UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q 

 

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(Mark One)

 

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

 

For the quarterly period ended June 30, 2013 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: 001-33448

 

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JMP Group Inc.

(Exact name of registrant as specified in its charter)

 

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Delaware	20-1450327
(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

 

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐  (Do not check if a smaller reporting company)		Smaller reporting company		☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

The number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding as of July 31, 2013 was 22,002,803 

 

 

 

Table of Contents

 

TABLE OF CONTENTS

 

		Page
PART I.	FINANCIAL INFORMATION		4
Item 1.	Financial Statements - JMP Group Inc.		4
	Consolidated Statements of Financial Condition - June 30, 2013 and December 31, 2012 (Unaudited)		4
	Consolidated Statements of Operations - For the Three and Six months Ended June 30, 2013 and 2012 (Unaudited)		6
	Consolidated Statements of Comprehensive Income - For the Three and Six months Ended June 30, 2013 and 2012 (Unaudited)		7
	Consolidated Statement of Changes in Equity - For the Six months Ended June 30, 2013 (Unaudited)		7
	Consolidated Statements of Cash Flows - For the Six months Ended June 30, 2013 and 2012 (Unaudited)		8
	Notes to Consolidated Financial Statements (Unaudited)		10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		65
Item 4.	Controls and Procedures		66
PART II.	OTHER INFORMATION		66
Item 1.	Legal Proceedings		66
Item 1A.	Risk Factors		67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		68
Item 3.	Defaults Upon Senior Securities		68
Item 4.	Mine Safety Disclosures		68
Item 5.	Other Information		68
Item 6.	Exhibits		68
SIGNATURES			69
EXHIBIT INDEX			70

 

 

 AVAILABLE INFORMATION

 

JMP Group Inc. 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 Inc. 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 Inc.’s SEC filings.

 

JMP Group Inc. 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 stockholders, 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.

 

JMP Group Inc. also makes available, in the Investor Relations section of its website and will provide print copies to stockholders 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 of JMP Group Inc., are not intended to be part of this quarterly report.

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.       Financial Statements 

 

JMP Group Inc.

Consolidated Statements of Financial Condition

(Unaudited)

(Dollars in thousands, except per share data)

 

		June 30, 2013				December 31, 2012
Assets
Cash and cash equivalents		$	53,330			$	67,075
Restricted cash and deposits (includes cash on deposit with clearing broker of $150 at both June 30, 2013 and December 31, 2012)			167,019				69,813
Receivable from clearing broker			1,848				1,117
Investment banking fees receivable, net of allowance for doubtful accounts of zero at June 30, 2013 and December 31, 2012			13,654				5,148
Marketable securities owned, at fair value			17,715				14,347
Incentive fee receivable			1,061				2,945
Other investments (of which $156,403 and $80,945 are recorded at fair value at June 30, 2013 and December 31, 2012, respectively)			156,557				81,161
Loans held for sale			6,779				3,134
Small business loans			-				38,934
Loans collateralizing asset-backed securities issued, net of allowance for loan losses			633,353				401,003
Interest receivable			1,152				1,229
Fixed assets, net			2,412				2,663
Deferred tax assets			9,472				13,087
Other assets			16,877				8,206
Total assets		$	1,081,229			$	709,862
Liabilities and Equity
Liabilities:
Marketable securities sold, but not yet purchased, at fair value		$	11,876			$	11,567
Accrued compensation			25,778				20,256
Asset-backed securities issued			742,709				415,456
Interest payable			2,563				588
Note payable			19,368				10,486
Line of credit			-				28,227
Bond payable			46,000				-
Deferred tax liability			3,706				9,775
Other liabilities			22,513				26,203
Total liabilities			874,513				522,558
Redeemable Non-controlling Interest			-				161
Commitments and Contingencies
JMP Group Inc. Stockholders' Equity
Common stock, $0.001 par value, 100,000,000 shares authorized; 22,780,052 shares issued at both June 30, 2013 and December 31, 2012; 22,138,483 and 22,591,649 shares outstanding at June 30, 2013 and December 31, 2012			23				23
Additional paid-in capital			130,279				128,318
Treasury stock, at cost, 641,569 and 188,403 shares at June 30, 2013 and December 31, 2012, respectively			(3,973	)			(1,007	)
Accumulated other comprehensive loss			(27	)			(55	)
Accumulated deficit			(5,182	)			(408	)
Total JMP Group Inc. stockholders' equity			121,120				126,871
Nonredeemable Non-controlling Interest			85,596				60,272
Total equity			206,716				187,143
Total liabilities and equity		$	1,081,229			$	709,862

 

See accompanying notes to consolidated financial statements. 

