JMP Group Reports Fourth Quarter and Fiscal Year 2019 Financial Results

SAN FRANCISCO–(BUSINESS WIRE)–JMP Group LLC (NYSE: JMP), an investment banking and alternative asset management firm, reported financial results today for the quarter and full fiscal year ended December 31, 2019.

A summary of JMP Group’s operating results for the quarter and year ended December 31, 2019, and for comparable prior periods, is set forth below.

Quarter Ended Year Ended
(in thousands, except per share amounts) Dec. 31, 2019 Sept. 30, 2019 Dec. 31, 2018 Dec. 31, 2019 Dec. 31, 2018
 
Total net revenues

$23,822

$21,024

$31,698

$100,081

$136,424

 
Net income/(loss) attributable to JMP Group

($6,445)

($4,061)

($203)

($6,549)

($2,187)

Net income/(loss) attributable to JMP Group per share

($0.33)

($0.21)

($0.01)

($0.32)

($0.10)

 
Operating net income/(loss)

$140

($1,963)

$2,525

($851)

$6,018

Operating net income/(loss) per share

$0.01

($0.10)

$0.12

($0.04)

$0.28

 
Book value per share

$3.16

$3.72

$3.93

$3.16

$3.93

Adjusted book value per share

$3.96

$4.51

$4.98

$3.96

$4.98

For more information about operating net income, including a reconciliation to net income, and adjusted book value per share, including a reconciliation to book value per share, see the section below titled “Non-GAAP Financial Measures.”

Our fourth-quarter operating results improved materially, due to our strongest investment banking performance of the year, a recovery in asset management earnings, and good cash returns on our invested capital,” said Chairman and Chief Executive Officer Joe Jolson. “We reported operating EPS of $0.01, after an operating loss of $0.10 per share for the prior quarter.

We are optimistic that the positive momentum in our investment banking business will continue in 2020. We expect our capital markets activity to rebound after a substandard 2019, and we expect to successfully execute on a record backlog of engaged advisory assignments. For the fourth quarter, capital markets revenues—which include institutional brokerage revenues—increased 43% year over year to $19.0 million, and the trend has continued thus far into the first quarter. Strategic advisory revenues for the fourth quarter declined 39% year over year to $6.3 million, primarily as a result of one large fee earned late in 2018. On the whole, advisory revenues for 2019 were disappointing, as we closed fewer engaged transactions by year-end than we had anticipated. However, most of these transactions continue to progress toward a close in the first half of 2020, and new mandates over the past six months have boosted our pipeline by nearly 70% when compared to January 2019, boding well for the revenue outlook in the second half of this year.

Our asset management business narrowed its operating loss in 2019 and, including the fee-based revenues from Medalist Partners Corporate Finance recognized as investment income, would have been profitable for the year. At December 31, client assets under management were $533 million. Our interest in Medalist, formerly known as JMP Credit Advisors, is no longer reported in this number. Medalist just priced its sixth CLO of $300 million, increasing its managed assets to roughly $1.5 billion, which could drive an increase of more than 25% in our earnings from our credit business this year. All together, we expect our combined asset management business to return to historical levels of profitability in 2020.

Our return on invested capital for the fourth quarter was 12.8% on an annualized basis, more than covering our corporate costs and contributing $0.08 to operating EPS. During the quarter, we had $58 million invested in the equity of three of our CLOs, which are now managed by Medalist. Cash distributions to us have been above forecast, but macro changes in interest rates and fears of a slowing economy led to a sharp selloff in broadly syndicated loans during the second half of 2019 and resulted in a non-cash valuation hit at year-end that was reflected in our GAAP results. Nevertheless, we expect cash distributions to remain strong this year, barring an actual downturn in the economy, and we could recover the valuation adjustment over time through improved earnings. Another $10 million of our capital is invested in Workspace Property Trust, which continues to improve net operating income by reducing its vacancy rates and increasing its average rents, even as it has successfully extended the duration of its office leases.

Lastly, we are planning to change the way we return capital to shareholders. We plan to suspend our quarterly dividend and intend to file a tender offer for up to three million of our shares, equal to roughly 15% of our total outstanding shares. While repurchasing shares will reduce shareholders’ equity initially, we will save more than $3 million per year from the change in dividend policy and expect to be solidly profitable in 2020, which will combine to help rebuild our equity base over time. Since going public in 2007, we have consistently returned more than 100% of our operating earnings to shareholders through cash dividends and buybacks.

