(In thousands)
|
|
Three Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Consolidated net income (loss) attributable to JMP Group LLC
|
|
$
|
(3,082
|
)
|
|
$
|
(4,061
|
)
|
Income tax expense (benefit)
|
|
|
(128
|
)
|
|
|
(1,220
|
)
|
Consolidated pre-tax net income (loss) attributable to JMP Group LLC
|
|
$
|
(3,210
|
)
|
|
$
|
(5,281
|
)
|
Addback (subtract):
|
|
|
|
|
|
|
|
|
Share-based awards and deferred compensation
|
|
|
(71
|
)
|
|
|
(753
|
)
|
Early retirement/repurchase of debt
|
|
|
-
|
|
|
|
(625
|
)
|
Impairment of CLO debt securities
|
|
|
(2,746
|
)
|
|
|
-
|
|
Strategic restructing charge
|
|
|
(2,056
|
)
|
|
|
-
|
|
Unrealized loss in real estate fund investment – depreciation and amortization
|
|
|
(438
|
)
|
|
|
(647
|
)
|
Unrealized mark-to-market gain (loss) on strategic equity investments
|
|
|
(704
|
)
|
|
|
(604
|
)
|
Total consolidation adjustments and reconciling items
|
|
|
(6,015
|
)
|
|
|
(2,629
|
)
|
Total segments adjusted operating pre-tax net income (loss)
|
|
$
|
2,805
|
|
|
$
|
(2,652
|
)
|
|
|
|
|
|
|
|
|
|
Subtract (addback) of segment income tax expense (benefit)
|
|
|
729
|
|
|
|
(689
|
)
|
Operating net income (loss)
|
|
$
|
2,076
|
|
|
$
|
(1,963
|
)
|
(In thousands)
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Consolidated net income (loss) attributable to JMP Group LLC
|
|
$
|
(13,706
|
)
|
|
$
|
(104
|
)
|
Income tax benefit
|
|
|
(7,191
|
)
|
|
|
(5,839
|
)
|
Consolidated pre-tax net loss attributable to JMP Group LLC
|
|
$
|
(20,897
|
)
|
|
$
|
(5,943
|
)
|
Subtract:
|
|
|
|
|
|
|
|
|
Share-based awards and deferred compensation
|
|
|
(487
|
)
|
|
|
(2,184
|
)
|
Early retirement/repurchase of debt
|
|
|
(89
|
)
|
|
|
(625
|
)
|
Impairment of CLO debt securities
|
|
|
(17,282
|
)
|
|
|
-
|
|
Strategic restructing charge
|
|
|
(2,056
|
)
|
|
|
-
|
|
Amortization of intangible asset – CLO III
|
|
|
-
|
|
|
|
(277
|
)
|
Unrealized loss in real estate fund investment – depreciation and amortization
|
|
|
(1,292
|
)
|
|
|
(1,425
|
)
|
Unrealized mark-to-market loss on strategic equity investments
|
|
|
(5,272
|
)
|
|
|
(93
|
)
|
Total consolidation adjustments and reconciling items
|
|
|
(26,478
|
)
|
|
|
(4,604
|
)
|
Total segments adjusted operating pre-tax net income (loss)
|
|
$
|
5,581
|
|
|
$
|
(1,339
|
)
|
|
|
|
|
|
|
|
|
|
Subtract (addback) of segment income tax expense (benefit)
|
|
|
1,452
|
|
|
|
(348
|
)
|
Operating net income (loss)
|
|
$
|
4,130
|
|
|
$
|
(991
|
)
|
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Revenues
Investment Banking
Investment banking revenues, earned in our Broker-Dealer segment, increased $5.6 million, or 37.1%, from $15.2 million for the quarter ended September 30, 2019 to $20.9 million for the same period in 2020. As a percentage of total net revenues, investment banking revenues increased from 72.4% for the quarter ended September 30, 2019 to 78.4% for the quarter ended September 30, 2020. On an operating basis, investment banking revenues were 69.0% and 67.4% for the quarters ended September 30, 2020 and 2019, respectively, as a percentage of adjusted net revenues.
(Dollars in thousands)
|
|
Three Months Ended September 30,
|
|
|
Change from 2020 to 2019
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Count
|
|
|
Revenues
|
|
|
Count
|
|
|
Revenues
|
|
|
Count
|
|
|
$
|
|
|
%
|
|
Equity and debt origination
|
|
|
29
|
|
|
$
|
16,152
|
|
|
|
17
|
|
|
$
|
8,561
|
|
|
|
12
|
|
|
$
|
7,591
|
|
|
|
88.7
|
%
|
Strategic advisory and private placements
|
|
|
4
|
|
|
|
4,722
|
|
|
|
6
|
|
|
|
6,667
|
|
|
|
(2
|
)
|
|
$
|
(1,945
|
)
|
|
|
-29.2
|
%
|
Total
|
|
|
33
|
|
|
$
|
20,874
|
|
|
|
23
|
|
|
$
|
15,228
|
|
|
|
10
|
|
|
$
|
5,646
|
|
|
|
37.1
|
%
|
The increase in revenues was driven by an 88.7% increase in equity and debt origination revenues as JMP executed 29 deals in the three months ended September 30, 2020 compared to 17 for the same period in 2019, partly offset by a 29.2% decrease in strategic advisory and private placements revenues. The number of transactions in which we acted as a bookrunning manager was one and six for the quarters ended September 30, 2020 and 2019, respectively.
