JMP Group LLC
JMP GROUP LLC (Form: 10-Q, Received: 11/01/2016 16:46:03)


  UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

(Mark One)

 

 

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

   
  For the quarterly period ended September 30, 2016 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 October 27, 2016: 20,952,222.

 



 
 

 

 

Table of Contents

   

TABLE OF CONTENTS

 

 

 

 

 

Page

 

PART I.

 

FINANCIAL INFORMATION

 

 

4

 

     

Item 1.

 

Financial Statements - JMP Group LLC

 

 

4

 

 

 

Consolidated Statements of Financial Condition   September 30, 2016 and December 31, 2015 (Unaudited)

 

 

4

 

 

 

Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)

 

 

6

 

 

 

Consolidated Statement s of C omprehensive Income - For the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)

 

 

7

 

   

Consolidated Statement s of Changes in Equity - For the Nine Months Ended September 30, 2016 and 2015 (Unaudited)

 

 

7

 
 

 

Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2016 and 2015 (Unaudited)

 

 

8

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

10

 

Item 2.

 

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

 

 

42

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

70

 

Item 4.

 

Controls and Procedures

 

 

71

 

     

PART II.

 

OTHER INFORMATION

 

 

71

 

     

Item 1.

 

Legal Proceedings

 

 

71

 

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. JMP Group LLC also uses the Investor Relations section of its website as a means of complying with its disclosure obligations under Regulation FD. Accordingly, you should monitor JMP Group LLC’s Investor Relations section of its website in addition to following JMP Group LLC’s press releases, SEC filings, and public conference calls and webcasts.

 

 
- 3 -

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements

 

JMP Group LLC

Consolidated Statements of Financial Condition

(Unaudited)

(Dollars in thousands, except per share data)

 

   

September 30, 2016

   

December 31, 2015

 
                 

Assets

               

Cash and cash equivalents

  $ 88,668     $ 68,551  

Restricted cash and deposits (includes cash on deposit with clearing broker of $250 at both September 30, 2016 and December 31, 2015)

    124,046       52,572  

Receivable from clearing broker

    10,952       14,586  

Investment banking fees receivable, net of allowance for doubtful accounts of zero at both September 30, 2016 and December 31, 2015, respectively

    4,819       5,044  

Marketable securities owned, at fair value

    21,553       28,493  

Incentive fee receivable

    320       4,397  

Other investments (includes $31,902 and $51,914 measured at fair value at September 30, 2016 and December 31, 2015, respectively)

    41,340       68,859  

Loans held for investment, net of allowance for loan losses

    2,153       2,595  

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

    823,694       969,665  

Interest receivable

    3,003       3,620  

Cash collateral posted for total return swap

    25,240       25,000  

Fixed assets, net

    3,286       3,929  

Deferred tax assets

    11,059       8,315  

Other assets

    6,846       15,232  

Total assets

  $ 1,166,979     $ 1,270,858  
                 

Liabilities and Equity

               

Liabilities:

               

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

  $ 8,886     $ 13,284  

Accrued compensation

    23,161       39,470  

Asset-backed securities issued (net of debt issuance costs of $3,497 and $4,168 at September 30, 2016 and December 31, 2015, respectively)

    857,444       930,224  

Interest payable

    5,961       5,377  

Bond payable (net of debt issuance costs of $2,147 and $2,475 at September 30, 2016 and December 31, 2015, respectively)

    91,680       91,825  

Deferred tax liability

    5,192       14,693  

Other liabilities

    36,586       23,091  

Total liabilities

    1,028,910       1,117,964  
                 

Commitments and Contingencies

               

JMP Group LLC Shareholders' Equity

               

Common shares, 100,000,000 shares authorized; 22,780,052 shares issued at both September 30, 2016 and December 31, 2015; 20,939,141 and 21,216,258 shares outstanding at September 30, 2016 and December 31, 2015, respectively

    23       23  

Additional paid-in capital

    139,946       135,003  

Treasury shares at cost, 1,840,911 and 1,497,075 shares at September 30, 2016 and December 31, 2015, respectively

    (10,695 )     (6,763 )

Accumulated deficit

    (7,473 )     (3,151 )

Total JMP Group LLC shareholders' equity

    121,801       125,112  

Nonredeemable Non-controlling Interest

    16,268       27,782  

Total equity

    138,069       152,894  

Total liabilities and equity

  $ 1,166,979     $ 1,270,858  

 

See accompanying notes to consolidated financial statements.

