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 endedDecember 31, 2019 contained in our Form 10-K for the year endedDecember 31, 2019 , filed with theSecurities and Exchange Commission onMarch 30, 2020 (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.
Impact of the COVID-19 Pandemic
Prior to the spread of the COVID-19 pandemic, we experienced growth trends in the first quarter of 2020, driven by investment banking momentum that continued from the fourth quarter of 2019, until theU.S. equities market saw sharp declines and extreme volatility inMarch 2020 in reaction to the COVID-19 pandemic. Consequently, investment banking transactions expected to close in March were pushed out into the future, postponing revenues that otherwise would have been recognized in the first quarter. On the other hand, in the first quarter we experienced a material increase in our institutional equities business, as brokerage clients turned to us for insight into an extraordinarily challenging market environment. In the second quarter of 2020, unprecedented fiscal and monetary stimuli by theU.S. government spurred a sharp recovery inU.S. equity prices, directly benefiting the Company's equity capital markets and brokerage revenues. In addition, with our employees continuing to work remotely due to the pandemic, our non-compensation expenses were unusually low for the quarter. These factors combined resulted in significantly improved financial results for the second quarter of 2020 compared to the first quarter of 2020. Due to the dramatic market volatility as a result of the COVID-19 pandemic, there was a significant decline in the fair value of our CLO debt securities and we recognized a significant unrealized loss in the first quarter of 2020. In the second quarter of 2020, the fair value of our CLO debt securities improved but remain in an unrealized loss position. We expect that the valuation of our CLO debt securities will remain volatile until the depth and duration of the current recession is better understood. While not nearly as significant, we recognized unrealized losses on other marketable securities, driven by lower market prices. Many parts ofCalifornia , in which our headquarters is located, remain locked down. Fortunately, the nature of our business allows us to successfully conduct investment banking, trading, and asset management activities, even though our employees have been working remotely since mid-March. As with most market dislocations, buyers and sellers need some time to adjust to the new environment, which can especially delay strategic advisory transactions and sometimes leads to reduced outcomes. Additionally, companies looking toward IPOs or follow-on offerings will ordinarily postpone their plans until market volatility normalizes. While we continue to be actively engaged with our clients and customers in finding the best available opportunities and solutions, we expect that delayed closings will weigh on investment banking revenues for the third quarter and beyond. An economic recession could have a material adverse effect on our business, financial condition, results of operations, or cash flows. We are closely monitoring the status of the COVID-19 pandemic and its impact on our business and the economy and capital markets globally. The unprecedented amount of Federal stimulus spending targeted at employees of small businesses, strategically important industries, and healthcare, may help stabilize theU.S. economy and capital markets. However, we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our business in the third quarter and beyond. Deconsolidation During the first three months of 2019, multiple events and transactions took place which resulted in the Company deconsolidating variable interest entities ("VIEs"): JMPCA, JMP Credit Advisors CLO III(R) Ltd. ("CLO III"),JMP Credit Advisors CLO IV Ltd ("CLO IV"),JMP Credit Advisors CLO V Ltd ("CLO V"), andJMP Credit Advisors Long-Term Warehouse Ltd ("CLO VI") (CLO III , CLO IV, CLO V and CLO VI are collectively the "CLOs"). These events and transactions are hereafter referred to as the "Deconsolidation". The Company continues to hold approximately 47% of the subordinated notes ofCLO III and 100% of the junior subordinated notes of CLO IV and CLO V and accounts for its ownership of these subordinated notes as an investment in a debt security and classifies them as available-for-sale securities. Refer to the Annual Report for more information on the Deconsolidation. 29 --------------------------------------------------------------------------------
Components of Revenues
We derive revenues primarily from: fees from our investment banking business, net commissions from our sales and trading business, management fees and incentive fees from our asset management business, and interest income earned on collateralized loan obligations we manage (throughMarch 19, 2019 ). We also generate revenues from principal transactions, interest, dividends and other income. Investment Banking
We earn investment banking revenues from underwriting securities offerings, arranging private capital markets transactions and providing advisory services in mergers and acquisitions and other strategic transactions.
