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JMP Group Reports Fourth Quarter and Fiscal Year 2018 Financial ResultsJMP 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, 2018. A summary of JMP Group's operating results for the quarter and year ended December 31, 2018, and for comparable prior periods, is set forth below.
For more information about operating net income, including a reconciliation to net income, and adjusted book value per share, including a reconciliation to book value per share, see the section below titled "Non-GAAP Financial Measures." "We had a better-than-expected fourth quarter, with operating earnings of $0.12 per share," said Chairman and Chief Executive Officer Joe Jolson. "JMP Securities contributed $0.08 per share, despite the sharp sell-off in the equities market, which limited capital markets activity in the period. For the full year, JMP Securities' operating earnings per share were up nearly 20%, to $0.37 per share, driven by record advisory fee revenues that rose nearly 40%. As a result, JMP Securities generated an after-tax return on equity of more than 30% for 2018. "Asset management fee income and investment income combined to contribute $0.14 of operating EPS, up 8% from the fourth quarter of 2017. Investment income covered our fixed corporate costs for the third consecutive quarter, and earnings of $0.12 per share produced by our untaxed pass-through entities more than covered our fourth-quarter cash distributions of $0.09 per share. "We also initiated an aggressive corporate simplification strategy during the fourth quarter, intended to make our business less complicated to manage and easier for investors to understand. As disclosed in January, we have elected to be taxed as a C corporation going forward, which will increase our corporate tax rate but will eliminate Schedule K-1s for investors, removing substantial corporate costs and potentially increasing our appeal to institutional investors." Segment Results of Operations A summary of JMP Group's operating net income per share by segment for the quarter and year ended December 31, 2018, and for comparable prior periods, is set forth below.
For more information about 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 $17.8 million, a decrease of 21.0% from $22.5 million for the quarter ended December 31, 2017. For the year ended December 31, 2018, investment banking revenues were a record $88.1 million, an increase of 13.9% from $77.3 million for the year ended December 31, 2017. A summary of the company's investment banking revenues and transaction counts for the quarter and year ended December 31, 2018, and for comparable prior periods, is set forth below.
Brokerage Net brokerage revenues were $5.9 million, a decrease of 1.3% from $6.0 million for the quarter ended December 31, 2017. For the year ended December 31, 2018, net brokerage revenues were $20.7 million, a decrease of 2.0% from $21.1 million for the year ended December 31, 2017. 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 $13.3 million and $75.4 million for the quarter and year ended December 31, 2018, respectively, compared to $18.9 million and $74.5 million for the quarter and year ended December 31, 2017, respectively. Asset Management Asset management fees were $3.6 million, a decrease of 8.3% from $4.0 million for the quarter ended December 31, 2017. For the year ended December 31, 2018, asset management fees were $19.1 million, an increase of 6.1% from $18.0 million for the year ended December 31, 2017. A summary of the company's client assets under management for the quarter ended December 31, 2018, and for comparable prior periods, is set forth below.
Principal Transactions Principal transactions generated a net realized and unrealized loss of $0.8 million, compared to a net realized and unrealized loss of $2.8 million for the quarter ended December 31, 2017. For the year ended December 31, 2018, principal transactions generated a net realized and unrealized loss of $2.3 million, compared to a net realized and unrealized loss of $6.4 million for the year ended December 31, 2017. Net Interest Income Net interest income was $5.0 million, an increase of 106.1% from $2.4 million for the quarter ended December 31, 2017. For the year ended December 31, 2018, net interest income was $16.9 million, an increase of 127.2% from $7.5 million for the year ended December 31, 2017. The year-over-year increase was primarily due to a higher average loan balance for 2018 than for 2017, due to the reinvestment of funds that resulted from the liquidation of JMP Credit Advisors CLO I in February 2017. Provision for Loan Losses For the quarter ended December 31, 2018, the net loan loss provision was $0.9 million, including a general loan loss provision of $0.6 million and a specific loan loss provision of $0.3 million. Expenses Compensation and Benefits Compensation and benefits expense was $21.3 million, compared to $21.6 million for the quarter ended December 31, 2017. As a percentage of net revenues, compensation and benefits expense was 67.2%, compared to 70.0% for the quarter ended December 31, 2017. With regard to annually awarded compensation, a non-GAAP measure that adjusts compensation expense related to share-based awards and deferred compensation, compensation and benefits expense was 67.5% of net revenues, compared to 72.6% for the quarter ended December 31, 2017. For the year ended December 31, 2018, compensation and benefits expense was $97.4 million, compared to $90.6 million for the year ended December 31, 