UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019 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 |
|
47-1632931 |
(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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Trading symbol |
Name of Each Exchange on Which Registered |
||
Shares representing limited liability company interests in JMP Group LLC |
JMP |
New York Stock Exchange |
||
JMP Group Inc. 8.00% Senior Notes due 2023 | JMPB | New York Stock Exchange | ||
JMP Group Inc. 7.25% Senior Notes due 2027 | JMPD | New York Stock Exchange |
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 |
|
☐ |
|
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 August 05, 2019: 19,324,427.
Table of Contents
TABLE OF CONTENTS
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|
Page |
PART I. |
FINANCIAL INFORMATION |
4 |
Item 1. |
Financial Statements - JMP Group LLC |
4 |
Consolidated Statements of Financial Condition – June 30, 2019 (Unaudited) and December 31, 2018 |
4 |
|
Consolidated Statements of Operations - For the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited) |
6 |
|
Consolidated Statements of Comprehensive Income - For the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited) | 7 | |
Consolidated Statements of Changes in Equity - For the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited) |
8 |
|
Consolidated Statements of Cash Flows - For the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited) |
9 |
|
Notes to Consolidated Financial Statements (Unaudited) |
11 |
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
37 |
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
62 |
Item 4. |
Controls and Procedures |
62 |
PART II. |
OTHER INFORMATION |
63 |
Item 1. |
Legal Proceedings |
63 |
Item 1A. |
Risk Factors |
63 |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
64 |
Item 3. |
Defaults Upon Senior Securities |
64 |
Item 4. |
Mine Safety Disclosures |
64 |
Item 5. |
Other Information |
64 |
Item 6. |
Exhibits |
64 |
SIGNATURES |
65 |
|
EXHIBIT INDEX |
66 |
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"). 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.
PART I. FINANCIAL INFORMATION
ITEM 1. |
Financial Statements |
JMP Group LLC
Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in thousands, except per share data)
June 30, 2019 |
December 31, 2018 |
|||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 52,901 | $ | 70,927 | ||||
Restricted cash |
1,221 | 61,881 | ||||||
Investment banking fees receivable |
6,169 | 6,647 | ||||||
Marketable securities owned (includes $68,151 and $18,874 at fair value at June 30, 2019 and December 31, 2018, respectively) |
81,499 | 18,874 | ||||||
Other investments (includes $14,009 and $9,913 at fair value at June 30, 2019 and December 31, 2018, respectively) |
32,112 | 16,124 | ||||||
Loans held for investment, net of allowance for loan losses |
5,292 | 29,608 | ||||||
Loans collateralizing asset-backed securities issued, net of allowance for loan losses |
- | 1,161,463 | ||||||
Interest receivable |
386 | 3,004 | ||||||
Fixed assets, net |
2,518 | 2,351 | ||||||
Operating lease right-of-use asset |
21,096 | - | ||||||
Other assets |
32,779 | 20,363 | ||||||
Total assets |
$ | 235,973 | $ | 1,391,242 | ||||
Liabilities and Equity |
||||||||
Liabilities: |
||||||||
Marketable securities sold, but not yet purchased, at fair value |
$ | 2,724 | $ | 4,626 | ||||
Accrued compensation |
13,672 | 41,609 | ||||||
Asset-backed securities issued (net of debt issuance costs of $8,979 at December 31, 2018) |
- | 1,112,342 | ||||||
Interest payable |
1,153 | 11,210 | ||||||
Note payable |
15,812 | 829 | ||||||
CLO warehouse credit facilities |
- | 22,500 | ||||||
Bond payable (net of debt issuance costs of $2,219 and $2,428 at June 30, 2019 and December 31, 2018, respectively) |
83,706 | 83,497 | ||||||
Operating lease liability |
26,482 | - | ||||||
Other liabilities |
17,252 | 17,423 | ||||||
Total liabilities |
160,801 | 1,294,036 | ||||||
Commitments and Contingencies (Note 17) |
||||||||
JMP Group LLC Shareholders' Equity |
||||||||
Common shares, $0.001 par value, 100,000,000 shares authorized; 22,780,052 shares issued at both June 30, 2019 and December 31, 2018; 19,302,478 and 21,319,720 shares outstanding at June 30, 2019 and December 31, 2018, respectively |
23 | 23 | ||||||
Additional paid-in capital |
134,332 | 134,129 | ||||||
Treasury shares at cost, 3,477,574 and 1,460,332 shares at June 30, 2019 and December 31, 2018, respectively |
(15,876 | ) | (7,932 | ) | ||||
Accumulated other comprehensive loss |
(2,569 | ) | - | |||||
Accumulated deficit |
(40,469 | ) | (42,513 | ) | ||||
Total JMP Group LLC shareholders' equity |
75,441 | 83,707 | ||||||
Nonredeemable Non-controlling Interest |
(269 | ) | 13,499 | |||||
Total equity |
75,172 | 97,206 | ||||||
Total liabilities and equity |
$ | 235,973 | $ | 1,391,242 |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Consolidated Statements of Financial Condition - (Continued)
(Unaudited)
(Dollars in thousands, except per share data)
Assets and liabilities of consolidated variable interest entities (“VIEs”) included in total assets and total liabilities above:
June 30, 2019 |
December 31, 2018 |
|||||||
Restricted cash |
$ | - | $ | 50,456 | ||||
Loans collateralizing asset-backed securities issued, net of allowance for loan losses |
- | 1,161,463 | ||||||
Interest receivable |
- | 2,711 | ||||||
Other investments |
- | 821 | ||||||
Other assets |
- | 67 | ||||||
Total assets of consolidated VIEs |
$ | - | $ | 1,215,518 | ||||
Asset-backed securities issued, net of debt issuance costs |
- | 1,122,187 | (1) | |||||
Interest payable |
- | 10,132 | ||||||
Other liabilities |
- | 1,877 | ||||||
Total liabilities of consolidated VIEs |
$ | - | $ | 1,134,196 |
(1) Includes $9.8 million of debt held by the Company which is eliminated on the Consolidated Statements of Financial Condition. |
The asset-backed securities issued (“ABS”) by the VIE are limited recourse obligations payable solely from cash flows of the loans collateralizing them and related collection and payment accounts pledged as security. Accordingly, only the assets of the VIE can be used to settle the obligations of the VIE.
See accompanying notes to consolidated financial statements.
