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 March 31, 2019 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

 

 

 

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. ☐

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

  Trading symbol  

Name of Each Exchange on Which Registered

Shares representing limited liability company interests in JMP Group LLC

 

JMP

 

New York Stock Exchange

JMP Group Inc. 8.00% Senior Notes due 2023   JMPB   New York Stock Exchange
JMP Group Inc. 7.25% Senior Notes due 2027   JMPD   New York Stock Exchange

 

 

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 May 14, 2019: 21,102,170.

 



 

 

 
 

 

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 – March 31, 2019 (Unaudited) and December 31, 2018

4

 

Consolidated Statements of Operations - For the Three Months Ended March 31, 2019 and 2018 (Unaudited)

6

 

Consolidated Statements of Changes in Equity - For the Three Months Ended March 31, 2019 and 2018 (Unaudited)

8

 

Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 2019 and 2018 (Unaudited)

9

 

Notes to Consolidated Financial Statements (Unaudited)

11

Item 2.

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

36

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

56

Item 4.

Controls and Procedures

56

     

PART II.

OTHER INFORMATION

57

     

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 3.

Defaults Upon Senior Securities

58

Item 4.

Mine Safety Disclosures

58

Item 5.

Other Information

58

Item 6.

Exhibits

58

   

SIGNATURES

59

   

EXHIBIT INDEX

60

 

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"). 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. 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)

 

 

   

March 31, 2019

   

December 31, 2018

 

Assets

               

Cash and cash equivalents

  $ 41,909     $ 70,927  

Restricted cash

    1,221       61,881  

Investment banking fees receivable

    5,608       6,647  

Marketable securities owned (includes $78,557 and $18,484 at fair value at March 31, 2019 and December 31, 2018, respectively)

    92,190       18,874  

Other investments (includes $13,530 and $9,913 at fair value at March 31, 2019 and December 31, 2018, respectively)

    23,447       16,124  

Loans held for investment, net of allowance for loan losses

    4,962       29,608  

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

    -       1,161,463  

Interest receivable

    311       3,004  

Fixed assets, net

    2,575       2,351  

Operating lease right-of-use asset

    22,104       -  

Other assets

    27,438       20,363  

Total assets

  $ 221,765     $ 1,391,242  
                 

Liabilities and Equity

               

Liabilities:

               

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

  $ 2,696     $ 4,626  

Accrued compensation

    5,647       41,609  

Asset-backed securities issued (net of debt issuance costs of $8,979 at December 31, 2018)

    -       1,112,342  

Interest payable

    1,035       11,210  

Note payable

    829       829  

CLO warehouse credit facilities

    -       22,500  

Bond payable (net of debt issuance costs of $2,325 and $2,428 at March 31, 2019 and December 31, 2018, respectively)

    83,600       83,497  

Operating lease liability

    27,470       -  

Other liabilities

    14,041       17,423  

Total liabilities

    135,318       1,294,036  
                 

Commitments and Contingencies (Note 16)

               

JMP Group LLC Shareholders' Equity

               

Common shares, $0.001 par value, 100,000,000 shares authorized; 22,780,052 shares issued at both March 31, 2019 and December 31, 2018; 21,210,107 and 21,319,720 shares outstanding at March 31, 2019 and December 31, 2018, respectively

    23       23  

Additional paid-in capital

    134,234       134,129  

Treasury shares at cost, 1,569,945 and 1,460,332 shares at March 31, 2019 and December 31, 2018, respectively

    (8,328 )     (7,932 )

Accumulated other comprehensive loss

    (782 )     -  

Accumulated deficit

    (38,514 )     (42,513 )

Total JMP Group LLC shareholders' equity

    86,633       83,707  

Nonredeemable Non-controlling Interest

    (186 )     13,499  

Total equity

    86,447       97,206  

Total liabilities and equity

  $ 221,765     $ 1,391,242  


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:

 

   

March 31, 2019

   

December 31, 2018

 
                 

Restricted cash

  $ -     $ 50,456  

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

    -       1,161,463  

Interest receivable

    -       2,711  

Other investments

    -       821  

Other assets

    -       67  

Total assets of consolidated VIEs

  $ -     $ 1,215,518  
                 

Asset-backed securities issued, net of debt issuance costs

    -       1,122,187 (1) 

Interest payable

    -       10,132  

Other liabilities

    -       1,877  

Total liabilities of consolidated VIEs

  $ -     $ 1,134,196  

 

(1) Includes $9.8 million of debt held by the Company which is eliminated on the Consolidated Statements of Financial Condition.

 

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 March 31,

 
   

2019

   

2018

 
                 

Revenues

               

Investment banking

  $ 11,879     $ 20,662  

Brokerage

    4,535       4,664  

Asset management fees

    1,703       6,425  

Principal transactions

    5,288       (3,620 )

Loss on sale, payoff and mark-to-market of loans

    (17 )     (182 )

Net dividend income

    296       296  

Other (loss) income

    (35 )     49  

Non-interest revenues

    23,649       28,294  
                 

Interest income

    14,291       12,710  

Interest expense

    (10,773 )     (9,702 )

Net interest income

    3,518       3,008  
                 

Loss on repurchase, reissuance or early retirement of debt

    -       (2,626 )

Provision for loan losses

    -       (1,465 )

Total net revenues after provision for loan losses

    27,167       27,211  
                 

Non-interest expenses

               

