Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - JMP GROUP LLC | ex_99175.htm |
EX-32.1 - EXHIBIT 32.1 - JMP GROUP LLC | ex_99173.htm |
EX-31.2 - EXHIBIT 31.2 - JMP GROUP LLC | ex_99172.htm |
EX-31.1 - EXHIBIT 31.1 - JMP GROUP LLC | ex_99171.htm |
EX-10.18 - EXHIBIT 10.18 - JMP GROUP LLC | ex_99508.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017 OR |
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File Number: 001-36802
JMP Group LLC
(Exact name of registrant as specified in its charter)
Delaware |
|
47-1632931 |
(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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
☐ |
|
Accelerated filer |
|
☐ |
Non-accelerated filer |
|
☐ (Do not check if a smaller reporting company) |
|
Smaller reporting company |
|
☒ |
Emerging growth company |
|
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
JMP Group LLC shares representing limited liability company interests outstanding as of November 6, 2017: 21,485,981.
Table of Contents
TABLE OF CONTENTS
|
|
Page |
PART I. |
FINANCIAL INFORMATION |
4 |
Item 1. |
Financial Statements - JMP Group LLC |
4 |
Condensed Consolidated Statements of Financial Condition – September 30, 2017 and December 31, 2016 (Unaudited) |
4 |
|
Condensed Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited) |
6 |
|
Condensed Consolidated Statements of Changes in Equity - For the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited) |
7 |
|
Condensed Consolidated Statements of Cash Flows - For the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited) |
8 |
|
Notes to Condensed Consolidated Financial Statements (Unaudited) |
10 |
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
42 |
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
69 |
Item 4. |
Controls and Procedures |
69 |
PART II. |
OTHER INFORMATION |
69 |
Item 1. |
Legal Proceedings |
69 |
Item 1A. |
Risk Factors |
69 |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
70 |
Item 3. |
Defaults Upon Senior Securities |
70 |
Item 4. |
Mine Safety Disclosures |
70 |
Item 5. |
Other Information |
70 |
Item 6. |
Exhibits |
70 |
SIGNATURES |
71 |
|
EXHIBIT INDEX |
72 |
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.
PART I. FINANCIAL INFORMATION
ITEM 1. |
Financial Statements |
JMP Group LLC
Condensed Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in thousands, except per share data)
September 30, 2017 |
December 31, 2016 |
|||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 87,493 | $ | 85,492 | ||||
Restricted cash and deposits (includes cash on deposit with clearing broker of $250 at both September 30, 2017 and December 31, 2016) |
61,964 | 227,656 | ||||||
Receivable from clearing broker |
20,384 | 6,586 | ||||||
Investment banking fees receivable, net of allowance for doubtful accounts of $80 and zero at September 30, 2017 and December 31, 2016, respectively |
14,692 | 5,681 | ||||||
Marketable securities owned, at fair value |
22,015 | 18,722 | ||||||
Incentive fee receivable |
19 | 499 | ||||||
Other investments (includes $20,191 and $21,459 measured at fair value at September 30, 2017 and December 31, 2016, respectively) |
26,573 | 32,869 | ||||||
Loans held for sale |
- | 32,488 | ||||||
Loans held for investment, net of allowance for loan losses of $2,151 and $443 at September 30, 2017 and December 31, 2016, respectively |
18,747 | 1,930 | ||||||
Loans collateralizing asset-backed securities issued, net of allowance for loan losses of $6,596 and $6,540, respectively |
756,166 | 654,127 | ||||||
Interest receivable |
2,051 | 3,429 | ||||||
Cash collateral posted for total return swap |
- | 25,000 | ||||||
Fixed assets, net |
2,459 | 3,143 | ||||||
Deferred tax assets |
12,287 | 7,942 | ||||||
Other assets |
6,181 | 20,266 | ||||||
Total assets |
$ | 1,031,031 | $ | 1,125,830 | ||||
Liabilities and Equity |
||||||||
Liabilities: |
||||||||
Marketable securities sold, but not yet purchased, at fair value |
$ | 21,001 | $ | 4,747 | ||||
Accrued compensation |
28,285 | 36,158 | ||||||
Asset-backed securities issued (net of debt issuance costs of $3,251 and $3,271 at September 30, 2017 and December 31, 2016, respectively) |
737,780 | 825,854 | ||||||
Interest payable |
7,557 | 6,317 | ||||||
CLO V warehouse credit facility |
7,000 | - | ||||||
Bond payable (net of debt issuance costs of $1,727 and $2,042 at September 30, 2017 and December 31, 2016, respectively) |
92,101 | 91,785 | ||||||
Deferred tax liability |
2,393 | 3,872 | ||||||
Other liabilities |
20,351 | 21,803 | ||||||
Total liabilities |
916,468 | 990,536 | ||||||
Commitments and Contingencies (Footnote 13) |
||||||||
JMP Group LLC Shareholders' Equity |
||||||||
Common shares, $0.001 par value, 100,000,000 shares authorized; 22,780,052 shares issued at both September 30, 2017 and December 31, 2016; 21,460,785 and 21,457,054 shares outstanding at September 30, 2017 and December 31, 2016, respectively |
23 | 23 | ||||||
Additional paid-in capital |
137,430 | 135,945 | ||||||
Treasury shares at cost, 1,319,267 and 1,322,998 shares at September 30, 2017 and December 31, 2016, respectively |
(7,605 | ) | (7,792 | ) | ||||
Accumulated deficit |
(29,138 | ) | (8,799 | ) | ||||
Total JMP Group LLC shareholders' equity |
100,710 | 119,377 | ||||||
Nonredeemable Non-controlling Interest |
13,853 | 15,917 | ||||||
Total equity |
114,563 | 135,294 | ||||||
Total liabilities and equity |
$ | 1,031,031 | $ | 1,125,830 |
See accompanying notes to condensed consolidated financial statements.
JMP Group LLC
Condensed Consolidated Statements of Financial Condition - (Continued)
(Unaudited)
(Dollars in thousands, except per share data)
Assets and liabilities of consolidated variable interest entities (“VIEs”) included in total assets and total liabilities above:
September 30, 2017 |
December 31, 2016 |
|||||||
Restricted cash |
$ | 54,137 | $ | 225,777 | ||||
Loans held for sale |
- | 32,488 | ||||||
Loans collateralizing asset-backed securities issued, net of allowance for loan losses |
756,166 | 654,127 | ||||||
Interest receivable |
2,022 | 2,180 | ||||||
Other assets |
90 | 178 | ||||||
Total assets of consolidated VIEs |
$ | 812,415 | $ | 914,750 | ||||
Asset-backed securities issued |
737,780 | 825,854 | ||||||
Interest payable |
6,020 | 4,580 | ||||||
Other liabilities |
1,281 | 1,192 | ||||||
Total liabilities of consolidated VIEs |
$ | 745,081 | $ | 831,626 |
The asset-backed securities issued (“ABS”) by the VIE are limited recourse obligations payable solely from cash flows of the loans collateralizing them and related collection and payment accounts pledged as security. Accordingly, only the assets of the VIE can be used to settle the obligations of the VIE.
See accompanying notes to condensed consolidated financial statements.
JMP Group LLC
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2017 |
2016 |
2017 |
2016 |
|||||||||||||
Revenues |
||||||||||||||||
Investment banking |
$ | 22,085 | $ | 15,048 | $ | 54,813 | $ | 41,719 | ||||||||
Brokerage |
4,763 | 5,015 | 15,127 | 16,921 | ||||||||||||
Asset management fees |
4,014 | 4,044 | 14,078 | 18,958 | ||||||||||||
Principal transactions |
(1,392 | ) | 2,764 | (3,608 | ) | 10,326 | ||||||||||
Gain (loss) on sale and payoff of loans |
278 | (52 | ) | 1,208 | (961 | ) | ||||||||||
Net dividend income |
278 | 230 | 817 | 736 | ||||||||||||
Other income |
282 | 262 | 921 | 534 | ||||||||||||
Non-interest revenues |
30,308 | 27,311 | 83,356 | 88,233 | ||||||||||||
Interest income |
10,900 | 11,472 | 29,663 | 35,997 | ||||||||||||
Interest expense |
(8,811 | ) | (8,212 | ) | (24,649 | ) | (24,297 | ) | ||||||||
Net interest income |
2,089 | 3,260 | 5,014 | 11,700 | ||||||||||||
Gain (loss) repurchase/early retirement of debt |
- | - | (5,332 | ) | - | |||||||||||
Reversal (provision) for loan losses |
(368 | ) | 104 | (3,488 | ) | (980 | ) | |||||||||
Total net revenues |
32,029 | 30,675 | 79,550 | 98,953 | ||||||||||||
Non-interest expenses |
||||||||||||||||
Compensation and benefits |
24,563 | 22,167 | 69,013 | 70,273 | ||||||||||||
Administration |
1,459 | 1,808 | 5,999 | 5,640 | ||||||||||||
Brokerage, clearing and exchange fees |
740 | 734 | 2,288 | 2,308 | ||||||||||||
Travel and business development |
709 | 1,019 | 2,735 | 3,548 | ||||||||||||
Communications and technology |
1,046 | 1,033 | 3,150 | 3,093 | ||||||||||||
Occupancy |
1,117 | 987 | 3,339 | 2,853 | ||||||||||||
Professional fees |
1,094 | 1,119 | 3,109 | 3,245 | ||||||||||||
Depreciation |
277 | 312 | 891 | 968 | ||||||||||||
Other |
366 | 491 | 1,993 | 1,652 | ||||||||||||
Total non-interest expenses |
31,371 | 29,670 | 92,517 | 93,580 | ||||||||||||
Net income (loss) before income tax expense |
658 | 1,005 | (12,967 | ) | 5,373 | |||||||||||
Income tax expense (benefit) |
1,113 | (597 | ) | (169 | ) | (793 | ) | |||||||||
Net income (loss) |
(455 | ) | 1,602 | (12,798 | ) | 6,166 | ||||||||||
Less: Net income attributable to nonredeemable non-controlling interest |
780 | 941 | 1,712 | 4,029 | ||||||||||||
Net income (loss) attributable to JMP Group LLC |
$ | (1,235 | ) | $ | 661 | $ | (14,510 | ) | 2,137 | |||||||
Net income (loss) attributable to JMP Group LLC per common share: |
||||||||||||||||
Basic |
$ | (0.06 | ) | $ | 0.03 | $ | (0.67 | ) | $ | 0.10 | ||||||
Diluted |
$ | (0.06 | ) | $ | 0.03 | $ | (0.67 | ) | $ | 0.10 | ||||||
Distributions declared per common share |
$ | 0.090 | $ | 0.090 | $ | 0.270 | $ | 0.300 | ||||||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
21,525 | 20,946 | 21,583 | 21,117 | ||||||||||||
Diluted |
21,525 | 21,901 | 21,583 | 21,796 |
See accompanying notes to condensed consolidated financial statements.
JMP Group LLC
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
(In thousands)
JMP Group LLC's Equity |
||||||||||||||||||||||||||||
Additional |
Nonredeemable |
|||||||||||||||||||||||||||
Common Shares |
Treasury |
Paid-In |
Accumulated |
Non-controlling |
||||||||||||||||||||||||
Shares |
Amount |
Shares |
Capital |
Deficit |
Interest |
Total Equity |
||||||||||||||||||||||
Balance, December 31, 2016 |
22,780 | 23 | (7,792 | ) | 135,945 | (8,799 | ) | 15,917 | 135,294 | |||||||||||||||||||
Net income (loss) |
- | - | - | - | (14,510 | ) | 1,712 | (12,798 | ) | |||||||||||||||||||
Additional paid-in capital - share-based compensation |
- | - | - | 1,485 | - | - | 1,485 | |||||||||||||||||||||
Distributions and distribution equivalents declared on common shares and restricted share units |
- | - | - | - | (5,829 | ) | - | (5,829 | ) | |||||||||||||||||||
Purchases of shares of common shares for treasury |
- | (1,967 | ) | - | (1,967 | ) | ||||||||||||||||||||||
Reissuance of shares of common shares from treasury |
- | - | 2,154 | - | - | - | 2,154 | |||||||||||||||||||||
Distributions to non-controlling interest holders |
- | - | - | - | - | (3,868 | ) | (3,868 | ) | |||||||||||||||||||
Capital contributions from non-controlling interest holders |
- | - | - | - | - | 92 | 92 | |||||||||||||||||||||
Balance, September 30, 2017 |
22,780 | 23 | (7,605 | ) | 137,430 | (29,138 | ) | 13,853 | 114,563 |
JMP Group LLC's Equity |
||||||||||||||||||||||||||||
Additional |
Nonredeemable |
|||||||||||||||||||||||||||
Common Shares |
Treasury |
Paid-In |
Accumulated |
Non-controlling |
||||||||||||||||||||||||
Shares |
Amount |
Shares |
Capital |
Deficit |
Interest |
Total Equity |
||||||||||||||||||||||
Balance, December 31, 2015 |
22,780 | $ | 23 | $ | (6,763 | ) | $ | 135,003 | $ | (3,151 | ) | $ | 27,782 | $ | 152,894 | |||||||||||||
Net income |
- | - | - | - | 2,137 | 4,029 | 6,166 | |||||||||||||||||||||
Additonal paid-in capital - share-based compensation |
- | - | - | 3,559 | - | - | 3,559 | |||||||||||||||||||||
Distributions and distribution equivalents declared on common shares and restricted share units |
- | - | - | - | (6,459 | ) | - | (6,459 | ) | |||||||||||||||||||
Purchases of shares of common shares for treasury |
- | (4,192 | ) | - | (4,192 | ) | ||||||||||||||||||||||
Reissuance of shares of common shares from treasury |
- | - | 260 | - | - | - | 260 | |||||||||||||||||||||
Purchase of subsidiary shares from non-controlling interest holders |
- | - | - | 1,384 | - | (9,595 | ) | (8,211 | ) | |||||||||||||||||||
Distributions to non-controlling interest holders |
- | - | - | - | - | (5,948 | ) | (5,948 | ) | |||||||||||||||||||
Balance, September 30, 2016 |
22,780 | $ | 23 | $ | (10,695 | ) | $ | 139,946 | $ | (7,473 | ) | $ | 16,268 | $ | 138,069 |
See accompanying notes to condensed consolidated financial statements.
JMP Group LLC
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended September 30, |
||||||||
2017 |
2016 |
|||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (12,798 | ) | $ | 6,166 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Provision for doubtful accounts |
90 | - | ||||||
Provision for loan losses |
3,488 | 980 | ||||||
Accretion of deferred loan fees |
(1,734 | ) | (1,224 | ) | ||||
Amortization of liquidity discount, net |
- | (108 | ) | |||||
Amortization of debt issuance costs |
315 | 328 | ||||||
Amortization of original issue discount, related to CLO II, CLO III, and CLO IV |
1,607 | 1,814 | ||||||
Interest paid in kind |
- | (53 | ) | |||||
(Gain) loss on sale and payoff of loans |
(1,208 | ) | 961 | |||||
Loss (gain) on repurchase/early retirement of debt |
5,542 | (87 | ) | |||||
Change in other investments: |
||||||||
Loss from investments in equity method investees |
4,628 | 238 | ||||||
Fair value on other equity investments |
(505 | ) | 1,819 | |||||
Realized (gain) loss on other investments |
(26 | ) | (7,981 | ) | ||||
Depreciation and amortization of fixed assets |
891 | 968 | ||||||
Share-based compensation expense |
2,159 | 4,199 | ||||||
Deferred income taxes |
(5,824 | ) | (12,245 | ) | ||||
Net change in operating assets and liabilities: |
||||||||
Decrease in interest receivable |
1,378 | 617 | ||||||
(Increase) decrease in receivables |
(22,419 | ) | 7,936 | |||||
(Increase) decrease in marketable securities |
(3,293 | ) | 6,940 | |||||
Decrease in restricted cash (excluding restricted cash reserved for lending activities) |
(1,324 | ) | 827 | |||||
Decrease in deposits and other assets |
6,538 | 8,709 | ||||||
Increase in marketable securities sold, but not yet purchased |
16,254 | (4,398 | ) | |||||
(Decrease) increase in interest payable |
1,240 | 584 | ||||||
Decrease in accrued compensation and other liabilities |
(8,983 | ) | (11,898 | ) | ||||
Net cash provided by (used in) operating activities |
(13,984 | ) | 5,092 | |||||
Cash flows from investing activities: |
||||||||
Purchases of fixed assets |
(204 | ) | (325 | ) | ||||
Purchases of other investments |
(2,034 | ) | (6,103 | ) | ||||
Sales of other investments |
12,300 | 39,491 | ||||||
Funding of loans collateralizing asset-backed securities issued |
(614,431 | ) | (185,586 | ) | ||||
Funding of loans held for sale |
(2,752 | ) | - | |||||
Funding of loans held for investment |
(13,514 | ) | - | |||||
Sale and payoff of loans collateralizing asset-backed securities issued |
477,210 | 279,415 | ||||||
Sale of loans held for sale |
33,951 | - | ||||||
Principal receipts on loans collateralizing asset-backed securities issued |
29,339 | 51,975 | ||||||
Repayments on loans held for investment |
975 | 52 | ||||||
Repayments on loans held for sale |
1,784 | - | ||||||
Net change in restricted cash reserved for lending activities |
167,016 | (72,301 | ) | |||||
Net changes in cash collateral posted for derivative transactions |
25,000 | (240 | ) | |||||
Net cash provided by investing activities |
114,640 | 106,378 |
See accompanying notes to condensed consolidated financial statements.
JMP Group LLC
Condensed Consolidated Statements of Cash Flows - (Continued)
(Unaudited)
(In thousands)
Nine Months Ended September 30, |
||||||||
2017 |
2016 |
|||||||
Cash flows from financing activities: |
||||||||
Proceeds from CLO V warehouse credit facility |
7,000 | - | ||||||
Proceeds from asset-backed securities issued |
408,394 | - | ||||||
Repurchase of bonds payable |
- | (385 | ) | |||||
Repayment of asset-backed securities issued |
(503,617 | ) | (74,592 | ) | ||||
Distributions and distribution equivalents paid on common shares and RSUs |
(5,838 | ) | (6,236 | ) | ||||
Proceeds from exercises of stock options |
1,149 | - | ||||||
Purchase of common shares for treasury |
(1,660 | ) | (4,192 | ) | ||||
Capital contributions of nonredeemable non-controlling interest holders |
92 | - | ||||||
Distributions to non-controlling interest shareholders |
(3,868 | ) | (5,948 | ) | ||||
Employee taxes paid on shares withheld for tax-withholding purposes |
(307 | ) | - | |||||
Net cash used in financing activities |
(98,655 | ) | (91,353 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
2,001 | 20,117 | ||||||
Cash and cash equivalents, beginning of period |
85,492 | 68,551 | ||||||
Cash and cash equivalents, end of period |
$ | 87,493 | $ | 88,668 | ||||
Non-cash investing and financing activities: |
||||||||
Reissuance of shares of common share from treasury related to vesting of restricted share units and exercises of share options |
$ | 2,154 | $ | 260 | ||||
Distributions declared but not yet paid |
$ | 644 | $ | 628 | ||||
Purchase of subsidiary shares not yet settled |
$ | - | $ | 8,211 | ||||
Restructuring of loans held for investment to equity securities |
$ | 520 | $ | - |
See accompanying notes to condensed consolidated financial statements.
JMP Group LLC
Notes to Condensed Consolidated Financial Statements
September 30, 2017
(Unaudited)
1. Organization and Description of Business
JMP Group LLC, together with its subsidiaries (collectively, the “Company”), is a diversified capital markets firm headquartered in San Francisco, California. The Company conducts its brokerage business through JMP Securities LLC (“JMP Securities”), its asset management business through Harvest Capital Strategies LLC (“HCS”), HCAP Advisors LLC (“HCAP Advisors”), JMP Asset Management LLC (“JMPAM”), and JMP Credit Advisors LLC (“JMPCA”), and certain principal investments through JMP Investment Holdings LLC (“JMP Investment Holdings”), JMP Realty Trust Inc., and JMPCA. The above entities, other than HCAP Advisors, are wholly-owned subsidiaries. JMP Securities is a U.S. registered broker-dealer under the Securities Exchange Act of 1934, as amended (“the Exchange Act”), and is a member of the Financial Industry Regulatory Authority (“FINRA”). JMP Securities operates as an introducing broker and does not hold funds or securities for, or owe any money or securities to customers and does not carry accounts for customers. All customer transactions are cleared through another broker-dealer on a fully disclosed basis. HCS is a registered investment advisor under the Investment Advisers Act of 1940, as amended, and provides investment management services for sophisticated investors in investment partnerships and other entities managed by HCS. HCAP Advisors provides investment advisory services to Harvest Capital Credit Corporation (“HCC”). JMPAM currently manages two fund strategies: one that invests in real estate and real estate-related enterprises and another that provides credit to small and midsized private companies. JMPCA is an asset management platform that underwrites and manages investments in senior secured debt. JMPCA currently manages two collateralized loan obligations (“CLO”) vehicles and one CLO warehouse. The Company completed a Reorganization Transaction in January 2015 pursuant to which JMP Group Inc. became a wholly owned subsidiary of JMP Group LLC (the “Reorganization Transaction”).
Recent Transactions
On June 29, 2017, entities sponsored by JMP Group LLC priced a $456.9 million CLO. The senior notes offered in this transaction (the “Secured Notes”) were issued by JMP Credit Advisors CLO IV Ltd. (“CLO IV”), a special purpose Cayman vehicle, and co-issued in part by JMP Credit Advisors CLO IV LLC, a special purpose Delaware vehicle, and were backed by a diversified portfolio of broadly syndicated leveraged loans. The Secured Notes were issued in multiple tranches and are rated by Moody's Investors Service, Inc. The Company, through a wholly-owned subsidiary, retained 100% of the senior and junior subordinated notes, which are not rated. The transaction closed on June 29, 2017. The Company manages CLO IV, and owns 100% of the subordinated notes.
Upon the closing of CLO IV, the Company performed a consolidation analysis to determine appropriate consolidation treatment. An entity is considered a VIE and, therefore, would be subject to the consolidation provisions of ASC 810-10-15 if, by design, equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In the analysis, the Company determines if it is the primary beneficiary of the VIE by performing a qualitative analysis of the VIE that includes a review of, among other factors, its capital structure, contractual terms, related party relationships, the Company’s fee arrangements and the design of the VIE. As of June 30, 2017, CLO IV was determined to be a VIE. The Company was identified as the primary beneficiary based on the ability to direct the activities of CLO IV through its subsidiary manager, JMPCA, and the 100% ownership of the subordinated notes. As a result, the Company consolidates the assets and liabilities of CLO IV, and the underlying loans owned by the CLO are shown on the Consolidated Statements of Financial Condition under loans collateralizing asset-backed securities issued and the asset-backed securities issued to third parties are shown under asset-backed securities issued.
On July 31, 2017, the Company established, through its affiliate JMP Credit Advisors CLO V Ltd. (“CLO V”), a Cayman Islands vehicle (the “Borrower”), a $200 million revolving credit facility (the “Facility”) to finance the acquisition of a portfolio of assets, including certain debt obligations. JMPCA will act as collateral manager with duties including the selection of assets to be acquired by the Borrower. All borrowings under the Facility will be subject to the satisfaction of certain customary covenants, the accuracy of certain representations and warranties, concentration limitations and other restrictions. The Facility will be primarily secured by a portfolio of collateral that includes certain debt obligations that are eligible for acquisition by the Borrower. The Borrower is subject to mandatory prepayments under the Facility upon the occurrence of certain events. In addition, the Borrower may make optional prepayments under the Facility. The Facility was established to fund the purchase of a diverse pool of loans. The Facility is structured to have a twelve month revolving period ending July 30, 2018, and a ten-month amortization period. The Facility will have a market standard advance rate and any outstanding balances will bear interest at standard market interest rates based on LIBOR.
2. Summary of Significant Accounting Policies
Basis of Presentation
These condensed consolidated financial statements and related notes are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2016 (the “Annual Report”). The results of operations for any interim period are not necessarily indicative of the results to be expected for a full year. In the opinion of management, all normal, recurring adjustments have been included for a fair statement of this interim financial information
The consolidated accounts of the Company include the wholly-owned subsidiaries, JMP Securities, HCS, JMPCA, JMP Investment Holdings, JMPCA TRS, JMP Asset Management Inc., JMP Realty Trust Inc., and CLO IV, CLO V, and the partially-owned subsidiaries JMP Credit Advisors CLO I Ltd. (“CLO I”), JMP Credit Advisors CLO II Ltd. (“CLO II”), JMP Credit Advisors CLO III Ltd. (“CLO III”) and HCAP Advisors. All material intercompany accounts and transactions have been eliminated in consolidation. Non-controlling interest on the Consolidated Statements of Financial Condition at September 30, 2017 and December 31, 2016 relate to the interest of third parties in the partially-owned subsidiaries.
See Note 2 - Summary of Significant Accounting Policies in the Company's Annual Report for the Company's significant accounting policies.
3. Recent Accounting Pronouncements
Recently Adopted Accounting Guidance
ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting (Topic 323), was issued in March 2016. When an investment qualifies for the use of the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence, the amendments eliminate the requirement to retroactively adopt the equity method of accounting. This standard was effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of ASU 2016-07 did not have a material impact on the Company’s financial statements.
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), was issued in March 2016 as part of its initiative to reduce complexity in accounting standards. Areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This standard was effective for fiscal years beginning after December 31, 2016. The adoption of ASU 2016-09 did not have a material impact on the Company’s financial statements.
Accounting Guidance Not Yet Adopted
Accounting Standards Updates (“ASU”) 2014-09, ASU 2015-14, ASU 2016-10 and ASU 2016-12, Revenue from Contracts with Customers (Topic 606), and ASU 2016-08, Principal versus Agent Considerations (Topic 606), were issued in May 2014, August 2015, April 2016, May 2016 and March 2016, respectively, to provide a more robust framework for addressing revenue issues, and to clarify the implementation guidance on principal versus agent considerations. The standards allow either a full retrospective or modified approach at adoption and the Company has chosen modified adoption. They are effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted on the original effective date, as stated by ASU 2014-09, annual reporting periods beginning after December 15, 2016. The core principles of the provisions are that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The updates also clarify guidance relating to identifying performance obligations and licensing implementation. The Company is evaluating certain agreements to determine whether it acts as a principal and should present the related revenue gross of expenses. Any impact resulting from adoption could result in adjustments on investment banking and brokerage revenues, although no material change is expected. While the evaluation efforts over the revenue standard updates are not complete, the Company does not anticipate a significant impact on its financial statements.
ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), was issued in January 2016. The amendments address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. They require equity securities that are neither accounted by equity method nor consolidated to be measured at fair value with changes of fair values recognized as net income. Those equity securities that do not have readily determinable fair value may be measured at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. In addition, the amendments simplify the impairment assessment of equity investments without determinable fair values by requiring a qualitative assessment at each reporting period. This standard will be effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of ASU 2016-01 is not expected to have a material impact on the Company’s financial statements.
ASU 2016-02, Leases (Topic 842), was issued in February 2016 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing information about leasing arrangements. The standard requires lessees to recognize the assets and liabilities arising from operational leases on the balance sheet. ASU 2016-02 will become effective for fiscal years beginning after December 15, 2018. Upon adoption, the Company’s right-to-use assets and corresponding lease liabilities will be grossed up to reflect the present value of the lease payments.
ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), was issued in June 2016 to replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This standard will become effective for fiscal years beginning after December 31, 2019. The Company expects the adoption of ASU 2016-13 may result in an increase to the allowance for loan losses. The Company is still in the process of determining the magnitude of the impact.
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.
4. Fair Value Measurements
The following tables provide fair value information related to the Company’s financial instruments at September 30, 2017 and December 31, 2016:
September 30, 2017 |
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(In thousands) |
Carrying Value |
Fair Value |
||||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
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Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 87,493 | $ | 87,493 | $ | - | $ | - | $ | 87,493 | ||||||||||
Restricted cash and deposits |
61,964 | 61,964 | - | - | 61,964 | |||||||||||||||
Marketable securities owned |
22,015 | 22,015 | - | - | 22,015 | |||||||||||||||
Other investments |
12,475 | - | 11,956 | 519 | 12,475 | |||||||||||||||
Other investments measured at net asset value (1) |
14,098 | - | - | - | - | |||||||||||||||
Loans held for investment, net of allowance for loan losses |
18,747 | - | 13,626 | 3,619 | 17,245 | |||||||||||||||
Loans collateralizing asset-backed securities issued, net of allowance for loan losses |
756,166 | - | 755,435 | 478 | 755,913 | |||||||||||||||
Total assets: |
$ | 972,958 | $ | 171,472 | $ | 781,017 | $ | 4,616 | $ | 957,105 | ||||||||||
Liabilities: |
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Marketable securities sold, but not yet purchased |
$ | 21,001 | $ | 21,001 | $ | - | $ | - | $ | 21,001 | ||||||||||
Asset-backed securities issued |
737,780 | - | 746,100 | - | 746,100 | |||||||||||||||
Bond payable |
92,101 | - | 96,488 | - | 96,488 | |||||||||||||||
CLO V warehouse credit facility |
7,000 | - | 7,000 | - | 7,000 | |||||||||||||||
Total liabilities: |
$ | 857,882 | $ | 21,001 | $ | 849,588 | $ | - | $ | 870,589 |
December 31, 2016 |
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(In thousands) |
Carrying Value |
Fair Value |
||||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
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Assets: |
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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: |
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Marketable securities sold, but not yet purchased |
$ | 4,747 | $ | 4,747 | $ | - | $ | - | $ | 4,747 | ||||||||||
Asset-backed securities issued |
825,854 | - | 831,854 | - | 831,854 | |||||||||||||||
Bond payable |
91,785 | - | 94,517 | - | 94,517 | |||||||||||||||
Total liabilities: |
$ | 922,386 | $ | 4,747 | $ | 926,371 | $ | - | $ | 931,118 |
(1) |
In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. |
Recurring Fair Value Measurement
The following tables provide information related to the Company’s assets and liabilities carried at fair value on a recurring basis at September 30, 2017 and December 31, 2016:
(In thousands) |
September 30, 2017 |
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Carrying Value |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||||||
Marketable securities owned |
22,015 | $ | 22,015 | $ | - | $ | - | $ | 22,015 | |||||||||||
Other investments: |
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Investments in hedge funds managed by HCS |
11,956 | - | 11,956 | - | 11,956 | |||||||||||||||
Investments in private equity funds managed by HCS (1) |
5,503 | - | - | - | - | |||||||||||||||
Investments in funds of funds managed by HCS (1) |
3 | - | - | - | - | |||||||||||||||
Investments in funds of capital debt managed by the Company (1) |
239 | - | - | - | - | |||||||||||||||
Total investment in funds managed by HCS |
17,701 | - | 11,956 | - | 11,956 | |||||||||||||||
Limited partnership in investments in private equity/ real estate funds (1) |
3,547 | - | - | - | - | |||||||||||||||
Total other investments |
21,248 | - | 11,956 | - | 11,956 | |||||||||||||||
Total assets: |
43,263 | $ | 22,015 | $ | 11,956 | $ | - | $ | 33,971 | |||||||||||
Marketable securities sold, but not yet purchased |
21,001 | 21,001 | - | - | 21,001 | |||||||||||||||
Total liabilities: |
21,001 | $ | 21,001 | $ | - | $ | - | $ | 21,001 |
(In thousands) |
December 31, 2016 |
|||||||||||||||||||
Carrying Value |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||||||
Marketable securities owned |
18,722 | $ | 18,722 | $ | - | $ | - | $ | 18,722 | |||||||||||
Other investments: |
||||||||||||||||||||
Investments in hedge funds managed by HCS |
12,444 | - | 12,444 | - | 12,444 | |||||||||||||||
Investments in private equity funds managed by HCS (1) |
4,227 | . | . | - | - | |||||||||||||||
Investments in funds of funds managed by HCS (1) |
5 | - | - | - | - | |||||||||||||||
Total investment in funds managed by HCS |
16,676 | - | 12,444 | - | 12,444 | |||||||||||||||
Limited partnership in investments in private equity/ real estate funds (1) |
3,530 | - | - | - | - | |||||||||||||||
Total return swap |
1,253 | 1,253 | 1,253 | |||||||||||||||||
Total other investments |
21,459 | - | 13,697 | - | 13,697 | |||||||||||||||
Total assets: |
$ | 40,181 | $ | 18,722 | $ | 13,697 | $ | - | $ | 32,419 | ||||||||||
Marketable securities sold, but not yet purchased |
4,747 | 4,747 | - | - | 4,747 | |||||||||||||||
Total liabilities: |
$ | 4,747 | $ | 4,747 | $ | - | $ | - | $ | 4,747 |
(1) |
In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. |
Transfers between levels of the fair value hierarchy result from changes in the observability of fair value inputs used in determining fair values for different types of financial assets and are recognized at the beginning of the reporting period in which the event or change in circumstances that caused the transfer occurs.
The Company’s Level 2 assets held in other investments consist of investments in hedge funds managed by HCS. The carrying value of investment in hedge funds is calculated using the equity method and approximates fair value. Earnings or losses attributable to these investments are recorded in principal transactions. These assets are considered Level 2 as the underlying hedge funds are mainly invested in publicly traded stocks whose value is based on quoted market prices. The Company’s proportionate share of those investments is included in the tables above.
The investments in private equity funds managed by HCS and JMPAM are recognized using the fair value option. The Company uses the reported net asset value per share as a practical expedient to estimate the fair value of the funds. The risks associated with these investments are limited to the amounts of invested capital, remaining capital commitment and any management and incentive fees receivable. The Company uses the reported net asset value per share as a practical expedient to estimate the fair value of Harvest Growth Capital LLC (“HGC”) and HGC II (“HGC II”) and JMPRP.
The Company holds a limited partner investment in a private equity fund, managed by a third party. This fund aims to achieve medium to long-term capital appreciation by investing in a diversified portfolio of technology companies that leverage the growth of Greater China. The Company also holds investments in real estate funds, which aim to generate revenue streams from investments in real estate joint ventures. The Company recognizes these investments using the fair value option. The primary reason for electing the fair value option was to measure gains on the same basis as the Company’s other equity securities, which are stated at fair value. The Company uses the reported net asset value per share as a practical expedient to estimate the fair value of the funds. The investments in private investment funds managed by third parties are generally not redeemable at the option of the Company.
