JMP Group LLC
Oct 24, 2014

JMP Group Reports Third Quarter 2014 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, 2014.

"JMP Group posted another good quarter, thanks to our diversified business model, with operating earnings increasing 28% year-over-year to $0.15 per share, despite a slower pace in the equity capital markets environment," said Chairman and Chief Executive Officer Joe Jolson. "Excluding net investment income and corporate costs, our three operating platforms earned a record $0.66 per share for the latest twelve months, an increase of 74% from $0.38 per share for the prior twelve-month period. The strong results drove a 12% increase in our tangible book value per share to $6.32 and also allowed us to return 48% of our operating earnings to stockholders through cash dividends and share buybacks over the past year."

Segment Results of Operations

At JMP Securities, the broker-dealer segment, adjusted net revenues were $23.5 million, a decrease of 5.5% from $24.9 million for the third quarter of 2013. The broker-dealer segment's operating margin on adjusted net revenues was 14.5%, compared to 16.8% for the prior quarter and 13.8% for the third quarter of 2013.

At Harvest Capital Strategies, the asset management segment, adjusted net revenues of $11.2 million increased 82.3% from $6.2 million for the third quarter of 2013. JMP Group's return on its capital invested in hedge funds managed by Harvest Capital Strategies was 1.8% for the period.

At JMP Credit Advisors, the corporate credit management segment, adjusted net revenues totaled $1.2 million, a decrease of 8.6% from $1.4 million for the third quarter of 2013. For the third quarter of 2014, there was no net realized gain or loss on the sale or payoff of loans underlying collateralized loan obligations; while, for the third quarter of 2013, there was a net realized gain of $0.2 million.

A summary of JMP Group's operating net income per share by segment for the quarter and nine months ended September 30, 2014, and for comparable prior periods is set forth below.

  Quarter Ended   Nine Months Ended
($ as shown) Sept. 30, 2014   June 30, 2014   Sept. 30, 2013 Sept. 30, 2014   Sept. 30, 2013
 
Broker-dealer $0.09 $0.13 $0.10 $0.40 $0.27
Asset management 0.04 0.02 0.01 0.06 0.01
Corporate credit management 0.00   0.02   0.01   0.02   0.02  
Operating platform EPS 0.13 0.17 0.12 0.48 0.30
Investment income 0.11 0.12 0.07 0.35 0.42
Corporate costs (0.09 ) (0.11 ) (0.07 ) (0.31 ) (0.29 )
 
Operating EPS (diluted) $0.15   $0.18   $0.12   $0.52   $0.43  

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 $17.1 million, a decrease of 10.8% from $19.1 million for the third quarter of 2013. For the nine months ended September 30, 2014, investment banking revenues were $65.2 million, an increase of 24.6% from $52.3 million for the nine months ended September 30, 2013.

A summary of the company's investment banking revenues and transaction counts for the quarter and nine months ended September 30, 2014, and for comparable prior periods is set forth below.

  Quarter Ended   Nine Months Ended
Sept. 30, 2014   June 30, 2014   Sept. 30, 2013 Sept. 30, 2014   Sept. 30, 2013
($ in thousands) Count   Revenues Count   Revenues Count   Revenues Count   Revenues Count   Revenues
 
Public equity 26 $9,834 34 $14,717 27 $10,822 93 $44,072 97 $29,253

Debt and convertible securities

4 470 5 1,090 5 3,495 15 3,131 23 10,033

Private capital markets and other

1 125 - 325 2 1,534 2 1,148 4 4,509
Strategic advisory 4 6,634 8 6,929 4 3,286 15 16,826 9 8,506
 
Total 35 $17,063 47 $23,061 38 $19,137 125 $65,177 133 $52,301

Brokerage

Net brokerage revenues were $6.5 million, an increase of 12.3% from $5.8 million for the third quarter of 2013. For the nine months ended September 30, 2014, net brokerage revenues were $19.6 million, an increase of 9.3% from $17.9 million for the nine months ended September 30, 2013.

Asset Management

Asset management-related fee revenues were $11.1 million, an increase of 85.6% from $6.0 million for the third quarter of 2013, largely due to an increase in incentive fees to $6.2 million from $2.5 million. For the nine months ended September 30, 2014, asset management-related fee revenues were $32.6 million, an increase of 81.7% from $18.0 million for the nine months ended September 30, 2013. 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, 2014, totaled $2.2 billion, including $1.1 billion of funds managed by Harvest Capital Strategies and HCAP Advisors and $1.1 billion par value of loans and cash managed by JMP Credit Advisors. Client assets under management were $1.9 billion at June 30, 2014, and $1.6 billion at September 30, 2013. Including sponsored funds in which Harvest Capital Strategies owns an economic interest, client assets under management totaled $2.5 billion at September 30, 2014.

