JMP Group LLC
JMP Group Inc. (Form: 10-Q, Received: 10/31/2013 16:49:43)

  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, 2013 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: 001-33448

 

 

 


JMP Group Inc.

(Exact name of registrant as specified in its charter)

 


 

 

Delaware

20-1450327

(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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

       

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

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

 

The number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding as of October 30, 2013 was 21,848,146.  

 



 

 

 

TABLE OF CONTENTS

 

 

 

Page

PART I.

FINANCIAL INFORMATION

4

     

Item 1.

Financial Statements - JMP Group Inc.

4

 

Consolidated Statements of Financial Condition - September 30, 2013 and December 31, 2012 (Unaudited)

4

 

Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)

6

 

Consolidated Statements of Comprehensive Income - For the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)

7

 

Consolidated Statement of Changes in Equity - For the Nine Months Ended September 30, 2013 (Unaudited)

7

 

Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)

8

 

Notes to Consolidated Financial Statements (Unaudited)

9

Item 2.

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

34

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

64

Item 4.

Controls and Procedures

65

     

PART II.

OTHER INFORMATION

66

     

Item 1.

Legal Proceedings

66

Item 1A.

Risk Factors

66

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

67

Item 3.

Defaults Upon Senior Securities

67

Item 4.

Mine Safety Disclosures

67

Item 5.

Other Information

67

Item 6.

Exhibits

67

   

SIGNATURES

68

   

EXHIBIT INDEX

69

 

 
- 2 -

 

 

AVAILABLE INFORMATION

 

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

 

JMP Group Inc. 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 stockholders, 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.

 

JMP Group Inc. also makes available, in the Investor Relations section of its website and will provide print copies to stockholders 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 of JMP Group Inc., are not intended to be part of this quarterly report.

 

 
- 3 -

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.          Financial Statements

 

JMP Group Inc.

Consolidated Statements of Financial Condition

(Unaudited)

(Dollars in thousands, except per share data)

 

    

   

September 30, 2013

   

December 31, 2012

 
                 

Assets

               

Cash and cash equivalents

  $ 55,740     $ 67,075  

Restricted cash and deposits (includes cash on deposit with clearing broker of $150 at both September 30, 2013 and December 31, 2012)

    84,788       69,813  

Receivable from clearing broker

    1,304       1,117  

Investment banking fees receivable, net of allowance for doubtful accounts of zero at September 30, 2013 and December 31, 2012

    13,957       5,148  

Marketable securities owned, at fair value

    19,569       14,347  

Incentive fee receivable

    2,960       2,945  

Other investments (of which $169,229 and $80,945 are recorded at fair value at September 30, 2013 and December 31, 2012, respectively)

    169,413       81,161  

Loans held for sale

    -       3,134  

Loans held for investment, net of allowance for loan losses

    667       150  

Small business loans

    -       38,934  

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

    709,403       401,003  

Interest receivable

    1,009       1,229  

Fixed assets, net

    2,237       2,663  

Deferred tax assets

    9,237       13,087  

Other assets

    13,036       8,056  

Total assets

  $ 1,083,320     $ 709,862  
                 

Liabilities and Equity

               

Liabilities:

               

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

  $ 15,397     $ 11,567  

Accrued compensation

    34,459       20,256  

Asset-backed securities issued

    722,279       415,456  

Interest payable

    4,417       588  

Note payable

    17,184       10,486  

Line of credit

    -       28,227  

Bond payable

    46,000       -  

Deferred tax liability

    3,095       9,775  

Other liabilities

    22,278       26,203  

Total liabilities

    865,109       522,558  
                 

Redeemable Non-controlling Interest

    -       161  

Commitments and Contingencies

               

JMP Group Inc. Stockholders' Equity

               

Common stock, $0.001 par value, 100,000,000 shares authorized; 22,780,052 shares issued at both September 30, 2013 and December 31, 2012; 21,961,227 and 22,591,649 shares outstanding at September 30, 2013 and December 31, 2012

    23       23  

Additional paid-in capital

    131,548       128,318  

Treasury stock, at cost, 818,825 and 188,403 shares at September 30, 2013 and December 31, 2012

    (5,124 )     (1,007 )

Accumulated other comprehensive loss

    (14 )     (55 )

Accumulated deficit

    (2,693 )     (408 )

Total JMP Group Inc. stockholders' equity

    123,740       126,871  

Nonredeemable Non-controlling Interest

    94,471       60,272  

Total equity

    218,211       187,143  

Total liabilities and equity

  $ 1,083,320     $ 709,862  

 

See accompanying notes to consolidated financial statements.  