Brokerage Revenues
Brokerage revenues earned in our Broker-Dealer segment increased $0.2 million from $4.0 million for the quarter ended September 30, 2019 to $4.2 million for the quarter ended September 30, 2020. Brokerage revenues decreased as a percentage of total net revenues, from 18.9% for the quarter ended September 30, 2019 to 15.7% for the quarter ended September 30, 2020. On an operating basis, brokerage revenues were 16.0% and 18.4% for the quarters ended September 30, 2020 and 2019, respectively, as a percentage of total net revenues.
Asset Management Fees
(In thousands)
|
|
Three Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Asset management related fees:
|
|
|
|
|
|
|
|
|
Fees reported as asset management fees
|
|
$
|
2,911
|
|
|
$
|
1,628
|
|
Fees reported as other income
|
|
|
841
|
|
|
|
759
|
|
Less: non-controlling interests
|
|
|
(300
|
)
|
|
|
(323
|
)
|
Total segment asset management related fee revenues
|
|
$
|
3,452
|
|
|
$
|
2,064
|
|
Fees reported as asset management fees were $2.9 million and $1.6 million for the quarters ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, asset management revenues increased from 7.7% for the quarter ended September 30, 2019 to 10.9% for the quarter ended September 30, 2020.
Total segment asset management-related fees include base management fees and incentive fees from our assets under management, as well as other income from fee-sharing arrangements with, and fees earned to raise capital for, third-party or equity-method investment partnerships or funds. Total segment asset management-related fee revenues are reconciled to the GAAP measure, total asset management fee revenues, in the table above. We believe that presenting operating asset management-related fees is useful to investors as a means of assessing the performance of our combined asset management activities, including fundraising and other services for third parties. We also believe 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 the various asset management activities on the Company’s total net revenues.
Total segment asset management related fee revenue increased $1.4 million from $2.1 million for the quarter ended September 30, 2019 to $3.5 million for the quarter ended September 30, 2020. On an operating basis, asset management related fee revenues were 11.4% and 9.1% for the quarters ended September 30, 2020 and 2019, respectively, as a percentage of total net revenues.
The following table presents a summary of the Company’s client assets under management with respect to the assets managed by HCS, JMP Asset Management LLC (“JMPAM”), HCAP Advisors LLC (“HCAP Advisors”) and assets managed by sponsored funds:
(In thousands)
|
|
Client Assets Under Management at
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Client Assets Managed by HCS, JMPAM, and HCAP Advisors (1)
|
|
$
|
599,795
|
|
|
$
|
594,678
|
|
Client Assets Under Management by Sponsored Funds (2)
|
|
|
5,005,196
|
|
|
|
5,381,432
|
|
|
|
|
|
|
|
|
|
|
JMP Group LLC total client assets under management
|
|
$
|
5,604,992
|
|
|
$
|
5,976,110
|
|
(1)
|
For HCS, JMPAM, and HCAP Advisors, client assets under management represent the net assets of such funds or the commitment amount
|
|
Sponsored funds are third-party asset managers in which the Company owns an economic interest.
|
Principal Transactions
Principal transaction revenues decreased $2.4 million from a loss of $0.3 million for the quarter ended September 30, 2019 to a loss of $2.7 million for the same period in 2020. This decrease was primarily driven by a $2.7 million impairment loss on CLO debt securities included in principal transaction revenues for the quarter ended September 30, 2020.
Total segment principal transaction revenues increased from $0.9 million for the quarter ended September 30, 2019 to $1.1 million for the same period in 2020, primarily driven by a $0.8 million gain on equity and other securities. Total segment principal transaction revenues are a non-GAAP financial measure that aggregates our segment reported principal transaction revenues across each segment. The principal transaction revenues for both 2020 and 2019 were included in our Investment Income segment. Total segment principal transaction revenues are reconciled to the GAAP measure, total principal transaction revenues, in the table below. See the Operating Net Income section above for additional information on the adjustments made to arrive at the non-GAAP measure and why management believes that this non-GAAP number is useful and important to the users of these financial statements.
(In thousands)
|
|
Three Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Equity and other securities
|
|
$
|
849
|
|
|
$
|
(15
|
)
|
Warrants and other investments
|
|
|
301
|
|
|
$
|
894
|
|
Investment partnerships
|
|
|
(8
|
)
|
|
|
4
|
|
Total segment principal transaction revenues
|
|
|
1,142
|
|
|
|
883
|
|
Operating adjustment addbacks
|
|
|
(3,879
|
)
|
|
|
(1,223
|
)
|
Total principal transaction revenues
|
|
$
|
(2,737
|
)
|
|
$
|
(340
|
)
|
On an operating basis, as a percentage of adjusted net revenues, principal transaction revenues decreased from 3.9% for the quarter ended September 30, 2019 to 3.8% for the quarter ended September 30, 2020.
Net Interest Income/Expense
Net interest income increased $0.2 from $0.4 million for the quarter ended September 30, 2019 to $0.6 million for the quarter ended September 30, 2020 As a percentage of total net revenues, net interest income was 2.5% for the quarter ended September 30, 2019 and 1.9% for the quarter ended September 30, 2020.
Total segment net interest income did not change as it was $0.6 million for the quarter ended September 30, 2019 and $0.6 million for the quarter ended September 30, 2020. Net interest income is earned in our Investment Income segment. Total segment net interest income after deconsolidation reflects the effective yield of the Company's ownership of subordinated notes in CLO III, CLO IV, and CLO V, net of bond interest expense. As a percentage of total segment net revenues, net interest income was 2.4% for the quarter ended September 30, 2019 and 1.9% for the quarter ended September 30, 2020.
