JMP Group LLC
JMP GROUP LLC (Form: 10-Q, Received: 05/04/2017 17:22:29)

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

(Mark One)

 

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

   
 

For the quarterly period ended March 31, 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, a smaller reporting company, or an emerging growth 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 April 28, 2017: 21,673,824.

 



 

 
 

 

 

TABLE OF CONTENTS

 

    Page
     

PART I.

FINANCIAL INFORMATION

4
     

Item 1.

Financial Statements - JMP Group LLC

4
 

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

4
 

Condensed Consolidated Statements of Operations - For the Three Months Ended March 31, 2017 and 2016 (Unaudited)

6
 

Condensed Consolidated Statements of Changes in Equity - For the Three Months Ended March 31, 2017 and 2016 (Unaudited)

7
 

Condensed Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 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

35

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

56

Item 4.

Controls and Procedures

57
     

PART II.

OTHER INFORMATION

57
     

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 3.

Defaults Upon Senior Securities

58

Item 4.

Mine Safety Disclosures

58

Item 5.

Other Information

58

Item 6.

Exhibits

58
     
SIGNATURES 59
     
EXHIBIT INDEX 60

 

 
- 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)

 

   

March 31, 2017

   

December 31, 2016

 
                 

Assets

               

Cash and cash equivalents

  $ 81,235     $ 85,492  

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

    67,133       227,656  

Receivable from clearing broker

    6,051       6,586  

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

    8,122       5,681  

Marketable securities owned, at fair value

    20,558       18,722  

Incentive fee receivable

    242       499  

Other investments (includes $19,989 and $21,459 measured at fair value at March 31, 2017 and December 31, 2016, respectively)

    30,279       32,869  

Loans held for sale

    1,437       32,488  

Loans held for investment, net of allowance for loan losses of $1,155 and $443 at March 31, 2017 and December 31, 2016, respectively

    1,157       1,930  

Loans collateralizing asset-backed securities issued, net of allowance for loan losses of $7,095 and $6,540, respectively

    610,955       654,127  

Interest receivable

    2,549       3,429  

Cash collateral posted for total return swap

    25,940       25,000  

Fixed assets, net

    2,863       3,143  

Deferred tax assets

    7,942       7,942  

Other assets

    14,725       20,266  

Total assets

  $ 881,188     $ 1,125,830  

Liabilities and Equity

               

Liabilities:

               

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

  $ 5,206     $ 4,747  

Accrued compensation

    8,520       36,158  

Asset-backed securities issued (net of debt issuance costs of $2,988 and $3,271 at March 31, 2017 and December 31, 2016, respectively)

    613,354       825,854  

Interest payable

    5,769       6,317  

Bond payable (net of debt issuance costs of $1,937 and $2,042 at March 31, 2017 and December 31, 2016, respectively)

    91,890       91,785  

Deferred tax liability

    2,653       3,872  

Other liabilities

    25,056       21,803  

Total liabilities

    752,448       990,536  

Commitments and Contingencies

               

JMP Group LLC Shareholders' Equity

               

Common shares, $0.001 par value, 100,000,000 shares authorized; 22,780,052 shares issued at both March 31, 2017 and December 31, 2016; 21,659,239 and 21,457,054 shares outstanding at March 31, 2017 and December 31, 2016, respectively

    23       23  

Additional paid-in capital

    136,246       135,945  

Treasury shares at cost, 1,120,813 and 1,322,998 shares at March 31, 2017 and December 31, 2016, respectively

    (6,608 )     (7,792 )

Accumulated deficit

    (15,487 )     (8,799 )

Total JMP Group LLC shareholders' equity

    114,174       119,377  

Nonredeemable Non-controlling Interest

    14,566       15,917  

Total equity

    128,740       135,294  

Total liabilities and equity

  $ 881,188     $ 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:

 

   

March 31, 2017

   

December 31, 2016

 
                 

Restricted cash

  $ 63,391     $ 225,777  

Loans held for sale

    1,437       32,488  

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

    610,955       654,127  

Interest receivable

    1,447       2,180  

Other assets

    117       178  

Total assets of consolidated VIEs

  $ 677,347     $ 914,750  
                 

Asset-backed securities issued

    613,354       825,854  

Interest payable

    4,368       4,580  

Other liabilities

    1,316       1,192  

Total liabilities of consolidated VIEs

  $ 619,038     $ 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 March 31,

 
   

2017

   

2016

 
                 

Revenues

               

