N@N

JMP Group Reports Third Quarter 2010 Financial Results

^{Published on 2010-10-27 05:11:00 - Market Wire}
 

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 September 30, 2010.

"Managementa™s Discussion and Analysis of Financial Condition and Results of Operations"

• Total net revenues were $32.7 million, compared to $41.7 million for the third quarter of 2009. For the nine months ended September 30, 2010, total net revenues were $100.7million, compared to $103.4 million for the nine months ended September 30, 2009.
• Net income attributable to JMP Group was $1.4 million, or $0.06 per diluted share, compared to $3.0 million, or $0.13 per diluted share, for the third quarter of 2009. For the nine months ended September 30, 2010, net income attributable to JMP Group was $5.3 million, or $0.24 per diluted share, compared to $7.3 million, or $0.34 per diluted share, for the nine months ended September30, 2009.
• Operating net income was $3.7 million, or $0.17 per diluted share, an increase of 42.2% from $2.6million, or $0.12 per diluted share, for the third quarter of 2009. For the nine months ended September 30, 2010, operating net income was $11.4 million, or $0.51 per diluted share, an increase of 66.5% from $6.9million, or $0.32 per diluted share, for the nine months ended September 30, 2009. For more information on operating net income, including a reconciliation to net income, please see the section below titled aNon-GAAP Financial Measures.a

aJMP produced better-than-expected operating earnings for the third quarter, despite a number of challenges,a said Joe Jolson, chairman and chief executive officer of JMP Group. aAt JMP Securities, investment banking revenues were above plan, while our brokerage revenues fell short of expectations primarily due to a dramatic industry-wide slowdown in institutional equities trading activity. Harvest Capital Strategies had a flattish quarter on its invested capital but benefitted from better-than-expected incentive fee income in its REIT advisory business. JMP Credit had another good quarter, driven by continued loan sale gains and the distribution of excess cash flow from Cratos CLO I. While we would expect some level of loan sale income to continue for the foreseeable future, it is difficult to predict the timing of loan sales. Assuming business conditions remain stable, we would hope to continue to generate an annual after-tax return of at least 10% on our adjusted tangible book value.a

Revenues

Investment Banking

Investment banking revenues were $12.3 million, an increase of 18.7% from $10.4 million for the third quarter of 2009. For the nine months ended September 30, 2010, investment banking revenues were $28.4million, an increase of 13.3% from $25.1 million for the nine months ended September 30, 2009.

The company executed 16 investment banking transactions during the quarter, compared to 17 during the third quarter of 2009. Public equity underwriting revenues were $4.3million, down from $6.5million for the third quarter of 2009, as the company executed seven public equity offerings, versus 12 a year earlier. Private placement fee revenues amounted to $5.1million, up from $1.3million for the third quarter of 2009, as the company executed five private placements, versus two a year prior. Strategic advisory revenues totaled $2.9million, up from $2.6million for the third quarter of 2009, with the company acting as a strategic advisor on four completed transactions, versus three a year earlier.

Brokerage

Net brokerage revenues were $5.9 million, a decrease of 25.7% from $7.9 million for the third quarter of 2009. For the nine months ended September 30, 2010, net brokerage revenues were $21.3 million, a decrease of 17.7% from $25.8 million for the nine months ended September 30, 2009.

Asset Management

Asset management-related fee revenues were $3.6 million, an increase of 2.3% from $3.5 million for the third quarter of 2009, including incentive fees of $0.7 million and $1.1 million, respectively. For the nine months ended September 30, 2010, asset management-related fee revenues were $10.4 million, a decrease of 38.5% from $16.9 million for the nine months ended September 30, 2009, including incentive fees of $2.2 million and $9.5 million, respectively. Asset management-related fee revenues include asset management fees as well as 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) reported in JMP Groupa™s financial statements as other income. Fee revenues classified as other income were $0.3million and $0.2million for the third quarters of 2010 and 2009, respectively, and $1.1million and $1.2 million for the nine months ended September 30, 2010 and September 30, 2009, respectively.