As September 30, 2017 and December 31, 2016, the fair value of the following investments was estimated using net asset value as a practical expedient:
|
|
Fair Value at |
Unfunded Commitments |
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Dollars in thousands |
Redemption Frequency |
Redemption Notice Period |
September 30, 2017 |
December 31, 2016 |
September 30, 2017 |
December 31, 2016 |
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Investments in Funds of Funds managed by HCS (1) |
N/A | N/A | $ | 3 | $ | 5 | $ | - | $ | - | ||||||||||||||
Limited partner investments in private equity/ real estate funds |
Nonredeemable |
N/A | $ | 3,547 | $ | 3,530 | $ | - | $ | - | ||||||||||||||
Investment in private equity funds managed by HCS |
Nonredeemable |
N/A | $ | 5,503 | $ | 4,227 | $ | 1,085 | $ | 1,085 | ||||||||||||||
Investments in funds of capital debt managed by the Company |
Nonredeemable |
N/A | $ | 239 | $ | - | $ | 2,184 | $ | - |
(1) Investments in Funds of Funds managed by HCS began the process of liquidation on December 31, 2015.
Non-recurring Fair Value Measurements
The Company's assets that are measured at fair value on a non-recurring basis result from the application of lower of cost or market accounting or write-downs of individual assets. As of December 31, 2016, the Company held loans held for sale of $32.5 million which were measured at the lower of cost or market. The Company held loans measured at fair value on a non-recurring basis of $2.5 and $34.4 as of September 30, 2017 and December 31, 2016, respectively.
Loans Held for Investment
At September 30, 2017 and December 31, 2016, loans held for investment included ten and four loans, respectively, outside of the CLO portfolios. Given the small size of this loan portfolio, the Company reviews credit quality of the loans within this portfolio segment on a loan by loan basis mainly focusing on the borrower’s financial position and results of operations as well as the current and expected future cash flows on the loans. In addition, as of September 30, 2017, the Company held $10.1 million loans held for investment in the CLO V warehouse portfolio. The credit quality of the CLO V warehouse loans is evaluated in the same manner as the credit qualify of loans collateralizing asset-backed securities issued. See Note 5.
Effective July 1, 2013, the Company 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 September 30, 2017 and December 31, 2016, the carrying value of this loan was $0.3 million, net of a $2.0 million reserve, and $1.7 million, net of a $0.4 million reserve, respectively. The Company determined the fair value of loans held for investment to be $0.3 million and $1.6 million as of September 30, 2017 and December 31, 2016, respectively, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate.
As of September 30, 2017, the Company held $4.9 million of loans held for investment which were, previously held in the CLO II portfolio. The Company recorded a net reversal of provision for loan losses of $116 thousand at September 30, 2017 related to these loans. Such loans are identified as Level 2 assets. The valuations are received from a pricing service to which the Company subscribes. The pricing service’s analysis incorporates comparable loans traded in the marketplace, the obligor’s industry, future business prospects, capital structure, and expected credit losses. At September 30, 2017 the Company had two loans which were modified in a troubled debt restructuring. The principal balance of the loans was reduced from $2.6 million to $0.5 million, the maturity dates of the loans were extended from 2021 to 2022, and interest rates on the loans were increased by 1.30% and 3.10% percent. In addition, the Company received cash of $0.5 million and $0.5 million worth of equity shares in connection with the restructuring. The Company has no commitments to lend additional funds for the loans that were restructured.
On September 19, 2017, the Company made a loan to a registered investment adviser of $3.4 million, at an interest rate of 15% per year. As of September 30, 2017, the Company’s loan outstanding to this entity was $3.4 million. The Company determined the fair value of loans held for investment to be $3.4 million as of September 30, 2017, respectively, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate.
Investments at Cost and other Equity Method Investments
On April 5, 2011, the Company made a $0.3 million commitment to invest in RiverBanc LLC (“RiverBanc”), which manages the assets of a commercial real estate investing platform in mezzanine debt and equity from multifamily properties and other residential real estate. The Company recognized its investment in RiverBanc using the equity method. In the first quarter of 2016, the Company recognized a $0.1 million gain, and received a distribution of $0.5 million. RiverBanc was sold in the second quarter of 2016, resulting in a $6.0 million gain to the Company.
On November 16, 2015, the Company made a $2.0 million commitment to a fund, which focuses on acquiring a portfolio of seasoned real estate equity investments. The Company recognizes its investment using the equity method. In the three and nine months ended September 30, 2016, the Company recognized gains of zero and $0.3 million, and received distributions of $0.1 million and $0.7 million, respectively. On September 26, 2016, the Company sold the investment to JMPRP, resulting in a $0.1 million loss.
On December 2, 2015, the Company made a $12.8 million investment in a business, which acquires buildings and land for the purpose of holding, selling and managing the properties. The Company recognizes its investment using the equity method, with related gains recognized in principal transactions. In the quarter and nine months ended September 30, 2017, the Company recognized losses of $2.6 million and $5.4 million, and received distributions of $0.4 million and $1.0 million. In the quarter and nine months ended September 30, 2016, the Company recognized gains of $0.4 million and a loss of $0.8 million, and received distributions of $0.3 million and $0.6 million. In the quarter and nine months ended September 30, 2017, these losses incorporated depreciation and amortization expenses at this business of $2.6 million and $6.5 million. In the quarter and nine months ended September 30, 2016, these losses incorporated depreciation and amortization expenses at this business of $0.7 million and $3.1 million. On September 26, 2016, the Company sold 21.6% of this investment to JMPRP, resulting in a $0.4 million gain. As of September 30, 2017 and December 31, 2016, the carrying value of this investment was $4.5 million and $10.8 million, respectively.
Derivative Financial Instruments
In the second quarter of 2015, JMPCA TRS entered into a TRS. The TRS effectively allows the Company to build up a portfolio of broadly syndicated loans with characteristics similar to the warehouse facility used to accumulate assets for CLO III. The TRS differs from a traditional warehouse facility, in that the Company does not own or take title to the loans. The TRS provides all the economic risks and rewards of owning the assets; however, they are only reference assets during the life of the investment. Under the TRS, JMPCA TRS pays interest on the value of the portfolio balance in exchange for any income or fees earned from a portfolio of syndicated loans held by the counter-party. The TRS had a tenor of 36 months with an 18 month revolving period and an 18 month amortization period. As of December 31, 2016, the TRS is held in Other Investments, with gains and losses recorded in Principal Transactions. In the nine months ended September 30, 2017, the Company recognized a $1.3 million loss on the TRS. In the three and nine months ended September 30, 2016, the Company recognized a $1.5 million and a $2.1 million gain on the TRS, respectively. The Company determined the fair value of the TRS to be $1.3 million asset as of December 31, 2016, respectively, using the market value of the loans as provided by our counterparty. In association with this agreement, the Company posted $25.0 million as cash collateral, in prior periods which was recorded in the line item cash collateral posted for total return swap. In the first quarter of 2017, the Company posted an additional $0.9 million. In association with CLO IV purchasing the TRS assets, in the second quarter, the TRS returned $23.5 million of the cash collateral. During the third quarter all of the remaining cash collateral was returned to the Company.
5. Loans Collateralizing Asset-backed Securities Issued and Loans Held for Sale
Loans collateralizing asset-backed securities issued and loans held for sale are commercial loans securitized and owned by the Company’s CLOs. The loans consist of those loans within the CLO securitization structure at the acquisition date of CLO I and loans purchased by the CLOs subsequent to the CLO I acquisition date. In the fourth quarter of 2016, CLO I initiated the liquidation process and sold the majority of its loan portfolio within that quarter. The remaining loans were reflected as loans held for sale as of December 31, 2016. The following table presents the components of loans collateralizing asset-backed securities issued and loans held for sale as of September 30, 2017 and December 31, 2016:
(In thousands) |
Loans Collateralizing Asset-backed Securities |
Loans Held for Sale |
||||||||||||||
September 30, 2017 |
December 31, 2016 |
September 30, 2017 |
December 31, 2016 |
|||||||||||||
Outstanding principal |
$ | 768,531 | $ | 667,237 | $ | - | $ | 33,748 | ||||||||
Allowance for loan losses |
(6,596 | ) | (6,540 | ) | - | - | ||||||||||
Liquidity discount |
- | - | - | (772 | ) | |||||||||||
Deferred loan fees, net |
(5,769 | ) | (6,570 | ) | - | (308 | ) | |||||||||
Valuation allowance |
N/A | N/A | - | (180 | ) | |||||||||||
Total loans, net |
$ | 756,166 | $ | 654,127 | $ | - | $ | 32,488 |
The table below summarizes the activity in the loan principal, allowance for loan losses, liquidity discount, deferred loan fees, and the carrying value for the loans as of and for the three months ended September 30, 2017 and 2016:
(In thousands) |
Three Months Ended September 30, 2017 |
|||||||||||||||||||
Principal |
Allowance for Loan Losses |
Liquidity Discount |
Deferred Loan Fees |
Carrying Value, |
||||||||||||||||
Impaired Loans |
||||||||||||||||||||
Balance at beginning of period |
$ | 3,827 | $ | (1,211 | ) | $ | - | $ | (121 | ) | $ | 2,495 | ||||||||
Repayments |
(32 | ) | - | - | - | (32 | ) | |||||||||||||
Provision for loan losses |
- | (128 | ) | - | - | (128 | ) | |||||||||||||
Write-off / restructuring |
(1,405 | ) | 950 | - | 106 | (349 | ) | |||||||||||||
Transfers to/from non-impaired loans, net |
(969 | ) | - | - | - | (969 | ) | |||||||||||||
Balance at end of period |
$ | 1,421 | $ | (389 | ) | $ | - | $ | (15 | ) | $ | 1,017 | ||||||||
Non-impaired Loans |
||||||||||||||||||||
Balance at beginning of period |
$ | 767,778 | $ | (6,451 | ) | $ | - | $ | (6,060 | ) | $ | 755,267 | ||||||||
Purchases |
104,644 | - | (633 | ) | 104,011 | |||||||||||||||
Repayments |
(8,516 | ) | - | - | (8,516 | ) | ||||||||||||||
Accretion of discount |
- | - | 428 | 428 | ||||||||||||||||
Provision for loan losses |
- | 244 | - | 244 | ||||||||||||||||
Sales and payoff |
(97,765 | ) | - | 511 | (97,254 | ) | ||||||||||||||
Transfers to/from impaired loans, net |
969 | - | - | 969 | ||||||||||||||||
Balance at end of period |
$ | 767,110 | $ | (6,207 | ) | $ | - | $ | (5,754 | ) | $ | 755,149 |
(In thousands) |
Three Months Ended September 30, 2016 |
|||||||||||||||||||
Principal |
Allowance for Loan Losses |
Liquidity Discount |
Deferred Loan Fees |
Carrying Value, |
||||||||||||||||
Impaired Loans |
||||||||||||||||||||
Balance at beginning of period |
$ | 3,198 | $ | (698 | ) | $ | - | $ | (249 | ) | $ | 2,251 | ||||||||
Repayments |
(43 | ) | - | - | - | (43 | ) | |||||||||||||
Balance at end of period |
$ | 3,155 | $ | (698 | ) | $ | - | $ | (249 | ) | $ | 2,208 | ||||||||
Non-impaired Loans |
||||||||||||||||||||
Balance at beginning of period |
$ | 915,616 | $ | (5,339 | ) | $ | (847 | ) | $ | (7,883 | ) | $ | 901,547 | |||||||
Purchases |
71,071 | - | - | (644 | ) | 70,427 | ||||||||||||||
Repayments |
(14,610 | ) | - | - | 195 | (14,415 | ) | |||||||||||||
Accretion of discount |
- | - | 37 | 409 | 446 | |||||||||||||||
Reversal of provision for loan losses |
- | 104 | - | - | 104 | |||||||||||||||
Sales and payoff |
(137,008 | ) | - | - | 385 | (136,623 | ) | |||||||||||||
Balance at end of period |
$ | 835,069 | $ | (5,235 | ) | $ | (810 | ) | $ | (7,538 | ) | $ | 821,486 |
The table below summarizes the activity in the loan principal, allowance for loan losses, liquidity discount, deferred loan fees, and the carrying value for the loans as of and for the nine months ended September 30, 2017 and 2016:
(In thousands) |
Nine Months Ended September 30, 2017 |
|||||||||||||||||||
Principal |
Allowance for Loan Losses |
Liquidity Discount |
Deferred Loan Fees |
Carrying Value, |
||||||||||||||||
Impaired Loans |
||||||||||||||||||||
Balance at beginning of period |
$ | 3,113 | $ | (937 | ) | $ | - | $ | (249 | ) | $ | 1,927 | ||||||||
Repayments |
(136 | ) | - | - | - | (136 | ) | |||||||||||||
Provision for loan losses |
- | (1,641 | ) | - | - | (1,641 | ) | |||||||||||||
Write-off / restructuring |
(1,405 | ) | 950 | - | 106 | (349 | ) | |||||||||||||
Transfers to/from non-impaired loans, net |
3,888 | - | - | (30 | ) | 3,858 | ||||||||||||||
Transfers to loans held for investment |
(4,040 | ) | 1,239 | - | 159 | (2,642 | ) | |||||||||||||
Balance at end of period |
$ | 1,420 | $ | (389 | ) | $ | - | $ | (14 | ) | $ | 1,017 | ||||||||
Non-impaired Loans |
||||||||||||||||||||
Balance at beginning of period |
$ | 664,124 | $ | (5,603 | ) | $ | - | $ | (6,323 | ) | $ | 652,198 | ||||||||
Purchases |
618,944 | - | - | (4,513 | ) | 614,431 | ||||||||||||||
Repayments |
(29,203 | ) | - | - | - | (29,203 | ) | |||||||||||||
Accretion of discount |
- | - | - | 1,419 | 1,419 | |||||||||||||||
Provision for loan losses |
- | (630 | ) | - | - | (630 | ) | |||||||||||||
Sales and payoff |
(479,733 | ) | - | - | 3,551 | (476,182 | ) | |||||||||||||
Transfers to/from non-impaired loans, net |
(3,888 | ) | - | - | 29 | (3,859 | ) | |||||||||||||
Transfers to loans held for investment |
(3,133 | ) | 26 | - | 82 | (3,025 | ) | |||||||||||||
Balance at end of period |
$ | 767,111 | $ | (6,207 | ) | $ | - | $ | (5,755 | ) | $ | 755,149 |
(In thousands) |
Nine Months Ended September 30, 2016 |
|||||||||||||||||||
Principal |
Allowance for Loan Losses |
Liquidity Discount |
Deferred Loan Fees |
Carrying Value, |
||||||||||||||||
Impaired Loans |
||||||||||||||||||||
Balance at beginning of period |
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Repayments |
(56 | ) | - | - | - | (56 | ) | |||||||||||||
Provision for loan losses |
- | (24 | ) | - | - | (24 | ) | |||||||||||||
Transfers to/from non-impaired loans, net |
3,211 | (674 | ) | - | (249 | ) | 2,288 | |||||||||||||
Balance at end of period |
$ | 3,155 | $ | (698 | ) | $ | - | $ | (249 | ) | $ | 2,208 | ||||||||
Non-impaired Loans |
||||||||||||||||||||
Balance at beginning of period |
$ | 984,110 | $ | (5,396 | ) | $ | (918 | ) | $ | (8,132 | ) | $ | 969,664 | |||||||
Purchases |
188,488 | - | - | (2,902 | ) | 185,586 | ||||||||||||||
Repayments |
(52,485 | ) | - | - | 566 | (51,919 | ) | |||||||||||||
Accretion of discount |
- | - | 108 | 1,224 | 1,332 | |||||||||||||||
Provision for loan losses |
- | (513 | ) | - | - | (513 | ) | |||||||||||||
Sales and payoff |
(281,833 | ) | - | - | 1,457 | (280,376 | ) | |||||||||||||
Transfers to/from non-impaired loans, net |
(3,211 | ) | 674 | - | 249 | (2,288 | ) | |||||||||||||
Balance at end of period |
$ | 835,069 | $ | (5,235 | ) | $ | (810 | ) | $ | (7,538 | ) | $ | 821,486 |
Allowance for Loan Losses
A summary of the activity in the allowance for loan losses for loans collateralizing asset-backed securities for the three and nine months ended September 30, 2017 and 2016 is as follows:
(In thousands) |
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
|||||||||||||
Balance at beginning of period |
$ | (7,662 | ) | $ | (6,037 | ) | $ | (6,540 | ) | (5,397 | ) | |||||
Provision for loan losses: |
||||||||||||||||
Specific reserve |
(128 | ) | - | (1,641 | ) | (698 | ) | |||||||||
General reserve |
244 | 104 | (630 | ) | 162 | |||||||||||
Write-off / restructuring |
950 | - | 950 | - | ||||||||||||
Transfer to loans held for investment |
- | - | 1,265 | - | ||||||||||||
Balance at end of period |
$ | (6,596 | ) | $ | (5,933 | ) | $ | (6,596 | ) | $ | (5,933 | ) |
Impaired Loans, Non-Accrual, Past Due Loans and Restructured Loans
A loan is considered to be impaired when, based on current information, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the original loan agreement, including scheduled principal and interest payments. As of September 30, 2017 and December 31, 2016, $4.2 million and $2.9 million of recorded investment amount of loans collateralizing asset-backed securities issued were individually evaluated for impairment. The remaining $751.9 million and $657.8 million of recorded investment amount of loans collateralizing asset-backed securities issued were collectively evaluated for impairment, as of September 30, 2017 and December 31, 2016, respectively. The entire $32.5 million of recorded investment amount of loans held for sale was individually evaluated for impairment at December 31, 2016.
As of September 30, 2017 and December 31, 2016, the Company classified all its loans as Cash Flow loans, as their funding decisions were all primarily driven by the cash flows of the borrower. The table below presents certain information pertaining to the loans on non-accrual status at September 30, 2017 and December 31, 2016:
(In thousands) |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||||
September 30, 2017 |
||||||||||||||||||||
Impaired loans with an allowance recorded |
$ | 4,221 | $ | 4,355 | $ | 1,172 | $ | 4,274 | $ | 95 | ||||||||||
Impaired loans with no related allowance recorded |
- | - | - | - | - | |||||||||||||||
$ | 4,221 | $ | 4,355 | $ | 1,172 | $ | 4,274 | $ | 95 | |||||||||||
December 31, 2016 |
||||||||||||||||||||
Impaired loans with an allowance recorded |
$ | 2,864 | $ | 3,211 | $ | 938 | $ | 2,913 | $ | 75 | ||||||||||
Impaired loans with no related allowance recorded |
- | - | - | - | - | |||||||||||||||
$ | 2,864 | $ | 3,211 | $ | 938 | $ | 2,913 | $ | 75 |
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. No loans were past due at September 30, 2017 or December 31, 2016. As of December 31, 2016, the Company had no loans which were modified in a troubled debt restructuring. At September 30, 2017 the Company had two loans which were modified in a troubled debt restructuring. The principal balance of the loans was reduced from $2.5 million to $0.5 million, the maturity dates of the loans were extended from 2021 to 2022, and interest rates on the loans were increased by 1.30% and 3.10% percent. In addition, the Company received cash of $0.4 million and $0.5 million worth of equity shares in connection with the restructuring. The Company has no commitments to lend additional funds for the loans that were restructured.
Credit Quality of Loans
The Company’s management, at least on a quarterly basis, reviews each loan and evaluates the credit quality of the loan. The review primarily includes the following credit quality indicators with regard to each loan: 1) Moody’s rating, 2) current internal rating, 3) the trading price of the loan and 4) performance of the obligor. The tables below present, by credit quality indicator, the Company’s recorded investment in loans collateralizing asset-backed securities issued at September 30, 2017 and December 31, 2016:
(In thousands |
Cash Flow Loans |
Loans Held for Sale - Cash Flow |
|||||||||||||||
September 30, 2017 |
December 31, 2016 |
September 30, 2017 |
December 31, 2016 |
||||||||||||||
Moody's rating: |
|||||||||||||||||
Baa1 - Baa3 |
$ | 9,008 | $ | 12,145 | $ | - | $ | 6,769 | |||||||||
Ba1 - Ba3 |
123,893 | 137,717 | - | 13,957 | |||||||||||||
B1 - B3 |
586,401 | 467,125 | - | 11,377 | |||||||||||||
Caa1 - Caa3 |
43,461 | 37,913 | - | 565 | |||||||||||||
Ca |
- | 2,903 | - | - | |||||||||||||
Not Rated |
- | 2,864 |
a |
- | |||||||||||||
Total: |
$ | 762,763 | $ | 660,667 | $ | - | $ | 32,668 | |||||||||
Internal rating: (1) |
|||||||||||||||||
2 | $ | 658,312 | $ | 545,181 | $ | - | $ | 27,109 | |||||||||
3 | 88,310 | 94,407 | - | 5,559 | |||||||||||||
4 | 14,734 | 18,215 | - | - | |||||||||||||
5 | 1,407 | 2,864 | - | - | |||||||||||||
Total: |
$ | 762,763 | $ | 660,667 | $ | - | $ | 32,668 | |||||||||
Performance: |
|||||||||||||||||
Performing |
$ | 761,356 | $ | 657,803 | $ | - | $ | 32,668 | |||||||||
Non-Performing |
1,407 | 2,864 | - | - | |||||||||||||
Total: |
$ | 762,763 | $ | 660,667 | $ | - | $ | 32,668 |
(1) |
Loans with an internal rating of 4 or below are reviewed individually to identify loans to be designated for non-accrual status. |
The Company determined the fair value of loans collateralizing asset-backed securities to be $755.4 million and $685.4 million as of September 30, 2017 and December 31, 2016, respectively; primarily using the average market bid and ask quotation obtained from a loan pricing service. Such loans are identified as Level 2 assets. The valuations are received from a pricing service to which the Company subscribes. Significant declines in the performance of the obligor would result in decreases to the fair value measurement. The fair value of loans held for sale was determined to be $33.7 million as of December 31, 2016. The Company held no loans held for sale as of September 30, 2017.
6. Debt
Bond Payable
In January 2013, JMP Group Inc. raised approximately $46.0 million from the sale of 8.00% Senior Notes (the “2013 Senior Notes”). In January 2014, JMP Group Inc. raised an additional approximate amount of $48.3 million from the sale of 7.25% Senior Notes (the “2014 Senior Notes”). The 2013 Senior Notes will mature on January 15, 2023 and may be redeemed in whole or in part at any time or from time to time at JMP Group Inc.’s option on or after January 15, 2016, at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The notes bear interest at a rate of 8.00% per year, payable quarterly on January 15, April 15, July 15 and October 15 of each year. The 2014 Senior Notes will mature on January 15, 2021, and may be redeemed in whole or in part at any time or from time to time at the JMP Group Inc.’s option on or after January 15, 2017, at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The notes bear interest at a rate of 7.25% per year, payable quarterly on January 15, April 15, July 15 and October 15 of each year, and began April 15, 2014.
The 2013 Senior Notes and 2014 Senior Notes (collectively, the “Senior Notes”) were issued pursuant to indentures with U.S. Bank National Association, as trustee. The indentures contain a minimum liquidity covenant that obligates JMP Group Inc. to maintain liquidity of at least an amount equal to the lesser of (i) the aggregate amount due on the next eight scheduled quarterly interest payments on the Senior Notes, or (ii) the aggregate amount due on all remaining scheduled quarterly interest payments on the Senior Notes until the maturity of the Senior Notes. The indenture also contains customary event of default and cure provisions. If an uncured default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the Senior Notes may declare the Senior Notes immediately due and payable.
The Senior Notes are general unsecured senior obligations, must rank equally with all existing and future senior unsecured indebtedness and are senior to any other indebtedness expressly made subordinate to the notes. The notes will be effectively subordinated to all of JMP Group Inc.’s existing and future secured indebtedness (to the extent of the value of the assets securing such indebtedness) and structurally subordinated to all existing and future liabilities of our subsidiaries, including trade payables.
JMP Group Inc., as a wholly owned subsidiary of JMP Group LLC, is the primary obligor of the Senior Notes. In connection with the Reorganization Transaction, on January 1, 2015, JMP Group LLC and JMP Investment Holdings LLC became guarantors of JMP Group Inc. with respect to the Senior Notes.
In February 2016, the Company purchased $0.5 million face value of the Senior Notes for $0.4 million. This purchase resulted in a $0.1 million gain, which is recognized in Other Income.
The Company incurred no debt issuance costs in the nine months ended September 30, 2017 and 2016. Debt issuance costs are amortized over the estimated life of the bond. As of September 30, 2017 and December 31, 2016, the Company held $1.8 million and $2.0 million of unamortized debt issuance costs.
As of September 30, 2017 |
As of December 31, 2016 |
|||||||||||||||
Principal |
Unamortized Discount and Debt Issuance Costs |
Principal |
Unamortized Discount and Debt Issuance Costs |
|||||||||||||
7.25% Senior Notes |
$ | 47,922,500 | $ | 816,026 | $ | 47,922,500 | $ | 1,001,956 | ||||||||
8.00% Senior Notes |
$ | 45,905,250 | $ | 911,199 | $ | 45,905,250 | $ | 1,040,347 |
Note Payable and Lines of Credit
As of September 30, 2017 and December 31, 2016, the Company held revolving lines of credit related to JMP Holding LLC (formerly known as JMP Group LLC) and JMP Securities.
The Company’s Credit Agreement (the “Credit Agreement”), dated as of August 3, 2006, was entered into by and between JMP Holding LLC and City National Bank (“CNB”), and was subsequently amended. The Credit Agreement and subsequent amendments provide a $25.0 million line of credit with a revolving period of one year through May 2, 2018. On such date, any outstanding amounts convert to a term loan. The term loan will be repaid in quarterly installments of 3.75% of funded debt for the first two years, 5.00% of funded debt for the next two years, and the remainder due at maturity. Proceeds for this line of credit will be used to make financial investments, for working capital purposes, for general corporate purposes, as well as a $5.0 million sublimit to issue letters of credit. The Company’s outstanding balance on this line of credit was zero as of both September 30, 2017 and December 31, 2016.
JMP Securities holds a $20.0 million revolving line of credit with CNB to be used for regulatory capital purposes during its securities underwriting activities. The unused portion of the line bears interest at the rate of 0.25% per annum, paid monthly. On June 6, 2017, JMP Securities entered into an amendment to its Credit Agreement (the “Amendment”). Pursuant to this Amendment, the $20.0 million line of credit was renewed for one year. On June 6, 2018, any existing outstanding amount will convert to a term loan maturing the following year. The remaining terms of this line of credit are consistent with those of the existing line of credit. There was no borrowing on this line of credit as of September 30, 2017 and December 31, 2016.
The Credit Agreement contains financial and other covenants, including, but not limited to, limitations on debt, liens and investments, as well as the maintenance of certain financial covenants. A violation of any one of these covenants could result in a default under the Credit Agreement, which would permit CNB to terminate the Company’s note and require the immediate repayment of any outstanding principal and interest. At both September 30, 2017 and December 31, 2016, the Company was in compliance with the loan covenants. The revolving lines of credit are collateralized by a pledge of the Company’s assets, including its interests in each of JMP Securities and HCS.
CLO V Warehouse Credit Facility
On July 31, 2017, the Company established, through its affiliate JMP Credit Advisors CLO V Ltd., a $200.0 million revolving credit facility with BNP Paribas to finance the acquisition of a portfolio of assets, including certain debt obligations. As of September 30, 2017, the balance of the credit facility was $7.0 million.
7. Asset-backed Securities Issued
CLO I
On May 17, 2007, CLO I completed a $500.0 million aggregate principal amount of notes (the “Notes”) on-balance sheet debt securitization comprised of $455.0 million of secured debt and $45.0 million of unsecured, subordinated notes (“CLO equity”). The Notes would be repaid from the cash flows generated by the loan portfolio owned by CLO I. The Notes were issued in six separate classes as set forth in the table below. The Company owns approximately 94.0% of the unsecured subordinated notes and $13.8 million of Class C, D and E notes ($2.0 million of Class C, $4.1 million of Class D and $7.7 million of Class E notes). These unsecured subordinated notes and the Class C, D and E notes owned by the Company were eliminated upon consolidation of JMP Investment Holdings, and therefore, are not reflected on the Company’s consolidated statement of financial condition at September 30, 2017 and December 31, 2016.
The reinvestment period for CLO I ended in May 2013. Since this date, all scheduled principal payments from the borrowers have been applied to paying down the most senior (AAA) CLO notes. The Company was still permitted to reinvest some unscheduled principal payments, which includes most loan payoffs subject to certain provision. In the fourth quarter in 2016, the Company made the decision to call the secured notes on CLO I in the first quarter of 2017 and began the process of liquidating the portfolio.
The below table list the notes outstanding as of December 31, 2016. There were no notes outstanding as of September 30, 2017.
(In millions) |
As of December 31, 2016 |
|||||||||||||
Notes Originally Issued |
Net Outstanding Balance |
Interest Rate Spread to LIBOR |
Ratings (Moody's |
|||||||||||
Class A Senior Secured Floating Rate Revolving Notes due 2021 |
$ | 72.2 | $ | 72.2 | 0.26% | - | 0.29% |
Aaa/AAA |
||||||
Class B Senior Secured Floating Rate Notes due 2021 |
30.0 | 30.0 | 0.50% |
Aaa/AAA |
||||||||||
Class C Senior Secured Deferrable Floating Rate Notes due 2021 |
35.0 | 35.0 | 1.10% |
Aaa/AAA |
||||||||||
Class D Secured Deferrable Floating Rate Notes due 2021 |
34.0 | 34.0 | 2.40% |
Aa1/A+ |
||||||||||
Class E Secured Deferrable Floating Rate Notes due 2021 |
30.0 | 30.0 | 5.00% |
Baa1/BB+ |
||||||||||
Total secured notes sold to investors |
$ | 201.2 | $ | 201.2 | ||||||||||
Unsecured subordinated notes due 2021 |
45.0 | 45.0 | ||||||||||||
Total notes for the CLO I offering |
$ | 246.2 | $ | 246.2 | ||||||||||
Consolidation elimination |
N/A | (58.7 | ) | |||||||||||
Total asset-backed securities issued |
N/A | $ | 187.5 |
The secured notes and subordinated notes are limited recourse obligations payable solely from cash flows of the CLO I loan portfolio and related collection and payment accounts pledged as security. Payment on the Class A-1 notes rank equal, or pari-passu, in right of payment with payments on the Class A-2 notes and payment on the Class A-1 and Class A-2 notes rank senior in right of payment to the other secured notes and the subordinated notes. Payment on the Class B, Class C, Class D and Class E notes generally rank subordinate in right of payment to any other class of notes which has an earlier alphabetical designation. The subordinated notes are subordinated in right of payment to all other classes of notes and do not accrue interest. Interest on the secured notes is payable quarterly at a per annum rate equal to LIBOR plus the applicable spread set forth in the table above. Payment of interest on the Class C, Class D and Class E notes was payable only to the extent proceeds are available under the applicable payment priority provisions. To the extent proceeds are not so available, interest on the Class C, Class D and Class E notes will be deferred. As of December 31, 2016, all interest on the secured notes was current. The secured notes are secured by the CLO loan portfolio and the funds on deposit in various related collection and payment accounts. The terms of the debt securitization subject the loans in the CLO loan portfolio to a number of collateral quality, portfolio profile, interest coverage and overcollateralization tests.
The activity in the note principal for the three and nine months ended September 30, 2017 and 2016 comprised the following:
(In thousands) |
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
|||||||||||||
Balance at beginning of period |
$ | - | $ | 251,693 | $ | 187,417 | $ | 293,457 | ||||||||
Repayments |
- | (32,068 | ) | (187,417 | ) | (73,832 | ) | |||||||||
Asset-backed securities at end of period |
$ | - | $ | 219,625 | $ | - | $ | 219,625 |
CLO II
On April 30, 2013, CLO II completed a $343.8 million securitization with $320.0 million in aggregate principal amount of secured notes (the “Secured Notes”) and $23.8 million in unsecured subordinated notes (the “Subordinated Notes”). The Secured Notes were issued in multiple tranches and are rated by Standard & Poor's Ratings Services. The Secured Notes are repaid from the cash flows generated by the loan portfolio owned by CLO II. The Company initially owned approximately 72.8% of the Subordinated Notes. In the first quarter of 2014, the Company repurchased $6.0 million of the Subordinated Notes from a third party investor in CLO II, increasing the Company’s ownership from 72.8% to 98.0%. The Company repurchased $7.0 million of Class F notes in March 2017. The Subordinated Notes were eliminated upon consolidation, and therefore, are not reflected on the Company’s consolidated statement of financial condition at September 30, 2017 and December 31, 2016.
During the second quarter of 2017, the Company, as majority owner of the subordinated notes, called the notes and began the process of liquidating the portfolio. The below table list the notes outstanding as of December 31, 2016. There were no notes outstanding as of September 30, 2017.
