UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2013 OR |
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File Number: 001-33448
JMP Group Inc.
(Exact name of registrant as specified in its charter)
|
Delaware |
20-1450327 |
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(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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
☐ |
Accelerated filer |
☒ |
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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 October 30, 2013 was 21,848,146.
TABLE OF CONTENTS
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Page | |
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PART I. |
FINANCIAL INFORMATION |
4 | |
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Item 1. |
Financial Statements - JMP Group Inc. |
4 | |
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Consolidated Statements of Financial Condition - September 30, 2013 and December 31, 2012 (Unaudited) |
4 | ||
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Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited) |
6 | ||
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Consolidated Statements of Comprehensive Income - For the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited) |
7 | ||
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Consolidated Statement of Changes in Equity - For the Nine Months Ended September 30, 2013 (Unaudited) |
7 | ||
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Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2013 and 2012 (Unaudited) |
8 | ||
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Notes to Consolidated Financial Statements (Unaudited) |
9 | ||
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
34 | |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
64 | |
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Item 4. |
Controls and Procedures |
65 | |
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PART II. |
OTHER INFORMATION |
66 | |
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Item 1. |
Legal Proceedings |
66 | |
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Item 1A. |
Risk Factors |
66 | |
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
67 | |
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Item 3. |
Defaults Upon Senior Securities |
67 | |
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Item 4. |
Mine Safety Disclosures |
67 | |
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Item 5. |
Other Information |
67 | |
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Item 6. |
Exhibits |
67 | |
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SIGNATURES |
68 | ||
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EXHIBIT INDEX |
69 | ||
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)
|
September 30, 2013 |
December 31, 2012 |
|||||||
|
Assets |
||||||||
|
Cash and cash equivalents |
$ | 55,740 | $ | 67,075 | ||||
|
Restricted cash and deposits (includes cash on deposit with clearing broker of $150 at both September 30, 2013 and December 31, 2012) |
84,788 | 69,813 | ||||||
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Receivable from clearing broker |
1,304 | 1,117 | ||||||
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Investment banking fees receivable, net of allowance for doubtful accounts of zero at September 30, 2013 and December 31, 2012 |
13,957 | 5,148 | ||||||
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Marketable securities owned, at fair value |
19,569 | 14,347 | ||||||
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Incentive fee receivable |
2,960 | 2,945 | ||||||
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Other investments (of which $169,229 and $80,945 are recorded at fair value at September 30, 2013 and December 31, 2012, respectively) |
169,413 | 81,161 | ||||||
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Loans held for sale |
- | 3,134 | ||||||
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Loans held for investment, net of allowance for loan losses |
667 | 150 | ||||||
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Small business loans |
- | 38,934 | ||||||
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Loans collateralizing asset-backed securities issued, net of allowance for loan losses |
709,403 | 401,003 | ||||||
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Interest receivable |
1,009 | 1,229 | ||||||
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Fixed assets, net |
2,237 | 2,663 | ||||||
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Deferred tax assets |
9,237 | 13,087 | ||||||
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Other assets |
13,036 | 8,056 | ||||||
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Total assets |
$ | 1,083,320 | $ | 709,862 | ||||
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Liabilities and Equity |
||||||||
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Liabilities: |
||||||||
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Marketable securities sold, but not yet purchased, at fair value |
