Company Background and History
Cohen & Company Inc. (COHN) is a financial services firm that specializes in an expanding range of capital markets and asset management services. The company has a long and storied history, dating back to its origins as Cohen Brothers, LLC, which was formed in 2004 to acquire the net assets of several subsidiaries. Over the years, the company has undergone several transformations, including a merger with Alesco Financial Inc. in 2009 and subsequent name changes to Institutional Financial Markets, Inc. and Cohen & Company Inc.
One of the key events in the company's history was the AFN Merger in 2009, where Cohen Brothers merged with a subsidiary of Alesco Financial Inc., a publicly traded real estate investment trust (REIT). This transaction was accounted for as a reverse acquisition, with Cohen Brothers being deemed the accounting acquirer. As a result, all of Alesco Financial Inc.'s assets and liabilities were required to be revalued at fair value as of the acquisition date. Following the merger, the company ceased to qualify as a REIT in 2010 and has since focused on expanding its capital markets and asset management operations.
Business Segments
Today, Cohen & Company Inc. operates within three primary business segments: Capital Markets, Asset Management, and Principal Investing. The Capital Markets segment consists primarily of fixed income sales, trading, gestation repo financing, new issue placements in corporate and securitized products, and advisory services. This segment operates through subsidiaries JVB in the United States and CCFESA in Europe, with Cohen & Company Capital Markets (CCM) serving as the company's full-service boutique investment bank.
The Capital Markets segment specializes in a wide variety of products, including corporate bonds, asset-backed securities (ABS), mortgage-backed securities (MBS), residential mortgage-backed securities (RMBS), collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), collateralized bond obligations (CBOs), collateralized mortgage obligations (CMOs), municipal securities, to-be-announced securities (TBAs) and other forward agency MBS contracts, Small Business Administration (SBA) loans, U.S. government bonds, U.S. government agency securities, brokered deposits and certificates of deposit (CDs) for small banks, and hybrid capital of financial institutions including trust preferred securities (TruPS), whole loans, and other structured financial instruments.
The Asset Management segment manages assets within collateralized debt obligations (CDOs), managed accounts, joint ventures, and investment funds. As of September 30, 2024, the company had approximately $2.37 billion in assets under management (AUM), of which 41% was in CDOs. This segment includes fee-based asset management operations, generating ongoing base and incentive management fees.
The Principal Investing segment comprises investments related to the company's SPAC franchise and other investments made for the purpose of earning an investment return. This segment also includes financial instruments received as consideration for advisory services provided by the Capital Markets segment.
Challenges and Transformations
Cohen & Company Inc. has faced several challenges throughout its history. The company has experienced substantial operating and capital losses, which has impacted its ability to use its net operating loss and net capital loss carryforward deferred tax assets. Additionally, the company has been subject to an investigation by the SEC's enforcement division regarding disclosure practices around conflicts of interest and other issues at its subsidiary investment adviser, Cohen & Company Financial Management LLC. Despite these challenges, the company has continued to work on transforming its business and expanding its range of services.
Financial Performance
In terms of financial performance, Cohen & Company Inc. has faced some challenges in recent years. For the year ended December 31, 2023, the company reported a net loss of $5.1 million, with total revenues of $83.0 million. This represented a significant decline from the previous year, where the company reported net income of $74.0 million on revenues of $146.4 million. The company's operating expenses have also remained elevated, with total expenses of $76.1 million in 2023, compared to $106.8 million in 2021.
However, recent quarters have shown signs of improvement. For the third quarter of 2024, the company reported revenue of $31.70 million, representing an increase of $14.57 million or 85.00% compared to Q3 2023. Net income for the quarter was $2.15 million, an increase of $2.57 million or 608.00% compared to the same period in the previous year. Operating cash flow (OCF) and free cash flow (FCF) also increased significantly year-over-year, indicating improved liquidity and cash flow generation.