(In millions) |
As of December 31, 2016 |
|||||||||||||||||||||
Notes Originally Issued |
Outstanding Principal Balance |
Issuance Discount |
Net Outstanding Balance |
Interest Rate Spread to LIBOR |
Ratings |
|||||||||||||||||
Class X Senior Secured Floating Rate Notes due 2016 |
$ | 3.8 | $ | - | $ | - | $ | - | 1.00 | % |
AAA |
|||||||||||
Class A Senior Secured Floating Rate Notes due 2023 |
217.6 | 217.6 | (0.5 | ) | 217.1 | 1.18 | % |
AAA |
||||||||||||||
Class B Senior Deferrable Floating Rate Notes due 2023 |
34.0 | 34.0 | (0.2 | ) | 33.8 | 1.75 | % |
AA |
||||||||||||||
Class C Senior Deferrable Floating Rate Notes due 2023 |
17.0 | 17.0 | (0.4 | ) | 16.6 | 2.75 | % |
A |
||||||||||||||
Class D Senior Deferrable Floating Rate Notes due 2023 |
18.7 | 18.7 | (1.0 | ) | 17.7 | 3.85 | % |
BBB |
||||||||||||||
Class E Senior Deferrable Floating Rate Notes due 2023 |
18.7 | 18.7 | (1.6 | ) | 17.1 | 5.25 | % |
BB |
||||||||||||||
Class F Senior Deferrable Floating Rate Notes due 2023 |
10.2 | 10.2 | (1.2 | ) | 9.0 | 5.75 | % |
B |
||||||||||||||
Total secured notes sold to investors |
$ | 320.0 | $ | 316.2 | $ | (4.9 | ) | $ | 311.3 | |||||||||||||
Unsecured subordinated notes due 2023 |
23.8 | 23.8 | (0.3 | ) | 23.5 | |||||||||||||||||
Total notes for the CLO II offering |
$ | 343.8 | $ | 340.0 | $ | (5.2 | ) | $ | 334.8 | |||||||||||||
Consolidation elimination |
N/A | (23.8 | ) | 0.3 | (23.5 | ) | ||||||||||||||||
Total CLO II asset-backed securities issued |
N/A | $ | 316.2 | $ | (4.9 | ) | $ | 311.3 |
The Secured Notes and Subordinated Notes are limited recourse obligations payable solely from cash flows of the CLO II loan portfolio and related collection and payment accounts pledged as security. Payment on the Class X notes rank equal, or pari-passu, in right of payment with payments on the Class A notes and payment on the Class X and Class A notes rank senior in right of payment to the other Secured Notes and the Subordinated Notes. Payment on the Class B, Class C, Class D, Class E and Class F notes generally rank subordinate in right of payment to any other class of notes which has an earlier alphabetical designation. The Subordinated Notes are subordinated in right of payment to all other classes of notes and accrue interest. Interest on the Secured Notes is paid quarterly at a per annum rate equal to LIBOR plus the applicable spread set forth in the table above. Payment of interest on the Class C, Class D, Class E and Class F notes is payable only to the extent proceeds are available under the applicable payment priority provisions. To the extent proceeds are not so available, interest on the Class C, Class D, Class E and Class F notes will be deferred. The Secured Notes are secured by the CLO II loan portfolio and the funds on deposit in various related collection and payment accounts. The terms of the debt securitization subject the loans included in the CLO II loan portfolio to a number of collateral quality, portfolio profile, interest coverage and overcollateralization tests.
The CLO II notes recorded at fair value upon the issuance of CLO II in April 2013 include a discount to par value. As the Company called the notes in the second quarter of 2017 the remaining issuance discount of $4.6 million was amortized during the quarter in the gain (loss) repurchase/early retirement of debt line item. The activity in the note principal and issuance discount for the three and nine months ended September 30, 2017 and 2016 comprised the following:
(In thousands) |
Three Months Ended September 30, 2017 |
Three Months Ended September 30, 2016 |
||||||||||||||||||||||
Principal |
Issuance Discount |
Net |
Principal |
Issuance Discount |
Net |
|||||||||||||||||||
Balance at beginning of period |
$ | - | $ | - | $ | - | $ | 316,200 | $ | (5,446 | ) | $ | 310,754 | |||||||||||
Repayments |
- | - | - | - | - | - | ||||||||||||||||||
Amortization of discount |
- | - | - | - | 263 | 263 | ||||||||||||||||||
Loss on early retirement of debt |
- | - | - | - | - | - | ||||||||||||||||||
Balance at end of period |
$ | - | $ | - | $ | - | $ | 316,200 | $ | (5,183 | ) | $ | 311,017 |
(In thousands) |
Nine Months Ended September 30, 2017 |
Nine Months Ended September 30, 2016 |
||||||||||||||||||||||
Principal |
Issuance Discount |
Net |
Principal |
Issuance Discount |
Net |
|||||||||||||||||||
Balance at beginning of period |
$ | 316,200 | $ | (4,916 | ) | $ | 311,284 | $ | 316,960 | $ | (5,960 | ) | $ | 311,000 | ||||||||||
Repayments |
(316,200 | ) | - | (316,200 | ) | (760 | ) | - | (760 | ) | ||||||||||||||
Amortization of discount |
- | 547 | 547 | - | 777 | 777 | ||||||||||||||||||
Loss on early retirement of debt |
- | 4,369 | 4,369 | - | - | - | ||||||||||||||||||
Balance at end of period |
$ | - | $ | - | $ | - | $ | 316,200 | $ | (5,183 | ) | $ | 311,017 |
CLO III
On September 30, 2014, CLO III completed a $370.5 million securitization, comprised of $332.1 million aggregate principal amount of secured notes (the “Secured Notes”) and $38.4 million of unsecured subordinated notes (the “Subordinated Notes”). The Secured Notes offered in this transaction were issued in multiple tranches and are rated by Moody's Investors Service, Inc. and, in respect of certain tranches, Fitch. 9The Secured Notes will be repaid from the cash flows generated by the loan portfolio owned by CLO III. The Company owned approximately 46.7% of the Subordinated Notes at September 30, 2017 and December 31, 2016. These Subordinated Notes are eliminated upon consolidation, and therefore, are not reflected on the Company’s consolidated statement of financial condition at September 30, 2017 and December 31, 2016.
(In millions) |
As of September 30, 2017 |
||||||||||||||||||||
Notes Originally Issued |
Outstanding Principal Balance |
Issuance Discount |
Net Outstanding Balance |
Interest Rate Spread to LIBOR |
Ratings |
||||||||||||||||
Class A Senior Secured Floating Rate Notes due 2025 |
$ | 228.0 | $ | 228.0 | $ | (0.4 | ) | $ | 227.6 | 1.24 | % |
Aaa/AAA |
|||||||||
Class B Senior Secured Floating Rate Notes due 2025 |
41.7 | 41.7 | (0.5 | ) | 41.2 | 1.80 | % |
Aa2/NR |
|||||||||||||
Class C Senior Deferrable Floating Rate Notes due 2025 |
22.5 | 22.5 | (0.4 | ) | 22.1 | 2.60 | % |
A2/NR |
|||||||||||||
Class D Senior Deferrable Floating Rate Notes due 2025 |
21.6 | 21.6 | - | 21.6 | 3.90 | % |
Baa3/NR |
||||||||||||||
Class E Senior Deferrable Floating Rate Notes due 2025 |
18.3 | 18.3 | - | 18.3 | 7.10 | % |
Ba3/NR |
||||||||||||||
Total secured notes sold to investors |
$ | 332.1 | $ | 332.1 | $ | (1.3 | ) | $ | 330.8 | ||||||||||||
Unsecured subordinated notes due 2025 |
38.4 | 38.4 | (4.5 | ) | 33.9 | ||||||||||||||||
Total notes for the CLO III offering |
$ | 370.5 | $ | 370.5 | $ | (5.8 | ) | $ | 364.7 | ||||||||||||
Consolidation elimination |
N/A | (38.4 | ) | 4.5 | (33.9 | ) | |||||||||||||||
Total CLO III asset-backed securities issued |
N/A | $ | 332.1 | $ | (1.3 | ) | $ | 330.8 |
(In millions) |
As of December 31, 2016 |
||||||||||||||||||||
Notes Originally Issued |
Outstanding Principal Balance |
Issuance Discount |
Net Outstanding Balance |
Interest Rate Spread to LIBOR |
Ratings |
||||||||||||||||
Class A Senior Secured Floating Rate Notes due 2025 |
$ | 228.0 | $ | 228.0 | $ | (0.5 | ) | $ | 227.5 | 1.53 | % |
Aaa/AAA |
|||||||||
Class B Senior Secured Floating Rate Notes due 2025 |
41.7 | 41.7 | (0.7 | ) | 41.0 | 2.05 | % |
Aa2/NR |
|||||||||||||
Class C Senior Deferrable Floating Rate Notes due 2025 |
22.5 | 22.5 | (0.5 | ) | 22.0 | 2.90 | % |
A2/NR |
|||||||||||||
Class D Senior Deferrable Floating Rate Notes due 2025 |
21.6 | 21.6 | - | 21.6 | 5.10 | % |
Baa3/NR |
||||||||||||||
Class E Senior Deferrable Floating Rate Notes due 2025 |
18.3 | 18.3 | - | 18.3 | 7.35 | % |
Ba3/NR |
||||||||||||||
Total secured notes sold to investors |
$ | 332.1 | $ | 332.1 | $ | (1.7 | ) | $ | 330.4 | ||||||||||||
Unsecured subordinated notes due 2025 |
38.4 | 38.4 | (4.5 | ) | 33.9 | ||||||||||||||||
Total notes for the CLO III offering |
$ | 370.5 | $ | 370.5 | $ | (6.2 | ) | $ | 364.3 | ||||||||||||
Consolidation elimination |
N/A | (38.4 | ) | 4.5 | (33.9 | ) | |||||||||||||||
Total CLO III asset-backed securities issued |
N/A | $ | 332.1 | $ | (1.7 | ) | $ | 330.4 |
The Secured Notes and Subordinated Notes are limited recourse obligations payable solely from cash flows of the CLO III loan portfolio and related collection and payment accounts pledged as security. Payment on the Class A notes rank senior in right of payment with payments on the Class B notes and payment on the Class A and Class B notes rank senior in right of payment to the other Secured Notes and the Subordinated Notes. Payment on the Class C, Class D and Class E notes generally rank subordinate in right of payment to any other class of notes which has an earlier alphabetical designation. The Subordinated Notes are subordinated in right of payment to all other classes of notes and accrue interest. Interest on the Secured Notes is paid quarterly at a per annum rate equal to LIBOR plus the applicable spread set forth in the table above. Payment of interest on the Class C, Class D and Class E notes is payable only to the extent proceeds are available under the applicable payment priority provisions. To the extent proceeds are not so available, interest on the Class C, Class D and Class E notes will be deferred. The Secured Notes are secured by the CLO III loan portfolio and the funds on deposit in various related collection and payment accounts. The terms of the debt securitization subject the loans included in the CLO III loan portfolio to a number of collateral quality, portfolio profile, interest coverage and overcollateralization tests.
The Notes were recorded at fair value upon the issuance of CLO III in September 2014, and include a discount to par value. The activity in the note principal and purchase discount for the three and nine months ended September 30, 2017 and 2016 comprised the following:
(In thousands) |
Three Months Ended September 30, 2017 |
Three Months Ended September 30, 2016 |
||||||||||||||||||||||
Principal |
Issuance Discount |
Net |
Principal |
Issuance Discount |
Net |
|||||||||||||||||||
Balance at beginning of period |
$ | 332,100 | $ | (1,427 | ) | $ | 330,673 | $ | 332,100 | $ | (1,923 | ) | $ | 330,177 | ||||||||||
Amortization of discount |
- | 123 | 123 | - | 124 | 124 | ||||||||||||||||||
Balance at end of period |
$ | 332,100 | $ | (1,304 | ) | $ | 330,796 | $ | 332,100 | $ | (1,799 | ) | $ | 330,301 |
(In thousands) |
Nine Months Ended September 30, 2017 |
Nine Months Ended September 30, 2016 |
||||||||||||||||||||||
Principal |
Issuance Discount |
Net |
Principal |
Issuance Discount |
Net |
|||||||||||||||||||
Balance at beginning of period |
$ | 332,100 | $ | (1,676 | ) | $ | 330,424 | $ | 332,100 | $ | (2,165 | ) | $ | 329,935 | ||||||||||
Amortization of discount |
- | 372 | 372 | - | 366 | 366 | ||||||||||||||||||
Balance at end of period |
$ | 332,100 | $ | (1,304 | ) | $ | 330,796 | $ | 332,100 | $ | (1,799 | ) | $ | 330,301 |
CLO IV
On June 29, 2017, CLO IV completed a $456.9 million securitization, comprised of $414.0 million aggregate principal amount of secured notes (the “Secured Notes”) and $42.9 million of unsecured subordinated notes (the “Subordinated Notes”). The Secured Notes offered in this transaction were issued in multiple tranches and are rated by Moody's Investors Service, Inc. and, in respect of certain tranches, Fitch. The Secured Notes will be repaid from the cash flows generated by the loan portfolio owned by CLO IV. The Company owned 100% of the Subordinated Notes at September 30, 2017. These Subordinated Notes are eliminated upon consolidation, and therefore, are not reflected on the Company’s consolidated statement of financial condition at September 30, 2017.
(In millions) |
As of September 30, 2017 |
|||||||||||||||||||||
Notes Originally Issued |
Outstanding Principal Balance |
Issuance Discount |
Net Outstanding Balance |
Interest Rate Spread to LIBOR |
Ratings |
|||||||||||||||||
Class A Senior Secured Floating Rate Notes due 2025 |
$ | 285.8 | $ | 285.8 | $ | - | $ | 285.8 | 1.37 | % |
Aaa/AAA |
|||||||||||
Class B Senior Deferrable Floating Rate Notes due 2025 |
54.0 | 54.0 | (0.2 | ) | 53.8 | 1.90 | % |
Aa2/NR |
||||||||||||||
Class C Senior Deferrable Floating Rate Notes due 2025 |
27.0 | 27.0 | (0.3 | ) | 26.7 | 2.65 | % |
A2/NR |
||||||||||||||
Class D Senior Deferrable Floating Rate Notes due 2025 |
24.8 | 24.8 | (0.6 | ) | 24.2 | 4.15 | % |
Baa3/NR |
||||||||||||||
Class E Senior Deferrable Floating Rate Notes due 2025 |
22.4 | 22.4 | (0.9 | ) | 21.5 | 6.80 | % |
Ba3/NR |
||||||||||||||
Total secured notes sold to investors |
$ | 414.0 | $ | 414.0 | $ | (2.0 | ) | $ | 412.0 | |||||||||||||
Unsecured subordinated notes due 2025 |
42.9 | 42.9 | (3.8 | ) | 39.1 | |||||||||||||||||
Total notes for the CLO IV offering |
$ | 456.9 | $ | 456.9 | $ | (5.8 | ) | $ | 451.1 | |||||||||||||
Consolidation elimination |
N/A | (42.9 | ) | 3.8 | (39.1 | ) | ||||||||||||||||
Total CLO IV asset-backed securities issued |
N/A | $ | 414.0 | $ | (2.0 | ) | $ | 412.0 |
The Secured Notes and Subordinated Notes are limited recourse obligations payable solely from cash flows of the CLO IV loan portfolio and related collection and payment accounts pledged as security. Payment on the Class A notes rank senior in right of payment with payments on the Class B notes and payment on the Class A and Class B notes rank senior in right of payment to the other Secured Notes and the Subordinated Notes. Payment on the Class C, Class D and Class E notes generally rank subordinate in right of payment to any other class of notes which has an earlier alphabetical designation. The Subordinated Notes are subordinated in right of payment to all other classes of notes and accrue interest. Interest on the Secured Notes is paid quarterly at a per annum rate equal to LIBOR plus the applicable spread set forth in the table above. Payment of interest on the Class C, Class D and Class E notes is payable only to the extent proceeds are available under the applicable payment priority provisions. To the extent proceeds are not so available, interest on the Class B, Class C, Class D and Class E notes will be deferred. The Secured Notes are secured by the CLO IV loan portfolio and the funds on deposit in various related collection and payment accounts. The terms of the debt securitization subject the loans included in the CLO IV loan portfolio to a number of collateral quality, portfolio profile, interest coverage and overcollateralization tests.
The Notes were recorded at fair value upon the issuance of CLO IV in June 2017, and include a discount to par value. The activity in the note principal and purchase discount for the three and nine months ended September 30, 2017 comprised the following:
(In thousands) |
Three Months Ended September 30, 2017 |
Nine Months Ended September 30, 2017 |
||||||||||||||||||||||
Principal |
Issuance Discount |
Net |
Principal |
Issuance Discount |
Net |
|||||||||||||||||||
Balance at beginning of period |
$ | 414,000 | $ | (1,990 | ) | $ | 412,010 | $ | - | $ | - | $ | - | |||||||||||
CLO IV issuance |
- | - | - | 414,000 | (1,990 | ) | 412,010 | |||||||||||||||||
Amortization of discount |
- | 44 | 44 | - | 138 | 138 | ||||||||||||||||||
Balance at end of period |
$ | 414,000 | $ | (1,946 | ) | $ | 412,054 | $ | 414,000 | $ | (1,852 | ) | $ | 412,148 |
Interest on Asset Backed Securities
Total interest expense related to the asset-backed securities issued for the three and nine months ended September 30, 2017 was $6.8 million and $18.9 million, which comprised of coupon interest of $6.4 million and $17.0 million, and issuance discount amortization of $0.5 million and $1.9 million. Total interest expense related to the asset-backed securities issued for the three and nine months ended September 30, 2016 was $6.4 million and $18.8 million, which comprised of coupon interest of $5.8 million and $17.0 million, and issuance discount amortization of $0.6 million and $1.8 million. As of September 30, 2017 and December 30, 2016, accrued interest payable on the Notes was $6.0 million and $4.6 million, respectively.
Fair Value of Asset Backed Securities
The Company determined the fair value of asset-backed securities issued to be $746.1 million and $831.9 million as of September 30, 2017 and December 31, 2016, respectively, 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.
8. Shareholders’ Equity
Share Repurchase Program
On February 13, 2017, with the previous authorization expired, our board of directors authorized the repurchase of 1,000,000 shares through December 31, 2017. During the three and nine months ended September 30, 2017, the Company repurchased 235,612 and 362,694 of the Company’s shares, respectively, at an average price of $5.34 and $5.42 per share, respectively, for an aggregate purchase price of $1.3M and $2.0 million on the open market, respectively.
The timing and amount of any future open market share repurchases will be determined by the Company’s management based on its evaluation of market conditions, the relative attractiveness of other capital deployment activities, regulatory considerations and other factors. Any open market share repurchase activities will be conducted in compliance with the safe harbor provisions of Rule 10b-18 of the Exchange Act, or in privately negotiated transactions. Repurchases of common shares may also be made under an effective Rule 10b5-1 plan which permits common shares to be repurchased when the Company may otherwise be prohibited from doing so under insider trading laws. This repurchase program may be suspended or discontinued at any time.
9. Share-Based Compensation
The JMP Group LLC Amended and Restated Equity Incentive Plan (“JMP Group Plan”) authorized the issuance of 4,000,000 common shares. This amount is increased by any shares JMP Group LLC purchases on the open market, or through any share repurchase or share exchange program, as well as any shares that may be returned to the JMP Group Plan or the JMP Group LLC 2004 Equity Incentive Plan (“JMP Group 2004 Plan”) as a result of forfeiture, termination or expiration of awards, not to exceed a maximum aggregate number of shares of 2,960,000 shares under the JMP Group 2004 Plan. The Company will issue shares upon exercises or vesting from authorized but unissued shares or from treasury shares.
Share Options
The following table summarizes the share option activity for the nine months ended September 30, 2017:
Nine Months Ended |
||||||||
September 30, 2017 |
||||||||
Shares Subject |
Weighted Average |
|||||||
to Option |
Exercise Price |
|||||||
Balance, beginning of year |
2,710,000 | $ | 6.53 | |||||
Exercised |
(195,000 | ) | 6.24 | |||||
Balance, end of period |
2,515,000 | $ | 6.54 | |||||
Options exercisable at end of period |
2,515,000 | $ | 6.54 |
The following table summarizes the share options outstanding as well as share options vested and exercisable as of September 30, 2017:
September 30, 2017 |
||||||||||||||||||||||||||||||||||
Options Outstanding |
Options Vested and Exercisable |
|||||||||||||||||||||||||||||||||
Weighted |
Weighted |
|||||||||||||||||||||||||||||||||
Average |
Weighted |
Average |
Weighted |
|||||||||||||||||||||||||||||||
Range of |
Remaining |
Average |
Aggregate |
Remaining |
Average |
Aggregate |
||||||||||||||||||||||||||||
Exercise |
Number |
Contractual |
Exercise |
Intrinsic |
Number |
Contractual |
Exercise |
Intrinsic |
||||||||||||||||||||||||||
Prices |
Outstanding |
Life in Years |
Price |
Value |
Exercisable |
Life in Years |
Price |
Value |
||||||||||||||||||||||||||
$6.05 |
- | $7.33 | 2,490,000 | 1.76 | $ | 6.54 | $ | - | 2,490,000 | 1.76 | $ | 6.54 | - |
The Company recognized current income tax benefits $24 thousand and $53 thousand from the exercise of share options during the three and nine months ended September 30, 2017. There were no share options exercised during the three and nine months ended September 30, 2016. As a result, the Company did not recognize any current income tax benefits from the exercise of share options during these periods.
Nine Months Ended |
||||||||
September 30, 2017 |
||||||||
Restricted |
Weighted Average |
|||||||
Share Units |
Grant Date Fair Value |
|||||||
Balance, beginning of year |
646,558 | $ | 5.14 | |||||
Granted |
389,915 | 5.89 | ||||||
Vested |
(164,062 | ) | 5.99 | |||||
Forfeited |
(31,071 | ) | 4.10 | |||||
Balance, end of period |
841,340 | $ | 5.21 |
The aggregate fair value of RSUs vested during both the three months ended September 30, 2017 and 2016 were $0.4 million and $0.2 million, respectively. The aggregate fair value of RSUs vested during the nine months ended September 30, 2017 and 2016 were $1.0 million and $0.4 million, respectively.
For the three months ended September 30, 2017 and 2016, the income tax benefits realized from the vested RSUs were $0.1 million and $51 thousand, respectively. For the nine months ended September 30, 2017 and 2016, the income tax benefits realized from the vested RSUs were $0.4 million and $0.1 million, respectively.
The Company recognizes compensation expense for RSUs over the vesting period using the accelerated attribution method when they are subject to graded vesting and on a straight-line basis when they are subject to cliff vesting. For the three months ended September 30, 2017 and 2016, the Company recorded compensation expenses of $0.8 million and $1.4 million for RSUs, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded compensation expenses of $2.4 million and $3.4 million for RSUs, respectively.
For the three months ended September 30, 2017 and 2016, the Company recognized income tax benefits of $0.3 million and $0.6 million, respectively, related to the compensation expense recognized for RSUs. For the nine months ended September 30, 2017 and 2016, the Company recognized income tax benefits of $0.9 million and $1.5 million, respectively, related to the compensation expense recognized for RSUs. As of September 30, 2017, there was $0.9 million of unrecognized compensation expense related to RSUs expected to be recognized over a weighted average period of 0.78 years.
The Company pays cash distribution equivalents on certain unvested RSUs. Distribution equivalents paid on RSUs are generally charged to retained earnings. Distribution equivalents paid on RSUs expected to be forfeited are included in compensation expense. The Company accounts for the tax benefit related to distribution equivalents paid on RSUs as an increase in additional paid-in capital.
Share Appreciation Rights
The following table summarizes the SARs activity for the nine months ended September 30, 2017:
Nine Months Ended |
||||||||
September 30, 2017 |
||||||||
Share Appreciation |
Weighted Average |
|||||||
Rights |
Exercise Price |
|||||||
Balance, beginning of year |
2,580,000 | $ | 7.33 | |||||
Forfeited |
(95,000 | ) | 7.33 | |||||
Balance, end of period |
2,485,000 | $ | 7.33 |
The following table summarizes the share options outstanding as well as share options vested and exercisable as of September 30, 2017:
September 30, 2017 |
||||||||||||||||||
Options Outstanding |
||||||||||||||||||
Weighted |
||||||||||||||||||
Average |
Weighted |
|||||||||||||||||
Range of |
Remaining |
Average |
Aggregate |
|||||||||||||||
Exercise Prices |
Number |
Contractual |
Exercise |
Intrinsic |
||||||||||||||
Outstanding |
Life in Years |
Price |
Value |
|||||||||||||||
$7.33 |
- | $7.33 | 2,485,000 | 2.25 | $ | 7.33 | $ | - |
The Company recognizes compensation expense for SARs over the vesting period, through monthly mark to market of adjustments to the liability award. For the three months ended September 30, 2017 and 2016, the Company recorded SARs compensation benefit of $67 thousand and expense of $46 thousand, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded SARs compensation benefit of $0.3 million and expense of $0.2 million, respectively.
For the three months ended September 30, 2017 and 2016, the Company recognized income tax benefit of $0.1 million and income tax expense of $0.2 million, respectively, related to the compensation expense and reversal recognized for SARs. For the nine months ended September 30, 2017 and 2016, the Company recognized income tax expense of $26 thousand and income tax benefit of $0.1 million, respectively, related to the compensation expense and reversal recognized for SARs. As of September 30, 2017, there was $40 thousand of unrecognized compensation expense related to SARs expected to be recognized over a weighted average period of 0.25 years.
10. Net Income (Loss) per Common Share
Basic net income (loss) per share for the Company is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the reporting period. Diluted net income (loss) per share is calculated by adjusting the weighted average number of outstanding shares to reflect the potential dilutive impact as if all potentially dilutive share options or RSUs were exercised or converted under the treasury share method. However, for periods that the Company has a net loss, the effect of outstanding share options or RSUs is anti-dilutive and, accordingly, is excluded from the calculation of diluted loss per share.
The computations of basic and diluted net income per share for the quarters and nine months ended September 30, 2017 and 2016 are shown in the tables below:
(In thousands, except per share data) |
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
|||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) attributable to JMP Group, LLC |
$ | (1,235 | ) | $ | 661 | $ | (14,510 | ) | $ | 2,137 | ||||||
Denominator: |
||||||||||||||||
Basic weighted average shares outstanding |
21,525 | 20,946 | 21,583 | 21,117 | ||||||||||||
Effect of potential dilutive securities: |
||||||||||||||||
Restricted share units |
- | 955 | - | 679 | ||||||||||||
Diluted weighted average shares outstanding |
21,525 | 21,901 | 21,583 | 21,796 | ||||||||||||
Net income (loss) per share |
||||||||||||||||
Basic |
$ | (0.06 | ) | $ | 0.03 | $ | (0.67 | ) | $ | 0.10 | ||||||
Diluted |
$ | (0.06 | ) | $ | 0.03 | $ | (0.67 | ) | $ | 0.10 |
In the table above, for the quarter ended September 30, 2016, unvested non-forfeitable RSUs that have distribution equivalent rights are treated as a separate class of securities in calculating net income per share. There was no impact of applying this methodology to the basic net income per share of zero for the quarter.
Share options to purchase 2,501,141 and 2,667,283 shares of common shares for the quarters ended September 30, 2017 and 2016, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding. Share options to purchase 2,572,012 and 2,720,985 shares of common shares for the nine months ended September 30, 2017 and 2016, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding.
Restricted share units for 824,053 and zero shares of common shares for the quarters ended September 30, 2017 and 2016, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding. Restricted share units for 822,240 and 97,382 shares of common share for the nine months ended September 30, 2017 and 2016, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding.
11. Employee Benefits
All full-time employees of the Company are eligible to participate in the JMP Group 401(k) Plan after three months of employment. Participants may contribute up to the limits set by the U.S. Internal Revenue Service. The Company contributes a match of 100% of each participant’s contributions to the JMP Group 401(k) Plan up to a maximum of 3% of the participant’s compensation plus 50% of the participant’s elective deferrals between 3% and 5%. All participants are immediately vested 100% on matched contributions. The Company recorded JMP Group 401(k) Plan matching expense of $0.2 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively. The Company recorded JMP Group 401(k) Plan matching expense of $1.3 million and $1.4 million for the nine months ended September 30, 2017 and 2016, respectively.
12. Income Taxes
JMP Group LLC qualifies as a publicly traded partnership taxable as a partnership for United States federal income tax purposes. The consolidated entities of the Company consist of wholly-owned corporate subsidiaries and entities treated as partnerships for U.S. income tax purposes. Income earned by the corporate subsidiaries is subject to U.S. federal and state income taxation. Income earned by the non-corporate subsidiaries is not subject to U.S. federal and state corporate income tax. These amounts are allocated to JMP Group LLCs partners.
For the three months ended September 30, 2017 and 2016, the Company recorded income tax expense of $1.1 million and income tax benefit of $0.6 million, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded income tax benefit of $0.2 million and $0.8 million, respectively. The effective tax rates were 8.1 % and 10.3 % for the three months ended September 30, 2017 and 2016, respectively. The effective tax rates were 1.3 % and 14.8 % for the nine months ended September 30, 2017 and 2016, respectively
For financial reporting purposes, the Company’s effective tax rate used for the interim periods is based on the estimated full-year income tax rate. The effective tax rate differs from the statutory rate primarily due to the following: (i) a portion of the reported pre-tax income is attributable to non-controlling interests held in the Company’s consolidated entities by third parties, and (ii) a significant portion of pre-tax income/(loss) is from qualifying sources that are generated by certain flow through entities within the Company. These amounts are excluded from the computation of corporate income tax.
The Company recognizes deferred tax assets and liabilities in accordance with ASC 740, Income Taxes, and are determined based upon the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse.
13. Commitments and Contingencies
The Company leases office space in California, Illinois, Georgia, Massachusetts, Minnesota, New York, and Florida under various operating leases. Occupancy expense for the quarters ended September 30, 2017 and 2016 was $1.1 million and $1.0 million, respectively. The Company recorded sublease income of $54 thousand and $0.1 million for the quarters ended September 30, 2017 and 2016, respectively. Occupancy expense for the nine months ended September 30, 2017 and 2016 was $3.3 million and $2.9 million, respectively. The Company recorded sublease income of $0.2 million for both the nine months ended September 30, 2017 and 2016. The California, Illinois, Minnesota and New York leases included a period of free rent at the start of the lease. Rent expense is recognized over the entire lease period uniformly net of the free rent savings. The aggregate minimum future commitments of these leases are:
(In thousands) |
Minimum Future Lease |
|||
Year Ending December 31, |
Commitments | |||
2017 |
$ | 1,183 | ||
2018 |
4,787 | |||
2019 |
3,984 | |||
2020 |
2,568 | |||
2021 |
2,553 | |||
Thereafter |
10,020 | |||
Total Lease Commitments |
$ | 25,095 |
In connection with its underwriting activities, JMP Securities enters into firm commitments for the purchase of securities in return for a fee. These commitments require JMP Securities to purchase securities at a specified price. Securities underwriting exposes JMP Securities to market and credit risk, primarily in the event that, for any reason, securities purchased by JMP Securities cannot be distributed at anticipated price levels. Settlement of transactions relating to such underwriting commitments, which were open at September 30, 2017 and December 31, 2016, had no material effect on the consolidated financial statements.
The marketable securities owned and the restricted cash, as well as the cash held by the clearing broker, may be used to maintain margin requirements. The Company had $0.3 million of cash on deposit with JMP Securities’ clearing broker at both September 30, 2017 and December 31, 2016. Furthermore, the marketable securities owned may be hypothecated or borrowed by the clearing broker.
Unfunded commitments are agreements to lend to a borrower, provided that all conditions have been met. The Company had unfunded commitments to lend $39.4 million as of September 30, 2017. As of December 31, 2016, the Company had sold unfunded commitments of $20.7 million that had not yet settled. The Company had sold unfunded commitments of $34.0 million as of December 31, 2016, related to commitments sold but not yet closed in CLO I. $2.9 million of the unfunded commitments as of December 31, 2016, relate to commitments traded but not yet closed in CLO II. $10.0 million and $7.8 million of the unfunded commitments as of September 30, 2017 and December 31, 2016, respectively, relate to commitments traded but not yet closed in CLO III. $12.9 million of the unfunded commitments as of September 30, 2017 relate to commitments traded but not yet closed in CLO IV. $16.5 million of the unfunded commitments as of September 30, 2017 relate to commitments traded but not yet closed in CLO V. The Company determined the fair value of the unfunded commitments to be $41.8 million as of September 30, 2017, using the average market bid and ask quotation obtained from a loan pricing service. The Company determined the fair value of the sold unfunded commitments, not yet settled, to be $18.5 million as of December 31, 2016, using the average market bid and ask quotation obtained from a loan pricing service.
14. Regulatory Requirements
JMP Securities is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital, as defined, and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. JMP Securities had net capital of $21.1 million and $29.7 million, which were $19.8 million and $28.6 million in excess of the required net capital of $1.3 million and $1.1 million at September 30, 2017 and December 31, 2016, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 0.92 to 1 and 0.56 to 1 at September 30, 2017 and December 31, 2016, respectively.
Since all customer transactions are cleared through another broker-dealer on a fully disclosed basis, JMP Securities is not required to maintain a separate bank account for the exclusive benefit of customers in accordance with Rule 15c3-3 under the Exchange Act.
15. Related Party Transactions
The Company earns base management fees and incentive fees from serving as investment advisor for various entities, including corporations, partnerships limited liability companies, and offshore investment companies. The Company also owns an investment in most of such affiliated entities. As of September 30, 2017 and December 31, 2016, the aggregate fair value of the Company’s investments in the affiliated entities for which the Company serves as the investment advisor was $26.8 million and $27.8 million, respectively, which consisted of investments in hedge and other private funds of $16.6 million and $17.3 million, respectively, and an investment in HCC common stock of $10.2 million and $10.5 million, respectively. Base management fees earned from these affiliated entities were $3.9 million and $4.2 million for the quarters ended September 30, 2017 and 2016. Base management fees earned from these affiliated entities were $12.1 million and $12.4 million for the nine months ended September 30, 2017 and 2016, respectively. Also, the Company earned incentive fees of $0.1 million from these affiliated entities for the three months ended September 30, 2017. No incentive was earned for the three months ended September 30, 2016. The Company earned incentive fees of $2.0 million and $6.5 million, from these affiliated entities for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017 and December 31, 2016, the Company had incentive fees receivable from these affiliated entities of $19 thousand and $0.5 million, respectively.
16. Guarantees
JMP Securities has agreed to indemnify its clearing broker for losses that the clearing broker may sustain from the accounts of customers introduced by JMP Securities. Should a customer not fulfill its obligation on a transaction, JMP Securities may be required to buy or sell securities at prevailing market prices in the future on behalf of its customer. JMP Securities’ obligation under the indemnification has no maximum amount. All unsettled trades at September 30, 2017 and December 31, 2016 have subsequently settled with no resulting material liability to the Company. For the three and nine months ended September 30, 2017 and 2016, the Company had no material loss due to counterparty failure, and has no obligations outstanding under the indemnification arrangement as of September 30, 2017 or December 31, 2016.
The Company is engaged in various investment banking and brokerage activities whose counterparties primarily include broker-dealers, banks and other financial institutions. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the instrument. It is the Company’s policy to review, as necessary, the credit standing of each counterparty with which it conducts business.
17. Litigation
The Company may be involved from to time in a number of judicial, regulatory, litigation and arbitration matters arising in connection with the business. The outcome of such matters the Company has been and/or currently is involved in cannot be determined at this time, and the results cannot be predicted with certainty. There can be no assurance that these matters will not have a material adverse effect on the results of operations in any future period and a significant outcome could have a material adverse impact on the Company’s financial condition, results of operations and cash flows.