 

 
- 4 -

 

 

JMP Group Inc.

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, 2013

   

December 31, 2012

 
                 

Cash and cash equivalents

  $ 150     $ -  

Restricted cash

    68,113       56,968  

Loans held for sale

    -       3,134  

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

    709,403       401,003  

Interest receivable

    1,717       1,062  

Incentive fees receivable

    495       -  

Deferred tax assets

    2,438       3,387  

Other assets

    3,120       32  

Total assets of consolidated VIEs

  $ 785,436     $ 465,586  
                 

Asset-backed securities issued

    722,279       415,456  

Note payable

    2,500       -  

Interest payable

    3,603       542  

Deferred tax liability

    2,756       8,437  

Other liabilities

    5,896       3,573  

Total liabilities of consolidated VIEs

  $ 737,034     $ 428,008  

 

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 Inc.

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Revenues

                               

Investment banking

  $ 19,137     $ 12,218     $ 52,301     $ 38,010  

Brokerage

    5,750       5,371       17,924       16,275  

Asset management fees

    5,328       3,755       15,606       10,721  

Principal transactions

    640       (1,955 )     4,849       12,309  

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

    166       564       1,591       3,016  

Net dividend income (expense)

    243       (2 )     290       (25 )

Other income

    267       365       581       3,507  

Non-interest revenues

    31,531       20,316       93,142       83,813  
                                 

Interest income

    8,734       8,333       24,603       24,051  

Interest expense

    (4,421 )     (10,087 )     (25,825 )     (29,573 )

Net interest income (expense)

    4,313       (1,754 )     (1,222 )     (5,522 )
                                 

Provision for loan losses

    (467 )     65       (2,391 )     (1,135 )
                                 

Total net revenues after provision for loan losses

    35,377       18,627       89,529       77,156  
                                 

Non-interest expenses

                               

Compensation and benefits

    24,685       17,358       69,066       55,833  

Administration

    1,919       1,645       7,255       4,604  

Brokerage, clearing and exchange fees

    939       902       2,851       2,656  

Travel and business development

    994       746       2,991       2,435  

Communications and technology

    907       909       2,592       2,642  

Occupancy

    822       814       2,434       2,352  

Professional fees

    632       967       2,468       2,324  

Depreciation

    231       227       695       642  

Other

    342       67       649       282  

Total non-interest expenses

    31,471       23,635       91,001       73,770  

Income (loss) before income tax expense

    3,906       (5,008 )     (1,472 )     3,386  

Income tax expense (benefit)

    1,634       (884 )     178       (1,423 )

Net income (loss)

    2,272       (4,124 )     (1,650 )     4,809  

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

    (1,017 )     (2,817 )     (1,785 )     7,380  

Income (loss) attributable to JMP Group Inc.

  $ 3,289     $ (1,307 )   $ 135     $ (2,571 )
                                 

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

                               

Basic

  $ 0.15     $ (0.06 )   $ 0.01     $ (0.11 )

Diluted

  $ 0.14     $ (0.06 )   $ 0.01     $ (0.11 )
                                 

Dividends declared per common share

  $ 0.035     $ 0.035     $ 0.105     $ 0.100  
                                 

Weighted average common shares outstanding:

                               

Basic

    22,014       22,737       22,271       22,564  

Diluted

    22,713       22,737       22,669       22,564  
  

See accompanying notes to consolidated financial statements.

 

 
- 6 -

 

 

 JMP Group Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)

 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Net income (loss)

  $ 2,272     $ (4,124 )   $ (1,650 )   $ 4,809  

Other comprehensive income (loss)

                               

Unrealized gain on cash flow hedge, net of tax

    13       14       41       34  

Comprehensive income (loss)

    2,285       (4,110 )     (1,609 )     4,843  

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

    (1,017 )     (2,817 )     (1,785 )     7,380  

Comprehensive income (loss) attributable to JMP Group Inc.