 

 

JMP Group Inc.

Consolidated Statements of Financial Condition - (Continued)

(Unaudited)

(Dollars in thousands, except per share data)

 

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

 

		June 30, 2013				December 31, 2012
Cash and cash equivalents		$	183			$	-
Restricted cash			154,939				56,968
Loans held for sale			6,779				3,134
Loans collateralizing asset-backed securities issued, net of allowance for loan losses			633,353				401,003
Interest receivable			1,400				1,062
Incentive fees receivable			495				-
Deferred tax assets			3,061				3,387
Other assets			3,183				32
Total assets of consolidated VIE		$	803,393			$	465,586
Asset-backed securities issued			742,709				415,456
Note payable			2,500				-
Interest payable			1,759				542
Deferred tax liability			2,709				8,437
Other liabilities			4,915				3,573
Total liabilities of consolidated VIE		$	754,592			$	428,008

 

 The asset-backed securities issued (“ABS”) by the VIE are limited recourse obligations payable solely from cash flows of the loans collateralizing them and related collection and payment accounts pledged as security. Accordingly, only the assets of the VIE can be used to settle the obligations of the VIE.

 

See accompanying notes to consolidated financial statements.

 

 

JMP Group Inc.

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2013				2012				2013				2012
Revenues
Investment banking		$	21,057			$	9,133			$	33,164			$	25,792
Brokerage			6,980				5,412				12,174				10,904
Asset management fees			3,527				3,492				10,278				6,966
Principal transactions			2,292				7,780				4,209				14,264
Gain on sale and payoff of loans and mark-to-market of loans			336				1,405				1,425				2,452
Net dividend expense			55				(9	)			47				(23	)
Other income			26				2,407				314				3,142
Non-interest revenues			34,273				29,620				61,611				63,497
Interest income			7,711				8,260				15,869				15,718
Interest expense			(10,105	)			(9,878	)			(21,404	)			(19,486	)
Net interest expense			(2,394	)			(1,618	)			(5,535	)			(3,768	)
Provision for loan losses			(975	)			(1,107	)			(1,924	)			(1,200	)
Total net revenues after provision for loan losses			30,904				26,895				54,152				58,529
Non-interest expenses
Compensation and benefits			24,776				16,704				44,381				38,475
Administration			4,005				1,709				5,336				2,959
Brokerage, clearing and exchange fees			1,025				858				1,912				1,754
Travel and business development			1,039				987				1,997				1,689
Communications and technology			832				825				1,685				1,733
Occupancy			808				721				1,612				1,538
Professional fees			812				718				1,836				1,357
Depreciation			238				217				464				415
Other			224				(51	)			307				215
Total non-interest expenses			33,759				22,688				59,530				50,135
(Loss) income before income tax expense			(2,855	)			4,207				(5,378	)			8,394
Income tax benefit			(644	)			(920	)			(1,456	)			(539	)
Net (loss) income			(2,211	)			5,127				(3,922	)			8,933
Less: Net (loss) income attributable to nonredeemable non-controlling interest			(776	)			6,765				(768	)			10,197
Loss attributable to JMP Group Inc.		$	(1,435	)		$	(1,638	)		$	(3,154	)		$	(1,264	)
Net loss attributable to JMP Group Inc. per common share:
Basic		$	(0.06	)		$	(0.07	)		$	(0.14	)		$	(0.06	)
Diluted		$	(0.06	)		$	(0.07	)		$	(0.14	)		$	(0.06	)
Dividends declared per common share		$	0.035			$	0.035			$	0.070			$	0.065
Weighted average common shares outstanding:
Basic			22,199				22,772				22,402				22,476
Diluted			22,199				22,772				22,402				22,476

 

See accompanying notes to consolidated financial statements.