The Company reviews the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in liability and the amount of loss, if any, can be reasonably estimated. Generally, given the inherent difficulty of predicting the outcome of matters the Company is involved in, particularly cases in which claimants seek substantial or indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution. For these matters, no reserve is established until such time, other than for reasonably estimable legal fees and expenses. Management, after consultation with legal counsel, believes that the currently known actions or threats will not result in any material adverse effect on the Company’s financial condition, results of operations or cash flows.
18. Financial Instruments with Off-Balance Sheet Risk, Credit Risk or Market Risk
The majority of the Company’s transactions, and consequently the concentration of its credit exposure, is with its clearing broker. The clearing broker is also a significant source of short-term financing for the Company, which is collateralized by cash and securities owned by the Company and held by the clearing broker. The Company’s securities owned may be pledged by the clearing broker. The receivable from the clearing broker represents amounts receivable in connection with the trading of proprietary positions.
The Company is also exposed to credit risk from other brokers, dealers and other financial institutions with which it transacts business. In the event that counterparties do not fulfill their obligations, the Company may be exposed to credit risk.
The Company’s trading activities include providing securities brokerage services to institutional clients. To facilitate these customer transactions, the Company purchases proprietary securities positions (“long positions”) in equity securities. The Company also enters into transactions to sell securities not yet purchased (“short positions”), which are recorded as liabilities on the Consolidated Statements of Financial Condition. The Company is exposed to market risk on these long and short securities positions as a result of decreases in market value of long positions and increases in market value of short positions. Short positions create a liability to purchase the security in the market at prevailing prices. Such transactions result in off-balance sheet market risk as the Company’s ultimate obligation to satisfy the sale of securities sold, but not yet purchased, may exceed the amount recorded in the Consolidated Statements of Financial Condition. To mitigate the risk of losses, these securities positions are marked to market daily and are monitored by management to assure compliance with limits established by the Company.
In connection with the CLOs, the Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include unfunded commitments to lend and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet of the Company.
Unfunded commitments are agreements to lend to a borrower, provided that all conditions have been met. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each borrower’s creditworthiness on a case by case basis.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a borrower to a third party. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to borrowers. The Company had unfunded commitments to lend $39.4 million as of September 30, 2017. The Company had sold unfunded commitments of $20.7 million as of December 31, 2016 that had not yet settled. The Company had sold unfunded commitments of $34.0 million as of December 31, 2016, related to commitments sold but not yet closed in CLO I. $2.9 million of the unfunded commitments as of December 31, 2016, relate to commitments traded but not yet closed in CLO II. $10.0 million and $7.8 million of the unfunded commitments as of September 30, 2017 and December 31, 2016, respectively, relate to commitments traded but not yet closed in CLO III. $12.9 million of the unfunded commitments as of September 30, 2017 relate to commitments traded but not yet closed in CLO IV. $16.5 million of the unfunded commitments as of September 30, 2017 relate to commitments traded but not yet closed in CLO V. The Company determined the fair value of the unfunded commitments to be $41.8 million as of September 30, 2017, using the average market bid and ask quotation obtained from a loan pricing service. The Company determined the fair value of the sold unfunded commitments, not yet settled, to be $18.5 million as of December 31, 2016, using the average market bid and ask quotation obtained from a loan pricing service.
19. Business Segments
The Company’s business results are categorized into the following three business segments: Broker-Dealer, Asset Management, and Corporate. The Broker-Dealer segment includes a broad range of services, such as underwriting and acting as a placement agent for public and private capital markets raising transactions and financial advisory services in M&A, restructuring and other strategic transactions. The Broker-Dealer segment also includes institutional brokerage services and equity research services to our institutional investor clients. The Asset Management segment includes the management of a broad range of pooled investment vehicles, including the Company’s hedge funds, private equity funds, hedge funds of funds, and collateralized loan obligations. The Corporate segment includes income from the Company’s principal investments in public and private securities and investment funds managed by HCS, as well as any other net interest and income from investing activities. The Corporate segment also includes expenses related to JMP Group LLC, JMP Holding LLC and JMP Group Inc., and is mainly comprised of corporate overhead expenses and interest expense related to the Company’s bond issuance.
Management uses operating net income as a key metric when evaluating the performance of JMP Group’s core business strategy and ongoing operations. This measure adjusts the Company’s net income as follows: (i) reverses non-cash share-based compensation expense related to historical equity awards granted in prior periods, (ii) recognizes 100% of the cost of deferred compensation in the period for which such compensation was awarded, instead of recognizing such cost over the vesting period as required under GAAP, (iii) reverses amortization expense related to an intangible asset resulting from the repurchase of a portion of the equity of JMP Credit Advisors CLO III; (iv) reverses depreciation and amortization expense related to commercial real estate investments; (v) reverses net unrealized gains and losses on strategic equity investments and warrants, (vi) excludes general loan loss reserves on the CLOs, (vii) presents revenues and expenses on a basis that deconsolidates HCAP Advisors and the CLOs, (viii) reverses the one-time expense associated with the contribution of the remaining assets in JMP Credit Advisors CLO II to newly formed JMP Credit Advisors CLO IV, and (ix) the one-time transaction costs related to the refinancing of the debt issued by JMP Credit Advisors CLO III; and the resulting acceleration of the amortization of remaining capitalized issuance costs. These charges may otherwise obscure the Company’s operating income and complicate an assessment of the Company’s core business activities. The operating pre-tax net income facilitates a meaningful comparison of the Company’s results in a given period to those in prior and future periods.
The Company’s segment information for the quarters and nine months ended September 30, 2017 and 2016 was prepared using the following methodology:
|
• |
|
Revenues and expenses directly associated with each segment are included in determining segment operating income. |
|
• |
|
Revenues and expenses not directly associated with a specific segment are allocated based on the most relevant measures applicable, including revenues, headcount and other factors. |
|
• |
|
Each segment’s operating expenses include: a) compensation and benefits expenses that are incurred directly in support of the segments and b) other operating expenses, which include expenses for premises and occupancy, professional fees, travel and entertainment, communications and information services, equipment and indirect support costs (including compensation and other operating expenses related thereto) for administrative services. |
|
• |
|
Assets directly associated with each segment are allocated to the respective segment. One exception is depreciable assets, which are held at the Corporate segment. The associated depreciation is allocated to the related segment. |
Segment Operating Results
Management believes that the following information provides a reasonable representation of each segment’s contribution to revenues, income and assets:
(In thousands) |
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
|||||||||||||
Broker-Dealer |
||||||||||||||||
Non-interest revenues |
$ | 26,848 | $ | 20,066 | $ | 69,944 | $ | 58,640 | ||||||||
Total net revenues after provision for loan losses |
$ | 26,848 | $ | 20,066 | $ | 69,944 | $ | 58,640 | ||||||||
Non-interest expenses |
22,215 | 19,332 | 63,234 | 57,637 | ||||||||||||
Segment operating pre-tax net income |
$ | 4,633 | $ | 734 | $ | 6,710 | $ | 1,003 | ||||||||
Segment assets |
$ | 81,880 | $ | 63,648 | $ | 81,880 | $ | 63,648 | ||||||||
Asset Management |
||||||||||||||||
Non-interest revenues |
$ | 4,798 | $ | 5,296 | $ | 14,965 | $ | 21,721 | ||||||||
Total net revenues after provision for loan losses |
$ | 4,798 | $ | 5,296 | $ | 14,965 | $ | 21,721 | ||||||||
Non-interest expenses |
4,948 | 5,176 | 15,346 | 20,473 | ||||||||||||
Segment operating pre-tax net income |
$ | (150 | ) | $ | 120 | $ | (381 | ) | $ | 1,248 | ||||||
Segment assets |
$ | 19,424 | $ | 30,158 | $ | 19,424 | $ | 30,158 | ||||||||
Corporate |
||||||||||||||||
Non-interest revenues |
$ | 1,572 | $ | 3,635 | $ | 7,199 | $ | 12,728 | ||||||||
Net interest income |
1,145 | 2,057 | 2,100 | 6,431 | ||||||||||||
Provision for loan losses |
(593 | ) | 17 | (2,415 | ) | (795 | ) | |||||||||
Total net revenues after provision for loan losses |
$ | 2,124 | $ | 5,709 | $ | 6,884 | $ | 18,364 | ||||||||
Non-interest expenses |
3,706 | 4,308 | 12,624 | 14,857 | ||||||||||||
Segment operating pre-tax net income |
$ | (1,582 | ) | $ | 1,401 | $ | (5,740 | ) | $ | 3,507 | ||||||
Segment assets |
$ | 1,252,859 | 1,410,152 | $ | 1,252,859 | $ | 1,410,152 | |||||||||
Eliminations |
||||||||||||||||
Non-interest revenues |
$ | (821 | ) | $ | (1,422 | ) | $ | (2,584 | ) | $ | (4,057 | ) | ||||
Total net revenues after provision for loan losses |
$ | (821 | ) | $ | (1,422 | ) | $ | (2,584 | ) | $ | (4,057 | ) | ||||
Non-interest expenses |
(821 | ) | (1,422 | ) | (2,584 | ) | (4,057 | ) | ||||||||
Segment operating pre-tax net loss |
$ | - | $ | - | $ | - | $ | - | ||||||||
Segment assets |
$ | (323,132 | ) | $ | (336,979 | ) | $ | (323,132 | ) | $ | (336,979 | ) | ||||
Total Segments |
||||||||||||||||
Non-interest revenues |
$ | 32,397 | $ | 27,575 | $ | 89,524 | $ | 89,032 | ||||||||
Net interest income |
1,145 | 2,057 | 2,100 | 6,431 | ||||||||||||
Provision for loan losses |
(593 | ) | 17 | (2,415 | ) | (795 | ) | |||||||||
Total net revenues after provision for loan losses |
$ | 32,949 | $ | 29,649 | $ | 89,209 | $ | 94,668 | ||||||||
Non-interest expenses |
30,048 | 27,394 | 88,620 | 88,910 | ||||||||||||
Segment operating pre-tax net income |
$ | 2,901 | $ | 2,255 | $ | 589 | $ | 5,758 | ||||||||
Total assets |
$ | 1,031,031 | $ | 1,166,979 | $ | 1,031,031 | $ | 1,166,979 |
The following tables reconcile the total segments to consolidated net income before income tax expense and total assets as of and for the three and six months ended September 30, 2017 and 2016.
(In thousands) |
As of and Three Months Ended September 30, 2017 |
As of and Three Months Ended September 30, 2016 |
||||||||||||||||||||||||
Total Segments |
Consolidation Adjustments and Reconciling Items |
JMP Consolidated |
Total Segments |
Consolidation Adjustments and Reconciling Items |
JMP Consolidated |
|||||||||||||||||||||
Non-interest revenues |
$ | 32,397 | $ | (2,089 | ) |
(a) |
$ | 30,308 | $ | 27,575 | $ | (264 | ) |
(a) |
$ | 27,311 | ||||||||||
Net Interest Income |
1,145 | 944 |
(b) |
2,089 | 2,057 | 1,203 |
(b) |
3,260 | ||||||||||||||||||
Gain (loss) repurchase/early retirement of debt |
- | - | - | - | - | - | ||||||||||||||||||||
Provision for loan losses |
(593 | ) | 225 | (368 | ) | 17 | 87 | 104 | ||||||||||||||||||
Total net revenues after provision for loan losses |
$ | 32,949 | $ | (920 | ) | $ | 32,029 | $ | 29,649 | $ | 1,026 | $ | 30,675 | |||||||||||||
Non-interest expenses |
30,048 | 1,323 |
(c ) |
31,371 | 27,394 | 2,276 |
(c ) |
29,670 | ||||||||||||||||||
Noncontrolling interest |
- | 780 | 780 | - | 941 | 941 | ||||||||||||||||||||
Operating pre-tax net income (loss) |
$ | 2,901 | $ | (3,023 | ) |
(d) |
$ | (122 | ) | $ | 2,255 | $ | (2,191 | ) |
(d) |
$ | 64 | |||||||||
Total assets |
$ | 1,031,031 | $ | - | $ | 1,031,031 | $ | 1,166,979 | $ | - | $ | 1,166,979 |
(In thousands) |
As of and Nine Months Ended September 30, 2017 |
As of and Nine Months Ended September 30, 2016 |
||||||||||||||||||||||||
Total Segments |
Consolidation Adjustments and Reconciling Items |
JMP Consolidated |
Total Segments |
Consolidation Adjustments and Reconciling Items |
JMP Consolidated |
|||||||||||||||||||||
Non-interest revenues |
$ | 89,524 | $ | (6,168 | ) |
(a) |
$ | 83,356 | $ | 89,032 | $ | (799 | ) |
(a) |
$ | 88,233 | ||||||||||
Net Interest Income |
2,100 | 2,914 |
(b) |
5,014 | 6,431 | 5,269 |
(b) |
11,700 | ||||||||||||||||||
Gain (loss) repurchase/early retirement of debt |
- | (5,332 | ) | (5,332 | ) | - | - | - | ||||||||||||||||||
Provision for loan losses |
(2,415 | ) | (1,073 | ) | (3,488 | ) | (795 | ) | (185 | ) | (980 | ) | ||||||||||||||
Total net revenues after provision for loan losses |
$ | 89,209 | $ | (9,659 | ) | $ | 79,550 | $ | 94,668 | $ | 4,285 | $ | 98,953 | |||||||||||||
Non-interest expenses |
88,620 | 3,897 |
(c ) |
92,517 | 88,910 | 4,670 |
(c ) |
93,580 | ||||||||||||||||||
Noncontrolling interest |
- | 1,712 | 1,712 | - | 4,029 | 4,029 | ||||||||||||||||||||
Operating pre-tax net income (loss) |
$ | 589 | $ | (15,268 | ) |
(d) |
$ | (14,679 | ) | $ | 5,758 | $ | (4,414 | ) |
(d) |
$ | 1,344 | |||||||||
Total assets |
$ | 1,031,031 | $ | - | $ | 1,031,031 | $ | 1,166,979 | $ | - | $ | 1,166,979 |
(a) Non-interest revenue adjustments is comprised of loan sale gains, mark-to-market gains/losses, strategic equity investments and warrants, and fund-related revenues recognized upon consolidation of certain Harvest Funds.
(b) The Net Interest Income adjustment is comprised of the non-cash net amortization of liquidity discounts at the CLOs, due to scheduled contractual repayments, and amortization expense related to an intangible asset.
(c) Non-interest expense adjustments relate to reversals of share-based compensation and exclusion of fund-related expenses recognized upon consolidation of certain Harvest Funds.
(d) Reconciling operating pre-tax net income to Consolidated Net Income before income tax expense in the Consolidated Statements of Operations consists of the following:
(In thousands) |
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
|||||||||||||
Consolidated Net Income (loss) attributable to JMP Group LLC |
$ | (1,235 | ) | $ | 661 | $ | (14,510 | ) | $ | 2,137 | ||||||
Income tax expense (benefit) |
1,113 | (597 | ) | (169 | ) | (793 | ) | |||||||||
Consolidated pre-tax net income (loss) attributable to JMP Group LLC |
$ | (122 | ) | $ | 64 | $ | (14,679 | ) | $ | 1,344 | ||||||
Subtract (Add back) |
||||||||||||||||
Share-based compensation expense |
(260 | ) | (583 | ) | (595 | ) | (1,283 | ) | ||||||||
Deferred compensation program accounting adjustment |
(436 | ) | (1,126 | ) | (1,268 | ) | (1,046 | ) | ||||||||
Net unrealized loss/ (gain) on strategic equity investments and warrants. |
191 | (435 | ) | (297 | ) | 329 | ||||||||||
General loan loss reserve for the CLOs |
136 | 76 | (697 | ) | 109 | |||||||||||
CLO refinancing and accelerated expenses |
(14 | ) | - | (300 | ) | - | ||||||||||
Depreciation of commercial real estate in underlying investments |
(2,571 | ) | (123 | ) | (6,472 | ) | (2,523 | ) | ||||||||
Amortization of intangible assets |
(69 | ) | - | (207 | ) | - | ||||||||||
Early debt retirement of CLO |
- | - | (5,432 | ) | - | |||||||||||
Total Consolidation Adjustments and Reconciling Items |
(3,023 | ) | (2,191 | ) | (15,268 | ) | (4,414 | ) | ||||||||
Segment operating pre-tax net income (loss) |
$ | 2,901 | $ | 2,255 | $ | 589 | $ | 5,758 |
20. Summarized Financial Information for Equity Method Investments
The tables below present summarized financial information of the hedge funds and private equity fund, which the Company accounts for under the equity method. The financial information below represents 100% of the net assets, net realized and unrealized gains (losses) and net investment income (loss) of such hedge funds as of the dates and for the periods indicated.
As of |
||||||||
(In thousands) |
September 30, 2017 |
December 31, 2016 |
||||||
Net Assets |
Net Assets |
|||||||
Harvest Small Cap Partners |
$ | 293,412 | $ | 296,404 | ||||
Harvest Agriculture Select |
22,609 | 22,796 |
(In thousands) |
Three Months Ended September 30, |
|||||||||||||||
2017 |
2016 |
|||||||||||||||
Net Realized and Unrealized Gains (Losses) |
Net Investment Income (Loss) |
Net Realized and Unrealized Gains (Losses) |
Net Investment Income (Loss) |
|||||||||||||
Harvest Small Cap Partners |
$ | 14,991 | $ | (4,228 | ) | $ | 732 | $ | (4,868 | ) | ||||||
Harvest Agriculture Select |
655 | (42 | ) | 300 | (93 | ) | ||||||||||
Harvest Technology Partners |
- | - | 82 | (52 | ) | |||||||||||
Harvest Financial Partners |
- | - | 795 | (53 | ) |
(In thousands) |
Nine Months Ended September 30, |
|||||||||||||||
2017 |
2016 |
|||||||||||||||
Net Realized and Unrealized Gains (Losses) |
Net Investment Income (Loss) |
Net Realized and Unrealized Gains (Losses) |
Net Investment Income (Loss) |
|||||||||||||
Harvest Small Cap Partners |
$ | 2,037 | $ | (13,528 | ) | $ | 32,417 | $ | (15,209 | ) | ||||||
Harvest Agriculture Select |
1,492 | (157 | ) | (66 | ) | (170 | ) | |||||||||
Harvest Technology Partners |
- | - | (87 | ) | (173 | ) | ||||||||||
Harvest Financial Partners |
- | - | 204 | (228 | ) |
21. Condensed Consolidating Financial Statements
JMP Group Inc., a 100% owned subsidiary of JMP Group LLC, is the primary obligor of the Company’s 8.00% Senior Notes due 2023 and the Company’s 7.25% Senior Notes due 2021. In conjunction with the Reorganization Transaction, on January 1, 2015, JMP Group LLC and JMP Investment Holdings LLC became guarantors of JMP Group Inc. with respect to the Senior Notes. The guarantee is full and unconditional. One of the non-guarantor subsidiaries, JMP Securities, is subject to certain regulations, which require the maintenance of minimum net capital. This requirement may limit the issuer’s access to this subsidiary’s assets.
The following condensed consolidating financial statements present the consolidated statements of financial condition, condensed consolidated statements of operations, consolidated statements of comprehensive income and consolidated statements of cash flows of JMP Group LLC (parent company and guarantor), JMP Group Inc. (issuer), JMP Investment Holdings LLC (guarantor subsidiary), and the elimination of entries necessary to consolidate or combine the issuer with the guarantor and non-guarantor subsidiaries. These statements are presented in accordance with the disclosure requirements under SEC Regulation S-X Rule 3-10.
(In thousands) |
As of September 30, 2017 |
|||||||||||||||||||||||
Parent Company |
Subsidiary Issuer |
Guarantor Subsidiary |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated JMP Group LLC |
|||||||||||||||||||
Assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 8,828 | $ | 1,759 | $ | 19,065 | $ | 57,841 | $ | - | $ | 87,493 | ||||||||||||
Restricted cash and deposits |
- | 1,471 | - | 60,493 | - | 61,964 | ||||||||||||||||||
Receivable from clearing broker |
- | - | - | 20,384 | - | 20,384 | ||||||||||||||||||
Investment banking fees receivable, net of allowance for doubtful accounts |
- | - | - | 14,692 | - | 14,692 | ||||||||||||||||||
Marketable securities owned, at fair value |
- | - | 10,582 | 11,905 | (472 | ) | 22,015 | |||||||||||||||||
Incentive fee receivable |
- | - | - | 19 | - | 19 | ||||||||||||||||||
Other investments |
- | 4,962 | 11,386 | 10,225 | - | 26,573 | ||||||||||||||||||
Loans held for investment, net of allowance for loan losses |
- | - | 4,905 | 13,842 | - | 18,747 | ||||||||||||||||||
Loans collateralizing asset-backed securities issued, net of allowance for loan losses |
- | - | - | 756,166 | - | 756,166 | ||||||||||||||||||
Interest receivable |
- | - | 7 | 2,044 | - | 2,051 | ||||||||||||||||||
Collateral posted for derivative transaction |
- | - | - | - | - | - | ||||||||||||||||||
Fixed assets, net |
- | - | - | 2,459 | - | 2,459 | ||||||||||||||||||
Deferred tax assets |
- | 12,287 | - | - | - | 12,287 | ||||||||||||||||||
Other assets |
(4,558 | ) | 137,579 | (9,516 | ) | 37,133 | (154,457 | ) | 6,181 | |||||||||||||||
Investment in subsidiaries |
224,303 | 73,338 | 19,047 | - | (316,688 | ) | - | |||||||||||||||||
Total assets |
$ | 228,573 | $ | 231,396 | $ | 55,476 | $ | 987,203 | $ | (471,617 | ) | $ | 1,031,031 | |||||||||||
Liabilities and Equity |
||||||||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||
Marketable securities sold, but not yet purchased, at fair value |
$ | - | $ | - | $ | - | $ | 21,001 | $ | - | $ | 21,001 | ||||||||||||
Accrued compensation |
750 | 2,039 | 869 | 24,627 | - | 28,285 | ||||||||||||||||||
Asset-backed securities issued |
- | - | - | 737,780 | - | 737,780 | ||||||||||||||||||
Interest payable |
- | 1,506 | - | 6,051 | - | 7,557 | ||||||||||||||||||
Note payable |
137,603 | - | - | 15,000 | (152,603 | ) | - | |||||||||||||||||
CLO V Warehouse Facility |
- | - | - | 7,000 | - | 7,000 | ||||||||||||||||||
Bond payable |
- | 92,573 | - | - | (472 | ) | 92,101 | |||||||||||||||||
Deferred tax liability |
- | 1,993 | - | 400 | - | 2,393 | ||||||||||||||||||
Other liabilities |
1,406 | 20,944 | - | (252 | ) | (1,747 | ) | 20,351 | ||||||||||||||||
Total liabilities |
$ | 139,759 | $ | 119,055 | $ | 869 | $ | 811,607 | $ | (154,822 | ) | $ | 916,468 | |||||||||||
Total members' (deficit) equity |
88,814 | 112,341 | 40,036 | 176,526 | (317,007 | ) | 100,710 | |||||||||||||||||
Nonredeemable Non-controlling Interest |
$ | - | $ | - | $ | 14,571 | $ | (930 | ) | $ | 212 | $ | 13,853 | |||||||||||
Total equity |
$ | 88,814 | $ | 112,341 | $ | 54,607 | $ | 175,596 | $ | (316,795 | ) | $ | 114,563 | |||||||||||
Total liabilities and equity |
$ | 228,573 | $ | 231,396 | $ | 55,476 | $ | 987,203 | $ | (471,617 | ) | $ | 1,031,031 |
As of December 31, 2016 |
||||||||||||||||||||||||
Parent Company |
Subsidiary Issuer |
Guarantor Subsidiary |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated JMP Group LLC |
|||||||||||||||||||
Assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 255 | $ | 1,763 | $ | 5,060 | $ | 78,414 | $ | - | $ | 85,492 | ||||||||||||
Restricted cash and deposits |
- | 1,471 | - | 226,185 | - | 227,656 | ||||||||||||||||||
Receivable from clearing broker |
- | - | - | 6,586 | - | 6,586 | ||||||||||||||||||
Investment banking fees receivable, net of allowance for doubtful accounts |
- | - | - | 5,681 | - | 5,681 | ||||||||||||||||||
Marketable securities owned, at fair value |
- | - | 10,877 | 8,317 | (472 | ) | 18,722 | |||||||||||||||||
Incentive fee receivable |
- | - | - | 499 | - | 499 | ||||||||||||||||||
Other investments |
- | 5,126 | 9,838 | 17,905 | - | 32,869 | ||||||||||||||||||
Loans held for sale |
- | - | 32,488 | - | 32,488 | |||||||||||||||||||
Loans held for investment, net of allowance for loan losses |
- | - | - | 1,930 | - | 1,930 | ||||||||||||||||||
Loans collateralizing asset-backed securities issued, net of allowance for loan losses |
- | - | - | 654,127 | - | 654,127 | ||||||||||||||||||
Interest receivable |
- | - | 72 | 3,429 | (72 | ) | 3,429 | |||||||||||||||||
Collateral posted for derivative transaction |
- | - | - | 25,000 | - | 25,000 | ||||||||||||||||||
Fixed assets, net |
- | - | - | 3,143 | - | 3,143 | ||||||||||||||||||
Deferred tax assets |
- | 7,942 | - | - | - | 7,942 | ||||||||||||||||||
Other assets |
(1,045 | ) | 141,905 | (8,957 | ) | 42,597 | (154,234 | ) | 20,266 | |||||||||||||||
Investment in subsidiaries |
252,486 | 74,166 | 117,537 | - | (444,189 | ) | - | |||||||||||||||||
Total assets |
$ | 251,696 | $ | 232,373 | $ | 134,427 | $ | 1,106,301 | $ | (598,967 | ) | $ | 1,125,830 | |||||||||||
Liabilities and Equity |
||||||||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||
Marketable securities sold, but not yet purchased, at fair value |
$ | - | $ | - | $ | - | $ | 4,747 | $ | - | $ | 4,747 | ||||||||||||
Accrued compensation |
90 | 150 | - | 35,918 | - | 36,158 | ||||||||||||||||||
Asset-backed securities issued |
- | - | - | 825,854 | - | 825,854 | ||||||||||||||||||
Interest payable |
- | 1,506 | - | 4,811 | - | 6,317 | ||||||||||||||||||
Note payable |
137,603 | - | - | 15,000 | (152,603 | ) | - | |||||||||||||||||
Bond payable |
- | 92,258 | - | - | (473 | ) | 91,785 | |||||||||||||||||
Deferred tax liability |
- | 3,232 | - | 640 | - | 3,872 | ||||||||||||||||||
Other liabilities |
1,520 | 22,706 | 313 | (1,142 | ) | (1,594 | ) | 21,803 | ||||||||||||||||
Total liabilities |
$ | 139,213 | $ | 119,852 | $ | 313 | $ | 885,828 | $ | (154,670 | ) | $ | 990,536 | |||||||||||
Total members' (deficit) equity |
112,483 | 112,521 | 117,532 | 221,350 | (444,509 | ) | 119,377 | |||||||||||||||||
Nonredeemable Non-controlling Interest |
$ | - | $ | - | $ | 16,582 | $ | (877 | ) | $ | 212 | $ | 15,917 | |||||||||||
Total equity |
$ | 112,483 | $ | 112,521 | $ | 134,114 | $ | 220,473 | $ | (444,297 | ) | $ | 135,294 | |||||||||||
Total liabilities and equity |
$ | 251,696 | $ | 232,373 | $ | 134,427 | $ | 1,106,301 | $ | (598,967 | ) | $ | 1,125,830 |
(In thousands) |
For the Three Months Ended September 30, 2017 |
|||||||||||||||||||||||
Parent Company |
Subsidiary Issuer |
Guarantor Subsidiary |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated JMP Group LLC |
|||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Investment banking |
$ | - | $ | - | $ | - | $ | 22,085 | $ | - | $ | 22,085 | ||||||||||||
Brokerage |
- | - | - | 4,763 | - | 4,763 | ||||||||||||||||||
Asset management fees |
- | - | - | 4,054 | (40 | ) | 4,014 | |||||||||||||||||
Principal transactions |
- | 85 | - | (1,477 | ) | - | (1,392 | ) | ||||||||||||||||
Loss on sale, payoff and mark-to-market of loans |
- | - | - | 278 | - | 278 | ||||||||||||||||||
Gain on repurchase of debt |
- | - | - | - | - | |||||||||||||||||||
Net dividend income |
- | 2 | - | 276 | - | 278 | ||||||||||||||||||
Other income |
- | - | - | 282 | - | 282 | ||||||||||||||||||
Equity earnings of subsidiaries |
731 | 2,077 | 3,489 | - | (6,297 | ) | - | |||||||||||||||||
Non-interest revenues |
731 | 2,164 | 3,489 | 30,261 | (6,337 | ) | 30,308 | |||||||||||||||||
Interest income |
367 | 1,139 | - | 11,349 | (1,955 | ) | 10,900 | |||||||||||||||||
Interest expense |
(1,139 | ) | (2,274 | ) | (7 | ) | (7,410 | ) | 2,019 | (8,811 | ) | |||||||||||||
Net interest income |
(772 | ) | (1,135 | ) | (7 | ) | 3,939 | 64 | 2,089 | |||||||||||||||
Reversal of provision for loan losses |
- | - | - | (368 | ) | - | (368 | ) | ||||||||||||||||
Total net revenues after provision for loan losses |
(41 | ) | 1,029 | 3,482 | 33,832 | (6,273 | ) | 32,029 | ||||||||||||||||
Non-interest expenses |
||||||||||||||||||||||||
Compensation and benefits |
498 | 1,455 | - | 22,610 | - | 24,563 | ||||||||||||||||||
Administration |
145 | 102 | - | 1,252 | (40 | ) | 1,459 | |||||||||||||||||
Brokerage, clearing and exchange fees |
- | - | - | 740 | - | 740 | ||||||||||||||||||
Travel and business development |
15 | - | - | 694 | - | 709 | ||||||||||||||||||
Communications and technology |
- | 3 | - | 1,043 | - | 1,046 | ||||||||||||||||||
Occupancy |
- | - | - | 1,117 | - | 1,117 | ||||||||||||||||||
Professional fees |
536 | 55 | - | 503 | - | 1,094 | ||||||||||||||||||
Depreciation |
- | - | - | 277 | - | 277 | ||||||||||||||||||
Other |
- | 36 | - | 330 | - | 366 | ||||||||||||||||||
Total non-interest expenses |
1,194 | 1,651 | - | 28,566 | (40 | ) | 31,371 | |||||||||||||||||
Net income (loss) before income tax expense |
(1,235 | ) | (622 | ) | 3,482 | 5,266 | (6,233 | ) | 658 | |||||||||||||||
Income tax benefit |
- | (493 | ) | - | 1,606 | - | 1,113 | |||||||||||||||||
Net income (loss) |
(1,235 | ) | (129 | ) | 3,482 | 3,660 | (6,233 | ) | (455 | ) | ||||||||||||||
Less: Net income (loss) attributable to nonredeemable non-controlling interest |
- | - | - | 780 | - | 780 | ||||||||||||||||||
Net income (loss) attributable to JMP Group LLC |
$ | (1,235 | ) | $ | (129 | ) | $ | 3,482 | $ | 2,880 | $ | (6,233 | ) | $ | (1,235 | ) |
(In thousands) |
For the Three Months Ended September 30, 2016 |
|||||||||||||||||||||||
Parent Company |
Subsidiary Issuer |
Guarantor Subsidiary |
Non- Guarantor Subsidiaries |
Eliminations |
Consolidated JMP Group LLC |
|||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Investment banking |
$ | - | $ | - | $ | - | $ | 15,048 | $ | - | $ | 15,048 | ||||||||||||
Brokerage |
- | - | - | 5,015 | - | 5,015 | ||||||||||||||||||
Asset management fees |
- | - | - | 4,127 | (83 | ) | 4,044 | |||||||||||||||||
Principal transactions |
- | (65 | ) | (95 | ) | 2,924 | - | 2,764 | ||||||||||||||||
Loss on sale, payoff and mark-to-market of loans |
- | - | - | (52 | ) | - | (52 | ) | ||||||||||||||||
Gain on repurchase of debt |
- | - | 239 | (9 | ) | - | 230 | |||||||||||||||||
Net dividend income |
- | - | - | 262 | - | 262 | ||||||||||||||||||
Other income |
2,552 | (458 | ) | 6,170 | - | (8,264 | ) | - | ||||||||||||||||
Equity earnings of subsidiaries |
2,552 | (523 | ) | 6,314 | 27,315 | (8,347 | ) | 27,311 | ||||||||||||||||
Non-interest revenues |
||||||||||||||||||||||||
Interest income |
369 | 1,139 | 172 | 11,787 | (1,995 | ) | 11,472 | |||||||||||||||||
Interest expense |
(1,139 | ) | (2,270 | ) | - | (6,798 | ) | 1,995 | (8,212 | ) | ||||||||||||||
Net interest income |
(770 | ) | (1,131 | ) | 172 | 4,989 | - | 3,260 | ||||||||||||||||
Gain (loss) repurchase/early retirement of debt |
- | - | - | 104 | - | 104 | ||||||||||||||||||
Provision for loan losses |
1,782 | (1,654 | ) | 6,486 | 32,408 | (8,347 | ) | 30,675 | ||||||||||||||||
Total net revenues after provision for loan losses |
||||||||||||||||||||||||
Non-interest expenses |
||||||||||||||||||||||||
Compensation and benefits |
479 | 929 | 365 | 20,394 | - | 22,167 | ||||||||||||||||||
Administration |
116 | 122 | 54 | 1,599 | (83 | ) | 1,808 | |||||||||||||||||
Brokerage, clearing and exchange fees |
- | - | - | 734 | - | 734 | ||||||||||||||||||
Travel and business development |
19 | - | - | 1,000 | - | 1,019 | ||||||||||||||||||
Communications and technology |
1 | 4 | - | 1,028 | - | 1,033 | ||||||||||||||||||
Occupancy |
- | - | - | 987 | - | 987 | ||||||||||||||||||
Professional fees |
505 | 236 | - | 378 | - | 1,119 | ||||||||||||||||||
Depreciation |
- | - | - | 312 | - | 312 | ||||||||||||||||||
Other |
- | 10 | - | 481 | - | 491 | ||||||||||||||||||
Total non-interest expenses |
1,120 | 1,301 | 419 | 26,913 | (83 | ) | 29,670 | |||||||||||||||||
Net income (loss) before income tax expense |
662 | (2,955 | ) | 6,067 | 5,495 | (8,264 | ) | 1,005 | ||||||||||||||||
Income tax expense (benefit) |
- | (236 | ) | - | (361 | ) | - | (597 | ) | |||||||||||||||
Net income (loss) |
662 | (2,719 | ) | 6,067 | 5,856 | (8,264 | ) | 1,602 | ||||||||||||||||
Less: Net income (loss) attributable to nonredeemable non-controlling interest | - | - | 796 | 145 | - | 941 | ||||||||||||||||||
Net income (loss) attributable to JMP Group LLC |
$ | 662 | $ | (2,719 | ) | $ | 5,271 | $ | 5,711 | $ | (8,264 | ) | $ | 661 |
(In thousands) |
For the Nine Months Ended September 30, 2017 |
|||||||||||||||||||||||
Parent Company |
Subsidiary Issuer |
Guarantor Subsidiary |
Non- Guarantor Subsidiaries |
Eliminations |
Consolidated JMP Group LLC |
|||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Investment banking |
$ | - | $ | - | $ | - | $ | 54,813 | $ | - | $ | 54,813 | ||||||||||||
Brokerage |
- | - | - | 15,127 | - | 15,127 | ||||||||||||||||||
Asset management fees |
- | - | - | 14,197 | (119 | ) | 14,078 | |||||||||||||||||
Principal transactions |
- | (394 | ) | (72 | ) | (3,142 | ) | - | (3,608 | ) | ||||||||||||||
Loss on sale, payoff and mark-to-market of loans |
- | - | - | 1,208 | - | 1,208 | ||||||||||||||||||
Net dividend income |
- | 3 | 512 | 302 | - | 817 | ||||||||||||||||||
Other income |
- | - | - | 921 | - | 921 | ||||||||||||||||||
Equity earnings of subsidiaries |
(8,738 | ) | 2,805 | (123 | ) | - | 6,056 | - | ||||||||||||||||
Non-interest revenues |
(8,738 | ) | 2,414 | 317 | 83,426 | 5,937 | 83,356 | |||||||||||||||||
Interest income |
1,207 | 3,417 | 107 | 30,964 | (6,032 | ) | 29,663 | |||||||||||||||||
Interest expense |
(3,417 | ) | (6,820 | ) | (7 | ) | (20,501 | ) | 6,096 | (24,649 | ) | |||||||||||||
Net interest income |
(2,210 | ) | (3,403 | ) | 100 | 10,463 | 64 | 5,014 | ||||||||||||||||
Gain (loss) repurchase/early retirement of debt |
210 | - | - | (5,542 | ) | - | (5,332 | ) | ||||||||||||||||
Provision for loan losses |
- | - | (20 | ) | (3,468 | ) | - | (3,488 | ) | |||||||||||||||
