FBR Capital Markets' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.23.14 | About: FBR & (FBRC)

FBR Capital Markets Corporation (NASDAQ:FBRC)

Q1 2014 Earnings Conference Call

April 23, 2014, 9:00 AM ET

Executives

Shannon Hawkins - Senior Vice President of Corporate Communications

Rick Hendrix - Chairman and Chief Executive Officer

Brad Wright - Chief Financial Officer

Analysts

Alex Paris - Barrington Research

Operator

Good day, ladies and gentlemen, and welcome to the FBR & Co. First Quarter 2014 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 introduce your host for today's conference, Shannon Hawkins, Senior Vice President. Ma'am, you may begin.

Shannon Hawkins

Thank you and good morning. This is Shannon Hawkins, 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 results to differ materially is contained on FBR's annual report on Form 10-K and in current reports on Form 8-K.

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 of FBR.

Rick Hendrix

Thank you, Shannon, and good morning, everyone. Last night, we reported net earnings of $5.6 million or $0.46 per diluted share for the first quarter of 2014, which compares to $35.3 million or $2.65 per diluted share in the first quarter of 2013 and $8.6 million or $0.69 per diluted share in last year's fourth quarter. This was our eighth profitable quarter out of the last nine since we completed our restructuring and included little to no impact from non-recurring items, presenting a clear picture of the earnings and margin profile of our business at this level of revenue.

Pretax income from continuing operations was $9 million in the first quarter of 2014 compared to $35.9 million in the first quarter of 2013 and $3.6 million in the fourth quarter of 2013. Our operating margin was 17% for the quarter compared to 30% and 9% in the last year's first and fourth quarters respectively. Although materially lower than the revenue we reported in the first quarter of last year, our revenue this quarter was solid as we continued to focus on winning mandates and delivering ideas and executions for our clients.

For the first quarter of 2014, revenue totaled $54.4 million compared to $117.9 million in the first quarter of 2013 and $40.6 million in the most recent quarter. 0This quarter, a headcount of 292, revenue per employee was $745,000 on an annualized basis, within our target range of $700,000 to $80,000 per employee. Achieving this target should result in pretax margins in the high-teens as exhibited this quarter.

For the first quarter of 2014, investment banking revenue was $37 million compared to $101 million in the first quarter of 2013 and $23 million in the fourth quarter of last year. This quarter's total included two sole managed institutional private and a sole book run convertible bond deal. Additionally, we're seeing improvement in our advisory business as a result of key hires in 2013 and a renewed focus on M&A as a priority. Overall, equity capital markets were strong during the first quarter and the IPO market in particular was up significantly from the year-ago period.

A continued constructive market should allow us to execute a significant portion of our backlog, which is currently strong and diverse across industry sectors. Including in that mix are opportunities in verticals where we've recently expanded our capability, specifically in media, healthcare and renewable energy. We're continuing to add talent to support these efforts and build on our initial momentum.

Over the last two years, our underwriting revenue has been concentrated in real estate, particularly housing and specialty finance. And while we see continued strength in these groups, we expect there'd more diversification in revenue from an industry perspective over the next several quarters.

Institutional brokerage contributed $15 million in revenue in the first quarter compared to $13.7 million in both the first and fourth quarters of last year. In fact, this quarter's results were higher than any individual quarter in 2013. Additionally, our cash equities business had its best quarter since the first quarter of 2012, and we've just begun to see the impact of the people who've joined our firm in the fourth quarter of last year.

We expect to see increased trading revenue throughout the year as we gain momentum from our expanded team, particularly in healthcare. Our continued investment in quality differentiated research is an important grading in this improvement. And we're seeing consistently improved rankings from voting accounts across the platform. All of this directly correlates to overall best volume in trading revenue.

As we announced in a recent 8-K filing, we have entered into an agreement to bring on a securities lending business from Lazard Capital Markets following necessary regulatory approvals. This business is expected to deliver attractive returns and is in excellent fit with the high touch value-added approach in the rest of our trading businesses. And we also expect that this addition will be accretive to overall revenue per employee. We look forward to completing the transaction sometime in the third quarter this year and are working with the existing team to ensure stability and enhanced growth during the transition to FBR.

Also during the year, the company generated over $2.6 million from principal investing activities. We've had success investing in themes, where we believe we have informed views of market opportunity, generating attractive risk-adjusted returns for shareholders, largely uncorrelated with our underwriting activities. In addition, the capital gains that we realized in this activity are lowering our effective tax rate as we recognize the benefits of capital loss carryforward still fully reserved in our deferred tax accounts. As we pointed out in the release, we expect our full year tax rate to be below that of the first quarter and to approximate 30%.

We continue to maintain our expenses as evidenced by our non-comp fixed expense level of $10.6 million in the first quarter compared to $11.1 million and $11.3 million in the first and fourth quarters of 2013 respectively. We expect this first quarter level to be representative of the full year run rate. Additionally, we managed our compensation to net revenue ratio within our target range and finished the quarter at 57.6%. As a reminder, we expect the comps in net revenue will be approximately 1.5 points to 2 points higher in 2014 than last year due to the amortization over the course of this year of one-time transition payment made in connection with the 2013 group hire.

