Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
GLCH > SEC Filings for GLCH > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for GLEACHER & COMPANY, INC.

Form 10-Q for GLEACHER & COMPANY, INC.


9-Nov-2012

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

(Unaudited)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This document contains or incorporates by reference "forward-looking statements." These statements are not historical facts but instead represent the Company's belief or plans regarding future events, many of which, by their nature, are inherently uncertain and outside of the Company's control. The Company often, but not always, identifies forward-looking statements by using words or phrases such as "anticipate," "estimate," "plan," "project," "target," "expect," "continuing," "ongoing," "believe" and "intend." These statements may contain projections relating to revenues, earnings, operations, other financial measures, economic conditions, trends and known uncertainties, and may include statements regarding the Company's future performance, strategies and objectives. The Company's forward-looking statements are based on facts as the Company understands them at the time the Company makes any such statement as well as estimates and judgments based on these facts. The Company's forward-looking statements are not intended to be guarantees and may turn out to be inaccurate for a variety of reasons, many of which are outside of its control. Factors that could render the Company's forward-looking statements subsequently inaccurate include the conditions of the securities markets, generally, and demand for the Company's services within those markets, the risk of further credit rating downgrades of the U.S. government by major credit rating agencies, the impact of international and domestic sovereign debt uncertainties, the possibilities of localized or global economic recession, ClearPoint's ability to obtain continued financing under its warehouse lines of credit, and other risks and factors identified from time to time in the Company's filings with the Securities and Exchange Commission. Moreover, the Company's previously announced review of strategic alternatives may not culminate in a transaction or change in its current operations, on the timelines anticipated or at all. The Company's previously disclosed strategic plan is also still being implemented, which is designed to improve its operating results, and this plan may not be successful. You are cautioned not to place undue reliance on these forward-looking statements. The Company does not undertake to update any of its forward-looking statements.

Any forward-looking statement should be read and interpreted together with the information included under Part II, "Risk Factors" herein and with the Company's filed document and other statements, including the following:

the description of our business contained under Item 1 "Business," in the Company's Annual Report on Form 10-K for the year ended December 31, 2011,

the risk factors contained under Item 1A "Risk Factors," in the Company's Annual Report on Form 10-K for the year ended December 31, 2011,

the discussion of our legal proceedings contained in this report under Part II, Item 1 "Legal Proceedings,"

the discussion and analysis of our financial condition and results of operations contained in this report under Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations,"

the discussion of market, credit, operational and other risks impacting our business contained in this report under Item 3 "Quantitative and Qualitative Disclosures about Market Risk,"

the notes to the consolidated financial statements contained in this report under Item 1 "Financial Statements," and

cautionary statements we make in our public documents, reports and announcements.

As used herein, the terms "Company," "Gleacher," "we," "us," or "our," refer to Gleacher & Company, Inc. and its subsidiaries.


Table of Contents

Business Overview

The Company is an independent investment bank that provides corporate and institutional clients with strategic and financial advisory services, including merger and acquisition, restructuring, recapitalization, and strategic alternative analysis. The Company also provides capital raising, research-based investment analysis, and securities brokerage services, and, through its subsidiary ClearPoint Funding, Inc. ("ClearPoint"), engages in residential mortgage lending. The Company offers a diverse range of products through its Investment Banking, Mortgage Backed Securities & Rates ("MBS & Rates," formerly known as MBS/ABS & Rates), Credit Products (formerly known as Corporate Credit) and ClearPoint divisions.

Currently, we operate through the following four business segments:

Investment Banking - This division provides financial advisory and capital raising services in connection with mergers, acquisitions and other strategic matters. The division is being realigned around existing M&A expertise, expanded capital markets capabilities and key industry verticals, including real estate, financial services, aerospace and defense, technology, media and telecom, general industrial and financial sponsor coverage.

MBS & Rates - This division provides sales, trading, research and advisory services on a wide range of mortgage and asset-backed securities, U.S. Treasury and government agency securities, structured products such as CLOs and CDOs, whole loans, and other securities. Revenues are generated from spreads on principal transactions executed to facilitate trades for clients. Revenues are also generated from interest income on securities held in inventory.

