Gleacher & Company Reports Fourth Quarter and Year End 2012 Financial Results

Gleacher & Company Reports Fourth Quarter and Year End 2012 Financial Results

Company Announces Sale of ClearPoint

Company Concludes Formal Strategic Review


NEW YORK--(BUSINESS WIRE)-- Gleacher & Company, Inc. (NAS: GLCH) today reported net revenues of $50.9 million, net loss from continuing operations of ($11.5) million, or ($10.8) million on a non-GAAP basis, and diluted loss per share of ($0.10), or ($0.09) on a non-GAAP basis for the quarter ended December 31, 2012. The Company also announced that it has entered into an agreement with Homeward Residential, Inc., a wholly owned subsidiary of Ocwen Financial Corporation (NYS: OCN) pursuant to which Homeward will purchase substantially all of the assets of ClearPoint. Finally, having considered a range of opportunities during its previously announced strategic review, including partnering with one or more equity investors, strategic acquisitions and divestitures, and business combinations, the Company determined that the available opportunities were not in the best interests of Gleacher's stockholders at this time.

Highlights

  • FY2012 dominated by restructuring the management team and compensation methodologies, and a review of strategic alternatives. The Company suffered a natural interruption in revenue generation as a result of those actions.
  • Q4 results benefitted by performance in Investment Banking and Credit Products; MBS & Rates suffered from weaker sales volumes.
  • ClearPoint entered into an agreement to sell substantially all of its assets to Homeward.
  • Company concludes formal strategic review.
  • The Board of Directors renewed the Company's stock repurchase program, authorizing up to $10 million in stock repurchases.

Thomas Hughes, Chief Executive Officer, said, "We accomplished a great deal during the course of 2012, and I believe we are better positioned to begin sustained growth and profitability. We have assembled a management team and producers who possess deep experience serving clients in the product efforts that comprise our strategy. We have revamped our compensation methodologies in an effort to achieve our stated goal of a 60% compensation to revenue ratio in the coming years. And we have entered into an agreement to sell ClearPoint in a transaction that we expect will close in the first quarter."

Mr. Hughes continued, "While the revenue decline in MBS & Rates has been natural in the face of all of our restructuring efforts in that business, we are not satisfied with those results. However, we recruited outstanding talent in this Business Unit, we believe our ability to serve customers in this product segment is strong, and once we have fully integrated our Rangemark capabilities with Sales & Trading, our customer interface will be even more compelling. We are pleased with our performance in Investment Banking and Credit Products. Our Real Estate Finance team now ranks #1 in M&A transactions executed for REITs, and our Credit Products business grew its market share throughout 2012."

Mr. Hughes, commenting on the strategic review, said, "Assisted by our financial advisor, we looked at a wide variety of strategic transactions, including merger, acquisition, and business combinations. Although we did not believe any proposal we received during the process adequately reflected Gleacher's value, we will, as before, be opportunistic in considering value-building strategic initiatives that may accelerate our growth and improve stockholder returns. That said, we made significant strategic progress during the course of the year, we believe in our business strategy and in the capabilities of our team, and we intend to continue our business expansion and fortify our brand."

           

 

Three Months Ended Years Ended
December 31,       September 30,       December 31, December 31,       December 31,
(In thousands, except for per share amounts) 2012   2012   2011   2012   2011  
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net revenues $ 50,876 $ 43,330 $ 61,240 $ 203,595 $ 261,172
Pre-tax loss from continuing operations (11,293 ) (5,024 ) (236 ) (53,353 ) (61,877 )
Net (loss)/income from continuing operations (11,486 ) (2,801 ) 1,765 (77,955 ) (64,084 )
Discontinued operations, net of taxes 224 33 383 265 (18,040 )
 
Non-GAAP pre-tax (loss)/income from continuing operations* (10,590 ) (5,059 ) n/a (28,939 ) 20,267
Non-GAAP net (loss)/income from continuing operations* (10,783 ) (2,821 ) n/a (24,397 ) 12,132
 
(Loss)/earnings per share:
Diluted - continuing operations $ (0.10 ) $ (0.02 ) $ 0.01 $ (0.66 ) $ (0.52 )
Diluted - continuing operations (Non-GAAP)* (0.09 ) (0.02 ) n/a (0.21 ) 0.09
 

*Designates non-GAAP financial results. A reconciliation of the Company's GAAP results to non-GAAP financial results is set forth below under the caption "Non-GAAP Financial Results."

