jmpllc20170930_10q.htm
 

 



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q
 


 

(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

   
  For the quarterly period ended June 30, 2018 OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

   
  For the transition period from       to   

 

Commission File Number: 001-36802

JMP Group LLC

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

47-1632931

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

     

 

600 Montgomery Street, Suite 1100, San Francisco, California 94111

(Address of principal executive offices)

 

Registrant’s telephone number: (415) 835-8900

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

       

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

             

Emerging growth company

 

       

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

JMP Group LLC shares representing limited liability company interests outstanding as of August 3, 2018: 21,452,249.

 



 

1

 
 

 

Table of Contents

 

 

TABLE OF CONTENTS

 

     

 

 

Page

PART I.

FINANCIAL INFORMATION

4

     

Item 1.

Financial Statements - JMP Group LLC

4

 

Consolidated Statements of Financial Condition – June 30, 2018 (Unaudited) and December 31, 2017

4

 

Consolidated Statements of Operations - For the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)

6

 

Consolidated Statements of Changes in Equity - For the Six Months Ended June 30, 2018 and 2017 (Unaudited)

7

 

Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 2018 and 2017 (Unaudited)

8

 

Notes to Consolidated Financial Statements (Unaudited)

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

39

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

69

Item 4.

Controls and Procedures

69

     

PART II.

OTHER INFORMATION

69

     

Item 1.

Legal Proceedings

69

Item 1A.

Risk Factors

69

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

70

Item 3.

Defaults Upon Senior Securities

70

Item 4.

Mine Safety Disclosures

70

Item 5.

Other Information

70

Item 6.

Exhibits

70

   

SIGNATURES

71

   

EXHIBIT INDEX

72

 

2

 
 

 

 AVAILABLE INFORMATION

 

JMP Group LLC is required to file current, annual and quarterly reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the Securities and Exchange Commission (the "SEC"). You may read and copy any document JMP Group LLC files with the SEC at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet website at http://www.sec.gov, from which interested persons can electronically access JMP Group LLC’s SEC filings.

 

JMP Group LLC provides its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, Forms 3, 4 and 5 filed by or on behalf of directors, executive officers and certain large shareholders, and any amendments to those documents filed or furnished pursuant to the Exchange Act free of charge on the Investor Relations section of its website located at http://www.jmpg.com. These filings will become available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. From time to time JMP Group LLC may use its website as a channel of distribution of material company information.

 

JMP Group LLC also makes available, in the Investor Relations section of its website and will provide print copies to shareholders upon request, (i) its corporate governance guidelines, (ii) its code of business conduct and ethics, and (iii) the charters of the audit, compensation, and corporate governance and nominating committees of its board of directors. These documents, as well as the information on the website, are not intended to be part of this quarterly report on Form 10-Q (the “Quarterly Report”) and inclusions of the internet address in this Quarterly Report are intended to be inactive textual references, and not live hyperlinks. JMP Group LLC also uses the Investor Relations section of its website as a means of complying with its disclosure obligations under Regulation FD. Accordingly, you should monitor JMP Group LLC’s Investor Relations section of its website in addition to following JMP Group LLC’s press releases, SEC filings, and public conference calls and webcasts.

 

3

 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements

 

JMP Group LLC

Consolidated Statements of Financial Condition

(Unaudited)

(Dollars in thousands, except per share data)

   

June 30, 2018

   

December 31, 2017

 

Assets

               

Cash and cash equivalents

  $ 50,402     $ 85,594  

Restricted cash

    46,693       51,727  

Investment banking fees receivable (net of allowance for doubtful accounts of $455 and $159 as of June 30, 2018 and December 31, 2017)

    17,540       9,567  

Marketable securities owned, at fair value

    21,455       20,825  

Other investments (includes $10,387 and $18,450 measured at fair value at June 30, 2018 and December 31, 2017, respectively)

    16,916       27,984  

Loans held for investment, net of allowance for loan losses

    285,846       83,948  

Loans collateralizing asset-backed securities issued, net of allowance for loan losses

    784,663       765,583  

Interest receivable

    2,571       2,259  

Fixed assets, net

    2,351       2,322  

Other assets

    22,594       26,817  

Total assets

  $ 1,251,031     $ 1,076,626  
                 

Liabilities and Equity

               

Liabilities:

               

Marketable securities sold, but not yet purchased, at fair value

  $ 5,630     $ 7,919  

Accrued compensation

    25,290       43,131  

Asset-backed securities issued (net of debt issuance costs of $6,188 and $7,852 at June 30, 2018 and December 31, 2017, respectively)

    739,912       738,248  

Interest payable

    8,854       6,512  
       Notes payable     18,829       -  

CLO V warehouse credit facility

    238,500       61,250  

Bond payable (net of debt issuance costs of $2,760 and $2,810 at June 30, 2018 and December 31, 2017, respectively)

    93,145       93,103  

Other liabilities

    18,602       16,284  

Total liabilities

    1,148,762       966,447  
                 

Commitments and Contingencies (Footnote 13)

               

JMP Group LLC Shareholders' Equity

               

Common shares, $0.001 par value, 100,000,000 shares authorized; 22,780,052 shares issued at both June 30, 2018 and December 31, 2017; 21,486,361 and 21,729,079 shares outstanding at June 30, 2018 and December 31, 2017, respectively

    23       23  

Additional paid-in capital

    134,547       134,719  

Treasury shares at cost, 1,293,691 and 1,050,973 shares at June 30, 2018 and December 31, 2017, respectively

    (7,218 )     (5,955 )

Accumulated deficit

    (38,698 )     (32,452 )

Total JMP Group LLC shareholders' equity

    88,654       96,335  

Nonredeemable Non-controlling Interest

    13,615       13,844  

Total equity

    102,269       110,179  

Total liabilities and equity

  $ 1,251,031     $ 1,076,626  

 

See accompanying notes to consolidated financial statements.