Credit Products - This division provides analysis, sales and trading on a wide range of debt securities including bank debt and loans, investment grade debt, high-yield debt, treasuries, convertibles, distressed debt, preferred debt, emerging market debt and reorganization equities to corporate and institutional investor clients. The division also provides trade execution services, liability management, corporate debt repurchase programs and new issue distributions. Revenues are generated primarily from spreads on riskless principal transactions, and to a lesser extent, principal trading and commissions on trades executed on behalf of clients. In addition, revenues are also generated on a smaller scale from interest income on securities held in inventory.

ClearPoint - This division originates, processes and underwrites single and multi-family residential mortgage loans within 43 states across the country. The loans are underwritten using standards prescribed by conventional mortgage lenders and loan buyers such as the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. Revenues are generated primarily from the sale of the residential mortgage loans with servicing released. On November 8, 2012, the Company announced that it was pursuing a sale of the ClearPoint business. Refer to "Recent Developments - ClearPoint", herein, for additional information.

The Company also recognizes investment gains/(losses) and earns fees related to the Company's investment in and management of FA Technology Ventures L.P. ("FATV" or "the Partnership") which includes interests in publicly and privately held companies. The Company's results also include expenses not directly associated with specific reportable segments, including amortization of intangible assets from business acquisitions and costs related to corporate overhead and support, including financing, legal and settlement expenses.


Table of Contents

On August 30, 2012, the Company announced that it was exploring and evaluating strategic alternatives which included consideration of a range of available options, including a merger with a strategic counterparty, a strategic acquisition, divestiture of business units, investment in our company by a third party, or a stay the course outcome. We continue to evaluate identified opportunities. Market dynamics continue to develop in the Company's favor and we believe that we are stronger and better positioned today than we were a year ago.

Our business is dependent on our ability to attract, develop and retain highly skilled employees who are motivated and committed to providing the highest quality service and guidance to our clients. We continue to focus on unifying our brand, integrating our operations and, expanding our business. The Company is well capitalized, with no significant long-term debt, positioning us well for continued growth both organically or through other strategic alternatives.

Refer to Item 7 in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, for additional information regarding material opportunities, challenges and risks related to our business.

Business Environment in the Third Quarter 2012

The financial markets experienced gains during the three months ended September 30, 2012, with the Dow Jones Industrial Index and S&P 500 Index rising approximately 4% and 6%, respectively.

The financial markets benefitted from the renewed quantitative easing program implemented by the Federal Reserve with the intention of keeping interest rates low and thereby driving investment toward riskier asset classes. However, market sentiment remains skeptical, stemming from key fiscal issues both domestically and abroad, including the uncertainties resulting from the recent presidential election and its related effects on fiscal policy, as well as broader issues related to the European debt crisis, which remain largely unresolved.

Fixed income trading volumes declined by 5% compared to the second quarter, but this was primarily due to the seasonally slow summer months of July and August. Trading volumes as reported by TRACE were meaningfully higher in the month of September. In addition, announced M&A volumes remained weak and were 15% lower compared to the last quarter.

Given the continued uncertainties both domestically and abroad, the results of our operations, which are largely dependent on the environment in which our businesses operates, may not necessarily be indicative of what may be recognized in the future.


Table of Contents

Recent Developments - Hurricane Sandy

The massive hurricane ("Hurricane Sandy") that swept through New York City and the greater New York-New Jersey-Connecticut financial and commercial zone on October 28-30 has had and is expected to have an short-term adverse impact on us and other business concerns. The long-term ramifications, if any, cannot be predicted at this time. The high winds and flooding that accompanied this storm left behind power outages and dislocations in communications and local and long-distance transportation of historic proportions. The loss of life and housing for some, and the loss of power, heat and internet access for many, greatly disrupted normal business operations for the entire area. This dislocation will continue for some inestimable period, although presumably diminishing over time.

