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Edited Transcript of JMP earnings conference call or presentation 27-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 JMP Group Inc Earnings Call

SAN FRANCISCO May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of JMP Group Inc earnings conference call or presentation Thursday, April 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew P. Palmer

JMP Group LLC - Director of IR

* Carter D. Mack

JMP Group LLC - Co-Founder, President and Director

* Joseph Andrew Jolson

JMP Group LLC - Co-Founder, Chairman of the Board, CEO and CEO of Harvest Capital Strategies LLC

* Mark L. Lehmann

JMP Group LLC - Director and President of JMP Securities

* Raymond S. Jackson

JMP Group LLC - CFO, Principal Accounting Officer, MD and Assistant Secretary

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Conference Call Participants

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* Alexander P. Paris

Barrington Research Associates, Inc., Research Division - Director of Research and Senior MD

* Christopher McCampbell

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Presentation

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Operator [1]

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Welcome to JMP Group's First Quarter 2017 Earnings Conference Call. Please note that today's call is being recorded. (Operator Instructions) I'll now turn the call over to Andrew Palmer, the company's Head of Investor Relations.

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Andrew P. Palmer, JMP Group LLC - Director of IR [2]

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Good morning. On the line with me today are Joe Jolson, JMP Group's Chairman and Chief Executive Officer; and Ray Jackson, the company's Chief Financial Officer. We're joined by Carter Mack, President of JMP Group; Mark Lehmann, President of JMP Securities; and Tom Wright, our Director of Equities. Before we begin, please note that some of this morning's comments may contain forward-looking statements about future events that are out of our control. Actual results may differ materially from those indicated or implied. For a discussion of the uncertainties that could affect JMP's future performance, please review the Risk Factors detailed in our most recent 10-K. With that, I'll turn things over to our Chairman and CEO, Joe Jolson.

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Joseph Andrew Jolson, JMP Group LLC - Co-Founder, Chairman of the Board, CEO and CEO of Harvest Capital Strategies LLC [3]

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Thanks, Andrew. Our first quarter operating net loss of $0.09 per share included specific loss provisions for 2 corporate credits as well as a large negative mark on our total return swap, resulting from an overall decline in prices of noninvestment grade corporate loans. Excluding these items, which reduced our net investment income by $0.13 per share, our operating EPS would've been $0.04, which while still below our normalized run rate, it was primarily due to carrying a very large cash balance of almost $2.60 a share at quarter end, that is funded with 8% long-term debt. While we continued to look for opportunities to redeploy our cash and generate attractive risk-adjusted returns, investors should expect that our net investment income will remain below historical levels. Even so, we're very optimistic about the remainder of this year. Based on an improving environment for equity issuance, our first quarter capital markets revenues were up 28% and 16% versus last year in the last quarter, respectively.

We also continue to expect another big year of strategic advisory revenues despite a soft first quarter, given our existing transaction pipeline. Additionally, we're hopeful that borrowing any further material loan losses and the successful execution of CLO IV in the next 3 months, our net interest income and net investment income will make a positive contribution to operating EPS in the quarters to come.

Before I go on, I'll have Ray give some financial highlights and Carter is going to discuss some activities at JMP Securities. Ray?

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Raymond S. Jackson, JMP Group LLC - CFO, Principal Accounting Officer, MD and Assistant Secretary [4]

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Thanks, Joe. Adjusted net revenues, which exclude noncash items and noncontrolling interest were $25.3 million, down from $36.6 million for the first quarter of 2016.

Our operating net loss was $2.1 million or $0.09 per share, as Joe mentioned. Compared to operating net income of $2.2 million or $0.10 per share a year earlier.

On the expense front, our adjusted compensation ratio excluding specific loss provisions and hedge fund incentive fees was 75.5% versus 70.7% for the first quarter of '16.

