JMP Group LLC
JMP GROUP LLC (Form: 10-Q, Received: 11/09/2017 17:30:57)

 

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 , 2017 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: 001-36802

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” “smaller reporting company” and “emerging growth 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

 

             

Emerging growth company

 

       

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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 November 6, 2017: 21,485,981.

 



 

 

 

 

Table of Contents

 

 

TABLE OF CONTENTS

 

     

 

 

Page

PART  I.

FINANCIAL INFORMATION

4

     

Item  1.

Financial Statements - JMP Group LLC

4

 

Condensed Consolidated Statements of Financial Condition – September 30, 2017 and December 31, 2016 (Unaudited)

4

 

Condensed Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)

6

 

Condensed Consolidated Statements of Changes in Equity - For the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)

7

 

Condensed Consolidated Statements of Cash Flows - For the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)

8

 

Notes to Condensed 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

69

Item  4.

Controls and Procedures

69

     

PART  II.

OTHER INFORMATION

69

     

Item  1.

Legal Proceedings

69

Item  1A.

Risk Factors

69

Item  2.

Unregistered Sales of Equity Securities and Use of Proceeds

70

Item  3.

Defaults Upon Senior Securities

70

Item  4.

Mine Safety Disclosures

70

Item  5.

Other Information

70

Item  6.

Exhibits

70

   

SIGNATURES

71

   

EXHIBIT INDEX

72

 

-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

Condensed Consolidated Statements of Financial Condition

(Unaudited)

(Dollars in thousands, except per share data)

   

September 30, 2017

   

December 31, 2016

 

Assets

               

Cash and cash equivalents

  $ 87,493     $ 85,492  

Restricted cash and deposits (includes cash on deposit with clearing broker of $250 at both September 30, 2017 and December 31, 2016)

    61,964       227,656  

Receivable from clearing broker

    20,384       6,586  

Investment banking fees receivable, net of allowance for doubtful accounts of $80 and zero at September 30, 2017 and December 31, 2016, respectively

    14,692       5,681  

Marketable securities owned, at fair value

    22,015       18,722  

Incentive fee receivable

    19       499  

Other investments (includes $20,191 and $21,459 measured at fair value at September 30, 2017 and December 31, 2016, respectively)

    26,573       32,869  

Loans held for sale

    -       32,488  

Loans held for investment, net of allowance for loan lo sses of $2,151 and $443 at September 30, 2017 and December 31, 2016, respectively

    18,747       1,930  

Loans collateralizing asset-backed securities issued, net of allowance for loan losses of $6,596 and $6,540, respectively

    756,166       654,127  

Interest receivable

    2,051       3,429  

Cash collateral posted for total return swap

    -       25,000  

Fixed assets, net

    2,459       3,143  

Deferred tax assets

    12,287       7,942  

Other assets

    6,181       20,266  

Total assets

  $ 1,031,031     $ 1,125,830  
                 

Liabilities and Equity

               

Liabilities:

               

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

  $ 21,001     $ 4,747  

Accrued compensation

    28,285       36,158  

Asset-backed securities issued (net of debt issuance costs of $3,251 and $3,271 at September 30, 2017 and December 31, 2016, respectively)

    737,780       825,854  

Interest payable

    7,557       6,317  

CLO V warehouse credit facility

    7,000       -  

Bond payable (net of debt issuance costs of $1,727 and $2,042 at September 30, 2017 and December 31, 2016, respectively)

    92,101       91,785  

Deferred tax liability

    2,393       3,872  

Other liabilities

    20,351       21,803  

Total liabilities

    916,468       990,536  
                 

Commitments and Contingencies (Footnote 13)

               

JMP Group LLC Shareholders' Equity

               

Common shares, $0.001 par value, 100,000,000 shares authorized; 22,780,052 shares issued at both September 30, 2017 and December 31, 2016; 21,460,785 and 21,457,054 shares outstanding at September 30, 2017 and December 31, 2016, respectively

    23       23  

Additional paid-in capital

    137,430       135,945  

Treasury shares at cost, 1,319,267 and 1,322,998 shares at September 30, 2017 and December 31, 2016, respectively

    (7,605 )     (7,792 )

Accumulated deficit

    (29,138 )     (8,799 )

Total JMP Group LLC shareholders' equity

    100,710       119,377  

Nonredeemable Non-controlling Interest

    13,853       15,917  

Total equity

    114,563       135,294  

Total liabilities and equity

  $ 1,031,031     $ 1,125,830  

 

See accompanying notes to condensed consolidated financial statements.

 

-4-

 

 

JMP Group LLC

Condensed 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, 2017

   

December 31, 2016

 
                 

Restricted cash

  $ 54,137     $ 225,777  

Loans held for sale

    -       32,488  

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

    756,166       654,127  

Interest receivable

    2,022       2,180  

Other assets

    90       178  

Total assets of consolidated VIEs

  $ 812,415     $ 914,750  
                 

Asset-backed securities issued

    737,780       825,854  

Interest payable

    6,020       4,580  

Other liabilities

    1,281       1,192  

Total liabilities of consolidated VIEs

  $ 745,081     $ 831,626  

 

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 condensed consolidated financial statements.