We look forward to updating everyone further in late April, when we report our first-quarter results.”

Segment Results of Operations

A summary of JMP Group’s operating net income per share by segment for the quarter and year ended December 31, 2019, and for comparable prior periods, is set forth below.

Quarter Ended   Year Ended
($ as shown) Dec. 31, 2019 Sept. 30, 2019 Dec. 31, 2018   Dec. 31, 2019 Dec. 31, 2018
   
Broker-dealer

($0.10)

($0.06)

$0.08

 

($0.24)

$0.37

   
Asset management:  
Asset management fee income

0.03

(0.01)

0.01

 

(0.02)

(0.03)

Investment income

0.11

0.05

0.14

 

0.48

(1)

0.34

Total asset management

0.14

0.03

0.14

 

0.46

0.31

   
Corporate costs

(0.03)

(0.08)

(0.11)

 

(0.26)

(0.41)

   
Operating EPS (diluted)

$0.01

($0.10)

$0.12

 

($0.04)

$0.28

(1)

Includes a gain of $0.08 per share on the sale of a controlling interest in JMP Credit Advisors LLC to Medalist Partners LP.

Note: Due to rounding, numbers in columns above may not sum to totals presented.

For more information about operating net income, including a reconciliation to net income, see the section below titled “Non-GAAP Financial Measures.”

Composition of Revenues

Investment Banking

Investment banking revenues were $20.9 million, an increase of 17.3% from $17.8 million for the quarter ended December 31, 2018. For the year ended December 31, 2019, investment banking revenues were $65.7 million, a decrease of 25.4% from $88.1 million for the year ended December 31, 2018.

A summary of the company’s investment banking revenues and transaction counts for the quarter and year ended December 31, 2019, and for comparable prior periods, is set forth below.

Quarter Ended

 

Year Ended

Dec. 31, 2019

Sept. 30, 2019

Dec. 31, 2018

 

Dec. 31, 2019

Dec. 31, 2018

($ in thousands) Count Revenues Count Revenues Count Revenues   Count Revenues Count Revenues
Equity and debt origination

19

$14,557

17

$8,561

17

$7,383

 

78

$42,236

90

$54,660

Strategic advisory and private placements

3

6,316

6

6,667

5

10,405

 

18

23,480

22

33,447

Total

22

$20,873

23

$15,228

22

$17,788

 

96

$65,716

112

$88,107

Brokerage

Net brokerage revenues were $4.5 million, a decrease of 24.6% from $5.9 million for the quarter ended December 31, 2018. For the year ended December 31, 2019, net brokerage revenues were $17.6 million, a decrease of 14.9% from $20.7 million for the year ended December 31, 2018.

Total capital markets revenues, which consist of net brokerage revenues produced by the institutional equities division in addition to equity and debt origination revenues generated by the investment banking division, were $19.0 million and $59.9 million for the quarter and year ended December 31, 2019, respectively, compared to $13.3 million and $75.4 million for the quarter and year ended December 31, 2018, respectively.

Asset Management

Asset management fees were $1.7 million, a decrease of 52.2% from $3.6 million for the quarter ended December 31, 2018. For the year ended December 31, 2019, asset management fees were $7.4 million, a decrease of 61.2% from $19.1 million for the year ended December 31, 2018. The decrease is primarily due to the sale of the Harvest Small Cap Partners hedge fund strategy at year-end 2018. For the quarter and year ended December 31, 2018, the fund strategy contributed $1.6 million and $11.7 million, respectively, to asset management fees. While the sale resulted in a considerable loss of asset management revenue, it was structured to have an approximately neutral effect on the company’s operating net income, as JMP Group continues to share in the fund strategy’s revenues, now recognized as other income, and no longer incurs any related compensation expense.

A summary of the company’s client assets under management for the quarter ended December 31, 2019, and for comparable prior periods, is set forth below.

(in millions) Dec. 31, 2019 Sept. 30, 2019 Dec. 31, 2018
Harvest Capital Strategies, JMP Asset Management and HCAP Advisors

$533

$554

$921

JMP Credit Advisors (1)

1,245

Client assets under management

533

554

2,166

Assets under management by sponsored funds (2)

5,381

5,241

3,449

Client assets under management, including sponsored funds

$5,914

$5,795

$5,615

(1)

As announced on March 20, 2019, JMP Group sold a 50.1% equity interest in JMP Credit Advisors LLC to Medalist Partners LP and a 4.9% interest to employees of JMP Credit Advisors. Consequently, assets managed by Medalist Partners Corporate Finance, the former JMP Credit Advisors, have been included among sponsored funds since the quarter ended March 31, 2019.