$ | 15,397 | $ | 11,567 | ||||
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Accrued compensation |
34,459 | 20,256 | ||||||
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Asset-backed securities issued |
722,279 | 415,456 | ||||||
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Interest payable |
4,417 | 588 | ||||||
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Note payable |
17,184 | 10,486 | ||||||
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Line of credit |
- | 28,227 | ||||||
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Bond payable |
46,000 | - | ||||||
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Deferred tax liability |
3,095 | 9,775 | ||||||
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Other liabilities |
22,278 | 26,203 | ||||||
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Total liabilities |
865,109 | 522,558 | ||||||
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Redeemable Non-controlling Interest |
- | 161 | ||||||
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Commitments and Contingencies |
||||||||
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JMP Group Inc. Stockholders' Equity |
||||||||
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Common stock, $0.001 par value, 100,000,000 shares authorized; 22,780,052 shares issued at both September 30, 2013 and December 31, 2012; 21,961,227 and 22,591,649 shares outstanding at September 30, 2013 and December 31, 2012 |
23 | 23 | ||||||
|
Additional paid-in capital |
131,548 | 128,318 | ||||||
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Treasury stock, at cost, 818,825 and 188,403 shares at September 30, 2013 and December 31, 2012 |
(5,124 | ) | (1,007 | ) | ||||
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Accumulated other comprehensive loss |
(14 | ) | (55 | ) | ||||
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Accumulated deficit |
(2,693 | ) | (408 | ) | ||||
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Total JMP Group Inc. stockholders' equity |
123,740 | 126,871 | ||||||
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Nonredeemable Non-controlling Interest |
94,471 | 60,272 | ||||||
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Total equity |
218,211 | 187,143 | ||||||
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Total liabilities and equity |
$ | 1,083,320 | $ | 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:
September 30, 2013 December 31, 2012 Cash and cash equivalents Restricted cash Loans held for sale Loans collateralizing asset-backed securities issued, net of allowance for loan losses Interest receivable Incentive fees receivable Deferred tax assets Other assets Total assets of consolidated VIEs Asset-backed securities issued Note payable Interest payable Deferred tax liability Other liabilities Total liabilities of consolidated VIEs
$
150
$
-
68,113
56,968
-
3,134
709,403
401,003
1,717
1,062
495
-
2,438
3,387
3,120
32
$
785,436
$
465,586
722,279
415,456
2,500
-
3,603
542
2,756
8,437
5,896
3,573
$
737,034
$
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 September 30, Nine Months Ended September 30, 2013 2012 2013 2012 Revenues Investment banking Brokerage Asset management fees Principal transactions Gain on sale and payoff of loans and mark-to-market of loans Net dividend income (expense) Other income Non-interest revenues Interest income Interest expense Net interest income (expense) Provision for loan losses Total net revenues after provision for loan losses Non-interest expenses Compensation and benefits Administration Brokerage, clearing and exchange fees Travel and business development Communications and technology Occupancy Professional fees Depreciation Other Total non-interest expenses Income (loss) before income tax expense Income tax expense (benefit) Net income (loss) Less: Net (loss) income attributable to nonredeemable non-controlling interest Income (loss) attributable to JMP Group Inc. Net income (loss) attributable to JMP Group Inc. per common share: Basic Diluted Dividends declared per common share Weighted average common shares outstanding: Basic Diluted
$
19,137
$
12,218
$
52,301
$
38,010
5,750
5,371
17,924
16,275
5,328
3,755
15,606
10,721
640
(1,955
)
4,849
12,309
166
564
1,591
3,016
243
(2
)
290
(25
)
267
365
581
3,507
31,531
20,316
93,142
83,813
8,734
8,333
24,603
24,051
(4,421
)
(10,087
)
(25,825
)
(29,573
)
4,313
(1,754
)
(1,222
)
(5,522
)
(467
)
65
(2,391
)
(1,135
)
35,377
18,627
89,529
77,156
24,685
17,358
69,066
55,833
1,919
1,645
7,255
4,604
939
902
2,851
2,656
994
746
2,991
2,435
907
909
2,592
2,642
822
814
2,434
2,352
632
967
2,468
2,324
231
227
695
642
342
67
649
282
31,471
23,635
91,001
73,770
3,906
(5,008
)
(1,472
)
3,386
1,634
(884
)
178
(1,423
)
2,272
(4,124
)
(1,650
)
4,809
(1,017
)
(2,817
)
(1,785
)
7,380
$
3,289
$
(1,307
)
$
135
$
(2,571
)
$
0.15
$
(0.06
)
$
0.01
$
(0.11
)
$
0.14
$
(0.06
)
$
0.01
$
(0.11
)
$
0.035
$
0.035
$
0.105
$
0.100
22,014
22,737
22,271
22,564
22,713
22,737
22,669
22,564
See accompanying notes to consolidated financial statements.
