Cohen & Company Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Financial statements are unaudited. Unless noted, dollar amounts below are in thousands.
Business context
Cohen & Company is a fixed-income financial services firm with Capital Markets, Asset Management, and Principal Investing segments. At quarter-end, assets under management were $2.78 billion, including $2.31 billion in company-sponsored CDOs. The company says it has not completed a new securitization since 2008.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $11,145 | $9,338 | +19% |
| Operating income (loss) | $(63) | $(360) | Loss narrowed |
| Net income (loss) | $(1,824) | $(2,151) | Loss narrowed |
| Net loss attributable to Cohen & Company Inc. | $(1,202) | $(1,474) | Loss narrowed |
| Basic and diluted loss per share | $(1.06) | $(1.26) | Improved |
| Net cash from (used in) operating activities | $(9,270) | $4,655 | Declined |
| Cash and cash equivalents, quarter-end | $9,283 | $11,756 | Down $2,473 year over year |
- Net trading revenue rose 41% to $8,729, driven primarily by a $2,295 increase in wholesale and other trading. Matched-book repo revenue was $1,294, up $184.
- Asset-management revenue increased 11% to $2,002. Other vehicle fees and performance fees offset lower CDO fees; CDO management fees fell to $950 from $1,287.
- New issue and advisory revenue was zero, versus $696 a year earlier. Principal transactions and other income declined 36% to $414.
- Operating expenses increased 16% to $11,208. Compensation rose 23% to $6,364, and subscriptions, clearing, and execution costs increased 24% to $2,273. Interest expense was $1,859, up from $1,819.
- Capital Markets, Asset Management, and Principal Investing each reported positive segment net income before unallocated expenses and taxes: $1,348, $221, and $208, respectively. Unallocated expenses and taxes drove the consolidated net loss.
- At March 31, total assets were $4.95 billion and total liabilities $4.91 billion; total equity was $42.7 million. Assets and liabilities declined from year-end, largely alongside lower repo balances.
- Debt carrying value was $43.7 million. This included $15.0 million of 2017 convertible notes, $6.8 million of 2013 convertible notes, and $22.8 million of junior subordinated notes, net of discounts and costs. The estimated fair value of debt was $51.2 million.
- Repo financing was substantial: resale-agreement receivables were $4.51 billion and repurchase-agreement liabilities were $4.56 billion. The company reported $18.7 million of redeemable financial instruments. Cash declined by $4.8 million during the quarter; investing activities provided $0.9 million and financing activities provided $3.6 million.
- Regulatory capital exceeded minimums: JVB’s adjusted net capital was $51.1 million, $50.8 million above its minimum; CCFL’s net liquid capital was $919,000, $50,000 above its minimum.
Material changes and unusual items
- Revenue growth was principally from net trading, while the absence of new issue and advisory revenue and lower CDO fees were offsets. Management attributed higher compensation mainly to incentive compensation associated with stronger trading and asset-management revenue.
- Operating cash flow shifted to an outflow from an inflow in the prior-year quarter. The filing attributes much of the movement to trading and repo-related working-capital balances, which can fluctuate with business activity.
- The company adopted the new lease standard on January 1, 2019, recording a right-of-use asset of $8.4 million and lease liability of $8.9 million. Operating lease obligations were $8.7 million at quarter-end, with a weighted-average remaining term of 8.65 years.
- The sponsored Insurance SPAC completed its IPO in March, raising $150.7 million gross. The company consolidated sponsor entities, recognized $2.55 million of third-party investment as non-controlling interest, and accounted for its SPAC investment under the equity method. A business combination must be completed within 18 months of the IPO or the SPAC will liquidate.
- The 2013 convertible notes, held by related parties, had a September 2019 maturity and a $12.00 conversion price following amendments. The company also restructured its MB Financial facilities in January; it had made no draws under the available facilities as of March 31.
- The board declared a $0.20-per-share dividend on May 1, 2019, payable June 5. The filing states dividends may be reduced or discontinued. The company’s share-repurchase plan expired March 19 and was not renewed.
Outlook, commentary, and risks
- No specific earnings or revenue guidance is provided. Management says results are unpredictable and depend on financial-market activity, volatility, interest rates, mortgage volumes, and transaction timing.
- Management believes available cash, trading investments, and related borrowing capacity are sufficient for near-term operating needs, but says future financing availability and terms are uncertain.
- Funding concentration is a key exposure: nearly all GCF repo funding comes from FICC. The company also describes its gestational repo business as concentrated among a limited number of counterparties. A loss of funding or higher funding costs could adversely affect operations.
- Other stated risks include market and valuation losses, counterparty and settlement failures, margin calls, limited liquidity, regulatory capital constraints, competition and margin pressure, reliance on key personnel, and the effects of changing interest rates on mortgage activity.
- Management reported routine legal and regulatory matters and said it could not estimate related future legal fees; it did not expect the matters themselves to materially affect financial condition, operations, or cash flows. No material changes to the risk factors in the 2018 Form 10-K were reported.
- Disclosure controls and procedures were concluded to be effective at March 31, 2019; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether trading revenue and the increase in wholesale and other activity are repeatable, given management’s warning that trading results can be volatile.
- The sustainability of asset-management fees as CDO assets continue to run off, and the scale and performance of newer managed vehicles.
- The company’s ability to maintain repo financing, especially its reliance on FICC and concentration among gestational repo counterparties, including collateral and margin requirements.
- Cash needs and repayment plans for the $6.8 million 2013 convertible notes due in September 2019, alongside other debt, redeemable instruments, lease payments, and dividends.
- The valuation assumptions for less-liquid investments, including Level 3 CLO holdings, and the exposure to market, interest-rate, currency, and counterparty changes.
- Progress and potential funding, dilution, and loss implications of ViaNova, the U.S. Insurance JV, and the Insurance SPAC; the SPAC’s business-combination deadline is 18 months after its IPO.