(2)

Funds managed by third-party asset managers in which JMP Group owns an economic interest.

Principal Transactions

Principal transactions generated a net loss of $5.0 million, compared to a net loss of $0.8 million for the quarter ended December 31, 2018. The difference is in large part due to the impairment of CLO equity owned by JMP Group. A reduction in the net present value of forecasted cash flows through the end of the expected life of the CLOs required an impairment charge in the amount of $4.2 million for the quarter ended December 31, 2019.

For the year ended December 31, 2019, principal transactions generated a net gain of $1.3 million, compared to a net loss of $2.3 million for the year ended December 31, 2018. In addition to the effect of the aforementioned impairment charge, the difference for the year is primarily due to a gain of $3.4 million on the sale of a majority interest in JMP Credit Advisors in March 2019, in addition to a gain of $0.2 million on JMP Group’s investment in Workspace Property Trust for the quarter ended March 31, 2019, compared to a loss of $2.0 million on the investment for the quarter ended March 31, 2018, due to costs associated with a failed initial public offering.

Net Interest Income

Net interest income was $0.6 million, a decrease of 88.2% from $5.0 million for the quarter ended December 31, 2018. For the year ended December 31, 2019, net interest income was $5.3 million, a decrease of 68.5% from $16.9 million for the year ended December 31, 2018. The difference is primarily due to a change in the recognition of income from investments in collateralized loan obligations following the sale of a majority interest in JMP Credit Advisors to Medalist Partners in March 2019.

Provision for Loan Losses

No loan loss provision was recorded for the quarter ended December 31, 2019. For the quarter ended December 31, 2018, before JMP Group deconsolidated all collateralized loan obligations from the company’s financial statements with the sale of a majority interest in JMP Credit Advisors to Medalist Partners in March 2019, the net loan loss provision was $0.9 million.

Expenses

Compensation and Benefits

Compensation and benefits expense was $22.6 million, compared to $21.3 million for the quarter ended December 31, 2018. As a percentage of net revenues, compensation and benefits expense was 95.0%, compared to 67.2% for the quarter ended December 31, 2018. With regard to annually awarded compensation, a non-GAAP measure that adjusts compensation expense related to share-based awards and deferred compensation, compensation and benefits expense was 87.1% of net revenues, compared to 67.5% for the quarter ended December 31, 2018.

For the year ended December 31, 2019, compensation and benefits expense was $77.3 million, compared to $97.4 million for the year ended December 31, 2018. As a percentage of net revenues, compensation and benefits expense was 77.3%, compared to 71.4% for the year ended December 31, 2018. With regard to annually awarded compensation, compensation and benefits expense was 73.2% of net revenues, compared to 71.2% for the year ended December 31, 2018.

For more information about compensation ratios, see the section below titled “Non-GAAP Financial Measures.”

Non-Compensation Expense

Non-compensation expense was $8.5 million and $36.2 million for the quarter and year ended December 31, 2019, respectively, compared to $8.5 million and $39.1 million for the quarter and year ended December 31, 2018, respectively.

Personnel

At December 31, 2019, the company had 209 full-time employees, compared to 208 at September 30, 2019, and 228 at December 31, 2018.

Other Corporate Actions

The company did not repurchase any outstanding common shares during the quarter ended December 31, 2019. The company is suspending its quarterly dividend. The Company is announcing through a separate press release today its intention to file a tender offer for up to three million of its common shares, equal to approximately 15% of the company’s total outstanding capital stock.

Certain Information Regarding the Tender Offer

The tender offer described in this press release has not yet commenced. The information in this press release describing JMP Group’s tender offer is for informational purposes only and does not constitute an offer to buy or the solicitation of an offer to sell shares in the tender offer. On the commencement date of the tender offer, a tender offer statement on Schedule TO, including an offer to purchase, a letter of transmittal and related materials, will be filed with the United States Securities and Exchange Commission (the “SEC”) by JMP Group. The tender offer will only be made pursuant to the offer to purchase, the letter of transmittal and related materials filed as a part of the Schedule TO. Shareholders should read the offer to purchase and the related materials carefully because they contain important information, including the various terms and conditions of the tender offer. Once the tender offer is commenced, shareholders will be able to obtain a free copy of the Schedule TO, the offer to purchase and other documents that JMP Group will be filing with the SEC from the SEC’s website at www.sec.gov. Shareholders may also obtain a copy of these documents, without charge, from D.F. King & Co., Inc., the information agent for the tender offer, by calling (800) 622-1569 (toll free). Shareholders are urged to carefully read these materials prior to making any decision with respect to the tender offer. Shareholders and investors who have questions or need assistance may call D.F. King & Co., Inc., the information agent for the tender offer, toll free at (800) 622-1569 or may email D.F. King & Co., Inc. at jmp@dfking.com.

