Cohen & Company Inc.
Q3 2018 Earnings Call Transcript

Published: 31 Oct 2018

[Operator:]

Good morning, ladies and gentlemen. And welcome to Cohen & Company’s Third Quarter 2018 Earnings Call. My name is Krystal and I will 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 applicable securities laws. These statements may involve risk 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 this 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 and in its most recent annual report on Form 10-K filed with the SEC. I would now like to turn the call over to Mr. Lester Brafman, Chief Executive Officer of Cohen & Company.

[Lester Brafman:]

Thank you, Krystal. And thank you everybody for joining us for our third quarter 2018 earnings call. With me on the call is Joe Pooler, our CFO. Although, we were disappointed with results of the quarter, we continue to make progress in several of our strategic initiatives. This is exemplified by our growth in the GCF Repo business, which have reached over -- balances, which have reached over $4 billion. In the third quarter, we have also launched our U.S. insurances and SPAC equity business with capital commitments for investors totaling approximately $79 million. These businesses will help us diversify our Company by growing our asset management segment. We remain committed to enhancing stockholder value and in the third quarter, we continued to pay our quarterly dividend. Now, I will turn the call over to Joe to walk through this quarter’s financial highlights in more detail.

[Joe Pooler:]

Thank you, Lester. Starting with our statement of operations, our operating income was $356,000 for the quarter compared to $1.4 million for the prior quarter, and $1 million for the prior year quarter. Our loss before income taxes was $1.8 million for the current quarter compared to $826,000 for the prior quarter and $617,000 for the prior year quarter. During the third quarter, our income tax benefit was $595,000. We expect to have additional net operating loss carry-forwards available to offset a portion of our deferred tax liability in the future years. The related reduction of the deferred tax liability is recorded as an income tax benefit. The net loss attributable to Cohen & Company was $651,000 or $0.57 per diluted share for the current quarter compared to net income of $80,000 or $0.07 per diluted share for the prior quarter, and net loss of $547,000 or $0.45 per diluted share for the prior year quarter. Net trading revenue came in at $6.8 million in the third quarter, down $370,000 from the second quarter and up $820,000 from the third quarter of '17. Our asset management revenue totaled $2.8 million in the quarter, down $387,000 from the prior quarter and up $1 million from the year ago quarter. In the current and prior quarters, but not the year ago quarter, there were one-time performance fees related to our European separate accounts. In addition, the second quarter of '18 included auction fees and previously unpaid subordinated management fees related to the successful auction and liquidation of the Dekania Europe I CDO. There was no new issue on advisory revenue in the current quarter. Our new issue and advisory revenue has been volatile and we expect that trend to continue. We are in revenue from a limited number of engagements, and a small change in a number of engagements can result in meaningful fluctuations in the revenue recognized quarter-to-quarter. Third quarter 2018 principal transactions revenue was $2.4 million, up from both the prior and year ago quarters, primarily due to favorable marks on our investments in CLO equity and certain other equity positions we own. Compensation and benefits expense for the third quarter of '18 was $7.2 million, up $588,000 from the prior quarter and up $2.4 million from the prior year quarter. The quarterly changes were primarily the result of the variable compensation model we have in place to relate to our variations in net trading, new issue and advisory and asset management revenues from the comparable periods, as well as headcount changes. Compensation as a percentage of revenue was 59% in the third quarter of '18 compared to 54% in the second quarter of '18 and 48% in the third quarter of '17. The number of Cohen & Company employees was 86 as of September 30 compared to 87 as of June 30, and 84 as of the prior year, September 30 quarter end. Net interest expense for the third quarter was $2.2 million, including $896,000 from our two trust preferred debt instruments, $572,000 on our 8% convertible notes and $618,000 from our redeemable financial instruments. In terms of our balance sheet, at the end of the quarter, our total equity was $43.2 million, a decrease of $4.9 million from December 31 year-end. Total assets continued to grow based on the growth in our matched book repo businesses. At the end of the quarter, our mortgage group had on the balance sheet about $345 million of gestational match book reverse repo balances and $4.1 billion of GCS matched book reverse repo balances. At the end of the quarter, consolidated corporate indebtedness was carried at $43.4 million and we had $5.2 million of unrestricted cash on the balance sheet. During the quarter, we repaid $1.5 million of our maturing 2013 8% convertible notes, but we're able to extend the maturity for one year on the remaining $6.8 million. We did reduce the conversion price on these 2013 convertible notes from $30 per share to $12 per share. Also, during the quarter, we committed to invest up to $3 million in the equity of a newly formed joint venture with an outside investor who committed to invest approximately $63 million in the equity of this joint venture. The joint venture was formed for the purpose of investing in debt issued by small and medium size U.S. and Bermuda insurance and range this companies and is managed by one of our asset management subsidiaries. The joint venture may use leverage to grow its assets. The insurance company debt that will be funded by the joint venture may be originated by us. And there maybe origination fees earned by our wholly-owned broker dealer JV financial. We will earn management fees as the manager of the joint venture. We are entitled to a quarterly based management fee and annual incentive fee of certain return hurdles are met, and an additional incentive fee upon the liquidation of the portfolio, again, if certain return hurdles are met. During the quarter ended September 30, 2018, we invested $1 million in this joint venture and the joint venture made its first investments totaling $22 million. Additionally, during the quarter, we became the general partner of a newly formed SPAC fund for the purpose of investing in the equity interest of special purpose acquisition companies. We are the manager of the SPAC funds and we have invested 600,000 in the fund. As the manager, we are entitled to a quarterly based management fee based on a percentage of the net asset value of the funds and an annual incentive allocation based on the actual returns earned by the fund. At the end of the quarter, the net asset value of the SPAC fund was $15.3 million. We’ve announced the $0.20dividend for the quarter and we’ll continue to review the dividend policy on a quarterly basis. The dividend is payable on November 30, 2018 to stockholders of record on November 16, 2018. Finally, we expect to file our 10-Q no later than Friday. With that, I will turn it back over to Lester.

[Lester Brafman:]

Thank you, Joe. Please direct any investor questions to Joe Pooler at 215-701-8952. His contact information is at the bottom of our earnings release or via email to [e-mail]. Thank you for joining us today. Operator, we can now end the call.

[Operator:]

This concludes today’s conference call. You may now disconnect.