UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018 OR |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File Number: 001-36802
JMP Group LLC
(Exact name of registrant as specified in its charter)
Delaware |
| 47-1632931 |
(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification No.) |
600 Montgomery Street, Suite 1100, San Francisco, California 94111
(Address of principal executive offices)
Registrant’s telephone number: (415) 835-8900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| ☐ |
| Accelerated filer |
| ☐ |
Non-accelerated filer |
| ☐ |
| Smaller reporting company |
| ☒ |
Emerging growth company |
| ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
JMP Group LLC shares representing limited liability company interests outstanding as of November 6, 2018: 21,296,633
Table of Contents
TABLE OF CONTENTS
|
| Page |
PART I. | FINANCIAL INFORMATION | 4 |
Item 1. | Financial Statements - JMP Group LLC | 4 |
Consolidated Statements of Financial Condition – September 30, 2018 (Unaudited) and December 31, 2017 | 4 | |
Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited) | 6 | |
Consolidated Statements of Changes in Equity - For the Nine Months Ended September 30, 2018 and 2017 (Unaudited) | 7 | |
Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2018 and 2017 (Unaudited) | 8 | |
Notes to Consolidated Financial Statements (Unaudited) | 10 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 39 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 69 |
Item 4. | Controls and Procedures | 69 |
PART II. | OTHER INFORMATION | 69 |
Item 1. | Legal Proceedings | 69 |
Item 1A. | Risk Factors | 69 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 70 |
Item 3. | Defaults Upon Senior Securities | 70 |
Item 4. | Mine Safety Disclosures | 70 |
Item 5. | Other Information | 70 |
Item 6. | Exhibits | 70 |
SIGNATURES | 71 | |
EXHIBIT INDEX | 72 |
AVAILABLE INFORMATION
JMP Group LLC is required to file current, annual and quarterly reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the Securities and Exchange Commission (the "SEC"). The SEC maintains an internet website at http://www.sec.gov, from which interested persons can electronically access JMP Group LLC’s SEC filings.
JMP Group LLC provides its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, Forms 3, 4 and 5 filed by or on behalf of directors, executive officers and certain large shareholders, and any amendments to those documents filed or furnished pursuant to the Exchange Act free of charge on the Investor Relations section of its website located at http://www.jmpg.com. These filings will become available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. From time to time JMP Group LLC may use its website as a channel of distribution of material company information.
JMP Group LLC also makes available, in the Investor Relations section of its website and will provide print copies to shareholders upon request, (i) its corporate governance guidelines, (ii) its code of business conduct and ethics, and (iii) the charters of the audit, compensation, and corporate governance and nominating committees of its board of directors. These documents, as well as the information on the website, are not intended to be part of this quarterly report on Form 10-Q (the “Quarterly Report”) and inclusions of the internet address in this Quarterly Report are intended to be inactive textual references, and not live hyperlinks. JMP Group LLC also uses the Investor Relations section of its website as a means of complying with its disclosure obligations under Regulation FD. Accordingly, you should monitor JMP Group LLC’s Investor Relations section of its website in addition to following JMP Group LLC’s press releases, SEC filings, and public conference calls and webcasts.
PART I. FINANCIAL INFORMATION
ITEM 1. | Financial Statements |
JMP Group LLC
Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in thousands, except per share data)
September 30, 2018 | December 31, 2017 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 73,143 | $ | 85,594 | ||||
Restricted cash | 48,586 | 51,727 | ||||||
Investment banking fees receivable (net of allowance for doubtful accounts of $455 and $159 as of September 30, 2018 and December 31, 2017) | 10,725 | 9,567 | ||||||
Marketable securities owned, at fair value | 20,194 | 20,825 | ||||||
Other investments (includes $8,785 and $18,450 measured at fair value at September 30, 2018 and December 31, 2017, respectively) | 15,793 | 27,984 | ||||||
Loans held for investment, net of allowance for loan losses | 5,606 | 83,948 | ||||||
Loans collateralizing asset-backed securities issued, net of allowance for loan losses | 1,164,404 | 765,583 | ||||||
Interest receivable | 3,046 | 2,259 | ||||||
Fixed assets, net | 2,363 | 2,322 | ||||||
Other assets | 19,706 | 26,817 | ||||||
Total assets | $ | 1,363,566 | $ | 1,076,626 | ||||
Liabilities and Equity | ||||||||
Liabilities: | ||||||||
Marketable securities sold, but not yet purchased, at fair value | $ | 5,604 | $ | 7,919 | ||||
Accrued compensation | 33,371 | 43,131 | ||||||
Asset-backed securities issued (net of debt issuance costs of $9,551 and $7,852 at September 30, 2018 and December 31, 2017, respectively) | 1,112,049 | 738,248 | ||||||
Interest payable | 10,371 | 6,512 | ||||||
Note payable | 829 | - | ||||||
CLO V warehouse credit facility | - | 61,250 | ||||||
Bond payable (net of debt issuance costs of $2,530 and $2,810 at September 30, 2018 and December 31, 2017, respectively) | 83,395 | 93,103 | ||||||
Other liabilities | 17,653 | 16,284 | ||||||
Total liabilities | 1,263,272 | 966,447 | ||||||
Commitments and Contingencies (Footnote 13) | ||||||||
JMP Group LLC Shareholders' Equity | ||||||||
Common shares, $0.001 par value, 100,000,000 shares authorized; 22,780,052 shares issued at both September 30, 2018 and December 31, 2017; 21,357,212 and 21,729,079 shares outstanding at September 30, 2018 and December 31, 2017, respectively | 23 | 23 | ||||||
Additional paid-in capital | 134,960 | 134,719 | ||||||
Treasury shares at cost, 1,422,840 and 1,050,973 shares at September 30, 2018 and December 31, 2017, respectively | (7,908 | ) | (5,955 | ) | ||||
Accumulated deficit | (40,341 | ) | (32,452 | ) | ||||
Total JMP Group LLC shareholders' equity | 86,734 | 96,335 | ||||||
Nonredeemable Non-controlling Interest | 13,560 | 13,844 | ||||||
Total equity | 100,294 | 110,179 | ||||||
Total liabilities and equity | $ | 1,363,566 | $ | 1,076,626 |
See accompanying notes to consolidated financial statements.
JMP Group LLC
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, 2018 | December 31, 2017 | |||||||
Restricted cash | $ | 44,840 | $ | 43,050 | ||||
Loans collateralizing asset-backed securities issued, net of allowance for loan losses | 1,164,404 | 765,583 | ||||||
Interest receivable | 2,838 | 1,918 | ||||||
Other assets | 1,104 | 568 | ||||||
Total assets of consolidated VIEs | $ | 1,213,186 | $ | 811,119 | ||||
Asset-backed securities issued, net of debt issuance costs | 1,114,549 | (1) | 738,248 | |||||
Interest payable | 9,479 | 5,346 | ||||||
Other liabilities | 1,650 | 1,221 | ||||||
Total liabilities of consolidated VIEs | $ | 1,125,678 | $ | 744,815 |
(1) Includes $2.5 million of debt held by the Company which is eliminated on the Consolidated Statements of Financial Condition.
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 LLC
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | ||||||||||||||||
Investment banking | $ | 21,095 | $ | 22,085 | $ | 70,319 | $ | 54,813 | ||||||||
Brokerage | 4,676 | 4,763 | 14,787 | 15,127 | ||||||||||||
Asset management fees | 3,702 | 4,014 | 15,505 | 14,078 | ||||||||||||
Principal transactions | 469 | (1,392 | ) | (1,467 | ) | (3,608 | ) | |||||||||
Gain (loss) on sale, payoff and mark-to-market of loans | (556 | ) | 278 | (888 | ) | 1,208 | ||||||||||
Net dividend income | 320 | 278 | 935 | 817 | ||||||||||||
Other income | 306 | 282 | 666 | 921 | ||||||||||||
Non-interest revenues | 30,012 | 30,308 | 99,857 | 83,356 | ||||||||||||
Interest income | 18,652 | 10,900 | 47,031 | 29,663 | ||||||||||||
Interest expense | (13,789 | ) | (8,811 | ) | (35,125 | ) | (24,649 | ) | ||||||||
Net interest income | 4,863 | 2,089 | 11,906 | 5,014 | ||||||||||||
Loss on repurchase, reissuance or early retirement of debt | (170 | ) | - | (2,838 | ) | (5,332 | ) | |||||||||
Provision for loan losses | (1,454 | ) | (368 | ) | (4,199 | ) | (3,488 | ) | ||||||||
Total net revenues after provision for loan losses | 33,251 | 32,029 | 104,726 | 79,550 | ||||||||||||
Non-interest expenses | ||||||||||||||||
Compensation and benefits | 22,671 | 24,563 | 76,070 | 69,013 | ||||||||||||
Administration | 2,302 | 1,459 | 7,246 | 5,999 | ||||||||||||
Brokerage, clearing and exchange fees | 808 | 740 | 2,373 | 2,288 | ||||||||||||
Travel and business development | 1,080 | 709 | 3,236 | 2,735 | ||||||||||||
Communications and technology | 1,040 | 1,046 | 3,149 | 3,150 | ||||||||||||
Managed deal expenses | 614 | - | 4,528 | - | ||||||||||||
Occupancy | 1,172 | 1,117 | 3,432 | 3,339 | ||||||||||||
Professional fees | 1,272 | 1,094 | 4,315 | 3,109 | ||||||||||||
Depreciation | 285 | 277 | 836 | 891 | ||||||||||||
Other | 369 | 366 | 1,532 | 1,993 | ||||||||||||
Total non-interest expenses | 31,613 | 31,371 | 106,717 | 92,517 | ||||||||||||
Net income (loss) before income tax expense | 1,638 | 658 | (1,991 | ) | (12,967 | ) | ||||||||||
Income tax expense (benefit) | 527 | 1,113 | (146 | ) | (169 | ) | ||||||||||
Net income (loss) | 1,111 | (455 | ) | (1,845 | ) | (12,798 | ) | |||||||||
Less: Net income attributable to nonredeemable non-controlling interest | 823 | 780 | 138 | 1,712 | ||||||||||||
Net income (loss) attributable to JMP Group LLC | $ | 288 | $ | (1,235 | ) | $ | (1,983 | ) | $ | (14,510 | ) | |||||
Net income (loss) attributable to JMP Group LLC per common share: | ||||||||||||||||
Basic | $ | 0.01 | $ | (0.06 | ) | $ | (0.09 | ) | $ | (0.67 | ) | |||||
Diluted | $ | 0.01 | $ | (0.06 | ) | $ | (0.09 | ) | $ | (0.67 | ) | |||||
Distributions declared per common share | $ | 0.090 | $ | 0.090 | $ | 0.270 | $ | 0.270 | ||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 21,435 | 21,525 | 21,545 | 21,583 | ||||||||||||
Diluted | 21,737 | 21,525 | 21,545 | 21,583 |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Consolidated Statements of Changes in Equity
(Unaudited)
(In thousands)
JMP Group LLC's Equity | ||||||||||||||||||||||||||||
Additional | Nonredeemable | |||||||||||||||||||||||||||
Common Shares | Treasury | Paid-In | Accumulated | Non-controlling | ||||||||||||||||||||||||
Shares | Amount | Shares | Capital | Deficit | Interest | Total Equity | ||||||||||||||||||||||
Balance, December 31, 2017 | 22,780 | $ | 23 | $ | (5,955 | ) | $ | 134,719 | $ | (32,452 | ) | $ | 13,844 | $ | 110,179 | |||||||||||||
Net income (loss) | - | - | - | - | (1,983 | ) | 138 | (1,845 | ) | |||||||||||||||||||
Additional paid-in capital - share-based compensation | - | - | - | 897 | - | - | 897 | |||||||||||||||||||||
Distributions and distribution equivalents declared on common shares and restricted share units | - | - | - | - | (5,906 | ) | - | (5,906 | ) | |||||||||||||||||||
Purchases of shares of common shares for treasury | - | - | (2,340 | ) | �� | - | - | - | (2,340 | ) | ||||||||||||||||||
Reissuance of shares of common shares from treasury | - | - | 387 | - | - | - | 387 | |||||||||||||||||||||
Surrender of subsidiary shares from non-controlling interest holders | - | - | - | (656 | ) | - | 656 | - | ||||||||||||||||||||
Distributions to non-controlling interest holders | - | - | - | - | - | (1,527 | ) | (1,527 | ) | |||||||||||||||||||
Capital contributions from non-controlling interest holders | - | - | - | - | - | 449 | 449 | |||||||||||||||||||||
Balance, September 30, 2018 | 22,780 | $ | 23 | $ | (7,908 | ) | $ | 134,960 | $ | (40,341 | ) | $ | 13,560 | $ | 100,294 |
JMP Group LLC's Equity | ||||||||||||||||||||||||||||
Additional | Nonredeemable | |||||||||||||||||||||||||||
Common Shares | Treasury | Paid-In | Accumulated | Non-controlling | ||||||||||||||||||||||||
Shares | Amount | Shares | Capital | Deficit | Interest | Total Equity | ||||||||||||||||||||||
Balance, December 31, 2016 | 22,780 | $ | 23 | $ | (7,792 | ) | $ | 135,945 | $ | (8,799 | ) | $ | 15,917 | $ | 135,294 | |||||||||||||
Net income (loss) | - | - | - | - | (14,510 | ) | 1,712 | (12,798 | ) | |||||||||||||||||||
Additional paid-in capital - share-based compensation | - | - | - | 1,485 | - | - | 1,485 | |||||||||||||||||||||
Distributions and distribution equivalents declared on common shares and restricted share units | - | - | - | - | (5,829 | ) | - | (5,829 | ) | |||||||||||||||||||
Purchases of shares of common shares for treasury | - | - | (1,967 | ) | - | - | - | (1,967 | ) | |||||||||||||||||||
Reissuance of shares of common shares from treasury | - | - | 2,154 | - | - | - | 2,154 | |||||||||||||||||||||
Distributions to non-controlling interest holders | - | - | - | - | - | (3,868 | ) | (3,868 | ) | |||||||||||||||||||
Capital contributions from non-controlling interest holders | - | - | - | - | - | 92 | 92 | |||||||||||||||||||||
Balance, September 30, 2017 | 22,780 | $ | 23 | $ | (7,605 | ) | $ | 137,430 | $ | (29,138 | ) | $ | 13,853 | $ | 114,563 |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (1,845 | ) | $ | (12,798 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Provision for loan losses | 4,199 | 3,488 | ||||||
(Gain) loss on sale and payoff of loans and mark-to-market of loans | 888 | (1,208 | ) | |||||
Loss on repurchase, reissuance or early retirement of debt | 2,838 | 5,542 | ||||||
Change in other investments: | ||||||||
Income from investments in equity method investees | 273 | 4,628 | ||||||
Unrealized loss on other equity investments | (179 | ) | (505 | ) | ||||
Realized (gain) loss on other investments | 205 | (26 | ) | |||||
Depreciation and amortization | 1,067 | 1,079 | ||||||
Share-based compensation expense | 1,135 | 2,159 | ||||||
Other | 296 | 90 | ||||||
Net change in operating assets and liabilities: | ||||||||
Decrease (increase) in interest receivable | (787 | ) | 1,378 | |||||
Increase in receivables | (1,454 | ) | (22,419 | ) | ||||
Decrease (increase) in marketable securities | 631 | (3,293 | ) | |||||
Decrease in deposits and other assets | 6,937 | 714 | ||||||
Increase (decrease) in marketable securities sold, but not yet purchased | (2,315 | ) | 16,254 | |||||
Increase in interest payable | 3,859 | 1,240 | ||||||
Decrease in accrued compensation | (9,760 | ) | (7,873 | ) | ||||
Increase (decrease) in other liabilities | 1,967 | (1,110 | ) | |||||
Net cash provided by (used in) operating activities | 7,955 | (12,660 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchases of fixed assets | (877 | ) | (204 | ) | ||||
Purchases of other investments | (1,525 | ) | (2,034 | ) | ||||
Sales of distributions from other investments | 13,949 | 12,300 | ||||||
Funding of loans collateralizing asset-backed securities issued | (307,808 | ) | (614,431 | ) | ||||
Funding of loans held for sale | - | (2,752 | ) | |||||
Funding of loans held for investment | (312,089 | ) | (13,514 | ) | ||||
Sale, payoff and principal receipts of loans held for sale | - | 35,735 | ||||||
Sale, payoff and principal receipts of loans collateralizing asset-backed securities issued | 268,239 | 506,549 | ||||||
Sale, payoff and principal payments on loans held for investment | 26,726 | 975 | ||||||
Net changes in cash collateral posted for derivative transactions | - | 25,000 | ||||||
Net cash used in investing activities | (313,385 | ) | (52,376 | ) |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Consolidated Statements of Cash Flows - (Continued)
(Unaudited)
(In thousands)
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from financing activities: | ||||||||
Repayment on bonds payable | (9,980 | ) | - | |||||
Proceeds from issuance of Repurchase Agreement | 3,878 | - | ||||||
Proceeds from drawdowns on CLO V warehouse facility | 263,750 | 7,000 | ||||||
Repayments on CLO V warehouse facility | (325,000 | ) | - | |||||
Proceeds from sale of note payable to affiliate | 829 | - | ||||||
Payment of debt issuance costs | (1,897 | ) | - | |||||
Repayment of asset-backed securities issued | (332,100 | ) | (503,617 | ) | ||||
Repayment of Repurchase Agreement | (3,878 | ) | - | |||||
Proceeds of issuance from asset-backed securities issued | 699,107 | 408,394 | ||||||
Reissuance of asset-back securities | 4,453 | - | ||||||
Distributions and distribution equivalents paid on common shares and RSUs | (5,906 | ) | (5,838 | ) | ||||
Capital contributions of nonredeemable non-controlling interest holders | 449 | 92 | ||||||
Proceeds from exercises of stock options | - | 1,149 | ||||||
Purchase of common shares for treasury | (2,309 | ) | (1,660 | ) | ||||
Distributions to non-controlling interest shareholders | (1,527 | ) | (3,868 | ) | ||||
Employee taxes paid on shares withheld for tax-withholding purposes | (31 | ) | (307 | ) | ||||
Net cash provided by (used in) financing activities | 289,838 | (98,655 | ) | |||||
Net decrease in cash, cash equivalents, and restricted cash | (15,592 | ) | (163,691 | ) | ||||
Cash, cash equivalents and restricted cash, beginning of period | 137,321 | 313,148 | ||||||
Cash, cash equivalents and restricted cash, end of period | $ | 121,729 | $ | 149,457 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for interest | $ | 31,266 | $ | 20,096 | ||||
Cash paid during the period for taxes | $ | 2,173 | $ | 1,153 | ||||
Non-cash investing and financing activities: | ||||||||
Reissuance of shares of common share from treasury related to vesting of restricted share units and exercises of share options | $ | 387 | $ | 2,154 | ||||
Distributions declared but not yet paid | $ | 643 | $ | 644 | ||||
Acquisition of equity securities in restructuring of loans | $ | 809 | $ | 520 | ||||
Transfer of loans held for investment to loans collateralizing asset-backed securities issued upon securitization of CLO V | $ | 362,213 | $ | - |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)
1. Organization and Description of Business
JMP Group LLC, together with its subsidiaries (collectively, the “Company”), is a diversified capital markets firm headquartered in San Francisco, California. The Company conducts its investment banking and institutional brokerage business through JMP Securities LLC (“JMP Securities”) and its asset management business through Harvest Capital Strategies LLC (“HCS”), HCAP Advisors LLC (“HCAP Advisors”), JMP Asset Management LLC (“JMPAM”), and JMP Credit Advisors LLC (“JMPCA”). The Company conducts certain principal investment transactions through JMP Investment Holdings LLC (“JMP Investment Holdings”) and other subsidiaries. The above entities, other than HCAP Advisors, are wholly-owned subsidiaries. JMP Securities is a U.S. registered broker-dealer under the Securities Exchange Act of 1934, as amended (the "Exchange Act”), and is a member of the Financial Industry Regulatory Authority (“FINRA”). JMP Securities operates as an introducing broker and does not hold funds or securities for, or owe any money or securities to customers and does not carry accounts for customers. All customer transactions are cleared through another broker-dealer on a fully disclosed basis. HCS is a registered investment advisor under the Investment Advisers Act of 1940, as amended, and provides investment management services for sophisticated investors in investment partnerships and other entities managed by HCS. HCAP Advisors provides investment advisory services to Harvest Capital Credit Corporation (“HCC”). JMPAM currently manages two fund strategies: one that invests in real estate and real estate-related enterprises and another that provides credit to small and midsized private companies. JMPCA is an asset management platform that underwrites and manages investments in senior secured debt. JMPCA currently manages three collateralized loan obligations (“CLO”) vehicles. The Company completed a Reorganization Transaction in January 2015 pursuant to which JMP Group Inc. became a wholly-owned subsidiary of JMP Group LLC (the “Reorganization Transaction”). The Company entered into a Contribution Agreement in November 2017 pursuant to which JMP Group Inc. became a wholly-owned subsidiary of JMP Investment Holdings, which is a wholly-owned subsidiary of JMP Group LLC.
Recent Transactions
In February 20, 2018, the Company closed a refinancing of the asset back securities issued by JMP Credit Advisors CLO III Ltd ("CLO III"), which lowered the weighted average cost of funds by 55 basis points and extended the reinvestment period for two years. In connection with the refinancing, the Company recorded losses on early retirement of debt related to unamortized debt issuance costs of $2.6 million for the quarter ended March 31, 2018.
On July 26, 2018, entities sponsored by JMP Group LLC closed a $407.8 million CLO. The senior notes offered in this transaction (the "Secured Notes") were issued by JMP Credit Advisors CLO V Ltd. ("CLO V"), a special purpose Cayman vehicle, and co-issued by JMP Credit Advisors CLO V LLC, a special purpose Delaware vehicle, and were backed by a diversified portfolio of broadly syndicated leveraged loans. The Secured Notes were issued in multiple tranches and are rated by Moody's Investors Service, Inc. The Company, through a wholly-owned subsidiary, retained 100% of the junior subordinated notes and 25% of the senior subordinated notes, which are not rated. JMPCA serves as collateral manager of CLO V under a collateral management agreement.
On October 11, 2018, the Company established, through its affiliate, JMP Credit Advisors Long-Term Warehouse Ltd., a Cayman Islands vehicle (the “Borrower”), and the Borrower's subsidiary, JMP Credit Advisors CLO VI Warehouse Ltd., a Cayman Islands vehicle (together with the Borrower, the Borrower Entities"), a $100 million revolving credit facility (the “Facility”) with BNP Paribas to finance the acquisition of a portfolio of broadly syndicated corporate loans. JMPCA will act as collateral manager with duties including the selection of assets to be acquired by the Borrower Entities. All borrowings under the Facility will be subject to the satisfaction of certain customary covenants, the accuracy of certain representations and warranties, concentration limitations and other restrictions. The Facility will be primarily secured by a portfolio of broadly syndicated corporate loans that are eligible for acquisition by the Borrower Entities. The Borrower Entities are collectively subject to mandatory prepayments under the Facility upon the occurrence of certain events. In addition, the Borrower may make optional prepayments under the Facility. The Facility is structured to have a revolving period of up to three years ending October 11, 2021, and a twelve-month amortization period. The Facility will have a market standard advance rate, and any outstanding balances will bear interest at standard market interest rates based on LIBOR.
2. Summary of Significant Accounting Policies
Basis of Presentation
These 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 Annual Report on Form 10-K for the year ended December 31, 2017 (the “Annual Report”). The results of operations for any interim period are not necessarily indicative of the results to be expected for a full year. In the opinion of management, all normal, recurring adjustments have been included for a fair statement of this interim financial information.
The consolidated accounts of the Company include the wholly-owned subsidiaries and the partially-owned subsidiaries of which we are the majority owner or the primary beneficiary. All material intercompany accounts and transactions have been eliminated in consolidation. Non-controlling interests on the Consolidated Statements of Financial Condition as of September 30, 2018 and December 31, 2017 relate to the interest of third parties in the partially-owned subsidiaries. Certain prior year amounts have been reclassified to conform to current year presentation.
See Note 2 - Summary of Significant Accounting Policies in the Company's Annual Report for the Company's significant accounting policies.
For the nine months ended September 30, 2018, there were no significant changes made to the Company’s significant accounting policies other than those described below. The accounting policy changes are attributable to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Company adopted this standard on January 1, 2018 using a modified retrospective approach. Accordingly, the new revenue standard was applied prospectively in the Company’s financial statements from January 1, 2018 forward and reported financial information for historical comparable periods was not revised and will continue to be reported under the accounting standards in effect during those historical periods.
Refer to Note 3, Recent Accounting Pronouncements, for additional information.
3. Recent Accounting Pronouncements
Accounting Standards to be Adopted in Future Periods
ASU 2016-02, Leases (Topic 842), was issued in February 2016, with subsequent amendments, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing information about leasing arrangements. The standard requires lessees to recognize the assets and liabilities arising from operational leases on the balance sheet. ASU 2016-02 will become effective for fiscal years beginning after December 15, 2018. Upon adoption, the Company expects to recognize its lease agreements as a right-to-use asset with a corresponding lease liability to reflect the present value of the future lease payments. The Company is evaluating the impact of the adoption of this standard.
ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), was issued in June 2016 to replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This standard will become effective for fiscal years beginning after December 31, 2019. The Company is evaluating the impact of the adoption of this standard.
ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Sub-topic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued in March 2017 to shorten the amortization period for certain purchased callable debt securities held at a premium. It requires the premium to be amortized over the period until the earliest call date. The amendment does not make any changes for securities held at a discount. The new guidance will be effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the impact of the adoption of this standard.
ASU 2018-13, Fair Value Measurement (Topic 820), was issued in August 2018 as part of the disclosure framework project to improve the effectiveness of the disclosures in the notes to the financial statements. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The new guidance will be effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is evaluating the impact of the adoption of this standard.
Recently Adopted Accounting Guidance
ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Sub-topic - 825-10) was issued in February 2018 to address the questions raised by stakeholders to clarify the guidance issued in ASU 2016-01. The Financial Accounting and Standards Board amended the guidance on using the measurement alternative for equity securities without readily determinable fair value and clarifies the presentation requirements for entities that elect the fair value option. The amendments in the update are effective for public business entities for fiscal periods beginning after December 15, 2017, and interim periods beginning after June 15, 2018. The adoption of ASU 2018-03 did not have a material impact on the company's financial statements.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), was issued in May 2014, with subsequent amendments, to provide a more robust framework for addressing revenue issues, and to clarify the implementation guidance on principal versus agent considerations. The standard is effective for annual reporting periods beginning after December 15, 2017 and allows either a full retrospective or modified retrospective approach. The Company adopted this standard on January 1, 2018 using a modified retrospective approach. Accordingly, the new revenue standard will be applied prospectively in the Company’s financial statements from January 1, 2018 forward and reported financial information for historical comparable periods will not be revised and will continue to be reported under the accounting standards in effect during those historical periods. The new standard does not apply to revenue from financial instruments, including loans and securities, and as a result, did not have an impact on revenues closely associated with financial instruments, including principal transactions, interest income, and interest expense. The new standard primarily impacts the presentation of our investment banking revenues, specifically our underwriting revenues, strategic advisory revenues, and private placement fees. Certain investment banking revenues have historically been presented net of related expenses. Under the new standard, revenues and expenses related to investment banking transactions are presented gross in the Consolidated Statements of Operations.
For the quarter ended September 30, 2018, there was no significant impact as a result of adoption of the new revenue standard to our consolidated financial statements. The new revenue standard primarily impacted the presentation of our investment banking revenue and expenses. The table below presents the impact to revenues and expenses as a result of the change in presentation of investment banking expenses:
Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | |||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
As Reported | ASC 606 Impact | Pre-Adoption (1) | As Reported | ASC 606 Impact | Pre-Adoption (1) | |||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Investment banking | $ | 21,095 | $ | 913 | �� | $ | 20,182 | $ | 70,319 | $ | 5,643 | $ | 64,676 | |||||||||||
Total non-interest revenues | 30,012 | 913 | 29,099 | 99,857 | 5,643 | 94,214 | ||||||||||||||||||
Total net revenues after provision for loan losses | 33,251 | 913 | 32,338 | 104,726 | 5,643 | 99,083 | ||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Travel and business development | 1,080 | 299 | 781 | 3,236 | 928 | 2,308 | ||||||||||||||||||
Managed deal expenses | 614 | 614 | - | 4,528 | 4,528 | - | ||||||||||||||||||
Professional fees | 1,272 | - | 1,272 | 4,315 | 187 | 4,128 | ||||||||||||||||||
Total non-comp expenses | 8,942 | 913 | 8,029 | 30,647 | 5,643 | 25,004 | ||||||||||||||||||
Total non-interest expenses | 31,613 | 913 | 30,700 | 106,717 | 5,643 | 101,074 |
(1) | Amounts reflect each impacted consolidated financial statement line item as they would have been reported under accounting principles generally accepted in the United States of America prior to the adoption of the new revenue standard. |
ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Sub-topic 825-10), was issued in January 2016. The amendments address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. They require equity securities that are neither accounted by equity method nor consolidated to be measured at fair value with changes of fair values recognized as net income. Those equity securities that do not have readily determinable fair value may be measured at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. In addition, the amendments simplify the impairment assessment of equity investments without determinable fair values by requiring a qualitative assessment at each reporting period. This standard was effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of ASU 2016-01 did not have a material impact on the Company’s financial statements.
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230), was issued in August 2016 to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This standard addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this standard are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of ASU 2016-15 did not have a material impact on the Company’s financial statements.
ASU 2016-16, Income Taxes (Topic 740), was issued in October 2016 to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory and to reduce the complexity/cost in accounting standards. The Financial Accounting Standards Board decided to recognize the income tax consequences to intra-entity transfers when the transfer occurs. The amendment is effective for annual reporting periods beginning after December 15, 2017 including interim reporting periods within those annual reporting periods. Early adoption is permitted and is applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. The adoption of ASU 2016-16 did not have a material impact on the Company’s financial statements.
ASU 2016-18, Statement of Cash Flows (Topic 230) addresses the diversity that exists in the classification and presentation of changes in restricted cash and transfers between cash and restricted cash on the statement of cash flows. The amendment applies to all entities that report restricted cash or restricted cash equivalents and present a statement of cash flows. The provisions of this update require the explanation of the changes during the period. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Additionally, early adoption is permitted with a retrospective transition method and all adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The adoption of ASU 2016-18 resulted in a decrease of cash used in operating activities of $1.3 million and a decrease in cash provided by investing activities of $167.0 million for the nine months ended September 30, 2017.
