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 September 30, 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

 


 

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 LLC 6.875% Senior Notes due 2029   JMPE   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 (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. ☐

 

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 November 12, 2019: 19,346,376.

 



 

 

 

 

 

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 – September 30, 2019 (Unaudited) and December 31, 2018

4

 

Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)

6

  Consolidated Statements of Comprehensive Income - For the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited) 7
 

Consolidated Statements of Changes in Equity - For the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)

8

 

Consolidated Statements of Cash Flows - For the Three and Nine Months Ended September 30, 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

37

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

62

Item 4.

Controls and Procedures

62

     

PART II.

OTHER INFORMATION

63

     

Item 1.

Legal Proceedings

63

Item 1A.

Risk Factors

63

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

64

Item 3.

Defaults Upon Senior Securities

64

Item 4.

Mine Safety Disclosures

64

Item 5.

Other Information

64

Item 6.

Exhibits

64

   

SIGNATURES

65

   

EXHIBIT INDEX

66

 

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 the Investor Relations section of JMP Group LLC's website in addition to following JMP Group LLC’s SEC filings, press releases and investor presentation materials. 

 

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)

 

   

September 30, 2019

   

December 31, 2018

 

Assets

               

Cash and cash equivalents

  $ 48,020     $ 70,927  

Restricted cash

    1,221       61,881  

Investment banking fees receivable

    7,392       6,647  

Marketable securities owned (includes $70,739 and $18,874 at fair value at September 30, 2019 and December 31, 2018, respectively)

    83,555       18,874  

Other investments (includes $14,392 and $9,913 at fair value at September 30, 2019 and December 31, 2018, respectively)

    34,841       16,124  

Loans held for investment, net of allowance for loan losses

    4,777       29,608  

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

    -       1,161,463  

Interest receivable

    372       3,004  

Fixed assets, net

    2,649       2,351  

Operating lease right-of-use asset

    20,293       -  

Other assets

    30,171       20,363  

Total assets

  $ 233,291     $ 1,391,242  
                 

Liabilities and Equity

               

Liabilities:

               

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

  $ 2,837     $ 4,626  

Accrued compensation

    17,867       41,609  

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

    -       1,112,342  

Interest payable

    549       11,210  

Note payable

    15,812       829  

CLO warehouse credit facilities

    -       22,500  

Bond payable (net of debt issuance costs of $3,521 and $2,428 at September 30, 2019 and December 31, 2018, respectively)

    82,427       83,497  

Operating lease liability

    26,145       -  

Other liabilities

    16,141       17,423  

Total liabilities

    161,778       1,294,036  
                 

Commitments and Contingencies (Note 17)

               

JMP Group LLC Shareholders' Equity

               

Common shares, $0.001 par value, 100,000,000 shares authorized; 22,797,092 and 22,780,052 shares issued at September 30, 2019 and December 31, 2018, respectively; 19,324,427 and 21,319,720 shares outstanding at September 30, 2019 and December 31, 2018, respectively

    23       23  

Additional paid-in capital

    134,858       134,129  

Treasury shares at cost, 3,472,665 and 1,460,332 shares at September 30, 2019 and December 31, 2018, respectively

    (15,869 )     (7,932 )

Accumulated other comprehensive loss

    (1,860 )     -  

Accumulated deficit

    (45,303 )     (42,513 )

Total JMP Group LLC shareholders' equity

    71,849       83,707  

Nonredeemable Non-controlling Interest

    (336 )     13,499  

Total equity

    71,513       97,206  

Total liabilities and equity

  $ 233,291     $ 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:

 

   

September 30, 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 September 30,

   

Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Revenues

                               

Investment banking

  $ 15,228     $ 21,095     $ 44,843     $ 70,319  

Brokerage

    3,968       4,676       13,160       14,787  

Asset management fees

    1,628       3,702       5,685       15,505  

Principal transactions

    (340 )     469       6,371       (1,467 )

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

    -       (556 )     (38 )     (888 )

Net dividend income

    279       320       868       935  

Other income

    759       306       1,517       666  

Non-interest revenues

    21,522       30,012       72,406       99,857  
                                 

Interest income

    2,328       18,652       19,391       47,031  

Interest expense

    (1,930 )     (13,789 )     (14,642 )     (35,125 )