Underwriting Revenues
We earn revenues from securities offerings in which we act as an underwriter, such as initial public offerings and follow-on equity offerings. Underwriting revenues include management fees, underwriting fees, selling concessions, and realized and unrealized net gains and losses on equity positions held in inventory for a period of time to facilitate the completion of certain underwritten offerings. We record underwriting revenues, gross of related syndicate expenses, on the trade date which is typically the date of pricing an offering (or the following day). The Company has determined that its performance obligations are completed and the related income is reasonably determinable on the trade date. In syndicated transactions, management estimates our share of transaction-related expenses incurred by the syndicate, and we recognize revenues gross of such expense. On final settlement by the lead manager, typically 90 days from the trade date of the transaction, we adjust these amounts to reflect the actual transaction-related expenses and our resulting underwriting fee. We receive a higher proportion of total fees in underwritten transactions in which we act as a lead manager.
Strategic Advisory Revenues
Our strategic advisory revenues primarily consist of success fees received upon the closing of mergers and acquisitions but also include retainer fees received when we are first engaged to provide advisory services. We also earn fees for related advisory work and other services, such as fairness opinions, valuation analyses, due diligence, and pre-transaction structuring advice. These revenues may be earned for providing services to either the buyer or the seller involved in a transaction. Depending on the nature of the engagement letter and the agreed upon services, customers may simultaneously receive and consume the benefits of services or services may culminate in the delivery of the advisory services at a point in time. The Company evaluates each contract individually and the performance obligations identified to determine if revenue should be recognized ratably over the term of the agreement or at a specific point in time. Any retainer fees received in connection with these agreements are individually evaluated and any unearned fees are deferred for revenue recognition.
We earn fees for private capital markets and other services in connection with transactions that are not underwritten, such as private placements of equity securities, private investments in public equity ("PIPE") transactions and Rule 144A offerings. We record private placement revenues on the closing date of these transactions. Client reimbursements for costs associated for private placement fees are recorded gross within Investment banking and various expense captions, excluding compensation. Since our investment banking revenues are generally recognized at the time of completion of a transaction or the services to be performed, these revenues typically vary between periods and may be affected considerably by the timing of the closing of significant transactions.
Brokerage Revenues
Our brokerage revenues include trading commissions paid by customers for purchases or sales of exchange-listed and over-the-counter equity securities. Commissions resulting from equity securities transactions executed on behalf of customers are recorded on a trade date basis. The Company believes that the performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to/from the customer. Brokerage revenues also include net trading gains and losses that result from market-making activities and from our commitment of capital to facilitate customer transactions. Our brokerage revenues may vary between periods, in part depending on commission rates, trading volumes and our ability to deliver equity research and other value-added services to our clients. The ability to execute trades electronically, through the internet and through other alternative trading systems, has increased pressure on trading commissions and spreads across our industry. We expect this trend toward alternative trading systems and the related pricing pressure in the brokerage business to continue. We are, to some extent, compensated through brokerage commissions for the equity research and other value-added services we deliver to our clients. These "soft dollar" practices have been the subject of discussion among regulators, the investment banking community and our sales and trading clients. In particular, commission sharing arrangements have been adopted by some large institutional investors. In these arrangements, an institutional investor concentrates its trading with fewer "execution" brokers and pays a fixed amount for execution, with a designated amount set aside for payments to other firms for research or other brokerage services. Accordingly, trading volume directed to us by investors that enter into such arrangements may be reduced, or eliminated, but we may be compensated for our research and sales efforts through allocations of the designated amounts. Depending on the extent to which we agree to this practice and depending on our ability to enter into arrangements on terms acceptable to us, this trend would likely impair the revenues and profitability of our brokerage business by negatively affecting both volumes and trading commissions. 30 --------------------------------------------------------------------------------
Asset Management Fees We earn asset management fees for managing a family of investment partnerships, including hedge funds, hedge funds of funds, private equity funds, real estate funds, a capital debt fund, as well as a publicly traded specialty finance company, Harvest Capital Credit Corporation ("HCC"). These fees include base management fees and incentive fees. Base management fees are generally determined by the fair value of the assets under management ("AUM"), invested capital or the aggregate capital commitment and the fee schedule for each fund or account. Incentive fees are based upon the investment performance of the funds or accounts. For most of our funds, incentive fees equate to a percentage of the excess investment return above a specified high-water mark or hurdle rate over a defined period of time. For private equity funds, incentive fees equate to a percentage of the realized gain from the disposition of each portfolio investment in which each investor participates, which we earn after returning contributions by an investor for a portfolio investment. Some of these incentive fees are subject to contingent repayments to investors or clawback and cannot be recognized until it is probable that there will not be a significant reversal of revenue. Any such fees earned are deferred for revenue recognition until the contingency is removed or the Company determines that it is not probable that a significant reversal of revenue will occur. 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 atJune 30 ,December 31, 2020 2019
