JMP Group LLC
JMP GROUP LLC (Form: 10-Q, Received: 08/04/2015 16:24:35)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


  FORM 10-Q

 


 

(Mark One)

 

 

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

   
  For the quarterly period ended June 30, 2015 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: 001-302350     

JMP Group LLC

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

47 -1 632931

(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 ☒

 

JMP Group LLC shares representing limited liability company interests outstanding as of July 31, 2015: 21,240,820.

 

 
 

 

 

TABLE OF CONTENTS

 

       

 

 

Page

PART I.

FINANCIAL INFORMATION

 

4

     

Item 1.

Financial Statements - JMP Group LLC.

 

4

 

Consolidated Statements of Financial Condition – June 30, 2015 and December 31, 2014 (Unaudited)

 

4

 

Consolidated Statements of Operations - For the Three and Six Months Ended June 30, 2015 and 2014 (Unaudited)

 

6

 

Consolidated Statements of Comprehensive Income - For the Three and Six Months Ended June 30, 2015 and 2014 (Unaudited)

 

7

 

Consolidated Statements of Changes in Equity - For the Three and Six Months Ended June 30, 2015 and 2014 (Unaudited)

 

7

 

Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 2015 and 2014 (Unaudited)

 

8

 

Notes to Consolidated Financial Statements (Unaudited)

 

10

Item 2.

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

 

40

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

69

Item 4.

Controls and Procedures

 

70

     

PART II.

OTHER INFORMATION

 

70

     

Item 1.

Legal Proceedings

 

70

Item 1A.

Risk Factors

 

71

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

72

Item 3.

Defaults Upon Senior Securities

 

72

Item 4.

Mine Safety Disclosures

 

72

Item 5.

Other Information

 

72

Item 6.

Exhibits

 

72

   

SIGNATURES

 

73

   

EXHIBIT INDEX

 

74

 

 
- 2 -

 

 

  AVAILABLE INFORMATION

 

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

 

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

 

JMP Group LLC also makes available, in the Investor Relations section of its website and will provide print copies to shareholders upon request, (i) its corporate governance guidelines, (ii) its code of business conduct and ethics, and (iii) the charters of the audit, compensation, and corporate governance and nominating committees of its board of directors. These documents, as well as the information on the website, are not intended to be part of this quarterly report on Form 10-Q (the “Quarterly Report”) and inclusions of the internet address in this Quarterly Report.

 

 
- 3 -

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.      Financial Statements

 

JMP Group LLC

Consolidated Statements of Financial Condition

(Unaudited)

(Dollars in thousands, except per share data)

 

   

June 30, 2015

   

December 31, 2014

 
                 

Assets

               

Cash and cash equivalents

  $ 35,511     $ 101,362  

Restricted cash and deposits (includes cash on deposit with clearing broker of $250 and $220 at June 30, 2015 and December 31, 2014, respectively)

    107,840       67,102  

Receivable from clearing broker

    1,450       1,285  

Investment banking fees receivable, net of allowance for doubtful accounts of zero and $5 at June 30, 2015 and December 31, 2014, respectively

    16,071       10,439  

Marketable securities owned, at fair value

    58,820       29,466  

Incentive fee receivable

    1,494       7,092  

Other investments (includes $77,595 and $206,819 measured at fair value at June 30, 2015 and December 31, 2014, respectively)

    79,363       208,947  

Loans held for investment, net of allowance for loan losses

    2,611       1,997  

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

    982,486       1,038,848  

Interest receivable

    2,463       2,885  

Cash collateral posted for total return swap

    25,000       -  

Fixed assets, net

    3,008       2,233  

Deferred tax assets

    11,324       10,570  

Other assets

    22,750       33,966  

Total assets

  $ 1,350,191     $ 1,516,192  
                 

Liabilities and Equity

               

Liabilities:

               

