JMP Group LLC
JMP Group Inc. (Form: 10-Q, Received: 11/04/2014 17:00:52)

 

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, 2014 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 31, 2014 was 20,551,582.  

 



 
 

 

 

 

TABLE OF CONTENTS

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

        

Item 1.

Financial Statements - JMP Group Inc.

 

 

Consolidated Statements of Financial Condition – September 30, 2014 and December 31, 2013 (Unaudited)

 

 

Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)

 

 

Consolidated Statements of Comprehensive Income - For the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)

 

 

Consolidated Statement of Changes in Equity - For the Nine Months Ended September 30, 2014 (Unaudited)

 

 

Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2014 and 2013 (Unaudited)

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

10 

Item 2.

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

 

36 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

64 

Item 4.

Controls and Procedures

 

65 

       

PART II.

OTHER INFORMATION

 

65 

        

Item 1.

Legal Proceedings

 

65 

Item 1A.

Risk Factors

 

65 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

66 

Item 3.

Defaults Upon Senior Securities

 

66 

Item 4.

Mine Safety Disclosures

 

66 

Item 5.

Other Information

 

66 

Item 6.

Exhibits

 

66 

      

SIGNATURES

 

67 

      

EXHIBIT INDEX

 

68 

 

 
- 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. From time to time JMP Group Inc. may use its website as a channel of distribution of material company information.

 

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 and inclusions of our internet address in this Form 10-Q are inactive textual references only.

 

 
- 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, 2014

   

December 31, 2013

 
                 

Assets

               

Cash and cash equivalents

  $ 87,735     $ 65,906  

Restricted cash and deposits (includes cash on deposit with clearing broker of $220 and $150 at September 30, 2014 and December 31, 2013, respectively)

    199,496       68,029  

Receivable from clearing broker

    1,579       1,280  

Investment banking fees receivable, net of allowance for doubtful accounts of $15 and zero at September 30, 2014 and December 31, 2013, respectively

    9,081       13,161  

Marketable securities owned, at fair value

    35,630       29,295  

Incentive fee receivable

    6,152       7,910  

Other investments (includes $197,890 and $161,518 measured at fair value at September 30, 2014 and December 31, 2013, respectively)

    199,781       161,773  

Loans held for investment, net of allowance for loan losses

    1,786       825  

Loans collateralizing asset-backed securities issued, net of allowance for loan losses (1)

    917,715       727,270  

Interest receivable

    2,257       1,876  

Fixed assets, net

    2,287       2,092  

Deferred tax assets

    7,220       12,492  

Other assets

    20,949       30,022  

Total assets

  $ 1,491,668     $ 1,121,931  
                 

Liabilities and Equity

               

Liabilities:

               

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

  $ 18,462     $ 13,749  

Accrued compensation

    46,800       51,347  

Asset-backed securities issued

    1,013,849       716,423  

Interest payable

    3,455       2,767  

Note payable

    -       15,000  

Line of credit

    -       2,895  

Bond payable

    94,300       46,000  

Deferred tax liability

    6,984       3,625  

Other liabilities

    29,829       32,885  

Total liabilities

    1,213,679       884,691  
                 

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, 2014 and December 31, 2013; 21,619,369 and 21,819,446 shares outstanding at September 30, 2014 and December 31, 2013, respectively

    23       23  

Additional paid-in capital

    137,933       132,547  

Treasury stock, at cost, 1,160,683 and 960,606 shares at September 30, 2014 and December 31, 2013, respectively

    (7,383 )     (6,076 )

Retained earnings (Accumulated deficit)

    6,114       (109 )

Total JMP Group Inc. stockholders' equity

    136,687       126,385  

Nonredeemable Non-controlling Interest

    141,302       110,855  

Total equity

    277,989       237,240  

Total liabilities and equity

  $ 1,491,668     $ 1,121,931  

 

 

(1)

As of December 31, 2013, includes loans which were subsequently used to collateralize CLO III upon its securitization in September 2014.