 

 

  JMP Group Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2013				2012				2013				2012
Net (loss) income		$	(2,211	)		$	5,127			$	(3,922	)		$	8,933
Other comprehensive income (loss)
Unrealized gain on cash flow hedge, net of tax			14				8				28				20
Comprehensive (loss) income			(2,197	)			5,135				(3,894	)			8,953
Less: Comprehensive (loss)/income attributable to non-controlling interest			(776	)			6,765				(768	)			10,197
Comprehensive (loss) income attributable to JMP Group Inc.		$	(1,421	)		$	(1,630	)		$	(3,126	)		$	(1,244	)

 

     

 

 

JMP Group Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

(In thousands)

 

		JMP Group Inc. Stockholders' Equity
		Common Stock								Treasury				Additional Paid-In				Accumulated				Accumulated Other Comprehensive				Nonredeemable Non-controlling
		Shares				Amount				Stock				Capital				Deficit				Loss				Interest				Total Equity
Balance, December 31, 2012			22,780			$	23			$	(1,007	)		$	128,318			$	(408	)		$	(55	)		$	60,272			$	187,143
Net loss			-				-				-				-				(3,154	)			-				(768	)			(3,922	)
Additonal paid-in capital - stock-based compensation			-				-				-				1,887				-				-				-				1,887
Dividends and dividend equivalents declared on common stock and restricted stock units			-				-				-				-				(1,620	)			-				-				(1,620	)
Purchases of shares of common stock for treasury			-				-				(3,129	)			-				-				-				-				(3,129	)
Reissuance of shares of common stock from treasury			-				-				163				74				-				-				-				237
Distributions to non-controlling interest holders			-				-				-				-				-				-				(3,377	)			(3,377	)
Unrealized gain on cash flow hedge, net of tax			-				-				-				-				-				28				-				28
Capital contributions from non-controlling interest holders			-				-				-				-				-				-				52,658				52,658
Reorganization/dissolution of subsidiaries (Note 2)			-				-				-				-				-								(23,189	)			(23,189	)
Balance, June 30, 2013			22,780			$	23			$	(3,973	)		$	130,279			$	(5,182	)		$	(27	)		$	85,596			$	206,716

  

See accompanying notes to consolidated financial statements.

 

 

JMP Group Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

		Six Months Ended June 30,
		2013				2012
Cash flows from operating activities:
Net (loss) income		$	(3,922	)		$	8,933
Adjustments to reconcile net income to net cash used in operating activities:
Provision for doubtful accounts			2				-
Provision for loan losses			1,924				1,200
Accretion of deferred loan fees			(1,139	)			(671	)
Amortization of liquidity discount, net			14,978				14,175
Amortization of debt issuance costs			31				-
Amortization of purchase discount			143				-
Interest paid in kind			(284	)			(144	)
Gain on sale and payoff of loans			(1,425	)			(2,439	)
Change in other investments:
Fair value			(3,159	)			(11,177	)
Incentive fees reinvested in general partnership interests			(3,730	)			(1,062	)
Change in fair value of small business loans			(90	)			245
Realized gain on other investments			(175	)			(1,024	)
Depreciation and amortization of fixed assets			464				415
Stock-based compensation expense			2,551				388
Deferred income taxes			(2,454	)			(694	)
Net change in operating assets and liabilities:
Decrease (increase) in interest receivable			77				(188	)
Increase in receivables			(6,647	)			(6,034	)
(Increase) decrease in marketable securities			(3,368	)			8,684
Decrease (increase) in restricted cash (excluding restricted cash reserved for lending activities), deposits and other assets			17,693				850
Decrease in deferred tax liabilities			-				(125	)
Increase in marketable securities sold, but not yet purchased			309				1,162
Increase (decrease) in interest payable			1,975				(7	)
Increase (decrease) in accrued compensation and other liabilities			1,773				(15,361	)
Net cash provided by (used in) operating activities			15,527				(2,874	)
Cash flows from investing activities:
Purchases of fixed assets			(213	)			(384	)
Investment in subsidiary			(17,325	)			-
Purchases of other investments			(67,158	)			(16,689	)
Sales of other investments			5,841				7,229
Funding of loans collateralizing asset-backed securities issued			(346,470	)			(86,371	)
Funding of small business loans			(1,451	)			(14,863	)
Sale and payoff of loans collateralizing asset-backed securities issued			92,374				67,277
Principal receipts on loans collateralizing asset-backed securities issued			19,309				17,088
Net change in restricted cash reserved for lending activities			235,713				1,983
Cash associated with consolidation / deconsolidation of subsidiaries			(13,343	)			-
Net cash used in investing activities			(92,723	)			(24,730	)

 

See accompanying notes to consolidated financial statements. 

 

 

JMP Group Inc.