At September 30, 2014, private capital, including corporate credit, small business lending, venture capital and real estate-related advisory services, represented 63.1% of client assets under management, including sponsored funds.

Principal Transactions

Principal transactions generated net realized and unrealized losses of $4.3 million and net realized and unrealized gains of $1.7 million for the quarter and nine months ended September 30, 2014, respectively, compared to net realized and unrealized gains of $0.6 million and $4.8 million for the quarter and nine months ended September 30, 2013, respectively.

A summary of the company's principal transaction revenues for the quarter and nine months ended September 30, 2014, and for comparable prior periods is set forth below.

  Quarter Ended   Nine Months Ended
(in thousands) Sept. 30, 2014   June 30, 2014   Sept. 30, 2013 Sept. 30, 2014   Sept. 30, 2013
 
Hedge fund investments $1,784   $2,255   $432   $5,747   $3,238  
 
Principal investments:

Investment in Harvest Capital Credit Corporation

(1,273 ) 19 205 (1,417 ) 69
Other principal investments 26   (108 ) (139 ) (28 ) -  
Total principal investments (1,247 ) (89 ) 66   (1,445 ) 69  
 
Venture investments:

Investment in Harvest Growth Capital funds

(164 ) 284 (33 ) (183 ) 34
Other venture investments and warrants (298 ) 255   794   246   1,831  
Total venture investments (462 ) 539   761   63   1,865  
 

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

75   2,705   1,259   4,365   5,172  
 

Non-controlling interests in Harvest Growth Capital funds

(4,351 ) 6,983   (619 ) (2,646 ) (323 )
 
Total principal transaction revenues ($4,276 ) $9,688   $640   $1,719   $4,849  

Included in the net loss of $4.3 million for the quarter ended September 30, 2014, was a loss of $4.4 million attributable to non-controlling interests in net realized and unrealized gains 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 4.8% of Harvest Growth Capital and 2.3% 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 $4.4 million is not included in adjusted net revenues. Net of its non-controlling interests, JMP Group had a net realized and unrealized loss of $0.2 million on its investments in Harvest Growth Capital and Harvest Growth Capital II for the quarter. For more information on adjusted net revenues, including reconciliation to net revenues, please see the section below titled "Non-GAAP Financial Measures."

Collateralized Loan Obligations

The net returns on invested capital managed by JMP Credit Advisors were 3.9% and 12.4% for the quarter and nine months ended September 30, 2014, respectively, compared to 6.9% and 26.3% for the quarter and nine months ended September 30, 2013, respectively.

At September 30, 2014, discounts and reserves (including liquidity discounts, allowances for loan losses and deferred loan fees) equaled $11.4 million, or 1.2% of gross performing loans outstanding at JMP Credit. At September 30, 2013, such discounts and reserves equaled $8.5 million, or 1.2% of gross performing loans outstanding. There were no impaired loans at either September 30, 2014, or September 30, 2013.

A net loan loss provision of $1.0 million for the quarter was recorded at JMP Credit, which is consolidated under GAAP, primarily representing a general reserve in connection with the loan portfolio being accumulated for JMP Credit Advisors CLO III. At September 30, 2014, general loan loss reserves equaled 0.6% of gross performing loans at JMP Credit.

Net Interest Income

Net interest income was $4.4 million, compared to net interest income of $4.3 million for the third quarter of 2013.

For the nine months ended September 30, 2014, net interest income was $11.9 million, compared to net interest expense of $1.2 million for the nine months ended September 30, 2013, when interest expense due to net amortization of liquidity discounts at JMP Credit equaled $14.9 million. Excluding the amortization-related expense for the period, net interest income would have been $13.7 million for the nine months ended September 30, 2013. Further excluding net interest income of $1.8 million attributable to Harvest Capital Credit, which, due to its May 2013 initial public offering, is no longer consolidated by JMP Group, net interest income would have been $11.9 million for the nine months ended September 30, 2013.

Expenses

Compensation and Benefits

Compensation and benefits expense was $28.3 million, compared to $24.7 million for the third quarter of 2013. Excluding the cost of stock-based awards but accelerating and recognizing the cost of net deferred compensation related to the period, compensation and benefits expense was 68.7% of adjusted net revenues, compared to 69.0% for the third quarter of 2013. Further excluding compensation expense related to strategic initiatives and hedge fund incentive fees, the compensation ratio was 62.8%, compared to 65.3% for the third quarter of 2013.