 

4

 

 

JMP Group LLC

 Consolidated Statements of Financial Condition - (Continued)

(Unaudited)

(Dollars in thousands, except per share data)

 

Assets and liabilities of consolidated variable interest entities (“VIEs”) included in total assets and total liabilities above:

 

   

June 30, 2018

   

December 31, 2017

 
                 

Restricted cash

  $ 23,870     $ 43,050  

Loans collateralizing asset-backed securities issued, net of allowance for loan losses

    784,663       765,583  

Interest receivable

    1,862       1,918  

Other assets

    1,113       568  

Total assets of consolidated VIEs

  $ 811,508     $ 811,119  
                 

Asset-backed securities issued

    739,912       738,248  

Interest payable

    6,453       5,346  

Other liabilities

    1,287       1,221  

Total liabilities of consolidated VIEs

  $ 747,652     $ 744,815  

 

The asset-backed securities issued (“ABS”) by the VIE are limited recourse obligations payable solely from cash flows of the loans collateralizing them and related collection and payment accounts pledged as security. Accordingly, only the assets of the VIE can be used to settle the obligations of the VIE.

 

See accompanying notes to consolidated financial statements.

 

5

 
 

 

JMP Group LLC

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Revenues

                               

Investment banking

  $ 28,562     $ 19,128     $ 49,224     $ 32,728  

Brokerage

    5,447       5,078       10,111       10,364  

Asset management fees

    5,378       4,153       11,803       10,064  

Principal transactions

    1,684       (323 )     (1,936

)

    (2,216 )

Gain (loss) on sale, payoff and mark-to-market of loans

    (150 )     83       (332 )     930  

Net dividend income

    319       273       615       539  

Other income

    311       194       360       639  

Non-interest revenues

    41,551       28,586       69,845       53,048  
                                 

Interest income

    15,669       9,696       28,379       18,763  

Interest expense

    (11,634 )     (7,743 )     (21,336 )     (15,838 )

Net interest income

    4,035       1,953       7,043       2,925  
                                 

Loss on repurchase, reissuance or early retirement of debt

    (42 )     (5,542 )     (2,668 )     (5,332 )

Provision for loan losses

    (1,280 )     (1,854 )     (2,745 )     (3,120 )

Total net revenues after provision for loan losses

    44,264       23,143       71,475       47,521  
                                 

Non-interest expenses

                               

Compensation and benefits

    29,138       22,652       53,399       44,450  

Administration

    2,711       2,721       4,944       4,540  

Brokerage, clearing and exchange fees

    788       789       1,565       1,548  

Travel and business development

    1,202       1,111       2,156       2,026  

Communications and technology

    1,047       1,051       2,109       2,104  

Managed deal expenses

    2,348       -       3,914       -  

Occupancy

    1,143       1,111       2,260       2,222  

Professional fees

    1,138       853       3,043       2,015  

Depreciation

    287       303       551       614  

Other

    776       950       1,163       1,627  

Total non-interest expenses

    40,578       31,541       75,104       61,146  

Net income (loss) before income tax expense

    3,686       (8,398 )     (3,629 )     (13,625 )

Income tax expense (benefit)

    4,895       (198 )     (673 )     (1,282 )

Net loss

    (1,209 )     (8,200 )     (2,956 )     (12,343 )

Less: Net income (loss) attributable to nonredeemable non-controlling interest

    779       335       (685 )     932  

Net loss attributable to JMP Group LLC

  $ (1,988 )   $ (8,535 )   $ (2,271 )   $ (13,275 )
                                 

Net loss attributable to JMP Group LLC per common share:

                               

Basic

  $ (0.09 )   $ (0.39 )   $ (0.11 )   $ (0.61 )

Diluted

  $ (0.09 )   $ (0.39 )   $ (0.11 )   $ (0.61 )
                                 

Distributions declared per common share

  $ 0.090     $ 0.090     $ 0.180     $ 0.180  
                                 

Weighted average common shares outstanding:

                               

Basic

    21,537       21,652       21,601       21,612  

Diluted

    21,537       21,652       21,601       21,612  

 

See accompanying notes to consolidated financial statements. 