 

 

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, 2014

   

December 31, 2013

 
                 

Cash and cash equivalents

  $ 682     $ 211  

Restricted cash

    179,663       43,497  

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

    917,716       726,774  

Interest receivable

    2,212       1,851  

Incentive fees receivable

    676       495  

Deferred tax assets

    2,689       1,935  

Other assets

    5,908       3,107  

Total assets of consolidated VIEs

  $ 1,109,546     $ 777,870  
                 

Accrued compensation

    363       405  

Asset-backed securities issued

    1,013,849       716,423  

Note payable (1)

    4,105       4,053  

Interest payable

    1,931       1,947  

Deferred tax liability

    1,400       1,647  

Other liabilities

    951       882  

Total liabilities of consolidated VIEs

  $ 1,022,599     $ 725,357  

 

 

(1)

September 30, 2014 and December 31, 2013 balances are inclusive of intercompany loan.

 

  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,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

Revenues

                               

Investment banking

  $ 17,063     $ 19,137     $ 65,177     $ 52,301  

Brokerage

    6,455       5,750       19,585       17,924  

Asset management fees

    9,630       5,328       30,032       15,606  

Principal transactions

    (4,276 )     640       1,719       4,849  

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

    (12 )     166       (183 )     1,591  

Net dividend income

    242       243       739       290  

Other income

    1,192       267       1,564       581  

Non-interest revenues

    30,294       31,531       118,633       93,142  
                                 

Interest income

    9,973       8,734       27,773       24,603  

Interest expense

    (5,614 )     (4,421 )     (15,866 )     (25,825 )

Net interest income (expense)

    4,359       4,313       11,907       (1,222 )
                                 

Provision for loan losses

    (956 )     (467 )     (1,665 )     (2,391 )
                                 

Total net revenues after provision for loan losses

    33,697       35,377       128,875       89,529  
                                 

Non-interest expenses

                               

Compensation and benefits

    28,315       24,685       97,670       69,066  

Administration

    1,901       1,919       5,383       7,255  

Brokerage, clearing and exchange fees

    772       939       2,515       2,851  

Travel and business development

    890       994       2,721       2,991  

Communications and technology

    970       907       2,860       2,592  

Occupancy

    846       822       2,522       2,434  

Professional fees

    1,157       632       3,233       2,468  

Depreciation

    235       231       689       695  

Other

    236       342       778       649  

Total non-interest expenses

    35,322       31,471       118,371       91,001  

Net income (loss) before income tax expense

    (1,625 )     3,906       10,504       (1,472 )

Income tax expense (benefit)

    1,460       1,634       5,606       178  

Net income (loss)

    (3,085 )     2,272       4,898       (1,650 )

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

    (4,580 )     (1,017 )     (3,790 )     (1,785 )

Net income (loss) attributable to JMP Group Inc.

  $ 1,495     $ 3,289     $ 8,688       135  
                                 

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

                               

Basic

  $ 0.07     $ 0.15     $ 0.38     $ 0.01  

Diluted

  $ 0.06     $ 0.14     $ 0.37     $ 0.01  
                                 

Dividends declared per common share

  $ 0.060     $ 0.035     $ 0.155     $ 0.105  
                                 

Weighted average common shares outstanding:

                               

Basic

    21,686       22,014       21,739       22,271  

Diluted

    23,834       22,713       23,680       22,669  

   

See accompanying notes to consolidated financial statements.

 

 
- 6 -

 

 

  J MP Group Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

Net income (loss)

  $ (3,085 )   $ 2,272     $ 4,898     $ (1,650 )

Other comprehensive income

                               

Unrealized gain on cash flow hedge, net of tax

    -       13       -       41  

Comprehensive income (loss) attributable to JMP Group Inc.

    (3,085 )     2,285       4,898       (1,609 )

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

    (4,580 )     (1,017 )     (3,790 )     (1,785 )

Comprehensive income (loss) attributable to JMP Group Inc.

