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FBR Capital Markets Corporation (NASDAQ:FBRC)

Q3 2013 Earnings Call

October 23, 2013 9:00 AM ET

Executives

Shannon Small – SVP, Corporate Communications

Rick Hendrix – Chairman and CEO

Brad Wright – EVP, CFO and Chief Administrative Officer

Analysts

Aaron Kindig – Hill Road Partners

Kevin Mirise – Satsuit Capital Management, LLC

Albert Jones – Jones Capital Management

Operator

Good day ladies and gentlemen and welcome to FBR & Co. Third Quarter 2013 Earnings Conference call. At this time, all participants are in a listen-only mode. Later, we’ll conduct the question-and-answer session and instructions will be given at that time. If anyone should require operator assistance during the conference call, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded.

I would now like to hand the conference over to Ms. Shannon Small, Senior Vice President. Ma’am, you may begin.

Shannon Small

Thank you and good morning. This is Shannon Small, Senior Vice President of Corporate Communications for FBR.

Before, we begin this morning’s call, I would like to remind everyone that statements concerning expectations, future performance, developments, events, market forecasts, revenues, expenses, earnings, run rates, and any other guidance on present or future periods constitute forward-looking statements. These forward-looking statements are subject to a number of factors, risks and uncertainties that might cause actual results to differ materially from stated expectations or current circumstances. These factors include, but are not limited to the demand for securities offerings, activity in the secondary securities markets, interest rates, the realization of gains and losses on principal investments, available technologies, competition for business and personnel, and general, economic, political and market conditions. Additional information concerning these factors that could cause results to differ materially is contained on FBR’s annual report on Form 10-K and in quarterly reports on Form 10-Q.

Joining us on the call today is Brad Wright, Chief Financial Officer of FBR. I’ll now turn the call over to Rick Hendrix, Chairman and Chief Executive Officer.

Rick Hendrix

Thank you, Shannon and good morning everyone. Last night, we reported third quarter net income of $6.4 million or $0.48 per diluted share, on revenue of $34.1 million. As noted in the release, these earnings include pre-tax operating income of $3.1 million and net income from discontinued operations of $3.6 million. For the first nine months of 2013, the Company’s net income was $88.2 million or $6.70 per diluted share on revenue of $219.2 million.

For the quarter our revenue is $34 million. This is the lowest revenue quarter since the third quarter of last year and it’s indicative of the volatility that is inherent in our business model. A more representative look at recent performance is our trailing 12-month revenue of $240 million excluding about $38 million of revenue related to a transaction that was executed prior to that period.

The very nature of our business and the core strength of our franchise, large, frequently sole [ph] managed initial equity raises is the primary reason that our results can be valid from quarter to quarter. The difference for us today, however, is that with our reduced cost structure and more focused franchise, we are able to generate a quarterly profit with meaningfully lower revenue levels than what’s the case from much of our history.

Investment banking revenues for the quarter were $20 million and the transactions we completed spend all of our banking groups. The notable missing element this quarter was that we did not execute a large sole managed offering. Even in good years it is not unusual for us to have one or two quarters without such a deal. We are optimistic that we will complete one or more deals of this type in the fourth quarter.

We maintained our substantial lead as the number one book runner of initial common stock offerings over the last 12 months across all industries from market caps of a billion and a half and under. And we are ranked number nine with the 5% market share for all book loan common stock offerings across all industries from market caps of a billion and a half and under.

On the brokerage side of the business and a quarter with the lowest daily cash equity volumes in recent history, we generated net revenue of $13.2 million up from $11.3 million in the third quarter of last year and $13.1 million in the prior quarter. The recently announced additions to our institutional brokerage business should lead the higher revenue and strong client relationships. It will also enhance distribution capabilities for our primary business.

We continue to deploy our capital in ways which support our operation businesses and generate positive returns for our shareholders. During the quarter, in addition to the buyback which I will discuss in a moment, we generated $1.2 million in earnings from a principal investing activity.