  $ 3,302     $ (1,293 )   $ 176     $ (2,537 )

 

 

 

JMP Group Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

(In thousands)

 

   

JMP Group Inc. Stockholders' Equity

                 
   

Common Stock

   

Treasury

   

Additional

Paid-In

   

Retained

Earnings/

Accumulated

   

Accumulated

Other

Comprehensive

   

Nonredeemable

Non-controlling

         
   

Shares

   

Amount

   

Stock

   

Capital

   

Deficit

   

Loss

   

Interest

   

Total Equity

 

Balance, December 31, 2012

    22,780     $ 23     $ (1,007)     $ 128,318     $ (408)     $ (55)     $ 60,272     $ 187,143  

Net income (loss)

    -       -       -       -       135       -       (1,785)       (1,650)  

Additonal paid-in capital - stock-based compensation

    -       -       -       3,150       -       -       -       3,150  

Dividends and dividend equivalents declared on c ommon stock and restricted stock units

     -        -        -        -        (2,420)        -        -        (2,420)  

Purchases of shares of common stock for treasury

    -       -       (4,342)       -       -       -       -       (4,342)  

Reissuance of shares of common stock from treasury

    -       -       225       80       -       -       -       305  

Distributions to non-controlling interest holders

    -       -       -       -       -       -       (3,552)       (3,552)  

Unrealized gain on cash flow hedge, net of tax

    -       -       -       -       -       41       -       41  

Capital contributions from non-controlling interest holders

    -       -       -       -       -       -       62,725       62,725  

Reorganization/dissolution of subsidiaries (Note 2)

    -       -       -       -       -               (23,189)       (23,189)  

Balance, September 30, 2013

    22,780     $ 23     $ (5,124)     $ 131,548     $ (2,6930     $ (14)     $ 94,471     $ 218,211  
 

See accompanying notes to consolidated financial statements.

 

 

 
- 7 -

 

 

JMP Group Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

   

Nine Months Ended September 30,

 
   

2013

   

2012

 

Cash flows from operating activities:

               

Net (loss) income

  $ (1,650 )   $ 4,809  

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

               

Provision for doubtful accounts

    2       -  

Provision for loan losses

    2,391       1,135  

Accretion of deferred loan fees

    (1,522 )     (928 )

Amortization of liquidity discount, net

    14,911       21,631  

Amortization of debt issuance costs

    31       -  

Amortization of original issuance discount, related to CLO II

    360       -  

Interest paid in kind

    (284 )     (129 )

Gain on sale and payoff of loans

    (1,591 )     (2,643 )

Change in other investments:

               

Fair value

    (3,850 )     (7,091 )

Incentive fees reinvested in general partnership interests

    (5,424 )     (2,216 )

Change in fair value of small business loans

    (90 )     (120 )

Realized gain on other investments

    (175 )     (2,280 )

Depreciation and amortization of fixed assets

    695       642  

Stock-based compensation expense

    3,883       582  

Deferred income taxes

    (2,830 )     (907 )

Net change in operating assets and liabilities:

               

Decrease (increase) in interest receivable

    220       (217 )

Increase in receivables

    (9,585 )     (8,685 )

(Increase) decrease in marketable securities

    (5,222 )     9,827  

Decrease (increase) in restricted cash (excluding restricted cash reserved for lending activities), deposits and other assets

    13,703       (22 )

Increase in marketable securities sold, but not yet purchased

    3,830       462  

Increase (decrease) in interest payable

    3,829       (4 )

Increase (decrease) in accrued compensation and other liabilities

    10,642       (11,195 )

Net cash provided by operating activities

    22,274       2,651  
                 

Cash flows from investing activities:

               

Purchases of fixed assets

    (269 )     (1,167 )

Investment in subsidiary

    (17,325 )     -  

Purchases of other investments

    (80,058 )     (19,873 )

Sales of other investments

    9,873       10,478  

Funding of loans collateralizing asset-backed securities issued

    (494,924 )     (122,542 )

Funding of small business loans

    (1,451 )     (18,459 )

Funding of loans held for investment

    (517 )     -  

Sale and payoff of loans collateralizing asset-backed securities issued

    157,951       111,681  

Principal receipts on loans collateralizing asset-backed securities issued

    33,066       25,453  

Net change in restricted cash reserved for lending activities

    325,625       (14,615 )

Cash associated with consolidation / deconsolidation of subsidiaries

    (13,343 )     -  

Net cash used in investing activities

    (81,372 )     (29,044 )

  

 
- 8 -

 

 

Cash flows from financing activities:

               