Compensation and benefits

    17,222       24,261  

Administration

    1,929       2,233  

Brokerage, clearing and exchange fees

    701       777  

Travel and business development

    1,021       954  

Managed deal expenses

    533       1,566  

Communications and technology

    1,053       1,062  

Occupancy

    1,423       1,117  

Professional fees

    1,456       1,905  

Depreciation

    297       264  

Other

    495       387  

Total non-interest expenses

    26,130       34,526  

Net income (loss) before income tax expense

    1,037       (7,315 )

Income tax benefit

    (4,102 )     (5,568 )

Net income (loss)

    5,139       (1,747 )

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

    70       (1,464 )

Net income (loss) attributable to JMP Group LLC

  $ 5,069     $ (283 )
                 

Net income (loss) attributable to JMP Group LLC per common share:

               

Basic

  $ 0.24     $ (0.01 )

Diluted

  $ 0.24     $ (0.01 )
                 

Weighted average common shares outstanding:

               

Basic

    21,288       21,666  

Diluted

    21,429       21,666  

 

See accompanying notes to consolidated financial statements.

 

6

 
 

 

JMP Group LLC

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands, except per share data)

 

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 

Net income (loss)

    5,139       (1,747 )

Other comprehensive loss:

               

Unrealized loss on available-for-sale securities, net of tax

    (782 )     -  

Comprehensive income (loss) attributable to JMP Group LLC

    4,357       (1,747 )

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

    70       (1,464 )

Comprehensive income (loss) attributable to JMP Group LLC

    4,287       (283 )

 

 

See accompanying notes to consolidated financial statements. 

 

7

 

 

 

 

JMP Group LLC

Consolidated Statements of Changes in Equity

(Unaudited)

(In thousands)

 

 

 

   

JMP Group LLC's Equity

                 
                           

Additional

           

Accumulated

   

Nonredeemable

         
   

Common Shares

   

Treasury

   

Paid-In

   

Accumulated

   

Other Comprehensive

   

Non-controlling

         
   

Shares

   

Amount

   

Shares

   

Capital

   

Deficit

   

Loss

   

Interest

   

Total Equity

 

Balance, December 31, 2018

    22,780     $ 23     $ (7,932 )   $ 134,129     $ (42,513 )   $ -     $ 13,499     $ 97,206  

Net income

    -       -       -       -       5,069       -       70       5,139  

Additional paid-in capital - share-based compensation

    -       -       -       144       -       -       -       144  

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

    -       -       -       -       (1,070 )     -       -       (1,070 )

Purchases of shares of common shares for treasury

    -       -       (753 )     -       -       -       -       (753 )

Reissuance of shares of common shares from treasury

    -       -       357       (39 )     -       -       -       318  

Distributions to non-controlling interest holders

    -       -       -       -       -       -       (913 )     (913 )

Derecognition of non-controlling interest due to deconsolidation

    -       -       -       -       -       -       (12,842 )     (12,842 )

Unrealized loss on available-for-sale securities, net of tax

    -       -       -       -       -       (782 )     -       (782 )

Balance, March 31, 2019

    22,780     $ 23     $ (8,328 )   $ 134,234     $ (38,514 )   $ (782 )   $ (186 )   $ 86,447  

 

 

 

 

   

JMP Group LLC's Equity

                 
                           

Additional

           

Accumulated

   

Nonredeemable

         
   

Common Shares

   

Treasury

   

Paid-In

   

Accumulated

   

Other Comprehensive

   

Non-controlling

         
   

Shares

   

Amount

   

Shares

   

Capital

   

Deficit

   

Loss

   

Interest

   

Total Equity

 

Balance, December 31, 2017

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

Net loss

    -       -       -       -       (283 )     -       (1,464 )     (1,747 )

Additional paid-in capital - share-based compensation

    -       -       -       365       -       -       -       365  

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

    -       -       -       -       (2,038 )     -       -       (2,038 )

Purchases of shares of common shares for treasury

    -       -       (1,044 )     -       -       -       -       (1,044 )

Reissuance of shares of common shares from treasury

    -       -       83       -       -       -       -       83  

Distributions to non-controlling interest holders

    -       -       -       -       -       -       (108 )     (108 )

Capital contributions from non-controlling interest holders

    -       -       -       -       -       -       446       446  

Balance, March 31, 2018

    22,780     $ 23     $ (6,916 )   $ 135,084     $ (34,773 )   $ -     $ 12,718     $ 106,136  

 

 

 

See accompanying notes to consolidated financial statements.

 

8

 
 

 

JMP Group LLC

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net income (loss)

  $ 5,139     $ (1,747 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities

               

Provision for loan losses

    -       1,465  

Loss on sale and payoff of loans and mark-to-market of loans

    -       182  

Loss on repurchase, reissuance or early retirement of debt

    -       2,626  

Change in other investments:

               

Income from investments in equity method investees

    46       2,021  

Unrealized loss (gain) on other equity investments

    -       318  

Unrealized (gain) loss on other investments

    (1,192 )     278  

Depreciation and amortization

    1,827       251  

Share-based compensation expense

    462       448  

Gain on deconsolidation

    (3,520 )     -  

Other, net

    76       (79 )

Net change in operating assets and liabilities:

               

Increase in interest receivable

    (4,838 )     (180 )

Decrease in receivables

    1,039       1,413  

Decrease in marketable securities

    3,563       1,185  

Decrease (increase) in deposits and other assets

    (7,978 )     1,077  

Decrease in marketable securities sold, but not yet purchased

    (1,930 )     (1,639 )