Total net revenues after provision for loan losses |
(10,738 | ) | (989 | ) | 397 | 84,879 | 6,001 | 79,550 | ||||||||||||||||
Non-interest expenses |
||||||||||||||||||||||||
Compensation and benefits |
1,580 | 2,850 | 779 | 63,804 | - | 69,013 | ||||||||||||||||||
Administration |
415 | 335 | 97 | 5,271 | (119 | ) | 5,999 | |||||||||||||||||
Brokerage, clearing and exchange fees |
- | - | - | 2,288 | - | 2,288 | ||||||||||||||||||
Travel and business development |
103 | - | - | 2,632 | - | 2,735 | ||||||||||||||||||
Communications and technology |
2 | 8 | - | 3,140 | - | 3,150 | ||||||||||||||||||
Occupancy |
- | - | - | 3,339 | - | 3,339 | ||||||||||||||||||
Professional fees |
1,670 | 209 | - | 1,230 | - | 3,109 | ||||||||||||||||||
Depreciation |
- | - | - | 891 | - | 891 | ||||||||||||||||||
Other |
- | 53 | 138 | 1,802 | - | 1,993 | ||||||||||||||||||
Total non-interest expenses |
3,770 | 3,455 | 1,014 | 84,397 | (119 | ) | 92,517 | |||||||||||||||||
Net income (loss) before income tax expense |
(14,508 | ) | (4,444 | ) | (617 | ) | 482 | 6,120 | (12,967 | ) | ||||||||||||||
Income tax expense (benefit) |
- | (2,583 | ) | - | 2,414 | - | (169 | ) | ||||||||||||||||
Net income (loss) |
(14,508 | ) | (1,861 | ) | (617 | ) | (1,932 | ) | 6,120 | (12,798 | ) | |||||||||||||
Less: Net income (loss) attributable to nonredeemable non-controlling interest |
- | - | 693 | 1,019 | - | 1,712 | ||||||||||||||||||
Net income (loss) attributable to JMP Group LLC |
$ | (14,508 | ) | $ | (1,861 | ) | $ | (1,310 | ) | $ | (2,951 | ) | $ | 6,120 | $ | (14,510 | ) |
(In thousands) |
Nine Months Ended September 30, 2016 |
|||||||||||||||||||||||
Parent Company |
Subsidiary Issuer |
Guarantor Subsidiary |
Non- Guarantor Subsidiaries |
Eliminations |
Consolidated JMP Group LLC |
|||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Investment banking |
$ | - | $ | - | $ | - | $ | 41,719 | $ | - | $ | 41,719 | ||||||||||||
Brokerage |
- | - | - | 16,921 | - | 16,921 | ||||||||||||||||||
Asset management fees |
- | - | - | 19,155 | (197 | ) | 18,958 | |||||||||||||||||
Principal transactions |
- | 350 | 4,437 | 5,539 | - | 10,326 | ||||||||||||||||||
Loss on sale, payoff and mark-to-market of loans |
- | - | - | (961 | ) | - | (961 | ) | ||||||||||||||||
Net dividend income |
- | - | 717 | 19 | - | 736 | ||||||||||||||||||
Other income |
- | - | 87 | 447 | - | 534 | ||||||||||||||||||
Equity earnings of subsidiaries |
7,986 | 45 | 14,634 | - | (22,665 | ) | - | |||||||||||||||||
Non-interest revenues |
7,986 | 395 | 19,875 | 82,839 | (22,862 | ) | 88,233 | |||||||||||||||||
Interest income |
1,109 | 3,417 | 511 | 36,945 | (5,985 | ) | 35,997 | |||||||||||||||||
Interest expense |
(3,417 | ) | (6,828 | ) | - | (20,037 | ) | 5,985 | (24,297 | ) | ||||||||||||||
Net interest income |
(2,308 | ) | (3,411 | ) | 511 | 16,908 | - | 11,700 | ||||||||||||||||
Provision for loan losses |
- | - | - | (980 | ) | - | (980 | ) | ||||||||||||||||
Total net revenues after provision for loan losses |
5,678 | (3,016 | ) | 20,386 | 98,767 | (22,862 | ) | 98,953 | ||||||||||||||||
Non-interest expenses |
||||||||||||||||||||||||
Compensation and benefits |
$ | 1,526 | $ | 2,782 | $ | 2,792 | $ | 63,173 | $ | - | $ | 70,273 | ||||||||||||
Administration |
363 | 373 | 191 | 3,795 | 918 | 5,640 | ||||||||||||||||||
Brokerage, clearing and exchange fees |
- | - | - | 2,308 | - | 2,308 | ||||||||||||||||||
Travel and business development |
114 | - | - | 3,434 | - | 3,548 | ||||||||||||||||||
Communications and technology |
5 | 8 | - | 3,080 | - | 3,093 | ||||||||||||||||||
Occupancy |
- | - | - | 2,853 | - | 2,853 | ||||||||||||||||||
Professional fees |
1,534 | 342 | 12 | 1,357 | - | 3,245 | ||||||||||||||||||
Depreciation |
- | - | - | 968 | - | 968 | ||||||||||||||||||
Other |
- | 10 | - | 2,755 | (1,113 | ) | 1,652 | |||||||||||||||||
Total non-interest expenses |
3,542 | 3,515 | 2,995 | 83,723 | (195 | ) | 93,580 | |||||||||||||||||
Net income (loss) before income tax expense |
2,136 | (6,531 | ) | 17,391 | 15,044 | (22,667 | ) | 5,373 | ||||||||||||||||
Income tax expense (benefit) |
- | (437 | ) | - | (356 | ) | - | (793 | ) | |||||||||||||||
Net income (loss) |
2,136 | (6,094 | ) | 17,391 | 15,400 | (22,667 | ) | 6,166 | ||||||||||||||||
Less: Net income (loss) attributable to nonredeemable non-controlling interest |
- | - | 3,311 | 718 | - | 4,029 | ||||||||||||||||||
Net income (loss) attributable to JMP Group LLC |
$ | 2,136 | $ | (6,094 | ) | $ | 14,080 | $ | 14,682 | $ | (22,667 | ) | $ | 2,137 |
(In thousands) |
Nine Months Ended September 30, 2017 |
|||||||||||||||||||||||
Parent Company |
Subsidiary Issuer |
Guarantor Subsidiary |
Non- Guarantor Subsidiaries |
Eliminations |
Consolidated JMP Group LLC |
|||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net income (loss) |
$ | (14,508 | ) | $ | (1,861 | ) | $ | (617 | ) | $ | (1,932 | ) | $ | 6,120 | $ | (12,798 | ) | |||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||||||||||||||||||
Provision for doubtful accounts |
- | - | - | 90 | - | 90 | ||||||||||||||||||
Provision for loan losses |
- | - | 116 | 3,372 | - | 3,488 | ||||||||||||||||||
Accretion of deferred loan fees |
- | - | - | (1,734 | ) | - | (1,734 | ) | ||||||||||||||||
Amortization of debt issuance costs |
- | 315 | - | - | - | 315 | ||||||||||||||||||
Amortization of original issue discount, related to CLO II and CLO III |
- | - | - | 1,607 | - | 1,607 | ||||||||||||||||||
Loss (gain) on sale and payoff of loans |
- | - | - | (1,208 | ) | - | (1,208 | ) | ||||||||||||||||
Gain on repurchase of asset-backed securities issued |
- | - | - | 5,542 | - | 5,542 | ||||||||||||||||||
Change in other investments: |
- | |||||||||||||||||||||||
Income from investments in equity method investees |
- | - | - | 4,628 | - | 4,628 | ||||||||||||||||||
Fair value on other equity investments |
- | 394 | (650 | ) | (249 | ) | - | (505 | ) | |||||||||||||||
Realized gain on other investments |
- | - | - | (26 | ) | - | (26 | ) | ||||||||||||||||
Depreciation and amortization of fixed assets |
- | - | - | 891 | - | 891 | ||||||||||||||||||
Stock-based compensation expense |
2,159 | - | - | - | - | 2,159 | ||||||||||||||||||
Deferred income taxes |
- | (5,584 | ) | - | (240 | ) | - | (5,824 | ) | |||||||||||||||
Net change in operating assets and liabilities: |
- | |||||||||||||||||||||||
Decrease (increase) in interest receivable |
- | - | 65 | 1,385 | (72 | ) | 1,378 | |||||||||||||||||
Increase in receivables |
- | - | - | (22,419 | ) | - | (22,419 | ) | ||||||||||||||||
Decrease (increase) in marketable securities |
- | - | 295 | (3,588 | ) | - | (3,293 | ) | ||||||||||||||||
Decrease in restricted cash (excluding restricted cash |
- | - | - | (1,324 | ) | - | (1,324 | ) | ||||||||||||||||
(Increase) decrease in deposits and other assets |
3,513 | 4,326 | 559 | 13,117 | (14,977 | ) | 6,538 | |||||||||||||||||
Decrease in marketable securities sold, but not yet purchased |
- | - | - | 16,254 | - | 16,254 | ||||||||||||||||||
Decrease in interest payable |
- | - | - | 1,240 | - | 1,240 | ||||||||||||||||||
Increase (decrease) in accrued compensation and other liabilities |
885 | 128 | 556 | (10,399 | ) | (153 | ) | (8,983 | ) | |||||||||||||||
Net cash used in operating activities |
$ | (7,951 | ) | $ | (2,282 | ) | $ | 324 | $ | 5,007 | $ | (9,082 | ) | $ | (13,984 | ) | ||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Purchases of fixed assets |
- | - | - | (204 | ) | - | (204 | ) | ||||||||||||||||
Investment in subsidiary |
28,183 | 828 | 98,490 | - | (127,501 | ) | - | |||||||||||||||||
Purchases of other investments |
- | (844 | ) | (1,190 | ) | - | - | (2,034 | ) | |||||||||||||||
Sales of other investments |
- | 613 | 812 | (4,327 | ) | 15,202 | 12,300 | |||||||||||||||||
Funding of loans collateralizing asset-backed securities issued |
- | - | - | (614,431 | ) | - | (614,431 | ) | ||||||||||||||||
Funding of loans held for sale |
- | - | - | (2,752 | ) | - | (2,752 | ) | ||||||||||||||||
Funding of loans held for investment |
- | - | (6,151 | ) | (13,029 | ) | 5,666 | (13,514 | ) | |||||||||||||||
Sale and payoff of loans collateralizing asset-backed securities issued |
- | - | - | 482,876 | (5,666 | ) | 477,210 | |||||||||||||||||
Sales of loans held for sale |
- | - | - | 33,951 | - | 33,951 | ||||||||||||||||||
Principal receipts on loans collateralizing asset-backed securities issued |
- | - | - | 29,339 | - | 29,339 | ||||||||||||||||||
Principal receipts on loans held for investment |
- | - | 610 | 365 | - | 975 | ||||||||||||||||||
Repayment of note receivable |
- | - | - | 1,784 | - | 1,784 | ||||||||||||||||||
Net change in restricted cash reserved for lending activities |
- | - | - | 167,016 | - | 167,016 | ||||||||||||||||||
Cash collateral posted for total return swap |
- | - | - | 25,000 | - | 25,000 | ||||||||||||||||||
Net cash provided by (used in) investing activities |
$ | 28,183 | $ | 597 | $ | 92,571 | $ | 105,588 | $ | (112,299 | ) | $ | 114,640 | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Proceeds from CLO V facility |
- | - | - | 7,000 | - | 7,000 | ||||||||||||||||||
Proceeds from asset-backed securities issued |
- | - | - | 408,394 | - | 408,394 | ||||||||||||||||||
Repayment of asset-backed securities issued |
- | - | - | (503,617 | ) | - | (503,617 | ) | ||||||||||||||||
Distributions and dividend equivalents paid on common shares and RSUs |
(5,838 | ) | - | - | - | - | (5,838 | ) | ||||||||||||||||
Purchase of common shares for treasury |
(1,660 | ) | - | - | - | - | (1,660 | ) | ||||||||||||||||
Capital contributions of parent |
(5,003 | ) | 1,681 | (76,186 | ) | (41,873 | ) | 121,381 | - | |||||||||||||||
Capital contributions of nonredeemable non-controlling interest holders |
- | - | - | 92 | - | 92 | ||||||||||||||||||
Distributions to non-controlling interest shareholders |
- | - | (2,704 | ) | (1,164 | ) | - | (3,868 | ) | |||||||||||||||
Proceeds from exercises of stock options |
1,149 | - | - | - | - | 1,149 | ||||||||||||||||||
Employee Taxes Paid on Shares Withheld for Tax-withholding purposes |
(307 | ) | - | - | - | - | (307 | ) | ||||||||||||||||
Net cash (used in) provided by financing activities |
$ | (11,659 | ) | $ | 1,681 | $ | (78,890 | ) | $ | (131,168 | ) | $ | 121,381 | $ | (98,655 | ) | ||||||||
Net decrease in cash and cash equivalents |
8,573 | (4 | ) | 14,005 | (20,573 | ) | - | 2,001 | ||||||||||||||||
Cash and cash equivalents, beginning of period |
$ | 255 | $ | 1,763 | $ | 5,060 | $ | 78,414 | $ | - | 85,492 | |||||||||||||
Cash and cash equivalents, end of period |
8,828 | 1,759 | 19,065 | 57,841 | - | 87,493 |
(In thousands) |
Nine Months Ended September 30, 2016 |
|||||||||||||||||||||||
Parent Company |
Subsidiary Issuer |
Guarantor Subsidiary |
Non- Guarantor Subsidiaries |
Eliminations |
Consolidated JMP Group LLC |
|||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net income (loss) |
$ | 2,136 | $ | (6,094 | ) | $ | 17,391 | $ | 15,400 | $ | (22,667 | ) | $ | 6,166 | ||||||||||
Adjustments to reconcile net income to net cash provided by (used in) |
||||||||||||||||||||||||
Provision for loan losses |
- | - | - | 980 | - | 980 | ||||||||||||||||||
Accretion of deferred loan fees |
- | - | - | (1,224 | ) | - | (1,224 | ) | ||||||||||||||||
Amortization of liquidity discount, net |
- | - | - | (108 | ) | - | (108 | ) | ||||||||||||||||
Amortization of debt issuance costs |
- | 328 | - | - | - | 328 | ||||||||||||||||||
Amortization of original issue discount, related to CLO II and CLO III |
- | - | - | 1,814 | - | 1,814 | ||||||||||||||||||
Interest paid in kind |
- | - | - | (53 | ) | - | (53 | ) | ||||||||||||||||
Loss (gain) on sale and payoff of loans |
- | - | - | 961 | - | 961 | ||||||||||||||||||
Gain on repurchase of asset-backed securities issued |
- | - | (87 | ) | - | - | (87 | ) | ||||||||||||||||
Change in other investments: |
||||||||||||||||||||||||
Income from investments in equity method investees |
- | - | - | 238 | - | 238 | ||||||||||||||||||
Fair value on other equity investments |
- | (351 | ) | 298 | 1,872 | - | 1,819 | |||||||||||||||||
Incentive fees reinvested in general partnership interests |
- | - | - | - | - | - | ||||||||||||||||||
Realized gain on other investments |
- | - | (4,425 | ) | (3,556 | ) | - | (7,981 | ) | |||||||||||||||
Depreciation and amortization of fixed assets |
- | - | - | 968 | - | 968 | ||||||||||||||||||
Stock-based compensation expense |
4,199 | - | - | - | - | 4,199 | ||||||||||||||||||
Deferred income taxes |
- | (12,026 | ) | - | (219 | ) | - | (12,245 | ) | |||||||||||||||
Net change in operating assets and liabilities: |
||||||||||||||||||||||||
(Increase) decrease in interest receivable |
- | - | (7 | ) | 485 | 139 | 617 | |||||||||||||||||
Decrease (increase) in receivables |
- | - | - | 7,985 | (49 | ) | 7,936 | |||||||||||||||||
(Increase) decrease in marketable securities |
- | - | (696 | ) | 7,251 | 385 | 6,940 | |||||||||||||||||
Decrease in restricted cash (excluding restricted cash reserved for lending activities) |
- | 40 | - | 787 | - | 827 | ||||||||||||||||||
(Increase) decrease in deposits and other assets |
(945 | ) | 15,057 | 12,396 | (34,463 | ) | 16,664 | 8,709 | ||||||||||||||||
Increase in marketable securities sold, but not yet purchased |
- | - | - | (4,398 | ) | - | (4,398 | ) | ||||||||||||||||
Increase (decrease) in interest payable |
- | - | - | 650 | (66 | ) | 584 | |||||||||||||||||
Increase (decrease) in accrued compensation and other liabilities |
1,703 | 3,340 | 1,690 | (17,266 | ) | (1,365 | ) | (11,898 | ) | |||||||||||||||
Net cash used in operating activities |
$ | 7,093 | $ | 294 | $ | 26,560 | $ | (21,896 | ) | $ | (6,959 | ) | $ | 5,092 | ||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Purchases of fixed assets |
- | - | - | (325 | ) | - | (325 | ) | ||||||||||||||||
Investment in subsidiary |
3,573 | (7,077 | ) | (9,649 | ) | 6,581 | 6,572 | - | ||||||||||||||||
Purchases of other investments |
- | (3,642 | ) | (3,007 | ) | (1,527 | ) | 2,073 | (6,103 | ) | ||||||||||||||
Sales of other investments |
- | 2,179 | 21,752 | 17,956 | (2,396 | ) | 39,491 | |||||||||||||||||
Funding of loans collateralizing asset-backed securities issued |
- | - | - | (185,586 | ) | - | (185,586 | ) | ||||||||||||||||
Sale and payoff of loans collateralizing asset-backed securities issued |
- | - | - | 279,415 | - | 279,415 | ||||||||||||||||||
Principal receipts on loans collateralizing asset-backed securities issued |
- | - | - | 51,975 | - | 51,975 | ||||||||||||||||||
Repayments on loans held for investment |
- | - | - | 52 | - | 52 | ||||||||||||||||||
Net change in restricted cash reserved for lending activities |
- | - | - | (72,301 | ) | - | (72,301 | ) | ||||||||||||||||
Cash collateral posted for total return swap |
- | - | - | (240 | ) | - | (240 | ) | ||||||||||||||||
Net cash provided by (used in) investing activities |
$ | 3,573 | $ | (8,540 | ) | $ | 9,096 | $ | 96,000 | $ | 6,249 | $ | 106,378 | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Repayment of note payable |
- | - | - | 15,000 | (15,000 | ) | - | |||||||||||||||||
Repurchase of bonds payable |
- | - | - | - | (385 | ) | (385 | ) | ||||||||||||||||
Repayment of asset-backed securities issued |
- | - | - | (74,592 | ) | - | (74,592 | ) | ||||||||||||||||
Distributions and dividend equivalents paid on common shares and RSUs |
(6,236 | ) | - | - | - | - | (6,236 | ) | ||||||||||||||||
Purchases of shares of common stock for treasury |
(4,192 | ) | - | - | - | - | (4,192 | ) | ||||||||||||||||
Capital contributions of parent |
- | 3,578 | (19,673 | ) | - | 16,095 | - | |||||||||||||||||
Capital contributions of nonredeemable non-controlling interest holders |
- | - | (4,907 | ) | (1,041 | ) | - | (5,948 | ) | |||||||||||||||
Net cash (used in) provided by financing activities |
$ | (10,428 | ) | $ | 3,578 | $ | (24,580 | ) | $ | (60,633 | ) | $ | 710 | $ | (91,353 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
238 | (4,668 | ) | 11,076 | 13,471 | - | 20,117 | |||||||||||||||||
Cash and cash equivalents, beginning of period |
$ | 80 | 11,260 | 1,225 | 55,986 | - | 68,551 | |||||||||||||||||
Cash and cash equivalents, end of period |
318 | 6,592 | 12,301 | 69,457 | - | 88,668 |
22. Subsequent Events
On October 20, 2017, the Company’s board of directors declared cash distributions of $0.03 per share for the months of October, November, and December. The October distribution is payable on November 15, 2017, to shareholders of record as of October 31, 2017. The November distribution is payable on December 15, 2017, to shareholders of record as of November 30, 2017. The December distribution is payable on January 12, 2018, to shareholders of record as of December 29, 2017.
ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the unaudited condensed consolidated financial statements and the related notes included elsewhere in this report. For additional context with which to understand our financial condition and results of operations, see the MD&A for the fiscal year ended December 31, 2016 contained in our Form 10-K (the “Annual Report”), as well as the consolidated financial statements and notes contained therein.
Cautionary Statement Regarding Forward-Looking Statements
This MD&A and other sections of this Form 10-Q (the “Quarterly Report”) contain forward looking statements. We make forward-looking statements, as defined by the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and in some cases you can identify these statements by forward-looking words such as “if,” “shall,” “may,” “might,” “will likely result,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “intend,” “goal,” “objective,” “predict,” “potential” or “continue,” the negative of these terms, and other comparable terminology. These forward-looking statements, which are based on various underlying assumptions and expectations and are subject to risks, uncertainties and other unknown factors, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events that we believe to be reasonable. There are or may be important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the historical or future results, level of activity, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, those discussed under the caption “Risk Factors” in our Annual Report. In preparing this MD&A, we presume that readers have access to and have read the MD&A in our Annual Report, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K. We undertake no duty to update any of these forward-looking statements after the date of filing of this Quarterly Report to conform such forward-looking statements to actual results or revised expectations, except as otherwise required by law.
Overview
JMP Group LLC, together with its subsidiaries (collectively, the “Company”, “we”, or “us”), is a diversified capital markets firm headquartered in San Francisco, California. We have a diversified business model with a focus on small and middle-market companies and provide:
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• |
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investment banking services, including corporate finance, mergers and acquisitions and other strategic advisory services, to corporate clients; |
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• |
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sales and trading and related securities brokerage services to institutional investors; |
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• |
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equity research coverage of four target industries; |
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• |
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asset management products and services to institutional investors, high net-worth individuals and for our own account; and |
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management of collateralized loan obligations and a specialty finance company. |
Components of Revenues
We derive revenues primarily from: fees from our investment banking business, net commissions from our sales and trading business, management fees and incentive fees from our asset management business, and interest income earned on collateralized loan obligations we manage. We also generate revenues from principal transactions, interest, dividends and other income.
Investment Banking
We earn investment banking revenues from underwriting securities offerings, arranging private capital markets transactions and providing advisory services in mergers and acquisitions and other strategic transactions.
Underwriting Revenues
We earn revenues from securities offerings in which we act as an underwriter, such as initial public offerings and follow-on equity offerings. Underwriting revenues include management fees, underwriting fees, selling concessions and realized and unrealized net gains and losses on equity positions held in inventory for a period of time to facilitate the completion of certain underwritten offerings. We record underwriting revenues, net of related syndicate expenses, at the time an underwritten transaction is completed. In syndicated transactions, management estimates our share of transaction-related expenses incurred by the syndicate, and we recognize revenues net of such expense. On final settlement by the lead manager, typically 90 days from the trade date of the transaction, we adjust these amounts to reflect the actual transaction-related expenses and our resulting underwriting fee. We receive a higher proportion of total fees in underwritten transactions in which we act as a lead manager.
Strategic Advisory Revenues
Our strategic advisory revenues primarily consist of success fees received upon the closing of mergers and acquisitions but also include retainer fees received when we are first engaged to provide advisory services. We also earn fees for related advisory work and other services, such as fairness opinions and valuation analyses. These revenues may be earned for providing services to either the buyer or the seller involved in a transaction. We record strategic advisory revenues when the transactions or the services to be performed (or, if applicable, separate components thereof) are substantially completed, the fees are determinable and collection is reasonably assured.
Private Capital Markets and Other Revenues
We earn fees for private capital markets and other services in connection with transactions that are not underwritten, such as private placements of equity securities, private investments in public equity (“PIPE”) transactions and Rule 144A offerings. We record private placement revenues on the closing date of these transactions.
Since our investment banking revenues are generally recognized at the time of completion of a transaction or the services to be performed, these revenues typically vary between periods and may be affected considerably by the timing of the closing of significant transactions.
Brokerage Revenues
Our brokerage revenues include trading commissions paid by customers for purchases or sales of exchange-listed and over-the-counter (“OTC”) equity securities. Commissions are recognized on a trade date basis. Brokerage revenues also include net trading gains and losses that result from market-making activities and from our commitment of capital to facilitate customer transactions. Our brokerage revenues may vary between periods, in part depending on commission rates, trading volumes and our ability to deliver equity research and other value-added services to our clients. The ability to execute trades electronically, through the Internet and through other alternative trading systems, has increased pressure on trading commissions and spreads across our industry. We expect this trend toward alternative trading systems and the related pricing pressure in the brokerage business to continue. We are, to some extent, compensated through brokerage commissions for the equity research and other value-added services we deliver to our clients. These “soft dollar” practices have been the subject of discussion among regulators, the investment banking community and our sales and trading clients. In particular, commission sharing arrangements have been adopted by some large institutional investors. In these arrangements, an institutional investor concentrates its trading with fewer “execution” brokers and pays a fixed amount for execution, with a designated amount set aside for payments to other firms for research or other brokerage services. Accordingly, trading volume directed to us by investors that enter into such arrangements may be reduced, or eliminated, but we may be compensated for our research and sales efforts through allocations of the designated amounts. Depending on the extent to which we agree to this practice and depending on our ability to enter into arrangements on terms acceptable to us, this trend would likely impair the revenues and profitability of our brokerage business by negatively affecting both volumes and trading commissions.
Asset Management Fees
We earn asset management fees for managing a family of investment partnerships, including hedge funds, hedge funds of funds and private equity funds, as well as a publicly traded specialty finance company, HCC. These fees include base management fees and incentive fees. Base management fees are generally determined by the fair value of the assets under management or the aggregate capital commitment and the fee schedule for each fund or account. Incentive fees are based upon the investment performance of the funds or accounts. For most of our funds, incentive fees equate to a percentage of the excess investment return above a specified high-water mark or hurdle rate over a defined period of time. For private equity funds, incentive fees equate to a percentage of the realized gain from the disposition of each portfolio investment in which each investor participates, which we earn after returning contributions by an investor for a portfolio investment. Generally, we do not earn management fees calculated on the basis of average assets under management (“AUM”).
As of September 30, 2017 the contractual base management fees earned from each of our investment funds or companies ranged between 1% and 2% of assets under management or were between 1% and 2% of aggregate committed capital. The contractual incentive fees were generally 20%, subject to high-water marks, for the hedge funds; 5% to 20%, subject to high-water marks or a performance hurdle rate, for the hedge funds of funds; and 20%, subject to high-water marks, for Harvest Growth Capital LLC (“HGC”) and Harvest Growth Capital II LLC (“HGC II”). Our asset management revenues are subject to fluctuations due to a variety of factors that are unpredictable, including the overall condition of the economy, the securities markets as a whole and our core sectors. These market and industry conditions can have a material effect on the inflows and outflows of assets under management and on the performance of our asset management funds. For example, a significant portion of the performance-based or incentive fee revenues that we recognize are based on the value of securities held in the funds we manage. The value of these securities includes unrealized gains or losses that may change from one period to another.
Asset management fees for the CLOs we manage currently consist only of senior and subordinated base management fees. We recognize base management fees for the CLOs on a monthly basis over the period during which the collateral management services are performed. The base management fees for the CLOs are calculated as a percentage of the average aggregate collateral balances for a specified period. As we have consolidated CLO I, CLO II, CLO III and CLO IV, the management fees earned at JMP Credit Advisors LLC (“JMPCA”) from the CLOs are eliminated on consolidation in accordance with GAAP. For both the nine months ended September 30, 2017 and 2016, the contractual senior and subordinated base management fees earned from CLO I and CLO II were 0.50% of the average aggregate collateral balance. For the nine months ended September 30, 2017 and 2016, the contractual senior and subordinated base management fees earned from CLO III were 0.327% and 0.219%, respectively, of the average aggregate collateral balance. For the nine months ended September 30, 2017, the contractual base and subordinated fees earned from CLO IV, after securitization, were 0.50% of the average aggregate collateral balance.
The redemption provisions of our funds require at least 90 days’ advance notice. The redemption provisions do not apply to the CLOs.
The following tables present certain information with respect to the investment funds managed by HCS, JMPAM, HCAP Advisors, JMP Capital I Managing Member, and CLOs and assets referenced by the TRS managed by JMPCA:
(In thousands) |
Assets Under Management (1) at |
Company's Share of |
||||||||||||||
September 30, 2017 |
December 31, 2016 |
September 30, 2017 |
December 31, 2016 |
|||||||||||||
Funds Managed by HCS, JMPAM, HCAP Advisors and JMP Capital I Managing Member: |
||||||||||||||||
Hedge Funds: |
||||||||||||||||
Harvest Small Cap Partners |
$ | 507,348 | $ | 509,833 | $ | 2,794 | $ | 3,416 | ||||||||
Harvest Agriculture Select (2) |
107,097 | 101,132 | 9,162 | 9,027 | ||||||||||||
Private Equity Funds: |
||||||||||||||||
Harvest Growth Capital LLC (3) |
22,497 | 22,089 | 924 | 960 | ||||||||||||
Harvest Growth Capital LLC II (3) |
148,868 | 131,015 | 3,079 | 2,844 | ||||||||||||
Harvest Intrexon Enterprise Fund |
245,157 | 245,156 | 1,500 | 1,500 | ||||||||||||
JMP Realty Partners I |
22,025 | 16,981 | 2,180 | 1,681 | ||||||||||||
Other |
12,109 | 6,988 | N/A | N/A | ||||||||||||
Funds of Funds: |
||||||||||||||||
JMP Masters Fund (4) |
2,880 | 4,010 | 3 | 5 | ||||||||||||
Loans: |
||||||||||||||||
Harvest Capital Credit Corporation |
115,996 | 141,706 | N/A | N/A | ||||||||||||
JMP Capital I |
23,529 | - | 2,329 | N/A | ||||||||||||
HCS, JMPAM, HCAP Advisors and JMP Capital I Managing Members Totals |
$ | 1,207,506 | $ | 1,178,910 | $ | 21,971 | $ | 19,433 | ||||||||
CLOs Managed by JMPCA: |
||||||||||||||||
CLO I (3) |
- | 223,914 | N/A | N/A | ||||||||||||
CLO II (3) |
- | 332,233 | N/A | N/A | ||||||||||||
CLO III (3) |
361,153 | 361,722 | N/A | N/A | ||||||||||||
CLO IV (3) |
450,835 | - | N/A | N/A | ||||||||||||
CLO V (3) |
14,547 | - | N/A | N/A | ||||||||||||
Assets Referenced in TRS (5) |
- | 155,177 | N/A | N/A | ||||||||||||
JMPCA Totals |
$ | 826,535 | $ | 1,073,046 | $ | N/A | $ | N/A | ||||||||
JMP Group LLC Totals |
$ | 2,034,041 | $ | 2,251,956 | $ | 21,971 | $ | 19,433 |
(1) |
For hedge funds, funds of funds, HGC, HGC II and Other, assets under management represent the net assets of such funds. For Harvest Intrexon Enterprise Fund (“HIEF”), JMP Realty Partners I and JMP Capital I, assets under management represent the commitment amount that is subject to the management fee calculation. For CLOs, assets under management represent the sum of the aggregate collateral balance and restricted cash to be reinvested in collateral, upon which management fees are earned. |
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(2) |
Harvest Agriculture Select (“HAS”) includes managed accounts in which the Company has neither equity investment nor control. These are included as they follow the respective funds' strategies and earn fees. |
||||||||||||||||||||||||
(3) |
CLO I, CLO II and CLO III were consolidated in the Company’s Statements of Financial Condition at December 31, 2016. CLO III, CLO IV, and CLO V were consolidated in the Company’s Statements of Financial Condition at September 30, 2017. |
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(4) |
JMP Masters began the process of liquidation on December 31, 2015. |
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(5) |
Assets Referenced in TRS represent the fair value of the settled loans in the loan portfolio held by the counterparty. |
Funds Managed by HCS and JMPAM |
||||||||||||||||
Hedge Funds |
Private Equity Funds |
Funds of Funds |
Total |
|||||||||||||
AUM at December 31, 2016 |
$ | 610,965 | $ | 422,229 | $ | 4,010 | 1,037,204 | |||||||||
Contributions |
32,927 | 5,860 | - | 38,787 | ||||||||||||
Redemptions |
(34,165 | ) | - | - | (34,165 | ) | ||||||||||
Distributions from realization event |
- | (14,223 | ) | (641 | ) | (14,864 | ) | |||||||||
Appreciation |
4,718 | 36,790 | (489 | ) | 41,019 | |||||||||||
AUM at September 30, 2017 |
$ | 614,445 | $ | 450,656 | $ | 2,880 | 1,067,981 |
Funds Managed by HCS and JMPAM |
||||||||||||||||
(In thousands) |
Hedge Funds |
Private Equity Funds |
Funds of Funds |
Total |
||||||||||||
AUM at December 31, 2015 |
$ | 631,964 | $ | 391,490 | $ | 5,110 | 1,028,564 | |||||||||
Contributions |
98,289 | 30,581 | - | 128,870 | ||||||||||||
Redemptions |
(96,305 | ) | - | (1,184 | ) | (97,489 | ) | |||||||||
Distributions from realization event |
- | (138 | ) | - | (138 | ) | ||||||||||
Appreciation |
21,260 | (1,429 | ) | 76 | 19,907 | |||||||||||
AUM at September 30, 2016 |
$ | 655,208 | $ | 420,504 | $ | 4,002 | 1,079,714 |
AUM related to hedge funds, private equity funds and funds of funds increased $30.8 million, or 3.0%, from $1,037.2 million at December 31, 2016 to $1,068.0 million at September 30, 2017. This increase was primarily attributed to $5.9 million contributions and $36.8 million appreciation, in our private equity funds and $32.9 million capital contributions and $4.7 million appreciation in the hedge funds managed by HCS, partially offset by $34.2 million redemptions and $14.2 million distributions relating to one of the private equity funds.