Hurricane Sandy had an immediate and direct impact on our Credit Products and MBS & Rates trading operations. Our Roseland, New Jersey office, which houses a substantial portion of our Credit Products trading business, was without power for four business days. A small minority of traders both within our Credit Products and MBS & Rates businesses were able to continue trading, either from our Manhattan headquarters (which was operational), our Stamford office, from home or some other remote location. Suspension of mass transit in and around New York City, and the far-reaching power and internet outages, prevented others from doing the same. Moreover, many of the Company's usual trading counterparties were similarly affected, aggrevating the disruption.

The impact of the storm on the economy as a whole and on the financial markets in particular cannot be predicted at this time. The economy was characterized prior to the storm as "weak," and the property loss and disruption in commerce brought about by the storm might have exacerbated the threat of recession. At the same time, however, some have conjectured that the massive rebuilding effort required to repair critical infrastructure and commercial and residential properties and systems could provide a dramatic lift to the economy. While the Company is currently evaluating any recoveries it may achieve through business interruption insurance, at this stage, it is premature to predict the ultimate impact of the storm on the Company, both operationally and financially. In the short term, we expect that the storm will adversely affect our results of operations, but at this time we cannot predict the magnitude of this impact.


Table of Contents

Recent Developments - ClearPoint

The Company acquired ClearPoint on January 3, 2011 with the intent to add an element of competitive differentiation for the Company's MBS Business. That differentiation was to have been achieved by offering customers of the Company's MBS Business, institutional investors, the ability to purchase mortgage backed securities backed by loans that conformed to customized specified pool characteristics. ClearPoint intended to originate loans according to customers' desired specifications, deliver those loans to a Government Sponsored Enterprise (GSE, or FNMA, FHLMC, or GNMA) in exchange for a security backed by those loans, and sell that security to the Company's MBS unit - for onward sale to the MBS unit's customers. The strategy required ClearPoint to have GSE seller servicer approvals, the application for which required the development of adequate infrastructure, and sustained profitability in the ClearPoint subsidiary as a standalone business unit.

ClearPoint is a "wholesale third party originator" of conforming residential loans. The original business strategy included three options for the sale of loans that ClearPoint originates, namely: 1. sell to "aggregators" (who may retain the loans for their balance sheets, or deliver them to a "GSE window");
2. sell to a GSE "window" for cash; 3. sell to a GSE window and receive a GSE security in return - for onward sale, as described above, through the Company or other broker dealers, to MBS buyers. Since inception, without GSE approvals, ClearPoint has been forced to sell all the loans it originates to aggregators.

Since implementing our mortgage origination strategy, beginning with the acquisition of ClearPoint, market dynamics have changed dramatically. As the effects of the mortgage crisis have rippled through the market, representation and warranty risk remains an intense focus. Moreover, as mentioned above, without GSE approvals, ClearPoint is confined to selling loans to a limited universe of aggregators, thus providing no benefit to the Company's MBS customers. These factors have led the Company to conclude that the commercial prospects for its mortgage origination activity have greatly diminished. The Company has decided it will therefore pursue a sale of the ClearPoint business.

The Company currently estimates incurring a range of loss of between approximately $1.5 million to $6.0 million in connection with any disposition of this business. Amounts reflected within this estimate include the Company's remaining payment obligations to the former stockholder of ClearPoint associated with the ClearPoint acquisition on January 3, 2011, the write-off of certain assets, including intangible assets, and the termination of certain other contractual obligations. This currently estimated range of loss assumes that ClearPoint's funded and locked loans are ultimately sold without a loss. The Company ultimately would expect to recapture a substantial portion of the approximately $30 million of cash currently held in the ClearPoint business.


Table of Contents

FINANCIAL OVERVIEW

The Company prepares its consolidated financial statements using accounting principles generally accepted in the United States of America ("GAAP"). These consolidated financial statements are contained within Item 1 of this Quarterly Report on Form 10-Q.