On the same basis, our adjusted noncompensation ratio was 28.8% compared to 21.8% a year ago. From a balance sheet perspective, our recourse debt to total capital ratio was 45% at March 31. Shareholders' equity, all of which was tangible was $114.2 million with adjusted book value per share, which reverses the impact of accumulated depreciation and amortization related to commercial real estate investments, as well as accumulated general loan loss provisions related to our CLOs ends the quarter at $5.74.

Last week, we announced monthly cash distributions of $0.03 per share for the second quarter unchanged from the first quarter making for a quarterly per share distribution of $0.09, an annual run rate of $0.36. Carter?

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Carter D. Mack, JMP Group LLC - Co-Founder, President and Director [5]

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Thanks, Ray. I want to provide an overview of our investment banking business, and in particular highlight the transaction momentum we saw developed during the first quarter and extend into the start of the second quarter. While the year started slowly in our underwriting and advisory businesses, we have seen a sustained upturn in transactions in client engagement. Our first quarter investment banking revenues of $13.6 million increased meaningfully each month during the quarter from $2.9 million in January to $4.5 million in February and $6.2 million in April. And this can -- in March, excuse me. And this trend continued into April, which could exceed strong March levels.

In our equity capital markets business, our clients are accessing the markets more actively after a muted start early in 2017 that followed a very depressed 2016 in equity capital markets. JMP has already acted as book runner on 8 ECM transactions so far this year compared to only 5 for all of 2016.

Our book run transactions in 2017 to date include 3 convertible equity offerings, 4 follow-on equity offerings and 1 PIPE offering. In the past week alone, we acted as book runner or lead placement agent on 2 follow-ons, a convertible equity offering and a PIPE transaction. As well as acting as financial advisor on a registered direct offering.

By the end of this week, JMP will have executed 7 IPOs so far in 2017 compared to a total of 9 during all of 2016, when overall IPO activity was extraordinarily subdued.

We are encouraged that the improved capital markets activity is diversified not only by product but also by industry. All 4 of JMP industry verticals: healthcare, technology, financial services and real estate have participated in the upswing.

We're hopeful that the record stock market levels, the open IPO and capital raising window and our clients' interest in accessing growth capital will continue to provide a positive ECM backdrop in 2017.

On the strategic advisory front, we closed 3 M&A transactions in the first quarter with revenues of $3.1 million, although this result did not match our targeted run rate, we are experiencing good momentum in our advisory business. In April, we've already announced 2 significant M&A transactions involving public companies with JMP acting as exclusive financial advisor to the seller in each case.

Our senior bankers across all our industry verticals are deeply involved in the strategic dialogues with the clients and many have active M&A engagements. Importantly, we anticipate that the M&A-focused bankers we added last year will contribute meaningfully to this year's advisory revenue now that they are established on that platform. M&A business is typically back-end waited with many transactions closing in the fourth quarter, making us confident that our robust pipeline of engagements should result in strong advisory revenues in 2017.

On the whole, we are encouraged by positive operational backdrop and momentum in our investment banking business and believe that this will translate into meaningfully improved revenue levels as 2017 progresses. Back to you, Joe.

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Joseph Andrew Jolson, JMP Group LLC - Co-Founder, Chairman of the Board, CEO and CEO of Harvest Capital Strategies LLC [6]

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Thanks, Carter. A few observations about our first quarter results, which also indicate positive momentum underlying the headline loss. While our investment banking revenues of $13.6 million were well below the $18.3 million from a year ago, as Carter mentioned, the mix was heavily weighted to ECM fee revenues. The fees we earned on public equity and debt offerings rose by 56% from the prior quarter and 68% from the previous first quarter a year ago to $10.4 million, which signals a revitalized backdrop for new equity issuance.

Though capital markets activities is still nowhere near the record levels of 2013 and 2014, a partial recovery this year bodes well for us achieving our 2017 business plan. We are seeing the momentum continue as Carter mentioned into the second quarter thus far. Our strategic advisory revenues are hard to predict from quarter-to-quarter but are more visible over a full year. The first quarter's advisory revenues of $3.1 million were short of the record $12.1 million from a year ago, but as Carter said, the M&A mandates we have in hand make us more confident that the remainder of this year will make for better year-over-year comparisons.

