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JMP Group, Inc. (NYSE:JMP)

Q4 2013 Results Earnings Conference Call

February 14, 2014, 10:00 AM ET

Executives

Andrew Palmer - Investor Relations

Joseph A. Jolson - Chairman and Chief Executive Officer

Raymond S. Jackson - Chief Financial Officer

Carter D. Mack - President

Analysts

Michael Needham - Keefe, Bruyette & Woods, Inc.

Operator

Good morning everyone and welcome to JMP Group’s Fourth Quarter 2013 Earnings Conference Call. Today’s call is being recorded. (Operator Instructions). At this time I would like to turn the conference over to Andrew Palmer, JMP Group's Head of Investor Relations. Please go head.

Andrew Palmer

Good morning. Here with me today are Joe Jolson, JMP’s Chairman and Chief Executive Officer and Ray Jackson our Chief Financial Officer. They are joined by Carter Mack, President in JMP Group and Mark Lehmann President in JMP Securities.

Before we move on I will note that some of this morning’s comments may contain forward-looking statements with future events that are out of JMP’s control. Actual results may differ materially from those indicated or implied. For a discussion of uncertainties that could affect JMP’s future performance please see the description of risk factors included in our most recent 10-K.

That said, I’ll hand things off to JMP’s Chairman and CEO Joe Jolson.

Joseph A. Jolson

Thanks Andrew. I am proud to report that JMP Securities had its best fourth quarter and full year in our company's history. For the quarter and year ended in December JMP Securities has raised $6.3 billion and $27.6 billion respectively for total of 128 businesses in the four growth sectors of the U.S. economy that we focus on; healthcare, technology, financial services and real estate. That compares to 87 companies in 2012.

We feel really good that JMP Securities continues to help U.S. companies raise the capital they need to expand their activities and create job opportunities especially in the slower growth economy. JMP Group's adjusted net revenues also set records for the quarter and the year despite an unexpected decline in net investment income from JMP Private Advisor CLO 1. Excluding that investment income and corporate expenses the earnings of the company's operating platforms jumped 113% year-over-year to $0.17 in the fourth quarter and nearly doubled to $0.47 for the fully year.

We ended 2013 with strong positive momentum in all of our businesses and I am optimistic that the favorable trend will continue into 2014. Before I continue Ray will take you through a few financial highlights. Ray?

Raymond S. Jackson

Thanks, Joe. Adjusted net revenues which exclude non-cash items and non-controlling interest were a record $48 million for the quarter and a record $154.3 million for the full year. Operating net income was $3.9 million or $0.17 per share for the quarter versus $6 million or $0.26 per share for the fourth quarter of 2012.

For the year operating net income was 13.5% or $0.16 per share compared to $16.5 million or $0.72 per share for 2012. Excluding a one-time after tax expense of $0.08 per share related to the May IPO Harvest Capital Credit Corporation and a $0.02 loss in acquired loan sales, operating EPS would have been $0.65 for 2013 versus $0.68 for 2012 after excluding $0.04 of profits from sales of acquired loans.

For the fourth quarter, when excluding net investment income JMP Securities contribute $0.12 to operating EPS, up from $0.02 a year earlier. Harvest Capital Strategy makes $0.04 per share down a penny from $0.05 per share for the fourth quarter of 2012. JMP Credit which was a $0.01 of operating EPS in-line with a $0.01 year ago.

Net investment income earned by the company as whole came to $015 per share compared to $0.29 per share for the fourth quarter of 2012, while total corporate cost deducted $0.15 from operating EPS, up from $0.11 a year earlier.

From expense standpoint adjusted compensation and benefit expense, which includes the deferred comp but excludes non-cash expense tied to stock-based awards as a percentage of adjusted net revenues was 71.8% for the quarter and 67.6% for the full year. The compensation ratio was above our target range for the year as a result of better than forecasted incentive fees from our asset management business as well as the cost of our strategic hiring initiatives. Excluding the strategic hiring expense the compensation ratio would have been 64.9% for 2013.

With regard to the company's balance sheet at year-end JMP's recourse debt-to-total capital ratio was 33.5%. Net cash and liquid security equaled $2.09 a share and net invested capital working through less liquid investments $5.56 per share.

