JMP Group LLC
JMP GROUP LLC (Form: 10-Q, Received: 05/05/2015 16:27:38)


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


(Mark One)

 

 

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

 

For the quarterly period ended March 31, 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 April 30, 2015: 21,228,539.

 


 
 

 

 

EXPLANATORY NOTE

 

On January 1, 2015, JMP Group Inc. completed its merger with and into JMP Group LLC, a Delaware limited liability company, with JMP Group LLC as the surviving entity (the “Reorganization Transaction”) pursuant to the Agreement and Plan of Merger, dated as of August 20, 2014 by and among JMP Group Inc., JMP Group LLC and JMP Merger Corp. (the “Merger Agreement”). Entry into the Merger Agreement was previously announced by JMP Group Inc. on its current report on Form 8-K filed with the SEC on August 20, 2014. JMP Group LLC had not commenced operations and had no assets or liabilities as of December 31, 2014.

 

JMP Group LLC filed a current report on Form 8-K on January 2, 2015 (the “January Form 8-K”) for the purpose of establishing JMP Group LLC as the successor issuer pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and to disclose certain related matters, including the consummation of the Reorganization Transaction. Pursuant to Rule 12g-3(a) under the Exchange Act and in accordance with the filing of the January Form 8-K, the shares representing limited liability company interests in JMP Group LLC, as the successor issuer to JMP Group Inc., were deemed registered under Section 12(b) of the Exchange Act.

 

References to JMP Group LLC in this Quarterly Report on Form 10-Q that include any period prior to the effectiveness of the Reorganization Transaction shall be deemed to refer to JMP Group Inc. For more information concerning the effects of the Reorganization Transaction and the succession of JMP Group LLC to JMP Group Inc. upon its effectiveness, please see the January Form 8-K.

 

On January 1, 2015, the Third Supplemental Indenture among JMP Group LLC, JMP Group Inc., JMP Investment Holdings LLC, and U.S. Bank National Association became effective. Under the Third Supplemental Indenture, JMP Group LLC and JMP Investment Holdings LLC have jointly and severally provided a full and unconditional guarantee of the 7.25% Senior Notes due 2021 and 8.00% Senior Notes due 2023 (collectively the “Notes”) issued by JMP Group Inc. In accordance with Rule 3-10(d) of Regulation S-X and Rule 12h-5 of the Exchange Act, JMP Group Inc. is exempt from the requirements of Section 13(a) or 15(d) of the Act. Accordingly, JMP Group Inc. will cease filing reports under the Exchange Act.

 

 
- 2 -

 

   

Table of Contents

   

TABLE OF CONTENTS

 

      Page

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

5

   

 

Item 1.

 

Financial Statements - JMP Group LLC .

5

 

 

Consolidated Statements of Financial Condition   March 31, 2015 and December 31, 2014 (Unaudited)

5

 

 

Consolidated Statements of Operations - For the Three Months Ended March 31, 2015 and 2014 (Unaudited)

7

 

 

Consolidated Statement s of C omprehensive Income - For the Three Months Ended March 31, 2015 and 2014 (Unaudited)

8

   

Consolidated Statements of Changes in Equity - For the Three Months Ended March 31, 2015 and 2014 (Unaudited)

8

 

 

Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 2015 and 2014 (Unaudited)

   9

 

 

Notes to Consolidated Financial Statements (Unaudited)

   11

Item 2.

 

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

  38

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   59

Item 4.

 

Controls and Procedures

   60

   

 

PART II.

 

OTHER INFORMATION

   60

   

 

Item 1.

 

Legal Proceedings

   60

Item 1A.

 

Risk Factors

   60

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   61

Item 3.

 

Defaults Upon Senior Securities

   61

Item 4.

 

Mine Safety Disclosures

   61

Item 5.

 

Other Information

   61

Item 6.