Investment banking

  $ 13,600     $ 18,296  

Brokerage

    5,286       6,095  

Asset management fees

    5,911       9,326  

Principal transactions

    (1,893 )     930  

Gain (loss) on sale and payoff of loans

    847       (376 )

Gain on repurchase of asset-backed securities issued

    210       -  

Net dividend income

    266       263  

Other income

    445       226  

Non-interest revenues

    24,672       34,760  
                 

Interest income

    9,067       12,401  

Interest expense

    (8,095 )     (7,975 )

Net interest income

    972       4,426  
                 

Provision for loan losses

    (1,266 )     (631 )
                 

Total net revenues after provision for loan losses

    24,378       38,555  
                 

Non-interest expenses

               

Compensation and benefits

    21,798       27,425  

Administration

    1,819       1,818  

Brokerage, clearing and exchange fees

    759       761  

Travel and business development

    915       1,291  

Communications and technology

    1,053       1,016  

Occupancy

    1,111       936  

Professional fees

    1,162       1,073  

Depreciation

    311       332  

Other

    677       621  

Total non-interest expenses

    29,605       35,273  

Net income (loss) before income tax expense

    (5,227 )     3,282  

Income tax expense (benefit)

    (1,084 )     50  

Net income (loss)

    (4,143 )     3,232  

Less: Net income attributable to nonredeemable non-controlling interest

    597       1,429  

Net income (loss) attributable to JMP Group LLC

  $ (4,740 )   $ 1,803  
                 

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

               

Basic

  $ (0.22 )   $ 0.08  

Diluted

  $ (0.22 )   $ 0.08  
                 

Distributions declared per common share

  $ 0.090     $ 0.120  
                 

Weighted average common shares outstanding:

               

Basic

    21,573       21,349  

Diluted

    21,573       21,865  

 

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

                 
                                   

Retained

                 
                           

Additional

   

Earnings/

   

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)

    -       -       -       -       (4,740 )     597       (4,143 )

Additonal paid-in capital - share-based compensation

    -       -       -       301       -       -       301  

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

    -       -       -       -       (1,948 )     -       (1,948 )

Purchases of shares of common shares for treasury

    -       -       (184 )     -       -       -       (184 )

Reissuance of shares of common shares from treasury

    -       -       1,368       -       -       -       1,368  

Distributions to non-controlling interest holders

    -       -       -       -       -       (2,040 )     (2,040 )

Capital contributions from non-controlling interest holders

    -       -       -       -       -       92       92  

Balance, March 31, 2017

    22,780     $ 23     $ (6,608 )   $ 136,246     $ (15,487 )   $ 14,566     $ 128,740  

 

 

   

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

    -       -       -       -       1,803       1,429       3,232  

Additonal paid-in capital - share-based compensation

    -       -       -       1,020       -       -       1,020  

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

    -       -       -       -       (2,615 )     -       (2,615 )

Purchases of shares of common shares for treasury

    -               (2,629 )     -                       (2,629 )

Reissuance of shares of common shares from treasury

    -       -       45       -       -       -       45  

Distributions to non-controlling interest holders

    -       -       -       -       -       (1,704 )     (1,704 )

Balance, March 31, 2016

    22,780     $ 23     $ (9,347 )   $ 136,023     $ (3,963 )   $ 27,507     $ 150,243  

 

See accompanying notes to condensed consolidated financial statements.

 

 
- 7 -

 

 

JMP Group LLC

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

   

Three Months Ended March 31,

 
   

2017

   

2016

 

Cash flows from operating activities:

               

Net income (loss)

  $ (4,143 )   $ 3,232  

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

               

Provision for doubtful accounts

    90       -  

Provision for loan losses

    1,266       631  

Accretion of deferred loan fees

    (840 )     (360 )

Amortization of liquidity discount, net

    -       (36 )

Amortization of debt issuance costs

    105       117  

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

    702       598  

Interest paid in kind

    -       (53 )

(Gain) loss on sale and payoff of loans

    (1,027 )     376  

Gain on repurchase of bonds payable and asset-backed securities issued

    (210 )     (87 )

Change in other investments:

               

Income from investments in equity method investees

    690       (283 )

Fair value on other equity investments

    1,462       (97 )

Realized loss on other investments

    (371 )     (19 )

Depreciation and amortization of fixed assets

    311       332  

Share-based compensation expense

    780       1,242  

Deferred income taxes

    (1,219 )     (1,480 )

Net change in operating assets and liabilities:

               

Decrease in interest receivable

    880       39  

Increase in receivables

    (1,739 )     (1,915 )