Client Assets Managed by HCS, JMPAM, and
5,101,652 5,381,432 JMP Group LLC total client assets under management$ 5,690,905 $ 5,976,110
(1) For HCS, JMPAM, and
the net assets of such funds or the commitment amount. (2) Sponsored funds are third-party asset managers in which the Company owns an
economic interest. Principal Transactions Principal transaction revenues include net realized and unrealized gains and losses resulting from our principal investments in equity and other securities for our own account as well as equity-linked warrants received from certain investment banking clients and limited partner investments in private funds managed by third parties. Principal transaction revenues also include earnings, or losses, attributable to interests in investment partnerships managed by our asset management subsidiaries, HCS and JMPAM, which are recorded using the fair value option and the net asset value practical expedient, or are accounted for using the equity method of accounting. Revenues also included unrealized gains and losses on investments that elect the fair option and unrealized gains and losses on the deconsolidation of businesses and investments. In addition, our principal transaction revenues include unrealized gains or losses on an investment in an entity that acquires buildings and land for the purpose of holding, managing and selling the properties and also include unrealized gains or losses on the investments in other private companies. 31 --------------------------------------------------------------------------------
Gain (Loss) on Sale, Payoff, and Mark-to-Market of Loans
Gain (loss) on sale, payoff, and mark-to-market of loans consists of gains and losses from the sale and payoff of loans collateralizing asset-backed securities ("ABS") recognized prior to the deconsolidation of the CLOs in the first quarter of 2019. Gains are recorded when the proceeds exceed the carrying value of the loan. Net Dividend Income
Net dividend income includes dividends from our investments offset by dividend expense resulting from short positions in our principal investment portfolio.
Other Income Other income includes revenues from equity method investments, revenues from fee-sharing arrangements with our funds, contingent revenue from a sale of a general partnership, subordinated management fees earned on CLO investments, and fees earned to raise capital for third-party investment partnerships. Interest Income Interest income primarily consists of interest income earned on loans collateralizing ABS issued (throughMarch 19, 2019 ), investments in CLO equity tranches, and loans held for investment. Interest income on loans is comprised of the stated coupon as a percentage of the face amount receivable as well as accretion of purchase discounts and deferred fees. Interest income is recorded on an accrual basis, in accordance with the terms of the respective loans, unless such loans are placed on non-accrual status. Interest on CLO debt securities are recognized in interest income using the effective yield method. OnJanuary 17, 2019 , the non-call period forCLO III expired and the Company lost the ability to direct the most significant activities ofCLO III . As a result, the Company deconsolidatedCLO III as ofJanuary 17, 2019 and ceased recognizing interest income on loans collateralizing asset-backed securities forCLO III as of the date of sale. OnMarch 19, 2019 , the Company sold a total of 55.0% of the equity interest in JMPCA. Due to the sale of the majority of the equity interest and the loss of control over the CLO IV, CLO V, and CLO VI warehouse, the Company deconsolidated these entities and ceased recognizing interest income on loans collateralizing asset-backed securities and loans held for investment underlying the CLO VI warehouse portfolio as of the deconsolidation date. After deconsolidation of the CLOs, the Company accounts for its ownership of the subordinated notes of the CLOs as beneficial interests in debt securities and recorded interest income on those instruments using the effective-yield method. Interest Expense Interest expense primarily consists of interest expense related to ABS issued and CLO warehouse credit facilities (throughMarch 19, 2019 ), Senior Notes, lines of credit, and notes payable, as well as the amortization of bond issuance costs. Interest expense on asset-backed securities is the stated coupon payable as a percentage of the principal amount. Interest expense is recorded on an accrual basis, in accordance with the terms of the respective debt instruments. Due to deconsolidation of the CLOs and the CLO VI warehouse in the first quarter of 2019, the Company ceased recording interest expense on asset-backed securities issued as ofJanuary 17, 2019 forCLO III and onMarch 19, 2019 , for CLO IV, CLO V, and CLO VI warehouse.
Gain (loss) on Repurchase, Reissuance, or Early Retirement of Debt
Gain (loss) on repurchase, reissuance, or early retirement of debt primarily consists of gains recognized on repurchase of Senior Notes and losses incurred in the write-off of debt issuance costs related to Senior Notes that has been repurchased or retired sooner than the life of the instrument. 32 --------------------------------------------------------------------------------
Components of Expenses We classify our expenses as compensation and benefits; administration; brokerage, clearing and exchange fees; travel and business development; managed deal expenses, communications and technology; occupancy; professional fees, depreciation, and other. A significant portion of our expense base is variable, including compensation and benefits; brokerage, clearing and exchange fees; travel and business development; and communication and technology expenses.