4. Fair Value Measurements
The following tables provide fair value information related to the Company’s financial instruments at September 30, 2018 and December 31, 2017:
September 30, 2018 | ||||||||||||||||||||
(In thousands) | Carrying Value | Fair Value | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 73,143 | $ | 73,143 | $ | - | $ | - | $ | 73,143 | ||||||||||
Restricted cash and deposits | 48,586 | 48,586 | - | - | 48,586 | |||||||||||||||
Marketable securities owned | 20,194 | 20,194 | - | - | 20,194 | |||||||||||||||
Other investments (1) | 868 | - | 868 | - | 868 | |||||||||||||||
Other investments measured at net asset value (1) | 8,304 | - | - | - | - | |||||||||||||||
Loans held for investment, net of allowance for loan losses | 5,606 | - | 1,325 | 3,673 | 4,998 | |||||||||||||||
Loans collateralizing asset-backed securities issued, net of allowance for loan losses | 1,164,404 | - | 1,171,526 | 1,271 | 1,172,797 | |||||||||||||||
Total assets: | $ | 1,321,105 | $ | 141,923 | $ | 1,173,719 | $ | 4,944 | $ | 1,320,586 | ||||||||||
Liabilities: | ||||||||||||||||||||
Marketable securities sold, but not yet purchased | $ | 5,604 | $ | 5,604 | $ | - | $ | - | $ | 5,604 | ||||||||||
Notes payable | 829 | - | 829 | - | 829 | |||||||||||||||
Asset-backed securities issued, net of debt issuance costs | 1,112,049 | - | 1,120,691 | - | 1,120,691 | |||||||||||||||
Bond payable | 83,395 | 87,201 | - | - | 87,201 | |||||||||||||||
Total liabilities: | $ | 1,201,877 | $ | 92,805 | $ | 1,121,520 | $ | - | $ | 1,214,325 |
December 31, 2017 | ||||||||||||||||||||
(In thousands) | Carrying Value | Fair Value | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 85,594 | $ | 85,594 | $ | - | $ | - | $ | 85,594 | ||||||||||
Restricted cash and deposits | 51,727 | 51,727 | - | - | 51,727 | |||||||||||||||
Marketable securities owned | 20,825 | 20,825 | - | - | 20,825 | |||||||||||||||
Receivable from clearing broker | 6,801 | 6,801 | - | - | 6,801 | |||||||||||||||
Other investments (1) | 10,226 | - | 10,226 | - | 10,226 | |||||||||||||||
Other investments measured at net asset value (1) | 8,224 | - | - | - | - | |||||||||||||||
Loans held for investment, net of allowance for loan losses | 83,948 | - | 80,956 | 3,342 | 84,298 | |||||||||||||||
Loans collateralizing asset-backed securities issued, net of allowance for loan losses | 765,583 | - | 766,298 | - | 766,298 | |||||||||||||||
Total assets: | $ | 1,032,928 | $ | 164,947 | $ | 857,480 | $ | 3,342 | $ | 1,025,769 | ||||||||||
Liabilities: | ||||||||||||||||||||
Marketable securities sold, but not yet purchased | $ | 7,919 | $ | 7,919 | $ | - | $ | - | $ | 7,919 | ||||||||||
Asset-backed securities issued, net of debt issuance costs | 738,248 | - | 748,015 | - | 748,015 | |||||||||||||||
Bond payable | 93,103 | - | 97,014 | - | 97,014 | |||||||||||||||
CLO V warehouse credit facility | 61,250 | - | 61,250 | - | 61,250 | |||||||||||||||
Total liabilities: | $ | 900,520 | $ | 7,919 | $ | 906,279 | $ | - | $ | 914,198 |
(1) | In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. The carrying values of these lines reconciles to the parenthetical disclosure of other investments on the Consolidated Statements of Financial Condition. |
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, 2018 and December 31, 2017:
(In thousands) | September 30, 2018 | |||||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Marketable securities owned | $ | 20,194 | $ | 20,194 | $ | - | $ | - | $ | 20,194 | ||||||||||
Other investments: | ||||||||||||||||||||
Investments in hedge funds managed by the Company | 868 | - | 868 | - | 868 | |||||||||||||||
Investments in other funds managed by the Company (1) | 4,870 | - | - | - | - | |||||||||||||||
Total investment in funds managed by the Company (1) | 5,738 | - | 868 | - | 868 | |||||||||||||||
Limited partnership in investments in private equity/ real estate funds (1) | 3,434 | - | - | - | - | |||||||||||||||
Total other investments | 9,172 | - | 868 | - | 868 | |||||||||||||||
Total assets: | $ | 29,366 | $ | 20,194 | $ | 868 | $ | - | $ | 21,062 | ||||||||||
Marketable securities sold, but not yet purchased | $ | 5,604 | $ | 5,604 | $ | - | $ | - | $ | 5,604 | ||||||||||
Total liabilities: | $ | 5,604 | $ | 5,604 | $ | - | $ | - | $ | 5,604 |
(1) | In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. The carrying values of these lines reconciles to the parenthetical disclosure of other investments on the Consolidated Statements of Financial Condition. |
(In thousands) | December 31, 2017 | |||||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Marketable securities owned | $ | 20,825 | $ | 20,825 | $ | - | $ | - | $ | 20,825 | ||||||||||
Other investments: | ||||||||||||||||||||
Investments in hedge funds managed by the Company | 10,226 | - | 10,226 | - | 10,226 | |||||||||||||||
Investments in other funds managed by the Company (1) | 4,463 | - | - | - | - | |||||||||||||||
Total investment in funds managed by the Company (1) | 14,689 | - | 10,226 | - | 10,226 | |||||||||||||||
Limited partnership in investments in private equity/ real estate funds (1) | 3,761 | - | - | - | - | |||||||||||||||
Total other investments | 18,450 | - | 10,226 | - | 10,226 | |||||||||||||||
Total assets: | $ | 39,275 | $ | 20,825 | $ | 10,226 | $ | - | $ | 31,051 | ||||||||||
Marketable securities sold, but not yet purchased | $ | 7,919 | $ | 7,919 | $ | - | $ | - | $ | 7,919 | ||||||||||
Total liabilities: | $ | 7,919 | $ | 7,919 | $ | - | $ | - | $ | 7,919 |
(1) | In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. The carrying values of these lines reconciles to the parenthetical disclosure of other investments on the Consolidated Statements of Financial Condition. |
Transfers between levels of the fair value hierarchy result from changes in the observability of fair value inputs used in determining fair values for different types of financial assets and are recognized at the beginning of the reporting period in which the event or change in circumstances that caused the transfer occurs. The Company’s policy is to recognize the fair value of transfers among Levels 1, 2 and 3 as of the end of the reporting period. For recurring fair value measurements, there were no transfers between Levels 1, 2 and 3 for the three and nine months ended September 30, 2018 and year ended December 31, 2017.
The Company’s Level 2 assets held in other investments consist of investments in hedge funds managed by HCS. The carrying value of investments in hedge funds is calculated using the equity method and approximates fair value. Earnings or losses attributable to these investments are recorded in principal transactions. These assets are considered Level 2 as the underlying hedge funds are mainly invested in publicly traded stocks whose value is based on quoted market prices. The Company’s proportionate share of those investments is included in the tables above.
The investments in private equity funds managed by HCS and JMPAM are recognized using the fair value option. The Company uses the reported net asset value per share as a practical expedient to estimate the fair value of the funds. The risks associated with these investments are limited to the amounts of invested capital, remaining capital commitment and any management and incentive fees receivable.
The Company determined the fair value of short-term debt, which includes notes payable, to approximate their carrying values. This was determined as the debt has either (1) a variable interest rate tied to LIBOR and therefore reflects market conditions, or (2) a term less than one year and there have been no observable changes in the credit quality of the Company since the issuance of the debt. Based on the fair value methodology, the Company has identified short-term debt as Level 2 liabilities.
The Company determined the fair value of loans collateralizing asset-backed securities and loans held for investment identified as Level 2 assets primarily using the average market bid and ask quotation obtained from a loan pricing service. The valuations are received from a pricing service to which the Company subscribes. The pricing service's analysis incorporates comparable loans traded in the marketplace, the obligors industry, future business prospects, capital structure, and expected credit losses. Significant declines in the performance of the obligor would result in decrease to the fair value measurement. The fair value of loans held for investment identified as Level 3 assets are determined using the discounted cash flow model using the treasury rate, loan interest rate, and an internally generated risk rate.
The Company determined the fair value of asset-backed securities issued based upon pricing from published market research for equivalent-rated CLO notes. Based on the fair value methodology, the Company has identified the asset-backed securities issued as Level 2 liabilities.
As of both September 30, 2018 and December 31, 2017, $7.9 million of assets were measured using the net asset value as a practical expedient. Investments for which fair value was estimated using net asset value as a practical expedient were as follows:
Fair Value at | Unfunded Commitments | ||||||||||||||||||||
Dollars in thousands | Redemption Frequency | Redemption Notice Period | September 30, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||||
Limited partner investments in private equity/ real estate funds | Nonredeemable | N/A | $ | 3,434 | $ | 3,761 | $ | 2,013 | $ | 3,279 | |||||||||||
Investment in other funds managed by the Company | Nonredeemable | N/A | $ | 4,870 | $ | 4,173 | $ | - | $ | - |
Non-recurring Fair Value Measurements
The Company's assets that are measured at fair value on a non-recurring basis result from the application of lower of cost or market accounting or write-downs of individual assets. The Company held loans measured at fair value on a non-recurring basis of $1.6 million and $2.0 million as of September 30, 2018 and December 31, 2017, respectively.
Loans Held for Investment
At September 30, 2018 and December 31, 2017, the number of loans held for investment outside of the CLO portfolios were six and ten, respectively. The Company reviews credit quality of these loans within this portfolio segment on a loan by loan basis mainly focusing on the borrower’s financial position and results of operations as well as the current and expected future cash flows on the loans.
There were no loans past due as of September 30, 2018, and there was one loan past due as of December 31, 2017. A summary of activity in loan losses for the three and nine months ended September 30, 2018 and 2017 is as follows:
(in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||
Impaired | Non-impaired | Impaired | Non-impaired | Impaired | Non-impaired | Impaired | Non-impaired | |||||||||||||||||||||||||
Balance, at beginning of the period | $ | - | $ | (1,746 | ) | $ | (2,413 | ) | $ | - | $ | (2,279 | ) | $ | (494 | ) | $ | (823 | ) | $ | - | |||||||||||
Provision for loan losses | ||||||||||||||||||||||||||||||||
Specific | (149 | ) | - | (734 | ) | - | (353 | ) | - | (1,465 | ) | - | ||||||||||||||||||||
General | - | - | - | (49 | ) | - | (1,278 | ) | - | (49 | ) | |||||||||||||||||||||
Charge off | - | - | 996 | - | 2,483 | 26 | 1376 | - | ||||||||||||||||||||||||
Transfers to (from) loans collateralizing asset-backed securities | - | 1,746 | - | - | - | 1,746 | (1,239 | ) | - | |||||||||||||||||||||||
Balance, at end of the period | $ | (149 | ) | $ | - | $ | (2,151 | ) | $ | (49 | ) | $ | (149 | ) | $ | - | $ | (2,151 | ) | $ | (49 | ) |
A loan is considered to be impaired when, based on current information, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the original loan agreement, including scheduled principal and interest payments. As of September 30, 2018 and December 31, 2017, $0.5 million and $1.4 million of recorded investment amount of loans issued were individually evaluated for impairment, respectively.
As of September 30, 2018 and December 31, 2017, the Company classified all its loans as Cash Flow loans, as their funding decisions were all primarily driven by the cash flows of the borrower. The table below presents certain information pertaining to the loans on non-accrual status as of September 30, 2018 and December 31, 2017:
(in thousands) | Recorded Investment | Unpaid Principal | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
September 30, 2018 | ||||||||||||||||||||
Impaired loans with an allowance recorded | $ | 467 | $ | 489 | $ | 149 | $ | 467 | $ | 22 | ||||||||||
Impaired loans with no related allowance recorded | - | - | - | - | - | |||||||||||||||
Total impaired loans | $ | 467 | $ | 489 | �� | $ | 149 | $ | 467 | $ | 22 |
(in thousands) | Recorded Investment | Unpaid Principal | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
December 31, 2017 | ||||||||||||||||||||
Impaired loans with an allowance recorded | $ | 1,379 | $ | 1,448 | $ | 391 | $ | 1,411 | $ | 32 | ||||||||||
Impaired loans with no related allowance recorded | - | - | - | - | - | |||||||||||||||
Total impaired loans | $ | 1,379 | $ | 1,448 | $ | 391 | $ | 1,411 | $ | 32 |
The Company's management, at least on a quarterly basis, reviews each loan and evaluates the credit quality of the loan. The review primarily includes the following credit quality indicators with regard to each loan: 1) Moody's rating, 2) current internal rating, 3) trading price of the loan, and 4) performance of the obligor. The tables below present, by credit quality indicator, the Company's recorded investment in loans held for investment at September 30, 2018 and December 31, 2017:
(In thousands) | | |||||||
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Moody's rating: | ||||||||
Baa1 - Baa3 | $ | - | $ | - | ||||
Ba1 - Ba3 | - | 12,174 | ||||||
B1 - B3 | - | 64,170 | ||||||
Caa1 - Caa3 | 2,468 | 5,310 | ||||||
Not Rated | 3,336 | 4,595 | ||||||
Total: | $ | 5,804 | $ | 86,249 | ||||
Internal rating (1) : | ||||||||
2 | $ | 918 | $ | 77,525 | ||||
3 | - | 384 | ||||||
4 | 1,978 | 2,613 | ||||||
5 | 489 | 1,379 | ||||||
Not rated | 2,419 | 4,348 | ||||||
Total: | $ | 5,804 | $ | 86,249 | ||||
Performance: | ||||||||
Performing | $ | 5,300 | $ | 83,161 | ||||
Non-performing | 504 | 3,088 | ||||||
Total: | $ | 5,804 | $ | 86,249 |
(1) | Loans with an internal rating of 3 or below are reviewed individually to identify loans to be designated for non-accrual status. |
5. Loans Collateralizing Asset-backed Securities Issued
Allowance for Loan Losses
A summary of the activity in the allowance for loan losses for the three and nine months ended September 30, 2018 and 2017 is as follows:
(In thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||
Impaired | Non-Impaired | Impaired | Non-Impaired | Impaired | Non-Impaired | Impaired | Non-Impaired | |||||||||||||||||||||||||
Balance at beginning of period | $ | (110 | ) | $ | (6,861 | ) | $ | (1,211 | ) | $ | (6,477 | ) | $ | (390 | ) | $ | (6,533 | ) | $ | (937 | ) | $ | (5,783 | ) | ||||||||
Reversal (provision) for loan losses: | ||||||||||||||||||||||||||||||||
Specific reserve | (558 | ) | - | (128 | ) | 26 | (1,366 | ) | - | (1,641 | ) | 26 | ||||||||||||||||||||
General reserve | - | (747 | ) | - | 244 | - | (1,075 | ) | - | (630 | ) | |||||||||||||||||||||
Charge off | 110 | - | 950 | - | 1,198 | - | 950 | 180 | ||||||||||||||||||||||||
Transfer to (from) loans held for investment | - | (1,746 | ) | - | - | - | (1,746 | ) | 1,239 | - | ||||||||||||||||||||||
Balance at end of period | $ | (558 | ) | $ | (9,354 | ) | $ | (389 | ) | $ | (6,207 | ) | $ | (558 | ) | $ | (9,354 | ) | $ | (389 | ) | $ | (6,207 | ) |
Impaired Loans, Non-Accrual, Past Due Loans and Restructured Loans
A loan is considered to be impaired when, based on current information, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the original loan agreement, including scheduled principal and interest payments. As of September 30, 2018 and December 31, 2017, $1.8 million and $1.4 million of the recorded investment amount in loans collateralizing asset-backed securities issued were individually evaluated for impairment, respectively. The remaining $1,172.5 million and $771.1 million of recorded investment amount of loans collateralizing asset-backed securities issued were collectively evaluated for impairment as of September 30, 2018 and December 31, 2017, respectively.
As of September 30, 2018 and December 31, 2017, the Company classified all its loans as Cash Flow loans, as their funding decisions were all primarily driven by the cash flows of the borrower. The table below presents certain information pertaining to the loans on non-accrual status at September 30, 2018 and December 31, 2017:
(In thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
September 30, 2018 | ||||||||||||||||||||
Impaired loans with an allowance recorded | $ | 1,830 | $ | 1,956 | $ | 558 | $ | 1,830 | $ | 119 | ||||||||||
Impaired loans with no related allowance recorded | - | - | - | - | - | |||||||||||||||
Total impaired loans | $ | 1,830 | $ | 1,956 | $ | 558 | $ | 1,830 | $ | 119 | ||||||||||
December 31, 2017 | ||||||||||||||||||||
Impaired loans with an allowance recorded | $ | 1,379 | $ | 1,448 | $ | 391 | $ | 1,411 | $ | 32 | ||||||||||
Impaired loans with no related allowance recorded | - | - | - | - | - | |||||||||||||||
Total impaired loans | $ | 1,379 | $ | 1,448 | $ | 391 | $ | 1,411 | $ | 32 |
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. No loans were past due at September 30, 2018 or December 31, 2017. During the three and nine months ended September 30, 2017, the Company had two loans which were modified in troubled debt restructurings. The principal balances of the loans were reduced from $2.5 million to $0.5 million, the maturity dates of the loans were extended from 2021 to 2022, and the interest rates on the loans were increased by 1.30% and 3.00% percent. In addition the Company received $0.4 million of cash and $0.5 million worth of equity shares in connection with the restructuring. The Company has no commitments to lend additional funds for the loans that were restructured.
During the nine months ended September 30, 2018, the Company had two loans, which were modified in a troubled debt restructuring. The loans, with a principal balance and a carrying balance of $1.9 million and $1.0 million in total, respectively, were converted to equity. The Company valued the equity at $0.8 million in total upon conversion and incurred a loss of $0.1 million in relation to the restructuring as of September 30, 2018. The Company had no loans modified in a troubled debt restructuring during the three months ended September 30, 2018.
Credit Quality of Loans
The Company’s management, at least on a quarterly basis, reviews each loan and evaluates the credit quality of the loan. The review primarily includes the following credit quality indicators with regard to each loan: 1) Moody’s rating, 2) current internal rating, 3) the trading price of the loan and 4) performance of the obligor. The tables below present, by credit quality indicator, the Company’s recorded investment in loans collateralizing asset-backed securities issued at September 30, 2018 and December 31, 2017:
(In thousands) | Cash Flow Loans | |||||||
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Moody's rating: | ||||||||
Baa1 - Baa3 | $ | 7,411 | $ | 8,880 | ||||
Ba1 - Ba3 | 239,980 | 134,061 | ||||||
B1 - B3 | 881,880 | 579,091 | ||||||
Caa1 - Caa3 | 43,215 | 50,475 | ||||||
Ca | 1,271 | - | ||||||
Total: | $ | 1,173,757 | $ | 772,507 | ||||
Internal rating: (1) | ||||||||
2 | $ | 1,024,963 | $ | 692,198 | ||||
3 | 134,928 | 70,217 | ||||||
4 | 12,595 | 8,713 | ||||||
5 | 1,271 | 1,379 | ||||||
Total: | $ | 1,173,757 | $ | 772,507 | ||||
Performance: | ||||||||
Performing | $ | 1,172,486 | $ | 771,128 | ||||
Non-Performing | 1,271 | 1,379 | ||||||
Total: | $ | 1,173,757 | $ | 772,507 |
(1) | Loans with an internal rating of 3 or below are reviewed individually to identify loans to be designated for non-accrual status. |
6. Debt
Bond Payable
(In thousands) | September 30, 2018 | December 31, 2017 | ||||||
8.00% Senior Notes due 2023 | $ | 36,000 | $ | 46,000 | ||||
7.25% Senior Notes due 2027 | 50,000 | 50,000 | ||||||
Total outstanding principal | $ | 86,000 | $ | 96,000 | ||||
Less: Debt issuance costs | (2,530 | ) | (2,802 | ) | ||||
Less: Consolidation elimination | (75 | ) | (95) | |||||
Total debt obligations | $ | 83,395 | $ | 93,103 |
The 8% Senior Notes due 2023 and the 7.25% Senior Notes due 2027 (collectively, the “Senior Notes”) were issued pursuant to indentures with U.S. Bank National Association, as trustee. The 8% Senior Notes indentures contain a minimum liquidity covenant that obligates JMP Group Inc. to maintain liquidity of at least an amount equal to the lesser of (i) the aggregate amount due on the next eight scheduled quarterly interest payments on the 8% Senior Notes, or (ii) the aggregate amount due on all remaining scheduled quarterly interest payments on the $46 million 8% Senior Notes until the maturity of the Senior Notes. The Senior Notes indenture also contains customary event of default and cure provisions. If an uncured default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the Senior Notes may declare the Senior Notes immediately due and payable. The Senior Notes are JMP Group Inc.’s general unsecured senior obligations, and rank equally with all existing and future senior unsecured indebtedness and are senior to any other indebtedness expressly made subordinate to the notes. At both September 30, 2018 and December 31, 2017, the Company was in compliance with the debt covenants in the indentures. On July 31, 2018, the Company redeemed $10 million of the 8% Senior Notes. The Company recorded a loss of $0.2 million related to early redemption.
The future scheduled principal payments of the debt obligations were as follows:
(In thousands) | September 30, 2018 | |||
2018 | $ | - | ||
2019 | - | |||
2020 | - | |||
2021 | - | |||
2022 | - | |||
Thereafter | 86,000 | |||
Total | $ | 86,000 |
Note Payable, Lines of Credit and Credit Facilities
(In thousands) | Outstanding Balance | |||||||
September 30, 2018 | December 31, 2017 | |||||||
$340 million, CLO V Warehouse Credit Facility through July 31, 2018 | $ | - | $ | 61,250 | ||||
$25 million, JMP Holding Credit Agreement through June 4, 2019 | - | - | ||||||
$20 million, JMP Securities Revolving Line of Credit through June 6, 2019 | - | - | ||||||
Other | 829 | - | ||||||
Total Credit Facilities | $ | 829 | $ | 61,250 |
The Company's Credit Agreement (the "Credit Agreement") dated as of August 3, 2016, was entered by and between JMP Holding and City National Bank ("CNB"). The Credit Agreement contains financial and other covenants, including, but not limited to, limitations on debt, liens and investments, as well as the maintenance of certain financial covenants. A violation of any one of these covenants could result in a default under the Credit Agreement, which would permit CNB to terminate the Company’s note and require the immediate repayment of any outstanding principal and interest. As of both September 30, 2018 and December 31, 2017, the Company was in compliance with the loan covenants. As of both September 30, 2018 and December 31, 2017, the outstanding balance on the Credit Agreement was zero. The $25 million line of credit has a LIBOR plus 225 bps interest rate, which will convert to a term loan after June 4, 2019, and will be repaid in quarterly installments of 3.75% of funded debt for the first two years, 5.00% of funded debt for the next two years, and the remainder due at maturity.
JMP Securities holds a $20 million revolving line of credit with CNB to be used for regulatory capital purposes during its securities underwriting activities. The line of credit bears interest at a rate to be agreed upon at the time of advance between the Company and CNB.
The net loans collateralizing asset-backed securities CLO V warehouse facility was $76.8 million as of December 31, 2017. The CLO V warehouse facility had a market standard advance rate and the outstanding balances bore interest at LIBOR plus 1.375% until July 31, 2018, which marked the end of the revolving period on the facility. If not paid off prior to July 31, 2018, the facility had a 10 month amortization period after the revolving period in which the outstanding balances would bear interest rate at LIBOR plus 2.30%. On July 26, 2018 CLO V completed a $407.8 million securitization, comprised of $368.0 million aggregate principal amount of secured notes (the “Secured Notes”) and $39.8 million of unsecured subordinated notes (the “Subordinated Notes”). Proceeds from the securitization were used, in part, to retire the warehouse facility. The Secured Notes offered in this transaction were issued in multiple tranches and are rated by Moody's Investors Service, Inc. and, in respect of certain tranches, Fitch. The Secured Notes will be repaid from the cash flows generated by the loan portfolio owned by CLO V. The CLO V warehouse was fully repaid as of July 26, 2018.
On February 28, 2018, the Company entered into a Repurchase Agreement with BNP Paribas. In connection with the Repurchase Agreement, BNP took custody of asset-back securities issued by CLO III that had a par-value of $4.5 million. The Repurchase Agreement specified that a significant decline in the fair market value of the asset-backed securities would result in a call of additional cash collateral. The Company settled the Repurchase Agreement and sold the CLO III asset-backed security in May 2018 and recognized a loss on redemption of the asset-backed security of $42 thousand.
7. Asset-backed Securities Issued
The table below sets forth the outstanding debt obligations of CLO III, CLO IV, and CLO V as of September 30, 2018 and December 31, 2017:
(In thousands) | As of September 30, 2018 | As of December 31, 2017 | ||||||||||||||||||||||
Outstanding | Interest Rate | Weighted Average Remaining Maturity | Outstanding | Interest Rate | Weighted Average Remaining Maturity | |||||||||||||||||||
Class A Senior Secured Floating Rate Notes | $ | 769,750 | 0.85%-1.37 | % | 10.12 | $ | 513,750 | 1.24%-1.37 | % | 9.22 | ||||||||||||||
Class B Senior Secured Floating Rate Notes | 143,700 | 1.30%-1.90 | % | 10.13 | 95,700 | 1.80%-1.90 | % | 9.26 | ||||||||||||||||
Class C Senior Secured Deferrable Floating Rate Notes | 71,500 | 1.80%-2.65 | % | 10.09 | 49,500 | 2.60%-2.65 | % | 9.18 | ||||||||||||||||
Class D Senior Secured Deferrable Floating Rate Notes | 68,350 | 2.60%-4.15 | % | 10.09 | 46,350 | 3.90%-4.15 | % | 9.14 | ||||||||||||||||
Class E Senior Secured Deferrable Floating Rate Notes | 60,800 | 5.70%-6.80 | % | 10.11 | 40,800 | 6.80%-7.10 | % | 9.21 | ||||||||||||||||
Total secured notes sold to investors | $ | 1,114,100 | $ | 746,100 | ||||||||||||||||||||
Senior Subordinated Notes | 7,500 | 6.90 | % | 10.75 | - | |||||||||||||||||||
Less: Debt issuance costs |
| (9,551 | ) | (7,852 | ) | |||||||||||||||||||
Total CLOs asset-backed securities issued | $ | 1,112,049 | $ | 738,248 |
The secured notes and subordinated notes are limited recourse obligations payable solely from cash flows of the CLOs loan portfolio and related collection and payment accounts pledged as security. Payment on Class A notes rank senior in right of payment to the other secured notes and the subordinated notes. Payment on the Class B, Class C, Class D and Class E notes generally rank subordinate in right of payment to any other class of notes which has an earlier alphabetical designation. Payment of interest on the Class C, Class D, Class E, and senior subordinated notes is payable only to the extent proceeds are available under the applicable payment priority provisions. To the extent proceeds are not available, interest on the Class C, Class D, Class E, and senior subordinated notes will be deferred. The secured notes are secured by the CLOs loan portfolio and the funds on deposit in various related collection and payment accounts. The terms of the debt securitization subject the loans included in the CLOs loan portfolio to a number of collateral quality, portfolio profile, interest coverage and overcollateralization tests. The subordinated notes are subordinated in right of payment to all other classes of notes and are unsecured.
As of September 30, 2018, future scheduled payments with respect to the debt obligations of the CLOs were as follows:
(In thousands) | ||||
As of September 30, 2018 | ||||
2018 | $ | - | ||
2019 | - | |||
2020 | - | |||
2021 | - | |||
2022 | - | |||
Thereafter | 1,121,600 | |||
Total | $ | 1,121,600 |
The net loans collateralizing asset-backed securities for CLO III, CLO IV, and CLO V is $1,164.4 million and $765.6 million as of September 30, 2018 and December 31, 2017, respectively.
8. Shareholders’ Equity
Share Repurchase Program
During the three months ended September 30, 2018, the Company repurchased 146,003 of the Company’s shares, at an average price of $5.34 per share, for an aggregate purchase price of $0.8 million on the open market. During the nine months ended September 30, 2018, the Company repurchased 434,800 of the Company’s shares, at an average price of $5.29 per share, for an aggregate purchase price of $2.3 million on the open market.
The timing and amount of any future open market share repurchases will be determined by the Company’s management based on its evaluation of market conditions, the relative attractiveness of other capital deployment activities, regulatory considerations and other factors. Any open market share repurchase activities will be conducted in compliance with the safe harbor provisions of Rule 10b-18 of the Securities Exchange Act of 1934, as amended, or in privately negotiated transactions. Repurchases of common shares may also be made under an effective Rule 10b5-1 plan which permits common shares to be repurchased when the Company may otherwise be prohibited from doing so under insider trading laws. This repurchase program may be suspended or discontinued at any time.
9. Share-Based Compensation
On January 1, 2015, the Company's board of directors adopted the JMP Group LLC Amended and Restated Equity Incentive Plan (“JMP Group Plan”). The JMP Group Plan maintains authorization of the issuance of 4,000,000 shares, as originally approved by shareholders on April 12, 2007 and subsequently approved by shareholders on June 6, 2011. This amount is increased by any shares the Company purchases on the open market, or through any share repurchase or share exchange program, initiated by the Company unless the board of directors or its appointee determines otherwise. The Company will issue shares upon exercises or vesting from authorized but unissued shares or from treasury shares.
Share Options
The following table summarizes the share option activity for the nine months ended September 30, 2018:
Nine Months Ended | ||||||||
September 30, 2018 | ||||||||
Shares Subject | Weighted Average | |||||||
to Option | Exercise Price | |||||||
Balance, beginning of year | 2,515,000 | $ | 6.55 | |||||
Balance, end of period | 2,515,000 | $ | 6.55 | |||||
Options exercisable at end of period | 2,515,000 | $ | 6.55 |
The following table summarizes the share options outstanding as well as share options vested and exercisable as of September 30, 2018:
September 30, 2018 | ||||||||||||||||||||||||||||||||||
Options Outstanding | Options Vested and Exercisable | |||||||||||||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||||||||||||
Average | Weighted | Average | Weighted | |||||||||||||||||||||||||||||||
Range of | Remaining | Average | Aggregate | Remaining | Average | Aggregate | ||||||||||||||||||||||||||||
Exercise | Number | Contractual | Exercise | Intrinsic | Number | Contractual | Exercise | Intrinsic | ||||||||||||||||||||||||||
Prices | Outstanding | Life in Years | Price | Value | Exercisable | Life in Years | Price | Value | ||||||||||||||||||||||||||
$6.05 | - | $7.33 | 2,515,000 | 0.77 | $ | 6.55 | $ | - | 2,515,000 | 0.77 | $ | 6.55 | - |
There were no share options exercised during the three and nine months ended September 30, 2018. As a result, the Company did not recognize any current income tax benefits from the exercise of share options. The Company recognized current income tax benefits of zero and $20 thousand from the exercise of share options during the three and nine months ended September 30, 2017, respectively.