JMP Group Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
Three Months Ended September 30, Nine Months Ended September 30, 2013 2012 2013 2012 Net income (loss) Other comprehensive income (loss) Unrealized gain on cash flow hedge, net of tax Comprehensive income (loss) Less: Comprehensive (loss)/income attributable to non-controlling interest Comprehensive income (loss) attributable to JMP Group Inc.
$
2,272
$
(4,124
)
$
(1,650
)
$
4,809
13
14
41
34
2,285
(4,110
)
(1,609
)
4,843
(1,017
)
(2,817
)
(1,785
)
7,380
$
3,302
$
(1,293
)
$
176
$
(2,537
)
JMP Group Inc.
Consolidated Statement of Changes in Equity
(Unaudited)
(In thousands)
JMP Group Inc. Stockholders' Equity Common Stock Treasury Additional Paid-In Retained Earnings/ Accumulated Accumulated Other Comprehensive Nonredeemable Non-controlling Shares Amount Stock Capital Deficit Loss Interest Total Equity Balance, December 31, 2012 Net income (loss) Additonal paid-in capital - stock-based compensation Dividends and dividend equivalents declared on common stock and restricted stock units Purchases of shares of common stock for treasury Reissuance of shares of common stock from treasury Distributions to non-controlling interest holders Unrealized gain on cash flow hedge, net of tax Capital contributions from non-controlling interest holders Reorganization/dissolution of subsidiaries (Note 2) Balance, September 30, 2013
22,780
$
23
$
(1,007)
$
128,318
$
(408)
$
(55)
$
60,272
$
187,143
-
-
-
-
135
-
(1,785)
(1,650)
-
-
-
3,150
-
-
-
3,150
-
-
-
-
(2,420)
-
-
(2,420)
-
-
(4,342)
-
-
-
-
(4,342)
-
-
225
80
-
-
-
305
-
-
-
-
-
-
(3,552)
(3,552)
-
-
-
-
-
41
-
41
-
-
-
-
-
-
62,725
62,725
-
-
-
-
-
(23,189)
(23,189)
22,780
$
23
$
(5,124)
$
131,548
$
(2,6930
$
(14)
$
94,471
$
218,211
See accompanying notes to consolidated financial statements.
JMP Group Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
|
Nine Months Ended September 30, |
||||||||
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2013 |
2012 |
|||||||
|
Cash flows from operating activities: |
||||||||
|
Net (loss) income |
$ | (1,650 | ) | $ | 4,809 | |||
|
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
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Provision for doubtful accounts |
2 | - | ||||||
|
Provision for loan losses |
2,391 | 1,135 | ||||||
|
Accretion of deferred loan fees |
(1,522 | ) | (928 | ) | ||||
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Amortization of liquidity discount, net |
14,911 | 21,631 | ||||||
|
Amortization of debt issuance costs |
31 | - | ||||||
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Amortization of original issuance discount, related to CLO II |
360 | - | ||||||
|
Interest paid in kind |
(284 | ) | (129 | ) | ||||
|
Gain on sale and payoff of loans |
(1,591 | ) | (2,643 | ) | ||||
|
Change in other investments: |
||||||||
|
Fair value |
(3,850 | ) | (7,091 | ) | ||||
|
Incentive fees reinvested in general partnership interests |
(5,424 | ) | (2,216 | ) | ||||
|
Change in fair value of small business loans |
(90 | ) | (120 | ) | ||||
|
Realized gain on other investments |
(175 | ) | (2,280 | ) | ||||
|
Depreciation and amortization of fixed assets |
695 | 642 | ||||||
|
Stock-based compensation expense |
3,883 | 582 | ||||||
|
Deferred income taxes |
(2,830 | ) | (907 | ) | ||||
|
Net change in operating assets and liabilities: |
||||||||
|
Decrease (increase) in interest receivable |
220 | (217 | ) | |||||
|
Increase in receivables |
(9,585 | ) | (8,685 | ) | ||||
|
(Increase) decrease in marketable securities |
(5,222 | ) | 9,827 | |||||