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

  $ 13,633     $ 15,048  

Accrued compensation

    21,842       54,739  

Asset-backed securities issued

    987,434       1,001,137  

Interest payable

    5,095       5,568  

Bond payable

    94,300       94,300  

Deferred tax liability

    20,837       19,161  

Other liabilities

    42,445       37,310  

Total liabilities

    1,185,586       1,227,263  
                 

Commitments and Contingencies

               

JMP Group LLC Shareholders' Equity

               

Common shares, 100,000,000 shares authorized; 22,780,052 shares issued at both June 30, 2015 and December 31, 2014; 21,240,820 and 21,216,258 shares outstanding at June 30, 2015 and December 31, 2014, respectively

    23       23  

Additional paid-in capital

    139,034       134,800  

Treasury shares at cost, 1,539,232 and 1,563,794 shares at June 30, 2015 and December 31, 2014, respectively

    (10,154 )     (10,316 )

Retained earnings

    7,241       8,090  

Total JMP Group LLC shareholders' equity

    136,144       132,597  

Nonredeemable Non-controlling Interest

    28,461       156,332  

Total equity

    164,605       288,929  

Total liabilities and equity

  $ 1,350,191     $ 1,516,192  

 

 

See accompanying notes to consolidated financial statements.  

 

 
- 4 -

 

 

JMP Group LLC

Consolidated Statements of Financial Condition - (Continued)

(Unaudited)

(Dollars in thousands, except per share data)

 

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

 

   

June 30, 2015

   

December 31, 2014

 
                 

Cash and cash equivalents

  $ 852     $ 1,294  

Restricted cash

    92,719       50,617  

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

    982,486       1,038,848  

Interest receivable

    2,428       2,861  

Incentive fees receivable

    649       902  

Deferred tax assets

    -       1,063  

Other assets

    5,400       5,156  

Total assets of consolidated VIEs

  $ 1,084,534     $ 1,100,741  
                 

Accrued compensation and other liabilities

    2,049       1,918  

Asset-backed securities issued

    987,434       1,001,137  

Note payable (1)

    2,500       2,500  

Interest payable

    3,636       4,107  

Deferred tax liability

    -       1,317  

Total liabilities of consolidated VIEs

  $ 995,619     $ 1,010,979  

 

 

(1)

June 30, 2015 and December 31, 2014 balances are inclusive of a $2.5 million 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 LLC

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Revenues

                               

Investment banking

  $ 21,331     $ 23,061     $ 42,025     $ 48,114  

Brokerage

    6,404       6,474       12,469       13,130  

Asset management fees

    4,721       14,858       9,383       20,402  

Principal transactions

    2,857       9,688       6,601       5,995  

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

    (1,132 )     (551 )     (1,710 )     (171 )

Net dividend income

    256       262       447       497  

Other income

    62       150       802       372  

Non-interest revenues

    34,499       53,942       70,017       88,339  
                                 

Interest income

    12,801       9,212       25,578       17,800  

Interest expense

    (7,386 )     (5,424 )     (14,674 )     (10,252 )

Net interest income

    5,415       3,788       10,904       7,548  
                                 

Reversal (Provision) for loan losses

    545       (212 )     488       (709 )
                                 

Total net revenues after provision for loan losses

    40,459       57,518       81,409       95,178  
                                 

Non-interest expenses

                               

Compensation and benefits

    27,524       37,979       54,588       69,355  

Administration

    2,293       1,760       3,985       3,482  

Brokerage, clearing and exchange fees

    814       818       1,612       1,743  

Travel and business development

    1,295       980       2,233       1,831  

Communications and technology

    982       942       1,952       1,890  

Occupancy

    961       851       1,774       1,676  

Professional fees

    1,040       1,269       2,014       2,076  

Depreciation

    215       227       441       454  

Other

    698       330       1,228       542  

Total non-interest expenses

    35,822       45,156       69,827       83,049  

Net income before income tax expense

    4,637       12,362       11,582       12,129  

Income tax (benefit) expense

    (2,864 )     2,450       4,136       4,146  

Net income

    7,501       9,912       7,446       7,983  

Less: Net income attributable to nonredeemable non-controlling interest

    1,675       6,717       3,512       790  

Net income attributable to JMP Group LLC

  $ 5,826     $ 3,195     $ 3,934       7,193  
                                 

Net income attributable to JMP Group LLC per common share:

                               

Basic

  $ 0.26     $ 0.14     $ 0.18     $ 0.31  

Diluted

  $ 0.25     $ 0.13     $ 0.17     $ 0.30  
                                 

Distributions declared per common share

  $ 0.111     $ 0.050     $ 0.216     $ 0.095  
                                 

Weighted average common shares outstanding:

                               

Basic

    21,233       21,712       21,225       21,766  

Diluted

    22,964       23,745       22,800       23,640  

  

 

See accompanying notes to consolidated financial statements.

 

 
- 6 -

 

J MP Group LLC

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)

 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Net income

  $ 7,501     $ 9,912     $ 7,446     $ 7,983  

Other comprehensive income

                               

Unrealized gain on cash flow hedge, net of tax

    -       -       -       -  

Comprehensive income

    7,501       9,912       7,446       7,983  

Less: Comprehensive income attributable to non-controlling interest

    1,675       6,717       3,512       790  

Comprehensive income attributable to JMP Group LLC

  $ 5,826     $ 3,195     $ 3,934     $ 7,193  

 

 

JMP Group LLC

Consolidated Statement s of Changes in Equity

(Unaudited)

(In thousands)

   

   

JMP Group LLC's Equity

                 
                           

Additional

           

Nonredeemable

         
   

Common Shares

   

Treasury

   

Paid-In

   

Retained

   

Non-controlling

         
   

Shares

   

Amount

   

Shares

   

Capital

   

Earnings

   

Interest

   

Total Equity

 

Balance, December 31, 2014

    22,780     $ 23     $ (10,316 )   $ 134,800     $ 8,090     $ 156,332     $ 288,929  

Adjustment for adoption of new consolidation guidance

    -       -       -       -       -       (126,934 )     (126,934 )

Net income

    -       -       -       -       3,934       3,512       7,446  

Additonal paid-in capital - share-based compensation

    -       -       -       4,210       -       -       4,210  

Excess tax benefit related to share-based compensation

    -       -       -       9       -       -       9  

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

    -       -       -       -       (4,783 )     -       (4,783 )

Reissuance of common shares from treasury

    -       -       162       15       -       -       177  

Distributions to non-controlling interest holders

    -       -       -       -       -       (4,884 )     (4,884 )

Capital contributions from non-controlling interest holders

    -       -       -       -       -       435       435  

Balance, June 30, 2015

    22,780     $ 23     $ (10,154 )   $ 139,034     $ 7,241     $ 28,461     $ 164,605  

 

 

   

JMP Group LLC's Equity

                 
                                   

Retained

                 
                           

Additional

   

Earnings

   

Nonredeemable

         
   

Common Shares

   

Treasury

   

Paid-In

   

(Accumulated

   

Non-controlling

         
   

Shares

   

Amount

   

Shares

   

Capital

   

Deficit)

   

Interest

   

Total Equity

 

Balance, December 31, 2013

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

Net income (loss)

    -       -       -       -       7,193       790       7,983  

Additonal paid-in capital - share-based compensation

    -       -       -       3,814       -       -       3,814  

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

    -       -       -       -       (2,188 )     -       (2,188 )

Purchases of common shares for treasury

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

Reissuance of common shares from treasury

    -       -       517       82       -       -       599  

Purchase of subsidiary shares from non-controlling interest holders

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

Distributions to non-controlling interest holders

    -       -       -       -       -       (2,851 )     (2,851 )

Capital contributions from non-controlling interest holders

    -       -       -       -       -       4,430       4,430  

Balance, June 30, 2014

    22,780     $ 23     $ (6,925 )   $ 135,599     $ 4,896     $ 108,068     $ 241,661  

 

 

See accompanying notes to consolidated financial statements.