 

 
- 4 -

 

 

JMP Group LLC

Consolidated Statements of Financial Condition - (Continued)

(Unaudited)

(Dollars in thousands, except per share data)

 

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

    

   

September 30, 2016

   

December 31, 2015

 
                 

Cash and cash equivalents

  $ -     $ 1,311  

Restricted cash

    122,950       51,220  

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

    823,694       969,665  

Interest receivable

    2,125       2,575  

Incentive fees receivable

    -       990  

Other assets

    187       2,102  

Total assets of consolidated VIEs

  $ 948,956     $ 1,027,863  
                 

Accrued compensation

    -       761  

Asset-backed securities issued

    857,444       930,224  

Note payable (1)

    -       2,500  

Interest payable

    4,368       3,781  

Other liabilities

    1,316       1,360  

Total liabilities of consolidated VIEs

  $ 863,128     $ 938,626  

 

(1)    December 31, 2015 balance is 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 September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Revenues

                               

Investment banking

  $ 15,048     $ 11,918     $ 41,719     $ 53,943  

Brokerage

    5,015       6,046       16,921       18,515  

Asset management fees

    4,044       6,963       18,958       16,346  

Principal transactions

    2,764       (1,440 )     10,326       5,161  

Gain (loss) on sale and payoff of loans

    (52 )     30       (961 )     (1,680 )

Net dividend income

    230       263       736       710  

Other income

    262       (279 )     534       523  

Non-interest revenues

    27,311       23,501       88,233       93,518  
                                 

Interest income

    11,472       12,675       35,997       38,253  

Interest expense

    (8,212 )     (7,523 )     (24,297 )     (22,197 )

Net interest income

    3,260       5,152       11,700       16,056  
                                 

(Provision) reversal for loan losses

    104       (563 )     (980 )     (75 )
                                 

Total net revenues after provision for loan losses

    30,675       28,090       98,953       109,499  
                                 

Non-interest expenses

                               

Compensation and benefits

    22,167       21,949       70,273       76,537  

Administration

    1,808       1,719       5,640       5,704  

Brokerage, clearing and exchange fees

    734       842       2,308       2,454  

Travel and business development

    1,019       1,101       3,548       3,334  

Communications and technology

    1,033       964       3,093       2,916  

Occupancy

    987       945       2,853       2,719  

Professional fees

    1,119       1,252       3,245       3,266  

Depreciation

    312       390       968       831  

Other

    491       465       1,652       1,693  

Total non-interest expenses

    29,670       29,627       93,580       99,454  

Net income before income tax expense

    1,005       (1,537 )     5,373       10,045  

Income tax expense (benefit)

    (597 )     (343 )     (793 )     3,793  

Net income (loss)

    1,602       (1,194 )     6,166       6,252  

Less: Net income attributable to nonredeemable non-controlling interest

    941       1,797       4,029       5,309  

Net income (loss) attributable to JMP Group LLC

  $ 661     $ (2,991 )   $ 2,137       943  
                                 

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

                               

Basic

  $ 0.03     $ (0.14 )   $ 0.10     $ 0.04  

Diluted

  $ 0.03     $ (0.14 )   $ 0.10     $ 0.04  
                                 

Distributions declared per common share

  $ 0.090     $ 0.150     $ 0.300     $ 0.366  
                                 

Weighted average common shares outstanding:

                               

Basic

    20,946       21,241       21,117       21,230  

Diluted

    21,901       21,241       21,796       22,864  

 

See accompanying notes to consolidated financial statements.

 

 
- 6 -

 

 

J MP Group LLC

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)

 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Net income (loss)

  $ 1,602     $ (1,194 )   $ 6,166     $ 6,252  

Other comprehensive income

    -       -       -       -  

Comprehensive income attributable to JMP Group LLC

    1,602       (1,194 )     6,166       6,252  

Less: Comprehensive income attributable to non-controlling interest

    941       1,797       4,029       5,309  

Comprehensive income (loss) attributable to JMP Group LLC

  $ 661     $ (2,991 )   $ 2,137     $ 943  

 

 

JMP Group LLC

Consolidated Statement s of Changes in Equity

(Unaudited)

(In thousands)

 

   

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, 2015

    22,780     $ 23     $ (6,763 )   $ 135,003     $ (3,151 )   $ 27,782     $ 152,894  

Net income

    -       -       -       -       2,137       4,029       6,166  

Additonal paid-in capital - share-based compensation

    -       -       -       3,559       -       -       3,559  

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

    -       -       -       -       (6,459 )     -       (6,459 )

Purchases of common shares for treasury

    -       -       (4,192 )     -       -       -       (4,192 )