On February 6, 2018, the Company granted approximately 260,000 RSUs to certain employees of the Company as part of the 2017 deferred compensation program. 50% of these units will vest on December 1, 2018 and the remaining 50% will vest on December 1, 2019, subject to the grantees’ continued employment through such dates. On March 15, 2018, the Company granted approximately 67,000 RSUs to its independent directors. 25% of these units will vest on April 1, 2018, July 1, 2018, October 1, 2018, respectively, and the remaining 25% will vest on January 1, 2019. The Company also granted RSUs for new hires throughout the year.
Nine Months Ended | ||||||||
September 30, 2018 | ||||||||
Restricted | Weighted Average | |||||||
Share Units | Grant Date Fair Value | |||||||
Balance, beginning of year | 277,193 | $ | 5.60 | |||||
Granted | 454,974 | 5.01 | ||||||
Vested | (69,044 | ) | 5.78 | |||||
Forfeited | (128,003 | ) | 5.32 | |||||
Balance, end of period | 535,120 | $ | 5.14 |
The aggregate fair value of RSUs vested during both the three months ended September 30, 2018 and 2017 were $91 thousand and $380 thousand, respectively. The aggregate fair value of RSUs vested during both the nine months ended September 30, 2018 and 2017 were $399 thousand and $983 thousand, respectively. The income tax benefits realized from the vested RSUs were zero and $169 thousand for the three months ended September 30, 2018 and 2017, respectively. The income tax benefits realized from the vested RSUs were $28 thousand and $419 thousand for the nine months ended September 30, 2018 and 2017, respectively.
The Company recognizes compensation expense for RSUs over the vesting period using the accelerated attribution method when they are subject to graded vesting and on a straight-line basis when they are subject to cliff vesting. For the three months ended September 30, 2018 and 2017, the Company recorded compensation expenses related to RSU's of $507 thousand and $788 thousand, respectively. For the nine months ended September 30, 2018 and 2017, the Company recorded compensation expense related to RSU's of $1.3 million and $2.4 million, respectively.
For the three months ended September 30, 2018 and 2017, the Company recognized income tax benefits of $101 thousand and $299 thousand, respectively, related to the compensation expense recognized for RSUs. For the nine months ended September 30, 2018 and 2017, the Company recognized income tax benefits of $215 thousand and $658 thousand, respectively, related to the compensation expense recognized for RSUs. As of September 30, 2018, there was $1.2 million of unrecognized compensation expense related to RSUs expected to be recognized over a weighted average period of 0.99 years.
The Company pays cash distribution equivalents on certain unvested RSUs. Distribution equivalents paid on RSUs are generally charged to retained earnings. Distribution equivalents paid on RSUs expected to be forfeited are included in compensation expense. The Company accounts for the tax benefit related to distribution equivalents paid on RSUs as an increase in additional paid-in capital.
Share Appreciation Rights
In February 2015, the Company granted an aggregate of 2,865,000 share appreciation rights (“SARs”) to certain employees and the Company’s independent directors. These SARs have a base price of $7.33 per share, an exercise period of five years and have vested and became exercisable on December 31, 2017 subject to the terms and conditions of the applicable grant agreements. The fair value of the SARs was determined using a quantitative model, using the following assumptions: expected life of 2.0 years, risk-free interest rate of 2.86%, distribution yield of 9.43%, and volatility of 20.00%. The risk-free rate was interpolated from the U.S. constant maturity treasuries for a term corresponding to the maturity of the SAR. The volatility was calculated from the historical weekly share prices of the Company as of the grant date for a term corresponding to the maturity of the SAR. The distribution yield was calculated as the sum of the last twelve-month distributions over the share price as of the grant date.
The following table summarizes the SARs activity for the nine months ended September 30, 2018:
Nine Months Ended | ||||||||
September 30, 2018 | ||||||||
Share Appreciation | Weighted Average | |||||||
Rights | Exercise Price | |||||||
Balance, beginning of year | 2,485,000 | $ | 7.33 | |||||
Balance, end of period | 2,485,000 | $ | 7.33 |
The following table summarizes the SARs outstanding as well as SARs vested and exercisable as of September 30, 2018:
September 30, 2018 | ||||||||||||||||||
Options Outstanding | ||||||||||||||||||
Weighted | ||||||||||||||||||
Average | Weighted | |||||||||||||||||
Range of | Remaining | Average | Aggregate | |||||||||||||||
Exercise Prices | Number | Contractual | Exercise | Intrinsic | ||||||||||||||
Outstanding | Life in Years | Price | Value | |||||||||||||||
$7.33 | - | $7.33 | 2,485,000 | 1.25 | $ | 7.33 | $ | - |
The Company recognizes compensation expense for SARs over the vesting period. All of the outstanding SARs as of September 30, 2018 are fully vested. For the three months ended September 30, 2018 and 2017, the Company recorded compensation benefit of $50 thousand and compensation expense of $68 thousand, respectively. For the nine months ended September 30, 2018 and 2017, the Company recorded compensation benefit of $149 thousand and $263 thousand, respectively.
For the three months ended September 30, 2018 and 2017, the Company recognized income tax benefit of $13 thousand and income tax expense of $26 thousand, respectively, related to the compensation expense recognized for SARs. For the nine months ended September 30, 2018 and 2017, the Company recognized income tax benefit of $39 thousand and $101 thousand, respectively, related to the compensation expense recognized for SARs. As of September 30, 2018, there was no unrecognized compensation expense related to SARs. There were no SARs exercised during the nine months ended September 30, 2018. As a result, the Company did not recognize any current income tax benefits from the exercise of SARs.
10. Net Income per Common Share
Basic net income per share for the Company is calculated by dividing net income by the weighted average number of common shares outstanding for the reporting period. Diluted net income (loss) per share is calculated by adjusting the weighted average number of outstanding shares to reflect the potential dilutive impact as if all potentially dilutive share options or RSUs were exercised or converted under the treasury share method. However, for periods that the Company has a net loss, the effect of outstanding share options or RSUs is anti-dilutive and, accordingly, is excluded from the calculation of diluted loss per share.
The computations of basic and diluted net loss per share for the three and nine months ended September 30, 2018 and 2017 are shown in the tables below:
(In thousands, except per share data) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) attributable to JMP Group LLC | $ | 288 | $ | (1,235 | ) | $ | (1,983 | ) | $ | (14,510 | ) | |||||
Denominator: | ||||||||||||||||
Basic weighted average shares outstanding | 21,435 | 21,525 | 21,545 | 21,583 | ||||||||||||
Effect of potential dilutive securities: | ||||||||||||||||
Restricted share units | 302 | - | - | - | ||||||||||||
Diluted weighted average shares outstanding | 21,737 | 21,525 | 21,545 | 21,583 | ||||||||||||
Net income (loss) per share | ||||||||||||||||
Basic | $ | 0.01 | $ | (0.06 | ) | $ | (0.09 | ) | $ | (0.67 | ) | |||||
Diluted | $ | 0.01 | $ | (0.06 | ) | $ | (0.09 | ) | $ | (0.67 | ) |
Due to the net loss for the three and nine months ended September 30, 2017, and nine months ended September 30, 2018, all of the share options and RSUs outstanding, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding.
11. Employee Benefits
All salaried employees of the Company are eligible to participate in the JMP Group 401(k) Plan after three months of employment. Participants may contribute up to the limits set by the U.S. Internal Revenue Service. Effective January 1, 2015, the Company contributes a match of 100% of each participant’s contributions to the JMP Group 401(k) Plan up to a maximum of 3% of the participant’s compensation plus 50% of the participant’s elective deferrals between 3% and 5%. All participants are immediately vested 100% on matched contributions. The Company recorded JMP Group 401(k) Plan matching expense of $0.3 million and $0.2 million for the three months ended September 30, 2018 and 2017, respectively. The Company recorded JMP Group 401(k) Plan matching expense of $1.5 million and $1.3 million for the nine months ended September 30, 2018 and 2017, respectively.
12. Income Taxes
JMP Group LLC qualifies as a publicly traded partnership. The entity is taxed as a partnership for United States federal income tax purposes. The Company owns intermediate holding subsidiaries, a few of which are taxable corporate subsidiaries. The taxable income earned by these subsidiaries is subject to U.S. Federal and state income taxation. Taxable income earned by JMP Investment Holdings LLC, a wholly-owned subsidiary, is not subject to U.S. federal and state corporate income tax. This taxable income is allocated to JMP Group LLCs partners.
For the three months ended September 30, 2018 and 2017, the Company recorded income tax expense of $0.5 million and $1.1 million, respectively. For the nine months ended September 30, 2018 and 2017, the Company recorded income tax benefit of $0.1 million and $0.2 million, respectively. The effective tax rates were -11.24% and -8.12% for the three months ended September 30, 2018 and 2017, respectively. The effective tax rates were 7.32% and 1.30% for the nine months ended September 30, 2018 and 2017, respectively.
For financial reporting purposes, the Company’s effective tax rate used for the interim periods is based on the estimated full-year income tax rate. The effective tax rate differs from the statutory rate primarily due to the following: (i) a portion of the reported pre-tax income is attributable to non-controlling interests held in the Company’s consolidated entities by third parties, and (ii) a significant portion of pre-tax income (loss) is from qualifying sources that are generated by certain flow through entities within the Company. These amounts are excluded from the computation of corporate income tax.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law which included a broad range of tax reform proposals. The Securities and Exchange Commission Staff Accounting Bulletin 118 (SAB 118) expresses views of the staff regarding application of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740, Income Taxes (“ASC Topic 740”). The Company has made reasonable assessments under SAB 118 in accounting for certain effects of tax reform. However, the provisional impacts may be refined over the prescribed measurement period.
The Company recognizes deferred tax assets and liabilities in accordance with ASC 740, Income Taxes, and are determined based upon the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse.
13. Commitments and Contingencies
The Company leases office space in California, Illinois, Georgia, Massachusetts, Minnesota, Florida, and New York under various operating leases. Occupancy expense was $1.2 million and $1.1 million for quarters ended September 30, 2018 and 2017, respectively. Occupancy expense was $3.4 million and $3.3 million for the nine months ended September 30, 2018 and 2017, respectively.
The California, Illinois, Minnesota, and New York leases included a period of free rent at the start of the lease. Rent expense is recognized over the entire lease period. The aggregate minimum future commitments of these leases are:
(In thousands) | Minimum Future Lease Commitments | |||
Year Ending December 31, | ||||
2018 | $ | 1,381 | ||
2019 | 4,365 | |||
2020 | 2,990 | |||
2021 | 2,982 | |||
2022 | 2,857 | |||
Thereafter | 8,149 | |||
Total Lease Commitments | $ | 22,724 |
In connection with its underwriting activities, JMP Securities may, from time to time, enter into firm commitments for the purchase of securities in return for a fee. These commitments require JMP Securities to purchase securities at a specified price. Securities underwriting exposes JMP Securities to market and credit risk, primarily in the event that, for any reason, securities purchased by JMP Securities cannot be distributed at anticipated price levels. At both September 30, 2018 and December 31, 2017, JMP Securities had no open underwriting commitments.
The marketable securities owned and the restricted cash, as well as the cash held by the clearing broker may be used to maintain margin requirements. The Company had $0.3 million of cash on deposit with JMP Securities’ clearing broker at both September 30, 2018 and December 31, 2017. Furthermore, the marketable securities owned may be hypothecated or borrowed by the clearing broker.
Unfunded commitments are agreements to lend to a borrower, provided that all conditions have been met. The Company had unfunded commitments to lend of $28.3 million and $49.1 million as of September 30, 2018 and December 31, 2017, respectively. Using the average market bid and ask quotation obtained from a loan pricing service, the Company determined the fair value of the unfunded commitments to be $26.7 million and $49.2 million as of September 30, 2018 and December 31, 2017, respectively.
14. Regulatory Requirements
JMP Securities is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital, as defined, and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. JMP Securities had net capital of $28.3 million and $37.3 million, which were $27.0 million and $35.9 million in excess of the required net capital of $1.3 million and $1.4 million at September 30, 2018 and December 31, 2017, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 0.70 to 1 and 0.58 to 1 at September 30, 2018 and December 31, 2017, respectively.
Since all customer transactions are cleared through another broker-dealer on a fully disclosed basis, JMP Securities is not required to maintain a separate bank account for the exclusive benefit of customers in accordance with Rule 15c3-3 under the Exchange Act.
15. Related Party Transactions
The Company earns base management fees and incentive fees from serving as investment advisor for various entities, including corporations, partnerships limited liability companies, and offshore investment companies. The Company also owns an investment in some of such affiliated entities. As of September 30, 2018 and December 31, 2017, the aggregate fair value of the Company’s investments in the affiliated entities for which the Company serves as the investment advisor was $18.3 million and $24.1 million, respectively, which consisted of investments in hedge and other private funds of $7.5 million and $14.7 million, respectively, and an investment in HCC common stock of $10.8 million and $9.4 million, respectively. Base management fees earned from these affiliated entities were $3.2 million and $3.9 million for the three months ended September 30, 2018 and 2017. Base management fees earned from these affiliated entities were $9.5 million and $12.1 million for the nine months ended September 30, 2018 and 2017. Also, the Company earned incentive fees of $0.5 million and $0.1 million, from these affiliated entities for the three months ended September 30, 2018 and 2017, respectively. The Company earned incentive fees of $6.0 million and $2.0 million, from these affiliated entities for the nine months ended September 30, 2018 and 2017, respectively. The Company had incentive fees receivable from these affiliated entities of zero and $0.4 million for September 30, 2018 and December 31, 2017, respectively.
On September 19, 2017, the Company made a loan to a registered investment adviser of $3.4 million, at an interest rate of 15% per year. In October 2017, the Company sold 30% of the loan, or $1.0 million, to an affiliate. As of September 30, 2018 and December 31, 2017, the Company’s portion of the outstanding loan balance to this entity was $2.4 million. The Company determined the fair value of loans held for investment to be $2.4 million and $2.9 million as of September 30, 2018 and December 31, 2017, respectively, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate.
On January 9, 2018, an affiliate purchased a $0.8 million note from the Company. As of September 30, 2018, the carrying value of note payable was $0.8 million.
On January 9, 2018, the Company sold a 30% subscription into an investment series held by a subsidiary to an affiliate. The transaction resulted in the admission of the affiliate into the limited liability company subsidiary as a non-controlling member. The Company recorded $0.5 million as capital attributable to non-controlling interest upon execution as of September 30, 2018. The Company has allocated income on the investment based on the affiliate's pro-rata share of ownership of the investment series of $16 thousand and $44 thousand for the three and nine months ended September 30, 2018.
16. Guarantees
JMP Securities has agreed to indemnify its clearing broker for losses that the clearing broker may sustain from the accounts of customers introduced by JMP Securities. Should a customer not fulfill its obligation on a transaction, JMP Securities may be required to buy or sell securities at prevailing market prices in the future on behalf of its customer. JMP Securities’ obligation under the indemnification has no maximum amount. All unsettled trades at September 30, 2018 and December 31, 2017 have subsequently settled with no resulting material liability to the Company. For the three and nine months ended September 30, 2018 and 2017, the Company had no material loss due to counterparty failure, and has no obligations outstanding under the indemnification arrangement as of September 30, 2018 or December 31, 2017.
The Company is engaged in various investment banking and brokerage activities whose counterparties primarily include broker-dealers, banks and other financial institutions. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the instrument. It is the Company’s policy to review, as necessary, the credit standing of each counterparty with which it conducts business.
17. Litigation
The Company may be involved from to time in a number of judicial, regulatory, litigation and arbitration matters arising in connection with the business. The outcome of such matters the Company has been and/or currently is involved in cannot be determined at this time, and the results cannot be predicted with certainty. There can be no assurance that these matters will not have a material adverse effect on the results of operations in any future period and a significant outcome could have a material adverse impact on the Company’s financial condition, results of operations and cash flows.
The Company reviews the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in liability and the amount of loss, if any, can be reasonably estimated. Generally, given the inherent difficulty of predicting the outcome of matters the Company is involved in, particularly cases in which claimants seek substantial or indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution. For these matters, no reserve is established until such time, other than for reasonably estimable legal fees and expenses. Management, after consultation with legal counsel, believes that the currently known actions or threats will not result in any material adverse effect on the Company’s financial condition, results of operations or cash flows.
18. Financial Instruments with Off-Balance Sheet Risk, Credit Risk or Market Risk
The majority of the Company’s transactions, and consequently the concentration of its credit exposure, is with its clearing broker. The clearing broker is also a significant source of short-term financing for the Company, which is collateralized by cash and securities owned by the Company and held by the clearing broker. The Company’s securities owned may be pledged by the clearing broker. The receivable from the clearing broker represents amounts receivable in connection with the trading of proprietary positions.
The Company is also exposed to credit risk from other brokers, dealers and other financial institutions with which it transacts business. In the event that counterparties do not fulfill their obligations, the Company may be exposed to credit risk.
The Company’s trading activities include providing securities brokerage services to institutional clients. To facilitate these customer transactions, the Company purchases proprietary securities positions (“long positions”) in equity securities. The Company also enters into transactions to sell securities not yet purchased (“short positions”), which are recorded as liabilities on the Consolidated Statements of Financial Condition. The Company is exposed to market risk on these long and short securities positions as a result of decreases in market value of long positions and increases in market value of short positions. Short positions create a liability to purchase the security in the market at prevailing prices. Such transactions result in off-balance sheet market risk as the Company’s ultimate obligation to satisfy the sale of securities sold, but not yet purchased, may exceed the amount recorded in the Consolidated Statements of Financial Condition. To mitigate the risk of losses, these securities positions are marked to market daily and are monitored by management to assure compliance with limits established by the Company.
In connection with the CLOs, the Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include unfunded commitments to lend and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet of the Company.
Unfunded commitments are agreements to lend to a borrower, provided that all conditions have been met. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each borrower’s creditworthiness on a case by case basis.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a borrower to a third party. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to borrowers. In connection with the CLOs, the Company had standby letters of credit of $1.1 million and $0.2 million as of September 30, 2018 and December 31, 2017, respectively. In addition, the Company had unfunded commitments to lend to a borrower. See Note 13 for description of the Company's unfunded commitments to lend as of September 30, 2018 and December 31, 2017.
19. Business Segments
The Company’s business results are categorized into the following four business segments: Broker-Dealer, Asset Management Fee Income, Investment Income, and Corporate costs. The Broker-Dealer segment includes a broad range of services, such as underwriting and acting as a placement agent for public and private capital markets raising transactions and financial advisory services in M&A, restructuring and other strategic transactions. The Broker-Dealer segment also includes institutional brokerage services and equity research services to our institutional investor clients. The Asset Management Fee Income segment includes the management of a broad range of pooled investment vehicles, including the Company’s hedge funds, private equity funds, hedge funds of funds, and collateralized loan obligations. The Investment income segment includes income from the Company’s principal investments in public and private securities and investment funds managed by HCS, as well as any other net interest and income from investing activities, and interest expense related to the Company's bond issuance. The Corporate Costs segment also includes expenses related to JMP Group LLC, JMP Holding LLC and JMP Group Inc., and is mainly comprised of corporate overhead expenses.
During the third quarter of 2018, the Company changed its internal reporting which resulted in changes to the Company's segment information. The Company has restated the prior periods presented herein to conform to the new presentation.
Management uses operating net income as a key metric when evaluating the performance of JMP Group’s core business strategy and ongoing operations. This measure adjusts the Company’s net income as follows: (i) reverses non-cash share-based compensation expense related to historical equity awards granted in prior periods, (ii) recognizes 100% of the cost of deferred compensation in the period for which such compensation was awarded, instead of recognizing such cost over the vesting period as required under GAAP, (iii) reverses amortization expense related to an intangible asset resulting from the repurchase of a portion of the equity of CLO III; (iv) unrealized gains or losses on commercial real estate investments, adjusted for non-cash expenditures, including depreciation and amortization; (v) reverses net unrealized gains and losses on strategic equity investments and warrants, (vi) excludes general loan loss provisions related to the CLOs, (vii) reverses one-time transaction costs related to the refinancing of the debt; (viii) one time expense associated with redemption of debt underlying the CLOs, the redemption of other debt, and the resulting acceleration of amortization of remaining capitalized issuance costs for each. These charges may otherwise obscure the Company’s operating income and complicate an assessment of the Company’s core business activities. The operating pre-tax net income facilitates a meaningful comparison of the Company’s results in a given period to those in prior and future periods.
The Company’s segment information for the three and nine months ended September 30, 2018 and 2017 was prepared using the following methodology:
| • |
| Revenues and expenses directly associated with each segment are included in determining segment operating income. |
| • |
| Revenues and expenses not directly associated with a specific segment are allocated based on the most relevant measures applicable, including revenues, headcount and other factors. |
| • |
| Each segment’s operating expenses include: a) compensation and benefits expenses that are incurred directly in support of the segments and b) other operating expenses, which include expenses for premises and occupancy, professional fees, travel and entertainment, communications and information services, equipment and indirect support costs (including compensation and other operating expenses related thereto) for administrative services. |
| • |
| Assets directly associated with each segment are allocated to the respective segment. One exception is depreciable assets, which are held at the Corporate segment. The associated depreciation is allocated to the related segment. |
Segment Operating Results
Management believes that the following information provides a reasonable representation of each segment’s contribution to revenues, income and assets:
(In thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||
Broker-Dealer | |||||||||||||||||
Non-interest revenues | $ | 25,777 | $ | 26,848 | $ | 85,121 | $ | 69,944 | |||||||||
Total net revenues after provision for loan losses | $ | 25,777 | $ | 26,848 | $ | 85,121 | $ | 69,944 | |||||||||
Non-interest expenses | 23,202 | 22,215 | 76,528 | 63,234 | |||||||||||||
Segment operating pre-tax net income | $ | 2,575 | $ | 4,633 | $ | 8,593 | $ | 6,710 | |||||||||
Segment assets | $ | 68,352 | $ | 81,880 | $ | 68,352 | $ | 81,880 | |||||||||
Asset Management Fee Income | |||||||||||||||||
Non-interest revenues | $ | 4,878 | $ | 4,798 | $ | 13,439 | $ | 14,965 | |||||||||
Total net revenues after provision for loan losses | $ | 4,878 | $ | 4,798 | $ | 13,439 | $ | 14,965 | |||||||||
Non-interest expenses | 4,794 | 4,948 | 14,570 | 15,346 | |||||||||||||
Segment operating pre-tax net income (loss) | $ | 84 | $ | (150 | ) | $ | (1,131 | ) | $ | (381 | ) | ||||||
Segment assets | $ | 21,033 | $ | 19,424 | $ | 21,033 | $ | 19,424 | |||||||||
Investment Income | |||||||||||||||||
Non-interest revenues | $ | 237 | $ | 1,572 | $ | 5,961 | $ | 6,989 | |||||||||
Net interest income | 3,715 | 1,145 | 8,769 | 2,100 | |||||||||||||
Gain (loss) on repurchase, reissuance or early retirement of debt | - | - | (42 | ) | 210 | ||||||||||||
Provision for loan losses | (470 | ) | (593 | ) | (1,400 | ) | (2,415 | ) | |||||||||
Total net revenues after provision for loan losses | $ | 3,482 | $ | 2,124 | $ | 13,288 | $ | 6,884 | |||||||||
Non-interest expenses | 1,535 | 934 | 9,096 | 5,709 | |||||||||||||
Segment operating pre-tax net income | $ | 1,947 | $ | 1,190 | $ | 4,192 | $ | 1,175 | |||||||||
Segment assets | $ | 1,270,289 | $ | 908,228 | $ | 1,270,289 | $ | 908,228 | |||||||||
Corporate Costs | |||||||||||||||||
Non-interest expenses | 2,688 | 2,772 | 7,519 | 6,915 | |||||||||||||
Segment operating pre-tax net loss | $ | (2,688 | ) | $ | (2,772 | ) | $ | (7,519 | ) | $ | (6,915 | ) | |||||
Segment assets | $ | 258,217 | $ | 329,631 | $ | 258,217 | $ | 329,631 | |||||||||
Eliminations | |||||||||||||||||
Non-interest revenues | $ | (1,205 | ) | $ | (821 | ) | $ | (3,352 | ) | $ | (2,584 | ) | |||||
Total net revenues after provision for loan losses | $ | (1,205 | ) | $ | (821 | ) | $ | (3,352 | ) | $ | (2,584 | ) | |||||
Non-interest expenses | (1,205 | ) | (821 | ) | (3,354 | ) | (2,584 | ) | |||||||||
Segment operating pre-tax net income | $ | - | $ | - | $ | 2 | $ | - | |||||||||
Segment assets | $ | (254,326 | ) | $ | (308,132 | ) | $ | (254,326 | ) | $ | (308,132 | ) | |||||
Consolidating adjustments and reconciling items | |||||||||||||||||
Non-interest revenues | $ | 325 | (a) | $ | (2,089 | ) | (a) | $ | (1,312 | ) | (a) | $ | (5,958 | ) | (a) | ||
Net interest income | 1,148 | (b) | 944 | (b) | 3,137 | (b) | 2,914 | (b) | |||||||||
Loss on repurchase or early retirement of debt | (170 | ) | - | (2,796 | ) | (5,542 | ) | ||||||||||
(Provision) reversal for loan losses | (984 | ) | 225 | (2,799 | ) | (1,073 | ) | ||||||||||
Total net revenues after provision for loan losses | $ | 319 | $ | (920 | ) | $ | (3,770 | ) | $ | (9,659 | ) | ||||||
Non-interest expenses | 599 | (c) | 1,323 | (c) | 2,358 | (c) | 3,897 | (c) | |||||||||
Non-controlling interest expense | 823 | 780 | 138 | 1,712 | |||||||||||||
Segment operating pre-tax net loss | $ | (1,103 | ) | $ | (3,023 | ) | $ | (6,266 | ) | $ | (15,268 | ) | |||||
Segment assets | $ | - | $ | - | $ | - | $ | - | |||||||||
Total Segments | |||||||||||||||||
Non-interest revenues | $ | 30,012 | 30,308 | 99,857 | 83,356 | ||||||||||||
Net interest income | 4,863 | 2,089 | 11,906 | 5,014 | |||||||||||||
Loss on repurchase, reissuance or early retirement of debt | (170 | ) | - | (2,838 | ) | (5,332 | ) | ||||||||||
Provision for loan losses | (1,454 | ) | (368 | ) | (4,199 | ) | (3,488 | ) | |||||||||
Total net revenues after provision for loan losses | $ | 33,251 | $ | 32,029 | $ | 104,726 | $ | 79,550 | |||||||||
Non-interest expenses | 31,613 | 31,371 | 106,717 | 92,517 | |||||||||||||
Non-controlling interest expense | 823 | 780 | 138 | 1,712 | |||||||||||||
Segment operating pre-tax net income (loss) | $ | 815 | $ | (122 | ) | $ | (2,129 | ) | $ | (14,679 | ) | ||||||
Total assets | $ | 1,363,566 | $ | 1,031,031 | $ | 1,363,566 | $ | 1,031,031 |
(a) | Non-interest revenue adjustments are comprised of mark-to-market gains/losses on strategic equity investments and warrants, deferred compensation invested in funds, and unrealized gains or losses on commercial real estate investments, adjusted for non-cash expenditures, included depreciation and amortization. |
(b) | The net interest income adjustment is comprised of costs related to refinancing and early retirement of debt. |
(c) | Non-interest expense adjustments relate to reversals of share-based and deferred compensation and the amortization expense related to an intangible asset. |
(In thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Operating net income | $ | 1,741 | $ | 2,291 | $ | 3,494 | $ | 767 | ||||||||
Addback (subtract) of segment income tax expense (benefit) | 177 | 610 | 643 | (178 | ) | |||||||||||
Total Segments adjusted operating pre-tax net income | $ | 1,918 | $ | 2,901 | $ | 4,137 | $ | 589 | ||||||||
Subtract (Add back) | ||||||||||||||||
Share-based awards and deferred compensation | 76 | 696 | 289 | 1,863 | ||||||||||||
General loan loss provision (reversal) – CLOs, CLO warehouse | 855 | (136 | ) | 2,348 | 697 | |||||||||||
Early debt retirement retirement/reissuance | 170 | - | 1,488 | 5,432 | ||||||||||||
Restructuring costs – CLOs | - | 14 | 54 | 300 | ||||||||||||
Amortization of intangible asset – CLO III | 69 | 69 | 207 | 207 | ||||||||||||
Unrealized loss – real estate-related depreciation and amortization | 260 | 2,571 | 1,864 | 6,472 | ||||||||||||
Unrealized mark-to-market (gain) loss-strategic equity investments | (327 | ) | (191 | ) | 16 | 297 | ||||||||||
Total Consolidation Adjustments and Reconciling Items | 1,103 | 3,023 | 6,266 | 15,268 | ||||||||||||
Consolidated pre-tax net income (loss) attributable to JMP Group LLC | $ | 815 | $ | (122 | ) | $ | (2,129 | ) | $ | (14,679 | ) | |||||
Income tax expense (benefit) | 527 | 1,113 | (146 | ) | (169 | ) | ||||||||||
Consolidated net income (loss) attributable to JMP Group LLC | $ | 288 | $ | (1,235 | ) | $ | (1,983 | ) | $ | (14,510 | ) |
20. Nonconsolidated Variable Interest Entities
VIEs for which the Company is not the primary beneficiary consists of private equity funds and other investments in which the Company has an equity ownership interest. The Company's maximum exposure to loss from these VIEs consists of equity investments and receivables as follows:
(In thousands) | As of | |||||||
September 30, 2018 | December 31, 2017 | |||||||
Investments | $ | 5,405 | $ | 8,226 | ||||
Receivables | 28 | 262 | ||||||
Total | $ | 5,433 | $ | 8,488 |
21. Consolidating Financial Statements
JMP Group Inc., a wholly-owned subsidiary of JMP Group LLC, is the primary obligor of the Company’s Senior Notes (Note 6). In conjunction with the Reorganization Transaction, on January 1, 2015, JMP Group LLC and JMP Investment Holdings LLC became guarantors of JMP Group Inc. The guarantee is full and unconditional. One of the non-guarantor subsidiaries, JMP Securities, is subject to certain regulations, which require the maintenance of minimum net capital. This requirement may limit the issuer’s access to this subsidiary’s assets.