 

Exhibits

   61

 

 

SIGNATURES

   62

 

 

EXHIBIT INDEX

   63

 

 
- 3 -

 

 

  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.

 

 
- 4 -

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements

 

JMP Group LLC

Consolidated Statements of Financial Condition

(Unaudited)

(Dollars in thousands, except per share data)

   

   

March 31, 2015

   

December 31, 2014

 
                 

Assets

               

Cash and cash equivalents

  $ 49,337     $ 101,362  

Restricted cash and deposits (includes cash on deposit with clearing broker of $150 and $220 at March 31, 2015 and December 31, 2014, respectively)

    75,164       67,102  

Receivable from clearing broker

    1,552       1,285  

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

    15,414       10,439  

Marketable securities owned, at fair value

    36,952       29,466  

Incentive fee receivable

    1,054       7,092  

Other investments (includes $86,223 and $206,819 measured at fair value at March 31, 2015 and December 31, 2014, respectively)

    87,930       208,947  

Loans held for investment, net of allowance for loan losses

    1,952       1,997  

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

    1,031,613       1,038,848  

Interest receivable

    2,763       2,885  

Fixed assets, net

    2,243       2,233  

Deferred tax assets

    11,509       10,570  

Other assets

    21,528       33,966  

Total assets

  $ 1,339,011     $ 1,516,192  
                 

Liabilities and Equity

               

Liabilities:

               

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

  $ 17,677     $ 15,048  

Accrued compensation

    10,853       54,739  

Asset-backed securities issued

    995,046       1,001,137  

Interest payable

    7,602       5,568  

Bond payable

    94,300       94,300  

Deferred tax liability

    21,129       19,161  

Other liabilities

    31,672       37,310  

Total liabilities

    1,178,279       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 March 31, 2015 and December 31, 2014; 21,228,539 and 21,216,258 shares outstanding at March 31, 2015 and December 31, 2014, respectively

    23       23  

Additional paid-in capital

    136,751       134,800  

Treasury stock, at cost, 1,551,513 and 1,563,794 shares at March 31, 2015 and December 31, 2014, respectively

    (10,235 )     (10,316 )

Retained earnings

    3,892       8,090  

Total JMP Group LLC shareholders' equity

    130,431       132,597  

Nonredeemable Non-controlling Interest

    30,301       156,332  

Total equity

    160,732       288,929  

Total liabilities and equity

  $ 1,339,011     $ 1,516,192  

 

 

See accompanying notes to consolidated financial statements.  

 

 
- 5 -

 

 

JMP Group LLC

Consolidated Statements of Financial Condition - (Continued)

(Unaudited)

(Dollars in thousands, except per share data)

 

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

   

March 31, 2015

   

December 31, 2014

 
                 

Cash and cash equivalents

  $ 857     $ 1,294  

Restricted cash

    56,113       50,617  

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

    1,031,613       1,038,848  

Interest receivable

    2,728       2,861  

Incentive fees receivable

    606       902  

Deferred tax assets

    -       1,063  

Other assets

    5,506       5,156  

Total assets of consolidated VIEs

  $ 1,097,423     $ 1,100,741  
                 

Accrued compensation

    179       1,918  

Asset-backed securities issued

    995,046       1,001,137  

Note payable (1)

    2,500       2,500  

Interest payable

    6,140       4,107  

Deferred tax liability

    -       1,317  

Total liabilities of consolidated VIEs

  $ 1,003,865     $ 1,010,979  

 

 

(1)

March 31, 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.