 
- 7 -

 

 

JMP Group LLC

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

   

Six Months Ended June 30,

 
   

2015

   

2014

 

Cash flows from operating activities:

               

Net income

  $ 7,446     $ 7,983  

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

               

(Reversal) provision for doubtful accounts

    (5 )     75  

(Reversal) provision for loan losses

    (488 )     709  

Accretion of deferred loan fees

    (988 )     (563 )

Amortization of liquidity discount, net

    (64 )     (58 )

Amortization of debt issuance costs

    105       190  

Amortization of original issue discount, related to CLO II and CLO III

    720       452  

Interest paid in kind

    (97 )     (67 )

Loss on sale and payoff of loans

    1,710       171  

Change in other investments:

               

Fair value

    (1,232 )     (4,507 )

Incentive fees reinvested in general partnership interests

    (110 )     (9,809 )

Realized gain on other investments

    (2,649 )     (691 )

Depreciation and amortization of fixed assets

    441       454  

Share-based compensation expense

    4,387       4,461  

Deferred income taxes

    922       4,204  

Net change in operating assets and liabilities:

               

Decrease (increase) in interest receivable

    422       (51 )

(Increase) decrease in receivables

    (4,373 )     275  

Increase in marketable securities

    (29,354 )     (7,547 )

Decrease (increase) in restricted cash (excluding restricted cash reserved for lending activities)

    1,537       (10,542 )

Decrease (increase) in deposits and other assets

    11,244       (7,309 )

(Decrease) increase in marketable securities sold, but not yet purchased

    (1,415 )     10,920  

(Decrease) increase in interest payable

    (473 )     659  

Decrease in accrued compensation and other liabilities

    (28,396 )     (11,780 )

Net cash used in operating activities

    (40,710 )     (22,371 )
                 

Cash flows from investing activities:

               

Purchases of fixed assets

    (1,216 )     (331 )

Purchases of other investments

    (7,207 )     (26,304 )

Sales of other investments

    18,002       24,357  

Funding of loans collateralizing asset-backed securities issued

    (136,462 )     (282,311 )

Funding of loans held for investment

    (610 )     (728 )

Sale and payoff of loans collateralizing asset-backed securities issued

    146,319       155,836  

Principal receipts on loans collateralizing asset-backed securities issued

    46,335       37,815  

Repayments on loans held for investment

    93       -  

Net change in restricted cash reserved for lending activities

    (42,275 )     (14,371 )

Cash collateral posted for total return swap

    (25,000 )     -  

Cash and cash equivalents derecognized due to adoption of new consolidation guidance

    (260 )     -  

Net cash provided by (used in) investing activities

    (2,281 )     (106,037 )

 

   

See accompanying notes to consolidated financial statements.  

 

 
- 8 -

 

 

JMP Group LLC

Consolidated Statements of Cash Flows - (Continued)

(Unaudited)

(In thousands)

   

 

   

Six Months Ended June 30,

 
   

2015

   

2014

 

Cash flows from financing activities:

               

Proceeds from line of credit

    -       691  

Proceeds from CLO III credit warehouse

    -       97,510  

Proceeds from bond issuance

    -       48,300  

Payments of debt issuance costs

    -       (1,707 )

Repayment of note payable

    -       (15,000 )

Repayment of line of credit

    -       (2,895 )

Repayment of asset-backed securities issued

    (14,423 )     (6,771 )

Distributions and dividend equivalents paid on common shares and RSUs

    (3,997 )     (2,188 )

Purchases of common shares for treasury

    -       (1,366 )

Capital contributions of nonredeemable non-controlling interest holders

    435       4,430  

Distributions to non-controlling interest shareholders

    (4,884 )     (2,851 )