Expenses
Non-Interest Expenses
Compensation and Benefits
Compensation and benefits, which includes employee payroll, taxes and benefits, performance-based cash bonus and commissions, as well as equity-based compensation to our employees and managing directors, increased $6.0 million, or 34.3%, from $17.5 million for the quarter ended September 30, 2019 to $23.5 million for the quarter ended September 30, 2020. The increase in compensation and benefits is partly attributable to a $2.1 million charge recorded in connection with severance costs deriving from a strategic restructuring and reduction in headcount in September 2020.
Employee payroll, taxes and benefits, and consultant fees decreased $0.3 million from $10.5 million for the quarter ended September 30, 2019 to $10.2 million for the quarter ended September 30, 2020. Performance-based bonus and commission increased $6.3 million from $6.5 million for the quarter ended September 30, 2019 to $12.8 million for the quarter ended September 30, 2020.
Equity-based compensation did not change from $0.5 million for the quarter ended September 30, 2019 to $0.5 million for the quarter ended September 30, 2020.
Compensation and benefits as a percentage of revenues increased from 83.3% of total net revenues for the quarter ended September 30, 2019 to 88.3% for the quarter ended September 30, 2020. Compensation and benefits increased 34.3% from the quarter ended September 30, 2019 when compared to the quarter ended September 30, 2020. Net revenue increased 26.6% from the quarter ended September 30, 2019 when compared to the quarter ended September 30, 2020.
Administration
Administration expense decreased $0.9 million from $2.3 million for the quarter ended September 30, 2019 to $1.4 million for the quarter ended September 30, 2020. As a percentage of total net revenues, administration expense was 5.3% and 10.7% for the quarters ended September 30, 2020 and 2019, respectively.
Travel and Business Development
Travel and business development expense was $0.1 million and $1.3 million for the quarters ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, travel and business development expense was 0.2% and 6.0% for the quarters ended September 30, 2020 and 2019, respectively.
Communications and Technology
Communications and technology expense was $1.1 million for both of the quarters ended September 30, 2020 and 2019. As a percentage of total net revenues, communications and technology expense was 4.0% and 5.0% for the quarters ended September 30, 2020 and 2019, respectively.
Occupancy
Occupancy expenses were $1.2 million and $1.2 million for the quarters ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, occupancy expenses were 4.0% and 5.0% for the quarters ended September 30, 2020 and 2019, respectively.
Provision for Income Taxes
Income tax benefit was $0.1 million and $1.2 million for the quarters ended September 30, 2020 and 2019, respectively. The Company's tax benefit decreased for the quarter ended September 30, 2020 from September 30, 2019 due to an decrease in pre-tax net loss from 2019 to 2020.
Beginning January 1, 2019, the Company elected to be treated as a C corporation for tax purposes, rather than a partnership, going forward.
For GAAP reporting purposes, the Company’s effective tax rate used for the interim periods is based on the estimated full-year income tax rate. The effective tax rate differs from the statutory rate primarily due to the net operating loss carryback that was created in prior year which was subsequently carried back to offset years with taxable income that was derived from a different corporate tax rate.
Segment income tax was a $0.7 million expense and $0.7 million benefit for the quarters ended September 30, 2020 and 2019, respectively.
For segment reporting purposes, an effective tax rate of 26% was assumed for the three months ended September 30, 2020 and 2019 based on our best estimation of the subsidiary’s average rate of taxation over the long term.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted in response to market conditions related to the COVID-19 pandemic. The CARES Act includes many measures to help companies, including changes that are temporary and non-income based tax laws, some of which were part of the Tax Cuts and Jobs Act (TCJA). The Company has made reasonable assessments in accounting for certain effects of the CARES Act that was passed. However, the provisional impacts may be refined over the prescribed measurement period.
The Company recognizes deferred tax assets and liabilities in accordance with ASC 740, Income Taxes, and are determined based upon the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Revenues
Investment Banking
Investment banking revenues, earned in our Broker-Dealer segment, increased $12.3 million, or 27.3%, from $44.8 million for the nine months ended September 30, 2019 to $57.1 million for the same period in 2020. As a percentage of total net revenues, investment banking revenues increased from 58.8% for the nine months ended September 30, 2019 to 92.3% for the nine months ended September 30, 2020. On an operating basis, investment banking revenues were 67.1% and 58.0% for the nine months ended September 30, 2020 and 2019, respectively, as a percentage of adjusted net revenues.
(Dollars in thousands)
|
|
Nine Months Ended September 30,
|
|
|
Change from 2020 to 2019
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Count
|
|
|
Revenues
|
|
|
Count
|
|
|
Revenues
|
|
|
Count
|
|
|
$
|
|
|
%
|
|
Equity and debt origination
|
|
|
68
|
|
|
|
39,277
|
|
|
|
59
|
|
|
$
|
27,678
|
|
|
|
9
|
|
|
$
|
11,599
|
|
|
|
41.9
|
%
|
Strategic advisory and private placements
|
|
|
13
|
|
|
|
17,817
|
|
|
|
15
|
|
|
|
17,165
|
|
|
|
(2
|
)
|
|
$
|
652
|
|
|
|
3.8
|
%
|
Total
|
|
|
81
|
|
|
$
|
57,094
|
|
|
|
74
|
|
|
$
|
44,843
|
|
|
|
7
|
|
|
$
|
12,251
|
|
|
|
27.3
|
%
|
The increase in revenues was primarily driven by a 41.9% increase in equity and debt origination revenues as JMP executed 68 deals in the first nine months of 2020 compared to 59 for the same period in 2019. The number of transactions in which we acted as a bookrunning manager was three and sixteen for the nine months ended September 30, 2020 and 2019, respectively.