Decrease in interest payable

    (3,548 )     (469 )

Decrease in accrued compensation

    (35,695 )     (33,067 )

Increase in other liabilities

    3,171       3,535  

Net cash used in operating activities

    (43,378 )     (22,382 )
                 

Cash flows from investing activities:

               

Purchases of fixed assets

    (637 )     (111 )

Purchases of other investments

    (844 )     (994 )

Sales or distributions from other investments

    8,312       768  

Funding of loans collateralizing asset-backed securities issued

    (35,153 )     (72,642 )

Funding of loans held for investment

    (25,102 )     (63,245 )

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

    23,806       82,909  

Sale, payoff and principal receipts of loans held for investment

    6,876       1,431  

Net decrease in cash and restricted cash due to deconsolidation of subsidiaries

    (27,771 )     -  

Net cash used in investing activities

    (50,513 )     (51,884 )
                 

See accompanying notes to consolidated financial statements.

 

9

 

 

JMP Group LLC

Consolidated Statements of Cash Flows - (Continued)

(Unaudited)

(In thousands)

 

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 

Cash flows from financing activities:

               

Proceeds from issuance of repurchase agreement

    -       3,878  

Proceeds from drawdowns on line of credit

    -       8,000  

Proceeds from drawdowns on CLO warehouse facilities

    7,750       51,550  

Proceeds from sale of note payable to affiliate

    -       829  

Payment of debt issuance costs

    -       (1,837 )

Repayment of asset-backed securities issued

    (801 )     (332,100 )

Proceeds of issuance from asset-backed securities issued

    -       327,646  

Distributions and distribution equivalents paid on common shares and RSUs

    (1,070 )     (2,038 )

Capital contributions of nonredeemable non-controlling interest holders

    -       445  

Purchase of common shares for treasury

    (669 )     (1,044 )

Distributions to non-controlling interest shareholders

    (913 )     (108 )

Employee taxes paid on shares withheld for tax-withholding purposes

    (84 )     -  

Net cash provided by financing activities

    4,213       55,222  

Net decrease in cash, cash equivalents, and restricted cash

    (89,678 )     (19,044 )

Cash, cash equivalents and restricted cash, beginning of period

    132,808       137,321  

Cash, cash equivalents and restricted cash, end of period

  $ 43,130     $ 118,277  
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the period for interest

  $ 14,321     $ 10,171  

Cash paid during the period for taxes

  $ 89     $ -  
                 

Non-cash investing and financing activities:

               

Reissuance of shares of common share from treasury related to

               

vesting of restricted share units

  $ 357     $ 83  

Distributions declared but not yet paid

  $ 640     $ 646  

Acquisition of equity securities in restructuring of loans

  $ 259     $ -  

Initial recognition of operating lease right-of-use assets

  $ 23,604     $ -  

Initial recognition of operating lease liabilities

  $ 29,278     $ -  

Carrying value of noncash assets derecognized on deconsolidation of subsidiaries

  $ 1,226,848     $ -  

Carrying value of noncash liabilities derecognized on deconsolidation of subsidiaries

  $ 1,161,933     $ -  

Carrying value of non-controlling interest derecognized on deconsolidation of subsidiaries

  $ 12,842     $ -  

Fair value of marketable securities recognized on deconsolidation of subsidiaries

  $ 76,879     $ -  

Fair value of other investments recognized on deconsolidation of subsidiaries

  $ 7,516     $ -  
                 
                 
                 
                 
                 
                 
                 

See accompanying notes to consolidated financial statements. 

 

10

 

 

JMP Group LLC

Notes to Consolidated Financial Statements

March 31, 2019

(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 investment banking and institutional 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”) JMP Credit Advisors LLC ("JMPCA") (through March 19, 2019). 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 four collateralized loan obligations (“CLO”) vehicles. 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

 

On January 17, 2019, the non-call period of JMP Credit Advisors CLO III Ltd. (“CLO III”) expired, which resulted in a change in the entity with the control over the most significant activities of the variable interest entity (“VIE”). Previously the Company concluded that it was the primary beneficiary of CLO III through its combination of control over the manager and its economic interest in CLO III. When the non-call period expired, an election of the majority holders of the subordinated notes can refinance or liquidate the CLO and this ability has been determined to be the most significant activity. The expiration of the non-call period resulted in the Company losing control over the most significant activities of CLO III as it cannot unilaterally direct this activity. The Company deconsolidated CLO III as of January 17, 2019. The Company continues to hold approximately 47% of the outstanding subordinated notes of CLO III and accounts for its ownership of the CLO III subordinated notes as an investment in a debt security. The Company has classified the subordinated notes as held-to-maturity. The Company recognized a gain of $1.6 million as revenue from principal transactions on the deconsolidation of CLO III for the three months ended March 31, 2019

 

On March 19, 2019, the Company sold a 50.1% equity interest in JMPCA to Medalist Partners LP (“Medalist”), an alternative asset management firm specializing in structured credit and asset-backed lending, and a 4.9% interest to management employees of JMPCA. The Company retained 45.0% of the equity interest in JMPCA. The sale of JMPCA was considered a reconsideration event as defined in Accounting Standard Codification (“ASC”) 810, Consolidation, which requires a new consolidation analysis, and the Company determined that JMPCA is a VIE after the transaction date. The Company determined that it is not the primary beneficiary of JMPCA as the Company is not the party with the power to direct the most significant activities of JMPCA. As the Company was determined that it is not the primary beneficiary, the Company deconsolidated JMPCA as of the date of sale. As the Company retained 45.0% of the equity interest of JMPCA and has significant influence, the Company has determined that it is required to account for its retained interest as an equity method investment, however the Company has made the election to apply the fair value option to this investment. The Company received a cash payment of $0.3 million in consideration for the limited liability company interest and recorded a gain of $3.4 million on deconsolidation as revenue from principal transactions. The Company will receive a portion of the subordinated management fees from the CLOs JMPCA currently manages and from CLO VI once it securitizes. After the sale, JMPCA was renamed Medalist Partners Corporate Finance LLC.