|
Decrease (increase) in restricted cash (excluding restricted cash reserved for lending activities), deposits and other assets |
13,703 | (22 | ) | |||||
|
Increase in marketable securities sold, but not yet purchased |
3,830 | 462 | ||||||
|
Increase (decrease) in interest payable |
3,829 | (4 | ) | |||||
|
Increase (decrease) in accrued compensation and other liabilities |
10,642 | (11,195 | ) | |||||
|
Net cash provided by operating activities |
22,274 | 2,651 | ||||||
|
Cash flows from investing activities: |
||||||||
|
Purchases of fixed assets |
(269 | ) | (1,167 | ) | ||||
|
Investment in subsidiary |
(17,325 | ) | - | |||||
|
Purchases of other investments |
(80,058 | ) | (19,873 | ) | ||||
|
Sales of other investments |
9,873 | 10,478 | ||||||
|
Funding of loans collateralizing asset-backed securities issued |
(494,924 | ) | (122,542 | ) | ||||
|
Funding of small business loans |
(1,451 | ) | (18,459 | ) | ||||
|
Funding of loans held for investment |
(517 | ) | - | |||||
|
Sale and payoff of loans collateralizing asset-backed securities issued |
157,951 | 111,681 | ||||||
|
Principal receipts on loans collateralizing asset-backed securities issued |
33,066 | 25,453 | ||||||
|
Net change in restricted cash reserved for lending activities |
325,625 | (14,615 | ) | |||||
|
Cash associated with consolidation / deconsolidation of subsidiaries |
(13,343 | ) | - | |||||
|
Net cash used in investing activities |
(81,372 | ) | (29,044 | ) | ||||
|
Cash flows from financing activities: |
||||||||
|
Proceeds from issuance of note payable |
15,000 | - | ||||||
|
Proceeds from borrowing on line of credit |
- | 9,987 | ||||||
|
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 |
(8,302 | ) | (6,552 | ) | ||||
|
Repayment of asset-backed securities issued |
(20,647 | ) | - | |||||
|
Dividends and dividend equivalents paid on common stock and RSUs |
(2,420 | ) | (2,279 | ) | ||||
|
Purchases of shares of common stock for treasury |
(4,342 | ) | (4,839 | ) | ||||
| Cash settlement of share-based compensation | (427 | ) | - | |||||
|
Capital contributions of redeemable non-controlling interest holders |
134 | 110 | ||||||
|
Capital contributions of nonredeemable non-controlling interest holders |
56,240 | 24,565 | ||||||
|
Distributions to non-controlling interest shareholders |
(3,552 | ) | (5,272 | ) | ||||
|
Net cash provided by financing activities |
47,763 | 15,720 | ||||||
|
Net decrease in cash and cash equivalents |
(11,335 | ) | (10,673 | ) | ||||
|
Cash and cash equivalents, beginning of period |
67,075 | 70,363 | ||||||
|
Cash and cash equivalents, end of period |
$ | 55,740 | $ | 59,690 | ||||
|
Supplemental disclosures of cash flow information: |
||||||||
|
Cash paid during the period for interest |
$ | 5,938 | $ | 4,669 | ||||
|
Cash paid during the period for taxes |
$ | 7,046 | $ | 839 | ||||
|
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 |
$ | 225 | $ | 7,430 |
See accompanying notes to consolidated financial statements.
JMP GROUP INC.
Notes to Consolidated Financial Statements
September 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 September 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, or a 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. That option was exercised on May 15, raising an additional $6.5 million. After the offering, the Company's ownership of HCC was 11.6%. 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 do not bear interest and are not 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 a 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.