JMP Group LLC
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
Revenues |
||||||||||||||||
Investment banking |
$ | 17,736 | $ | 28,562 | $ | 29,615 | $ | 49,224 | ||||||||
Brokerage |
4,657 | 5,447 | 9,192 | 10,111 | ||||||||||||
Asset management fees |
2,354 | 5,378 | 4,057 | 11,803 | ||||||||||||
Principal transactions |
1,423 | 1,684 | 6,711 | (1,936 | ) | |||||||||||
Loss on sale, payoff and mark-to-market of loans |
(21 | ) | (150 | ) | (38 | ) | (332 | ) | ||||||||
Net dividend income |
293 | 319 | 589 | 615 | ||||||||||||
Other income |
793 | 311 | 758 | 360 | ||||||||||||
Non-interest revenues |
27,235 | 41,551 | 50,884 | 69,845 | ||||||||||||
Interest income |
2,772 | 15,669 | 17,063 | 28,379 | ||||||||||||
Interest expense |
(1,939 | ) | (11,634 | ) | (12,712 | ) | (21,336 | ) | ||||||||
Net interest income |
833 | 4,035 | 4,351 | 7,043 | ||||||||||||
Loss on repurchase, reissuance or early retirement of debt |
- | (42 | ) | - | (2,668 | ) | ||||||||||
Provision for loan losses |
- | (1,280 | ) | - | (2,745 | ) | ||||||||||
Total net revenues after provision for loan losses |
28,068 | 44,264 | 55,235 | 71,475 | ||||||||||||
Non-interest expenses |
||||||||||||||||
Compensation and benefits |
19,945 | 29,138 | 37,167 | 53,399 | ||||||||||||
Administration |
2,748 | 2,711 | 4,677 | 4,944 | ||||||||||||
Brokerage, clearing and exchange fees |
733 | 788 | 1,434 | 1,565 | ||||||||||||
Travel and business development |
1,347 | 1,202 | 2,368 | 2,156 | ||||||||||||
Managed deal expenses |
1,334 | 2,348 | 1,867 | 3,914 | ||||||||||||
Communications and technology |
1,127 | 1,047 | 2,180 | 2,109 | ||||||||||||
Occupancy |
1,409 | 1,143 | 2,832 | 2,260 | ||||||||||||
Professional fees |
821 | 1,138 | 2,277 | 3,043 | ||||||||||||
Depreciation |
311 | 287 | 608 | 551 | ||||||||||||
Other |
5 | 776 | 500 | 1,163 | ||||||||||||
Total non-interest expenses |
29,780 | 40,578 | 55,910 | 75,104 | ||||||||||||
Net income (loss) before income tax expense |
(1,712 | ) | 3,686 | (675 | ) | (3,629 | ) | |||||||||
Income tax expense (benefit) |
(517 | ) | 4,895 | (4,619 | ) | (673 | ) | |||||||||
Net income (loss) |
(1,195 | ) | (1,209 | ) | 3,944 | (2,956 | ) | |||||||||
Less: Net income (loss) attributable to nonredeemable non-controlling interest |
(83 | ) | 779 | (13 | ) | (685 | ) | |||||||||
Net income (loss) attributable to JMP Group LLC |
$ | (1,112 | ) | $ | (1,988 | ) | $ | 3,957 | $ | (2,271 | ) | |||||
Net income (loss) attributable to JMP Group LLC per common share: |
||||||||||||||||
Basic |
$ | (0.05 | ) | $ | (0.09 | ) | $ | 0.19 | $ | (0.11 | ) | |||||
Diluted |
$ | (0.05 | ) | $ | (0.09 | ) | $ | 0.19 | $ | (0.11 | ) | |||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
20,772 | 21,537 | 21,028 | 21,601 | ||||||||||||
Diluted |
20,772 | 21,537 | 21,151 | 21,601 |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands, except per share data)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
Net income (loss) |
$ | (1,195 | ) | $ | (1,209 | ) | $ | 3,944 | $ | (2,956 | ) | |||||
Other comprehensive loss: |
||||||||||||||||
Unrealized loss on available-for-sale securities, net of tax |
(1,787 | ) | - | (2,569 | ) | - | ||||||||||
Comprehensive income (loss) attributable to JMP Group LLC |
(2,982 | ) | (1,209 | ) | 1,375 | (2,956 | ) | |||||||||
Less: Comprehensive income (loss) attributable to non-controlling interest |
(83 | ) | 779 | (13 | ) | (685 | ) | |||||||||
Comprehensive income (loss) attributable to JMP Group LLC |
$ | (2,899 | ) | $ | (1,988 | ) | $ | 1,388 | $ | (2,271 | ) |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Consolidated Statements of Changes in Equity
(Unaudited)
(In thousands)
JMP Group LLC's Equity |
||||||||||||||||||||||||||||||||
Additional |
Accumulated |
Nonredeemable |
||||||||||||||||||||||||||||||
Common Shares |
Treasury |
Paid-In |
Accumulated |
Other Comprehensive |
Non-controlling |
|||||||||||||||||||||||||||
Shares |
Amount |
Shares |
Capital |
Deficit |
Loss |
Interest |
Total Equity |
|||||||||||||||||||||||||
Balance, December 31, 2018 |
22,780 | $ | 23 | $ | (7,932 | ) | $ | 134,129 | $ | (42,513 | ) | $ | - | $ | 13,499 | $ | 97,206 | |||||||||||||||
Net income (loss) |
- | - | - | - | 3,957 | - | (13 | ) | 3,944 | |||||||||||||||||||||||
Additional paid-in capital - share-based compensation |
- | - | - | 321 | - | - | - | 321 | ||||||||||||||||||||||||
Distributions and distribution equivalents declared on common shares and restricted share units |
- | - | - | - | (1,913 | ) | - | - | (1,913 | ) | ||||||||||||||||||||||
Purchases of shares of common shares for treasury |
- | - | (8,797 | ) | - | - | - | - | (8,797 | ) | ||||||||||||||||||||||
Reissuance of shares of common shares from treasury |
- | - | 853 | (118 | ) | - | - | - | 735 | |||||||||||||||||||||||
Distributions to non-controlling interest holders |
- | - | - | - | - | - | (913 | ) | (913 | ) | ||||||||||||||||||||||
Derecognition of non-controlling interest due to deconsolidation |
- | - | - | - | - | - | (12,842 | ) | (12,842 | ) | ||||||||||||||||||||||
Unrealized loss on available-for-sale securities, net of tax |
- | - | - | - | - | (2,569 | ) | - | (2,569 | ) | ||||||||||||||||||||||
Balance, June 30, 2019 |
22,780 | $ | 23 | $ | (15,876 | ) | $ | 134,332 | $ | (40,469 | ) | $ | (2,569 | ) | $ | (269 | ) | $ | 75,172 |
JMP Group LLC's Equity |
||||||||||||||||||||||||||||||||
Additional |
Accumulated |
Nonredeemable |
||||||||||||||||||||||||||||||
Common Shares |
Treasury |
Paid-In |
Accumulated |
Other Comprehensive |
Non-controlling |
|||||||||||||||||||||||||||
Shares |
Amount |
Shares |
Capital |
Deficit |
Loss |
Interest |
Total Equity |
|||||||||||||||||||||||||
Balance, December 31, 2017 |
22,780 | $ | 23 | $ | (5,955 | ) | $ | 134,719 | $ | (32,452 | ) | $ | - | $ | 13,844 | $ | 110,179 | |||||||||||||||
Net loss |
- | - | - | - | (2,271 | ) | - | (685 | ) | (2,956 | ) | |||||||||||||||||||||
Additional paid-in capital - share-based compensation |
- | - | - | 484 | - | - | - | 484 | ||||||||||||||||||||||||
Distributions and distribution equivalents declared on common shares and restricted share units |
- | - | - | - | (3,975 | ) | - | - | (3,975 | ) | ||||||||||||||||||||||
Purchases of shares of common shares for treasury |
- | - | (1,556 | ) | - | - | - | - | (1,556 | ) | ||||||||||||||||||||||
Reissuance of shares of common shares from treasury |
- | - | 293 | - | - | - | - | 293 | ||||||||||||||||||||||||
Purchase of subsidiary shares from non-controlling interest holders |