Also during the quarter, we recognized a $3.6 million gain from discontinued operations. This reflects the impact of increasing assets under management and the mutual funds business that we sold in the fourth quarter of 2012. After the final payment early in November of this year, we anticipate the total proceeds from the sale to be approximately $37 million, almost $5 million more than the initial valuation last October.

Our spends profile continues to be efficient and consistent with our targets. Year-to-date confident [ph] revenue is on target at 56%. Non-comp fixed expenses were $11 million in the quarter. As we have said before, we expect to continue to realize additional savings in 2014 particularly in the areas of occupancy and technology.

Headcount as of September 30th was 269 compared to 265 at the end of the second quarter. Last quarter, we reported that based on improved operating performance and our outlook for perspective performance, we had released a significant component of our valuation allowance held against deferred tax assets.

The Company has a year-to-date effective tax rate from approximately 4.5%. But including the valuation allowance released, we reported a net tax benefit of $28 million for the nine months end of September 30th. While the year-to-date effective tax rate reflects our expectations for all of 2013, we expect to return to a more normalized rate in 2014.

Just last week, we announced the addition of a seasoned team of research sales and trading professionals from Lazard Capital Markets. I’m pleased to report that within a week of that announcement, these new employees are already fully engaged with clients and contributing to our business and our culture. With these additional resources in our consumer and T&T groups as well as the re-establishment of a full healthcare vertical, we will achieve significantly more relevance and deliver measurable increases and value to our buy-side clients.

The feedback we received to date has been extremely positive and supports that conviction.

Shareholders’ equity was $307 million as of the – as of September 30th, 2013 compared to $315 million as of June 30th. This decrease reflects the $20.4 million we invested in repurchasing 777,000 shares of common stock at an average price of $26.28 during the quarter.

Yesterday, the Board authorized the repurchase about an additional 2.5 million shares. As of September 30th, the Company’s cash balance is $202 million and its book value per share was $26.40, up $0.58 in the quarter and 38% since the beginning of the year.

Before we open up the call to your questions, I want to, once again, thank our team for their outstanding focus and hard work this year. Going forward, we will continue to focus on delivering differentiated ideas and execution and remain committed to the key strengths of our franchise. Said simply, we intend to remain a small firm that accomplishes big things.

Within that context, our goal is to become recognized as the best small CapEx lease firm in the industry. I’m confident having the right structure, the right business model and the right team in place that we are well on our way to achieving that goal.

Thank you and operator, please open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question comes from Aaron Kindig from Hill Road Partners

Aaron Kindig – Hill Road Partners

It’s a nice job, thanks for taking the call. After the end of the quarter the stock price was, I would say, decently below book value. Any transactions there?

Rick Hendrix

Regarding buyback activity?

Aaron Kindig – Hill Road Partners

Correct.

Rick Hendrix

No. When we get close to the end of the quarter and through the date of our earnings release, we’re in a black-out period with regards to buyback activity. So there’s been nothing to date since the end of the quarter.

Aaron Kindig – Hill Road Partners

All right. You talked about the normalized tax rates for 2014, is that – is that going to be for the full-year 2014? You think you’ll have more of a normalized tax rate?

Brad Wright

Yes, yes, I think we can anticipate something high 30% to low 40% for the full year.

Aaron Kindig – Hill Road Partners

For the full year, great. And then lastly on headcounts, do you think you are now where you need to be as far as headcount and then skill set and so forth going forward or any potential additions?

Rick Hendrix

We’re comfortable with where we are post the group hired from Lazard. That puts us roughly at about 295 people currently. I don’t anticipate meaningful increases from that level going forward.

Aaron Kindig – Hill Road Partners

Great. Okay, thanks a lot, guys.

Rick Hendrix

Great. Thank you.

Aaron Kindig – Hill Road Partners

Yes.

Operator

Thank you. (Operator instructions) Your next question comes from Kevin Mirise from Satsuit Capital.

