Cohen & Company Inc.
Q4 2015 Earnings Call Transcript

Published: 10 Mar 2016

[Operator:]

Good morning, ladies and gentlemen and welcome to Institutional Financial Markets’ Fourth Quarter and Year-End 2015 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 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. I would now like to turn the call over to Mr. Lester Brafman, Chief Executive Officer of IFMI.

[Lester Brafman:]

Thank you, Maria. And thank you everybody for joining us on our fourth quarter and year end 2015 earnings call. With me on the call is Joe Pooler, our CFO. Like many in our space we were not immune to the market volatility and headwinds that persist in the quarter. Despite some of the recent success we’ve had in our U.S. Capital Markets business, the quarter was adversely affected by the underperformance of certain principal investments as a solvent the equity and credit markets had a negative impact on our CLO portfolio. During the fourth quarter, we recorded $1.9 million of losses on our CLO investments. Additionally, our results were impacted by the $2.1 million write-off of a note receivable from a former European investment banking client, despite these market-wide challenges, we continue to remain focused on the execution of our strategic initiatives including growing our mortgage and SBA groups. We also continue our discipline operating expense management as evidenced by the 9% year-over-year decrease excluding the goodwill impairment. Looking ahead our focus will be on adding revenue and growing businesses where our client’s needs are no longer addressed by larger financial institutions. 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. Our operating loss was $3 million for the quarter ended December 31, 2015 compared to operating income of $600,000 for the quarter ended September 30, 2015, and operating income of $4.2 million for the prior-year quarter end. As Lester mentioned, the fourth quarter of 2015 was adversely impacted by a $2.1 million write-off of a note receivable due from a former European investment banking client in the mining industry. And $1.9 million in recorded losses on our CLO investments. Net trading revenue came in at $8.7 million in the fourth quarter, up 350,000 from the third quarter of 2015 and up 500,000 from the fourth quarter of 2014. The increase from prior quarter was primarily due to more trading revenue from our corporate group. And the increase from the prior-year quarter was primarily due to more trading revenue from our corporate and mortgage groups, partially offset by lower trading revenue from our wholesale group. New issue and advisory revenue was $1.1 million in the fourth quarter of 2015, down from both the prior quarter and the fourth quarter of 2014. 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 revenue recognized. Fourth quarter 2015 principal transactions revenue was negative $1.8 million, which compared unfavorably to both the prior and year-ago quarters. During the fourth quarter of 2015, our CLO investments generated $1.9 million of negative principal transactions revenue. Although, our CLO investments have experienced significant unfavorable mark-to-market adjustments in 2015. They’re still making routine distributions, we will continue to hold these investments, but have not made new investments in CLO positions since July of 2014. Our asset management revenue totaled $2.8 million in the fourth quarter of 2015, which was up $500,000, compared to the prior quarter, and down $1.7 million compared to the year-ago quarter. The increase from the third quarter of 2015 was primarily due to incentive fees in our European separate account businesses during the fourth quarter of 2015, which were partially offset by lower CDO asset management fees. The decrease from the prior-year quarter was primarily due to incentive fees in our European separate account business in 2014 which were higher than in fourth quarter of 2015. As well as the reduction in the Euro currency rate, which was significantly lower in 2015 compared to 2014, and impacted the amount of CDO asset management fees recorded from the four European deals that we manage. Other revenue was negative $1.4 million in the fourth quarter of 2015, compared to $800,000 in the third quarter, and $3.2 million in the fourth quarter of 2014. This line item was negatively impacted by the write-off of the $2.1 million note receivable previously mentioned. In addition, the variation from the prior year period was primarily the result of the revenue share payments related to the performance over the old sale of the Star Asia Group which fluctuated due to the amount of incentive fees received during each of the periods. Compensation and benefits expense for the fourth quarter of 2015 was $7.2 million, up $200,000 from the third quarter of 2015, and down $400,000 from the fourth quarter of 2014. As a percentage of revenue, compensation was 77% in the fourth quarter of 2015, compared to 54% in the third quarter of 2015, and 43% in the prior-year quarter. The percentages in the fourth quarter of 2015 were unfavorably impacted by the note receivable write-off and the recorded losses on our CLO investments. The number of IFMI employees was 87, as of the end of 2015, compared to 93 as of the end of September – as of September 30, 2015 and 111, as of December 31, 2014. In the quarter, our total non-compensation operating expenses, excluding depreciation and amortization were $5 million, down $150,000 from the prior quarter, and down $650,000 from the prior-year quarter. The decrease from the prior quarter was primarily the result of lower consulting expenses due to the termination and related expenses of several European consultants during the third quarter. The decrease from the prior-year quarter occurred across all major line items, we continue to be diligent about managing our expenses. In terms of the balance sheet, at the end of the year our total equity was $46.2 million, a decrease of $10.3 million from the prior year-end. We had $39.7 million of equity capital invested in our net trading portfolio, and $14.9 million invested in our principal investing portfolio. The other investments have fair value line item represents our principal investing portfolio, and includes our $11.6 million investments in CLO positions. As of December 31, consolidated corporate indebtedness which carried at $28.9 million, and we had $14.1 million of unrestricted cash balances on the balance sheet. We believe that our unrestricted cash balance of $14.1 million, combined with the $39.7 million of net assets from our highly liquid trading portfolio, and the $14.9 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 are putting our capital to use most productively. We announced $0.02 dividend for the quarter and will continue to review the dividend policy on a quarterly basis. The dividend is payable on April 6 to stockholders of record on March 23. Finally, we expect to file our 10-K tomorrow, Wednesday. With that, I'll 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], was also at the bottom of our earnings release. Thank you for joining us today. Operator, you can now end the call.

[Operator:]

Thank you. This concludes IMFI’s fourth quarter and year-end 2015 earnings call. Thank you for participating. And you may now disconnect.