One of the key drivers of the company's financial performance has been its involvement in the special purpose acquisition company (SPAC) market. Cohen & Company Inc. has been an active sponsor and investor in SPACs, which has resulted in significant holdings of public equity positions in post-business combination companies. However, the decline in the equity value of these post-business combination SPACs has had a negative impact on the company's principal transactions and other revenue, contributing to the overall decline in financial performance.
Revenue Diversification and Growth Initiatives
Despite these challenges, Cohen & Company Inc. has taken steps to diversify its revenue streams and improve its financial position. In recent quarters, the company has seen a significant increase in new issue and advisory revenue, driven by the performance of its capital markets division, Cohen & Company Capital Markets (CCM). CCM has focused on mergers and acquisitions (M&A), underwriting, capital markets, and SPAC advisory services, and has been recognized as a leading advisor in the de-SPAC market for 2023.
For the nine months ended September 30, 2024, the company reported total revenues of $61.06 million, with the Capital Markets segment contributing $80.81 million, the Asset Management segment contributing $9.51 million, and the Principal Investing segment contributing $29.26 million in revenue. Net trading revenue increased by 19% to $27.46 million for the nine-month period, while asset management fees increased by 28% to $6.94 million and new issue and advisory revenue increased by 459% to $53.35 million compared to the same period in the prior year.
Cost Management and Operational Efficiency
Furthermore, the company has made efforts to manage its costs, including changes to its compensation and benefits structure. As of September 30, 2024, the company had a total of 113 employees, down from 121 at the end of the prior quarter and 114 as of September 30, 2023. The company has also been proactive in managing its debt obligations, with total consolidated indebtedness of $34.9 million as of September 30, 2024, up from $29.7 million at the end of 2023.
Liquidity and Capital Management
Cohen & Company Inc. has maintained a relatively strong liquidity position. As of September 30, 2024, the company reported cash of $14.29 million and had access to a $15.0 million unsecured line of credit with Byline Bank, which was undrawn. The company's debt-to-equity ratio stood at 0.17767, indicating a relatively low level of leverage. The current ratio and quick ratio were both 3.39, suggesting a strong ability to meet short-term obligations.
Looking ahead, Cohen & Company Inc. remains focused on enhancing long-term, sustained value for its shareholders. The company has continued to pay quarterly dividends, with the most recent dividend of $0.25 per share declared in November 2024 and payable in December 2024. The company's management has stated that future dividend decisions will be impacted by quarterly operating results and the company's capital needs.
Industry Trends and Market Position
The financial services industry in which Cohen & Company Inc. operates is highly correlated to the overall strength of the economy and financial market activity. Profitability is sensitive to factors such as market volatility, interest rates, and transaction volumes. The industry has experienced margin pressure in certain product areas due to increased competition.
It's worth noting that Cohen & Company Inc. has not completed a new securitization since 2008, which has resulted in a decline in asset management revenue as CDO assets mature or are liquidated. The company's ability to complete new securitizations in the future will depend on factors such as asset origination capacity, warehouse financing, and market demand.
Conclusion and Outlook
Overall, Cohen & Company Inc. is a financial services firm with a diverse range of offerings, including capital markets, asset management, and principal investing activities. While the company has faced some challenges in recent years, it has taken steps to diversify its revenue streams and improve its financial position. Recent quarters have shown positive trends, particularly in the company's investment banking and advisory business.
The company's CEO, Lester Brafman, noted that "the positive trends for the first half of the year extended into the third quarter with a strong execution and continued momentum from Cohen & Company Capital Markets (CCM)." The company's adjusted pretax income improved by $26.5 million year-to-date versus 2023, despite the impact of ongoing unfavorable mark-to-market adjustments on their principal investment portfolio.
While Cohen & Company Inc. has not provided specific forward-looking guidance, management remains confident about the company's future earnings potential and its focus on enhancing long-term sustained value for stockholders. With a focus on strategic growth initiatives, cost management, and its strong position in niche markets such as SPAC advisory services, Cohen & Company Inc. is well-positioned to navigate the evolving financial services landscape and create value for its shareholders.