JMP GROUP LLC
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") should be read together with the
unaudited consolidated financial statements and the related notes included
elsewhere in this report. For additional context with which to understand our
financial condition and results of operations, see the MD&A for the fiscal year
ended December 31, 2020 contained in our Form 10-K for the year ended December
31, 2020 , filed with the Securities and Exchange Commission on March 29,
2021 (the "Annual Report"), as well as the consolidated financial statements and
notes contained therein.
Cautionary Statement Regarding Forward-Looking Statements
This MD&A and other sections of this Form 10-Q (the "Quarterly Report") contain forward looking statements. The Company makes forward-looking statements, as defined by the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, and in some cases you can identify these statements by forward-looking words such as "if," "shall," "may," "might," "will likely result," "should," "expect," "plan," "anticipate," "believe," "estimate," "project," "intend," "goal," "objective," "predict," "potential" or "continue," the negative of these terms, and other comparable terminology. These forward-looking statements, which are based on various underlying assumptions and expectations and are subject to risks, uncertainties and other unknown factors, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events that the Company believes to be reasonable. There are or may be important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the historical or future results, level of activity, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, those discussed under the caption "Risk Factors" in our Annual Report. In preparing this MD&A, the Company presumes that readers have access to and have read the MD&A in our Annual Report, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K.The Company undertakes no duty to update any of these forward-looking statements after the date of filing of this Quarterly Report to conform such forward-looking statements to actual results or revised expectations, except as otherwise required by law. Overview
• investment banking services, including corporate finance, mergers and
acquisitions and other strategic advisory services, to corporate clients;
• sales and trading and related securities brokerage services to institutional
investors;
• equity research coverage of three target industries;
• asset management products and services to institutional investors, high
net-worth individuals and for our own account; and
• management of collateralized loan obligations (through
specialty finance company.
Operating Results
A summary of the Company's operating results for the three and nine months ended
Nine Months Ended September
Three Months Ended September 30, 30,
(in thousands, except per share amounts) 2021 2020 2021 2020
Total net revenues $ 77,785 $ 26,624 $ 164,770 $ 61,884
Net income/(loss) attributable to JMP
Group 21,819 (3,082 ) 26,536 (13,706 )
Net income/(loss) attributable to JMP
Group per share 1.10 (0.16 ) 1.34 (0.70 )
Operating Net Income/(Loss)* 23,570 2,591 33,483 4,130
Operating Net Income/(Loss) per share* 1.11 0.13 1.59 0.21
* Operating Net Income (Loss) is a non-GAAP measure. See the section titled
Operating Net Income (Non-GAAP Financial Measure) for more information about
this non-GAAP measure, including a reconciliation to net income (loss). Recent Developments OnJanuary 30, 2020 , the spread of novel coronavirus ("COVID-19") was declared a Public Health Emergency of International Concern by theWorld Health Organization ("WHO"). Subsequently, onMarch 11, 2020 ,WHO characterized the COVID-19 outbreak as a pandemic. InMarch 2020 , theU.S. equities market saw sharp declines and extreme volatility in reaction to the COVID-19 pandemic. In the second quarter of 2020, unprecedented fiscal and monetary stimuli by theU.S. government spurred a sharp recovery inU.S. equity prices. TheU.S. equities market continued to recover from the impact of the COVID-19 pandemic during the second half of 2020. The Company's equity capital markets and brokerage revenues directly benefited from the improved capital market condition. We continue to closely monitor the status of the COVID-19 pandemic and its impact on our business, the economy and capital markets globally. An economic recession could have a material adverse effect on our business, financial condition, results of operations, or cash flows. While we are optimistic that the equity market could remain active through year-end, we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our