 

The sale of JMPCA also required Medalist to provide additional capital to purchase preference shares in JMP Credit Advisors Long-Term Warehouse Ltd (“CLO VI”) to finance the acquisition of broadly syndicated corporate loans. On March 19, 2019, Medalist related entities purchased 66% of the outstanding preference shares of CLO VI on March 19, 2019 for $7.6 million. There was no gain or loss recognized on the sale of the preference shares.

 

After the sale of JMPCA, the Company lost the ability to direct the most significant activities of the following VIEs: JMP Credit Advisors CLO IV Ltd (“CLO IV”), JMP Credit Advisors CLO V Ltd (“CLO V”), and CLO VI (collectively with CLO III the “CLOs”) and as a result, deconsolidated those CLOs as of March 19, 2019. Previously the Company concluded that it was the primary beneficiary of CLO IV, CLO V, and CLO VI warehouse through its control over JMPCA and its ownership of 100% of the equity tranches or preference shares of these CLOs. The Company continues to hold 100% of the junior subordinated notes of CLO IV and CLO V, 100% and 25% of the senior subordinated notes of CLO IV and CLO V, respectively, and 33% of the preference shares of CLO VI as of March 31, 2019. The Company accounts for its ownership of the subordinated notes as an investment in a debt security and accounts for its ownership of the CLO VI preference shares as an equity investment. The Company will classify the junior subordinated notes as available-for-sale securities and will classify the senior subordinated notes as trading securities. Collectively, the Company recognized a loss on the deconsolidation of CLO IV, CLO V, and CLO VI of $1.9 million for the three months ended March 31, 2019 in revenues from principal transactions

 

The deconsolidation of the CLOs and JMPCA was accounted for based on the guidance in ASC 810, Consolidation. According to that guidance, the gain or loss on deconsolidation is calculated as the difference between (i) the aggregate of the fair value of the retained interest in the former subsidiaries, the fair value of any consideration received, and the carrying value of the non-controlling interest in the former subsidiaries; and (ii) the carrying value of the assets and liabilities of the former subsidiaries. The gain recognized by the Company is primarily the result of the remeasurement of the retained interest in the CLOs and JMPCA. The difference between these was recorded as a gain on deconsolidation in the Consolidated Statement of Operations under principal transactions revenue. The following table represents the consideration received, the fair value of the retained interest, and the resulting gain on deconsolidation of the CLOs and JMPCA:

 

Cash received:

  $ 7,942  

Retained interest, at fair value (1)

    74,989  

Non-controlling interest, at carrying value

    12,842  
Total of consideration received, retained interest, and non-controlling interest   $ 95,773  

Less:

       

Net assets of deconsolidated subsidiaries at carrying value (2)

    92,581  

Gain on deconsolidation

  $ 3,192  

 

(1) The fair value of the Company's retained interest in CLO III, CLO IV, CLO V, CLO VI, and JMPCA as of the deconsolidation date was $13.3 million, $27.8 million, $26.5 million, $3.8 million, and $3.6 million, respectively
(2) The book value of the net assets of CLO III, CLO IV, CLO V, CLO VI, and JMPCA as of the deconsolidation date was $24.5 million, $30.2 million, $25.8 million, $11.6 million, and $0.5 million, respectively

 

See Item 5 of this Form 10-Q for the pro forma information on the sale of JMPCA and the resulting deconsolidation of JMPCA, CLO III, CLO IV, CLO V, and CLO VI.

 

 

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, 2018 (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 at March 31, 2019 and December 31, 2018 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 three months ended March 31, 2019, there were no significant changes made to the Company’s significant accounting policies other than those described below and the accounting policy changes are attributable to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The Company adopted this standard on January 1, 2019 using a modified retrospective approach. Accordingly, the new leasing standard was applied prospectively in the Company’s financial statements from January 1, 2019 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.
 
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CLO debt securities:

 

Investments in CLO debt securities are accounted for according to their purpose and holding period. CLO debt security investments that are classified as trading securities are those that are bought and held principally for the purpose of selling them in the near term. The Company had $9.3 million and zero CLO debt securities classified as trading securities as of March 31, 2019 and December 31, 2018, respectively, which are comprised of senior subordinated notes in CLO IV and CLO V. The Company’s investments in debt securities classified as available-for-sale are comprised of junior subordinated notes in CLO IV and CLO V and are those that may be sold before maturity and are reported at fair value with unrealized gains and losses, net of taxes, reported as a component of other comprehensive income ("OCI"). The Company had $53.5 million and zero CLO debt securities classified as available-for-sale securities as of March 31, 2019 and December 31, 2018, respectively. The Company’s investment in CLO debt securities classified as held-to-maturity are comprised of CLO III junior subordinated notes and are those that management has the positive intent and ability to hold to maturity and are reported at amortized cost. The Company had $13.6 million and zero CLO debt securities classified as held-to-maturity securities as of March 31, 2019 and December 31, 2018, respectively. Interest on CLO debt securities are recognized in interest income on an accrual basis using the effective yield method. Realized gains and losses on the sale of debt securities are determined using the specific identification method and recognized in current period earnings in revenues from principal transactions.

