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Institutional Financial Markets, Inc. (NYSEMKT:IFMI)

Q2 2014 Earnings Conference Call

July 31, 2014 10:00 a.m. ET

Executives

Lester Brafman - Chief Executive Officer

Joe Pooler - CFO

Analysts

Operator

Good morning, ladies and gentlemen and welcome to the Institutional Financial Markets’ second quarter 2014 earnings call. My name is Christie 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 the 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 2014, the non-GAAP measures of performance have been reconciled to their corresponding GAAP measures for performance.

I would now like to turn the call over to Mr. Lester Brafman, Chief Executive Officer of IFMI.

Lester Brafman

Thank you, operator and thank you everybody for joining us for our second quarter 2014 earnings call. With me on the call is Joe Pooler, our CFO.

We’re pleased that recent strategic initiatives have started to positively impact IFMI’s financial results as demonstrated by our adjusted operating income of $2.0 million in the second quarter. Also without impairment of goodwill charge, our net income would have been a positive $300,000 in the second quarter. We are optimistic that with our enhanced capital position and simplified organization, IFMI is better positioned to more effectively take advantage of important growth opportunities in our industry.

During the second quarter, we continued to deploy available capital into our principal investing portfolio primarily in CLO equity tranches. CLOs are proven asset class with solid performance over the past cycle and we’re targeting double-digit returns for these investments.

During the second quarter of 2014, we purchased $13.6 million of CLO equity and non-sponsored investment vehicles bringing our CLO portfolio to $18.8 million and our overall principal investment portfolio to $26.4 million as of June 30, 2014.

So far during the third quarter we own additional $4.5 million pending closing. We have to grow the principal investing portfolio to $35 million in coming quarters. The focus on CLO equity leverages IFMI’s strengths in structured credit and leveraged finance. Investment and origination trading team is already in place and consists of structured credit products and leveraged finance industry veterans. We have strong relationships with key market participants.

We continue to work diligently to reposition the company for future success and remain committed to generating an asset returns and increasing value for our shareholders. Importantly, our board continues to return value to our stockholders through a $0.02 dividend for the quarter. As always, and especially in the context of these challenging markets, we will carefully review our dividend policy on a quarterly basis.

Now Joe will walk through some of the previous financial highlights in more detail.

Joe Pooler

Thank you, Lester. As Lester mentioned, our adjusted operating income was $2 million for the quarter ended June 30 ‘14 compared to adjusted operating loss of $700,000 for the prior quarter and adjusted operating loss of $5.1 million for the prior year quarter.

Our net trading revenue came in at $6.6 million in the current quarter, down $300,000 from the second quarter of ‘13. The prior quarter decrease was primarily due to less trading revenue from our structured product and high-yield corporate groups. While the decrease from prior year was primarily driven by the restructuring and consolidation of IFMI’s domestic trading operations in the second half of ‘13, which included the elimination of certain asset classes and a significant reduction in the number of revenue producers.

New issue and advisory revenue was $2.4 million in the second quarter of ‘14, which compared favorably to both the prior and year ago quarters. The increase was primarily due to a SPAC transaction fee received in the second quarter of ‘14.

Our asset management revenue was down $900,000 to $3.4 million in the second quarter of ‘14 from the first quarter of ‘14 and was down $800,000 compared to the year ago quarter. The prior quarter decrease was primarily the result of the payments of previously unpaid subordinated fees by one of the Company’s managed CDOs in the first quarter of ’14, which did not recur in the second quarter and incentive fees in our European separate account business that were received, as well as the sale of the Star Asia entities early in the first quarter of ‘14, which included Star Asia Management. The decrease from the prior year quarter was primarily due to the sale of the Star Asia entities, which as noted included the Star Asia Management.

Second quarter of ‘14 principal transactions revenue was $1.2 million, which compares favorably to both the prior quarter and the year ago quarters. The increase from the prior year period was primarily the result of the sale of the Star Asia entities in the first quarter of ’14, which eliminated a significant source of volatility in IFMI’s past financial results, as well as revenue recognized during the second quarter of ’14 from our growing CLO portfolio and our investments in EuroDekania. The increase from prior quarter was primarily the result of losses related to the termination of the Company’s Japanese Yen currency hedge during the first quarter of ‘14, as well as revenue recognized during the second quarter of ‘14 from the Company’s CLO portfolio.

Compensation and benefits expense for the second quarter of $7.6 million decreased $400,000 or 5% from the first quarter of ‘14 and decreased $5 million or 40% from the second quarter of ‘13. Compensation as a percentage of revenue was 53% in the second quarter compared to 60% in the first quarter and 91% in the second quarter of the prior year.

Employees decreased to 121 at June 30 2014 from 148 at the end of ‘13 and 204 at June 30, ‘13. During the three and six months ended June 30, 2014 the Company recognized a non-cash goodwill impairment charge of $3.1 million after performing its annual impairment test of goodwill attributed to the Company’s wholly-owned subsidiary, Cira SCM. The Company has no goodwill attributable to Cira SCM after this impairment.

Our total non-comp operating expenses excluding depreciation and amortization and the goodwill impairment charge of $4.9 million decreased by $1.6 million or 25% in the second quarter from the first quarter and decreased by $1.8 million or 27% from the second quarter of ‘13. These decreases occurred across all line items in both the prior quarter and year-ago quarter comparisons. We continue to be diligent about managing expenses. Based on our current level of operating activity we think $5 million to $5.5 million per quarter is an achievable range for our non-compensation operating expenses.

In terms of our balance sheet as of June 30, our stockholders’ equity was $55.6 million. We had $31.6 million of equity capital invested in our net trading portfolio and $26.4 million invested in our principal investing portfolio. The other instruments at fair value line items represents our principal investing portfolio and includes our recent investments in the CLO positions. The fair value includes $18.8 million of CLO investments. Thus far during the third quarter of ‘14, we have purchased an additional $4.5 million of CLO positions.

Also at the end of the quarter, our consolidated corporate indebtedness was carried at $27.2 million. In mid May, there was an optional redemption period for the remaining $3.1 million fair value of our 10.5% contingent convertible notes. We redeemed this class of assets [ph] at fair value plus accrued and non-paid interest. At the end of the quarter, we had $12.9 million of unrestricted cash balances. We believe that the unrestricted cash balances combined with the capital invested in our net trading and principal investing will be sufficient to fund our near term business model.

As Lester noted, we’ve announced a $0.02 dividend for the quarter and we’ll continue to review the dividend policy on a quarterly basis. The dividend is payable on August 29th to stockholders of record on August 15.

Finally, we expect to file our 10-Q no later than Monday, August 4th.

With that, I will turn it back over to Lester for closing remarks.

Lester Brafman

Thanks Joe. We are pleased to see some positive momentum in our earnings and contribution from some of the strategic initiatives that we’ve recently implemented. However, we recognize that the market continues to have numerous challenges, though we hope we are able to build our momentum in the quarters coming and going forward. Please write any investor questions to Joe Pooler at 215-701-8952. His contact information is at the bottom of our earnings release or the email to investorrelations@ifmi.com.

Operator

Thank you. This does conclude today’s conference call. You may disconnect your lines at this time and have a wonderful day.

Question-and-Answer Session

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Source: Institutional Financial Markets' (IFMI) CEO Lester Brafman on Q2 2014 Results - Earnings Call Transcript

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