  $ 1,495     $ 3,302     $ 8,688     $ 176  

 

 

 

 

JMP Group Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

(In thousands)

 

                                   

Retained

                 
    Common              

Additional

   

Earnings

   

Nonredeemable

         
   

Stock

   

Treasury

   

Paid-In

   

(Accumulated

   

Non-controlling

         
   

Shares

   

Amount

   

Stock

   

Capital

   

Deficit)

   

Interest

   

Total Equity

 

Balance, December 31, 2013

    22,780     $ 23     $ (6,076 )   $ 132,547     $ (109 )   $ 110,855     $ 237,240  

Net income

    -       -       -       -       8,688       (3,790 )     4,898  

Additonal paid-in capital - stock-based compensation

    -       -       -       6,136       -       -       6,136  

Dividends and dividend equivalents declared on common stock and restricted stock units

    -       -       -       -       (3,562 )     -       (3,562 )

Purchases of shares of common stock for treasury

    -       -       (1,899 )     -       -       -       (1,899 )

Reissuance of shares of common stock from treasury

    -       -       592       94       -       -       686  

Purchase of subsidiary shares from non-controlling interest holders

    -       -       -       (844 )     -       (5,156 )     (6,000 )

Distributions to non-controlling interest holders

    -       -       -       -       -       (3,032 )     (3,032 )

Capital contributions from non-controlling interest holders

    -       -       -       -       -       18,202       18,202  

Sale of subsidiary shares to non-controlling interest holders

    -       -       -       -       1,097       24,223       25,320  

Balance, September 30, 2014

    22,780     $ 23     $ (7,383 )   $ 137,933     $ 6,114     $ 141,302     $ 277,989  

 

See accompanying notes to consolidated financial statements.

 

 
- 7 -

 

 

JMP Group Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

   

Nine Months Ended September 30,

 
   

2014

   

2013

 

Cash flows from operating activities:

               

Net income (loss)

  $ 4,898     $ (1,650 )

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

               

Provision for doubtful accounts

    15       2  

Provision for loan losses

    1,665       2,391  

Accretion of deferred loan fees

    (934 )     (1,522 )

Amortization of liquidity discount, net

    (88 )     14,911  

Amortization of debt issuance costs

    296       31  

Amortization of original issue discount, related to CLO II

    684       360  

Interest paid in kind

    (111 )     (284 )

Loss (gain) on sale and payoff of loans

    183       (1,591 )

Change in other investments:

               

Fair value

    (2,121 )     (3,850 )

Incentive fees reinvested in general partnership interests

    (13,641 )     (5,424 )

Change in fair value of small business loans

    -       (90 )

Realized gain on other investments

    (680 )     (175 )

Depreciation and amortization of fixed assets

    689       695  

Stock-based compensation expense

    6,945       3,883  

Deferred income taxes

    8,631       (2,830 )

Net change in operating assets and liabilities:

               

(Increase) decrease in interest receivable

    (270 )     220  

Decrease (increase) in receivables

    4,694       (9,585 )

Increase in marketable securities

    (6,335 )     (5,222 )

(Increase) decrease in restricted cash (excluding restricted cash reserved for lending activities), deposits and other assets

    (9,927 )     13,703  

Increase in marketable securities sold, but not yet purchased

    4,713       3,830  

Increase in interest payable

    688       3,829  

(Decrease) increase in accrued compensation and other liabilities

    (7,602 )     10,642  

Net cash (used in) provided by operating activities

    (7,608 )     22,274  
                 

Cash flows from investing activities:

               

Purchases of fixed assets

    (884 )     (269 )

Investment in subsidiary

    -       (17,325 )

Purchases of other investments

    (43,408 )     (80,058 )

Sales of other investments

    37,795       9,873  

Funding of loans collateralizing asset-backed securities issued

    (466,932 )     (494,924 )

Funding of small business loans

    -       (1,451 )

Funding of loans held for investment

    (961 )     (517 )

Sale and payoff of loans collateralizing asset-backed securities issued

    222,284       157,951  

Principal receipts on loans collateralizing asset-backed securities issued

    53,377       33,066  

Net change in restricted cash reserved for lending activities

    (126,147 )     325,625  

Cash associated with consolidation / deconsolidation of subsidiaries

    -       (13,343 )

Net cash used in investing activities

    (324,876 )     (81,372 )

 

See accompanying notes to consolidated financial statements.  

 

 
- 8 -

 

 

JMP Group Inc.