 

6

 
 

 

JMP Group LLC

Consolidated Statements of Changes in Equity

(Unaudited)

(In thousands)

  

   

JMP Group LLC's Equity

                 
                           

Additional

           

Nonredeemable

         
   

Common Shares

   

Treasury

   

Paid-In

   

Accumulated

   

Non-controlling

         
   

Shares

   

Amount

   

Shares

   

Capital

   

Deficit

   

Interest

   

Total Equity

 

Balance, December 31, 2017

    22,780     $ 23     $ (5,955 )   $ 134,719     $ (32,452 )   $ 13,844     $ 110,179  

Net loss

    -       -       -       -       (2,271 )     (685 )     (2,956 )

Additional paid-in capital - share-based compensation

    -       -       -       484       -       -       484  

Distributions and distribution equivalents declared on common shares and restricted share units

    -       -       -       -       (3,975 )     -       (3,975 )

Purchases of shares of common shares for treasury

    -       -       (1,556 )     -       -       -       (1,556 )

Reissuance of shares of common shares from treasury

    -       -       293       -       -       -       293  
    Surrender of subsidiary shares by non-controlling interest holders     -       -       -       (656 )     -       656       -  

Distributions to non-controlling interest holders

    -       -       -       -       -       (649 )     (649 )

Capital contributions from non-controlling interest holders

    -       -       -       -       -       449       449  

Balance, June 30, 2018

    22,780     $ 23     $ (7,218 )   $ 134,547     $ (38,698 )   $ 13,615     $ 102,269  

 

 

   

JMP Group LLC's Equity

                 
                           

Additional

           

Nonredeemable

         
   

Common Shares

   

Treasury

   

Paid-In

   

Accumulated

   

Non-controlling

         
   

Shares

   

Amount

   

Shares

   

Capital

   

Deficit

   

Interest

   

Total Equity

 

Balance, December 31, 2016

    22,780     $ 23     $ (7,792 )   $ 135,945     $ (8,799 )   $ 15,917     $ 135,294  

Net income (loss)

    -       -       -       -       (13,275 )     932       (12,343 )

Additional paid-in capital - share-based compensation

    -       -       -       1,086       -       -       1,086  

Distributions and distribution equivalents declared on common shares and restricted share units

    -       -       -       -       (3,894 )     -       (3,894 )

Purchases of shares of common shares for treasury

    -       -       (586 )     -       -       -       (586 )

Reissuance of shares of common shares from treasury

    -       -       1,454       -       -       -       1,454  
   Distributions to non-controlling interest holders     -       -       -       -       -       (3,071 )     (3,071 )

Capital contributions from non-controlling interest holders

    -       -       -       -       -       92       92  

Balance, June 30, 2017

    22,780     $ 23     $ (6,924 )   $ 137,031     $ (25,968 )   $ 13,870     $ 118,032  

 

See accompanying notes to consolidated financial statements.

 

7

 
 

 

JMP Group LLC

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

   

Six Months Ended June 30,

 
   

2018

   

2017

 

Cash flows from operating activities:

               

Net loss

  $ (2,956 )   $ (12,343 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Provision for loan losses

    2,745       3,120  

(Gain) loss on sale and payoff of loans and mark-to-market of loans

    332       (930 )

Loss on repurchase, reissuance or early retirement of debt

    2,668       5,332  

Change in other investments:

               

Income from investments in equity method investees

    387       2,130  

Fair value on other equity investments

    (136 )     39  

Realized (gain) loss on other investments

    197       (361 )

Depreciation and amortization

    480       556  

Share-based compensation expense

    778       1,304  

Other

    296       90  

Net change in operating assets and liabilities:

               

Decrease (increase) in interest receivable

    (312 )     1,540  

Increase in receivables

    (8,269 )     (5,494 )

Increase in marketable securities

    (630 )     (2,511 )

Decrease (increase) in deposits and other assets

    5,551       (891 )

Increase (decrease) in marketable securities sold, but not yet purchased

    (2,289 )     1,023  

(Decrease) increase in interest payable

    2,342       (2,594 )

Decrease in accrued compensation

    (17,842 )     (17,419 )

Increase in other liabilities

    2,464       716  

Net cash used in operating activities

    (14,194 )     (26,693 )
                 

Cash flows from investing activities:

               

Purchases of fixed assets

    (580 )     (100 )

Purchases of other investments

    (1,219 )     (1,528 )

Sales of other investments

    11,172       11,076  

Funding of loans collateralizing asset-backed securities issued

    (193,024 )     (510,421 )
       Funding of loans held for sale     -       (2,752 )

Funding of loans held for investment

   
(225,351
)     (256 )
       Repayments of loans held for sale     -       1,784  

Sale, payoff, and principal receipts of loans collateralizing asset-backed securities issued

    172,415       400,532  

Sale, payoff, and principal payments on loans held for investment

    22,106       33,951  

Net changes in cash collateral posted for derivative transactions

    -       23,460  

Net cash used in investing activities

    (214,481 )     (44,254 )

 

See accompanying notes to consolidated financial statements.

 

8

 

 

JMP Group LLC

Consolidated Statements of Cash Flows - (Continued)

(Unaudited)

(In thousands)

 

   

Six Months Ended June 30,

 
   

2018

   

2017

 

Cash flows from financing activities:

               

Proceeds from issuance of Repurchase Agreement

    3,878       -  

Proceeds from drawdowns on CLO V warehouse facility

    177,250       -  

Proceeds from drawdowns on line of credit

    18,000       -  
       Proceeds from sale of note to affiliate     829       -  

Payment of debt issuance costs

    (1,857 )     -  

Repayment of asset-backed securities issued

    (332,100 )     (503,617 )
       Repayment of Repurchase Agreement     (3,878 )     -  

Proceeds of issuance from asset-backed securities issued

    327,605       408,394  
       Reissuance of asset-backed securities     4,453       -  

Distributions and distribution equivalents paid on common shares and RSUs

    (3,975 )     (3,903 )

Capital contributions of nonredeemable non-controlling interest holders

    449       92  

Proceeds from exercise of stock options

    -       905  

Purchase of common shares for treasury

   