- | - | - | (656 | ) | - | - | 656 | - | |||||||||||||||||||||||
Distributions to non-controlling interest holders |
- | - | - | - | - | - | (649 | ) | (649 | ) | ||||||||||||||||||||||
Capital contributions from non-controlling interest holders |
- | - | - | - | - | - | 449 | 449 | ||||||||||||||||||||||||
Balance, June 30, 2018 |
22,780 | $ | 23 | $ | (7,218 | ) | $ | 134,547 | $ | (38,698 | ) | $ | - | $ | 13,615 | $ | 102,269 |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended June 30, |
||||||||
2019 |
2018 |
|||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 3,944 | $ | (2,956 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
||||||||
Provision for loan losses |
- | 2,745 | ||||||
Loss on sale and payoff of loans and mark-to-market of loans |
38 | 332 | ||||||
Loss on repurchase, reissuance or early retirement of debt |
- | 2,668 | ||||||
Change in other investments: |
||||||||
(Income) loss from investments in equity method investees |
(621 | ) | 387 | |||||
Unrealized gain on other equity investments |
(297 | ) | (136 | ) | ||||
Unrealized (gain) loss on other investments |
(1,039 | ) | 197 | |||||
Depreciation and amortization |
428 | 480 | ||||||
Share-based compensation expense |
1,057 | 778 | ||||||
Gain on deconsolidation |
(3,520 | ) | - | |||||
Other, net |
94 | 296 | ||||||
Net change in operating assets and liabilities: |
||||||||
Increase in interest receivable |
(4,913 | ) | (312 | ) | ||||
Decrease (increase) in receivables |
478 | (8,269 | ) | |||||
Decrease (increase) in marketable securities |
10,781 | (630 | ) | |||||
Decrease (increase) in other assets |
(12,518 | ) | 5,551 | |||||
Decrease in marketable securities sold, but not yet purchased |
(1,902 | ) | (2,289 | ) | ||||
(Decrease) increase in interest payable |
(3,430 | ) | 2,342 | |||||
Decrease in accrued compensation |
(27,670 | ) | (17,842 | ) | ||||
Increase in other liabilities |
7,951 | 2,464 | ||||||
Net cash used in operating activities |
(31,139 | ) | (14,194 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of fixed assets |
(904 | ) | (580 | ) | ||||
Purchases of other investments |
(9,630 | ) | (1,219 | ) | ||||
Sales or distributions from other investments |
10,364 | 11,172 | ||||||
Funding of loans collateralizing asset-backed securities issued |
(35,153 | ) | (193,024 | ) | ||||
Funding of loans held for investment |
(25,587 | ) | (225,351 | ) | ||||
Sale, payoff and principal receipts of loans collateralizing asset-backed securities issued |
23,806 | 172,415 | ||||||
Sale, payoff and principal receipts on loans held for investment |
7,020 | 22,106 | ||||||
Net decrease in cash and restricted cash due to deconsolidation of subsidiaries |
(27,771 | ) | - | |||||
Net cash used in investing activities |
(57,855 | ) | (214,481 | ) |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Consolidated Statements of Cash Flows - (Continued)
(Unaudited)
(In thousands)
Six Months Ended June 30, |
||||||||
2019 |
2018 |
|||||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of repurchase agreement |
- | 3,878 | ||||||
Repayment of repurchase agreement |
- | (3,878 | ) | |||||
Proceeds from drawdowns on line of credit |
16,583 | 18,000 | ||||||
Proceeds from drawdowns on CLO warehouse facilities |
7,750 | 177,250 | ||||||
Proceeds from sale of note payable to affiliate |
- | 829 | ||||||
Payment of debt issuance costs |
- | (1,857 | ) | |||||
Repayment of line of credit | (1,600 | ) | - | |||||
Repayment of asset-backed securities issued |
(801 | ) | (332,100 | ) | ||||
Proceeds of issuance from asset-backed securities issued |
- | 327,605 | ||||||
Reissuance of asset-back securities |
- | 4,453 | ||||||
Distributions and distribution equivalents paid on common shares and RSUs |
(1,913 | ) | (3,975 | ) | ||||
Capital contributions of nonredeemable non-controlling interest holders |
- | 449 | ||||||
Purchase of common shares for treasury |
(8,614 | ) | (1,525 | ) | ||||
Distributions to non-controlling interest shareholders |
(913 | ) | (649 | ) | ||||
Employee taxes paid on shares withheld for tax-withholding purposes |
(184 | ) | (31 | ) | ||||
Net cash provided by financing activities |
10,308 | 188,449 | ||||||
Net decrease in cash, cash equivalents, and restricted cash |
(78,686 | ) | (40,226 | ) | ||||
Cash, cash equivalents and restricted cash, beginning of period |
132,808 | 137,321 | ||||||
Cash, cash equivalents and restricted cash, end of period |
$ | 54,122 | $ | 97,095 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the period for interest |
$ | 16,142 | $ | 18,994 | ||||
Cash paid during the period for taxes |
$ | 2,060 | $ | 1,660 | ||||
Non-cash investing and financing activities: |
||||||||
Reissuance of common shares from treasury related to vesting of restricted share units | $ | 854 | $ | 293 | ||||
Distributions declared but not yet paid |
$ | - | $ | 646 | ||||
Acquisition of equity securities in restructuring of loans |
$ | 259 | $ | 809 | ||||
Sale of other investments |
$ | - | $ | 1,400 | ||||
Initial recognition of operating lease right-of-use assets |
$ | 23,604 | $ | - | ||||
Initial recognition of operating lease right-of-use liabilities |
$ | 29,278 | $ | - | ||||
Carrying value of noncash assets derecognized on deconsolidation of subsidiaries |
$ | 1,226,848 | $ | - | ||||
Carrying value of noncash liabilities derecognized on deconsolidation of subsidiaries |
$ | 1,161,933 | $ | - | ||||
Carrying value of non-controlling interest derecognized on deconsolidation of subsidiaries |
$ | 12,842 | $ | - | ||||
Fair value of marketable securities recognized on deconsolidation of subsidiaries |
$ | 76,879 | $ | - | ||||
Fair value of other investments recognized on deconsolidation of subsidiaries |
$ | 7,516 | $ | - |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Notes to Consolidated Financial Statements
June 30, 2019
(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 investment banking and institutional brokerage business through JMP Securities LLC (“JMP Securities”) and 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") (through March 19, 2019). The Company conducts certain principal investment transactions through JMP Investment Holdings LLC (“JMP Investment Holdings”) and other subsidiaries. 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. 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”). The Company entered into a Contribution Agreement in November 2017 pursuant to which JMP Group Inc. became a wholly-owned subsidiary of JMP Investment Holdings, which is a wholly-owned subsidiary of JMP Group LLC.