Stockholder's equity all of which was tangible was a $126.9 million and tangible book value per share was $5.81. Adjusted tangible book value per share was $5.44 versus $5.15 a year earlier. Because of the accelerated amortization and net liquidity discount on JMP Credit assets just completed in May the only remaining difference between tangible and adjusted book value is due to our accelerated recognition of comp expense which under GAAP is deferred.

From a capital management standpoint JMP used $5.8 million representing $0.26 per share to repurchase approximately 900,000 shares of stock during 2013 and paid cash dividends totaling $0.145 per share. In total we returned 66% of operating earnings last year with the remainder increasing tangible book value per share by $0.18. With that I will turn things back over to Joe.

Joseph A. Jolson

Thanks Ray. I wanted to go over the strategic initiatives expense and what we thing in regard to that given that a year ago we articulated that we were planning on giving that to everyone on this call. So at the start of 2013 we developed the financial plan and committed to spending as much as $0.20 a share of investment income to essentially subsidize the organic growth rate of our operating platforms.

The goal was to boost our company's top line growth to more than 15% a year versus a compounded rate of slightly more than 9% during the tumultuous time since our 2007 IPO. And we still wanted to maintain a reasonable level of profitability.

In reviewing these goals now that the year is over our strategic hiring initiatives ended up costing $0.12 a share the Harvest Capital Credit IPO cost us roughly $0.03 a share and the net cost of the negative carry on the bond deal we did about a year ago cost $0.02 a share and altogether these expense were $0.17 which was inline or slightly better than our initial expectations.

In early 2013 the consensus EPS estimate for JMP was $0.54 which included an estimate for some but not all of these costs especially [inaudible]. We're happy that we're able to achieve these expectations earning $0.60 on operating basis and accelerating our top line growth to 23% in the process by excluding investment income our top line growth actually grew more or like 33% year-over-year.

Now what do we get for all this expense and investment spending that we did in these operating platforms. First we have for the most part completed the revamping of our institutional brokerage distribution efforts by the end of last year. And we're excited about the momentum in this business building for 2014 and beyond.

Our net brokerage revenues last quarter were up 19% year-over-year and for the year it was up 12% which was our first positive comparison year-over-year since 2008. And this occurred despite very high levels of turnover we experienced in the year in that area, we repositioned the business under new management.

We continue to target tripling of our market share in this business to around 1% by 2017 in our original plan.

Secondly, in investment banking we added four managing directors bringing the number of calling officers to 21, and senior product manager to four at year end. As expected, the new additions impacted revenues only modestly in 2013 given the lag in accounting closing revenues after moving to new platform. Of the record $74 million of investment banking revenues for the year, roughly 70 million were attributable to our bankers which makes us very optimistic about the next couple of years once assuming stable capital market conditions as these new additions ramp to target revenue level of roughly $5 million per Managing Director.

Thirdly, we successfully completed the IPO of Harvest Capital Credit Corp last May as expected. In addition to subsidizing underwriting spread we are getting incentive fees and free to absorb part of back office expenses for the first 12 months post offering. Selectively, we think cost may be closer to $0.04 and $0.03. Assuming we do a good job of deploying the IPO proceeds in 55 million of committed secured line of credit, we think we can manage about $140 million to $150 million in the strategy 12 to 18 months from now versus $52 million at the end of September. I can't give you the December number because they haven't reported yet.

Now if that happens as we planned that will drive fee income upwards of over $5 million a year and we will earnings our piece of the earnings on that strategy will exceed the entire expenses after tax that cost us in 2013 to taking public. Of course we hope to raise additional capital overtime to further grow this franchise.

Fourth in 2013, January we raised $46 million 8% ten year fixed rate debt and partially was deployed in our sector hedge funds and then later with the closing of CLO 2 $17 million was deployed in that strategy. In December of 2013 we committed $25 million to secure a $100 million warehouse line in order to begin accumulating loans for CLO 3 which we hope to close in 2014 subject to market conditions. We expect the IRR in CLO 2 be in the 12% to 13% range over this period assuming normalized loan losses and modeling the forward LIBOR curve. Forward LIBOR curve has rates, short going up and normalized loan losses that we are assuming are well above the current levels, so CLO 2 is performing well in excess of 12% to 13% as we speak.

In January of this year we closed on $42 of 7.25% fixed rate seven year debt and a green shoot about $6 million was exercised last week. Our plan for this money is to fund future principal opportunities this year including hopefully initiating CLO 4 later in the year, once again assuming CLO 3 closes successfully. Meanwhile we plan to repay our $50 million line of credit and we've already invested $50 million of the proceeds in our sector hedge fund.

