Cohen & Company Inc.
Q4 2016 Earnings Call Transcript

Published: 14 Mar 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to Institutional Financial Markets’ Fourth Quarter and Yearend 2016 Earnings Call. My name is Paula and I’ll 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 obligation to update such statements to reflect subsequent events or circumstances. IFMI advises you to read the cautionary notes 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, and thank you, everyone for joining us for our fourth quarter and yearend 2016 earnings call. With me on the call is Joe Pooler, our CFO. IFMI’s strong performance in 2016 as well as our fourth consecutive quarter of profitability, was driven by the solid execution of our business strategy. We continued to execute on our business strategy with an eye towards stockholder value. In addition, we are pleased to announce a $15 million capital raise and are confident that this additional capital will allow us to pursue strategic opportunities we have identified in our capital markets and asset management segments. Going forward, we remain focused on our mortgage (throughput) and in capital and growing businesses where our clients’ needs are no longer addressed by large financial institutions and businesses that are synergistic with our current platform. Additionally, we have once again declared a $0.02 dividend in the quarter, highlighting our commitment to enhancing value for our stockholders. 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. Looking first at our statement of operations, our operating income was $2.5 million for the quarter ended 12/31/16, compared to $2.7 million for the quarter ended 9/30/16 and operating loss of $3 million for the quarter ended December 31, 2015. Net income was $400,000 or $0.02 per diluted share for the current quarter, compared to net income of $1.5 million or $0.09 per diluted share for the prior quarter and net loss of $3.8 million or $0.19 per diluted share for the prior year quarter. Net trading revenue came in at $7.1 million in the fourth quarter, down $3.4 million from the third quarter and down $1.5 million from the fourth quarter of the prior year. The decrease from the fourth quarter of 2016 was primarily due to decreased trading revenue from our wholesale, mortgage and SBA groups, while the decrease from the prior year quarter was primarily due to decreased trading revenue from our wholesale and corporate groups. In the quarter, our wholesale trading group’s client base was quite inactive during the volatility surrounding the period leading up to and immediately after the election. Our asset management revenue totaled $2.9 million in the fourth quarter, which was up compared to both the prior and year ago quarters. The increase was primarily due to higher CDO asset management fees as a result of our European CLO reserving subordinate management fee payments, causing the accrual of subordinated fee revenue in the fourth quarter of 2016. We expect subordinate management fee payments for the European CLO to be somewhat volatile going forward. New issue and advisory revenue was $800,000 in the fourth quarter of 2016, which was flat with the prior quarter and down $300,000 from the prior year quarter. 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 in the revenue recognized. Fourth quarter 2016 principal transactions revenue was $900,000, which compared favorably to both the prior and year ago quarters. In the fourth quarter of 2016, the positive principal transactions revenue was generated by our investments in CLOs and EuroDekania. In the fourth quarter of 2016, the positive principal revenue was due to our investments in CLOs, partially offset by losses from our investment in EuroDekania. In the prior year quarter, the negative principle transactions revenue was from market value losses in our investments in CLOs, which were offset by gains in our investment in EuroDekania. Other revenue was $1.4 million in the fourth quarter of 2016 compared to $500,000 in the third quarter and negative $1.4 million in the fourth quarter of 2015. Most of the variation compared to the prior quarter was the result of the revenue share payments related to our past sale of the Star Asia group, which fluctuate due to the amount of incentive fees the Star Asia Group receives during each period. The increase from the prior year period was primarily the result of the $2.1 million write-off of the new receivable due from a former European investment banking client in the fourth quarter of 2015. Compensation and benefits expense for the fourth quarter was $6.7 million, down $700,000 from the third quarter of 2016, and down $500,000 from the fourth quarter of 2015. Compensation as a percentage of revenue was 51% in the fourth quarter of 2016, compared to 53% in the third quarter and 77% in the fourth quarter of 2015. The number of IFMI employees was 79 at the end of the year, compared to 87 at the end of the prior year, resulting in an annual decrease of 9%. In the quarter, our total non-compensation operating expenses, excluding depreciation and amortization, were $3.9 million, even with the prior quarter, and down $1.1 million from the prior year quarter. The decrease from the fourth 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 our expenses. Looking at our balance sheet, at the end of the year, our total equity was $46.8 million, an increase of $600,000 from December 31, 2015. During the fourth quarter, we repurchased 6,200 shares of common stock for $6,500 at an average share price of $1.05 using cash on hand. At the end of the year, we had $53.8 million of equity capital invested in our net trading portfolio, and $8.3 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 $6.7 million of investments in CLO positions. At the end of the year, consolidated corporate indebtedness was carried at $29.5 million, and we had $15.2 million of unrestricted cash balances. As Lester mentioned, subsequent to yearend, IFMI issued to DGC Family Fintech Trust, in exchange for $15 million, a convertible senior secured promissory note which accrues interest at a rate of 8% per year and which is convertible into units of membership interest of IFMI LLC at a conversion price of $1.45 per unit. The principle amount under the note is due and payable on March 10, 2022, provided that IFMI may in its sole discretion, extend the maturity date for an additional one year period. This trust was established by Daniel Cohen, the Vice Chairman of our Board of Directors. Additionally, also subsequent to yearend, C&Co Europe Acquisition LLC, an entity controlled by Mr. Cohen, provided notice to IFMI that it was terminating the share purchase agreement dated August 19, 2014 pursuant to which C&Co Europe Acquisition had intended to acquire the company’s European operations. We’ve announced a $0.02 dividend for the quarter and we’ll continue to review the dividend policy on a quarterly basis. The dividend is payable on April 11, 2017 to stockholders of record on March 28, 2017. Finally, we expect to file our 10-Q no later than this Friday. With that, I will turn it back over to Lester for closing remarks.

[Lester Brafman:]

Thanks, Joe, and thank you all for joining the call. At this time, the call is concluded. No questions. Thank you, ladies and gentlemen. 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].