Purchase of subsidiary shares from non-controlling interest holders

    -       (6,000 )

Cash settlement of share-based compensation

    -       (48 )

Excess tax benefit related to share-based compensation

    9       -  

Net cash (used in) provided by financing activities

    (22,860 )     112,105  

Net decrease in cash and cash equivalents

    (65,851 )     (16,303 )

Cash and cash equivalents, beginning of period

    101,362       65,906  

Cash and cash equivalents, end of period

  $ 35,511     $ 49,603  
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the period for interest

  $ 13,672     $ 9,214  

Cash (refunded) paid during the period for taxes

  $ (59 )   $ 9,439  
                 

Non-cash investing and financing activities:

               

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

  $ 162     $ 517  

 

 

See accompanying notes to consolidated financial statements.  

 

 
- 9 -

 

 

JMP G roup LLC

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

1. Organization and Description of Business

 

JMP Group LLC, 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 Investment Holdings LLC (“JMP Investment Holdings”). The above entities, other than HCAP Advisors, are wholly-owned subsidiaries. JMP Securities is a U.S. registered broker-dealer under 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. 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”). On May 8, 2015, JMP Investment Holdings formed a 100% owned special purpose vehicle, JMP Credit Advisors TRS Ltd (“JMPCA TRS”), to enter into a total return swap (“TRS”). Refer to Note 2 for further discussion.

 

In the third quarter of 2014, the board of directors of the predecessor entity, JMP Group Inc., approved a transaction to convert the Company’s corporate form from a Delaware corporation to a Delaware limited liability company (the “Reorganization Transaction”). The Company’s shareholders approved the Reorganization Transaction at a meeting of the shareholders on December 1, 2014. In connection with the Reorganization Transaction, JMP Group Inc. entered into an agreement and plan of merger, dated August 20, 2014 (the “Merger Agreement”) with JMP Group LLC, a Delaware limited liability company and JMP Merger Corp., a Delaware corporation and wholly-owned subsidiary of JMP Group LLC. On January 1, 2015, JMP Group LLC completed the Reorganization Transaction with JMP Group LLC as the surviving entity. JMP Group LLC filed a current report on Form 8-K on January 2, 2015 for the purpose of establishing JMP Group LLC as the successor issuer to JMP Group Inc. pursuant to Rule 12g-3(a) under the Exchange Act. The effects of the Reorganization Transaction and the succession of JMP Group LLC to JMP Group Inc. are described in greater detail in the current report on Form 8-K filed on January 2, 2015 by JMP Group LLC. The Reorganization Transaction resulted in each share of issued and outstanding JMP Group Inc. stock being exchanged for a limited liability company interest in JMP Group LLC.

 

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, 2014 (the “Annual Report”). 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 Company performs consolidation analyses on entities to identify variable interest entities (“VIEs”) and determine appropriate accounting 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. ASU 2015-2, Amendments to Consolidation Analysis , was issued February 2015, which amends the consolidation requirements in ASC 810, Consolidation . Under the amended guidance, an entity also is considered a VIE if it has equity investors who lack substantive participating or kick-out rights. VIEs are consolidated by their primary beneficiaries. When the Company enters into a transaction with a VIE, the Company determines if it is the primary beneficiary by determining whether it (a) has the power to direct the activities that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. If determined to be the primary beneficiary, the Company consolidates the entity. The Company reconsiders the conclusion continually.