If so, we would expect a substantial improvement in JMP's operating earnings this year. In the first quarter, JMP securities was nominally profitable contributing a $0.01 a share in operating EPS and generating a slim 1.7% operating margin.

This low level of profitability was a result of soft advisory revenues and our decision that we made over the last few years to maintain our core franchises despite the significant decline in ECM activities since the first half of 2015. Before capital markets revenues keep their current pace and our advisory revenues meet their plan -- our plan for the year, we would expect to see much-improved operating margins as this year progresses.

Our asset management businesses, Harvest Capital Strategies, JMP Asset Management, JMP Credit Advisors and HCAP Advisors combined to earn a $0.01 a share for the quarter that given the limited capital needed for these businesses resulted in a return on equity of 8.2%.

Asset management-related fees fell by 34% year-over-year to $5.9 million, reflecting a decrease in hedge fund incentive fees compared to a very good quarter a year ago.

This modest profitability was expected, and as a result of increased platform operating cost in the current environment, including the startup costs for 2 of our newly started funds. The clawback of incentive fees at HCAP Advisors and continued operating losses, as I said, from the newer funds that haven't reached scale.

As the year progresses, we expect profitability to improve due to additional AUM in our newer strategies, as well as a reduction in the clawback of incentive fees.

For the quarter, we posted a gain of just 0.4% on the capital we invested in our hedge funds versus gains of 3.6% and 2.5% for the HFRI Equity Hedge (Total) Index and the Russell 2000, respectively.

Including our -- all of our investments, including the CLO securities and principal and other investments, our total return on capital was just 1.3%. I mentioned some of the reasons for that earlier in my remarks. That return for the first time in a long time on a quarterly basis was actually below the quarterly cost of our long-term fixed-rate debt, which resulted in a loss of about $0.11 a share in net corporate income compared to making $0.07 in the prior quarter and a $0.01 a year ago.

As I mentioned earlier, much of the shortfall can be attributable to few noncash items, specific loss provisions in connection with 2 corporate credits and a mark-to-market loss on our total return swap.

The loan loss provisions reflected 2 impaired credits, while the negative mark on the TRS reflects just the overall drop in the noninvestment grade corporate loan market in the quarter. We expect loan losses in our corporate credit business and we always underwrite our CLOs assuming an average of about 60 basis points of charge-offs a year versus our actual experience in the past 5 years has just been 13 basis points a year. The absence of loan losses in the recent past reflects the strength of the U.S. economy and the health of the noninvestment grade corporate credit market. While we do have general loan loss reserves, GAAP accounting does not allow us to use these to smooth quarterly earnings volatility.

So were the credit markets to return to our normalize state, we would expect more greater loan losses and we assume in our budget that, that we have those going forward. The large negative mark on the TRS reflected price declines in the overall loan market may be due to the Feds raising short-term interest rates. In April, we did close our TRS and transferred the loans to a new warehouse facility in anticipation of executing a CLO in the next 3 to 6 months. As such, the potential earnings volatility that existed while the TRS was in place will no longer negatively or positively impact our results going forward.

Our investment in Workspace Property Trust continues to perform well and generated a return on investment of little under 10% for the quarter. And provides many growth opportunities going forward. We continue to carry the investment at the book value of our ownership interest, and we believe there could be material upside to this based on current valuations of publicly traded peers. Before I finish my prepared remarks, I also wanted give an update on our 4 key business objectives for 2017 and beyond that I've outlined in the past.

First, to grow our M&A franchise to more than $50 million in annual revenues by 2021. Now despite the soft first quarter as we've talked about, we are pleased with the pipeline in place and some of that is being generated by some recently added M&A bankers and our increased calling efforts on publicly traded small-cap companies, which Carter alluded to recently, 2 announced deals in the last month.

