JMP Group Reports Third Quarter 2012 Financial Results

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JMP Group Reports Third Quarter 2012 Financial Results

SAN FRANCISCO--(BUSINESS WIRE)-- JMP Group Inc. (NYSE:JMP), an investment banking and alternative asset management firm, reported financial results today for the quarter and nine months ended September 30, 2012.

  • Operating net income was $3.0 million, or $0.13 per diluted share, compared to $2.7 million, or $0.12 per share, for the third quarter of 2011. For the nine months ended September 30, 2012, operating net income was $10.6 million, or $0.46 per share, compared to $13.9 million, or $0.61 per share, for the nine months ended September 30, 2011.
  • Excluding the financial impact of gains recognized by JMP Credit Corporation on the sale or payoff of loans initially acquired in April 2009, adjusted operating net income was $0.13 per diluted share, an increase of 30.0% from $0.10 per share for the third quarter of 2011. For the nine months ended September 30, 2012, adjusted operating net income was a record $0.44 per share, an increase of 7.3% from $0.41 per share for the nine months ended September 30, 2011. For more information on operating net income and adjusted operating net income, including a reconciliation to net income, please see the section below titled "Non-GAAP Financial Measures."
  • The net loss attributable to JMP Group under generally accepted accounting principles, or GAAP, was $1.7 million, or $0.07 per diluted share, compared to a net loss of $1.6 million, or $0.07 per share, for the third quarter of 2011. For the nine months ended September 30, 2012, the net loss was $2.9 million, or $0.13 per share, compared to net income of $3.4 million, or $0.15 per share, for the nine months ended September 30, 2011.
  • Adjusted net revenues, which exclude certain non-cash items and non-controlling interests, were $28.8 million, compared to $28.1 million for the third quarter of 2011. For the nine months ended September 30, 2012, adjusted net revenues were $91.7 million, compared to $109.6 million for the nine months ended September 30, 2011. Further excluding net gains or losses on the sale or payoff of acquired loans, adjusted net revenues would have been $28.4 million and $90.7 million for the quarter and nine months ended September 30, 2012, respectively, and $27.1 million and $96.7 million for the quarter and nine months ended September 30, 2011, respectively. For more information on adjusted net revenues, including a reconciliation to net revenues, please see the section below titled "Non-GAAP Financial Measures."
  • Total net revenues on a GAAP basis were $18.1 million and $76.1 million for the quarter and nine months ended September 30, 2012, respectively, compared to $17.4 million and $91.7 million for the quarter and nine months ended September 30, 2011, respectively.

"We had a better-than-expected third quarter as a result of increased equity capital markets activity and good overall performance in our hedge funds," said Chairman and Chief Executive Officer Joe Jolson. "JMP Group posted adjusted operating EPS—which excludes profits on the sale of acquired loans—of $0.13, up 30% from the third quarter of last year. Despite depressed institutional equity underwriting and trading volumes that have persisted across Wall Street for much of 2012, JMP remains on track to produce a second consecutive year of record earnings, generating $0.44 of adjusted operating EPS for the first nine months of 2012, compared to $0.41 for the same period in 2011. We continue to be cautiously optimistic heading into the fourth quarter, with increased ECM market share, a healthy backlog of advisory revenues, and growth initiatives underway at our three operating platforms."


Revenues

Investment Banking

Investment banking revenues were $12.2 million, an increase of 21.6% from $10.0 million for the third quarter of 2011. For the nine months ended September 30, 2012, investment banking revenues were $38.0 million, a decrease of 5.8% from $40.3 million for the nine months ended September 30, 2011.

A statement of the company's investment banking revenues and transaction counts for the quarter and nine months ended September 30, 2012 and for comparable prior periods is set forth below.

 Quarter Ended Nine Months Ended
Sept. 30, 2012 June 30, 2012 Sept. 30, 2011Sept. 30, 2012 Sept. 30, 2011
($ in thousands)Count RevenuesCount RevenuesCount RevenuesCount RevenuesCount Revenues
 
Public equity28$9,29716$6,72913$7,28067$25,05053$25,684

Debt and convertible securities

329356421441132,39376,266

Private capital markets and other

298931,047-24974,23653,729
Strategic advisory3 1,6391 7153 2,0789 6,33110 4,653
 
Total36$12,21825$9,13317$10,04896$38,01075$40,332

Brokerage

Net brokerage revenues were $5.4 million, a decrease of 22.1% from $6.9 million for the third quarter of 2011, although approximately in line with the second quarter's total. For the nine months ended September 30, 2012, net brokerage revenues totaled $16.3 million, a decrease of 16.0% from $19.4 million for the nine months ended September 30, 2011.

