Cohen & Company Inc.
Q1 2016 Earnings Call Transcript

Published: 3 May 2016

[Operator:]

Good morning, ladies and gentlemen, and welcome to Institutional Financial Markets’ First Quarter 2016 Earnings Call. My name is Rachel and I will be your operator for today. Before we begin, IFMI 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 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 obligations to update such statements to reflect subsequent events or circumstances. IFMI 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 IFMI.

[Lester Brafman:]

Thank you, Rachel, and thank you everybody for joining us for our first quarter 2016 earnings call. With me on the call is Joe Pooler, our CFO. Reflecting on the first quarter and the challenging market environment, we are very pleased with the performance of our U.S. Capital Markets business; remain focused on execution of our strategic initiatives including growing our mortgage and SBA groups. In particular, our mortgage group built up its gestational repo business to $175 million at the end of the quarter and now we’re close to $215 million after quarter end. This is an important funding service that we are providing to unreserved mortgage originators helping us to further deepen our client relationships. In terms of the rest of our U.S. fixed income trading operation, we are very happy with our team of traders. They have been quite nimble in avoiding some of the drag that has hindered many of the bigger trading shops. And in fact, our U.S. Capital Markets group delivered their best net trading revenue quarter in three years. We have created a stable and capable U.S. Capital Markets business and we are exploring ways to add revenue to this platform. Looking ahead, we will continue to focus on adding revenue and growing businesses where our clients’ needs are no longer addressed by larger financial institutions. Additionally, we are pleased to initiate a share repurchase program in the quarter, which will remain in place throughout year-end and our board has continuing our quarterly dividend. Now, I’ll turn the call over to Joe to walk through this quarter’s financial highlights in more detail.

[Joe Pooler:]

Thank you, Lester. Turning to our statement of operations, our operating income was $1.3 million for quarter ended March 31 of 2016 as compared to an operating loss of $3 million for the quarter ended December 31 of 2015, and operating income of $300,000 for the quarter ended March 31 of 2015. Net income was $300,000, or $0.01 per diluted share, for the quarter ended March 31, 2016 compared to net loss of $3.8 million, or $0.19 per diluted share, for the quarter ended December 31, and net loss of $800,000, or $0.04 per diluted share, for the prior year quarter-end. Net trading revenue came in at $10.2 million in the first quarter, up $1.5 million from the fourth quarter of 2015, and up $2.9 million from the first quarter of 2015. The increase from both prior quarters was primarily due to increased trading revenue from our corporate, mortgage and wholesale groups partially offset by lower trading revenue from our SBA group. As Lester mentioned, our U.S. Capital Markets group delivered their best net trading revenue quarter in three years. New issue and advisory revenue was $400,000 in the first quarter of 2016, which was down from both the prior quarter and the first quarter of 2015. Our new issue and advisory revenue has been volatile and we expect that trend to continue as we earn revenue from a limited number of engagements, a small change in the number of engagements can result in meaningful fluctuations and the revenue recognized. First quarter 2016 principle transactions revenue was $100,000, which compared favorably to the prior quarter and unfavorably to the year ago quarter. The increase from the prior quarter was primarily the result of increased revenue from our CLO investments, which experienced significant mark-to-market adjustments in the fourth quarter of 2015. The decrease from the year ago quarter was primarily the result of decreased revenue from our investments in EuroDekania and the CLOs. Our asset management revenue totaled $2.3 million in the first quarter of 2016, which was down compared to the prior quarter and flat compared with the year ago quarter. The decrease from the fourth quarter of 2015 was primarily due to lower incentive fees in our European separate account business, during the first quarter of 2016. Compared to the prior year quarter, lower CDO asset management fees were offset by higher fees related to our European separate account business. Other revenue was $700,000 in the first quarter of 2016 compared to negative $1.4 million in the fourth quarter of 2015 and $1.3 million in the first quarter of 2015. In the prior quarter, this line item was negatively impacted by a $2.1 million write-down of a note receivable due from a former European investment banking client. Most of the other variation across periods was the result of the revenue share payments related to the sale of the Star Asia Group, which fluctuates due to the amount of incentive fees the Star Asia Group receives during each periods. Compensation and benefits expense for the first quarter of 2016 was $8.5 million, up $1.3 million from the fourth quarter of 2015, and up $1 million from the first quarter of 2015. Compensation as a percentage of revenue was 62% in the first quarter, compared to 77% in the fourth quarter and 59% in the prior year quarter. The number of IFMI employees was 86 at the end of the first quarter of 2016, compared to 104 as of March 31 of 2015, resulting in an annual decrease of 17%. In the quarter, our total non-compensation operating expenses, excluding depreciation and amortization were $3.8 million, down $1.2 million from the prior quarter, and down $800,000 from the prior year quarter. The decrease occurred across all major line items with the exception of clearing and execution cost, which were up as a result of higher net trading revenue. We continue to be diligent about managing our expenses. In terms of our balance sheet, as of the end of the quarter, our total equity was $44.4 million, a decrease of $1.8 million from December 31 of 2015. During the first quarter of 2016, we repurchased approximately 1.8 million shares of our common stock for $2.2 million at an average share price of $1.24 using cash on hand. At the end of the quarter, we had $47.9 million of equity capital invested in our net trading portfolio, and $13.7 million invested in our principal investing portfolio. The other investments have fair value line item represents our principal investing portfolio, and includes our investments in CLO positions. The $13.7 million fair value includes $10.9 million of CLO investments. As of the end of the quarter, consolidated corporate indebtedness was carried at $28.8 million, and we had $5.6 million of unrestricted cash balances on the balance sheet. We believe that our unrestricted cash balances of $5.6 million, combined with the $47.9 million of net assets from our highly liquid trading portfolio, and the $13.7 million invested in our principal investing portfolio are sufficient to fund our near-term business model. Going forward, we will continue to evaluate our capital allocation strategy to ensure that we’re putting our capital to use most productively. As Lester mentioned, we’ve announced $0.02 dividend for the quarter and will continue to review the dividend policy on a quarterly basis. The dividend is payable on June 3, 2016 to stockholders of record on May 20, 2016. Finally, we expect to file our 10-Q no later than this coming Friday. With that, I will turn it back over to Lester for closing remarks.

[Lester Brafman:]

Thanks, 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, you can now end the call.

[Operator:]

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