Decrease (increase) in marketable securities

    (1,836 )     1,055  

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

    944       337  

Decrease in deposits and other assets

    (8,675 )     4,586  

Increase in marketable securities sold, but not yet purchased

    459       89  

Increase in interest payable

    (548 )     434  

Increase in accrued compensation and other liabilities

    (24,518 )     (24,201 )

Net cash used in operating activities

    (37,437 )     (15,463 )
                 

Cash flows from investing activities:

               

Purchases of fixed assets

    (31 )     (72 )

Purchases of other investments

    (990 )     (2,779 )

Sales of other investments

    9,364       11,694  

Funding of loans collateralizing asset-backed securities issued

    (50,122 )     (52,181 )

Funding of loans held for sale

    (2,752 )     -  

Sale and payoff of loans collateralizing asset-backed securities issued

    111,743       53,698  

Principal receipts on loans collateralizing asset-backed securities issued

    16,728       15,861  

Net change in restricted cash reserved for lending activities

    159,579       (6,090 )

Net changes in cash collateral posted for derivative transactions

    (940 )     (240 )

Net cash provided by investing activities

    242,579       19,891  

 

See accompanying notes to condensed consolidated financial statements.

 

 
- 8 -

 

 

JMP Group LLC

Condensed Consolidated Statements of Cash Flows - (Continued)

(Unaudited)

(In thousands)

 

   

Three Months Ended March 31,

 
   

2017

   

2016

 

Cash flows from financing activities:

               

Repurchase of bonds payable

    -       (385 )

Repayment of asset-backed securities issued

    (206,202 )     (11,824 )

Distributions and distribution equivalents paid on common shares and RSUs

    (1,954 )     (2,616 )

Net cash settlement of RSU vesting

    889       (2,629 )

Capital contributions of nonredeemable non-controlling interest holders

    92       -  

Distributions to non-controlling interest shareholders

    (2,040 )     (1,704 )

Employee taxes paid on shares withheld for tax-withholding purposes

    (184 )     -  

Net cash used in financing activities

    (209,399 )     (19,158 )

Net decrease in cash and cash equivalents

    (4,257 )     (14,730 )

Cash and cash equivalents, beginning of period

    85,492       68,551  

Cash and cash equivalents, end of period

  $ 81,235     $ 53,821  
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the period for interest

  $ 8,991     $ 7,317  

Cash paid during the period for taxes

  $ 2     $ -  
                 

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

  $ 1,368     $ 45  

Distributions declared but not yet paid

  $ 650     $ 849  

 

 

See accompanying notes to condensed consolidated financial statements.  

 

 
- 9 -

 

 

JMP G roup LLC

Notes to Condensed Consolidated Financial Statements

March 31, 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”), 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”).

 

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”). 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, JMP Asset Management Inc., JMP Realty Trust Inc., 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 March 31, 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

 

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. 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 would result in adjustments on principal transactions, interest income and interest expense. While the evaluation efforts over the revenue standard updates are not complete, the Company does not anticipate a significant impact on its financial statements.

 

 
- 10 -

 

 

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 2016-07, 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.

 

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 adoption of ASU 2016-13 may result in more immediate recognition of losses on the Company’s amortized cost investments, and an impact to the allowance for loan losses.

 

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.

 

ASU 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.

 

ASU 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.

 

 
- 11 -

 

 

4. Fair Value Measurements

 

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

 

   

At March 31, 2017

 

(In thousands)

 

Carrying Value

   

Fair Value

 
           

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                                       

Cash and cash equivalents

  $ 81,235     $ 81,235     $ -     $ -     $ 81,235  

Restricted cash and deposits

    67,133       67,133       -       -       67,133  

Marketable securities owned

    20,558       20,558       -       -       20,558  

Other investments

    12,420       -       12,420       -       12,420  

Other investments measured at net asset value (1)

    17,859       -       -       -       -  

Loans held for investment, net of allowance for loan losses

    1,157       -       -       1,270       1,270  

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

    610,955       -       610,948       -       610,948  

Cash collateral posted for total return swap

    25,940       25,940       -       -       25,940  

Total assets:

  $ 837,257     $ 194,866     $ 623,368     $ 1,270     $ 819,504  
                                         

Liabilities:

                                       

Marketable securities sold, but not yet purchased

  $ 5,206     $ 5,206     $ -     $ -     $ 5,206  

Asset-backed securities issued

    613,354       -       621,785       -       621,785  

Total return swap

    140       -       140       -       140  

Bond payable

    91,890       -       94,803       -       94,803  

Total liabilities:

  $ 710,590     $ 5,206     $ 716,728     $ -     $ 721,934  

 

   

At 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 condition.