Net interest income

    398       4,863       4,749       11,906  
                                 

Loss on repurchase, reissuance or early retirement of debt

    (458 )     (170 )     (458 )     (2,838 )

Provision for loan losses

    (438 )     (1,454 )     (438 )     (4,199 )

Total net revenues after provision for loan losses

    21,024       33,251       76,259       104,726  
                                 

Non-interest expenses

                               

Compensation and benefits

    17,506       22,671       54,673       76,070  

Administration

    2,301       2,302       6,978       7,246  

Brokerage, clearing and exchange fees

    617       808       2,051       2,373  

Travel and business development

    1,263       1,080       3,631       3,236  

Managed deal expenses

    685       614       2,552       4,528  

Communications and technology

    1,061       1,040       3,241       3,149  

Occupancy

    1,196       1,172       4,028       3,432  

Professional fees

    1,236       1,272       3,513       4,315  

Depreciation

    307       285       915       836  

Other

    200       369       700       1,532  

Total non-interest expenses

    26,372       31,613       82,282       106,717  

Net income (loss) before income tax expense

    (5,348 )     1,638       (6,023 )     (1,991 )

Income tax expense (benefit)

    (1,220 )     527       (5,839 )     (146 )

Net income (loss)

    (4,128 )     1,111       (184 )     (1,845 )

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

    (67 )     823       (80 )     138  

Net income (loss) attributable to JMP Group LLC

  $ (4,061 )   $ 288     $ (104 )   $ (1,983 )
                                 

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

                               

Basic

  $ (0.21 )   $ 0.01     $ (0.01 )   $ (0.09 )

Diluted

  $ (0.21 )   $ 0.01     $ (0.01 )   $ (0.09 )
                                 

Weighted average common shares outstanding:

                               

Basic

    19,324       21,435       20,454       21,545  

Diluted

    19,324       21,737       20,454       21,545  

 

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 September 30,

   

Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Net income (loss)

  $ (4,128 )   $ 1,111     $ (184 )   $ (1,845 )

Other comprehensive gain (loss):

                               

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

    709       -       (1,860 )     -  

Comprehensive income (loss) attributable to JMP Group LLC

    (3,419 )     1,111       (2,044 )     (1,845 )

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

    (67 )     823       (80 )     138  

Comprehensive income (loss) attributable to JMP Group LLC

  $ (3,352 )   $ 288     $ (1,964 )   $ (1,983 )

 

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

                 
   

Common Shares

   

Treasury

    Additional Paid-In    

Accumulated

    Accumulated Other Comprehensive     Nonredeemable 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 loss

    -       -       -       -       (104 )     -       (80 )     (184 )

Additional paid-in capital - share-based compensation

    -       -       -       765       -       -       -       765  

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

    -       -       -       -       (2,686 )     -       -       (2,686 )

Purchases of shares of common shares for treasury

    -       -       (8,763 )     -       -       -       -       (8,763 )
Reissuance of shares of common shares from treasury     -       -       826       (129 )     -       -       -       697  
Common shares issued     17       -       -       93       -       -       -       93  

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

    -       -       -       -       -       (1,860 )     -       (1,860 )
Balance, September 30, 2019     22,797     $ 23     $ (15,869 )   $ 134,858     $ (45,303 )   $ (1,860 )   $ (336 )   $ 71,513  

 

 

 

 

   

JMP Group LLC's Equity

                 
   

Common Shares

   

Treasury

    Additional Paid-In    

Accumulated

    Accumulated Other Comprehensive     Nonredeemable 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 income (loss)

    -       -       -       -       (1,983 )     -       138       (1,845 )

Additional paid-in capital - share-based compensation

    -       -       -       857       -       -       -       857  

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

    -       -       -       -       (5,906 )     -       -       (5,906 )

Purchases of shares of common shares for treasury

    -       -       (2,340 )     -       -       -       -       (2,340 )

Reissuance of shares of common shares from treasury

    -       -       387       40       -       -       -       427  

Purchase of subsidiary shares from non-controlling interest holders

    -       -       -       (656 )     -       -       656       -  

Distributions to non-controlling interest holders

    -       -       -       -       -       -       (1,527 )     (1,527 )

Capital contributions from non-controlling interest holders

    -       -       -       -       -       -       449       449  

Balance, September 30, 2018

    22,780     $ 23     $ (7,908 )   $ 134,960     $ (40,341 )   $ -     $ 13,560     $ 100,294  

 

See accompanying notes to consolidated financial statements.