For the nine months ended September 30, 2014, compensation and benefits expense was $97.7 million, compared to $69.1 million for the nine months ended September 30, 2013. Excluding the cost of stock-based awards but accelerating and recognizing the cost of net deferred compensation related to the period, compensation and benefits expense was 70.5% of adjusted net revenues, compared to 65.7% for the nine months ended September 30, 2013. Further excluding compensation expense related to strategic initiatives and hedge fund incentive fees, the compensation ratio was 64.7%, compared to 60.1% for the nine months ended September 30, 2013.

For more information on compensation ratios, please see the section below titled "Non-GAAP Financial Measures."

Non-Compensation Expense

Non-compensation expense was $7.0 million, compared to $6.8 million for the third quarter of 2013. For the nine months ended September 30, 2014, non-compensation expense was $20.7 million, compared to $21.9 million for the nine months ended September 30, 2013. Excluding costs related to JMP Group's conversion to a publicly traded limited liability company, non-compensation expense would have been $6.6 million for the quarter and $20.1 million for the nine months ended September 30, 2014.

Personnel

At September 30, 2014, the company had 233 full-time employees, compared to 231 at June 30, 2014, and 231 at September 30, 2013.

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 more a 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 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.

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 (until its IPO on May 2, 2013), (ii) excludes the net amortization of liquidity discounts on loans held and asset-backed securities issued by JMP Credit Advisors CLO I, (iii) reverses the general loan loss provision taken with regard to other CLOs, (iv) adjusts for unrealized mark-to-market gains and losses recorded at Harvest Capital Credit (prior to its IPO on May 2, 2013), (v) reverses net unrealized gains and losses on strategic equity investments and warrants, (vi) excludes the non-controlling interest in net unrealized gains and losses on Harvest Growth Capital and Harvest Growth Capital II, and (vii) reverses unrealized mark-to-market gains or losses on investments related to deferred compensation. In particular, adjusted net revenue adjusts for:

A reconciliation of JMP Group's net revenues to its adjusted net revenues for the quarter and nine months ended September 30, 2014, and for comparable prior periods is set forth below.

  Quarter Ended   Nine Months Ended
(in thousands) Sept. 30, 2014   June 30, 2014   Sept. 30, 2013 Sept. 30, 2014   Sept. 30, 2013
 
Revenues:
Non-interest revenues $30,294 $53,942 31,531 $118,633 $93,142
Net interest income/(expense) 4,359 3,788 4,313 11,907 (1,222 )
Loan loss provision (956 ) (212 ) (467 ) (1,665 ) (2,391 )
Total net revenues 33,697 57,518 35,377 128,875 89,529

Asset management fees earned on Harvest Growth Capital funds and Harvest Capital Credit (1) (2)

281 366 387 1,025 1,766

Dividend distribution from Harvest Capital Credit (2)

- - - - 678

Less: Net interest income and other revenues from Harvest Capital Credit (2)

-   -   -   -   (2,116 )

Total net revenues including fee revenues from consolidated entities

33,978   57,884   35,764   129,900   89,857  
 
Add back/(subtract):

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

- - - - 14,979

General loan loss provision - collateralized loan obligations

919 382 377 1,851 1,505

Unrealized mark-to-market (gain) - Harvest Capital Credit

- - - - (515 )

Realization of mark-to-market gain - Harvest Capital Credit

- - - - 772

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

1,392

(72 ) (531 ) 1,494 (617 )

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

4,361 (6,980 ) 619 2,678 323

Unrealized mark-to-market (gain)/loss - deferred compensation

(332 ) (656 ) 1   (1,058 ) (152 )
Adjusted net revenues $40,318   $50,558   $36,230   $134,865   $106,152  
(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.
 
(2) Subsequent to its IPO on May 2, 2013, Harvest Capital Credit is no longer consolidated; therefore, fees and dividends related to Harvest Capital Credit are included in non-interest revenues following that date.

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 (until its IPO on May 2, 2013) 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 and nine months ended September 30, 2014, and for comparable prior periods is set forth below.

  Quarter Ended   Nine Months Ended
(in thousands) Sept. 30, 2014   June 30, 2014   Sept. 30, 2013 Sept. 30, 2014   Sept. 30, 2013
 
Base management fees:
Fees reported as asset management fees $2,983 $2,725 $2,585 $8,302 $7,502

Fees earned at Harvest Growth Capital, Harvest Growth Capital II and Harvest Capital Credit/HCAP Advisors

769 804 636 2,342 1,740
Total base management fees 3,752 3,529 3,221 10,644 9,242
 
Incentive fees:
Fees reported as asset management fees 5,622 11,209 2,493 19,750 7,715

Fees earned at Harvest Growth Capital, Harvest Growth Capital II and Harvest Capital Credit/HCAP Advisors