On August 6, 2013, JMP Capital LLC made a $0.5 million investment in RB Multifamily LLC ("RMI"), an investment company which invests in real estate joint ventures. On September 20, 2013, the Company made a subsequent investment of $2.2 million. The Company elected to account for its 31.25% equity interest in RMI using the fair value option. The primary reason for electing the fair value option was to measure the gains on the investments on the same basis as the other equity securities, all of which are stated at fair value. The Company uses net asset value as a practical expedient to estimate fair value. The gains on the investments in RMI are reported in Principal Transactions in the Consolidated Statements of Operation.
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 September 30, 2013 and December 31, 2012:
|
At September 30, 2013 | ||||||||||||||||||||
|
(In thousands) |
Carrying Value |
Fair Value | ||||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||||||
|
Assets: |
||||||||||||||||||||
|
Cash and cash equivalents |
$ | 55,740 | $ | 55,740 | $ | - | $ | - | $ | 55,740 | ||||||||||
|
Restricted cash and deposits |
84,788 | 84,788 | - | - | 84,788 | |||||||||||||||
|
Marketable securities owned |
19,569 | 19,569 | - | - | 19,569 | |||||||||||||||
|
Other investments |
169,413 | 10,611 | 62,757 | 95,861 | 169,229 | |||||||||||||||
|
Loans held for investment, net of allowance for loan losses |
667 | - | - | 568 | 568 | |||||||||||||||
|
Loans collateralizing asset-backed securities issued, net of allowance for loan losses |
709,403 | - | 718,107 | - | 718,107 | |||||||||||||||
|
Long term receivable |
1,090 | - | - | 1,330 | 1,330 | |||||||||||||||
|
Total assets: |
$ | 1,040,670 | $ | 170,708 | $ | 780,864 | $ | 97,759 | $ | 1,049,331 | ||||||||||
|
Liabilities: |
||||||||||||||||||||
|
Marketable securities sold, but not yet purchased |
$ | 15,397 | $ | 15,397 | $ | - | $ | - | $ | 15,397 | ||||||||||
|
Asset-backed securities issued |
722,279 | - | 708,946 | - | 708,946 | |||||||||||||||
|
Bond payable |
46,000 | - | 46,495 | - | 46,495 | |||||||||||||||
|
Note payable |
17,184 | - | 17,184 | - | 17,184 | |||||||||||||||
|
Total liabilities: |
$ | 800,860 | $ | 15,397 | $ | 772,625 | $ | - | $ | 788,022 | ||||||||||
|
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 investment, net of allowance for loan losses |
150 | - | - | 150 | 150 | |||||||||||||||
|
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: |
$ | 676,959 | $ | 152,100 | $ | 441,071 | $ | 94,903 | $ | 688,074 | ||||||||||
|
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 September 30, 2013 and December 31, 2012:
(In thousands) September 30, 2013 Level 1 Level 2 Level 3 Total Marketable securities owned Other investments: Investments in hedge funds managed by HCS Investments in funds of funds managed by HCS Total investment in funds managed by HCS Investments in private equity/ real estate funds Warrants and other held at JMPS and JMPG LLC Equity securities in HCC Equity securities in HGC, HGC II and JMP Capital Forward purchase contract Total other investments Total assets: Marketable securities sold, but not yet purchased Total liabilities:
$
19,569
$
-
$
-
$
19,569
-
60,184
-
60,184
-
-
130
130
-
60,184
130
60,314
-
-
4,944
4,944
-
-
1,286
1,286
10,549
-
-
10,549
62
2,573
83,425
86,060
-
-
6,076
6,076
10,611
62,757
95,861
169,229
$
30,180
$
62,757
$
95,861
$
188,798
15,397
-
-
15,397
$
15,397
$
-
$
-
$
15,397
|
(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 | ||||||||||||
|
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 also holds an investment in a real estate fund, which aims to generate revenue stream from investments in real estate joint ventures.
