FBR's (FBRC) CEO Rick Hendrix on Q1 2016 Results - Earnings Call Transcript

| About: FBR & (FBRC)

FBR & Co (NASDAQ:FBRC)

Q1 2016 Results Earnings Conference Call

April 27, 2016, 9:00 am ET

Executives

Shannon Hawkins - Senior Vice President and Director of Corporate Marketing and Communications

Analysts

Steve Emerson - Emerson Investment

Rick Hendrix - Chairman of the Board, President, Chief Executive Officer

Operator

Good day, ladies and gentlemen and welcome to the FBR & Co. first quarter 2016 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 call maybe recorded.

I would now like to introduce your host for today's conference, Shannon Hawkins, Senior Vice President. Please go ahead..

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 market, 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, Quarterly Reports on Form 10-Q and in current reports on Form 8-K.

Joining us on today's call is Brad Wright, Chief Financial Officer of FBR.

I will now turn the call over to Rick Hendrix, Chairman and Chief Executive Officer.

Rick Hendrix

Thanks, Shannon and thank you to everyone for dialing in this morning. This morning, we reported a net loss of $5.5 million and net revenue of $17.9 million for the first quarter of 2016. Our revenue this quarter reflects the extremely narrow and anemic equity capital markets activity industrywide and for FBR, specifically, this resulted in the quarter with none of the large sole managed transactions that FBR thrives on and lower than normal capital markets activity even away from that most volatile part of our business.

The overall activity in the IPO market was at the lowest levels since the first quarter of 2009 and the immediate aftermath was a most intense period of financial crisis. Investment banking revenue for the first quarter was $4.2 million for FBR, compared to 12.7 million 14 million in the first and fourth quarters of 2015 respectively, institutional brokerage revenue was 14.4 million in the first quarter of 13 point 7,000,004.2 million in the first and fourth quarters of 2015.

We believe this quarter-over-quarter and year-over-year improvement is largely a result of first quarter volatility that provided a better trading environment, even as it limited the ability to execute new issue volume. In addition to a little better trading environment, we also benefited from our ongoing work to more tightly align research coverage with our execution areas and management changes we made at the end of 2015. Additionally, increasing success on our corporate buyback desk is helping to support volumes in the equity business.

Non-comp fixed expenses were $9.7 million in the first quarter, down from $10.1 million and $11.7 million in the first and fourth quarters of 2015, respectively. This improvement in expense levels reflects our ongoing efforts to control and reduce expenses where opportunities exist. This quarter, we saw reduced legal expenses related to investment banking activity and we experienced somewhat lower business development expenses in line with overall activity levels. Headcount was down from 303 at the end of 2015 to 287 as of March 31.

During the first three months of this year, we repurchased 545,000 shares at a total cost of $9.1 million. This was accomplished through a combination of open market purchases of 152,000 shares for $2.7 million and net fair settlement for taxes related to the vesting of equity awards that we discussed on our last quarterly call totaling 393,000 shares. Since 2010, FBR has repurchased 11.6 million shares in the open market returning capital of over $227 million to shareholders and 848,000 shares remain within our current repurchase authorization. Our expectation is that we will fully utilize the remaining repurchase authorization this calendar year. Shareholders' equity was $195 million as of March 31, 2016 compared to $211 million the end of 2015, which includes the effect of $9.1 million of share buyback activity. Yesterday, the Board declared a $0.20 per share dividend for the quarter to be paid on May 27, 2016.

Balance sheet strength continues to be an important attribute for FBR, particularly as we consider how many midsize broker-dealers are no longer part of the competitive landscape due to a combination of the challenging environment over the last several years and in many cases less stable balance sheets.

As I mentioned earlier, so far in 2016 receptivity in the capital market has been incredibly narrow with only nine initial equity transactions in the first quarter, six small healthcare IPOs and three specs. The overall health of the initial equity market is an essential element in the biggest part of our business, initial equity underwriting. Our tremendously focused strategy on ECM execution dictates that it is difficult to overcome an annualized 75% decline in industry volume. While IPO activity for companies with less than $1.5 billion in market capitalization was down 25% in 2015 versus 2014, at just under $17 billion new issue volume, the first quarter of 2016 saw only $1 billion of new issue capital in this market segment.

The possibility and at some level probability of this type of environment emerging periodically is precisely why we aggressively restructured the business several years ago, taking overall expenses down by over 65% and headcount down by a similar amount. We are clearly not satisfied with our recent results and during the slowdown we continue to focus on controlling and reducing expenses where there are opportunities and making capital allocation decisions that create value for shareholders while we work to position ourselves for significant revenue as the market becomes more receptive. We are seeing very recent signs of improvement in the new issue environment and are encouraged that improvement will lead to better result over the balance of 2016.

Thank you for joining us this morning. And operator, we will now take questions.

Question-and-Answer Session

Operator

[Operator Instructions]. We do have a question from the line of Steve Emerson of Emerson Investment. Your line is open.

Steve Emerson

Yes. Can you give us a flavor for the pipeline at this point since clearly markets have saw quite good?

Rick Hendrix

Sure. So Steve, we are very active right now working to put transactions in place that should execute over certainly the balance of the year but even potentially the balance of this quarter. I would say, the most active area is clearly energy and we are seeing transaction opportunities that span the gamut of distressed orientation, new capital in a couple of sectors that have high returns attached to them, some restructuring that is distressed but is really more financial engineering in nature. And so we are working on those types of transactions all across the energy group. We have opportunities in our industrials group. We have opportunities in our healthcare group. So look, our banking team is very active out soliciting and pitching and winning business and as you said and as we noted in the script, the market has improved here a little bit of late and so we are optimistic that we are going to begin to get more active.

Steve Emerson

Okay. Thank you.

Operator

Thank you. [Operator Instructions].

Rick Hendrix

Okay. Operator, if there are no other questions at this time, I want thank everybody for joining us and we look forward to talking to you after our second quarter call.

Operator

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

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