 

8

 
 

 

JMP Group LLC

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net loss

  $ (184 )   $ (1,845 )

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

               

Provision for loan losses

    438       4,199  

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

    38       888  

Loss on repurchase, reissuance or early retirement of debt

    458       2,838  

Change in other investments:

               

(Income) loss from investments in equity method investees

    (1,305 )     273  

Unrealized gain on other equity investments

    (156 )     (179 )

Unrealized (gain) loss on other investments

    (1,098 )     205  

Depreciation and amortization

    1,316       1,067  

Share-based compensation expense

    1,590       1,135  

Gain on deconsolidation

    (3,520 )     -  
Distributions of investment income from equity method investees     492       -  

Other, net

    293       296  

Net change in operating assets and liabilities:

               

Increase in interest receivable

    (4,899 )     (787 )

Increase in receivables

    (950 )     (1,454 )

Decrease in marketable securities

    9,643       631  

Decrease (increase) in other assets

    (10,181 )     6,937  

Decrease in marketable securities sold, but not yet purchased

    (1,789 )     (2,315 )

(Decrease) increase in interest payable

    (4,034 )     3,859  

Decrease in accrued compensation

    (23,475 )     (9,760 )

Increase in other liabilities

    6,895       1,967  

Net cash provided by (used in) operating activities

    (30,428 )     7,955  
                 

Cash flows from investing activities:

               

Purchases of fixed assets

    (1,341 )     (877 )

Purchases of other investments

    (12,538 )     (1,525 )

Sales or distributions from other investments

    10,655       13,949  

Funding of loans collateralizing asset-backed securities issued

    (35,153 )     (307,808 )

Funding of loans held for investment

    (25,679 )     (312,089 )

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

    23,806       268,239  

Sale, payoff and principal receipts on loans held for investment

    7,211       26,726  

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

    (27,771 )     -  

Net cash used in investing activities

    (60,810 )     (313,385 )

 

See accompanying notes to consolidated financial statements.

 

9

 

 

JMP Group LLC

Consolidated Statements of Cash Flows - (Continued)

(Unaudited)

(In thousands)

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 

Cash flows from financing activities:

               

Proceeds from issuance of repurchase agreement

    -       3,878  

Repayment of repurchase agreement

    -       (3,878 )

Proceeds from drawdowns on line of credit

    16,583       -  

Proceeds from drawdowns on CLO warehouse facilities

    7,750       263,750  

Proceeds from sale of note payable to affiliate

    -       829  
Proceeds from bond issuance     36,000       -  

Payment of debt issuance costs

    (1,887 )     (1,897 )

Repayment of line of credit

    (1,600 )     -  

Repayment of asset-backed securities issued

    (801 )     (332,100 )
Repayments on CLO warehouse facilities     -       (325,000 )

Repayment on bonds payable

    (35,977 )     (9,980 )

Proceeds of issuance from asset-backed securities issued

    -       699,107  

Reissuance of asset-back securities

    -       4,453  

Distributions and distribution equivalents paid on common shares and RSUs

    (2,686 )     (5,906 )

Capital contributions of nonredeemable non-controlling interest holders

    -       449  

Purchase of common shares for treasury

    (8,614 )     (2,309 )

Distributions to non-controlling interest shareholders

    (913 )     (1,527 )

Employee taxes paid on shares withheld for tax-withholding purposes

    (184 )     (31 )

Net cash provided by financing activities

    7,671       289,838  

Net decrease in cash, cash equivalents, and restricted cash

    (83,567 )     (15,592 )

Cash, cash equivalents and restricted cash, beginning of period

    132,808       137,321  

Cash, cash equivalents and restricted cash, end of period

  $ 49,241     $ 121,729  
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the period for interest

  $ 18,676     $ 31,266  

Cash paid during the period for taxes

  $ 2,060     $ 2,173  
                 

Non-cash investing and financing activities:

               

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

  $ 954     $ 387  

Distributions declared but not yet paid

  $ -     $ 643  

Acquisition of equity securities in restructuring of loans

  $ 259     $ 809  
Transfer of loans held for investment to loans collateralizing asset-backed securities issued upon securitization of CLO V   $ -     $ 362,213  