Brokerage Revenues
Brokerage revenues earned in our Broker-Dealer segment increased from $13.2 million for the nine months ended September 30, 2019 to $14.0 million for the nine months ended September 30, 2020. Brokerage revenues increased as a percentage of total net revenues, from 17.3% for the nine months ended September 30, 2019 to 22.6% for the nine months ended September 30, 2020. On an operating basis, brokerage revenues were 23.3% and 18.2% for the nine months ended September 30, 2020 and 2019, respectively, as a percentage of total adjusted net revenues.
Asset Management Fees
(In thousands)
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Asset management related fees:
|
|
|
|
|
|
|
|
|
Fees reported as asset management fees
|
|
$
|
6,339
|
|
|
$
|
5,685
|
|
Fees reported as other income
|
|
|
2,688
|
|
|
|
1,517
|
|
Less: Non-controlling interest in HCAP Advisors
|
|
|
(947
|
)
|
|
|
(908
|
)
|
Total segment asset management related fee revenues
|
|
$
|
8,080
|
|
|
$
|
6,294
|
|
Fees reported as asset management fees was $5.7 million and $6.3 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, asset management revenues increased from 7.5% for the nine months ended September 30, 2019 to 10.2% for the nine months ended September 30, 2020.
Total segment asset management-related fees include base management fees and incentive fees from our assets under management, as well as other income from fee-sharing arrangements with, and fees earned to raise capital for, third-party or equity-method investment partnerships or funds. Total segment asset management-related fee revenues are reconciled to the GAAP measure, total asset management fee revenues, in the table above. We believe that presenting operating asset management-related fees is useful to investors as a means of assessing the performance of our combined asset management activities, including fundraising and other services for third parties. We also believe 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 the various asset management activities on the Company’s total net revenues.
Total segment asset management related fee revenue increased $1.8 million from $6.3 million for the nine months ended September 30, 2019 to $8.1 million for the nine months ended September 30, 2020. On an operating basis, asset management related fee revenues were 9.5% and 8.1% for the nine months ended September 30, 2020 and 2019, respectively, as a percentage of total net revenues.
Principal Transactions
Principal transaction revenues decreased $26.7 million from a gain of $6.4 million for the nine months ended September 30, 2019 to a loss of $20.3 million for the same period in 2020. This decrease was primarily driven by a $17.3 million impairment loss on CLO debt securities and a $5.3 million unrealized loss on the Company’s investment in Harvest Capital Credit Corporation included in principal transaction revenues for the nine months ended September 30, 2020 and a $3.4 million gain on deconsolidation of JMPCA included in the same period in 2019.
Total segment principal transaction revenues decreased from $7.8 million for the nine months ended September 30, 2019 to $3.5 million for the same period in 2020. Total segment principal transaction revenues are a non-GAAP financial measure that aggregates our segment reported principal transaction revenues across each segment. The principal transaction revenues for both 2020 and 2019 were included in our Investment Income segment. Total segment principal transaction revenues are reconciled to the GAAP measure, total principal transaction revenues, in the table below. See the Operating Net Income section above for additional information on the adjustments made to arrive at the non-GAAP measure and why management believes that this non-GAAP number is useful and important to the users of these financial statements.
(In thousands)
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Equity and other securities
|
|
$
|
358
|
|
|
$
|
1,354
|
|
Warrants and other investments
|
|
|
2,622
|
|
|
|
6,253
|
|
Investment partnerships
|
|
|
510
|
|
|
|
155
|
|
Total segment principal transaction revenues
|
|
|
3,490
|
|
|
|
7,762
|
|
Operating adjustment addbacks
|
|
|
(23,827
|
)
|
|
|
(1,391
|
)
|
Total principal transaction revenues
|
|
$
|
(20,337
|
)
|
|
$
|
6,371
|
|
On an operating basis, as a percentage of total net revenues, principal transaction revenues decreased from 10.0% for the nine months ended September 30, 2019 to 4.1% for the nine months ended September 30, 2020.
Net Interest Income/Expense
Net interest income decreased $3.5 million from $4.7 million for the nine months ended September 30, 2019 to $1.2 million for the nine months ended September 30, 2020. The decrease in net interest income was driven primarily by a $13.0 million decrease in net interest earned, partially offset by a $9.4 million increase in net interest expense. As a percentage of total net revenues, net interest income was 6.1% for the nine months ended September 30, 2019 and 1.4% for the nine months ended September 30, 2020.
Total segment net interest income decreased from $4.7 million for the nine months ended September 30, 2019 to $1.2 million for the nine months ended September 30, 2020, driven by deconsolidation of the CLOs in the first quarter of 2019. Net interest income is earned in our Investment Income segment. Total segment net interest income after deconsolidation reflects the effective yield of the Company's ownership of subordinated notes in CLO III, CLO IV, and CLO V, net of bond interest expense. As a percentage of total segment net revenues, net interest income was 6.1% for the nine months ended September 30, 2019 and 1.4% for the nine months ended September 30, 2020.
Expenses
Non-Interest Expenses
Compensation and Benefits
Compensation and benefits, which includes employee payroll, taxes and benefits, performance-based cash bonus and commissions, as well as equity-based compensation to our employees and managing directors, increased $7.4 million, or 13.5%, from $54.7 million for the nine months ended September 30, 2019 to $62.1 million for the nine months ended September 30, 2020. The increase in compensation and benefits is partly attributable to a $2.1 million charge recorded in connection with severance costs deriving from a strategic restructuring and reduction in headcount in September 2020.