business in the remainder of 2021 and beyond. InFebruary 2020 ,Medalist Partners Corporate Finance LLC ("MPCF") completed the securitization ofMedalist Partners Corporate Finance CLO VI Ltd upon which the related CLO VI warehouse was liquidated. The Company does not hold any subordinated notes ofMedalist Partners Corporate Finance CLO VI Ltd. OnJune 9, 2021 ,HCC and Portman Ridge Finance Corporation ("PTMN") closed a merger transaction pursuant to which HCC merged with and into PTMN, a business development company managed bySierra Crest Investment Management LLC ("Sierra Crest"), an affiliate ofBC Partners Advisors L.P. In connection with the merger, the Company received aggregate consideration totaling$9.5 million and recorded a realized gain of$0.1 million . The Company's subsidiaryHCAP Advisors provided investment advisory services to HCC and in connection with the merger, Sierra Crest andHCAP Advisors have agreed to a transition services agreement pursuant to whichHCAP Advisors will provide certain consulting services to Sierra Crest relating to HCC's investment portfolio. Under the transition services agreement,HCAP Advisors is expected to earn$3.9 million in total through the three-year period commencing on the merger date. InJune 2021 , the Company sold its existing 45.0% ownership interest inMedalist Partners Corporate Finance LLC . The Company received a$1.5 million upfront cash payment, canceled its previous fee-sharing agreement, and entered into a new fee sharing agreement, in which the Company will retain an interest to receive 20 basis points of the total 35 basis points in subordinated management fees fromJMP Credit Advisors CLO IV Ltd. AndJMP Credit Advisors CLO V Ltd. The Company recognized a realized gain of$1.4 million on this transaction. OnJuly 30, 2021 , the Company received a$23.8 million distribution fromWorkspace Property Trust LP ("Workspace") that recently completed a dividend recapitalization. The Company records its equity interest in Workspace using equity method accounting and currently holds its interest at zero. OnSeptember 8, 2021 ,JMP Group LLC , aDelaware limited liability company ("JMP", or the "Company"), Citizens Financial Group, Inc., aDelaware corporation ("Citizens"), andJolt Acquisition LLC , aDelaware limited liability company and direct, wholly owned subsidiary of Citizens ("Merger Subsidiary") entered into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the Merger Agreement, Merger Subsidiary will merge with and into JMP, whereupon the separate existence of Merger Subsidiary will cease, and the Company will be the surviving corporation as a direct wholly owned subsidiary of Citizens (the "Merger"). Pursuant to the Merger Agreement, each outstanding common share of JMP will be converted into the right to receive cash consideration of$7.50 (the "Merger Consideration"), or approximately$149 million in cash. The transaction is targeted to close in the fourth quarter of 2021, subject to approval by the shareholders of JMP, receipt of required regulatory approvals, and satisfaction of other customary closing conditions. 31 --------------------------------------------------------------------------------
Results of Operations The following table sets forth our results of operations for the three and nine months endedSeptember 30, 2021 and 2020, and is not necessarily indicative of the results to be expected for any future period. Three Months Ended Nine Months Ended September Three Month Change From Nine Month Change From 2020 to (In thousands) September 30, 30, 2020 to 2021 2021 2021 2020 2021 2020 $ % $ % Revenues Investment banking$ 39,916 $ 20,874 $ 105,198 $ 57,094 $ 19,042 91.2 %$ 48,104 84.3 % Brokerage 4,128 4,176 13,424 14,008 (48 ) -1.1 % (584 ) -4.2 % Asset management fees 8,803 2,911 22,073 6,339 5,892 202.4 % 15,734 248.2 % Principal transactions 18,275 (2,737 ) 15,015 (20,337 ) 21,012 -767.7 % 35,352 -173.8 % Net dividend income 9 4 224 241 5 125.0 % (17 ) -7.1 % Other income 2,900 841 4,843 2,688 2,059 244.8 % 2,155 80.2 % Non-interest revenues 74,031 26,069 160,777 60,033 47,962 184.0 % 100,744 167.8 % Interest income 1,761 2,287 5,616 6,391 (526 ) -23.0 % (775 ) -12.1 % Interest expense (1,060 ) (1,732 ) (4,117 ) (5,237 ) 672 -38.8 % 1,120 -21.4 % Net interest income 701 555 1,499 1,154 146 26.3 % 345 29.9 % (Loss) gain on repurchase, reissuance, or early retirement of debt 3,053 - 2,494 697 3,053 -100.0 % 1,797 257.8 % Total net revenues 77,785 26,624 164,770 61,884 51,161 192.2 % 102,886 166.3 % Non-interest expenses Compensation and benefits 38,314 23,502 103,405 62,101 14,812 63.0 % 41,304 