Q2 2020 Cohen & Company Inc Earnings Call

Hi.

Good morning, ladies and gentlemen, and welcome to the Cowen and company second quarter 2020 earnings call.

My name is the Colin I'll be your operator for today.

Before we begin Cowen and company would like to remind everyone that some of the statements. The company makes during this call may contain forward looking statement under the applicable securities laws.

These statements may involve risk and uncertainties that could cause the company's actual results could differ materially from the results discussed in such forward looking statement.

The forward looking statements made during this call and they'd only hasn't the date of the call and the company undertakes no obligation to update such statements to reflect subsequent events or circumstances.

Cowen and company advises you to reap the cautionary note regarding forward looking statements and its earnings release. It is most and its most recent annual report on form 10-K filed with the FCC <unk>.

I would now like turn the conference over to Mr., Lester Brafman, Chief Executive Officer of Cowen and company.

Thank you Nicole Thank you everybody for joining us for a second quarter.

The earnings call.

With me on the call is Joe Pooler, our CFO.

We're pleased with our second quarter results, an extremely excited about the development of some our longer term strategic initiatives across our spec franchise as well as our broker dealer and ask you mentioned businesses. We're active in the multiple aspects of this back market, including a sponsor asset manager investor or company sponsored insurance back insurers that was there.

You Corp entered into a merger agreement we ship technologies and we're now also the sponsor was second special acquisition company with it with which intends to raised 175 million initial public offering of its units.

Well, our phones was focused on investing in spec opportunities raising additional capital during the quarter.

I was involved in the stock market, both as a sponsor.

It is an asset manager has given the from access to unique investment opportunities one of which drove revenue in our principal investing segment. This past period.

We have a long history in spec space, and we intend to get to building or spec 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 balances increased to $2.3 billion, but ended the quarter, our European investment Advisory subsidiary successfully launched another series of clothes and investment vehicles. This one totaling in excess of 375 million euros.

I'm proud of our company's ability to drive initiatives forward will navigate this uniquely challenging environment.

We were optimistic that the strategic investments. We have made these business will continue to pay off and we remain committed to executing on our objectives and a continued focus.

Messenger style stockholder value.

No I will return the call over to Joe to walk through this quarter's financial highlights in more detail.

Thank you lustre, we'll start with our statement of operations.

Our net income was 3.3 million for the quarter were 69 cents per diluted share compared to net loss of 11.8 million for the prior quarter were $2.70 loss per diluted share and net loss of 1 million for the prior year quarter for 36 cents loss.

Loss per diluted share.

The prior quarter results included a 7.9 million dollar goodwill impairment charge.

Excluding the goodwill impairment charge from the prior quarters 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 900000 for the prior year quarter.

Again, the quarter over quarter comparison, so a strong 7.8 million dollar improvement in adjusted net income.

Note that adjusted net income is not a measure recognized Thunder U.S. generally accepted accounting principles. So.

See our disclosures calculations reconciliation 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 gestational repo group and from our wholesale trading desks.

Our gestational repo balances have grown to 2.3 billion as of June Thirtyth 20.

The increase from the second quarter 19 was primarily the result of increased trading across all the broker dealers trading desks, including our gestational repo NRG CF repo groups.

Our asset management revenue totaled 1.7 million in the quarter up slightly from the prior quarter and down slightly from a 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 585000, a year ago quarter.

Principal transactions revenue includes all gains and losses and income earned 109.7 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.

Primarily relate to our variations in net trading revenue from the comparable periods.

Variable compensation structure had I know outside unfavorable impact on results in the first quarter of 20 due to significant negative revenue recorded from certain of 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, 58% in the second quarter of 2019.

The number of Cowen and company employees was 94 as of June 30, compared to 95 as of March 31 in 90 as of the prior year quarter.

Net interest expense for the second quarter of 20 was 3.1 million, including 752001 or two trust preferred debt instruments 580000 on our senior notes 1.4 million on our redeemable financial instruments and 362000 on our credit.

Line.

Loss from equity method affiliates during the second quarter totaled 1.2 million compared to the prior quarter loss of 100000 in the prior year quarter loss of 250000.

The increase in loss from equity method affiliates was primarily related to expenses incurred by the company sponsored insurance acquisition Corp, our sponsored spec.

In terms of our balance sheet as of the ended the quarter. Our total equity was 40.4 million a deep 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 ended the quarter, our total unrestricted cash and cash equivalents totaled 235 million.

The note about our cash balances.

Part of our match book repo operations, we enter in to reverse repos with Counterparties, whereby we lend money and receive security that collateral the collateral securities or not recorded on our balance sheet.

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 were provided cash as collateral for reverse repo transactions, we will make an entry to increase cash into 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 provide substitute liquid securities as collateral or otherwise satisfied the reverse repo obligation.

At the ended 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.

Stand ready to return the collateral held once the reverse repo counterparty provide liquid securities for the repo matures.

As previously announced and as Lester mentioned insurance acquisition Corp, our sponsored.

Back 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 closing of the merger, we expect that our consolidated subsidiaries that serve as the sponsor. This back would collectively retain an aggregate of 375000 placement shares as well as between 4 million of four and a half million founder shares of the merged company.

We also expect that 253000 of those placement shares and between 2.2 and 2.5 million of those founder shares will be distributed to the non controlling interests of those consolidated sponsors subsidiaries with Cowen and company retaining the balance of the placement shares in the founder shares.

So the company's routine placement shares would approximate 122000 placement shares and would approximate 2 million the 2.2 million founder shares.

Again additional details regarding the merger transaction are available in our filings with the FCC, including our 10-Q that was filed today.

We've also announced that we intend to sponsor a second special purpose acquisition company spec to will seek to affect the merger or similar business combination with one or more businesses that provides insurance for insurance related services, but will not be required to complete a business combination with an insurance business.

In July of 2020 spec to filed a registration statement with the FCC with the intent to raise a 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.

Thanks, Joe.

So you direct any offline investor questions to Joe Pooler at 2157 on 1.952 or via email to Investor Relations at Cowen and company Dot Com.

Contact information can also be found at the bottom of our earnings release.

Operator, you can open the call lines for questions.

And thank everyone for joining us today.

At this time, if you would like to ask an audio questions. You may do so by pressing star in the number one on your telephone keypad.

Again, not a star one well pause for just a moment.

Again to asking audio question Nustar, one on your telephone keypad.

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

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

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