 

-5-

 

 

JMP Group LLC

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Revenues

                               

Investment banking

  $ 22,085     $ 15,048     $ 54,813     $ 41,719  

Brokerage

    4,763       5,015       15,127       16,921  

Asset management fees

    4,014       4,044       14,078       18,958  

Principal transactions

    (1,392 )     2,764       (3,608 )     10,326  

Gain (loss) on sale and payoff of loans

    278       (52 )     1,208       (961 )

Net dividend income

    278       230       817       736  

Other income

    282       262       921       534  

Non-interest revenues

    30,308       27,311       83,356       88,233  
                                 

Interest income

    10,900       11,472       29,663       35,997  

Interest expense

    (8,811 )     (8,212 )     (24,649 )     (24,297 )

Net interest income

    2,089       3,260       5,014       11,700  
                                 

Gain (loss) repurchase/early retirement of debt

    -       -       (5,332 )     -  

Reversal (provision) for loan losses

    (368 )     104       (3,488 )     (980 )
                                 

Total net revenues

    32,029       30,675       79,550       98,953  
                                 

Non-interest expenses

                               

Compensation and benefits

    24,563       22,167       69,013       70,273  

Administration

    1,459       1,808       5,999       5,640  

Brokerage, clearing and exchange fees

    740       734       2,288       2,308  

Travel and business development

    709       1,019       2,735       3,548  

Communications and technology

    1,046       1,033       3,150       3,093  

Occupancy

    1,117       987       3,339       2,853  

Professional fees

    1,094       1,119       3,109       3,245  

Depreciation

    277       312       891       968  

Other

    366       491       1,993       1,652  

Total non-interest expenses

    31,371       29,670       92,517       93,580  

Net income (loss) before income tax expense

    658       1,005       (12,967 )     5,373  

Income tax expense (benefit)

    1,113       (597 )     (169 )     (793 )

Net income (loss)

    (455 )     1,602       (12,798 )     6,166  

Less: Net income attributable to nonredeemable non-controlling interest

    780       941       1,712       4,029  

Net income (loss) attributable to JMP Group LLC

  $ (1,235 )   $ 661     $ (14,510 )     2,137  
                                 

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

                               

Basic

  $ (0.06 )   $ 0.03     $ (0.67 )   $ 0.10  

Diluted

  $ (0.06 )   $ 0.03     $ (0.67 )   $ 0.10  
                                 

Distributions declared per common share

  $ 0.090     $ 0.090     $ 0.270     $ 0.300  
                                 

Weighted average common shares outstanding:

                               

Basic

    21,525       20,946       21,583       21,117  

Diluted

    21,525       21,901       21,583       21,796  

 

See accompanying notes to condensed consolidated financial statements.  

 

-6-

 

 

JMP Group LLC

Condensed Consolidated Statement s of Changes in Equity

(Unaudited)

(In thousands)

   

   

JMP Group LLC's Equity

                 
                           

Additional

           

Nonredeemable

         
   

Common Shares

   

Treasury

   

Paid-In

   

Accumulated

   

Non-controlling

         
   

Shares

   

Amount

   

Shares

   

Capital

   

Deficit

   

Interest

   

Total Equity

 

Balance, December 31, 2016

    22,780       23       (7,792 )     135,945       (8,799 )     15,917       135,294  

Net income (loss)

    -       -       -       -       (14,510 )     1,712       (12,798 )

Additional paid-in capital - share-based compensation

    -       -       -       1,485       -       -       1,485  

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

    -       -       -       -       (5,829 )     -       (5,829 )

Purchases of shares of common shares for treasury

    -               (1,967 )     -                       (1,967 )

Reissuance of shares of common shares from treasury

    -       -       2,154       -       -       -       2,154  

Distributions to non-controlling interest holders

    -       -       -       -       -       (3,868 )     (3,868 )

Capital contributions from non-controlling interest holders

    -       -       -       -       -       92       92  

Balance, September 30, 2017

    22,780       23       (7,605 )     137,430       (29,138 )     13,853       114,563  

 

 

   

JMP Group LLC's Equity

                 
                           

Additional

           

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 shares of common shares for treasury

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

Reissuance of shares 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  

 

See accompanying notes to condensed consolidated financial statements.

 

-7-

 

 

JMP Group LLC

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 

Cash flows from operating activities:

               

Net income (loss)

  $ (12,798 )   $ 6,166  

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

               

Provision for doubtful accounts

    90       -  

Provision for loan losses

    3,488       980  

Accretion of deferred loan fees

    (1,734 )     (1,224 )

Amortization of liquidity discount, net

    -       (108 )

Amortization of debt issuance costs

    315       328  

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

    1,607       1,814  

Interest paid in kind

    -       (53 )

(Gain) loss on sale and payoff of loans

    (1,208 )     961  

Loss (gain) on repurchase/early retirement of debt

    5,542       (87 )

Change in other investments:

               

Loss from investments in equity method investees

    4,628       238  

Fair value on other equity investments

    (505 )     1,819  

Realized (gain) loss on other investments

    (26 )     (7,981 )

Depreciation and amortization of fixed assets

    891       968  

Share-based compensation expense

    2,159       4,199  

Deferred income taxes

    (5,824 )     (12,245 )

Net change in operating assets and liabilities:

               

Decrease in interest receivable

    1,378       617  

(Increase) decrease in receivables

    (22,419 )     7,936  

(Increase) decrease in marketable securities

    (3,293 )     6,940  

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

    (1,324 )     827  

Decrease in deposits and other assets

    6,538       8,709  

Increase in marketable securities sold, but not yet purchased

    16,254       (4,398 )