Recent Transactions
On January 17, 2019, the non-call period of JMP Credit Advisors CLO III(R) Ltd. (“CLO III”) expired, which resulted in a change in the entity with the control over the most significant activities of the variable interest entity (“VIE”). During the non-call period the Company concluded that it was the primary beneficiary of CLO III through its combination of control over the manager and its economic interest in CLO III. When the non-call period expired, holders of a majority of the subordinated notes could refinance or liquidate the CLO and the Company determined this to be the most significant activity. The expiration of the non-call period resulted in the Company losing control over the most significant activity of CLO III as it cannot unilaterally direct this activity. The Company deconsolidated CLO III as of January 17, 2019. The Company continues to hold approximately 47% of the outstanding subordinated notes of CLO III and accounts for its ownership of the CLO III subordinated notes as an investment in a debt security. The Company has classified the subordinated notes as held-to-maturity. The Company recognized a gain of $1.6 million as revenue from principal transactions on the deconsolidation of CLO III in March 2019.
On March 19, 2019, the Company sold a 50.1% equity interest in JMPCA to Medalist Partners LP (“Medalist”), an alternative asset management firm specializing in structured credit and asset-backed lending, and a 4.9% interest to management employees of JMPCA. The Company retained 45.0% of the equity interest in JMPCA. The sale of JMPCA was considered a reconsideration event as defined in Accounting Standard Codification (“ASC”) 810, Consolidation, which requires a new consolidation analysis, and the Company determined that JMPCA is a VIE after the transaction date. The Company determined that it was not the primary beneficiary of JMPCA as the Company is not the party with the power to direct the most significant activities of JMPCA. As the Company determined that it is not the primary beneficiary, the Company deconsolidated JMPCA as of the date of sale. As the Company retained 45.0% of the equity interest of JMPCA and has significant influence, the Company has determined that it is required to account for its retained interest as an equity method investment, however the Company has made the election to apply the fair value option to this investment. The Company received a cash payment of $0.3 million in consideration for the limited liability company interest sold and recorded a gain of $3.4 million on deconsolidation as revenue from principal transactions. The Company will receive a portion of the subordinated management fees from the CLOs JMPCA managed as of the date of the sale and from CLO VI, once it securitizes. After the sale, JMPCA was renamed Medalist Partners Corporate Finance LLC.
The sale of JMPCA also required Medalist to provide additional capital to purchase an equity interest in JMP Credit Advisors Long-Term Warehouse Ltd (“CLO VI”) to finance the acquisition of broadly syndicated corporate loans. On March 19, 2019, Medalist related entities purchased 66% of the outstanding equity interest of CLO VI for $7.6 million. There was no gain or loss recognized on the sale of the equity interest.
After the sale of JMPCA, the Company lost the ability to direct the most significant activities of the following VIEs: JMP Credit Advisors CLO IV Ltd (“CLO IV”), JMP Credit Advisors CLO V Ltd (“CLO V”), and CLO VI (collectively with CLO III, the “CLOs”) and as a result, deconsolidated the aforementioned CLOs as of March 19, 2019. Previously the Company concluded that it was the primary beneficiary of CLO IV, CLO V, and CLO VI through its control over JMPCA and its ownership of 100% of the equity interests of these CLOs. The Company continues to hold 100% of the junior subordinated notes of CLO IV and CLO V and approximately 33% of the equity interests of CLO VI as of June 30, 2019. The Company owned 100% and 25% of the senior subordinated notes of CLO IV and CLO V, respectively, as of the date of deconsolidation. The Company sold all of its senior subordinated notes in CLO IV and CLO V in May 2019. The Company accounts for its ownership of the subordinated notes as an investment in a debt security and accounts for its ownership of the CLO VI equity interest as an equity investment. The Company classifies the junior subordinated notes of CLO IV and CLO V as available-for-sale securities and classified the senior subordinated notes as trading securities. Collectively, the Company recognized a loss on the deconsolidation of CLO IV, CLO V, and CLO VI of $1.8 million in March 2019 in revenues from principal transactions. The Company recorded a loss of $0.1 million on the sale of the senior subordinated notes of CLO IV and CLO V in May 2019 in revenues from principal transactions.
The deconsolidation of the CLOs and JMPCA was accounted for based on the guidance in ASC 810, Consolidation. According to that guidance, the gain or loss on deconsolidation is calculated as the difference between (i) the aggregate of the fair value of the retained interest in the former subsidiaries, the fair value of any consideration received, and the carrying value of the non-controlling interest in the former subsidiaries; and (ii) the carrying value of the assets and liabilities of the former subsidiaries. The gain recognized by the Company is primarily the result of the remeasurement of the retained interest in the CLOs and JMPCA. The difference between these was recorded as a gain on deconsolidation in the Consolidated Statements of Operations under principal transactions revenue. The following table represents the consideration received, the fair value of the retained interest, and the resulting gain on deconsolidation of the CLOs and JMPCA:
Cash received: |
$ | 7,942 | |||
Retained interest, at fair value (1) |
74,989 | ||||
Non-controlling interest, at carrying value |
12,842 | ||||
Total of consideration received, retained interest, and non-controlling interest |
$ | 95,773 | |||
Less: |
|||||
Net assets of deconsolidated subsidiaries, at carrying value (2) |
92,581 | ||||
Gain on deconsolidation | 3,192 | ||||
Gain on remeasurement of CLO IV and CLO V senior subordinated notes | 328 | ||||
Total gain on deconsolidation |
$ | 3,520 |
(1) |
The fair value of the Company's retained interest in CLO III, CLO IV, CLO V, CLO VI, and JMPCA as of the deconsolidation date was $13.3 million, $27.8 million, $26.5 million, $3.8 million, and $3.6 million, respectively |
(2) |
The book value of the net assets of CLO III, CLO IV, CLO V, CLO VI, and JMPCA as of the deconsolidation date was $24.5 million, $30.2 million, $25.8 million, $11.6 million, and $0.5 million, respectively |
2. Summary of Significant Accounting Policies
Basis of Presentation
These consolidated financial statements and related notes are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2018 (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.