Asset Management

Asset management fees and other related revenues were $4.7 million, a decrease of 31.9% from $6.9 million for the third quarter of 2011. For the nine months ended September 30, 2012, asset management fees and other related revenues were $15.5 million, a decrease of 14.2% from $18.0 million for the nine months ended September 30, 2011. For more information on asset management-related fee revenues, please see the section below titled "Non-GAAP Financial Measures."

Client assets under management at September 30, 2012 totaled $1.2 billion, including $726.7 million of funds managed by Harvest Capital Strategies and $471.0 million par value of loans and cash underlying the collateralized loan obligation managed by JMP Credit Advisors. Client assets under management were $1.2 billion at June 30, 2012 and $1.3 billion at September 30, 2011. Including sponsored funds, client assets under management totaled $1.7 billion at September 30, 2012, compared to $1.6 billion at June 30, 2012 and $2.4 billion at September 30, 2011.

At September 30, 2012, private capital, including corporate credit, small business lending, REIT advisory services, venture capital and distressed mortgage investments, represented 62.4% of client assets under management including sponsored funds.

Principal Transactions

Principal transactions generated net realized and unrealized losses of $2.0 million, compared to net losses of $6.3 million for the third quarter of 2011. For the nine months ended September 30, 2012, principal transactions generated net realized and unrealized gains of $12.3 million, compared to net losses of $0.1 million for the nine months ended September 30, 2011.

A statement of the company's principal transaction revenues for the quarter and nine months ended September 30, 2012 and for comparable prior periods is set forth below.

 Quarter Ended Nine Months Ended
(in thousands)Sept. 30, 2012 June 30, 2012 Sept. 30, 2011Sept. 30, 2012 Sept. 30, 2011
 
Hedge fund investments$1,580 

$

(248

)

$

(1,758

)$4,076 $521 
 
Principal investments:
Investment in New York Mortgage Trust--(689)(209)14
Other principal investments 38  901  (68) 829  (349)
Total principal investments 38  901  (757) 620  (335)
 
Venture investments:
Investment in Harvest Growth Capital(131)328(149)394(49)
Other venture investments and warrants (421) 279  (642) 360  (24)
Total venture investments (552) 607  (791) 754  (73)
 

Principal transaction revenues net of non-controlling interest in Harvest Growth Capital

 1,066  1,260  (3,306) 5,450  113 
 

Non-controlling interest in Harvest Growth Capital

 (3,021) 6,520  (2,984) 6,859  (219)
 
Total principal transaction revenues

$

(1,955

)$7,780 

$

(6,290

)$12,309 

$

(106

)

Of the $2.0 million in net losses for the quarter ended September 30, 2012, a loss of $3.0 million was attributable to a non-controlling interest in net realized and unrealized losses at Harvest Growth Capital, a venture capital fund managed by Harvest Capital Strategies that is consolidated under GAAP. GAAP accounting requires that JMP Group consolidate Harvest Growth Capital due to Harvest Capital Strategies' role as the fund's manager and managing member, despite the company's ownership of just 4.6% of the fund. The presentation of adjusted net revenues elsewhere in this press release excludes JMP Group's non-controlling interest in Harvest Growth Capital; and, accordingly, the aforementioned loss of $3.0 million is not included in adjusted net revenues. Net of its non-controlling interest, JMP Group had a net realized and unrealized loss of $0.1 million on its investment in Harvest Growth Capital for the quarter. For more information on adjusted net revenues, including a reconciliation to net revenues, please see the section below titled "Non-GAAP Financial Measures."

Gain on Sales and Payoffs of Loans and Loan Loss Provision

JMP Credit Corporation realized a net gain of $0.2 million due to a mark-to-market adjustment on a loan held for sale in addition to the sale or payoff of 28 of the loans in its portfolio, compared to a net gain of $1.4 million in connection with 20 loans for the third quarter of 2011. For the nine months ended September 30, 2012, the net realized gain amounted to $2.6 million as a result of the sale or payoff of 67 loans, compared to a net gain of $15.0 million in connection with 90 loans for the nine months ended September 30, 2011. For the quarter and nine months ended September 30, 2012, net realized gains of $0.5 million and $2.0 million, respectively, were due to the sale or payoff of loans acquired with JMP Credit in April 2009, compared to net realized gains of $1.0 million and $13.0 million, respectively, for the quarter and nine months ended September 30, 2011. At September 30, 2012, eight loans with an aggregate par value of $30.2 million and an associated liquidity discount of $6.5 million remained from the portfolio acquired in April 2009.

