JMP Group Reports Fourth Quarter and Fiscal Year 2017 Financial Results

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JMP Group LLC (NYSE: JMP),
an investment banking and alternative asset management firm, reported
financial results today for the quarter and full fiscal year ended
December 31, 2017.

  • The net loss attributable to JMP Group under generally accepted
    accounting principles, or GAAP, was $1.4 million, or $0.06 per diluted
    share, compared to net income of $0.8 million, or $0.04 per share, for
    the quarter ended December 31, 2016. For the year ended December 31,
    2017, the net loss was $15.9 million, or $0.74 per share, compared to
    net income of $2.9 million, or $0.13 per share, for the year ended
    December 31, 2016.
  • Total net revenues on a GAAP basis were $30.3 million and $109.9
    million for the quarter and year ended December 31, 2017,
    respectively, compared to $36.0 million and $135.0 million for the
    quarter and year ended December 31, 2016, respectively.
  • Operating net income was $3.6 million, or $0.16 per diluted share,
    compared to $2.8 million, or $0.13 per share, for the quarter ended
    December 31, 2016. For the year ended December 31, 2017, operating net
    income was $4.3 million, or $0.20 per share, compared to $10.5
    million, or $0.48 per share, for the year ended December 31, 2016. For
    more information about operating net income, including a
    reconciliation to net income attributable to JMP Group, see the
    section below titled “Non-GAAP Financial Measures.”
  • Adjusted net revenues, which exclude certain non-cash items and
    non-controlling interests, were $34.2 million and $123.4 million for
    the quarter and year ended December 31, 2017, respectively, compared
    to $35.5 million and $130.2 million for the quarter and year ended
    December 31, 2016, respectively. For more information about adjusted
    net revenues, including a reconciliation to net revenues, see the
    section below titled “Non-GAAP Financial Measures.”

“We had a better-than-expected fourth quarter, with operating earnings
of $0.16 per share, which, for the first time since 2016, included a
positive contribution from net corporate income of $0.03 per share,”
said Chairman and Chief Executive Officer Joe Jolson. “JMP Securities
continued to produce at near-record levels, contributing $0.12 per
share—an annualized ROE of 38%—and our asset management subsidiaries
returned to profitability, adding $0.02 per share to operating earnings.
Importantly, with net investment income of $0.09 per share at our
publicly traded partnership, we covered our quarterly cash distribution
for the first time in 2017.

“Early in 2017, our performance suffered from a depressed equity capital
markets environment and from the turnover of our first two CLOs, which
diminished asset management fee income and challenged us to redeploy a
material amount of cash that was funded with 8% long-term debt. As the
year progressed, our operating earnings improved steadily as we
reinvested our capital back into our CLO business and U.S. ECM activity
recovered. In a better environment, JMP Securities achieved impressive
market share gains and grew its ECM revenues 83% year-over-year, while
U.S. equity underwriting fees increased 27% across the industry.

“We are off to a good start in 2018, with record investment banking
revenues for the month of January. Also, we recently priced the reset of
CLO III, which we expect to close the week of February 19. We hope to
execute on a new CLO around mid-year, which would complete the
reinvestment of our capital in our credit business and would return our
asset management segment to more consistent profitability.”

Segment Results of Operations

At JMP Securities, the broker-dealer segment, adjusted net revenues were
$28.5 million, an increase of 39.3% from $20.5 million for the fourth
quarter of 2016. JMP Securities’ operating margin on adjusted net
revenues was 14.7%, compared to 4.3% for the fourth quarter of 2016. The
asset management segment reported adjusted net revenues of $4.9 million,
a decrease of 19.5% from $6.1 million for the fourth quarter of 2016.
Together, these two segments represent JMP Group’s operating platforms.

JMP Group’s principal investment activities generate net investment
income, which has historically more than covered corporate expenses and
has contributed to operating earnings through net corporate income.
However, after calling JMP Credit Advisors CLO I in December 2016 and
redeeming capital from hedge funds managed by Harvest Capital Strategies
during 2017, JMP Group operated with an unusually large investable cash
balance throughout the year, resulting in net corporate expense of $2.5
million for 2017. However, for the fourth quarter, with a portion of the
available cash redeployed in the second half of the year, the company
reported net corporate income of $0.6 million, compared to $1.5 million
for the fourth quarter of 2016.

A summary of JMP Group’s operating net income per share by segment for
the quarter and year ended December 31, 2017, and for comparable prior
periods, is set forth below.