The consolidated accounts of the Company include the wholly-owned subsidiaries and the partially-owned subsidiaries of which we are the majority owner or the primary beneficiary. All material intercompany accounts and transactions have been eliminated in consolidation. Non-controlling interests on the Consolidated Statements of Financial Condition at June 30, 2019 and December 31, 2018 relate to the interest of third parties in the partially-owned subsidiaries. Certain prior year amounts have been reclassified to conform to current year presentation.
For the six months ended June 30, 2019, there were no significant changes made to the Company’s significant accounting policies other than those described below and the accounting policy changes are attributable to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The Company adopted this standard on January 1, 2019 using a modified retrospective approach. Accordingly, the new leasing standard was applied prospectively in the Company’s financial statements from January 1, 2019 forward and reported financial information for historical comparable periods was not revised and will continue to be reported under the accounting standards in effect during those historical periods.
CLO Debt Securities
Investments in CLO debt securities are accounted for according to their purpose and holding period. CLO debt security investments that are classified as trading securities are those that are bought and held principally for the purpose of selling them in the near term. The Company had zero CLO debt securities classified as trading securities as of June 30, 2019 and December 31, 2018. The Company previously classified its senior subordinated notes in CLO IV and CLO V as trading securities, but sold these notes in May 2019 and recognized a loss of $0.1 million for the three months ended June 30, 2019. The Company’s investments in debt securities classified as available-for-sale are comprised of junior subordinated notes in CLO IV and CLO V and are those that may be sold before maturity and are reported at fair value with unrealized gains and losses, net of taxes, reported as a component of other comprehensive income ("OCI"). The Company had $51.9 million and zero CLO debt securities classified as available-for-sale securities as of June 30, 2019 and December 31, 2018, respectively. The Company’s investment in CLO debt securities classified as held-to-maturity are comprised of CLO III junior subordinated notes and are those that management has the positive intent and ability to hold to maturity and are reported at amortized cost. The Company had $13.3 million and zero CLO debt securities classified as held-to-maturity securities as of June 30, 2019 and December 31, 2018, respectively. Interest on CLO debt securities are recognized in interest income on an accrual basis using the effective yield method. Realized gains and losses on the sale of debt securities are determined using the specific identification method and recognized in current period earnings in revenues from principal transactions.
The Company evaluates the available-for-sale and held-to-maturity investments in debt securities for other than temporary impairment ("OTTI") quarterly. Impairment would be recorded if the net present value of the cash flows of the investment is below amortized cost and the Company does not expect to recover the amortized cost basis before the security is expected to be sold or the security matures, whichever comes first. Should the Company determine that there is an OTTI, the amount of the impairment is bifurcated between losses related to credit losses, which is recognized in revenues from principal transactions, and all other factors, which is recognized in OCI. The Company recorded no OTTI on CLO debt securities for either of the three or six months ended June 30, 2019 and 2018.
3. Recent Accounting Pronouncements
Accounting Standards to be adopted in Future Periods
ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), was issued in June 2016, with subsequent amendments, 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 15, 2019. The Company is evaluating the impact of the adoption of this standard.
ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Sub-topic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued in March 2017 to shorten the amortization period for certain purchased callable debt securities held at a premium. It requires the premium to be amortized over the period until the earliest call date. The amendment does not make any changes for securities held at a discount. The new guidance will be effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the impact of the adoption of this standard.
ASU 2018-13, Fair Value Measurement (Topic 820), was issued in August 2018 as part of the disclosure framework project to improve the effectiveness of the disclosures in the notes to the financial statements. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The new guidance will be effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is evaluating the impact of the adoption of this standard.
Recently Adopted Accounting Guidance
ASU 2016-02, Leases (Topic 842), was issued in February 2016, with subsequent amendments, 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. The Company adopted this standard on January 1, 2019 using a modified retrospective approach and recognized its lease agreements as a right-of-use asset with a corresponding lease liability to reflect the present value of the future lease payments. Accordingly, the new leasing standard was applied prospectively in the Company’s financial statements from January 1, 2019 forward and reported financial information for historical comparable periods was not revised and will continue to be reported under the accounting standards in effect during those historical periods. Additionally upon adoption the Company elected the package of practical expedients for leases that commenced before the date of adoption in which the Company was not required to reassess (i) whether any existing or expired contracts contain leases, (ii) the lease classification of existing or expired leases, and (iii) initial direct costs of existing or expired leases. On January 1, 2019, the Company recognized $23.6 million as an operating lease right-of-use asset and $29.3 million as an operating lease liability on the Consolidated Statements of Financial Condition related to its leasing obligations. As of June 30, 2019, the Company carried a $21.1 million operating lease right-of-use asset and a $26.5 million operating lease liability on the Consolidated Statements of Financial Condition related to its leasing obligations.
