UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 30, 2014 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
JMP Group Inc.
(Exact name of registrant as specified in its charter)
|
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
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 29, 2014 was 21,690,397.
TABLE OF CONTENTS
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PART I. |
FINANCIAL INFORMATION |
4 |
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Item 1. |
Financial Statements - JMP Group Inc. |
4 |
|
Consolidated Statements of Financial Condition – June 30, 2014 and December 31, 2013 (Unaudited) |
4 | |
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Consolidated Statements of Operations - For the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited) |
6 | |
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Consolidated Statements of Comprehensive Income - For the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited) |
7 | |
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Consolidated Statement of Changes in Equity - For the Six Months Ended June 30, 2014 (Unaudited) |
7 | |
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Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 2014 and 2013 (Unaudited) |
8 | |
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Notes to Consolidated Financial Statements (Unaudited) |
10 | |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
35 |
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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 |
65 |
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Item 1. |
Legal Proceedings |
65 |
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Item 1A. |
Risk Factors |
65 |
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
66 |
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Item 3. |
Defaults Upon Senior Securities |
66 |
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Item 4. |
Mine Safety Disclosures |
66 |
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Item 5. |
Other Information |
66 |
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Item 6. |
Exhibits |
66 |
| SIGNATURES | 67 | |
| EXHIBIT INDEX | 68 | |
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. From time to time JMP Group Inc. may use its website as a channel of distribution of material company information.
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 and inclusions of our internet address in this Form 10-Q are inactive textual references only.
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, 2014 |
December 31, 2013 |
|||||||
|
Assets |
||||||||
|
Cash and cash equivalents |
$ | 49,603 | $ | 65,906 | ||||
|
Restricted cash and deposits (includes cash on deposit with clearing broker of $335 and $150 at June 30, 2014 and December 31, 2013, respectively) |
97,156 | 68,029 | ||||||
|
Receivable from clearing broker |
1,397 | 1,280 | ||||||
|
Investment banking fees receivable, net of allowance for doubtful accounts of $75 and zero at June 30, 2014 and December 31, 2013, respectively |
12,100 | 13,161 | ||||||
|
Marketable securities owned, at fair value |
36,842 | 29,295 | ||||||
|
Incentive fee receivable |
11,833 | 7,910 | ||||||
|
Other investments (includes $189,523 and $161,518 measured at fair value at June 30, 2014 and December 31, 2013, respectively) |
190,349 | 161,773 | ||||||
|
Loans held for investment, net of allowance for loan losses |
1,553 | 825 | ||||||
|
Loans collateralizing asset-backed securities issued, net of allowance for loan losses (1) |
815,671 | 727,270 | ||||||
|
Interest receivable |
1,994 | 1,876 | ||||||
|
Fixed assets, net |
1,969 | 2,092 | ||||||
|
Deferred tax assets |
8,959 | 12,492 | ||||||
|
Other assets |
19,682 | 30,022 | ||||||
|
Total assets |
$ | 1,249,108 | $ | 1,121,931 | ||||
|
Liabilities and Equity |
||||||||
|
Liabilities: |
||||||||
|
Marketable securities sold, but not yet purchased, at fair value |
$ | 24,669 | $ | 13,749 | ||||
|
Accrued compensation |
40,615 | 51,347 | ||||||
|
Asset-backed securities issued |
710,104 | 716,423 | ||||||
|
Interest payable |
3,426 | 2,767 | ||||||
|
Note payable |
- | 15,000 | ||||||
|
Line of credit |
691 | 2,895 | ||||||
|
CLO III warehouse credit facility |
97,510 | - | ||||||
|
Bond payable |
94,300 | 46,000 | ||||||
|
Deferred tax liability |
4,295 | 3,625 | ||||||
|
Other liabilities |
31,837 | 32,885 | ||||||
|
Total liabilities |
1,007,447 | 884,691 | ||||||
|
Commitments and Contingencies |
||||||||
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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, 2014 and December 31, 2013; 21,690,397 and 21,819,446 shares outstanding at June 30, 2014 and December 31, 2013, respectively |
23 | 23 | ||||||
|
Additional paid-in capital |
135,599 | 132,547 | ||||||
|
Treasury stock, at cost, 1,089,655 and 960,606 shares at June 30, 2014 and December 31, 2013, respectively |
(6,925 | ) | (6,076 | ) | ||||
|
Retained earnings (Accumulated deficit) |
4,896 | (109 | ) | |||||
|
Total JMP Group Inc. stockholders' equity |
133,593 | 126,385 | ||||||
|
Nonredeemable Non-controlling Interest |
108,068 | 110,855 | ||||||
|
Total equity |
241,661 | 237,240 | ||||||
|
Total liabilities and equity |
$ | 1,249,108 | $ | 1,121,931 | ||||
|
(1) |
Includes loans which will be used to collateralize CLO III. Refer to Note 5 for further discussion. |
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, 2014 |
December 31, 2013 |
|||||||
|
Cash and cash equivalents |
$ | 94 | $ | 211 | ||||
|
Restricted cash |
60,714 | 43,497 | ||||||
|
Loans collateralizing asset-backed securities issued, net of allowance for loan losses |
703,353 | 726,774 | ||||||
|
Interest receivable |
1,653 | 1,851 | ||||||
|
Incentive fees receivable |
621 | 495 | ||||||
|
Deferred tax assets |
2,239 | 1,935 | ||||||
|
Other assets |
3,145 | 3,107 | ||||||
|
Total assets of consolidated VIEs |
$ | 771,819 | $ | 777,870 | ||||
|
Accrued compensation |
250 | 405 | ||||||
|
Asset-backed securities issued |
710,104 | 716,423 | ||||||
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Note payable (1) |
2,500 | 4,053 | ||||||
|
Interest payable |
1,907 | 1,947 | ||||||
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Deferred tax liability |
1,482 | 1,647 | ||||||
|
Other liabilities |
806 | 882 | ||||||
|
Total liabilities of consolidated VIEs |
$ | 717,049 | $ | 725,357 | ||||
|
(1) |
June 30, 2014 and December 31, 2013 balances are inclusive of intercompany loan. |
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, |
|||||||||||||||
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2014 |
2013 |
2014 |
2013 |
|||||||||||||
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Revenues |
||||||||||||||||
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Investment banking |
$ | 23,061 | $ | 21,057 | $ | 48,114 | $ | 33,164 | ||||||||
|
Brokerage |
6,474 | 6,980 | 13,130 | 12,174 | ||||||||||||
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Asset management fees |
14,858 | 3,527 | 20,402 | 10,278 | ||||||||||||
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Principal transactions |
9,688 | 2,292 | 5,995 | 4,209 | ||||||||||||
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Gain (loss) on sale, payoff and mark-to-market of loans |
(551 | ) | 336 | (171 | ) | 1,425 | ||||||||||
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Net dividend income |
262 | 55 | 497 | 47 | ||||||||||||
|
Other income |
150 | 26 | 372 | 314 | ||||||||||||
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Non-interest revenues |
53,942 | 34,273 | 88,339 | 61,611 | ||||||||||||
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Interest income |
9,212 | 7,711 | 17,800 | 15,869 | ||||||||||||
|
Interest expense |
(5,424 | ) | (10,105 | ) | (10,252 | ) | (21,404 | ) | ||||||||
|
Net interest income (expense) |
3,788 | (2,394 | ) | 7,548 | (5,535 | ) | ||||||||||
|
Provision for loan losses |
(212 | ) | (975 | ) | (709 | ) | (1,924 | ) | ||||||||
|
Total net revenues after provision for loan losses |
57,518 | 30,904 | 95,178 | 54,152 | ||||||||||||
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Non-interest expenses |
||||||||||||||||
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Compensation and benefits |
37,979 | 24,776 | 69,355 | 44,381 | ||||||||||||
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Administration |
1,760 | 4,005 | 3,482 | 5,336 | ||||||||||||
|
Brokerage, clearing and exchange fees |
818 | 1,025 | 1,743 | 1,912 | ||||||||||||
|
Travel and business development |
980 | 1,039 | 1,831 | 1,997 | ||||||||||||
|
Communications and technology |
942 | 832 | 1,890 | 1,685 | ||||||||||||
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Occupancy |
851 | 808 | 1,676 | 1,612 | ||||||||||||
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Professional fees |
1,269 | 812 | 2,076 | 1,836 | ||||||||||||
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Depreciation |
227 | 238 | 454 | 464 | ||||||||||||
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Other |
330 | 224 | 542 | 307 | ||||||||||||
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Total non-interest expenses |
45,156 | 33,759 | 83,049 | 59,530 | ||||||||||||
|
Net income (loss) before income tax expense |
12,362 | (2,855 | ) | 12,129 | (5,378 | ) | ||||||||||
|
Income tax expense (benefit) |
2,450 | (644 | ) | 4,146 | (1,456 | ) | ||||||||||
|
Net income (loss) |
9,912 | (2,211 | ) | 7,983 | (3,922 | ) | ||||||||||
|
Less: Net income (loss) attributable to nonredeemable non-controlling interest |
6,717 | (776 | ) | 790 | (768 | ) | ||||||||||
|
Net income (loss) attributable to JMP Group Inc. |
$ | 3,195 | $ | (1,435 | ) | $ | 7,193 | (3,154 | ) | |||||||
|
Net income (loss) attributable to JMP Group Inc. per common share: |
||||||||||||||||
|
Basic |
$ | 0.14 | $ | (0.06 | ) | $ | 0.31 | $ | (0.14 | ) | ||||||
|
Diluted |
$ | 0.13 | $ | (0.06 | ) | $ | 0.30 | $ | (0.14 | ) | ||||||
|
Dividends declared per common share |
$ | 0.050 | $ | 0.035 | $ | 0.095 | $ | 0.070 | ||||||||
|
Weighted average common shares outstanding: |
||||||||||||||||
|
Basic |
21,712 | 22,199 | 21,766 | 22,402 | ||||||||||||
|
Diluted |
23,745 | 22,199 | 23,640 | 22,402 | ||||||||||||
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, |
|||||||||||||||
|
2014 |
2013 |
2014 |
2013 |
|||||||||||||
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Net income (loss) |
$ | 9,912 | $ | (2,211 | ) | $ | 7,983 | $ | (3,922 | ) | ||||||
|
Other comprehensive income |
||||||||||||||||
|
Unrealized gain on cash flow hedge, net of tax |
- | 14 | - | 28 | ||||||||||||
|
Comprehensive income (loss) attributable to JMP Group Inc. |
9,912 | (2,197 | ) | 7,983 | (3,894 | ) | ||||||||||
|
Less: Comprehensive (loss) income attributable to non-controlling interest |
6,717 | (776 | ) | 790 | (768 | ) | ||||||||||
|
Comprehensive income (loss) attributable to JMP Group Inc. |
$ | 3,195 | $ | (1,421 | ) | $ | 7,193 | $ | (3,126 | ) | ||||||
JMP Group Inc.
Consolidated Statement of Changes in Equity
(Unaudited)
(In thousands)
|
JMP Group Inc. Stockholders' Equity |
||||||||||||||||||||||||||||||||
|
Retained |
Accumulated |
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|
Additional |
Earnings |
Other |
Nonredeemable |
|||||||||||||||||||||||||||||
|
Common Stock |
Treasury |
Paid-In |
(Accumulated |
Comprehensive |
Non-controlling |
Total | ||||||||||||||||||||||||||
|
Shares |
Amount |
Stock |
Capital |
Deficit) |
Loss |
Interest |
Equity |
|||||||||||||||||||||||||
|
Balance, December 31, 2013 |
22,780 | $ | 23 | $ | (6,076 | ) | $ | 132,547 | $ | (109 | ) | $ | - | $ | 110,855 | $ | 237,240 | |||||||||||||||
|
Net income |
- | - | - | - | 7,193 | - | 790 | 7,983 | ||||||||||||||||||||||||
|
Additonal paid-in capital - stock-based compensation |
- | - | - | 3,814 | - | - | - | 3,814 | ||||||||||||||||||||||||
|
Dividends and dividend equivalents declared on common stock and restricted stock units |
- | - | - | - | (2,188 | ) | - | - | (2,188 | ) | ||||||||||||||||||||||
|
Purchases of shares of common stock for treasury |
- | - | (1,366 | ) | - | - | - | - | (1,366 | ) | ||||||||||||||||||||||
|
Reissuance of shares of common stock from treasury |
- | - | 517 | 82 | - | - | - | 599 | ||||||||||||||||||||||||
|
Purchase of subsidiary shares from non-controlling interest holders |
- | - | - | (844 | ) | - | - | (5,156 | ) | (6,000 | ) | |||||||||||||||||||||
|
Distributions to non-controlling interest holders |
- | - | - | - | - | - | (2,851 | ) | (2,851 | ) | ||||||||||||||||||||||
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Capital contributions from non-controlling interest holders |
- | - | - | - | - | - | 4,430 | 4,430 | ||||||||||||||||||||||||
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Balance, June 30, 2014 |
22,780 | $ | 23 | $ | (6,925 | ) | $ | 135,599 | $ | 4,896 | $ | - | $ | 108,068 | $ | 241,661 | ||||||||||||||||
See accompanying notes to consolidated financial statements.
JMP Group Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
|
Six Months Ended June 30, |
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|
2014 |
2013 |
|||||||
|
Cash flows from operating activities: |
||||||||
|
Net income (loss) |
$ | 7,983 | $ | (3,922 | ) | |||
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
|
Provision for doubtful accounts |
75 | 2 | ||||||
|
Provision for loan losses |
709 | 1,924 | ||||||
|
Accretion of deferred loan fees |
(563 | ) | (1,139 | ) | ||||
|
Amortization of liquidity discount, net |
(58 | ) | 14,978 | |||||
|
Amortization of debt issuance costs |
190 | 31 | ||||||
|
Amortization of original issue discount, related to CLO II |
452 | 143 | ||||||
|
Interest paid in kind |
(67 | ) | (284 | ) | ||||
|
Loss (gain) on sale and payoff of loans |
171 | (1,425 | ) | |||||
|
Change in other investments: |
||||||||
|
Fair value |
(4,507 | ) | (3,159 | ) | ||||
|
Incentive fees reinvested in general partnership interests |
(9,809 | ) | (3,730 | ) | ||||
|
Change in fair value of small business loans |
- | (90 | ) | |||||
|
Realized gain on other investments |
(691 | ) | (175 | ) | ||||
|
Depreciation and amortization of fixed assets |
454 | 464 | ||||||
|
Stock-based compensation expense |
4,461 | 2,551 | ||||||
|
Deferred income taxes |
4,204 | (2,454 | ) | |||||
|
Net change in operating assets and liabilities: |
||||||||
|
(Increase) decrease in interest receivable |
(51 | ) | 77 | |||||
|
(Decrease) increase in receivables |
275 | (6,647 | ) | |||||
|
Increase in marketable securities |
(7,547 | ) | (3,368 | ) | ||||
|
(Increase) decrease in restricted cash (excluding restricted cash reserved for lending activities), deposits and other assets |
(17,851 | ) | 17,693 | |||||
|
Increase in marketable securities sold, but not yet purchased |
10,920 | 309 | ||||||
|
Increase in interest payable |
659 | 1,975 | ||||||
|
(Decrease) increase in accrued compensation and other liabilities |
(11,780 | ) | 1,772 | |||||
|
Net cash (used in) provided by operating activities |
(22,371 | ) | 15,526 | |||||
|
Cash flows from investing activities: |
||||||||
|
Purchases of fixed assets |
(331 | ) | (213 | ) | ||||
|
Investment in subsidiary |
- | (17,325 | ) | |||||
|
Purchases of other investments |
(26,304 | ) | (67,158 | ) | ||||
|
Sales of other investments |
24,357 | 5,841 | ||||||
|
Funding of loans collateralizing asset-backed securities issued |
(282,311 | ) | (346,470 | ) | ||||
|
Funding of small business loans |
- | (1,451 | ) | |||||
|
Funding of loans held for investment |
(728 | ) | - | |||||
|
Sale and payoff of loans collateralizing asset-backed securities issued |
155,836 | 92,374 | ||||||
|
Principal receipts on loans collateralizing asset-backed securities issued |
37,815 | 19,309 | ||||||
|
Net change in restricted cash reserved for lending activities |
(14,371 | ) | 235,713 | |||||
|
Cash associated with consolidation / deconsolidation of subsidiaries |
- | (13,343 | ) | |||||
|
Net cash used in investing activities |
(106,037 | ) | (92,723 | ) | ||||
See accompanying notes to consolidated financial statements.
JMP Group Inc.
Consolidated Statements of Cash Flows - (Continued)
(Unaudited)
(In thousands)
|
Six Months Ended June 30, |
||||||||
|
2014 |
2013 |
|||||||
|
Cash flows from financing activities: |
||||||||
|
Proceeds from issuance of note payable |
- | 15,000 | ||||||
|
Proceeds from line of credit |
691 | - | ||||||
|
Proceeds from CLO III credit warehouse |
97,510 | - | ||||||
|
Proceeds from bond issuance |
48,300 | 46,000 | ||||||
|
Payments of debt issuance costs |
(1,707 | ) | (1,694 | ) | ||||
|
Repayment of note payable |
(15,000 | ) | (6,118 | ) | ||||
|
Repayment of line of credit |
(2,895 | ) | (28,227 | ) | ||||
|
Repayment of asset-backed securities issued |
(6,771 | ) | - | |||||
|
Dividends and dividend equivalents paid on common stock and RSUs |
(2,188 | ) | (1,620 | ) | ||||
|
Purchases of shares of common stock for treasury |
(1,366 | ) | (3,129 | ) | ||||
|
Capital contributions of redeemable non-controlling interest holders |
- | 134 | ||||||
|
Capital contributions of nonredeemable non-controlling interest holders |
4,430 | 46,483 | ||||||
|
Distributions to non-controlling interest shareholders |
(2,851 | ) | (3,377 | ) | ||||
|
Purchase of subsidiary shares from non-controlling interest holders |
(6,000 | ) | - | |||||
|
Cash settlement of stock-based compensation |
(48 | ) | - | |||||
|
Net cash provided by financing activities |
112,105 | 63,452 | ||||||
|
Net decrease in cash and cash equivalents |
(16,303 | ) | (13,745 | ) | ||||
|
Cash and cash equivalents, beginning of period |
65,906 | 67,075 | ||||||
|
Cash and cash equivalents, end of period |
$ | 49,603 | $ | 53,330 | ||||
|
Supplemental disclosures of cash flow information: |
||||||||
|
Cash paid during the period for interest |
$ | 9,214 | $ | 3,671 | ||||
|
Cash paid during the period for taxes |
$ | 9,439 | $ | 6,957 | ||||
|
Non-cash investing and financing activities: |
||||||||
|
Reissuance of shares of common stock from treasury related to vesting of restricted stock units and exercises of stock options |
$ | 517 | $ | 163 | ||||
See accompanying notes to consolidated financial statements.
JMP GROUP INC.
Notes to Consolidated Financial Statements
June 30, 2014
(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”) and 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 2013, the Company also conducted corporate credit business through partially owned Harvest Capital Credit LLC (“HCC LLC”). On December 18, 2012, HCAP Advisors was formed as a Delaware Limited Liability Company. Effective May 1, 2013, HCAP Advisors provides investment advisory services to Harvest Capital Credit Corporation (“HCC”). Through JMPCA, the Company manages Cratos CLO I Holdings, LLC (“CLO I”), JMPCA CLO II Ltd (“CLO II”) and JMPCA CLO III Ltd (“CLO III”).
2. Summary of Significant Accounting Policies
Recent Transactions
In January 2014, the Company contributed an additional $15.0 million investment to CLO III. With this contribution, the Company has met its $25.0 million commitment. The $25.0 million equity financing was used to purchase loans, prior to leveraging the existing CLO III credit warehouse held at BNP Paribas. As of June 30, 2014, $97.5 million was used from the $100.0 million credit facility to fund additional CLO III loans.
In the first quarter of 2014, the Company repurchased $6.0 million of the unsecured subordinated notes from CLO II non-controlling interests, increasing the Company’s ownership from 72.8% to 98.0%. The effects of changes on the Company’s equity from net income attributable to JMP Group Inc. and the purchase of CLO II non-controlling interest are noted below.
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Three Months Ended June 30, |
Six Months Ended June 30, |
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2014 |
2013 |
2014 |
2013 |
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Net income (loss) attributable to JMP Group Inc. |
$ | 3,195 | $ | (1,435 | ) | $ | 7,193 | $ | (3,154 | ) | ||||||
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Transfers from non-controlling interest |
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Decrease in JMP Group Inc. paid-in capital for purchase of CLO II interest |
- | - | (844 | ) | - | |||||||||||
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Net transfers from non-controlling interest |
- | - | (844 | ) | - | |||||||||||
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Change from net income (loss) attributable to JMP Group Inc and transfers from non-controlling interest |
$ | 3,195 | $ | (1,435 | ) | $ | 6,349 | $ | (3,154 | ) | ||||||
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 2013 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, CLO III (effective December 11, 2013), and the partially-owned subsidiaries Harvest Growth Capital LLC (“HGC”), Harvest Growth Capital II LLC (“HGC II”), HCC LLC (from August 18, 2011 through May 2, 2013), CLO I, 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, 2014 and December 31, 2013 relate to the interest of third parties in the partly-owned subsidiaries.
See Note 2 - Summary of Significant Accounting Policies in the Company's 2013 10-K for the Company's significant accounting policies.
3. Recent Accounting Pronouncements
ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists was issued to provide guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity settles at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The adoption of ASU 2013-11 on January 1, 2014 did not have a material impact on the Company’s financial statement disclosures.
In May 2014, ASU 2014-9, Revenue from Contracts with Customers was issued to provide a more robust framework for addressing revenue issues. The provisions of this standard are effective for annual reporting periods beginning after December 15, 2016, and do not allow early adoption. The adoption of ASC 2014-9 may have an impact on the Company’s financial statements; however, the extent is not yet determined.
4. Fair Value Measurements
The following tables provide fair value information related to the Company’s financial instruments at June 30, 2014 and December 31, 2013:
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At June 30, 2014 |
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(In thousands) |
Carrying Value |
Fair Value |
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Level 1 |
Level 2 |
Level 3 |
Total |
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Assets: |
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Cash and cash equivalents |
$ | 49,603 | $ | 49,603 | $ | - | $ | - | $ | 49,603 | ||||||||||
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Restricted cash and deposits |
97,156 | 97,156 | - | - | 97,156 | |||||||||||||||
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Marketable securities owned |
36,842 | 36,842 | - | - | 36,842 | |||||||||||||||
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Other investments |
190,349 | 5,062 | 69,054 | 116,007 | 190,123 | |||||||||||||||
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Loans held for investment, net of allowance for loan losses |
1,553 | - | - | 1,374 | 1,374 | |||||||||||||||
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Loans collateralizing asset-backed securities issued, net of allowance for loan losses |
815,671 | - | 825,350 | - | 825,350 | |||||||||||||||
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Long term receivable |
1,013 | - | - | 1,179 | 1,179 | |||||||||||||||
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Total assets: |
$ | 1,192,187 | $ | 188,663 | $ | 894,404 | $ | 118,560 | $ | 1,201,627 | ||||||||||
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Liabilities: |
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Marketable securities sold, but not yet purchased |
$ | 24,669 | $ | 24,669 | $ | - | $ | - | $ | 24,669 | ||||||||||
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Asset-backed securities issued |
710,104 | - | 705,607 | - | 705,607 | |||||||||||||||
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Line of credit |
691 | - | 691 | - | 691 | |||||||||||||||
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Bond payable |
94,300 | - | 95,611 | - | 95,611 | |||||||||||||||
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CLO III warehouse credit facility |
97,510 | - | 97,510 | - | 97,510 | |||||||||||||||
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Total liabilities: |
$ | 927,274 | $ | 24,669 | $ | 899,419 | $ | - | $ | 924,088 | ||||||||||
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At December 31, 2013 |
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(In thousands) |
Carrying Value |
Fair Value |
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Level 1 |
Level 2 |
Level 3 |
Total |
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Assets: |
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Cash and cash equivalents |
$ | 65,906 | $ | 65,906 | $ | - | $ | - | $ | 65,906 | ||||||||||
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Restricted cash and deposits |
68,029 | 68,029 | - | - | 68,029 | |||||||||||||||
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Marketable securities owned |
29,295 | 29,295 | - | - | 29,295 | |||||||||||||||
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Other investments |
161,773 | 57 | 49,389 | 112,072 | 161,518 | |||||||||||||||
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Loans held for investment, net of allowance for loan losses |
825 | - | - | 693 | 693 | |||||||||||||||
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Loans collateralizing asset-backed securities issued, net of allowance for loan losses |
727,270 | - | 737,327 | - | 737,327 | |||||||||||||||
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Long term receivable |
1,152 | - | - | 1,364 | 1,364 | |||||||||||||||
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Total assets: |
$ | 1,054,250 | $ | 163,287 | $ | 786,716 | $ | 114,129 | $ | 1,064,132 | ||||||||||
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Liabilities: |
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Marketable securities sold, but not yet purchased |
$ | 13,749 | $ | 13,749 | $ | - | $ | - | $ | 13,749 | ||||||||||
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Asset-backed securities issued |
716,423 | - | 710,961 | - | 710,961 | |||||||||||||||
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Note payable |
15,000 | - | 15,000 | - | 15,000 | |||||||||||||||
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Line of credit |
2,895 | - | 2,895 | - | 2,895 | |||||||||||||||
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Bond payable |
46,000 | - | 46,552 | - | 46,552 | |||||||||||||||
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Total liabilities: |
$ | 794,067 | $ | 13,749 | $ | 775,408 | $ | - | $ | 789,157 | ||||||||||
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, 2014 and December 31, 2013:
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(In thousands) |
June 30, 2014 |
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Level 1 |
Level 2 |
Level 3 |
Total |
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Marketable securities owned |
$ | 36,842 | $ | - | $ | - | $ | 36,842 | ||||||||
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Other investments: |
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Investments in hedge funds managed by HCS |
- | 68,820 | - | 68,820 | ||||||||||||
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Investments in funds of funds managed by HCS |
- | - | 147 | 147 | ||||||||||||
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Total investment in funds managed by HCS |
- | 68,820 | 147 | 68,967 | ||||||||||||
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Investments in private equity/ real estate funds |
- | - | 6,909 | 6,909 | ||||||||||||
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Warrants and other held at JMPS and JMPG LLC |
- | - | 916 | 916 | ||||||||||||
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Equity securities in HGC, HGC II and JMP Capital |
5,062 | 234 | 101,001 | 106,297 | ||||||||||||
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Forward purchase contract and swaption |
- | - | 6,434 | 6,434 | ||||||||||||
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Total other investments |
5,062 | 69,054 | 115,407 | 189,523 | ||||||||||||
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Total assets: |
$ | 41,904 | $ | 69,054 | $ | 115,407 | $ | 226,365 | ||||||||
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Marketable securities sold, but not yet purchased |
24,669 | - | - | 24,669 | ||||||||||||
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Total liabilities: |
$ | 24,669 | $ | - | $ | - | $ | 24,669 | ||||||||
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(In thousands) |
December 31, 2013 |
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Level 1 |
Level 2 |
Level 3 |
Total |
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Marketable securities owned |
$ | 29,295 | $ | - | $ | - | $ | 29,295 | ||||||||
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Other investments: |
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Investments in hedge funds managed by HCS |
- | 44,647 | - | 44,647 | ||||||||||||
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Investments in funds of funds managed by HCS |
- | - | 139 | 139 | ||||||||||||
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Total investment in funds managed by HCS |
- | 44,647 | 139 | 44,786 | ||||||||||||
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Investments in private equity/ real estate funds |
- | - | 5,967 | 5,967 | ||||||||||||
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Warrants and other held at JMPS and JMPG LLC |
- | - | 1,121 | 1,121 | ||||||||||||
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Equity securities in HGC, HGC II and JMP Capital |
57 | 4,742 | 97,981 | 102,780 | ||||||||||||
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Forward purchase contract |
- | - | 6,864 | 6,864 | ||||||||||||
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Total other investments |
57 | 49,389 | 112,072 | 161,518 | ||||||||||||
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Total assets: |
$ | 29,352 | $ | 49,389 | $ | 112,072 | $ | 190,813 | ||||||||
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Marketable securities sold, but not yet purchased |
13,749 | - | - | 13,749 | ||||||||||||
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Total liabilities: |
$ | 13,749 | $ | - | $ | - | $ | 13,749 | ||||||||
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 recognizes this investment 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’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 June 30, 2014 and 2013.
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(In thousands) |
Balance as of March 31, 2014 |
Purchases |
Sales |
Settlements |
Total gains (losses) - realized and unrealized included in earnings (1) |
Transfers in/(out) of Level 3 |
Balance as of June 30, 2014 |
Unrealized gains/(losses) included in earnings related to assets still held at reporting date |
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Investments in funds of funds managed by HCS |
$ | 153 | $ | - | $ | - | $ | - | $ | (6 | ) | $ | - | $ | 147 | $ | (6 | ) | ||||||||||||||
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Limited partner investment in private equity fund |
6,178 | 1,080 | - | (262 | ) | (87 | ) | - | 6,909 | (87 | ) | |||||||||||||||||||||
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Warrants and other held at JMPS |
741 | - | - | - | 175 | - | 916 | - | ||||||||||||||||||||||||
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Equity securities held by HGC, HGC II and JMP Capital |
94,260 | 231 | (2,204 | ) | - | 8,935 | (221 | ) | 101,001 | 8,950 | ||||||||||||||||||||||
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Forward Purchase Contract and Swaption |
7,068 | 460 | - | - | (1,094 | ) | - | 6,434 | (1,094 | ) | ||||||||||||||||||||||
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Total Level 3 assets |
$ | 108,400 | $ | 1,771 | $ | (2,204 | ) | $ | (262 | ) | $ | 7,923 | $ | (221 | ) | $ | 115,407 | $ | 7,763 | |||||||||||||
(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.
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(In thousands) |
Balance as of March 31, 2013 |
Purchases |
Sales |
Settlements |
Total gains (losses) - realized and unrealized included in earnings (1) |
Transfers in/(out) of Level 3 |
Balance as of June 30, 2013 |
Unrealized gains/(losses) included in earnings related to assets still held at reporting date |
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Investments in funds of funds managed by HCS |
$ | 117 | $ | - | $ | - | $ | - | $ | 11 | $ | - | $ | 128 | $ | 11 | ||||||||||||||||
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Limited partner investment in private equity fund |
2,558 | - | - | - | 133 | - | 2,691 | 133 | ||||||||||||||||||||||||
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Warrants and other held at JMPS |
296 | 42 | - | - | 445 | - | 783 | 445 | ||||||||||||||||||||||||
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Warrants and equity held at HCC |
3,102 | - | - | - | - | (3,102 | ) | - | - | |||||||||||||||||||||||
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Small business loans |
36,823 | 382 | - | - | - | (37,205 | ) | - | - | |||||||||||||||||||||||
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Equity securities held by HGC, HGC II and JMP Capital |
48,478 | 28,256 | - | - | 1,007 | - | 77,741 | 1,007 | ||||||||||||||||||||||||
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Forward Purchase Contract |
5,000 | - | - | - | - | - | 5,000 | - | ||||||||||||||||||||||||
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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.
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, 2014 and 2013.
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(In thousands) |
Balance as of December 31, 2013 |
Purchases |
Sales |
Settlements |
Total gains (losses) - realized and unrealized included in earnings (1) |
Transfers in/(out) of Level 3 |
Balance as of June 30, 2014 |
Unrealized gains/(losses) included in earnings related to assets still held at reporting date |
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Investments in funds of funds managed by HCS |
$ | 139 | $ | - | $ | - | $ | - | $ | 8 | $ | - | $ | 147 | $ | 8 | ||||||||||||||||
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Limited partner investment in private equity fund |
5,967 | 1,080 | - | (396 | ) | 258 | - | 6,909 | 258 | |||||||||||||||||||||||
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Warrants and other held at JMPS |
1,121 | - | - | (19 | ) | (186 | ) | - | 916 | - | ||||||||||||||||||||||
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Equity securities held by HGC, HGC II and JMP Capital |
97,981 | 3,019 | (2,204 | ) | - | 2,426 | (221 | ) | 101,001 | 2,960 | ||||||||||||||||||||||
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Forward Purchase Contract and Swaption |
6,864 | 460 | - | - | (890 | ) | - | 6,434 | (890 | ) | ||||||||||||||||||||||
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Total Level 3 assets |
$ | 112,072 | $ | 4,559 | $ | (2,204 | ) | $ | (415 | ) | $ | 1,616 | $ | (221 | ) | $ | 115,407 | $ | 2,336 | |||||||||||||