AUM related to hedge funds, private equity funds and funds of funds increased $51.1 million, or 5.0%, from $1,028.6 million at December 31, 2015 to $1,079.7 million at September 30, 2016. This increase was primarily attributed to capital contributions of $128.9 million in the hedge funds and private equity funds managed by HCS and JMPAM and appreciation of $21.3 million in the funds managed by HCS and JMPAM, partially offset by redemptions of $96.3 million related to funds managed by HCS. The increase of capital contributions was driven by the launch of JMPRP in September 2016 and related capital commitments. The redemptions were driven by the closure of HFP in August 2016.
(In thousands) |
Three Months Ended September 30, 2017 |
Three Months Ended September 30, 2016 |
||||||||||||||||||||||
Company's Share of Change in Fair Value |
Management Fee |
Incentive Fee |
Company's Share of Change in Fair Value |
Management Fee |
Incentive Fee |
|||||||||||||||||||
Hedge Funds: |
||||||||||||||||||||||||
Harvest Small Cap Partners |
$ | 134 | $ | 1,850 | $ | 19 | $ | (88 | ) | $ | 1,913 | $ | (135 | ) | ||||||||||
Harvest Agriculture Select (1) |
256 | 246 | 54 | 102 | 317 | 1 | ||||||||||||||||||
Harvest Technology Partners |
- | - | - | 22 | 82 | - | ||||||||||||||||||
Harvest Financial Partners |
- | - | - | 278 | 20 | 6 | ||||||||||||||||||
Private Equity Funds: |
||||||||||||||||||||||||
Harvest Growth Capital LLC |
(68 | ) | - | - | (70 | ) | - | - | ||||||||||||||||
Harvest Growth Capital II LLC |
(63 | ) | 135 | - | 49 | 246 | - | |||||||||||||||||
Harvest Intrexon Enterprise Fund |
- | 613 | - | (8 | ) | 613 | - | |||||||||||||||||
JMP Realty Partners I |
(6 | ) | 144 | 17 | - | 15 | - | |||||||||||||||||
Other |
- | 3 | - | - | 2 | - | ||||||||||||||||||
Funds of Funds: |
||||||||||||||||||||||||
JMP Masters Fund (2) |
- | 8 | - | 13 | 9 | - | ||||||||||||||||||
Loans: |
||||||||||||||||||||||||
Harvest Capital Credit Corporation |
N/A | 643 | - | N/A | 725 | 149 | ||||||||||||||||||
CLOs: |
||||||||||||||||||||||||
CLO I (3) |
N/A | - | - | N/A | 383 | - | ||||||||||||||||||
CLO II (3) |
N/A | - | - | N/A | 424 | - | ||||||||||||||||||
CLO III (3) |
N/A | 303 | - | N/A | 303 | - | ||||||||||||||||||
CLO IV (3) |
N/A | 576 | - | N/A | - | - | ||||||||||||||||||
CLO V (3) |
N/A | 9 | - | N/A | - | - | ||||||||||||||||||
Assets Referenced in TRS (4) |
N/A | - | - | N/A | 63 | 75 | ||||||||||||||||||
Totals |
$ | 253 | $ | 4,530 | $ | 90 | $ | 298 | $ | 5,115 | $ | 96 |
(1) |
HAS includes managed accounts in which the Company has neither equity investment nor control. These are included with the funds, as they follow the respective strategies and earn fees. |
(2) |
JMP Masters began the process of liquidation on December 31, 2015. |
(3) |
Revenues earned from CLO I, CLO II, CLO III, CLO IV and CLO V are consolidated and then eliminated in consolidation in the Company’s Statements of Operations, net of non-controlling interest. |
(4) |
Revenues earned from Assets referenced in TRS are consolidated and then eliminated in consolidation in the Company’s Statements of Operations. All of the assets referenced in TRS were sold to CLO IV in the second quarter of 2017, and TRS completed its liquidation in the third quarter of 2017. |
(In thousands) |
Nine Months Ended September 30, 2017 |
Nine Months Ended September 30, 2016 |
||||||||||||||||||||||
Company's Share of Change in Fair Value |
Management Fee |
Incentive Fee |
Company's Share of Change in Fair Value |
Management Fee |
Incentive Fee |
|||||||||||||||||||
Hedge Funds: |
||||||||||||||||||||||||
Harvest Small Cap Partners |
$ | (82 | ) | $ | 5,853 | $ | 1,651 | $ | 201 | $ | 5,601 | $ | 5,378 | |||||||||||
Harvest Agriculture Select (1) |
580 | 705 | 65 | (79 | ) | 950 | 1 | |||||||||||||||||
Harvest Technology Partners |
1 | - | - | (156 | ) | 249 | - | |||||||||||||||||
Harvest Financial Partners |
- | - | - | (57 | ) | 122 | 6 | |||||||||||||||||
Private Equity Funds: |
||||||||||||||||||||||||
Harvest Growth Capital LLC |
(6 | ) | - | - | (240 | ) | - | - | ||||||||||||||||
Harvest Growth Capital II LLC |
607 | 452 | - | 49 | 738 | - | ||||||||||||||||||
Harvest Intrexon Enterprise Fund |
(13 | ) | 1,839 | - | (23 | ) | 1,870 | - | ||||||||||||||||
JMP Realty Partners I |
114 | 277 | 17 | - | 15 | - | ||||||||||||||||||
Other |
- | 13 | - | - | 2 | - | ||||||||||||||||||
Funds of Funds: |
||||||||||||||||||||||||
JMP Masters Fund (2) |
4 | 25 | - | 24 | 30 | - | ||||||||||||||||||
Loans: |
||||||||||||||||||||||||
Harvest Capital Credit Corporation |
N/A | 2,018 | 260 | N/A | 2,206 | 1,275 | ||||||||||||||||||
CLOs: |
||||||||||||||||||||||||
CLO I (3) |
N/A | 179 | - | N/A | 1,223 | - | ||||||||||||||||||
CLO II (3) |
N/A | 734 | - | N/A | 1,254 | - | ||||||||||||||||||
CLO III (3) |
N/A | 898 | - | N/A | 705 | - | ||||||||||||||||||
CLO IV (3) |
N/A | 690 | - | N/A | - | - | ||||||||||||||||||
CLO V (3) |
N/A | 9 | - | N/A | - | - | ||||||||||||||||||
Assets Referenced in TRS (4) |
N/A | 88 | - | N/A | 188 | 75 | ||||||||||||||||||
Totals |
$ | 1,205 | $ | 13,780 | $ | 1,993 | $ | (281 | ) | $ | 15,153 | $ | 6,735 |
(1) |
HAS includes managed accounts in which the Company has neither equity investment nor control. These are included with the funds, as they follow the respective strategies and earn fees. |
(2) |
JMP Masters began the process of liquidation on December 31, 2015. |
(3) |
Revenues earned from CLO I, CLO II, CLO III, CLO IV and CLO V are consolidated and then eliminated in consolidation in the Company’s Statements of Operations, net of non-controlling interest. |
(4) |
Revenues earned from Assets referenced in TRS are consolidated and then eliminated in consolidation in the Company’s Statements of Operations. All of the assets referenced in TRS were sold to CLO IV in the second quarter of 2017, and TRS completed its liquidation in the third quarter of 2017. |
Principal Transactions
Principal transaction revenues include net realized and unrealized gains and losses resulting from our principal investments in equity and other securities for our own account as well as equity-linked warrants received from certain investment banking clients and limited partner investments in private funds managed by third parties. Principal transaction revenues also include earnings, or losses, attributable to interests in investment partnerships managed by our asset management subsidiaries, HCS and JMPAM, which are accounted for using the equity method of accounting. In addition, our principal transaction revenues include unrealized gains or losses on an investment in an entity that acquires buildings and land for the purpose of holding, managing and selling the properties and also include unrealized gains or losses on the investments in private companies by JMP Holding LLC and JMP Capital LLC.
Gain on Sale and Payoff of Loans
Gain on sale and payoff of loans consists of gains and losses from the sale and payoff of loans collateralizing asset-backed securities. Gains are recorded when the proceeds exceed the carrying value of the loan. Gain on sale, payoff and mark-to-market of loans also consists of the lower of cost or market adjustments arising from loans held for sale. Losses are recorded for a loan held for sale when the carrying value exceeds fair value.
Net Dividend Income
Net dividend income includes dividends from our investments offset by dividend expense resulting from short positions in our principal investment portfolio.
Other Income
Other income includes revenues from equity method investments, revenues from fee-sharing arrangements with our funds, and fees earned to raise capital for third-party investment partnerships.
Interest Income
Interest income primarily consists of interest income earned on loans collateralizing asset-backed securities issued and loans held for investment. Interest income on loans is comprised of the stated coupon as a percentage of the face amount receivable as well as accretion of purchase discounts and deferred fees. Interest income is recorded on an accrual basis, in accordance with the terms of the respective loans, unless such loans are placed on non-accrual status.
Interest Expense
Interest expense primarily consists of interest expense related to asset-backed securities issued and notes payable, as well as the amortization of bond issuance costs. Interest expense on asset-backed securities is the stated coupon payable as a percentage of the principal amount in addition to amortization of the liquidity discount that was recorded at the acquisition date of CLO I. Interest expense is recorded on an accrual basis, in accordance with the terms of the respective asset-backed securities issued and notes payable.
Provision for Loan Losses
Provision for loan losses includes the provision for losses recognized on our loan notes and non-revolving credit agreements at JMP Capital LLC and JMP Investment Holdings (collectively loans held for investment) and on loans collateralizing asset-backed securities (“ABS”) in order to record the loans held for investment and ABS at their estimated net realizable value. We maintain an allowance for loan losses that is intended to estimate loan losses inherent in JMP Capital LLC’s loan portfolio. A provision for loan losses is charged to expense to establish the allowance for loan losses. The allowance for loan losses is maintained at a level, in the opinion of management, sufficient to offset estimated losses inherent in the loan portfolio as of the date of the financial statements. The appropriateness of the allowance and the allowance components are reviewed quarterly. Our estimate of each allowance component is based on observable information and on market and third-party data that we believe are reflective of the underlying loan losses being estimated. We employ internally developed and third-party estimation tools for measuring credit risk (loan ratings, probability of default, and exposure at default).
A specific reserve is provided for loans that are considered impaired. A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. We measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral securing the loan, if the loan is collateral-dependent, depending on the circumstances and our collection strategy. For those loans held by CLO I at the date of acquisition by JMP Credit, and deemed impaired at that date or a subsequent date, allowance for loan losses is calculated considering two additional factors. For loans deemed impaired at the date of acquisition, if there is a further decline in expected future cash flows, this reduction is recognized as a specific reserve in accordance with the guidance above. For those loans deemed impaired subsequent to the acquisition date, or for loans held at CLO II, CLO III, CLO IV or CLO V, if the net realizable value is lower than the current carrying value, the carrying value is reduced, and the difference is booked as a provision for loan losses. If the total discount from unpaid principal balance to carrying value is larger than the expected loss at the date of assessment, no provision for loan losses is recognized.
Loans which are deemed to be uncollectible are charged off, and the charged-off amount results in a reduced allowance.
Components of Expenses
We classify our expenses as compensation and benefits; administration; brokerage, clearing and exchange fees; travel and business development; communications and technology; occupancy; professional fees, depreciation, impairment loss on purchased management contract, and other. A significant portion of our expense base is variable, including compensation and benefits; brokerage, clearing and exchange fees; travel and business development; and communication and technology expenses.
Compensation and Benefits
Compensation and benefits is the largest component of our expenses and includes employees’ base pay, performance bonuses, sales commissions, related payroll taxes, and medical and benefits expenses, as well as expenses for contractors, temporary employees and equity-based compensation. Our employees receive a substantial portion of their compensation in the form of an individual, performance-based bonus. As is the widespread practice in our industry, we pay bonuses on an annual basis, and for senior professionals these bonuses typically make up a large portion of their total compensation. A portion of the performance-based bonuses paid to certain senior professionals is paid in the form of deferred compensation. Bonus payments may have a greater impact on our cash position and liquidity in the periods in which they are paid than would otherwise be reflected in our Consolidated Statements of Operations. We accrue for the estimated amount of these bonus payments ratably over the applicable service period.
Compensation is accrued with specific ratios of total compensation and benefits to total revenues applied to specific revenue categories, with adjustments made if, in management’s opinion, such adjustments are necessary and appropriate to maintain competitive compensation levels.
Administration
Administration expense primarily includes the cost of hosted conferences, non-capitalized systems and software expenditures, insurance, business tax (non-income), office supplies, recruiting, and regulatory fees.
Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fees include the cost of floor and electronic brokerage and execution, securities clearance, and exchange fees. We clear our securities transactions through National Financial Services. Changes in brokerage, clearing and exchange fees fluctuate largely in line with the volume of our sales and trading activity.
Travel and Business Development
Travel and business development expense is net of expenses reimbursed by clients.
Communications and Technology
Communications and technology expense primarily relates to the cost of communication and connectivity, information processing and subscriptions to certain market data feeds and services.
Professional Fees
Professional fees primarily relate to legal and accounting professional services.
Other Expenses
Other operating expenses primarily consist of CLO administration expense.
Income Taxes
JMP Group LLC is a publicly traded partnership, taxed as a partnership, and not as a corporation, for U.S. federal income tax purposes, so long as 90% or more of its gross income for each taxable year constitutes “qualifying income.”
The Company’s effective tax rate is directly impacted by the proportion of income subject to tax compared to income not subject to tax. JMP Group Inc., a wholly owned subsidiary, is subject to U.S. federal and state income taxes. The remainder of the Company’s income is generally not subject to corporate-level taxation.
The Company recognizes deferred tax assets and liabilities in accordance with ASC 740, Income Taxes, which are determined based upon the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce the deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized.
The Company applies the accounting principles related to uncertainty in income taxes. Under the guidance, the Company recognizes a tax benefit from an uncertain position only if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authorities’ widely understood administrative practices and precedents. If this threshold is met, the Company measures the tax benefit as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
The Company’s policy for recording interest and penalties associated with the tax audits or unrecognized tax benefits, if any, is to record such items as a component of income tax.
Non-controlling Interest
Non-controlling interest for both the nine months ended September 30, 2017 and 2016 includes the interest of third parties in CLO I, CLO II, CLO III, and HCAP Advisors, partially-owned subsidiaries consolidated in our financial statements.
The Company currently manages several asset management funds, which are structured as limited partnerships, and is the general partner of each. The Company assesses whether the partnerships meet the definition of a variable interest entities (“VIEs”) in accordance with ASC 810-10-15-14 and whether the Company qualifies as the primary beneficiary. Funds determined not to meet the definition of a VIE are considered voting interest entities, for which the rights of the limited partners are evaluated to determine if consolidation is necessary. Such guidance provides that the presumption that the general partner controls the limited partnership may be overcome if the limited partners have substantive kick-out rights. With exception of HGC and HGC II, the partnership agreements for these funds provide for the right of the limited partners to remove the general partners by a simple majority vote of the non-affiliated limited partners. Because of these substantive kick-out rights, the Company, as the general partner, does not control these funds and therefore does not consolidate them. The Company accounts for its investments in these non-consolidated funds under the equity method of accounting.
On August 6, 2010, the Company transferred 109 subordinated notes of CLO I to certain employees in exchange for their interests in JMP Credit Corporation. As a result of the aforementioned transfer, the Company owned approximately 94% of the subordinated notes of CLO I. CLO I initiated liquidation proceedings in the fourth quarter of 2016 and completed its liquidation in the first quarter of 2017.
On April 30, 2013, entities sponsored by the Company closed on a $343.8 million CLO. The senior notes offered in this transaction (the “Secured Notes”) were issued by CLO II, a special purpose Cayman vehicle, and co-issued in part by JMP Credit Advisors CLO II LLC, a special purpose Delaware vehicle, and were backed by a diversified portfolio of broadly syndicated leveraged loans. The Company, through a wholly-owned subsidiary, managed CLO II from issuance through its liquidation in the second quarter of 2017. From issuance through December 31, 2013, the Company owned $17.3 million, or 72.8%, of the subordinated notes of the issuer (the “Subordinated Notes”). In the first quarter of 2014, the Company repurchased $6.0 million of Subordinated Notes, increasing its ownership to 98.0%. In March 2017, the Company repurchased $7.0 million of Class F notes. CLO II began and completed its liquidation in the second quarter of 2017.
On September 30, 2014, the Company closed on a $370.5 million CLO. The proceeds from the close of the CLO were used to pay off and retire the warehouse facility that had previously funded the loan assets. A third party and employees of JMPCA purchased subordinated notes in CLO III, reducing the Company’s investment in the subordinated notes to $4.7 million, or 13.5%. The senior notes offered in this transaction were issued by CLO III and are backed primarily by a diversified portfolio of broadly syndicated leveraged loans. These senior notes were subject to a two-year non-call period. CLO III has a four-year reinvestment period, through October 17, 2018, that allows for the use of the proceeds from any principal repayments on, or any sales of, collateral assets towards the purchase of qualifying replacement assets, subject to certain conditions and limitations. The Company was identified as the primary beneficiary, based on the ability to direct activities of CLO III through its subsidiary manager, JMP Credit Advisors, and its equity ownership. On September 27, 2016, the Company repurchased $12.8 million face value of the unsecured subordinated notes from CLO III non-controlling interests, increasing the Company’s ownership of unsecured subordinated notes from 13.5% to 46.7%.
HCAP Advisors was formed on December 18, 2012. HCAP Advisors appointed JMP Group LLC as its Manager effective May 1, 2013 and began offering investment advisory services. The Company owns 51% equity interest in the entity.
Results of Operations
The following table sets forth our results of operations for the three and nine months ended September 30, 2017 and 2016, and is not necessarily indicative of the results to be expected for any future period.
(In thousands) |
Three Months Ended September 30, |
Nine Months Ended September 30, |
Three Month Change |
Nine Month Change |
||||||||||||||||||||||||||||
2017 |
2016 |
2017 |
2016 |
$ |
% |
$ |
% |
|||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||||||
Investment banking |
$ | 22,085 | $ | 15,048 | $ | 54,813 | $ | 41,719 | $ | 7,037 | 46.8 | % | $ | 13,094 | 31.4 | % | ||||||||||||||||
Brokerage |
4,763 | 5,015 | 15,127 | 16,921 | (252 | ) | -5.0 | % | (1,794 | ) | -10.6 | % | ||||||||||||||||||||
Asset management fees |
4,014 | 4,044 | 14,078 | 18,958 | (30 | ) | -0.7 | % | (4,880 | ) | -25.7 | % | ||||||||||||||||||||
Principal transactions |
(1,392 | ) | 2,764 | (3,608 | ) | 10,326 | (4,156 | ) | -150.4 | % | (13,934 | ) | -134.9 | % | ||||||||||||||||||
Gain (loss) on sale, payoff and mark-to-market of loans |
278 | (52 | ) | 1,208 | (961 | ) | 330 | 634.6 | % | 2,169 | 225.7 | % | ||||||||||||||||||||
Net dividend income |
278 | 230 | 817 | 736 | 48 | 20.9 | % | 81 | 11.0 | % | ||||||||||||||||||||||
Other income |
282 | 262 | 921 | 534 | 20 | 7.6 | % | 387 | 72.5 | % | ||||||||||||||||||||||
Non-interest revenues |
30,308 | 27,311 | 83,356 | 88,233 | 2,997 | 11.0 | % | (4,877 | ) | -5.5 | % | |||||||||||||||||||||
Interest income |
10,900 | 11,472 | 29,663 | 35,997 | (572 | ) | -5.0 | % | (6,334 | ) | -17.6 | % | ||||||||||||||||||||
Interest expense |
(8,811 | ) | (8,212 | ) | (24,649 | ) | (24,297 | ) | (599 | ) | -7.3 | % | (352 | ) | -1.4 | % | ||||||||||||||||
Net interest income |
2,089 | 3,260 | 5,014 | 11,700 | (1,171 | ) | -35.9 | % | (6,686 | ) | -57.1 | % | ||||||||||||||||||||
Gain (loss) repurchase/early retirement of debt |
- | - | (5,332 | ) | - | - | N/A | (5,332 | ) | N/A | ||||||||||||||||||||||
Provision for loan losses |
(368 | ) | 104 | (3,488 | ) | (980 | ) | (472 | ) | -453.8 | % | (2,508 | ) | -255.9 | % | |||||||||||||||||
Total net revenues |
32,029 | 30,675 | 79,550 | 98,953 | 1,354 | 4.4 | % | (19,403 | ) | -19.6 | % | |||||||||||||||||||||
Non-interest expenses |
||||||||||||||||||||||||||||||||
Compensation and benefits |
24,563 | 22,167 | 69,013 | 70,273 | 2,396 | 10.8 | % | (1,260 | ) | -1.8 | % | |||||||||||||||||||||
Administration |
1,459 | 1,808 | 5,999 | 5,640 | (349 | ) | -19.3 | % | 359 | 6.4 | % | |||||||||||||||||||||
Brokerage, clearing and exchange fees |
740 | 734 | 2,288 | 2,308 | 6 | 0.8 | % | (20 | ) | -0.9 | % | |||||||||||||||||||||
Travel and business development |
709 | 1,019 | 2,735 | 3,548 | (310 | ) | -30.4 | % | (813 | ) | -22.9 | % | ||||||||||||||||||||
Communication and technology |
1,046 | 1,033 | 3,150 | 3,093 | 13 | 1.3 | % | 57 | 1.8 | % | ||||||||||||||||||||||
Professional fees |
1,094 | 1,119 | 3,109 | 3,245 | (25 | ) | -2.2 | % | (136 | ) | -4.2 | % | ||||||||||||||||||||
Other |
1,760 | 1,790 | 6,223 | 5,473 | (30 | ) | -1.7 | % | 750 | 13.7 | % | |||||||||||||||||||||
Total non-interest expenses |
31,371 | 29,670 | 92,517 | 93,580 | 1,701 | 5.7 | % | (1,063 | ) | -1.1 | % | |||||||||||||||||||||
Income (loss) before income tax expense |
658 | 1,005 | (12,967 | ) | 5,373 | (347 | ) | -34.5 | % | (18,340 | ) | -341.3 | % | |||||||||||||||||||
Income tax expense (benefit) |
1,113 | (597 | ) | (169 | ) | (793 | ) | 1,710 | 286.4 | % | 624 | 78.7 | % | |||||||||||||||||||
Net income (loss) |
(455 | ) | 1,602 | (12,798 | ) | 6,166 | (2,057 | ) | -128.4 | % | (18,964 | ) | -307.6 | % | ||||||||||||||||||
Less: Net income attributable to non-controlling interest |
780 | 941 | 1,712 | 4,029 | (161 | ) | -17.1 | % | (2,317 | ) | -57.5 | % | ||||||||||||||||||||
Net income (loss) attributable to JMP Group LLC |
$ | (1,235 | ) | $ | 661 | $ | (14,510 | ) | $ | 2,137 | $ | (1,896 | ) | -286.8 | % | $ | (16,647 | ) | -779.0 | % |
Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
Overview
Total net revenues after provision for loan losses increased $1.4 million, or 4.4%, from $30.7 million for the quarter ended September 30, 2016 to $32.1 million for the quarter ended September 30, 2017, primarily resulting from a $3.0 million increase in non-interest revenues, partially offset by a $1.2 million decline in net interest income.
Non-interest revenues increased $3.0 million, or 11.0%, from $27.3 million for the quarter ended September 30, 2016 to $30.3 million in the same period in 2017. This increase was driven by a $7.0 million increase in investment banking, partially offset by a $4.2 million decline in principal transactions.
Provision for loan losses increased $0.5 million from a reversal of $0.1 million for the quarter ended September 30, 2016 to $0.4 million for the quarter ended September 30, 2017.
Total non-interest expenses increased $1.7 million, or 5.7%, from $29.7 million for the quarter ended September 30, 2016 to $31.4 million for the quarter ended September 30, 2017, primarily due to a $2.4 million increase in compensation and benefits, partially offset by a $0.3 million decrease in administration and a $0.3 million decrease in travel and business development.
Net income attributable to JMP Group LLC decreased $1.9 million from $0.7 million for the quarter ended September 30, 2016 to a net loss of $1.2 million for the quarter ended September 30, 2017.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Overview
Total net revenues after provision for loan losses decreased $19.4 million, or 19.6%, from $99.0 million for the nine months ended September 30, 2016 to $79.6 million for the nine months ended September 30, 2017, resulting from a decline in non-interest revenues of $4.9 million, a $5.3 million loss on early retirement of debt, a decline in net interest income of $6.3 million, and an increase in provision for loan losses of $2.5 million.
Non-interest revenues decreased $4.9 million, or 5.5%, from $88.2 million for the nine months ended September 30, 2016 to $83.4 million in the same period in 2017. This decrease was primarily driven by a $1.8 million decline in brokerage, a $4.9 million decrease in asset management fees and a $13.9 million decrease in principal transactions, partially offset by a $13.1 million increase in investment banking and a $2.2 million gain on the sale, payoff and mark-to-market of loans.
A loss on the repurchase of debt of $5.3 million for the nine months ended September 30, 2017 was primarily due to the liquidation of CLO II in conjunction with the launch of CLO IV.
Provision for loan losses increased $2.5 million from $1.0 million for the nine months ended September 30, 2016 to $3.5 million for the nine months ended September 30, 2017.
Total non-interest expenses decreased $1.1 million, or 1.1%, from $93.6 million for the nine months ended September 30, 2016 to $92.5 million for the nine months ended September 30, 2017, primarily due to a $1.3 million decrease in compensation and benefits and a $0.8 million decrease in travel and business development, partially offset by a $0.4 million increase in administration and a $0.8 million increase in other.
Net income attributable to JMP Group LLC decreased $16.6 million from $2.1 million after income tax benefit of $0.8 million for the nine months ended September 30, 2016 to a net loss of $14.5 million loss after income tax benefit of $0.2 million for the nine months ended September 30, 2017.
Operating Net Income (Non-GAAP Financial Measure)
Management uses Operating Net Income as a key, non-GAAP metric when evaluating the performance of JMP Group LLC’s core business strategy and ongoing operations, as management believes that this metric appropriately illustrates the operating results of JMP Group LLC’s core operations and business activities. Operating Net Income is derived from our segment reported results and is the measure of segment profitability on an after-tax basis used by management to evaluate our performance. This non-GAAP measure is presented to enhance investors’ overall understanding of the Company’s current financial performance. Additionally, management believes that Operating Net Income is a useful measure because it allows for a better evaluation of the performance of JMP Group LLC’s ongoing business and facilitates a meaningful comparison of the Company’s results in a given period to those in prior and future periods.
However, Operating Net Income should not be considered a substitute for results that are presented in a manner consistent with GAAP. A limitation of the non-GAAP financial measures presented is that, unless otherwise indicated, the adjustments concern gains, losses or expenses that JMP Group LLC generally expects to continue to recognize, and the adjustment of these items should not always be construed as an inference that these gains or expenses are unusual, infrequent or non-recurring. Therefore, management believes that both JMP Group LLC’s GAAP measures of its financial performance and the respective non-GAAP measures should be considered together. Operating Net Income may not be comparable to a similarly titled measure presented by other companies.
Operating Net Income is a non-GAAP financial measure that adjusts the Company’s GAAP net income as follows:
(i) |
reverses non-cash share-based compensation expense recognized under GAAP related to equity awards granted in prior periods, as management generally evaluates performance by considering the full expense of equity awards in the period in which they are granted, even if the expense of such compensation will be recognized in future periods under GAAP; |
(ii) |
recognizes 100% of the cost of deferred compensation in the period for which such compensation was awarded, instead of recognizing such cost over the vesting period as required under GAAP, in order to match compensation expense with the actual period upon which the compensation was based; |
(iii) |
reverses amortization expense related to an intangible asset resulting from the repurchase of a portion of the equity of JMP Credit Advisors CLO III; |
(iv) |
reverses depreciation and amortization expense related to commercial real estate investments that is recognized by JMP Group as a result of equity method accounting; |
(v) |
reverses net unrealized gains and losses on strategic equity investments and warrants; |
(vi) |
presents revenues and expenses on a basis that deconsolidates HCAP Advisors and the CLOs; |
(vii) |
excludes general loan loss provisions recorded in connection with certain CLOs; |
(viii) |
reverses the one-time expense associated with the contribution of the remaining assets in JMP Credit Advisors CLO II to newly formed JMP Credit Advisors CLO IV and the resulting acceleration of the amortization of remaining capitalized issuance costs; |
(ix) |
reverses the one-time transaction costs related to the refinancing of the debt issued by JMP Credit Advisors CLO III; |
(x) |
assumes a combined federal, state and local income tax rate of 38% at the Company’s taxable direct subsidiary, while applying a tax rate of 0% to the Company’s other direct subsidiary, which is a “pass-through entity” for tax purposes. |
Discussed below is our Operating Net Income by segment. This information is reflected in a manner utilized by management to assess the financial operations of the Company's various business lines.
