Citizens Financial Group, Inc. (CFG) Q2 2013 Earnings Report, Transcript and Summary

Welcome to the JMP Group Second Quarter 2013 Earnings Conference Call. Today’s call is being recorded. All lines have been placed on mute. (Operator Instructions). At this time, I’d like to turn the call over to Andrew Palmer, the company's Head of Investor Relations. Please go ahead.

Good morning. Welcome. Here with me today are Joe Jolson, JMP’s Chairman and Chief Executive Officer and Ray Jackson, our Chief Financial Officer. You’re joined by Carter Mack, President of the Company and Craig Johnson, Vice Chairman. Before we move on I’d like to point out that some of this morning’s comments may contain forward-looking statements about future events that are out of JMP’s control. Actual results may differ materially from those indicated or implied. For a discussion of the uncertainties that could affect the company’s future performance please see the description of risk factors included in JMP’s most recent 10-K. With that said, I’ll turn the call over to our Chairman and CEO, Joe Jolson.

Thanks Andrew and thanks to those of you listening today for your interest in JMP Group. JMP had a great second quarter, excluding an after-tax expense of $0.03 a share relating to the successful IPO of Harvest Capital operated in May. operating EPS increased by 38% from a year ago to $0.18 driven by a similar year-over-year increase of 37% in adjusted net revenues. JMP Securities produced record revenues for the quarter as our market share gain since 2009 positioned us to benefit from an improving capital market's environment and more than offset the decline in net investment income and incentive fees during the period. We were particularly pleased to see that positive client reaction to management changes we recently made in our institutional equities business led to improved results more quickly than we had anticipated. I’ll have Ray take you through some of the quarter’s financial results before saying more.

Thanks Joe. Operating net income as reported was 3.3 million or $0.15 per share versus 3.1 million or $0.13 per share for the second quarter of 2012. Adjusted net revenues, which exclude non-cash items and non-controlling interest was 38 million compared to 27.7 million a year ago. For the six months ended June 30, adjusted net revenues were 70.1 million compared to 62.9 million for the first six months of 2012. Our adjusted operating margin was 14% for the second quarter, and was 15.9% for the six months ended June 30. In the second quarter, JMP Securities contributed $0.13 per share to operating EPS, up from $0.05 per share in the prior quarter and just $0.01 a year earlier. Harvest Capital Strategies lost $0.01 per share on operating EPS basis but on $0.02 when excluding the $0.03 after-tax expense tied to Harvest Capital Credit IPO. JMP Credit produced $0.13 per share versus $0.14 per share for the second quarter of 2012. From an expense standpoint, pro forma compensation and benefits expense, which excludes non-cash expense tied to stock-based awards but includes any deferred compensation as a percentage of adjusted net revenues was 65.6% for the second quarter and 64.1% for the first half. The non-compensation expense ratio excluding the one-time $2.5 million expense related to the IPO of Harvest Capital Credit was 17% for the second quarter and 18.1% for the first half. With regard to our balance sheet at June 30, JMP’s recourse debt to total capital ratio was 35% and our net cash and liquid securities per share was $1.78. Stockholder’s equity, all of which was tangible was $121.1 million and tangible book value per share was $5.47. Adjusted tangible book value per share was $5.21 versus $4.78 a year ago. Because the accelerated amortization of the net liquid discount on JMP Credit’s assets was completed in May, the only remaining difference between tangible and adjusted book value is due to our accelerated recognition of compensation expense, which must be deferred under GAAP. From a capital management standpoint, JMP repurchased approximately 0.5 million shares and paid a cash dividend of $0.035 during the second quarter. Year-to-date, we have returned $0.22 per share to stockholders, roughly 70% of our operating EPS is $0.31 per share with the remainder increasing at tangible book value and anticipation of attractive future investment opportunities. We continue to make effective capital management priority, balancing dividends and share buybacks with other principle investment activities. With that, I’ll turn things back over to Joe.

Thanks Ray. I want to make a few comments about the record quarterly results at JMP Securities before providing a mid-year report on our progress in meeting our near-term and longer term objectives. At the time of our May 2007 IPO, JMP Securities was the primary contributor of revenue and earnings to JMP Group. Since that time, sever industry wide secular headwinds combined with the cyclical global capital markets meltdown to undermine our growth objectives and in many cases bankrupt some of our competitors. Looking back the carnage industry wide since our IPO delivering essentially flat revenues managing our cost in order to stay profitable and at the same time gaining substantial market share of JMP Securities seems like a pretty successful outcome. JMP Securities produced record results in the second quarter because of our efforts to gain market share during the downturn were rewarded by surging revenues as overall capital markets environment began to improvement. Our commissions business benefited from rotation equities during the quarter as some of our larger clients traditional money managers experienced net outflows for the first time in many years… I’m sorry, net inflows for the first time I many years. That business also benefited from the recent leadership changes we made in that area which I’ll discuss in a few minutes. Our investment banking group generated record revenues, which were fairly well diversified across our industry groups and products, and were derived from any unusually large transactions in the period. The record revenues translated into record operating earnings of $0.13 a share as our operating margin surge to little under 17% from the quarter despite the fact that we maintained our comp ratio at 65% for the first half of 2013. We’re increasingly optimistic about our future earnings prospects at JMP Securities but continue…

(Operator Instructions). You have a question from the line of Joel Jeffrey from KBW. Joel Jeffrey - Keefe, Bruyette & Woods: Appreciating again the color and about sort of larger than expected, the $0.20 sort of earnings tied to the growth initiatives. I mean did the growth initiative this first half of the year really contribute meaningfully to the revenue side of the equation or are you really just seeing this more from (inaudible) and basically the operating leverage is really yet to come?