Consolidated Statements of Cash Flows - (Continued)

(Unaudited)

(In thousands)   

 

   

Nine Months Ended September 30,

 
   

2014

   

2013

 

Cash flows from financing activities:

               

Proceeds from issuance of note payable

    5,000       15,000  

Proceeds from CLO III credit warehouse

    207,393       -  

Proceeds from bond issuance

    48,300       46,000  

Proceeds from asset-backed securities issued

    329,339       -  

Payments of debt issuance costs

    (1,740 )     (1,694 )

Repayment of note payable

    (20,000 )     (8,302 )

Repayment of line of credit

    (2,895 )     (28,227 )

Repayment of credit warehouse

    (207,393 )     -  

Repayment of asset-backed securities issued

    (32,597 )     (20,647 )

Dividends and dividend equivalents paid on common stock and RSUs

    (3,562 )     (2,420 )

Purchases of shares of common stock for treasury

    (1,899 )     (4,342 )

Capital contributions of redeemable non-controlling interest holders

    -       134  

Capital contributions of nonredeemable non-controlling interest holders

    18,202       56,240  

Distributions to non-controlling interest shareholders

    (3,032 )     (3,552 )

Purchase of subsidiary shares from non-controlling interest holders

    (6,000 )     -  

Cash settlement of stock-based compensation

    (123 )     (427 )

Sale of subsidiary shares to non-controlling interest holders

    25,320       -  

Net cash provided by financing activities

    354,313       47,763  

Net increase (decrease) in cash and cash equivalents

    21,829       (11,335 )

Cash and cash equivalents, beginning of period

    65,906       67,075  

Cash and cash equivalents, end of period

  $ 87,735     $ 55,740  
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the period for interest

  $ 14,472     $ 5,938  

Cash paid during the period for taxes

  $ 9,439     $ 7,046  
                 

Non-cash investing and financing activities:

               

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

  $ 592     $ 225  

 

See accompanying notes to consolidated financial statements.  

 

 
- 9 -

 

 

JMP GROUP INC.

Notes to Consolidated Financial Statements

September 30, 2014

(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”) and 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 2013, the Company also conducted corporate credit business through partially owned Harvest Capital Credit LLC (“HCC LLC”). On December 18, 2012, HCAP Advisors was formed as a Delaware Limited Liability Company. Effective May 1, 2013, HCAP Advisors provides investment advisory services to Harvest Capital Credit Corporation (“HCC”). Through JMPCA, the Company manages JMPCA CLO I Ltd (“CLO I”), JMPCA CLO II Ltd (“CLO II”) and JMPCA CLO III Ltd (“CLO III”).

 

2. Summary of Significant Accounting Policies

 

Recent Transactions

 

In January 2014, the Company contributed an additional $15.0 million investment to CLO III, bringing its total equity in the entity to $25.0 million. The $25.0 million equity financing was used to purchase loans, prior to leveraging the existing CLO III credit warehouse held at BNP Paribas. The equity investment increased to $30.0 million in the third quarter of 2014, and the warehouse facility increased to $150.0 million. On September 30, 2014, CLO III closed a $370.5 million CLO transaction. The senior notes offered in this transaction (the “Secured Notes”) were issued by JMP Credit Advisors CLO III Ltd., and coissued in part by JMP Credit Advisors CLO III LLC, and are backed primarily by a diversified portfolio of broadly syndicated leveraged loans. The Secured Notes are subject to a two-year non-call period. The CLO has a four-year reinvestment period, through October 17, 2018, that allows for the use of the proceeds from principal repayments on, or sales of, collateral assets towards the purchase of qualifying replacement assets, subject to certain conditions and limitations. A third party and employees of JMPCA purchased subordinated notes in CLO III, reducing the Company’s investment in the subordinated notes to $4.7 million, or 13.5%. As of September 30, 2014, the Company owned 13.5% of the subordinated notes.

 

Upon the closing of CLO III, the Company performed a consolidation analysis to determine appropriate consolidation treatment. An entity is considered a VIE and, therefore, would be subject to the consolidation provisions of ASC 810-10-15 if, by design, equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In the analysis, 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. As of September 30, 2014, CLO III was determined to be a VIE. The Company was identified as the primary beneficiary based on the ability to direct activities of CLO III through its subsidiary manager, JMP Credit Advisors, and the 13.5% ownership of the subordinated notes. As a result, the Company consolidates the assets and liabilities of CLO III, and the underlying loans owned by the CLO are shown on the Consolidated Statements of Financial Condition under loans collateralizing asset-backed securities issued and the asset-backed securities issued to third parties are shown under asset-backed securities issued.

