FBR Capital Markets' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 5.14 | About: FBR & (FBRC)

FBR Capital Markets Corporation (NASDAQ:FBRC)

Q4 2013 Earnings Conference Call

February 05, 2014 09:00 AM ET

Executives

Shannon Small - Senior Vice President

Brad Wright - Chief Financial Officer

Rick Hendrix - Chairman and CEO

Analysts

Larry Callahan - Wheelhouse Securities

Joe Janssen - Barrington Research

Operator

Good day ladies and gentlemen and welcome to FBR & Co. Fourth Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Shannon Small, Senior Vice President. Please begin.

Shannon Small

Thank you and good morning. This is Shannon Hawkins 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 result -- 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

Thanks Shannon and good morning. Last night, we reported record annual earnings of $93 million as much of the work we have accomplished over the last several years paid off from a profitability and shareholder return perspective. This compares to net earnings of $30 million in 2012.

Pre-tax income from continuing operations was $57 million and revenues of $260 million versus $4 million pre-tax income and revenues of $151 million in 2012, demonstrating clearly the operating leverage in our platform as we generate higher levels of revenue. Pre-tax operating margin from [continuing] operations for the year was 22% with a return on equity of 35%. These results were driven by an industry-leading net revenue per employ of $962,000 based on average headcount of 270 during the year.

The company is all of its federal net operating loss carry forwards in 2013 and release its valuation allowance with respect to a significant portion of its deferred tax assets resulting in a benefit of $27 million for the year. We expect our effective rates begin to normalize in 2014.

During the year, we recognized $8.2 million of net income from discontinued operations. In October, we received $19.3 million representing the final payment from the 2012 sale of our asset management transaction. In total, we received $39 million in the sale over the past two years and generated a total gain of approximately $33 million.

For the full year 2013, we saw significant growth across the border in our investment banking business, with revenues totaling $196 million, up from $91 million in 2012. This revenue reflects 66 transactions and a total of $16 billion in transaction volume. In terms of assessing momentum in that business, we believe it’s helpful to move the NMI fee recognized in 2013 back into 2012 when the capital was actually raised. This results in a more representative year-over-year investment banking revenue comparison of $129 million 2012 versus $158 million 2013. Excluding NMI, we completed five 144As totaling approximately $1.6 billion in capital raise in 2013. Additionally we were book runner on seven IPOs and for the second year in a row we were book runner on the second best performing domestic IPO of the year.

Over the course of 2013, industry pressure continued to weigh in volumes across institutional brokerage platforms. Equity volumes across the industry were down 4.7% year-over-year. While our trading businesses were not immune to these challenges for the full year our equity volumes were up quarter-over-quarter for the last three quarters and for the year were up about 4%.

Overall, revenue from institutional brokerage was $55 million up from $53 million in 2012. This year-over-year improvement is attributable on large part to our team’s continued focus on building client relationships by leveraging the thought leadership by leveraging the thought leadership and differentiated views of our research analysts, as well as the expertise delivered by our trading professionals to our buy-side clients.

Late in the year, we began to see the lift in equities revenue that we had anticipated from the addition of sales, trading and research resources in the fourth quarter. The group on-boarded in October has exceeded expectations in terms of their ability to hit the ground running and stimulate with our existing team and structure.

In research in particular, since the beginning of November, we have initiated coverage of 93 companies, bringing our current total to 475. We expect to continue growing our coverage list over the next several months, resulting in approximately 550 companies on recoveries by the middle of 2014.

During the fourth quarter, the company generated $3.6 million in investment income, contributing to a 2013 total of $9.9 million. We also accomplished the rebalancing of our investment holdings during the quarter, moving out of some legacy merchant investments into a more diverse portfolio that is not as directly correlated to the rest of our equities franchise.

Also in 2013, we continued our focus on reducing expenses. Non-comp fixed expenses for the year were $43.6 million, down from $45.1 million in 2012. We expect to see further reductions in that total in 2014.

Headcount was up from 256 at the beginning of the year to 302 at year-end due to the previously mentioned strategic group hire completed in the fourth quarter and the reestablishment of our college recruiting program.

For the year, our compensation to net revenue ratio was 56%, which we expect to be at the low-end of our peer group range. In the fourth quarter, the company repurchased 885,000 shares at an average price of $25.80 per share. Included in the fourth quarter purchases were 737,000 shares at $25.75 per share from affiliates of Crestview Partners, part of the largest transaction where they sold a total approximately 1.5 million shares, essentially completing their exit from ownership of our shares.

Crestview has been an outstanding partner through a challenging time in our industry. They have contributed significantly with a representation on our Board since their initial investment in 2006 and we appreciate their continued support. Over the course of the full year, the company -- capital of $55.5 million to shareholders through the repurchase of 2.4 million shares at an average price of $23.36 per share.

It’s important to note that over the last three years we have returned approximately $100 million in capital to shareholders through accretive share repurchases, having done so without diminishing the strength and liquidity of our balance sheet.

These actions combined with the company’s operating performance in 2013 resulted in tangible book value per share of $26.86 at the end of the year, up 40% from $19.18 at the end of 2012 and up 68% over the last two year.