 

 
- 6 -

 

 

JMP Group LLC

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)  

   

Three Months Ended March 31,

 
   

2015

   

2014

 
                 

Revenues

               

Investment banking

  $ 20,694     $ 25,053  

Brokerage

    6,065       6,656  

Asset management fees

    4,662       5,544  

Principal transactions

    3,744       (3,693 )

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

    (578 )     380  

Net dividend income

    191       235  

Other income

    740       222  

Non-interest revenues

    35,518       34,397  
                 

Interest income

    12,777       8,588  

Interest expense

    (7,288 )     (4,828 )

Net interest income

    5,489       3,760  
                 

Provision for loan losses

    (57 )     (497 )
                 

Total net revenues after provision for loan losses

    40,950       37,660  
                 

Non-interest expenses

               

Compensation and benefits

    27,064       31,376  

Administration

    1,692       1,722  

Brokerage, clearing and exchange fees

    798       925  

Travel and business development

    938       851  

Communications and technology

    970       948  

Occupancy

    813       825  

Professional fees

    974       807  

Depreciation

    226       227  

Other

    530       212  

Total non-interest expenses

    34,005       37,893  

Net income (loss) before income tax expense

    6,945       (233 )

Income tax expense

    7,000       1,696  

Net loss

    (55 )     (1,929 )

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

    1,837       (5,927 )

Net income (loss) attributable to JMP Group LLC

  $ (1,892 )   $ 3,998  
                 

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

               

Basic

  $ (0.09 )   $ 0.17  

Diluted

  $ (0.09 )   $ 0.17  
                 

Distributions declared per common share

  $ 0.105     $ 0.045  
                 

Weighted average common shares outstanding:

               

Basic

    21,216       21,820  

Diluted

    21,216       23,612  

 

  

 

See accompanying notes to consolidated financial statements.

 

 
- 7 -

 

 

  J MP Group LLC

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 
                 

Net loss

  $ (55 )   $ (1,929 )

Other comprehensive income

               

Unrealized gain on cash flow hedge, net of tax

    -       -  

Comprehensive loss attributable to JMP Group LLC

    (55 )     (1,929 )

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

    1,837       (5,927 )

Comprehensive income (loss) attributable to JMP Group LLC

  $ (1,892 )   $ 3,998  

 

 

 

 

JMP Group LLC

Consolidated Statements 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 (loss)

    -       -       -       -       (1,892 )     1,837       (55 )

Additonal paid-in capital - share-based compensation

    -       -       -       1,937       -       -       1,937  

Excess tax benefit related to stock-based compensation

    -       -       -       5       -       -       5  

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

    -       -       -       -       (2,306 )     -       (2,306 )

Reissuance of shares of common shares from treasury

    -       -       81       9       -       -       90  

Distributions to non-controlling interest holders

    -       -       -       -       -       (934 )     (934 )

Balance, March 31, 2015

    22,780     $ 23     $ (10,235 )   $ 136,751     $ 3,892     $ 30,301     $ 160,732  

 

   

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)

    -       -       -       -       3,998       (5,927 )     (1,929 )

Additonal paid-in capital - stock-based compensation

    -       -       -       1,734       -       -       1,734  

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

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

Purchases of shares of common stock for treasury

    -       -       (33 )     -       -       -       (33 )

Reissuance of shares of common stock from treasury

    -       -       142       35       -       -       177  

Purchase of subsidiary shares from non-controlling interest holders

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

Distributions to non-controlling interest holders

    -       -       -       -       -       3,389       3,389  

Capital contributions from non-controlling interest holders

    -       -       -       -       -       (579 )     (579 )

Balance, March 31, 2014

    22,780     $ 23     $ (5,967 )   $ 133,472     $ 2,845     $ 102,582     $ 232,955  

 

See accompanying notes to consolidated financial statements.