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, and JMP Capital. 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, and JMP Capital 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 September 30, 2013 and 2012.
|
(In thousands) |
Balance as of June 30, 2013 |
Purchases |
Sales |
Settlements |
Total gains (losses) - realized and unrealized included in earnings (1) |
Transfers out of Level 3 / Deconsolidation |
Balance as of September 30, 2013 |
Unrealized gains/(losses) included in earnings related to assets still held at reporting date |
||||||||||||||||||||||||
|
General partner investment in funds of funds |
$ | 128 | $ | - | $ | - | $ | - | $ | 2 | $ | - | $ | 130 | $ | 2 | ||||||||||||||||
|
Investment in private equity/ real estate funds |
2,691 | 2,734 | - | (634) | 153 | - | 4,944 | 153 | ||||||||||||||||||||||||
|
Warrants and other held at JMPS/JMPG |
783 | - | - | - | 503 | - | 1,286 | 503 | ||||||||||||||||||||||||
|
Equity securities in HGC, HGC II and JMP Capital |
77,741 | 9,884 | - | - | (1,628) | (2,572) | 83,425 | (1,628) | ||||||||||||||||||||||||
|
Forward purchase contract |
5,000 | - | - | - | 1,076 | - | 6,076 | 1,076 | ||||||||||||||||||||||||
|
Total Level 3 assets |
$ | 86,343 | $ | 12,618 | $ | - | $ | (634) | $ | 106 | $ | (2,572) | $ | 95,861 | $ | 106 | ||||||||||||||||
(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 June 30, 2012 |
Purchases |
Sales |
Settlements |
Total gains (losses) - realized and unrealized included in earnings (1) |
Transfers out of Level 3 |
Balance as of September 30, 2012 |
Unrealized gains/(losses) included in earnings related to assets still held at reporting date |
||||||||||||||||||||||||
|
General partner investment in funds of funds |
$ | 104 | $ | - | $ | - | $ | - | $ | 1 | $ | - | $ | 105 | $ | 1 | ||||||||||||||||
|
Investment in private equity fund |
2,741 | 25 | - | - | (322) | - | 2,444 | (322) | ||||||||||||||||||||||||
|
Warrants and other held at JMPS/JMPG |
782 | - | - | - | (113) | - | 669 | (113) | ||||||||||||||||||||||||
|
Warrants and other held at HCC LLC |
100 | 206 | - | - | - | - | 306 | - | ||||||||||||||||||||||||
|
Small business loans |
16,478 | 3,306 | - | - | 318 | 20,102 | 318 | |||||||||||||||||||||||||
|
Equity securities in HGC, HGC II and JMP Capital |
35,976 | 2,771 | - | - | (3,070) | (300) | 35,377 | (3,070) | ||||||||||||||||||||||||
|
Forward purchase contract |
7,424 | - | - | - | (887) | - | 6,537 | (887) | ||||||||||||||||||||||||
|
Total Level 3 assets |
$ | 63,605 | $ | 6,308 | $ | - | $ | - | $ | (4,073) | $ | (300) | $ | 65,540 | $ | (4,073) | ||||||||||||||||
(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 nine months ended September 30, 2013 and 2012.
|
(In thousands) |
Balance as of December 31, 2012 |
Purchases |
Sales |
Settlements |
Total gains (losses) - realized and unrealized included in earnings (1) |
Transfers out of Level 3 / Deconsolidation |
Balance as of September 30, 2013 |
Unrealized gains/(losses) included in earnings related to assets still held at reporting date |
||||||||||||||||||||||||
|
General partner investment in funds of funds |
$ | 109 | $ | - | $ | - | $ | - | $ | 21 | $ | - | $ | 130 | $ | 21 | ||||||||||||||||
|
Investment in private equity/ real estate funds |
2,332 | 2,734 | - | (634) | 512 | - | 4,944 | 512 | ||||||||||||||||||||||||
|
Warrants and other held at JMPS/JMPG |
413 | 42 | - | - | 831 | - | 1,286 | 831 | ||||||||||||||||||||||||
|
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 | |||||||||||||||||||||||||||||||