Reissuance of common shares from treasury

    -       -       260       -       -       -       260  

Purchase of subsidiary shares from non-controlling interest holders

    -       -       -       1,384       -       (9,595 )     (8,211 )

Distributions to non-controlling interest holders

    -       -       -       -       -       (5,948 )     (5,948 )

Balance, September 30, 2016

    22,780     $ 23     $ (10,695 )   $ 139,946     $ (7,473 )   $ 16,268     $ 138,069  

     

   

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, 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

    -       -       -       -       943       5,309       6,252  

Additonal paid-in capital - share-based compensation

    -       -       -       5,957       -       -       5,957  

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

    -       -       -       -       (8,132 )     -       (8,132 )

Purchases of common shares for treasury

    -       -       (312 )     -       -       -       (312 )

Reissuance of common shares from treasury

    -       -       297       23       -       -       320  

Distributions to non-controlling interest holders

    -       -       -       -       -       (7,128 )     (7,128 )

Capital contributions from non-controlling interest holders

    -       -       -       -       -       435       435  

Balance, September 30, 2015

    22,780     $ 23     $ (10,331 )   $ 140,780     $ 901     $ 28,014     $ 159,387  

 

See accompanying notes to consolidated financial statements.

 

 
- 7 -

 

 

JMP Group LLC

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)  

 

   

Nine Months Ended September 30,

 
   

2016

   

2015

 

Cash flows from operating activities:

               

Net income

  $ 6,166     $ 6,252  

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

               

Provision for doubtful accounts

    -       (5 )

Provision for loan losses

    980       75  

Accretion of deferred loan fees

    (1,224 )     (1,452 )

Amortization of liquidity discount, net

    (108 )     (97 )

Amortization of debt issuance costs

    328       105  

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

    1,814       1,091  

Interest paid in kind

    (53 )     (147 )

Loss on sale and payoff of loans

    961       1,680  

Gain on repurchase of bonds payable

    (87 )     -  

Change in other investments:

               

Income from investments in equity method investees

    238       482  

Fair value on other equity investments

    1,819       (347 )

Incentive fees reinvested in general partnership interests

    -       (1,617 )

Realized gain on other investments

    (7,981 )     (3,603 )

Depreciation and amortization of fixed assets

    968       831  

Share-based compensation expense

    4,199       6,277  

Deferred income taxes

    (12,245 )     (268 )

Net change in operating assets and liabilities:

               

Decrease in interest receivable

    617       (451 )

Decrease in receivables

    7,936       4,861  

Decrease (increase) in marketable securities

    6,940       (5,246 )

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

    827       1,366  

Decrease in deposits and other assets

    8,709       10,514  

Increase in marketable securities sold, but not yet purchased

    (4,398 )     (446 )

Increase (decrease) in interest payable

    584       (313 )

Decrease in accrued compensation and other liabilities

    (11,898 )     (30,846 )

Net cash provided by (used in) operating activities

    5,092       (11,304 )
                 

Cash flows from investing activities:

               

Purchases of fixed assets

    (325 )     (2,777 )

Purchases of other investments

    (6,103 )     (7,687 )

Sales of other investments

    39,491       23,846  

Funding of loans collateralizing asset-backed securities issued

    (185,586 )     (244,178 )

Funding of loans held for investment

    -       (610 )

Sale and payoff of loans collateralizing asset-backed securities issued

    279,415       232,479  

Principal receipts on loans collateralizing asset-backed securities issued

    51,975       64,032  

Repayments on loans held for investment

    52       188  

Net change in restricted cash reserved for lending activities

    (72,301 )     (10,697 )

Cash collateral posted for total return swap

    (240 )     (25,000 )

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

    -       (260 )

Net cash provided by investing activities

    106,378       29,336  

 

   

See accompanying notes to consolidated financial statements.  

 

 
- 8 -

 

 

JMP Group LLC

Consolidated Statements of Cash Flows - (Continued)

(Unaudited)

(In thousands)

 

 

   

Nine Months Ended September 30,

 
   

2016

   

2015

 

Cash flows from financing activities:

               

Repurchase of bonds payable

    (385 )     -  

Repayment of asset-backed securities issued

    (74,592 )     (42,461 )

Distributions and distribution equivalents paid on common shares and RSUs

    (6,236 )     (7,346 )

Purchases of common share for treasury

    (4,192 )     (312 )

Capital contributions of nonredeemable non-controlling interest holders

    -       435  

Distributions to non-controlling interest shareholders

    (5,948 )     (7,128 )

Net cash used in financing activities

    (91,353 )     (56,812 )

Net decrease in cash and cash equivalents

    20,117       (38,780 )

Cash and cash equivalents, beginning of period

    68,551       101,362  

Cash and cash equivalents, end of period

  $ 88,668     $ 62,582  
                 
                 

Non-cash investing and financing activities:

               

Reissuance of common share from treasury related to vesting of restricted share units

  $ 260     $ 297  

Distributions declared but not yet paid

  $ 628     $ 850  

Purchase of subsidiary shares not yet settled

  $ 8,211       -  

   

 

See accompanying notes to consolidated financial statements.  

