JMP Group Reports First Quarter 2013 Financial Results

JMP Group Reports First Quarter 2013 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 ended March 31, 2013.

  • Operating net income was $3.6 million, or $0.16 per diluted share, compared to $4.5 million, or $0.19 per share, for the first quarter of 2012.
  • The net loss attributable to JMP Group under generally accepted accounting principles, or GAAP, was $1.7 million, or $0.08 per share, compared to net income of $0.4 million, or $0.02 per share, for the first quarter of 2012.
  • Adjusted net revenues, which exclude certain non-cash items and non-controlling interests, were $32.0 million, compared to $35.1 million for the first quarter of 2012. 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 $23.2 million, compared to $31.7 million for the first quarter of 2012.

"JMP Group produced better-than-expected operating EPS of $0.16 for the first quarter, thanks to continued strong investment performance at JMP Credit, Harvest Capital Credit and our hedge funds—in particular, Harvest Small Cap Partners," said Chairman and Chief Executive Officer Joe Jolson. "During the quarter, we made some key hires in JMP Securities' institutional equities and investment banking businesses and expect that 2013, and potentially 2014, will be a period of increased investment spending. Since going public in May 2007, we have considered numerous acquisition opportunities in our core businesses and have determined, instead, to spend some potential earnings to accelerate the organic growth of our three successful and scalable operating subsidiaries. In January, we raised $46 million of 10-year 8.0% senior notes to provide additional capital for our planned expansion; and, at the end of April, we closed a $344 million CLO—our first since 2007—which included an investment of $17.3 million by JMP Group in the subordinated notes. Last week, we also priced the IPO of Harvest Capital Credit, our small business lending strategy, which converted to a BDC structure and now trades under the symbol 'HCAP.' We look forward to reporting further progress in the execution of our growth strategies over the next three to four quarters."


Segment Results of Operations

At JMP Securities, adjusted net revenues excluding net investment income (which consists of principle transactions, net dividend income and net interest income) were $17.4 million, a decline of 21.8% from the first quarter of 2012 as a result of a difficult comparison to strong investment banking results for that period and an ongoing industry-wide decline in brokerage commissions. JMP Securities' operating margin on adjusted net revenues was 9.7%, an improvement from 8.6% for the prior quarter but well below the 15.4% recorded for the first quarter of 2012.

At Harvest Capital Strategies, adjusted net revenues of $8.0 million excluding net investment income grew 71.9% from the first quarter of 2012, due to an increase in incentive fees generated by the company's hedge funds, primarily Harvest Small Cap Partners. JMP Group's return on the capital it had invested in its hedge funds was 3.3% for the quarter, compared to 7.0% for the first quarter of 2012.

At JMP Credit, a segment that includes Harvest Capital Credit, adjusted net revenues totaled $4.7 million, a decrease of 17.1% from $5.7 million for the first quarter of 2012. Included in the $4.7 million of revenues for the first quarter of 2013 is a net gain of $0.2 million due to the sale or payoff of loans acquired with JMP Credit in April 2009 as well as a loan loss provision of $0.9 million related to an impaired acquired loan. For the first quarter of 2012, the net gain on acquired loans was $0.7 million.

A summary of JMP Group's operating net income by segment for the quarter ended March 31, 2013 and for comparable prior periods is set forth below.

      Quarter Ended
($ as shown) Mar. 31, 2013   Dec. 31, 2012   Mar. 31, 2012
JMP Securities $ 0.05 $ 0.04 $ 0.09
Harvest Capital Strategies 0.04 0.06 0.04
JMP Credit 0.15 0.21 0.14
Corporate   (0.08 )   (0.05 )   (0.08 )
Operating EPS $ 0.16   $ 0.26   $ 0.19  

For more information on segment reporting; adjusted net revenues, including a reconciliation to net revenues; and operating net income, including a reconciliation to net income, please see the section below titled "Non-GAAP Financial Measures."

Composition of Revenues

Investment Banking

Investment banking revenues were $12.1 million, a decrease of 27.3% from $16.7 million for the first quarter of 2012.