(1,525

)     (402 )

Distributions to non-controlling interest shareholders

    (649 )     (3,071 )

Employee taxes paid on shares withheld for tax-withholding purposes

   
(31
    (184 )

Net cash provided by (used in) financing activities

    188,449       (101,786 )

Net decrease in cash, cash equivalents, and restricted cash

    (40,226 )     (172,733 )

Cash, cash equivalents, and restricted cash, beginning of period

    137,321       313,147  

Cash, cash equivalents, and restricted cash, end of period

  $ 97,095     $ 140,414  
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the period for interest

  $ 18,994     $ 18,432  

Cash paid during the period for taxes

  $ 1,660     $ 1,489  
                 

Non-cash investing and financing activities:

               

Reissuance of shares of common share from treasury related to vesting of restricted share units and exercises of share options

  $ 293     $ 1,454  

Distributions declared but not yet paid

  $ 646     $ 648  
       Sale of other investments   $ 1,400     $ -  
       Acquisition of equity securities in restructuring of loans   $ 809     $ -  

 

See accompanying notes to consolidated financial statements. 

 

9

 

 

JMP Group LLC

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

 

1. Organization and Description of Business

 

       JMP Group LLC, together with its subsidiaries (collectively, the “Company”), is a diversified capital markets firm headquartered in San Francisco, California. The Company conducts its brokerage business through JMP Securities LLC (“JMP Securities”) and its asset management business through Harvest Capital Strategies LLC (“HCS”), HCAP Advisors LLC (“HCAP Advisors”), JMP Asset Management LLC (“JMPAM”), and JMP Credit Advisors LLC (“JMPCA”). The Company conducts certain principal investment transactions through JMP Investment Holdings LLC (“JMP Investment Holdings”) and other subsidiaries. The above entities, other than HCAP Advisors, are wholly-owned subsidiaries. JMP Securities is a U.S. registered broker-dealer under the Securities Exchange Act of 1934, as amended (“the Exchange Act”), and is a member of the Financial Industry Regulatory Authority (“FINRA”). JMP Securities operates as an introducing broker and does not hold funds or securities for, or owe any money or securities to customers and does not carry accounts for customers. All customer transactions are cleared through another broker-dealer on a fully disclosed basis. HCS is a registered investment advisor under the Investment Advisers Act of 1940, as amended, and provides investment management services for sophisticated investors in investment partnerships and other entities managed by HCS. HCAP Advisors provides investment advisory services to Harvest Capital Credit Corporation (“HCC”). JMPAM currently manages two fund strategies: one that invests in real estate and real estate-related enterprises and another that provides credit to small and midsized private companies. JMPCA is an asset management platform that underwrites and manages investments in senior secured debt. JMPCA currently manages two collateralized loan obligations (“CLO”) vehicles and one CLO warehouse. The Company completed a Reorganization Transaction in January 2015 pursuant to which JMP Group Inc. became a wholly owned subsidiary of JMP Group LLC (the “Reorganization Transaction”). The Company entered into a Contribution Agreement in November 2017 pursuant to which JMP Group Inc. became a wholly owned subsidiary of JMP Investment Holdings, which is a wholly owned subsidiary of JMP Group LLC. 

 

Recent Transactions

 

      In February 2018, the Company completed a refinancing of the asset back securities issued by JMP Credit Advisors CLO III Ltd ("CLO III"), which lowered the weighted average cost of funds by 55 basis points and extended the reinvestment period for two years. In connection with the refinancing, the Company recorded losses on early retirement of debt related to unamortized debt issuance costs of $2.6 million for the quarter ended March 31, 2018.  

 

 

 

 

2. Summary of Significant Accounting Policies 

 

Basis of Presentation

 

These consolidated financial statements and related notes are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2017 (the “Annual Report”). The results of operations for any interim period are not necessarily indicative of the results to be expected for a full year. In the opinion of management, all normal, recurring adjustments have been included for a fair statement of this interim financial information.

 

The consolidated accounts of the Company include the wholly-owned subsidiaries and the partially-owned subsidiaries of which we are the majority owner or the primary beneficiary. All material intercompany accounts and transactions have been eliminated in consolidation. Non-controlling interests on the Consolidated Statements of Financial Condition as of  June 30, 2018 and December 31, 2017 relate to the interest of third parties in the partially-owned subsidiaries. Certain prior year amounts have been reclassified to conform to current year presentation.

 

See Note 2 - Summary of Significant Accounting Policies in the Company's Annual Report for the Company's significant accounting policies.

 

For the six months ended June 30, 2018, there were no significant changes made to the Company’s significant accounting policies other than those described below. The accounting policy changes are attributable to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Company adopted this standard on January 1, 2018 using a modified retrospective approach. Accordingly, the new revenue standard was applied prospectively in the Company’s financial statements from January 1, 2018 forward and reported financial information for historical comparable periods was not revised and will continue to be reported under the accounting standards in effect during those historical periods.

 

Refer to Note 3, Recent Accounting Pronouncements, for additional information.

 

 

10

 

 

 

3. Recent Accounting Pronouncements

 

 Accounting Standards to be adopted in Future Periods

 

ASU 2016-02, Leases (Topic 842), was issued in February 2016 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing information about leasing arrangements. The standard requires lessees to recognize the assets and liabilities arising from operational leases on the balance sheet. ASU 2016-02 will become effective for fiscal years beginning after December 15, 2018. Upon adoption, the Company expects to recognize its lease agreements as a right-to-use asset with a corresponding lease liability to reflect the present value of the lease payments. The Company is evaluating the impact of the adoption of this standard.