A net loan loss provision of $0.1 million was recorded for the quarter as a general reserve in connection with performing loans at JMP Credit and Harvest Capital Credit, both of which are currently consolidated under GAAP. At September 30, 2012, general loan loss reserves equaled 0.7% of gross performing loans, compared to 0.4% at September 30, 2011.

At September 30, 2012, gross impaired loans totaled $3.2 million, or 0.7% of gross loans outstanding, compared to $14.0 million, or 3.1% of gross loans outstanding, at September 30, 2011. With regard to impaired loans at September 30, 2012, discounts and reserves (including credit discounts, liquidity discounts, and allowances for loan losses) equaled $3.2 million, or 100.0% of gross impaired loans outstanding. With regard to performing loans at September 30, 2012, discounts and reserves (including liquidity discounts, allowances for loan losses and deferred loan fees) equaled $15.7 million, or 3.6% of gross performing loans outstanding.

Other Income

Other income was $0.4 million, compared to $1.0 million for the third quarter of 2011. For the nine months ended September 30, 2012, other income was $3.5 million, compared to $2.5 million for the nine months ended September 30, 2011.

Net Interest Income

Interest income was $8.3 million, and interest expense was $10.1 million, resulting in net interest expense of $1.8 million, compared to net interest expense of $1.6 million for the third quarter of 2011. Excluding net amortization expense related to liquidity discounts, net interest income was $5.7 million, compared to $4.8 million for the third quarter of 2011. The year-over-year increase was due to the launch of Harvest Capital Credit in September 2011 and the subsequent deployment of a portion of its committed capital. The net amortization expense, which reduced third quarter EPS by approximately $0.19, is expected to be extinguished in May 2013. For the nine months ended September 30, 2012, net interest expense was $5.5 million, compared to net interest expense of $0.7 million for the nine months ended September 30, 2011; excluding net interest expense due to net amortization of liquidity discounts, net interest income was $16.1 million and $16.2 million, respectively, for the same periods.

Expenses

Compensation and Benefits

Compensation and benefits expense was $17.4 million, compared to $16.0 million for the third quarter of 2011. For the third quarter of 2012, non-cash compensation expense attributable to performance-related and other restricted stock units, or RSUs, granted subsequent to JMP Group's May 2007 initial public offering was $0.2 million, compared to $0.1 million for the third quarter of 2011.

For the nine months ended September 30, 2012, compensation and benefits expense was $55.8 million, compared to $66.2 million for the nine months ended September 30, 2011. For the nine months ended September 30, 2012, there was no non-cash compensation expense attributable to RSUs granted in connection with the company's IPO, as the expense completely amortized in the first half of 2011 with the vesting of the final tranche of IPO-related RSUs. For the nine months ended September 30, 2011, non-cash compensation expense attributable to IPO-related RSUs was $0.8 million. For the nine months ended September 30, 2012, non-cash compensation expense attributable to performance-related and other RSUs granted subsequent to the company's IPO was $0.6 million, compared to $0.4 million for the nine months ended September 30, 2011.

As a percentage of adjusted net revenues, compensation and benefits expense was 60.2% for the quarter, compared to 56.8% for the third quarter of 2011, and was 60.9% for the nine months ended September 30, 2012, compared to 60.4% for the nine months ended September 30, 2011. Excluding the cost of RSU grants, compensation and benefits expense was 59.5% of adjusted net revenues for the quarter, compared to 56.4% for the third quarter of 2011, and was 60.2% for the nine months ended September 30, 2012, compared to 59.4% for the nine months ended September 30, 2011.

Non-Compensation Expense

Non-compensation expense was $6.3 million, compared to $7.5 million for the third quarter of 2011. For the nine months ended September 30, 2012, non-compensation expense was $17.9 million, compared to $20.2 million for the nine months ended September 30, 2011. As a percentage of adjusted net revenues, non-compensation expense was 21.8% for the quarter, compared to 26.8% for the third quarter of 2011, and was 19.6% for the nine months ended September 30, 2012, compared to 18.4% for the nine months ended September 30, 2011.