A summary of the company's investment banking revenues and transaction counts for the quarter ended March 31, 2013 and for comparable prior periods is set forth below.

      Quarter Ended
Mar. 31, 2013   Dec. 31, 2012   Mar. 31, 2012
($ in thousands) Count   Revenues Count   Revenues Count   Revenues
Public equity 33 $ 8,914 15 $ 3,905 23 $ 9,024
Debt and convertible securities 10 1,648 5 718 5 1,459
Private capital markets and other - 145 4 5,789 2 2,200
Strategic advisory 1   1,400 3   2,560 5   3,976
Total 44 $ 12,107 27 $ 12,972 35 $ 16,659

Brokerage

Net brokerage revenues were $5.2 million, a decrease of 5.4% from $5.5 million for the first quarter of 2012.

Asset Management

Asset management fees and other related revenues were $7.9 million, an increase of 73.9% from $4.5 million for the first quarter of 2012. For more information on asset management-related fee revenues, please see the section below titled "Non-GAAP Financial Measures."

Client assets under management at March 31, 2013 totaled $1.2 billion, including $0.8 billion of funds managed by Harvest Capital Strategies and $472.6 million par value of loans and cash underlying the collateralized loan obligation managed by JMP Credit Advisors. Client assets under management were also $1.2 billion at December 31, 2012 and March 31, 2012. Including sponsored funds, client assets under management totaled $1.4 billion at March 31, 2013, compared to $1.8 billion at December 31, 2012 and $2.1 billion at March 31, 2012.

At March 31, 2013, private capital, including corporate credit, small business lending, venture capital and REIT advisory services, represented 51.4% of client assets under management including sponsored funds.

Principal Transactions

Principal transactions generated a net realized and unrealized gain of $1.9 million, compared to $6.5 million for the first quarter of 2012.

A summary of the company's principal transaction revenues for the quarter ended March 31, 2013 and for comparable prior periods is set forth below.

    Quarter Ended
(in thousands) Mar. 31, 2013   Dec. 31, 2012   Mar. 31, 2012
 
Hedge fund investments $ 1,898   $ 821   $ 2,744  
 
Principal investments:
Investment in New York Mortgage Trust - - (209 )
Other principal investments   85     17     (110 )
Total principal investments   85     17     (319 )
 
Venture investments:
Investment in Harvest Growth Capital funds (19 ) (192 ) 197
Other venture investments and warrants   553     1,140     502  
Total venture investments   534     948     699  
 

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

  2,517     1,786     3,124  
 
Non-controlling interests in Harvest Growth Capital funds   (599 )   (3,558 )   3,360  
 
Total principal transaction revenues $ 1,918     ($1,772 ) $ 6,484  

Included in the net gain of $1.9 million for the quarter ended March 31, 2013 was a loss of $0.6 million attributable to non-controlling interests in net realized and unrealized losses at Harvest Growth Capital and Harvest Growth Capital II, venture capital funds managed by Harvest Capital Strategies that are consolidated under GAAP. GAAP accounting requires that JMP Group consolidate both funds due to Harvest Capital Strategies' role as the funds' manager and managing member, despite the company's ownership of just 4.4% of Harvest Growth Capital and 2.4% of Harvest Growth Capital II. The presentation of adjusted net revenues elsewhere in this press release excludes JMP Group's non-controlling interests in these funds; and, accordingly, the aforementioned loss of $0.6 million is not included in adjusted net revenues. Net of its non-controlling interests, JMP Group had a net realized and unrealized loss of $19,000 on its investments in Harvest Growth Capital and Harvest Growth Capital II 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 Sale, Payoff and Mark-to-Market of Loans and Loan Loss Provision

Together, JMP Credit Corporation and Harvest Capital Credit generated a net realized and unrealized gain of $1.1 million from the sale, payoff or mark-to-market of loans, in line with $1.1 million for the first quarter of 2012.