Compensation and Benefits
Compensation and benefits is the largest component of our expenses and includes employees' base pay, performance bonuses, sales commissions, related payroll taxes, equity-based compensation, and medical and benefits expenses, as well as expenses for contractors and temporary employees. Our employees receive a substantial portion of their compensation in the form of an individual, performance-based bonus. As is the widespread practice in our industry, we pay bonuses on an annual basis, and for senior professionals these bonuses typically make up a large portion of their total compensation. A portion of the performance-based bonuses paid to certain senior professionals is paid in the form of deferred compensation. Bonus payments may have a greater impact on our cash position and liquidity in the periods in which they are paid than would otherwise be reflected in our Consolidated Statements of Operations. We accrue for the estimated amount of these bonus payments ratably over the applicable service period. Compensation is accrued with specific ratios of total compensation and benefits to total revenues applied to specific revenue categories, with adjustments made if, in management's opinion, such adjustments are necessary and appropriate to maintain competitive compensation levels.
Administration
Administration expense primarily includes the cost of hosted conferences, non-capitalized systems and software expenditures, insurance, business tax (non-income), office supplies, recruiting, and regulatory fees.
Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fees include the cost of floor and electronic brokerage and execution, securities clearance, and exchange fees. Changes in brokerage, clearing and exchange fees fluctuate largely in line with the volume of our sales and trading activity.
Travel and Business Development
Travel and business development expense primarily consists of costs incurred traveling to client locations for the purposes of executing transactions or meeting potential new clients, travel for administrative functions, and other costs incurred in developing new business. Travel costs related to existing clients for mergers and acquisitions and underwriting deals are sometimes reimbursed by clients. Under the new revenue standard ASC 606, reimbursed costs are presented as revenue on the Consolidated Statements of Operations.
Managed Deal Expenses
Managed deal expenses primarily relate to costs incurred and/or allocated in the execution of investment banking transactions, including reimbursable costs. Under the new revenue standard ASC 606, reimbursed costs are presented as revenue on the Consolidated Statements of Operations.
Communications and technology expense primarily relates to the cost of communication and connectivity, information processing, and subscriptions to certain market data feeds and services.
Occupancy Expenses
Occupancy costs primarily include payments made under operating leases that are recognized on a straight-line basis over the period of the lease and the accretion of any lease incentives.
Professional Fees
Professional fees primarily relate to legal and accounting professional services.
Depreciation Depreciation expenses include the straight-line amortization of purchases of certain furniture and fixtures, computer and office equipment, certain software costs, and leasehold improvements to allocate their depreciation amounts over their estimated useful life. Other Expenses
Other operating expenses primarily include occupancy, depreciation, and administration expense.
Income Taxes
SinceJanuary 2015 ,JMP Group LLC has been a publicly traded partnership and, as such, has been taxed as a partnership, and not as a corporation, forU.S. federal income tax purposes, so long as 90% or more of its gross income for each taxable year constitutes "qualifying income." OnJanuary 31, 2019 , the Company filed an election with theU.S. Internal Revenue Service to be treated as a C corporation for tax purposes, rather than a partnership, going forward. The election was approved and became retroactively effective as ofJanuary 1, 2019 . 33 -------------------------------------------------------------------------------- The Company recognizes deferred tax assets and liabilities in accordance with ASC 740, Income Taxes, which 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. Valuation allowances are established when necessary to reduce the deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized. The Company does not have a valuation allowance as ofJune 30, 2020 . The Company records uncertain tax positions using a two-step process: (i) the Company determines whether it is more likely than not that each tax position will be sustained on the basis of the technical merits of the position; and (ii) for those tax positions that meet the more-likely-than not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than fifty percent likely to be realized upon ultimate settlement with the related tax authority. The Company's policy for recording interest and penalties associated with the tax audits or unrecognized tax benefits, if any, is to record such items as a component of income tax. Non-controlling Interest Non-controlling interest for the three and six months endedJune 30, 2020 includes the interest of third parties inHCS Strategic Investments LLC ("HCS SI") andHCAP Advisors . Non-controlling interest for the three and six months endedJune 30, 2019 includes the interest of third parties inCLO III (throughJanuary 17, 2019 ), HCS SI, andHCAP Advisors .