Three Months Ended September 30, 2017 |
||||||||||||||||||||||||
(In thousands) |
Broker- Dealer |
Asset Management |
Operating Platforms |
Corporate |
Eliminations |
Total Segments |
||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Investment banking |
$ | 22,085 | $ | - | $ | 22,085 | $ | - | $ | - | $ | 22,085 | ||||||||||||
Brokerage |
4,763 | - | 4,763 | - | - | 4,763 | ||||||||||||||||||
Asset management related fees |
- | 4,798 | 4,798 | 167 | (821 | ) | 4,144 | |||||||||||||||||
Principal transactions |
- | - | - | 867 | - | 867 | ||||||||||||||||||
Gain (loss) on sale, payoff and mark-to-market of loans |
- | - | - | 260 | - | 260 | ||||||||||||||||||
Gain on repurchase of asset-backed securities issued |
- | - | - | - | - | - | ||||||||||||||||||
Net dividend income |
- | - | - | 278 | - | 278 | ||||||||||||||||||
Net interest income |
- | - | - | 1,145 | - | 1,145 | ||||||||||||||||||
Provision for loan losses |
- | - | - | (593 | ) | - | (593 | ) | ||||||||||||||||
Adjusted net revenues |
26,848 | 4,798 | 31,646 | 2,124 | (821 | ) | 32,949 | |||||||||||||||||
Non-interest expenses |
||||||||||||||||||||||||
Non-interest expenses |
22,215 | 4,948 | 27,163 | 3,706 | (821 | ) | 30,048 | |||||||||||||||||
Operating pre-tax net income |
4,633 | (150 | ) | 4,483 | (1,582 | ) | - | 2,901 | ||||||||||||||||
Income tax expense (assumed rate of 38% for Operating Platforms) |
1,761 | (57 | ) | 1,704 | (1,094 | ) | - | 610 | ||||||||||||||||
Operating net income (loss) |
$ | 2,872 | $ | (93 | ) | $ | 2,779 | $ | (488 | ) | $ | - | $ | 2,291 |
Three Months Ended September 30, 2016 |
||||||||||||||||||||||||
(In thousands) |
Broker- Dealer |
Asset Management |
Operating Platforms |
Corporate |
Elimin- ations |
Total Segments |
||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Investment banking |
$ | 15,048 | $ | - | $ | 15,048 | $ | - | $ | - | $ | 15,048 | ||||||||||||
Brokerage |
5,015 | - | 5,015 | - | - | 5,015 | ||||||||||||||||||
Asset management related fees |
3 | 5,296 | 5,299 | - | (1,422 | ) | 3,877 | |||||||||||||||||
Principal transactions |
- | - | - | 3,342 | - | 3,342 | ||||||||||||||||||
Gain (loss) on sale, payoff and mark-to-market of loans |
- | - | - | 32 | - | 32 | ||||||||||||||||||
Net dividend income |
- | - | - | 261 | - | 261 | ||||||||||||||||||
Net interest income |
- | - | - | 2,057 | - | 2,057 | ||||||||||||||||||
Provision for loan losses |
- | - | - | 17 | - | 17 | ||||||||||||||||||
Adjusted net revenues |
20,066 | 5,296 | 25,362 | 5,709 | (1,422 | ) | 29,649 | |||||||||||||||||
Non-interest expenses |
||||||||||||||||||||||||
Non-interest expenses |
19,332 | 5,176 | 24,508 | 4,308 | (1,422 | ) | 27,394 | |||||||||||||||||
Operating pre-tax net income |
734 | 120 | 854 | 1,401 | - | 2,255 | ||||||||||||||||||
Income tax expense (assumed rate of 38% for Operating Platforms) |
279 | 46 | 325 | (966 | ) | - | (641 | ) | ||||||||||||||||
Operating net income (loss) |
$ | 455 | $ | 74 | $ | 529 | $ | 2,367 | $ | - | $ | 2,896 |
Nine Months Ended September 30, 2017 |
||||||||||||||||||||||||
(In thousands) |
Broker- Dealer |
Asset Management |
Operating Platforms |
Corporate |
Elimin- ations |
Total Segments |
||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Investment banking |
$ | 54,813 | $ | - | $ | 54,813 | $ | - | $ | - | $ | 54,813 | ||||||||||||
Brokerage |
15,127 | - | 15,127 | - | - | 15,127 | ||||||||||||||||||
Asset management related fees |
4 | 14,965 | 14,969 | 1,827 | (2,584 | ) | 14,212 | |||||||||||||||||
Principal transactions |
- | - | - | 3,200 | - | 3,200 | ||||||||||||||||||
Gain (loss) on sale, payoff and mark-to-market of loans |
- | - | - | 1,143 | - | 1,143 | ||||||||||||||||||
Gain on repurchase of asset-backed securities issued |
- | - | - | 210 | - | 210 | ||||||||||||||||||
Net dividend income |
- | - | - | 819 | - | 819 | ||||||||||||||||||
Net interest income |
- | - | - | 2,100 | - | 2,100 | ||||||||||||||||||
Provision for loan losses |
- | - | - | (2,415 | ) | - | (2,415 | ) | ||||||||||||||||
Adjusted net revenues |
69,944 | 14,965 | 84,909 | 6,884 | (2,584 | ) | 89,209 | |||||||||||||||||
Non-interest expenses |
||||||||||||||||||||||||
Non-interest expenses |
63,234 | 15,346 | 78,580 | 12,624 | (2,584 | ) | 88,620 | |||||||||||||||||
Less: Non-controlling interest |
- | - | - | - | - | - | ||||||||||||||||||
Operating pre-tax net income |
6,710 | (381 | ) | 6,329 | (5,740 | ) | - | 589 | ||||||||||||||||
Income tax expense (assumed rate of 38% for Operating Platforms) |
2,551 | (145 | ) | 2,406 | (2,584 | ) | - | (178 | ) | |||||||||||||||
Operating net income (loss) |
$ | 4,159 | $ | (236 | ) | $ | 3,923 | $ | (3,156 | ) | $ | - | $ | 767 |
Nine Months Ended September 30, 2016 |
||||||||||||||||||||||||
(In thousands) |
Broker- Dealer |
Asset Management |
Operating Platforms |
Corporate Costs |
Elimin- ations |
Total Segments |
||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Investment banking |
$ | 41,719 | $ | - | $ | 41,719 | $ | - | $ | - | $ | 41,719 | ||||||||||||
Brokerage |
16,921 | - | 16,921 | - | - | 16,921 | ||||||||||||||||||
Asset management related fees |
- | 21,721 | 21,721 | 123 | (4,057 | ) | 17,787 | |||||||||||||||||
Principal transactions |
- | - | - | 12,412 | - | 12,412 | ||||||||||||||||||
Gain on sale, payoff and mark-to-market of loans |
- | - | - | (635 | ) | - | (635 | ) | ||||||||||||||||
Net dividend income |
- | - | - | 828 | - | 828 | ||||||||||||||||||
Net interest (expense) income |
- | - | - | 6,431 | - | 6,431 | ||||||||||||||||||
Provision for loan losses |
- | - | - | (795 | ) | - | (795 | ) | ||||||||||||||||
Adjusted net revenues |
58,640 | 21,721 | 80,361 | 18,364 | (4,057 | ) | 94,668 | |||||||||||||||||
Non-interest expenses |
||||||||||||||||||||||||
Non-interest expenses |
57,637 | 20,473 | 78,110 | 14,857 | (4,057 | ) | 88,910 | |||||||||||||||||
Less: Non-controlling interest |
- | - | - | - | - | - | ||||||||||||||||||
Operating pre-tax net income |
1,003 | 1,248 | 2,251 | 3,507 | - | 5,758 | ||||||||||||||||||
Income tax expense (assumed rate of 38% for Operating Platforms) |
383 | 473 | 856 | (2,720 | ) | - | (1,864 | ) | ||||||||||||||||
Adjusted operating net income |
$ | 620 | $ | 775 | $ | 1,395 | $ | 6,227 | $ | - | $ | 7,622 |
The following table reconciles operating net income to Total Segments operating pre-tax net income, and also to consolidated pre-tax net income (loss) attributable to JMP Group LLC and to consolidated net income (loss) attributable to JMP Group LLC for the three and nine months ended September 30, 2017 and 2016.
(In thousands) |
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
|||||||||||||
Operating net income |
$ | 2,291 | $ | 2,896 | $ | 767 | $ | 7,622 | ||||||||
Addback of Segment Income tax expense |
610 | (641 | ) | (178 | ) | (1,864 | ) | |||||||||
Total Segments operating pre-tax net income |
$ | 2,901 | $ | 2,255 | $ | 589 | $ | 5,758 | ||||||||
Subtract / (Add back) |
||||||||||||||||
Share-based compensation expense |
260 | 583 | 595 | 1,283 | ||||||||||||
Deferred compensation program accounting adjustment |
436 | 1,126 | 1,268 | 1,046 | ||||||||||||
Net unrealized gain (loss) on strategic equity investments |
(191 | ) | 435 | 297 | (329 | ) | ||||||||||
General loan loss reserve for the CLOs |
(136 | ) | (76 | ) | 697 | (109 | ) | |||||||||
CLO refinancing and accelerated expenses |
14 | - | 300 | - | ||||||||||||
Depreciation of commercial real estate in underlying investments |
2,571 | 123 | 6,472 | 2,523 | ||||||||||||
Amortization of intangible asset |
69 | - | 207 | - | ||||||||||||
Early debt retirement of CLO |
- | - | 5,432 | - | ||||||||||||
Total Consolidation Adjustments and Reconciling Items |
3,023 | 2,191 | 15,268 | 4,414 | ||||||||||||
Consolidated pre-tax net income (loss) attributable to JMP Group LLC |
$ | (122 | ) | $ | 64 | $ | (14,679 | ) | $ | 1,344 | ||||||
Income tax expense (benefit) |
1,113 | (597 | ) | (169 | ) | (793 | ) | |||||||||
Consolidated Net Income (Loss) attributable to JMP Group LLC |
$ | (1,235 | ) | $ | 661 | $ | (14,510 | ) | $ | 2,137 |
Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
Revenues
Investment Banking
Investment banking revenues, earned in our Broker-Dealer segment, increased $7.0 million, or 46.8%, from $15.0 million for the quarter ended September 30, 2016 to $22.1 million for the same period in 2017. As a percentage of total net revenues after provision for loan losses, investment banking revenues increased from 49.1% for the quarter ended September 30, 2016 to 69.0% for the quarter ended September 30, 2017. On an operating basis, investment banking revenues were 67.0% and 50.8% for the quarters ended September 30, 2017 and 2016, respectively, as a percentage of adjusted net revenues after provision for loan losses.
(Dollars in thousands) |
Three Months Ended September 30, |
Change from 2016 to 2017 |
||||||||||||||||||||||||||
2017 |
2016 |
|||||||||||||||||||||||||||
Count |
Revenues |
Count |
Revenues |
Count |
$ |
% |
||||||||||||||||||||||
Equity and debt origination |
22 | $ | 15,639 | 15 | $ | 8,098 | 7 | $ | 7,541 | 93.1 | % | |||||||||||||||||
Advisory |
6 | 6,446 | 8 | 6,950 | (2 | ) | (504 | ) | -7.3 | % | ||||||||||||||||||
Total transactions |
28 | $ | 22,085 | 23 | $ | 15,048 | 5 | $ | 7,037 | 46.8 | % |
The increase in revenues was driven not only by a 21.7% increase in the number of transactions executed but also by an increase in the average size of the fee paid per transaction. The number of transactions in which we acted as a bookrunning manager increased from three to six for the quarters ended September 30, 2016 and 2017, respectively.
Brokerage Revenues
Brokerage revenues earned in our Broker-Dealer segment were $4.8 million and $5.0 million for the quarters ended September 30, 2017 and 2016, respectively. Brokerage revenues decreased as a percentage of total net revenues after provision for loan losses, from 16.3% for the quarter ended September 30, 2016 to 14.9% for the quarter ended September 30, 2017. On an operating basis, brokerage revenues were 14.5% and 16.9% for the quarters ended September 30, 2017 and 2016, respectively, as a percentage of adjusted net revenues after provision for loan losses.
Asset Management Fees
(In thousands) |
Three Months Ended September 30, |
|||||||
2017 |
2016 |
|||||||
Base management fees: |
||||||||
Fees reported as asset management fees |
$ | 3,941 | $ | 4,160 | ||||
Less: Non-controlling interest in HCAP Advisors |
(154 | ) | (355 | ) | ||||
Total base management fees |
3,787 | 3,805 | ||||||
Incentive fees: |
||||||||
Fees reported as asset management fees |
$ | 73 | $ | (116 | ) | |||
Less: Non-controlling interest in HCAP Advisors |
- | (73 | ) | |||||
Total incentive fees |
73 | (189 | ) | |||||
Other fee income: |
||||||||
Fundraising and other income: |
$ | 284 | $ | 261 | ||||
Total other fee income |
284 | 261 | ||||||
Asset management related fees: |
||||||||
Fees reported as asset management fees |
$ | 4,014 | $ | 4,044 | ||||
Fees reported as other income |
284 | 261 | ||||||
Less: Non-controlling interest in HCAP Advisors |
(154 | ) | (428 | ) | ||||
Total Segment asset management related fee revenues |
$ | 4,144 | $ | 3,877 | ||||
Consolidation adjustment |
154 | 428 | ||||||
Adjusted total asset management related fees: |
$ | 4,298 | $ | 4,305 |
Fees reported as asset management fees were $4.0 million and $4.0 million for the quarters ended September 30, 2017 and 2016, respectively. As a percentage of total net revenues after provision for loan losses, asset management revenues decreased from 13.2% for the quarter ended September 30, 2016 to 12.5% for the quarter ended September 30, 2017. Fees reported as other income were $0.3 million and $0.3 million for the quarters ended September 30, 2017 and 2016, respectively. As a percentage of total net revenues after provision for loan losses, other income was 0.9% both for the quarter ended September 30, 2016 and for the quarter ended September 30, 2017.
Total segment asset management related fees include base management fees and incentive fees from our funds, HCC and our CLOs under management, as well as other income from fee-sharing arrangements with, and fees earned to raise capital for, third-party or equity-method investment partnerships or funds. Segment asset management related fees are a non-GAAP financial measure that adjusts our total segment asset management related fees by reversing the elimination of those fees in the consolidation of HCAP Advisors. Segment asset management related fees are reconciled to the GAAP measure, total segment asset management fee revenues, in the table above.
Total segment asset management related fee revenue increased $0.2 million, from $3.9 million for the quarter ended September 30, 2016 to $4.1 million for the quarter ended September 30, 2017. Total base management fees were $3.8 million both for the quarter ended September 30, 2016 and for the same period in 2017. Total incentive fees increased $0.2 million, from a cost of $0.1 million for the quarter ended September 30, 2016 to $0.1 million for the same period in 2017. On an operating basis, asset management related fee revenues were 12.6% and 13.6% for the quarters ended September 30, 2017 and 2016, respectively, as a percentage of adjusted net revenues after provision for loan losses.
Principal Transactions
Principal transaction revenues decreased $4.2 million, from $2.8 million for the quarter ended September 30, 2016 to a loss of $1.4 million for the same period in 2017. As a percentage of total net revenues after provision for loan losses, principal transaction revenues were 9.0% for the quarter ended September 30, 2016 and negative 4.3% for the quarter ended September 30, 2017.
Total segment principal transaction revenues decreased $2.5 million, from $3.3 million for the quarter ended September 30, 2016 to $0.9 million for the same period in 2017. Total segment principal transaction revenues are a non-GAAP financial measure that aggregates our segment reported principal transaction revenues across each segment. The principal transaction revenues for both 2017 and 2016 were based in our Corporate segment. Total segment principal transaction revenues are reconciled to the GAAP measure, total principal transaction revenues, in the table below.
Three Month Ended September 30, |
||||||||
(in thousands) |
2017 |
2016 |
||||||
Hedge fund investments |
$ | 687 | $ | 939 | ||||
Investment in Harvest Capital Credit Corporation |
191 | (435 | ) | |||||
Other principal investments |
(2,269 | ) | 2,260 | |||||
Total principal transaction revenues |
(1,391 | ) | 2,764 | |||||
Operating adjustment addbacks |
||||||||
Total operating adjustments |
2,258 | 578 | ||||||
Total Segment principal transaction revenues |
$ | 867 | $ | 3,342 |
The decrease is primarily attributed to a $2.2 million decrease in unrealized gain and loss on the TRS as a result of its liquidation which was substantially completed in the second quarter of 2017. On an operating basis, as a percentage of total net revenues after provision for loan losses, principal transaction revenues decreased from 11.3% for the quarter ended September 30, 2016 to 2.6% for the quarter ended September 30, 2017.
Gain and Loss on Sale and Payoff of Loans
Gain on sale and payoff of loans increased from a loss of $0.1 million for the quarter ended September 30, 2016 to a gain of $0.3 million for the quarter ended September 30, 2017. Gain and loss on sale and payoff of loans was incurred in our Corporate segment. On a segment basis, gain on sale and payoff of loans increased from a $32 thousand gain for the quarter ended September 30, 2016 to a $0.3 million gain for the quarter ended September 30, 2017.
Net Dividend Income
Net dividend income was $0.3 million and $0.2 million for the quarters ended September 30, 2017 and 2016, respectively. Net dividend income primarily related to dividends from our HCC investment.
Net Interest Income/Expense
(In thousands) |
Three Months Ended September 30, |
|||||||
2017 |
2016 |
|||||||
CLO I loan contractual interest income |
$ | - | $ | 2,186 | ||||
CLO I ABS issued contractual interest expense |
- | (1,109 | ) | |||||
Net CLO I contractual interest |
- | 1,077 | ||||||
CLO II loan contractual interest income |
$ | - | $ | 3,943 | ||||
CLO II ABS issued contractual interest expense |
- | (2,056 | ) | |||||
Net CLO II contractual interest |
- | 1,887 | ||||||
CLO III loan contractual interest income |
$ | 4,743 | $ | 4,562 | ||||
CLO III ABS issued contractual interest expense |
(2,975 | ) | (2,471 | ) | ||||
Net CLO III contractual interest |
1,768 | 2,091 | ||||||
CLO IV loan contractual interest income |
$ | 5,861 | $ | - | ||||
CLO IV ABS issued contractual interest expense |
(3,876 | ) | - | |||||
Net CLO IV contractual interest |
1,985 | - | ||||||
CLO V loan contractual interest income |
$ | 33 | $ | - | ||||
CLO V warehouse credit facility contractual interest expense |
(7 | ) | - | |||||
Net CLO IV contractual interest |
26 | - | ||||||
Bond Payable interest expense |
(1,900 | ) | (1,900 | ) | ||||
Less: Non-controlling interest in CLOs |
(944 | ) | (1,203 | ) | ||||
Other interest income |
210 | 105 | ||||||
Total Segment net interest income |
$ | 1,145 | $ | 2,057 | ||||
Non-controlling interest in CLOs |
944 | 1,203 | ||||||
Total net interest income (expense) |
$ | 2,089 | $ | 3,260 |
Net interest income decreased $1.2 million from $3.3 million for the quarter ended September 30, 2016 to $2.1 million for the quarter ended September 30, 2017. The decrease was driven primarily by the closures of CLO I and CLO II in 2017, leading to a decline in net interest income that was only partially offset by net interest earned from newly launched CLO IV. As a percentage of total net revenues after provision for loan losses, net interest income was 10.6% for the quarter ended September 30, 2016 and 6.5% for the quarter ended September 30, 2017.
Total segment net interest income decreased from $2.1 million for the quarter ended September 30, 2016 to $1.1 million for the quarter ended September 30, 2017. Net interest income is earned in our Corporate segment and reflects our portion of the net CLO contractual interest. Total segment net interest income is reconciled to the GAAP measure, total net interest expense, in the table above. As a percentage of total segment net revenues, net interest income was 3.5% and 6.9% for the quarters ended September 30, 2017 and 2016, respectively.
The following table sets forth contractual interest income and expense related to CLO loans and ABS issued and their weighted average contractual interest rates:
(In thousands) |
Three Months Ended September 30, 2017 |
|||||||||||||||||||
Interest Income (Expense) |
Average CLO Loan (CLO ABS Issued) Balance |
Weighted Average Contractual Interest Rate |
Weighted Average LIBOR |
Spread to Weighted Average LIBOR |
||||||||||||||||
CLO III loan contractual interest income |
4,743 | 349,038 | 5.07 | % | 1.28 | % | 3.79 | % | ||||||||||||
CLO III ABS issued contractual interest expense |
(2,975 | ) | (332,100 | ) | 3.18 | % | 1.28 | % | 1.90 | % | ||||||||||
CLO IV loan contractual interest income |
5,861 | 435,724 | 5.02 | % | 1.33 | % | 3.69 | % | ||||||||||||
CLO IV ABS issued contractual interest expense |
(3,876 | ) | (424,718 | ) | 3.40 | % | 1.33 | % | 2.07 | % | ||||||||||
CLO V loan contractual interest income |
33 | 2,424 | 4.88 | % | 1.24 | % | 3.64 | % | ||||||||||||
CLO V warehouse credit facility contractual interest expense |
(7 | ) | (3,960 | ) | 2.61 | % | 1.24 | % | 1.37 | % | ||||||||||
Net CLO contractual interest |
$ | 3,779 | $ | N/A | N/A | N/A | N/A |
(In thousands) |
Three Months Ended September 30, 2016 |
|||||||||||||||||||
Interest Income (Expense) |
Average CLO Loan (CLO ABS Issued) Balance |
Weighted Average Contractual Interest Rate |
Weighted Average LIBOR |
Spread to Weighted Average LIBOR |
||||||||||||||||
CLO I loan contractual interest income |
$ | 2,186 | $ | 222,945 | 3.84 | % | 0.71 | % | 3.13 | % | ||||||||||
CLO I ABS issued contractual interest expense |
(1,109 | ) | (250,464 | ) | 1.98 | % | 0.71 | % | 1.27 | % | ||||||||||
CLO II loan contractual interest income |
3,943 | 314,713 | 4.90 | % | 0.67 | % | 4.23 | % | ||||||||||||
CLO II ABS issued contractual interest expense |
(2,056 | ) | (316,200 | ) | 2.54 | % | 0.67 | % | 1.87 | % | ||||||||||
CLO III loan contractual interest income |
4,562 | 351,354 | 5.08 | % | 0.67 | % | 4.41 | % | ||||||||||||
CLO III warehouse/ABS issued contractual interest expense |
(2,471 | ) | (332,100 | ) | 2.91 | % | 0.67 | % | 2.24 | % | ||||||||||
Net CLO contractual interest |
$ | 5,055 | $ | N/A | N/A | N/A | N/A |
Provision for Loan Losses
(In thousands) |
Three Months Ended September 30, |
|||||||
2017 |
2016 |
|||||||
CLO related provision |
$ | 116 | $ | 104 | ||||
Non-CLO related provision |
(484 | ) | - | |||||
Provision for Loan Losses |
$ | (368 | ) | $ | 104 | |||
Less: General reserves related to CLO II, CLO III and CLO IV, and non-controlling interest |
(225 | ) | (87 | ) | ||||
Segment Provision for Loan Losses |
$ | (593 | ) | $ | 17 |
Provision for loan losses increased $0.5 million, from a loan loss reversal of $0.1 million for the quarter ended September 30, 2016 to a loan loss provision of $0.4 million for the same period in 2017. The increase was due to specific reserves totaling $0.9 million related to two loans, partially offset by recoveries among our CLO portfolios and loans held for investment. As a percent of net revenues after provision for loan losses, the provision for loan losses was 0.3% for the quarter ended September 30, 2016 and negative 1.1% for the quarter ended September 30, 2017.
Total segment provision for loan losses increased from a loan loss reversal of $17 thousand for the quarter ended September 30, 2016 to a provision of $0.6 million for the quarter ended September 30, 2017. Total segment provision for loan losses is a non-GAAP financial measure that aggregates our segment reported provision for loan losses across each segment. Our total segment provision for loan losses in 2017 and 2016 was solely recognized in our Corporate segment. As a percent of total segment adjusted net revenues, segment provision for loan losses were 1.8% and 0.1% for the quarters ended September 30, 2017 and 2016, respectively.
Expenses
Non-Interest Expenses
Compensation and Benefits
Compensation and benefits, which includes employee payroll, taxes and benefits, performance-based cash bonus and commissions, as well as equity-based compensation to our employees and managing directors, increased $2.4 million, or 10.8%, from $22.2 million for the quarter ended September 30, 2016 to $24.6 million for the quarter ended September 30, 2017.
Employee payroll, taxes and benefits, and consultant fees were $11.1 million and $11.2 million for the quarters ended September 30, 2017 and 2016, respectively. Performance-based bonus and commission increased $3.3 million from $9.3 million for the quarter ended September 30, 2016 to $12.6 million for the quarter ended September 30, 2017.
Equity-based compensation was $0.9 million and $1.7 million for the quarters ended September 30, 2017 and 2016, respectively. The equity-based compensation included a $0.2 million decline in share options and share appreciation rights.
Compensation and benefits as a percentage of revenues increased from 72.3% of total net revenues after provision for loan losses for the quarter ended September 30, 2016 to 76.7% for the quarter ended September 30, 2017.
Our segment reported compensation and benefits recognizes 100% of the cost of deferred compensation, including non-cash share-based compensation expense, in the period for which such compensation was awarded, instead of recognizing such cost over the vesting period as required under GAAP, in order to match compensation expense with the actual period upon which the compensation was based. The segment reported compensation and benefits increased $3.2 million from $20.3 million for the quarter ended September 30, 2016 to $23.5 million for the quarter ended September 30, 2017. As a percent of total segment net revenues, compensation and benefits were 71.3% and 68.4% for the quarters ended September 30, 2017 and 2016, respectively.
Administration
Administration expense was $1.5 million and $1.8 million for the quarters ended September 30, 2017 and 2016, respectively. As a percentage of total net revenues after provision for loan losses, administration expense decreased from 5.9% for the quarter ended September 30, 2016 to 4.6% for the same period in 2017.
Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fees were $0.7 million both for the quarter ended September 30, 2017 and for the quarter ended September 30, 2016. As a percentage of total net revenues after provision for loan losses, our brokerage, clearing and exchange fees decreased from 2.4% for the quarter ended September 30, 2016 to 2.3% for the same period in 2017.
Travel and Business Development
Travel and business development expenses decreased $0.3 million, from $1.0 million for the quarter ended September 30, 2016 to $0.7 million for the quarter ended September 30, 2017. As a percentage of total net revenues after provision for loan losses, travel and business development expense was 2.2% and 3.3% for the quarters ended September 30, 2017 and 2016, respectively.
Communications and Technology
Communications and technology expenses were $1.0 million both for the quarter ended September 30, 2017 and for the quarter ended September 30, 2016. As a percentage of total net revenues after provision for loan losses, communications and technology expense decreased from 3.4% for the quarter ended September 30, 2016 to 3.3% for the same period in 2017.
Professional Fees
Professional fees were $1.1 million both for the quarter ended September 30, 2017 and for the quarter ended September 30, 2016. As a percentage of total net revenues after provision for loan losses, professional fees decreased from 3.6% for the quarter ended September 30, 2016 to 3.4% for the same period in 2017.
Other Expenses
Other expenses were $1.8 million both for the quarter ended September 30, 2017 and for the quarter ended September 30, 2016. As a percentage of total net revenues after provision for loan losses, other expenses decreased from 5.8% for the quarter ended September 30, 2016 to 5.5% for the same period in 2017.
Net Income Attributable to Non-controlling Interest
Net income attributable to non-controlling interest decreased from $0.9 million for the quarter ended September 30, 2016 to $0.8 million for the quarter ended September 30, 2017. Non-controlling interest for the quarters ended September 30, 2016 and 2017 includes the interest of third parties in CLO I, CLO II, CLO III, and HCAP Advisors.
Provision for Income Taxes
Income tax expense was $1.1 million for the quarter ended September 30, 2017, while an income tax benefit of $0.6 million was recorded for the quarter ended September 30, 2016. For the purposes of calculating operating net income, an effective tax rate of 38% is assumed for our taxable direct subsidiary, based on our best estimation of the subsidiary’s average rate of taxation over the long term, while a rate of 0% is applied to our other direct subsidiary, which is a “pass-through entity” for tax purposes. Segment income tax benefit was $0.6 million for the quarter ended September 30, 2016, while segment income tax expense was $0.6 million for the quarter ended September 30, 2017.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Revenues
Investment Banking
Investment banking revenues, earned in our Broker-Dealer segment, increased $13.1 million, or 31.4%, from $41.7 million for the nine months ended September 30, 2016 to $54.8 million for the same period in 2017. As a percentage of total net revenues after provision for loan losses, investment banking revenues increased from 42.2% for the nine months ended September 30, 2016 to 68.9% for the same period in 2017. On an operating basis, investment banking revenues were 61.4% and 44.1% for the nine months ended September 30, 2017 and 2016, respectively, as a percentage of adjusted net revenues after provision for loan losses.
(Dollars in thousands) |
Nine Months Ended September 30, |
Change from 2016 to 2017 |
||||||||||||||||||||||||||
2017 |
2016 |
|||||||||||||||||||||||||||
Count |
Revenues |
Count |
Revenues |
Count |
$ |
% |
||||||||||||||||||||||
Equity and debt origination |
82 | $ | 40,493 | 39 | $ | 17,636 | 43 | $ | 22,857 | 129.6 | % | |||||||||||||||||
Advisory |
14 | 14,320 | 19 | 24,083 | (5 | ) | (9,763 | ) | -40.5 | % | ||||||||||||||||||
Total cash flows |
96 | $ | 54,813 | 58 | $ | 41,719 | 38 | $ | 13,094 | 31.4 | % |
The increase in revenues was driven by a 65.5% increase in the number of transactions executed. The number of transactions in which we acted as a book running manager increased from three to 18 for the nine months ended September 30, 2016 and 2017, respectively.
Brokerage Revenues
Brokerage revenues earned in our Broker-Dealer segment were $15.1 million and $16.9 million for the nine months ended September 30, 2017 and 2016, respectively. Brokerage revenues increased as a percentage of total net revenues after provision for loan losses, from 17.1% for the nine months ended September 30, 2016 to 19.0% for the nine months ended September 30, 2017. On an operating basis, brokerage revenues were 17.0% and 17.9% for the nine months ended September 30, 2017 and 2016, respectively, as a percentage of adjusted net revenues after provision for loan losses.
Asset Management Fees
(In thousands) |
Nine Months Ended September 30, |
|||||||
2017 |
2016 |
|||||||
Base management fees: |
||||||||
Fees reported as asset management fees |
$ | 12,084 | $ | 12,434 | ||||
Less: Non-controlling interest in HCAP Advisors |
(663 | ) | (1,081 | ) | ||||
Total base management fees |
11,421 | 11,353 | ||||||
Incentive fees: |
||||||||
Fees reported as asset management fees |
$ | 1,993 | $ | 6,523 | ||||
Less: Non-controlling interest in HCAP Advisors |
(128 | ) | (623 | ) | ||||
Total incentive fees |
1,865 | 5,900 | ||||||
Other fee income: |
||||||||
Fundraising and other income: |
$ | 926 | $ | 534 | ||||
Total other fee income |
926 | 534 | ||||||
Asset management related fees: |
||||||||
Fees reported as asset management fees |
$ | 14,077 | $ | 18,957 | ||||
Fees reported as other income |
926 | 534 | ||||||
Less: Non-controlling interest in HCAP Advisors |
(791 | ) | (1,704 | ) | ||||
Total Segment asset management related fee revenues |
$ | 14,212 | $ | 17,787 | ||||
Consolidation adjustment |
791 | 1,704 | ||||||
Adjusted total asset management related fees: |
$ | 15,003 | $ | 19,491 |
Fees reported as asset management fees were $14.1 million and $19.0 million for the nine months ended September 30, 2017 and 2016, respectively. As a percentage of total net revenues after provision for loan losses, asset management revenues decreased from 19.2% for the nine months ended September 30, 2016 to 17.7% for the same period in 2017. Fees reported as other income were $0.9 million and $0.5 million for the nine months ended September 30, 2017 and 2016, respectively. As a percentage of total net revenues after provision for loan losses, other income increased from 0.5% for the nine months ended September 30, 2016 to 1.2% for the same period in 2017.
Total segment asset management related fees include base management fees and incentive fees from our funds, HCC and our CLOs under management, as well as other income from fee-sharing arrangements with, and fees earned to raise capital for, third-party or equity-method investment partnerships or funds. Segment asset management related fees are a non-GAAP financial measure that adjusts our total segment asset management related fees by reversing the elimination of those fees in the consolidation of HCAP Advisors. Segment asset management related fees are reconciled to the GAAP measure, total segment asset management fee revenues, in the table above.
Total segment asset management related fee revenue decreased $3.6 million, from $17.8 million for the nine months ended September 30, 2016 to $14.2 million for the same period in 2017. Total base management fees were $11.4 million both for the nine months ended September 30, 2016 and for the same period in 2017. Total incentive fees decreased $4.0 million, from $5.9 million for the nine months ended September 30, 2016 to $1.9 million for the same period in 2017. On an operating basis, asset management related fee revenues were 15.9% and 20.0% for the nine months ended September 30, 2017 and 2016, respectively, as a percentage of adjusted net revenues after provision for loan losses.
Principal Transactions
Principal transaction revenues decreased $13.9 million, from $10.3 million for the nine months ended September 30, 2016 to a loss of $3.6 million for the same period in 2017. As a percentage of total net revenues after provision for loan losses, principal transaction revenues were 10.4% for the nine months ended September 30, 2016 and negative 4.5% for the same period in 2017.
Total segment principal transaction revenues decreased $9.2 million, from $12.4 million for the nine months ended September 30, 2016 to $3.2 million for the same period in 2017. Total segment principal transaction revenues are a non-GAAP financial measure that aggregates our segment reported principal transaction revenues across each segment. The principal transaction revenues for both 2016 and 2017 were based in our Corporate segment. Total segment principal transaction revenues are reconciled to the GAAP measure, total principal transaction revenues, in the table below.
Nine Months Ended Setember 30, |
||||||||
(in thousands) |
2017 |
2016 |
||||||
Hedge fund investments |
$ | 1,170 | $ | 73 | ||||
Investment in Harvest Capital Credit Corporation |
(297 | ) | 314 | |||||
Other principal investments |
(4,479 | ) | 9,938 | |||||
Total principal transaction revenues |
(3,606 | ) | 10,325 | |||||
Operating adjustment addbacks |
||||||||
Total operating adjustments |
6,806 | 2,087 | ||||||
Total Segment principal transaction revenues |
$ | 3,200 | $ | 12,412 |
The decrease is primarily attributed to a $6.0 million sale of our interest in Riverbanc in 2016 and a $4.4 million decrease in unrealized gain and loss on TRS as a result of its liquidation in 2017, partially offset by a 1.1 million increase in unrealized gain and loss on our hedge fund investments. On an operating basis, as a percentage of total net revenues after provision for loan losses, principal transaction revenues decreased from 13.1% for the nine months ended September 30, 2016 to 2.6% for the nine months ended September 30, 2017.
Gain and Loss on Sale and Payoff of Loans
Gain on sale and payoff of loans increased from a loss of $1.0 million for the nine months ended September 30, 2016 to a gain of $1.2 million for the nine months ended September 30, 2017. Gain and loss on sale and payoff of loans was incurred in our Corporate segment. On a segment basis, gain on sale and payoff of loans was a $0.7 million loss and a $1.1 million gain for the nine months ended September 30, 2016 and 2017, respectively.
Net Dividend Income
Net dividend income was $0.8 million and $0.7 million for the nine months ended September 30, 2017 and 2016, respectively. Net dividend income primarily related to dividends from our HCC investment.
Net Interest Income/Expense
(In thousands) |
Nine Months Ended September 30, |
|||||||
2017 |
2016 |
|||||||
CLO I loan contractual interest income |
$ | 480 | $ | 7,576 | ||||
CLO I ABS issued contractual interest expense |
(691 | ) | (3,285 | ) | ||||
Net CLO I contractual interest |
(211 | ) | 4,291 | |||||
CLO II loan contractual interest income |
$ | 6,474 | $ | 12,145 | ||||
CLO II ABS issued contractual interest expense |
(4,807 | ) | (6,011 | ) | ||||
Net CLO II contractual interest |
1,667 | 6,134 | ||||||
CLO III loan contractual interest income |
$ | 14,147 | $ | 13,741 | ||||
CLO III ABS issued contractual interest expense |
(8,687 | ) | (7,232 | ) | ||||
Net CLO III contractual interest |
5,460 | 6,509 | ||||||
CLO IV loan contractual interest income |
$ | 8,035 | $ | - | ||||
CLO IV ABS issued contractual interest expense |
(4,697 | ) | - | |||||
Net CLO IV contractual interest |
3,338 | - | ||||||
CLO V loan contractual interest income |
$ | 33 | $ | - | ||||
CLO V warehouse credit facility contractual interest expense |
(7 | ) | - | |||||
Net CLO V contractual interest |
26 | - | ||||||
Bond Payable interest expense |
(5,701 | ) | (5,714 | ) | ||||
Less: Non-controlling interest in CLOs |
(2,914 | ) | (5,269 | ) | ||||
Other interest income |
461 | 480 | ||||||
Total Segment net interest income |
$ | 2,100 | $ | 6,431 | ||||
Non-controlling interest in CLOs |
2,914 | 5,269 | ||||||
Total net interest income (expense) |
$ | 5,014 | $ | 11,700 |
Net interest income decreased $6.7 million from $11.7 million for the nine months ended September 30, 2016 to $5.0 million for the same period in 2017. The decrease was driven primarily by the closures of CLO I and CLO II in 2017, leading to a decline in net interest income that was only partially offset by net interest earned from newly launched CLO IV. As a percentage of total net revenues after provision for loan losses, net interest income was 11.8% for the nine months ended September 30, 2016 and 6.3% for the same period in 2017.