The Company has included in this press release "non-GAAP financial results." A non-GAAP financial result is a numerical measure of financial position or results of operations that includes amounts that are excluded, or excludes amounts that are included, in the most directly comparable result calculated and presented in accordance with generally accepted accounting principles ("GAAP").

In the financial data included in this press release, the items for which the Company adjusted its GAAP results consist of the following:

  • legal, consulting and advisory costs incurred in connection with our strategic review process during the second, third and fourth quarter of 2012,
  • impairment of goodwill and intangibles recorded during the second quarter of 2012 and the third quarter of 2011, as well as other non-compensation expenses incurred in connection with the Investment Banking realignment in the third quarter of 2011,
  • the change in the valuation allowance on the deferred tax assets, initially established in the second quarter of 2012,
  • severance expense recorded during the first quarter of 2012 (partially reversed in the third quarter of 2012) and third quarter of 2011,
  • compensation expense related to the resignation of the former interim CEO in the second quarter of 2011, and
  • the bargain purchase gain related to the ClearPoint acquisition in the first quarter of 2011.

For detailed information on the adjustments made, and a reconciliation of the non-GAAP financial results included in this press release to the most directly comparable GAAP financial metrics, refer to "Non-GAAP Financial Results" below. While the Company believes that the non-GAAP financial results included herein are instructive, they should only be considered together with their corresponding GAAP financial metrics.

 
Business Segment Results (including Non-GAAP results)
                             
Three Months Ended Years Ended
December 31, September 30, December 31, December 31, December, 31
(In thousands of dollars) 2012   2012   2011   2012   2011  
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
 
Net revenues:
Investment Banking $ 12,680 $ 1,499 $ 2,936 $ 27,442 $ 26,611
MBS & Rates 6,081 8,943 14,668 40,637 103,857
Credit Products 16,039 18,804 20,019 74,432 71,056
ClearPoint   13,615     12,899     20,815     53,375     46,924  
Net revenues - operating segments 48,415 42,145 58,438 195,886 248,448
Other   2,461     1,185     2,802     7,709     10,394*
Total $ 50,876   $ 43,330   $ 61,240   $ 203,595   $ 258,842*
 
Pre-tax (loss)/income from continuing operations:
Investment Banking $ 2,061 $ (257 ) $ (1,249 ) $ 4,576 $ 4,584*
MBS & Rates (5,434 ) 1,814 3,465 127 33,120
Credit Products (795 ) 2,619* 3,400 4,070* 9,738
ClearPoint   (13 )   (524 )   (779 )   (5,891 )   (3,686 )
Pre-tax (loss)/income - operating segments (4,181 ) 3,652* 4,837 2,882 43,756*
Other   (6,409)*   (8,711)*   (5,073 )   (31,821)*   (23,489)*
Total $ (10,590)* $ (5,059)* $ (236 ) $ (28,939)* $ 20,267*
 

*Designates non-GAAP financial results. A reconciliation of the Company's GAAP results to its non-GAAP financial results is set forth below under the caption "Non-GAAP Financial Results."

Investment Banking

Net revenues were $12.7 million for the quarter ended December 31, 2012, an improvement of $11.2 million compared to the third quarter of 2012 and $9.7 million compared to the fourth quarter of 2011. Net revenues also slightly improved year-over-year and were $27.4 million for the year ended December 31, 2012, compared to the prior year of $26.6 million.

The composition of the division's investment banking revenues was as follows:

           
Three Months Ended Years Ended
December 31,       September 30,       December 31, December 31,       December 31,
(In thousands) 2012 2012 2011 2012 2011
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
 
Advisory $ 12,636 $ 914 $ 2,936 $ 24,332 $ 20,954
Capital Markets   44   585   -   3,110   5,657
Total: $ 12,680 $ 1,499 $ 2,936 $ 27,442 $ 26,611
 

MBS & Rates

Net revenues were $6.1 million for the quarter ended December 31, 2012, a decline of $2.9 million and $8.6 million compared to the third quarter of 2012 and fourth quarter of 2011, respectively. The market environment proved challenging for the division, which experienced reduced sales and trading revenues on lower spreads and market volatility. These declines were partially offset by higher net interest income due to higher average inventory levels when compared to the third quarter of 2012, as net interest income was $7.5 million in the fourth quarter of 2012 compared to $4.0 million in the third quarter of 2012 (net interest income was $13.3 million in the fourth quarter of 2011). Revenues for the third quarter of 2012 also included approximately $0.7 million of other revenue, related to the clawback of certain stock-based compensation grants of former employees which were subject to non-competition and/or other forfeiture provisions.