  Quarter Ended   Year Ended
($ as shown) Dec. 31, 2017   Sept. 30, 2017   Dec. 31, 2016 Dec. 31, 2017   Dec. 31, 2016
Broker-dealer $0.12 $0.13 $0.02 $0.31 $0.05
Asset management 0.02 (0.00 ) 0.04 0.01   0.07
Operating platform EPS 0.13 0.13 0.06 0.31 0.13
Net corporate income 0.03 (0.02 ) 0.07 (0.12 ) 0.35
Operating EPS (diluted) $0.16 $0.10   $0.13 $0.20   $0.48
 

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

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

Composition of Revenues

Investment Banking

Investment banking revenues were $22.5 million and $77.3 million for the
quarter and year ended December 31, 2017, respectively, compared to
$13.6 million and $55.4 million for the quarter and year ended December
31, 2016, respectively.

A summary of the company’s investment banking revenues and transaction
counts for the quarter and year ended December 31, 2017, and for
comparable prior periods, is set forth below.

  Quarter Ended   Year Ended
Dec. 31, 2017   Sept. 30, 2017   Dec. 31, 2016 Dec. 31, 2017   Dec. 31, 2016
($ in thousands) Count   Revenues Count   Revenues Count   Revenues Count   Revenues Count   Revenues

Equity and debt origination

21 $12,863 22 $15,639 15 $6,704 103 $53,355 54 $24,340

Strategic advisory and private placements

4 9,647 6 6,446 6 6,930 18 23,968 25 31,013
Total 25 $22,510 28 $22,085 21 $13,634 121 $77,323 79 $55,353

Brokerage

Net brokerage revenues were $6.0 million and $21.1 million for the
quarter and year ended December 31, 2017, respectively, compared to $6.8
million and $23.8 million for the quarter and year ended December 31,
2016, respectively.

Total capital markets revenues, which consist of net brokerage revenues
produced by the institutional equities division in addition to equity
and debt origination revenues generated by the investment banking
division, were $18.9 million and $74.5 million for the quarter and year
ended December 31, 2017, respectively, compared to $13.5 million and
$48.1 million for the quarter and year ended December 31, 2016,
respectively.

Asset Management

Asset management fees were $4.0 million, compared to $7.8 million for
the fourth quarter of 2016. For the year ended December 31, 2017, asset
management fees were $18.0 million, including $2.5 million of incentive
fees, compared to $26.8 million, including $10.5 million of incentive
fees, for the year ended December 31, 2016.

Asset management-related fee revenues reflect asset management fees, net
of non-controlling interests in HCAP Advisors, as well as certain fee
revenues reported in the company’s financial statements as other income.
Asset management-related fee revenues were $4.3 million and $18.5
million for the quarter and year ended December 31, 2017, respectively,
compared to $8.4 million and $26.2 million for the quarter and year
ended December 31, 2016, respectively. For more information about asset
management-related fee revenues, see the section below titled “Non-GAAP
Financial Measures.”

Client assets under management at December 31, 2017, totaled $2.0
billion, including $1.1 billion of funds managed by Harvest Capital
Strategies, JMP Asset Management and HCAP Advisors and $0.9 billion par
value of loans and cash managed by JMP Credit Advisors. Client assets
under management were $2.0 billion at September 30, 2017, and $2.2
billion at December 31, 2016. Including sponsored funds in which JMP
Group owns an economic interest, client assets under management totaled
$5.2 billion at December 31, 2017.

At December 31, 2017, private capital, including corporate credit, small
business lending, venture capital and real estate-related investments,
represented 52.2% of client assets under management, including sponsored
funds.

Principal Transactions

Principal transactions generated a net realized and unrealized loss of
$3.0 million, compared to a net realized and unrealized gain of $5.9
million for the fourth quarter of 2016. For the year ended December 31,
2017, principal transactions generated a net realized and unrealized
loss of $6.6 million, compared to a net realized and unrealized gain of
$16.2 million for the year ended December 31, 2016.

Adjusted principal transaction revenues exclude certain unrealized
mark-to-market gains or losses, including those on JMP Group’s
investment in Harvest Capital Credit Corporation, as well as unrealized
losses derived from depreciation and amortization of real estate
investment properties. Adjusted principal transaction revenues were -$14
thousand and $3.2 million for the quarter and year ended December 31,
2017, respectively, compared to $6.1 million and $18.5 million for the
quarter and year ended December 31, 2016, respectively. For more
information about adjusted principal transaction revenues, including a
reconciliation to principal transaction revenues, see the section below
titled “Non-GAAP Financial Measures.”

Net Interest Income

Net interest income was $2.1 million and $7.1 million for the quarter
and year ended December 31, 2017, respectively, compared to $2.3 million
and $14.0 million for the quarter and year ended December 31, 2016,
respectively. The year-over-year declines were primarily due to
materially lower average loan balances in 2017 resulting from the
liquidation of JMP Credit Advisors CLO I in February 2017.