 

 
- 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 March 31, 2017 and December 31, 2016:  

 

(In thousands)

         

March 31, 2017

 
    Carrying Value    

Level 1

   

Level 2

   

Level 3

   

Total

 
                                         

Marketable securities owned

    20,558     $ 20,558     $ -     $ -     $ 20,558  

Other investments:

                                       

Investments in hedge funds managed by HCS

    12,420       -       12,420       -       12,420  

Investments in private equity funds managed by HCS (1)

    4,045       .       .       -       -  

Investments in funds of funds managed by HCS (1)

    5       -       -       -       -  

Total investment in funds managed by HCS (1)

    16,470       -       12,420       -       12,420  

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

    3,519       -       -       -       -  

Total other investments

    19,989       -       12,420       -       12,420  

Total assets:

    40,547     $ 20,558     $ 12,420     $ -     $ 32,978  

Marketable securities sold, but not yet purchased

    5,206       5,206       -       -       5,206  

Total return swap

    140       -       140       -       140  

Total liabilities:

    5,346     $ 5,206     $ 140     $ -     $ 5,346  

 

(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 (1)

    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 condition.

 

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

 

   

Redemption

   

Redemption

   

Fair Value at

   

Unfunded Commitments

 

Dollars in thousands

 

Frequency

   

Notice Period

   

March 31, 2017

   

December 31, 2016

   

March 31, 2017

   

December 31, 2016

 

Investments in Funds of Funds managed by HCS (1)

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

Limited partner investments in private equity/ real estate funds

 

Nonredeemable

      N/A     $ 3,519     $ 3,530     $ -     $ -  

Investment in private equity funds managed by HCS

 

Nonredeemable

      N/A     $ 4,045     $ 4,227     $ 1,085     $ 1,085  

 

(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 March 31, 2017 and December 31, 2016, the Company held loans collateralizing asset-backed securities of $2.9 million and $1.9 million, respectively, which were placed on non-accrual status. For the quarters ended March 31, 2017 and 2016, the Company recorded related losses of $1.0 million and zero, respectively.

 

Loans Held for Investment

 

At March 31, 2017 and December 31, 2016, 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 2016, the Company placed this loan on non-accrual status, and recorded a related reserve for $0.4 million. As of March 31, 2017 and December 31, 2016, the Company’s loan outstanding to this entity was $1.0 million, net of a $1.2 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 $1.1 million and $1.6 million as of March 31, 2017 and December 31, 2016, respectively, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate.

 

Investments at Cost

 

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 year ended December 31, 2015, the Company recognized a gain of $1.7 million, and received distributions of $1.7 million. 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 investment in Mountain Opportunity Fund III LLC (“Mountain Opportunity Fund”), which focuses on acquiring a portfolio of seasoned real estate equity investments. The Company recognizes its investment in Mountain Opportunity Fund using the equity method. In the three months ended March 31, 2016, the Company recognized gains of $0.1 million and received distributions of $0.2 million. 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 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. In the quarter ended March 31, 2016, the Company recognized gains of $0.1 million, and received distributions of $0.1 million. On September 26, 2016, the Company sold 21.6% of this investment to JMPRP, resulting in a $0.4 million gain. As of March 31, 2017 and December 31, 2016, the carrying value of this investment was $9.3 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 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 that starts with an 18 month revolving period during which referenced assets can be accumulated up to a certain amount and is followed by an 18 month amortization period during which referenced assets can no longer be accumulated. As of December 31, 2016, the TRS is held in Other Investments, with gains and losses recorded in Principal Transactions. As of March 31, 2017, the TRS is held in Other Liabilities, with gains and losses recorded in Principal Transactions. In the three months ended March 31, 2017 and 2016, the Company recognized a $1.3 million loss and a $0.1 million gain on the TRS, respectively. The Company determined the fair value of the TRS to be a $0.1 million liability and a $1.3 million asset as of March 31, 2017 and 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, which is 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. The contract with the counter-party incorporates a master netting agreement. If the Company enters into another derivative with this counterparty, it could be offset with the TRS. The maximum exposure of the TRS is the $25.9 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 TRS is currently in its amortization period, and is scheduled to liquidate from loan repayments and sales of the referenced assets by May 2018.

