Cohen & Company Inc.
Q2 2020 Earnings Call Transcript

Published: 12 Aug 2020

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Cohen & Company's Second Quarter 2020 Earnings Call. My name is Nicole, and I'll be your operator for today. Before we begin, Cohen & Company would like to remind everyone that some of the statements the company makes during this call may contain forward-looking statements under the applicable securities laws. These statements may involve risks and uncertainties that could cause the company's actual results to differ materially from the results discussed in such forward-looking statements. The forward-looking statements made during this call are made only as of the date of the call, and the company undertakes no obligation to update such statements to reflect subsequent events or circumstances. Cohen & Company advises you to read the cautionary note regarding forward-looking statements in its earnings release in its most recent annual report on Form 10-K filed with the SEC. I would now like to turn the conference over to Mr. Lester Brafman, Chief Executive Officer of Cohen & Company.

[Lester Brafman:]

Thank you, Nicole, and thank you, everybody, for joining us for our Second Quarter 2020 Earnings Call. With me on the call is Joe Pooler, our CFO. We are pleased with our second quarter results and extremely excited about the development on some of our longer-term strategic initiatives across our SPAC franchise as well as our broker-dealer and asset management businesses. We are active in the multiple aspects of the SPAC market including a sponsor, asset manager and investor. Our company-sponsored insurance SPAC, Insurance Acquisition Corp., entered into a merger agreement with Shift Technologies, and we are now also the sponsor of a second special acquisition company, which intends to raise $175 million in an initial public offering of its units. Our Vellar Funds, which focus on investing in SPAC opportunities, raised an additional capital during the quarter. Cohen's involvement in the SPAC market, both as a sponsor and as an asset manager, has given the firm access to unique investment opportunities, one of which drove the revenue in our principal investing segment this past period. We've a long history in the SPAC space, and we intend to continue building our SPAC franchise and capitalizing on opportunities in this area. On the broker-dealer side, we continue to grow our mortgage complex, specifically our Gestational Repo business, where our balances increased to $2.3 billion by the end of the quarter. Our European investment and advisory subsidiary successfully launched another series of closed-end investment vehicles at this point totaling in excess of EUR 375 million. I am proud of our company's ability to drive initiatives forward, while navigating this uniquely challenging environment. We are optimistic that the strategic investments we have made in these businesses will continue to pay off, and we remain committed to executing on our objectives and a continued focus for enhancing stockholder value. Now I will return the call over to Joe to walk through this quarter's financial highlights in more detail.

[Joe Pooler:]