Initial recognition of operating lease right-of-use assets

  $ 23,604     $ -  

Initial recognition of operating lease right-of-use 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

September 30, 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”), and 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. 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(R) 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”). During the non-call period 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, holders of a majority of the subordinated notes could refinance or liquidate the CLO and the Company determined this to be the most significant activity. The expiration of the non-call period resulted in the Company losing control over the most significant activity 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 in March 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 due to subsequent change in JMPCA ownership structure, and the Company determined that JMPCA is a VIE after the transaction date. The Company determined that it was 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 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 sold 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 managed as of the date of the sale 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 an equity interest 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 equity interest of CLO VI for $7.6 million. There was no gain or loss recognized on the sale of the equity interest.

 

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 the aforementioned CLOs as of March 19, 2019 (except CLO III which was deconsolidated on January 17, 2019). Previously the Company concluded that it was the primary beneficiary of CLO IV, CLO V, and CLO VI through its control over JMPCA and its ownership of 100% of the equity interests of these CLOs. The Company continues to hold 100% of the junior subordinated notes of CLO IV and CLO V and approximately 33% of the equity interests of CLO VI as of September 30, 2019. The Company owned 100% and 25% of the senior subordinated notes of CLO IV and CLO V, respectively, as of the date of deconsolidation. The Company sold all of its senior subordinated notes in CLO IV and CLO V in May 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 equity interest as an equity investment. The Company classifies the junior subordinated notes of CLO IV and CLO V as available-for-sale securities and classified 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 $1.8 million in March 2019 in revenues from principal transactions. The Company recorded a loss of $0.1 million on the sale of the senior subordinated notes of CLO IV and CLO V in May 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 Statements 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  

Gain on remeasurement of CLO IV and CLO V senior subordinated notes

    328  

Total gain on deconsolidation

  $ 3,520  

 

(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

 

On August 8, 2019, Medalist closed a refinancing of the asset-backed securities issued by CLO IV, which lowered the weighted average cost of funds. The refinancing of CLO IV had no impact on the Company's accounting for the investment in the CLO IV debt securities including the decision to deconsolidate CLO IV.

 

On September 26, 2019, the Company issued $36.0 million of 6.875% senior notes (the "2019 Senior Notes"). The 2019 Senior Notes will mature on September 30, 2029, may be redeemable in whole or in part at any time or from time to time at JMP Group LLC’s option on or after September 30, 2021, at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The notes bear interest at a rate of 6.875% per year, payable quarterly on March 30, June 30, September 30, and December 30 of each year, and commencing on December 30, 2019.

 

On September 27, 2019 the Company announced JMP Group Inc.'s intention to redeem the JMP Group Inc. outstanding 8.00% senior notes (the "2013 Senior Notes") on October 28, 2019. The Company opted to pay the principal and contractually owed interest to the trustee, U.S. Bank National Association, in order to satisfy and discharge the debt as of September 27, 2019. On September 27, 2019 the Company deposited sufficient funds with the trustee to satisfy and discharge the 2013 Senior Notes and the trustee acknowledged such satisfaction and discharge. In connection with the redemption, the Company recorded losses on early retirement of debt related to unamortized bond issuance costs of $0.5 million and recognized an additional $0.2 million of interest expense on the accelerated repayment during the quarter ended September 30, 2019.

 

11

 

 

 

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 September 30, 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 nine months ended September 30, 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.
 

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 zero CLO debt securities classified as trading securities as of September 30, 2019 and December 31, 2018. The Company previously classified its senior subordinated notes in CLO IV and CLO V as trading securities, but sold these notes in May 2019 and recognized a loss of $0.1 million for the nine months ended September 30, 2019. 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 $53.2 million and zero CLO debt securities classified as available-for-sale securities as of September 30, 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 $12.8 million and zero CLO debt securities classified as held-to-maturity securities as of September 30, 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 impairment quarterly. As part of the evaluation, the Company obtains the new cash flow projections for the CLO debt securities at period end and determines, based on those cash flows and other current information, if there has been a favorable or adverse change in the cash flows expected to be collected as compared to the projected cash flows from the prior period. An adverse change in cash flows is determined in the context of both the timing and the amount of the cash flows. An impairment would be recorded if the net present value of the cash flows of the investment is below the amortized cost basis of the investment 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 impairment, 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 impairment on CLO debt securities for either of the three or nine months ended September 30, 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, with subsequent amendments, 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. The new guidance will be effective for public business entities that meet the definition of a smaller reporting company for fiscal years and all interim periods within those fiscal years, beginning after December 15, 2022. 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 September 30, 2019, the Company carried a $20.3 million operating lease right-of-use asset and a $26.1 million operating lease liability on the Consolidated Statements of Financial Condition related to its leasing obligations.