Employee payroll, taxes and benefits, and consultant fees decreased $0.5 million from $32.0 million for the nine months ended September 30, 2019 to $31.5 million for the nine months ended September 30, 2020. Performance-based bonus and commission increased $8.1 million from $21.1 million for the nine months ended September 30, 2019 to $29.2 million for the nine months ended September 30, 2020.
Equity-based compensation decreased $0.2 million from $1.6 million for the nine months ended September 30, 2019 to $1.4 million for the nine months ended September 30, 2020.
Compensation and benefits as a percentage of revenues increased from 71.7% of total net revenues for the nine months ended September 30, 2019 to 100.4% for the nine months ended September 30, 2020. The increase in the compensation and benefits as a percentage of revenues is primarily due to the decrease in principal transaction revenues within total net revenues from the nine months ended September 30, 2019 compared to the same period in 2020.
Administration
Administration expense decreased $2.3 million from $7.0 million for the nine months ended September 30, 2019 to $4.7 million for the nine months ended September 30, 2020. As a percentage of total net revenues, administration expense was 7.6% and 9.2% for the nine months ended September 30, 2020 and 2019, respectively.
Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fee was $1.9 million and $2.1 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, our brokerage, clearing and exchange fee was 3.1% and 2.7% for the nine months ended September 30, 2020 and 2019, respectively.
Travel and Business Development
Travel and business development expense was $1.0 million and $3.6 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, travel and business development expense was 1.7% and 4.8% for the nine months ended September 30, 2020 and 2019, respectively.
Managed deal expenses
Managed deal expense was $2.5 million and $2.6 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, managed deal expense was 4.1% and 3.3% for the nine months ended September 30, 2020 and 2019, respectively.
Communications and Technology
Communications and technology expense was $3.3 million and $3.2 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, communications and technology expense were 5.3% and 4.2% for the nine months ended September 30, 2020 and 2019, respectively.
Occupancy
Occupancy expense was $3.6 million and $4.0 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, occupancy expense was 5.8% and 5.3% for the nine months ended September 30, 2020 and 2019, respectively.
Professional Fees
Professional fees were $2.4 million and $3.5 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, professional fees were 3.9% and 4.6% for the nine months ended September 30, 2020 and 2019, respectively.
Depreciation
Depreciation expenses were $1.2 million and $0.9 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, depreciation was 2.0% and 1.2% for the nine months ended September 30, 2020 and 2019, respectively.
Provision for Income Taxes
Income tax benefit was $7.2 million and $5.8 million for the nine months ended September 30, 2020 and 2019, respectively. The Company's tax benefit increased for the nine months ended September 30, 2020 from September 30, 2019 due to a increase in pre-tax net loss from 2019 to 2020.
For GAAP reporting purposes, the Company’s effective tax rate used for the interim periods is based on the estimated full-year income tax rate. The effective tax rate differs from the statutory rate primarily due to the net operating loss carryback that was created in prior year which was subsequently carried back to offset years with taxable income that was derived from a different corporate tax rate.
Segment income tax was a $1.5 million expense and a $0.3 million benefit for the nine months ended September 30, 2020 and 2019, respectively.
For segment reporting purposes, an effective tax rate of 26% was assumed for the nine months ended September 30, 2020 and 2019 based on our best estimation of the subsidiary’s average rate of taxation over the long term.
Beginning January 1, 2019, the Company elected to be treated as a C corporation for tax purposes, rather than a partnership, which resulted in the Company recognizing initial temporary differences between the book and tax basis of assets and liabilities that were previously held under pass through entities.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted in response to market conditions related to the COVID-19 pandemic. The CARES Act includes many measures to help companies, including changes that are temporary and non-income based tax laws, some of which were part of the Tax Cuts and Jobs Act (TCJA). The Company has made reasonable assessments in accounting for certain effects of the CARES Act that was passed. However, the provisional impacts may be refined over the prescribed measurement period.
The Company recognizes deferred tax assets and liabilities in accordance with ASC 740, Income Taxes, and are determined based upon the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse.
Summarized Financial Information
JMP Group Inc., a wholly-owned subsidiary of JMP Group LLC, is the primary obligor of the Company’s 7.25% Senior Notes due 2027 (the “2027 Senior Notes”) (Note 7). Pursuant to the indenture of the 2027 Senior Notes, JMP Group LLC and JMP Investment Holdings LLC (the “Guarantors”) are the guarantors of the 2027 Senior Notes. The Guarantors jointly and severally provide a full and unconditional guarantee of the due and punctual payment of the principal and interest on the 2027 Senior Notes and the due and punctual payment or performance of all other obligations of JMP Group Inc. under the indenture governing the 2027 Senior Notes.
The following summarized financial information presents the information of JMP Group LLC, JMP Investment Holdings LLC and JMP Group Inc. on a combined basis and eliminates intercompany balances. It does not include or present investments in subsidiaries that are not an issuer or guarantor. One of the non-guarantor subsidiaries not combined, JMP Securities, is subject to certain regulations, which require the maintenance of minimum net capital. This requirement may limit the issuer’s access to this subsidiary’s assets.
These disclosures are in accordance with the new disclosure requirements under SEC Regulation S-X Rule 3-10 and Rule 13-02 issued in March 2020. We have early adopted these disclosure rules.
The tables below present summarized financial information as of September 30, 2020 and December 31, 2019 and for the nine months ended September 30, 2020.