 

 
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In performing the analysis under the revised amendment, the Company concluded Harvest Growth Capital LLC (“HGC”) and Harvest Growth Capital II LLC (“HGC II”) no longer require consolidation effective January 1, 2015. HGC and HGC II qualify as VIEs, based on the limited partners’ lack of control attributed to the absence of kick-out or participating rights. As the Company has ownership percentages under 5%, the Company does not have the obligation to absorb losses or right to receive benefits that could be significant to the Funds. Therefore, the Company is not deemed the primary beneficiary. Effective January 1, 2015, the Company recognizes its investments in HGC and HGC II using the fair value option. The Company used a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption, resulting in the following adjustments in the respective line items:

 

(In thousands)

 

December 31, 2014

   

Adjustment for

adoption of new

consolidation guidance

    January 1, 2015  
                         

Cash and cash equivalents

  $ 101,362       (260 )     101,102  

Other investments

    208,947       (127,062 )     81,885  

Other assets

    33,966       236       34,202  

Total assets

  $ 1,516,192     $ (127,087 )     1,389,105  
                         

Other liabilities

    37,310       (153 )     37,157  

Total liabilities

    1,227,263       (153 )     1,227,110  
                         

Nonredeemable Non-controlling Interest

    156,332       (126,934 )     29,398  

Total equity

    288,929       (126,934 )     161,995  

Total liabilities and equity

  $ 1,516,192     $ (127,087 )     1,389,105  

 

On May 8, 2015, JMP Investment Holdings formed a 100% owned special purpose vehicle, JMPCA TRS, to enter into a TRS. Under the TRS, the Company receives the sum of all interest, fees and any positive change in fair value amounts from a loan portfolio held by the counterparty and pays interest on the loan portfolio plus any negative change in fair value amounts from such referenced assets. The Company performed a consolidation analysis on JMPCA TRS. The entity was not considered a VIE, as there is sufficient equity at risk and equity investors have the characteristics of a controlling financial interest. As JMPCA TRS is 100% owned and controlled by the Company, the entity was consolidated.

 

The consolidated accounts of the Company include the wholly-owned subsidiaries, JMP Securities, HCS, JMP Capital, JMP Credit, JMPCA, JMPCA TRS (effective May 8, 2015), (and the partially-owned subsidiaries HGC (from April 1, 2010 through December 31, 2014), HGC II (from October 1, 2012 through December 31, 2014), CLO I, CLO II, CLO III and HCAP Advisors. All material intercompany accounts and transactions have been eliminated in consolidation. Non-controlling interest on the Consolidated Statements of Financial Condition at June 30, 2015 and December 31, 2014 relate to the interest of third parties in the partly-owned subsidiaries.

 

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

 

3. Recent Accounting Pronouncemen ts

 

ASU 2014-9 , Revenue from Contracts with Customers was issued in May 2014 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. In July 2015, the Financial Accounting Standards Board (“FASB”) approved a one year deferral of the effective date of ASU 2014-9. Its adoption 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 will not impact the Company’s financial statements.

 

ASU 2014-13, Consolidation: Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financial Entity was issued in August 2014 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. ASU 2014-13 is effective for annual and interim periods ending after December 15, 2015. 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 statements.

 

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 2014-15 is not expected to have an impact on the Company’s financial statements.

 

 
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ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity was issued to eliminate the use of different methods in practice and thereby reduce existing diversity in the accounting for hybrid financial instruments issued in the form of a share. For hybrid financial instruments issued in the form of a share, an entity should determine the nature of the contract by considering the economic characteristics and risks of the entire hybrid financial instrument. The existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. This standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU 2014-16 is not expected to have an impact on the Company’s financial statements.

 

ASU 2015-2, Amendments to Consolidation Analysis , was issued February 2015, which amends the consolidation requirements in ASC 810, Consolidation . The amendments will change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of entities, and eliminate the presumption that a general partner should consolidate a limited partnership. This standard will be effective for fiscal years beginning after December 15, 2015. Early adoption is permitted. The Company early adopted ASU 2015-2 effective January 1, 2015. In performing the analysis under the revised amendments, the Company concluded HGC and HGC II no longer require consolidation effective January 1, 2015.

 

ASU 2015-3, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs , was issued April 2015. To simplify the presentation of debt issuance costs, the amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This standard will be effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  Upon adoption, the Company will reclassify the debt issuance costs to the respective debt liability line items. The adoption of ASU 2015-3 is not expected to have a material impact on the Company’s financial statements.

