Cohen & Company Inc. (COHN) CEO Lester Brafman on Q3 2020 Results - Earnings Call Transcript

Cohen & Company Inc. (NYSEMKT:COHN) Q3 2020 Earnings Conference Call November 4, 2020 10:00 AM ET

Company Participants

Lester Brafman - CEO

Joe Pooler - CFO

Conference Call Participants

Operator

Good morning, ladies and gentlemen, and welcome to the Cohen & Company's Third Quarter 2020 Earnings Conference 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 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 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, Nicole, and thank you, everybody, for joining us on our third quarter 2020 earnings call. With me on the call is Joe Pooler, our CFO.

We are pleased with our third quarter results, particularly on the broker-dealer side, where we continued to strengthen our Gestation Repo business, with balances now increasing to $2.9 billion by the end of the quarter.

For the second quarter in a row, we were able to generate more than $3 million of net income and more than $4 million of adjusted net income for the firm from wide.

Additionally, we are excited to announce positive developments in our SPAC business. Recently, subsequent to the quarter end, our first company-sponsored insurance SPAC, Insurance Acquisition Corp. closed its merger with Shift Technologies, Inc., symbol SFT, and during the third quarter, our second company-sponsored Insurance SPAC, INSU Acquisition Corp. II, raised $230 million in an initial public offering of its units.

We're active in multiple aspects of the SPAC market, including as a sponsor, asset manager and investor. Our team has a long history in the SPAC space, and we continue to grow - we continue growing our SPAC franchise and capitalizing on opportunities in this space.

We are enthusiastic about our business going forward, and we remain committed to executing on our strategic priorities and a continued focus on enhancing stockholder value.

Now I will turn the call over to Joe to walk through the quarter's financial highlights in more detail.

Joe Pooler

Thank you, Lester.

We'll start with our statement of operations. Our net income was $3.3 million for the quarter or $1.19 per fully diluted share compared to net income of $3.3 million for the prior quarter or $0.69 per diluted share and net loss of $1.9 million for the prior year quarter or a loss of $1.06 per fully diluted share.

Our adjusted net income was $4.2 million for the quarter compared to adjusted net income of $4 million for the prior quarter and adjusted net loss of $1.9 million for the prior year quarter. 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 $17 million in the third quarter, down $3 million from the second quarter and up $8.5 million from the third quarter of '19. The decrease from the second quarter was primarily the result of decreased trading from our GCF Repo and corporate trading groups, which was offset by an increase of $3.1 million in our Gestation Repo revenue.

Our Gestation Repo balances have grown to $2.9 billion as of September 30, 2020. The increase from the third quarter of '19 was primarily the result of increased trading from our Gestation Repo and corporate trading groups. Our asset management revenue totaled $1.6 million in the quarter, down $61,000 from the prior quarter and down $387,000 from the year ago quarter.

Third quarter 2020 principal transactions revenue was $2.6 million compared to $2.3 million in the prior quarter and $310,000 in the year ago quarter. The principal transactions revenue includes all gains and losses and income earned on our $22.5 million investment portfolio classified as other investments at fair value on our balance sheet.

This investment portfolio has increased recently due to our involvement in various SPACs as our SPAC franchise expands. However, this $22.5 million principal investing portfolio as of the end of the quarter does not include the favorable impact of our founder shares from the Insurance Acquisition Corp.'s merger with Shift Technologies as the merger closed in early fourth quarter.

Compensation and benefits expense for the third quarter of 2020 was $11 million, down $359,000 from the prior quarter and up $3.9 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 from the comparable periods.

Compensation as a percentage of revenue was 50% in the third quarter of 2020 compared to 47% in the second quarter and 62% in the third quarter of the prior year. The number of Cohen employees was 87 as of September 30, 2020, compared to 94 as of June 30 and 90 as of the prior year quarter end.

Net interest expense for the third quarter of 2020 was $2 million, including $660,000 on our 2 trust preferred debt instruments, $589,000 on our senior notes, $357,000 on our redeemable financial instruments and $345,000 on our credit line.

Loss from equity method affiliates during the quarter totaled $1.4 million compared to the prior quarter loss of $1.2 million and the prior year quarter loss of $109,000. The increase in loss from equity method affiliates was primarily related to pre-business combination expenses incurred by the company's 2 sponsored insurance SPACs.

In terms of the balance sheet at the end of the quarter, our total equity was $47.8 million, a decrease of $973,000 from year-end. At the end of the quarter, consolidated corporate indebtedness was carried at $64.4 million, and our redeemable financial instruments were carried at $14.5 million.

At the end of the quarter, our total unrestricted cash and cash equivalents totaled $129.3 million, including counterparty cash collateral of $125.3 million related to our matched book repo operations, which was included in both cash and cash equivalents and other liabilities on our balance sheet.

As previously announced, and as Lester mentioned, Insurance Acquisition Corp., our first sponsored insurance SPAC, closed its merger with Shift Technologies on October 13, and as of October 15, the merged company began trading on NASDAQ under the symbol SFT.

Additional details regarding the merger transaction are available in the company's filings with the Securities and Exchange Commission.

Upon the closing of the merger, our consolidated subsidiaries, that served as the sponsors of Insurance SPAC I, collectively retained an aggregate of 375,000 Shift Class A common stock from placement shares and 4 - approximately 4.5 million Shift Class A common stock from founder shares.

We currently expect that approximately 252,000 of the Shift Class A common stock from placement shares and approximately 2.5 million of the Shift Class A common stock from founder shares will be distributed to the noncontrolling interest of the consolidated sponsor subsidiaries.

Immediately - therefore, immediately following the distributions, the company expects to retain 122,665 Class 8 common stock from placement shares and another 2,020,000 Shift Class A common stock from the founder shares. Again, additional details regarding the merger transaction will be available in the company's filings, including our 10-K, which we expect to file no later than Friday.

Note that the favorable impact on our P&L, specifically on our principal transactions revenue line item from the mark-to-market on the company's retained Shift placement and founder shares is not reflected in our third quarter results, but rather will be reflected in our fourth quarter results as the merger closed in October.

And also, as Lester mentioned, our - and as we previously announced, our second sponsored insurance SPAC, INSU Acquisition Corp. II, completed the sale of 23 million units at $10 per unit on September - in the IPO on September 8, for gross proceeds of $230 million. The consolidated Insurance SPAC II Sponsor Entities currently collectively hold approximately 7.8 million founder shares of Insurance SPAC II.

The number of founder shares eventually retained by the Insurance SPAC II Sponsor Entities will not be finally determined until the Insurance SPAC II business combination is eventually completed. The company currently consolidates the Insurance SPAC II Sponsor Entities and treat the Insurance SPAC II Sponsor Entities investment in Insurance SPAC II as an equity method investment. And finally, we expect to file our 10-Q no later than this Friday, November 6.

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 (215) 701-8952 or via e-mail to investorrelations@cohencompany.com. The contact information can also be found at the bottom of our earnings release.

Operator, you can now open the call lines for questions. Thank you all for joining us today.

Question-and-Answer Session

Operator

Lester Brafman

Okay. Then again, thanks, everybody, for joining us today. And we look forward to speaking with you next quarter.

Operator

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