If 2017 strategic advisory revenues end up within 10% plus or minus of last year's record results. We remain hopeful that our company's valuation could improve materially, given that our stock trades at plus or minus book -- adjusted book value. Our strategic advisory platform needs limited working capital to operate and to grow. And as such, can provide highly appealing returns on the small amount of equity.

Second, to maintain the franchise value of our capital markets business in the face of what could be a year 3 of a severe industry downturn, although at this point with the improving trends it looks like that may be in the rear-view mirror. Even though we had misjudged the duration of this down cycle, higher equity prices this year have finally spurred corporate issuers into action as the business of the capital markets, IPOs, follow-ons, converts and commissions are starting to improve materially.

We will continue to manage this area actively as the year unfolds, and we are committed to being very well positioned if the cycle turns more favorable, which we think that it is.

Third, to grow assets under management in our existing funds with excess capacity. In the first quarter, AUM was negatively impacted by the liquidation of CLO I and redemptions at Blue Jay. We're in the process of launching CLO IV in the next few months, and potentially, CLO V by year-end, which if successful, would redeploy much of our excess cash back into the strategy and increase our AUM beyond December 2016 levels. We have been successful in launching JMP Capital One, a debt-focused strategy that will seek to take advantage of the best opportunities originated across our platform, with roughly $21 million in equity commitments as of April 3.

JMP Group is also committing another $10 million to the strategy in addition to this client capital. And we are in the process of working on a new credit facility to get some leverage in the fund to give us overall asset capacity of $50 million to $60 million.

During the first quarter, there were no additions or established strategies to our platform through investment, outsourcing agreements or acquisition, but we continue to be actively engaged in discussions.

And fourth, obviously, we need to redeploy our large investable cash balance of almost $2.60 a share, which has grown significantly in the last few quarters as a result of hedge fund redemptions and the harvesting of successful investments.

We need to redeploy this into new opportunities. On our radar screen currently are the $10 million we just committed to JMP Capital One, a successful execution of CLO IV, and perhaps CLO V by year-end if conditions warrant.

Strategic acquisitions and investments and potentially retiring some of our long-term debt, which has a pretax blended rate of approximately 8%. Given the uncertain timing of the CLOs as well as investment opportunities, we expect net investment income to be well below historical levels in 2017, but hope that it will improve each quarter as we put some of this capital to work. There's potential upside to this scenario since it does not anticipate that any of our existing principal investments will be monetized this year. In 2016, we enjoyed 2 such positive events, which added roughly $0.17 to the net investment income and operating results.

To conclude, I want to thank JMP's employees and independent directors for their tireless efforts as always. With a disappointing first quarter now firmly in our rear-view mirror, I'm optimistic that the growth initiatives that we have put in place will continue to drive long-term shareholder value and I look forward to sharing our second quarter results on our next conference call in late July.

Operator, I -- happy to take questions. If there are any.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Alex Paris with Barrington Research.

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Alexander P. Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Senior MD [2]

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I detect some optimism as you had kind of outlined the balance of the year. Congratulations on the success on the capital-raising side. Hopefully, we'll see that continue like you said with higher stock market valuations. On the strategic advisory side, obviously, this quarter was a tough comp. I think first quarter last year was your highest quarter ever for that effort. The comps are a bit easier over the balance of the year. Now did I hear you right, I think Joe, that you got a shot at 2016 levels plus or minus 10%, is that what you said?

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Joseph Andrew Jolson, JMP Group LLC - Co-Founder, Chairman of the Board, CEO and CEO of Harvest Capital Strategies LLC [3]

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Well, that's our goal, so you heard me right. I don't know if Carter wants to elaborate on that, but that's been our goal since the beginning of the year and from all that we see right now we have pipeline that should allow us to execute on that.