 

ASU 2015-07, Fair Value Measurement: Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent) , was issued May 2015, to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. This standard also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. This standard will be effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. The adoption of ASU 2015-07 is not anticipated to impact the Company’s consolidated financial position or results of operation. Its adoption will result in a revision to disclosures of investments held at net asset value.

 

4. Fair Value Measurements

 

The following tables provide fair value information related to the Company’s financial instruments at June 30, 2015 and December 31, 2014:

 

 

   

At June 30, 2015

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 35,511     $ 35,511     $ -     $ -     $ 35,511  

Restricted cash and deposits

    107,840       107,840       -       -       107,840  

Marketable securities owned

    58,820       58,820       -       -       58,820  

Other investments

    79,363       -       62,824       16,539       79,363  

Loans held for investment, net of allowance for loan losses

    2,611       -       -       2,398       2,398  

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

    982,486       -       981,831       -       981,831  

Cash collateral posted for total return swap

    25,000       25,000       -       -       25,000  

Long term receivable

    689       -       -       752       752  

Total assets:

  $ 1,292,320     $ 227,171     $ 1,044,655     $ 19,689     $ 1,291,515  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 13,633     $ 13,633     $ -     $ -     $ 13,633  

Asset-backed securities issued

    987,434       -       978,703       -       978,703  

Bond payable

    94,300       95,631               -       95,631  

Total liabilities:

  $ 1,095,367     $ 109,264     $ 978,703     $ -     $ 1,087,967  

 

 
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At December 31, 2014

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 101,362     $ 101,362     $ -     $ -     $ 101,362  

Restricted cash and deposits

    67,102       67,102       -       -       67,102  

Marketable securities owned

    29,466       29,466       -       -       29,466  

Other investments (1)

    208,947       3,539       64,628       138,652       206,819  

Loans held for investment, net of allowance for loan losses

    1,997       -       -       1,734       1,734  

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

    1,038,848       -       1,031,885       -       1,031,885  

Long term receivable

    860       -       -       960       960  

Total assets:

  $ 1,448,582     $ 201,469     $ 1,096,513     $ 141,346     $ 1,439,328  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 15,048     $ 15,048     $ -     $ -     $ 15,048  

Asset-backed securities issued

    1,001,137       -       992,625       -       992,625  

Bond payable

    94,300       96,017       -       -       96,017  

Total liabilities:

  $ 1,110,485     $ 111,065     $ 992,625     $ -     $ 1,103,690  

(1) Includes equity securities in HGC and HGC II which were deconsolidated effective January 1, 2015.

 

Recurring Fair Value Measurement

 

The following tables provide information related to the Company’s assets and liabilities carried at fair value on a recurring basis at June 30, 2015 and December 31, 2014:  

 

(In thousands)

 

June 30, 2015

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Marketable securities owned

  $ 58,820     $ -     $ -     $ 58,820  

Other investments:

                               

Investments in hedge funds managed by HCS

    -       62,543       -       62,543  

Investments in private equity funds managed by HCS

    .       .       4,474       4,474  

Investments in funds of funds managed by HCS

    -       -       167       167  

Total investment in funds managed by HCS

    -       62,543       4,641       67,184  

Limited partnership in investments in private equity/ real estate funds

    -       -       9,031       9,031  

TRS (Note 2)

    -       281       -       281  

Equity securities in JMP Capital

    -       -       1,099       1,099  

Total other investments

    -       62,824       14,771       77,595  

Total assets:

  $ 58,820     $ 62,824     $ 14,771     $ 136,415  
                                 

Marketable securities sold, but not yet purchased

    13,633       -       -       13,633  
                                 

Total liabilities:

  $ 13,633     $ -     $ -     $ 13,633  

 

 
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(In thousands)