The following consolidating financial statements present the financial condition, results of operations, and cash flows of JMP Group LLC and JMP Investment Holdings LLC (collectively, "Parent Companies and Guarantors"), JMP Group Inc. ("Subsidiary Issuer"), and all other consolidated subsidiaries (collectively, "Non-Guarantor Subsidiaries") in accordance with the disclosure requirements under SEC Regulation S-X Rule 3-10.
As of September 30, 2018 | ||||||||||||||||||||
Parent Companies and Guarantors | Subsidiary Issuer | Non-Guarantor Subsidiaries | Eliminations | Consolidated JMP Group LLC | ||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 6,663 | $ | 5,819 | $ | 60,661 | $ | - | $ | 73,143 | ||||||||||
Restricted cash and deposits | - | 1,471 | 47,115 | - | 48,586 | |||||||||||||||
Investment banking fees receivable, net of allowance for doubtful accounts | - | - | 10,725 | - | 10,725 | |||||||||||||||
Marketable securities owned, at fair value | 10,864 | - | 9,404 | (74 | ) | 20,194 | ||||||||||||||
Other investments | 3,159 | 2,142 | 10,492 | - | 15,793 | |||||||||||||||
Loans held for investment, net of allowance for loan losses | 3,175 | - | 2,431 | - | 5,606 | |||||||||||||||
Loans collateralizing asset-backed securities issued, net of allowance for loan losses | - | - | 1,164,404 | - | 1,164,404 | |||||||||||||||
Interest receivable | 208 | 2 | 3,074 | (238 | ) | 3,046 | ||||||||||||||
Fixed assets, net | - | - | 2,363 | - | 2,363 | |||||||||||||||
Other assets | (15,998 | ) | 125,625 | 56,012 | (145,933 | ) | 19,706 | |||||||||||||
Investment in subsidiaries | 318,508 | 76,325 | - | (394,833 | ) | - | ||||||||||||||
Total assets | $ | 326,579 | $ | 211,384 | $ | 1,366,681 | $ | (541,078 | ) | $ | 1,363,566 | |||||||||
Liabilities and Equity | ||||||||||||||||||||
Liabilities: | ||||||||||||||||||||
Marketable securities sold, but not yet purchased, at fair value | $ | - | $ | - | $ | 5,604 | $ | - | $ | 5,604 | ||||||||||
Accrued compensation | 1,030 | 2,257 | 30,084 | - | 33,371 | |||||||||||||||
Asset-backed securities issued | - | - | 1,112,049 | - | 1,112,049 | |||||||||||||||
Interest payable | - | 1,071 | 9,538 | (238 | ) | 10,371 | ||||||||||||||
Notes payable | 127,603 | - | 17,763 | (144,537 | ) | 829 | ||||||||||||||
Bond payable | - | 83,470 | - | (75 | ) | 83,395 | ||||||||||||||
Other liabilities | 2,759 | 5,530 | 10,653 | (1,289 | ) | 17,653 | ||||||||||||||
Total liabilities | $ | 131,392 | $ | 92,328 | $ | 1,185,691 | $ | (146,139 | ) | $ | 1,263,272 | |||||||||
Total shareholders' (deficit) equity | 181,459 | 119,056 | 181,370 | (395,151 | ) | 86,734 | ||||||||||||||
Nonredeemable Non-controlling Interest | $ | 13,728 | $ | - | $ | (380 | ) | $ | 212 | $ | 13,560 | |||||||||
Total equity | $ | 195,187 | $ | 119,056 | $ | 180,990 | $ | (394,939 | ) | $ | 100,294 | |||||||||
Total liabilities and equity | $ | 326,579 | $ | 211,384 | $ | 1,366,681 | $ | (541,078 | ) | $ | 1,363,566 |
As of December 31, 2017 | ||||||||||||||||||||
Parent Companies and Guarantors | Subsidiary Issuer | Non-Guarantor Subsidiaries | Eliminations | Consolidated JMP Group LLC | ||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 13,632 | $ | 4,819 | $ | 67,143 | $ | - | $ | 85,594 | ||||||||||
Restricted cash and deposits | - | 1,471 | 50,256 | - | 51,727 | |||||||||||||||
Investment banking fees receivable, net of allowance for doubtful accounts | - | - | 9,567 | - | 9,567 | |||||||||||||||
Marketable securities owned, at fair value | 9,464 | - | 11,456 | (95 | ) | 20,825 | ||||||||||||||
Other investments | 11,543 | 3,101 | 13,340 | - | 27,984 | |||||||||||||||
Loans held for investment, net of allowance for loan losses | 4,233 | - | 79,715 | - | 83,948 | |||||||||||||||
Loans collateralizing asset-backed securities issued, net of allowance for loan losses | - | - | 765,583 | - | 765,583 | |||||||||||||||
Interest receivable | 165 | 4 | 2,090 | - | 2,259 | |||||||||||||||
Fixed assets, net | - | - | 2,322 | - | 2,322 | |||||||||||||||
Other assets | (13,390 | ) | 132,931 | 64,490 | (157,214 | ) | 26,817 | |||||||||||||
Investment in subsidiaries | 354,219 | 70,775 | - | (424,994 | ) | - | ||||||||||||||
Total assets | $ | 379,866 | $ | 213,101 | $ | 1,065,962 | $ | (582,303 | ) | $ | 1,076,626 | |||||||||
Liabilities and Equity | ||||||||||||||||||||
Liabilities: | ||||||||||||||||||||
Marketable securities sold, but not yet purchased, at fair value | $ | - | $ | - | $ | 7,919 | $ | - | $ | 7,919 | ||||||||||
Accrued compensation | - | 150 | 42,981 | - | 43,131 | |||||||||||||||
Asset-backed securities issued | - | - | 738,248 | - | 738,248 | |||||||||||||||
Interest payable | - | 1,109 | 5,403 | - | 6,512 | |||||||||||||||
CLO V warehouse credit facility | - | - | 61,250 | - | 61,250 | |||||||||||||||
Bond payable | - | 93,198 | - | (95 | ) | 93,103 | ||||||||||||||
Other liabilities | 138,796 | 5,710 | 28,885 | (157,107 | ) | 16,284 | ||||||||||||||
Total liabilities | $ | 138,796 | $ | 100,167 | $ | 884,686 | $ | (157,202 | ) | $ | 966,447 | |||||||||
Total shareholders' (deficit) equity | 226,401 | 112,934 | 182,313 | (425,313 | ) | 96,335 | ||||||||||||||
Nonredeemable Non-controlling Interest | $ | 14,669 | $ | - | $ | (1,037 | ) | $ | 212 | $ | 13,844 | |||||||||
Total equity | $ | 241,070 | $ | 112,934 | $ | 181,276 | $ | (425,101 | ) | $ | 110,179 | |||||||||
Total liabilities and equity | $ | 379,866 | $ | 213,101 | $ | 1,065,962 | $ | (582,303 | ) | $ | 1,076,626 |
For the Three Months Ended September 30, 2018 | ||||||||||||||||||||
Parent Companies and Guarantors | Subsidiary Issuer | Non-Guarantor Subsidiaries | Eliminations | Consolidated JMP Group LLC | ||||||||||||||||
Revenues | ||||||||||||||||||||
Investment banking | $ | - | $ | - | $ | 21,095 | $ | - | $ | 21,095 | ||||||||||
Brokerage | - | - | 4,676 | - | 4,676 | |||||||||||||||
Asset management fees | - | - | 3,742 | (40 | ) | 3,702 | ||||||||||||||
Principal transactions | 620 | (390 | ) | 239 | - | 469 | ||||||||||||||
Loss on sale, payoff and mark-to-market of loans | - | - | (556 | ) | - | (556 | ) | |||||||||||||
Net dividend income | 284 | 13 | 23 | - | 320 | |||||||||||||||
Other income | - | - | 306 | - | 306 | |||||||||||||||
Equity earnings of subsidiaries | 5,490 | 1,635 | - | (7,125 | ) | - | ||||||||||||||
Non-interest revenues | 6,394 | 1,258 | 29,525 | (7,165 | ) | 30,012 | ||||||||||||||
Interest income | 639 | 1,084 | 19,122 | (2,193 | ) | 18,652 | ||||||||||||||
Interest expense | (1,080 | ) | (2,144 | ) | (12,758 | ) | 2,193 | (13,789 | ) | |||||||||||
Net interest income | (441 | ) | (1,060 | ) | 6,364 | - | 4,863 | |||||||||||||
Loss on repurchase, reissuance or early retirement of debt | - | (170 | ) | - | - | (170 | ) | |||||||||||||
Provision for loan losses | (149 | ) | - | (1,305 | ) | - | (1,454 | ) | ||||||||||||
Total net revenues after provision for loan losses | 5,804 | 28 | 34,584 | (7,165 | ) | 33,251 | ||||||||||||||
Non-interest expenses | ||||||||||||||||||||
Compensation and benefits | 745 | 1,086 | 20,840 | - | 22,671 | |||||||||||||||
Administration | 151 | 128 | 2,063 | (40 | ) | 2,302 | ||||||||||||||
Brokerage, clearing and exchange fees | - | - | 808 | - | 808 | |||||||||||||||
Travel and business development | 11 | 12 | 1,057 | - | 1,080 | |||||||||||||||
Communications and technology | 1 | 1 | 1,038 | - | 1,040 | |||||||||||||||
Managed deal expense | - | - | 614 | - | 614 | |||||||||||||||
Occupancy | - | - | 1,172 | - | 1,172 | |||||||||||||||
Professional fees | 586 | 169 | 517 | - | 1,272 | |||||||||||||||
Depreciation | - | - | 285 | - | 285 | |||||||||||||||
Other | 69 | - | 300 | - | 369 | |||||||||||||||
Total non-interest expenses | 1,563 | 1,396 | 28,694 | (40 | ) | 31,613 | ||||||||||||||
Net income (loss) before income tax expense | 4,241 | (1,368 | ) | 5,890 | (7,125 | ) | 1,638 | |||||||||||||
Income tax expense (benefit) | - | (265 | ) | 792 | - | 527 | ||||||||||||||
Net income (loss) | 4,241 | (1,103 | ) | 5,098 | (7,125 | ) | 1,111 | |||||||||||||
Less: Net income attributable to nonredeemable non-controlling interest | 707 | - | 116 | - | 823 | |||||||||||||||
Net income (loss) attributable to JMP Group LLC | $ | 3,534 | $ | (1,103 | ) | $ | 4,982 | $ | (7,125 | ) | $ | 288 |
For the Three Months Ended September 30, 2017 | ||||||||||||||||||||
Parent Companies and Guarantors | Subsidiary Issuer | Non-Guarantor Subsidiaries | Eliminations | Consolidated JMP Group LLC | ||||||||||||||||
Revenues | ||||||||||||||||||||
Investment banking | $ | - | $ | - | $ | 22,085 | $ | - | $ | 22,085 | ||||||||||
Brokerage | - | - | 4,763 | - | 4,763 | |||||||||||||||
Asset management fees | - | - | 4,054 | (40 | ) | 4,014 | ||||||||||||||
Principal transactions | - | 85 | (1,477 | ) | - | (1,392 | ) | |||||||||||||
Gain on sale, payoff and mark-to-market of loans | - | - | 278 | - | 278 | |||||||||||||||
Net dividend income | - | 2 | 276 | - | 278 | |||||||||||||||
Other income | - | - | 282 | - | 282 | |||||||||||||||
Equity earnings of subsidiaries | 4,220 | 2,077 | - | (6,297 | ) | - | ||||||||||||||
Non-interest revenues | 4,220 | 2,164 | 30,261 | (6,337 | ) | 30,308 | ||||||||||||||
Interest income | 367 | 1,139 | 11,349 | (1,955 | ) | 10,900 | ||||||||||||||
Interest expense | (1,146 | ) | (2,274 | ) | (7,410 | ) | 2,019 | (8,811 | ) | |||||||||||
Net interest income | (779 | ) | (1,135 | ) | 3,939 | 64 | 2,089 | |||||||||||||
Provision for loan losses | - | - | (368 | ) | - | (368 | ) | |||||||||||||
Total net revenues after provision for loan losses | 3,441 | 1,029 | 33,832 | (6,273 | ) | 32,029 | ||||||||||||||
Non-interest expenses | ||||||||||||||||||||
Compensation and benefits | 498 | 1,455 | 22,610 | - | 24,563 | |||||||||||||||
Administration | 145 | 102 | 1,252 | (40 | ) | 1,459 | ||||||||||||||
Brokerage, clearing and exchange fees | - | - | 740 | - | 740 | |||||||||||||||
Travel and business development | 15 | - | 694 | - | 709 | |||||||||||||||
Communications and technology | - | 3 | 1,043 | - | 1,046 | |||||||||||||||
Occupancy | - | - | 1,117 | - | 1,117 | |||||||||||||||
Professional fees | 536 | 55 | 503 | - | 1,094 | |||||||||||||||
Depreciation | - | - | 277 | - | 277 | |||||||||||||||
Other | - | 36 | 330 | - | 366 | |||||||||||||||
Total non-interest expenses | 1,194 | 1,651 | 28,566 | (40 | ) | 31,371 | ||||||||||||||
Net income (loss) before income tax expense | 2,247 | (622 | ) | 5,266 | (6,233 | ) | 658 | |||||||||||||
Income tax expense (benefit) | - | (493 | ) | 1,606 | - | 1,113 | ||||||||||||||
Net income (loss) | 2,247 | (129 | ) | 3,660 | (6,233 | ) | (455 | ) | ||||||||||||
Less: Net income attributable to nonredeemable non-controlling interest | - | - | 780 | - | 780 | |||||||||||||||
Net income (loss) attributable to JMP Group LLC | $ | 2,247 | $ | (129 | ) | $ | 2,880 | $ | (6,233 | ) | $ | (1,235 | ) |
For the Nine Months Ended September 30, 2018 | ||||||||||||||||||||
Parent Companies and Guarantors | Subsidiary Issuer | Non-Guarantor Subsidiaries | Eliminations | Consolidated JMP Group LLC | ||||||||||||||||
Revenues | ||||||||||||||||||||
Investment banking | $ | - | $ | - | $ | 70,319 | $ | - | $ | 70,319 | ||||||||||
Brokerage | - | - | 14,787 | - | 14,787 | |||||||||||||||
Asset management fees | - | - | 15,766 | (261 | ) | 15,505 | ||||||||||||||
Principal transactions | (2,026 | ) | (533 | ) | 1,092 | - | (1,467 | ) | ||||||||||||
Loss on sale, payoff and mark-to-market of loans | (15 | ) | - | (873 | ) | - | (888 | ) | ||||||||||||
Net dividend income | 836 | 27 | 72 | - | 935 | |||||||||||||||
Other income | - | - | 666 | - | 666 | |||||||||||||||
Equity earnings of subsidiaries | 12,586 | 4,426 | - | (17,012 | ) | - | ||||||||||||||
Non-interest revenues | 11,381 | 3,920 | 101,829 | (17,273 | ) | 99,857 | ||||||||||||||
Interest income | 1,972 | 3,366 | 48,417 | (6,724 | ) | 47,031 | ||||||||||||||
Interest expense | (3,382 | ) | (6,735 | ) | (31,731 | ) | 6,723 | (35,125 | ) | |||||||||||
Net interest income | (1,410 | ) | (3,369 | ) | 16,686 | (1 | ) | 11,906 | ||||||||||||
Loss on repurchase, reissuance or early retirement of debt | (42 | ) | (170 | ) | (2,626 | ) | - | (2,838 | ) | |||||||||||
Provision for loan losses | (134 | ) | - | (4,065 | ) | - | (4,199 | ) | ||||||||||||
Total net revenues after provision for loan losses | 9,795 | 381 | 111,824 | (17,274 | ) | 104,726 | ||||||||||||||
Non-interest expenses | ||||||||||||||||||||
Compensation and benefits | 1,826 | 3,161 | 71,083 | - | 76,070 | |||||||||||||||
Administration | 477 | 367 | 6,663 | (261 | ) | 7,246 | ||||||||||||||
Brokerage, clearing and exchange fees | - | - | 2,373 | - | 2,373 | |||||||||||||||
Travel and business development | 46 | 31 | 3,159 | - | 3,236 | |||||||||||||||
Communications and technology | 2 | 6 | 3,141 | - | 3,149 | |||||||||||||||
Managed deal expense | - | - | 4,528 | - | 4,528 | |||||||||||||||
Occupancy | - | - | 3,432 | - | 3,432 | |||||||||||||||
Professional fees | 1,847 | 321 | 2,147 | - | 4,315 | |||||||||||||||
Depreciation | - | - | 836 | - | 836 | |||||||||||||||
Other | 208 | - | 1,324 | - | 1,532 | |||||||||||||||
Total non-interest expenses | 4,406 | 3,886 | 98,686 | (261 | ) | 106,717 | ||||||||||||||
Net income (loss) before income tax expense | 5,389 | (3,505 | ) | 13,138 | (17,013 | ) | (1,991 | ) | ||||||||||||
Income tax expense (benefit) | - | (2,520 | ) | 2,374 | - | (146 | ) | |||||||||||||
Net income (loss) | 5,389 | (985 | ) | 10,764 | (17,013 | ) | (1,845 | ) | ||||||||||||
Less: Net income (loss) attributable to nonredeemable non-controlling interest | 477 | - | (339 | ) | - | 138 | ||||||||||||||
Net income (loss) attributable to JMP Group LLC | $ | 4,912 | $ | (985 | ) | $ | 11,103 | $ | (17,013 | ) | $ | (1,983 | ) |
For the Nine Months Ended September 30, 2017 | ||||||||||||||||||||
Parent Companies and Guarantors | Subsidiary Issuer | Non-Guarantor Subsidiaries | Eliminations | Consolidated JMP Group LLC | ||||||||||||||||
Revenues | ||||||||||||||||||||
Investment banking | $ | - | $ | - | $ | 54,813 | $ | - | $ | 54,813 | ||||||||||
Brokerage | - | - | 15,127 | - | 15,127 | |||||||||||||||
Asset management fees | - | - | 14,197 | (119 | ) | 14,078 | ||||||||||||||
Principal transactions | (72 | ) | (394 | ) | (3,142 | ) | - | (3,608 | ) | |||||||||||
Gain on sale, payoff and mark-to-market of loans | - | - | 1,208 | - | 1,208 | |||||||||||||||
Net dividend income | 512 | 3 | 302 | - | 817 | |||||||||||||||
Other income | - | - | 921 | - | 921 | |||||||||||||||
Equity earnings of subsidiaries | (8,861 | ) | 2,805 | - | 6,056 | - | ||||||||||||||
Non-interest revenues | (8,421 | ) | 2,414 | 83,426 | 5,937 | 83,356 | ||||||||||||||
Interest income | 1,314 | 3,417 | 30,964 | (6,032 | ) | 29,663 | ||||||||||||||
Interest expense | (3,424 | ) | (6,820 | ) | (20,501 | ) | 6,096 | (24,649 | ) | |||||||||||
Net interest income | (2,110 | ) | (3,403 | ) | 10,463 | 64 | 5,014 | |||||||||||||
Gain (loss) on repurchase, reissuance or early retirement of debt | 210 | - | (5,542 | ) | - | (5,332 | ) | |||||||||||||
Provision for loan losses | (20 | ) | - | (3,468 | ) | - | (3,488 | ) | ||||||||||||
Total net revenues after provision for loan losses | (10,341 | ) | (989 | ) | 84,879 | 6,001 | 79,550 | |||||||||||||
Non-interest expenses | ||||||||||||||||||||
Compensation and benefits | 2,359 | 2,850 | 63,804 | - | 69,013 | |||||||||||||||
Administration | 512 | 335 | 5,271 | (119 | ) | 5,999 | ||||||||||||||
Brokerage, clearing and exchange fees | - | - | 2,288 | - | 2,288 | |||||||||||||||
Travel and business development | 103 | - | 2,632 | - | 2,735 | |||||||||||||||
Communications and technology | 2 | 8 | 3,140 | - | 3,150 | |||||||||||||||
Occupancy | - | - | 3,339 | - | 3,339 | |||||||||||||||
Professional fees | 1,670 | 209 | 1,230 | - | 3,109 | |||||||||||||||
Depreciation | - | - | 891 | - | 891 | |||||||||||||||
Other | 138 | 53 | 1,802 | - | 1,993 | |||||||||||||||
Total non-interest expenses | 4,784 | 3,455 | 84,397 | (119 | ) | 92,517 | ||||||||||||||
Net income (loss) before income tax expense | (15,125 | ) | (4,444 | ) | 482 | 6,120 | (12,967 | ) | ||||||||||||
Income tax expense (benefit) | - | (2,583 | ) | 2,414 | - | (169 | ) | |||||||||||||
Net income (loss) | (15,125 | ) | (1,861 | ) | (1,932 | ) | 6,120 | (12,798 | ) | |||||||||||
Less: Net income attributable to nonredeemable non-controlling interest | 693 | - | 1,019 | - | 1,712 | |||||||||||||||
Net income (loss) attributable to JMP Group LLC | $ | (15,818 | ) | $ | (1,861 | ) | $ | (2,951 | ) | $ | 6,120 | $ | (14,510 | ) |
For the Nine Months Ended September 30, 2018 | ||||||||||||||||||||
Parent Companies and Guarantors | Subsidiary | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 11,080 | $ | 9,608 | $ | 14,341 | $ | (27,074 | ) | $ | 7,955 | |||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchases of fixed assets | - | - | (877 | ) | - | (877 | ) | |||||||||||||
Purchases of other investments | (5,460 | ) | (430 | ) | (88 | ) | 4,453 | (1,525 | ) | |||||||||||
Sales of distributions from other investments | 13,363 | 448 | 4,549 | (4,411 | ) | 13,949 | ||||||||||||||
Funding of loans collateralizing asset-backed securities issued | - | - | (307,808 | ) | - | (307,808 | ) | |||||||||||||
Funding of loans held for investment | (664 | ) | - | (311,425 | ) | - | (312,089 | ) | ||||||||||||
Sale, payoff and principal receipts of loans collateralizing asset-backed securities issued | (15 | ) | - | 268,254 | - | 268,239 | ||||||||||||||
Sale, payoff and principal receipts on loans held for investment | 1,614 | - | 25,112 | - | 26,726 | |||||||||||||||
Investment in subsidiary | 35,711 | (5,550 | ) | - | (30,161 | ) | - | |||||||||||||
Net cash provided by (used in) investing activities | $ | 44,549 | $ | (5,532 | ) | $ | (322,283 | ) | $ | (30,119 | ) | $ | (313,385 | ) | ||||||
Cash flows from financing activities: | ||||||||||||||||||||
Repayment on bonds payable | - | (9,980 | ) | - | - | (9,980 | ) | |||||||||||||
Proceeds from issuance of Repurchase Agreement | 3,878 | - | - | - | 3,878 | |||||||||||||||
Proceeds from drawdowns on CLO V warehouse facility | - | - | 263,750 | - | 263,750 | |||||||||||||||
Repayments on CLO V warehouse facility | - | - | (325,000 | ) | - | (325,000 | ) | |||||||||||||
Proceeds from sale of note payable to affiliate | - | - | 829 | - | 829 | |||||||||||||||
Payments of debt issuance costs | - | (203 | ) | (1,715 | ) | 21 | (1,897 | ) | ||||||||||||
Repayment of asset-backed securities issued | (4,453 | ) | - | (327,647 | ) | - | (332,100 | ) | ||||||||||||
Repayment of Repurchase Agreement | (10,000 | ) | - | - | 10,000 | - | ||||||||||||||
Repayment of notes payable | (3,878 | ) | - | - | - | (3,878 | ) | |||||||||||||
Proceeds from issuance of asset-backed securities issued | - | - | 699,107 | - | 699,107 | |||||||||||||||
Reissuance of asset-back securities | 4,411 | - | 42 | - | 4,453 | |||||||||||||||
Distributions and distribution equivalents paid on common shares and RSUs | (5,906 | ) | - | - | - | (5,906 | ) | |||||||||||||
Capital contributions of nonredeemable non-controlling interest holders | - | - | 449 | - | 449 | |||||||||||||||
Purchases of common shares for treasury | (2,309 | ) | - | - | - | (2,309 | ) | |||||||||||||
Purchase of subsidiary shares from non-controlling interest holders | (656 | ) | - | 656 | - | - | ||||||||||||||
Distributions to non-controlling interest shareholders | (1,418 | ) | - | (109 | ) | - | (1,527 | ) | ||||||||||||
Employee taxes paid on shares withheld for tax-withholding purposes | (31 | ) | - | - | - | (31 | ) | |||||||||||||
Capital contributions of parent | (42,236 | ) | 7,107 | (12,043 | ) | 47,172 | - | |||||||||||||
Net cash provided by (used in) financing activities | $ | (62,598 | ) | $ | (3,076 | ) | $ | 298,319 | $ | 57,193 | $ | 289,838 | ||||||||
Net increase (decrease) in cash and cash equivalents | (6,969 | ) | 1,000 | (9,623 | ) | - | (15,592 | ) | ||||||||||||
Cash, cash equivalents and restricted cash, beginning of period | 13,632 | 6,290 | 117,399 | - | 137,321 | |||||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 6,663 | $ | 7,290 | $ | 107,776 | $ | - | $ | 121,729 |
For the Nine Months Ended September 30, 2017 | ||||||||||||||||||||
Parent Companies and Guarantors | Subsidiary | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (7,627 | ) | $ | (2,282 | ) | $ | 6,331 | $ | (9,082 | ) | $ | (12,660 | ) | ||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchases of fixed assets | - | - | (204 | ) | - | (204 | ) | |||||||||||||
Purchases of other investments | (1,190 | ) | (844 | ) | - | - | (2,034 | ) | ||||||||||||
Sales of distributions from other investments | 812 | 613 | (4,327 | ) | 15,202 | 12,300 | ||||||||||||||
Funding of loans collateralizing asset-backed securities issued | - | - | (614,431 | ) | - | (614,431 | ) | |||||||||||||
Funding of loans held for sale | - | - | (2,752 | ) | - | (2,752 | ) | |||||||||||||
Funding of loans held for investment | (6,152 | ) | - | (13,029 | ) | 5,667 | (13,514 | ) | ||||||||||||
Sale, payoff, and principal receipts of loans held for sale | - | - | 35,735 | - | 35,735 | |||||||||||||||
Sale, payoff and principal receipts of loans collateralizing asset-backed securities issued | - | - | 512,216 | (5,667 | ) | 506,549 | ||||||||||||||
Sale, payoff and principal payments on loans held for investment | 610 | - | 365 | - | 975 | |||||||||||||||
Net changes in cash collateral posted for derivative transactions | - | - | 25,000 | - | 25,000 | |||||||||||||||
Investment in subsidiary | 126,673 | 828 | - | (127,501 | ) | - | ||||||||||||||
Net cash provided by (used in) investing activities | $ | 120,753 | $ | 597 | $ | (61,427 | ) | $ | (112,299 | ) | $ | (52,376 | ) | |||||||
Cash flows from financing activities: | ||||||||||||||||||||
Proceeds from drawdowns on CLO V warehouse facility | - | - | 7,000 | - | 7,000 | |||||||||||||||
Repayment of asset-backed securities issued | - | - | (503,617 | ) | - | (503,617 | ) | |||||||||||||
Proceeds from issuance of asset-backed securities issued | - | - | 408,394 | - | 408,394 | |||||||||||||||
Distributions and distribution equivalents paid on common shares and RSUs | (5,838 | ) | - | - | - | (5,838 | ) | |||||||||||||
Capital contributions of nonredeemable non-controlling interest holders | - | - | 92 | - | 92 | |||||||||||||||
Proceeds from exercises of stock options | 1,149 | - | - | - | 1,149 | |||||||||||||||
Purchases of common shares for treasury | (1,660 | ) | - | - | - | (1,660 | ) | |||||||||||||
Distributions to non-controlling interest shareholders | (2,704 | ) | - | (1,164 | ) | - | (3,868 | ) | ||||||||||||
Employee taxes paid on shares withheld for tax-withholding purposes | (307 | ) | - | - | - | (307 | ) | |||||||||||||
Capital contributions of parent | (81,189 | ) | 1,681 | (41,873 | ) | 121,381 | - | |||||||||||||
Net cash provided by (used in) financing activities | $ | (90,549 | ) | $ | 1,681 | $ | (131,168 | ) | $ | 121,381 | $ | (98,655 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | 22,577 | (4 | ) | (186,264 | ) | - | (163,691 | ) | ||||||||||||
Cash, cash equivalents and restricted cash, beginning of period | 5,315 | 3,234 | 304,599 | - | 313,148 | |||||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 27,892 | $ | 3,230 | $ | 118,335 | $ | - | $ | 149,457 |
22. Subsequent Events
On October 11, 2018, the Company established, through its affiliate JMP Credit Advisors Long-Term Warehouse Ltd., a Cayman Islands vehicle (the “Borrower”), and the Borrower's subsidiary, JMP Credit Advisors CLO VI Warehouse Ltd., a Cayman Islands vehicle (the "CLO Subsidiary" and, together with the Borrower, the Borrower Entities"), a $100 million revolving credit facility (the “Facility”) with BNP Paribas to finance the acquisition of a portfolio of broadly syndicated corporate loans. JMPCA will act as collateral manager with duties including the selection of assets to be acquired by the Borrower Entities. All borrowings under the Facility will be subject to the satisfaction of certain customary covenants, the accuracy of certain representations and warranties, concentration limitations and other restrictions. The Facility will be primarily secured by a portfolio of broadly syndicated corporate loans that are eligible for acquisition by the Borrower Entities. The Borrower Entities are collectively subject to mandatory prepayments under the Facility upon the occurrence of certain events. In addition, the Borrower may make optional prepayments under the Facility. The Facility is structured to have a revolving period of up to three years ending October 11, 2021, and a twelve-month amortization period. The Facility has a market standard advance rate, and any outstanding balances bear interest at standard market interest rates based on LIBOR.
On October 18, 2018, the Company’s board of directors declared cash distributions of $0.03 per share for the months of October, November, and December. The October distribution is payable on November 15, 2018, to shareholders of record as of October 31, 2018. The November distribution is payable on December 14, 2018, to shareholders of record as of November 30, 2018. The December distribution is payable on January 15, 2019, to shareholders of record as of December 31, 2018.