66.5 % Administration 2,364 1,408 5,796 4,697 956 67.9 % 1,099 23.4 % Brokerage, clearing and exchange fees 701 620 2,025 1,901 81 13.1 % 124 6.5 % Travel and business development 383 65 665 1,041 318 489.2 % (376 ) -36.1 % Managed deal expenses 925 990 3,677 2,528 (65 ) -6.6 % 1,149 45.5 % Communications and technology 1,133 1,072 3,400 3,286 61 5.7 % 114 3.5 % Occupancy 1,160 1,194 3,531 3,587 (34 ) -2.8 % (56 ) -1.6 % Professional fees 2,949 776 5,170 2,397 2,173 280.0 % 2,773 115.7 % Depreciation 261 278 801 1,223 (17 ) -6.1 % (422 ) -34.5 % Other (loss) 1,579 (8 ) 1,787 201 1,587 -19837.5 % 1,586 789.1 % Total non-interest expenses 49,769 29,897 130,257 82,962 19,872 66.5 % 47,295 57.0 % Net income (loss) before income taxes 28,016 (3,273 ) 34,513 (21,078 ) 31,289 -956.0 % 55,591 -263.7 % Income tax expense (benefit) 6,181 (128 ) 7,867 (7,191 ) 6,309 -4928.9 % 15,058 -209.4 % Net income (loss) 21,835 (3,145 ) 26,646 (13,887 ) 24,980 -794.3 % 40,533 -291.9 % Less: Net income (loss) attributable to non-controlling interest 16 (63 ) 110 (181 ) 79 -125.4 % 291 -160.8 % Net income (loss) attributable toJMP Group LLC$ 21,819 $ (3,082 ) $ 26,536 $ (13,706 ) $ 24,901 -807.9 %$ 40,242 -293.6 % 32
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Operating Net Income (Non-GAAP Financial Measure)
Management uses Operating Net Income as a key, non-GAAP metric when evaluating the performance ofJMP Group LLC's core business strategy and ongoing operations, as management believes that this metric appropriately illustrates the operating results ofJMP Group LLC's core operations and business activities. Operating Net Income is derived from our segment reported results and is the measure of segment profitability on an after-tax basis used by management to evaluate our performance. This non-GAAP measure is presented to enhance investors' overall understanding of the Company's current financial performance. Additionally, management believes that Operating Net Income is a useful measure because it allows for a better evaluation of the performance ofJMP Group LLC's ongoing business and facilitates a meaningful comparison of the Company's results in a given period to those in prior and future periods. However, Operating Net Income 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, unless otherwise indicated, the adjustments concern gains, losses or expenses thatJMP Group LLC generally expects to continue to recognize, and the adjustment of these items should not always be construed as an inference that these gains or expenses are unusual, infrequent or non-recurring. Therefore, management believes that bothJMP Group LLC's GAAP measures of its financial performance and the respective non-GAAP measures should be considered together. Operating Net Income may not be comparable to a similarly titled measure presented by other companies.
Operating Net Income is a non-GAAP financial measure that adjusts the Company's GAAP net income as follows:
(i) reverses compensation expense recognized under GAAP related to equity
awards;
(ii) recognizes 100% of the cost of deferred compensation in the period for
which such compensation was awarded, instead of recognizing such cost
over the vesting period as required under GAAP, in order to matchcompensation expense with the actual period upon which the compensation
was based;
(iii) reverses amortization expense related to an intangible asset resulting
from the repurchase of a portion of the equity of CLO III prior to March
31, 2019 ;
(iv) unrealized gains or losses on commercial real estate investments,
adjusted for non-cash expenditures, including depreciation and
amortization;
(v) reverses net unrealized gains and losses on strategic equity investments
and warrant positions;
(vi) reverses impairment of CLO debt securities recognized in principal
transaction revenues, as the Company believes that the forecasted
reduction in future cash flows will be mitigated by a change in the
interest rate environment and that distributions will be larger than
currently projected;
(vii) reverses the one-time transaction costs related to the refinancing or
repurchase of the debt;
(viii) includes a combined federal, state and local income tax rate of 26% at
the consolidated taxable parent company, JMP Group LLC ;
(ix) removes any non-controlling interest in consolidated but less than wholly
owned subsidiaries; and
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Discussed below is our Operating Net Income by segment. This information is reflected in a manner utilized by management to assess the financial operations of the Company's various business lines.