(Decrease) increase in interest payable

    1,240       584  

Decrease in accrued compensation and other liabilities

    (8,983 )     (11,898 )

Net cash provided by (used in) operating activities

    (13,984 )     5,092  
                 

Cash flows from investing activities:

               

Purchases of fixed assets

    (204 )     (325 )

Purchases of other investments

    (2,034 )     (6,103 )

Sales of other investments

    12,300       39,491  

Funding of loans collateralizing asset-backed securities issued

    (614,431 )     (185,586 )

Funding of loans held for sale

    (2,752 )     -  

Funding of loans held for investment

    (13,514 )     -  

Sale and payoff of loans collateralizing asset-backed securities issued

    477,210       279,415  

Sale of loans held for sale

    33,951       -  

Principal receipts on loans collateralizing asset-backed securities issued

    29,339       51,975  

Repayments on loans held for investment

    975       52  

Repayments on loans held for sale

    1,784       -  

Net change in restricted cash reserved for lending activities

    167,016       (72,301 )

Net changes in cash collateral posted for derivative transactions

    25,000       (240 )

Net cash provided by investing activities

    114,640       106,378  

 

See accompanying notes to condensed consolidated financial statements.

 

-8-

 

 

JMP Group LLC

Condensed Consolidated Statements of Cash Flows - (Continued)

(Unaudited)

(In thousands)

    

   

Nine Months Ended September 30,

 
   

2017

   

2016

 

Cash flows from financing activities:

               

Proceeds from CLO V warehouse credit facility

    7,000       -  

Proceeds from asset-backed securities issued

    408,394       -  

Repurchase of bonds payable

    -       (385 )

Repayment of asset-backed securities issued

    (503,617 )     (74,592 )

Distributions and distribution equivalents paid on common shares and RSUs

    (5,838 )     (6,236 )

Proceeds from exercises of stock options

    1,149       -  

Purchase of common shares for treasury

    (1,660 )     (4,192 )

Capital contributions of nonredeemable non-controlling interest holders

    92       -  

Distributions to non-controlling interest shareholders

    (3,868 )     (5,948 )

Employee taxes paid on shares withheld for tax-withholding purposes

    (307 )     -  

Net cash used in financing activities

    (98,655 )     (91,353 )

Net (decrease) increase in cash and cash equivalents

    2,001       20,117  

Cash and cash equivalents, beginning of period

    85,492       68,551  

Cash and cash equivalents, end of period

  $ 87,493     $ 88,668  
                 
                 

Non-cash investing and financing activities:

               

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

  $ 2,154     $ 260  

Distributions declared but not yet paid

  $ 644     $ 628  

Purchase of subsidiary shares not yet settled

  $ -     $ 8,211  

Restructuring of loans held for investment to equity securities

  $ 520     $ -  

 

See accompanying notes to condensed consolidated financial statements.  

 

-9-

 

 

JMP G roup LLC

Notes to Condensed Consolidated Financial Statements

September 30 , 2017

(Unaudited)

 

1. Organization and Description of Business

 

JMP Group LLC, together with its subsidiaries (collectively, the “Company”), is a diversified capital markets 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 LLC (“JMPAM”), 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”). JMPAM currently manages two fund strategies: one that invests in real estate and real estate-related enterprises and another that provides credit to small and midsized private companies. JMPCA is an asset management platform that underwrites and manages investments in senior secured debt. JMPCA currently manages two collateralized loan obligations (“CLO”) vehicles and one CLO warehouse. 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 June 29, 2017, entities sponsored by JMP Group LLC priced a $456.9 million CLO. The senior notes offered in this transaction (the “Secured Notes”) were issued by JMP Credit Advisors CLO IV Ltd. (“CLO IV”), a special purpose Cayman vehicle, and co-issued in part by JMP Credit Advisors CLO IV LLC, a special purpose Delaware vehicle, and were backed by a diversified portfolio of broadly syndicated leveraged loans. The Secured Notes were issued in multiple tranches and are rated by Moody's Investors Service, Inc. The Company, through a wholly-owned subsidiary, retained 100% of the senior and junior subordinated notes, which are not rated. The transaction closed on June 29, 2017. The Company manages CLO IV, and owns 100% of the subordinated notes.

 

Upon the closing of CLO IV, the Company performed a consolidation analysis to determine appropriate consolidation treatment. An entity is considered a VIE and, therefore, would be subject to the consolidation provisions of ASC 810-10-15 if, by design, equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In the analysis, the Company determines if it is the primary beneficiary of the VIE by performing a qualitative analysis of the VIE that includes a review of, among other factors, its capital structure, contractual terms, related party relationships, the Company’s fee arrangements and the design of the VIE. As of June 30, 2017, CLO IV was determined to be a VIE. The Company was identified as the primary beneficiary based on the ability to direct the activities of CLO IV through its subsidiary manager, JMPCA, and the 100% ownership of the subordinated notes. As a result, the Company consolidates the assets and liabilities of CLO IV, and the underlying loans owned by the CLO are shown on the Consolidated Statements of Financial Condition under loans collateralizing asset-backed securities issued and the asset-backed securities issued to third parties are shown under asset-backed securities issued.