2017. As a percentage of net revenues, compensation and benefits expense was 71.4%, compared to 82.1% for the year ended December 31, 2017. With regard to annually awarded compensation, compensation and benefits expense was 71.2% of net revenues, compared to 81.1% for the year ended December 31, 2017. For more information about compensation ratios, see the section below titled "Non-GAAP Financial Measures." Non-Compensation Expense Non-compensation expense was $8.5 million and $39.1 million for the quarter and year ended December 31, 2018, respectively, compared to $7.9 million and $31.4 million for the quarter and year ended December 31, 2017, respectively. The year-over-year increases were in part attributable to the adoption of new accounting guidance on revenue recognition, which caused $0.8 million of investment banking-related expenses to be presented on a gross basis and to be included within non-compensation expense for the quarter ended December 31, 2018. For the year ended December 31, 2018, the amount was $6.5 million. In prior periods, such expenses were presented as a deduction from investment banking revenues. Share Repurchase Activity During the quarter ended December 31, 2018, JMP Group repurchased approximately 195,000 shares of its common stock at an aggregate cost of $0.9 million, or $4.79 per share. As of January 1, 2019, approximately 370,000 shares were eligible for repurchase through April 30, 2019. Personnel At December 31, 2018, the company had 228 full-time employees, compared to 224 at September 30, 2018, and 230 at December 31, 2017. 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 across 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. Compensation Ratio A compensation ratio expresses compensation expense as a percentage of net revenues in a given period. As presented by JMP Group, an adjusted compensation ratio is a non-GAAP financial measure that utilizes adjusted compensation and benefits expense as the numerator. This adjusted ratio excludes certain compensation-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 share-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). A statement of JMP Group's compensation ratio for the quarter and year ended December 31, 2018, and for comparable prior periods, is set forth below.
Operating Net Income Operating net income is a non-GAAP financial measure that (i) reverses compensation expense related to share-based awards and deferred compensation, (ii) reverses the general loan loss provision taken with regard to certain CLOs, (iii) excludes the impact of the early retirement of debt issued by JMP Group and a CLO, (iv) excludes transaction costs related to a CLO, (v) excludes amortization expense related to a CLO, (vi) reverses unrealized gains or losses related to real estate investment properties, (vii) reverses net unrealized gains and losses on strategic equity investments and warrants, and (viii) 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 year ended December 31, 2018, and for comparable prior periods is set forth below.
Book Value per Share At December 31, 2018, JMP Group's book value per share was $3.93. Adding back accumulated depreciation and amortization expense related to commercial real estate investments that is recognized by JMP Group as a result of equity method accounting reflects the reversal of that expense in the calculation of adjusted net revenues, adjusted principal transaction revenues and operating net income. Likewise, adding back the accumulated general loan loss provision related to collateralized loan obligations reflects the reversal of that provision in the calculation of adjusted net revenues and operating net income. Such reversals result in an adjusted book value per share of $4.98, as set forth below.
Conference Call JMP Group will hold a conference call to discuss the results detailed herein at 10:00 a.m. ET on Thursday, February 14, 2019. To participate in the call, dial (888) 566-6060 (domestic) or (973) 200-3100 (international). The conference identification number is 2372106. 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. 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, 2017, as filed with the U.S. Securities and Exchange Commission on March 28, 2018, 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, 2017, and all other periodic reports are available on JMP Group's website at www.jmpg.com and on the SEC'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. Disclosure Information JMP Group uses the investor relations section of its website as a means of complying with its disclosure obligations under Regulation FD. Accordingly, investors should monitor the company's website in addition to its press releases, SEC filings, and investor conference calls and webcasts. About JMP Group JMP Group LLC is a diversified capital markets firm that provides investment banking, equity research, and sales and trading services to corporate and institutional clients as well as alternative asset management products and services to institutional and high-net-worth investors. JMP Group conducts its investment banking and research, sales and trading activities through JMP Securities; its hedge fund, venture and private capital, and credit management activities through Harvest Capital Strategies, JMP Asset Management and JMP Credit Advisors; and the management of Harvest Capital Credit Corporation (NASDAQ: HCAP), a business development company, through HCAP Advisors. For more information, visit www.jmpg.com.
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