Cohen & Company Inc.
Q3 2016 Earnings Call Transcript

Published: 1 Nov 2016

[Operator:]

Good morning, ladies and gentlemen, and welcome to Institutional Financial Markets’ Third Quarter 2016 Earnings Call. My name is Maria and I’ll be your operator for today. Before we begin, IFMI would like to remind everyone that some of the statements that the Company makes during the 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 obligation 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, everybody for joining us for our third quarter 2016 earnings call. With me on the call is Joe Pooler, our CFO. We remain pleased with IFMI’s performance, especially as we report our third consecutive quarter of profitability. We continue to execute on our business strategy with an eye towards stockholder value. Going forward, we will remain focused on growing our mortgage and SBA groups, adding revenue and growing businesses where our clients’ needs are no longer addressed by large financial institutions. Additionally, we’ve continued to repurchase shares under our previously announced program which will remain in place at least through the year-end and have once again declared a $0.02 dividend in the quarter, both of which highlight our commitment to enhancing shareholder value. Now, I’ll return the call over to Joe to walk through this quarter’s financial highlights in more detail.

[Joe Pooler:]

Thank you, Lester. Looking first at our statement of operations, our operating income was $2.7 million for the quarter ended September 30, 2016, compared to $2.2 million for the quarter ended June 30, 2016, and $600,000 for the quarter ended September 30, 2015. Net income was $1.5 million, or $0.09 per diluted share for the current quarter compared to net income of $1.2 million or $0.07 per diluted share, for the prior quarter and net loss of $600,000, or $0.03 per diluted share, for the prior year quarter. Net trading revenue came in at $10.5 million in the third quarter, down $800,000 from the second quarter of 2016, and up $2.3 million from the third quarter of 2015. The modest decrease from the second quarter of 2016 occurred across all of our trading groups, while the increase from the prior year quarter was primarily due to increased trading revenue from our mortgage and wholesale groups. Our asset management revenue totaled $1.8 million in the third quarter, which was up compared to the prior quarter and down compared to the year ago quarter. The increase from the prior quarter was primarily due to lower CDO asset management fees as a result of our European CLO temporarily shutting off sub management fee, causing the reversal of some accrued subordinated fees in the second quarter of 2016. Decrease from the prior year quarter was primarily due to generally lower collateral balances in our managed CDOs, which is driving down management fees as well as the European CLO shutting off its subordinated fees in 2016. New issue and advisory revenue was $800,000 in the third quarter of 2016, which was down from both the prior quarter and the prior year quarter. Our new issue and advisory revenue has been volatile and we expect that trend to continue. We earn revenue from a limited number of engagements and a small change in the number of engagements can result in meaningful fluctuations and the revenue recognized. Third quarter 2016 principal transactions revenue was $500,000, which compared favorably to both the prior and year ago quarters. In both the third and second quarters of 2016, all the positive principal transactions revenue was generated by our investments in CLOs, which was partially offset by negative revenue from our investment in EuroDekania. Other revenue was $500,000 in the third quarter of 2016 compared to $500,000 in the second quarter of 2016 and $800,000 in the third quarter of 2015. Most of the variation compared to the prior year period, was the result of the revenue share payments related to our past sales of Star Asia group, which fluctuate due to the amount of incentive fees that Star Asia Group receives during each period. Compensation and benefits expense for the third quarter of 2016 was $7.5 million, down $900,000 from the second quarter of 2016, and up $400,000 from the third quarter of 2015. Compensation as a percentage of revenue was 53% in the third quarter of 2016, compared to 58% in the second quarter and 54% in the third quarter of 2015. The number of IFMI employees was 83 at September 30, 2016, compared to 80 as of June 30, 2016, and 93 as of September 30, 2015, resulting in an annual decrease of 11%. In the quarter, our total non-compensation operating expenses, excluding depreciation and amortization, were $3.9 million, up $200,000 from the prior quarter, and down $1.3 million from the prior year quarter. The decrease from the third quarter of 2015 occurred across all line items with the exception of trading revenue driven clearing and execution costs. We continue to be diligent about managing expenses. In terms of our balance sheet, at the end of the quarter, our total equity was $46.6 million, an increase of $500,000 from year-end 2015. During the third quarter of 2016, we repurchased 80,400 shares of our common stock for $79,000 at an average share price of $0.99 using cash on hand. As of the end of the quarter, we had $54 million of equity capital invested in our net trading portfolio, and $7.9 million invested in our principal investing portfolio. The other investments at fair value line item on our balance sheet represents our principal investing portfolio, and includes our $6.2 million of investments in CLO positions. At the end of the quarter, consolidated corporate indebtedness was carried at $29.3 million, and we had $10.1 million of unrestricted cash balances on the balance sheet. We believe that our unrestricted cash balances of $10.1 million, combined with the $54 million of net assets from our liquid trading portfolio and the $7.9 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 a $0.02 dividend for the quarter and will continue to review the dividend policy on a quarterly basis. The dividend is payable on November 30, 2016 to stockholders of record on November 16, 2016. Finally, we expect to file our 10-Q no later than Friday of this week. 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:]

Thank you, ladies and gentlemen. This does conclude today's conference call. You many now disconnect.