 

On July 31, 2017, the Company established, through its affiliate JMP Credit Advisors CLO V Ltd. (“ CLO V”), a Cayman Islands vehicle (the “Borrower”), a $200 million revolving credit facility (the “Facility”) to finance the acquisition of a portfolio of assets, including certain debt obligations. JMPCA will act as collateral manager with duties including the selection of assets to be acquired by the Borrower. All borrowings under the Facility will be subject to the satisfaction of certain customary covenants, the accuracy of certain representations and warranties, concentration limitations and other restrictions. The Facility will be primarily secured by a portfolio of collateral that includes certain debt obligations that are eligible for acquisition by the Borrower. The Borrower is subject to mandatory prepayments under the Facility upon the occurrence of certain events. In addition, the Borrower may make optional prepayments under the Facility. The Facility was established to fund the purchase of a diverse pool of loans. The Facility is structured to have a twelve month revolving period ending July 30, 2018, and a ten-month amortization period. The Facility will have a market standard advance rate and any outstanding balances will bear interest at standard market interest rates based on LIBOR.

 

2. Summary of Significant Accounting Policies  

 

Basis of Presentation

 

These condensed 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 condensed 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, 2016 (the “Annual Report”). The results of operations for any interim period are not necessarily indicative of the results to be expected for a full year. In the opinion of management, all normal, recurring adjustments have been included for a fair statement of this interim financial information

 

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The consolidated accounts of the Company include the wholly-owned subsidiaries, JMP Securities, HCS, JMPCA, JMP Investment Holdings, JMPCA TRS, JMP Asset Management Inc., JMP Realty Trust Inc., and CLO IV, CLO V, and the partially-owned subsidiaries JMP C redit Advisors CLO I Ltd. (“CLO I”), JMP Credit Advisors CLO II Ltd. (“CLO II”), JMP Credit Advisors CLO III Ltd. (“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, 2017 and December 31, 2016 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.

 

3. Recent Accounting Pronouncemen ts

 

Recently Adopted Accounting Guidance

 

ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting (Topic 323) , 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 was effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of ASU 2016-07 did not have a material impact on the Company’s financial statements.

 

ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718) , 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 was effective for fiscal years beginning after December 31, 2016. The adoption of ASU 2016-09 did not have a material impact on the Company’s financial statements.

 

Accounting Guidance Not Yet Adopted

 

Accounting Standards Updates (“ASU”) 2014-09, ASU 2015-14, ASU 2016-10 and ASU 2016-12 , Revenue from Contracts with Customers (Topic 606) , and ASU 2016-08, Principal versus Agent Considerations (Topic 606) , were issued in May 2014, August 2015, April 2016, May 2016 and March 2016, respectively, to provide a more robust framework for addressing revenue issues, and to clarify the implementation guidance on principal versus agent considerations. The standards allow either a full retrospective or modified approach at adoption and the Company has chosen modified adoption. They are effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted on the original effective date, as stated by ASU 2014-09, annual reporting periods beginning after December 15, 2016. The core principles of the provisions are that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The updates also clarify guidance relating to identifying performance obligations and licensing implementation. The Company is evaluating certain agreements to determine whether it acts as a principal and should present the related revenue gross of expenses. Any impact resulting from adoption could result in adjustments on investment banking and brokerage revenues, although no material change is expected. While the evaluation efforts over the revenue standard updates are not complete, the Company does not anticipate a significant impact on its financial statements.

 

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10) , was issued in January 2016. The amendments address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. They require equity securities that are neither accounted by equity method nor consolidated to be measured at fair value with changes of fair values recognized as net income. Those equity securities that do not have readily determinable fair value may be measured at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. In addition, the amendments simplify the impairment assessment of equity investments without determinable fair values by requiring a qualitative assessment at each reporting period. This standard will be effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of ASU 2016-01 is not expected to have a material impact on the Company’s financial statements.

 

ASU 2016-02, Leases (Topic 842) , was issued in 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 right-to-use assets and corresponding lease liabilities will be grossed up to reflect the present value of the lease payments.

 

ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326) , 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 Company expects the adoption of ASU 2016-13 may result in an increase to the allowance for loan losses. The Company is still in the process of determining the magnitude of the impact.

 

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ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230) , 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.

 

AS U 2016-16, Income Taxes (Topic 740) , was issued in October 2016 to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory and to reduce the complexity/cost in accounting standards. The Financial Accounting Standards Board decided to recognize the income tax consequences to intra-entity transfers when the transfer occurs. The amendment is effective for annual reporting periods beginning after December 15, 2017 including interim reporting periods within those annual reporting periods. Early adoption is permitted and is applied modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. The Company is evaluating the impact of the adoption of this standard.

 

AS U 2016-18, Statement of Cash Flows (Topic 230) addresses the diversity that exists in the classification and presentation of changes in restricted cash and transfers between cash and restricted cash on the statement of cash flows. The amendment applies to all entities that report restricted cash or restricted cash equivalents and present a statement of cash flows. The provisions of this update require the explanation of the changes during the period. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Additionally, early adoption is permitted with a retrospective transition method and all adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The adoption of this standard is expected to result in additional disclosures in the Company’s filings.

 

ASU 2017-01, Business Combinations (Topic 805) , provides a more robust framework to clarify the definition of a business with the objective to determine when a set of assets and activities is a business. The provisions to this standard for public businesses are effective for annual periods beginning after December 15, 2017 and all other entities applied to annual periods beginning after December 15, 2018 and interim periods within the annual periods beginning after December 15, 2019. This update is applied prospectively on or before the effective date with the possibility of early adoption. This Company will continue to monitor the impact on the business.