 

 
- 9 -

 

 

JMP G roup LLC

Notes to Consolidated Financial Statements

September 30, 2016

(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”), HCAP Advisors LLC (“HCAP Advisors”), JMP Asset Management Inc. (“JMPAM”), JMP Realty I LLC (“JMP Realty”), and JMP Credit Advisors LLC (“JMPCA”), and certain principal investments through JMP Investment Holdings LLC (“JMP Investment Holdings”), JMP Realty Trust Inc., and JMPCA. The above entities, other than HCAP Advisors, are wholly-owned subsidiaries. JMP Securities is a U.S. registered broker-dealer under the Securities Exchange Act of 1934, as amended (“the Exchange Act”), and is a member of the Financial Industry Regulatory Authority (“FINRA”). JMP Securities operates as an introducing broker and does not hold funds or securities for, or owe any money or securities to customers and does not carry accounts for customers. All customer transactions are cleared through another broker-dealer on a fully disclosed basis. HCS is a registered investment advisor under the Investment Advisers Act of 1940, as amended, and provides investment management services for sophisticated investors in investment partnerships and other entities managed by HCS. HCAP Advisors provides investment advisory services to Harvest Capital Credit Corporation (“HCC”). JMP Realty manages JMP Realty Partners I LLC (“JMPRP”), a fund formed in the third quarter of 2016 to invest in real estate portfolios. Through JMPCA, the Company manages JMPCA CLO I Ltd (“CLO I”), JMPCA CLO II Ltd (“CLO II”), JMPCA CLO III Ltd (“CLO III”), and JMP Credit Advisors TRS Ltd (“JMPCA TRS”), a wholly owned special purpose vehicle formed to enter into a total return swap (“TRS”). The Company completed a Reorganization Transaction in January 2015 pursuant to which JMP Group Inc. became a wholly owned subsidiary of JMP Group LLC (the “Reorganization Transaction”).

 

Recent Transactions

 

On September 27, 2016, the Company repurchased $12.8 million face value of the unsecured subordinated notes from CLO III non-controlling interests, increasing the Company’s ownership of unsecured subordinated notes from 13.5% to 46.7%. The effects of changes on the Company’s equity from net income attributable to JMP Group LLC and the purchase of CLO III non-controlling interest are noted below.

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Net income (loss) attributable to JMP Group LLC

  $ 661     $ (2,991 )   $ 2,137     $ 943  

Transfers from non-controlling interest

                               

Increase in JMP Group LLC paid-in capital for purchase of CLO III interest at discount

    1,384       -       1,384       -  

Net transfers from non-controlling interest

    1,384       -       1,384       -  

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

  $ 2,045     $ (2,991 )   $ 3,521     $ 943  

 

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, 2015 (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 consolidated accounts of the Company include the wholly-owned subsidiaries, JMP Securities, HCS, JMPCA, JMP Investment Holdings, JMPCA TRS (effective May 2015), JMP Asset Management Inc. (effective October 2015), JMP Realty Trust Inc. (effective September 2015), and the partially-owned subsidiaries 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 September 30, 2016 and December 31, 2015 relate to the interest of third parties in the partially-owned subsidiaries.

 

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

 

 
- 10 -

 

 

3. Recent Accounting Pronouncemen ts

 

Accounting Standards Updates (“ASU”) 2014-09, ASU 2015-14, ASU 2016-10 and ASU 2016-12 , Revenue from Contracts with Customers , were issued in May 2014, August 2015, April 2016 and May 2016, respectively, to provide a more robust framework for addressing revenue issues. The provisions of these standards are effective for annual reporting periods beginning after December 15, 2017, and do not allow early adoption. ASU 2016-08, Principal versus Agent Considerations , was issued in March 2016 to clarify the implementation guidance on principal versus agent considerations. Its adoption may have an impact on the Company’s financial statements; however, the extent is not yet determined.

