Cohen & Company Inc (COHN) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Alesco Financial Inc's 2009 second quarter earnings conference call. Before we begin, Alesco Financial would like to remind everyone that information provided in its earnings release and during this call contain forward looking statements, which involve a number of risks and uncertainties. Alesco Financial cautions readers that forward looking information is not guaranteed of future performance, and actual events -- and actual results could differ materially from those contained or implied in forward looking information.

Factors that may affect future results are contained in Alesco's filings with the SEC, which are available at the SEC's website at www.sec.gov. At this time, all participants are placed on a listen only mode. Following formal remarks, the call will be open for questions. I would now like to turn the call over to Jay McEntee, President and CEO of Alesco Financial. Sir, you may begin.

Thank you very much, operator, and good morning, everyone. Welcome to our 2009 second quarter earnings call. Also representing the Company with me today is John Longino, our Chief Financial Officer.

Before we get started, I would like to explain the reason for the delay in filing our 10-Q for the second quarter. The delay was due to the identification of internal control deficiencies by the Company and our independent public accounts, Ernst and Young.

The internal control deficiencies related to our processes for determining the fair value of certain of our assets, primarily investments in TruPS debt securities. We needed the extra time to determine whether there were any deficiencies in our previously reported amounts requiring restatement. And whether the internal control deficiencies amounted to a material weakness at December 31, 2008. We are pleased to say that no restatement was required, and that our auditors confirmed this conclusion.

However, we did determine that there was a material weakness around the process we used to determine the fair value of our consolidated TruPS assets as of 12/31/2008. We found a computational error in our internal evaluation models which we used in part to determine the fair value of our consolidated investments in TruPS assets. After identifying this error, we undertook a comprehensive review of our valuation procedures and methodologies. To remediate this internal control over financial reporting deficiency, management has enhanced its controls over financial reporting. We believe that the resulting improvements in controls will strengthen our internal control over financial reporting, relating to our valuation process.

We also remind you that although the accounting rules require us to consolidate all of the underlying assets and liabilities of the CDOs on our balance sheet, the nature of our investments in CDOs is such that all related liabilities are non-recourse, which limits the impact to Alesco's shareholders to the remaining equity in the structures.

For example, in the case of our TruPS CDOs, the notional amount of assets we consolidate is approximately $5.5 billion, and the notional amount of the liabilities is approximately $4.9 billion. These assets and liabilities must be separately valued by us under GAAP, even though it is only the equity in these CDO transactions that we own.

The consolidated TruPS assets serve as the sole source of collateral and cash flows for the TruPS CDO liabilities. As a result, we generally expect that there will be significant correlation between the fair value estimates of the CDO assets and the liabilities. This expected price correlation between the underlying assets and liabilities was consistent with what the Company had historically experienced and observed in the marketplace.

However, during the three months ended June 30, 2009, changes in market conditions significantly impacted the degree of this correlation. Market conditions during the quarter had a significant positive impact on the pricing of credit risk associated with our individual TruPS assets. The change in market perceptions regarding the benefits or risks associated with our TruPS assets did not have a significant impact on the market's perceptions regarding the credit risk and other market risks of our TruPS liabilities.

As a result, the correlation of the changes in fair value of our TruPS assets and liabilities was not consistent with our historical experience. And therefore, the changes in the fair value of our TruPS assets were significantly greater than the changes in the fair value of our TruPS liabilities.

As a result, our GAAP stockholders equity includes $413 million of equity relating to our consolidated TruPS CDOs. However, we estimate that our direct investment in the preference shares of the TruPS CDOs has little or no value as of June 30, 2009.

On our last call we focused on a few major areas, our liquidity and financial position, our asset performance, some high level information about our results for the quarter, and the proposed merger with Cohen and Company. Since that time, we have filed a proxy statement and related documents with the SEC. These documents contained more detailed information on the merger, including the year-end audited and first quarter financials for Cohen and Company, and pro forma information on the combined company.

We expect to file an updated proxy shortly, which will include the second quarter financials for Alesco and Cohen. As a result, today's discussion will be fairly brief. On our call today, I would again like to focus only on a few key areas. First, I'll update you on our liquidity and financial position. Second, I'll provide a brief overview of our asset performance. And then I will hand the call over to John Longino, who will provide some high level information about our results for the second quarter. Finally I will comment on the proposed merger with Cohen and Company.