 

December 31, 2014

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Marketable securities owned

  $ 29,466     $ -     $ -     $ 29,466  

Other investments:

                               

Investments in hedge funds managed by HCS

    -       64,628       -       64,628  

Investments in funds of funds managed by HCS

    -       -       152       152  

Total investment in funds managed by HCS

    -       64,628       152       64,780  

Limited partnership in investments in private equity/ real estate funds

    -       -       9,102       9,102  

Warrants and other held at JMPS and JMP Holding LLC

    -       -       732       732  

Equity securities in HGC, HGC II and JMP Capital (1)

    3,539       -       122,058       125,597  

Forward purchase contract

    -       -       6,608       6,608  

Total other investments

    3,539       64,628       138,652       206,819  

Total assets:

  $ 33,005     $ 64,628     $ 138,652     $ 236,285  
                                 

Marketable securities sold, but not yet purchased

    15,048       -       -       15,048  
                                 

Total liabilities:

  $ 15,048     $ -     $ -     $ 15,048  

 

(1) Equity securities in HGC and HGC II were deconsolidated effective January 1, 2015.

 

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 these investments 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.

 

Effective January 1, 2015, the Company elected to early adopt new consolidation accounting guidance. Under the new guidance, HGC and HGC II were identified as VIEs, and consequently, these investments were deconsolidated. The Company recognizes these investments using the fair value option in the Other Investments line item. The carrying value of the investment was $4.5 million as of June 30, 2015, with a remaining commitment of $0.2 million. The risks associated with this investment are limited to the amounts of invested capital, remaining capital commitment and any management and incentive fees receivable. The Company uses the reported net asset value per share as a practical expedient to estimate the fair value of HGC and HGC II.

 

The Company’s Level 2 assets held in other investments consist of investments in hedge funds and private equity funds managed by HCS. The carrying value of investment in hedge funds is calculated using the equity method. 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 carrying value of the investments in private equity funds reflects the fair value option. The Level 2 equity securities owned by 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 owned by 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.

 

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 June 30, 2015 and 2014.

 

(In thousands)

 

Investments in funds of funds managed by HCS

   

Investments in private equity funds managed by HCS

   

Limited partner investments in private equity/ real estate funds

   

Warrants and other held at JMPS

   

Equity securities held by HGC, HGC II and JMP Capital

   

Forward Purchase Contract and Swaption

   

Total Level 3

Assets

 
                                                         

Balance as of March 31, 2015

  $ 157     $ 4,198     $ 8,976     $ 766     $ 1,017     $ -       15,114  
                                                         

Purchases

    4       12       -       -       -       -       16  

Sales

    -       -       -       -       -       -       -  

Settlements

    -       -       (538 )     -       -       -       (538 )

Total gains (losses) - realized and unrealized included in earnings (2)

    6       264       593       (766 )     82       -       179  

Balance as of June 30, 2015

  $ 167     $ 4,474     $ 9,031     $ -     $ 1,099     $ -     $ 14,771  

Unrealized gains/(losses) included in earnings related to assets still held at reporting date

  $ 6     $ 264     $ 67     $ -     $ 82     $ -     $ 419  

 

(1) Refer to Note 2 for additional discussion relating to adoption of new consolidation guidance.

( 2 ) 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.

 

 
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(In thousands)

 

Investments in funds of funds managed by HCS

   

Investments in private equity funds managed by HCS

   

Limited partner investments in private equity/ real estate funds

   

Warrants and other held at JMPS

   

Equity securities held by HGC, HGC II and JMP Capital

   

Forward Purchase Contract and Swaption

   

Total Level 3

Assets

 
                                                         

Balance as of March 31, 2014

  $ 153     $ -     $ 6,178     $ 741     $ 94,260     $ 7,068       108,400  
                                                      -  

Purchases

    -               1,080       -       231       460       1,771  

Sales

    -               -       -       (2,204 )     -