4. Fair Value Measurements
The following tables provide fair value information related to the Company’s financial instruments at June 30, 2019 and December 31, 2018:
June 30, 2019 |
||||||||||||||||||||
(In thousands) |
Carrying Value |
Fair Value |
||||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||||||
Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 52,901 | $ | 52,901 | $ | - | $ | - | $ | 52,901 | ||||||||||
Restricted cash and deposits |
1,221 | 1,221 | - | - | 1,221 | |||||||||||||||
Marketable securities owned |
81,499 | 16,252 | - | 64,157 | 80,409 | |||||||||||||||
Other investments |
4,307 | - | 203 | 4,104 | 4,307 | |||||||||||||||
Other investments, measured at net asset value (1) |
9,702 | - | - | - | - | |||||||||||||||
Loans held for investment, net of allowance for loan losses |
5,292 | - | 884 | 4,423 | 5,307 | |||||||||||||||
Total assets: |
$ | 154,922 | $ | 70,374 | $ | 1,087 | $ | 72,684 | $ | 144,145 | ||||||||||
Liabilities: |
||||||||||||||||||||
Marketable securities sold, but not yet purchased |
$ | 2,724 | $ | 2,724 | $ | - | $ | - | $ | 2,724 | ||||||||||
Notes payable |
15,812 | - | 14,983 | 829 | 15,812 | |||||||||||||||
Bond payable |
83,706 | - | 87,223 | - | 87,223 | |||||||||||||||
Total liabilities: |
$ | 102,242 | $ | 2,724 | $ | 102,206 | $ | 829 | $ | 105,759 |
December 31, 2018 |
||||||||||||||||||||
(In thousands) |
Carrying Value |
Fair Value |
||||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||||||
Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 70,927 | $ | 70,927 | $ | - | $ | - | $ | 70,927 | ||||||||||
Restricted cash and deposits |
61,881 | 61,881 | - | - | 61,881 | |||||||||||||||
Marketable securities owned |
18,874 | 18,874 | - | - | 18,874 | |||||||||||||||
Other investments |
490 | - | 490 | - | 490 | |||||||||||||||
Other investments, measured at net asset value (1) |
9,423 | - | - | - | - | |||||||||||||||
Loans held for investment, net of allowance for loan losses |
29,608 | - | 26,188 | 2,576 | 28,764 | |||||||||||||||
Loans collateralizing asset-backed securities issued, net of allowance for loan losses |
1,161,463 | - | 1,125,310 | 1,173 | 1,126,483 | |||||||||||||||
Total assets: |
$ | 1,352,666 | $ | 151,682 | $ | 1,151,988 | $ | 3,749 | $ | 1,307,419 | ||||||||||
Liabilities: |
||||||||||||||||||||
Marketable securities sold, but not yet purchased |
$ | 4,626 | $ | 4,626 | $ | - | $ | - | $ | 4,626 | ||||||||||
Notes payable |
829 | - | - | 829 | 829 | |||||||||||||||
Asset-backed securities issued, net of debt issuance costs |
1,112,342 | - | 1,091,677 | - | 1,091,677 | |||||||||||||||
Bond payable |
83,497 | - | 78,642 | - | 78,642 | |||||||||||||||
CLO VI warehouse credit facility |
22,500 | - | 22,500 | - | 22,500 | |||||||||||||||
Total liabilities: |
$ | 1,223,794 | $ | 4,626 | $ | 1,192,819 | $ | 829 | $ | 1,198,274 |
(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 carrying value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated statements of financial position. The carrying values of these lines reconciles to the parenthetical disclosure of other investments on the Statements of Financial Condition. |
Recurring Fair Value Measurement
The following tables provide information related to the Company’s assets and liabilities carried at fair value on a recurring basis at June 30, 2019 and December 31, 2018:
(In thousands) |
June 30, 2019 |
|||||||||||||||||||
Carrying Value |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||||||
Marketable securities owned |
$ | 68,151 | $ | 16,252 | $ | - | $ | 51,899 | $ | 68,151 | ||||||||||
Other investments: |
||||||||||||||||||||
Equity investments |
4,104 | - | - | 4,104 | 4,104 | |||||||||||||||
Investments in hedge funds managed by the Company |
203 | - | 203 | - | 203 | |||||||||||||||
Investments in other funds managed by the Company (1) |
5,245 | - | - | - | - | |||||||||||||||
Limited partnership in investments in private equity/ real estate funds (1) |
4,457 | - | - | - | - | |||||||||||||||
Total other investments |
14,009 | - | 203 | 4,104 | 4,307 | |||||||||||||||
Total assets: |
$ | 82,160 | $ | 16,252 | $ | 203 | $ | 56,003 | $ | 72,458 | ||||||||||
Marketable securities sold, but not yet purchased |
2,724 | 2,724 | - | - | 2,724 | |||||||||||||||
Total liabilities: |
$ | 2,724 | $ | 2,724 | $ | - | $ | - | $ | 2,724 |
(In thousands) |
December 31, 2018 |
|||||||||||||||||||
Carrying Value |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||||||
Marketable securities owned |
$ | 18,874 | $ | 18,874 | $ | - | $ | - | $ | 18,874 | ||||||||||
Other investments: |
||||||||||||||||||||
Investments in hedge funds managed by the Company |
490 | - | 490 | - | 490 | |||||||||||||||
Investments in other funds managed by the Company (1) |
5,503 | - | - | - | - | |||||||||||||||
Limited partnership in investments in private equity/ real estate funds (1) |
3,920 | - | - | - | - | |||||||||||||||
Total other investments |
9,913 | - | 490 | - | 490 | |||||||||||||||
Total assets: |
$ | 28,787 | $ | 18,874 | $ | 490 | $ | - | $ | 19,364 | ||||||||||
Marketable securities sold, but not yet purchased |
4,626 | 4,626 | - | - | 4,626 | |||||||||||||||
Total liabilities: |
$ | 4,626 | $ | 4,626 | $ | - | $ | - | $ | 4,626 |
(1) |
In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. The carrying values of these lines reconciles to the parenthetical disclosure of other investments on the Consolidated Statements of Financial Condition. |
As of June 30, 2019, marketable securities sold but not yet purchased were primarily comprised of U.S. listed securities. As of June 30, 2019, marketable securities was comprised of U.S. listed equity securities and CLO debt securities. As of December 31, 2018, both marketable securities owned and marketable securities sold, but not yet purchased, were primarily comprised of U.S. listed equity securities.
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 policy is to recognize the fair value of transfers among Levels 1, 2 and 3 as of the end of the reporting period. For recurring fair value measurements, there were no transfers between Levels 1, 2 and 3 for the six months ended June 30, 2019 and the year ended December 31, 2018.
The Company’s Level 2 assets held in other investments consist of investments in hedge funds managed by HCS. The carrying value of investments in hedge funds are 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 determined the fair value of short-term debt, which includes notes payable and CLO credit facilities, to approximate their carrying values. This was determined as the debt has either (1) a variable interest rate tied to LIBOR and therefore reflects market conditions, or (2) a term less than one year and there have been no observable changes in the credit quality of the Company since the issuance of the debt. Based on the fair value methodology, the Company has identified short-term debt as Level 2 liabilities.
The Company's Level 3 assets in other investments is comprised of investments in equity securities of private companies. The Company determines the fair value of the investments either through (1) using the net present value of discounted cash flows of the estimated value of the put option of the investment or (2) using a market multiples approach. For the investment whose fair value determined using the discounted cash flows approach, the Company has a put option on this investment that is exercisable at three times the management fee revenue of the entity for the prior twelve months as of the effective date of the put option. The put option may be elected beginning March 31, 2022. The significant unobservable inputs under this approach are the estimated twelve months of revenues, the credit factor and the discount rate. For this investment, the Company elected the fair value option as the Company determined that the fair value of its option to put the equity securities was the best representation of the fair value of the investment. While the Company has made other equity investments, it has not elected the fair value option for those investments as it is impractical to determine the fair value of those investments. For the investment whose fair value is determined using the market multiples approach, the Company determines the enterprise value of the investment using the investments estimated EBITDA and an EBITDA multiple from comparable companies.