   

 
- 8 -

 

 

JMP Group LLC

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 

Cash flows from operating activities:

               

Net loss

  $ (55 )   $ (1,929 )

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

               

Provision for doubtful accounts

    (5 )     -  

Provision for loan losses

    57       497  

Accretion of deferred loan fees

    (287 )     (351 )

Amortization of liquidity discount, net

    (32 )     (28 )

Amortization of debt issuance costs

    105       85  

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

    357       224  

Interest paid in kind

    (48 )     -  

Loss (gain) on sale and payoff of loans

    578       (380 )

Change in other investments:

               

Fair value

    (1,603 )     4,201  

Incentive fees reinvested in general partnership interests

    (76 )     (1,921 )

Realized (loss) gain on other investments

    (1,298 )     9  

Depreciation and amortization of fixed assets

    226       227  

Stock-based compensation expense

    2,027       1,959  

Deferred income taxes

    1,029       (1,159 )

Net change in operating assets and liabilities:

               

(Increase) decrease in interest receivable

    122       25  

Decrease (increase) in receivables

    (3,407 )     (15,485 )

Increase in marketable securities

    (7,486 )     (2,210 )

(Increase) decrease in restricted cash (excluding restricted cash reserved for lending activities)

    (7,109 )     (581 )

(Increase) decrease in deposits and other assets

    12,281       19,428  

Increase in marketable securities sold, but not yet purchased

    2,629       757  

Increase in interest payable

    2,034       499  

(Decrease) increase in accrued compensation and other liabilities

    (50,116 )     (34,242 )

Net cash used in operating activities

    (50,077 )     (30,375 )
                 

Cash flows from investing activities:

               

Purchases of fixed assets

    (236 )     (154 )

Purchases of other investments

    (7,896 )     (23,282 )

Sales of other investments

    9,324       19,941  

Funding of loans collateralizing asset-backed securities issued

    (56,645 )     (127,933 )

Funding of loans held for investment

    -       (319 )

Sale and payoff of loans collateralizing asset-backed securities issued

    37,318       60,569  

Principal receipts on loans collateralizing asset-backed securities issued

    26,246       11,570  

Repayments on loans held for investment

    93       -  

Net change in restricted cash reserved for lending activities

    (952 )     (6,940 )

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

    (260 )     -  

Net cash provided by (used in) investing activities

    6,992       (66,548 )

     

See accompanying notes to consolidated financial statements.  

 

 
- 9 -

 

 

JMP Group LLC

Consolidated Statements of Cash Flows - (Continued)

(Unaudited)

(In thousands)

   

   

Three Months Ended March 31,

 
   

2015

   

2014

 

Cash flows from financing activities:

               

Proceeds from CLO III credit warehouse

    -       50,413  

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

    (6,448 )     (3,139 )

Distributions and dividend equivalents paid on common shares and RSUs

    (1,563 )     (8 )

Purchases of shares of common stock for treasury

    -       (33 )

Capital contributions of nonredeemable non-controlling interest holders

    -       3,389  

Distributions to non-controlling interest shareholders

    (934 )     (579 )

Purchase of subsidiary shares from non-controlling interest holders

    -       (6,000 )

Cash settlement of stock-based compensation

    -       (48 )

Excess tax benefit related to stock-based compensation

    5       -  

Net cash (used in) provided by financing activities

    (8,940 )     72,693  

Net decrease in cash and cash equivalents

    (52,025 )     (24,230 )

Cash and cash equivalents, beginning of period

    101,362       65,906  

Cash and cash equivalents, end of period

  $ 49,337     $ 41,676  
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the period for interest

  $ 4,557     $ 3,983  

Cash paid during the period for taxes

  $ -     $ 4,784  
                 

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

  $ 81     $ 142  

 

See accompanying notes to consolidated financial statements.  

 

 
- 10 -

 

 

JMP G roup LLC

Notes to Consolidated Financial Statements

March 31, 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”).

 

In the third quarter of 2014, the board of directors of our 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 stockholders approved the Reorganization Transaction at a meeting of the stockholders 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  

 

The consolidated accounts of the Company include the wholly-owned subsidiaries, JMP Securities, HCS, JMP Capital, JMP Credit, JMPCA, 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 (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 March 31, 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. The adoption of ASU 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 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.

 

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.

 

 
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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.