I don't think that they've contributed to the earnings in the first half, in the sense that we just hired some people in the sales and trading operations, Tom joined in February. So I think it's starting to contribute. So I don't we've seen that yet, but maybe a little bit of it in the second quarter. And in the investment banking side, the two investment bankers we hired, one started early in the year and he's already become reasonably productive to better than expected. The other one started in the second quarter and we're getting good feedback, but no revenues to report there, year-to-date. We did that deal in January, so obviously that expense is therefore pretty much the whole year, and of course the cost of taking (inaudible) public. I mean I think that when I gave you that number of upwards of $0.20 that essentially assumed that the comp that we kind of targeted to pay some of these guys, most of which isn't guaranteed or anything, but I think that's assuming for very little revenue. So we're obviously hoping to do better than that by the end of the year. Joel Jeffrey - Keefe, Bruyette & Woods: And how much of that $0.20 do you think you have already sort of incurred in the first half of the year?

It's spread out, the interest expenses spread out right, so if you look at $0.10 potentially from just the debt cost, we have kind of covered most of that cost just r at least part of that cost with the 30 million we put into our funds, right. The CLO investment was the rest of that and that closed in April and it takes a while for loans to close. So in the second quarter they actually had a negative return on the 17.3, because you are paying out on all the bonds, but the loans haven't closed yet. I think most of those loans will be closed by the next couple of months. So it should be a positive contributor in the third quarter and then maybe be at a normalized run rate in the fourth quarter. We have just budgeted that cost for close strategic hires evenly across the year, so that is already, one-fourth of that would have been this quarter. Joel Jeffrey - Keefe, Bruyette & Woods: So essentially though what we're seeing is basically half of the drag on the bottom line but no pickup really on the revenue side, so the operating margins really get to come from these.

Remember that, I mean it's hard to be precise about these we can track revenues for the people that we hired, but since most of them that we have hired have joined in the last few months, it's a little early to expect major revenue contributions there. Joel Jeffrey - Keefe, Bruyette & Woods: And then I mean the broker business was particularly strong. Looks like it's getting back to sort of more traditional levels. I mean again this is really just a function of people coming back to equities. I know you said in the commentary we got some other we have seen flows in the equities. But are you seeing just that much more of an appetite for institutions that progress on.

I think that and that's not the part of business that I am involved, I will just tell you the answers for the questions when I ask that. I think we're seeing a lot higher client engagement with some of these changes we made in personnel, so that's a positive. I think if you look at industry wide business there on the commission side and you would look at this more than I bet when the dust settles it will be up slightly year-over-year for equities U.S. equities trading, and maybe 5% or something like that. And so we obviously we're up a lot more than that. So we picked up some market share there. And like I said I think that's because of some of the people we brought in and the level of their relationships with institutions. Joel Jeffrey - Keefe, Bruyette & Woods: And then just lastly for me, on the investment banking side, it looks like sort of the debt and convertible securities line was pretty solid again particularly in terms of the revenue side. I mean is this sort of a new run rate we should kind of think about, was there anything specific in the line of quarter.

I will make a quick comment but I would like Carter to give you some details; but basically we bolted on a number of products in the last three or four years to leverage their relationships that we have on calling on these three participants. So it isn’t something that we just started to do but we have seen some improvement in terms of getting higher in closing revenues. So we feel pretty good about that, Carter can give us more details.

Yes, we had one significant transaction in the second quarter, $300 million debt yield that we are co-book runner on. So that was a significant feed. Other than that it came from a number of different convert and debt placement. We continue to be pretty engaged in both of those areas. In the convertible area in particular, we are seeing a lot of activity and expect to have some significant deals in the second half of the year. On the debt side, it continues to be engaged more on the private placement part of that. Overall it is a more significant contributor to our business and we expect that going forward. Joel Jeffrey - Keefe, Bruyette & Woods: Did the potential rise in rates have anything to do with people sort of maybe accelerating their plans to raise capital or isn’t that had any impact at all?

That happened at the end of second quarter, so it didn’t really have a positive or negative effect, I think, on our quarter.

No, we didn’t really see any major effect from that and Joe said it happened towards the end of the quarter. There are issues, that we’re looking at the rate environment and we are in historically one of the best high yield debt environments we have seen, very good convert market environment. So we are encouraging people to take advantage of that.

We cover middle market, kind of smaller middle market companies that are using capital to grow and expand in general. So we don’t do anything in the high grade area. So it will be less sensitive, reasonable changes in market interest rates is going to be a lot more sensitive to the user proceeds and the credit spreads type of side of it.

At this time there are no further questions.

Well, I would like to thank everyone for their interest today. I will be around today. If you have any follow-up questions, just give me a call and or Ray, or Andrew. And we will catch up within three months. Thank you.

Thank you ladies and gentlemen, and that conclude today’s conference call. You may now disconnect.