 

12

 

 

 

4. Fair Value Measurements

 

The following tables provide fair value information related to the Company’s financial instruments at September 30, 2019 and December 31, 2018:

 

   

September 30, 2019

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 48,020     $ 48,020     $ -     $ -     $ 48,020  

Restricted cash and deposits

    1,221       1,221       -       -       1,221  

Marketable securities owned

    83,555       17,578       -       65,277       82,855  

Other investments

    4,164       -       201       3,963       4,164  

Other investments, measured at net asset value (1)

    10,228       -       -       -       -  

Loans held for investment, net of allowance for loan losses

    4,777       -       -       4,825       4,825  

Total assets:

  $ 151,965     $ 66,819     $ 201     $ 74,065     $ 141,085  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 2,837     $ 2,837     $ -     $ -     $ 2,837  

Notes payable

    15,812       -       14,983       829       15,812  

Bond payable

    82,427       -       87,618       -       87,618  

Total liabilities:

  $ 101,076     $ 2,837     $ 102,601     $ 829     $ 106,267  

 

 

   

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  

Asset-backed securities issued, net of debt issuance costs

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

Notes payable

    829       -       -       829       829  

CLO warehouse credit facilities

    22,500       -       22,500       -       22,500  

Bond payable

    83,497       -       78,642       -       78,642  

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 carrying value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated statements 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 September 30, 2019 and December 31, 2018: 

 

(In thousands)

         

September 30, 2019

 
   

Carrying Value

   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                         

Marketable securities owned

  $ 70,739     $ 17,578     $ -     $ 53,161     $ 70,739  

Other investments:

                                       

Equity investments

    3,963       -       -       3,963       3,963  

Investments in hedge funds managed by the Company

    201       -       201       -       201  

Investments in other funds managed by the Company (1)

    5,282       -       -       -       -  

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

    4,946       -       -       -       -  

Total other investments

    14,392       -       201       3,963       4,164  

Total assets:

  $ 85,131     $ 17,578     $ 201     $ 57,124     $ 74,903  
                                         

Marketable securities sold, but not yet purchased

    2,837       2,837       -       -       2,837  
                                         

Total liabilities:

  $ 2,837     $ 2,837     $ -     $ -     $ 2,837  

 

(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       -       -       -       -  

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.

 

As of September 30, 2019, marketable securities sold but not yet purchased were primarily comprised of U.S. listed securities. As of September 30, 2019, marketable securities was comprised of U.S. listed equity securities and CLO debt securities. 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.

 

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 nine months ended September 30, 2019 and the 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 assets in other investments is comprised of investments in equity securities of private companies. The Company determines the fair value of the investments either through (1) using the net present value of discounted cash flows of the estimated value of the put option of the investment or (2) using a market multiples approach. For the investment whose fair value determined using the discounted cash flows approach, the Company has a put option on this investment that 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. For the investment whose fair value is determined using the market multiples approach, the Company determines the enterprise value of the investment using the investments estimated EBITDA and an EBITDA multiple from comparable companies. 