Proceeds from issuance of note payable

    15,000       -  

Proceeds from borrowing on line of credit

    -       9,987  

Proceeds from bond issuance

    46,000       -  

Payments of debt issuance costs

    (1,694 )     -  

Repayments of borrowing on line of credit

    (28,227 )     -  

Repayment of note payable

    (8,302 )     (6,552 )

Repayment of asset-backed securities issued

    (20,647 )     -  

Dividends and dividend equivalents paid on common stock and RSUs

    (2,420 )     (2,279 )

Purchases of shares of common stock for treasury

    (4,342 )     (4,839 )
Cash settlement of share-based compensation     (427 )     -  

Capital contributions of redeemable non-controlling interest holders

    134       110  

Capital contributions of nonredeemable non-controlling interest holders

    56,240       24,565  

Distributions to non-controlling interest shareholders

    (3,552 )     (5,272 )

Net cash provided by financing activities

    47,763       15,720  

Net decrease in cash and cash equivalents

    (11,335 )     (10,673 )

Cash and cash equivalents, beginning of period

    67,075       70,363  

Cash and cash equivalents, end of period

  $ 55,740     $ 59,690  
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the period for interest

  $ 5,938     $ 4,669  

Cash paid during the period for taxes

  $ 7,046     $ 839  
                 

Non-cash investing and financing activities:

               

Issuance of shares of common stock from treasury related to vesting of restricted stock units and exercises of stock options

  $ 225     $ 7,430  

 

See accompanying notes to consolidated financial statements.

 

 
- 9 -

 

 

JMP GROUP INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

1. Organization and Description of Business

 

JMP Group Inc., together with its subsidiaries (collectively, the “Company”), is an independent investment banking and asset management firm headquartered in San Francisco, California. The Company conducts its brokerage business through JMP Securities LLC (“JMP Securities”), its asset management business through Harvest Capital Strategies LLC (“HCS”), and HCAP Advisors LLC ("HCAP Advisors"), its corporate credit business through JMP Credit Corporation (“JMP Credit”), JMP Credit Advisors LLC (“JMPCA”) and certain principal investments through JMP Capital LLC (“JMP Capital”). 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, 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. From September 2011 through May 2, 2013, the Company also conducted corporate credit business through partly owned Harvest Capital Credit LLC ("HCC LLC"). On December 26, 2012, Harvest Capital Credit Corporation ("HCC") filed a registration statement on Form N-2 with the SEC in connection with a proposed initial public offering as a Business Development Company ("BDC") under the Investment Company Act of 1940. On May 2, 2013, HCC priced its initial public offering. On December 18, 2012, HCAP Advisors was formed as a Delaware Limited Liability Company. Effective May 1, 2013, HCAP Advisors provides investment advisory services. On April 30, 2013, the Company, through JMPCA CLO II Ltd ("CLO II") closed a CLO, managed by JMPCA.

 

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 2012 10-K. These consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for the fair statement of the results for the interim periods. The results of operations for any interim period are not necessarily indicative of the results to be expected for a full year.

 

The consolidated accounts of the Company include the wholly-owned subsidiaries, JMP Securities, HCS, JMP Capital, JMP Credit, JMPCA, and the partly-owned subsidiaries Harvest Growth Capital LLC (“HGC”), CLO I, HCC LLC (through May 2, 2013), Harvest Growth Capital II LLC (“HGC II”) (effective October 1, 2012), CLO II (effective April 30, 2013) and HCAP Advisors (effective May 1, 2013). All material intercompany accounts and transactions have been eliminated in consolidation. Non-controlling interest on the Consolidated Statements of Financial Condition at September 30, 2013 and December 31, 2012 relate to the interest of third parties in the partly-owned subsidiaries.

 

See Note 2 - Summary of Significant Accounting Policies in the Company's 2012 10-K for the Company's significant accounting policies.