Pro forma long-term debt will make up just 41% of our total capital and will potentially support manage CLO assets of somewhat between $1.5 billion and $2 billion over the next couple of years compared to under $800 million at the end of last year.

Now these strategic initiatives have been geared towards accelerating the revenue and earnings growth at our operating platforms and that will shift JMP's revenue mix such that net investment income becomes a smaller component of total earnings. In 2013 at the onset of our five year strategic growth plan we expect that our operating earnings we will get from this strategy versus the 2012 level but overtime operating revenue should replace and ultimately far surpass the extraordinary profits that have been generated by JMP Credits 2009 acquisition of CLO 1 which as we mentioned earlier began to normalize in the second half of this year as corporate borrowers took advantage of market conditions to refinance, which reduced our weighted average spread and as the CLO de-levered in the second half of the year after the end of its contractual reinvestment period in May.

Even so that investment comes sloping through to $0.13 per share last year after covering all corporate expenses including the alleviated strategic initiative cost. The recently issued $48 million of senior debt which reduced this year's net investment income by roughly $0.07 per share without any positive offset from higher investment income as the year progress. So last year it was $0.10 a share and we earned back $0.08 of that and of course this $0.07 we are hopeful that will earn back all $0.07 or even make a positive spread on that.

Even so we continue to anticipate that net investment income will cover all of our corporate cost this year and generate a positive return to shareholders as-well-as a growing contribution thereafter. The net result of JMP's $0.17 investment spending last year on growing the operating platform, decline in operating EPS $0.60 compared to $0.72 in 2012 as Ray mentioned. You could see that in our operating margin on adjusted revenues which was 14% for the year. Of course if you excluded that one-time cost of HCAP of what our operating margin was still above the low end of our target range which is 15% to 20% longer-term. Now that compared to 22% in 2012.

Our return on adjusted tangible equity was 11.6% last year once again that included that one-time cost for the HCAP IPO in the previous year was 13%.

I am very pleased that our result exceeded our original plan as-well-as the initial analyst consensus estimate of $0.54 in 2013. We have met or exceeded analyst estimates now in 26 of 27 quarters since our IPO. I am sure there will be another quarter in there that we do not analyst estimates but if we take this very seriously as you can tell from that track record.

The main driver of our recent out performance has been accelerated annual revenue growth of 33% at our operating platform combined with positive operating margin leverage which led to the near doubling operating EPS from platforms to $0.47 last year. Importantly we enjoyed record fourth quarter operating platform EPS of $0.17 compared to $0.08 a year earlier with all three of our business segments experiencing strong momentum. While it's always difficult to predict capital market conditions particularly on the short-term basis we are optimistic that we have built strong foundation on which to grow over the next three to five years.

Our longer term plan continues to be to double our market share of the overall equity capital market fee revenues to 1%, to triple our market share of institutional brokerage revenues to 1% and to double our sponsored assets under management between 2012 and 2017. Now thus we are successful and we're off to a very good start in the first year in the plan we believe that we will now only benefit from the top line growth that this would drive but also positive operating margin leverage and with our active capital management strategy we think will be the compound EPS growth well in excess of top line growth over that period of time.

Now I want to add just a little color on asset management activities in the quarter and then we'll have Carter Mack to discuss some additional JMP Securities highlights. Asset management related fee income of $10.9 million for the quarter jumped 71% from a year earlier and for the year was up 32%. Excellent performance of Harvest Small Cap Partners and Harvest Franchise Fund yielded record incentive fees which in the quarter was $7.6 million and for the year were $15 million -- for the year was up 138%. Operating margin of Harvest Capital strategies were better than they were in 2012 but they remained depressed because we continue to staff for more rapid AUM growth than we've accomplished because we wait on incentive at H Cap Advisors for four quarters as I mentioned earlier.

In 2013 our hedge funding AUM did increase by 25% which is a big positive. Included sponsors fund from which we earned fees assets under management equaled $1.9 billion at the end of last year up from $1.8 billion a year earlier of which 39% was in hedge funds and 61% was in private capital strategies.