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Carter D. Mack, JMP Group LLC - Co-Founder, President and Director [4]

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Yes, I mean as I stated in my remarks, this is Carter. We've announced 2 significant deals for us post the end of the first quarter just really in the last week. And those are both meaningful fees. They may if -- one, I think, will close in the third quarter and the other may close in the second quarter, but it's a chunky business. As you pointed out, we had a really good first quarter last year and we had a pretty good fourth quarter. And so we had less closings in the first quarter, but we still feel really good about the business and our level of engagement and the deals were signing up and the size of transactions that we're doing. So all that put together we still feel very comfortable with our plans for the year.

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Alexander P. Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Senior MD [5]

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So is that on plan or are you increasingly optimistic over the past 4 months with regard to strategic advisory?

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Carter D. Mack, JMP Group LLC - Co-Founder, President and Director [6]

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Well, I mean, the run rate isn't on plan, but where we think deals will close and get to the end of the year, we think will be at the levels -- the planned level. It's just a chunky business, like I said. We had 2 deals announced right after the first quarter that were both significant fees.

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Alexander P. Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Senior MD [7]

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Great. And then on the capital-raising side, you said you had sequential month-over-month improvements during the first quarter and that's continued into April.

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Carter D. Mack, JMP Group LLC - Co-Founder, President and Director [8]

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Yes, I mean, we'll exceed April -- I mean, we'll exceed March revenue levels in April.

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Alexander P. Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Senior MD [9]

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Great. And then just moving down the line into the net brokerage revenues, which are a crappy part of the business over the last few years, as Joe mentioned, that's been down for at least a couple of years now. The net brokerage revenue in the first quarter was down 13% it was lesser late in the fourth quarter. So it looked worst in the first quarter, I guess, on a year-over-year basis. Can you break it down by month where has there been improvement sequentially from January to March or into April?

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Mark L. Lehmann, JMP Group LLC - Director and President of JMP Securities [10]

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Sure, this is Mark. Yes, April as the month have progressed, our -- we've clawed our way back and April, as Carter said on the capital market side, is a better comparison to the first quarter and we're finding similar comparisons on April versus a year ago.

So as the market has gotten a little more receptive, activity has also picked up. And like you said it, this is one of more challenging sides of our business, but I think, the optimism we have about the capital markets should help our overall trading business. And just to give you a sense, I mean, we'll have a couple IPOs that we'll price tonight, both have to find right receptivity from The Street, there's a couple more IPOs we have on the road that should be pricing sometime in early May.

So that kind of activity we haven't seen. We'll price more IPOs in the first 3 or 4-plus, 1 week of year in '17 than we had in all of '16. And I would expect others to see that kind of activity for The Street and take advantage of that, given the current levels of the stock market. So April is going to be a nice month for us around the firm and I think it will lead to some other optimism from some of our issuer clients as well as some of our buy-side clients.

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Alexander P. Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Senior MD [11]

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So in other words, or in addition to the typical trading commission paying you for your research product and things like that, there's a high correlation between new issues that you're book running and in commission trading on your desk?

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Mark L. Lehmann, JMP Group LLC - Director and President of JMP Securities [12]

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There's a good correlation. I think people look to us, obviously, they trade those deals that we're a part of. And also, we're part of some of the better -- just recently some of the tech IPOs, that I think people know we're a force and on the research side and also on the banking side, it just enhances what we have as a product for our issuers as well as our buy-side clients.

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Joseph Andrew Jolson, JMP Group LLC - Co-Founder, Chairman of the Board, CEO and CEO of Harvest Capital Strategies LLC [13]

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Alex, the -- there was the year-over-year comparisons improved, as we went from January, February, March, but I -- we won't get the numbers for the -- the blogging numbers for another -- with a lag of 3 months, but our general sense is that down 13% was we -- I think we held to serve maybe even improved a little relative to The Street.

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Alexander P. Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Senior MD [14]

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Is it -- it used to give a lot of pressure on rate, or is it more volume-driven, the decline in trading revenues?

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Joseph Andrew Jolson, JMP Group LLC - Co-Founder, Chairman of the Board, CEO and CEO of Harvest Capital Strategies LLC [15]

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That's all volume-driven. There really hasn't been any pressure on commission rates, material pressure in the long time, I mean it's just a matter of activity.