 

Recent Business Transactions

 

On April 25, 2013, HCC entered into an acquisition agreement with HCC LLC. Pursuant to this acquisition agreement, immediately prior to the election to be treated as a BDC under the 1940 Act, HCC acquired HCC LLC, and the holders of membership interests in HCC LLC received shares of HCC common stock in exchange for their interests in HCC LLC. The outstanding limited liability company units of HCC LLC were converted into a number of shares of HCC common stock equal to (i) $33.7 million ( i.e. , the net asset value of HCC LLC as of December 31, 2012), plus the proceeds of sales of membership interests by HCC LLC since December 31, 2012, plus the reclassification of mezzanine equity to members capital, and minus distributions of pre - December 31, 2012 earnings made by HCC LLC after December 31, 2012, divided by (ii) $15.00 per share of HCC common stock. In connection with the merger, the number of units underlying each warrant, and the exercise price thereof, were converted into its common stock equivalent. HCC assumed and succeeded to all of the assets and liabilities of HCC LLC, including its obligations under the revolving credit facility with JMP Group, as amended. The conversion of units to shares and HCC LLC to HCC did not result in a change of control, or a change in management. The conversion was a transaction to change corporate form in preparation for the IPO. HCC engaged HCAP Advisors LLC to act as its adviser. Subject to the overall supervision of the HCC independent board of directors, HCAP Advisors manages HCC's day-to-day operations and provides investment advisory services. On May 2, 2013, HCC priced its initial public offering of 3.4 million shares of its common stock at a price of $15.00 per share, raising $51.0 million in gross proceeds. The underwriters of the offering were granted a 30-day option to purchase up to an additional 433,333 shares of common stock from the company. That option was exercised on May 15, raising an additional $6.5 million. After the offering, the Company's ownership of HCC was 11.6%. The Company performed a consolidation analysis at the time of the offering. Because of its current ownership and management position, the Company deconsolidated HCC effective May 2, 2013. The Company accounts for its investment in HCC using the fair value option.

 

 

 

 
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On April 3, 2013, entities sponsored by JMP Group Inc. priced a $343.8 million CLO. The senior notes offered in this transaction (the “Secured Notes”) were issued by JMP Credit Advisors CLO II Ltd., a special purpose Cayman vehicle, and co-issued in part by JMP Credit Advisors CLO II LLC, a special purpose Delaware vehicle, and were backed by a diversified portfolio of broadly syndicated leveraged loans. The Secured Notes were issued in multiple tranches and are rated by Standard & Poor's Ratings Services and, in respect of certain tranches, Moody's Investors Service, Inc. The Secured Notes were priced with a weighted average coupon of three-month LIBOR plus 1.86%. The Company, through a wholly-owned subsidiary, retained $17.3 million of the subordinated notes of the Issuer (the “Subordinated Notes”). The Subordinated Notes do not bear interest and are not rated. The transaction closed on April 30, 2013. The Company manages CLO II, and owns approximately 73% of the Subordinated Notes.

 

HCAP Advisors was formed on December 18, 2012. HCAP Advisors appointed JMP Group LLC as its Manager effective May 1, 2013, and began offering investment advisory services. The Company owns a 51% equity interest in HCAP Advisors. HCAP Advisors borrowed $2.5 million from JMP Capital LLC, to be repaid in quarterly installments, commencing on the last business day of March 2015, with the last such installment due and payable on December 31, 2017. HCAP Advisors used these funds to pay the underwriters a portion of the sales load in the amount of $2.5 million, related to the IPO of HCC. HCC is not obligated to repay the portion of the sales load paid by HCAP Advisors. 

 

The Company follows the authoritative accounting guidance for the consolidation of variable interest entities ("VIEs"). Such guidance applies to VIEs, which are entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficiency of equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. When the Company enters into a transaction with a VIE, the Company determines if it is the primary beneficiary of the VIE by performing a qualitative analysis of the VIE that includes a review of, among other factors, its capital structure, contractual terms, related party relationships, the Company's fee arrangements and the design of the VIE. The Company performed this analysis for HCAP Advisors and CLO II, and concluded they were VIEs and that the Company is the primary beneficiary for both. As a result, the Company consolidates the assets and liabilities of both entities. The underlying loans owned by CLO II are shown on the Consolidated Statements of Financial Condition under loans collateralizing asset-backed securities issued and the asset-backed securities ("ABS") issued to third parties are shown under asset-backed securities issued. See Note 5 and Note 7 for information pertaining to the loans owned and ABS issued by CLO II, respectively.

 

On August 6, 2013, JMP Capital LLC made a $0.5 million investment in RB Multifamily LLC ("RMI"), an investment company which invests in real estate joint ventures. On September 20, 2013, the Company made a subsequent investment of $2.2 million. The Company elected to account for its 31.25% equity interest in RMI using the fair value option. The primary reason for electing the fair value option was to measure the gains on the investments on the same basis as the other equity securities, all of which are stated at fair value. The Company uses net asset value as a practical expedient to estimate fair value. The gains on the investments in RMI are reported in Principal Transactions in the Consolidated Statements of Operation.