Non-GAAP Financial Measures

In addition to the GAAP financial results presented in this press release, JMP Group presents the non-GAAP financial measures discussed below. These non-GAAP measures are provided to enhance investors’ overall understanding of the company’s current financial performance. Furthermore, company management believes that this presentation enables a more meaningful comparison of JMP Group’s financial performance across various periods. However, the non-GAAP financial results presented should not be considered a substitute for results that are presented in a manner consistent with GAAP. A limitation of the non-GAAP financial measures presented is that the adjustments concern gains, losses or expenses that JMP Group generally expects to continue to recognize. The adjustment of these non-GAAP items should not be construed as an inference that these gains or expenses are unusual, infrequent or non-recurring. Therefore, both GAAP measures of JMP Group’s financial performance and the respective non-GAAP measures should be considered together. The non-GAAP measures presented herein may not be comparable to similarly titled measures presented by other companies.

Compensation Ratio

A compensation ratio expresses compensation expense as a percentage of net revenues in a given period. As presented by JMP Group, an adjusted compensation ratio is a non-GAAP financial measure that utilizes adjusted compensation and benefits expense as the numerator. This adjusted ratio excludes certain compensation-related expenses that are or are not recognized under GAAP. In particular, the adjusted compensation ratio reverses compensation expense and unrealized mark-to-market gains or losses related to share-based awards and deferred compensation (so that the compensation expenses used in the numerator correspond to the adjusted net revenues generated in the periods presented).

A statement of JMP Group’s compensation ratio for the quarter and year ended December 31, 2019, and for comparable prior periods, is set forth below.

Quarter Ended   Year Ended
($ in thousands) Dec. 31, 2019 Sept. 30, 2019 Dec. 31, 2018   Dec. 31, 2019 Dec. 31, 2018
   
Total net revenues

$23,822

$21,024

$31,698

 

$100,081

$136,424

   
Compensation and benefits

$22,641

$17,506

$21,289

 

$77,314

$97,359

Subtract/(add back):  
Share-based awards and deferred compensation

1,895

753

(122)

 

4,079

167

Adjusted compensation and benefits

$20,746

$16,753

$21,411

 

$73,235

$97,192

   
Ratio of compensation expense to net revenues

95.0%

83.3%

67.2%

 

77.3%

71.4%

Ratio of adjusted compensation expense to net revenues

87.1%

79.7%

67.5%

 

73.2%

71.2%

Operating Net Income

Operating net income is a non-GAAP financial measure that (i) reverses compensation expense related to share-based awards and deferred compensation, (ii) reverses the general loan loss provision taken with regard to certain CLOs, (iii) excludes the impact of the early retirement of debt issued by JMP Group and a CLO, (iv) excludes transaction costs related to a CLO, (v) excludes amortization expense related to a CLO, (vi) reverses unrealized gains or losses related to real estate investment properties, (vii) reverses net unrealized gains and losses on strategic equity investments and warrants, and (viii) assumes an effective tax rate. In particular, operating net income adjusts for:

  • the grant of RSUs and options;
  • net deferred compensation, which consists of (a) deferred compensation awarded in a given period but recognized as a GAAP expense over the subsequent three years, less (b) GAAP expense recognized in a given period but already reflected in the operating income of a prior period; the purpose of this adjustment is to fully reflect compensation awarded in a given year, notwithstanding the timing of GAAP expense;
  • the non-specific loss provision recorded with regard to loans held by collateralized loan obligations and loans held for investment, which is required by GAAP, prior to the quarter ended March 31, 2019;
  • the impairment of CLO equity recorded among principal transactions, as the company believes that the forecasted reduction in future cash flows will be mitigated by a change in the interest rate environment and that distributions will be larger than currently projected;
  • one-time expenses associated with the redemption of debt underlying JMP Credit Advisors CLO III (in the first quarter of 2018), the redemption of senior notes due 2023 (in the third quarter of 2018 and the third quarter of 2019), and the resulting acceleration of the amortization of remaining capitalized issuance costs;
  • one-time transaction costs related to the refinancing of notes issued by JMP Credit Advisors CLO III;
  • amortization expense related to an intangible asset resulting from the repurchase of a portion of the management fees from JMP Credit Advisors CLO III;
  • unrealized gains or losses on commercial real estate investments, adjusted for non-cash expenditures, including depreciation and amortization;
  • unrealized mark-to-market gains or losses on the company’s strategic equity investments as well as certain warrant positions; and
  • as of January 1, 2019, a combined federal, state and local income tax rate of 26% at the consolidated taxable parent company, JMP Group, while, prior to January 1, 2019, a combined federal, state and local income tax rate of 26% at the taxable direct subsidiary of JMP Group and a tax rate of 0% at the company’s other direct subsidiary, which was a “pass-through entity” for tax purposes.

A reconciliation of JMP Group’s net income to its operating net income for the quarter and year ended December 31, 2019, and for comparable prior periods is set forth below.

Quarter Ended

 

Year Ended

(in thousands, except per share amounts)

Dec. 31, 2019

Sept. 30, 2019

Dec. 31, 2018

 

Dec. 31, 2019

Dec. 31, 2018

   
Net income/(loss) attributable to JMP Group

($6,445)

($4,061)

($203)

 

($6,549)

($2,187)

   
Add back/(subtract):  
Income tax expense/(benefit)

(988)

(1,220)

1,313

 

(6,827)

1,167

Income/(loss) before taxes

(7,433)

(5,281)

1,110

 

(13,376)

(1,020)

   
Add back/(subtract):  
Share-based awards and deferred compensation

1,895

753

(122)

 

4,079

167

General loan loss provision/(reversal) – collateralized loan obligations

530

 

2,878

Impairment of CLO equity

4,204

 

4,204

Early retirement of debt

625

 

625

1,488

Restructuring costs – CLO portfolios

 

54

Amortization of intangible asset – CLO III

69

 

277

276

Unrealized (gain)/loss – real estate-related depreciation and amortization

354

647

369

 

1,779

2,233

Unrealized mark-to-market (gain)/loss – strategic equity investments and warrants

1,169

604

837

 

1,262

853

Operating income/(loss) before taxes

189

(2,652)

2,793

 

(1,150)

6,929

   
Income tax expense/(benefit)

49

(689)

268

 

(299)

911

Operating net income/(loss)

$140

($1,963)

$2,525

 

($851)

$6,018

   
Operating net income/(loss) per share:  
Basic

$0.01

($0.10)

$0.12

 

($0.04)

$0.28

Diluted (1)

$0.01

($0.10)

$0.12

 

($0.04)

$0.28

   
Weighted average shares outstanding:  
Basic

19,402

19,324

21,326

 

20,189

21,490

Diluted (1)

19,661

19,582

21,614

 

20,323

21,701

(1)

On a GAAP basis, the weighted average number of diluted shares outstanding for the quarters ended December 31, 2019, September 30, 2019, and December 31, 2018, and for the years ended December 31, 2019, and December 31, 2018, was 19,401,844, 19,324,427, 21,326,473, 20,188,887 and 21,490,277, respectively, equivalent to the weighted average number of basic shares outstanding, due to the company’s net loss for those periods. Under GAAP, in a period of net loss, dilutive securities are disregarded in the calculation of earnings per share.

Book Value per Share

At December 31, 2019, JMP Group’s book value per share was $3.16. Adding back accumulated depreciation and amortization expense related to commercial real estate investments that is recognized by JMP Group as a result of equity method accounting reflects the reversal of that expense in the calculation of operating net income. Starting with the quarter ended March 31, 2019, the add-back includes a tax provision related to the expense reversed in that period, due to the company’s election to be taxed as a C corporation as of January 1, 2019. Likewise, adding back the accumulated general loan loss provision related to collateralized loan obligations reflects the reversal of that provision in the calculation of operating net income, an adjustment not made subsequent to the sale of a majority interest in JMP Credit Advisors in March 2019.

Contacts

Investor Relations Contact
JMP Group LLC

Andrew Palmer

(415) 835-8978

apalmer@jmpg.com

Media Relations Contacts

Dukas Linden Public Relations, Inc.

Zach Leibowitz

(646) 722-6528

zach@dlpr.com

Michael Falco

(646) 808-3611

michael@dlpr.com

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