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Alexander P. Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Senior MD [16]

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How much lower can they go? Just kidding.

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Joseph Andrew Jolson, JMP Group LLC - Co-Founder, Chairman of the Board, CEO and CEO of Harvest Capital Strategies LLC [17]

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That's the -- probably it's an offline discussion over a few hard Bourbons or something. But yes, it's -- that part of our business as well as Wall Street is really been depreciated in the last decade plus. So if everyone comes to work, working hard every day, it's a tough area of the business, but we're firmly committed to it. And it drives our market share on the equity issuance side.

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Alexander P. Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Senior MD [18]

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Yes. Clearly, an important part of the business, I agree. I'm also cautiously optimistic for the balance of the year.

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Joseph Andrew Jolson, JMP Group LLC - Co-Founder, Chairman of the Board, CEO and CEO of Harvest Capital Strategies LLC [19]

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Great.

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Operator [20]

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There are no -- we do have a question from the line of Chris McCampbell with Hilltop Securities.

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Christopher McCampbell, [21]

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Wanted to follow up on the fact that in the past, you all have been, I guess, aggressive. Well, aggressive wouldn't be the right term, but when the stock is traded below book value, you've been opportunistic with the share repurchases, and obviously that wasn't the case over the last 6 months, but is that something that you would be more open to now that we're trading below that?

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Joseph Andrew Jolson, JMP Group LLC - Co-Founder, Chairman of the Board, CEO and CEO of Harvest Capital Strategies LLC [22]

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Well, it doesn't -- the answer to your question is, yes, I mean, if the lower stock price -- buying back stock is accretive to book value per share. It just hasn't been trading below book value for a while. We'll see where it settles in here. I think that the -- clearly, this quarter wasn't one of our better quarters, but it was generated with some unusual negative items on the investment side. And we have some potential on usual positive things that could happen on the investment side as the year goes along and it remains to be seen by year-end whether or not we'll have a really good year on the investment side. I'm still pretty optimistic, we're only 4 months into the year there. But we do have some wood to chop and redeploying all this cash to get a more consistent net investment income level every quarter. But I think that we have a lot of cash, as we said, it's couple of bucks a share of excess cash. So we'll see where the stock levels in here.

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Christopher McCampbell, [23]

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And I know you've obviously on a number of your presentations showed a long list of companies that are no longer around because of M&A. And I just wonder, obviously, we're optimistic going forward here, but can you talk about the ability just from a broad standpoint of JMP growing the business after arguably a relatively long bull market already compared to potentially seeking strategic alternatives for shareholders?

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Joseph Andrew Jolson, JMP Group LLC - Co-Founder, Chairman of the Board, CEO and CEO of Harvest Capital Strategies LLC [24]

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Well, the bull market's been long. We can all agree on that. And from a duration, if it's not unprecedented, it's probably close to being unprecedented. The business of the stock market though until very recently has been in a sharp decline. So when I say the business of the stock market, I'm talking about raising growth capital for public companies, equity and converts and commissions.

And for us, as well as for Wall Street across the board is probably depending on the firm, 50% to 70% kind of declines in those businesses depending on the mix of their business over a 2-year period.

So it's one of those kind of situations where the business of the market should not have been strong while the market it's held in there. So what remains to be seen if the business is corrected is another word, already even though the levels didn't

force it. I think that the -- we're always looking at things, and we're always talking to people. And I think that -- but there's nothing actively going on at the moment, but we're always looking at opportunities for our company and our shareholders.

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Operator [25]

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And I show no further audio questions at this time.

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Joseph Andrew Jolson, JMP Group LLC - Co-Founder, Chairman of the Board, CEO and CEO of Harvest Capital Strategies LLC [26]

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Okay. Thanks, everybody. I look forward to giving you a better update in July. Take care.

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Operator [27]

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This does conclude today's conference call. We thank you for your participation. Please disconnect your lines.