 

3. Recent Accounting Pronouncements

 

ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income , was issued to improve the reporting of reclassifications out of accumulated other comprehensive income of various components. The standard requires an entity to present either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The adoption of ASU 2013-02 on January 1, 2013 did not have a material impact on its financial statement disclosures.

 

 
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4. Fair Value Measurements

 

The following tables provide fair value information related to the Company’s financial instruments at September 30, 2013 and December 31, 2012:

 

   

At September 30, 2013

(In thousands)

 

Carrying Value

   

Fair Value  

           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 55,740     $ 55,740     $ -     $ -     $ 55,740  

Restricted cash and deposits

    84,788       84,788       -       -       84,788  

Marketable securities owned

    19,569       19,569       -       -       19,569  

Other investments

    169,413       10,611       62,757       95,861       169,229  

Loans held for investment, net of allowance for loan losses

    667       -       -       568       568  

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

    709,403       -       718,107       -       718,107   

Long term receivable

    1,090       -       -       1,330       1,330  

Total assets:

  $ 1,040,670     $ 170,708     $ 780,864     $ 97,759     $ 1,049,331   
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 15,397     $ 15,397     $ -     $ -     $ 15,397  

Asset-backed securities issued

    722,279       -       708,946       -       708,946  

Bond payable

    46,000       -       46,495       -       46,495  

Note payable

    17,184       -       17,184       -       17,184  

Total liabilities:

  $ 800,860     $ 15,397     $ 772,625     $ -     $ 788,022   

 

 

   

At December 31, 2012  

(In thousands)

 

Carrying Value

   

Fair Value  

           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 67,075     $ 67,075     $ -     $ -     $ 67,075  

Restricted cash and deposits

    69,813       69,813       -       -       69,813  

Marketable securities owned

    14,347       14,347       -       -       14,347  

Other investments

    81,161       865       28,137       51,943       80,945  

Loans held for investment, net of allowance for loan losses

    150       -       -       150       150  

Loans held for sale

    3,134       -       3,134       -       3,134  

Small business loans

    38,934       -       3,487       35,447       38,934  

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

    401,003       -       406,313       5,716       412,029  

Long term receivable

    1,342       -       -       1,647       1,647  

Total assets:

  $ 676,959     $ 152,100     $ 441,071     $ 94,903     $ 688,074  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 11,567     $ 11,567     $ -     $ -     $ 11,567  

Asset-backed securities issued

    415,456       -       404,341       -       404,341  

Note payable

    10,486       -       10,486       -       10,486  

Line of credit

    28,227       -       28,227       -       28,227  

Total liabilities:

  $ 465,736     $ 11,567     $ 443,054     $ -     $ 454,621  

 

 
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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, 2013 and December 31, 2012:  

 

(In thousands)

 

September 30, 2013

   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Marketable securities owned

  $ 19,569     $ -     $ -     $ 19,569  

Other investments:

                               

Investments in hedge funds managed by HCS

    -       60,184       -       60,184  

Investments in funds of funds managed by HCS

    -       -       130       130  

Total investment in funds managed by HCS

    -       60,184       130       60,314  

Investments in private equity/ real estate funds

    -       -       4,944       4,944  

Warrants and other held at JMPS and JMPG LLC

    -       -       1,286       1,286  

Equity securities in HCC

    10,549       -       -       10,549  

Equity securities in HGC, HGC II and JMP Capital

    62       2,573       83,425       86,060  

Forward purchase contract

    -       -       6,076       6,076  

Total other investments

    10,611       62,757       95,861       169,229  

Total assets:

  $ 30,180     $ 62,757     $ 95,861     $ 188,798  
                                 

Marketable securities sold, but not yet purchased

    15,397       -       -       15,397  
                                 

Total liabilities:

  $ 15,397     $ -     $ -     $ 15,397  

 

 

(In thousands)

 

December 31, 2012  

   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Marketable securities owned

  $ 14,347     $ -     $ -     $ 14,347  

Small business loans

    -       3,487       35,447       38,934  

Other investments:

                               