Going forward we continue to target to launch of at least one new fund per year through strategies which we think have a sustainable edge and can manage upward of $500 million within a five year period. In the fourth quarter we partnered with a hedge fund healthcare focus Blue Jay Health Sciences Fund that at the end of the year has gotten up to $42.6 million from zero at the end of the third quarter before the launch. In addition later in the quarter we partnered to launch Global Bank Multi-Family Investors and this is a private capital strategy so we hope to have a first close sometime in the next three to six month.

Now including our principal investment our total return on invested capital last year was 34.3%, that's a big number obviously and both people we'll be happy with that except a year before was 53.2%.

From an operating EPS standpoint that translated into $0.57 a share of net investment income which of course was down from $0.83 a share -- the lapping $0.83 per share I should say that we earned in 2012. The primary driver of that what as the previously mentioned decline in contribution which is still very favorable one from JMP Credit Advisors CLO 1.

Finally in the fourth quarter we earned 2.8% on our capital and our hedge funds which was above the 2.5% a quarter kind of target level but for the year our return was 7.5% which was below our annual goal of 10% and that shortfall accounted for roughly $0.03 a share of the decline in net investment income.

I'll ask Carter to take you through some JMP Securities highlights before I wrap up.

Carter D. Mack

Thank you, Joe. JMP Securities had another excellent quarter adding the strong results with another exceptional performance from our investment banking group which produced record revenues of $21.9 million up 69% from the quarter a year earlier. For the full year investment banking revenues were a record $74.2 million up 46% from 2012. JMP Securities benefited from improved equity capital market conditions in 2013. The firm's market share improved modestly last year to 91 basis points of all U.S. equity underwriting fees in the firm's four targeted industries compared to 90 basis points in 2012.

Our focus is on accelerating our grant organic growth since the financial crisis has paid the big dividend when considering our share of 27 basis points in 2009. Productivity in 2013 was broadly diversified by industry vertical and by product line demonstrating the growing value of the franchise. Our investment banking group completed a 171 transactions in 2013, compared to 123 in 2013. Of those 113 transactions were public common equity offering with JMP acting as lead manager on 27 transactions up from 15 a year before.

Giving full credit to co-managers, JMP's securities ranked number three overall and first among equals as an underwriter of U.S. common equity offering in its four targeted industry verticals last year and that was up from number nine and again first among equals in 2012. During the year JMP Securities was able to capitalize on substantial market share gains made since market downturn as well as the best equity capital market environment in quite some time.

JMP's equity capital rating market share is measured by percentage of total U.S. ECMP earnings was $0.44 for 2013 and our objective continues to be to increase our market share to 1% by 2017. In order to meet this goal we continue to focus on increasing our economics on co-managed deals winning a larger number of book run transactions and increasing our overall number of transactions we have hired more senior banker and research analysts to increase our coverage footprint in our industry areas.

Of particular note in 2013 was our performance in initial public offering and also in convertible issues. We highlighted our impressive market share gains in the IPO business in our third quarter earnings call and those trends continued in the fourth quarter. For the full year 2013, JMP acted as manager on 33 IPOs for 14.4% market share of U.S. IPO market. Our market share more than doubled from the 10 IPO and 6.9% market share we had in 2012 and was by far our best year ever in the IPO business.

2014 started off well for the IPO market despite the downturn in the overall market. JMP has already participated in seven IPOs so far this year including three book run transactions. Our convertibles business also had an outstanding year in 2013 as you can see the 21 convertible transactions brought over $5.1 billion in proceeds including four book run transactions. We ranked as the number one manager of convertible transaction among all the chief investment banks in 2013 by both number and volume of transactions. We continue to see good engagement from our corporate clients in 2014 given the continued weak activity in the market of new convertible issues.

Our M&A business experienced modest revenue growth in 2013 with $11.1 million of revenues up from 12 transactions, up from $8.9 billion from 12 transactions in 2012. We are optimistic about the growth in our M&A business in 2014 given the maturation of deal pipeline from some of that M&A focused bankers we hired in 2013 as well as strong level of current M&A mandate and engagements spread across our four industry verticals.

With that I will let Joe finish up.

Joseph A. Jolson

Thanks Carter. None of these calls would be complete without me putting my stock analyst hat back on, if you will indulge me briefly but a quick update on my JMP thesis. Our trailing 12 months earnings at our operating platforms improved from $0.38 per share in the third quarter to $0.47 a share in the fourth quarter. Now I'll just remind you, these numbers exclude 100% of all the net investment income at our operating subsidiaries which once again by the way covers all of our corporate cost as well as all the cost of those strategic initiatives and then contribute $0.13 a share to overall earnings per share of $0.60. The average fee multiple right now in our peer group is over 15 times the estimate for 2014.