 

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 nine months ended September 30, 2019, the fair value of the Company's investment in CLO debt securities declined due to changes in market interest rates and the CLO debt securities were not determined to be impaired. 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 and nine months ended September 30, 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

  $ -     $ -     $ 57     $ 57  

Fair value at recognition date

    54,279       9,289       3,568       67,136  

Purchases

    -       -       11       11  

Accrued interest

    294       34       -       328  

Unrealized losses on investments, recognized in OCI

    (1,055 )     -       -       (1,055 )

Balance as of March 31, 2019

    53,518       9,323       3,636       66,477  

Accrued interest

    1,969       69       -       2,038  

Purchases

    -       -       171       171  

Investment distributions

    (1,170 )     (883 )     -       (2,053 )
Unrealized losses on investments, recognized in OCI     (2,418 )     -       -       (2,418 )

Unrealized gains on investments, recognized in earnings

    -       -       297       297  

Realized losses on sales, recognized in earnings

    -       (112 )     -       (112 )

Sales

    -       (8,397 )     -       (8,397 )
Balance as of June 30, 2019     51,899       -       4,104       56,003  
Accrued interest     1,733       -       -       1,733  
Purchases     -       -       -       -  
Investment distributions     (1,389 )     -       -       (1,389 )
Unrealized gains on investments, recognized in OCI     918       -       -       918  
Unrealized losses on investments, recognized in earnings     -       -       (141 )     (141 )

Balance as of September 30, 2019

  $ 53,161     $ -     $ 3,963     $ 57,124  

 

14

 

 

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 investments, a significant increase (decrease) in the credit factor or the discount rate would result in a significantly lower (higher) fair value measurement or a significant increase (decrease) in the EBITDA multiple would result in a significant higher (lower) fair value measurement. For Level 3 assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:

 

       

Significant Unobservable Inputs

                 

(In thousands)

     

Range (Weighted-average)

   

Fair Value

 
   

Valuation Technique

 

Description

 

September 30, 2019

   

December 31, 2018

   

September 30, 2019

   

December 31, 2018

 

CLO debt security

 

Discounted cash flows

 

Risk adjusted discounting factor

    15.0 %     N/A     $ 53,161     $ -  
       

Default rate

    0% - 2% (1.9%)       N/A                  
       

Severity rate

    25.0 %     N/A                  
       

Prepay rate

    25 CPR       N/A                  
       

Collateral liquidation price

    99.0 %     N/A                  

Equity investments

 

Discounted cash flows

 

Credit factor

    20.0 %     N/A     $ 3,542     $ -  
       

Risk adjusted discounting factor

    17.3 %     N/A                  
   

Market

 

EBITDA Multiple

    8.0x       N/A     $ 421     $ 57  

 

The Company determined the fair value of loans collateralizing ABS issued 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 ABS 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  September 30, 2019 and December 31, 2018, $10.2 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

 
    Redemption Notice     Redemption Notice       September 30,       December 31,       September 30,       December 31,  

Dollars in thousands

 

Frequency

 

Period

   

2019

   

2018

   

2019

   

2018

 
                                             

Limited partner investments in private equity/ real estate funds

 

Nonredeemable

    N/A     $ 4,946     $ 3,920     $ 1,176     $ 68  

Investment in other funds managed by the Company

 

Nonredeemable

    N/A     $ 5,282     $ 5,503     $ 1,677     $ 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 $0.6 million and $1.3 million as of September 30, 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 $12.8 million as of September 30, 2019.

 

 

 

5. Investment Securities

 

Debt Securities

 

  The following table summarizes available-for-sale securities in an unrealized position as of September 30, 2019:

 

(In thousands)

 

Amortized Cost

   

Gross Unrealized Gains

   

Gross Unrealized Losses

   

Fair Value

   

Total Impairment in OCI

   

Number of Positions

 

CLO IV junior subordinated notes

  $ 28,294     $ -     $ (2,091 )   $ 26,203     $ -       1  

CLO V junior subordinated notes

    27,422       -     $ (464 )     26,958       -       1  

Total

  $ 55,716     $ -     $ (2,555 )   $ 53,161     $ -          

 

          The following table summarizes the held-to-maturity securities in an unrealized position as of September 30, 2019:

 

(In thousands)

 

Amortized Cost

   

Gross Unrealized Gains

   

Gross Unrealized Losses

   

Fair Value

   

Number of Positions

 

CLO III subordinated notes

  $ 12,816     $ -     $ (700 )   $ 12,116       1  

Total

  $ 12,816     $ -     $ (700 )   $ 12,116          

 

15

 

 

   The following table summarizes the fair value and amortized cost of the available-for-sale and held-to-maturity securities by contractual maturity as of September 30, 2019:

 

(In thousands)

 

Available-for-Sale

   

Held-to-Maturity

 
   

Amortized Cost

   

Fair Value

   

Amortized Cost

   