 

4 . Fair Value Measurement s

 

The following tables provide fair value information related to the Company ’s financial instruments at September 30, 2017 and December 31, 2016:

 

   

September 30, 2017

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 87,493     $ 87,493     $ -     $ -     $ 87,493  

Restricted cash and deposits

    61,964       61,964       -       -       61,964  

Marketable securities owned

    22,015       22,015       -       -       22,015  

Other investments

    12,475       -       11,956       519       12,475  

Other investments measured at net asset value (1)

    14,098       -       -       -       -  

Loans held for investment, net of allowance for loan losses

    18,747       -       13,626       3,619       17,245  

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

    756,166       -       755,435       478       755,913  

Total assets:

  $ 972,958     $ 171,472     $ 781,017     $ 4,616     $ 957,105  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 21,001     $ 21,001     $ -     $ -     $ 21,001  

Asset-backed securities issued

    737,780       -       746,100       -       746,100  

Bond payable

    92,101       -       96,488       -       96,488  

CLO V warehouse credit facility

    7,000       -       7,000       -       7,000  

Total liabilities:

  $ 857,882     $ 21,001     $ 849,588     $ -     $ 870,589  

 

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December 31, 2016

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 85,492     $ 85,492     $ -     $ -     $ 85,492  

Restricted cash and deposits

    227,656       227,656       -       -       227,656  

Marketable securities owned

    18,722       18,722       -       -       18,722  

Other investments

    13,697       -       13,697       -       13,697  

Other investments measured at net asset value (1)

    19,172       -       -       -       -  

Loans held for sale

    32,488       -       33,651               33,651  

Loans held for investment, net of allowance for loan losses

    1,930       -       -       1,824       1,824  

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

    654,127       -       685,392       -       685,392  

Cash collateral posted for total return swap

    25,000       25,000       -       -       25,000  

Total assets:

  $ 1,078,284     $ 356,870     $ 732,740     $ 1,824     $ 1,091,434  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 4,747     $ 4,747     $ -     $ -     $ 4,747  

Asset-backed securities issued

    825,854       -       831,854       -       831,854  

Bond payable

    91,785       -       94,517       -       94,517  

Total liabilities:

  $ 922,386     $ 4,747     $ 926,371     $ -     $ 931,118  

 

 

(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.

 

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, 2017 and December 31, 2016:  

 

(In thousands)

         

September 30, 2017

 
   

Carrying Value

   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                         

Marketable securities owned

    22,015     $ 22,015     $ -     $ -     $ 22,015  

Other investments:

                                       

Investments in hedge funds managed by HCS

    11,956       -       11,956       -       11,956  

Investments in private equity funds managed by HCS (1)

    5,503       -       -       -       -  

Investments in funds of funds managed by HCS (1)

    3       -       -       -       -  

Investments in funds of capital debt managed by the Company (1)

    239       -       -       -       -  

Total investment in funds managed by HCS

    17,701       -       11,956       -       11,956  

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

    3,547       -       -       -       -  

Total other investments

    21,248       -       11,956       -       11,956  

Total assets:

    43,263     $ 22,015     $ 11,956     $ -     $ 33,971  

Marketable securities sold, but not yet purchased

    21,001       21,001       -       -       21,001  

Total liabilities:

    21,001     $ 21,001     $ -     $ -     $ 21,001  

 

(In thousands)

         

December 31, 2016

 
   

Carrying Value

   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                         

Marketable securities owned

    18,722     $ 18,722     $ -     $ -     $ 18,722  

Other investments:

                                       

Investments in hedge funds managed by HCS

    12,444       -       12,444       -       12,444  

Investments in private equity funds managed by HCS (1)

    4,227       .       .       -       -  

Investments in funds of funds managed by HCS (1)

    5       -       -       -       -  

Total investment in funds managed by HCS

    16,676       -       12,444       -       12,444  

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

    3,530       -       -       -       -  

Total return swap

    1,253               1,253               1,253  

Total other investments

    21,459       -       13,697       -       13,697  

Total assets:

  $ 40,181     $ 18,722     $ 13,697     $ -     $ 32,419  

Marketable securities sold, but not yet purchased

    4,747       4,747       -       -       4,747  

Total liabilities:

  $ 4,747     $ 4,747     $ -     $ -     $ 4,747  

 

 

(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.

 

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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.  

 

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 Harvest Growth Capital LLC (“HGC”) and HGC II (“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.

 

As September 30, 2017 and December 31, 2016, the fair value of the following investments was estimated using net asset value as a practical expedient:

 

   

 

   

 

   

Fair Value at

   

Unfunded Commitments

 

Dollars in thousands

 

Redemption Frequency

   

Redemption

Notice Period

   

September 30, 2017

   

December 31, 2016

   

September 30, 2017

   

December 31, 2016

 
                                                

Investments in Funds of Funds managed by HCS (1)

  N/A       N/A     $ 3     $ 5     $ -     $ -  

Limited partner investments in private equity/ real estate funds

 

Nonredeemable

      N/A     $ 3,547     $ 3,530     $ -     $ -  

Investment in private equity funds managed by HCS

 

Nonredeemable

      N/A     $ 5,503     $ 4,227     $ 1,085     $ 1,085  

Investments in funds of capital debt managed by the Company

 

Nonredeemable

      N/A     $ 239     $ -     $ 2,184     $ -  

 

(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. As of December 31, 2016, the Company held loans held for sale of $32.5 million which were measured at the lower of cost or market. The Company held loans measured at fair value on a non-recurring basis of $2.5 and $34.4 as of September 30, 2017 and December 31, 2016, respectively.