Thank you, Lester. We will start with our statement of operations. Our net income was $3.3 million for the quarter or $0.69 per diluted share compared to net loss of $11.8 million for the prior quarter or $2.70 loss per diluted share and net loss of $1 million for the prior year quarter or $0.36 loss per diluted share. The prior quarter results included a $7.9 million goodwill impairment charge. Excluding the goodwill impairment charge from the prior quarter's loss, net income still improved a robust $7.2 million from the prior quarter. Our adjusted net income was $4 million for the quarter compared to adjusted net loss of $3.7 million for the prior quarter and adjusted net loss of $900,000 for the prior year quarter. Again, the quarter-over-quarter comparison saw a strong $7.8 million improvement in adjusted net income. Note that adjusted net income is not a measure recognized under U.S. generally accepted accounting principles. See our disclosures, calculations and reconciliations surrounding adjusted net income in our earnings release. Net trading revenue came in at $20 million in the second quarter, up $1.4 million from the first quarter and up $11.3 million from the second quarter of '19. The increase from the first quarter was primarily the result of increased trading from our Gestation Repo group and from our wholesale trading desks. Our Gestation Repo balances have grown to $2.3 billion as of June 30, '20. The increase from the second quarter of '19 was primarily the result of increased trading across all the broker-dealers' trading desks including our Gestation Repo and our GCF Repo groups. Our asset management revenue totaled $1.7 million in the quarter, up slightly from the prior quarter and down slightly from the year ago quarter. Second quarter 2020 principal transactions revenue was $2.3 million compared to a negative $2.6 million in the prior quarter and $585,000 in the year ago quarter. The principal transactions revenue includes all gains and losses and income earned on our $9.7 million investment portfolio classified as other investments at fair value on our balance sheet. Compensation and benefits expense for the second quarter of '20 was $11.3 million, down $2.8 million from the prior quarter and up $4.9 million from the prior year quarter. The quarterly changes were primarily the result of the variable compensation model we have in place and primarily relate to our variations in net trading revenue from the comparable periods. Our variable compensation structure had an outsized unfavorable impact on results in the first quarter of '20 due to significant negative revenue recorded from certain trading books and from principal transactions during that first quarter. Compensation as a percentage of revenue was 47% in the second quarter of '20 compared to 80% in the first quarter and 58% in the second quarter of 2019. The number of Cohen & Company employees was 94 as of June 30 compared to 95 as of March 31 and 90 as of the prior year quarter. Net interest expense for the second quarter of '20 was $3.1 million including $752,000 on our 2 trust preferred debt instruments, $580,000 on our senior notes, $1.4 million on our redeemable financial instruments and $362,000 on our credit line. Loss from equity method affiliates during the second quarter totaled $1.2 million compared to the prior quarter loss of $100,000 and the prior year quarter loss of $250,000. The increase in loss from equity method affiliates was primarily related to expenses incurred by the company-sponsored Insurance Acquisition Corp., our sponsored SPAC. In terms of our balance sheet. As of the end of the quarter, our total equity was $40.4 million, a decrease of $8.4 million from year-end. At June 30, consolidated corporate indebtedness was carried at $64.2 million, and our redeemable financial instruments were carried at $16.9 million. At the end of the quarter, our total unrestricted cash and cash equivalents totaled $235 million. A note about our cash balances. As part of our matched book repo operations, we enter into reverse repos with counterparties, whereby we lend money and receive securities as collateral. The collateral securities are not recorded on our balance sheet. The reverse repo is all in accordance with GAAP accounting for repos. However, from time to time, we will hold cash instead of securities as collateral for these transactions. When we are providing cash as collateral for reverse repo transactions, we will make an entry to increase cash and to also increase other liabilities for the amount of cash received. It's important to note that when we receive cash as collateral, it is temporary in nature, and we have an obligation to return that cash when the counterparty provides substitute liquid securities as collateral or otherwise satisfies the reverse repo obligation. At the end of the quarter, the portion of our cash balance that was from counterparty cash collateral was $219 million, which was included in both cash and other liabilities on our balance sheet. We have no obligation to segregate this cash collateral, and therefore, it is a part of our cash and cash equivalents on our balance sheet. However, it is generally not available for use in our operations as we always must stand ready to return the collateral held once the reverse repo counterparty provides liquid securities or the repo matures. As previously announced and as Lester mentioned, Insurance Acquisition Corp., our sponsored SPAC, entered into an agreement and plan of merger with Shift Technologies. Additional details regarding the merger are available in the company's filings with the Securities and Exchange Commission. Upon a closing of the merger, we expect that our consolidated subsidiaries that serve as the sponsor of this SPAC would collectively retain an aggregate of 375,000 placement shares as well as between 4 million and 4.5 million founder shares of the merged company. We also expect that 253,000 of those placement shares and between 2.2 million and 2.5 million of those founder shares will be distributed to the noncontrolling interest of those consolidated sponsor subsidiaries, with Cohen & Company retaining the balance of the placement shares and the founder shares. So the company's retained placement shares would approximate 122,000 placement shares and would approximate 2 million to 2.2 million founder shares. Again, additional details regarding the merger transaction are available in our filings with the SEC including our 10-Q that was filed today. We have also announced that we intend to sponsor a second special purpose acquisition company. SPAC 2 will seek to effect the merger or a similar business combination with one or more businesses that provides insurance or insurance-related services, but will not be required to complete a business combination with an insurance business. In July of 2020, SPAC 2 filed a registration statement with the SEC with the intent to raise $175 million. Finally, as noted, we did file our 10-Q earlier today. With that, I'll turn it back over to Lester for closing remarks.

[Lester Brafman:]

Thanks, Joe. Please direct any off-line investor questions to Joe Pooler at [phone] or via e-mail to [e-mail]. The contact information can also be found at the bottom of our earnings release. Operator, you can now open up the call lines for questions, and thank you everyone for joining us today.

[Lester Brafman:]

Okay. Thank you, Nicole. And again, thanks, everyone, for joining us today.

[Operator:]

This does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.