 

 
- 10 -

 

 

In the first quarter of 2014, the Company repurchased $6.0 million of the unsecured subordinated notes from CLO II non-controlling interests, increasing the Company’s ownership from 72.8% to 98.0%. The effects of changes on the Company’s equity from net income attributable to JMP Group Inc. and the purchase of CLO II non-controlling interest are noted below.

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

Net income (loss) attributable to JMP Group Inc.

  $ 1,495     $ 3,289     $ 8,688     $ 135  

Transfers from non-controlling interest

                               

Decrease in JMP Group Inc. paid-in capital for purchase of CLO II interest

    -       -       (844 )     -  

Net transfers from non-controlling interest

    -       -       (844 )     -  

Change from net income (loss) attributable to JMP Group Inc and transfers from non-controlling interest

  $ 1,495     $ 3,289     $ 7,844     $ 135  

 

In the third quarter of 2014, the board of directors approved a transaction to convert its corporate form into a limited liability company that would be taxed as a partnership, and not as a corporation, contingent upon the approval by its stockholders at a December 1, 2014 meeting. In connection with the proposed transaction, the Company has entered into an agreement and plan of merger with a newly formed, wholly owned, limited liability company subsidiary, JMP Group LLC, and a newly formed Delaware corporation and indirect wholly owned subsidiary, JMP Merger Corp. Subject to the approval of JMP's stockholders and the decision of its board of directors to complete the transaction, JMP would be merged with and into JMP Merger Corp., with JMP continuing as the surviving entity and as a direct, wholly owned subsidiary of JMP Group LLC (the "Reorganization Transaction"). The Reorganization Transaction, if completed, would result in each share of currently issued and outstanding JMP stock being exchanged for a limited liability company interest in JMP Group LLC. If approved by the stockholders, the Reorganization Transaction is anticipated to be completed by January 1, 2015.

 

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 2013 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 partially-owned subsidiaries Harvest Growth Capital LLC (“HGC”), Harvest Growth Capital II LLC (“HGC II”), HCC LLC (from August 18, 2011 through May 2, 2013), CLO I, CLO II (effective April 30, 2013), HCAP Advisors (effective May 1, 2013), and CLO III (effective December 11, 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, 2014 and December 31, 2013 relate to the interest of third parties in the partly-owned subsidiaries.

 

See Note 2 - Summary of Significant Accounting Policies in the Company's 2013 10-K for the Company's significant accounting policies.

 

3. Recent Accounting Pronouncemen ts

 

ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists was issued to provide guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity settles at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The adoption of ASU 2013-11 on January 1, 2014 did not have a material impact on the Company’s financial statement disclosures.

 

In May 2014, ASU 2014-9 , Revenue from Contracts with Customers was issued to provide a more robust framework for addressing revenue issues. The provisions of this standard are effective for annual reporting periods beginning after December 15, 2016, and do not allow early adoption. The adoption of ASC 2014-9 may have an impact on the Company’s financial statements; however, the extent is not yet determined.

 

ASU 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved aft er the Requisite Service Period was issued to provide guidance on share-based payments with terms where a performance target that affects vesting could be achieved after the requisite service period. The provisions of this standard are effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015, and allows for early adoption. The adoption of ASC 2014-12 may have an impact on the Company’s financial statements; however, the extent is not yet determined.

 

In August 2014, ASU 2014-13, Consolidation: Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financial Entity was issued to address discrepancy in the fair value measurement of a collateralized financing entity’s financial assets from the fair value of their financial liabilities even when the financial liabilities have recourse only to the financial assets. Prior to this update, there was no specific guidance on how to account for this difference. As the Company does not carry its CLOs’ financial assets and liabilities at fair value, the adoption of ASU 2014-13 for annual and interim periods ending after December 15, 2015 will not impact the Company’s financial statement. Given the size of the existing discrepancy between the fair value of the Company’s CLOs’ financial assets and liabilities, the adoption of this ASU is not anticipated to have a material impact on the Company’s financial statement disclosures.