Client assets under management at September 30, 2010 totaled $1.3 billion, including $568.4 million of funds managed by Harvest Capital Strategies and $766.2 million par value of loans and cash underlying the two collateralized loan obligations managed by JMP Credit Advisors (the internal manager of JMP Credit Corporation). Client assets under management totaled $1.1 billion at both June 30, 2010 and September30, 2009.

Principal Transactions

Principal transactions generated net revenues of $1.1 million, compared to net revenues of $6.0 million for the third quarter of 2009. For the nine months ended September 30, 2010, principal transactions generated net revenues of $2.9 million, compared to net revenues of $15.4 million for the nine months ended September30, 2009. Principal transactions primarily include direct investments made by JMP Group as well as investments by the company in funds managed by Harvest Capital Strategies.

For the quarter, equity investments and investments by JMP Group in its hedge funds produced net realized and unrealized gains of $1.3 million, compared to net realized and unrealized gains of $3.7million for the third quarter of 2009. In addition, an investment in publicly traded New York Mortgage Trust, Inc. produced an unrealized loss of $0.2 million, compared to an unrealized gain of $2.3million for the third quarter of 2009.

Gain on Sales and Payoffs of Loans and Loan Loss Provision

JMP Credit realized gains of $7.0 million due to the sale or payoff of 17 of the loans in its portfolio, compared to $6.7 million due to the sale or payoff of six loans during the third quarter of 2009. For the nine months ended September 30, 2010, realized gains amounted to $26.2 million as a result of the sale or payoff of 49 loans. At September 30, 2010, 39 loans with an aggregate par value of $173.2 million and an associated liquidity discount of $51.6 million remained from the portfolio acquired by JMP Credit in April2009.

A loan loss provision of $0.5 million was recorded for the quarter, of which $0.3 million was with regard to an impaired direct investment by JMP Group and $0.2 million was with regard to performing loans as a general reserve at JMP Credit. For the third quarter of 2009, a loan loss provision of $1.4 million was recorded with regard to impaired loans at JMP Credit.

At September 30, 2010, gross impaired loans totaled $14.0 million, or 3.2% of gross loans outstanding, compared to $24.4 million, or 5.5% of gross loans outstanding, at June 30, 2010 and $93.6 million, or 19.9% of gross loans outstanding, at September 30, 2009. With regard to impaired loans at September 30, 2010, discounts and reserves (including credit discounts, liquidity discounts and allowances for loan losses) equaled $11.9million, or 84.5% of gross impaired loans outstanding. With regard to performing loans at September 30, 2010, discounts and reserves (including liquidity discounts, allowances for loan losses and deferred loan fees) equaled $55.7million, or 13.1% of gross performing loans outstanding.

Net Interest and Net Dividend Income

Net interest income equaled $3.0 million, compared to $3.7 million for the third quarter of 2009, and net dividend income totaled $0.4 million, versus $0.8 million for the third quarter of 2009. For the nine months ended September 30, 2010, net interest income was $11.0 million, compared to $6.7 million for the nine months ended September 30, 2009, and net dividend income was $1.5million, versus $1.8million for the nine months ended September 30, 2009.

For the quarter and nine months ended September30, 2010, unscheduled principal prepayments enhanced the yield on loans at JMP Credit and contributed $0.9million and $3.6 million of net interest income, respectively. JMP Credit did not exist prior to April 2009, which partially accounts for the significant difference in net interest income for the nine months ended September 30, 2010 and September30, 2009.

Expenses

Compensation and Benefits

Compensation and benefits expense was $19.4 million, compared to $29.3 million for the third quarter of 2009. For the nine months ended September 30, 2010, compensation and benefits expense was $65.5million, compared to $70.8 million for the nine months ended September 30, 2009. Of the amounts recorded for the quarter and nine months ended September 30, 2010, non-cash compensation expense attributable to restricted stock units, or RSUs, granted in connection with JMP Groupa™s May 2007 initial public offering was $0.3million and $2.2 million, respectively, while such expense attributable to RSUs granted thereafter was $0.4 million and $0.8 million, respectively.

As a percentage of total net revenues, compensation and benefits expense was 59.2%, compared to 70.3% for the third quarter of 2009, and was 65.0% for the nine months ended September 30, 2010, compared to 68.5% for the nine months ended September 30, 2009. Pro forma compensation and benefits expense (which excludes the cost of RSU grants) was 57.0% of total net revenues, compared to 67.3% for the third quarter of 2009, and was 62.0% for the nine months ended September 30, 2010, compared to 64.8% for the nine months ended September30, 2009.