(In thousands)
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,401
|
|
|
$
|
12,557
|
|
Marketable securities owned, at fair value
|
|
|
28,965
|
|
|
|
34,203
|
|
Due from non-obligated subsidiaries
|
|
|
1,221
|
|
|
|
200
|
|
Deferred tax asset
|
|
|
17,076
|
|
|
|
18,547
|
|
Operating lease right-of-use asset
|
|
|
17,112
|
|
|
|
19,632
|
|
Total assets
|
|
|
88,659
|
|
|
|
99,100
|
|
|
|
|
|
|
|
|
|
|
Bond payable, net of debt issuance costs
|
|
|
80,816
|
|
|
|
82,584
|
|
Due to non-obligated subsidiaries
|
|
|
17,023
|
|
|
|
20,912
|
|
Operating lease liability
|
|
|
22,239
|
|
|
|
25,394
|
|
Total liabilities
|
|
|
135,174
|
|
|
|
140,377
|
|
Total equity
|
|
|
(46,515
|
)
|
|
|
(41,276
|
)
|
Total liabilities and equity
|
|
|
88,659
|
|
|
|
99,101
|
|
(In thousands)
|
|
Nine Months Ended
|
|
|
|
September 30, 2020
|
|
|
|
|
|
|
Total net revenues after provision for loan losses
|
|
$
|
(933
|
)
|
Total non-interest expenses
|
|
|
4,375
|
|
Net loss
|
|
|
(4,331
|
)
|
Financial Condition, Liquidity and Capital Resources
In the section that follows, we discuss the significant changes in the components of our balance sheet, cash flows and capital resources and liquidity for the nine months ended September 30, 2020 to demonstrate where our capital is invested and the financial condition of the Company.
Overview
As a result of the ongoing COVID-19 pandemic, we expect certain costs to decline as the underlying activities are restricted by the COVID-19 pandemic, including travel and related expenses. In addition, after a careful review of our cost structure, we reduced headcount modestly during the quarter ended September 30, 2020. While the headcount reduction resulted in recognition of severance costs, the reduced ongoing cost should increase cash flows in the future periods. However, the extent to which the COVID-19 pandemic will impact our liquidity in future periods still remains uncertain.
As of September 30, 2020, we had $56.7 million in cash and cash equivalents and $17.9 million in undrawn borrowing capacity on our revolving line of credit (some of which borrowing capacity may be used for working capital – See the section entitled JMP Holding LLC Credit Agreement with CNB, below). Based on our historical results, management's experience and our current business strategy, we believe that our existing cash resources and available credit will be sufficient to meet anticipated working capital and capital expenditure requirements for at least the next twelve months.
As of September 30, 2020, we had net liquid assets of $95.0 million primarily consisting of cash and cash equivalents, receivable from clearing brokers, marketable securities owned, and investment banking receivables, net of marketable securities sold but not yet purchased and accrued compensation. We have satisfied our capital and liquidity requirements primarily through the issuance of the Senior Notes, draws on a line of credit, and internally generated cash from operations. Most of our financial instruments, other than loans held for investment and certain marketable securities, are recorded at fair value or amounts that approximate fair value.
Liquidity Considerations
As of September 30, 2020, our material indebtedness consisted of our then outstanding Senior Notes and borrowing on our revolving line of credit with City National Bank (“CNB”) under the Credit Agreement described below.
Senior Notes
In November 2017, JMP Group Inc. raised $50.0 million from the issuance of 7.25% Senior Notes (“2027 Senior Notes”). The 2027 Senior Notes will mature on November 15, 2027 and may be redeemed in whole or in part at any time or from time to time at JMP Group Inc.’s option on or after November 28, 2020 at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The 2027 Senior Notes bear interest at a rate of 7.25% per year, payable quarterly on February 15, May 15, August 15 and November 15 of each year. Pursuant to the indenture of the 2027 Senior Notes, JMP Group LLC and JMP Investment Holdings LLC (the “Guarantors”) are the guarantors of the 2027 Senior Notes. The Guarantors jointly and severally provide a full and unconditional guarantee of the due and punctual payment of the principal and interest on the 2027 Senior Notes and the due and punctual payment or performance of all other obligations of JMP Group Inc. under the indenture governing the 2027 Senior Notes.
In September 2019, JMP Group LLC raised $36.0 million from the issuance of 6.875% Senior Notes (“2029 Senior Notes”). The 2029 Senior Notes will mature on September 30, 2029 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after September 30, 2021 at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The 2029 Senior Notes bear interest at a rate of 6.875% per year, payable quarterly on March 30, June 30, September 30, and December 30 of each year.
In March 2020, the Company repurchased $1.4 million and $0.7 million par value of its issued and outstanding 2029 Senior Notes and 2027 Senior Notes, respectively. Since they were repurchased at less than carrying value, a gain of $0.7 million was recognized upon the repurchase of the bonds, which has been included in the Consolidated Statements of Operations, gain on repurchase, reissuance or early retirement of debt.
JMP Holding LLC Credit Agreement with CNB
JMP Holding LLC (the “Borrower”), a wholly owned subsidiary of the Company, entered into a Second Amended and Restated Credit Agreement dated April 30, 2014 among the Borrower, the lenders from time to time party thereto (the “Lenders”) and CNB, as administrative agent for the Lenders (as amended, the “Credit Agreement”).