Consolidated Statements of Cash Flows - (Continued)

(Unaudited)

(In thousands)

   

Cash flows from financing activities:
Proceeds from issuance of note payable			15,000				-
Proceeds from borrowing on line of credit			-				12,487
Proceeds from bond issuance			46,000				-
Payments of debt issuance costs			(1,694	)			-
Repayments of borrowing on line of credit			(28,227	)			-
Repayment of note payable			(6,118	)			(4,368	)
Dividends and dividend equivalents paid on common stock and RSUs			(1,620	)			(1,481	)
Purchases of shares of common stock for treasury			(3,129	)			(4,511	)
Capital contributions of redeemable non-controlling interest holders			134				56
Capital contributions of nonredeemable non-controlling interest holders			46,483				20,917
Distributions to non-controlling interest shareholders			(3,377	)			(2,854	)
Net cash provided by financing activities			63,452				20,246
Net decrease in cash and cash equivalents			(13,745	)			(7,358	)
Cash and cash equivalents, beginning of period			67,075				70,363
Cash and cash equivalents, end of period		$	53,330			$	63,005
Supplemental disclosures of cash flow information:
Cash paid during the period for interest		$	3,671			$	3,141
Cash paid during the period for taxes		$	6,957			$	745
Non-cash investing and financing activities:
Issuance of shares of common stock from treasury related to vesting of restricted stock units and exercises of stock options		$	163			$	7,238

  

See accompanying notes to consolidated financial statements. 

 

 

JMP GROUP INC.

Notes to Consolidated Financial Statements

June 30, 2013

(Unaudited)

 

1. Organization and Description of Business

 

JMP Group Inc., together with its subsidiaries (collectively, the “Company”), is an independent investment banking and asset management firm headquartered in San Francisco, California. The Company conducts its brokerage business through JMP Securities LLC (“JMP Securities”), its asset management business through Harvest Capital Strategies LLC (“HCS”), and HCAP Advisors LLC ("HCAP Advisors"), its corporate credit business through JMP Credit Corporation (“JMP Credit”), JMP Credit Advisors LLC (“JMPCA”) and certain principal investments through JMP Capital LLC (“JMP Capital”). 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, 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. From September 2011 through May 2, 2013, the Company also conducted corporate credit business through partly owned Harvest Capital Credit LLC ("HCC LLC"). On December 26, 2012, Harvest Capital Credit Corporation ("HCC") filed a registration statement on Form N-2 with the SEC in connection with a proposed initial public offering as a Business Development Company ("BDC") under the Investment Company Act of 1940. On May 2, 2013, HCC priced its initial public offering. On December 18, 2012, HCAP Advisors was formed as a Delaware Limited Liability Company. Effective May 1, 2013, HCAP Advisors provides investment advisory services. On April 30, 2013, the Company, through JMPCA CLO II Ltd ("CLO II") closed a CLO, managed by JMPCA.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

These consolidated financial statements and related notes are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its 2012 10-K. These consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for the fair statement of the results for the interim periods. The results of operations for any interim period are not necessarily indicative of the results to be expected for a full year.

 

The consolidated accounts of the Company include the wholly-owned subsidiaries, JMP Securities, HCS, JMP Capital, JMP Credit, JMPCA, and the partly-owned subsidiaries Harvest Growth Capital LLC (“HGC”), CLO I, HCC LLC (through May 2, 2013), Harvest Growth Capital II LLC (“HGC II”) (effective October 1, 2012), CLO II (effective April 30, 2013) and HCAP Advisors (effective May 1, 2013). All material intercompany accounts and transactions have been eliminated in consolidation. Non-controlling interest on the Consolidated Statements of Financial Condition at June 30, 2013 and December 31, 2012 relate to the interest of third parties in the partly-owned subsidiaries.

 

See Note 2 - Summary of Significant Accounting Policies in the Company's 2012 10-K for the Company's significant accounting policies.