Personnel

At September 30, 2012, the company had 217 full-time employees, compared to 214 at the end of the prior quarter and 215 at September 30, 2011.

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. Additionally, company management believes that this presentation enables meaningful comparison of JMP Group's financial performance in 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 expects to continue to recognize; the adjustment of these items should not be construed as an inference that these gains or expenses are unusual, infrequent or non-recurring. Therefore, company management believes that both JMP Group's GAAP measures of its 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.

Adjusted Net Revenue

Adjusted net revenue is a non-GAAP financial measure that (i) includes asset management fees, net interest income or expense, and other revenues eliminated upon the consolidation of Harvest Growth Capital and Harvest Capital Credit, (ii) excludes the net amortization of liquidity discounts on loans held and asset-backed securities issued by JMP Credit Corporation, (iii) excludes amortization expense related to an intangible asset, (iv) reverses loan loss provisions taken in connection with Harvest Capital Credit, (v) reverses net unrealized gains and losses on strategic equity investments and warrants and (iv) excludes the non-controlling interest in net unrealized gains and losses on Harvest Growth Capital. In particular, adjusted net revenue adjusts for:

  • base management and incentive fees earned by Harvest Capital Strategies as manager of Harvest Growth Capital, a venture capital fund, and Harvest Capital Credit, a small business lending strategy; Harvest Capital Strategies is managing member of Harvest Growth Capital and the external manager of Harvest Capital Credit; and, as a result of its ownership of each, JMP Group consolidates both entities in accordance with GAAP accounting standards and eliminates the fees in consolidation; presenting these fees as though Harvest Growth Capital and Harvest Capital Credit were deconsolidated presents the entities' results in a manner similar to those of the other investment funds managed by Harvest Capital Strategies;
  • the non-cash net amortization of liquidity discounts at JMP Credit, due to scheduled contractual principal repayments, of $7.5 million and $21.6 million for the quarter and nine months ended September 30, 2012, respectively;
  • non-cash amortization, in connection with an intangible asset, of $0.1 million per quarter in certain periods prior to the quarter ended September 30, 2011;
  • non-cash general loan loss provisions of $0.1 million and $0.7 million taken with regard to Harvest Capital Credit for the quarter and nine months ended September 30, 2012, respectively;
  • unrealized mark-to-market gains or losses on the company's strategic equity investments as well as certain warrant positions; and
  • the non-controlling interest in net unrealized gains and losses generated by Harvest Growth Capital, of which Harvest Capital Strategies is manager and managing member; under GAAP, JMP Group consolidates the fund; however, as presented, unrealized gains and losses that do not accrue to the company are reversed.

Additionally, management considers it instructive to further adjust the company's adjusted net revenues to exclude the financial impact of gains or losses recognized by JMP Credit Corporation due to the sale or payoff of loans originally included in the portfolio acquired by JMP Group in April 2009.

A reconciliation of JMP Group's net revenues to its adjusted net revenues for the quarter and nine months ended September 30, 2012 and for comparable prior periods is set forth below.

 Quarter Ended Nine Months Ended
(in thousands)Sept. 30, 2012 June 30, 2012 Sept. 30, 2011Sept. 30, 2012 Sept. 30, 2011
 
Revenues:
Non-interest revenues$19,885$28,235$18,948$81,628$92,399
Net interest income (1,754) (1,618) (1,573) (5,522) (661)
Total net revenues18,13126,61717,37576,10691,738

Asset management fees earned on Harvest Growth Capital and Harvest Capital Credit (1)

5973532031,281609

Dividend distribution from Harvest Capital Credit (1)

157--234-

Less: Net interest income and other revenues from Harvest Capital Credit (1)

 (772) (475) -  (1,586) - 

Total net revenues including fee revenues from consolidated entities

 18,113  26,495  17,578  76,035  92,347 
 
Add back/(subtract):

Net amortization of liquidity discounts on loans and asset-backed securities issued

7,4567,0006,36321,63116,903
Amortization of intangible asset----200
Loan loss provision - Harvest Capital Credit1373223267832

Net unrealized loss/(gain) on strategic equity investments and warrants

1074471,141233(80)

Non-controlling interest in net unrealized loss/(gain) on Harvest Growth Capital

 3,021  (6,520) 2,984  (6,859)
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