The Credit Agreement provides a $25.0 million revolving line of credit (the “Revolver”) through December 31, 2020. On such date, if the revolving period has not been previously extended, any outstanding amounts under the Revolver would convert to a term loan (the “Converted Term Loan”). The Converted Term Loan must be repaid in 12 quarterly installments commencing on January 1, 2021, with each of the first six installments being equal to 3.75% of the principal amount of the Converted Term Loan and each of the next six installments being equal to 5.0% of the principal amount of the Converted Term Loan. A final payment of all remaining principal and interest due under the Converted Term Loan must be made at the earlier of: (a) December 31, 2023; or (b) if certain liquidity requirements are not satisfied by the Company, the date that is last day of the fiscal quarter ending most recently (but no less than 60 days) prior to the earliest maturity date of any senior unsecured notes issued by JMP Group Inc. or JMP Group LLC then outstanding.
The Credit Agreement provides that the Revolver may be used, on a revolving basis, to fund specified permitted investments in collateralized loan obligation vehicles. In addition, up to $5.0 million of the Revolver may be used, on a revolving basis, to fund other types of permitted investments and acquisitions and for working capital.
On July 16, 2020, JMP Holding LLC (“JMP Holding”), a wholly owned subsidiary of JMP Group LLC, entered into an Amendment Number Seven to its existing Second Amended and Restated Credit Agreement, dated as of April 30, 2014 (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), with JMP Holding and its affiliates that are a party thereto as lenders and City National Bank (“CNB”), as administrative agent for the lenders, in order to, among other provisions, (i) allow JMP Holding to incur liens of certain clearing agents in the ordinary course of business, (ii) reduce the margin applicable to LIBOR loans from 2.25% to 2.00% and (iii) require that JMP Holding maintain a minimum of $6.0 million of CLO debt securities, based on their fair value as of June 30, 2020, pledged as collateral supporting the obligations under the Credit Agreement and refrain from exercising any right to call the related CLO entities or cause the liquidation of such CLO entities.
As of September 30, 2020, the Borrower had drawn $6.0 million against the Revolver and had letters of credit outstanding under this facility to support office lease obligations of approximately $1.1 million in the aggregate.
The Credit Agreement contains financial and other covenants, including, but not limited to, limitations on debt, liens and investments, as well as the maintenance of certain financial covenants. The Credit Agreement also includes an event of default for a “change of control” that tests, in part, the composition of our ownership and an event of default if three or more of the members of the Company’s executive committee fail to be involved actively on an ongoing basis in the management of the Company or any of its subsidiaries. A violation of any one of these covenants could result in a default under the Credit Agreement, which would permit CNB to terminate our Revolver or Converted Term Loan and require the immediate repayment of any outstanding principal and interest. In addition, our subsidiaries are restricted under the Credit Agreement under certain circumstances from making distributions to us if an event of default has occurred under the Credit Agreement.
As of September 30, 2020 and December 31, 2019, we were in compliance with the loan covenants under the Credit Agreement.
The Borrower’s obligations under the Credit Agreement are guaranteed by all of the Company’s other wholly owned subsidiaries (other than JMP Securities) and are secured by substantially all of its and the guarantors’ assets. In addition, we have entered into a limited recourse pledge agreement with CNB whereby JMP Group LLC granted a lien on the equity interests in JMP Investment Holdings LLC and JMPAM to secure the Borrower’s obligations under the Credit Agreement.
JMP Securities LLC Revolving Note Agreement with CNB
Under a Revolving Note and Cash Subordination Agreement (as amended, the “Revolving Note Agreement”) and related Revolving Note (as amended, the “Revolving Note”), each dated April 8, 2011, JMP Securities holds a $20.0 million revolving line of credit with CNB to be used for regulatory capital purposes in connection with its securities underwriting activities. Advances under the Revolving Note Agreement bear interest at CNB’s announced prime interest rate. The unused portion of the line bears interest at the rate of 0.25% per annum, paid monthly.
On June 29, 2020, JMP Securities entered Amendment Number Eleven to the Revolving Note Agreement. Pursuant to this amendment, the $20.0 million Revolving Note Agreement was extended for one year until June 30, 2021. On June 20, 2021, any existing outstanding amount under the Revolving Note will convert to a term loan maturing the following year.
There was no borrowing on the Revolving Note as of September 30, 2020 and December 31, 2019.
The Revolving Note Agreement contains financial and other covenants. A violation of any one of these covenants could result in a default under the Revolving Note, which would permit CNB to terminate the Revolving Note and require the immediate repayment of any outstanding principal and interest, subject to the terms of the Revolving Note Agreement.
At both September 30, 2020 and December 31, 2019, JMP Securities was in compliance with the loan covenants under the Revolving Note Agreement.
JMP Securities’ obligations under the Revolving Note Agreement are guaranteed by all of the Company’s wholly owned subsidiaries (other than JMP Securities) and are secured by substantially all the guarantors’ assets.
Other JMP Group LLC considerations
On February 24, 2020 the Company launched a self-tender offer (the “2020 Tender Offer”) to repurchase for cash up to 3,000,000 of shares at $3.25 a share, representing limited liability company interests of the Company, which was terminated on March 19, 2020 as a result of multiple conditions to the 2020 Tender Offer, including share price and market index conditions, not having been satisfied.
During the three months ended September 30, 2020, the Company did not repurchase any of the Company's shares.
On February 19, 2020, the Company suspended its quarterly cash distributions program on outstanding shares.
Upon the securitization of Medalist Partners Corporate Finance CLO VI in February 2020, the Company received $13.7 million in cash from the CLO VI warehouse and recognized a gain of $1.0 million.
The timing of bonus compensation payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees and managing directors are generally paid semi-monthly during the year, bonus compensation, which makes up a larger portion of total compensation, is generally paid once a year during the first two months of the following year. In the first two months of 2020, we paid out $26.9 million of cash bonuses for 2019, including employer payroll tax expense.