 

The Company evaluates the available-for-sale and held-to-maturity investments in debt securities for other than temporary impairment ("OTTI") quarterly. Impairment would be recorded if the net present value of the cash flows of the investment is below amortized cost and the Company does not expect to recover the amortized cost basis before the security is expected to be sold or the security matures, whichever comes first. Should the Company determine that there is an OTTI, the amount of the impairment is bifurcated between losses related to credit losses, which is recognized in revenues from principal transactions, and all other factors, which is recognized in OCI. The Company recorded no OTTI on CLO debt securities for either of the three months ended March 31, 2019 and 2018.

 

 

3. Recent Accounting Pronouncements

 

 Accounting Standards to be adopted in Future Periods

 

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 15, 2019. The Company is evaluating the impact of the adoption of this standard.

 

ASU 2017-08, Receivables-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.

 

ASU 2018-13, Fair Value Measurement (Topic 820), was issued in August 2018 as part of the disclosure framework project to improve the effectiveness of the disclosures in the notes to the financial statements. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The new guidance will be effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is evaluating the impact of the adoption of this standard.

 

Recently Adopted Accounting Guidance

 

ASU 2016-02, Leases (Topic 842), was issued in February 2016, with subsequent amendments, 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. The Company adopted this standard on January 1, 2019 using a modified retrospective approach and recognized its lease agreements as a right-of-use asset with a corresponding lease liability to reflect the present value of the future lease payments. Accordingly, the new leasing standard was applied prospectively in the Company’s financial statements from January 1, 2019 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. Additionally upon adoption the Company elected the package of practical expedients for leases that commenced before the date of adoption in which the Company was not required to reassess (i) whether any existing or expired contracts contain leases, (ii) the lease classification of existing or expired leases, and (iii) initial direct costs of existing or expired leases. On January 1, 2019, the Company recognized $23.6 million as an operating lease right-of-use asset and $29.3 million as an operating lease liability on the Consolidated Statements of Financial Condition related to its leasing obligations. As of March 31, 2019, the Company carried a $22.1 million operating lease right-of-use asset and a $27.5 million operating lease liability on the Consolidated Statements of Financial Condition related to its leasing obligations.

 

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4. Fair Value Measurements

 

The following tables provide fair value information related to the Company’s financial instruments at March 31, 2019 and December 31, 2018:

 

   

March 31, 2019

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 41,909     $ 41,909     $ -     $ -     $ 41,909  

Restricted cash and deposits

    1,221       1,221       -       -       1,221  

Marketable securities owned

    92,190       15,717       -       75,962      

91,679

 

Other investments

    8,349       -       -       8,349       8,349  

Other investments measured at net asset value (1)

    9,763       -       -       -       -  

Loans held for investment, net of allowance for loan losses

    4,962       -       2,318       2,668       4,986  

Total assets:

  $ 158,394     $ 58,847     $ 2,318     $ 86,979     $ 148,144  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 2,696     $ 2,696     $ -     $ -     $ 2,696  

Notes payable

    829       -       -       829       829  

Bond payable

    83,600       -       86,659       -       86,659  

Total liabilities:

  $ 87,125     $ 2,696     $ 86,659     $ 829     $ 90,184  

 

   

December 31, 2018

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 70,927     $ 70,927     $ -     $ -     $ 70,927  

Restricted cash and deposits

    61,881       61,881       -       -       61,881  

Marketable securities owned

    18,874       18,874       -       -       18,874  

Other investments

    490       -       490       -       490  

Other investments measured at net asset value (1)

    9,423       -       -       -       -  

Loans held for investment, net of allowance for loan losses

    29,608       -       26,188       2,576       28,764  

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

    1,161,463       -       1,125,310       1,173       1,126,483  

Total assets:

  $ 1,352,666     $ 151,682     $ 1,151,988     $ 3,749     $ 1,307,419  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 4,626     $ 4,626     $ -     $ -     $ 4,626  

Notes payable

    829       -       -       829       829  

Asset-backed securities issued, net of debt issuance costs

    1,112,342       -       1,091,677       -       1,091,677  

Bond payable

    83,497       -       78,642       -       78,642  

CLO VI warehouse credit facility

    22,500       -       22,500       -       22,500  

Total liabilities:

  $ 1,223,794     $ 4,626     $ 1,192,819     $ 829     $ 1,198,274  

 

 

(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 Statements of Financial Condition.