 

Recent Business Transactions

 

On April 25, 2013, HCC entered into an acquisition agreement with HCC LLC. Pursuant to this acquisition agreement, immediately prior to the election to be treated as a BDC under the 1940 Act, HCC acquired HCC LLC, and the holders of membership interests in HCC LLC received shares of HCC common stock in exchange for their interests in HCC LLC. The outstanding limited liability company units of HCC LLC were converted into a number of shares of HCC common stock equal to (i) $33.7 million (i.e., the net asset value of HCC LLC as of December 31, 2012), plus the proceeds of sales of membership interests by HCC LLC since December 31, 2012, plus the reclassification of mezzanine equity to members capital, and minus distributions of pre - December 31, 2012 earnings made by HCC LLC after December 31, 2012, divided by (ii) $15.00 per share of HCC common stock. In connection with the merger, the number of units underlying each warrant, and the exercise price thereof, were converted into its common stock equivalent. HCC assumed and succeeded to all of the assets and liabilities of HCC LLC, including its obligations under the revolving credit facility with JMP Group, as amended. The conversion of units to shares and HCC LLC to HCC did not result in a change of control, nor change in management. The conversion was a transaction to change corporate form in preparation for the IPO. HCC engaged HCAP Advisors LLC to act as its adviser. Subject to the overall supervision of the HCC independent board of directors, HCAP Advisors manages HCC's day-to-day operations and provides investment advisory services. On May 2, 2013, HCC priced its initial public offering of 3.4 million shares of its common stock at a price of $15.00 per share, raising $51.0 million in gross proceeds. The underwriters of the offering were granted a 30-day option to purchase up to an additional 433,333 shares of common stock from the company. The option was exercised on May 15, raising an additional $6.5 million. After the offering, the Company's ownership of HCC was 13.1%. The Company performed a consolidation analysis at the time of the offering. Because of its current ownership and management position, the Company deconsolidated HCC effective May 2, 2013. The Company accounts for its investment in HCC using the fair value option.

 

 

On April 3, 2013, entities sponsored by JMP Group Inc. priced a $343.8 million CLO. The senior notes offered in this transaction (the “Secured Notes”) were issued by JMP Credit Advisors CLO II Ltd., 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 Secured Notes were issued in multiple tranches and are rated by Standard & Poor's Ratings Services and, in respect of certain tranches, Moody's Investors Service, Inc. The Secured Notes were priced with a weighted average coupon of three-month LIBOR plus 1.86%. The Company, through a wholly-owned subsidiary, retained $17.3 million of the subordinated notes of the Issuer (the “Subordinated Notes”). The Subordinated Notes will not bear interest and will not be rated. The transaction closed on April 30, 2013. The Company manages CLO II, and owns approximately 73% of the Subordinated Notes.

 

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 HCAP Advisors. HCAP Advisors borrowed $2.5 million from JMP Capital LLC, to be repaid in quarterly installments, commencing on the last business day of March 2015, with the last such installment due and payable on December 31, 2017. HCAP Advisors used these funds to pay the underwriters a portion of the sales load in the amount of $2.5 million, related to the IPO of HCC. HCC is not obligated to repay the portion of the sales load paid by HCAP Advisors. 

 

The Company follows the authoritative accounting guidance for the consolidation of variable interest entities ("VIEs"). Such guidance applies to VIEs, which are entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficiency of equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. When the Company enters into a transaction with a VIE, 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. The Company performed this analysis for HCAP Advisors and CLO II, and concluded they were VIEs and that the Company is the primary beneficiary for both. As a result, the Company consolidates the assets and liabilities of both entities. The underlying loans owned by CLO II are shown on the Consolidated Statements of Financial Condition under loans collateralizing asset-backed securities issued and the asset-backed securities ("ABS") issued to third parties are shown under asset-backed securities issued. See Note 5 and Note 7 for information pertaining to the loans owned and ABS issued by CLO II, respectively.

 

3. Recent Accounting Pronouncements

 

ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, was issued to improve the reporting of reclassifications out of accumulated other comprehensive income of various components. The standard requires an entity to present either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The adoption of ASU 2013-02 on January 1, 2013 did not have a material impact on its financial statement disclosures.

 

4. Fair Value Measurements

 

The following tables provide fair value information related to the Company’s financial instruments at June 30, 2013 and December 31, 2012:

 

		At June 30, 2013
(In thousands)		Carrying Value				Fair Value
						Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents		$	53,330			$	53,330			$	-			$	-			$	53,330
Restricted cash and deposits			167,019				167,019				-				-				167,019
Marketable securities owned			17,715				17,715				-				-				17,715
Other investments			156,557				59				70,001				86,343				156,403
Loans held for sale			6,779				-				2,591				4,326				6,917
Loans collateralizing asset-backed securities issued, net of allowance for loan losses			633,353				-				642,630				-				642,630
Long term receivable			1,298				-				-				1,501				1,501
Total assets:		$	1,036,051			$	238,123			$	715,222			$	92,170			$	1,045,515
Liabilities:
Marketable securities sold, but not yet purchased		$	11,876			$	11,876			$	-			$	-			$	11,876
Asset-backed securities issued			742,709				-				725,604				-				725,604
Bond payable			46,000				-				46,202				-				46,202
Note payable			19,368				-				19,368				-				19,368
Total liabilities:		$	819,953			$	11,876			$	791,174			$	-			$	803,050