 

Loans Held for Investment

 

At September 30, 2017 and December 31, 2016, loans held for investment included ten and four loans, respectively, outside of the CLO portfolios. Given the small size of this loan portfolio, 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 loans. In addition, as of September 30, 2017, the Company held $10.1 million loans held for investment in the CLO V warehouse portfolio.  The credit quality of the CLO V warehouse loans is evaluated in the same manner as the credit qualify of loans collateralizing asset-backed securities issued.  See Note 5.

 

Effective July 1, 2013, the Company a greed 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 2016, the Company placed this loan on non-accrual status, and recorded a related reserve for $0.4 million. As of September 30, 2017 and December 31, 2016, the carrying value of this loan was $0.3 million, net of a $2.0 million reserve, and $1.7 million, net of a $0.4 million reserve, respectively. The Company determined the fair value of loans held for investment to be $0.3 million and $1.6 million as of September 30, 2017 and December 31, 2016, respectively, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate.

 

As of September 30, 2017, the Company held $4.9 million of loans held for investment which were, previously held in the CLO II portfolio. The Company recorded a net reversal of provision for loan losses of $116 thousand at September 30, 2017 related to these loans. Such loans are identified as Level 2 assets. The valuations are received from a pricing service to which the Company subscribes. The pricing service’s analysis incorporates comparable loans traded in the marketplace, the obligor’s industry, future business prospects, capital structure, and expected credit losses. At September 30, 2017 the Company had two loans which were modified in a troubled debt restructuring. The principal balance of the loans was reduced from $2.6 million to $0.5 million, the maturity dates of the loans were extended from 2021 to 2022, and interest rates on the loans were increased by 1.30% and 3.10% percent. In addition, the Company received cash of $0.5 million and $0.5 million worth of equity shares in connection with the restructuring. The Company has no commitments to lend additional funds for the loans that were restructured.

 

On September 19, 2017, the Company made a loan to a registered investment adviser of $3.4 million, at an interest rate of 15% per year. As of September 30, 2017, the Company’s loan outstanding to this entity was $3.4 million. The Company determined the fair value of loans held for investment to be $3.4 million as of September 30, 2017, respectively, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate.

 

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Investments at Cost and other Equity Method Investments

 

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 recognized its investment in RiverBanc using the equity method. In the first quarter of 2016, the Company recognized a $0.1 million gain, and received a distribution of $0.5 million. RiverBanc was sold in the second quarter of 2016, resulting in a $6.0 million gain to the Company.

 

On November 16, 2015, the Company made a $2.0 million commitment to a fund, which focuses on acquiring a portfolio of seasoned real estate equity investments. The Company recognizes its investment using the equity method. In the three and nine months ended September 30, 2016, the Company recognized gains of zero and $0.3 million, and received distributions of $0.1 million and $0.7 million, respectively. On September 26, 2016, the Company sold the investment to JMPRP, resulting in a $0.1 million loss.

 

On December 2, 2015, the Company made a $12.8 million investment in a business, 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. In the quarter and nine months ended September 30, 2017, the Company recognized losses of $2.6 million and $5.4 million, and received distributions of $0.4 million and $1.0 million. In the quarter and nine months ended September 30, 2016, the Company recognized gains of $0.4 million and a loss of $0.8 million, and received distributions of $0.3 million and $0.6 million. In the quarter and nine months ended September 30, 2017, these losses incorporated depreciation and amortization expenses at this business of $2.6 million and $6.5 million. In the quarter and nine months ended September 30, 2016, these losses incorporated depreciation and amortization expenses at this business of $0.7 million and $3.1 million. On September 26, 2016, the Company sold 21.6% of this investment to JMPRP, resulting in a $0.4 million gain. As of September 30, 2017 and December 31, 2016, the carrying value of this investment was $4.5 million and $10.8 million, respectively.

 

Derivative Financial Instruments

 

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 CLO III.   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 had a tenor of 36 months with an 18 month revolving period and an 18 month amortization period. As of December 31, 2016, the TRS is held in Other Investments, with gains and losses recorded in Principal Transactions. In the nine months ended September 30, 2017, the Company recognized a $1.3 million loss on the TRS. In the three and nine months ended September 30, 2016, the Company recognized a $1.5 million and a $2.1 million gain on the TRS, respectively. The Company determined the fair value of the TRS to be $1.3 million asset as of December 31, 2016, 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, in prior periods which was recorded in the line item cash collateral posted for total return swap. In the first quarter of 2017, the Company posted an additional $0.9 million. In association with CLO IV purchasing the TRS assets, in the second quarter, the TRS returned $23.5 million of the cash collateral. During the third quarter all of the remaining cash collateral was returned to the Company.