 

ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), was issued in June 2016 to replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This standard will become effective for fiscal years beginning after December 31, 2019. The Company is evaluating the impact of the adoption of this standard.

 

ASU 2017-08Receivables-Nonrefundable Fees and Other Costs (Sub-topic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued in March 2017 to shorten the amortization period for certain purchased callable debt securities held at a premium. It requires the premium to be amortized over the period until the earliest call date. The amendment does not make any changes for securities held at a discount. The new guidance will be effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the impact of the adoption of this standard.

 

Recently Adopted Accounting Guidance

 

ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Sub-topic - 825-10) was issued in February 2018 to address the questions raised by stakeholders to clarify the guidance issued in ASU 2016-01. The Financial Accounting and Standards Board amended the guidance on using the measurement alternative for equity securities without readily determinable fair value and clarifies the presentation requirements for entities that elect the fair value option. The amendments in the update are effective for public business entities for fiscal periods beginning after December 15, 2017, and interim periods beginning after June 15, 2018. The adoption of ASU 2018-03 did not have a material impact on the company's financial statements.

 

ASU 2014-09, Revenue from Contracts with Customers (Topic 606), was issued in May 2014, with subsequent amendments, to provide a more robust framework for addressing revenue issues, and to clarify the implementation guidance on principal versus agent considerations. The standard is effective for annual reporting periods beginning after December 15, 2017 and allows either a full retrospective or modified retrospective approachThe Company adopted this standard on January 1, 2018 using a modified retrospective approach. Accordingly, the new revenue standard will be applied prospectively in the Company’s financial statements from January 1, 2018 forward and reported financial information for historical comparable periods will not be revised and will continue to be reported under the accounting standards in effect during those historical periods. The new standard does not apply to revenue from financial instruments, including loans and securities, and as a result, did not have an impact on revenues closely associated with financial instruments, including principal transactions, interest income, and interest expense. The new standard primarily impacts the presentation of our investment banking revenues, specifically our underwriting revenues, strategic advisory revenues, and private placement fees. Certain investment banking revenues have historically been presented net of related expenses. Under the new standard, revenues and expenses related to investment banking transactions are presented gross in the Consolidated Statements of Operations.

 

For the quarter ended June 30, 2018, there was no significant impact as a result of adoption of the new revenue standard to our consolidated financial statements. The new revenue standard primarily impacted the presentation of our investment banking revenue and expenses. The table below presents the impact to revenues and expenses as a result of the change in presentation of investment banking expenses (in thousands):

 

    Three Months Ended June 30, 2018         Six Months Ended June 30, 2018     

(in thousands)

                                               
   

As Reported

   

ASC 606 Impact

   

Pre-Adoption (1)

   

As Reported

   

ASC 606 Impact

   

Pre-Adoption (1)

 
                                                 

Revenues

                                               

Investment banking

  $ 28,562     $ 2,690     $ 25,872     $ 49,224     $ 4,730     $ 44,494  

Total non-interest revenues

   
41,551
      2,690       38,861      
69,845
      4,730       65,115  

Total net revenues after provision for loan losses

    44,264       2,690       41,574       71,475       4,730       66,745  
                                                 

Expenses

                                               

Travel and business development

    1,202       283       919       2,156       629       1,527  

Managed deal expenses

    2,348       2,348       -       3,914       3,914       -  

Professional fees

    1,138       59       1,079       3,043       187       2,856  

Total non-comp expenses

    11,440       2,690       8,750       21,705       4,730       16,975  

Total non-interest expenses

    40,578       2,690       37,888       75,104       4,730       70,374  

 

 (1)  Amounts reflect each impacted consolidated financial statement line item as they would have been reported under accounting principles generally accepted in the United States of America prior to the adoption of the new revenue standard.     

 

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Sub-topic 825-10), was issued in January 2016. The amendments address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. They require equity securities that are neither accounted by equity method nor consolidated to be measured at fair value with changes of fair values recognized as net income. Those equity securities that do not have readily determinable fair value  may be measured at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. In addition, the amendments simplify the impairment assessment of equity investments without determinable fair values by requiring a qualitative assessment at each reporting period. This standard was effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of ASU 2016-01 did not have a material impact on the Company’s financial statements.

 

ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230), was issued in August 2016 to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This standard addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this standard are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of ASU 2016-15 did not have a material impact on the Company’s financial statements.

 

ASU 2016-16, Income Taxes (Topic 740), was issued in October 2016 to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory and to reduce the complexity/cost in accounting standards. The Financial Accounting Standards Board decided to recognize the income tax consequences to intra-entity transfers when the transfer occurs. The amendment is effective for annual reporting periods beginning after December 15, 2017 including interim reporting periods within those annual reporting periods. Early adoption is permitted and is applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. The adoption of ASU 2016-16 did not have a material impact on the Company’s financial statements.

 

ASU 2016-18, Statement of Cash Flows (Topic 230addresses the diversity that exists in the classification and presentation of changes in restricted cash and transfers between cash and restricted cash on the statement of cash flows. The amendment applies to all entities that report restricted cash or restricted cash equivalents and present a statement of cash flows. The provisions of this update require the explanation of the changes during the period. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Additionally, early adoption is permitted with a retrospective transition method and all adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The adoption of ASU 2016-18 resulted in a decrease of cash provided by operating activities of $2.4 million and a decrease in cash provided by investing activities of $173.6 million for the six months ended June 30, 2017.