Results of Operations



                                                               Three Months Ended
                                                                 September 30,
(In thousands of dollars)                                      2012          2011
Revenues:
Principal transactions*                                     $   15,652    $    9,791
Commissions*                                                    17,830        15,968
Investment banking                                               1,996         9,359
Investment gains, net                                              163         2,857
Interest income                                                  6,879        16,249
Fees and other                                                   2,959         2,612
Total revenues                                                  45,479        56,836
Interest expense                                                 2,149         2,672
Net revenues                                                    43,330        54,164
Expenses (excluding interest):
Compensation and benefits                                       25,534        32,684
Impairment of goodwill and intangible assets (Refer to
Note 12 contained in Item 1 of this Quarterly report on
Form 10-Q)                                                           -        80,244
Clearing, settlement and brokerage                               9,461         8,946
Professional fees                                                4,282         1,944
Communications and data processing                               3,224         3,614
Occupancy, depreciation and amortization                         2,277         2,041
Business development                                               823         1,139
Other                                                            2,753         2,337
Total expenses (excluding interest)                             48,354       132,949
Loss from continuing operations before income taxes and
discontinued operations                                         (5,024 )     (78,785 )
Income tax benefit                                              (2,223 )      (3,085 )
Loss from continuing operations                                 (2,801 )     (75,700 )
Income/(loss) from discontinued operations, net of taxes

(Refer to Note 24 contained in Item 1 of this Quarterly Report on Form 10-Q) 33 (5,357 ) Net loss $ (2,768 ) $ (81,057 )



* Revenues earned on a riskless principal basis in the amount of $15.7 million for the three months ended September 30, 2011 have been reclassified from principal transactions to commission income in order to distinguish such revenues (commission equivalents) from revenues earned on financial instruments held in inventory, in order to conform to current year presentation.

Three Months Ended September 30, 2012 and 2011

For the three months ended September 30, 2012, net revenues from continuing operations were $43.3 million, compared to $54.2 million for the three months ended September 30, 2011. The 20.0% decrease in net revenues was due to decreases in net revenues in the Investment Banking and MBS & Rates segments and lower investment gains resulting from the change in value of the Company's FATV investment, partially offset by increased net revenues in the Credit Products segment. Non-interest expenses for the three months ended September 30, 2012 of $48.4 million decreased $84.6 million, or 63.6%, compared to $132.9 million for the three months ended September 30, 2011. This was primarily due to a goodwill impairment charge of $80.2 million associated with the Investment Banking division realignment which took place during the three months ended September 30, 2011.


Table of Contents

The Company reported a net loss from continuing operations of ($2.8) million and ($75.7) million for the three months ended September 30, 2012 and 2011, respectively. Net loss per diluted share from continuing operations was ($0.02) and ($0.61) for the three months ended September 30, 2012 and 2011, respectively. Income/(loss) from discontinued operations, net of taxes for the three months ended September 30, 2012 and 2011 was $0.0 million and ($5.4) million, respectively.

Net Revenues

For the three months ended September 30, 2012, net revenues from continuing operations was $43.3 million, compared to $54.2 million for the three months ended September 30, 2011. Commissions and principal transactions revenues increased $7.7 million, or 29.8%, to $33.5 million for the three months ended September 30, 2012 from $25.8 million for the three months ended September 30, 2011 due to increases of $4.4 million in the MBS & Rates segment, $2.4 million in the Credit Products segment and $0.9 million in ClearPoint. Investment banking revenues decreased $7.4 million, or 78.7%, to $2.0 million for the three months ended September 30, 2012. Investment gains, which represent the change in the value of the Company's investment in FATV, were $0.2 million for the three months ended September 30, 2012 compared to investment gains of $2.9 million for the three months ended September 30, 2011. Net interest income of $4.7 million as of September 30, 2012 decreased $8.9 million compared to $13.6 million for the three months ended September 30, 2011. This was primarily due to lower average inventory levels. Fees and other revenues of $3.0 million for the three months ended September 30, 2012 increased $0.3 million, and includes $0.9 million related to the clawback of certain stock-based compensation grants subject to non-competition provisions. This was partially offset by lower fees and other revenue related to fees earned in connection with the mortgage lending activities of ClearPoint.