Net revenues of $40.6 million for the year ended December 31, 2012, declined by $63.2 million compared to the prior year. This was largely attributable to the previously reported leadership transition and accompanying turnover experienced during the second and third quarter of 2012, resulting in a repositioning and rebuilding of the division which is substantially complete. In addition, the division recognized lower net interest income year-over-year on lower average inventory levels and the prior year also includes non-agency asset-backed securities gains of approximately $26.5 million.

Credit Products

Net revenues were $16.0 million for the quarter ended December 31, 2012, a decline of $2.8 million compared to the third quarter of 2012 and $4.0 million compared to the fourth quarter of 2011. The declines were primarily due to lower commissions and principal transaction revenues due to spreads tightening, which was partially offset by higher volumes.

Net revenues of $74.4 million for the year ended December 31, 2012 improved by $3.4 million compared to the prior year, due to higher volumes and an expanded product profile, partially offset by spread compression.

ClearPoint

Net revenues were $13.6 million for the quarter ended December 31, 2012, an increase of $0.7 million compared to the third quarter of 2012 due to improved pricing margins, and a decline of $7.2 million compared to the fourth quarter of 2011 on lower volumes. Net revenues during the fourth and third quarter of 2012 reflect limits placed on ClearPoint's daily average loan commitments to a level aligned with its distribution capabilities.

Net revenues for the year ended December 31, 2012 were $53.4 million, an improvement of $6.5 million compared to the prior year. This increase was due to higher daily loan commitments primarily arising in the first quarter of 2012, prior to the implementation of the previously mentioned limits, coupled with lower daily average loan commitments in the prior year, as the division's operations had commenced on January 3, 2011.

Subsequent to the liquidity constraints experienced during the first half of 2012, the division has been managed to operate at or near break-even levels. On February 14, 2013, the Company entered into an agreement to sell substantially all of ClearPoint's assets to Homeward Residential, Inc., and we expect the transaction to close in the first quarter of 2013. The Company estimates it will recognize a loss of approximately $5.0 million in connection with this disposition.

ClearPoint will be reclassified as a discontinued operation in the first quarter of 2013.

Other

Net revenues were $2.5 million for the quarter ended December 31, 2012, an improvement of $1.3 million compared to the third quarter of 2012 and a decline of $0.3 million compared to the fourth quarter of 2011. Changes in net revenues are primarily related to changes in value of the Company's FATV investment.

Consolidated Compensation and Benefits Expenses (including Non-GAAP results)

Compensation and benefits expense was $41.6 million for the fourth quarter of 2012, an increase of $16.0 million ($14.7 million on a non-GAAP basis) compared to compensation and benefits expense in the third quarter of 2012, and $8.1 million compared to compensation and benefits expense in the fourth quarter of 2011.

Our compensation ratio from continuing operations was 81.7% for the fourth quarter of 2012, compared to 58.9% for the third quarter of 2012 (62.0% on a non-GAAP basis) and 54.7% for the fourth quarter of 2011. The Company's compensation as a percentage of net revenue when compared to the third quarter of 2012 was significantly influenced by the Company's decision to pay year-end bonus compensation primarily in the form of cash. In making this determination, the Company considered a variety of factors including the significant discount to which the Company's stock trades in relation to its book value. Compensation expense for the fourth quarter of 2012 was also impacted by approximately $0.9 million of retention payments made to certain key employees as a result of general uncertainties stemming from the strategic review process and $1.2 million of compensation guarantees principally incurred in the MBS & Rates division in connection with the division's rebuild.

The Company's compensation and benefits as a percentage of net revenues was 70.4% (70.3% on a non-GAAP basis) for the year ended December 31, 2012, compared to 62.2% (61.4% on a non-GAAP basis) for the prior year. The disparity between the ratios year-over-year is directly related to the lower net revenues, as well as the Company's election to pay primarily cash compensation in the current year, compared to a mix of cash and stock in the prior year.

Consolidated Non-Compensation Expenses (including Non-GAAP results)

Non-compensation expenses were $20.6 million for the fourth quarter of 2012 ($19.9 million on a non-GAAP basis), compared to $22.8 million for the third quarter of 2012 ($21.5 million on a non-GAAP basis) and $28.0 million for the fourth quarter of 2011. Included within non-compensation expenses are ClearPoint broker fees and loan processing fees of $9.3 million, $9.4 million and $16.0 million for the fourth quarter of 2012, third quarter of 2012 and fourth quarter of 2011, respectively, driven by the level of ClearPoint loan commitment volumes in each respective period.

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