Cohen & Company Inc.
Q2 2015 Earnings Call Transcript

Published: 2 Aug 2015

[Operator:]

Good morning, ladies and gentlemen and welcome to Institutional Financial Markets’ Second Quarter 2015 Earnings Call. My name is Lorie, 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 note regarding forward-looking statements in its earnings release and in its most recent Annual Report on Form 10-K filed with the SEC. Please note also that in the Company’s earnings release for the second quarter of 2015, the non-GAAP measures of performance have been reconciled to their corresponding GAAP measures of performance. At the conclusion of today’s call, there will be a question-and-answer period. [Operator Instructions] I would now like to turn the call over to Mr. Lester Brafman, Chief Executive Officer of IFMI.

[Lester Brafman:]

Thank you, Lorie. And thanks everybody for joining us for our second quarter 2015 earnings call. With me on the call is Joe Pooler, our CFO. Although the environment continues to be a challenging one, our firm is focused on the fixed income markets, we have made progress this quarter on two of our initiatives. Optimizing our resized broker/dealer platform and increasing the operating leverage of the firm by lowering its overall expense base. Regarding the US broker/dealer, we have allocated more resources to our mortgage group which has resulted in significant client growth and a 70% increase in year-to-date revenue as compared to last year. Our mortgage group focuses on the needs of middle-market mortgage originators, the products offered to assist these originators in growing our profitability by hedging the interest rate risk in their pipelines and increasing the velocity of their capital. We believe there is more opportunity space and we will continue to focus on this business going forward. Throughout the quarter we also continued to reduce operating expenses thereby increasing the operating leverage of the firm. Reduction in total operating expenses from the prior quarter was roughly $2 million or 16%. Nine compensation costs excluding D&A were also down $500,000 or 11%. The Board continues to return value to our stockholders as demonstrated through a $0.02 dividend for the quarter. As always, in a special account of these challenging market conditions, we will continue to carefully review our dividend policy on a quarterly basis. Now I will 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 adjusted operating income was $1 million for the quarter ended June 30, 2015, compared to adjusted operating income of $1.1 million for the quarter ended in March 31, of 2015 and adjusted operating income of $2 million for the prior year quarter. Net trading revenue came in at $6.7 million in the quarter, down $500,000 from the first quarter and up $100,000 from the second quarter of the prior year. The decrease from prior quarter was primarily due to less trading revenue from our corporate and municipal groups, partially offset by more trading revenue from our mortgage and SBA groups. Our mortgage group performed well with revenue of $2.2 million in the second quarter of 2015, up 50% from $1.5 million in the second quarter of 2014. New issue and advisory revenue was $700,000 in the second quarter, 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, our US capital markets’ new issue revenue will be limited to securitizations from our SBA group going forward. Second quarter principal transaction revenue was $600,000, which compared favorably to the prior quarter of $400,000 but unfavorably to the year ago quarter of $1.2 million. The increase from the prior quarter was primarily the result of higher revenues recognized from our investments in Tiptree, partially offset by lower revenue from our investments in CLOs and EuroDekania. The decrease from the prior year quarter was primarily the result of lower revenue recognized from each of those three investments EuroDekania and Tiptree and CLOs. Our asset management revenue totaled $2.3 million in the second quarter of 2015, which was flat compared to the prior quarter and down $900,000 compared to the year ago quarter. The decrease from the prior quarter was primarily due to the successful auction and redemption of two of our managed CDOs and the transfer of several collateral management agreements for our legacy ABS CDOs during 2014, which reduced CDO asset management fees. In addition, the decrease from the prior year period was due to the incentive fees in our European separate account business in 2014, which did not recur in 2015. Other revenue totaled $800,000 in the second quarter of 2015 compared to $1.3 million in the first quarter of 2015 and $800,000 in the second quarter of 2014. The variation across the periods presented was primarily the result of the revenue share payments related to the sale of the Star Asia Group, which fluctuated due to the amount of incentive fees they received during certain periods. Compensation and benefits expense for the second quarter of 2015 of $6.2 million was down $1.4 million from both the first quarter of 2015 and the second quarter of the prior year. Compensation as a percentage of revenue was 56% in the second quarter of 2015, compared to 59% in the first quarter and 53% in the prior year quarter. The number of IFMI employees was 101 as of June 30, compared to 104 as of March 31 and 121 as of the prior year quarter end resulting in an annual decrease of 17%. As Lester mentioned, in the quarter, we saw a decline in total non-compensation operating expenses excluding D&A to $4.2 million, representing a $500,0000 decrease quarter-over-quarter and an $8,000 decrease year-over-year. We continue to be diligent about managing expenses based on our current level of operating activity, with $4.5 million per quarter is a reasonable target range for our non-comp operating expenses, which should drop to about $3.5 million once the sale of European operations is completed subject to some volatility in clearing cost pending the level of net trading revenue. In terms of our balance sheet, at the end of the quarter, our total equity was $55.1 million, a decrease of $1.3 million from year end. We had $38.7 million of equity capital invested in our net trading portfolio and $20.8 million invested in our principal investing portfolio. The other investments at fair value line item on the balance sheet represents our principal investing portfolio and includes our investments in CLO positions. The $20.8 million fair value includes $16.2 million of CLO investments. At the end of the quarter, consolidated corporate indebtedness was carried at $28.5 million and we had $12.9 million of unrestricted cash balances. Although, we feel we could put more capital to use productively, we believe that for now, our own unrestricted cash balances of $12.9 million, combined with the $38.7 million of net assets in our liquid trading portfolio and the $20.8 million invested in the principal investing portfolio are sufficient to fund our near-term business model. As Lester noted, we've announced a $0.02 dividend for the quarter and we will continue to review the dividend policy on a quarterly basis. The dividend is payable on August 28 to holders of record on August 14th. Finally, as we noted in the press release this morning, in order to provide more time for the buyer to complete the regulatory approval process for the sale of the Company’s European operations, we have extended the deadline for the closing of the transaction to December 31 of 2015. Any further updates on the review and closing process will be provided in due course. We expect to file our 10-Q next week. With that, I'll turn it back over to Lester.

[Lester Brafman:]

Thanks, Joe. With that, I will open up the call for questions.

[Lester Brafman:]

Thanks, Lorie and thanks, everyone for joining the call. We look forward to speaking with you next quarter. Have a good afternoon.

[Operator:]

Thank you. This concludes Institutional Financial Markets’ Second Quarter 2015 Earnings Conference Call. You may now disconnect.