During the quarter, we repurchased 262,000 shares at an average price of $26.16 per share. Effectively we're returning $7 million to shareholders. Since 2010, we have repurchased 7.4 million shares or 40% of our shares outstanding at an average price of $16.63 per share, returning total capital of $122 million to shareholders in a highly accretive way. The company continues to have authority to repurchase up to 1.4 million additional shares, roughly 13% of the current 10.9 million shares outstanding. And our plan continues to be to return at least 100% of net earnings to shareholders through the most efficient methods available.

Shareholders' equity was $298 million as of the end of the quarter, up from $291 million at the end of last year. As of March 31, 2014, the company's tangible book value per share was $27.30, an increase of 2% from the beginning of the year. Over the last 12 months, our tangible book value per share has increased approximately 25% from $21.76 to $27.30. We expect to continue to grow book value through a combination of earnings performance and the efficient allocation of capital.

We're off to a strong start in 2014. And while there continues to be volatility in the market, we believe it is primarily in specific sectors that have seen rapid increases in valuation. We continue to have a positive view of our ability to execute for our clients in this current market and believe there's opportunity for us to gain further market share within equity capital markets. We have a committed team and strong leadership group with a clear and consistent view of our collective goals and a track record of accomplishing big things for clients.

Our primary areas of focus for 2014 are to fully complete the integration of our newest team members to be contributors to helping our clients achieve their goals and to further enhance our own productivity levels and consistency of our revenue.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Alex Paris of Barrington Research.

Alex Paris - Barrington Research

Just a couple of questions. First off, on the securities lending business that you acquired from Lazard, could you just give us a little bit more color around that and even the rationale for the purchase? Could this lead to self-clearing and things like that down the road?

Rick Hendrix

Alex, it's a small group in terms of headcount. It's about 10 people. But as we said in the script, we do expect this to be accretive to revenue per head relative to where we are today overall. It's a very attractive margin on a low risk-adjusted basis. And it's a good fit with the equities business that we have. And I think that we would expect to see it grow with our balance sheet, given that we're highly capitalized. It could lead to us self-clearing down the road. I don't expect to see that happen though anytime soon, but it does open up that avenue.

Alex Paris - Barrington Research

And then with regard to the other (inaudible) hires, now that you've had one full quarter of the (inaudible) hires, anything changed from the original projections? Do you still expect to having to produce run rate revenues within the equities business incremental at $15 million to $20 million?

Rick Hendrix

We do. These things obviously take time in terms of getting people integrated and having clients' view, the additions as part of the platform when they view FBR. But we're seeing real progress in that regard. We mentioned in the script that we're seeing consistent improvement in votes from accounts, and a lot of that has to do with the new hires. So we feel at least as good as we did when we initially brought team on, probably better frankly in terms of our ability to have those additions show up in revenues sort of along the lines you just described. And we're seeing a lot of activity in banking in those sectors as well. And that was always the wild card and the biggest opportunity frankly, particularly given the mix of our franchise revenues overall. So we're seeing progress in both parts of the business and we're optimistic that that will continue to better over the course of '14.

Alex Paris - Barrington Research

In the cash equities business, in which revenues were up, you attribute that to the Lazard hires. But on an organic basis, ex the Lazard hires, I think that's hard to separate, but is the cash equities business strengthening?

Rick Hendrix

It's very hard to separate out, I guess, is the quick answer. But the business is definitely strengthening. And there're certain accounts where very quickly we saw the vote improve for specific reasons related to the addition to industry groups and people. In other cases, that hasn't ported over yet, right? That's why we think we're going to see continued strength over the course of the year. So the business is strengthening just on an absolute basis and we think that there should be more strength to come as more resources are in place at FBR for a longer period of time. And we've got specific reasons that give us that level of optimism.

Alex Paris - Barrington Research

And then on the capital raising side, the 144A business is obviously important. In fact, it made for a pretty tough comp this quarter versus the first quarter last year. What was your view into 144 for the balance of the year? Do you still expect to do half a dozen or so this year?

Rick Hendrix

We do. We did two in the first quarter. And we sort of think about that part of our business along the lines of doing six to eight a year in a good year. And we expect that we'll do that in 2014.

Alex Paris - Barrington Research

And then one last question on modeling. You mentioned with regard to the tax rate that the tax rate should approximate 30% this year due to capital loss carryforwards. Looking into 2015, are capital loss carryforwards sufficient that we should expect the similar tax rate in 2015?

Rick Hendrix

Yeah, I think that's a reasonable expectation. Alex, we've got enough that extends into '15 that we should have a comparable tax rate.

Operator

(Operator Instructions) At this time, I'm showing no further questions. I'd like to turn the call back to management for any further remarks.

Rick Hendrix

Operator, thank you. And thank you all for joining us. We look forward to talking to you at the end of the second quarter.

Operator

Thank you, sir. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.

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