On October 31, 2018, the Company amended the San Francisco office lease agreement to extend the term of the lease through June 30, 2024. The base rent begins at $226,448 per month from July 1, 2019 for 37,808 square feet of commercial office space.
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the unaudited consolidated financial statements and the related notes included elsewhere in this report. For additional context with which to understand our financial condition and results of operations, see the MD&A for the fiscal year ended December 31, 2017 contained in our Form 10-K (the “Annual Report”), as well as the consolidated financial statements and notes contained therein.
Cautionary Statement Regarding Forward-Looking Statements
This MD&A and other sections of this Form 10-Q (the “Quarterly Report”) contain forward looking statements. We make forward-looking statements, as defined by the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and in some cases you can identify these statements by forward-looking words such as “if,” “shall,” “may,” “might,” “will likely result,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “intend,” “goal,” “objective,” “predict,” “potential” or “continue,” the negative of these terms, and other comparable terminology. These forward-looking statements, which are based on various underlying assumptions and expectations and are subject to risks, uncertainties and other unknown factors, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events that we believe to be reasonable. There are or may be important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the historical or future results, level of activity, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, those discussed under the caption “Risk Factors” in our Annual Report. In preparing this MD&A, we presume that readers have access to and have read the MD&A in our Annual Report, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K. We undertake no duty to update any of these forward-looking statements after the date of filing of this Quarterly Report to conform such forward-looking statements to actual results or revised expectations, except as otherwise required by law.
Impact of Adopting Revenue Recognition Guidance
On January 1, 2018, we adopted ASU 201-09, Revenue from Contracts with Customers (Topic 606), which provides a more robust framework for addressing revenue issues, and clarifies the implementation guidance on principal versus agent considerations. The Company adopted this standard using a modified retrospective approach and the new revenue standard was applied prospectively in the Company's financial statements. The Company reported financial information for historical comparable periods that was not revised and will continue to be reporting under the accounting standards in effect during those historical periods. The new standard does not apply to revenue from financial instruments, including loans and securities, and as a result, it did not have an impact on revenues closely associated with financial instruments, including principal transactions, interest income, and interest expenses. The new standard primarily impacts the presentation of out investment banking revenues, specifically underwriting revenues, strategic advisory revenues, and private placement fees. Certain investment banking revenues have historically been presented net of related expenses. Under the new standard, revenues and expenses related to investment banking transactions are presented gross in the Consolidated Statements of Operations.
Refer to Note 3, Recent Accounting Pronouncements, for additional information.
Overview
JMP Group LLC, together with its subsidiaries (collectively, the “Company”, “we”, or “us”), is a diversified capital markets firm headquartered in San Francisco, California. We have a diversified business model with a focus on small and middle-market companies and provide:
| • |
| investment banking services, including corporate finance, mergers and acquisitions and other strategic advisory services, to corporate clients; |
| • |
| sales and trading and related securities brokerage services to institutional investors; |
| • |
| equity research coverage of four target industries; |
| • |
| asset management products and services to institutional investors, high net-worth individuals and for our own account; and |
| • |
| management of collateralized loan obligations and a specialty finance company. |
Components of Revenues
We derive revenues primarily from: fees from our investment banking business, net commissions from our sales and trading business, management fees and incentive fees from our asset management business, and interest income earned on collateralized loan obligations we manage. We also generate revenues from principal transactions, interest, dividends and other income.
Investment Banking
We earn investment banking revenues from underwriting securities offerings, arranging private capital markets transactions and providing advisory services in mergers and acquisitions and other strategic transactions.
Underwriting Revenues
We earn revenues from securities offerings in which we act as an underwriter, such as initial public offerings and follow-on equity offerings. Underwriting revenues include management fees, underwriting fees, selling concessions, and realized and unrealized net gains and losses on equity positions held in inventory for a period of time to facilitate the completion of certain underwritten offerings. We record underwriting revenues, gross of related syndicate expenses, at the time an underwritten transaction is completed. In syndicated transactions, management estimates our share of transaction-related expenses incurred by the syndicate, and we recognize revenues gross of such expense. On final settlement by the lead manager, typically 90 days from the trade date of the transaction, we adjust these amounts to reflect the actual transaction-related expenses and our resulting underwriting fee. We receive a higher proportion of total fees in underwritten transactions in which we act as a lead manager.
Strategic Advisory Revenues
Our strategic advisory revenues primarily consist of success fees received upon the closing of mergers and acquisitions but also include retainer fees received when we are first engaged to provide advisory services. We also earn fees for related advisory work and other services, such as fairness opinions and valuation analyses. These revenues may be earned for providing services to either the buyer or the seller involved in a transaction. We record strategic advisory revenues when the transactions or the services to be performed (or, if applicable, separate components thereof) are substantially completed, the fees are determinable and collection is reasonably assured.
Private Capital Markets and Other Revenues
We earn fees for private capital markets and other services in connection with transactions that are not underwritten, such as private placements of equity securities, private investments in public equity (“PIPE”) transactions and Rule 144A offerings. We record private placement revenues on the closing date of these transactions.
Since our investment banking revenues are generally recognized at the time of completion of a transaction or the services to be performed, these revenues typically vary between periods and may be affected considerably by the timing of the closing of significant transactions.
Brokerage Revenues
Our brokerage revenues include trading commissions paid by customers for purchases or sales of exchange-listed and over-the-counter (“OTC”) equity securities. Commissions are recognized on a trade date basis. Brokerage revenues also include net trading gains and losses that result from market-making activities and from our commitment of capital to facilitate customer transactions. Our brokerage revenues may vary between periods, in part depending on commission rates, trading volumes and our ability to deliver equity research and other value-added services to our clients. The ability to execute trades electronically, through the Internet and through other alternative trading systems, has increased pressure on trading commissions and spreads across our industry. We expect this trend toward alternative trading systems and the related pricing pressure in the brokerage business to continue. We are, to some extent, compensated through brokerage commissions for the equity research and other value-added services we deliver to our clients. These “soft dollar” practices have been the subject of discussion among regulators, the investment banking community and our sales and trading clients. In particular, commission sharing arrangements have been adopted by some large institutional investors. In these arrangements, an institutional investor concentrates its trading with fewer “execution” brokers and pays a fixed amount for execution, with a designated amount set aside for payments to other firms for research or other brokerage services. Accordingly, trading volume directed to us by investors that enter into such arrangements may be reduced, or eliminated, but we may be compensated for our research and sales efforts through allocations of the designated amounts. Depending on the extent to which we agree to this practice and depending on our ability to enter into arrangements on terms acceptable to us, this trend would likely impair the revenues and profitability of our brokerage business by negatively affecting both volumes and trading commissions.
Asset Management Fees
We earn asset management fees for managing a family of investment partnerships, including hedge funds, hedge funds of funds, and private equity funds, as well as a publicly traded specialty finance company, HCC. These fees include base management fees and incentive fees. Base management fees are generally determined by the fair value of the assets under management or the aggregate capital commitment and the fee schedule for each fund or account. Incentive fees are based upon the investment performance of the funds or accounts. For most of our funds, incentive fees equate to a percentage of the excess investment return above a specified high-water mark or hurdle rate over a defined period of time. For private equity funds, incentive fees equate to a percentage of the realized gain from the disposition of each portfolio investment in which each investor participates, which we earn after returning contributions by an investor for a portfolio investment. Generally, we do not earn management fees calculated on the basis of average assets under management (“AUM”).
As of September 30, 2018 the contractual base management fees earned from each of our investment funds or companies ranged between 1% and 2% of AUM or were between 1% and 2% of aggregate committed capital. The contractual incentive fees were generally 20%, subject to high-water marks, for the hedge funds; 5% to 20%, subject to high-water marks or a performance hurdle rate, for the hedge funds of funds; 20%, subject to high-water marks, for Harvest Growth Capital LLC (“HGC”) and Harvest Growth Capital II LLC (“HGC II”); and 30% for JMP Capital I. Our asset management revenues are subject to fluctuations due to a variety of factors that are unpredictable, including the overall condition of the economy, the securities markets as a whole and our core sectors. These market and industry conditions can have a material effect on the inflows and outflows of AUM and on the performance of our asset management funds. For example, a significant portion of the performance-based or incentive fee revenues that we recognize are based on the value of securities held in the funds we manage. The value of these securities includes unrealized gains or losses that may change from one period to another.
Asset management fees for the CLOs we manage currently consist only of senior and subordinated base management fees. We recognize base management fees for the CLOs on a monthly basis over the period during which the collateral management services are performed. The base management fees for the CLOs are calculated as a percentage of the average aggregate collateral balances for a specified period. As we consolidate the CLO’s, the management fees earned at JMP Credit Advisors LLC (“JMPCA”) from the CLOs are eliminated on consolidation in accordance with GAAP. For the nine months ended September 30, 2017, the contractual senior and subordinated base management fees earned from CLO I and CLO II were 0.50% of the average aggregate collateral balance. For both the nine months ended September 30, 2018 and 2017, the contractual senior and subordinated base management fees earned from CLO III were 0.35% and 0.33%, respectively, of the average aggregate collateral balance. For the nine months ended September 30, 2017, the contractual senior and subordinated base management fees earned from CLO IV warehouse portfolio were 1.0% of the average collateral balance. For the nine months ended September 30, 2018 and 2017, the contractual senior and subordinated base management fees earned from CLO IV, after securitization, were 0.50% of the average aggregate collateral balance. For the three and nine months ended September 30, 2018, the contractual senior and subordinated base management fees earned from CLO V warehouse portfolio were 1.0% of the average equity contributions. For the three and months ended September 30, 2018, contractual senior and subordinated base management fees earned from CLO V, after securitization, were 0.50% of the average aggregate collateral balance.
The redemption provisions of our hedge funds require at least 60 to 90 days’ advance notice. Redemptions are not permitted in our private equity funds or our private debt capital vehicles. The redemption provisions do not apply to the CLOs.
The following tables present certain information with respect to the investment funds managed by HCS, JMPAM, HCAP Advisors, and JMPCA:
(In thousands) | Assets Under Management (1) at | Company's Share of Assets Under Management at | ||||||||||||||
September 30, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||
Funds Managed by HCS, JMPAM, or HCAP Advisors: | ||||||||||||||||
Hedge Funds: | ||||||||||||||||
Harvest Small Cap Partners (2) | $ | 373,349 | $ | 377,513 | $ | 365 | $ | 1,074 | ||||||||
Harvest Agriculture Select (3) | 73,297 | 99,133 | 504 | 9,259 | ||||||||||||
Private Equity Funds: | ||||||||||||||||
Harvest Growth Capital LLC | 19,883 | 19,487 | 878 | 852 | ||||||||||||
Harvest Growth Capital II LLC | 169,359 | 149,998 | 3,252 | 3,011 | ||||||||||||
Harvest Intrexon Enterprise Fund | 57,208 | 70,295 | 353 | 430 | ||||||||||||
JMP Realty Partners I | 38,782 | 33,282 | 2,832 | 2,832 | ||||||||||||
Other | 9,550 | 10,111 | N/A | N/A | ||||||||||||
Funds of Funds: | ||||||||||||||||
JMP Masters Fund (4) | 2,427 | 3,048 | 2 | 4 | ||||||||||||
Capital or Private Debt Capital: | ||||||||||||||||
JMP Capital I | 23,529 | 23,529 | 2,329 | 2,329 | ||||||||||||
Harvest Capital Credit Corporation | 132,493 | 128,408 | N/A | N/A | ||||||||||||
HCS, JMPAM, and HCAP Advisors Totals | $ | 899,877 | $ | 914,804 | $ | 10,515 | $ | 19,791 | ||||||||
CLOs Managed by JMPCA: | ||||||||||||||||
CLO III (5) | 360,098 | 360,680 | N/A | N/A | ||||||||||||
CLO IV (5) | 450,281 | 450,985 | N/A | N/A | ||||||||||||
CLO V and CLO V warehouse (5) | 400,170 | 82,691 | N/A | N/A | ||||||||||||
JMPCA Totals | $ | 1,210,549 | $ | 894,356 | $ | N/A | $ | N/A | ||||||||
JMP Group LLC Totals | $ | 2,110,426 | $ | 1,809,160 | $ | 10,515 | $ | 19,791 | ||||||||
(1) | For hedge funds, funds of funds, HGC, HGC II, Harvest Intrexon Enterprise Fund ("HIEF"), and Other, AUM represent the net assets of such funds. For JMP Realty Partners I and JMP Capital I, assets under management represent the commitment amount. For JMP Realty Partners I the commitment amount is subject to the management fee calculation. For CLOs, AUM represent the sum of the aggregate collateral balance and restricted cash to be reinvested in collateral, upon which management fees are earned. | ||||||||||||||||||||||||
(2) | The Company has agreed to a non-binding letter of intent to sell the general partnership interest in the Harvest Small Cap Partners fund entities to a newly formed entity owned by the portfolio manager of the Harvest Small Cap Partners funds. Completion of the sale is subject to certain terms and conditions and the parties are working toward the execution of the definitive agreements by year-end, assuming all conditions in the letter of intent are satisfied by the required time lines. The expected close date will be December 31, 2018. | ||||||||||||||||||||||||
(3) | Harvest Agriculture Select (“HAS”) includes managed accounts in which the Company has neither equity investment nor control. These are included as they follow the respective funds’ strategy and earn fees. | ||||||||||||||||||||||||
(4) | JMP Masters began the process of liquidation on December 31, 2015. | ||||||||||||||||||||||||
(5) | CLO III, CLO IV, CLO V (effective July 26, 2018), and CLO V warehouse (through July 26, 2018) were consolidated in the Company’s Statements of Financial Condition for the period ended September 30, 2018 and for the year ended December 31, 2017. |
(In thousands) | Three Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | ||||||||||||||||||||||
Company's Share of Change in Fair Value | Management Fee | Incentive Fee | Company's Share of Change in Fair Value | Management Fee | Incentive Fee | |||||||||||||||||||
Hedge Funds: | ||||||||||||||||||||||||
Harvest Small Cap Partners (1) | $ | 19 | 1,600 | 16 | $ | 134 | 1,850 | 19 | ||||||||||||||||
Harvest Agriculture Select (2) | 7 | 206 | - | 256 | 246 | 54 | ||||||||||||||||||
Private Equity Funds: | ||||||||||||||||||||||||
Harvest Growth Capital LLC | 61 | - | - | (68 | ) | - | - | |||||||||||||||||
Harvest Growth Capital II LLC | 32 | 146 | - | (63 | ) | 130 | - | |||||||||||||||||
Harvest Intrexon Enterprise Fund | (32 | ) | 176 | - | 2 | 613 | - | |||||||||||||||||
JMP Realty Partners I | (30 | ) | 89 | - | (6 | ) | 148 | - | ||||||||||||||||
Other | - | 5 | - | - | 3 | - | ||||||||||||||||||
Funds of Funds: | ||||||||||||||||||||||||
JMP Masters Fund (3) | 1 | 6 | - | - | 8 | - | ||||||||||||||||||
Capital or private debt capital: | ||||||||||||||||||||||||
JMP Capital | N/A | 1 | - | N/A | - | - | ||||||||||||||||||
Harvest Capital Credit Corporation (4) | N/A | 964 | 487 | N/A | 943 | - | ||||||||||||||||||
CLOs: | ||||||||||||||||||||||||
CLO III (5) | N/A | 323 | - | N/A | 303 | - | ||||||||||||||||||
CLO IV (5) | N/A | 575 | - | N/A | 576 | - | ||||||||||||||||||
CLO V and CLO V warehouse (5) | N/A | 413 | - | N/A | 9 | - | ||||||||||||||||||
Totals | $ | 58 | $ | 4,504 | $ | 503 | $ | 255 | $ | 4,829 | $ | 73 |
(1) | The Company has agreed to a non-binding letter of intent to sell the general partnership interest in the Harvest Small Cap Partners fund entities to a newly formed entity owned by the portfolio manager of the Harvest Small Cap Partners funds. Completion of the sale is subject to certain terms and conditions and the parties are working toward the execution of the definitive agreements by year-end, assuming all conditions in the letter of intent are satisfied by the required time lines. The expected close date will be December 31, 2018. |
(2) | HAS includes managed accounts in which the Company has neither equity investment nor control. These are included with the funds, as they follow the respective strategies and earn fees. |
(3) | JMP Masters began the process of liquidation on December 31, 2015. |
(4) | Management fees earned includes administrative services revenue. |
(5) | Management and Incentive Fees earned from CLOs are consolidated and then eliminated in consolidation in the Company’s Statements of Operations. |
(In thousands) | Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 | ||||||||||||||||||||||
Company's Share of Change in Fair Value | Management Fee | Incentive Fee | Company's Share of Change in Fair Value |
Management Fee | Incentive Fee | |||||||||||||||||||
Hedge Funds: | ||||||||||||||||||||||||
Harvest Small Cap Partners (1) | $ | 32 | 4,717 | 5,318 | $ | (82 | ) | 5,853 | 1,651 | |||||||||||||||
Harvest Agriculture Select (2) | (353 | ) | 662 | - | 580 | 705 | 65 | |||||||||||||||||
Private Equity Funds: | ||||||||||||||||||||||||
Harvest Growth Capital LLC | 170 | - | - | (6 | ) | - | - | |||||||||||||||||
Harvest Growth Capital II LLC | 452 | 460 | - | 608 | 426 | - | ||||||||||||||||||
Harvest Intrexon Enterprise Fund | (98 | ) | 527 | - | (11 | ) | 1,839 | - | ||||||||||||||||
JMP Realty Partners I | 29 | 268 | - | 114 | 281 | 17 | ||||||||||||||||||
Other | - | 14 | - | - | 25 | - | ||||||||||||||||||
Funds of Funds: | ||||||||||||||||||||||||
JMP Masters Fund (3) | 1 | 20 | - | 4 | 25 | - | ||||||||||||||||||
Capital or private debt capital: | ||||||||||||||||||||||||
JMP Capital I | N/A | 12 | 96 | N/A | - | - | ||||||||||||||||||
Harvest Capital Credit Corporation (4) | N/A | 2,945 | 487 | N/A | 2,923 | 260 | ||||||||||||||||||
CLOs: | ||||||||||||||||||||||||
CLO I (5)(6) | N/A | - | - | N/A | 179 | 42 | ||||||||||||||||||
CLO II (5)(6) | N/A | - | - | N/A | 734 | - | ||||||||||||||||||
CLO III (5) | N/A | 913 | - | N/A | 898 | - | ||||||||||||||||||
CLO IV (5) | N/A | 1,709 | - | N/A | 690 | - | ||||||||||||||||||
CLO V and CLO V warehouse (5) | N/A | 617 | - | 9 | - | |||||||||||||||||||
Assets Referenced in TRS (7) | N/A | - | - | N/A | 88 | - | ||||||||||||||||||
Totals | $ | 233 | $ | 12,864 | $ | 5,901 | $ | 1,207 | $ | 14,675 | $ | 2,035 |
(1) | The Company has agreed to a non-binding letter of intent to sell the general partnership interest in the Harvest Small Cap Partners fund entities to a newly formed entity owned by the portfolio manager of the Harvest Small Cap Partners funds. Completion of the sale is subject to certain terms and conditions and the parties are working toward the execution of the definitive agreements by year-end, assuming all conditions in the letter of intent are satisfied by the required time lines. The expected close date will be December 31, 2018. |
(2) | HAS includes managed accounts in which the Company has neither equity investment nor control. These are included with the funds, as they follow the respective strategies and earn fees. |
(3) | JMP Masters began the process of liquidation on December 31, 2015. |
(4) | Management fees earned includes administrative services revenue. |
(5) | Management and incentive fees earned from CLOs are consolidated and then eliminated in consolidation in the Company’s Statements of Operations. |
(6) | CLO I and CLO II were liquidated on February 21, 2017 and June 15, 2017, respectively. Most of the CLO II assets remaining at liquidation were sold to CLO IV. |
(7) | Management and incentive fees earned from Assets referenced in TRS are consolidated and then eliminated in consolidation in the Company’s Statements of Operations. All of the assets referenced in TRS were sold to CLO IV in the second quarter of 2017, and TRS completed its liquidation in the third quarter of 2017 |
Principal Transactions
Principal transaction revenues include net realized and unrealized gains and losses resulting from our principal investments in equity and other securities for our own account as well as equity-linked warrants received from certain investment banking clients and limited partner investments in private funds managed by third parties. Principal transaction revenues also include earnings, or losses, attributable to interests in investment partnerships managed by our asset management subsidiaries, HCS and JMPAM, which are accounted for using the equity method of accounting. In addition, our principal transaction revenues include unrealized gains or losses on an investment in an entity that acquires buildings and land for the purpose of holding, managing and selling the properties and also include unrealized gains or losses on the investments in other private companies.
Gain (Loss) on Sale and Payoff of Loans
Gain (loss) on sale and payoff of loans consists of gains and losses from the sale and payoff of loans collateralizing asset-backed securities. Gains are recorded when the proceeds exceed the carrying value of the loan. Gain on sale, payoff and mark-to-market of loans also consists of the lower of cost or market adjustments arising from loans held for sale. Losses are recorded for a loan held for sale when the carrying value exceeds fair value.
Net Dividend Income
Net dividend income includes dividends from our investments offset by dividend expense resulting from short positions in our principal investment portfolio.
Other Income
Other income includes revenues from equity method investments, revenues from fee-sharing arrangements with our funds, and fees earned to raise capital for third-party investment partnerships.
Interest Income
Interest income primarily consists of interest income earned on loans collateralizing asset-backed securities ("ABS") issued and loans held for investment. Interest income on loans is comprised of the stated coupon as a percentage of the face amount receivable as well as accretion of purchase discounts and deferred fees. Interest income is recorded on an accrual basis, in accordance with the terms of the respective loans, unless such loans are placed on non-accrual status.
Interest Expense
Interest expense primarily consists of interest expense related to ABS issued, Senior Notes, notes payable, and any warehouse credit facilities, as well as the amortization of bond issuance costs. Interest expense on ABS issued is the stated coupon payable as a percentage of the principal amount in addition to amortization of the liquidity discount that was recorded at the acquisition date. Interest expense is recorded on an accrual basis, in accordance with the terms of the respective debt instrument.
Loss on Repurchase, Reissuance, or Early Retirement of Debt
Loss on repurchase, reissuance, or early retirement of debt primarily consists of losses incurred in the write-off of debt issuance costs related to Senior Notes or ABS issued that have been repurchased or retired sooner than the life of the instrument.
Provision for Loan Losses
Provision for loan losses includes the provision for losses recognized on our loan notes and non-revolving credit agreements at JMP Capital LLC and JMP Investment Holdings (collectively loans held for investment) and on loans collateralizing ABS in order to record the loans held for investment and ABS at their estimated net realizable value. We maintain an allowance for loan losses that is intended to estimate loan losses inherent in our loan portfolios. A provision for loan losses is charged to expense to establish the allowance for loan losses. The allowance for loan losses is maintained at a level, in the opinion of management, sufficient to offset estimated losses inherent in the loan portfolio as of the date of the financial statements. The appropriateness of the allowance and the allowance components are reviewed quarterly. Our estimate of each allowance component is based on observable information and on market and third-party data that we believe are reflective of the underlying loan losses being estimated. We employ internally developed and third-party estimation tools for measuring credit risk (loan ratings, probability of default, and exposure at default).
A specific reserve is provided for loans that are considered impaired. A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. We measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral securing the loan, if the loan is collateral-dependent, depending on the circumstances and our collection strategy. For those loans held by CLO I at the date of acquisition by JMP Credit, and deemed impaired at that date or a subsequent date, allowance for loan losses is calculated considering two additional factors. For loans deemed impaired at the date of acquisition, if there is a further decline in expected future cash flows, this reduction is recognized as a specific reserve in accordance with the guidance above. For those loans deemed impaired subsequent to the acquisition date, or for loans held at CLO III, CLO IV, or CLO V, if the net realizable value is lower than the current carrying value, the carrying value is reduced, and the difference is booked as a provision for loan losses. If the total discount from unpaid principal balance to carrying value is larger than the expected loss at the date of assessment, no provision for loan losses is recognized.
Loans which are deemed to be uncollectible are charged off, and the charged-off amount is deducted from the allowance.
Components of Expenses
We classify our expenses as compensation and benefits; administration; brokerage, clearing and exchange fees; travel and business development; communications and technology; managed deal expenses, occupancy; professional fees, depreciation, and other. A significant portion of our expense base is variable, including compensation and benefits; brokerage, clearing and exchange fees; travel and business development; communication and technology expenses, and managed deal expenses.
Compensation and Benefits
Compensation and benefits is the largest component of our expenses and includes employees’ base pay, performance bonuses, sales commissions, related payroll taxes, and medical and benefits expenses, as well as expenses for contractors, temporary employees, and equity-based compensation. Our employees receive a substantial portion of their compensation in the form of an individual, performance-based bonus. As is the widespread practice in our industry, we pay bonuses, for the most part, on an annual basis, and for senior professionals these bonuses typically make up a large portion of their total compensation. A portion of the performance-based bonuses paid to certain senior professionals is paid in the form of deferred compensation. Bonus payments may have a greater impact on our cash position and liquidity in the periods in which they are paid than would otherwise be reflected in our Consolidated Statements of Operations. We accrue for the estimated amount of these bonus payments ratably over the applicable service period.
Compensation is accrued with specific ratios of total compensation and benefits to total revenues applied to specific revenue categories, with adjustments made if, in management’s opinion, such adjustments are necessary and appropriate to maintain competitive compensation levels.
Administration
Administration expense primarily includes the cost of hosted conferences, non-capitalized systems and software expenditures, insurance, business tax (non-income), office supplies, recruiting, and regulatory fees.
Brokerage, Clearing, and Exchange Fees
Brokerage, clearing, and exchange fees include the cost of floor and electronic brokerage and execution, securities clearance, and exchange fees. Changes in brokerage, clearing, and exchange fees fluctuate largely in line with the volume of our sales and trading activity.
Travel and Business Development
Travel and business development expense primarily consists of costs incurred traveling to client locations for the purposes of executing transactions or meeting potential new clients, travel for administrative functions, and other costs incurred in developing new business. Travel costs related to existing clients for mergers and acquisitions and underwriting deals are sometimes reimbursed by clients. Under the new revenue standard ASC 606, reimbursed costs are presented as revenue on the Consolidated Statements of Operations.
Managed Deal Expenses
Managed deal expenses primarily relate to costs incurred and/or allocated in the execution of investment banking transactions, including reimbursable costs. Under the new revenue standard ASC 606, reimbursed costs are presented as revenue on the Consolidated Statements of Operations.
Communications and Technology
Communications and technology expense primarily relates to the cost of communication and connectivity, information processing and subscriptions to certain market data feeds and services.
Occupancy Expenses
Occupancy costs primarily include payments made under operating leases that are recognized on a straight-line basis over the period of the lease.
Professional Fees
Professional fees primarily relate to legal and accounting professional services.
Depreciation
Depreciation expenses include the straight-line amortization of purchases of certain furniture and fixtures, computer and office equipment, certain software costs, and leasehold improvements to allocate their depreciation amounts over their estimated useful life.
Other Expenses
Other operating expenses primarily includes bad debt expense and CLO administration expense at JMP Investment Holdings.
Income Taxes
JMP Group LLC is a publicly traded partnership and, as such, is taxed as a partnership, and not as a corporation, for U.S. federal income tax purposes, so long as 90% or more of its gross income for each taxable year constitutes “qualifying income.”
The Company’s effective tax rate is directly impacted by the proportion of income subject to tax compared to income not subject to tax. JMP Group Inc., a wholly-owned subsidiary, is subject to U.S. federal and state income taxes. The remainder of the Company’s income is generally not subject to corporate-level taxation.
The Company recognizes deferred tax assets and liabilities in accordance with ASC 740, Income Taxes, which are determined based upon the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce the deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized.
The Company records uncertain tax positions using a two-step process: (i) the Company determines whether it is more likely than not that each tax position will be sustained on the basis of the technical merits of the position; and (ii) for those tax positions that meet the more-likely-than not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than fifty percent likely to be realized upon ultimate settlement with the related tax authority
The Company’s policy for recording interest and penalties associated with the tax audits or unrecognized tax benefits, if any, is to record such items as a component of income tax.
Non-controlling Interest
Non-controlling interest for the nine months ended September 30, 2018 includes the interest of third parties in CLO III, HCS Strategic Investments LLC, and HCAP Advisors, partially-owned subsidiaries consolidated in our financial statements. Non-controlling interest for the nine months ended September 30, 2017 included the interest of third parties in CLO I, CLO II, CLO III, and HCAP Advisors
The Company currently manages several asset management funds, which are structured as limited partnerships, and is the general partner of each. The Company assesses whether the partnerships meet the definition of variable interest entities (“VIEs”) in accordance with ASC 810-10-15-14 and whether the Company qualifies as the primary beneficiary. Funds determined not to meet the definition of a VIE are considered voting interest entities, for which the rights of the limited partners are evaluated to determine if consolidation is necessary. Such guidance provides that the presumption that the general partner controls the limited partnership may be overcome if the limited partners have substantive kick-out rights.
The Company owned approximately 94% of the subordinated notes of the issuer of CLO I. CLO I initiated liquidation proceedings in the fourth quarter of 2016 and completed its liquidation in the first quarter of 2017. The Company was identified as the primary beneficiary, based on the ability to direct activities of CLO I through its subsidiary manager, JMP Credit Advisors, and its equity ownership.
The Company, through a wholly-owned subsidiary, managed CLO II from issuance through its liquidation in the second quarter of 2017. From issuance through December 31, 2013, the Company owned $17.3 million, or 72.8%, of the subordinated notes of the issuer. In the first quarter of 2014, the Company repurchased $6.0 million of subordinated notes, increasing its ownership to 98.0%. In March 2017, the Company repurchased $7.0 million of Class F notes. CLO II began and completed its liquidation in the second quarter of 2017. The Company was identified as the primary beneficiary, based on the ability to direct activities of CLO II through its subsidiary manager, JMP Credit Advisors, and its equity ownership.
The Company, through a wholly-owned subsidiary, has managed CLO III since issuance. From issuance through September 27, 2016, the Company owned $5.2 million or 13.5% of the subordinated notes of the issuer. On September 27, 2016, the Company repurchased $12.8 million face value of the subordinated notes, increasing its ownership to 46.7%. The Company was identified as the primary beneficiary, based on the ability to direct activities of CLO III through its subsidiary manager, JMPCA, and its equity ownership. In February 2018, the Company closed a refinancing of the asset-backed securities issued by CLO III, which lowered the weighted average costs of funds by 55 basis points and extended the reinvestment period for two years. In connection with the refinancing, the Company recorded losses on early retirement of debt related to unamortized debt issuance costs of $2.6 million for the quarter ended March 31, 2018.