 

13

 

 

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 March 31, 2019 and December 31, 2018: 

 

(In thousands)

         

March 31, 2019

 
   

Carrying Value

   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                         

Marketable securities owned

  $ 78,557     $ 15,717     $ -     $ 62,840     $ 78,557  

Other investments:

                                       

Equity investments

    3,568       -       -       3,568       3,568  

Investments in hedge funds managed by the Company

    199       -       199       -       199  

Investments in other funds managed by the Company (1)

    5,045       -       -       -       -  

Total investment in funds managed by the Company (1)

    5,244       -       199       -       199  
Limited partnership in investments in private equity/ real estate funds (1)     4,718       -       -       -       -  

Total other investments

    13,530       -       199       3,568       3,767  

Total assets:

  $ 92,087     $ 15,717     $ 199     $ 66,408     $ 82,324  
                                         

Marketable securities sold, but not yet purchased

    2,696       2,696       -       -       2,696  
                                         

Total liabilities:

  $ 2,696     $ 2,696     $ -     $ -     $ 2,696  

 

(In thousands)

         

December 31, 2018

 
   

Carrying Value

   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                         

Marketable securities owned

  $ 18,874     $ 18,874     $ -     $ -     $ 18,874  

Other investments:

                                       

Investments in hedge funds managed by the Company

    490       -       490       -       490  

Investments in other funds managed by the Company (1)

    5,503       -       -       -       -  

Total investment in funds managed by the Company (1)

    5,993       -       490       -       490  

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

    3,920       -       -       -       -  

Total other investments

    9,913       -       490       -       490  

Total assets:

  $ 28,787     $ 18,874     $ 490     $ -     $ 19,364  
                                         

Marketable securities sold, but not yet purchased

    4,626       4,626       -       -       4,626  
                                         

Total liabilities:

  $ 4,626     $ 4,626     $ -     $ -     $ 4,626  

 

 

(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.

 

  The following table summarizes available-for-sale securities in an unrealized position.

 

 

                                               

(In thousands)

 

Amortized cost

   

Gross unrealized gains

   

Gross unrealized losses

   

Fair value

   

Total OTTI in OCI

   

Number of positions

 

CLO IV junior subordinated notes

  $ 27,922     $ -     $ (660 )   $ 27,262     $ -       1  

CLO V junior subordinated notes

    26,651       -       (395 )     26,256       -       1  

Total

  $ 54,573     $ -     $ (1,055 )   $ 53,518     $ -          

 

          The following table summarizes the held-to-maturity securities in an unrealized position.

 

(In thousands)

 

Amortized cost

   

Gross unrealized gains

   

Gross unrealized losses

   

Fair value

   

Number of positions

 

CLO III subordinated notes

  $ 13,633     $ -     $ (511 )   $ 13,122       1  

Total

  $ 13,633     $ -     $ (511 )   $ 13,122          

 

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   The following table summarizes the fair value and amortized cost of the available-for-sale and held-to-maturity securities by contractual maturity.

 

(In thousands)

 

Available-for-sale

   

Held-to-maturity

 
   

Amortized cost

   

Fair value

   

Amortized cost

   

Fair value

 

5-10 years

  $ 27,922       27,262       13,633       13,122  

10+ years

    26,651       26,256       -       -  

Total

  $ 54,573     $ 53,518     $ 13,633     $ 13,122  

 

   The following table summarizes the fair value and gross unrealized losses aggregated by category and the length of time that individual securities have been in a continuous unrealized loss position.

 

(In thousands)

 

Less than 12 months

   

Greater than 12 months

   

Total

 
   

Fair value

   

Gross unrealized loss

   

Fair value

   

Gross unrealized loss

   

Fair value

   

Gross unrealized loss

 

CLO III subordinated notes

  $ 13,122     $ (511 )   $ -     $ -     $ 13,122     $ (511 )

CLO IV junior subordinated notes

    27,262       (660 )     -       -       27,262       (660 )

CLO V junior subordinated notes

    26,256       (395 )     -       -       26,256       (395 )

Total

  $ 66,640     $ (1,566 )   $ -     $ -     $ 66,640     $ (1,566 )

 

As of December 31, 2018, both marketable securities owned and marketable securities sold, but not yet purchased, were primarily comprised of U.S. listed equity securities. As of March 31, 2019, marketable securities sold but not yet purchased were primarily comprised of U.S. listed securities. As of March 31, 2019, marketable securities was comprised of U.S. listed equity securities and CLO debt securities.

 

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 months ended March 31, 2019 and year ended December 31, 2018.

 

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 are 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 CLO credit facilities, 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's level 3 asset in other investments is comprised of an investment in equity securities of a private company. The Company used the net present value of discounted cash flows of the estimated value of the put option to determine the fair value of the investment. The put option is exercisable at three times the management fee revenue of the entity for the prior twelve months as of the effective date of the put option. The put option may be elected beginning March 31, 2022. The significant unobservable inputs under this approach are the estimated twelve months of revenues, the credit factor and the discount rate. For this investment, the Company elected the fair value option as the Company determined that the fair value of its option to put the equity securities was the best representation of the fair value of the investment. While the Company has made other equity investments, it has not elected the fair value option for those investments as it is impractical to determine the fair value of those investments.

 

The Company’s level 3 assets held in marketable securities consist of investments in CLO debt securities. The fair value of the CLO debt securities is determined using the net present value of discounted cash flows. The significant unobservable inputs used in the fair value measurement under this approach are the risk adjusted discount factors. The Company also uses performance and covenant compliance information provided by the CLO manager along with other risk factors including default risk, prepayment rates, interest rate risk, and credit spread risk when valuing this investment. During the three months ended March 31, 2019, the fair value of the Company's investment in CLO debt securities declined due a change that was deemed temporary. This conclusion was reached as the reduction in fair value was not due to credit factors and the Company believes that any reduction in fair value can be recovered before the security is sold or matures, whichever comes first.