Results of Operations
The following table sets forth our results of operations for the three and six months endedJune 30, 2020 and 2019, and is not necessarily indicative of the results to be expected for any future period. Three Month Change From 2019 Six Month Change From 2019 (In thousands) Three Months Ended June 30, Six Months Ended June 30, to 2020 to 2020 2020 2019 2020 2019 $ % $ % Revenues Investment banking$ 21,595 $ 17,736 $ 36,220 $ 29,615 $ 3,859 21.8 %$ 6,605 22.3 % Brokerage 5,645 4,657 9,832 9,192 988 21.2 % 640 7.0 % Asset management fees 1,712 2,354 3,428 4,057 (642 ) -27.3 % (629 ) -15.5 % Principal transactions (48 ) 1,423 (17,600 ) 6,711 (1,471 ) -103.4 % (24,311 ) -362.3 % Loss on sale, payoff and mark-to-market of loans - (21 ) 0 (38 ) 21 -100.0 % 38 -100.0 % Net dividend income 10 293 237 589 (283 ) -96.6 % (352 ) -59.8 % Other income 912 793 1,847 758 119 15.0 % 1,089 143.7 % Non-interest revenues 29,826 27,235 33,964 50,884 2,591 9.5 % (16,920 )
-33.3 %
Interest income 1,890 2,772 4,104 17,063 (882 ) -31.8 % (12,959 ) -75.9 % Interest expense (1,723 ) (1,939 ) (3,505 ) (12,712 ) 216 -11.1 % 9,207 -72.4 % Net interest income 167 833 599 4,351 (666 ) -80.0 % (3,752 )
-86.2 %
Gain on repurchase, reissuance, or early retirement of debt - - 697 0 - N/A 697 0.0 % Total net revenues 29,993 28,068 35,260 55,235 1,925 6.9 % (19,975 )
-36.2 %
Non-interest expenses Compensation and benefits 22,386 19,945 38,599 37,167 2,441 12.2 % 1,432 3.9 % Administration 1,067 2,748 3,289 4,677 (1,681 ) -61.2 % (1,388 ) -29.7 % Brokerage, clearing and exchange fees 647 733 1,281 1,434 (86 ) -11.7 % (153 ) -10.7 % Travel and business development 54 1,347 976 2,368 (1,293 ) -96.0 % (1,392 ) -58.8 % Managed deal expenses 950 1,334 1,538 1,867 (384 ) -28.8 % (329 ) -17.6 % Communications and technology 1,085 1,127 2,214 2,180 (42 ) -3.7 % 34 1.6 % Occupancy 1,194 1,409 2,393 2,832 (215 ) -15.3 % (439 ) -15.5 % Professional fees 731 821 1,621 2,277 (90 ) -11.0 % (656 ) -28.8 % Depreciation 397 311 945 608 86 27.7 % 337 55.4 % Other 208 5 208 500 203 4060.0 % (292 ) -58.4 % Total non-interest expenses 28,719 29,780 53,064 55,910 (1,061 ) -3.6 % (2,846 ) -5.1 % Net income (loss) before income taxes 1,274 (1,712 ) (17,804 ) (675 ) 2,986 -174.4 % (17,129 ) 2537.6 % Income tax expense (benefit) 176 (517 ) (7,063 ) (4,619 ) 693 -134.0 % (2,444 ) 52.9 % Net income (loss) 1,098 (1,195 ) (10,741 ) 3,944 2,293 -191.9 % (14,685 ) -372.3 % Less: Net income (loss) attributable to non-controlling interest (26 ) (83 ) (117 ) (13 ) 57 -68.7 % (104 ) 800.0 % Net income (loss) attributable toJMP Group LLC$ 1,124 $ (1,112 ) $ (10,624 ) $ 3,957 $ 2,236 -201.1 %$ (14,581 ) -368.5 % 34
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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 match
compensation 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 ofCLO III prior toMarch 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) a combined federal, state and local income tax rate of 26% at the consolidated taxable parent company,JMP Group LLC . (ix) presents revenues and expenses on a basis that deconsolidates the CLOs (throughMarch 19, 2019 ) and removes any non-controlling interest in consolidated but less than wholly owned subsidiaries. 35