 

5 . Loans Collateralizing Asset-backed Securities Issued and Loans Held for Sale

 

Loans collateralizing asset-backed securities issued and loans held for sale 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. In the fourth quarter of 2016, CLO I initiated the liquidation process and sold the majority of its loan portfolio within that quarter. The remaining loans were reflected as loans held for sale as of December 31, 2016. The following table presents the components of loans collateralizing asset-backed securities issued and loans held for sale as of September 30, 2017 and December 31, 2016:

 

(In thousands)

 

Loans Collateralizing Asset-backed

Securities

   

Loans Held for Sale

 
   

September 30,

2017

   

December 31,

2016

   

September 30,

2017

   

December 31,

2016

 

Outstanding principal

  $ 768,531     $ 667,237     $ -     $ 33,748  

Allowance for loan losses

    (6,596 )     (6,540 )     -       -  

Liquidity discount

    -       -       -       (772 )

Deferred loan fees, net

    (5,769 )     (6,570 )     -       (308 )

Valuation allowance

    N/A       N/A       -       (180 )

Total loans, net

  $ 756,166     $ 654,127     $ -     $ 32,488  

 

-15-

 

 

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, 2017 and 2016:

 

(In thousands)

 

Three Months Ended September 30, 2017

 
   

Principal

   

Allowance for Loan Losses

   

Liquidity Discount

   

Deferred Loan Fees

   

Carrying Value,
Net

 

Impaired Loans

                                       

Balance at beginning of period

  $ 3,827     $ (1,211 )   $ -     $ (121 )   $ 2,495  

Repayments

    (32 )     -       -       -       (32 )

Provision for loan losses

    -       (128 )     -       -       (128 )

Write-off / restructuring

    (1,405 )     950       -       106       (349 )

Transfers to/from non-impaired loans, net

    (969 )     -       -       -       (969 )

Balance at end of period

  $ 1,421     $ (389 )   $ -     $ (15 )   $ 1,017  
                                         

Non-impaired Loans

                                       

Balance at beginning of period

  $ 767,778     $ (6,451 )   $ -     $ (6,060 )   $ 755,267  

Purchases

    104,644       -               (633 )     104,011  

Repayments

    (8,516 )     -               -       (8,516 )

Accretion of discount

    -       -               428       428  

Provision for loan losses

    -       244               -       244  

Sales and payoff

    (97,765 )     -               511       (97,254 )

Transfers to/from impaired loans, net

    969       -               -       969  

Balance at end of period

  $ 767,110     $ (6,207 )   $ -     $ (5,754 )   $ 755,149  

 

(In thousands)

 

Three Months Ended September 30, 2016

 
   

Principal

   

Allowance for Loan Losses

   

Liquidity Discount

   

Deferred Loan Fees

   

Carrying Value,
Net

 

Impaired Loans

                                       

Balance at beginning of period

  $ 3,198     $ (698 )   $ -     $ (249 )   $ 2,251  

Repayments

    (43 )     -       -       -       (43 )

Balance at end of period

  $ 3,155     $ (698 )   $ -     $ (249 )   $ 2,208  
                                         

Non-impaired Loans

                                       

Balance at beginning of period

  $ 915,616     $ (5,339 )   $ (847 )   $ (7,883 )   $ 901,547  

Purchases

    71,071       -       -       (644 )     70,427  

Repayments

    (14,610 )     -       -       195       (14,415 )

Accretion of discount

    -       -       37       409       446  

Reversal of provision for loan losses

    -       104       -       -       104  

Sales and payoff

    (137,008 )     -       -       385       (136,623 )

Balance at end of period

  $ 835,069     $ (5,235 )   $ (810 )   $ (7,538 )   $ 821,486  

 

-16-

 

 

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 nine months ended September 30, 2017 and 2016:

(In thousands)

 

Nine Months Ended September 30, 2017

 
   

Principal

   

Allowance for Loan Losses

   

Liquidity Discount

   

Deferred Loan Fees

   

Carrying Value,
Net

 

Impaired Loans

                                       

Balance at beginning of period

  $ 3,113     $ (937 )   $ -     $ (249 )   $ 1,927  

Repayments

    (136 )     -       -       -       (136 )

Provision for loan losses

    -       (1,641 )     -       -       (1,641 )

Write-off / restructuring

    (1,405 )     950       -       106       (349 )

Transfers to/from non-impaired loans, net

    3,888       -       -       (30 )     3,858  

Transfers to loans held for investment

    (4,040 )     1,239       -       159       (2,642 )

Balance at end of period

  $ 1,420     $ (389 )   $ -     $ (14 )   $ 1,017  
                                         

Non-impaired Loans

                                       

Balance at beginning of period

  $ 664,124     $ (5,603 )   $ -     $ (6,323 )   $ 652,198  

Purchases

    618,944       -       -       (4,513 )     614,431  

Repayments

    (29,203 )     -       -       -       (29,203 )

Accretion of discount

    -       -       -       1,419       1,419  

Provision for loan losses

    -       (630 )     -       -       (630 )

Sales and payoff

    (479,733 )     -       -       3,551       (476,182 )

Transfers to/from non-impaired loans, net

    (3,888 )     -       -       29       (3,859 )

Transfers to loans held for investment

    (3,133 )     26       -       82       (3,025 )

Balance at end of period

  $ 767,111     $ (6,207 )   $ -     $ (5,755 )   $ 755,149  

 

(In thousands)

 

Nine Months Ended September 30, 2016

 
   

Principal

   

Allowance for Loan Losses

   

Liquidity Discount

   

Deferred Loan Fees

   

Carrying Value,
Net

 

Impaired Loans

                                       

Balance at beginning of period

  $ -     $ -     $ -     $ -     $ -  

Repayments

    (56 )     -       -       -       (56 )

Provision for loan losses

    -       (24 )     -       -       (24 )