Non-Interest Expense

Non-interest expenses for the three months ended September 30, 2012 of $48.4 million decreased $84.6 million, or 63.6%, compared to $132.9 million for the three months ended September 30, 2011.

Compensation and benefits expense was $25.5 million for the three months ended September 30, 2012, a decline of $7.2 million compared to the three months ended September 30, 2011. The decline was attributable to lower net revenues in the Investment Banking and MBS & Rates divisions, partially offset by higher net revenues in the Credit Products division. Compensation and benefits expense for the three months ended September 30, 2012 was reduced by $1.3 million (of which $1.0 million was non-cash compensation) as a result of the reversal of accrued severance expense which was previously recorded in the first quarter of 2012. In addition, compensation and benefits expense for the three months ended September 30, 2012 was also reduced by $1.2 million for stock-based compensation forfeitures. Compensation and benefits expense as a percentage of net revenues was 58.9% for the three months ended September 30, 2012 compared to 60.3% for the three months ended September 30, 2011.

Compensation and benefits expense for the prior-year quarter included $5.6 million of compensation reductions. These reductions, which were previously disclosed, included $3.8 million of reduced cash compensation accruals under the expectation that annual compensation for leaders of the Company's business segments and members of senior management would be more heavily weighted toward stock-based compensation. In addition, compensation expense in the prior-year quarter decreased by approximately $1.8 million due changes in the vesting and forfeiture provisions of stock-based compensation to be granted in connection with annual bonus compensation of the prior year. The changes resulted in compensation expense being recognized over a future vesting period, which was initially being fully recognized in that current year. Partially offsetting these reductions in the prior-year quarter was severance and stock-based compensation expense of $1.9 million related to the termination of 32 investment banking employees and certain administrative positions in connection with the Investment Banking division realignment.

The Company recorded a goodwill impairment charge of $80.2 million during the three months ended September 30, 2011 in connection with the Investment Banking division realignment (Refer to Note 12 within the footnotes to the consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for additional information).


Table of Contents

Clearing, settlement and brokerage costs of $9.5 million for the three months ended September 30, 2012 increased by $0.5 million, or 5.8%, compared to the three months ended September 30, 2011. The increase was primarily due to ClearPoint broker fees, partially offset by lower clearing fees of the MBS & Rates division on lower volumes.

Professional fees of $4.3 million for the three months ended September 30, 2012 increased by $2.3 million or 120.2% primarily due to higher legal, consulting and advisory fees incurred in connection with our strategic alternatives process, as well as costs incurred in connection with the Company's asset management initiative.

Communications and data processing expense of $3.2 million for the three months ended September 30, 2012 decreased by $0.4 million or 10.8% primarily due to decreased headcount resulting from the realignment of the Investment Banking division which took place in the third quarter of 2011.

Occupancy and depreciation expense of $2.3 million for the three months ended September 30, 2012 remained relatively unchanged compared to the three months ended September 30, 2011.

Business development expense of $0.8 million for the three months ended September 30, 2012 decreased by $0.3 million, or 27.7%, compared to the three months ended September 30, 2011, primarily due to the decreased headcount that resulted from the previously mentioned realignment of the Investment Banking division.

Other expenses of $2.8 million for the three months ended September 30, 2012 increased $0.4 million, or 17.8% compared to the three months ended September 30, 2011, primarily due to ClearPoint loan processing fees from increased loan commitment volumes.

Income Taxes

Three Months Ended September 30, 2012

The Company's effective income tax rate from continuing operations for the three months ended September 30, 2012 was 44.2%, resulting in an income tax benefit of approximately $2.2 million. The income tax benefit is primarily attributable to a $2.2 million increase in the net value of the deferred tax assets. Such increase is due to the Company's ability to carry-back realizable net operating losses to prior years. The Company has now fully utilized its available net . . .

  Add GLCH to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for GLCH - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.