JMP Credit Corporation realized a net gain of $0.9 million due to the sale or payoff of 33 of the loans in its portfolio, compared to a net gain of $1.0 million in connection with 20 loans for the first quarter of 2012. For the quarter ended March 31, 2013, net realized gains of $0.2 million were due to the sale or payoff of loans acquired with JMP Credit in April 2009, compared to $0.7 million for the quarter ended March 31, 2012. At March 31, 2013, six loans with an aggregate par value of $21.3 million and an associated liquidity discount of $3.5 million remained from the portfolio acquired in April 2009.

At March 31, 2013, discounts and reserves (including liquidity discounts, allowances for loan losses and deferred loan fees) equaled $11.4 million, or 2.7% of gross performing loans outstanding at JMP Credit. With regard to impaired loans, discounts and reserves (including credit discounts, liquidity discounts, and allowances for loan losses) equaled $2.6 million—equivalent to 74.5% of gross impaired loans outstanding or 0.6% of gross loans outstanding—compared to $9.5 million, or 2.2% of gross loans outstanding, at March 31, 2012.

A net loan loss provision of $0.9 million for the quarter ended March 31, 2013 was recorded at JMP Credit, which is consolidated under GAAP, as a specific reserve in connection with an impaired loan acquired in April 2009. At March 31, 2013, general loan loss reserves equaled 0.5% of gross performing loans at JMP Credit, compared to 0.6% at March 31, 2012.

Other Income

Other income was $0.3 million, compared to $0.7 million for the first quarter of 2012.

Net Interest Income

Interest income was $8.2 million, and interest expense was $11.3 million, resulting in net interest expense of $3.1 million, compared to net interest expense of $2.2 million for the first quarter of 2012. Excluding net amortization expense related to liquidity discounts, net interest income was $5.6 million, compared to $5.0 million for the first quarter of 2012.

Expenses

Compensation and Benefits

Compensation and benefits expense was $19.6 million, compared to $21.8 million for the first quarter of 2012. Non-cash compensation expense attributable to stock-based awards such as stock options and restricted stock units, or RSUs, was $1.0 million, compared to $0.2 million for the first quarter of 2012. The aforementioned compensation and benefits expense of $19.6 million excludes $1.1 million of net deferred compensation, which is composed of (a) amortization expense tied to deferred compensation awarded at year-end 2012 though recognized as a GAAP expense in 2013 and 2014 less (b) one quarter of the compensation assumed to be awarded at year-end 2013 and deferred into 2014 and 2015. Excluding the cost of stock-based awards but accelerating and recognizing the cost of net deferred compensation for the period, compensation and benefits expense was 62.4% of adjusted net revenues, compared to 61.4% for the first quarter of 2012.

Non-Compensation Expense

Non-compensation expense was $6.2 million, compared to $5.7 million for the first quarter of 2012. As a percentage of adjusted net revenues, non-compensation expense was 19.3%, compared to 16.1% for the first quarter of 2012.

Personnel

At March 31, 2013, the company had 218 full-time employees, compared to 224 at the end of 2012 and 208 at March 31, 2012.

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. Moreover, 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 generally 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, Harvest Growth Capital II 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) reverses unrealized mark-to-market gains and losses recorded at Harvest Capital Credit, (iv) reverses net unrealized gains and losses on strategic equity investments and warrants and (v) excludes the non-controlling interest in net unrealized gains and losses on Harvest Growth Capital and Harvest Growth Capital II. In particular, adjusted net revenue adjusts for:

  • base management and incentive fees earned by Harvest Capital Strategies as manager of Harvest Growth Capital and Harvest Growth Capital II, both venture capital funds, and Harvest Capital Credit, a small business lending strategy; Harvest Capital Strategies is managing member of Harvest Growth Capital and Harvest Growth Capital II and is the external manager of Harvest Capital Credit, and, as a result of its ownership of each, JMP Group consolidates the three entities in accordance with GAAP accounting standards and eliminates the fees in consolidation; presenting these fees as though Harvest Growth Capital, Harvest Growth Capital II 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 a scheduled contractual principal repayment, of $8.7 million for the quarter ended March 31, 2013;
  • unrealized mark-to-market gains or losses on the investment portfolio at Harvest Capital Credit;
  • unrealized mark-to-market gains or losses on the company's strategic equity investments as well as certain warrant positions; and
  • non-controlling interests in net unrealized gains and losses generated by Harvest Growth Capital and Harvest Growth Capital II, of which Harvest Capital Strategies is manager and managing member; under GAAP, JMP Group consolidates the two funds; however, as presented, unrealized gains and losses that do not accrue to the company are reversed.