 

ASU 2015-03 and ASU 2015-15, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs , were issued April 2015 and August 2015, respectively. To simplify the presentation of debt issuance costs, the amendments in 2015-03 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. ASU 2015-15 extends the scope of ASU 2015-03 to address debt issuance costs associated with line of credit arrangements. This standard became effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Upon adoption, the Company reclassified debt issuance costs to the respective debt liability line items.

 

ASU 2016-02, Leases , was issued February 2016 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing information about leasing arrangements. The standard requires lessees to recognize the assets and liabilities arising from operational leases on the balance sheet. ASU 2016-02 will become effective for fiscal years beginning after December 15, 2018. Upon adoption, the Company’s assets and liabilities will be grossed up to reflect the present value of the lease payments; however, the extent is not yet determined.

 

ASU 2016-06, Contingent Put and Call Options in Debt Instruments , was issued in March 2016 to clarify and improve GAAP by eliminating diversity in assessing embedded contingent call options in debt instruments. This standard will be effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Its adoption may have an impact on the Company’s financial statements; however, the extent is not yet determined.

 

ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting , was issued in March 2016. When an investment qualifies for the use of the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence, the amendments eliminate the requirement to retroactively adopt the equity method of accounting. This standard will be effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of ASU 2016-07 is not expected to have a material impact on the Company’s financial statements.

 

ASU 2016-09, Improvements to Employee Share-Based Payment Accounting , was issued in March 2016 as part of its initiative to reduce complexity in accounting standards. Areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This standard will become effective for fiscal years beginning after December 31, 2016. The adoption of ASU 2016-09 is not expected to have a material impact on the Company’s financial statements.

 

ASU 2016-13, Measurement of Credit Losses on Financial Instruments, was issued in June 2016 to replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This standard will become effective for fiscal years beginning after December 31, 2019. The adoption of ASU 2016-13 may result in more immediate recognition of losses on the Company’s amortized cost investments.

 

ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments , was issued in August 2016 to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This standard addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this standard are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments will be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues will be applied prospectively as of the earliest date practicable. The adoption of ASU 2016-15 is expected to result in reclassifications within the Company’s statements of cash flows.

 

 
- 11 -

 

 

4. Fair Value Measurements

 

The following tables provide fair value information related to the Company’s financial instruments at September 30, 2016 and December 31, 2015:

   

   

At September 30, 2016

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 88,668     $ 88,668     $ -     $ -     $ 88,668  

Restricted cash and deposits

    124,046       124,046       -       -       124,046  

Marketable securities owned

    21,553       21,553       -       -       21,553  

Other investments

    24,960       -       24,960       -       24,960  

Other investments measured at net asset value (1)

    16,380       -       -       -       -  

Loans held for investment, net of   allowance for loan losses

    2,153       -       -       2,016       2,016  

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

    823,694       -       815,567       -       815,567  

Cash collateral posted for total return swap

    25,240       25,240       -       -       25,240  

Settlement receivable

    135       -       -       135       135  

Total assets:

  $ 1,126,829     $ 259,507     $ 840,527     $ 2,151     $ 1,102,185  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 8,886     $ 8,886     $ -     $ -     $ 8,886  

Asset-backed securities issued

    857,444       -       850,114       -       850,114  

Bond payable

    91,680       -       95,457       -       95,457  

Total liabilities:

  $ 958,010     $ 8,886     $ 945,571     $ -     $ 954,457  

 

   

At December 31, 2015

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 68,551     $ 68,551     $ -     $ -     $ 68,551  

Restricted cash and deposits

    52,572       52,572       -       -       52,572  

Marketable securities owned

    28,493       27,058       1,458       -       28,516  

Other investments

    38,588       -       38,588       -       38,588  

Other investments measured at net asset value (1)

    30,271       -       -       -       -  

Loans held for investment, net of allowance for loan losses

    2,595       -       -       2,342       2,342  

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

    969,665       -       940,545       -       940,545  

Cash collateral posted for total return swap

    25,000       25,000       -       -       25,000  

Settlement receivable

    500       -       -       526       526  

Total assets:

  $ 1,216,235     $ 173,181     $ 980,591     $ 2,868     $ 1,156,640  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 13,284     $ 13,284     $ -     $ -     $ 13,284  

Asset-backed securities issued

    930,224       -       919,937       -       919,937  

Total return swap

    1,950       -       1,950       -       1,950  

Bond payable

    91,825       -       94,179       -       94,179  

Total liabilities:

  $ 1,037,283     $ 13,284     $ 1,016,066     $ -     $ 1,029,350  

 

 

(1)

In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.