Non-Compensation Expense

Non-compensation expense was $8.7 million, compared to $5.9 million for the third quarter of 2009. For the nine months ended September 30, 2010, non-compensation expense was $22.2 million, compared to $17.5million for the nine months ended September 30, 2009. Contributing to non-compensation expense for the quarter and nine months ended September 30, 2010 was a one-time impairment charge of $2.8million recorded in connection with the purchase of an asset management contract during the quarter. For more information regarding the acquisition and subsequent charge, please see the section below titled aPurchase of CLO Management Contract.a

As a percentage of total net revenues, non-compensation expense was 26.7% for the quarter, compared to 14.0% for the third quarter of 2009, and 22.0% for the nine months ended September 30, 2010, compared to 17.0% for the nine months ended September30, 2009. Excluding the one-time impairment charge of $2.8 million, the adjusted non-compensation expense ratio was 18.3% for the quarter and 19.3% for the nine months ended September 30, 2010.

Purchase of CLO Management Contract

On June 11, 2010, JMP Capital, a subsidiary of JMP Group, agreed to purchase the collateral management contracts for two collateralized loan obligations, or CLOs, from Princeton Advisory Group, Inc. for up to $5.0 million. The transfers of the contracts were subject to the receipt of certain consents and other conditions. On September 8, 2010, JMP Capital completed the purchase of one of the two management contracts for $3.8million, and the contract was transferred to JMP Credit Advisors. However, since a single investor had previously acquired control of the right to transfer the management contract without cause at any time with 90 daysa™ notice, JMP Group recorded an impairment charge of $2.8 million for the quarter. JMP Capital has since restructured the transaction to provide JMP Group with indemnity from the seller in the amount of $2.6 million, which is collateralized by certain assets and $1.0 million in cash. The indemnity amortizes over a period ending in February 2013, with the cash portion amortizing last, over the final year of the indemnity period. JMP Credit Advisors has not been given notice that the management contract will be transferred to another manager and, as long as JMP Credit Advisors remains the manager, it will continue to earn management fees from the CLO.

Share Repurchase Activity

During the quarter ended September 30, 2010, JMP Group repurchased a total of 168,739 shares of its common stock at an average price of $6.48 per share, or $1.1 million in aggregate.

Book Value per Share

At September 30, 2010, JMP Groupa™s tangible book value per share was $5.62, compared to $5.65 at June30, 2010 and $5.54 at September30, 2009. Adjusting book value to reflect the net liquidity discount on JMP Credita™s loan portfolio and asset-backed securities issued, JMP Groupa™s adjusted tangible book value per share at September 30, 2010 would have been $4.68, as indicated by the reconciliation below.

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 investorsa™ overall understanding of the companya™s current financial performance. Additionally, company management believes that this presentation enables meaningful comparison of JMP Groupa™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 expenses or gains that JMP Group expects to continue to recognize; the adjustment of these items should not be construed as an inference that these expenses or gains are unusual, infrequent or non-recurring. Therefore, company management believes that both JMP Groupa™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.

Operating Net Income

Operating net income is a non-GAAP financial measure that (i) reverses stock-based compensation expense related to equity awards granted both at the time of JMP Groupa™s May 2007 initial public offering and thereafter, (ii) excludes the net amortization of discounts on loans held and asset-backed securities issued by JMP Credit, (iii) excludes net unrealized gains and losses on strategic equity investments, and (iv) assumes an effective tax rate of 42%. This methodology differs from that employed by JMP Group in periods prior to the second quarter of 2010, when operating net income was defined as excluding only stock-based compensation expense related to the companya™s IPO. As now calculated, in particular, operating net income adjusts for:

• the grant of 1,931,060 restricted stock units at the time of the companya™s IPO, which resulted in non-cash compensation expense of $0.3million and $2.2 million for the quarter and nine months ended September30, 2010, respectively;
• the grant of restricted stock units subsequent to the companya™s IPO, which resulted in non-cash compensation expense of $0.4million and $0.8million for the quarter and nine months ended September30, 2010, respectively;
• the non-cash net amortization of liquidity discounts at JMP Credit, due to scheduled contractual principal repayments, of $2.1million and $5.3 million for the quarter and nine months ended September30, 2010, respectively;
• unrealized mark-to-market gains or losses on the companya™s strategic investments in publicly traded New York Mortgage Trust, Inc. and, prior to December 31, 2009, Hercules Technology Growth Capital, Inc.;
• a non-cash bargain purchase gain of $1.2 million resulting from the acquisition of Cratos Capital Partners by JMP Credit during the quarter ended June 30, 2009; and
• a combined federal, state and local income tax rate of 42%.

A reconciliation of JMP Groupa™s net income to the companya™s operating net income for the quarter and nine months ended September 30, 2010 and for comparable prior periods is set forth below.

Company management has utilized operating net income on a total and per share basis, adjusted in the manner described above, as an additional device to aid in understanding and analyzing JMP Groupa™s financial results for the periods presented. Management believes that operating net income provides useful information by excluding or including certain items that may not be representative of the companya™s core operating results or business outlook. Management also believes that operating net income is a useful measure because it allows for a better evaluation of the performance of JMP Groupa™s ongoing business and facilitates a meaningful comparison of the companya™s results in a given period to those in prior periods and future periods.

Cautionary Note Regarding Quarterly Financial Results

Due to the nature of its business, JMP Groupa™s quarterly revenues and net income may fluctuate materially depending on: the size and number of investment banking transactions on which it advises; the timing of the completion of those transactions; the size and number of securities trades which it executes for brokerage customers; the performance of its asset management funds and inflows and outflows of assets under management; gains stemming from sales of or prepayments on, or losses stemming from defaults on, loans underlying the companya™s collateralized loan obligation; and the effect of the overall condition of the securities markets and economy as a whole. Accordingly, revenues and net income in any particular quarter may not be indicative of future results. Further, JMP Groupa™s compensation expense is generally based upon revenues and can fluctuate materially in any particular quarter depending upon the amount and sort of revenue recognized as well as other factors. The amount of compensation and benefits expense recognized in any particular quarter may not be indicative of such expense in a future period. As a result, the company suggests that annual results may be the most meaningful gauge for investors in evaluating the performance of its business.

Cautionary Note Regarding Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements provide JMP Groupa™s current expectations or forecasts about future events, including beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts, such as the likelihood and size of future investment gains and the companya™s ability to generate future after-tax returns and earnings. Forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expected or implied by the forward-looking statements. JMP Groupa™s actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in the sections entitled aRisk Factorsa and aManagementa™s Discussion and Analysis of Financial Condition and Results of Operationsa in the companya™s Form 10-K for the year ended December 31, 2009 as filed with the Securities and Exchange Commission on March 9, 2010 as well as in the similarly captioned sections of other periodic reports filed by the company under the Exchange Act. The Form 10-K for the year ended December 31, 2009 and all other periodic reports are available on JMP Groupa™s website at [ http://www.jmpg.com ] and on the Securities and Exchange Commissiona™s website at [ http://www.sec.gov ]. Unless required by law, JMP Group undertakes no obligation to publicly update or revise any forward-looking statement to reflect circumstances or events after the date of this press release.

Conference Call

JMP Group will hold a conference call to discuss the results detailed herein at 10:00 a.m. EDT on Wednesday, October 27, 2010. To participate in the call, dial (877) 231-6085 (domestic) or (706) 643-3419 (international). The conference identification code is a20184499.a

The conference call will also be broadcast live over the Internet and will be accessible via a link in the investor relations section of the companya™s website, at [ http://investor.jmpg.com ]. The Internet broadcast will be archived and will remain available on the website for future replay.

About JMP Group

JMP Group Inc. is a full-service investment banking and alternative asset management firm that provides investment banking, sales and trading, and equity research services to corporate and institutional clients and alternative asset management products to institutional and high-net-worth investors. JMP Group operates through three subsidiaries, JMP Securities, Harvest Capital Strategies and JMP Credit Corporation. For more information, visit [ www.jmpg.com ].