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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 June 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$ 21,595 $ - $ - $ - $ - $ -$ 21,595 Brokerage 5,645 - - - - - 5,645 Asset management related fees 7 1,941 379 2,320 - (42 ) 2,285 Principal transactions 458 - 1,809 1,809 - - 2,267 Net dividend income - - 49 49 - - 49 Net interest income - - 192 192 - - 192 Total net revenues 27,705 1,941 2,429 4,370 - (42 ) 32,033 Non-interest expenses Non-interest expenses 24,045 2,144 303 2,447 2,082 (42 ) 28,532 Operating pre-tax net income (loss) 3,660 (203 ) 2,126 1,923 (2,082 ) - 3,501 Income tax expense (benefit) 951 (53 ) 553 500 (541 ) - 910 Operating net income (loss) $ 2,709 $ (150 )
$ 1,573 $ 1,423 $ (1,541 ) $ - $ 2,591 Three Months Ended June 30, 2019
(In thousands) Broker-Dealer Asset Management Corporate Costs Eliminations Total Segments Asset Management Fee Investment Total Asset Income Income Management Revenues Investment banking$ 17,736 $ - $ - $ - $ - $ -$ 17,736 Brokerage 4,657 - - - - - 4,657 Asset management related fees 6 2,536 323 2,859 - (34 ) 2,831 Principal transactions - - 1,492 1,492 - - 1,492 Loss on sale, payoff, and mark-to-market of loans - - (21 ) (21 ) - - (21 ) Net dividend income - - 331 331 - - 331 Net interest income - - 816 816 - - 816 Total net revenues 22,399 2,536 2,941 5,477 - (34 ) 27,842 Non-interest expenses Non-interest expenses 23,458 2,883 495 3,378 1,982 (34 ) 28,784 Operating pre-tax net income (loss) (1,059 ) (347 ) 2,446 2,099 (1,982 ) -
(942 )
Income tax expense (benefit) (275 ) (90 ) 635 545 (515 ) -
(245 )
Operating net income (loss) $ (784 ) $ (257 ) $
1,811$ 1,554 $ (1,467 ) $ - $ (697 ) 36
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Six Months EndedJune 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$ 36,220 $ - $ - $ - $ - $ -$ 36,220 Brokerage 9,832 - - - - - 9,832 Asset management related fees 159 3,844 712 4,556 - (87 ) 4,628 Principal transactions 487 - 1,861 1,861 - - 2,348 Net dividend income - - 305 305 - - 305 Net interest income - - 650 650 - - 650 Gain on repurchase, reissuance or early retirement of debt - - 786 786 - -
786
Adjusted net revenues 46,698 3,844 4,314 8,158 - (87 )
54,769
Non-interest expenses Non-interest expenses 43,246 4,506 454 4,960 3,874 (87 )
51,993
Operating pre-tax net income (loss) 3,452 (662 ) 3,860 3,198 (3,874 ) -
2,776
Income tax expense (benefit) 889 (173 ) 1,012 839 (1,007 ) -
722
Operating net income (loss) $ 2,563 $ (489 ) $
2,848$ 2,359 $ (2,868 ) $ - $ 2,055 Six Months Ended June 30, 2019
(In thousands) Broker-Dealer Asset Management Corporate Costs Eliminations Total Segments Asset Management Fee Investment Total Asset Income Income Management Revenues Investment banking$ 29,615 $ - $ - $ - $ - $ -$ 29,615 Brokerage 9,192 - - - - - 9,192 Asset management related fees 12 4,897 369 5,266 - (1,048 ) 4,230 Principal transactions - - 6,879 6,879 - - 6,879 Loss on sale, payoff, and mark-to-market of loans - - (39 ) (39 ) - - (39 ) Net dividend income - - 666 666 - - 666 Net interest income - - 4,139 4,139 - - 4,139 Adjusted net revenues 38,819 4,897 12,014 16,911 - (1,048 )
54,682
Non-interest expenses Non-interest expenses 41,358 5,973 3,044 9,017 4,042 (1,048 )
53,369
Operating pre-tax net income (loss) (2,539 ) (1,076 ) 8,970 7,894 (4,042 ) 0
1,313
Income tax expense (benefit) (660 ) (281 ) 2,332 2,051 (1,050 ) - 341
Operating net income (loss)
6,638$ 5,843 $ (2,992 ) $ - $ 972 37
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The following table reconciles operating net income (loss) to Total Segments operating pre-tax net income, and also to consolidated pre-tax net income (loss) attributable toJMP Group LLC and to consolidated net income (loss) attributable toJMP Group LLC for the three and six months endedJune 30, 2020 and 2019.
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