538 485 - 665 417
Total incentive fees 6,160 11,694 2,493 20,415 8,132
 
Other fee income:
Total fundraising and other fees 1,191 152 267 1,564 581
 
Asset management-related fee revenues $11,103 $15,375 $5,981 $32,623 $17,955
 
Summations:
Fees reported as asset management fees $8,605 $13,934 $5,078 $28,052 $15,217

Fees earned at Harvest Growth Capital, Harvest Growth Capital II and Harvest Capital Credit/HCAP Advisors

1,307 1,289 636 3,007 2,157
Fees reported as other fee income 1,191 152 267 1,564 581

Company management has utilized asset management-related fee revenue as a means of assessing the performance of JMP Group's combined asset management activities, including its fundraising and other services for third parties. Management believes that asset management-related fee revenues, as presented above, provide useful information by indicating the relative contributions of base management fees and performance-related incentive fees, thus facilitating a comparison of those fees in a given period to those in prior and future periods. Management also believes that asset management-related fee revenue is a more meaningful measure than standalone asset management fees as reported, because asset management-related fee revenues represent the combined impact of JMP Group's various asset management activities on the company's total net revenues.

Compensation Ratio

A compensation ratio expresses compensation expense as a percentage of net revenues in a given period. As utilized by JMP Group, an adjusted compensation ratio is a non-GAAP financial measure that employs adjusted net revenues as the denominator in its calculation. Furthermore, this ratio adjusts the financial impact of certain compensation-related and transaction-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 stock-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). The adjusted compensation ratio is further adjusted by excluding compensation paid to employees hired in connection with JMP Group's strategic investments in new business initiatives. In addition, the company presents an adjusted compensation ratio that excludes any compensation related to incentive fees generated by hedge funds, a majority of which is passed through to the funds' investment teams if earned.

A statement of JMP Group's compensation ratio for the quarter and nine months ended September 30, 2014, and for comparable prior periods is set forth below.

  Quarter Ended   Nine Months Ended
($ in thousands) Sept. 30, 2014   June 30, 2014   Sept. 30, 2013 Sept. 30, 2014   Sept. 30, 2013
 
Compensation Ratios
Adjusted net revenues $40,318   $50,558   $36,230   $134,865   $106,152  
 
Compensation and benefits $28,315 $37,979 $24,685 $97,670 $69,066
 
Subtract/(add back):
Compensation expense - stock options 509 504 262 1,408 658
Compensation expense - RSUs 776 934 699 2,563 2,019

Compensation expense - net deferred compensation

(991 ) (891 ) (1,277 ) (2,479 ) (3,547 )

Unrealized mark-to-market gain/(loss) - deferred compensation

332   656   (1 ) 1,058   152  
Adjusted compensation and benefits 27,689   36,776   25,002   95,120   69,784  
 
Subtract:

Compensation expense - strategic initiatives

500   500   648   1,610   3,418  

Adjusted compensation and benefits, excluding strategic initiatives

$27,189   $36,276   $24,354   $93,510   $66,366  
 

Adjusted ratio of compensation expense to revenues

68.7 % 72.7 % 69.0 % 70.5 % 65.7 %

Adjusted ratio of compensation expense to revenues, excluding strategic initiatives

67.4 % 71.8 % 67.2 % 69.3 % 62.5 %
 
Compensation Ratios Excluding Hedge Fund Incentive Fees
Adjusted net revenues $40,318 $50,558 $36,230 $134,865 $106,152
 
Subtract:

Compensation expense - hedge fund incentive fees

4,982   10,372   2,038   17,797   6,322  

Adjusted net revenues, excluding hedge fund incentive fees

$35,336   $40,186   $34,192   $117,068   $99,830  
 

Adjusted compensation and benefits, excluding strategic initiatives

$27,189 $36,276 $24,354 $93,510 $66,366
 
Subtract:

Compensation expense - hedge fund incentive fees

4,982   10,372   2,038   17,797   6,322  

Adjusted compensation and benefits, excluding strategic initiatives and hedge fund incentive fees

$22,207   $25,904   $22,316   $75,713   $60,044  
 

Adjusted ratio of compensation expense to revenues, excluding strategic initiatives and hedge fund incentive fees

62.8 % 64.5 % 65.3 % 64.7 % 60.1 %

Company management has utilized compensation ratios, adjusted in the manners described above, to assess JMP Group's personnel expenses as they relate to its revenues for the periods presented. Management believes that adjusted compensation ratios provide useful information by including or excluding certain expenses as a means of representing the company's ongoing personnel costs resulting from its core business activities. Management also believes that compensation ratios are useful measures because they allow and facilitate meaningful comparisons of the company's personnel expenses in a given period to those in prior and future periods.