With the remaining repurchase authority of up to 1.6 million shares we will continue to focus on growing book value through a combination of earning performance and the efficient allocation of capital.

As of December 31, 2013, shareholders’ equity totaled $291 million with $208 million held in cash. We continue to have a transparent, liquid and unlevered balance sheet, which has been a source of strength for the company.

We intend to maintain strong levels of liquidity and capital even as we work to efficiently allocate that capital to generate attractive returns to shareholders. FBR is off to a strong start again in 2014. Our pipeline of opportunities is solid and populated by both new and long-term relationships.

We continue to be a small firm that accomplishes big things and have four clear priorities in 2014. One, to build on the positive moment in investment banking and institutional brokerage; two, to maintain our vigilance on expenses; three, to build healthcare into an integrated core industry vertical across our organization; and four, to continue to execute shareholder-friendly approach to capital management. We will focus intensely on these priorities knowing that success in these areas will result in increasing value for our shareholders.

I want to once again thank all of our employees for their contributions in 2013. Our entire team has done an exceptional job of staying focused and on delivering differentiated ideas and outstanding execution for our clients. I am very confident in our team, our strategy and our future and believe we are doing the things required to become the leading equities firm in our industry.

While are acutely aware of and focused on potential challenges in front of us, we believe our model and our company are positioned to continue performing for clients and shareholders. Thank you. And operator, we’ll now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And I show the first question is from Larry Callahan of Wheelhouse Securities. Your line is open.

Larry Callahan - Wheelhouse Securities

Good morning. Could you give a little more detail on your deferred tax asset? Do you have capital loss carryovers that are not on your balance sheet right now?

Brad Wright

That’s correct, Larry. Our capital loss carry forwards are fully reserved. And to the extent that we generate capital gains, in particular during 2014 and ‘15 that will reduce our effective tax rate. That’s the one thing that we know is likely to push the effective rate below the statutory rate.

Larry Callahan - Wheelhouse Securities

What’s the magnitude of those?

Brad Wright

Tax benefit is $16 million. So that's the tax effect of a much larger number at 40%.

Larry Callahan - Wheelhouse Securities

Okay. Thank you.

Operator

Thank you. (Operator Instructions).

Rick Hendrix

Okay. Operator, if there are no further questions -- we have one more, okay.

Operator

Yes. And the next question is from Joe Janssen of Barrington Research. Your line is open.

Joe Janssen - Barrington Research

Yeah. Thanks for taking my call. I figured I’d just sneak one in there. I apologize for being late.

Rick Hendrix

Yeah. No problem. Thanks Joe.

Joe Janssen - Barrington Research

Yeah. I just on the call late, so you might have addressed this in your prepared remarks, but maybe just talk about the pipeline, the activity kind of where you're at, at year-end and then kind of given the volatility that we’ve seen in the market, has that done anything, has it had an effect on the pipe? What you've seen year-to-date?

Rick Hendrix

So, in terms of pipeline, we feel good about how we're entering 2014. We have sort of active engagements in all of our industry groups and we have -- there is one deal on the road currently, we have another one that is launching immediately. So, we feel like we're off to a pretty good start.

I would say the volatility has not had an impact yet. If we see further volatility and meaningful sell off from here in the market, I mean that's obviously something that can impact the business. But as it stands right now, we feel pretty good about our near-term pipeline, our ability to get it executed.

We are seeing continued momentum on the brokerage side of the business as well. We started 2014 with sort of a continuation of what we saw at the end of ‘13. A lot of that I think is attributable to the team we brought on board in the fourth quarter. We're seeing it show up in early votes from voting accounts and we’re definitely seeing it on our debt. But we have further to go to capture everything we’re looking for in those headcount additions. But we’re living in a world where volatility can show up quickly and we know that the economy and the market are not yet normalized. But we feel good about the beginning of the year and what it looks like currently.

Joe Janssen - Barrington Research

Great. And then on the institutional brokerage side, you talked about the additional hires that you made in Q4, I know they are still ramping up. If I look at that institutional brokerage business, it looks -- it’s kind of on an annual $50 million to $55 million run rate. With these additional hires kind of assuming simple math in terms of your revenue by employee base, would you think $10 million to $15 million for modelling purposes, once our full ramp is kind of what you are looking for in terms of the uptick in the institutional brokerage side?

Rick Hendrix

Yeah I would -- that's in the ballpark what we are looking for ultimately. I don’t think it likely will capture all of that on January 1st. But if you look at what we’re forecasting the run rate for the end of ‘14, we would exceed that target pretty meaningfully. And I think that's a -- the number that you are looking at of 10% to 15% that's a good target for the full year.

Joe Janssen - Barrington Research

Okay, great. Congratulations on a great year.

Rick Hendrix

Great, thanks Joe.

Operator

And there are no further questions at this time. I’ll turn the call back for closing remark.

Rick Hendrix

Great, thank you operator. Thank you all for joining us this morning. And we look forward to talking to you in April to discuss our first quarter results.

Operator

Ladies and gentlemen, that concludes today’s conference. You may now disconnect. Good day.

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