 

4. Fair Value Measurements

 

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

 

   

At March 31, 2015

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 49,337     $ 49,337     $ -     $ -     $ 49,337  

Restricted cash and deposits

    75,164       75,164       -       -       75,164  

Marketable securities owned

    36,952       36,952       -       -       36,952  

Other investments

    87,930       -       71,109       16,821       87,930  

Loans held for investment, net of allowance for loan losses

    1,952       -       -       1,736       1,736  

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

    1,031,613       -       1,012,864       -       1,012,864  

Long term receivable

    777       -       -       858       858  

Total assets:

  $ 1,283,725     $ 161,453     $ 1,083,973     $ 19,415     $ 1,264,841  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 17,677     $ 17,677     $ -     $ -     $ 17,677  

Asset-backed securities issued

    995,046       -       987,733       -       987,733  

Bond payable

    94,300       -       97,125       -       97,125  

Total liabilities:

  $ 1,107,023     $ 17,677     $ 1,084,858     $ -     $ 1,102,535  

 

   

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     $ 15,048     $ 1,088,642     $ -     $ 1,103,690  

 

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

 

 
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Recurring Fair Value Measurement

 

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

 

 

(In thousands)

 

March 31, 2015

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Marketable securities owned

  $ 36,952     $ -     $ -     $ 36,952  

Other investments:

                               

Investments in hedge funds managed by HCS

    -       71,109       -       71,109  

Investments in private equity funds managed by HCS

    -       -       4,198       4,198  

Investments in funds of funds managed by HCS

    -       -       157       157  

Total investment in funds managed by HCS

    -       71,109       4,355       75,464  

Limited partnership in investments in private equity/ real estate funds

    -       -       8,976       8,976  

Warrants and other held at JMPS

    -       -       766       766  

Equity securities in JMP Capital

    -       -       1,017       1,017  

Total other investments

    -       71,109       15,114       86,223  

Total assets:

  $ 36,952     $ 71,109     $ 15,114     $ 123,175  
                                 

Marketable securities sold, but not yet purchased

    17,677       -       -       17,677  
                                 

Total liabilities:

  $ 17,677     $ -     $ -     $ 17,677  
 

(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 $4.2 million as of March 31, 2015, with a remaining commitment of $0.4 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.

 

 
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The tables below provide a reconciliation of the beginning and ending balances for the assets held at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 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 December 31, 2014

  $ 152     $ -     $ 9,102     $ 732     $ 122,058     $ 6,608       138,652  
                                                         

Adjustment for adoption of new consolidation guidance (1)

    -       4,125       -       -       (121,041 )     (6,608 )     (123,524 )

Purchases

    9       100       -       -       -       -       109  

Sales

    (9 )     (7 )     (193 )     -       -       -       (209 )

Settlements

    -       -       -       -       -       -       -  

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

    5       (20 )     67       34       -       -       86  

Transfers in/(out) of Level 3

    -       -       -       -       -       -       -  

Balance as of March 31, 2015

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

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

  $ 5     $ (20 )   $ 67     $ 34     $ -     $ -     $ 86  

 

(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.

 

(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 December 31, 2013

  $ 139             $ 5,967     $ 1,121     $ 97,981     $ 6,864       112,072  
                                                      -  

Purchases

    -               -       -       2,788       -       2,788  

Sales

    -               -       -       -       -       -  

Settlements

    -               (134 )     (19 )     -       -       (153 )

Total gains (losses) - realized and unrealized included in earnings (1)

    14               345       (361 )     (6,509 )     204       (6,307 )

Transfers in/(out) of Level 3

    -               -       -       -       -       -  

Balance as of March 31, 2014

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

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

    14       -       345       -       (6,509 )     204       (5,946 )

 

(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.

 

Purchases and sales of Level 3 assets shown above were recorded at fair value at the date of the transaction.

 

Total gains and losses included in earnings represent the total gains and/or losses (realized and unrealized) recorded for the Level 3 assets and are reported in Principal Transactions in the accompanying Consolidated Statements of Operations.