Operating Net Income

Operating net income is a non-GAAP financial measure that (i) reverses compensation expense related to stock-based awards and deferred compensation, (ii) excludes the net amortization of liquidity discounts on loans held and asset-backed securities issued by JMP Credit Advisors CLO I, (iii) reverses the general loan loss provision taken with regard to other CLOs, (iv) adjusts for unrealized mark-to-market gains and losses recorded at Harvest Capital Credit, (v) reverses net unrealized gains and losses on strategic equity investments and warrants, and (vi) assumes an effective tax rate. In particular, operating net income adjusts for:

A reconciliation of JMP Group's net income to its operating net income for the quarter and nine months ended September 30, 2014, and for comparable prior periods is set forth below.

  Quarter Ended   Nine Months Ended
(in thousands, except per share amounts) Sept. 30, 2014   June 30, 2014   Sept. 30, 2013 Sept. 30, 2014   Sept. 30, 2013
 

Net income attributable to JMP Group Inc.

$1,495 $3,195 $3,289 $8,688 $135
 
Add back:

Income tax expense

1,460   2,450   1,634   5,606   178  

Income before taxes

2,955 5,645 4,923 14,294 313
 
Add back/(subtract):
Compensation expense - stock options 509 504 262 1,408 658
Compensation expense - RSUs 776 934 699 2,563 2,019

Compensation expense - net deferred compensation

(991 ) (891 ) (1,277 ) (2,479 ) (3,547 )

Net amortization of liquidity discounts - JMP Credit Advisors CLO I

-

- - - 14,979

General loan loss provision - collateralized loan obligations

913 380 274 1,838 1,095

Unrealized mark-to-market (gain) - Harvest Capital Credit

- - - - (162 )

Realization of mark-to-market gain - Harvest Capital Credit

- - - - 772

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

1,392   (72 ) (531 ) 1,494   (617 )
Operating income before taxes 5,554 6,500 4,350 19,118 15,510
 
Income tax expense (assumed rate of 38%) 2,111   2,470   1,653   7,265   5,893  
Operating net income $3,443   $4,030   $2,697   $11,853   $9,617  
 
Operating net income per share:
Basic $0.16 $0.19 $0.12 $0.55 $0.43
Diluted (1) $0.15 $0.18 $0.12 $0.52 $0.43
 
Weighted average shares outstanding:
Basic 21,686 21,712 22,014 21,739 22,271
Diluted (1) 23,093 22,901 22,713 22,843 22,669
(1)   In 2013 and the first quarter of 2014, JMP Group issued restricted stock units, or RSUs, bearing non-forfeitable dividend equivalent rights. GAAP requires RSUs with non-forfeitable dividend equivalent rights to be included in the diluted share count (without applying the treasury method). Management prefers to present a non-GAAP diluted share count for the period, in keeping with the presentation for quarters not impacted by this GAAP requirement for such RSUs. The non-GAAP diluted share count reflects the impact of such RSUs under the treasury method, which is consistent with the calculation of the dilutive impact of all other RSUs outstanding. On a GAAP basis, the weighted average number of diluted shares outstanding for the quarter and nine months ended September 30, 2014, was 23,833,756 and 23,680,133, respectively. Given those denominators, operating net income per diluted share would have instead been $0.14 for the quarter and $0.50 for the nine months ended September 30, 2014, respectively.

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 Group's financial results for the periods presented. Management believes that operating net income provides useful information by excluding certain items that may not be representative of the company's core operating results or core business activities. Management also believes that operating net income is a useful measure because 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.

Segment Reporting

In order to demonstrate the contribution to the company's results of each of its primary businesses on a standalone basis, JMP Group presents the operating net income generated by each segment in the tables that follow. Management believes that this presentation enables investors to better understand the separate but interrelated financial operations of the company's various business lines and to more accurately assess the contribution of each to JMP Group's aggregate results.

Total net revenues have been adjusted, in part, as detailed above in the section titled "Adjusted Net Revenue," and the resulting adjusted net revenues (i) include 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 (until its IPO on May 2, 2013), (ii) exclude the net amortization of liquidity discounts on loans held and asset-backed securities issued by JMP Credit Advisors CLO I, (iii) reverse the general loan loss provision taken with regard to other CLOs, (iv) adjust for unrealized mark-to-market gains and losses recorded at Harvest Capital Credit; (v) reverse net unrealized gains and losses on strategic equity investments and warrants and (vi) exclude non-controlling interests in net unrealized gains and losses on Harvest Growth Capital and Harvest Growth Capital II. Total non-interest expenses have been adjusted, in part, as detailed above in the section titled "Operating Net Income," and the resulting adjusted non-interest expense reverses compensation expense related to stock-based awards granted subsequent to JMP Group's initial public offering. For the purposes of calculating operating net income, an effective tax rate of 38% is assumed.

