Cohen & Company Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. The company provides fixed-income capital-markets, asset-management and principal-investing services. Assets under management were $2.67 billion, including $2.20 billion, or 82.4%, in company-sponsored CDOs.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $11.27 | $12.24 | $33.58 | $33.77 |
| Operating income (loss) | ($0.44) | $0.36 | $0.01 | $1.37 |
| Net income (loss) | ($1.92) | ($1.23) | ($4.77) | ($3.58) |
| Net loss attributable to Cohen & Company Inc. | ($1.22) | ($0.65) | ($2.83) | ($2.05) |
| Basic and diluted loss per share | ($1.06) | ($0.57) | ($2.48) | ($1.76) |
- Revenue mix: Q3 net trading revenue rose 24% to $8.48 million, while asset-management revenue fell 28% to $2.02 million and principal transactions and other income fell 80% to $0.52 million. Nine-month net trading revenue rose 28% to $25.87 million; asset-management revenue declined 26% to $5.77 million; principal transactions and other income declined 65% to $1.69 million; and new-issue/advisory revenue declined 71% to $0.25 million.
- Operating costs and earnings: Nine-month operating expenses increased 4% to $33.57 million, slightly exceeding revenue. Net interest expense improved to $5.33 million from $6.21 million, but the company still reported a larger net loss than in the prior-year period. Segment results before unallocated costs were positive; unallocated expenses were $5.54 million for the nine months.
- Cash flow: Nine-month operating cash flow was negative $9.15 million, investing cash flow was positive $4.25 million, and financing cash flow was positive $5.05 million. Cash increased by only $0.02 million to $14.13 million. Operating cash flow was affected substantially by movements in repo-related and trading balances, so it should not be read as a simple measure of underlying earnings.
- Balance sheet and liquidity: Total assets were $7.45 billion and total liabilities $7.41 billion; total equity was $39.70 million, including $32.66 million attributable to stockholders. Cash was $14.13 million. Reverse-repurchase receivables were $7.05 billion and repo borrowings were $7.10 billion, reflecting the company’s large matched-book financing business. The filing says management believes cash, trading assets and borrowing capacity are sufficient for near-term operating needs, while noting dependence on continued access to financing.
- Debt and other financing: Reported debt was $46.09 million, up from $43.54 million at year-end 2018; redeemable financial instruments were another $18.54 million. The $6.79 million notes due September 2019 were amended into 12% senior notes due September 2020, with the conversion feature removed. A $15 million 8% convertible note is due March 2022. The company also had $2.16 million drawn on ViaNova’s LegacyTexas facility; the filing reports its maturity was extended after quarter-end to April 15, 2020. FT credit facilities totaling $25 million were undrawn at quarter-end.
Material changes and notable items
- Q3 revenue declined 8% year over year and the company moved from operating income to an operating loss. The attributable net loss widened to $1.22 million from $0.65 million. For the nine months, revenue was nearly flat, but operating income fell to near break-even and the attributable net loss widened to $2.83 million.
- Trading gains were a key offset to pressure elsewhere. The company attributed nine-month trading growth principally to matched-book repo, mortgage, and wholesale/other activity; high-yield corporate trading revenue declined.
- Asset-management fees face structural pressure: no new securitization had been completed since 2008, and CDO assets decline through repayments, maturities, calls and defaults. A European CLO liquidated in August 2019; $0.45 million of Q3 fees related to its liquidation, with no future fees expected from that mandate. Lower performance fees also reduced revenue.
- On August 2, 2019, the company suspended its $0.20 quarterly dividend. It estimated annual cash savings of approximately $1.34 million and said it intended to use the savings for new initiatives and to improve its financial position. Reinstatement is not assured.
- Effective June 1, the company changed presentation of repo and reverse-repo transactions from net to gross. It restated the December 31, 2018 presentation, increasing reported repo and reverse-repo balances by $2.46 billion; the company stated other previously presented amounts were not affected. This change complicates balance-sheet comparisons.
- The company adopted lease accounting in 2019 and recorded a $7.46 million operating-lease right-of-use asset and an $8.01 million lease liability at September 30. It reported 8.4 years weighted-average remaining lease term.
Outlook, risks and contingencies
- No specific revenue, earnings or other quantitative financial guidance was provided. Management cautioned that results are unpredictable and can vary significantly with market conditions, trading volumes, interest rates, mortgage activity and investment performance.
- Key disclosed risks include competition and fixed-income margin compression; dependence on key personnel; market, valuation, credit and counterparty risk; and liquidity/funding concentration. The company identified reliance on FICC funding in its GCF repo business and a limited number of counterparties in gestational repo as concentrations. It also warned that loss of clearing or financing access could materially disrupt operations.
- As of September 30, 2019, the company reported that a 100-basis-point rise in the yield curve would produce an estimated $1.66 million loss on net interest-rate-sensitive positions. A 100-basis-point change in three-month LIBOR would change annual cash interest by approximately $0.50 million.
- JVB was sued in New York in August 2019 in litigation alleging broker-dealers aided and abetted a portfolio-manager mismarking scheme. The plaintiff seeks damages in excess of $1 billion; JVB moved to dismiss on October 16, 2019 and said it would defend vigorously. The filing does not provide a clear estimate of the company’s potential loss or any reserve for this matter.
- Management concluded disclosure controls and procedures were effective as of September 30, 2019. The company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and potential financial exposure in the litigation seeking more than $1 billion, including subsequent court developments and any reserve or insurance coverage.
- Liquidity sources and refinancing capacity, especially the 2020 senior-note maturity, redeemable financing, and continued availability and terms of repo and credit facilities.
- Whether trading revenue and matched-book repo income can be sustained, given funding concentration and the quarter’s reliance on those activities.
- Future asset-management revenue and AUM trends as CDOs run off and liquidated mandates cease generating fees; also the performance of newer investment vehicles.
- Dividend policy and the company’s stated use of cash savings, alongside cash flow, capital needs and regulatory-capital requirements.
- Comparability of balance-sheet and cash-flow trends after the repo gross-presentation change; distinguish the presentation gross-up from underlying changes in financing activity.