Three Months Ended September 30, 2021
(In thousands) Broker-Dealer Asset Management Corporate Costs Eliminations Total Segments
Asset
Management Fee Investment Total Asset
Income Income Management
Revenues
Investment banking $ 39,916 $ - $ - $ - $ - $ - $ 39,916
Brokerage 4,128 - - - - - 4,128
Asset management related fees 807 9,634 1,221 10,855 - - 11,662
Principal transactions 909 - 21,020 21,020 - - 21,929 Net interest income - - 726 726 - - 726 Gain (loss) on repurchase, reissuance or early retirement of debt 3,848 - - - - - 3,848 Net dividend income - - 9 9 - - 9 Adjusted net revenues 49,608 9,634
22,976 32,610 - - 82,218
Non-interest expenses 38,279 6,435 2,484 8,919 3,169 -
50,367
Operating pre-tax net income (loss) 11,329 3,199 20,492 23,691 (3,169 ) -
31,851
Income tax expense (benefit) 2,946 831 5,328 6,159 (824 ) -
8,281
Operating net income (loss) $ 8,383 $ 2,368 $
15,164 $ 17,532 $ (2,345 ) $ - $ 23,570
Three Months Ended September 30, 2020
(In thousands) Broker-Dealer Asset Management Corporate Costs Eliminations Total Segments
Asset
Management Fee Investment Total Asset
Income Income Management
Revenues
Investment banking $ 20,874 $ - $ - $ - $ - $ - $ 20,874
Brokerage 4,176 - - - - - 4,176
Asset management related fees 8 3,101 380 3,481 - (37 ) 3,452
Principal transactions 188 - 954 954 - - 1,142
Net dividend income - - 42 42 - - 42
Net interest income - - 581 581 - - 581
Adjusted net revenues 25,246 3,101 1,957 5,058 - (37 ) 30,267
Non-interest expenses 21,916 2,891 350 3,241 2,342 (37 ) 27,462
Operating pre-tax net income (loss) 3,330 210 1,607 1,817 (2,342 ) - 2,805
Income tax expense (benefit) 866 54 418 472 (609 ) - 729
Operating net income (loss) $ 2,464 $ 156 $ 1,189 $ 1,345 $ (1,733 ) $ - $ 2,076 34
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Nine Months Ended September 30, 2021
Total
(In thousands) Broker-Dealer Asset Management Corporate Costs Eliminations Segments
Asset
Management Fee Investment Total Asset
Income Income Management
Revenues
Investment banking $ 105,198 $ - $ - $ - $ - $ - $ 105,198
Brokerage 13,424 - - - - - 13,424
Asset management related fees 921 23,436 2,064 25,500 - (50 ) 26,371
Principal transactions 632 - 25,216 25,216 - - 25,848 Net interest income - - 1,574 1,574 - - 1,574 Gain (loss) on repurchase, reissuance or early retirement of debt 3,848 - - - - - 3,848 Net dividend income - - 224 224 - - 224 Adjusted net revenues 124,023 23,436 29,078 52,514 - (50 ) 176,487 Non-interest expenses 102,557 17,582 3,267 20,849 7,884 (50 ) 131,240 Operating pre-tax net income (loss) 21,466 5,854 25,811 31,665 (7,884 ) - 45,247 Income tax expense (benefit) 5,581 1,522 6,746 8,268 (2,085 ) - 11,764 Operating net income (loss)$ 15,885 $ 4,332 $ 19,065 $ 23,397 $ (5,799 ) $ -$ 33,483 Nine Months Ended September 30, 2020 (In thousands) Broker-Dealer Asset Management Corporate Costs Eliminations Total Segments Asset Management Fee Investment Total Asset Income Income Management Revenues Investment banking$ 57,094 $ - $ - $ - $ - $ -$ 57,094 Brokerage 14,008 - - - - - 14,008 Asset management related fees 167 6,945 1,092 8,037 - (124 ) 8,080 Principal transactions 675 - 2,815 2,815 - - 3,490 Net dividend income - - 347 347 - - 347 Net interest income - - 1,231 1,231 - - 1,231 Gain on repurchase, reissuance or early retirement of debt - - 786 786 - - 786 Adjusted net revenues 71,944 6,945 6,271 13,216 - (124 )
85,036
Non-interest expenses 65,162 7,397 804 8,201 6,216 (124 )
79,455
Operating pre-tax net income (loss) 6,782 (452 ) 5,467 5,015 (6,216 ) -
5,581
Income tax expense (benefit) 1,755 (119 ) 1,430 1,311 (1,615 ) -
1,451
Operating net income (loss) $ 5,027 $ (333 ) $
4,037 $ 3,704 $ (4,601 ) $ - $ 4,130
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The following table reconciles consolidated net income (loss) attributable toJMP Group LLC to total Operating Net Income (Loss) for the three and nine months endedSeptember 30, 2021 and 2020.
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