Kevin Mirise – Satsuit Capital Management, LLC

Guys if you have addressed this, I know, you just quantified, I was going to ask about the tax rate for next year. I’ll just take it one step further to 2015, what kind of ball parks can we do, what kind of tax rate there?

Brad Wright

I wouldn’t expect it to be any different. The only thing that’s out there as a potential to lower the rate is that we do have capital loss carry forwards remaining that to the extent we realize those that we will have decreases to the rate in even 2014 as well as 2015. But I think absent that, you should assume that the roughly 40% rate would be ongoing.

Kevin Mirise – Satsuit Capital Management, LLC

Okay. And I’m – [inaudible] I’m barely new to the story, any other modeling things that come to mind in terms of unusual things upcoming in the next year or two that would – should be factored in that you can comment on?

Brad Wright

No, I don’t. No, nothing that comes to mind.

Kevin Mirise – Satsuit Capital Management, LLC

Thank you.

Operator

Thank you. And our next question comes from Albert Jones from Jones Capital Management.

Albert Jones – Jones Capital Management

Yes, hi. Thanks for taking my questions. As far as the new employees go, how quickly do you expect them to come up to speed as far as the – hitting the metrics that you have for all your employees as far as revenue per employee? Would we expect them to ramp up quickly or how long would it take?

Rick Hendrix

We expect it to occur reasonably quickly. I mean we literally had research that was launched out of that research team last night and it was said in the call, they are up and running and engaging with the clients.

So we think we’re going to begin to see an impact right out of the box. In terms of getting to a fully ramped run rate, I’d like to think that that’s going to occur over the next three to six months. And that effectively for 2014, that our revenue for head metrics and compensation for head metrics would all be consistent with the rest of the business with one exemption that we do expect our – based on the structure of the higher, we do expect to have one-time expense in 2014 that could raise our confident revenue by 1.5% to 2.5%. So in terms of a run rate and productivity metrics, I expect that to be fully in place and intact for 2014.

Albert Jones – Jones Capital Management

I agree. Can you give just some color on the coal [ph] large deals that you may get here in the fourth quarter and the general overall IPO market at this point in time?

Rick Hendrix

Well, in terms of the IPO market generally, I would say that the market continues to be very constructive. We’re still seeing and have seen inflows into equity mutual funds which is one of the things that I think everybody should watch in terms of new issued calendar and the ability to get deals done.

So I think overall the healthy IPO market is pretty good. In terms of our individual pipeline, we’re not going to comment on specific transactions, but we do have a pipeline that gives us confidence about our ability to get one or more large sole managed transactions done in the fourth quarter. And we have a pipeline that includes a lot of other transactions in addition to the big FBR specific events where we’re going to be either a book runner, a co-book runner on IPOs and we’ve got some advisory work that is solely in the backlog for the fourth quarter.

So we feel good about the backlog generally. But we’re not in a position to comment on individual transactions.

Albert Jones – Jones Capital Management

Sure. As far as the new employees, are there some – are you getting some extra t’s [ph] there that will spread your verticals maybe to some new areas that you guys haven’t been actively in the past?

Rick Hendrix

Well specifically we added three analysts in healthcare and that really reopens an important industry for FBR. We have had a presence in healthcare at different times in the past and have had success there from a banking standpoint and trading perspective. Healthcare is the largest sector of the economy today. It’s a place that we felt like we needed to be and this was a great way to re-enter that business.

So it has definitely expanded our industry focus with the addition of this team.

Albert Jones – Jones Capital Management

Okay thanks. That’s it for me, a great quarter.

Rick Hendrix

Great, thank you.

Brad Wright

Thank you.

Operator

Thank you. (Operator instructions) I’m showing no one else in queue at this time. I’d like to hand the conference back over to Mr. Hendrix.

Rick Hendrix

Great. Thank you for joining us this morning. And we look forward to talking to you early next year to report on the fourth quarter.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program. You may all disconnect and have a wonderful day.

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