The Company’s Level 3 assets held in marketable securities consist of investments in CLO debt securities. The fair value of the CLO debt securities is determined using the net present value of discounted cash flows. The significant unobservable inputs used in the fair value measurement under this approach are the risk adjusted discount factors. The Company also uses performance and covenant compliance information provided by the CLO manager along with other risk factors including default risk, prepayment rates, interest rate risk, and credit spread risk when valuing this investment. During the three and six months ended June 30, 2019, the fair value of the Company's investment in CLO debt securities declined due a change that was deemed temporary. This conclusion was reached as the reduction in fair value was not due to credit factors and the Company believes that any reduction in fair value can be recovered before the security is sold or matures, whichever comes first.
For the three and six months ended June 30, 2019, the changes in Level 3 assets measured at fair value on a recurring basis were as follows:
(In thousands) |
CLO junior subordinated notes |
CLO senior subordinated notes |
Equity |
Total |
||||||||||||
Balance as of December 31, 2018 |
$ | - | $ | - | $ | 57 | $ | 57 | ||||||||
Fair value at recognition date |
54,279 | 9,289 | 3,568 | 67,136 | ||||||||||||
Purchases |
- | - | 11 | 11 | ||||||||||||
Accrued interest |
294 | 34 | - | 328 | ||||||||||||
Unrealized losses on investments, recognized in OCI |
(1,055 | ) | - | - | (1,055 | ) | ||||||||||
Balance as of March 31, 2019 |
$ | 53,518 | $ | 9,323 | $ | 3,636 | $ | 66,477 | ||||||||
Accrued interest |
1,969 | 69 | - | 2,038 | ||||||||||||
Purchases |
- | - | 171 | 171 | ||||||||||||
Investment distributions |
(1,170 | ) | (883 | ) | - | (2,053 | ) | |||||||||
Unrealized losses on investments, recognized in OCI |
(2,418 | ) | - | (2,418 | ) | |||||||||||
Unrealized gains on investments, recognized in earnings |
- | - | 297 | 297 | ||||||||||||
Realized losses on sales, recognized in earnings |
- | (112 | ) | - | (112 | ) | ||||||||||
Sales |
- | (8,397 | ) | - | (8,397 | ) | ||||||||||
Balance as of June 30, 2019 |
$ | 51,899 | $ | - | $ | 4,104 | $ | 56,003 |
For assets classified in the Level 3 hierarchy, any changes to any of the inputs to the fair value measurement could result in a significant increase or decrease in the fair value measurement. For CLO debt securities, a significant increase (decrease) in the discount rate, default rate, and severity rate would result in a significant decrease (increase) in the fair value of the instruments. For the equity investments, a significant increase (decrease) in the credit factor or the discount rate would result in a significantly lower (higher) fair value measurement or a significant increase (decrease) in the EBITDA multiple would result in a significant higher (lower) fair value measurement. For Level 3 assets measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:
(In thousands) |
Significant Unobservable Inputs |
Fair value |
||||||||||||||||||
Valuation Technique |
Description |
June 30, 2019 |
December 31, 2018 |
June 30, 2019 |
December 31, 2018 |
|||||||||||||||
CLO debt security |
Discounted cash flows |
Risk adjusted discounting factor |
15.0 | % | N/A | $ | 64,157 | $ | - | |||||||||||
Default rate |
0.0 - 2.0% (1.9 | %) | N/A | |||||||||||||||||
Severity rate |
25.0 | % | N/A | |||||||||||||||||
Prepay rate | 25 CPR | N/A | ||||||||||||||||||
Collateral liquidation price | 99.0 | % | N/A | |||||||||||||||||
Equity investments |
Discounted cash flows |
Credit factor |
20.0 | % | N/A | $ | 3,755 | $ | - | |||||||||||
Risk adjusted discounting factor |
17.6 | % | N/A | |||||||||||||||||
Market |
EBITDA Multiple |
7.0x |
N/A | $ | 349 | $ | 57 |
The Company determined the fair value of loans collateralizing ABS issued and loans held for investment identified as Level 2 assets primarily using the average market bid and ask quotation obtained from a loan pricing service. 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 obligors industry, future business prospects, capital structure, and expected credit losses. Significant declines in the performance of the obligor would result in decrease to the fair value measurement. The fair value of loans held for investment identified as Level 3 assets are determined using the discounted cash flow model using the treasury rate, loan interest rate, and an internally generated risk rate.
The Company determined the fair value of ABS issued based upon pricing from published market research for equivalent-rated CLO notes. Based on the fair value methodology, the Company has identified the asset-backed securities issued as Level 2 liabilities.
As of June 30, 2019 and December 31, 2018, $9.7 million and $9.4 million of assets were measured using the net asset value as a practical expedient. Investments for which fair value was estimated using net asset value as a practical expedient were as follows:
Fair Value at |
Unfunded Commitments |
||||||||||||||||||||
Dollars in thousands |
Redemption Frequency |
Redemption Notice Period |
June 30, 2019 |
December 31, 2018 |
June 30, 2019 |
December 31, 2018 |
|||||||||||||||
Limited partner investments in private equity/ real estate funds |
Nonredeemable |
N/A | $ | 4,457 | $ | 3,920 | $ | 4,833 | $ | 68 | |||||||||||
Investment in other funds managed by the Company |
Nonredeemable |
N/A | $ | 5,245 | $ | 5,503 | $ | 1,776 | $ | 1,945 |
Non-recurring Fair Value Measurements
The Company's assets that are measured at fair value on a non-recurring basis result from the application of lower of cost or market accounting or write-downs of individual assets. The Company held loans measured at fair value on a non-recurring basis of zero and $1.3 million as of June 30, 2019 and December 31, 2018, respectively.
The Company had marketable securities that were measured at fair value on a non-recurring basis as the Company has the intent and ability to hold these securities until maturity. The Company held marketable securities measured at fair-value on a non-recurring basis of $13.3 million as of June 30, 2019.