 

 

		At December 31, 2012
(In thousands)		Carrying Value				Fair Value
						Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents		$	67,075			$	67,075			$	-			$	-			$	67,075
Restricted cash and deposits			69,813				69,813				-				-				69,813
Marketable securities owned			14,347				14,347				-				-				14,347
Other investments			81,161				865				28,137				51,943				80,945
Loans held for sale			3,134				-				3,134				-				3,134
Small business loans			38,934				-				3,487				35,447				38,934
Loans collateralizing asset-backed securities issued, net of allowance for loan losses			401,003				-				406,313				5,716				412,029
Long term receivable			1,342				-				-				1,647				1,647
Total assets:		$	676,809			$	152,100			$	441,071			$	94,753			$	687,924
Liabilities:
Marketable securities sold, but not yet purchased		$	11,567			$	11,567			$	-			$	-			$	11,567
Asset-backed securities issued			415,456				-				404,341				-				404,341
Note payable			10,486				-				10,486				-				10,486
Line of credit			28,227				-				28,227				-				28,227
Total liabilities:		$	465,736			$	11,567			$	443,054			$	-			$	454,621

 

Recurring Fair Value Measurement

 

The following tables provide information related to the Company’s assets and liabilities carried at fair value on a recurring basis at June 30, 2013 and December 31, 2012: 

    

(In thousands)		June 30, 2013
		Level 1				Level 2				Level 3				Total
Marketable securities owned		$	17,715			$	-			$	-			$	17,715
Other investments:
Investments in hedge funds managed by HCS			-				59,667				-				59,667
Investments in funds of funds managed by HCS			-				-				128				128
Total investment in funds managed by HCS			-				59,667				128				59,795
Limited partner investment in private equity fund			-				-				2,691				2,691
Warrants and other held at JMPS and JMPG			-				-				783				783
Equity securities in HCC			-				10,334				-				10,334
Equity securities in HGC, HGC II and JMP Capital			59				-				77,741				77,800
Forward purchase contract			-				-				5,000				5,000
Total other investments			59				70,001				86,343				156,403
Total assets:		$	17,774			$	70,001			$	86,343			$	174,118
Marketable securities sold, but not yet purchased			11,876				-				-				11,876
Total liabilities:		$	11,876			$	-			$	-			$	11,876

 

(In thousands)		December 31, 2012
		Level 1				Level 2				Level 3				Total
Marketable securities owned		$	14,347			$	-			$	-			$	14,347
Small business loans			-				3,487				35,447				38,934
Other investments:
Investments in hedge funds managed by HCS			-				27,907				-				27,907
Investments in funds of funds managed by HCS			-				-				109				109
Total investment in funds managed by HCS			-				27,907				109				28,016
Limited partner investment in private equity fund			-				-				2,332				2,332
Warrants and other held at JMPS			-				-				413				413
Warrants and equity securities held at HCC LLC			-				-				2,577				2,577
Equity securities in HGC, HGC II and JMP Capital			865				230				41,075				42,170
Forward purchase contract			-				-				5,437				5,437
Total other investments			865				28,137				51,943				80,945
Total assets:		$	15,212			$	31,624			$	87,390			$	134,226
Marketable securities sold, but not yet purchased			11,567				-				-				11,567
Total liabilities:		$	11,567			$	-			$	-			$	11,567

 

The Company holds a limited partner investment in a private equity fund. 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's Level 2 assets held in other investments consist of small business loans (through May 2, 2013), investments in hedge funds managed by HCS, and equity securities in HGC, HGC II, JMP Capital and JMP Group. The fair value of the Level 2 small business loans is calculated using the average market bid and ask quotation obtained from a loan pricing service. The fair value of the investment in hedge funds is calculated using the net asset value. 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 Level 2 equity securities in HGC, HGC II, JMP Capital and JMP Group reflect investments in public securities, where the Company is subject to a lockup period. The fair value of the Level 2 equity securities in HGC, HGC II and JMP Capital is calculated by applying a discount rate to the quoted market prices of the portfolio securities due to lack of marketability.