 

Transfers between levels of the fair value hierarchy result from changes in the observability of fair value inputs used in determining fair values for different types of financial assets and are recognized at the beginning of the reporting period in which the event or change in circumstances that caused the transfer occurs.  

 

There was one transfer of $2.0 million into Level 1 for the three months ended March 31, 2014 as a result of the expiration of a lockup discount. There were no other transfers between Level 1, Level 2 or Level 3 during the three months ended March 31, 2014 and 2015.

 

The amount of unrealized gains and losses included in earnings attributable to the change in unrealized gains and losses relating to Level 3 assets still held at the end of the period are reported in Principal Transactions in the accompanying Consolidated Statements of Operations.

 

Included in other investments are investments in partnerships in which one of the Company’s subsidiaries is the investment manager and general partner. The Company accounts for these investments using the equity method as described in Note 2 - Summary of Significant Accounting Policies in the Annual Report. The Company’s proportionate share of those investments is included in the tables above. In addition, other investments include warrants and investments in funds managed by third parties. The investments in private investment funds managed by third parties are generally not redeemable at the option of the Company. As of both March 31, 2015 and December 31, 2014, the Company had unfunded investment commitments of $0.1 million related to private investment funds managed by third parties, and $2.2 million related to an investment company focusing on real estate joint ventures.

 

The amount of unrealized gains and losses included in earnings attributable to the change in unrealized gains and losses relating to Level 3 assets still held at the end of the period are reported in Principal Transactions in the accompanying Consolidated Statements of Operations.

 

 
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The Company used the following valuation techniques with unobservable inputs when estimating the fair value of the Level 3 assets  

Dollars in thousands

 

Fair Value at March 31, 2015

 

Valuation Technique

   

Unobservable Input

 

Range

(Weighted Average)

 
                       

Investments in Funds of Funds managed by HCS (1)

  $ 157  

Net Asset Value

   

N/A

 

N/A

 

Investment in private equity funds managed by HCS (1)

  $ 4,198  

Net Asset Value

   

N/A

 

N/A

 

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

  $ 8,976  

Net Asset Value

   

N/A

 

N/A

 

Warrants and Other held at JMPS and JMPG LLC

  $ 766  

Black-Scholes Option Model

   

Annualized volatility of credit

  20.1%  

Equity securities in JMP Capital (2)

  $ 1,017  

Market comparable companies

   

Revenue multiples

 

4.9x-6.1x (5.5x)

 
             (3)  

Discount for lack of marketability

  30%  
         

Market transactions

   

Revenue multiples

 

4.4x

 
               

Control premium

  25%  

 

(1) The Company uses the reported net asset value per share as a practical expedient to estimate the fair value of the investments in funds of funds managed by HCS and limited partner investment in private equity funds.

(2) The fair value of the securities in JMP Capital is calculated using a weighted allocation between the fair values assessed by the public comparables and M&A comparable valuation techniques.

(3) The Company applies a discount for lack of marketability (“DLOM”) to its investments, ranging from 30% to 50%. The discount is determined by the level of revenue of the investee and proximity to filing. The minimum discount applied is 30% for investees that either generate revenue exceeding $100 million, or have filed a registration statement. Higher discounts are applied to investees with less than $100 million of revenue or that are not on file, reflecting the longer anticipated term to a liquidity event. When investments become public, the Company is typically subject to a lock up period. In valuing these public companies, the Company has incorporated 5% per month of lockup into its valuations. As the typical lockup period is six months, the DLOM methodology has a floor threshold of 30% to mirror the discount rates applied once the investment goes public.

 

Dollars in thousands

 

Fair Value at December 31, 2014

 

Valuation Technique

   

Unobservable Input

 

Range

(Weighted Average)

 
                       

Investments in Funds of Funds managed by HCS (1)

  $ 152  

Net Asset Value

   

N/A

 

N/A