 

For the three months ended March 31, 2019, the changes in level 3 assets measured at fair value on a recurring basis were as follows:

 

(In thousands)

 

CLO junior subordinated notes

   

CLO senior subordinated notes

    Equity Investment    

Total

 

Balance as of December 31, 2018

  $ -     $ -     $ -     $ -  

Fair value at recognition date

    54,279       9,289       3,568       67,136  
Accrued interest     294       34       -       328  
Unrealized loss on investments, recognized in OCI     (1,055 )     -       -       (1,055 )

Balance as of March 31, 2019

  $ 53,518     $ 9,323     $ 3,568     $ 66,409  

 

15

 

 

For assets classified in the level 3 hierarchy, any changes to any of the inputs to the fair value measurement could result in a significant increase or decrease in the fair value measurement. For CLO debt securities, a significant increase (decrease) in the discount rate, default rate, and severity rate would result in a significant decrease (increase) in the fair value of the instruments. For the equity investment, a significant increase (decrease) in the credit factor or the discount rate would result in a significantly lower (higher) fair value measurement. For level 3 assets measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:

 

 

(In thousands)

 

Significant Unobservable Inputs Range (Weighted-average)

   

Fair value

 
 

Valuation Technique

Description

 

March 31, 2019

   

December 31, 2018

   

March 31, 2019

   

December 31, 2018

 

CLO debt security

Discounted cash flows

Risk adjusted discounting factor

    10 - 15% (11.5%)       N/A     $ 66,640     $ -  
    Default rate     0 - 2% (1.3%)       N/A                  
    Severity rate     25%       N/A                  

Equity investment

Discounted cash flows

Non-performance rate

    20%       N/A     $ 3,568     $ -  
   

Discount rate

    18%       N/A                  
   

 

                               

 

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  March 31, 2019 and December 31, 2018, $9.8 million and $9.4 million 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

   

March 31,

2019

   

December 31,

2018

   

March 31,

2019

   

December 31,

2018

 
                                           

Limited partner investments in private equity/ real estate funds

Nonredeemable

    N/A     $ 4,718     $ 3,920     $ 68     $ 68  

Investment in other funds managed by the Company

Nonredeemable

    N/A     $ 5,045     $ 5,503     $ 1,945     $ 1,945  

 

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 $0.1 million and $1.3 million as of March 31, 2019 and December 31, 2018, respectively.

 

The Company had marketable securities that were measured at fair value on a non-recurring basis as the Company has the intent and ability to hold these securities until maturity. The Company held marketable securities measured at fair-value on a non-recurring basis of $13.7 million as of March 31, 2019.

 

 

5. Loans 

 

Allowance for Loan Losses

 

During the period ending March 31, 2019, the Company deconsolidated its investments in the CLOs and as a result, no longer has loans collateralizing ABS on its Consolidated Statement of Financial Condition as of March 31, 2019. See Note 1 for additional information on deconsolidation. A summary of the activity in the allowance for loan losses for the three months ended March 31, 2019 and 2018 is as follows:

 

(In thousands)

 

Three Months Ended March 31,

 
   

2019

   

2018

 
   

Impaired

   

Non-Impaired

   

Impaired

   

Non-Impaired

 

Balance, at beginning of period

  $ (836 )   $ (9,751 )   $ (391 )   $ (6,533 )

Reversal (provision) for loan losses:

                               

Specific reserve

    -       -       (953 )     -  

General reserve

    -       -       -       41  

Charge off

    181       -       135       -  

Derecognition due to deconsolidation

    655       9,751       -       -  

Balance, at end of period

  $ -     $ -     $ (1,209 )   $ (6,492 )

 

16

 

 

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 December 31, 2018, $1.8 million of the recorded investment amount in loans collateralizing asset-backed securities issued were individually evaluated for impairment. The remaining $1,170.2 million of recorded investment amount of loans collateralizing asset-backed securities issued were collectively evaluated for impairment as of December 31, 2018.

 

As of December 31, 2018 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 December 31, 2018:

 

(In thousands)

 

Recorded Investment

   

Unpaid Principal

Balance

   

Related Allowance

   

Average Recorded

Investment

   

Interest Income

Recognized

 

December 31, 2018

                                       

Impaired loans with an allowance recorded

  $ 1,813     $ 1,951     $ 838     $ 1,817     $ 119  

Impaired loans with no related allowance recorded

    -       -       -       -       -  

Total impaired loans

  $ 1,813     $ 1,951     $ 838     $ 1,817     $ 119  

 

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 March 31, 2019 or December 31, 2018. During the year ended December 31, 2018, the Company had two loans, which were modified in a troubled debt restructuring. 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 restructuring as of December 31, 2018. 

 

The Company had one troubled debt restructuring during the three months ended March 31, 2019. The loan, with a principal balance and a carrying balance of $0.5 million and $0.2 million in total, respectively, was converted to equity. The Company valued the equity at $0.2 million in total upon conversion.

 

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) the 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 collateralizing asset-backed securities issued at December 31, 2018. These loans were deconsolidated as of March 31, 2019.