Investments in hedge funds managed by HCS

    -       27,907       -       27,907  

Investments in funds of funds managed by HCS

    -       -       109       109  

Total investment in funds managed by HCS

    -       27,907       109       28,016  

Investment in private equity fund

    -       -       2,332       2,332  

Warrants and other held at JMPS

    -       -       413       413  

Warrants and equity securities held at HCC LLC

    -       -       2,577       2,577  

Equity securities in HGC, HGC II and JMP Capital

    865       230       41,075       42,170  

Forward purchase contract

    -       -       5,437       5,437  

Total other investments

    865       28,137       51,943       80,945  

Total assets:

  $ 15,212     $ 31,624     $ 87,390     $ 134,226  
                                 

Marketable securities sold, but not yet purchased

    11,567       -       -       11,567  
                                 

Total liabilities:

  $ 11,567     $ -     $ -     $ 11,567  

 

The Company holds a limited partner investment in a private equity fund. This fund aims to achieve medium to long-term capital appreciation by investing in a diversified portfolio of technology companies that leverage the growth of Greater China. The Company also holds an investment in a real estate fund, which aims to generate revenue stream from investments in real estate joint ventures.

 

The Company's Level 2 assets held in other investments consist of small business loans (through May 2, 2013), investments in hedge funds managed by HCS, and equity securities in HGC, HGC II, and JMP Capital. The fair value of the Level 2 small business loans is calculated using the average market bid and ask quotation obtained from a loan pricing service. The fair value of the investment in hedge funds is calculated using the net asset value. 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 Level 2 equity securities in HGC, HGC II, and JMP Capital reflect investments in public securities, where the Company is subject to a lockup period. The fair value of the Level 2 equity securities in HGC, HGC II and JMP Capital is calculated by applying a discount rate to the quoted market prices of the portfolio securities due to lack of marketability.

 

 
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The tables below provide a reconciliation of the beginning and ending balances for the assets held at fair value using significant unobservable inputs (Level 3) for the three months ended September 30, 2013 and 2012.

        

(In thousands)

 

Balance as of

June 30,

2013

   

Purchases

   

Sales

   

Settlements

   

Total gains (losses)

- realized and

unrealized

included in

earnings (1)

   

Transfers out of Level

3 /

Deconsolidation

   

Balance as of

September 30,

2013

   

Unrealized

gains/(losses)

included in earnings related to assets still

held at reporting

date

 
                                                                 

General partner investment in funds of funds

  $ 128     $ -     $ -     $ -     $ 2     $ -     $ 130     $ 2  

Investment in private equity/ real estate funds

    2,691       2,734       -       (634)       153       -       4,944       153  

Warrants and other held at JMPS/JMPG

    783       -       -       -       503       -       1,286       503  

Equity securities in HGC, HGC II and JMP Capital

    77,741       9,884       -       -       (1,628)       (2,572)       83,425       (1,628)  

Forward purchase contract

    5,000       -       -       -       1,076       -       6,076       1,076  

Total Level 3 assets

  $ 86,343     $ 12,618     $ -     $ (634)     $ 106     $ (2,572)     $ 95,861     $ 106  

 

  (1) No Level 3 asset gains (losses) are included in other comprehensive income. All realized and unrealized gains (losses) related to Level 3 assets are included in earnings.

 

(In thousands)

 

Balance as of

June 30,

2012

   

Purchases

   

Sales

   

Settlements

   

Total gains (losses)

- realized and

unrealized

included in

earnings (1)

   

Transfers

out of

Level 3

   

Balance as of

September 30,

2012

   

Unrealized

gains/(losses)

included in earnings related to assets still

held at reporting

date

 
                                                                 

General partner investment in funds of funds

  $ 104     $ -     $ -     $ -     $ 1     $ -     $ 105     $ 1  

Investment in private equity fund

    2,741       25       -       -       (322)       -       2,444       (322)  

Warrants and other held at JMPS/JMPG

    782       -       -       -       (113)       -       669       (113)  

Warrants and other held at HCC LLC

    100       206       -       -       -       -       306       -  

Small business loans

    16,478       3,306       -       -       318               20,102       318  

Equity securities in HGC, HGC II and JMP Capital

    35,976       2,771       -       -       (3,070)       (300)       35,377       (3,070)  

Forward purchase contract

    7,424       -       -       -       (887)       -       6,537       (887)  

Total Level 3 assets

  $ 63,605     $ 6,308     $ -     $ -     $ (4,073)     $ (300)     $ 65,540