-value investments, particularly the Level 3 positions.
- The sustainability of trading gains, asset-management fees, and the $0.02 quarterly dividend given CDO runoff, financing costs, and regulatory capital limits.
- The outcome and potential financial exposure of the Pennsylvania tax appeal, and the status of the convertible notes and other debt obligations.