 

(In thousands)

   

Cash Flow Loans

 
     

March 31,

   

December 31,

 
     

2019

   

2018

 
                   

Moody's rating:

                 

Baa1 - Baa3

    $ -     $ 7,300  

Ba1 - Ba3

      -       247,686  

B1 - B3

      -       856,204  

Caa1 - Caa3

      -       59,046  

Ca

      -       1,813  

Total:

    $ -     $ 1,172,049  
                   

Internal rating: (1)

                 
2     $ -     $ 1,018,261  
3       -       132,169  
4       -       19,806  
5       -       1,813  

Total:

    $ -     $ 1,172,049  
                   

Performance:

                 

Performing

    $ -     $ 1,170,236  

Non-Performing

      -       1,813  

Total:

    $ -     $ 1,172,049  

 

(1)

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

 

17

 

 

Loans Held for Investment

 

At March 31, 2019 and December 31, 2018, the number of loans held for investment outside of the CLO warehouse portfolio was seven and five, 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. As of December 31, 2018, the Company held $26.0 million of loans held for investment in the CLO VI warehouse portfolio. The credit quality of the CLO VI warehouse loans are evaluated in the same manner as the credit quality of loans collateralizing asset-backed securities issued. During the three-month period ended March 31, 2019, the Company deconsolidated its investments in the CLO VI warehouse and a result, no longer has loans held for investment related to CLO VI on its Consolidated Statement of Financial Condition as of March 31, 2019. See Note 1 for additional information on deconsolidation.

 

There were no loans past due as of March 31, 2019 and March 31, 2018. A summary of activity in loan losses for the three months ended March 31, 2019 and 2018 is as follows:

 

(in thousands)

 

Three Months Ended March 31,

 
   

2019

    2018  
   

Impaired

   

Non-impaired

   

Impaired

   

Non-impaired

 

Balance, at beginning of the period

  $ (218 )   $ (181 )   $ (2,279 )   $ (494 )

Provision for loan losses

                               

Specific

    -       -       (205 )     -  

General

    -       -       -       (364 )

Charge off

    218       -       2,279       -  
Derecognition due to deconsolidation     -       181       -       -  

Balance, at end of the period

  $ -     $ -     $ (205 )   $ (858 )

 

  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 March 31, 2019 and December 31, 2018, zero and $0.5 million of recorded investment amount of loans issued were individually evaluated for impairment, respectively. 

 

The Company had one troubled debt restructuring during the three months ended March 31, 2019. The loan, with a principal balance and a carrying balance of $0.5 million and $0.2 million in total, respectively, was converted to equity. The Company valued the equity at $0.2 million in total upon conversion.

 

  As of December 31, 2018, 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. There were no impaired loans on non-accrual status as of March 31, 2019. The table below presents certain information pertaining to the loans on non-accrual status as of December 31, 2018:

 

   

Recorded Investment

   

Unpaid Principal

   

Related Allowance

   

Average Recorded

Investment

   

Interest Income

Recognized

 

December 31, 2018

                                       

Impaired loans with an allowance recorded

  $ 462     $ 484     $ 218     $ 462     $ 34  

Impaired loans with no related allowance recorded

    -       -       -       -       -  

Total impaired loans

  $ 462     $ 484     $ 218     $ 462     $ 34  

 

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 table below presents, by credit quality indicator, the Company's recorded investment in loans held for investment at March 31, 2019 and December 31, 2018:

 

(In thousands)

   

Cash Flow Loans

 
     

March 31,

   

December 31,

 
     

2019

   

2018

 
                   

Moody's rating:

                 

Baa1 - Baa3

    $ -     $ -  

Ba1 - Ba3

      -       7,459  

B1 - B3

      -       18,342  

Caa1 - Caa3

      -       419  

Ca

      -       463  

Not Rated

      4,853       3,326  

Total:

    $ 4,853     $ 30,009  
                   

Internal rating (1) :

                 
2     $ 1,539     $ 26,208  
3       885       909  
4       -       -  
5       -       462  

Not rated

      2,429       2,430  

Total:

    $ 4,853     $ 30,009  
                   

Performance:

                 

Performing

    $ 4,853     $ 29,547  

Non-performing

      -       462  

Total:

    $ 4,853     $ 30,009  

 

(1) Loans with an internal rating of 4 or below are reviewed individually to identify loans to be designated for non-accrual status.

 

18

 

 

 

6. Debt

 

Bond Payable

(In thousands)

 

March 31, 2019

   

December 31, 2018

 
                 

8.00% Senior Notes due 2023

  $ 36,000     $ 36,000  

7.25% Senior Notes due 2027

    50,000       50,000  

Total outstanding principal

  $ 86,000     $ 86,000  

Less: Debt issuance costs

    (2,325 )     (2,428 )

Less: Consolidation elimination

    (75 )     (75 )

Total bond payable, net

  $ 83,600     $ 83,497  

 

The 8.00% Senior Notes due 2023 and the 7.25% Senior Notes due 2027 (collectively, the “Senior Notes”) were issued pursuant to indentures with U.S. Bank National Association, as trustee. The 8.00% Senior Notes indentures contain a minimum liquidity covenant that obligates JMP Group Inc. to maintain liquidity of at least an amount equal to the lesser of (i) the aggregate amount due on the next eight scheduled quarterly interest payments on the 8.00% Senior Notes, or (ii) the aggregate amount due on all remaining scheduled quarterly interest payments on the $36 million 8.00% Senior Notes until the maturity of the Senior Notes. The Senior Notes indenture also contains customary event of default and cure provisions. If an uncured default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the Senior Notes may declare the Senior Notes immediately due and payable. The Senior Notes are JMP Group Inc.’s general unsecured senior obligations, and rank equally with all existing and future senior unsecured indebtedness and are senior to any other indebtedness expressly made subordinate to the notes. At both March 31, 2019 and December 31, 2018, the Company was in compliance with the debt covenants in the indentures. 

 

The future scheduled principal payments of the debt obligations as of March 31, 2019 were as follows:

 

(In thousands)

       
         

2019

  $