A reconciliation of JMP Group's net revenues to its adjusted net revenues for the quarter ended March 31, 2013 and for comparable prior periods is set forth below.

    Quarter Ended
(in thousands) Mar. 31, 2013   Dec. 31, 2012   Mar. 31, 2012
Revenues:
Non-interest revenues $ 27,338 $ 26,409 $ 33,877
Net interest expense (3,141 ) (1,573 ) (2,150 )
Loan loss provision   (949 )   (1,071 )   (93 )
Total net revenues 23,248 23,765 31,634

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

858 1,060 332
Dividend distribution from Harvest Capital Credit (1) 257 - 77

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

  (1,327 )   (1,202 )   (339 )

Total net revenues including fee revenues from consolidated entities

  23,036     23,623     31,704  
 
Add back/(subtract):

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

8,740 7,577 7,175
Unrealized mark-to-market (gain) - Harvest Capital Credit (516 ) (1,608 ) (57 )

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

157 294 (321 )

Non-controlling interests in net unrealized losses/(gains) on Harvest Growth Capital funds

  599     3,559     (3,360 )
Adjusted net revenues $ 32,016   $ 33,445   $ 35,141  

(1)

Adjustments to reflect economic contributions from two Harvest Growth Capital funds and Harvest Capital Credit as though deconsolidated for purposes of financial reporting; upon deconsolidation, fee revenues and dividend payments would be recognized, while net interest income and other revenues generated by these entities would not be recorded by JMP Group.

Company management has utilized adjusted net revenue, adjusted in the manner described above, as an additional device to aid in understanding and analyzing JMP Group's financial results for the periods presented. Management believes that adjusting net revenue in these ways is useful in that it allows for a better evaluation of the performance of JMP Group's ongoing business and facilitates a meaningful comparison of the company's results in a given period to those in prior and future periods.

Asset Management-Related Fee Revenues

Asset management-related fee revenue is a non-GAAP financial measure that sums asset management fees with certain fee revenues (in particular, asset management fundraising fees generated by JMP Securities, loan fees, and revenues from fee-sharing arrangements with other asset managers) that are reported in JMP Group's financial statements as other income. In addition, asset management-related fee revenues incorporate base management and incentive fees earned by Harvest Capital Strategies as manager of Harvest Growth Capital, Harvest Growth Capital II and Harvest Capital Credit. JMP Group consolidates the two Harvest Growth Capital funds and Harvest Capital Credit in accordance with GAAP accounting standards; however, asset management fees generated by these entities are included in asset management-related fee revenues as though deconsolidated.

A statement of JMP Group's asset management-related fee revenues for the quarter ended March 31, 2013 and for comparable prior periods is set forth below.

    Quarter Ended
(in thousands) Mar. 31, 2013   Dec. 31, 2012   Mar. 31, 2012
 
Base management fees:
Fees reported as asset management fees $ 2,365 $ 2,339 $ 2,438
Fees reported as other income 262 263 708

Fees earned at Harvest Growth Capital, Harvest Growth Capital II and Harvest Capital Credit

  508   435   201
Total base management fees   3,135   3,037   3,347
 
Incentive fees:
Fees reported as asset management fees 4,387 2,715 1,036

Fees earned at Harvest Growth Capital, Harvest Growth Capital II and Harvest Capital Credit

  350   624   131
Total incentive fees   4,737   3,339   1,167
 
Other fee income:
Fundraising fees   26   30   27

Total other fee income

  26   30   27
 
Asset management-related fee revenues:
All fees reported as asset management fees 6,752 5,054 3,474
All fees reported as other income 288 293 735

All fees earned at Ha

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