As for liquidity, unrestricted cash was $88.9 million as of June 30, 2009, up slightly from the $87.7 million at March 31. Recourse indebtedness continues to consist of $28.7 million of convertible debt, which can be put to us at par in May of 2012, and $49.6 million of TruPS debt with an average maturity date of 2036.

As you know, our business strategy was to invest on a levered basis in MBS securities, loans to financial services companies, mostly banks, as well as middle market loans. In spite of the fact that the markets for each of these asset classes has rallied over the last few months, the losses sustained in each of the investment vehicles in which we hold equity far exceed the equity we hold, making our investments in TruPS and MBS CDOs worthless or nearly worthless.

The Emporia middle market loan portfolio and our residential mortgage loan portfolio have also experienced significant stress but continue to retain some investment value. And, as John will explain, continue to provide positive cash flow during the previous quarter. I'll now hand the call over to John Longino to provide some high level information on our results for the second quarter.

Thank you, Jay. Alesco reported GAAP net income for the three months ended June 30, 2009 of $373.7 million, or $6.21 per diluted common share, as compared to a net loss of $81.2 million or $1.36 per diluted common share for the three months ended June 30, 2008.

AFN's net income for the three month period ended June 30, 2009, was primarily attributable to net changes in the fair value of financial instruments of $577.4 million, partially offset by loan loss provisions of $49.7 million.

During the three months ended June 30, 2009, these amounts were reduced by $168.2 million of net income attributable to non-controlling interest associated with our consolidated CDO entities.

As has been the case in other recent quarters, since the financial crisis began, the GAAP income statement amounts bear little to no correlation to Alesco's actual economic results for the quarter. Therefore I will concentrate my comments on the financial amounts that do reflect our economic results, including net cash from investments, debt service costs, and ongoing G&A expenses.

In the second quarter, we received $5.1 million in net cash on our investments, down from $6.6 million in the first quarter. Of the $5.1 million, $2.8 million came from the Emporia portfolio, which is down from $4.2 million in Q1. $2 million came from our residential mortgage portfolio, which is consistent with Q1. Cash received from our residential mortgage portfolio includes proceeds from the sales of REO properties in both quarters.

$200,000 came from on balance sheet TruPS consistent with Q1, and $100,000 came from other which is primarily interest income on unrestricted cash. It was down from $200,000 in Q1.

The $5.1 million in the second quarter net cash receipts on investments is expected to decrease in the third quarter. This decrease is due primarily to the Emporia investments.

While we have not experienced any over collateralization failures in this portfolio, we did have a failure in an interest diversion test in Emporia II, which has resulted in no Q3 '09 cash distribution for Emporia II. Assuming no additional defaults or significant credit downgrades, we do not expect to receive a quarterly cash distribution from Emporia II for several quarters. Our Q2 '09 cash distribution from Emporia II was $0.5 million.

The expected Q3 '09 decrease assumes we receive comparable earnings from our on-balance sheet TruPS and unrestricted cash. It does not include any possible proceeds from additional sales of REO properties. Unless we buy back additional debt, the annual recourse debt service costs continue to be approximately $6 million.

G&A costs paid directly by Alesco consist primarily of legal and professional fees, outside director fees, and D&O liability insurance expense. These costs typically total about $1.6 million per quarter. As expected these costs spiked up to over $2 million in the second quarter, due to costs associated with the proposed merger.

Unrestricted cash was $88.9 million as of June 30th, up slightly from $87.7 million at March 31, 2009. As long as the Emporia III and mortgage portfolios continue to cash flow, we expect to have breakeven to modest positive cash flow each quarter. As of June 30, our cash continues to be invested primarily in FDIC insured funds.

I will now turn the call back over to Jay McEntee.

Thanks, John. Before opening the call to questions, I would like to provide an update on the status of the merger. We currently expect to file the updated proxy statement shortly. As we have experienced a few delays in the proxy process to date, the transaction is not expected to be voted upon until the middle of the fourth quarter. Therefore, Alesco's shareholders will have plenty of time to review the proxy materials and to ask further questions.

We appreciate our shareholders patience and your willingness to take the time to learn more about the potential benefits of the merger, and to adequately consider its merits. We continue to be confident that you will reach the same conclusion that we have, that this transaction is in the best interest of Alesco's shareholders.

Thank you for your time today and your attention. I and the rest of the management team look forward to meeting and speaking with you over the coming months. And operator, I would now like to open the call up for questions.

Thank you. (Operator Instructions)

And at this time, I'm showing that we have no questions in queue.

Thank you, operator. And thank you everyone for participating in today's call.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day everyone.