 

 
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ASU 2014- 15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern was issued in August 2014 to provide guidance regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. This standard will be effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The adoption of ASU 20104-15 is not expected to have an impact on the Company’s financial statements.

 

4. Fair Value Measurements

 

The following tables provide fair value information related to the Company’s financial instruments at September 30, 2014 and December 31, 2013:

 

   

At September 30, 2014

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 87,735     $ 87,735     $ -     $ -     $ 87,735  

Restricted cash and deposits

    199,496       199,496       -       -       199,496  

Marketable securities owned

    35,630       35,630       -       -       35,630  

Other investments

    199,781       3,515       72,532       123,733       199,780  

Loans held for investment, net of allowance for loan losses

    1,786       -       -       1,546       1,546  

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

    917,715       -       919,707       -       919,707  

Long term receivable

    939       -       -       1,068       1,068  

Total assets:

  $ 1,443,082     $ 326,376     $ 992,239     $ 126,347     $ 1,444,962  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 18,462     $ 18,462     $ -     $ -     $ 18,462  

Asset-backed securities issued

    1,013,849       -       1,008,582       -       1,008,582  

Bond payable

    94,300       -       94,886       -       94,886  

Total liabilities:

  $ 1,126,611     $ 18,462     $ 1,103,468     $ -     $ 1,121,930  

 

 

   

At December 31, 2013

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 65,906     $ 65,906     $ -     $ -     $ 65,906  

Restricted cash and deposits

    68,029       68,029       -       -       68,029  

Marketable securities owned

    29,295       29,295       -       -       29,295  

Other investments

    161,773       57       49,389       112,072       161,518  

Loans held for investment, net of allowance for loan losses

    825       -       -       693       693  

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

    727,270       -       737,327       -       737,327  

Long term receivable

    1,152       -       -       1,364       1,364  

Total assets:

  $ 1,054,250     $ 163,287     $ 786,716     $ 114,129     $ 1,064,132  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 13,749     $ 13,749     $ -     $ -     $ 13,749  

Asset-backed securities issued

    716,423       -       710,961       -       710,961  

Note payable

    15,000       -       15,000       -       15,000  

Line of credit

    2,895       -       2,895       -       2,895  

Bond payable

    46,000       -       46,552       -       46,552  

Total liabilities:

  $ 794,067     $ 13,749     $ 775,408     $ -     $ 789,157  

 

 
- 12 -

 

 

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, 2014 and December 31, 2013:  

 

(In thousands)

 

September 30, 2014

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Marketable securities owned

  $ 35,630     $ -     $ -     $ 35,630  

Other investments:

                               

Investments in hedge funds managed by HCS

    -       72,254       -       72,254  

Investments in funds of funds managed by HCS

    -       -       156       156  

Total investment in funds managed by HCS

    -       72,254       156       72,410  

Investments in private equity/ real estate funds

    -       -       6,731       926,438  

Warrants and other held at JMPS and JMPG LLC

    -       -       647       647  

Equity securities in HGC, HGC II and JMP Capital

    3,515       278       108,075       111,868  

Forward purchase contract and swaption

    -       -       6,234       6,234  

Total other investments

    3,515       72,532       121,843       197,890  

Total assets:

  $ 39,145     $ 72,532     $ 121,843     $ 233,520  
                                 

Marketable securities sold, but not yet purchased

    18,462       -       -       18,462  
                                 

Total liabilities:

  $ 18,462     $ -     $ -     $ 18,462  

 

(In thousands)

 

December 31, 2013

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Marketable securities owned

  $ 29,295     $ -     $ -     $ 29,295  

Other investments:

                               

Investments in hedge funds managed by HCS

    -       44,647       -       44,647  

Investments in funds of funds managed by HCS

    -       -       139       139  

Total investment in funds managed by HCS

    -       44,647       139       44,786  

Investments in private equity/ real estate funds

    -       -       5,967       5,967  

Warrants and other held at JMPS and JMPG LLC

    -       -       1,121       1,121  

Equity securities in HGC, HGC II and JMP Capital

    57       4,742       97,981       102,780  

Forward purchase contract

    -       -       6,864       6,864  

Total other investments

    57       49,389       112,072       161,518  

Total assets:

  $ 29,352     $ 49,389     $ 112,072     $ 190,813  
                                 

Marketable securities sold, but not yet purchased

    13,749       -       -       13,749  
                                 

Total liabilities:

  $ 13,749     $ -     $ -     $ 13,749  

 

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 investments in real estate funds, which aim to generate revenue stream from investments in real estate joint ventures. The Company recognizes this investment using the fair value option. The primary reason for electing the fair value option was to measure gains on the same basis as the Company’s other equity securities, which are stated at fair value.

 

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.

 

 
- 13 -

 

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, 2014 and 2013.

(In thousands)

 

Balance as of

June 30, 2014

   

Purchases

   

Sales

   

Settlements

   

Total gains

(losses) -

realized and

unrealized

included in

earnings (1)

   

Transfers

in/(out) of

Level 3

   

Balance as of

September 30,

2014

   

Unrealized

gains/(losses)

included in

earnings related to

assets still held at  

reporting date

 

Investments in funds of funds managed by HCS

  $ 147     $ -     $ -     $ -     $ 9     $ -     $ 156     $ 9  

Investments in private equity/ real estate funds

    6,909       -       -       -       (178 )     -       6,731       (178 )

Warrants and other held at JMPS

    916       -       -       -       (269 )     -       647       (269 )

Equity securities held by HGC, HGC II and JMP Capital

    101,001       9,850       -       -       (2,776 )     -       108,075       (2,776 )

Forward Purchase Contract and Swaption

    6,434       -       -       -       (200 )     -       6,234       (200 )

Total Level 3 assets

  $ 115,407     $ 9,850     $ -     $ -     $ (3,414 )   $ -     $ 121,843     $ (3,414 )

 

(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, 2013

   

Purchases

   

Sales

   

Settlements

   

Total gains

(losses) -

realized and

unrealized

included in

earnings (1)

   

Transfers

in/(out) of

Level 3

   

Balance as of

September 30,

2013

   

Unrealized

gains/(losses)

included in

e arnings related to

assets still held at  

reporting date

 

Investments in funds of funds managed by HCS

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

Investments in private equity/ real estate funds

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

Warrants and other held at JMPS

    783       -       -       -       503       -       1,286       503  

Equity securities held by 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.

 

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 nine months ended September 30, 2014 and 2013.

(In thousands)

 

Balance as of

December 31,

2013

   

Purchases

   

Sales

   

Settlements

   

Total gains

(losses) -

realized and

unrealized

included in

earnings (1)

   

Transfers

in/(out) of

Level 3

   

Balance as of

September 30,

2014

   

Unrealized

gains/(losses)

included in

earnings related to

assets still held at

reporting date

 

Investments in funds of funds managed by HCS

  $ 139     $ -     $ -     $ -     $ 17     $ -     $ 156     $ 17  

Investments in private equity/ real estate funds

    5,967       1,080       -       (396 )     80       -       6,731       80  

Warrants and other held at JMPS

    1,121       -       -       (19 )     (455 )     -       647       -  

Equity securities held by HGC, HGC II and JMP Capital

    97,981       12,869       (2,204 )     -       (350 )     (221 )     108,075       (556 )

Forward Purchase Contract and Swaption

    6,864       460       -       -       (1,090 )     -       6,234       (1,090 )

Total Level 3 assets

  $ 112,072     $ 14,409     $ (2,204 )   $ (415 )   $ (1,798 )   $ (221 )   $ 121,843     $ (1,549 )

 

(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.

 
- 14 -

 

 

(In thousands)

 

Balance as of

December 31,

2012

   

Purchases

   

Sales

   

Settlements

   

Total gains

(losses) -

realized and

unrealized

included in

earnings (1)

   

Transfers

in/(out) of

Level 3

   

Balance as of

September 30,

2013

   

Unrealized

gains/(losses)

included in

earnings related to

assets still held a t

reporting date