Fair Value

 

5-10 years

  $ 28,294       26,203       12,816       12,116  

10+ years

    27,422       26,958       -       -  

Total

  $ 55,716     $ 53,161     $ 12,816     $ 12,116  

 

   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 as of September 30, 2019:

 

(In thousands)

 

Less than 12 months(1)

   

Greater than 12 months

   

Total

 
   

Fair Value

   

Gross Unrealized Loss

   

Fair Value

   

Gross Unrealized Loss

   

Fair Value

   

Gross Unrealized Loss

 

CLO III subordinated notes

  $ 12,116     $ (700 )   $ -     $ -     $ 12,116     $ (700 )

CLO IV junior subordinated notes

    26,203       (2,091 )     -       -       26,203       (2,091 )

CLO V junior subordinated notes

    26,958       (464 )     -       -       26,958       (464 )

Total

  $ 65,277     $ (3,255 )   $ -     $ -     $ 65,277     $ (3,255 )

 

(1)   For all CLO debt securities, the gross unrealized loss is measured since the date of deconsolidation, which was January 17, 2019 for CLO III and March 19, 2019 for CLO IV and CLO V.

 

During the three months ended September 30, 2019 and 2018, the Company recognized unrealized gains on CLO debt securities of $0.9 million and zero, respectively. During the nine months ended September 30, 2019 and 2018, the Company recognized unrealized losses on CLO debt securities of $2.6 million and zero, respectively.

 

Equity Securities

 

The Company has equity securities with quoted prices in active markets as well as equity securities without readily determinable fair market values. Equity securities without readily determinable fair market values are valued at cost, less any impairment, plus or minus changes in fair value resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. The Company's carrying value of these securities was $15.3 million and $0.8 million as of September 31, 2019 and December 31, 2018, respectively. Since obtaining ownership of these securities the Company has recognized $0.2 million of impairment, but no other upward or downward adjustments to the carrying value. The Company has not recognized any impairment or upward or downward adjustments during the three-months or nine-months ended September 31, 2019 and 2018. 

 

 

6. Loans 

 

Loans collateralizing ABS issued

 

During the period ending September 30, 2019, the Company deconsolidated its investments in the CLOs and as a result, no longer has loans collateralizing ABS on its Consolidated Statements of Financial Condition as of September 30, 2019. See Note 1 for additional information on deconsolidation. A summary of the activity in the allowance for loan losses for the three and nine months ended September 30, 2019 and 2018 is as follows:

 

(In thousands)

 

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 
   

Impaired

   

Non-Impaired

   

Impaired

   

Non-Impaired

   

Impaired

   

Non-Impaired

   

Impaired

   

Non-Impaired

 

Balance, at beginning of period

  $ -     $ -     $ (110 )   $ (6,861 )   $ (836 )   $ (9,751 )   $ (390 )   $ (6,533 )

Provision for loan losses:

                                                               

Specific reserve

    -       -       (558 )     -       -       -       (1,366 )     -  

General reserve

    -       -       -       (747 )     -       -       -       (1,075 )

Charge off

    -       -       110       -       181       -       1,198       -  
Transfer from loans held for investment     -       -       -       (1,746 )     -       -       -       -  

Derecognition due to deconsolidation

    -       -       -       -       655       9,751       -       (1,746 )

Balance, at end of period

  $ -     $ -     $ (558 )   $ (9,354 )   $ -     $ -     $ (558 )   $ (9,354 )

 

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 ABS issued were individually evaluated for impairment. The remaining $1,170.2 million of recorded investment amount of loans collateralizing ABS 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 September 30, 2019 or December 31, 2018. The Company had one troubled debt restructuring during the nine months ended September 30, 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 and recorded no material gain or loss upon the execution of the restructuring.

 

  During the three and nine months ended September 30, 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’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 September 30, 2019 as part of the deconsolidation of the CLOs. See Note 1 for additional information. 

 

 

(In thousands)

   

Cash Flow Loans

 
     

September 30,

   

December 31,

 
     

2019

   

2018

 
                   

Moody's rating:

                 

Baa1 - Baa3

    $ -     $ 7,300  

Ba1 - Ba3

      -       247,686  

B1 - B3

      -       856,204  

Caa1 - Caa3

      -       59,046  

Ca