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 owned a 51.0% equity interest in the entity until April 27, 2018 when the Company purchased an additional 18.4% of HCAP equity from a non-controlling interest holder. As of April 27, 2018, the Company owns a 69.4% of equity interest in the entity. The Company was identified as the primary beneficiary, based on the ability to direct activities of HCAP Advisors as the Manager and its equity ownership.
Results of Operations
The following table sets forth our results of operations for the three months and nine months ended September 30, 2018 and 2017, and is not necessarily indicative of the results to be expected for any future period.
(In thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | Three Month Change | Nine Month Change | ||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | $ | % | $ | % | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Investment banking | $ | 21,095 | $ | 22,085 | $ | 70,319 | $ | 54,813 | $ | (990 | ) | -4.5 | % | $ | 15,506 | 28.3 | % | |||||||||||||||
Brokerage | 4,676 | 4,763 | 14,787 | 15,127 | (87 | ) | -1.8 | % | (340 | ) | -2.2 | % | ||||||||||||||||||||
Asset management fees | 3,702 | 4,014 | 15,505 | 14,078 | (312 | ) | -7.8 | % | 1,427 | 10.1 | % | |||||||||||||||||||||
Principal transactions | 469 | (1,392 | ) | (1,467 | ) | (3,608 | ) | 1,861 | 133.7 | % | 2,141 | 59.3 | % | |||||||||||||||||||
Gain (loss) on sale, payoff and mark-to-market of loans | (556 | ) | 278 | (888 | ) | 1,208 | (834 | ) | -300.0 | % | (2,096 | ) | -173.5 | % | ||||||||||||||||||
Net dividend income | 320 | 278 | 935 | 817 | 42 | 15.1 | % | 118 | 14.4 | % | ||||||||||||||||||||||
Other income | 306 | 282 | 666 | 921 | 24 | 8.5 | % | (255 | ) | -27.7 | % | |||||||||||||||||||||
Non-interest revenues | 30,012 | 30,308 | 99,857 | 83,356 | (296 | ) | -1.0 | % | 16,501 | 19.8 | % | |||||||||||||||||||||
Interest income | 18,652 | 10,900 | 47,031 | 29,663 | 7,752 | 71.1 | % | 17,368 | 58.6 | % | ||||||||||||||||||||||
Interest expense | (13,789 | ) | (8,811 | ) | (35,125 | ) | (24,649 | ) | (4,978 | ) | -56.5 | % | (10,476 | ) | -42.5 | % | ||||||||||||||||
Net interest income | 4,863 | 2,089 | 11,906 | 5,014 | 2,774 | 132.8 | % | 6,892 | 137.5 | % | ||||||||||||||||||||||
Loss on repurchase, reissuance, or early retirement of debt | (170 | ) | - | (2,838 | ) | (5,332 | ) | (170 | ) | 0.0 | % | 2,494 | 46.8 | % | ||||||||||||||||||
Provision for loan losses | (1,454 | ) | (368 | ) | (4,199 | ) | (3,488 | ) | (1,086 | ) | -295.1 | % | (711 | ) | -20.4 | % | ||||||||||||||||
Total net revenues after provision for loan losses | 33,251 | 32,029 | 104,726 | 79,550 | 1,222 | 3.8 | % | 25,176 | 31.6 | % | ||||||||||||||||||||||
Non-interest expenses | ||||||||||||||||||||||||||||||||
Compensation and benefits | 22,671 | 24,563 | 76,070 | 69,013 | (1,892 | ) | -7.7 | % | 7,057 | 10.2 | % | |||||||||||||||||||||
Administration | 2,302 | 1,459 | 7,246 | 5,999 | 843 | 57.8 | % | 1,247 | 20.8 | % | ||||||||||||||||||||||
Brokerage, clearing, and exchange fees | 808 | 740 | 2,373 | 2,288 | 68 | 9.2 | % | 85 | 3.7 | % | ||||||||||||||||||||||
Travel and business development | 1,080 | 709 | 3,236 | 2,735 | 371 | 52.3 | % | 501 | 18.3 | % | ||||||||||||||||||||||
Managed deal expenses | 614 | - | 4,528 | - | 614 | 0.0 | % | 4,528 | 0.0 | % | ||||||||||||||||||||||
Communication and technology | 1,040 | 1,046 | 3,149 | 3,150 | (6 | ) | -0.6 | % | (1 | ) | 0.0 | % | ||||||||||||||||||||
Occupancy | 1,172 | 1,117 | 3,432 | 3,339 | 55 | 4.9 | % | 93 | 2.8 | % | ||||||||||||||||||||||
Professional fees | 1,272 | 1,094 | 4,315 | 3,109 | 178 | 16.3 | % | 1,206 | 38.8 | % | ||||||||||||||||||||||
Depreciation | 285 | 277 | 836 | 891 | 8 | 2.9 | % | (55 | ) | -6.2 | % | |||||||||||||||||||||
Other | 369 | 366 | 1,532 | 1,993 | 3 | 0.8 | % | (461 | ) | -23.1 | % | |||||||||||||||||||||
Total non-interest expenses | 31,613 | 31,371 | 106,717 | 92,517 | 242 | 0.8 | % | 14,200 | 15.3 | % | ||||||||||||||||||||||
Income (loss) before income tax expense | 1,638 | 658 | (1,991 | ) | (12,967 | ) | 980 | 148.9 | % | 10,976 | 84.6 | % | ||||||||||||||||||||
Income tax expense (benefit) | 527 | 1,113 | (146 | ) | (169 | ) | (586 | ) | -52.7 | % | 23 | 13.6 | % | |||||||||||||||||||
Net income (loss) | 1,111 | (455 | ) | (1,845 | ) | (12,798 | ) | 1,566 | 344.2 | % | 10,953 | 85.6 | % | |||||||||||||||||||
Less: Net income attributable to non-controlling interest | 823 | 780 | 138 | 1,712 | 43 | 5.5 | % | (1,574 | ) | -91.9 | % | |||||||||||||||||||||
Net income (loss) attributable to JMP Group LLC | $ | 288 | $ | (1,235 | ) | $ | (1,983 | ) | $ | (14,510 | ) | $ | 1,523 | 123.3 | % | $ | 12,527 | 86.3 | % | |||||||||||||
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Overview
Total net revenues after provision for loan losses increased $1.3 million, or 3.8%, from $32.0 million for the quarter ended September 30, 2017 to $33.3 million for the quarter ended September 30, 2018, primarily resulting from a $1.0 million decrease in investment banking revenue, a $0.8 million decrease in gains on sale, payoff, and mark-to-market of loans, and a $1.1 million increase in the provision for loan losses, partially offset by a $1.9 million increase in revenues from principal transactions and a $2.8 million increase in net interest income.
Non-interest revenues decreased $0.3 million, or 1.0%, from $30.3 million for the quarter ended September 30, 2017 to $30.0 million in the same period in 2018. This decrease was primarily driven by a $1.0 million decrease in investment banking revenues, a $0.3 million decrease in asset management revenues, and a $0.8 million decrease in gains on sale, payoff, and mark-to-market of loans, partially offset by a $1.9 million increase in revenues from principal transactions. Of the total of investment banking revenues earned, $0.9 million of revenue is related to a gross up of expenses as a result of the Company's adoption of ASC 606. See Note 3 of the Consolidated Financial Statements for additional details on the new revenue standard and accounts affected by adoption.
Net interest income increased $2.8 million, or 132.8%, from $2.1 million for the quarter ended September 30, 2017 to $4.9 million for the quarter ended September 30, 2018.
Loss on repurchase, reissuance, or early retirement of debt increased $0.2 million, from zero for the quarter ended September 30, 2017 to a loss of $0.2 million for the quarter ended September 30, 2018.
Provision for loan losses increased $1.1 million, or 295.1% from $0.4 million for the quarter ended September 30, 2017 to $1.5 million for the quarter ended September 30, 2018.
Total non-interest expenses increased $0.2 million, or 0.8%, from $31.4 million for the quarter ended September 30, 2017 to $31.6 million for the quarter ended September 30, 2018, primarily due to a $0.8 million increase in administration expenses, a $0.4 million increase in travel and business development, and a $0.6 million increase in managed deal expenses, partially offset by a $1.9 million decrease in compensation and benefits. Of the $0.2 million increase in expenses, $0.9 million of the increase is related to a gross-up of expenses as a result of the Company's adoption of ASC 606. See Note 3 of the Consolidated Financial Statements for additional details on the new revenue standard and accounts affected by adoption.
Net income attributable to non-controlling interest was $0.8 million for both of the quarters ended September 30, 2018 and 2017.
Net income attributable to JMP Group LLC increased $1.5 million, or 123.3% from a net loss $1.2 million for the quarter ended September 30, 2017 to net income of $0.3 million for the quarter ended September 30, 2018. This was primarily attributed to an increase in net income before tax expense of $1.0 million and a $0.6 million decrease in the income tax expense.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Overview
Total net revenues after provision for loan losses increased $25.1 million, or 31.6%, from $79.6 million for the nine months ended September 30, 2017 to $104.7 million for the nine months ended September 30, 2018, primarily resulting from a $15.5 million increase in investment banking revenues, a $1.4 million increase in asset management revenues, a $2.1 million increase in principal transaction revenue, a $6.9 million increase in net interest income, and a $2.5 million decrease in loss on repurchase/early retirement of debt, partially offset by a $2.1 million decrease in the gain on sale, payoff, and mark-to-market of loans and a $0.7 million increase in the provision for loan losses.
Non-interest revenues increased $16.5 million, or 19.8%, from $83.4 million for the nine months ended September 30, 2017 to $99.9 million in the same period in 2018. This increase was driven by a $15.5 million increase in investment banking revenues, and a $1.4 million increase in asset management revenues, and a $2.1 million increase in principal transaction revenue, partially offset by a $2.1 million decrease in the gain on sale, payoff, and mark-to-market of loans. Of the $15.5 million increase in investment banking revenues, $5.6 million of the increase is related to a gross up of expenses as a result of the Company's adoption of ASC 606. See Note 3 of the Consolidated Financial Statements for additional details on the new revenue standard and accounts affected by adoption.
Net interest income increased $6.9 million, or 137.5%, from $5.0 million for the nine months ended September 30, 2017 to $11.9 million for the nine months ended September 30, 2018.
Loss on repurchase, reissuance, or early retirement of debt decreased $2.5 million, or 46.8%, from a loss of $5.3 million for the nine months ended September 30, 2017 to a loss of $2.8 million for the nine months ended September 30, 2018.
Provision for loan losses increased $0.7 million from $3.5 million for the nine months ended September 30, 2017 to $4.2 million for the nine months ended September 30, 2018.
Total non-interest expenses increased $14.2 million, or 15.3%, from $92.5 million for the nine months ended September 30, 2017 to $106.7 million for the nine months ended September 30, 2018, primarily due to a $7.1 million increase in compensation and benefits, a $1.2 million increase in administration expenses, a $4.5 million increase in managed deal expenses, and a $1.2 million increase in professional fees, partially offset by a $0.5 million decrease in other expenses. Of the $14.2 million increase in expenses, $5.6 million of the increase is related to a gross-up of expenses as a result of the Company's adoption of ASC 606. See Note 3 of the Consolidated Financial Statements for additional details on the new revenue standard and accounts affected by adoption.
Net income attributable to non-controlling interest decreased $1.6 million, or 91.9% from net income of $1.7 million for the nine months ended September 30, 2017 to a net income of $0.1 million for the nine months ended September 30, 2018.
Net loss attributable to JMP Group LLC decreased $12.5 million, or 86.3%, from $14.5 million for the nine months ended September 30, 2017 to $2.0 million for the nine months ended September 30, 2018. This was primarily attributed to a decrease in net loss before tax expense of $11.0 million and a decrease in net income attributable to non-controlling interest of $1.6 million.
Operating Net Income (Non-GAAP Financial Measure)
Management uses Operating Net Income as a key, non-GAAP metric when evaluating the performance of JMP Group LLC’s core business strategy and ongoing operations, as management believes that this metric appropriately illustrates the operating results of JMP Group LLC’s core operations and business activities. Operating Net Income is derived from our segment reported results and is the measure of segment profitability on an after-tax basis used by management to evaluate our performance. This non-GAAP measure is presented to enhance investors’ overall understanding of the Company’s current financial performance. Additionally, management believes that Operating Net Income is a useful measure because it allows for a better evaluation of the performance of JMP Group LLC’s ongoing business and facilitates a meaningful comparison of the Company’s results in a given period to those in prior and future periods.
However, Operating Net Income should not be considered a substitute for results that are presented in a manner consistent with GAAP. A limitation of the non-GAAP financial measures presented is that, unless otherwise indicated, the adjustments concern gains, losses or expenses that JMP Group LLC generally expects to continue to recognize, and the adjustment of these items should not always be construed as an inference that these gains or expenses are unusual, infrequent or non-recurring. Therefore, management believes that both JMP Group LLC’s GAAP measures of its financial performance and the respective non-GAAP measures should be considered together. Operating Net Income may not be comparable to a similarly titled measure presented by other companies.
Operating Net Income is a non-GAAP financial measure that adjusts the Company’s GAAP net income as follows:
(i) | reverses non-cash share-based compensation expense recognized under GAAP related to equity awards granted in prior periods, as management generally evaluates performance by considering the full expense of equity awards in the period in which they are granted, even if the expense of such compensation will be recognized in future periods under GAAP; |
(ii) | recognizes 100% of the cost of deferred compensation in the period for which such compensation was awarded, instead of recognizing such cost over the vesting period as required under GAAP, in order to match compensation expense with the actual period upon which the compensation was based; |
(iii) | reverses amortization expense related to an intangible asset resulting from the repurchase of a portion of the equity of CLO III; |
(iv) | unrealized gains or losses on commercial real estate investments, adjusted for non-cash expenditures, including depreciation and amortization; |
(v) | reverses net unrealized gains and losses on strategic equity investments and certain warrant positions; |
(vi) | excludes general loan loss provisions related to the CLOs; |
(vii) | reverses the one-time transaction costs related to the refinancing of the debt; |
(viii) | one-time expenses associated with the redemption of debt underlying the CLOs, the redemption of other debt, and the resulting acceleration of the amortization of remaining capitalized issuance costs for each; and |
(ix) | assumes a combined federal, state and local income tax rate of 26% for the three and nine months ended September 30, 2018, and 38% for the three and nine months September 30, 2017, at the Company’s taxable direct subsidiary, adjusted for a cap on allowable interest expense deduction due to recent tax reform, while applying a tax rate of 0% to the Company’s other direct subsidiary, which is a “pass-through entity” for tax purposes. |
Discussed below is our Operating Net Income (Loss) by segment. This information is reflected in a manner utilized by management to assess the financial operations of the Company's various business lines.
Three Months Ended September 30, 2018 | ||||||||||||||||||||||||||||
(In thousands) | Broker- | Asset Management | Corporate | Eliminations | Total | |||||||||||||||||||||||
Dealer | Asset Management Fee Income | Investment Income | Total Asset Management | Costs | Segments | |||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||
Investment banking | $ | 21,095 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 21,095 | ||||||||||||||
Brokerage | 4,676 | - | - | - | - | - | 4,676 | |||||||||||||||||||||
Asset management related fees | 6 | 4,878 | 16 | 4,894 | - | (1,205 | ) | 3,695 | ||||||||||||||||||||
Principal transactions | - | - | 377 | 377 | - | - | 377 | |||||||||||||||||||||
Loss on sale, payoff, and mark-to-market of loans | - | - | (495 | ) | (495 | ) | - | - | (495 | ) | ||||||||||||||||||
Net dividend income | - | - | 339 | 339 | - | - | 339 | |||||||||||||||||||||
Net interest income | - | - | 3,715 | 3,715 | - | - | 3,715 | |||||||||||||||||||||
Provision for loan losses | - | - | (470 | ) | (470 | ) | - | - | (470 | ) | ||||||||||||||||||
Adjusted net revenues | 25,777 | 4,878 | 3,482 | 8,360 | - | (1,205 | ) | 32,932 | ||||||||||||||||||||
Non-interest expenses | ||||||||||||||||||||||||||||
Non-interest expenses | 23,202 | 4,794 | 1,535 | 6,329 | 2,688 | (1,205 | ) | 31,014 | ||||||||||||||||||||
Operating pre-tax net income (loss) | 2,575 | 84 | 1,947 | 2,031 | (2,688 | ) | - | 1,918 | ||||||||||||||||||||
Income tax expense (benefit) (assumed rate of 26% for Operating Platforms) | 670 | 23 | (153 | ) | (130 | ) | (363 | ) | - | 177 | ||||||||||||||||||
Operating net income (loss) | $ | 1,905 | $ | 61 | $ | 2,100 | $ | 2,161 | $ | (2,325 | ) | $ | - | $ | 1,741 |
Three Months Ended September 30, 2017 | ||||||||||||||||||||||||||||
(In thousands) | Broker- | Asset Management | Corporate | Eliminations | Total | |||||||||||||||||||||||
Dealer | Asset Management Fee Income | Investment Income | Total Asset Management | Costs | Segments | |||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||
Investment banking | $ | 22,085 | $ | - | $ | - | $ | - | $ | - | $ | 22,085 | ||||||||||||||||
Brokerage | 4,763 | - | - | - | - | 4,763 | ||||||||||||||||||||||
Asset management related fees | - | 4,798 | 167 | 4,965 | - | (821 | ) | 4,144 | ||||||||||||||||||||
Principal transactions | - | - | 867 | 867 | - | - | 867 | |||||||||||||||||||||
Gain on sale, payoff, and mark-to-market of loans | - | - | 260 | 260 | - | - | 260 | |||||||||||||||||||||
Net dividend income | - | - | 278 | 278 | - | - | 278 | |||||||||||||||||||||
Net interest income | - | - | 1,145 | 1,145 | - | - | 1,145 | |||||||||||||||||||||
Provision for loan losses | - | - | (593 | ) | (593 | ) | - | - | (593 | ) | ||||||||||||||||||
Adjusted net revenues | 26,848 | 4,798 | 2,124 | 6,922 | - | (821 | ) | 32,949 | ||||||||||||||||||||
Non-interest expenses | ||||||||||||||||||||||||||||
Non-interest expenses | 22,215 | 4,948 | 934 | 5,882 | 2,772 | (821 | ) | 30,048 | ||||||||||||||||||||
Operating pre-tax net income (loss) | 4,633 | (150 | ) | 1,190 | 1,040 | (2,772 | ) | - | 2,901 | |||||||||||||||||||
Income tax expense (benefit) (assumed rate of 38% for Operating Platforms) | 1,761 | (57 | ) | (467 | ) | (524 | ) | (627 | ) | - | 610 | |||||||||||||||||
Operating net income (loss) | $ | 2,872 | $ | (93 | ) | $ | 1,657 | $ | 1,564 | $ | (2,145 | ) | $ | - | $ | 2,291 |
Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||||||
(In thousands) | Broker- | Asset Management | Corporate | Eliminations | Total | |||||||||||||||||||||||
Dealer | Asset Management Fee Income | Investment Income | Total Asset Management | Costs | Segments | |||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||
Investment banking | $ | 70,318 | $ | - | $ | - | $ | - | $ | - | $ | 2 | $ | 70,320 | ||||||||||||||
Brokerage | 14,787 | - | - | - | - | - | 14,787 | |||||||||||||||||||||
Asset management related fees | 16 | 13,439 | 5,318 | 18,757 | - | (3,354 | ) | 15,419 | ||||||||||||||||||||
Principal transactions | - | - | 498 | 498 | - | - | 498 | |||||||||||||||||||||
Loss on sale, payoff, and mark-to-market of loans | - | - | (859 | ) | (859 | ) | - | - | (859 | ) | ||||||||||||||||||
Net dividend income | - | - | 1,004 | 1,004 | - | - | 1,004 | |||||||||||||||||||||
Net interest income | - | - | 8,769 | 8,769 | - | - | 8,769 | |||||||||||||||||||||
Gain on repurchase of asset-backed securities issue | - | - | (42 | ) | (42 | ) | - | - | (42 | ) | ||||||||||||||||||
Provision for loan losses | - | - | (1,400 | ) | (1,400 | ) | - | - | (1,400 | ) | ||||||||||||||||||
Adjusted net revenues | 85,121 | 13,439 | 13,288 | 26,727 | - | (3,352 | ) | 108,496 | ||||||||||||||||||||
Non-interest expenses | ||||||||||||||||||||||||||||
Non-interest expenses | 76,528 | 14,570 | 9,096 | 23,666 | 7,519 | (3,354 | ) | 104,359 | ||||||||||||||||||||
Operating pre-tax net income (loss) | 8,593 | (1,131 | ) | 4,192 | 3,061 | (7,519 | ) | 2 | 4,137 | |||||||||||||||||||
Income tax expense (benefit) (assumed rate of 26% for Operating Platforms) | 2,234 | (293 | ) | (289 | ) | (582 | ) | (1,009 | ) | - | 643 | |||||||||||||||||
Operating net income (loss) | $ | 6,359 | $ | (838 | ) | 4,481 | $ | 3,643 | $ | (6,510 | ) | $ | 2 | $ | 3,494 |
Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||||||
(In thousands) | Broker- | Asset Management | Corporate | Eliminations | Total | |||||||||||||||||||||||
Dealer | Asset Management Fee Income | Investment Income | Total Asset Management | Costs | Segments | |||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||
Investment banking | $ | 54,813 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 54,813 | ||||||||||||||
Brokerage | 15,127 | - | - | - | - | - | 15,127 | |||||||||||||||||||||
Asset management related fees | 4 | 14,965 | 1,827 | 16,792 | - | (2,584 | ) | 14,212 | ||||||||||||||||||||
Principal transactions | - | - | 3,200 | 3,200 | - | - | 3,200 | |||||||||||||||||||||
Gain (loss) on sale, payoff, and mark-to-market of loans | - | - | 1,143 | 1,143 | - | - | 1,143 | |||||||||||||||||||||
Net dividend income | - | - | 819 | 819 | - | - | 819 | |||||||||||||||||||||
Net interest income | - | - | 2,100 | 2,100 | - | - | 2,100 | |||||||||||||||||||||
Gain on repurchase of asset-backed securities issued | - | - | 210 | 210 | - | - | 210 | |||||||||||||||||||||
Provision for loan losses | - | - | (2,415 | ) | (2,415 | ) | - | - | (2,415 | ) | ||||||||||||||||||
Adjusted net revenues | 69,944 | 14,965 | 6,884 | 21,849 | - | (2,584 | ) | 89,209 | ||||||||||||||||||||
Non-interest expenses | ||||||||||||||||||||||||||||
Non-interest expenses | 63,234 | 15,346 | 5,709 | 21,055 | 6,915 | (2,584 | ) | 88,620 | ||||||||||||||||||||
Operating pre-tax net income (loss) | 6,710 | (381 | ) | 1,175 | 794 | (6,915 | ) | - | 589 | |||||||||||||||||||
Income tax expense (benefit) (assumed rate of 38% for Operating Platforms) | 2,551 | (145 | ) | (1,272 | ) | (1,417 | ) | (1,312 | ) | - | (178 | ) | ||||||||||||||||
Operating net income (loss) | $ | 4,159 | $ | (236 | ) | $ | 2,447 | $ | 2,211 | $ | (5,603 | ) | $ | - | $ | 767 | ||||||||||||
The following table reconciles operating net income to Total Segments operating pre-tax net income, and also to consolidated pre-tax net income (loss) attributable to JMP Group LLC and to consolidated net income (loss) attributable to JMP Group LLC for the three months and nine months ended September 30, 2018 and 2017.
(In thousands) | Three Months Ended September 30, | |||||||
2018 | 2017 | |||||||
Operating net income | $ | 1,741 | $ | 2,291 | ||||
Addback of Segment Income tax expense | 177 | 610 | ||||||
Total Segments adjusted operating pre-tax net income | $ | 1,918 | $ | 2,901 | ||||
Subtract / (Add back) | ||||||||
Share-based awards and deferred compensation | 76 | 696 | ||||||
General loan loss provision (reversal) - CLOs, CLO warehouse | 855 | (136 | ) | |||||
Early debt retirement/reissuance | 170 | - | ||||||
Restructuring costs - CLOs | - | 14 | ||||||
Amortization of intangible asset - CLO III | 69 | 69 | ||||||
Unrealized gain - real estate-related depreciation and amortization | 260 | 2,571 | ||||||
Unrealized mark-to-market gain - strategic equity investments | (327 | ) | (191 | ) | ||||
Total consolidation adjustments and reconciling Items | 1,103 | 3,023 | ||||||
Consolidated pre-tax net income (loss) attributable to JMP Group LLC | $ | 815 | $ | (122 | ) | |||
Income tax expense | 527 | 1,113 | ||||||
Consolidated net income (loss) attributable to JMP Group LLC | $ | 288 | $ | (1,235 | ) | |||
(In thousands) | Nine Months Ended September 30, | |||||||
2018 | 2017 | |||||||
Operating net income | $ | 3,494 | $ | 767 | ||||
Addback of Segment Income tax expense (benefit) | 643 | (178 | ) | |||||
Total Segments adjusted operating pre-tax net income | $ | 4,137 | $ | 589 | ||||
Subtract | ||||||||
Share-based awards and deferred compensation | 289 | 1,863 | ||||||
General loan loss provision (reversal) - CLOs, CLO warehouse | 2,348 | 697 | ||||||
Early debt retirement/reissuance | 1,488 | 5,432 | ||||||
Restructuring costs - CLOs | 54 | 300 | ||||||
Amortization of intangible asset - CLO III | 207 | 207 | ||||||
Unrealized gain - real estate-related depreciation and amortization | 1,864 | 6,472 | ||||||
Unrealized mark-to-market gain - strategic equity investments | 16 | 297 | ||||||
Total Consolidation Adjustments and Reconciling Items | 6,266 | 15,268 | ||||||
Consolidated pre-tax net loss attributable to JMP Group LLC | $ | (2,129 | ) | $ | (14,679 | ) | ||
Income tax benefit | (146 | ) | (169 | ) | ||||
Consolidated Net Loss attributable to JMP Group LLC | $ | (1,983 | ) | $ | (14,510 | ) | ||
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Revenues
Investment Banking
Investment banking revenues, earned in our Broker-Dealer segment, decreased $1.0 million, or 4.5%, from $22.1 million for the quarter ended September 30, 2017 to $21.1 million for the same period in 2018. As a percentage of total net revenues after provision for loan losses, investment banking revenues decreased from 69.0% for the quarter ended September 30, 2017 to 63.4% for the quarter ended September 30, 2018. On an operating basis, investment banking revenues were 64.1% and 67.0% for the quarters ended September 30, 2018 and 2017, respectively, as a percentage of adjusted net revenues.
(Dollars in thousands) | Three Months Ended September 30, | Change from 2017 to 2018 | ||||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||||||
Count | Revenues | Count | Revenues | Count | $ | % | ||||||||||||||||||||||
Equity and debt origination | 21 | $ | 11,366 | 22 | $ | 15,639 | (1 | ) | $ | (4,273 | ) | -27.3 | % | |||||||||||||||
Advisory | 4 | 9,729 | 6 | 6,446 | (2 | ) | 3,283 | 50.9 | % | |||||||||||||||||||
Total transactions | 25 | $ | 21,095 | 28 | $ | 22,085 | (3 | ) | $ | (990 | ) | -4.5 | % |
The decrease in revenues was primarily driven by a 7.0% increase in the average size of the fee paid per transaction and a 10.7% decrease in the number of transactions completed. In addition, of the total investment banking revenue earned during the three months ended September 30, 2018, $0.9 million is related to a gross up of expenses as a result of the Company's adoption of ASC 606. See Note 3 to the Consolidated Financial Statements for additional details on the new revenue standard and accounts affected by adoption. The number of transactions in which we acted as a bookrunning manager was one and six for the three months ended September 30, 2018 and 2017, respectively.
Brokerage Revenues
Brokerage revenues earned in our Broker-Dealer segment were $4.7 million and $4.8 million for the quarters ended September 30, 2018 and 2017, respectively. Brokerage revenues decreased as a percentage of total net revenues after provision for loan losses, from 14.9% for the quarter ended September 30, 2017 to 14.1% for the quarter ended September 30, 2018. On an operating basis, brokerage revenues were 14.2% and 14.5% for the quarters ended September 30, 2018 and 2017, respectively, as a percentage of adjusted net revenues.
Asset Management Fees
(In thousands) | Three Months Ended September 30, | |||||||
2018 | 2017 | |||||||
Base management fees: | ||||||||
Fees reported as asset management fees | $ | 3,199 | $ | 3,941 | ||||
Less: Non-controlling interest | (123 | ) | (152 | ) | ||||
Total base management fees | 3,076 | 3,789 | ||||||
Incentive fees: | ||||||||
Less: Non-controlling interest | 503 | 73 | ||||||
Less: Non-controlling interest | (149 | ) | - | |||||
Total incentive fees | 354 | 73 | ||||||
Other fee income: | ||||||||
Fundraising and other income: | 306 | 282 | ||||||
Less: Non-controlling interest | (41 | ) | - | |||||
Total other fee income | 265 | 282 | ||||||
Asset management related fees: | ||||||||
Fees reported as asset management fees | 3,702 | 4,014 | ||||||
Fees reported as other income | 306 | 282 | ||||||
Less: Non-controlling interest | (313 | ) | (152 | ) | ||||
Total Segment asset management related fee revenues | $ | 3,695 | $ | 4,144 |
Fees reported as asset management fees were $3.7 million and $4.0 million for the quarters ended September 30, 2018 and 2017, respectively. As a percentage of total net revenues after provision for loan losses, asset management revenues decreased from 12.5% for the quarter ended September 30, 2017 to 11.1% for the quarter ended September 30, 2018. Fees reported as other income were $0.3 million for both the quarters ended September 30, 2018 and 2017. As a percentage of total net revenues after provision for loan losses, other income was 0.9% for both of the quarters ended September 30, 2018 and 2017.