A statement of JMP Group's operating net income on a segment basis for the quarter ended September 30, 2014, is set forth below.

  Quarter Ended September 30, 2014
                 
Corp. Invest- HGC Consoli-
Broker- Asset Credit Operating ment Corp. Elimin- JMP Consoli- dated JMP
(in thousands, except per share amounts) Dealer Mgmt. Mgmt. Platforms Income Costs ations Group dation Group
 
Revenues:
Investment banking $17,063 - - $17,063 - - - $17,063 - $17,063
Brokerage 6,455 - - 6,455 - - - 6,455 - 6,455
Asset management-related fees (1) - $11,212 $1,235 12,447 - -

($1,344

) 11,103 ($281 ) 10,822
Principal transactions (2) - - - - $1,134 - - 1,134 (4,351 ) (3,217 )
Gain on sale and payoff of loans - - - - (12 ) - - (12 ) - (12 )
Net dividend income - - - - 242 - - 242 - 242
Net interest income - - - - 4,369 - - 4,369 (10 ) 4,359
Provision for loan losses - - - - (36 ) -   -   (36 ) -   (36 )
Adjusted net revenues 23,518 11,212 1,235 35,965 5,697 - (1,344 ) 40,318 (4,642 ) 35,676
 
Expenses:
Non-interest expense/(income) (3) 20,107 9,899 1,172 31,178 1,544 3,276 (1,344 ) 34,654 41 34,695
 
Less: Non-controlling interest (4) - 8 - 8 101   -   -   109   (4,683 ) (4,574 )

Operating income/(loss) before taxes

3,411 1,305 63 4,779 4,052 (3,276 ) - 5,555 - 5,555
 
Income tax expense/(benefit) 1,296 497 24 1,817 1,540   (1,245 ) -   2,112   -   2,112  
Operating net income/(loss) $2,115 $808 $39 $2,962 $2,512   ($2,031 ) -   $3,443   -   $3,443  
 

Operating net income/(loss) per share:

Basic $0.10 $0.04 $0.00 $0.14 $0.12 ($0.09 ) - $0.16 - $0.16
Diluted (5) $0.09 $0.04 $0.00 $0.13 $0.11 ($0.09 ) - $0.15 - $0.15
(1)   Reflects revenues detailed in section above titled "Asset Management-Related Fee Revenues;" management fees of $0.3 million are eliminated upon consolidation of two Harvest Growth Capital funds.
 
(2) Reverses net unrealized gains and losses on strategic equity investments and warrants. Excludes non-controlling interests in net realized and unrealized gains totaling $4.4 million that are recognized upon consolidation of two Harvest Growth Capital funds.
 
(3) Reverses stock-based compensation expense as well as accounting adjustments related to deferred compensation expense and excludes fund-related expenses totaling $41,000 that are recognized upon consolidation of two Harvest Growth Capital funds.
 
(4) Excludes non-controlling interests totaling $4.7 million in the net realized and unrealized gains of two Harvest Growth Capital funds that are recognized upon consolidation of the entities.
 
(5) In 2013 and the first quarter of 2014, JMP Group issued restricted stock units, or RSUs, bearing non-forfeitable dividend equivalent rights. GAAP requires RSUs with non-forfeitable dividend equivalent rights to be included in the diluted share count (without applying the treasury method). Management prefers to present a non-GAAP diluted share count for the period, in keeping with the presentation for quarters not impacted by this GAAP requirement for such RSUs. The non-GAAP diluted share count reflects the impact of such RSUs under the treasury method, which is consistent with the calculation of the dilutive impact of all other RSUs outstanding. On a GAAP basis, the weighted average number of diluted shares outstanding for the quarter ended September 30, 2014, was 23,833,756; given that denominator, operating net income per diluted share would have been $0.14.
 

A statement of JMP Group's operating net income on a segment basis for the nine months ended September 30, 2014, is set forth below.

  Nine Months Ended September 30, 2014
    Corp.     Invest-         HGC   Consoli-
Broker- Asset Credit Operating ment Corp. Elimin- JMP Consoli- dated JMP
(in thousands, except per share amounts) Dealer Mgmt. Mgmt. Platforms Income Costs ations Group dation Group
 
Revenues:
Investment banking $65,265 - - $65,265 - - ($88 ) $65,177 - $65,177
Brokerage 19,585 - - 19,585 - - - 19,585 - 19,585
Asset management-related fees (1) 50 $32,897 $3,842 36,789 - - (4,166 ) 32,623 ($1,027 ) 31,596
Principal transactions (2) - - - - $4,801 - - 4,801 (2,647 ) 2,154
Gain on sale and payoff of loans - - - - (183 ) - - (183 ) - (183 )
Net dividend income - - - - 738 - - 738 - 738
Net interest income - - - - 11,938 - - 11,938 (31 ) 11,907
Provision for loan losses - -   - -   186   -   -   186   -   186  
Adjusted net revenues 84,900 32,897 3,842 121,639 17,480 - (4,254 ) 134,865 (3,705 ) 131,160
 
