Urban Shines as Bright Spot Amidst Knight’s Crippling Q3 Losses

Knight Capital Group, Inc. (NYSE Euronext:KCG), the parent company of reverse mortgage lender Urban Financial, reported a consolidated net loss of $389.9 million for the third quarter ended Sept. 30, 2012, attributed to massive losses following a technology issue that happened during the quarter. 

Before income tax benefits, Knight’s losses stand at $602.9 million, and the quarter-end results include pre-tax losses of $461.1 million related to the August 1 technological glitch as well as $143 million non-cash pre-tax charge due to the write-down of goodwill and intangible assets. 

One of the quarter’s sole positive developments, according to chairman and CEO Tom Joyce, was Urban’s rise to second in industry rankings in reverse mortgage origination. Knight’s securitized HECM loan inventory from its Urban Financial business grew to $3.4 billion up from $1.7 billion a year prior. Joyce has previously said his company is not likely to shed the reverse mortgage business line.

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Urban’s growth was not enough to staunch the bleeding, though, as Knight’s net negative revenue was $189.8 million, including the $457.6 million in trading losses that occurred on August 1. During the same period in 2011, Knight reported revenues of $397.4 million.

“In the aftermath of the technology issue that occurred on August 1, 2012, Knight began the process of effecting a recovery,” said Joyce in a statement. “The recapitalization restored the firm’s liquidity and capital, Knight’s market share in U.S. equities substantially rebounded, and we’ve undertaken measures to enhance processes and controls. Obviously, consolidated financial results were negatively impacted by the trading losses, related expenses and subsequent non-cash write-downs. We are gratified though that, if one backs out these items, we made a small profit on an operating basis.”

Despite being in recovery mode, the third quarter GAAP net loss attributable to common stockholders was still significant at $764.3 million, or $6.30 per share. This includes a $373.4 million, or $3.08 per share, non-cash deemed dividend related to Knight’s $400 million convertible preferred share issuance on August 6, as well as losses related to the technology glitch of $2.46 per share, and the asset impairment charges of $0.76 per share.

On a non-GAAP basis, the net income attributable to common shareholders was $817,000, or $0.01 per share, for the third quarter of 2012.

In the third quarter, Knight reported consolidated earnings of $26.9 million, or $.29 per diluted share, which included a pre-tax restructuring charge for severance, write-down of assets and related costs of $28.6 million, equivalent to $0.19 per share. 

Written by Alyssa Gerace