Total segment asset management-related fees include base management fees and incentive fees from our funds, HCC, and CLOs under management, as well as other income from fee-sharing arrangements with, and fees earned to raise capital for, third-party or equity-method investment partnerships or funds. Total segment asset management-related fee revenues are reconciled to the GAAP measure, total asset management fee revenues, in the table above. We believe that presenting operating asset management-related fees is useful to investors as a means of assessing the performance of our combined asset management activities, including fundraising and other services for third parties. We believe that segment asset management-related fee revenues provides useful information by indicating the relative contributions of base management fees and performance-related incentive fees, thus facilitating a comparison of those fees in a given period to those in prior and future periods. We also believe that asset management-related fee revenue is a more meaningful measure than standalone asset management fees as reported, because asset management-related fee revenues represent the combined impact of the various asset management activities on the Company’s total net revenues.
Total segment asset management related fee revenue decreased $0.4 million, from $4.1 million for the quarter ended September 30, 2017 to $3.7 million for the quarter ended September 30, 2018. Total base management fees were $3.1 million and $3.8 million for the quarters ended September 30, 2018 and 2017, respectively. Total incentive fees increased $0.3 million, from a $0.1 million for the quarter ended September 30, 2017 to $0.4 million for the same period in 2018. On an operating basis, asset management related fee revenues were 11.2% and 12.6% for the quarters ended September 30, 2018 and 2017, respectively, as a percentage of adjusted net revenues.
Principal Transactions
Principal transaction revenues increased $1.9 million, from a loss of $1.4 million for the quarter ended September 30, 2017 to a gain of $0.5 million for the same period in 2018. As a percentage of total net revenues after provision for loan losses, principal transaction revenues were negative 4.3% for the quarter ended September 30, 2017 and a positive 1.4% for the quarter ended September 30, 2018.
Total segment principal transaction revenues decreased $0.5 million, from a gain of $0.9 million for the quarter ended September 30, 2017 to a gain of $0.4 million for the same period in 2018. Total segment principal transaction revenues are a non-GAAP financial measure that aggregates our segment reported principal transaction revenues across each segment. The principal transaction revenues for both 2018 and 2017 were reported in our Investment Income segment. Total segment principal transaction revenues are reconciled to the GAAP measure, total principal transaction revenues, in the table below.
Three Months Ended September 30, | ||||||||
(In thousands) | 2018 | 2017 | ||||||
Equity and other securities excluding non-controlling interest | $ | 292 | $ | 293 | ||||
Warrants and other investments | 83 | 438 | ||||||
Investment partnerships | 2 | 136 | ||||||
Total segment principal transaction revenues | 377 | 867 | ||||||
Operating adjustment addbacks | 92 | (2,259 | ) | |||||
Total principal transactions revenues | $ | 469 | $ | (1,392 | ) | |||
On a GAAP basis, the increase in principal transaction revenues is primarily attributed to the cessation of recording equity-method losses in an investment whose carrying value has been reduced to zero on the balance sheet, partially offset by decreases in net income earned on hedge fund investments. On an operating basis, as a percentage of total adjusted net revenues, principal transaction revenues decreased from 2.6% for the quarter ended September 30, 2017 to 1.1% for the quarter ended September 30, 2018.
Gain and Loss on Sale and Payoff of Loans
Gain on sale and payoff of loans decreased from a gain of $0.3 million for the quarter ended September 30, 2017 to a loss of $0.6 million for the quarter ended September 30, 2018. Gain and loss on sale and payoff of loans was incurred in our Investment Income segment. On a segment basis, gain on sale and payoff of loans decreased from a gain of $0.3 million for the quarter ended September 30, 2017 to a loss of $0.5 million for the quarter ended September 30, 2018.
Net Dividend Income
Net dividend income was $0.3 million for the both the quarters ended September 30, 2018 and 2017. Net dividend income primarily related to dividends from our HCC investment.
Net Interest Income/Expense
(In thousands) | Three Months Ended September 30, | |||||||
2018 | 2017 | |||||||
CLO II loan contractual interest income | $ | - | $ | 29 | ||||
CLO II ABS issued contractual interest expense | - | - | ||||||
Net CLO II contractual interest | - | 29 | ||||||
CLO III loan contractual interest income | $ | 5,553 | $ | 4,743 | ||||
CLO III ABS issued contractual interest expense | (3,343 | ) | (2,975 | ) | ||||
Net CLO III contractual interest | 2,210 | 1,768 | ||||||
CLO IV loan contractual interest income | $ | 6,939 | $ | 5,861 | ||||
CLO IV ABS issued contractual interest expense | (4,943 | ) | (3,876 | ) | ||||
Net CLO IV contractual interest | 1,996 | 1,985 | ||||||
CLO V loan contractual interest income | $ | 5,780 | $ | 33 | ||||
CLO V warehouse/ABS issued contractual interest expense | (3,816 | ) | (7 | ) | ||||
Net CLO V contractual interest | 1,964 | 26 | ||||||
Bond Payable interest expense | $ | (1,792 | ) | $ | (1,900 | ) | ||
Less: Non-controlling interest in CLOs | (1,148 | ) | (944 | ) | ||||
Other interest income | 485 | 181 | ||||||
Total Segment net interest income | $ | 3,715 | $ | 1,145 | ||||
Non-controlling interest in CLOs | 1,148 | 944 | ||||||
Total net interest income | $ | 4,863 | $ | 2,089 |
Net interest income increased $2.8 million from $2.1 million for the quarter ended September 30, 2017 to $4.9 million for the quarter ended September 30, 2018. The increase was driven primarily by the increased net asset balance at CLO V, which was in the warehouse phase in 2017 and securitized in July 2018. As a percentage of total net revenues after provision for loan losses, net interest income was 6.5% for the quarter ended September 30, 2017 and 14.6% for the quarter ended September 30, 2018.
Total segment net interest income increased from $1.1 million for the quarter ended September 30, 2017 to $3.7 million for the quarter ended September 30, 2018. Net interest income is reported in our Investment Income segment and reflects our portion of the net CLO contractual interest. Total segment net interest income is reconciled to the GAAP measure, total net interest expense, in the table above. As a percentage of total adjusted net revenues, net interest income was 11.3% and 3.5% for the quarters ended September 30, 2018 and 2017, respectively.
The following table sets forth contractual interest income and expense related to CLO loans and ABS issued and their weighted average contractual interest rates:
(In thousands) | Three Months Ended September 30, 2018 | |||||||||||||||||||
Interest Income (Expense) | Average CLO Loan (CLO ABS Issued) Balance | Weighted Average Contractual Interest Rate | Weighted Average LIBOR | Spread to Weighted Average LIBOR | ||||||||||||||||
CLO III loan contractual interest income | $ | 5,553 | 352,740 | 5.87 | % | 2.34 | % | 3.53 | % | |||||||||||
CLO III ABS issued contractual interest expense | (3,343 | ) | (332,100 | ) | 3.74 | % | 2.39 | % | 1.35 | % | ||||||||||
CLO IV loan contractual interest income | 6,939 | 443,247 | 5.88 | % | 2.34 | % | 3.54 | % | ||||||||||||
CLO IV ABS issued contractual interest expense | (4,943 | ) | (422,017 | ) | 4.45 | % | 2.39 | % | 2.06 | % | ||||||||||
CLO V loan contractual interest income | 5,780 | 368,143 | 5.81 | % | 2.33 | % | 3.48 | % | ||||||||||||
CLO V warehouse/ABS issued contractual interest expense | (3,816 | ) | (358,255 | ) | 4.02 | % | 2.27 | % | 1.75 | % | ||||||||||
Net CLO contractual interest | $ | 6,170 | $ | N/A | N/A | N/A | N/A |
(In thousands) | Three Months Ended September 30, 2017 | |||||||||||||||||||
Interest Income (Expense) | Average CLO Loan (CLO ABS Issued) Balance | Weighted Average Contractual Interest Rate | Weighted Average LIBOR | Spread to Weighted Average LIBOR | ||||||||||||||||
CLO II loan contractual interest income | $ | 29 | 2,435 | 4.10 | % | 0.00 | % | 4.10 | % | |||||||||||
CLO III loan contractual interest income | 4,743 | 349,038 | 5.07 | % | 1.28 | % | 3.79 | % | ||||||||||||
CLO III ABS issued contractual interest expense | (2,975 | ) | (332,100 | ) | 3.18 | % | 1.28 | % | 1.90 | % | ||||||||||
CLO IV loan contractual interest income | 5,861 | 435,724 | 5.02 | % | 1.33 | % | 3.70 | % | ||||||||||||
CLO IV ABS issued contractual interest expense | (3,876 | ) | (424,718 | ) | 3.40 | % | 1.33 | % | 2.08 | % | ||||||||||
CLO V loan contractual interest income | 33 | 2,424 | 4.88 | % | 1.24 | % | 3.64 | % | ||||||||||||
CLO V warehouse issued contractual interest expense | (7 | ) | (3,960 | ) | 2.61 | % | 1.24 | % | 1.38 | % | ||||||||||
Net CLO contractual interest | $ | 3,782 | $ | N/A | N/A | N/A | N/A |
Loss on Repurchase, Reissuance, or Early Retirement of Debt
Loss on repurchase, reissuance, or early retirement of debt increased from zero for the quarter ended September 30, 2017 to $0.2 million for the quarter ended September 30, 2018. The increase was related to the Company's early redemption of $10.0 million of the 8% Senior Notes. As a percentage of adjusted net revenues after provision for loan losses, the loss on repurchase/early retirement was 0.5% and zero for the quarters ended September 30, 2018 and 2017, respectively.
Provision for Loan Losses
(in thousands) | Three Months Ended September 30, | |||||||
2018 | 2017 | |||||||
CLO related reversal (provision) | $ | (1,306 | ) | $ | 229 | |||
Non-CLO related provision | (148 | ) | (597 | ) | ||||
Provision for Loan Losses | $ | (1,454 | ) | $ | (368 | ) | ||
Less: General reserves related to CLO II, CLO III, CLO IV, CLO V, CLO V warehouse, and non-controlling interest | 984 | (225 | ) | |||||
Segment provision for loan losses | $ | (470 | ) | $ | (593 | ) |
Provision for loan losses increased $1.1 million, from a provision of $0.4 million for the quarter ended September 30, 2017 to a provision of $1.5 million for the same period in 2018. As a percent of net revenues after provision for loan losses, the provision for loan losses was negative 4.4% and 1.1% for the quarters ended September 30, 2018 and 2017, respectively.
Total segment provision for loan losses decreased from $0.6 million for the quarter ended September 30, 2017 to $0.5 million for the quarter ended September 30, 2018. Total segment provision for loan losses is a non-GAAP financial measure that aggregates our segment reported provision for loan losses across each segment. Our total segment provision for loan losses in 2018 and 2017 was solely recognized in our Investment Income segment. As a percent of total adjusted net revenues, segment provision for loan losses was negative 4.4% and negative 1.8% for the quarters ended September 30, 2018 and 2017, respectively.
Expenses
Non-Interest Expenses
Compensation and Benefits
Compensation and benefits, which includes employee payroll, taxes and benefits, performance-based cash bonus and commissions, as well as equity-based compensation to our employees and managing directors, decreased $1.9 million, or 7.7%, from $24.6 million for the quarter ended September 30, 2017 to $22.7 million for the quarter ended September 30, 2018.
Employee payroll, taxes and benefits, and consultant fees were $10.4 million and $11.1 million for the quarters ended September 30, 2018 and 2017, respectively. Performance-based bonus and commission decreased $0.9 million from $12.4 million for the quarter ended September 30, 2017 to $11.5 million for the quarter ended September 30, 2018.
Equity-based compensation was $0.5 million and $0.9 million for the quarters ended September 30, 2018 and 2017, respectively.
Compensation and benefits as a percentage of total net revenues after provision for loan losses decreased from 76.7% for the quarter ended September 30, 2017 to 68.2% for the quarter ended September 30, 2018.
Our segment reported compensation and benefits recognizes 100% of the cost of deferred compensation, including non-cash share-based compensation expense, in the period for which such compensation was awarded, instead of recognizing such cost over the vesting period as required under GAAP, in order to match compensation expense with the actual period upon which the compensation was based. The segment reported compensation and benefits decreased $1.2 million from $23.5 million for the quarter ended September 30, 2017 to $22.3 million for the quarter ended September 30, 2018. As a percent of total adjusted net revenues, compensation and benefits were 67.7% and 71.3% for the quarters ended September 30, 2018 and 2017, respectively.
Administration
Administration expense was $2.3 million for the quarter ended September 30, 2018 and $1.5 million for the quarter ended September 30, 2017. As a percentage of total net revenues after provision for loan losses, administration expense increased from 4.6% for the quarter ended September 30, 2017 to 6.9% for the same period in 2018.
Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fees was $0.7 million for the quarter ended September 30, 2017 and $0.8 million for the same period in 2018. As a percentage of total net revenues after provision for loan losses, our brokerage, clearing and exchange fees increased from 2.3% for the quarter ended September 30, 2017 to 2.4% for the same period in 2018.
Travel and Business Development
Travel and business development expenses increased $0.4 million, from $0.7 million for the quarter ended September 30, 2017 to $1.1 million for the quarter ended September 30, 2018. As a percentage of total net revenues after provision for loan losses, travel and business development expense was 3.2% and 2.2% and for the quarters ended September 30, 2018 and 2017, respectively.
Managed deal expenses
Managed deal expenses were $0.6 million and zero for the quarters ended September 30, 2018 and 2017, respectively. As a percentage of total net revenues after provision for loan losses, managed deal expenses increased from zero percent for the quarter ended September 30, 2017 to 1.8% for the same period in 2018. The increase is related to a gross up of expenses as a result of the Company's adoption of ASC 606. See Note 3 to the Consolidated Financial Statements for additional details on the new revenue standard and accounts affected by adoption.
Communications and Technology
Communications and technology expenses were $1.0 million for both the quarters ended September 30, 2018 and 2017. As a percentage of total net revenues after provision for loan losses, communications and technology expense decreased from 3.3% for the quarter ended September 30, 2017 to 3.1% for the same period in 2018.
Occupancy
Occupancy expenses were $1.1 million for the quarter ended September 30, 2017 and $1.2 million for the quarter ended September 30, 2018. As a percentage of total net revenues after provision for loan losses, occupancy expenses were 3.5% for both the quarter ended September 30, 2018 and 2017.
Professional Fees
Professional fees were $1.3 million and $1.1 million for the quarters ended September 30, 2018 and 2017, respectively. As a percentage of total net revenues after provision for loan losses, professional fees increased from 3.4% for the quarter ended September 30, 2017 to 3.8% for the same period in 2018.
Depreciation
Depreciation expenses were $0.3 million for both of the quarters ended September 30, 2018 and 2017. As a percentage of total net revenues after provision for loan losses, depreciation was 0.9% for both the quarters ended September 30, 2018 and 2017.
Other Expenses
Other expenses were $0.4 million for both the quarters ended September 30, 2018 and 2017. As a percentage of total net revenues after provision for loan losses, other expenses was 1.1% for both the quarter ended September 30, 2018 and 2017.
Net Income Attributable to Non-controlling Interest
Net income attributable to non-controlling interest was $0.8 million for both the quarters ended September 30, 2018 and 2017. Non-controlling interest for the quarter ended September 30, 2017 includes the interest of third parties in CLO III and HCAP Advisors. Non-controlling interest for the quarter ended September 30, 2018 includes the interest of third parties in CLO III, HCAP Advisors, and HCS Strategic Investments LLC.
Provision for Income Taxes
Income tax expense was $0.5 million for the quarter ended September 30, 2018, while an income tax expense of $1.1 million was recorded for the quarter ended September 30, 2017. For the purposes of calculating operating net income, a combined federal and state tax rate of 26% is assumed for our taxable direct subsidiaries, adjusted for a cap on allowable interest expense deduction due to recent tax reform, while a rate of 0% is applied to our direct subsidiary, which is a “pass-through entity” for tax purposes.
Segment income tax was an expense of $0.2 million and $0.6 million for the quarters ended September 30, 2018 and 2017, respectively.
The decrease was mainly due to a lower projected effective tax rate for the current year then the prior year.
U.S. federal corporate income tax reform included a broad range of proposals affecting businesses, including corporate tax rates, business deductions and international tax provisions. The reduction in the federal corporate tax rate required a revaluation of our deferred tax assets at the corporate entity level. International tax provisions, including a shift to a territorial system, did not impact JMP Group LLC’s investment in foreign corporations, as the Company has historically included accumulated earnings and profits from controlled foreign corporations.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Revenues
Investment Banking
Investment banking revenues, included in our Broker-Dealer segment, increased $15.5 million, or 28.3%, from $54.8 million for the nine months ended September 30, 2017 to $70.3 million for the same period in 2018. As a percentage of total net revenues after provision for loan losses, investment banking revenues were 67.1% and 68.9% for the nine months ended September 30, 2018 and 2017, respectively. On an operating basis, investment banking revenues were 64.8% and 61.4% for the nine months ended September 30, 2018 and 2017, respectively, as a percentage of adjusted net revenues.
(Dollars in thousands) | Nine Months Ended September 30, | Change from 2017 to 2018 | ||||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||||||
Count | Revenues | Count | Revenues | Count | $ | % | ||||||||||||||||||||||
Equity and debt origination | 73 | $ | 47,276 | 82 | $ | 40,493 | (9 | ) | $ | 6,784 | 16.8 | % | ||||||||||||||||
Advisory | 17 | 23,042 | 14 | 14,321 | 3 | 8,722 | 60.9 | % | ||||||||||||||||||||
Total transactions | 90 | $ | 70,319 | 96 | $ | 54,813 | (6 | ) | $ | 15,505 | 28.3 | % |
The increase in revenues was driven primarily by a 36.8% increase in the average size of the fee paid per transaction, partially offset by a 6.3% decrease in the number of transactions completed. In addition, $5.6 million of the increase is related to a gross up of expenses as a result of the Company's adoption of ASC 606. See Note 3 to the Consolidated Financial Statements for additional details on the new revenue standard and accounts affected by adoption. The number of transactions in which we acted as a bookrunning manager decreased from eighteen to twelve for the nine months ended September 30, 2017 and 2018, respectively.
Brokerage Revenues
Brokerage revenues earned in our Broker-Dealer segment were $14.8 million and $15.1 million for the nine months ended September 30, 2018 and 2017, respectively. Brokerage revenues decreased as a percentage of total net revenues after provision for loan losses, from 19.0% for the nine months ended September 30, 2017 to 14.1% for the nine months ended September 30, 2018. On an operating basis, brokerage revenues were 13.6% and 17.0% for the nine months ended September 30, 2018 and 2017, respectively, as a percentage of adjusted net revenues.
Asset Management Fees
(In thousands) | Nine Months Ended September 30, | |||||||
2018 | 2017 | |||||||
Base management fees: | ||||||||
Fees reported as asset management fees | $ | 9,524 | $ | 12,085 | ||||
Less: Non-controlling interest | (483 | ) | (659 | ) | ||||
Total base management fees | 9,041 | 11,426 | ||||||
Incentive fees: | ||||||||
Fees reported as asset management fees | $ | 5,981 | $ | 1,993 | ||||
Less: Non-controlling interest | (149 | ) | (128 | ) | ||||
Total incentive fees | 5,832 | 1,865 | ||||||
Other fee income: | ||||||||
Fundraising and other income: | $ | 666 | $ | 921 | ||||
Less: Non-controlling interest | (120 | ) | - | |||||
Total other fee income | 546 | 921 | ||||||
Asset management related fees: | ||||||||
Fees reported as asset management fees | $ | 15,505 | $ | 14,078 | ||||
Fees reported as other income | 666 | 921 | ||||||
Less: Non-controlling interest | (752 | ) | (787 | ) | ||||
Total Segment asset management related fee revenues | $ | 15,419 | $ | 14,212 |
Fees reported as asset management fees were $15.5 million and $14.1 million for the nine months ended September 30, 2018 and 2017, respectively. As a percentage of total net revenues after provision for loan losses, asset management revenues decreased from 17.7% for the nine months ended September 30, 2017 to 14.8% for the nine months ended September 30, 2018. Fees reported as other income were $0.7 million and $0.9 million for the nine months ended September 30, 2018 and 2017, respectively. As a percentage of total net revenues after provision for loan losses, other income was 1.2% and 0.6% for the nine months ended September 30, 2017 and for the nine months ended September 30, 2018.
Total segment asset management-related fees include base management fees and incentive fees from our funds, HCC ,and CLOs under management, as well as other income from fee-sharing arrangements with, and fees earned to raise capital for, third-party or equity-method investment partnerships or funds. Total segment asset management-related fee revenues are reconciled to the GAAP measure, total asset management fee revenues, in the table above. We believe that presenting operating asset management-related fees is useful to investors as a means of assessing the performance of our combined asset management activities, including fundraising and other services for third parties. We believe that segment asset management-related fee revenues provides useful information by indicating the relative contributions of base management fees and performance-related incentive fees, thus facilitating a comparison of those fees in a given period to those in prior and future periods. We also believe that asset management-related fee revenue is a more meaningful measure than standalone asset management fees as reported, because asset management-related fee revenues represent the combined impact of the various asset management activities on the Company’s total net revenues.
Total segment asset management related fee revenue increased $1.2 million, from $14.2 million for the nine months ended September 30, 2017 to $15.4 million for the nine months ended September 30, 2018. Total base management fees were $9.0 million and $11.4 million for the nine months ended September 30, 2018 and 2017, respectively. Total incentive fees increased $3.9 million, from a $1.9 million for the nine months ended September 30, 2017 to $5.8 million for the same period in 2018. On an operating basis, asset management related fee revenues were 14.2% and 15.9% for the nine months ended September 30, 2018 and 2017, respectively, as a percentage of adjusted net revenues.
Principal Transactions
Principal transaction revenues increased $2.1 million, from a loss of $3.6 million for the nine months ended September 30, 2017 to a loss of $1.5 million for the same period in 2018. As a percentage of total net revenues after provision for loan losses, principal transaction revenues were negative 4.5% for the nine months ended September 30, 2017 and a negative 1.4% for the nine months ended September 30, 2018.
Total segment principal transaction revenues decreased $2.7 million, from a gain of $3.2 million for the nine months ended September 30, 2017 to a gain of $0.5 million for the same period in 2018. Total segment principal transaction revenues are a non-GAAP financial measure that aggregates our segment reported principal transaction revenues across each segment. The principal transaction revenues for both 2018 and 2017 were reported in our Investment Income segment. Total segment principal transaction revenues are reconciled to the GAAP measure, total principal transaction revenues, in the table below.
(In thousands) | Nine Months Ended September 30, | ||||||||
2018 | 2017 | ||||||||
Equity and other securities excluding non-controlling interest | $ | (537 | ) | $ | 770 | ||||
Warrants and other investments | 815 | 1,290 | |||||||
Investment partnerships | 220 | 1,140 | |||||||
Total segment principal transaction revenues | 498 | 3,200 | |||||||
Operating adjustment addbacks | (1,965 | ) | (6,808 | ) | |||||
Total principal transactions revenues | $ | (1,467 | ) | $ | (3,608 | ) | |||
On a GAAP basis, the increase in income from principal transaction revenues is the result of the cessation of recording equity-method losses investment due to a reduction of the carrying balance of the investment to zero on the balance sheet, partially offset by decreases in net income earned on hedge funds. On an operating basis, as a percentage of total net revenues after provision for loan losses, principal transaction revenues decreased from 3.6% for the nine months ended September 30, 2017 to 0.5% for the nine months ended September 30, 2018.
Gain (Loss) on Sale and Payoff of Loans
Gain on sale and payoff of loans decreased from a gain of $1.2 million for the nine months ended September 30, 2017 to a loss of $0.9 million for the nine months ended September 30, 2018. Gain and loss on sale and payoff of loans was incurred in our Investment Income segment. On a segment basis, gain on sale and payoff of loans decreased from a gain of $1.1 million for the nine months ended September 30, 2017 to a $0.9 million loss for the nine months ended September 30, 2018.
Net Dividend Income
Net dividend income was $0.8 million for the nine months ended September 30, 2017 and $0.9 million for the same period of 2018. Net dividend income primarily related to dividends from our HCC investment.
Net Interest Income/Expense
(In thousands) | ||||||||
2017 | ||||||||
CLO I loan contractual interest income | $ | - | $ | 480 | ||||
CLO I ABS issued contractual interest expense | - | (691 | ) | |||||
Net CLO I contractual interest | - | (211 | ) | |||||
CLO II loan contractual interest income | $ | - | $ | 6,474 | ||||
CLO II ABS issued contractual interest expense | - | (4,807 | ) | |||||
Net CLO II contractual interest | - | 1,667 | ||||||
CLO III loan contractual interest income | $ | 15,885 | $ | 14,147 | ||||
CLO III ABS issued contractual interest expense | (9,680 | ) | (8,687 | ) | ||||
Net CLO III contractual interest | 6,205 | 5,460 | ||||||
CLO IV loan contractual interest income | $ | 19,691 | $ | 8,035 | ||||
CLO IV ABS issued contractual interest expense | (13,879 | ) | (4,697 | ) | ||||
Net CLO IV contractual interest | 5,812 | 3,338 | ||||||
CLO V loan contractual interest income | $ | 10,475 | $ | 33 | ||||
CLO V warehouse/ABS issued contractual interest expense | (6,148 | ) | (7 | ) | ||||
Net CLO V contractual interest | 4,327 | 26 | ||||||
Bond Payable interest expense | (5,630 | ) | (5,701 | ) | ||||
Less: Non-controlling interest in CLOs | (3,137 | ) | (2,914 | ) | ||||
Other interest income | 1,192 | 435 | ||||||
Total Segment net interest income | $ | 8,769 | $ | 2,100 | ||||
Non-controlling interest in CLOs | 3,137 | 2,914 | ||||||
Total net interest income | $ | 11,906 | $ | 5,014 | ||||
Net interest income increased $6.9 million from $5.0 million for the nine months ended September 30, 2017 to $11.9 million for the nine months ended September 30, 2018. The increase was driven primarily by the increased net asset balance at CLO IV and CLO V, leading to an increase in net interest income of $2.5 million and $4.3 million, respectively. CLO IV was securitized in June 2017 and CLO V was securitized in July 2018. The increase in net interest income from CLO IV and CLO V was partially offset by the loss of $1.7 million in net interest earned from CLO II, which was liquidated in the second quarter of 2017. As a percentage of total net revenues after provision for loan losses, net interest income was 6.3% for the nine months ended September 30, 2017 and 11.4% for the nine months ended September 30, 2018.
Total segment net interest income increased from $2.1 million for the nine months ended September 30, 2017 to $8.8 million for the nine months ended September 30, 2018. Net interest income is reported in our Investment Income segment and reflects our portion of the net CLO contractual interest. Total segment net interest income is reconciled to the GAAP measure, total net interest expense, in the table above. As a percentage of adjusted net revenues, net interest income was 8.1% and 2.4% for the nine months ended September 30, 2018 and 2017, respectively.
The following table sets forth contractual interest income and expense related to CLO loans and ABS issued and their weighted average contractual interest rates:
(In thousands) | Nine Months Ended September 30, 2018 | |||||||||||||||||||
Interest Income (Expense) | Average CLO Loan (CLO ABS Issued) Balance | Weighted Average Contractual Interest Rate | Weighted Average LIBOR | Spread to Weighted Average LIBOR | ||||||||||||||||
CLO III loan contractual interest income | $ | 15,885 | 351,788 | 5.69 | % | 2.08 | % | 3.61 | % | |||||||||||
CLO III ABS issued contractual interest expense | (9,680 | ) | (332,100 | ) | 3.56 | % | 2.11 | % | 1.44 | % | ||||||||||
CLO IV loan contractual interest income | 19,691 | 438,583 | 5.69 | % | 2.08 | % | 3.61 | % | ||||||||||||
CLO IV ABS issued contractual interest expense | (13,879 | ) | (422,847 | ) | 4.18 | % | 2.12 | % | 2.07 | % | ||||||||||
CLO V loan contractual interest income | 10,475 | 231,550 | 5.66 | % | 2.33 | % | 3.32 | % | ||||||||||||
CLO V warehouse/ABS issued contractual interest expense | (6,148 | ) | (209,618 | ) | 3.58 | % | 2.08 | % | 1.50 | % | ||||||||||
Net CLO contractual interest | $ | 16,344 | $ | N/A | N/A | N/A | N/A |
(In thousands) | Nine Months Ended September 30, 2017 | |||||||||||||||||||
Interest Income (Expense) | Average CLO Loan (CLO ABS Issued) Balance | Weighted Average Contractual Interest Rate | Weighted Average LIBOR | Spread to Weighted Average LIBOR | ||||||||||||||||
CLO I loan contractual interest income | $ | 480 | $ | 6,975 | 4.10 | % | 0.39 | % | 3.71 | % | ||||||||||
CLO I ABS issued contractual interest expense | (691 | ) | (85,500 | ) | 1.03 | % | 0.39 | % | 0.64 | % | ||||||||||
CLO II loan contractual interest income | 6,474 | 162,643 | 4.96 | % | 0.00 | % | 4.96 | % | ||||||||||||
CLO II ABS issued contractual interest expense | (4,807 | ) | (256,749 | ) | 2.98 | % | 1.07 | % | 1.91 | % | ||||||||||
CLO III loan contractual interest income | 14,147 | 354,518 | 5.01 | % | 1.14 | % | 3.87 | % | ||||||||||||
CLO III loan contractual interest income | (8,687 | ) | (332,100 | ) | 3.13 | % | 1.14 | % | 1.99 | % | ||||||||||
CLO IV loan contractual interest income | 8,035 | 195,459 | 4.96 | % | 1.33 | % | 3.64 | % | ||||||||||||
CLO IV ABS issued contractual interest expense | (4,697 | ) | (320,946 | ) | 3.05 | % | 1.22 | % | 1.83 | % | ||||||||||
CLO V loan contractual interest income | 33 | 817 | 4.88 | % | 1.24 | % | 3.64 | % | ||||||||||||
CLO V warehouse issued contractual interest expense | (7 | ) | (3,960 | ) | 2.61 | % | 1.24 | % | 1.38 | % | ||||||||||
Net CLO contractual interest | $ | 10,254 | $ | N/A | N/A | N/A | N/A |
Loss on Repurchase, Reissuance, or Early Retirement of Debt
Loss on repurchase, reissuance, or early retirement of debt decreased from $5.3 million for the nine months ended September 30, 2017, to $2.8 million for the same period in 2018. The decrease in the loss is related to the liquidation of CLO II during the nine months ended September 30, 2017, partially offset by the refinancing of CLO III during the nine months ended September 30, 018.