 

 
- 12 -

 

 

Recurring Fair Value Measurement

 

The following tables provide information related to the Company’s assets and liabilities carried at fair value on a recurring basis at September 30, 2016 and December 31, 2015:  

 

(In thousands)

         

September 30, 2016

 
   

Carrying Value

   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                         

Marketable securities owned

  $ 21,553     $ 21,553     $ -     $ -     $ 21,553  

Other investments:

                                       

Investments in hedge funds managed by HCS

    24,693       -       24,693       -       24,693  

Investments in private equity funds managed by HCS and JMPAM (1)

    4,783       -       -       -       -  

Investments in funds of funds managed by HCS (1)

    5       -       -       -       -  

Total investment in funds managed by HCS and JMPAM (1)

    29,481       -       24,693       -       24,693  

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

    2,154       -       -       -       -  

Total return swap

    267       -       267       -       267  

Total other investments

    31,902       -       24,960       -       24,960  

Total assets:

  $ 53,455     $ 21,553     $ 24,960     $ -     $ 46,513  
                                         

Marketable securities sold, but not yet purchased

    8,886       8,886       -       -       8,886  
                                         

Total liabilities:

  $ 8,886     $ 8,886     $ -     $ -     $ 8,886  

 

(In thousands)

         

December 31, 2015

 
   

Carrying Value

   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                         

Marketable securities owned

  $ 28,493     $ 27,058     $ 1,435     $ -     $ 28,493  

Other investments:

                                       

Investments in hedge funds managed by HCS

    38,588       -       38,588       -       38,588  

Investments in private equity funds managed by HCS (1)

    4,057       -       -       -       -  

Investments in funds of funds managed by HCS (1)

    19       -       -       -       -  

Total investment in funds managed by HCS (1)

    42,664       -       38,588       -       38,588  

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

    9,250       -       -       -       -  

Total other investments

    51,914       -       38,588       -       38,588  

Total assets:

  $ 80,407     $ 27,058     $ 40,023     $ -     $ 67,081  
                                         

Marketable securities sold, but not yet purchased

    13,284       13,284       -       -       13,284  

Total return swap

    1,950       -       1,950       -       1,950  

Total liabilities:

  $ 15,234     $ 13,284     $ 1,950     $ -     $ 15,234  

 

(1)

In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.

 

The Company’s Level 2 assets held in other investments consist of investments in hedge funds managed by HCS. The carrying value of investment in hedge funds is calculated using the equity method and approximates fair value. Earnings or losses attributable to these investments are recorded in principal transactions. These assets are considered Level 2 as the underlying hedge funds are mainly invested in publicly traded stocks whose value is based on quoted market prices. The Company’s proportionate share of those investments is included in the tables above.

 

The investments in private equity funds managed by HCS and JMPAM are recognized using the fair value option. The Company uses the reported net asset value per share as a practical expedient to estimate the fair value of the funds. The risks associated with these investments are limited to the amounts of invested capital, remaining capital commitment and any management and incentive fees receivable. The Company uses the reported net asset value per share as a practical expedient to estimate the fair value of HGC, HGC II and JMPRP.

 

The Company holds a limited partner investment in a private equity fund, managed by a third party. 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 streams 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. The Company uses the reported net asset value per share as a practical expedient to estimate the fair value of the funds. The investments in private investment funds managed by third parties are generally not redeemable at the option of the Company.

 

 
- 13 -

 

 

As of September 30, 2016 and 2015, $6.9 million and $13.7 million of assets were measured using the net asset value as a practical expedient. Investments for which fair value was estimated using net asset value as a practical expedient were as follows:

 

   

Redemption

   

Redemption

   

Fair Value at

   

Unfunded Commitments

 

Dollars in thousands

 

Frequency

   

Notice Period

   

September 30, 2016

   

December 31, 2015

   

September 30, 2016

   

December 31, 2015

 
                                                 

Investments in Funds of Funds managed by HCS (1)

  N/A       N/A     $ 5     $ 19     $ -     $ -  

Limited partner investments in private equity funds

 

Nonredeemable

      N/A     $ 2,154     $ 9,250     $ -     $ -  

Investment in private equity funds managed by HCS

 

Nonredeemable

      N/A     $ 4,783     $ 4,057     $ 1,302     $ 1,400  

 

(1) Investments in Funds of Funds managed by HCS began the process of liquidation on December 31, 2015.

 

Non-recurring Fair Value Measurements

 

The Company's assets that are measured at fair value on a non-recurring basis result from the application of lower of cost or market accounting or write-downs of individual assets. The Company held no assets measured at fair value on a non-recurring basis at December 31, 2015. As of September 30, 2016, the Company held loans collateralizing asset-backed securities of $2.2 million, which were placed on non-accrual status. For the three months ended September 30, 2016, the Company recorded no related losses. For the nine months ended September 30, 2016, the Company recorded related losses of $0.7 million.

 

Loans Held for Investment

 

At September 30, 2016 and December 31, 2015, loans held for investment included four loans. Given the small size of this loan portfolio segment, the Company reviews credit quality of the loans within this portfolio segment on a loan by loan basis mainly focusing on the borrower’s financial position and results of operations as well as the current and expected future cash flows on the loan.

 

Effective July 1, 2013, the Company agreed to lend a health sciences fund investment advising company up to $2.0 million, at an interest rate of 10% per year. The outstanding principal balance and all accrued and unpaid interest is due and payable on July 1, 2018. In the quarter ended September 30, 2016, the Company placed this loan on non-accrual status, and recorded a related reserve for $0.4 million. As of September 30, 2016 and December 31, 2015, the Company’s loan outstanding to this entity was $1.7 million, net of a $0.4 million reserve, and $2.1 million, respectively. The Company determined the fair value of loans held for investment to be $1.6 million and $2.3 million as of September 30, 2016 and December 31, 2015, respectively, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate.

 

Investments at Cost and Equity Method

 

On February 11, 2010, the Company made a $1.5 million investment in Class D Preferred Units of Sanctuary Wealth Services LLC (“Sanctuary”), which provides a turnkey platform that allows independent wealth advisors to establish an independent advisory business without the high startup costs and regulatory hurdles. During the fourth quarter of 2010, the Company determined that its investment in Sanctuary was fully impaired and recorded an impairment loss of $1.5 million, which was included in Principal Transactions on the Consolidated Statements of Operations. On April 3, 2012, the Company purchased a $2.3 million receivable for $1.4 million from Sanctuary. The $1.4 million included $0.5 million in cash consideration and $0.9 million in connection with the partial redemption of the $1.5 million investment in Sanctuary. The Company recognized the $0.9 million as a gain in Principal Transactions, and the $2.3 million receivable in Other Assets. The carrying value of the settlement receivable was $0.1 million and $0.5 million as of September 30, 2016 and December 31, 2015, respectively. The Company determined the fair value of the settlement receivable to be $0.1 million and $0.5 million as of September 30, 2016 and December 31, 2015, respectively, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate. Significant increases in the market credit adjusted interest rate in isolation would result in decreases to the fair value measurement.

 

On April 5, 2011, the Company made a $0.3 million commitment to invest in RiverBanc LLC (“RiverBanc”), which manages the assets of a commercial real estate investing platform in mezzanine debt and equity from multifamily properties and other residential real estate. The Company recognizes its investment in RiverBanc using the equity method. In the three and nine months ended September 30, 2015, the Company recognized a loss of $0.3 million and a $0.5 million gain, respectively, and received distributions of $0.5 million and $1.7 million, respectively. In the first quarter of 2016, the Company recognized a $0.1 million gain, and received a distribution of $0.5 million. The Company sold RiverBanc in the second quarter of 2016, resulting in a $6.0 million gain.

 

On November 16, 2015, the Company made a $2.0 million investment in a fund, which focuses on acquiring a portfolio of seasoned real estate equity investments. The Company recognized its investment using the equity method, with related gains recognized in principal transactions. On September 15, 2016, the Company sold the investment to JMPRP, resulting in a $0.1 million loss. Prior to the sale, the Company received distributions of $0.1 million and $0.7 million, and recognized gains related to equity method income of zero and $0.3 million in the quarter and nine months ended September 30, 2016, respectively.

 

On December 2, 2015, the Company made a $12.8 million investment in a fund, which acquires buildings and land for the purpose of holding, selling and managing the properties. The Company recognizes its investment using the equity method, with related gains recognized in principal transactions. On September 15, 2016, the Company sold 21.6% of this investment to JMPRP, resulting in a $0.4 million gain. In the three and nine months ended September 30, 2016, the Company received distributions of $0.3 million and $0.6 million, respectively, and recognized gains related to equity method income of $0.4 million and a loss of $0.8 million in the quarter and nine months ended September 30, 2016, respectively. As of September 30, 2016, the carrying value of this investment was $9.0 million.

 

In October 2015, the Company entered into a $5.0 million commitment to invest in a general partner, which will manage real estate equity investments. The Company recognized its investment using the equity method, with related gains recognized in principal transactions. On September 26, 2016, the Company sold the investment to JMPRP, resulting in a $0.3 million gain. The Company received distributions of $0.1 million and recognized losses of $0.1 million related to equity method income for both the quarter and nine months ended September 30, 2016.

 

 
- 14 -

 

 

Derivative Financial Instruments

 

In February 2015, the Company received a $0.7 million convertible promissory note in exchange for a partial redemption of outstanding Class D Preferred Units of Sanctuary. At the option of the holder, the convertible promissory note is convertible into Class A Units on a fully diluted basis. The Company recognized the $0.7 million as a gain in Principal Transactions, and the $0.7 million convertible promissory note in Other Investments. In determining the carrying value of the investment, the Company bifurcated the convertible option from the promissory note. The Company identified this convertible option as an embedded derivative. The promissory note is recognized at amortized cost. The convertible option is recognized using the fair value option. In determining the fair value of the option, the value of the underlying shares will be compared against the value of the promissory note. The carrying value of the investment was $0.7 million as of December 31, 2015. The Company recorded a $0.7 million loss against this investment in the three months ended September 30, 2016. The Company recorded changes in the fair value of this investment as unrealized gain or loss in Principal Transactions. The Company determined the fair value of the investment to be zero as of September 30, 2016.

 

In the second quarter of 2015, JMPCA TRS entered into a TRS. The TRS effectively allows the Company to build up a portfolio of broadly syndicated loans with characteristics similar to the warehouse facility used to accumulate assets for JMPCA CLO III, Ltd.  The TRS differs from a traditional warehouse facility, in that the Company does not own or take title to the loans.  The TRS provides all the economic risks and rewards of owning the assets; however, they are only reference assets during the life of the investment. Under the TRS, JMPCA TRS pays interest on the value of the portfolio balance in exchange for any income or fees earned from a portfolio of syndicated loans held by the counter-party. The TRS has a tenor of 36 months with an 18 month revolving period and an 18 month amortization period. As of September 30, 2016, the TRS is held in Other Investments, with gains and losses recorded in Principal Transactions. In the three and nine months ended September 30, 2016, the Company recognized a $1.5 million and $2.1 million gain on the TRS, respectively. In the three and nine months ended September 30, 2015, the Company recognized a $0.4 million loss and $0.1 million loss on the TRS, respectively. The Company determined the fair value of the TRS to be a $0.3 million asset and a $1.9 million liability as of September 30, 2016 and December 31, 2015, respectively, using the market value of the loans as provided by our counterparty. In association with this agreement, the Company posted $25.0 million as cash collateral, which is recorded in the line item Cash collateral posted for total return swap. In the first quarter of 2016, the Company posted an additional $0.2 million. The contract with the counter-party incorporates a master netting agreement. If the Company enters into another derivative with this counter-party, it could be offset with the TRS. The maximum exposure of the TRS is the $25.2 million posted as cash collateral plus any margin call amounts the Company may make in the future. The Company monitors the portfolio continuously, updating the collateral pricing and ratings daily. The facility has been under-levered as the max borrowings are $167.0 million and the Company’s borrowing level remained between approximately $100.0 million and $110.0 million during the three months ended September 30, 2016.

 

5 . Loans Collateralizing Asset-backed Securities Issued

 

Loans collateralizing asset-backed securities issued are commercial loans securitized and owned by the Company’s CLOs. The loans consist of those loans within the CLO securitization structure at the acquisition date of CLO I and loans purchased by the CLOs subsequent to the CLO I acquisition date. The following table presents the components of loans collateralizing asset-backed securities issued as of September 30, 2016 and December 31, 2015:

   

(In thousands)

 

Loans Collateralizing Asset-backed Securities

 
   

September 30, 2016

   

December 31, 2015

 

Outstanding principal

  $ 838,224     $ 984,110  

Allowance for loan losses

    (5,933 )     (5,397 )

Liquidity discount

    (810 )     (918 )

Deferred loan fees, net

    (7,787 )     (8,130 )
Total loans, net   $ 823,694     $ 969,665  

 

Loans recorded upon the acquisition of CLO I at fair value reflect a liquidity discount. The table below summarizes the activity in the loan principal, allowance for loan losses, liquidity discount, deferred loan fees, and the carrying value for the loans as of and for the three months ended September 30, 2016 and 2015:

 

(In thousands)

 

Three Months Ended September 30, 2016

 
   

Principal

   

Allowance for Loan Losses

   

Liquidity Discount

   

Deferred Loan Fees

   

Carrying Value,