I would just note that the estimate for us for 2014 is up versus what we just reported but if we just look at it conservatively and take a trailing four quarter view of $0.47 and apply that PE multiple that the Group is selling on estimated earnings that yields a value of $7.20 a share for our operating businesses.

Now we believe that our net invest capital which at year-end grew to $5.66 per share was very conservatively stable. By the way $5.66 is an extraordinary percentage of the $5.81 of tangible book value that we have which tells you that we have very little of our capital tied up in productive assets. Now last year we made 11.5% return on that invested capital after all comp expense and after tax. So we think that in the [inaudible] leverage book less than 1 leverage.

So we think that, that is being carried out at least fair value if not conservatively stated, so if you add those two pieces together the kind of investment company piece with the operating platform piece you get a value of close to $13 a share. Now our stock closed yesterday a little bit over $7 a share and I would suggest to you that, that delta is one of the main reasons why we continue to aggressively buyback stock of well above book value as well as you might have notice some of us been aggressively buying this stock personally in the last few months.

In closing though I want to thank all of our employees and Board members for their contributions in making last year a tremendous success of our company. I am very proud of our accomplishments and I believe we are one step closer to making JMP the last great place to work on Wall Street We look forward to updating everyone on our progress as 2013 unfolds and with that operator we would be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Needham with KBW.

Michael Needham - Keefe, Bruyette & Woods, Inc.

Hey, good morning guys and congrats on the record revenues. So thanks for covering some of the sort of the spend on your growth initiatives this year. It looks like the headcount growth kind of slowed a bit in the fourth quarter so should we sort of look at the $0.12 spend in '13 and sort of run rate for '14 or has your outlook changed there?

Joseph A. Jolson

I think that just so you understand what calculates that $0.12 it's basically the air ball that occurs between when you hire some people and maybe be project them at a certain level of income in the first year and what they actually produce in revenue. And so we would be hopeful that as Carter mentioned that some of these guys for investment banking that we hired let alone the guys in sales and trading that have the potential to impact relatively quickly the results. We would be hoping that, that number would be less. But obviously we'll wait to see how the year progresses. But the hope would be that as a ramp up that $0.12 over the next year is less in 2014 and by may be later in 2014 it actually turns positive.

Michael Needham - Keefe, Bruyette & Woods, Inc.

Okay, fair enough and the compensation ratio is a bit higher than we are looking for in the fourth quarter. Is that primarily due to the stronger incentive fees and the higher payout ratio there?

Joseph A. Jolson

Yeah we like higher incentive fees because there is no non-comp expense relative to that so it does add to our earnings. There is a positive operating margin on it but it's by far the highest comp ratio which we think is a good aligned with the managers as well as the shareholders where those I mean the revenues are high but it doesn't make our earnings go up a lot if they have a big quarter so reduces the earnings volatility for public shareholders for that kind of business.

So you could figure there's very low operating margin on those revenues if you wanted to kind of get a better sense of how that affected our numbers but that was the driver.

Michael Needham - Keefe, Bruyette & Woods, Inc.

Okay. And sort of the debt on convertible under writing line was really strong in the fourth quarter is that -- I think you guys commented a bit on strengthened convertibles are convertible driving that line and is that a change in the environment that you are seeing or did you guys benefit from maybe one or two other transactions?

Joseph A. Jolson

I'll just briefly comment on that and let Carter give you some more details but we've been in the convertible business for a number of years and I think across Wall Street had a good year and we benefited from that. but he can give you some details on that.

Carter D. Mack

Yeah I think the fourth quarter we had a good quarter in the convertible space I think we book ran a couple of transactions during that quarter. And we had an active year throughout the year in convertible. As I said we were -- I think we did 21 convertible transactions. We've also been increasing our footprint on the debt advisory side and debt private placements.

So we're optimistic about that business in the pipeline the transactions there. But the convertible market continues to be a good market. There is good demand in the market from investors on new issues and that's where we're focused and we feel good about that area.

Michael Needham - Keefe, Bruyette & Woods, Inc.

Okay, great, thanks guys.

Operator

At this time there are no further questions.

Joseph A. Jolson

Well operator then we would like to thank everyone for their interest in our company and look forward to the first quarter call, that would be in late April I guess. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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