We had total restricted cash of $1.3 million comprised primarily of restricted cash at JMP Group Inc. related to the Company’s letters of credit on leasing arrangements.
JMP Securities, our wholly-owned subsidiary and a registered securities broker-dealer, is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital, as defined, and requires that the ratio of aggregate indebtedness to net capital, both as defined under the Exchange Act, shall not exceed 15 to 1. JMP Securities had net capital of $17.5 million and $16.9 million, which were $16.2 million and $15.5 million in excess of the required net capital of $1.3 million and $1.4 million, at September 30, 2020 and December 31, 2019, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 1.14 to 1 and 1.25 to 1 at September 30, 2020 and December 31, 2019, respectively.
A condensed table of cash flows for the nine months ended September 30, 2020 and 2019 is presented below.
(Dollars in thousands)
|
|
Nine Months Ended September 30,
|
|
|
Change from 2019 to 2020
|
|
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
Cash flows used in operating activities
|
|
$
|
(7,351
|
)
|
|
$
|
(30,428
|
)
|
|
|
23,077
|
|
|
|
-75.8
|
%
|
Cash flows provided by (used in) investing activities
|
|
|
12,137
|
|
|
$
|
(60,810
|
)
|
|
|
72,947
|
|
|
|
-120.0
|
%
|
Cash flows (used in) provided by financing activities
|
|
|
2,262
|
|
|
$
|
7,671
|
|
|
|
(5,409
|
)
|
|
|
-70.5
|
%
|
Total cash flows
|
|
$
|
7,048
|
|
|
$
|
(83,567
|
)
|
|
$
|
90,615
|
|
|
|
-108.4
|
%
|
Cash Flows for the Nine Months Ended September 30, 2020
Cash increased by $7.0 million during the nine months ended September 30, 2020 as a result of cash used in operating activities, partially offset by cash provided by investing and financing activities.
Our operating activities used $7.4 million of cash from a net loss of $13.9 million, adjusted for the cash used on the gain on other investments, and cash used by operating assets and liabilities of $6.2 million.
Our investing activities provided $12.1 million of cash primarily due to a $14.2 million in sales from non-equity method investments.
Our financing activities provided $2.3 million of cash primarily due to $3.8 million proceeds from PPP loans, partially offset by $1.4 million in repurchase of bonds payable.
Cash Flows for the Nine Months Ended September 30, 2019
Cash decreased by $83.6 million during the nine months ended September 30, 2019, as a result of cash used in operating and investing activities, partially offset by cash provided by financing activities.
Our operating activities used $30.4 million of cash from a net loss of $0.2 million, adjusted for the cash used by operating assets and liabilities of $28.8 million, the cash used by non-cash revenue and expense items of $1.9 million and the cash received as investment income from equity method investments of $0.5 million. The cash used by the change in operating assets and liabilities was primarily due to a decrease in accrued compensation of $23.5 million, increases in other assets of $10.2 million, increases in interest receivable of $4.9 million, and decreases in interest payable of $4.0 million, partially offset by a $9.6 million decrease in marketable securities, and a $6.9 million increase in other liabilities.
Our investing activities used $60.8 million of cash primarily due to a $35.2 million funding of loans collateralizing ABS issued, a $27.8 million decrease in cash and restricted cash due to deconsolidation of subsidiaries, $25.7 million of funding of loans held for investment, and $12.5 million of purchases of other investments, partially offset by $23.8 million of receipts from loans collateralizing ABS issued, $10.7 million of receipts from sales and distributions from other investments, and $7.2 million of receipts from loans held for investment.
Our financing activities provided $7.7 million of cash primarily due to $36.0 million of proceeds from a bond issuance, $16.6 million of proceeds from draw downs on the line of credit, $7.8 million of proceeds from the drawdowns on the CLO warehouse facility, partially offset by $36.0 million repayments on bonds payable, $8.6 million in purchases of common shares from treasury, $2.7 million in distributions and distribution equivalents on common shares and RSUs, $1.9 million of payments on bond issuance costs, $1.6 million in repayments on the line of credit, and $0.9 million of distributions to non-controlling interest shareholders.
Contractual Obligations
As of September 30, 2020, our aggregate minimum future commitment on our leases was $25.3 million. Our remaining contractual obligations have not materially changed from those reported in our Annual Report.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of September 30, 2020. However, through indemnification provisions in our clearing agreements with our clearing brokers, customer activities may expose us to off-balance sheet credit risk, which we seek to mitigate through customer screening and collateral requirements.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and of revenues and expenses during the reporting periods. We base our estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances. The use of different estimates and assumptions could produce materially different results. For example, if factors such as those described under the caption “Risk Factors” in our Annual Report cause actual events to differ from the assumptions we used in applying the accounting policies, our results of operations, financial condition and liquidity could be adversely affected.
On an ongoing basis, we evaluate our estimates and assumptions, particularly as they relate to accounting policies that we believe are most important to the presentation of our financial condition and results of operations. We regard an accounting estimate or assumption to be most important to the presentation of our financial condition and results of operations where:
|
•
|
the nature of the estimates or assumptions is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and
|
|
•
|
the impact of the estimates or assumptions on our financial condition or operating performance is material.
|
Using the foregoing criteria, we consider the following to be our critical accounting policies:
|
●
|
Valuation of Financial Instruments
|
|
●
|
Asset Management Investment Partnerships
|
|
●
|
Legal and Other Contingent Liabilities
|
Our significant accounting policies are described further in the “Critical Accounting Policies and Estimates” section and Note 2 - Summary of Significant Accounting Policies in these financial statements and our consolidated financial statements in our Annual Report.