 

The tables below provide a reconciliation of the beginning and ending balances for the assets held at fair value using significant unobservable inputs (Level 3) for the three months ended June 30, 2013 and 2012.

 

(In thousands)		Balance as of March 31, 2013				Purchases				Sales				Total gains (losses) - realized and unrealized included in earnings (1)				Transfers out of Level 3 / Deconsolidation				Balance as of June 30, 2013				Unrealized gains/(losses) included in earnings related to assets still held at reporting date
General partner investment in funds of funds		$	117			$	-			$	-			$	11			$	-			$	128			$	11
Limited partner investment in private equity fund			2,558				-				-				133				-				2,691				133
Warrants and other held at JMPS/JMPG			296				42				-				445				-				783				445
Warrants and other held at HCC LLC			3,102				-				-				-				(3,102	)			-				-
Small business loans			36,823				382				-				-				(37,205	)			-				-
Equity securities in HGC, HGC II and JMP Capital			48,478				28,256				-				1,007				-				77,741				1,007
Forward purchase contract			5,000				-				-				-				-				5,000				-
Total Level 3 assets		$	96,374			$	28,680			$	-			$	1,596			$	(40,307	)		$	86,343			$	1,596

 

⁽¹⁾ No Level 3 asset gains (losses) are included in other comprehensive income. All realized and unrealized gains (losses) related to Level 3 assets are included in earnings.

    

(In thousands)		Balance as of March 31, 2012				Purchases				Sales				Total gains (losses) - realized and unrealized included in earnings (1)				Transfers in/(out) of Level 3				Balance as of June 30, 2012				Unrealized gains/(losses) included in earnings related to assets still held at reporting date
General partner investment in funds of funds		$	105			$	-			$	-			$	(1	)		$	-			$	104			$	2
Limited partner investment in private equity fund			2,625				-				(49	)			165				-				2,741				165
Warrants and other held at JMPS/JMPG			805				2				-				(25	)			-				782				(25	)
Warrants and other held at HCC LLC			-				100				-				80				-				180				80
Small business loans			8,199				8,866				(500	)			(87	)							16,478				(87	)
Equity securities in HGC, HGC II and JMP Capital			26,963				5,100				-				3,913				-				35,976				3,913
Forward purchase contract			5,000				-				-				2,424				-				7,424				2,424
Total Level 3 assets		$	43,697			$	14,068			$	(549	)		$	6,469			$	-			$	63,685			$	6,472

 

⁽¹⁾ No Level 3 asset gains (losses) are included in other comprehensive income. All realized and unrealized gains (losses) related to Level 3 assets are included in earnings.

 

The tables below provide a reconciliation of the beginning and ending balances for the assets held at fair value using significant unobservable inputs (Level 3) for the six months ended June 30, 2013 and 2012.

 

 

(In thousands)		Balance as of December 31, 2012				Purchases				Sales				Total gains (losses) - realized and unrealized included in earnings (1)				Transfers out of Level 3 / Deconsolidation				Balance as of June 30, 2013				Unrealized gains/(losses) included in earnings related to assets still held at reporting date
General partner investment in funds of funds		$	109			$	-			$	-			$	19			$	-			$	128			$	19
Limited partner investment in private equity fund			2,332				-				-				359				-				2,691				359
Warrants and other held at JMPS/JMPG			413				42				-				328				-				783				328
Warrants and other held at HCC LLC			2,577				100				-				425				(3,102	)			-				-
Small business loans			35,447				1,771				(43	)			30				(37,205	)			-				-
Equity securities in HGC, HGC II and JMP Capital			41,075				36,038				-				628				-				77,741				628
Forward purchase contract			5,437				-				-				(437	)			-				5,000				(437	)
Total Level 3 assets		$	87,390			$	37,951			$	(43	)		$	1,352			$	(40,307	)		$	86,343			$	897

 

⁽¹⁾ No Level 3 asset gains (losses) are included in other comprehensive income. All realized and unrealized gains (losses) related to Level 3 assets are included in earnings.

 

(In thousands)		Balance as of December 31, 2011				Purchases				Sales				Total gains (losses) - realized and unrealized included in earnings (1)				Transfers out of Level 3				Balance as of June 30, 2012				Unrealized gains/(losses) included in earnings related to assets still held at reporting date
General partner investment in funds of funds		$	102			$	-			$	-			$	2			$	-			$	104			$	2
Limited partner investment in private equity fund