Total segment net interest income decreased $4.4 million from $6.4 million for the nine months ended September 30, 2016 to $2.1 million for the same period in 2017. Net interest income is earned in our Corporate segment and reflects our portion of the net CLO contractual interest. Total segment net interest income is reconciled to the GAAP measure, total net interest expense, in the table above. As a percentage of total segment net revenues, net interest income was 2.4% and 6.8% for the nine months ended September 30, 2016 and 2017, respectively.
The following table sets forth contractual interest income and expense related to CLO loans and ABS issued and their weighted average contractual interest rates:
(In thousands) |
Nine Months Ended June 30, 2017 |
|||||||||||||||||||
Interest Income (Expense) |
Average CLO Loan (CLO ABS Issued) Balance |
Weighted Average Contractual Interest Rate |
Weighted Average LIBOR |
Spread to Weighted Average LIBOR |
||||||||||||||||
CLO I loan contractual interest income |
$ | 480 | $ | 6,975 | 4.10 | % | 0.39 | % | 3.71 | % | ||||||||||
CLO I ABS issued contractual interest expense |
(691 | ) | (85,500 | ) | 1.03 | % | 0.39 | % | 0.64 | % | ||||||||||
CLO II loan contractual interest income |
6,474 | 162,643 | 4.96 | % | 0.00 | % | 4.96 | % | ||||||||||||
CLO II ABS issued contractual interest expense |
(4,807 | ) | (256,749 | ) | 2.98 | % | 1.07 | % | 1.91 | % | ||||||||||
CLO III loan contractual interest income |
14,147 | 354,518 | 5.01 | % | 1.14 | % | 3.87 | % | ||||||||||||
CLO III ABS issued contractual interest expense |
(8,687 | ) | (332,100 | ) | 3.13 | % | 1.14 | % | 1.99 | % | ||||||||||
CLO IV loan contractual interest income |
8,035 | 195,459 | 4.96 | % | 1.33 | % | 3.64 | % | ||||||||||||
CLO IV ABS issued contractual interest expense |
(4,697 | ) | (424,718 | ) | 3.40 | % | 1.33 | % | 2.08 | % | ||||||||||
CLO V loan contractual interest income |
33 | 817 | 4.88 | % | 1.24 | % | 3.64 | % | ||||||||||||
CLO V warehouse credit facility contractual interest expense |
(7 | ) | (3,960 | ) | 2.61 | % | 1.24 | % | 1.38 | % | ||||||||||
Net CLO contractual interest |
$ | 10,280 | $ | N/A | N/A | N/A | N/A |
(In thousands) |
Nine Months Ended June 30, 2016 |
|||||||||||||||||||
Interest Income (Expense) |
Average CLO Loan (CLO ABS Issued) Balance |
Weighted Average Contractual Interest Rate |
Weighted Average LIBOR |
Spread to Weighted Average LIBOR |
||||||||||||||||
CLO I loan contractual interest income |
$ | 7,576 | $ | 261,856 | 3.80 | % | 0.60 | % | 3.20 | % | ||||||||||
CLO I ABS issued contractual interest expense |
(3,285 | ) | (277,848 | ) | 1.78 | % | 0.60 | % | 1.18 | % | ||||||||||
CLO II loan contractual interest income |
12,145 | 320,382 | 4.98 | % | 0.62 | % | 4.36 | % | ||||||||||||
CLO II ABS issued contractual interest expense |
(6,044 | ) | (316,365 | ) | 2.49 | % | 0.62 | % | 1.87 | % | ||||||||||
CLO III loan contractual interest income |
13,741 | 351,848 | 5.13 | % | 0.62 | % | 4.51 | % | ||||||||||||
CLO III ABS issued contractual interest expense |
(7,232 | ) | (332,100 | ) | 2.86 | % | 0.62 | % | 2.24 | % | ||||||||||
Net CLO contractual interest |
$ | 16,901 | $ | N/A | N/A | N/A | N/A |
Provision for Loan Losses
(In thousands) |
Nine Months Ended September 30, |
|||||||
2017 |
2016 |
|||||||
CLO related provision |
$ | (2,271 | ) | $ | (537 | ) | ||
Non-CLO related provision |
(1,217 | ) | (443 | ) | ||||
Provision for Loan Losses |
$ | (3,488 | ) | $ | (980 | ) | ||
Less: General reserves related to CLO II, CLO III and CLO IV, and non-controlling interest |
1,073 | 185 | ||||||
Segment Provision for Loan Losses |
$ | (2,415 | ) | $ | (795 | ) |
Provision for loan losses increased $2.5 million, from $1.0 million for the nine months ended September 30, 2016 to $3.5 million for the same period in 2017. Approximately $1.7 million of the increase related to specific reserves on loans held in our CLO portfolios and among our loans held for investment. As a percent of net revenues after provision for loan losses, the provision for loan losses was negative 4.4% for the nine months ended September 30, 2017 and negative 1.0% for the same period in 2016.
Total segment provision for loan losses increased from $0.8 million for the nine months ended September 30, 2017 to $2.4 million for the six months ended June 30, 2017. Total segment provision for loan losses is a non-GAAP financial measure that aggregates our segment reported provision for loan losses across each segment. Our total segment provision for loan losses in 2017 and 2016 was solely recognized in our Corporate segment. As a percent of total segment adjusted net revenues, segment provision for loan losses were 2.7% and 0.8% for the nine months ended September 30, 2017 and 2016, respectively.
Expenses
Non-Interest Expenses
Compensation and Benefits
Compensation and benefits, which includes employee payroll, taxes and benefits, performance-based cash bonus and commissions, as well as equity-based compensation to our employees and managing directors, decreased $1.3 million, or 1.8%, from $70.3 million for the nine months ended September 30, 2016 to $69.0 million for the same period in 2017.
Employee payroll, taxes and benefits, and consultant fees were $34.5 million and $34.2 million for the nine months ended September 30, 2016 and 2017, respectively. Performance-based bonus and commission increased $1.0 million from $31.6 million for the nine months ended September 30, 2016 to $33.1 million for the same period in 2017.
Equity-based compensation was $2.2 million and $4.2 million for the nine months ended September 30, 2017 and 2016, respectively. The equity-based compensation included a $1.0 million decline in share options and share appreciation rights.
Compensation and benefits as a percentage of revenues increased from 71.0% of total net revenues after provision for loan losses for the nine months ended September 30, 2016 to 86.8% for the same period in 2017.
Our segment reported compensation and benefits recognizes 100% of the cost of deferred compensation, including non-cash share-based compensation expense, in the period for which such compensation was awarded, instead of recognizing such cost over the vesting period as required under GAAP, in order to match compensation expense with the actual period upon which the compensation was based. The segment reported compensation and benefits decreased $0.7 million from $67.1 million for the nine months ended September 30, 2016 to $66.4 million for the same period in 2017. As a percent of total segment net revenues, compensation and benefits were 74.5% and 70.9% for the nine months ended September 30, 2017 and 2016, respectively.
Administration
Administration expense was $6.0 and $5.6 million for the nine months ended September 30, 2017 and 2016, respectively. As a percentage of total net revenues after provision for loan losses, administration expense increased from 5.7% for the nine months ended September 30, 2016 to 7.5% for the same period in 2017.
Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fees were $2.3 million both for the nine months ended September 30, 2016 and for the same period in 2017. As a percentage of total net revenues after provision for loan losses, our brokerage, clearing and exchange fees increased from 2.3% for the nine months ended September 30, 2016 to 2.9% for the same period in 2017.
Travel and Business Development
Travel and business development expenses decreased $0.8 million, from $3.5 million for the nine months ended September 30, 2016 to $2.7 million for the nine months ended September 30, 2017. As a percentage of total net revenues after provision for loan losses, travel and business development expense were 3.4% and 3.6% for the nine months ended September 30, 2017 and 2016, respectively.
Communications and Technology
Communications and technology expenses were $3.2 million and $3.1 million for the nine months ended September 30, 2017 and 2016, respectively. As a percentage of total net revenues after provision for loan losses, communications and technology expense increased from 3.1% for the nine months ended September 30, 2016 to 4.0% for the same period in 2017.
Professional Fees
Professional fees decreased $0.1 million from $3.2 million for the nine months ended September 30, 2016 to $3.1 million for the nine months ended September 30, 2017. As a percentage of total net revenues after provision for loan losses, professional fees increased from 3.3% for the nine months ended September 30, 2016 to 3.9% for the same period in 2017.
Other Expenses
Other expenses increased $0.8 million from $5.5 million for the nine months ended September 30, 2016 to $6.2 million for the nine months ended September 30, 2017. The increase was attributable to a $0.5 million increase in occupancy costs. As a percentage of total net revenues after provision for loan losses, other expenses increased from 5.5% for the nine months ended September 30, 2016 to 7.8% for the same period in 2017.
Net Income Attributable to Non-controlling Interest
Net income attributable to non-controlling interest decreased from $4.0 million for the nine months ended September 30, 2016 to $1.7 million for the nine months ended September 30, 2017. Non-controlling interest for the nine months ended September 30, 2016 and 2017 includes the interest of third parties in CLO I, CLO II, CLO III, and HCAP Advisors.
Provision for Income Taxes
For the nine months ended September 30, 2017 and 2016, income tax benefits of $1.3 million and $0.2 million, respectively, were recorded. For the purposes of calculating operating net income, an effective tax rate of 38% is assumed for our taxable direct subsidiary, based on our best estimation of the subsidiary’s average rate of taxation over the long term, while a rate of 0% is applied to our other direct subsidiary, which is a “pass-through entity” for tax purposes. Segment income tax benefit decreased $1.7 million from $1.9 million for the nine months ended September 30, 2016 to $0.2 million for the same period in 2017.
Financial Condition, Liquidity and Capital Resources
In the section that follows, we discuss the significant changes in the components of our balance sheet, cash flows and capital resources and liquidity for the nine months ended September 30, 2017 to demonstrate where our capital is invested and the financial condition of the Company.
Overview
As of September 30, 2017, we had net liquid assets of $88.7 million consisting of cash and cash equivalents, proceeds from short sales on deposit, receivable from clearing broker, marketable securities owned, and general partner investments in hedge funds managed by HCS, net of marketable securities sold but not yet purchased, accrued compensation, deferred compensation paid in January 2014, and non-controlling interest. We have satisfied our capital and liquidity requirements primarily through the net proceeds from the initial public offering, the January 2013 issuance of the 2013 Senior Notes, the January 2014 issuance of the 2014 Senior Notes, and internally generated cash from operations. Most of our financial instruments, other than loans collateralizing asset-backed securities issued, loans held for investment and asset-backed securities issued, are recorded at fair value or amounts that approximate fair value.
Liquidity Considerations Related to CLOs
On April 7, 2009, we invested $4.0 million of cash and granted $3.0 million original par amount, with a $2.3 million estimated fair value, of contingent consideration (a zero coupon note) to acquire 100% of the membership interests and net assets of $7.5 million of CLO I. In December 2009, we repurchased the contingent consideration for $1.8 million. In the fourth quarter of 2016, CLO I initiated liquidation proceedings. In connection with this liquidation, the Company received a $29.0 million distribution in the first quarter of 2017 and the final distribution of $5.2 million in the second quarter of 2017.
Our maximum exposure to loss of capital on the CLOs is the $13.5 million investment related to CLO III and $39.0 million investment in CLO IV, plus any earnings retained in the CLOs since the acquisition or inception dates. However, for U.S. federal tax purposes, the CLOs are treated as disregarded entities such that the taxable income earned in the CLO is taxable to us. If the CLOs are in violation of certain coverage tests, mainly any of their over-collateralization ratios, residual cash flows otherwise payable to us as owners of the subordinated notes would be required to be used to repay indebtedness senior to us in the securitization, or, for CLO III or CLO IV, potentially to buy additional collateral. This could require us to pay income tax on earnings prior to the residual cash flow distributions to us.
The CLOs must comply with certain asset coverage tests, such as tests that restrict the amount of discounted obligations and obligations rated “CCC” or lower it can hold. Defaulted obligations, discounted assets and assets rated “CCC” or lower in excess of applicable limits in the CLOs investment criteria are not given full par credit for purposes of calculation of the CLO over-collateralization (“OC”) tests. We were in compliance with all OC tests on the determination dates since February 2010. However, we have been in violation and may be in the future. If any of the CLOs were to violate any of the secured note OC tests, we would be required to pay down the most senior notes with the residual cash flows until the violation was cured. In the most extreme case, if a CLO were in violation of the most senior OC test, the Class A note holders would have the ability to declare an event of default and cause an acceleration of all principal and interest outstanding on the notes.
For financial reporting purposes, the loans and asset-backed securities of the CLOs are consolidated on our balance sheet. The loans are reported at their cost adjusted for credit reserves, purchase discounts and allowance for loan losses. The asset-backed securities are recorded net of liquidity discounts and original issue discounts. At September 30, 2017, we had $756.2 million of loans collateralizing asset-backed securities, net, $57.7 million of restricted cash and $2.0 million of interest receivable funded by $737.8 million of asset-backed securities issued, net, and interest payable of $6.0 million. These assets and liabilities represented 79.1% of total assets and 81.4% of total liabilities respectively, reported on our Consolidated Statement of Financial Condition at September 30, 2017.
The tables below summarize the loans held by the CLOs grouped by range of outstanding balance, Moody’s Investors Services, Inc. rating category and industry as of September 30, 2017.
(Dollars in thousands) |
As of September 30, 2017 |
||||||||
Range of Outstanding Balance |
Number of Loans |
Maturity Date |
Total Principal |
||||||
$0 - $500 |
94 |
11/2019 - 8/2024 |
$ | 39,705 | |||||
$500 - $2,000 |
360 |
12/2018 - 7/2025 |
462,217 | ||||||
$2,000 - $5,000 |
95 |
1/2019 - 6/2014 |
252,217 | ||||||
$5,000 - $10,000 |
2 |
6/2021 - 9/2023 |
13,933 | ||||||
Total |
551 | $ | 768,072 |
(Dollars in thousands) |
As of September 30, 2017 |
|||||||||||
Industry |
Number of Loans |
Outstanding Balance |
% of Outstanding Balance |
|||||||||
Aerospace & Defense |
19 | $ | 24,162 | 3.1 | % | |||||||
Automotive |
26 | 32,774 | 4.3 | % | ||||||||
Banking, Finance, Insurance & Real Estate |
32 | 36,088 | 4.7 | % | ||||||||
Beverage, Food & Tobacco |
27 | 36,926 | 4.8 | % | ||||||||
Capital Equipment |
20 | 24,858 | 3.2 | % | ||||||||
Chemicals, Plastics & Rubber |
20 | 19,522 | 2.5 | % | ||||||||
Construction & Building |
19 | 27,712 | 3.6 | % | ||||||||
Consumer Goods: Durable |
13 | 19,328 | 2.5 | % | ||||||||
Consumer Goods: Non-durable |
14 | 22,722 | 3.0 | % | ||||||||
Containers, Packaging & Glass |
18 | 21,350 | 2.8 | % | ||||||||
Energy: Electricity |
5 | 10,997 | 1.4 | % | ||||||||
Energy: Oil & Gas |
8 | 8,119 | 1.1 | % | ||||||||
Environmental Industries |
8 | 13,953 | 1.8 | % | ||||||||
Forest Products & Paper |
1 | 993 | 0.1 | % | ||||||||
Healthcare & Pharmaceuticals |
40 | 55,609 | 7.2 | % | ||||||||
High Tech Industries |
40 | 68,202 | 8.9 | % | ||||||||
Hotel, Gaming & Leisure |
38 | 51,570 | 6.7 | % | ||||||||
Media: Diversified & Production |
4 | 5,569 | 0.7 | % | ||||||||
Media: Advertising, Printing, Publishing |
8 | 11,912 | 1.6 | % | ||||||||
Media: Broadcasting & Subscription |
16 | 26,885 | 3.5 | % | ||||||||
Metals & Mining |
7 | 10,459 | 1.4 | % | ||||||||
Retail |
31 | 50,509 | 6.6 | % | ||||||||
Services: Business |
52 | 82,880 | 10.8 | % | ||||||||
Services: Consumer |
22 | 33,860 | 4.4 | % | ||||||||
Telecommunications |
25 | 37,597 | 4.9 | % | ||||||||
Transportation: Cargo |
14 | 20,270 | 2.6 | % | ||||||||
Transportation: Consumer |
4 | 4,954 | 0.6 | % | ||||||||
Utilities: Oil & Gas |
1 | 975 | 0.1 | % | ||||||||
Utilities: Electric |
1 | 1,446 | 0.2 | % | ||||||||
Wholesale |
4 | 5,870 | 0.8 | % | ||||||||
Total |
537 | $ | 768071 | 100.0 | % |
Moody's Rating Category |
Number of Loans |
Outstanding Balance |
% of Outstanding Balance |
|||||||||
B1 |
109 | $ | 166,087 | 21.6 | % | |||||||
B2 |
205 | 293,420 | 38.2 | % | ||||||||
B3 |
92 | 131,105 | 17.1 | % | ||||||||
Ba1 |
15 | 26,566 | 3.5 | % | ||||||||
Ba2 |
29 | 35,613 | 4.6 | % | ||||||||
Ba3 |
50 | 62,223 | 8.1 | % | ||||||||
Baa3 |
5 | 9,010 | 1.2 | % | ||||||||
Caa1 |
25 | 38,648 | 5.0 | % | ||||||||
Caa2 |
6 | 5,307 | 0.7 | % | ||||||||
Caa3 |
1 | 92 | 0.0 | % | ||||||||
Total |
537 | $ | 768,071 | 100 | % |
Other Liquidity Considerations
As of September 30, 2017, our indebtedness consists of our bonds payable and our borrowings under the CLO V warehouse credit facility. We have no outstanding balances on our revolving lines of credit with City National Bank (“CNB”), related to JMP Holding LLC or JMP Securities.
In January 2013, we raised approximately $46.0 million from the sale of 8.00% Senior Notes (“2013 Senior Notes”). In January 2014, we raised an additional approximate $48.3 million from the sale of 7.25% Senior Notes (“2014 Senior Notes” and the 2013 Senior Notes together with the 2014 Senior Notes are the “Senior Notes”). The 2013 Senior Notes will mature on January 15, 2023 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after January 15, 2016, at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The 2013 Senior Notes bear interest at a rate of 8.00% per year, payable quarterly on January 15, April 15, July 15 and October 15 of each year. The 2014 Senior Notes will mature on January 15, 2021, and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after January 15, 2017, at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The 2014 Senior Notes bear interest at a rate of 7.25% per year, payable quarterly on January 15, April 15, July 15 and October 15 of each year. In February 2016, the Company purchased $0.5 million face value of the Senior Notes for $0.4 million.
In connection with the Reorganization Transaction, we entered into a Third Supplemental Indenture, dated as of October 15, 2014 (the “Third Supplemental Indenture”), among the JMP Group Inc., JMP Group LLC and JMP Investment Holdings LLC, as guarantors (the “Guarantors”), and U.S. Bank National Association, as trustee. The Third Supplemental Indenture became effective on January 1, 2015. Under the Third Supplemental Indenture, the Guarantors have jointly and severally provided a full and unconditional guarantee of the due and punctual payment of the principal and interest on the Senior Notes, and the due and punctual payment or performance of all other obligations of JMP Group Inc. under the Indenture, dated as of January 24, 2013, between JMP Group Inc. and the Trustee, as supplemented by a First Supplemental Indenture, dated as of January 25, 2013, a Second Supplemental Indenture, dated as of January 29, 2014 and the Third Supplemental Indenture, dated as of October 15, 2014.
The Company’s Credit Agreement (the “Credit Agreement”), dated as of August 3, 2006, was entered into by and between JMP Holding LLC and City National Bank (“CNB”), and was subsequently amended. The Credit Agreement and subsequent amendments provide a $25.0 million line of credit with a revolving period of one year through May 2, 2018. On such date, any outstanding amounts convert to a term loan. The term loan will be repaid in quarterly installments of 3.75% of funded debt for the first two years, 5.00% of funded debt for the next two years, and the remainder due at maturity. Proceeds for this line of credit will be used to make financial investments, for working capital purposes, for general corporate purposes, as well as a $5.0 million sublimit to issue letters of credit. The Company’s outstanding balance on this line of credit was zero as of both September 30, 2017 and December 31, 2016.
The Credit Agreement for the term loan provides that the proceeds of the CNB Loans are subject to the following restrictions: (i) the initial term loan and up to $5.0 million of the revolving line of credit loans may not be used for any purpose other than to fund certain permitted investments and acquisitions and to fund JMP Holding LLC’s working capital needs in the ordinary course of its business; (ii) all other proceeds of the revolving line of credit may not be used for any purpose other than to make investments in HCS and by HCS to make investments in loans that are made to persons that are not affiliates of borrower; and (iii) the term loan may not be used for any purpose other than to make equity investments in CLOs and by CLOs to make certain permitted investments in collateralized loan obligations.
The Credit Agreement includes a minimum fixed charge applicable to us and our subsidiaries, a minimum net worth covenant applicable to us and our subsidiaries and a minimum liquidity covenant applicable to JMP Holding LLC and its subsidiaries. As of September 30, 2017, we were in compliance with all of these financial covenants. The Credit Agreement also includes an event of default for a “change of control” that tests, in part, the composition of our ownership and an event of default if two or more of the members of the Company’s Executive Committee fail to be involved actively on an ongoing basis in the management of JMP Holding LLC or any of its subsidiaries. The CNB Loans are guaranteed by HCS and secured by a lien on substantially all assets of JMP Holding LLC and HCS.
Separately, under a Revolving Note and Cash Subordination Agreement, JMP Securities holds a $20.0 million revolving line of credit with CNB to be used for regulatory capital purposes during its securities underwriting activities. The unused portion of the line bears interest at the rate of 0.25% per annum, paid monthly. On June 6, 2017, JMP Securities entered into an amendment to its Credit Agreement (the “Amendment”). Pursuant to this Amendment, the $20.0 million line of credit was renewed for one year. On June 6, 2018, any existing outstanding amount will convert to a term loan maturing the following year. The remaining terms of this line of credit are consistent with those of the existing line of credit. There was no borrowing on this line of credit as of September 30, 2017 and December 31, 2016.
The Credit Agreement contains financial and other covenants, including, but not limited to, limitations on debt, liens and investments, as well as the maintenance of certain financial covenants. A violation of any one of these covenants could result in a default under the Credit Agreement, which would permit CNB to terminate the Company’s note and require the immediate repayment of any outstanding principal and interest. At both September 30, 2017 and December 31, 2016, the Company was in compliance with the loan covenants. The revolving lines of credit are collateralized by a pledge of the Company’s assets, including its interests in each of JMP Securities and HCS.
On July 31, 2017, the Company established, through its affiliate CLO V, a $200.0 million revolving credit facility with BNP Paribas to finance the acquisition of a portfolio of assets, including certain debt obligations. As of September 30, 2017, the balance of the credit facility was $7.0 million.
The timing of bonus compensation payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees and managing directors are generally paid semi-monthly during the year, bonus compensation, which makes up a larger portion of total compensation, is generally paid once a year during the first two months of the following year. In the first two months of 2017, we paid out $29.8 million of cash bonuses for 2016, excluding employer payroll tax expense.
The Company currently intends to continue to declare monthly cash distributions on all outstanding shares. The following table represents cash distributions made for the nine months ended September 30, 2017.
Date |
Record |
Date |
Per Share |
|||
Declared |
Date |
Paid |
Amount |
|||
1/19/2017 |
1/31/2017 |
2/15/2017 |
$ | 0.030 | ||
1/19/2017 |
2/28/2017 |
3/15/2017 |
$ | 0.030 | ||
1/19/2017 |
3/31/2017 |
4/14/2017 |
$ | 0.030 | ||
4/19/2017 |
4/28/2017 |
5/15/2017 |
$ | 0.030 | ||
4/19/2017 |
5/31/2017 |
6/15/2017 |
$ | 0.030 | ||
4/19/2017 |
6/30/2017 |
7/14/2017 |
$ | 0.030 | ||
7/20/2017 |
7/31/2017 |
8/15/2017 |
$ | 0.030 | ||
7/20/2017 |
8/31/2017 |
9/15/2017 |
$ | 0.030 | ||
7/20/2017 |
9/29/2017 |
10/13/2017 |
$ | 0.030 |
During the nine months ended September 30, 2017, the Company repurchased 362,694 of the Company’s shares at an average price of $5.42 per share for an aggregate purchase price of $2.0 million on the open market.
We had total restricted cash of $62.0 million comprised primarily of $57.7 million of restricted cash at JMP Investment Holdings on September 30, 2017. This balance was comprised of $11.0 million in interest received from loans in the CLOs, and $51.2 million in principal cash. The interest and fees will be restricted until the next payment date to note holders of the CLOs. The principal restricted cash will be used to buy additional loans or pay down the senior debt in the CLOs.
Because of the nature of our investment banking and sales and trading businesses, liquidity is important to us. Accordingly, we regularly monitor our liquidity position, including our cash and net capital positions. We believe that our available liquidity and current level of equity capital, combined with the funds anticipated to be provided by our operating activities, will be adequate to meet our liquidity and regulatory capital requirements for at least the next twelve months. If circumstances required it, we could improve our liquidity position by discontinuing repurchases of the Company’s common shares, halting cash distributions on our common shares and reducing cash bonus compensation paid.
JMP Securities, our wholly-owned subsidiary and a registered securities broker-dealer, is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital, as defined, and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. JMP Securities had net capital of $21.1 million and $29.7 million, which were $19.8 million and $28.6 million in excess of the required net capital of $1.3 million and $1.1 million, at September 30, 2017 and December 31, 2016, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 0.92 to 1 and 0.56 to 1 at September 30, 2017 and December 31, 2016, respectively.
A condensed table of cash flows for the nine months ended September 30, 2017 and 2016 is presented below.
(Dollars in thousands) |
Nine Months Ended September 30, |
Change from 2016 to 2017 |
||||||||||||||
2017 |
2016 |
% |
||||||||||||||
Cash flows used in operating activities |
$ | (13,984 | ) | $ | 5,092 | $ | (19,076 | ) | -374.6 | % | ||||||
Cash flows provided by investing activities |
114,640 | 106,378 | 8,262 | 7.8 | % | |||||||||||
Cash flows used in financing activities |
(98,655 | ) | (91,353 | ) | (7,302 | ) | -8.0 | % | ||||||||
Total cash flows |
$ | 2,001 | $ | 20,117 | $ | (18,116 | ) | -90.1 | % |
Cash Flows for the Nine Months Ended September 30, 2017
Cash decreased by $2.0 million during the nine months ended September 30, 2017, as a result of cash used in operating and financing activities, partially offset by cash provided by investing activities.
Our operating activities used $14.0 million of cash from the net loss of $12.8 million, adjusted for the cash used by operating assets and liabilities of $10.6 million, and provided by non-cash revenue and expense items of $9.4 million. The cash used by the change in operating assets and liabilities included an increase in receivables of $22.4 million, and decrease in accrued compensation and other liabilities of $9.0 million, partially offset by a, increase in marketable securities sold, but not yet purchased of $16.3 million and a decrease in deposits and other assets of $6.5 million.
Our investing activities provided $114.6 million of cash primarily due to the sale and payoff of loans collateralizing ABS of $477.2 million, the net change in restricted cash reserved for lending activities of $167.0 million driven by the liquidation of CLO I and CLO II, and, partially offset by $614.4 million funding of loans collateralizing ABS related to the CLO IV issuance.
Our financing activities used $98.7 million of cash primarily due to $503.6 million repayment of ABS issued relating to the liquidation of CLO I and CLO II, partially offset by $408.4 million of proceeds from asset-backed securities issued and $7.0 million of proceeds from the Facility.
Cash Flows for the Nine Months Ended September 30, 2016
Cash increased by $20.1 million during the nine months ended September 30, 2016, as a result of cash provided by operating and investing activities, partially offset by cash used in financing activities.
Our operating activities provided $5.1 million of cash from the net income of $6.2 million, adjusted for the cash used by operating assets and liabilities of $9.3 million, and by non-cash revenue and expense items of $10.4 million. The cash used by the change in operating assets and liabilities included a decline of accrued compensation and other liabilities of $11.9 million, partially offset by a decline in receivables of $7.9 million and a $6.9 million decrease in marketable securities.
Our investing activities provided $106.4 million of cash primarily due to the sale and payoff of loans collateralizing ABS of $279.4 million, and principal receipts on loans collateralizing asset-backed securities of $52.0 million, partially offset by $185.6 million funding of loans collateralizing ABS and $72.3 million increase in restricted cash for lending activities due trades made at the CLOs but not yet settled.
Our financing activities used $91.4 million of cash primarily due to $74.6 million repayment of ABS issued, $6.2 million distributions and distribution equivalents paid on common shares and RSUs and $5.9 million distributions to non-controlling shareholders.
Contractual Obligations
As of September 30, 2017, our aggregate minimum future commitment on our leases was $25.1 million. See Note 13 of the notes to the condensed consolidated financial statements for more information. Our remaining contractual obligations have not materially changed from those reported in our Annual Report.
Off-Balance Sheet Arrangements
In connection with the CLOs, the Company had standby letters of credit of $5.1 million and $1.0 million as of September 30, 2017 and December 31, 2016, respectively. The Company had unfunded commitments to lend of $39.4 million as of September 30, 2017. The Company had sold unfunded commitments of $20.7 million as of December 31, 2016 that had not yet settled. Had the borrower drawn on these, the Company would have been obligated to fund them. The funds for the unfunded commitments to lend and the cash collateral supporting these standby letters of credit are included in restricted cash on the Consolidated Statement of Financial Position as of September 30, 2017. The CLO-related commitments do not extend to JMP Group LLC. See Note 18 of the notes to the condensed consolidated financial statements for more information on the financial instruments with off-balance sheet risk in connection with the CLOs.
Unfunded commitments are agreements to lend to a borrower, provided that all conditions have been met. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each borrower’s creditworthiness on a case by case basis.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a borrower to a third party. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to borrowers.
We had no other material off-balance sheet arrangements as of September 30, 2017. However, as described below under “Item 3. Quantitative and Qualitative Disclosures About Market Risk,” through indemnification provisions in our clearing agreements with our clearing broker, customer activities may expose us to off-balance sheet credit risk, which we seek to mitigate through customer screening and collateral requirements.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and of revenues and expenses during the reporting periods. We base our estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances. The use of different estimates and assumptions could produce materially different results. For example, if factors such as those described under the caption “Risk Factors” in our Annual Report cause actual events to differ from the assumptions we used in applying the accounting policies, our results of operations, financial condition and liquidity could be adversely affected.
On an ongoing basis, we evaluate our estimates and assumptions, particularly as they relate to accounting policies that we believe are most important to the presentation of our financial condition and results of operations. We regard an accounting estimate or assumption to be most important to the presentation of our financial condition and results of operations where:
• |
the nature of the estimates or assumptions is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and |
• |
the impact of the estimates or assumptions on our financial condition or operating performance is material. |
Using the foregoing criteria, we consider the following to be our critical accounting policies:
● |
Valuation of Financial Instruments |
● |
Asset Management Investment Partnerships |
● |
Loans Held for Sale |
● |
Loans Collateralizing Asset-backed Securities Issued |
● |
Allowance for Loan Losses |
● |
Asset-backed Securities Issued |
● |
Legal and Other Contingent Liabilities |
● |
Income Taxes |
Our significant accounting policies are described further in the “Critical Accounting Policies and Estimates” section and Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements in our Annual Report.
ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
Not Applicable.
ITEM 4. |
Controls and Procedures |
Our management, with the participation of the Chairman and Chief Executive Officer (the principal executive officer) and the Chief Financial Officer (the principal financial officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. |
Legal Proceedings |
We are involved in a number of judicial, regulatory and arbitration matters arising in connection with our business. The outcome of matters we have been and currently are involved in cannot be determined at this time, and the results cannot be predicted with certainty. There can be no assurance that these matters will not have a material adverse effect on our results of operations in any future period and a significant judgment could have a material adverse impact on our financial condition, results of operations and cash flows. We may in the future become involved in additional litigation in the ordinary course of our business, including litigation that could be material to our business. Management, after consultation with legal counsel, believes that the currently known actions or threats against us will not result in any material adverse effect on our financial condition, results of operations or cash flows.
ITEM 1A. |
Risk Factors |
The risk factors included in our Annual Report continue to apply to us, and describe risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the forward-looking statements contained in this Quarterly Report. There have not been any material changes from the risk factors previously described in our Annual Report.
ITEM 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
The table below sets forth the information with respect to purchases made by or on behalf of JMP Group LLC or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common shares during the quarter ended September 30, 2017.
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
||||||||||||||||
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
||||||||||||||||
Total Number of Shares Purchased |
Average Price Paid Per Share |
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Period |
||||||||||||||||
July 1, 2017 to July 31, 2017 |
145,058 | $ | 5.32 | 145,058 | 780,410 | |||||||||||
August 1, 2017 to August 31, 2017 |
69,018 | $ | 5.38 | 69,018 | 711,392 | |||||||||||
September 1, 2017 to September 30, 2017 |
21,536 | $ | 5.35 | 21,536 | 689,856 | |||||||||||
Total |
235,612 | 235,612 |
(1) |
On February 13, 2017, our board of directors authorized the repurchase of 1,000,000 shares through December 31, 2017. |
ITEM 3. |
Defaults Upon Senior Securities |
None.
ITEM 4. |
Mine Safety Disclosures |
Not Applicable.
ITEM 5. |
Other Information |
None.
ITEM 6. |
Exhibits |
See Exhibit Index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 9, 2017
JMP Group LLC |
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By: |
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/s/ JOSEPH A. JOLSON |
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Name: |
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Joseph A. Jolson |
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Title: |
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Chairman and Chief Executive Officer |
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By: |
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/s/ RAYMOND S. JACKSON |
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Name: |
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Raymond S. Jackson |
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Title: |
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Chief Financial Officer |
EXHIBIT INDEX
Exhibit |
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Description |
10.18 |
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31.1 |
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31.2 |
|
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32.1 |
|
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32.2 |
|
|
101 |
The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes (furnished herewith). |
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