 

11

 

 

 

4. Fair Value Measurements

 

The following tables provide fair value information related to the Company’s financial instruments at June 30, 2018 and December 31, 2017:

 

   

 June 30, 2018

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 50,402     $ 50,402     $ -     $ -     $ 50,402  

Restricted cash and deposits

    46,693       46,693       -       -       46,693  

Marketable securities owned

    21,455       21,455       -       -       21,455  

Other investments (1)

    1,250       -       1,250       -       1,250  

Other investments measured at net asset value (1)

    9,137       -       -       -       -  

Loans held for investment, net of allowance for loan losses

    285,846       -       284,353       2,669       287,022  

Loans collateralizing asset-backed securities issued, net of allowance for loan losses

    784,663       -       786,482       -       786,482  

Total assets:

  $ 1,199,446     $ 118,550     $ 1,072,085     $ 2,669     $ 1,193,304  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 5,630     $ 5,630     $ -     $ -     $ 5,630  
Notes payable     18,829       -       18,829       -       18,829  

Asset-backed securities issued

    739,912       -       744,162       -       744,162  

Bond payable

    93,145       96,323       -       -       96,323  

CLO V warehouse credit facility

    238,500       -       238,500       -       238,500  

Total liabilities:

  $ 1,096,016     $ 101,953     $ 1,001,491     $ -     $ 1,103,444  

 

 

   

 December 31, 2017

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 85,594     $ 85,594     $ -     $ -     $ 85,594  

Restricted cash and deposits

    51,727       51,727       -       -       51,727  

Marketable securities owned

    20,825       20,825       -       -       20,825  
    Receivable from clearing broker     6,801       6,801       -               6,801  

Other investments (1)

    10,226       -       10,226       -       10,226  

Other investments measured at net asset value (1)

    8,224       -       -       -       -  

Loans held for investment, net of allowance for loan losses

    83,948       -       80,956       3,342       84,298  

Loans collateralizing asset-backed securities issued, net of allowance for loan losses

    765,583       -       766,298       -       766,298  

Total assets:

  $ 1,032,928     $ 164,947     $ 857,480     $ 3,342     $ 1,025,769  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 7,919     $ 7,919     $ -     $ -     $ 7,919  

Asset-backed securities issued

    738,248       -       748,015       -       748,015  

Bond payable

    93,103       -       97,014       -       97,014  
   CLO V warehouse credit facility     61,250       -       61,250       -       61,250  

Total liabilities:

  $ 900,520     $ 7,919     $ 906,279     $ -     $ 914,198  

 

 

(1)

In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. The carrying values of these lines reconciles to the parenthetical disclosure of other investments on the Consolidated Statements of Financial Condition.

 

Recurring Fair Value Measurement

 

The following tables provide information related to the Company’s assets and liabilities carried at fair value on a recurring basis at June 30, 2018 and December 31, 2017: 

 

(In thousands)

         

June 30, 2018

 
   

Carrying Value

   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                         

Marketable securities owned

  $ 21,455     $ 21,455     $ -     $ -     $ 21,455  

Other investments:

                                       

Investments in hedge funds managed by the Company

    1,250       -       1,250       -       1,250  

Investments in other funds managed by the Company (1)

    4,841       -       -       -       -  

Total investment in funds managed by the Company (1)

    6,091       -       1,250       -       1,250  

Limited partnership in investments in private equity/ real estate funds (1)

    4,296       -       -       -       -  

Total other investments

    10,387       -       1,250       -       1,250  

Total assets:

  $ 31,842     $ 21,455     $ 1,250     $ -     $ 22,705  
                                         

Marketable securities sold, but not yet purchased

  $ 5,630     $ 5,630     $ -     $ -     $ 5,630  
                                         

Total liabilities:

  $ 5,630     $ 5,630     $ -     $ -     $ 5,630  

 

 

(1)

In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. The carrying values of these lines reconciles to the parenthetical disclosure of other investments on the Consolidated Statements of Financial Condition.

 

12

 

 

 

(In thousands)

         

December 31, 2017

 
   

Carrying Value

   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                         

Marketable securities owned

  $ 20,825     $ 20,825     $ -     $ -     $ 20,825  

Other investments:

                                       

Investments in hedge funds managed by the Company

    10,226       -       10,226       -       10,226  
    Investments in other funds managed by the Company (1)     4,463       -       -       -       -  

Total investment in funds managed by the Company (1)

    14,689       -       10,226       -       10,226  

Limited partnership in investments in private equity/ real estate funds (1)

    3,761       -       -       -       -  

Total other investments

    18,450       -       10,226       -       10,226  

Total assets:

  $ 39,275     $ 20,825     $ 10,226     $ -     $ 31,051  
                                         

Marketable securities sold, but not yet purchased

  $ 7,919     $ 7,919     $ -     $ -     $ 7,919  
                                         

Total liabilities:

  $ 7,919     $ 7,919     $ -     $ -     $ 7,919  

 

 

(1)

In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. The carrying values of these lines reconciles to the parenthetical disclosure of other investments on the Consolidated Statements of Financial Condition.