Provision for Loan Losses
(in thousands) | Nine Months Ended September 30, | |||||||
2018 | 2017 | |||||||
CLO related provision | $ | (3,861 | ) | $ | (2,159 | ) | ||
Non-CLO related provision | (338 | ) | (1,329 | ) | ||||
Provision for Loan Losses | (4,199 | ) | (3,488 | ) | ||||
Less: General reserves related to CLO II, CLO III, CLO IV, CLO V, CLO V warehouse, and non-controlling interest | 2,799 | 1,073 | ||||||
Segment provision for loan losses | $ | (1,400 | ) | $ | (2,415 | ) |
Provision for loan losses increased $0.7 million, from a provision of $3.5 million for the nine months ended September 30, 2017 to a provision of $4.2million for the same period in 2018. The increase in the provision for loan losses is attributable to the larger average CLO loan balance outstanding for the nine months ended September 30, 2018 than September 30, 2017. As a percent of net revenues after provision for loan losses, the provision for loan losses was negative 4.0% and negative 4.4% for the nine months ended September 30, 2018 and 2017, respectively.
Total segment provision for loan losses decreased from a provision of $2.4 million for the nine months ended September 30, 2017 to a provision of $1.4 million for the nine months ended September 30, 2018. Total segment provision for loan losses is a non-GAAP financial measure that aggregates our segment reported provision for loan losses across each segment. Our total segment provision for loan losses in 2018 and 2017 was solely recognized in our Investment Income segment. As a percent of total segment adjusted net revenues, segment provision for loan losses was negative 1.3% and negative 2.7% for the nine months ended September 30, 2018 and 2017, respectively.
Expenses
Non-Interest Expenses
Compensation and Benefits
Compensation and benefits, which includes employee payroll, taxes and benefits, performance-based cash bonus and commissions, as well as equity-based compensation to our employees and managing directors, increased $7.1 million, or 10.2%, from $69.0 million for the nine months ended September 30, 2017 to $76.1 million for the nine months ended September 30, 2018.
Employee payroll, taxes and benefits, and consultant fees were $33.0 million and $34.4 million for the nine months ended September 30, 2018 and 2017, respectively. Performance-based bonus and commission increased $8.4 million from $32.2 million for the nine months ended September 30, 2017 to $40.6 million for the nine months ended September 30, 2018.
Equity-based compensation was $2.5 million and $2.2 million for the nine months ended September 30, 2018 and 2017, respectively.
Compensation and benefits as a percentage of revenues decreased from 86.8% of total net revenues after provision for loan losses for the nine months ended September 30, 2017 to 72.6% for the nine months ended September 30, 2018.
Our segment reported compensation and benefits recognizes 100% of the cost of deferred compensation, including non-cash share-based compensation expense, in the period for which such compensation was awarded, instead of recognizing such cost over the vesting period as required under GAAP, in order to match compensation expense with the actual period upon which the compensation was based. The segment reported compensation and benefits increased $8.4 million from $66.4 million for the nine months ended September 30, 2017 to $74.8 million for the nine months ended September 30, 2018. As a percent of total segment net revenues, compensation and benefits were 69.0% and 74.5% for the nine months ended September 30, 2018 and 2017, respectively.
Administration
Administration expense was $6.0 million for the nine months ended September 30, 2017 and $7.2 million for the same period in 2018. As a percentage of total net revenues after provision for loan losses, administration expense decreased from 7.5% for the nine months ended September 30, 2017 to 6.9% for the same period in 2018.
Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fees were $2.3 million for the nine months ended September 30, 2017 and $2.4 million for the nine months ended September 30, 2018. As a percentage of total net revenues after provision for loan losses, our brokerage, clearing and exchange fees decreased from 2.9% for the nine months ended September 30, 2017 to 2.3% for the same period in 2018.
Travel and Business Development
Travel and business development expenses increased $0.5 million, from $2.7 million for the nine months ended September 30, 2017 to $3.2 million for the nine months ended September 30, 2018. As a percentage of total net revenues after provision for loan losses, travel and business development expense was 3.1% and 3.4% for the nine months ended September 30, 2018 and 2017, respectively.
Managed deal expenses
Managed deal expenses were $4.5 million and zero for the nine months ended September 30, 2018 and 2017, respectively. As a percentage of total net revenues after provision for loan losses, managed deal expenses increased from zero percent for the nine months ended September 30, 2017 to 4.3% for the same period in 2018. The increase is related to a gross up of expenses as a result of the Company's adoption of ASC 606. See Note 3 to the Consolidated Financial Statements for additional details on the new revenue standard and accounts affected by adoption.
Communications and Technology
Communications and technology expenses were $3.1 million and $3.2 million for the nine months ended September 30, 2018 and 2017, respectively. As a percentage of total net revenues after provision for loan losses, communications and technology expense decreased from 4.0% for the nine months ended September 30, 2017 to 3.0% for the same period in 2018.
Occupancy
Occupancy expenses were $3.3 million for the nine months ended September 30, 2017 and $3.4 million for the nine months ended September 30, 2018. As a percentage of total net revenues after provision for loan losses, occupancy expense decreased from 4.2% for the nine months ended September 30, 2017 to 3.3% for the same period in 2018.
Professional Fees
Professional fees were $4.3 million and $3.1 million for the nine months ended September 30, 2018 and 2017, respectively. As a percentage of total net revenues after provision for loan losses, professional fees increased from 3.9% for the nine months ended September 30, 2017 to 4.1% for the same period in 2018.
Depreciation
Depreciation expenses were $0.8 million and $0.9 million for the nine months ended September 30, 2018 and 2017. As a percentage of total net revenues after provision for loan losses, depreciation decreased from 1.1% for the nine months ended September 30, 2017 to 0.8% for the same period in 2018.
Other Expenses
Other expenses were $1.5 million and $2.0 million for the nine months ended September 30, 2018 and 2017, respectively. As a percentage of total net revenues after provision for loan losses, other expenses decreased from 2.5% for the nine months ended September 30, 2017 to 1.5% for the same period in 2018.
Net Income Attributable to Non-controlling Interest
Net income attributable to non-controlling interest decreased from net income of $1.7 million for the nine months ended September 30, 2017 to net income of $0.1 million for the nine months ended September 30, 2018. Non-controlling interest for the nine months ended September 30, 2017 includes the interest of third parties in CLO I, CLO II, CLO III, and HCAP Advisors. Non-controlling interest for the nine months ended September 30, 2018 includes the interest of third parties in CLO III, HCAP Advisors, and HCS Strategic Investments LLC.
Provision for Income Taxes
Income tax benefit was $0.1 million for the nine months ended September 30, 2018 and $0.2 million for the nine months ended September 30, 2017. For the purposes of calculating operating net income, a combined federal and state tax rate of 26% is assumed for our taxable direct subsidiaries, adjusted for a cap on allowable interest expense deduction due to recent tax reform, while a rate of 0% is applied to our direct subsidiary, which is a “pass-through entity” for tax purposes.
Segment income tax was an expense of $0.6 million and a benefit of $0.2 million for the nine months ended September 30, 2018 and 2017, respectively.
The decrease in the income tax benefit was mainly due to the increase in book income earned by taxable direct subsidiaries and a change in the estimated effective tax rate for the year.
U.S. federal corporate income tax reform included a broad range of proposals affecting businesses, including corporate tax rates, business deductions and international tax provisions. The reduction in the federal corporate tax rate required a revaluation of our deferred tax assets at the corporate entity level. International tax provisions, including a shift to a territorial system, did not impact JMP Group LLC’s investment in foreign corporations, as the Company has historically included accumulated earnings and profits from controlled foreign corporations.
Financial Condition, Liquidity and Capital Resources
In the section that follows, we discuss the significant changes in the components of our balance sheet, cash flows, and capital resources and liquidity for the nine months ended September 30, 2018 to demonstrate where our capital is invested and the financial condition of the Company.
Overview
As of September 30, 2018, we had net liquid assets of $60.5 million consisting of cash and cash equivalents, proceeds from short sales on deposit, receivable from clearing broker, marketable securities owned, and general partner investments in hedge funds managed by HCS, net of marketable securities sold but not yet purchased, accrued compensation, deferred compensation paid in January 2018, and non-controlling interest. We have satisfied our capital and liquidity requirements primarily through the issuance of the Senior Notes and internally generated cash from operations. Most of our financial instruments, other than loans collateralizing ASB issued, loans held for investment, and ABS issued, are recorded at fair value or amounts that approximate fair value.
Liquidity Considerations Related to CLOs
Our maximum exposure to loss of capital on the CLOs is the $13.3 million investment related to CLO III, $36.8 million investment in CLO IV and $28.7 million in CLO V as of September 30, 2018, plus our portion of the earnings retained in the CLOs since the inception dates. However, for U.S. federal tax purposes, the CLOs are treated as disregarded entities such that the taxable income earned in the CLO is taxable to us. If the CLOs are in violation of certain coverage tests, mainly any of their over-collateralization ratios, residual cash flows otherwise payable to us as owners of the subordinated notes would be required to be used to buy additional collateral or to repay indebtedness senior to us in the securitization. This could require us to pay income tax on earnings prior to the residual cash flow distributions to us.
The CLOs must comply with certain asset coverage tests, such as tests that restrict the amount of discounted obligations and obligations rated “CCC” or lower it can hold. Defaulted obligations, discounted assets and assets rated “CCC” or lower in excess of applicable limits in the CLOs investment criteria are not given full par credit for purposes of calculation of the CLO over-collateralization (“OC”) tests. If any of the CLOs were to violate any of the secured note OC tests, we would be required to pay down the most senior notes with the residual cash flows until the violation was cured. In the most extreme case, if a CLO were in violation of the most senior OC test, the Class A note holders would have the ability to declare an event of default and cause an acceleration of all principal and interest outstanding on the notes. The CLOs were in compliance as of September 30, 2018 and December 31, 2017.
For financial reporting purposes, the loans and ABS of the CLOs are consolidated on our balance sheet. The loans are reported at their cost adjusted for credit reserves, purchase discounts, and allowance for loan losses. The ABS are recorded net of liquidity discounts and original issue discounts. At September 30, 2018, we had $1,164 million of loans collateralizing asset-backed securities, net, $44.8 million of restricted cash and $2.8 million of interest receivable funded by $1,114.5 million of asset-backed securities issued, net, and interest payable of $9.5 million. These assets and liabilities represented 89.0% of total assets and 89.1% of total liabilities, respectively, reported on our Consolidated Statement of Financial Condition at September 30, 2018.
The tables below summarize the loans held by the CLOs grouped by range of outstanding balance, Moody’s Investors Services, Inc. rating category and industry as of September 30, 2018.
(Dollars in thousands) | As of September 30, 2018 | ||||||||
Range of Outstanding Balance | Number of Loans | Maturity Date | Total Principal | ||||||
$0 - $500 | 175 | 3/3020 - 12/2026 | $ | 75,302 | |||||
$500 - $2,000 | 595 | 12/2018 - 8/2026 | 758,365 | ||||||
$2,000 - $5,000 | 94 | 9/2019 - 4/2026 | 240,597 | ||||||
$5,000 - $10,000 | 0 | - | |||||||
Total | 864 | $ | 1,074,264 |
(Dollars in thousands) | As of September 30, 2018 | |||||||||||
Industry | Number of Loans | Outstanding Balance | % of Outstanding Balance | |||||||||
Aerospace & Defense | 25 | $ | 37,296 | 3.5 | % | |||||||
Automotive | 34 | 39,622 | 3.7 | % | ||||||||
Banking, Finance, Insurance & Real Estate | 59 | 68,913 | 6.4 | % | ||||||||
Beverage, Food & Tobacco | 38 | 51,655 | 4.8 | % | ||||||||
Capital Equipment | 32 | 31,553 | 2.9 | % | ||||||||
Chemicals, Plastics & Rubber | 29 | 25,937 | 2.4 | % | ||||||||
Construction & Building | 25 | 27,439 | 2.6 | % | ||||||||
Consumer Goods: Durable | 20 | 24,984 | 2.3 | % | ||||||||
Consumer Goods: Non-durable | 36 | 49,442 | 4.6 | % | ||||||||
Containers, Packaging & Glass | 26 | 27,905 | 2.6 | % | ||||||||
Energy: Electricity | 8 | 9,827 | 0.9 | % | ||||||||
Energy: Oil & Gas | 11 | 13,921 | 1.3 | % | ||||||||
Environmental Industries | 13 | 15,341 | 1.4 | % | ||||||||
Forest Products & Paper | 3 | 2,220 | 0.2 | % | ||||||||
Healthcare & Pharmaceuticals | 58 | 73,061 | 6.8 | % | ||||||||
High Tech Industries | 66 | 86,763 | 8.1 | % | ||||||||
Hotel, Gaming & Leisure | 51 | 55,411 | 5.2 | % | ||||||||
Media: Broadcasting & Subscription | 19 | 25,910 | 2.4 | % | ||||||||
Media: Diversified & Production | 15 | 18,207 | 1.7 | % | ||||||||
Media: Advertising, Printing, Publishing | 14 | 19,223 | 1.8 | % | ||||||||
Metals & Mining | 15 | 13,044 | 1.2 | % | ||||||||
Retail | 48 | 71,467 | 6.7 | % | ||||||||
Services: Business | 87 | 116,693 | 10.9 | % | ||||||||
Services: Consumer | 50 | 67,873 | 6.3 | % | ||||||||
Telecommunications | 27 | 34,681 | 3.2 | % | ||||||||
Transportation: Cargo | 21 | 26,188 | 2.4 | % | ||||||||
Transportation: Consumer | 21 | 22,822 | 2.1 | % | ||||||||
Utilities: Electric | 1 | 236 | 0.0 | % | ||||||||
Wholesale | 12 | 16,630 | 1.5 | % | ||||||||
864 | $ | 1,074,264 | 100.0 | % |
(Dollars in thousands) | As of September 30, 2018 | |||||||||||
Moody's Rating Category | Number of Loans | Outstanding Balance | % of Outstanding Balance | |||||||||
Baa3 | 6 | $ | 7,421 | 0.7 | % | |||||||
Ba1 | 34 | 41,355 | 3.8 | % | ||||||||
Ba2 | 67 | 67,939 | 6.3 | % | ||||||||
Ba3 | 98 | 116,209 | 10.8 | % | ||||||||
B1 | 140 | 170,229 | 15.8 | % | ||||||||
B2 | 325 | 423,313 | 39.4 | % | ||||||||
B3 | 165 | 200,855 | 18.7 | % | ||||||||
Caa1 | 25 | 40,824 | 3.8 | % | ||||||||
Caa2 | 2 | 4,163 | 0.4 | % | ||||||||
Ca | 2 | 1,956 | 0.2 | % | ||||||||
Total | 864 | $ | 1,074,264 | 100.0 | % |
Other Liquidity Considerations
As of September 30, 2018, our indebtedness consists of our Senior Notes and notes payable. We have no outstanding balances on our revolving lines of credit with City National Bank (“CNB”) held at JMP Securities or JMP Holdings.
In January 2013, we raised approximately $46.0 million from the issuance of 8.00% Senior Notes (“2013 Senior Notes”). In January 2014, we raised approximately $48.3 million from the issuance of 7.25% Senior Notes (“2014 Senior Notes”), which were fully redeemed on December 28, 2017. In November 2017, we raised approximately $50.0 million from the issuance of 7.25% Senior Notes (“2017 Senior Notes” and, together with the 2013 Senior Notes, the “Senior Notes”). The 2013 Senior Notes will mature on January 15, 2023 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after January 15, 2016, at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The 2013 Senior Notes bear interest at a rate of 8.00% per year, payable quarterly on January 15, April 15, July 15 and October 15 of each year. The 2017 Senior Notes will mature on November 15, 2027 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after November 28, 2020, at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The 2017 Senior Notes bear interest at a rate of 7.25% per year, payable quarterly on February 15, May 15, August 15 and November 15 of each year. The Company redeemed $10.0 million of the issued and outstanding 2013 Senior Notes on July 31, 2018 The Company recorded a loss of $0.2 million related to the early retirement of the 2013 Senior Notes.
In connection with the Reorganization Transaction, pursuant to which JMP Group Inc. became a wholly-owned subsidiary of JMP Group LLC, we entered into a Third Supplemental Indenture, dated as of October 15, 2014 (the “Third Supplemental Indenture”), among JMP Group Inc., JMP Group LLC and JMP Investment Holdings LLC, as guarantors (the “Guarantors”), and U.S. Bank National Association, as trustee. The Third Supplemental Indenture became effective on January 1, 2015. Under the Third Supplemental Indenture, the Guarantors have jointly and severally provided a full and unconditional guarantee of the due and punctual payment of the principal and interest on the Senior Notes and the due and punctual payment or performance of all other obligations of JMP Group Inc. under the Indenture, dated as of January 24, 2013, between JMP Group Inc. and the Trustee, as supplemented by a First Supplemental Indenture, dated as of January 25, 2013, a Second Supplemental Indenture, dated as of January 29, 2014, a Third Supplemental Indenture, dated as of October 15, 2014, and the Fourth Supplemental Indenture, dated as of November 28, 2017.
The Company’s Credit Agreement (the “Credit Agreement”), dated as of August 3, 2006, was entered into by and between JMP Holding LLC and City National Bank (“CNB”), and was subsequently amended. The Credit Agreement and subsequent amendments provide a $25.0 million line of credit with a revolving period through June 4, 2019. On such date, any outstanding amounts convert to a term loan. The term loan will be repaid in quarterly installments of 3.75% of funded debt for the first two years, 5.00% of funded debt for the next two years, and the remainder due at maturity. Proceeds for this line of credit will be used to make financial investments, for working capital purposes, for general corporate purposes, as well as a $5.0 million sublimit to issue letters of credit. The Company had no outstanding balance on this line of credit as of September 30, 2018 and December 31, 2017.
The Credit Agreement for the term loan provides that the proceeds of the CNB Loans are subject to the following restrictions: (i) the initial term loan and up to $5.0 million of the revolving line of credit loans may not be used for any purpose other than to fund certain permitted investments and acquisitions and to fund JMP Holding LLC’s working capital needs in the ordinary course of its business; (ii) all other proceeds of the revolving line of credit may not be used for any purpose other than to make investments in HCS and by HCS to make investments in loans that are made to persons that are not affiliates of borrower; and (iii) the term loan may not be used for any purpose other than to make equity investments in CLOs and by CLOs to make certain permitted investments in collateralized loan obligations.
The Credit Agreement includes a minimum fixed charge applicable to us and our subsidiaries, a minimum net worth covenant applicable to us and our subsidiaries and a minimum liquidity covenant applicable to JMP Holding LLC and its subsidiaries. As of September 30, 2018, we were in compliance with all of these financial covenants. The Credit Agreement also includes an event of default for a “change of control” that tests, in part, the composition of our ownership and an event of default if two or more of the members of the Company’s Executive Committee fail to be involved actively on an ongoing basis in the management of JMP Holding LLC or any of its subsidiaries.
Separately, under a Revolving Note and Cash Subordination Agreement, JMP Securities holds a $20.0 million revolving line of credit with CNB to be used for regulatory capital purposes during its securities underwriting activities. The unused portion of the line bears interest at the rate of 0.25% per annum, paid monthly. On June 6, 2018, JMP Securities entered into an amendment to its Credit Agreement (the “Amendment”). Pursuant to this Amendment, the $20.0 million line of credit was renewed for one year. On June 6, 2019, any existing outstanding amount will convert to a term loan maturing the following year. The remaining terms of this line of credit are consistent with those of the existing line of credit. There was no borrowing on this line of credit as of September 30, 2018 and December 31, 2017.
The Credit Agreement contains financial and other covenants, including, but not limited to, limitations on debt, liens and investments, as well as the maintenance of certain financial covenants. A violation of any one of these covenants could result in a default under the Credit Agreement, which would permit CNB to terminate the Company’s note and require the immediate repayment of any outstanding principal and interest. At both September 30, 2018 and December 31, 2017, the Company was in compliance with the loan covenants.
On July 31, 2017, the Company established a $200.0 million revolving credit facility with BNP Paribas to finance the acquisition of a portfolio of assets, including certain debt obligations. The Company subsequently entered into amendments to the credit facility and as of June 21, 2018, the credit facility was increased to $340.0 million. On July 26, 2018, the credit facility was fully repaid using proceeds from the securitization of CLO V. The balance of the facility was zero as of September 30, 2018 and $61.3 million as of December 31, 2017.
On February 28, 2018, the Company, entered into a Repurchase Agreement with BNP Paribas to finance the acquisition of asset-backed securities issued by CLO III in connection with risk retention requirements. During the second quarter of 2018 the Company fully repaid the outstanding balance and sold the assets collateralizing the agreement. As of September 30, 2018, there was no balance outstanding in connection with the Repurchase Agreement.
The timing of bonus compensation payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees and managing directors are generally paid semi-monthly during the year, bonus compensation, which makes up a larger portion of total compensation, is generally paid once a year during the first two months of the following year. In the first two months of 2018, we paid out $37.2 million of cash bonuses for 2017, excluding employer payroll tax expense.
The Company currently intends to continue to declare monthly cash distributions on all outstanding shares. The table below represents cash distributions made for the three months ended September 30, 2018.
Date | Record | Date | Per Share | |||
Declared | Date | Paid | Amount | |||
July 18, 2018 | July 31, 2018 | August 15, 2018 | $ | 0.030 | ||
July 18, 2018 | August 31, 2018 | September 14, 2018 | $ | 0.030 | ||
July 18, 2018 | September 28 2018 | October 15, 2018 | $ | 0.030 |
During the three months ended September 30, 2018, the Company repurchased 146,003 of the Company’s shares at an average price of $5.34 per share for an aggregate purchase price of $0.8 million on the open market.
We had total restricted cash of $48.6 million comprised primarily of $44.8 million of restricted cash related to the CLOs as of September 30, 2018. This balance was comprised of $16.0 million in interest received from loans in the CLOs, and $28.8 million in principal cash. The interest and fees will be restricted until the next payment date to note holders of the CLOs. The principal restricted cash will be used to buy additional loans or pay down the senior debt in the CLOs.
Because of the nature of our investment banking and sales and trading businesses, liquidity is important to us. Accordingly, we regularly monitor our liquidity position, including our cash and net capital positions. We believe that our available liquidity and current level of equity capital, combined with the funds anticipated to be provided by our operating activities, will be adequate to meet our liquidity and regulatory capital requirements for at least the next twelve months. If circumstances required it, we could improve our liquidity position by discontinuing repurchases of the Company’s common shares, halting cash distributions on our common shares and reducing cash bonus compensation paid.
JMP Securities, our wholly-owned subsidiary and a registered securities broker-dealer, is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital, as defined, and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. JMP Securities had net capital of $28.3 million and $37.3 million, which were $27.0 million and $35.9 million in excess of the required net capital of $1.3 million and $1.4 million, at September 30, 2018 and December 31, 2017, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 0.70 to 1 and 0.58 to 1 at September 30, 2018 and December 31, 2017, respectively.
A condensed table of cash flows for the nine months ended September 30, 2018 and 2017 is presented below.
(Dollars in thousands) | Nine Months Ended September 30, | Change from 2017 to 2018 | ||||||||||||||
2018 | 2017 | $ | % | |||||||||||||
Cash flows provided by (used in) operating activities | $ | 7,955 | $ | (12,660 | ) | $ | 20,615 | 162.8 | % | |||||||
Cash flows used in investing activities | (313,385 | ) | (52,376 | ) | (261,009 | ) | -498.3 | % | ||||||||
Cash flows provided by (used in) financing activities | 289,838 | (98,655 | ) | 388,493 | 393.8 | % | ||||||||||
Total cash flows | $ | (15,592 | ) | $ | (163,691 | ) | $ | 148,099 | 90.5 | % |
Cash Flows for the nine months Ended September 30, 2018
Cash decreased by $15.6 million during the nine months ended September 30, 2018, as a result of cash used in investing activities, partially offset by cash provided by operating and financing activities.
Our operating activities provided $8.0 million of cash from the net loss of $1.8 million, adjusted for the cash used by operating assets and liabilities of $0.9 million, and provided by non-cash revenue and expense items of $10.7 million. The cash used by the change in operating assets and liabilities was primarily due to a decrease in accrued compensation of $9.8 million, partially offset by a decrease in deposits and other assets of $6.9 million and an increase in interest payable of $3.9 million.
Our investing activities used $313.4 million of cash primarily due to a $307.8 million funding of loans collateralizing asset-backed securities issued and $312.1 million of funding for loans held for investment, partially offset by the $268.2 million of receipts from loans collateralizing asset-backed securities issued, $26.7 million of receipts from loans held for investments, and $13.9 million from the sale of other investments.
Our financing activities provided $289.8 million of cash primarily due to $669.1 million of proceeds from the issuance of asset-backed securities due to the refinancing of CLO III and the securitization of CLO V and $263.8 million in proceeds from draws on the CLO V warehouse facility, partially offset by the repurchase of $332.1 million of asset-backed securities issued at CLO III, $325.0 million in repayments on the CLO V warehouse facility, and $9.9 million of repayments on bonds payable.
Cash Flows for the nine months Ended September 30, 2017
Cash decreased by $163.7 million during the nine months ended September 30, 2017, as a result of cash used in operating, investing, and financing activities.
Our operating activities used $12.7 million of cash from the net loss of $12.8 million, adjusted for the cash used by operating assets and liabilities of $15.1 million, and provided by non-cash revenue and expense items of $15.2 million. The cash used by the change in operating assets and liabilities is primarily due to a $22.4 million increase in receivables, and a $7.9 million decrease in accrued compensation, partially offset by a $16.3 million increase in market securities sold but not yet purchased.
Our investing activities used $52.4 million of cash primarily due $614.4 million of funding for loans collateralizing asset-backed securities issued and $13.5 million of funding of loans held for investment, partially offset by $506.5 million of receipts from loans collateralizing asset-backed securities, $35.7 million of proceeds from loans held for sale, $25.0 million of cash provided by changes in cash collateral posted for derivative transactions, and $12.3 million of proceeds from sale of other investments.
Our financing activities used $98.7 million of cash primarily due to $503.6 million of repayments of asset-backed securities issued relating to the liquidation of CLO I and CLO II, partially offset by $408.4 million of proceeds from issuance of asset-backed securities due to the securitization of CLO IV, and $7.0 million of proceeds from the CLO V warehouse facility.
Contractual Obligations
As of September 30, 2018, our aggregate minimum future commitment on our leases was $22.7 million. See Note 13 of the notes to the consolidated financial statements for more information. Our remaining contractual obligations have not materially changed from those reported in our Annual Report.
Off-Balance Sheet Arrangements
The Company had unfunded commitments to lend of $1.1 million and $2.1 million as of September 30, 2018 and December 31, 2017, respectively. Had the borrower drawn on these, the Company would have been obligated to fund them. The funds for the unfunded commitments to lend and the cash collateral supporting these standby letters of credit are included in restricted cash on the Consolidated Statement of Financial Position as of September 30, 2018. The CLO-related commitments do not extend to JMP Group LLC. See Note 18 of the notes to the consolidated financial statements for more information on the financial instruments with off-balance sheet risk in connection with the CLOs.
Unfunded commitments are agreements to lend to a borrower, provided that all conditions have been met. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each borrower’s creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a borrower to a third party. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to borrowers.
We had no other material off-balance sheet arrangements as of September 30, 2018.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and of revenues and expenses during the reporting periods. We base our estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances. The use of different estimates and assumptions could produce materially different results. For example, if factors such as those described under the caption “Risk Factors” in our Annual Report cause actual events to differ from the assumptions we used in applying the accounting policies, our results of operations, financial condition and liquidity could be adversely affected.
On an ongoing basis, we evaluate our estimates and assumptions, particularly as they relate to accounting policies that we believe are most important to the presentation of our financial condition and results of operations. We regard an accounting estimate or assumption to be most important to the presentation of our financial condition and results of operations where:
• | the nature of the estimates or assumptions is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and |
• | the impact of the estimates or assumptions on our financial condition or operating performance is material. |
Using the foregoing criteria, we consider the following to be our critical accounting policies:
● | Valuation of Financial Instruments |
● | Asset Management Investment Partnerships |
● | Loans Held for Sale |
● | Loans Collateralizing Asset-backed Securities Issued |
● | Allowance for Loan Losses |
● | Asset-backed Securities Issued |
● | Legal and Other Contingent Liabilities |
● | Income Taxes |
Our significant accounting policies are described further in the “Critical Accounting Policies and Estimates” section and Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements in our Annual Report.
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not Applicable.
ITEM 4. | Controls and Procedures |
Our management, with the participation of the Chairman and Chief Executive Officer (the principal executive officer) and the Chief Financial Officer (the principal financial officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. | Legal Proceedings |
We are involved in a number of judicial, regulatory and arbitration matters arising in connection with our business. The outcome of matters we have been and currently are involved in cannot be determined at this time, and the results cannot be predicted with certainty. There can be no assurance that these matters will not have a material adverse effect on our results of operations in any future period and a significant judgment could have a material adverse impact on our financial condition, results of operations and cash flows. We may in the future become involved in additional litigation in the ordinary course of our business, including litigation that could be material to our business. Management, after consultation with legal counsel, believes that the currently known actions or threats against us will not result in any material adverse effect on our financial condition, results of operations or cash flows.
ITEM 1A. | Risk Factors |
The risk factors included in our Annual Report continue to apply to us, and describe risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the forward-looking statements contained in this Quarterly Report. There have not been any material changes from the risk factors previously described in our Annual Report.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The table below sets forth the information with respect to purchases made by or on behalf of JMP Group LLC or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common shares during the quarter ended September 30, 2018
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||
July 1, 2018 to July 31, 2018 | 50,169 | $ | 5.38 | 50,169 | 661,034 | |||||||||||
August 1, 2018 to August 31, 2018 | 33,198 | $ | 5.38 | 33,198 | 627,836 | |||||||||||
September 1, 2018 to September 30, 2018 | 62,636 | $ | 5.28 | 62,636 | 565,200 | |||||||||||
Total | 146,003 | $ | 5.34 | 146,003 |
(1) | On December 11, 2017, our board of directors authorized the repurchase of 1,000,000 shares through December 31, 2018. |
ITEM 3. | Defaults Upon Senior Securities |
None.
ITEM 4. | Mine Safety Disclosures |
Not Applicable.
ITEM 5. | Other Information |
None.
ITEM 6. | Exhibits |
See Exhibit Index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 9, 2018
JMP Group LLC | |||
By: |
| /s/ JOSEPH A. JOLSON | |
Name: |
| Joseph A. Jolson | |
Title: |
| Chairman and Chief Executive Officer | |
By: |
| /s/ RAYMOND S. JACKSON | |
Name: |
| Raymond S. Jackson | |
Title: |
| Chief Financial Officer |
EXHIBIT INDEX
_________
*Filed herewith
**Furnished, and not filed
72