Expenses:
Non-interest expense/(income) (3) 69,983 30,813 3,184 103,980 4,370

$11,490

(4,166 ) 115,674 143 115,817
 
Less: Non-controlling interest (4) - (275 ) - (275 ) 343   -   -   68   (3,848 ) (3,780 )

Operating income/(loss) before taxes

14,917 2,359 658 17,934 12,767 (11,490 ) (88 ) 19,123 - 19,123
 
Income tax expense/(benefit) 5,669 898   250 6,817   4,851   (4,365 ) (33 ) 7,270   -   7,270  
Operating net income/(loss) $9,248 $1,461   $408 $11,117   $7,916   ($7,125 ) ($55 ) $11,853   -   $11,853  
 

Operating net income/(loss) per share:

Basic $0.43 $0.07 $0.02 $0.52 $0.36 ($0.33 ) ($0.00 ) $0.55 - $0.55
Diluted (5) $0.40 $0.06 $0.02 $0.48 $0.35 ($0.31 ) ($0.00 ) $0.52 - $0.52
(1)   Reflects revenues detailed in section above titled "Asset Management-Related Fee Revenues;" management fees of $1.0 million are eliminated upon consolidation of two Harvest Growth Capital funds.
 
(2) Reverses net unrealized gains and losses on strategic equity investments and warrants. Excludes non-controlling interests in net realized and unrealized gains totaling $2.7 million that are recognized upon consolidation of two Harvest Growth Capital funds.
 
(3) Reverses stock-based compensation expense as well as accounting adjustments related to deferred compensation expense and excludes fund-related expenses totaling $143,000 that are recognized upon consolidation of two Harvest Growth Capital funds.
 
(4) Excludes non-controlling interests totaling $3.8 million in the net realized and unrealized gains of two Harvest Growth Capital funds that are recognized upon consolidation of the entities.
 
(5) In 2013 and the first quarter of 2014, JMP Group issued restricted stock units, or RSUs, bearing non-forfeitable dividend equivalent rights. GAAP requires RSUs with non-forfeitable dividend equivalent rights to be included in the diluted share count (without applying the treasury method). Management prefers to present a non-GAAP diluted share count for the period, in keeping with the presentation for quarters not impacted by this GAAP requirement for such RSUs. The non-GAAP diluted share count reflects the impact of such RSUs under the treasury method, which is consistent with the calculation of the dilutive impact of all other RSUs outstanding. On a GAAP basis, the weighted average number of diluted shares outstanding for the nine months ended September 30, 2014, was 23,680,133; given that denominator, operating net income per diluted share would have been $0.50.
 

Book Value per Share

At September 30, 2014, JMP Group's tangible book value per share was $6.32, as set forth below.

(in thousands, except per share amounts)   Sept. 30, 2014   June 30, 2014   Sept. 30, 2013
 
Total JMP Group stockholders' equity $136,687 $133,593 $123,740
Less: Goodwill and intangible assets -   -   -  
Tangible stockholders' equity $136,687   $133,593   $123,740  
 
Tangible book value per share $6.32   $6.16   $5.63  
 
Basic shares outstanding 21,619 21,690 21,961
 
Quarterly operating ROTE (1) 10.2 % 12.2 % 8.8 %
LTM operating ROTE (1) 12.1 % 11.8 % 12.6 %
(1)   Return on tangible equity (ROTE) equals annualized operating net income divided by average tangible stockholders' equity.

Share Repurchase Activity

During the quarter ended September 30, 2014, JMP Group repurchased 82,949 shares of its common stock at an aggregate price of approximately $0.5 million, or $6.43 per share. At quarter-end, approximately 0.8 million shares remained eligible for repurchase under the company's existing repurchase authorization. Subsequently, on October 8, 2014, the company's board of directors increased the repurchase authorization such that 1.5 million shares were eligible for repurchase.

Cautionary Note Regarding Quarterly Financial Results

Due to the nature of its business, JMP Group'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 or losses stemming from sales of or prepayments on, or losses stemming from defaults on, loans underlying the company's collateralized loan obligations; 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. Furthermore, JMP Group's compensation expense is generally based upon revenues and can fluctuate materially in any quarter, depending upon the amount and sorts of revenue recognized as well as other factors. The amount of compensation and benefits expense recognized in a particular quarter may not be indicative of such expense in any future period. As a result, the company suggests that its 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 may contain 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 Group's current expectations or forecasts about future events, including beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. 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. The company's actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the company's Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on March 13, 2014, 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, 2013 and all other periodic reports are available on JMP Group's website at www.jmpg.com and on the Securities and Exchange Commission's website at 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 Friday, October 24, 2014. To participate in the call, dial (888) 566-6060 (domestic) or (973) 200-3100 (international). The conference identification number is 22366841.

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 company's website, at investor.jmpg.com/events.cfm. The Internet broadcast will be archived and will remain available on the website for future replay.

About JMP Group

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

 
JMP GROUP INC.
Consolidated Statements of Financial Condition

(Unaudited)

 
 
(in thousands)   Sept. 30, 2014   Dec. 31, 2013
 
Assets
 
Cash and cash equivalents $87,735 $65,906
Restricted cash and deposits 199,496 68,029
Marketable securities owned, at fair value 35,630 29,295
Other investments 199,781 161,773
Loans held for investment, net of allowance for loan losses 1,786

Loans collateralizing asset-backed securities issued, net of allowance for loan losses

917,715 727,270
Deferred tax assets 7,220 12,492
Other assets 42,305 57,166
Total assets $1,491,668 $1,121,931
 
Liabilities and Stockholders' Equity
 
Liabilities:
Marketable securities sold, but not yet purchased, at fair value $18,462 $13,749
Accrued compensation 46,800 51,347
Asset-backed securities issued 1,013,849 716,423
Note payable - 15,000
Line of credit - 2,895
Bond payable 94,300 46,000
Deferred tax liability 6,984 3,625
Other liabilities 33,284 35,652
Total liabilities 1,213,679 884,691
 
Stockholders' Equity:
Total JMP Group Inc. stockholders' equity 136,687 126,385
Non-redeemable non-controlling interest 141,302 110,855
Total equity 277,989 237,240
Total liabilities and stockholders' equity $1,491,668 $1,121,931

 
JMP GROUP INC.
Consolidated Statements of Operations

(Unaudited)

 
  Quarter Ended   Nine Months Ended
(in thousands, except per share amounts) Sept. 30, 2014   Sept. 30, 2013 Sept. 30, 2014   Sept. 30, 2013
 
Revenues:
Investment banking $17,063 $19,137 $65,177 $52,301
Brokerage 6,455 5,750 19,585 17,924
Asset management fees 9,630 5,328 30,032 15,606
Principal transactions (4,276 ) 640 1,719 4,849
Loss/(gain) on sale, payoff and mark-to-market of loans (12 ) 166 (183 ) 1,591
Net dividend income 242 243 739 290
Other income 1,192   267   1,564   581  
Non-interest revenues 30,294   31,531   118,633   93,142  
 
Interest income 9,973 8,734 27,773 24,603
Interest expense (5,614 ) (4,421 ) (15,866 ) (25,825 )
Net interest income/(expense) 4,359   4,313   11,907   (1,222 )
 
Provision for loan losses (956 ) (467 ) (1,665 ) (2,391 )
Total net revenues 33,697   35,377   128,875   89,529  
 
Non-interest expenses:
Compensation and benefits 28,315 24,685 97,670 69,066
Administration 1,901 1,919 5,383 7,255
Brokerage, clearing and exchange fees 772 939 2,515 2,851
Travel and business development 890 994 2,721 2,991
Communications and technology 970 907 2,860 2,592
Occupancy 846 822 2,522 2,434
Professional fees 1,157 632 3,233 2,468
Depreciation 235 231 689 695
Other 236   342   778   649  
Total non-interest expense 35,322   31,471   118,371   91,001  
 

Net (loss)/income before income tax expense

(1,625 ) 3,906 10,504 (1,472 )
Income tax expense 1,460   1,634   5,606   178  
Net (loss)/income (3,085 ) 2,272 4,898 (1,650 )

Less: Net (loss)/income attributable to non-controlling interests

(4,580 ) (1,017 ) (3,790 ) (1,785 )
Net income attributable to JMP Group Inc. $1,495   $3,289   $8,688   $135  
 
Net income attributable to JMP Group Inc. per share:
Basic $0.07 $0.15 $0.38 $0.01
Diluted $0.06 $0.14 $0.37 $0.01
 
Weighted average common shares outstanding:
Basic 21,686 22,014 21,739 22,271
Diluted 23,834 22,713 23,680 22,669

Investor Relations Contact
JMP Group Inc.
Andrew Palmer, 415-835-8978
apalmer@jmpg.com
or
Media Relations Contact
Dukas Public Relations
Seth Linden, 212-704-7385
seth@dukaspr.com
Zach Leibowitz, 212-704-7385
zach@dukaspr.com

Source: JMP Group Inc.

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