 

 

Transfers between levels of the fair value hierarchy result from changes in the observability of fair value inputs used in determining fair values for different types of financial assets and are recognized at the beginning of the reporting period in which the event or change in circumstances that caused the transfer occurs. The Company’s policy is to recognize the fair value of transfers among Levels 1, 2 and 3 as of the end of the reporting period. For recurring fair value measurements, there were no transfers between Levels 1, 2 and 3 for the three and six months ended June 30, 2018 and year ended December 31, 2017.

 

The Company’s Level 2 assets held in other investments consist of investments in hedge funds managed by HCS. The carrying value of investments in hedge funds is calculated using the equity method and approximates fair value. Earnings or losses attributable to these investments are recorded in principal transactions. These assets are considered Level 2 as the underlying hedge funds are mainly invested in publicly traded stocks whose value is based on quoted market prices. The Company’s proportionate share of those investments is included in the tables above.

 

The investments in private equity funds managed by HCS and JMPAM are recognized using the fair value option. The Company uses the reported net asset value per share as a practical expedient to estimate the fair value of the funds. The risks associated with these investments are limited to the amounts of invested capital, remaining capital commitment and any management and incentive fees receivable.

 

The Company determined the fair value of short-term debt, which includes notes payable and the CLO V warehouse credit facility, to approximate their carrying values. This was determined as the debt has either (1) a variable interest rate tied to LIBOR and therefore reflects market conditions, or (2) a term less than one year and there have been no observable changes in the credit quality of the Company since the issuance of the debt. Based on the fair value methodology, the Company has identified short-term debt as Level 2 liabilities.

 

The Company determined the fair value of loans collateralizing asset-backed securities and loans held for investment identified as Level 2 assets primarily using the average market bid and ask quotation obtained from a loan pricing service. The valuations are received from a pricing service to which the Company subscribes. The pricing service's analysis incorporates comparable loans traded in the marketplace, the obligors industry, future business prospects, capital structure, and expected credit losses. Significant declines in the performance of the obligor would result in decrease to the fair value measurement. The fair value of loans held for investment identified as Level 3 assets are determined using the discounted cash flow model using the treasury rate, loan interest rate, and an internally generated risk rate.

 

The Company determined the fair value of asset-backed securities issued based upon pricing from published market research for equivalent-rated CLO notes. Based on the fair value methodology, the Company has identified the asset-backed securities issued as Level 2 liabilities.

 

As of June 30, 2018 and December 31, 2017, $9.1 million and $7.9 million, respectively, of assets were measured using the net asset value as a practical expedient. Investments for which fair value was estimated using net asset value as a practical expedient were as follows:

 

   

 

   

 

   

Fair Value at

   

Unfunded Commitments

 

Dollars in thousands

 

Redemption

Frequency

   

Redemption

Notice Period

   

June 30, 2018

   

December 31, 2017

   

June 30, 2018

   

December 31, 2017

 
                                                

Limited partner investments in private equity/real estate funds

 

Nonredeemable

      N/A     $ 4,296     $ 3,761     $ 504     $ 1,235  

Investment in other funds managed by the Company

 

Nonredeemable

      N/A     $ 4,841     $

4,173

    $ -     $ -  

 

Non-recurring Fair Value Measurements

 

The Company's assets that are measured at fair value on a non-recurring basis result from the application of lower of cost or market accounting or write-downs of individual assets. The Company held loans measured at fair value on a non-recurring basis of $0.9 million and $2.0 million as of June 30, 2018 and December 31, 2017, respectively.

 

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Loans Held for Investment

 

 At June 30, 2018 and December 31, 2017, loans held for investment outside of the CLO portfolios were five and ten, respectively. The Company reviews credit quality of these loans within this portfolio segment on a loan by loan basis mainly focusing on the borrower’s financial position and results of operations as well as the current and expected future cash flows on the loans. In addition, as of June 30, 2018, the Company held $280.7 million of loans held for investment in the CLO V warehouse portfolio. The credit quality of the CLO V warehouse loans is evaluated in the same manner as the credit quality of loans collateralizing asset-backed securities issued. 

 

There were no loans past due as of June 30, 2018 and one loan past due as of December 31, 2017. A summary of activity in loan losses for the three and six months ended June 30, 2018 and 2017 is as follows:

 

(in thousands)

 

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 
   

Impaired

   

Non-impaired

   

Impaired

   

Non-impaired

   

Impaired

   

Non-impaired

   

Impaired

   

Non-impaired

 

Balance, at beginning of the period

  $ (205 )   $ (858 )   $ (1,534 )   $ -     $ (2,279 )   $ (494 )   $ (823 )   $ -  

Provision for loan losses

                                                               

Specific

    -       -       -       -       (205 )     -       (711 )     -  

General

    -       (914 )     -       -       -       (1,278 )     -       -  

Charge off

    205       26       380       -       2,484       26       380       -  
Transfer for loans collateralizing asset-backed securities     -       -       -       (513 )     -       -       -       (513 )

Balance, at end of the period

  $ -     $ (1,746 )   $ (1,154 )   $ (513 )   $ -     $ (1,746 )   $ (1,154 )   $ (513 )

 

A loan is considered to be impaired when, based on current information, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the original loan agreement, including scheduled principal and interest payments. The Company classified all of its loans as Cash Flow loans, as their funding decisions were all primarily driven by the cash flows of the borrower. There were no specifically impaired loans as of June 30, 2018. $1.4 million of recorded investment amount of loans issued were individually evaluated for impairment as of December 31, 2017The table below presents certain information pertaining to the loans on non-accrual status as of December 31, 2017:

 

   

Recorded

Investment

   

Unpaid

Principal

   

Related

Allowance

   

Average

Recorded

Investment

   

Interest

Income

Recognized

 

December 31, 2017

                                       

Impaired loans with an allowance recorded

  $ 1,379     $ 1,448     $ 391     $ 1,411     $ 32  

Impaired loans with no related allowance recorded

    -       -       -       -       -  

Total impaired loans

  $ 1,379     $ 1,448     $ 391     $ 1,411     $ 32  

 

The Company's management, at least on a quarterly basis, reviews each loan and evaluates the credit quality of the loan. The review primarily includes the following credit quality indicators with regard to each loan: 1) Moody's rating, 2) current internal rating, 3) trading price of the loan, and 4) performance of the obligor. The tables below present, by credit quality indicator, the Company's recorded investment in loans held for investment at June 30, 2018 and December 31, 2017:

 

(In thousands)

 

Held for Investment -
Cash Flow (CF)

 
   

June 30,

   

December 31,

 
   

2018

   

2017

 
                 

Moody's rating:

               

Baa1 - Baa3

  $ -     $  

Ba1 - Ba3

    57,848       12,174  

B1 - B3

    222,665       64,170  

Caa1 - Caa3

    4,452       5,310  

Not Rated

    2,669       4,595  

Total:

  $ 287,634     $ 86,249  
                 

Internal rating (1) :

               
2   $ 277,606     $ 77,525  
3     5,110       384  
4     2,499       2,613  
5     -       1,379  

Not rated

    2,419       4,348  

Total:

  $ 287,634     $ 86,249  
                 

Performance:

               

Performing

  $ 287,619     $ 83,161  

Non-performing

    15       3,088  

Total:

  $ 287,634     $ 86,249  

 

(1)

Loans with an internal rating of 3 or below are reviewed individually to identify loans to be designated for non-accrual status. 

 

14

 

 

 

5. Loans Collateralizing Asset-backed Securities Issued

 

Allowance for Loan Losses

 

A summary of the activity in the allowance for loan losses for the three and six months ended June 30, 2018 and 2017 is as follows:

 

(In thousands)

 

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 
   

Impaired

   

Non-Impaired

   

Impaired

   

Non-Impaired

   

Impaired

   

Non-Impaired

   

Impaired

   

Non-Impaired

 

Balance at beginning of period

  $ (1,209 )   $ (6,492 )   $ (1,908 )   $ (5,187 )   $ (390 )   $ (6,533 )   $ (937 )   $ (5,783 )

Provision for loan losses:

                                                               

Specific reserve

    -       -       (542 )     -       (953 )     -       (1,513 )     -  

General reserve

    -       (369 )     -       (1,290 )     -       (328 )     -       (874 )
Transfer to loans held for investment     -       -       1,239       -       -       -       1,239       -  

Charge off

    1,099       -       -       -       1,233       -       -       180  

Balance at end of period

  $ (110 )   $ (6,861 )   $ (1,211 )   $ (6,477 )   $ (110 )   $ (6,861 )   $ (1,211 )   $ (6,477 )

 

Impaired Loans, Non-Accrual, Past Due Loans and Restructured Loans

 

A loan is considered to be impaired when, based on current information, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the original loan agreement, including scheduled principal and interest payments. As of June 30, 2018 and December 31, 2017, $0.9 million and $1.4 million of the recorded investment amount in loans collateralizing asset-backed securities issued were individually evaluated for impairment. The remaining $790.7 million and $771.1 million of recorded investment amount of loans collateralizing asset-backed securities issued were collectively evaluated for impairment as of June 30, 2018 and December 31, 2017, respectively.

 

As of June 30, 2018 and December 31, 2017, the Company classified all its loans as Cash Flow loans, as their funding decisions were all primarily driven by the cash flows of the borrower. The table below presents certain information pertaining to the loans on non-accrual status at June 30, 2018 and December 31, 2017:

 

(In thousands)

 

Recorded

Investment

   

Unpaid Principal

Balance

   

Related

Allowance

   

Average

Recorded

Investment

   

Interest Income

Recognized

 

June 30, 2018

                                       

Impaired loans with an allowance recorded

  $ 864     $ 943     $ 110     $ 1,039     $ -  

Impaired loans with no related allowance recorded

    -       -       -       -       -  
Total Impaired Loans   $ 864     $ 943     $ 110     $ 1,039     $ -  
                                         

December 31, 2017

                                       

Impaired loans with an allowance recorded

  $ 1,379     $ 1,448     $ 391     $ 1,411     $ 32  

Impaired loans with no related allowance recorded

    -       -       -       -       -  
Total Impaired Loans   $ 1,379     $ 1,448     $ 391     $ 1,411     $ 32  

 

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. No loans were past due at June 30, 2018 or December 31, 2017. There was no troubled debt restructuring for the three and six months ended June 30, 2017.

 

During the three and six months ended June 30, 2018, the Company had two loans, which were modified in a troubled debt restructuring. The two loans were held under the same borrower. The loans, with a principal balance and a carrying balance of $ 1.9 million and $1.0 million in total, respectively, were converted to equity. The Company valued the equity at $0.8 million in total upon conversion and incurred a loss of $0.1 million in relation to the re