In addition, the fourth quarter of 2017 included $0.3 million of
interest expense that will not recur. During the quarter, JMP Group
issued 7.25% senior notes due 2027 and redeemed 7.25% senior notes due
2021. The company announced the redemption of the 2021 notes on November
28, 2017, and concluded the redemption on December 28, 2017. During the
30-day period in between, the company continued to pay interest to
holders of the 2021 notes while also starting to pay interest to holders
of the 2027 notes, which were priced on November 20, 2017. The interest
paid on the 2021 notes during that period equaled $0.3 million. With the
2027 notes now outstanding and the 2021 notes now redeemed, there will
not be a quarter in the future during which JMP Group recognizes
interest expense from both securities.

Provision for Loan Losses

The net loan loss provision for the quarter was $0.9 million and was
primarily general in nature, not reflective of specific loans deemed to
be impaired.

Early Retirement of Debt

In the second quarter of 2017, JMP Credit Advisors elected to redeem the
outstanding notes issued by JMP Credit Advisors CLO II and to contribute
the loans that had been underlying that structure to a newly formed
collateralized loan obligation, JMP Credit Advisors CLO IV. The
redemption of the debt associated with JMP Credit Advisors CLO II
accelerated the amortization of remaining capitalized issuance costs of
$5.5 million.

In the fourth quarter of 2017, JMP Group redeemed 7.25% senior notes due
2021. The redemption of the notes accelerated the amortization of
remaining capitalized issuance costs of $0.8 million. Additionally,
non-recurring interest expense of $0.3 million resulted from debt
service on the 2021 notes prior to their redemption in the fourth
quarter but following the issuance of 7.25% senior notes due 2027, as
described above in the section titled “Net Interest Income.”

Expenses

Compensation and Benefits

Compensation and benefits expense was $21.5 million, compared to $31.0
million for the fourth quarter of 2016. With regard to annually awarded
compensation, a concept which adjusts compensation expense related to
share-based awards and deferred compensation, compensation and benefits
expense was 64.3% of adjusted net revenues, compared to 73.2% for the
fourth quarter of 2016. Further excluding specific loan loss provisions
and compensation expense related to hedge fund incentive fees, the
compensation ratio was 63.8%, compared to 69.5% for the fourth quarter
of 2016.

For the year ended December 31, 2017, compensation and benefits expense
was $90.6 million, compared to $101.2 million for the year ended
December 31, 2016. With regard to annually awarded compensation,
compensation and benefits expense was 71.7% of adjusted net revenues,
compared to 71.5% for the year ended December 31, 2016. Further
excluding specific loan loss provisions and compensation expense related
to hedge fund incentive fees, the compensation ratio was 69.8%, compared
to 68.9% for the year ended December 31, 2016.

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

Non-Compensation Expense

Non-compensation expense was $7.9 million and $31.4 million for the
quarter and year ended December 31, 2017, respectively, compared to $7.6
million and $30.9 million for the quarter and year ended December 31,
2016, respectively.

Share Repurchase Activity

During the quarter ended December 31, 2017, JMP Group repurchased 78,749
shares of its common stock at an aggregate cost of $0.4 million, or
$5.38 per share. As of January 1, 2018, 1,000,000 shares were eligible
for repurchase during the upcoming year under the company’s most recent
repurchase authorization, which was announced on December 13, 2017.

Personnel

At December 31, 2017, the company had 230 full-time employees, compared
to 230 at September 30, 2017, and 228 at December 31, 2016.

Non-GAAP Financial Measures

In addition to the GAAP financial results presented in this press
release, JMP Group presents the non-GAAP financial measures discussed
below. These non-GAAP measures are provided to enhance investors’
overall understanding of the company’s current financial performance.
Furthermore, company management believes that this presentation enables
a more meaningful comparison of JMP Group’s financial performance 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) reverses
the general loan loss provision taken with regard to certain CLOs, (ii)
excludes the impact of the early retirement of debt issued by JMP Group
and a CLO, (iii) reverses net unrealized mark-to-market gains or losses
on investments related to deferred compensation, (iv) reverses
unrealized losses derived from depreciation and amortization of real
estate investment properties, (v) reverses net unrealized gains or
losses on strategic equity investments and warrants, and (vi) excludes
non-controlling interests in various sources of revenue that are
consolidated according to GAAP. In particular, adjusted net revenue
adjusts for:

  • the non-specific loss provision recorded with regard to loans held by
    JMP Credit Advisors CLO II (while outstanding), JMP Credit Advisors
    CLO III, JMP Credit Advisors CLO IV and JMP Credit Advisors CLO V and
    to loans held for investment, which is required by GAAP;
  • one-time expenses associated with the redemption of senior notes due
    2021 and of debt underlying JMP Credit Advisors CLO II and the
    resulting acceleration of the amortization of remaining capitalized
    issuance costs for each;
  • unrealized mark-to-market gains or losses on investments in the
    company’s hedge funds that are made on behalf of employees who opt for
    such investments under the terms of their deferred compensation
    agreements; any gains or losses will accrue to the individual employee
    once the deferred compensation is released to that individual;
  • depreciation and amortization expense related to commercial real
    estate investments that is recognized by JMP Group as a result of
    equity method accounting;
  • 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 revenues generated by consolidated
    entities, including HCAP Advisors and CLOs managed by JMP Credit
    Advisors.

A reconciliation of JMP Group’s net revenues to its adjusted net
revenues for the quarter and year ended December 31, 2017, and for
comparable prior periods, is set forth below.

  Quarter Ended   Year Ended
(in thousands) Dec. 31, 2017   Sept. 30, 2017   Dec. 31, 2016 Dec. 31, 2017   Dec. 31, 2016
 
Revenues:
Non-interest revenues $29,875 $30,308 $34,336 $113,231 $122,569
Net interest income 2,095 2,089 2,294 7,109 13,994
Early retirement of debt (775 ) (6,107 )
Provision for loan losses (875 ) (368 ) (606 ) (4,363 ) (1,586 )
Total net revenues 30,320 32,029 36,024 109,870 134,977
 
Add back/(subtract):

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

680 (136 ) 349 1,377 240
Early retirement of debt 1,067 6,499

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

(6 ) (122 ) (276 ) 31 (382 )

Unrealized loss – real estate-related depreciation and amortization

1,173 2,571 1,718 7,645 4,241

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

1,816 (191 ) (1,211 ) 2,113 (1,540 )
Non-controlling interests (826 ) (1,202 ) (1,115 ) (4,102 ) (7,379 )
 
Adjusted net revenues $34,224   $32,949   $35,489   $123,433   $130,157  

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 (i) excludes the non-controlling interest in asset management
subsidiary HCAP Advisors and in certain collateralized loan obligations
and (ii) includes 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.

A statement of JMP Group’s asset management-related fee revenues for the
quarter and year ended December 31, 2017, and for comparable prior
periods, is set forth below.

  Quarter Ended   Year Ended
(in thousands) Dec. 31, 2017   Sept. 30, 2017   Dec. 31, 2016 Dec. 31, 2017   Dec. 31, 2016
 
Base management fees:

Revenues reported as asset management fees

$3,463 $3,941 $3,851 $15,548 $16,285
Non-controlling interests (122 ) (152 ) (337 ) (782 ) (1,418 )
Total base management fees 3,341   3,789   3,514   14,766   14,867  
 
Incentive fees:

Revenues reported as asset management fees

508 73 3,983 2,501 10,506
Non-controlling interests     43   (128 ) (582 )
Total incentive fees 508   73   4,026   2,373   9,924  
 
Other income:
Total fundraising and other fees 430   282   872   1,352   1,408  
 

Asset management-related fee revenues

$4,279   $4,144   $8,412   $18,491   $26,199  

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.

Adjusted Principal Transaction Revenues

Adjusted principal transaction revenue is a non-GAAP financial measure
that reverses (i) net unrealized gains and losses related to deferred
compensation, (ii) unrealized losses derived from depreciation and
amortization of real estate investment properties, and (iii) net
unrealized gains and losses on strategic equity investments and
warrants, in keeping with the calculation of adjusted net revenue, as
detailed above.

A summary of the company’s principal transaction revenues for the
quarter and year ended December 31, 2017, and for comparable prior
periods, is set forth below.

  Quarter Ended   Year Ended
(in thousands) Dec. 31, 2017   Sept. 30, 2017   Dec. 31, 2016 Dec. 31, 2017   Dec. 31, 2016
 
Hedge fund investments $832 $687 $200 $2,001 $272

Investment in Harvest Capital Credit Corporation

(1,816 ) 191 1,211 (2,113 ) $1,525
Other principal investments (2,013 ) (2,269 ) 4,446   (6,493 ) 14,384  
Total principal transaction revenues (2,997 ) (1,391 ) 5,857   (6,605 ) 16,181  
 
Add back/(subtract):

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

(6 ) (122 ) (276 ) 31 (382 )

Unrealized loss – real estate-related depreciation and amortization

1,173 2,571

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