5. Investment Securities
The following table summarizes available-for-sale securities in an unrealized position as of June 30, 2019:
(In thousands) |
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value |
Total OTTI in OCI |
Number of positions |
||||||||||||||||||
CLO IV junior subordinated notes |
$ | 28,280 | $ | - | $ | (2,711 | ) | $ | 25,569 | $ | - | 1 | ||||||||||||
CLO V junior subordinated notes |
27,092 | - | (762 | ) | 26,330 | - | 1 | |||||||||||||||||
Total |
$ | 55,372 | $ | - | $ | (3,473 | ) | $ | 51,899 | $ | - |
The following table summarizes the held-to-maturity securities in an unrealized position as of June 30, 2019:
(In thousands) |
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value |
Number of positions |
|||||||||||||||
CLO III subordinated notes |
$ | 13,348 | $ | - | $ | (1,090 | ) | $ | 12,258 | 1 | ||||||||||
Total |
$ | 13,348 | $ | - | $ | (1,090 | ) | $ | 12,258 |
The following table summarizes the fair value and amortized cost of the available-for-sale and held-to-maturity securities by contractual maturity as of June 30, 2019:
(In thousands) |
Available-for-sale |
Held-to-maturity |
||||||||||||||
Amortized cost |
Fair value |
Amortized cost |
Fair value |
|||||||||||||
5-10 years |
$ | 28,280 | 25,569 | 13,348 | 12,258 | |||||||||||
10+ years |
27,092 | 26,330 | - | - | ||||||||||||
Total |
$ | 55,372 | $ | 51,899 | $ | 13,348 | $ | 12,258 |
The following table summarizes the fair value and gross unrealized losses aggregated by category and the length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2019:
(In thousands) |
Less than 12 months |
Greater than 12 months |
Total |
|||||||||||||||||||||
Fair value |
Gross unrealized loss |
Fair value |
Gross unrealized loss |
Fair value |
Gross unrealized loss |
|||||||||||||||||||
CLO III subordinated notes |
$ | 12,258 | $ | (1,090 | ) | $ | - | $ | - | $ | 12,258 | $ | (1,090 | ) | ||||||||||
CLO IV junior subordinated notes |
25,569 | (2,711 | ) | - | - | 25,569 | (2,711 | ) | ||||||||||||||||
CLO V junior subordinated notes |
26,330 | (762 | ) | - | - | 26,330 | (762 | ) | ||||||||||||||||
Total |
$ | 64,157 | $ | (4,563 | ) | $ | - | $ | - | $ | 64,157 | $ | (4,563 | ) |
During the three months ended June 30, 2019 and 2018, the Company recognized unrealized losses on CLO debt securities of $2.4 million and zero, respectively. During the six months ended June 30, 2019 and 2018, the Company recognized unrealized losses on CLO debt securities of $3.5 million and zero, respectively.
6. Loans
Loans collateralizing ABS issued
During the period ending June 30, 2019, the Company deconsolidated its investments in the CLOs and as a result, no longer has loans collateralizing ABS on its Consolidated Statements of Financial Condition as of June 30, 2019. See Note 1 for additional information on deconsolidation. A summary of the activity in the allowance for loan losses for the three and six months ended June 30, 2019 and 2018 is as follows:
(In thousands) |
Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||||||||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||||||||||||||||||
Impaired |
Non-Impaired |
Impaired |
Non-Impaired |
Impaired |
Non-Impaired |
Impaired |
Non-Impaired |
|||||||||||||||||||||||||
Balance, at beginning of period |
$ | - | $ | - | $ | (1,209 | ) | $ | (6,492 | ) | $ | (836 | ) | $ | (9,751 | ) | $ | (391 | ) | $ | (6,533 | ) | ||||||||||
Provision for loan losses: |
||||||||||||||||||||||||||||||||
Specific reserve |
- | - | - | - | - | - | (953 | ) | - | |||||||||||||||||||||||
General reserve |
- | - | - | (369 | ) | - | - | - | (328 | ) | ||||||||||||||||||||||
Charge off |
- | - | 1,099 | - | 181 | - | 1,234 | - | ||||||||||||||||||||||||
Derecognition due to deconsolidation |
- | - | - | - | 655 | 9,751 | - | - | ||||||||||||||||||||||||
Balance, at end of period |
$ | - | $ | - | $ | (110 | ) | $ | (6,861 | ) | $ | - | $ | - | $ | (110 | ) | $ | (6,861 | ) |
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 December 31, 2018, $1.8 million of the recorded investment amount in loans collateralizing asset-backed securities issued were individually evaluated for impairment. The remaining $1,170.2 million of recorded investment amount of loans collateralizing asset-backed securities issued were collectively evaluated for impairment as of December 31, 2018.
As of December 31, 2018 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 December 31, 2018:
(In thousands) |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||||
December 31, 2018 |
||||||||||||||||||||
Impaired loans with an allowance recorded |
$ | 1,813 | $ | 1,951 | $ | 838 | $ | 1,817 | $ | 119 | ||||||||||
Impaired loans with no related allowance recorded |
- | - | - | - | - | |||||||||||||||
Total impaired loans |
$ | 1,813 | $ | 1,951 | $ | 838 | $ | 1,817 | $ | 119 |
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 June 30, 2019 or December 31, 2018. The Company had one troubled debt restructuring during the six months ended June 30, 2019. The loan, with a principal balance and a carrying balance of $0.5 million and $0.2 million in total, respectively, was converted to equity. The Company valued the equity at $0.2 million in total upon conversion and recorded no material gain or loss upon the execution of the restructuring.
During the year ended December 31, 2018, the Company had two loans, which were modified in a troubled debt restructuring. The loans, with a principal balance and a carrying balance of $1.9 million and $1.0 million in total, respectively, were converted to equity. The Company valued the equity at $0.8 million in total upon conversion and incurred a loss of $0.1 million in relation to the restructuring as of December 31, 2018.
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 December 31, 2018. These loans were deconsolidated as of June 30, 2019 as part of the deconsolidation of the CLOs. See Note 1 for additional information.
(In thousands) |
Cash Flow Loans |
||||||||
June 30, |
December 31, |
||||||||
2019 |
2018 |
||||||||
Moody's rating: |
|||||||||
Baa1 - Baa3 |
$ | - | $ | 7,300 | |||||
Ba1 - Ba3 |
- | 247,686 | |||||||
B1 - B3 |
- | 856,204 | |||||||
Caa1 - Caa3 |
- | 59,046 | |||||||
Ca |
- | 1,813 | |||||||
Total: |
$ | - | $ | 1,172,049 | |||||
Internal rating: (1) |
|||||||||
2 | $ | - | $ | 1,018,261 | |||||
3 | - | 132,169 | |||||||
4 | - | 19,806 | |||||||
5 | - | 1,813 | |||||||
Total: |
$ | - | $ | 1,172,049 | |||||
Performance: |
|||||||||
Performing |
$ | - | $ | 1,170,236 | |||||
Non-Performing |
- | 1,813 | |||||||
Total: |
$ | - | $ | 1,172,049 |
(1) |
Loans with an internal rating of 3 or below are reviewed individually to identify loans to be designated for non-accrual status. |