 

 
- 14 -

 

 

5 . Loans Collateralizing Asset-backed Securities Issued

 

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 are reflected as loans held for sale. The following table presents the components of loans collateralizing asset-backed securities issued and loans held for sale as of March 31, 2017 and December 31, 2016:

 

(In thousands)

 

Loans Collateralizing Asset-backed

Securities

   

Loans Held for Sale

 
   

March 31, 2017

   

December 31, 2016

   

March 31, 2017

   

December 31, 2016

 

Outstanding principal

  $ 624,130     $ 667,237     $ 1,454     $ 33,748  

Allowance for loan losses

    (7,095 )     (6,540 )     -       -  

Liquidity discount

    -       -       -       (772 )

Deferred loan fees, net

    (6,080 )     (6,570 )     (17 )     (308 )

Valuation allowance

    N/A       N/A       -       (180 )

Total loans, net

  $ 610,955     $ 654,127     $ 1,437     $ 32,488  

 

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 March 31, 2017 and 2016:

 

(In thousands)

 

Three Months Ended March 31, 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

    (44 )     -       -       -       (44 )

Accretion of discount

    -       -       -       (1 )     (1 )

Provision for loan losses

    -       (971 )     -       -       (971 )

Transfers to/from non-impaired loans, net

    1,947       -       -       (3 )     1,944  

Balance at end of period

  $ 5,016     $ (1,908 )   $ -     $ (253 )   $ 2,855  
                                         

Non-impaired Loans

                                       

Balance at beginning of period

  $ 664,124     $ (5,603 )   $ -     $ (6,321 )   $ 652,200  

Purchases

    50,733       -       -       (611 )     50,122  

Repayments

    (14,900 )     -       -       -       (14,900 )

Accretion of discount

    -       -       -       526       526  

Provision for loan losses

    -       416       -       -       416  

Sales and payoff

    (78,896 )     -       -       576       (78,320 )

Transfers to/from impaired loans, net

    (1,947 )     -       -       3       (1,944 )

Balance at end of period

  $ 619,114     $ (5,187 )   $ -     $ (5,827 )   $ 608,100  

 

(In thousands)

 

Three Months Ended March 31, 2016

 
   

Principal

   

Allowance for Loan Losses

   

Liquidity Discount

   

Deferred Loan Fees

   

Carrying Value,

Net

 

Non-impaired Loans

                                       

Balance at beginning of period

  $ 984,110     $ (5,397 )   $ (918 )   $ (8,130 )   $ 969,665  

Purchases

    53,409       -       -       (1,228 )     52,181  

Repayments

    (15,997 )     -       -       136       (15,861 )

Accretion of discount

    -       -       36       360       396  

Provision for loan losses

    -       (631 )     -       -       (631 )

Sales and payoff

    (54,371 )     -       -       297       (54,074 )

Balance at end of period

  $ 967,151     $ (6,028 )   $ (882 )   $ (8,565 )   $ 951,676  

 

 
- 15 -

 

 

Allowance for Loan Losses

 

A summary of the activity in the allowance for loan losses for loans collateralizing asset-backed securities for the three months ended March 31, 2017 and 2016 is as follows:

 

(In thousands)

 

Three Months Ended March 31,

 
   

2017

   

2016

 

Balance at beginning of period

  $ (6,540 )   $ (5,397 )

Provision for loan losses:

               

Specific reserve

    (971 )     -  

General reserve

    416       (631 )

Balance at end of period

  $ (7,095 )   $ (6,028 )

 

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 March 31, 2017 and December 31, 2016, $4.8 million and $2.9 million of recorded investment amount of loans collateralizing asset-backed securities issued were individually evaluated for impairment. The remaining $613.3 million and $657.8 million of recorded investment amount of loans collateralizing asset-backed securities issued were collectively evaluated for impairment, as of March 31, 2017 and December 31, 2016, respectively. The entire $1.4 million and $32.5 million of recorded investment amount of loans held for sale were individually evaluated for impairment.

 

As of March 31, 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 March 31, 2017 and December 31, 2016:

 

 

(In thousands)

 

Recorded

Investment

   

Unpaid Principal Balance

   

Related

Allowance

   

Average

Recorded

Investment

   

Interest Income Recognized

 

March 31, 2017

                                       

Impaired loans with an allowance recorded

  $ 4,763     $ 5,158     $ 1,908     $ 4,779     $ 25  

Impaired loans with no related allowance recorded

    -       -       -       -       -  
    $ 4,763     $ 5,158     $ 1,908     $ 4,779     $ 25  
                                         

December 31, 2016