Transfers to/from non-impaired loans, net

    3,211       (674 )     -       (249 )     2,288  

Balance at end of period

  $ 3,155     $ (698 )   $ -     $ (249 )   $ 2,208  
                                         

Non-impaired Loans

                                       

Balance at beginning of period

  $ 984,110     $ (5,396 )   $ (918 )   $ (8,132 )   $ 969,664  

Purchases

    188,488       -       -       (2,902 )     185,586  

Repayments

    (52,485 )     -       -       566       (51,919 )

Accretion of discount

    -       -       108       1,224       1,332  

Provision for loan losses

    -       (513 )     -       -       (513 )

Sales and payoff

    (281,833 )     -       -       1,457       (280,376 )

Transfers to/from non-impaired loans, net

    (3,211 )     674       -       249       (2,288 )

Balance at end of period

  $ 835,069     $ (5,235 )   $ (810 )   $ (7,538 )   $ 821,486  

 

Allowance for Loan Losses

 

A summary of the activity in the allowance for loan losses for loans collateralizing asset-backed securities for the three and nine months ended September 30, 2017 and 2016 is as follows:

 

(In thousands)

 

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Balance at beginning of period

  $ (7,662 )   $ (6,037 )   $ (6,540 )     (5,397 )

Provision for loan losses:

                               

Specific reserve

    (128 )     -       (1,641 )     (698 )

General reserve

    244       104       (630 )     162  

Write-off / restructuring

    950       -       950       -  

Transfer to loans held for investment

    -       -       1,265       -  

Balance at end of period

  $ (6,596 )   $ (5,933 )   $ (6,596 )   $ (5,933 )

 

-17-

 

 

Impaired Loans, Non-Accru al, Past Due Loans and Restructured Loans

 

A loan is considered to be impaired when, based on current information, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the original loan agreement, including scheduled principal and interest payments. As of September 30, 2017 and December 31, 2016, $4.2 million and $2.9 million of recorded investment amount of loans collateralizing asset-backed securities issued were individually evaluated for impairment. The remaining $751.9 million and $657.8 million of recorded investment amount of loans collateralizing asset-backed securities issued were collectively evaluated for impairment, as of September 30, 2017 and December 31, 2016, respectively. The entire $32.5 million of recorded investment amount of loans held for sale was individually evaluated for impairment at December 31, 2016.

 

As of September 30, 2017 and December 31, 2016, the Company classified all its loans as Cash Flow loans, as their funding decisions were all primarily driven by the cash flows of the borrower. The table below presents certain information pertaining to the loans on non-accrual status at September 30, 2017 and December 31, 2016:

 

(In thousands)

 

Recorded

Investment

   

Unpaid Principal

Balance

   

Related

Allowance

   

Average

Recorded

Investment

   

Interest Income

Recognized

 

September 30, 2017

                                       

Impaired loans with an allowance recorded

  $ 4,221     $ 4,355     $ 1,172     $ 4,274     $ 95  

Impaired loans with no related allowance recorded

    -       -       -       -       -  
    $ 4,221     $ 4,355     $ 1,172     $ 4,274     $ 95  
                                         

December 31, 2016

                                       

Impaired loans with an allowance recorded

  $ 2,864     $ 3,211     $ 938     $ 2,913     $ 75  

Impaired loans with no related allowance recorded

    -       -       -       -       -  
    $ 2,864     $ 3,211     $ 938     $ 2,913     $ 75  

 

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. No loans were past due at September 30, 2017 or December 31, 2016. As of December 31, 2016, the Company had no loans which were modified in a troubled debt restructuring. At September 30, 2017 the Company had two loans which were modified in a troubled debt restructuring. The principal balance of the loans was reduced from $2.5 million to $0.5 million, the maturity dates of the loans were extended from 2021 to 2022, and interest rates on the loans were increased by 1.30% and 3.10% percent. In addition, the Company received cash of $0.4 million and $0.5 million worth of equity shares in connection with the restructuring. The Company has no commitments to lend additional funds for the loans that were restructured.

 

Credit Quality of Loans

 

The Company ’s management, at least on a quarterly basis, reviews each loan and evaluates the credit quality of the loan. The review primarily includes the following credit quality indicators with regard to each loan: 1) Moody’s rating, 2) current internal rating, 3) the trading price of the loan and 4) performance of the obligor. The tables below present, by credit quality indicator, the Company’s recorded investment in loans collateralizing asset-backed securities issued at September 30, 2017 and December 31, 2016:

 

(In thousands

   

Cash Flow Loans

   

Loans Held for Sale - Cash Flow

 
     

September 30, 2017

   

December 31, 2016

   

September 30, 2017

   

December 31, 2016

 
                                   

Moody's rating:

                                 

Baa1 - Baa3

    $ 9,008     $ 12,145     $ -     $ 6,769  

Ba1 - Ba3

      123,893       137,717       -       13,957  

B1 - B3

      586,401       467,125       -       11,377  

Caa1 - Caa3

      43,461       37,913       -       565  

Ca

      -       2,903       -       -  

Not Rated

      -       2,864    

a

      -  

Total:

    $ 762,763     $ 660,667     $ -     $ 32,668  
                                   

Internal rating: (1)

                         
2     $ 658,312     $ 545,181     $ -     $ 27,109  
3       88,310       94,407       -       5,559  
4       14,734       18,215       -       -  
5       1,407       2,864       -       -  

Total:

    $ 762,763     $ 660,667     $ -     $ 32,668  
                                   

Performance: