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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 September 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

 

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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 October 31, 2014 was 20,551,582. 

 

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TABLE OF CONTENTS

 

			Page
PART I.	FINANCIAL INFORMATION		4
Item 1.	Financial Statements - JMP Group Inc.		4
	Consolidated Statements of Financial Condition – September 30, 2014 and December 31, 2013 (Unaudited)		4
	Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)		6
	Consolidated Statements of Comprehensive Income - For the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)		7
	Consolidated Statement of Changes in Equity - For the Nine Months Ended September 30, 2014 (Unaudited)		7
	Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2014 and 2013 (Unaudited)		8
	Notes to Consolidated Financial Statements (Unaudited)		10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		64
Item 4.	Controls and Procedures		65
PART II.	OTHER INFORMATION		65
Item 1.	Legal Proceedings		65
Item 1A.	Risk Factors		65
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		66
Item 3.	Defaults Upon Senior Securities		66
Item 4.	Mine Safety Disclosures		66
Item 5.	Other Information		66
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)

 

		September 30, 2014				December 31, 2013
Assets
Cash and cash equivalents		$	87,735			$	65,906
Restricted cash and deposits (includes cash on deposit with clearing broker of $220 and $150 at September 30, 2014 and December 31, 2013, respectively)			199,496				68,029
Receivable from clearing broker			1,579				1,280
Investment banking fees receivable, net of allowance for doubtful accounts of $15 and zero at September 30, 2014 and December 31, 2013, respectively			9,081				13,161
Marketable securities owned, at fair value			35,630				29,295
Incentive fee receivable			6,152				7,910
Other investments (includes $197,890 and $161,518 measured at fair value at September 30, 2014 and December 31, 2013, respectively)			199,781				161,773
Loans held for investment, net of allowance for loan losses			1,786				825
Loans collateralizing asset-backed securities issued, net of allowance for loan losses (1)			917,715				727,270
Interest receivable			2,257				1,876
Fixed assets, net			2,287				2,092
Deferred tax assets			7,220				12,492
Other assets			20,949				30,022
Total assets		$	1,491,668			$	1,121,931
Liabilities and Equity
Liabilities:
Marketable securities sold, but not yet purchased, at fair value		$	18,462			$	13,749
Accrued compensation			46,800				51,347
Asset-backed securities issued			1,013,849				716,423
Interest payable			3,455				2,767
Note payable			-				15,000
Line of credit			-				2,895
Bond payable			94,300				46,000
Deferred tax liability			6,984				3,625
Other liabilities			29,829				32,885
Total liabilities			1,213,679				884,691
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 September 30, 2014 and December 31, 2013; 21,619,369 and 21,819,446 shares outstanding at September 30, 2014 and December 31, 2013, respectively			23				23
Additional paid-in capital			137,933				132,547
Treasury stock, at cost, 1,160,683 and 960,606 shares at September 30, 2014 and December 31, 2013, respectively			(7,383	)			(6,076	)
Retained earnings (Accumulated deficit)			6,114				(109	)
Total JMP Group Inc. stockholders' equity			136,687				126,385
Nonredeemable Non-controlling Interest			141,302				110,855
Total equity			277,989				237,240
Total liabilities and equity		$	1,491,668			$	1,121,931

 

(1)

As of December 31, 2013, includes loans which were subsequently used to collateralize CLO III upon its securitization in September 2014.

 

 

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, 2014				December 31, 2013
Cash and cash equivalents		$	682			$	211
Restricted cash			179,663				43,497
Loans collateralizing asset-backed securities issued, net of allowance for loan losses			917,716				726,774
Interest receivable			2,212				1,851
Incentive fees receivable			676				495
Deferred tax assets			2,689				1,935
Other assets			5,908				3,107
Total assets of consolidated VIEs		$	1,109,546			$	777,870
Accrued compensation			363				405
Asset-backed securities issued			1,013,849				716,423
Note payable (1)			4,105				4,053
Interest payable			1,931				1,947
Deferred tax liability			1,400				1,647
Other liabilities			951				882
Total liabilities of consolidated VIEs		$	1,022,599			$	725,357

 

(1)

September 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 September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Revenues
Investment banking		$	17,063			$	19,137			$	65,177			$	52,301
Brokerage			6,455				5,750				19,585				17,924
Asset management fees			9,630				5,328				30,032				15,606
Principal transactions			(4,276	)			640				1,719				4,849
Gain (loss) on sale, payoff and mark-to-market of loans			(12	)			166				(183	)			1,591
Net dividend income			242				243				739				290
Other income			1,192				267				1,564				581
Non-interest revenues			30,294				31,531				118,633				93,142
Interest income			9,973				8,734				27,773				24,603
Interest expense			(5,614	)			(4,421	)			(15,866	)			(25,825	)
Net interest income (expense)			4,359				4,313				11,907				(1,222	)
Provision for loan losses			(956	)			(467	)			(1,665	)			(2,391	)
Total net revenues after provision for loan losses			33,697				35,377				128,875				89,529
Non-interest expenses
Compensation and benefits			28,315				24,685				97,670				69,066
Administration			1,901				1,919				5,383				7,255
Brokerage, clearing and exchange fees			772				939				2,515				2,851
Travel and business development			890				994				2,721				2,991
Communications and technology			970				907				2,860				2,592
Occupancy			846				822				2,522				2,434
Professional fees			1,157				632				3,233				2,468
Depreciation			235				231				689				695
Other			236				342				778				649
Total non-interest expenses			35,322				31,471				118,371				91,001
Net income (loss) before income tax expense			(1,625	)			3,906				10,504				(1,472	)
Income tax expense (benefit)			1,460				1,634				5,606				178
Net income (loss)			(3,085	)			2,272				4,898				(1,650	)
Less: Net income (loss) attributable to nonredeemable non-controlling interest			(4,580	)			(1,017	)			(3,790	)			(1,785	)
Net income (loss) attributable to JMP Group Inc.		$	1,495			$	3,289			$	8,688				135
Net income (loss) attributable to JMP Group Inc. per common share:
Basic		$	0.07			$	0.15			$	0.38			$	0.01
Diluted		$	0.06			$	0.14			$	0.37			$	0.01
Dividends declared per common share		$	0.060			$	0.035			$	0.155			$	0.105
Weighted average common shares outstanding:
Basic			21,686				22,014				21,739				22,271
Diluted			23,834				22,713				23,680				22,669

  

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,
		2014				2013				2014				2013
Net income (loss)		$	(3,085	)		$	2,272			$	4,898			$	(1,650	)
Other comprehensive income
Unrealized gain on cash flow hedge, net of tax			-				13				-				41
Comprehensive income (loss) attributable to JMP Group Inc.			(3,085	)			2,285				4,898				(1,609	)
Less: Comprehensive (loss) income attributable to non-controlling interest			(4,580	)			(1,017	)			(3,790	)			(1,785	)
Comprehensive income (loss) attributable to JMP Group Inc.		$	1,495			$	3,302			$	8,688			$	176

 

 

 

 

JMP Group Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

(In thousands)

 

																		Retained
		Common												Additional				Earnings				Nonredeemable
		Stock								Treasury				Paid-In				(Accumulated				Non-controlling
		Shares				Amount				Stock				Capital				Deficit)				Interest				Total Equity
Balance, December 31, 2013			22,780			$	23			$	(6,076	)		$	132,547			$	(109	)		$	110,855			$	237,240
Net income			-				-				-				-				8,688				(3,790	)			4,898
Additonal paid-in capital - stock-based compensation			-				-				-				6,136				-				-				6,136
Dividends and dividend equivalents declared on common stock and restricted stock units			-				-				-				-				(3,562	)			-				(3,562	)
Purchases of shares of common stock for treasury			-				-				(1,899	)			-				-				-				(1,899	)
Reissuance of shares of common stock from treasury			-				-				592				94				-				-				686
Purchase of subsidiary shares from non-controlling interest holders			-				-				-				(844	)			-				(5,156	)			(6,000	)
Distributions to non-controlling interest holders			-				-				-				-				-				(3,032	)			(3,032	)
Capital contributions from non-controlling interest holders			-				-				-				-				-				18,202				18,202
Sale of subsidiary shares to non-controlling interest holders			-				-				-				-				1,097				24,223				25,320
Balance, September 30, 2014			22,780			$	23			$	(7,383	)		$	137,933			$	6,114			$	141,302			$	277,989

 

See accompanying notes to consolidated financial statements.

 

 

JMP Group Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

		Nine Months Ended September 30,
		2014				2013
Cash flows from operating activities:
Net income (loss)		$	4,898			$	(1,650	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for doubtful accounts			15				2
Provision for loan losses			1,665				2,391
Accretion of deferred loan fees			(934	)			(1,522	)
Amortization of liquidity discount, net			(88	)			14,911
Amortization of debt issuance costs			296				31
Amortization of original issue discount, related to CLO II			684				360
Interest paid in kind			(111	)			(284	)
Loss (gain) on sale and payoff of loans			183				(1,591	)
Change in other investments:
Fair value			(2,121	)			(3,850	)
Incentive fees reinvested in general partnership interests			(13,641	)			(5,424	)
Change in fair value of small business loans			-				(90	)
Realized gain on other investments			(680	)			(175	)
Depreciation and amortization of fixed assets			689				695
Stock-based compensation expense			6,945				3,883
Deferred income taxes			8,631				(2,830	)
Net change in operating assets and liabilities:
(Increase) decrease in interest receivable			(270	)			220
Decrease (increase) in receivables			4,694				(9,585	)
Increase in marketable securities			(6,335	)			(5,222	)
(Increase) decrease in restricted cash (excluding restricted cash reserved for lending activities), deposits and other assets			(9,927	)			13,703
Increase in marketable securities sold, but not yet purchased			4,713				3,830
Increase in interest payable			688				3,829
(Decrease) increase in accrued compensation and other liabilities			(7,602	)			10,642
Net cash (used in) provided by operating activities			(7,608	)			22,274
Cash flows from investing activities:
Purchases of fixed assets			(884	)			(269	)
Investment in subsidiary			-				(17,325	)
Purchases of other investments			(43,408	)			(80,058	)
Sales of other investments			37,795				9,873
Funding of loans collateralizing asset-backed securities issued			(466,932	)			(494,924	)
Funding of small business loans			-				(1,451	)
Funding of loans held for investment			(961	)			(517	)
Sale and payoff of loans collateralizing asset-backed securities issued			222,284				157,951
Principal receipts on loans collateralizing asset-backed securities issued			53,377				33,066
Net change in restricted cash reserved for lending activities			(126,147	)			325,625
Cash associated with consolidation / deconsolidation of subsidiaries			-				(13,343	)
Net cash used in investing activities			(324,876	)			(81,372	)

 

See accompanying notes to consolidated financial statements. 

 

 

JMP Group Inc.

Consolidated Statements of Cash Flows - (Continued)

(Unaudited)

(In thousands)  

 

		Nine Months Ended September 30,
		2014				2013
Cash flows from financing activities:
Proceeds from issuance of note payable			5,000				15,000
Proceeds from CLO III credit warehouse			207,393				-
Proceeds from bond issuance			48,300				46,000
Proceeds from asset-backed securities issued			329,339				-
Payments of debt issuance costs			(1,740	)			(1,694	)
Repayment of note payable			(20,000	)			(8,302	)
Repayment of line of credit			(2,895	)			(28,227	)
Repayment of credit warehouse			(207,393	)			-
Repayment of asset-backed securities issued			(32,597	)			(20,647	)
Dividends and dividend equivalents paid on common stock and RSUs			(3,562	)			(2,420	)
Purchases of shares of common stock for treasury			(1,899	)			(4,342	)
Capital contributions of redeemable non-controlling interest holders			-				134
Capital contributions of nonredeemable non-controlling interest holders			18,202				56,240
Distributions to non-controlling interest shareholders			(3,032	)			(3,552	)
Purchase of subsidiary shares from non-controlling interest holders			(6,000	)			-
Cash settlement of stock-based compensation			(123	)			(427	)
Sale of subsidiary shares to non-controlling interest holders			25,320				-
Net cash provided by financing activities			354,313				47,763
Net increase (decrease) in cash and cash equivalents			21,829				(11,335	)
Cash and cash equivalents, beginning of period			65,906				67,075
Cash and cash equivalents, end of period		$	87,735			$	55,740
Supplemental disclosures of cash flow information:
Cash paid during the period for interest		$	14,472			$	5,938
Cash paid during the period for taxes		$	9,439			$	7,046
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		$	592			$	225

 

See accompanying notes to consolidated financial statements. 

 

 

JMP GROUP INC.

Notes to Consolidated Financial Statements

September 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 JMPCA CLO I Ltd (“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, bringing its total equity in the entity to $25.0 million. The $25.0 million equity financing was used to purchase loans, prior to leveraging the existing CLO III credit warehouse held at BNP Paribas. The equity investment increased to $30.0 million in the third quarter of 2014, and the warehouse facility increased to $150.0 million. On September 30, 2014, CLO III closed a $370.5 million CLO transaction. The senior notes offered in this transaction (the “Secured Notes”) were issued by JMP Credit Advisors CLO III Ltd., and coissued in part by JMP Credit Advisors CLO III LLC, and are backed primarily by a diversified portfolio of broadly syndicated leveraged loans. The Secured Notes are subject to a two-year non-call period. The CLO has a four-year reinvestment period, through October 17, 2018, that allows for the use of the proceeds from principal repayments on, or sales of, collateral assets towards the purchase of qualifying replacement assets, subject to certain conditions and limitations. A third party and employees of JMPCA purchased subordinated notes in CLO III, reducing the Company’s investment in the subordinated notes to $4.7 million, or 13.5%. As of September 30, 2014, the Company owned 13.5% of the subordinated notes.

 

Upon the closing of CLO III, the Company performed a consolidation analysis to determine appropriate consolidation treatment. An entity is considered a VIE and, therefore, would be subject to the consolidation provisions of ASC 810-10-15 if, by design, equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In the analysis, the Company determines if it is the primary beneficiary of the VIE by performing a qualitative analysis of the VIE that includes a review of, among other factors, its capital structure, contractual terms, related party relationships, the Company’s fee arrangements and the design of the VIE. As of September 30, 2014, CLO III was determined to be a VIE. The Company was identified as the primary beneficiary based on the ability to direct activities of CLO III through its subsidiary manager, JMP Credit Advisors, and the 13.5% ownership of the subordinated notes. As a result, the Company consolidates the assets and liabilities of CLO III, and the underlying loans owned by the CLO are shown on the Consolidated Statements of Financial Condition under loans collateralizing asset-backed securities issued and the asset-backed securities issued to third parties are shown under asset-backed securities issued.

 

 

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.

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Net income (loss) attributable to JMP Group Inc.		$	1,495			$	3,289			$	8,688			$	135
Transfers from non-controlling interest
Decrease in JMP Group Inc. paid-in capital for purchase of CLO II interest			-				-				(844	)			-
Net transfers from non-controlling interest			-				-				(844	)			-
Change from net income (loss) attributable to JMP Group Inc and transfers from non-controlling interest		$	1,495			$	3,289			$	7,844			$	135

 

In the third quarter of 2014, the board of directors approved a transaction to convert its corporate form into a limited liability company that would be taxed as a partnership, and not as a corporation, contingent upon the approval by its stockholders at a December 1, 2014 meeting. In connection with the proposed transaction, the Company has entered into an agreement and plan of merger with a newly formed, wholly owned, limited liability company subsidiary, JMP Group LLC, and a newly formed Delaware corporation and indirect wholly owned subsidiary, JMP Merger Corp. Subject to the approval of JMP's stockholders and the decision of its board of directors to complete the transaction, JMP would be merged with and into JMP Merger Corp., with JMP continuing as the surviving entity and as a direct, wholly owned subsidiary of JMP Group LLC (the "Reorganization Transaction"). The Reorganization Transaction, if completed, would result in each share of currently issued and outstanding JMP stock being exchanged for a limited liability company interest in JMP Group LLC. If approved by the stockholders, the Reorganization Transaction is anticipated to be completed by January 1, 2015.

 

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, 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), HCAP Advisors (effective May 1, 2013), and CLO III (effective December 11, 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, 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.

 

ASU 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period was issued to provide guidance on share-based payments with terms where a performance target that affects vesting could be achieved after the requisite service period. The provisions of this standard are effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015, and allows for early adoption. The adoption of ASC 2014-12 may have an impact on the Company’s financial statements; however, the extent is not yet determined.

 

In August 2014, ASU 2014-13, Consolidation: Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financial Entity was issued to address discrepancy in the fair value measurement of a collateralized financing entity’s financial assets from the fair value of their financial liabilities even when the financial liabilities have recourse only to the financial assets. Prior to this update, there was no specific guidance on how to account for this difference. As the Company does not carry its CLOs’ financial assets and liabilities at fair value, the adoption of ASU 2014-13 for annual and interim periods ending after December 15, 2015 will not impact the Company’s financial statement. Given the size of the existing discrepancy between the fair value of the Company’s CLOs’ financial assets and liabilities, the adoption of this ASU is not anticipated to have a material impact on the Company’s financial statement disclosures.

 

 

ASU 2014- 15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern was issued in August 2014 to provide guidance regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. This standard will be effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The adoption of ASU 20104-15 is not expected to have an impact on the Company’s financial statements.

 

4. Fair Value Measurements

 

The following tables provide fair value information related to the Company’s financial instruments at September 30, 2014 and December 31, 2013:

 

		At September 30, 2014
(In thousands)		Carrying Value				Fair Value
						Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents		$	87,735			$	87,735			$	-			$	-			$	87,735
Restricted cash and deposits			199,496				199,496				-				-				199,496
Marketable securities owned			35,630				35,630				-				-				35,630
Other investments			199,781				3,515				72,532				123,733				199,780
Loans held for investment, net of allowance for loan losses			1,786				-				-				1,546				1,546
Loans collateralizing asset-backed securities issued, net of allowance for loan losses			917,715				-				919,707				-				919,707
Long term receivable			939				-				-				1,068				1,068
Total assets:		$	1,443,082			$	326,376			$	992,239			$	126,347			$	1,444,962
Liabilities:
Marketable securities sold, but not yet purchased		$	18,462			$	18,462			$	-			$	-			$	18,462
Asset-backed securities issued			1,013,849				-				1,008,582				-				1,008,582
Bond payable			94,300				-				94,886				-				94,886
Total liabilities:		$	1,126,611			$	18,462			$	1,103,468			$	-			$	1,121,930

 

 

		At December 31, 2013
(In thousands)		Carrying Value				Fair Value
						Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents		$	65,906			$	65,906			$	-			$	-			$	65,906
Restricted cash and deposits			68,029				68,029				-				-				68,029
Marketable securities owned			29,295				29,295				-				-				29,295
Other investments			161,773				57				49,389				112,072				161,518
Loans held for investment, net of allowance for loan losses			825				-				-				693				693
Loans collateralizing asset-backed securities issued, net of allowance for loan losses			727,270				-				737,327				-				737,327
Long term receivable			1,152				-				-				1,364				1,364
Total assets:		$	1,054,250			$	163,287			$	786,716			$	114,129			$	1,064,132
Liabilities:
Marketable securities sold, but not yet purchased		$	13,749			$	13,749			$	-			$	-			$	13,749
Asset-backed securities issued			716,423				-				710,961				-				710,961
Note payable			15,000				-				15,000				-				15,000
Line of credit			2,895				-				2,895				-				2,895
Bond payable			46,000				-				46,552				-				46,552
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 September 30, 2014 and December 31, 2013: 

 

(In thousands)		September 30, 2014
		Level 1				Level 2				Level 3				Total
Marketable securities owned		$	35,630			$	-			$	-			$	35,630
Other investments:
Investments in hedge funds managed by HCS			-				72,254				-				72,254
Investments in funds of funds managed by HCS			-				-				156				156
Total investment in funds managed by HCS			-				72,254				156				72,410
Investments in private equity/ real estate funds			-				-				6,731				926,438
Warrants and other held at JMPS and JMPG LLC			-				-				647				647
Equity securities in HGC, HGC II and JMP Capital			3,515				278				108,075				111,868
Forward purchase contract and swaption			-				-				6,234				6,234
Total other investments			3,515				72,532				121,843				197,890
Total assets:		$	39,145			$	72,532			$	121,843			$	233,520
Marketable securities sold, but not yet purchased			18,462				-				-				18,462
Total liabilities:		$	18,462			$	-			$	-			$	18,462

 

(In thousands)		December 31, 2013
		Level 1				Level 2				Level 3				Total
Marketable securities owned		$	29,295			$	-			$	-			$	29,295
Other investments:
Investments in hedge funds managed by HCS			-				44,647				-				44,647
Investments in funds of funds managed by HCS			-				-				139				139
Total investment in funds managed by HCS			-				44,647				139				44,786
Investments in private equity/ real estate funds			-				-				5,967				5,967
Warrants and other held at JMPS and JMPG LLC			-				-				1,121				1,121
Equity securities in HGC, HGC II and JMP Capital			57				4,742				97,981				102,780
Forward purchase contract			-				-				6,864				6,864
Total other investments			57				49,389				112,072				161,518
Total assets:		$	29,352			$	49,389			$	112,072			$	190,813
Marketable securities sold, but not yet purchased			13,749				-				-				13,749
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 investments in real estate funds, which aim 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 September 30, 2014 and 2013.

(In thousands)		Balance as of June 30, 2014				Purchases				Sales				Settlements				Total gains (losses) - realized and unrealized included in earnings (1)				Transfers in/(out) of Level 3				Balance as of September 30, 2014				Unrealized gains/(losses) included in earnings related to assets still held at  reporting date
Investments in funds of funds managed by HCS		$	147			$	-			$	-			$	-			$	9			$	-			$	156			$	9
Investments in private equity/ real estate funds			6,909				-				-				-				(178	)			-				6,731				(178	)
Warrants and other held at JMPS			916				-				-				-				(269	)			-				647				(269	)
Equity securities held by HGC, HGC II and JMP Capital			101,001				9,850				-				-				(2,776	)			-				108,075				(2,776	)
Forward Purchase Contract and Swaption			6,434				-				-				-				(200	)			-				6,234				(200	)
Total Level 3 assets		$	115,407			$	9,850			$	-			$	-			$	(3,414	)		$	-			$	121,843			$	(3,414	)

 

⁽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, 2013				Purchases				Sales				Settlements				Total gains (losses) - realized and unrealized included in earnings (1)				Transfers in/(out) of Level 3				Balance as of September 30, 2013				Unrealized gains/(losses) included in earnings related to assets still held at  reporting date
Investments in funds of funds managed by HCS		$	128			$	-			$	-			$	-			$	2			$	-			$	130			$	2
Investments in private equity/ real estate funds			2,691				2,734				-				(634	)			153				-				4,944				153
Warrants and other held at JMPS			783				-				-				-				503				-				1,286				503
Equity securities held by 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.

 

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, 2014 and 2013.

(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 September 30, 2014				Unrealized gains/(losses) included in earnings related to assets still held at reporting date
Investments in funds of funds managed by HCS		$	139			$	-			$	-			$	-			$	17			$	-			$	156			$	17
Investments in private equity/ real estate funds			5,967				1,080				-				(396	)			80				-				6,731				80
Warrants and other held at JMPS			1,121				-				-				(19	)			(455	)			-				647				-
Equity securities held by HGC, HGC II and JMP Capital			97,981				12,869				(2,204	)			-				(350	)			(221	)			108,075				(556	)
Forward Purchase Contract and Swaption			6,864				460				-				-				(1,090	)			-				6,234				(1,090	)
Total Level 3 assets		$	112,072			$	14,409			$	(2,204	)		$	(415	)		$	(1,798	)		$	(221	)		$	121,843			$	(1,549	)

 

⁽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, 2012				Purchases				Sales				Settlements				Total gains (losses) - realized and unrealized included in earnings (1)				Transfers in/(out) of Level 3				Balance as of September 30, 2013				Unrealized gains/(losses) included in earnings related to assets still held at reporting date
Investments in funds of funds managed by HCS		$	109			$	-			$	-			$	-			$	21			$	-			$	130			$	21
Investments in private equity/ real estate funds			2,332				2,734				-				(634	)			512				-				4,944				512
Warrants and other held at JMPS			413				42				-				-				831				-				1,286				831
Warrants and equity held at HCC			2,577				100				-				-				425				(3,102	)			-				-
Small business loans			35,447				1,771				(43	)			-				30				(37,205	)			-				-
Equity securities held by HGC, HGC II and JMP Capital			41,075				45,922				-				-				(1,000	)			(2,572	)			83,425				(1,000	)
Forward Purchase Contract			5,437				-				-				-				639