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, 2020 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 and Zip code)
(415) 835-8900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading symbol(s) | Name of Each Exchange on Which Registered | ||
Shares representing limited liability company interests in JMP Group LLC | JMP | New York Stock Exchange | ||
JMP Group LLC 6.875% Senior Notes due 2029 | JMPNZ | The NASDAQ Global Market | ||
JMP Group Inc. 7.25% Senior Notes due 2027 | JMPNL | The NASDAQ Global Market |
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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth 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 10, 2020: 19,665,947.
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 (Unaudited) | 4 | |
Consolidated Statements of Operations (Unaudited) | 5 | |
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) | 6 | |
Consolidated Statements of Changes in Shareholders' Equity (Unaudited) | 7 | |
Consolidated Statements of Cash Flows (Unaudited) | 8 | |
Notes to Consolidated Financial Statements (Unaudited) | 10 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 32 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 57 |
Item 4. | Controls and Procedures | 57 |
PART II. | OTHER INFORMATION | 58 |
Item 1. | Legal Proceedings | 58 |
Item 1A. | Risk Factors | 58 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 59 |
Item 3. | Defaults Upon Senior Securities | 59 |
Item 4. | Mine Safety Disclosures | 59 |
Item 5. | Other Information | 59 |
Item 6. | Exhibits | 59 |
EXHIBIT INDEX | 60 | |
SIGNATURES | 61 |
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. 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 the Investor Relations section of JMP Group LLC's website in addition to following JMP Group LLC’s SEC filings, press releases and investor presentation materials.
PART I. FINANCIAL INFORMATION
ITEM 1. | Financial Statements |
JMP Group LLC
Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in thousands, except share and per share data)
September 30, 2020 | December 31, 2019 (1) | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 56,678 | $ | 49,630 | ||||
Restricted cash | 1,287 | 1,287 | ||||||
Investment banking fees receivable | 13,146 | 9,066 | ||||||
Marketable securities owned at fair value (includes $5,975 and $0 pledged as collateral at September 30, 2020 and December 31, 2019, respectively) | 55,497 | 73,101 | ||||||
Other investments (includes $14,374 and $14,206 at fair value at September 30, 2020 and December 31, 2019, respectively) | 24,022 | 35,309 | ||||||
Loans held for investment, net of allowance for loan losses | 1,109 | 1,210 | ||||||
Interest receivable | 348 | 502 | ||||||
Fixed assets, net | 3,381 | 4,267 | ||||||
Operating lease right-of-use asset | 17,112 | 19,632 | ||||||
Other assets | 40,077 | 36,253 | ||||||
Total assets | $ | 212,657 | $ | 230,257 | ||||
Liabilities and Equity | ||||||||
Liabilities: | ||||||||
Marketable securities sold, but not yet purchased, at fair value | $ | - | $ | 3,855 | ||||
Accrued compensation | 25,550 | 30,253 | ||||||
Interest payable | 707 | 520 | ||||||
Note payable | 10,610 | 6,812 | ||||||
Bond payable, net of debt issuance costs of $3,049 and $3,416 at September 30, 2020 and December 31, 2019, respectively | 80,816 | 82,584 | ||||||
Operating lease liability | 22,239 | 25,394 | ||||||
Other liabilities | 19,485 | 19,478 | ||||||
Total liabilities | 159,407 | 168,896 | ||||||
Commitments and Contingencies (Note 14) | ||||||||
JMP Group LLC Shareholders' Equity | ||||||||
Common shares, $0.001 par value, 100,000,000 shares authorized at September 30, 2020 and December 31, 2019; 22,797,092 shares issued at September 30, 2020 and December 31, 2019; 19,635,544 and 19,509,349 shares outstanding at September 30, 2020 and December 31, 2019, respectively | 23 | 23 | ||||||
Additional paid-in capital | 134,736 | 133,894 | ||||||
Treasury shares at cost, 3,161,548 and 3,287,743 shares at September 30, 2020 and December 31, 2019, respectively | (14,269 | ) | (14,872 | ) | ||||
Accumulated other comprehensive loss | (328 | ) | (4,769 | ) | ||||
Accumulated deficit | (66,294 | ) | (52,588 | ) | ||||
Total JMP Group LLC shareholders' equity | 53,868 | 61,688 | ||||||
Non-controlling interest | (618 | ) | (327 | ) | ||||
Total equity | 53,250 | 61,361 | ||||||
Total liabilities and equity | $ | 212,657 | $ | 230,257 |
(1) | The statement of financial condition as of December 31, 2019 is derived from the audited financial statements as of that date. |
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, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues | ||||||||||||||||
Investment banking | $ | 20,874 | $ | 15,228 | $ | 57,094 | $ | 44,843 | ||||||||
Brokerage | 4,176 | 3,968 | 14,008 | 13,160 | ||||||||||||
Asset management fees | 2,911 | 1,628 | 6,339 | 5,685 | ||||||||||||
Principal transactions | (2,737 | ) | (340 | ) | (20,337 | ) | 6,371 | |||||||||
Loss on sale, payoff and mark-to-market of loans | - | - | - | (38 | ) | |||||||||||
Net dividend income | 4 | 279 | 241 | 868 | ||||||||||||
Other income | 841 | 759 | 2,688 | 1,517 | ||||||||||||
Non-interest revenues | 26,069 | 21,522 | 60,033 | 72,406 | ||||||||||||
Interest income | 2,287 | 2,328 | 6,391 | 19,391 | ||||||||||||
Interest expense | (1,732 | ) | (1,930 | ) | (5,237 | ) | (14,642 | ) | ||||||||
Net interest income | 555 | 398 | 1,154 | 4,749 | ||||||||||||
Gain (loss) on repurchase, reissuance or early retirement of debt | - | (458 | ) | 697 | (458 | ) | ||||||||||
Provision for loan losses | - | (438 | ) | - | (438 | ) | ||||||||||
Total net revenues | 26,624 | 21,024 | 61,884 | 76,259 | ||||||||||||
Non-interest expenses | ||||||||||||||||
Compensation and benefits | 23,502 | 17,506 | 62,101 | 54,673 | ||||||||||||
Administration | 1,408 | 2,301 | 4,697 | 6,978 | ||||||||||||
Brokerage, clearing and exchange fees | 620 | 617 | 1,901 | 2,051 | ||||||||||||
Travel and business development | 65 | 1,263 | 1,041 | 3,631 | ||||||||||||
Managed deal expenses | 990 | 685 | 2,528 | 2,552 | ||||||||||||
Communications and technology | 1,072 | 1,061 | 3,286 | 3,241 | ||||||||||||
Occupancy | 1,194 | 1,196 | 3,587 | 4,028 | ||||||||||||
Professional fees | 776 | 1,236 | 2,397 | 3,513 | ||||||||||||
Depreciation | 278 | 307 | 1,223 | 915 | ||||||||||||
Other | (8 | ) | 200 | 201 | 700 | |||||||||||
Total non-interest expenses | 29,897 | 26,372 | 82,962 | 82,282 | ||||||||||||
Net income (loss) before income taxes | (3,273 | ) | (5,348 | ) | (21,078 | ) | (6,023 | ) | ||||||||
Income tax benefit | (128 | ) | (1,220 | ) | (7,191 | ) | (5,839 | ) | ||||||||
Net income (loss) | (3,145 | ) | (4,128 | ) | (13,887 | ) | (184 | ) | ||||||||
Less: Net income (loss) attributable to non-controlling interest | (63 | ) | (67 | ) | (181 | ) | (80 | ) | ||||||||
Net income (loss) attributable to JMP Group LLC | $ | (3,082 | ) | $ | (4,061 | ) | $ | (13,706 | ) | $ | (104 | ) | ||||
Net income (loss) attributable to JMP Group LLC per common share: | ||||||||||||||||
Basic | $ | (0.16 | ) | $ | (0.21 | ) | $ | (0.70 | ) | $ | (0.01 | ) | ||||
Diluted | $ | (0.16 | ) | $ | (0.21 | ) | $ | (0.70 | ) | $ | (0.01 | ) | ||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 19,628 | 19,324 | 19,581 | 20,454 | ||||||||||||
Diluted | 19,628 | 19,324 | 19,581 | 20,454 |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income (loss) | $ | (3,145 | ) | $ | (4,128 | ) | $ | (13,887 | ) | $ | (184 | ) | ||||
Other comprehensive income (loss): | ||||||||||||||||
Net unrealized gains (losses) on available-for-sale securities during the period, net of income tax provision (benefit) of ($675), $209, ($3,010) and ($695) | (1,844 | ) | $ | 709 | (8,197 | ) | $ | (1,860 | ) | |||||||
Less: reclassification adjustments for net (gains) losses on available-for-sale securities, net of income tax provision (benefit) of $738, $0, $4,643 and $0 | 2,009 | - | 12,638 | - | ||||||||||||
Net other comprehensive income (loss), net of income tax provision (benefit) of $63, $209, $1,633 and ($695) | 165 | 709 | 4,441 | (1,860 | ) | |||||||||||
Comprehensive income (loss) | (2,980 | ) | (3,419 | ) | (9,446 | ) | (2,044 | ) | ||||||||
Less: comprehensive income (loss) attributable to non-controlling interest | (63 | ) | (67 | ) | (181 | ) | (80 | ) | ||||||||
Comprehensive income (loss) attributable to JMP Group LLC | $ | (2,917 | ) | $ | (3,352 | ) | $ | (9,265 | ) | $ | (1,964 | ) |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
(In thousands)
JMP Group LLC's Equity | ||||||||||||||||||||||||||||||||
Common Shares | Treasury | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Non-controlling | Total | ||||||||||||||||||||||||||
Shares | Amount | Shares | Capital | Deficit | Income (Loss) | Interest | Equity | |||||||||||||||||||||||||
Balance, December 31, 2019 | 22,797 | $ | 23 | $ | (14,872 | ) | $ | 133,894 | $ | (52,588 | ) | $ | (4,769 | ) | $ | (327 | ) | $ | 61,361 | |||||||||||||
Net income (loss) | - | - | - | - | (11,748 | ) | - | (91 | ) | (11,839 | ) | |||||||||||||||||||||
Additional paid-in capital - share-based compensation | - | - | - | 266 | - | - | - | 266 | ||||||||||||||||||||||||
Purchases of shares of common shares for treasury | - | - | (26 | ) | - | - | - | - | (26 | ) | ||||||||||||||||||||||
Reissuance of shares of common shares from treasury | - | - | 200 | (32 | ) | - | - | - | 168 | |||||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 1,281 | - | 1,281 | ||||||||||||||||||||||||
Balance, March 31, 2020 | 22,797 | 23 | (14,698 | ) | 134,128 | (64,336 | ) | (3,488 | ) | (417 | ) | 51,212 | ||||||||||||||||||||
Net income (loss) | - | - | - | - | 1,124 | - | (26 | ) | 1,098 | |||||||||||||||||||||||
Additional paid-in capital - share-based compensation | - | - | - | 209 | - | - | - | 209 | ||||||||||||||||||||||||
Purchases of shares of common shares for treasury | - | - | 231 | - | - | - | - | 231 | ||||||||||||||||||||||||
Distribution to non-controlling interest holders | - | - | - | - | - | - | (112 | ) | (112 | ) | ||||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 2,995 | - | 2,995 | ||||||||||||||||||||||||
Balance, June 30, 2020 | 22,797 | 23 | (14,467 | ) | 134,337 | (63,212 | ) | (493 | ) | (555 | ) | 55,633 | ||||||||||||||||||||
Net income (loss) | - | - | - | - | (3,082 | ) | - | (63 | ) | (3,145 | ) | |||||||||||||||||||||
Additional paid-in capital - share-based compensation | - | - | - | 399 | - | - | - | 399 | ||||||||||||||||||||||||
Purchases of shares of common shares for treasury | - | - | 198 | - | - | - | - | 198 | ||||||||||||||||||||||||
Common Shares Issued | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Distribution to non-controlling interest holders | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 165 | - | 165 | ||||||||||||||||||||||||
Balance, September 30, 2020 | 22,797 | $ | 23 | $ | (14,269 | ) | $ | 134,736 | $ | (66,294 | ) | $ | (328 | ) | $ | (618 | ) | $ | 53,250 |
JMP Group LLC's Equity | ||||||||||||||||||||||||||||||||
Common Shares | Treasury | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Non-controlling | Total | ||||||||||||||||||||||||||
Shares | Amount | Shares | Capital | Deficit | Income (Loss) | Interest | Equity | |||||||||||||||||||||||||
Balance, December 31, 2018 | 22,780 | $ | 23 | $ | (7,932 | ) | $ | 134,129 | $ | (42,513 | ) | $ | - | $ | 13,499 | $ | 97,206 | |||||||||||||||
Net income (loss) | - | - | - | - | 5,069 | - | 70 | 5,139 | ||||||||||||||||||||||||
Additional paid-in capital - share-based compensation | - | - | - | 144 | - | - | - | 144 | ||||||||||||||||||||||||
Distributions and distribution equivalents declared on common shares and restricted share units | - | - | - | - | (1,070 | ) | - | - | (1,070 | ) | ||||||||||||||||||||||
Purchases of shares of common shares for treasury | - | - | (753 | ) | - | - | - | - | (753 | ) | ||||||||||||||||||||||
Reissuance of shares of common shares from treasury | - | - | 357 | (39 | ) | - | - | - | 318 | |||||||||||||||||||||||
Distributions to non-controlling interest holders | - | - | - | - | - | - | (913 | ) | (913 | ) | ||||||||||||||||||||||
Derecognition of non-controlling interest due to deconsolidation | - | - | - | - | - | - | (12,842 | ) | (12,842 | ) | ||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | (782 | ) | - | (782 | ) | ||||||||||||||||||||||
Balance, March 31, 2019 | 22,780 | 23 | (8,328 | ) | 134,234 | (38,514 | ) | (782 | ) | (186 | ) | 86,447 | ||||||||||||||||||||
Net income (loss) | - | - | - | - | (1,112 | ) | - | (83 | ) | (1,195 | ) | |||||||||||||||||||||
Additional paid-in capital - share-based compensation | - | - | - | 177 | - | - | - | 177 | ||||||||||||||||||||||||
Distributions and distribution equivalents declared on common shares and restricted share units | - | - | - | - | (843 | ) | - | - | (843 | ) | ||||||||||||||||||||||
Purchases of shares of common shares for treasury | - | - | (8,044 | ) | - | - | - | - | (8,044 | ) | ||||||||||||||||||||||
Reissuance of shares of common shares from treasury | - | - | 496 | (79 | ) | - | - | - | 417 | |||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | (1,787 | ) | - | (1,787 | ) | ||||||||||||||||||||||
Balance, June 30, 2019 | 22,780 | 23 | (15,876 | ) | 134,332 | (40,469 | ) | (2,569 | ) | (269 | ) | 75,172 | ||||||||||||||||||||
Net income (loss) | - | - | - | - | (4,061 | ) | - | (67 | ) | (4,128 | ) | |||||||||||||||||||||
Additional paid-in capital - share-based compensation | - | - | - | 444 | - | - | - | 444 | ||||||||||||||||||||||||
Distributions and distribution equivalents declared on common shares and restricted share units | - | - | - | - | (773 | ) | - | - | (773 | ) | ||||||||||||||||||||||
Purchases of shares of common shares for treasury | - | - | 34 | - | - | - | - | 34 | ||||||||||||||||||||||||
Reissuance of shares of common shares from treasury | - | - | (27 | ) | (11 | ) | - | - | - | (38 | ) | |||||||||||||||||||||
Common shares issued | 17 | - | - | 93 | - | - | - | 93 | ||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | 709 | - | 709 | ||||||||||||||||||||||||
Balance, September 30, 2019 | 22,797 | $ | 23 | $ | (15,869 | ) | $ | 134,858 | $ | (45,303 | ) | $ | (1,860 | ) | $ | (336 | ) | $ | 71,513 |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended September 30, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (13,887 | ) | $ | (184 | ) | ||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
(Gain) loss on repurchase, reissuance or early retirement of debt | (697 | ) | 458 | |||||
Provision for loan losses | - | 438 | ||||||
Loss on sale and payoff of loans and mark-to-market of loans | - | 38 | ||||||
Change in other investments: | ||||||||
(Income) loss from investments in equity method investees | (888 | ) | (1,305 | ) | ||||
Gain on other investments | (1,226 | ) | (1,254 | ) | ||||
Depreciation and amortization | 858 | 1,316 | ||||||
Share-based compensation expense | 1,401 | 1,590 | ||||||
Gain on deconsolidation | - | (3,520 | ) | |||||
Distributions of investment income from equity method investments | 1,044 | 492 | ||||||
Other, net | (194 | ) | 293 | |||||
Net change in operating assets and liabilities: | ||||||||
Decrease (increase) in interest receivable | 154 | (4,899 | ) | |||||
Decrease (increase) in receivables | (3,879 | ) | (950 | ) | ||||
Decrease (increase) in marketable securities | 23,684 | 9,643 | ||||||
Decrease (increase) in other assets | (5,870 | ) | (10,181 | ) | ||||
Increase (Decrease) in marketable securities sold, but not yet purchased | (3,855 | ) | (1,789 | ) | ||||
Increase (decrease) in interest payable | 187 | (4,034 | ) | |||||
Increase (decrease) in accrued compensation | (4,703 | ) | (23,475 | ) | ||||
Increase (decrease) in other liabilities | 520 | 6,895 | ||||||
Net cash provided by (used in) operating activities | (7,351 | ) | (30,428 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchases of fixed assets | (340 | ) | (1,341 | ) | ||||
Purchases of other investments | (1,814 | ) | (12,538 | ) | ||||
Sales or distributions from other investments | 14,170 | 10,655 | ||||||
Funding of loans collateralizing asset-backed securities issued | - | (35,153 | ) | |||||
Funding of loans held for investment | - | (25,679 | ) | |||||
Sale, payoff and principal receipts of loans collateralizing asset-backed securities issued | - | 23,806 | ||||||
Sale, payoff and principal receipts on loans held for investment | 121 | 7,211 | ||||||
Net decrease in cash and restricted cash due to deconsolidation of subsidiaries | - | (27,771 | ) | |||||
Net cash provided by (used in) investing activities | 12,137 | (60,810 | ) |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Consolidated Statements of Cash Flows - (Continued)
(Unaudited)
(In thousands)
Nine Months Ended September 30, | ||||||||
2020 | 2019 | |||||||
Cash flows from financing activities: | ||||||||
Proceeds from drawdowns on line of credit and other borrowings | 3,798 | 16,583 | ||||||
Proceeds from drawdowns on CLO warehouse facilities | - | 7,750 | ||||||
Proceeds from bond issuance | - | 36,000 | ||||||
Payment of debt issuance costs | - | (1,887 | ) | |||||
Repayment of line of credit | - | (1,600 | ) | |||||
Repayment of asset-backed securities issued | - | (801 | ) | |||||
Repayment on bonds payable | (1,361 | ) | (35,977 | ) | ||||
Repurchase of bonds payable | - | |||||||
Distributions and distribution equivalents paid on common shares and RSUs | - | (2,686 | ) | |||||
Purchase of common shares for treasury | - | (8,614 | ) | |||||
Distributions to non-controlling interest shareholders | (112 | ) | (913 | ) | ||||
Employee taxes paid on shares withheld for tax-withholding purposes | (63 | ) | (184 | ) | ||||
Net cash provided by provided by (used in) financing activities | 2,262 | 7,671 | ||||||
Cash, Cash Equivalents and Restricted Cash | ||||||||
Net (decrease) increase in cash, cash equivalents, and restricted cash | 7,048 | (83,567 | ) | |||||
Cash, cash equivalents and restricted cash, beginning of period | 50,917 | 132,808 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 57,965 | $ | 49,241 | ||||
Less: Restricted cash , end of period | 1,287 | 1,221 | ||||||
Cash and cash equivalents, end of period | $ | 56,678 | $ | 48,020 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid (received) during the period for interest | $ | 5,238 | $ | 18,676 | ||||
Cash paid (received) during the period for taxes, net of refunds | $ | (263 | ) | $ | 2,060 | |||
Non-cash investing and financing activities: | ||||||||
Reissuance of common shares from treasury related to vesting of restricted share units | $ | 666 | $ | 954 | ||||
Acquisition of equity securities in restructuring of loans | - | 259 | ||||||
Initial recognition of operating lease right-of-use assets | - | 23,604 | ||||||
Initial recognition of operating lease right-of-use liabilities | - | 29,278 | ||||||
Carrying value of non-cash assets derecognized on deconsolidation of subsidiaries | - | 1,226,848 | ||||||
Carrying value of non-cash liabilities derecognized on deconsolidation of subsidiaries | - | 1,161,933 | ||||||
Carrying value of non-controlling interest derecognized on deconsolidation of subsidiaries | - | 12,842 | ||||||
Fair value of marketable securities recognized on deconsolidation of subsidiaries | - | 76,879 | ||||||
Fair value of other investments recognized on deconsolidation of subsidiaries | - | 7,516 |
See accompanying notes to consolidated financial statements.
JMP Group LLC
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Description of Business
JMP Group LLC, together with its subsidiaries (collectively, the “Company”), is a diversified financial services 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”) (through March 19, 2019). 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”), a publicly-traded business development company. 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, which was a wholly-owned subsidiary until March 19, 2019, is an asset management platform that underwrites and manages investments in senior secured debt. 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.
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 Quarterly Report on 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, 2019 filed with the SEC on March 30, 2020 (the “Annual Report”). Certain disclosures required by GAAP and normally included in an annual report on Form 10-K have been condensed or omitted from this report; however, except as disclosed herein, there has been no material change in the information disclosed in the notes to consolidated financial statements included in 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 the Company is 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 at September 30, 2020 and December 31, 2019 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, 2020, there were no significant changes made to the Company’s significant accounting policies. See Note 3, Recent Accounting Pronouncements, for a summary of recently adopted or yet to be adopted accounting pronouncements, and their impact on the Company.
Deconsolidation
During the first three months of 2019, multiple events and transactions took place which resulted in the Company deconsolidating the following variable interest entities ("VIEs"): JMPCA, JMP Credit Advisors CLO III(R) Ltd. (“CLO III”), JMP Credit Advisors CLO IV Ltd (“CLO IV”), JMP Credit Advisors CLO V Ltd (“CLO V”), and JMP Credit Advisors Long-Term Warehouse Ltd (“CLO VI”) (CLO III, CLO IV, CLO V and CLO VI are collectively the “CLOs”). These events and transactions are hereafter referred to as the "Deconsolidation". The Company continues to hold approximately 47% of the subordinated notes of CLO III and 100% of the junior subordinated notes of CLO IV and CLO V and accounts for its ownership of these subordinated notes as an investment in a debt security and classifies them as available-for-sale securities. Refer to the Annual Report for more information on the Deconsolidation.
3. Recent Accounting Pronouncements
Accounting Standards to be adopted in Future Periods
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL), with subsequent amendments to clarify the guidance, provide transitional relief provisions and minor updates to the original ASU. ASU 206-13 replaces the existing 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 ASU is required to be adopted using a modified retrospective approach with a cumulative-effect adjustment to beginning retained earnings, as of the beginning of the first reporting period the guidance is effective for. As a result of one of the amendments to ASU 2016-13, the new guidance will be effective for public business entities that meet the definition of a smaller reporting company for fiscal years and all interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The Company does not plan to early adopt this standard, but continues to work through implementation. While the Company cannot reasonably estimate the impact of adopting this standard, it expects the impact will be influenced by the composition, characteristics and quality of the Company's securities portfolios, as well as the general economic conditions and forecasts as of the adoption date.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes. This guidance eliminates certain exceptions to the general approach to the income tax accounting model, and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. The Company is currently evaluating the impact of the adoption of this standard and its impact on the Company’s disclosures.
Recently Adopted Accounting Guidance
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework project. The Company adopted ASU 2018-13 effective January 1, 2020. The adoption did not materially impact the Company’s consolidated financial statements or its disclosures.
4. Fair Value Measurements
The following tables provide fair value information related to the Company’s financial instruments at September 30, 2020 and December 31, 2019:
September 30, 2020 | ||||||||||||||||||||
(In thousands) | Carrying Value | Fair Value | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 56,678 | $ | 56,678 | $ | - | $ | - | $ | 56,678 | ||||||||||
Restricted cash | 1,287 | 1,287 | - | - | 1,287 | |||||||||||||||
Marketable securities owned | 55,497 | 4,845 | - | 50,652 | 55,497 | |||||||||||||||
Equity Investments | 3,777 | - | - | 3,777 | 3,777 | |||||||||||||||
Investments in private equity, real estate and credit funds, measured at net asset value (1) | 10,597 | - | - | - | - | |||||||||||||||
Loans held for sale | 2,412 | - | - | 2,412 | 2,412 | |||||||||||||||
Loans held for investment, net of allowance for loan losses | 1,109 | - | - | 1,109 | 1,109 | |||||||||||||||
Total assets: | $ | 131,357 | $ | 62,810 | $ | - | $ | 57,950 | $ | 120,760 | ||||||||||
Liabilities: | ||||||||||||||||||||
Notes payable | $ | 10,610 | - | $ | 5,983 | $ | 4,627 | $ | 10,610 | |||||||||||
Bond payable | 80,816 | - | 75,070 | - | 75,070 | |||||||||||||||
Total liabilities: | $ | 91,426 | $ | - | $ | 81,053 | $ | 4,627 | $ | 85,680 |
December 31, 2019 | ||||||||||||||||||||
(In thousands) | Carrying Value | Fair Value | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 49,630 | $ | 49,630 | $ | - | $ | - | $ | 49,630 | ||||||||||
Restricted cash | 1,287 | 1,287 | - | - | 1,287 | |||||||||||||||
Marketable securities owned | 73,101 | 15,245 | - | 57,856 | 73,101 | |||||||||||||||
Equity Investments | 3,956 | - | - | 3,956 | 3,956.00 | |||||||||||||||
Investments in private equity, real estate and credit funds, measured at net asset value (1) | 10,250 | - | - | - | - | |||||||||||||||
Loans held for sale | 2,412 | - | - | 2,476 | 2,476 | |||||||||||||||
Loans held for investment, net of allowance for loan losses | 1,210 | - | - | 1,087 | 1,087 | |||||||||||||||
Total assets: | $ | 141,846 | $ | 66,162 | $ | - | $ | 65,375 | $ | 131,537 | ||||||||||
Liabilities: | ||||||||||||||||||||
Marketable securities sold, but not yet purchased | $ | 3,855 | $ | 3,855 | $ | - | $ | - | $ | 3,855 | ||||||||||
Notes payable | 6,812 | - | 5,983 | 829 | 6,812 | |||||||||||||||
Bond payable | 82,584 | - | 84,821 | - | 84,821 | |||||||||||||||
Total liabilities: | $ | 93,251 | $ | 3,855 | $ | 90,804 | $ | 829 | $ | 95,488 |
(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 carrying value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Statements of Financial Position. The carrying values of these lines reconciles to the parenthetical disclosure of other investments on the Statements of Financial Condition. |
The Company determined the fair value of the notes payable identified as a Level 2 liability to approximate its carrying value. This was determined as the debt has a variable interest rate tied to LIBOR and therefore reflects market conditions. The fair value of the notes payable identified as Level 3 liabilities was determined using the discounted cash flow model.
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.
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, 2020 and December 31, 2019:
(In thousands) | September 30, 2020 | |||||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Marketable securities owned | $ | 55,497 | $ | 4,845 | $ | - | $ | 50,652 | $ | 55,497 | ||||||||||
Other investments: | ||||||||||||||||||||
Equity investments | 3,777 | - | - | 3,777 | 3,777 | |||||||||||||||
Investments in private equity, real estate and credit funds (1) | 10,597 | - | - | - | - | |||||||||||||||
Total other investments | 14,374 | - | - | 3,777 | 3,777 | |||||||||||||||
Total assets: | $ | 69,871 | $ | 4,845 | $ | - | $ | 54,429 | $ | 59,274 | ||||||||||
(In thousands) | December 31, 2019 | |||||||||||||||||||
Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Marketable securities owned | $ | 73,101 | $ | 15,245 | $ | - | $ | 57,856 | $ | 73,101 | ||||||||||
Other investments: | ||||||||||||||||||||
Equity investments | 3,956 | - | - | 3,956 | 3,956 | |||||||||||||||
Investments in private equity, real estate and credit funds (1) | 10,250 | - | - | - | - | |||||||||||||||
Total other investments | 14,206 | - | - | 3,956 | 3,956 | |||||||||||||||
Total assets: | $ | 87,307 | $ | 15,245 | $ | - | $ | 61,812 | $ | 77,057 | ||||||||||
Marketable securities sold, but not yet purchased | 3,855 | 3,855 | - | - | 3,855 | |||||||||||||||
Total liabilities: | $ | 3,855 | $ | 3,855 | $ | - | $ | - | $ | 3,855 |
(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. |
As of September 30, 2020 and December 31, 2019, marketable securities sold but not yet purchased were primarily comprised of U.S. listed securities. As of September 30, 2020 and December 31, 2019, marketable securities was comprised of U.S. listed equity securities and CLO debt securities.
The fair value of the investments in private equity, real estate and credit funds was measured using the net asset value as a practical expedient. These investments are nonredeemable and had unfunded commitments of $3.5 million and $3.8 million as of September 30, 2020 and December 31, 2019 respectively.
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 nine months ended September 30, 2020 and the year ended December 31, 2019.
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’s Level 3 asset in other investments is primarily comprised of an equity investment in a private company. The Company determines the fair value of this investment using the net present value of discounted cash flows. The significant unobservable inputs used in the fair value measurement of this investment are presented in the Significant Unobservable Inputs table below. For this investment, the Company elected the fair value option. While the Company has made other investments in private equity securities, it has not elected the fair value option for those investments as it is impractical to determine the fair value of those investments.
For the nine months ended September 30, 2020, the changes in Level 3 assets measured at fair value on a recurring basis were as follows:
(In thousands) | CLO Junior Subordinated Notes | Equity Investment | Total | |||||||||
Balance as of December 31, 2019 | $ | 57,856 | $ | 3,956 | $ | 61,812 | ||||||
Accrued interest | 2,176 | - | 2,176 | |||||||||
Investment distributions | (2,040 | ) | - | (2,040 | ) | |||||||
Unrealized gains on investments, recognized in OCI | 1,751 | - | 1,751 | |||||||||
Unrealized losses on investments, recognized in earnings | (13,523 | ) | (689 | ) | (14,212 | ) | ||||||
Balance as of March 31, 2020 | $ | 46,220 | $ | 3,267 | $ | 49,487 | ||||||
Accrued interest | 1,720 | N/A | 1,720 | |||||||||
Unrealized gains on investments, recognized in OCI | 4,094 | N/A | 4,094 | |||||||||
Unrealized losses on investments, recognized in earnings | (1,013 | ) | 444 | (569 | ) | |||||||
Balance as of June 30, 2020 | $ | 51,021 | $ | 3,711 | $ | 54,732 | ||||||
Accrued interest | 2,143 | N/A | 2,143 | |||||||||
Unrealized gains on investments, recognized in OCI | 235 | N/A | 235 | |||||||||
Unrealized losses on investments, recognized in earnings | (2,746 | ) | 65 | (2,681 | ) | |||||||
Balance as of September 30, 2020 | $ | 50,653 | $ | 3,776 | $ | 54,429 |
The Company’s Level 3 assets held in marketable securities consist of investments in CLO debt securities. The fair value of the CLO debt securities is determined using the net present value of discounted cash flows. The significant unobservable inputs used in the fair value measurement of these investments are presented in the Significant Unobservable Inputs table below. The Company also uses covenant compliance information provided by the CLO manager when valuing this investment. During the nine months ended September 30, 2020, the fair value of the Company’s investment in CLO debt securities declined due to a decrease in the expected future cash flows from CLO debt securities, primarily due to an increase in estimated credit losses in the CLO portfolios.
For assets classified in the Level 3 hierarchy, any changes to any of the inputs to the fair value measurement could result in a significant increase or decrease in the fair value measurement. For CLO debt securities, a significant increase (decrease) in the discount rate, default rate, and severity rate would result in a significant decrease (increase) in the fair value of the instruments. For the equity investment, a significant increase (decrease) in the credit factor or the discount rate would result in a significantly lower (higher) fair value measurement. For Level 3 assets measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:
Significant Unobservable Inputs | ||||||||||||||||||||
(In thousands) | Range (Weighted-average (1)) | Fair value | ||||||||||||||||||
Valuation Technique | Description | September 30, 2020 | December 31, 2019 | September 30, 2020 | December 31, 2019 | |||||||||||||||
CLO debt securities | Discounted cash flows | Discount rate | 17.5% (N/A) | 17.5% (N/A) | $ | 50,652 | $ | 57,856 | ||||||||||||
Default rate | 2.0%-3.0% (2.4%) | 2.0% (N/A) | ||||||||||||||||||
Severity rate | 25.0% (N/A) | 25.0% (N/A) | ||||||||||||||||||
Prepayment rate | 10.0%-25.0% (15.2%) | 25.0% (N/A) | ||||||||||||||||||
Collateral liquidation price | 98.0%-99.0% (98.7%) | 98.0%-99.0% (98.7%) | ||||||||||||||||||
Equity investment | Discounted cash flows | Credit factor | 20% (N/A) | 20% (N/A) | $ | 3,167 | $ | 3,550 | ||||||||||||
Discount rate | 15.7% (N/A) | 17.7% (N/A) | ||||||||||||||||||
(1) | The weighted average was calculated based on the relative collateral balance of each CLO. |
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 a loan measured at fair value on a non-recurring basis of $2.4 million as of September 30, 2020 and December 31, 2019.
5. Available-for-Sale Securities
The following table summarizes available-for-sale securities, which have been included in marketable securities on the Consolidated Statements of Financial Condition, in an unrealized position as of September 30, 2020 and December 31, 2019:
September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||
(In thousands) | Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | Number of positions | Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | Number of positions | ||||||||||||||||||||||||||||||
CLO debt securities | $ | 51,094 | $ | - | $ | (442 | ) | $ | 50,652 | 3 | $ | 64,377 | $ | - | $ | (6,521 | ) | $ | 57,856 | 3 |
The following table summarizes the fair value and amortized cost of the available-for-sale securities by contractual maturity as of September 30, 2020 and December 31, 2019:
September 30, 2020 | December 31, 2019 | |||||||||||||||
(In thousands) | Available-for-sale | Available-for-sale | ||||||||||||||
Amortized cost | Fair value | Amortized cost | Fair value | |||||||||||||
5-10 years | $ | 30,089 | $ | 28,580 | $ | 38,451 | 33,877 | |||||||||
10+ years | 21,005 | 22,072 | 25,926 | 23,979 | ||||||||||||
Total | $ | 51,094 | $ | 50,652 | $ | 64,377 | $ | 57,856 |
In July 2020, the Company entered into a Seventh Amendment to its Credit Facility with CNB, that, among other things, requires the Company maintain a minimum of $6.0 million of CLO debt securities, based on their fair value as of June 30, 2020, pledged as collateral supporting the obligations under the Credit Agreement. See Note 7, Debt, for more information on the Seventh Amendment.
6. Loans
Loans collateralizing Asset-Backed Securities issued (through March 2019)
During the period ending March 31, 2019, the Company deconsolidated its investments in the CLOs and as a result, no longer has loans collateralizing ABS on its Consolidated Statements of Financial Condition. See Note 2 for additional information on deconsolidation. A summary of the activity in the allowance for loan losses for the three and nine months ended September 30, 2019 is as follows:
(In thousands) | Nine Months Ended September 30, | |||||||
2019 | ||||||||
Impaired | Non-Impaired | |||||||
Balance, at beginning of period | $ | (836 | ) | $ | (9,751 | ) | ||
Provision for loan losses: | ||||||||
Specific reserve | - | - | ||||||
General reserve | - | - | ||||||
Charge off | 181 | - | ||||||
Derecognition due to deconsolidation | 655 | 9,751 | ||||||
Balance, at end of period | $ | - | $ | - |
Loans Held for Investment
As of September 30, 2020 and December 31, 2019, the number of loans held for investment was four. The Company reviews the credit quality of these loans 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.
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.
There were no loans impaired, past due or on non-accrual status as of September 30, 2020 and December 31, 2019. There were no loan losses during the three and nine months ended September 30, 2020. A summary of the activity in loan losses for the three and nine months ended September 30, 2019 is as follows:
(in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2019 | |||||||||||||||
Impaired | Non-impaired | Impaired | Non-impaired | |||||||||||||
Balance, at beginning of the period | $ | - | $ | - | $ | (218 | ) | $ | (181 | ) | ||||||
Provision for loan losses | ||||||||||||||||
Specific | (438 | ) | - | (438 | ) | - | ||||||||||
General | - | - | - | - | ||||||||||||
Charge off | - | - | 218 | - | ||||||||||||
Derecognition due to deconsolidation | - | - | - | 181 | ||||||||||||
Balance, at end of the period | $ | (438 | ) | $ | - | $ | (438 | ) | $ | - |
7. Debt
Bond Payable
(In thousands) | September 30, 2020 | December 31, 2019 | ||||||
7.25% Senior Notes due 2027 | $ | 50,000 | $ | 50,000 | ||||
6.875% Senior Notes due 2029 | 36,000 | 36,000 | ||||||
Total outstanding principal | $ | 86,000 | $ | 86,000 | ||||
Less: Debt issuance costs | (3,049 | ) | (3,416 | ) | ||||
Less: Consolidation elimination | (2,135 | ) | - | |||||
Total bond payable, net | $ | 80,816 | $ | 82,584 |
The 7.25% senior notes due 2027 (the “2027 Senior Notes”) and the 6.875% senior notes due 2029 (the "2029 Senior Notes") (the 2027 and 2029 Senior Notes are collectively referred to as the “Senior Notes”) were issued by JMP Group Inc. and JMP Group LLC, respectively, pursuant to indentures with U.S. Bank National Association, as trustee. The Senior Notes indentures contain 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 and JMP Group LLC'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, 2020 and December 31, 2019, the Company was in compliance with the debt covenants in the indentures.
In March 2020, the Company repurchased $1.4 million and $0.7 million par value of its issued and outstanding 2029 Senior Notes and 2027 Senior Notes, respectively. Since they were repurchased at less than carrying value, a gain of $0.7 million was recognized upon the repurchase of the bonds, which is included in “Gain on repurchase, reissuance or early retirement of debt” on the Consolidated Statements of Operations.
Note Payable, Lines of Credit and Credit Facilities
(In thousands) | Outstanding Balance | |||||||
September 30, 2020 | December 31, 2019 | |||||||
Revolver / Credit Facility | $ | 5,983 | $ | 5,983 | ||||
Paycheck Protection Program (the "PPP") loan | 3,798 | - | ||||||
Note payable to an affiliate (Note 18) | 829 | 829 | ||||||
Total note payable, lines of credit, and credit facilities | $ | 10,610 | $ | 6,812 |
In April 2014, JMP Holding LLC (“JMP Holding”) and City National Bank (“CNB”) entered into a revolving $25.0 million credit facility that matures on December 31, 2020 (the “Revolver”). The credit agreement governing the Revolver (the “Credit Agreement") has been amended throughout its life to make various updates, clarifications and conforming changes to reflect the corporate structure and business changes of the Company since the Credit Agreement's execution. The Revolver bears interest at a rate of LIBOR plus 225 bps and the Company’s outstanding balance on the Revolver was $6.0 million as of September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, the Company had letters of credit outstanding under the Revolver supporting office lease obligations of approximately $1.1 million in the aggregate. Upon maturity, if the revolving period has not been extended, any outstanding amounts under the Revolver would convert to a term loan (the “Converted Term Loan”). The Converted Term Loan must be repaid in 12 quarterly installments commencing on January 1, 2021, with each of the first six installments being equal to 3.75% of the principal amount of the Converted Term Loan and each of the next six installments being equal to 5.0% of the principal amount of the Converted Term Loan. A final payment of all remaining principal and interest due under the Converted Term Loan must be made at the earlier of (a) December 31, 2023; or (b) the last day of the fiscal quarter, prior to the earliest maturity date of any senior unsecured notes issued by JMP Group Inc. or JMP Group LLC then outstanding (but no less than 60 days), unless certain liquidity requirements are met by the Company.
On July 16, 2020, JMP Holding entered into a Seventh Amendment to the Credit Agreement, in order to, among other provisions, (i) allow JMP Holding to incur liens of certain clearing agents in the ordinary course of business, (ii) reduce the margin applicable to LIBOR loans from 2.25% to 2.00% and (iii) require that JMP Holding maintain a minimum of $6.0 million of CLO debt securities, based on their fair value as of June 30, 2020, pledged as collateral supporting the obligations under the Credit Agreement and refrain from exercising any right to call the related CLO entities or cause the liquidation of such CLO entities.
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.
JMP Holding's obligations under the Credit Agreement are guaranteed by all of its wholly owned subsidiaries (other than JMP Securities and certain dormant subsidiaries) and are secured by substantially all of its and the guarantors' assets. In addition, the Company has entered into a limited recourse pledge agreement whereby the Company has granted a lien on all of our equity interests in JMP Investment Holdings and JMPAM to secure JMP Holding's obligations under the Credit Agreement.
Separately, under a Revolving Note and Cash Subordination Agreement, JMP Securities holds a $20.0 million revolving line of credit (the "Line of Credit") with CNB to be used for regulatory capital purposes during its securities underwriting activities. The unused portion of the Line of Credit accrues an unused fee at the rate of 0.25% per annum, payable monthly. On June 30, 2021, any outstanding amount under the Line of Credit will convert to a term loan maturing on June 30, 2022. There was no borrowing on this Line of Credit as of September 30, 2020 and December 31, 2019. Borrowings under the Line of Credit will bear interest at a rate to be agreed upon at the time of advance between the Company and CNB.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “CARES Act”) was enacted in response to market conditions related to the coronavirus ("COVID-19") pandemic. The CARES Act includes many measures to help companies, including providing loans to qualifying companies, under the Paycheck Protection Program (the "PPP") offered by the U.S. Small Business Administration (the “SBA”). On April 17, 2020, JMP Securities entered into a promissory note (the “PPP Loan”) with CNB as the lender (the “Lender”), pursuant to which the Lender agreed to loan the Company $3.8 million. The proceeds of the PPP Loan were available to be used to pay for payroll costs, rent and other eligible costs. As of September 30, 2020, the Company has used all of the PPP Loan proceeds for eligible costs and expects the PPP Loan to be forgiven in full.
The PPP Loan bears interest at the rate of 1% per annum. To the extent that amounts owed under the PPP Loan, or a portion of them, are not forgiven, the Company will be required to make principal and interest payments. No payments are required until the date the SBA makes a determination on the amount of loan forgiveness. The PPP Loan matures in June 2022. The PPP Loan includes events of default. Upon the occurrence of an event of default, the Lender will have the right to exercise remedies against the Company, including the right to require immediate payment of all amounts due under the PPP Loan.
8. Other Assets and Other Liabilities
At September 30, 2020 and December 31, 2019, other assets and other liabilities consisted of the following:
(In thousands) | ||||||||
September 30, 2020 | December 31, 2019 | |||||||
Accounts receivable | $ | 5,141 | $ | 7,053 | ||||
Prepaid expenses | 11,337 | 5,152 | ||||||
Deferred tax asset | 20,935 | 21,406 | ||||||
Loans held for sale (1) | 2,412 | 2,412 | ||||||
Other assets | 252 | 230 | ||||||
Total other assets | $ | 40,077 | $ | 36,253 | �� |
(1) | Loans held for sale are carried at the lower of cost or fair value less cost to sell. |
(In thousands) | ||||||||
September 30, 2020 | December 31, 2019 | |||||||
Accounts payable & accrued liabilities | $ | 6,408 | $ | 5,015 | ||||
Deferred compensation liabilities | 4,581 | 2,517 | ||||||
Deferred tax liability | 8,132 | 8,645 | ||||||
Other liabilities | 364 | 3,301 | ||||||
Total other liabilities | $ | 19,485 | $ | 19,478 |
9. Shareholders’ Equity
Self-Tender Offers
On February 24, 2020, the Company launched a tender offer (the “2020 Tender Offer”) to repurchase for cash up to 3,000,000 shares representing limited liability company interests in the Company. The 2020 Tender Offer was terminated on March 19, 2020 as a result of multiple conditions to the 2020 Tender Offer, including share price and market index conditions, not having been satisfied.
Quarterly Cash Distributions
On February 19, 2020, the Company suspended its quarterly cash distributions program on outstanding shares.
10. Share-Based Compensation
On January 27, 2015, the board of directors adopted the JMP Group LLC Amended and Restated Equity Incentive Plan (“JMP Group Plan”). The 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. Upon an exercise or vesting, the Company will issue new shares from authorized but unissued shares or provide shares from treasury shares.
The following table summarizes the share-based compensation expense for the three and nine months ended September 30, 2020 and 2019.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(In thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Restricted stock unit awards | $ | 353 | $ | 534 | $ | 1,008 | $ | 1,590 | ||||||||
Stock option awards | 151 | - | 392 | - | ||||||||||||
Share-based compensation expense | $ | 504 | $ | 534 | $ | 1,401 | $ | 1,590 |
Share Options
The following table summarizes the share option activity for the nine months ended September 30, 2020:
Nine Months Ended | ||||||||
September 30, 2020 | ||||||||
Shares Subject to Option | Weighted Average Exercise Price | |||||||
Balance, beginning of year | - | $ | - | |||||
Granted | 2,400,000 | 3.04 | ||||||
Forfeited | (400,000 | ) | 3.04 | |||||
Balance, end of period | 2,000,000 | $ | 3.04 | |||||
Options exercisable at end of period | - | $ | - |
The following table summarizes the share options outstanding as well as share options vested and exercisable as of September 30, 2020:
September 30, 2020 | ||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||
$3.04 | 2,000,000 | 4.35 | $ | 3.04 | $ | - | - | - | $ | - | $ | - |
The Company recognizes share-based compensation expense, net of estimated forfeitures, for share options 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.
As of September 30, 2020, there was $0.9 million in unrecognized compensation expense related to share options.
The Company uses the Black-Scholes option-pricing model or other quantitative models to calculate the fair value of option awards.
The following table summarizes restricted share unit ("RSU") activity for the nine months ended September 30, 2020:
Nine Months Ended | ||||||||
September 30, 2020 | ||||||||
Restricted Share Units | Weighted Average Grant Date Fair Value | |||||||
Balance, beginning of year | 387,006 | $ | 3.97 | |||||
Granted | 198,682 | 2.99 | ||||||
Vested | (147,374 | ) | 3.64 | |||||
Forfeited | (3,894 | ) | 4.43 | |||||
Balance, end of period | 434,420 | $ | 3.63 |
The Company recognizes compensation expense, net of estimated forfeitures, 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.
As of September 30, 2020, there was $0.7 million of unrecognized compensation expense related to RSUs expected to be recognized over a weighted average period of 1.42 years.
The Company pays cash distribution equivalents on certain RSUs upon vesting. Distribution equivalents paid on RSUs are generally charged to retained earnings. The Company accounts for the tax benefit related to distribution equivalents paid on RSUs as an increase in additional paid-in capital.
11. Net Income per Common Share
Basic net income (loss) per share for the Company is calculated by dividing net income (loss) 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 income per share for the nine months ended September 30, 2020 and 2019 are shown in the tables below:
(In thousands, except per share data) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) attributable to JMP Group LLC | $ | (3,082 | ) | $ | (4,061 | ) | $ | (13,706 | ) | $ | (104 | ) | ||||
Denominator: | ||||||||||||||||
Basic weighted average shares outstanding | 19,628 | 19,324 | 19,581 | 20,454 | ||||||||||||
Effect of potential dilutive securities: | ||||||||||||||||
Restricted share units | - | - | - | - | ||||||||||||
Diluted weighted average shares outstanding | 19,628 | 19,324 | 19,581 | 20,454 | ||||||||||||
Net income (loss) per share | ||||||||||||||||
Basic | $ | (0.16 | ) | $ | (0.21 | ) | $ | (0.70 | ) | $ | (0.01 | ) | ||||
Diluted | $ | (0.16 | ) | $ | (0.21 | ) | $ | (0.70 | ) | $ | (0.01 | ) |
Due to the net loss for all periods presented, all of the share options and restricted share units outstanding during those periods were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding. Additionally, the share options were considered out-of-the-money during all periods presented, and therefore, were not included in the computation of diluted weighted-average common shares outstanding.
12. Revenue from contracts with customers
The following tables represent the Company’s total revenues from contracts with customers, disaggregated by major business activity, for the three and nine months ended September 30, 2020 and September 30, 2019, respectively.
(in thousands) | Three Months Ended September 30, 2020 | |||||||||||||||
Broker -Dealer | Asset Management | Eliminations | Total | |||||||||||||
Total revenues from contracts with customers | ||||||||||||||||
Equity and debt origination | $ | 16,152 | $ | - | $ | - | $ | 16,152 | ||||||||
Strategic advisory and private placements | 4,722 | - | - | 4,722 | ||||||||||||
Total investment banking revenues | 20,874 | - | - | 20,874 | ||||||||||||
Commissions | 2,865 | - | - | 2,865 | ||||||||||||
Research payments | 1,258 | - | - | 1,258 | ||||||||||||
Net trading losses | 52 | - | - | 52 | ||||||||||||
Total brokerage revenues | 4,176 | - | - | 4,176 | ||||||||||||
Base management fees | - | 1,608 | (25 | ) | 1,583 | |||||||||||
Incentive management fees | - | 1,328 | - | 1,328 | ||||||||||||
Total asset management fees | - | 2,936 | (25 | ) | 2,911 | |||||||||||
Total revenues from contracts with customers | $ | 25,050 | $ | 2,936 | $ | (25 | ) | $ | 27,961 |
(in thousands) | Three Months Ended September 30, 2019 | |||||||||||||||
Broker -Dealer | Asset Management | Eliminations | Total | |||||||||||||
Total revenues from contracts with customers | ||||||||||||||||
Equity and debt origination | $ | 8,561 | $ | - | $ | - | $ | 8,561 | ||||||||
Strategic advisory and private placements | 6,667 | - | - | 6,667 | ||||||||||||
Total investment banking revenues | 15,228 | - | - | 15,228 | ||||||||||||
Commissions | 2,900 | - | - | 2,900 | ||||||||||||
Research payments | 1,152 | - | - | 1,152 | ||||||||||||
Net trading losses | (84 | ) | - | - | (84 | ) | ||||||||||
Total brokerage revenues | 3,968 | - | - | 3,968 | ||||||||||||
Base management fees | - | 1,597 | (25 | ) | 1,572 | |||||||||||
Incentive management fees | - | 59 | (3 | ) | 56 | |||||||||||
Total asset management fees | - | 1,656 | (28 | ) | 1,628 | |||||||||||
Total revenues from contracts with customers | $ | 19,196 | $ | 1,656 | $ | (28 | ) | $ | 20,824 |
(in thousands) | Nine Months Ended September 30, 2020 | |||||||||||||||
Broker -Dealer | Asset Management | Eliminations | Total | |||||||||||||
Total revenues from contracts with customers | ||||||||||||||||
Equity and debt origination | $ | 39,277 | $ | - | $ | - | $ | 39,277 | ||||||||
Strategic advisory and private placements | 17,817 | - | - | 17,817 | ||||||||||||
Total investment banking revenues | 57,094 | - | - | 57,094 | ||||||||||||
Commissions | 10,580 | - | - | 10,580 | ||||||||||||
Research payments | 3,887 | - | - | 3,887 | ||||||||||||
Net trading losses | (459 | ) | - | - | (459 | ) | ||||||||||
Total brokerage revenues | 14,007 | - | - | 14,007 | ||||||||||||
Base management fees | - | 5,018 | (75 | ) | 4,943 | |||||||||||
Incentive management fees | - | 1,397 | - | 1,397 | ||||||||||||
Total asset management fees | - | 6,415 | (75 | ) | 6,340 | |||||||||||
Total revenues from contracts with customers | $ | 71,101 | $ | 6,415 | $ | (75 | ) | $ | 77,441 |
(in thousands) | Nine Months Ended September 30, 2019 | |||||||||||||||
Broker -Dealer | Asset Management | Eliminations | Total | |||||||||||||
Total revenues from contracts with customers | ||||||||||||||||
Equity and debt origination | $ | 27,678 | $ | - | $ | - | $ | 27,678 | ||||||||
Strategic advisory and private placements | 17,165 | - | - | 17,165 | ||||||||||||
Total investment banking revenues | 44,843 | - | - | 44,843 | ||||||||||||
Commissions | 9,262 | - | - | 9,262 | ||||||||||||
Research payments | 4,016 | - | - | 4,016 | ||||||||||||
Net trading losses | (118 | ) | - | - | (118 | ) | ||||||||||
Total brokerage revenues | 13,160 | - | - | 13,160 | ||||||||||||
Base management fees | - | 5,835 | (1,058 | ) | 4,777 | |||||||||||
Incentive management fees | - | 908 | - | 908 | ||||||||||||
Total asset management fees | - | 6,743 | (1,058 | ) | 5,685 | |||||||||||
Total revenues from contracts with customers | $ | 58,003 | $ | 6,743 | $ | (1,058 | ) | $ | 63,688 |
13. Income Taxes
JMP Group LLC’s election to be taxed as a corporation for United States federal income tax purposes was approved by the Internal Revenue Service with an effective date of January 1, 2019. Taxable income derived from the investment activities of its previously untaxed pass-through entities will now be taxed at a U.S. federal and state corporate rate, along with the Company’s corporate subsidiaries.
As discussed previously, the CARES Act includes many measures to help companies, including changes that are temporary and non-income based tax laws, some of which were part of the Tax Cuts and Jobs Act. One provision of the CARES Act increases the tax deduction for net operating losses from 80% to 100% for 2018 through 2020 and allows net operating losses generated in 2018 through 2020 to be carried back up to five years. The Company has made reasonable assessments in accounting for certain effects of the CARES Act that was passed. However, the provisional impacts may be refined over the prescribed measurement period.
For the three months ended September 30, 2020 and 2019, the Company recorded income tax benefit of $0.1 million and $1.2 million, respectively. The effective tax rates were 4.4% and 22.8% for the three months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, the Company recorded income tax benefit of $7.2 million and $5.8 million, respectively. The effective tax rate is 34.9% and 97.0% for the nine months ended September 30, 2020 and 2019, 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. For the three, six and nine months ended September 30, 2019, the Company’s effective tax rate differs from the statutory rate primarily due to the net operating loss carryback that was created in prior year which was subsequently carried back to offset years with taxable income that was derived from a different corporate tax rate, as permitted by the CARES Act.
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.
14. Commitments and Contingencies
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. JMP Securities had no open underwriting commitments at both September 30, 2020 and December 31, 2019.
The marketable securities owned and the restricted cash, as well as the cash held by clearing brokers may be used to maintain margin requirements. The Company had $0.5 million of cash on deposit with JMP Securities’ clearing brokers at both September 30, 2020 and December 31, 2019. Furthermore, the marketable securities owned may be hypothecated or borrowed by clearing brokers.
Unfunded commitments are agreements to lend to a borrower, provided that all conditions have been met. The Company had no material unfunded commitments to lend at both September 30, 2020 and December 31, 2019.
15. 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 $17.5 million and $16.9 million, which were $16.2 million and $15.5 million in excess of the required net capital of $1.3 million and $1.4 million at September 30, 2020 and December 31, 2019 respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 1.14 to 1 and 1.25 to 1 at September 30, 2020 and December 31, 2019, 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.
16. 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, 2020 and December 31, 2019, the aggregate fair value of the Company’s investments in the affiliated entities for which the Company serves as the investment advisor was $12.5 million and $17.3 million, respectively, which consisted of investments in hedge and other private funds of $9.0 million and $8.6 million, for the periods, respectively and an investment in HCC common stock of $3.4 million and $8.7 million for the periods, respectively. Base management fees earned from these affiliated entities were $1.6 million and $1.5 million for the three months ended September 30, 2020 and 2019, respectively and were $5.0 million and $3.3 million for the six months ended September 30, 2020 and 2019.
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 both September 30, 2020 and December 31, 2019, the Company’s portion of the outstanding loan balance to this entity was $2.4 million.
On January 9, 2018, an affiliate purchased a $0.8 million note from the Company. As of September 30, 2020, the carrying value of note payable was $0.8 million. The note bears interest at a rate of 12.5% per annum and matures November 20, 2022.
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 establishes 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 brokers. The Company may enter into margin transactions in its principal trading accounts held at a clearing broker. Such margin transactions are collateralized by the Company’s cash and securities held in those accounts. Clearing brokers have the right to pledge or hypothecate such collateralized assets under the margin transaction agreement. The receivable from the clearing brokers include commissions receivable related to security transactions of customers and 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 these other parties do not fulfill their obligations in the course of business dealings, 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.
JMP Securities has agreed to indemnify its clearing brokers for losses that the clearing brokers 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’ indemnification obligations to its clearing brokers have no maximum amount. All unsettled trades at September 30, 2020 and December 31, 2019 have subsequently settled with no resulting material liability to the Company. For the nine months ended September 30, 2020 and 2019, the Company had no material loss due to counterparty failure, and had no obligations outstanding under the indemnification arrangement as of September 30, 2020 and December 31, 2019.
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.
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 addition, the Company had unfunded commitments to lend to a borrower. See Note 14 for description of the Company’s unfunded commitments to lend as of September 30, 2020 and December 31, 2019.
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 (through September 30, 2019). 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.
Management uses operating net income, a Non-GAAP financial measure, as a key metric when evaluating the performance of the Company's core business strategy and ongoing operations. This measure adjusts the Company’s net income as follows: (i) reverses share-based compensation expense recognized during the period, (ii) recognizes 100% of the share-based compensation expense in the period the award was granted, instead of recognizing it 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 prior to March 31, 2019; (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) reverses any impairment of CLO debt securities recognized in principal transactions, (vii) reverses one-time transaction costs related to the refinancing or repurchase of debt; (viii) reverses a charge recorded in connection with severance costs deriving from a strategic restructuring and reduction in headcount in September 2020; (ix) a combined federal, state and local income tax rate of 26% at the consolidated taxable parent company, JMP Group LLC; and (x) presents revenues and expenses on a basis that deconsolidates the CLOs (through March 31, 2019) and removes any non-controlling interest in consolidated but less than wholly owned subsidiaries. In management's view of the Company's performance, these charges may 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 from period to period.
Segment Operating Results
Management believes that the following information provides a reasonable representation of each segment’s contribution to revenues, income and assets:
Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||
(In thousands) | Broker-Dealer | Asset Management | Corporate Costs | Eliminations | Total Segments | Adjustments | Consolidated GAAP | ||||||||||||||||||||||||||||||
Asset Management Fee Income | Investment Income | Total Asset Management | |||||||||||||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||||||||||||||
Investment banking | $ | 20,874 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 20,874 | $ | - | $ | 20,874 | |||||||||||||||||||
Brokerage | 4,176 | - | - | - | - | - | 4,176 | - | 4,176 | ||||||||||||||||||||||||||||
Asset management related fees | 8 | 3,101 | 380 | 3,481 | - | (37 | ) | 3,452 | (541 | ) | (a) | 2,911 | |||||||||||||||||||||||||
Principal transactions | 188 | - | 954 | 954 | - | - | 1,142 | (3,879 | ) | (b) | (2,737 | ) | |||||||||||||||||||||||||
Net dividend income | - | - | 42 | 42 | - | - | 42 | (38 | ) | (c ) | 4 | ||||||||||||||||||||||||||
Other income | - | - | - | - | - | - | - | 841 | (a) | 841 | |||||||||||||||||||||||||||
Net interest income | - | - | 581 | 581 | - | - | 581 | (26 | ) | (c ) | 555 | ||||||||||||||||||||||||||
Gain on repurchase, reissuance or early retirement of debt | - | - | - | - | - | - | - | - | (d ) | - | |||||||||||||||||||||||||||
Total net revenues | 25,246 | 3,101 | 1,957 | 5,058 | - | (37 | ) | 30,267 | (3,643 | ) | 26,624 | ||||||||||||||||||||||||||
Non-interest expenses | 21,916 | 2,891 | 350 | 3,241 | 2,342 | (37 | ) | 27,462 | 2,436 | (e ) | 29,898 | ||||||||||||||||||||||||||
Operating income (loss) before taxes | 3,330 | 210 | 1,607 | 1,817 | (2,342 | ) | - | 2,805 | (6,079 | ) | (3,274 | ) | |||||||||||||||||||||||||
Income tax expense (benefit) | 866 | 54 | 418 | 472 | (609 | ) | - | 729 | (857 | ) | (f ) | (128 | ) | ||||||||||||||||||||||||
Net loss attributable to non-controlling interest | - | - | - | - | - | - | - | (64 | ) | (a), (c ), (e ) | (64 | ) | |||||||||||||||||||||||||
Operating net income (loss) | $ | 2,464 | $ | 156 | $ | 1,189 | $ | 1,345 | $ | (1,733 | ) | $ | - | $ | 2,076 | $ | (5,158 | ) | (g ) | $ | (3,082 | ) |
As of September 30, 2020 | ||||||||||||||||||||||||||||||||||||
(In thousands) | Broker-Dealer | Asset Management | Corporate Costs | Eliminations | Total Segments | Adjustments | Consolidated GAAP | |||||||||||||||||||||||||||||
Asset Management Fee Income | Investment Income | Total Asset Management | ||||||||||||||||||||||||||||||||||
Segment assets | $ | 56,266 | $ | 12,034 | $ | 74,648 | $ | 86,682 | $ | 227,129 | $ | (157,421 | ) | $ | 212,657 | $ | - | $ | 212,657 |
(a) | Total segment asset management-related fees include income from fee sharing arrangements with, and fees earned to raise capital for, third-party or equity-method investment partnerships or funds, which are reported as other income under GAAP. In addition, total segment asset management-related fees exclude base management fees and incentive fees attributable to non-controlling interests. |
(b) | Total segment principal transaction revenues exclude certain unrealized mark-to-market gains or losses, including those related to impairment of CLO debt securities and the Company's investment in Harvest Capital Credit Corporation, as well as unrealized losses derived from depreciation and amortization of real estate investment properties. |
(c) | Total segment net dividend income and net interest income exclude those attributable to non-controlling interests. |
(d) | Total segment gain/(loss) repurchase/early retirement of debt excludes losses on write offs of debt issuance costs related to early retirement or repurchase of debt. |
(e) | Total segments non-interest expenses exclude compensation expense recognized under GAAP related to equity awards, a charge recorded in connection with severance costs deriving from a strategic restructuring and reduction in headcount in September 2020, and expenses attributable to non-controlling interests. |
(f) | Total segment income tax (benefit) assumes a combined federal, state and local income tax rate of 26%. |
(g) | Operating net income (loss) is reconciled to GAAP net income (loss) attributable to JMP Group LLC. |
Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||
(In thousands) | Broker-Dealer | Asset Management | Corporate Costs | Eliminations | Total Segments | Adjustments | Consolidated GAAP | ||||||||||||||||||||||||||||||
Asset Management Fee Income | Investment Income | Total Asset Management | |||||||||||||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||||||||||||||
Investment banking | $ | 15,228 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 15,228 | $ | - | $ | 15,228 | |||||||||||||||||||
Brokerage | 3,968 | - | - | - | - | - | 3,968 | - | 3,968 | ||||||||||||||||||||||||||||
Asset management related fees | 6 | 1,795 | 234 | 2,029 | 76 | (47 | ) | 2,064 | (436 | ) | (a) | 1,628 | |||||||||||||||||||||||||
Principal transactions | - | - | 883 | 883 | - | - | 883 | (1,223 | ) | (b) | (340 | ) | |||||||||||||||||||||||||
Loss on sale, payoff, and mark-to-market of loans | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Net dividend income | - | - | 317 | 317 | - | - | 317 | (38 | ) | (c ) | 279 | ||||||||||||||||||||||||||
Other income | - | - | - | - | - | - | - | 759 | (a) | 759 | |||||||||||||||||||||||||||
Net interest income | - | - | 563 | 563 | - | - | 563 | (165 | ) | (c ) | 398 | ||||||||||||||||||||||||||
Gain (loss) on repurchase. reissuance or early retirement of debt | - | - | - | - | - | - | - | (458 | ) | (d) | (458 | ) | |||||||||||||||||||||||||
Provision for loan losses | - | - | (438 | ) | (438 | ) | - | - | (438 | ) | - | (438 | ) | ||||||||||||||||||||||||
Total net revenues | 19,202 | 1,795 | 1,559 | 3,354 | 76 | (47 | ) | 22,585 | (1,561 | ) | 21,024 | ||||||||||||||||||||||||||
Non-interest expenses | 20,677 | 2,101 | 334 | 2,435 | 2,172 | (47 | ) | 25,237 | 1,135 | (d) | 26,372 | ||||||||||||||||||||||||||
Operating income (loss) before taxes | (1,475 | ) | (306 | ) | 1,225 | 919 | (2,096 | ) | - | (2,652 | ) | (2,696 | ) | (5,348 | ) | ||||||||||||||||||||||
Income tax expense (benefit) | (383 | ) | (79 | ) | 318 | 239 | (545 | ) | - | (689 | ) | (531 | ) | (e ) | (1,220 | ) | |||||||||||||||||||||
Net income attributable to non-controlling interest | - | - | - | - | - | - | - | (67 | ) | (a), (c ), (d) | (67 | ) | |||||||||||||||||||||||||
Operating net income (loss) | $ | (1,092 | ) | $ | (227 | ) | $ | 907 | $ | 680 | $ | (1,551 | ) | $ | - | $ | (1,963 | ) | $ | (2,165 | ) | (f ) | $ | (4,061 | ) |
As of September 30, 2019 | ||||||||||||||||||||||||||||||||||||
(In thousands) | Broker-Dealer | Asset Management | Corporate Costs | Eliminations | Total Segments | Adjustments | Consolidated GAAP | |||||||||||||||||||||||||||||
Asset Management Fee Income | Investment Income | Total Asset Management | ||||||||||||||||||||||||||||||||||
Segment assets | $ | 49,554 | $ | 11,889 | $ | 78,910 | $ | 90,799 | $ | 240,718 | $ | (147,780 | ) | $ | 233,291 | $ | - | $ | 233,291 |
(a) | Total segment asset management-related fees include income from fee sharing arrangements with, and fees earned to raise capital for, third-party or equity-method investment partnerships or funds, which are reported as other income under GAAP. In addition, total segment asset management-related fees exclude base management fees and incentive fees attributable to non-controlling interests. |
(b) | Total segment principal transaction revenues exclude certain unrealized mark-to-market gains or losses, including those related to impairment of CLO debt securities and the Company's investment in Harvest Capital Credit Corporation, as well as unrealized losses derived from depreciation and amortization of real estate investment properties. |
(c) | Total segment net dividend income and net interest income exclude those attributable to non-controlling interests. |
(d) | Total segments non-interest expenses exclude compensation expense recognized under GAAP related to equity awards and expenses attributable to non-controlling interests. |
(e) | Total segment income tax (benefit) assumes a combined federal, state and local income tax rate of 26%. |
(f) | Operating net income (loss) is reconciled to GAAP net income (loss) attributable to JMP Group LLC. |
Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||
(In thousands) | Broker-Dealer | Asset Management | Corporate Costs | Eliminations | Total Segments | Adjustments | Consolidated GAAP | ||||||||||||||||||||||||||||||
Asset Management Fee Income | Investment Income | Total Asset Management | |||||||||||||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||||||||||||||
Investment banking | $ | 57,094 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 57,094 | $ | - | $ | 57,094 | |||||||||||||||||||
Brokerage | 14,008 | - | - | - | - | - | 14,008 | - | 14,008 | ||||||||||||||||||||||||||||
Asset management related fees | 167 | 6,945 | 1,092 | 8,037 | - | (124 | ) | 8,080 | (1,741 | ) | (a) | 6,339 | |||||||||||||||||||||||||
Principal transactions | 675 | - | 2,815 | 2,815 | - | - | 3,490 | (23,827 | ) | (b) | (20,337 | ) | |||||||||||||||||||||||||
Net dividend income | - | - | 347 | 347 | - | - | 347 | (106 | ) | (c ) | 241 | ||||||||||||||||||||||||||
Other income | - | - | - | - | - | - | - | 2,688 | (a) | 2,688 | |||||||||||||||||||||||||||
Net interest income | - | - | 1,231 | 1,231 | - | - | 1,231 | (77 | ) | (c ) | 1,154 | ||||||||||||||||||||||||||
Gain on repurchase, reissuance or early retirement of debt | - | - | 786 | 786 | - | - | 786 | (89 | ) | (d ) | 697 | ||||||||||||||||||||||||||
Total net revenues | 71,944 | 6,945 | 6,271 | 13,216 | - | (124 | ) | 85,036 | (23,152 | ) | 61,884 | ||||||||||||||||||||||||||
Non-interest expenses | 65,162 | 7,397 | 804 | 8,201 | 6,216 | (124 | ) | 79,455 | 3,507 | (e ) | 82,962 | ||||||||||||||||||||||||||
Operating income (loss) before taxes | 6,782 | (452 | ) | 5,467 | 5,015 | (6,216 | ) | - | 5,581 | (26,659 | ) | (21,078 | ) | ||||||||||||||||||||||||
Income tax expense (benefit) | 1,755 | (119 | ) | 1,430 | 1,311 | (1,615 | ) | - | 1,452 | (8,642 | ) | (f ) | (7,191 | ) | |||||||||||||||||||||||
Net loss attributable to non-controlling interest | - | - | - | - | - | - | - | (181 | ) | (a), (c ), (e ) | (181 | ) | |||||||||||||||||||||||||
Operating net income (loss) | $ | 5,027 | $ | (333 | ) | $ | 4,037 | $ | 3,704 | $ | (4,602 | ) | $ | - | $ | 4,130 | $ | (17,836 | ) | (g ) | $ | (13,706 | ) | ||||||||||||||
(a) | Total segment asset management-related fees include income from fee sharing arrangements with, and fees earned to raise capital for, third-party or equity-method investment partnerships or funds, which are reported as other income under GAAP. In addition, total segment asset management-related fees exclude base management fees and incentive fees attributable to non-controlling interests. |
(b) | Total segment principal transaction revenues exclude certain unrealized mark-to-market gains or losses, including those related to impairment of CLO debt securities and the Company's investment in Harvest Capital Credit Corporation, as well as unrealized losses derived from depreciation and amortization of real estate investment properties. |
(c) | Total segment net dividend income and net interest income exclude those attributable to non-controlling interests. |
(d) | Total segment gain/(loss) repurchase/early retirement of debt excludes losses on write offs of debt issuance costs related to early retirement or repurchase of debt. |
(e) | Total segments non-interest expenses exclude compensation expense recognized under GAAP related to equity awards, a charge recorded in connection with severance costs deriving from a strategic restructuring and reduction in headcount in September 2020, and expenses attributable to non-controlling interests. |
(f) | Total segment income tax expense (benefit) assumes a combined federal, state and local income tax rate of 26%. |
(g) | Operating net income (loss) is reconciled to GAAP net income (loss) attributable to JMP Group LLC. |
Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||
(In thousands) | Broker-Dealer | Asset Management | Corporate Costs | Eliminations | Total Segments | Adjustments | Consolidated GAAP | ||||||||||||||||||||||||||||||
Asset Management Fee Income | Investment Income | Total Asset Management | |||||||||||||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||||||||||||||
Investment banking | $ | 44,843 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 44,843 | $ | - | $ | 44,843 | |||||||||||||||||||
Brokerage | 13,160 | - | - | - | - | - | 13,160 | - | 13,160 | ||||||||||||||||||||||||||||
Asset management related fees | 18 | 6,692 | 603 | 7,295 | 76 | (1,095 | ) | 6,294 | (609 | ) | (a) | 5,685 | |||||||||||||||||||||||||
Principal transactions | - | - | 7,762 | 7,762 | - | - | 7,762 | (1,391 | ) | (b) | 6,371 | ||||||||||||||||||||||||||
Loss on sale, payoff, and mark-to-market of loans | - | - | (39 | ) | (39 | ) | - | - | (39 | ) | 1 | (c ) | (38 | ) | |||||||||||||||||||||||
Net dividend income | - | - | 983 | 983 | - | - | 983 | (115 | ) | (a) | 868 | ||||||||||||||||||||||||||
Other income | - | - | - | - | - | - | - | 1,517 | (c ) | 1,517 | |||||||||||||||||||||||||||
Gain (loss) on repurchase. reissuance or early retirement of debt | - | - | - | - | - | - | - | (458 | ) | (d) | (458 | ) | |||||||||||||||||||||||||
Provision for loan losses | - | - | (438 | ) | (438 | ) | - | - | (438 | ) | - | (438 | ) | ||||||||||||||||||||||||
Net interest income | - | - | 4,702 | 4,702 | - | - | 4,702 | 47 | (d ) | 4,749 | |||||||||||||||||||||||||||
Total net revenues | 58,021 | 6,692 | 13,573 | 20,265 | 76 | (1,095 | ) | 77,267 | (1,008 | ) | 76,259 | ||||||||||||||||||||||||||
Non-interest expenses | 62,035 | 8,074 | 3,378 | 11,452 | 6,214 | (1,095 | ) | 78,606 | 3,676 | (e ) | 82,282 | ||||||||||||||||||||||||||
Operating income (loss) before taxes | (4,014 | ) | (1,382 | ) | 10,195 | 8,813 | (6,138 | ) | - | (1,339 | ) | (4,684 | ) | (6,023 | ) | ||||||||||||||||||||||
Income tax expense (benefit) | (1,043 | ) | (360 | ) | 2,650 | 2,290 | (1,595 | ) | - | (348 | ) | (5,491 | ) | (f ) | (5,839 | ) | |||||||||||||||||||||
Net income attributable to non-controlling interest | - | - | - | - | - | - | - | (80.00 | ) | (a), (c ), (e ) | (80 | ) | |||||||||||||||||||||||||
Operating net income (loss) | $ | (2,971 | ) | $ | (1,022 | ) | $ | 7,545 | $ | 6,523 | $ | (4,543 | ) | $ | - | $ | (991 | ) | $ | 887 | (g ) | $ | (104 | ) | |||||||||||||
(a) | Total segment asset management-related fees include income from fee sharing arrangements with, and fees earned to raise capital for, third-party or equity-method investment partnerships or funds, which are reported as other income under GAAP. In addition, total segment asset management-related fees exclude base management fees and incentive fees attributable to non-controlling interests. |
(b) | Total segment principal transaction revenues exclude certain unrealized mark-to-market gains or losses, including those related to impairment of CLO debt securities and the Company's investment in Harvest Capital Credit Corporation, as well as unrealized losses derived from depreciation and amortization of real estate investment properties. |
(c) | Total segment net dividend income and net interest income exclude those attributable to non-controlling interests. |
(d) | Total segment gain/(loss) on repurchase, reissuance or early retirement of debt excludes losses on write offs of debt issuance costs related to early retirement or repurchase of debt. |
(e) | Total segment non-interest expenses exclude compensation expense recognized under GAAP related to equity awards, expenses attributable to non-controlling interests and amortization of an intangible asset related to CLO III prior to September 30, 2019. |
(f) | Total segment income tax expense (benefit) assumes a combined federal, state and local income tax rate of 26%. |
(g) | Operating net income (loss) is reconciled to GAAP net income (loss) attributable to JMP Group LLC. |
20. Nonconsolidated Variable Interest Entities
VIEs for which the Company is not the primary beneficiary consists of private equity funds, CLO investments, and other investments in which the Company has an equity ownership interest. The Company's maximum exposure to loss from its non-consolidated VIEs consists of equity investments and receivables as follows:
(In thousands) | As of | |||||||||||||||||||||||||||||||
September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||
Financial Statement | Maximum | Financial Statement | Maximum | |||||||||||||||||||||||||||||
Carrying Amount | Exposure to | Carrying Amount | Exposure to | |||||||||||||||||||||||||||||
Assets | Liabilities | Loss | VIE Assets | Assets | Liabilities | Loss | VIE Assets | |||||||||||||||||||||||||
CLOs and CLO warehouse | $ | 55,439 | $ | - | $ | 55,439 | $ | 1,205,427 | $ | 73,266 | $ | - | $ | 73,266 | $ | 1,439,442 | ||||||||||||||||
Fund investments | 11,024 | 285 | 14,539 | 471,919 | 10,396 | 207 | 14,196 | 346,206 | ||||||||||||||||||||||||
Other investments | 4,156 | 33 | 4,156 | 1,180,823 | 4,424 | 95 | 4,424 | 1,140,128 | ||||||||||||||||||||||||
Total | $ | 70,619 | $ | 318 | $ | 74,134 | $ | 2,858,169 | $ | 88,086 | $ | 302 | $ | 91,886 | $ | 2,925,776 |
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, 2019 contained in our Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 30, 2020 (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. The Company makes 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 the Company believes 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, the Company presumes 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. The Company undertakes 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.
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 three 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 (through March 19, 2019) and a specialty finance company. |
Operating Results
A summary of the Company’s operating results for the quarter and nine months ended September 30, 2020, and for comparable prior periods, is set forth below.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
(in thousands, except per share amounts) | 2020 | 2019 | 2020 | 2019 | ||||
Total net revenues | $ 26,624 | $ 21,024 | $ 61,884 | $ 76,259 | ||||
Net income/(loss) attributable to JMP Group | (3,082) | (4,061) | (13,706) | (104) | ||||
Net income/(loss) attributable to JMP Group per share | (0.16) | (0.21) | (0.70) | (0.01) | ||||
Operating Net Income/(Loss)* | 2,076 | (1,963) | 4,130 | (991) | ||||
Operating Net Income/(Loss) per share* | 0.10 | (0.10) | 0.21 | (0.05) |
* | Operating Net Income (Loss) is a non-GAAP measure. See the section titled Operating Net Income (Non-GAAP Financial Measure) for more information about this non-GAAP measure, including a reconciliation to net income (loss). |
Recent Developments
On January 30, 2020, the spread of novel coronavirus (“COVID-19”) was declared a Public Health Emergency of International Concern by the World Health Organization (“WHO”). Subsequently, on March 11, 2020, WHO characterized the COVID-19 outbreak as a pandemic. In March 2020, the U.S. equities market saw sharp declines and extreme volatility in reaction to the COVID-19 pandemic.
In the second quarter of 2020, unprecedented fiscal and monetary stimuli by the U.S. government spurred a sharp recovery in U.S. equity prices directly. The U.S. equities market continued to recover from the impact of the COVID-19 pandemic during the third quarter of 2020. The Company's equity capital markets and brokerage revenues directly benefited from the improved capital market condition.
We continue to closely monitor the status of the COVID-19 pandemic and its impact on our business, the economy and capital markets globally. An economic recession could have a material adverse effect on our business, financial condition, results of operations, or cash flows. While we are optimistic that the equity market could remain active through year-end, we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our business in the 4th quarter and beyond.
Deconsolidation
During the first three months of 2019, multiple events and transactions took place which resulted in the Company deconsolidating variable interest entities ("VIEs"): JMPCA, JMP Credit Advisors CLO III(R) Ltd. (“CLO III”), JMP Credit Advisors CLO IV Ltd (“CLO IV”), JMP Credit Advisors CLO V Ltd (“CLO V”), and JMP Credit Advisors Long-Term Warehouse Ltd (“CLO VI”) (CLO III, CLO IV, CLO V and CLO VI are collectively the “CLOs”). These events and transactions are hereafter referred to as the "Deconsolidation". The Company continues to hold approximately 47% of the subordinated notes of CLO III and 100% of the junior subordinated notes of CLO IV and CLO V and accounts for its ownership of these subordinated notes as an investment in a debt security and classifies them as available-for-sale securities. Refer to the Annual Report for more information on the Deconsolidation.
Results of Operations
The following table sets forth our results of operations for the three and nine months ended September 30, 2020 and 2019, 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 From 2019 to 2020 | Nine Month Change From 2019 to 2020 | ||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | $ | % | $ | % | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Investment banking | $ | 20,874 | $ | 15,228 | $ | 57,094 | $ | 44,843 | $ | 5,646 | 37.1 | % | $ | 12,251 | 27.3 | % | ||||||||||||||||
Brokerage | 4,176 | 3,968 | 14,008 | 13,160 | 208 | 5.2 | % | 848 | 6.4 | % | ||||||||||||||||||||||
Asset management fees | 2,911 | 1,628 | 6,339 | 5,685 | 1,283 | 78.8 | % | 654 | 11.5 | % | ||||||||||||||||||||||
Principal transactions | (2,737 | ) | (340 | ) | (20,337 | ) | 6,371 | (2,397 | ) | 705.0 | % | (26,708 | ) | -419.2 | % | |||||||||||||||||
Loss on sale, payoff and mark-to-market of loans | - | - | - | (38 | ) | - | 0.0 | % | 38 | -100.0 | % | |||||||||||||||||||||
Net dividend income | 4 | 279 | 241 | 868 | (275 | ) | -98.6 | % | (627 | ) | -72.2 | % | ||||||||||||||||||||
Other income | 841 | 759 | 2,688 | 1,517 | 82 | 10.8 | % | 1,171 | 77.2 | % | ||||||||||||||||||||||
Non-interest revenues | 26,069 | 21,522 | 60,033 | 72,406 | 4,547 | 21.1 | % | (12,373 | ) | -17.1 | % | |||||||||||||||||||||
Interest income | 2,287 | 2,328 | 6,391 | 19,391 | (41 | ) | -1.8 | % | (13,000 | ) | -67.0 | % | ||||||||||||||||||||
Interest expense | (1,732 | ) | (1,930 | ) | (5,237 | ) | (14,642 | ) | 198 | -10.3 | % | 9,405 | -64.2 | % | ||||||||||||||||||
Net interest income | 555 | 398 | 1,154 | 4,749 | 157 | 39.4 | % | (3,595 | ) | -75.7 | % | |||||||||||||||||||||
Loss on repurchase, reissuance, or early retirement of debt | - | (458 | ) | 697 | (458 | ) | 458 | -100.0 | % | 1,155 | -252.2 | % | ||||||||||||||||||||
Provision for Loans | - | (438 | ) | - | (438 | ) | 438 | -100.0 | % | 438 | -100.0 | % | ||||||||||||||||||||
Total net revenues after provision for loan losses | 26,624 | 21,024 | 61,884 | 76,259 | 5,600 | 26.6 | % | (14,375 | ) | -18.9 | % | |||||||||||||||||||||
Non-interest expenses | ||||||||||||||||||||||||||||||||
Compensation and benefits | 23,502 | 17,506 | 62,101 | 54,673 | 5,996 | 34.3 | % | 7,428 | 13.6 | % | ||||||||||||||||||||||
Administration | 1,408 | 2,301 | 4,697 | 6,978 | (893 | ) | -38.8 | % | (2,281 | ) | -32.7 | % | ||||||||||||||||||||
Brokerage, clearing and exchange fees | 620 | 617 | 1,901 | 2,051 | 3 | 0.5 | % | (150 | ) | -7.3 | % | |||||||||||||||||||||
Travel and business development | 65 | 1,263 | 1,041 | 3,631 | (1,198 | ) | -94.9 | % | (2,590 | ) | -71.3 | % | ||||||||||||||||||||
Managed deal expenses | 990 | 685 | 2,528 | 2,552 | 305 | 44.5 | % | (24 | ) | -0.9 | % | |||||||||||||||||||||
Communications and technology | 1,072 | 1,061 | 3,286 | 3,241 | 11 | 1.0 | % | 45 | 1.4 | % | ||||||||||||||||||||||
Occupancy | 1,194 | 1,196 | 3,587 | 4,028 | (2 | ) | -0.2 | % | (441 | ) | -10.9 | % | ||||||||||||||||||||
Professional fees | 776 | 1,236 | 2,397 | 3,513 | (460 | ) | -37.2 | % | (1,116 | ) | -31.8 | % | ||||||||||||||||||||
Depreciation | 278 | 307 | 1,223 | 915 | (29 | ) | -9.4 | % | 308 | 33.7 | % | |||||||||||||||||||||
Other | (8 | ) | 200 | 201 | 700 | (208 | ) | -104.0 | % | (499 | ) | -71.3 | % | |||||||||||||||||||
Total non-interest expenses | 29,897 | 26,372 | 82,962 | 82,282 | 3,525 | 13.4 | % | 680 | 0.8 | % | ||||||||||||||||||||||
Income (loss) before income tax expense | (3,273 | ) | (5,348 | ) | (21,078 | ) | (6,023 | ) | 2,075 | -38.8 | % | (15,055 | ) | 250.0 | % | |||||||||||||||||
Income tax expense (benefit) | (128 | ) | (1,220 | ) | (7,191 | ) | (5,839 | ) | 1,092 | -89.5 | % | (1,352 | ) | 23.2 | % | |||||||||||||||||
Net income (loss) | (3,145 | ) | (4,128 | ) | (13,887 | ) | (184 | ) | 983 | -23.8 | % | (13,703 | ) | 7447.3 | % | |||||||||||||||||
Less: Net income (loss) attributable to non-controlling interest | (63 | ) | (67 | ) | (181 | ) | (80 | ) | 4 | -6.0 | % | (101 | ) | 126.3 | % | |||||||||||||||||
Net income (loss) attributable to JMP Group LLC | $ | (3,082 | ) | $ | (4,061 | ) | $ | (13,706 | ) | $ | (104 | ) | $ | 979 | -24.1 | % | $ | (13,602 | ) | 13078.8 | % |
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 compensation expense recognized under GAAP related to equity awards; | |
(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 prior to March 31, 2019; | |
(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 warrant positions; | |
(vi) | reverses impairment of CLO debt securities recognized in principal transaction revenues, as the Company believes that the forecasted reduction in future cash flows will be mitigated by a change in the interest rate environment and that distributions will be larger than currently projected; | |
(vii) | reverses the one-time transaction costs related to the refinancing or repurchase of the debt; | |
(viii) | includes a combined federal, state and local income tax rate of 26% at the consolidated taxable parent company, JMP Group LLC; | |
(ix) | presents revenues and expenses on a basis that deconsolidates the CLOs (through March 19, 2019) and removes any non-controlling interest in consolidated but less than wholly owned subsidiaries; and | |
(x) | excludes a charge recorded in connection with severance costs deriving from a strategic restructuring and reduction in headcount in September 2020. |
Discussed below is our Operating Net Income 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, 2020 | ||||||||||||||||||||||||||||
(In thousands) | Broker-Dealer | Asset Management | Corporate Costs | Eliminations | Total Segments | |||||||||||||||||||||||
Asset Management Fee Income | Investment Income | Total Asset Management | ||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||
Investment banking | $ | 20,874 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 20,874 | ||||||||||||||
Brokerage | 4,176 | - | - | - | - | - | 4,176 | |||||||||||||||||||||
Asset management related fees | 8 | 3,101 | 380 | 3,481 | - | (37 | ) | 3,452 | ||||||||||||||||||||
Principal transactions | 188 | - | 954 | 954 | - | - | 1,142 | |||||||||||||||||||||
Net dividend income | - | - | 42 | 42 | - | - | 42 | |||||||||||||||||||||
Net interest income | - | - | 581 | 581 | - | - | 581 | |||||||||||||||||||||
Adjusted net revenues | 25,246 | 3,101 | 1,957 | 5,058 | - | (37 | ) | 30,267 | ||||||||||||||||||||
Non-interest expenses | 21,916 | 2,891 | 350 | 3,241 | 2,342 | (37 | ) | 27,462 | ||||||||||||||||||||
Operating pre-tax net income (loss) | 3,330 | 210 | 1,607 | 1,817 | (2,342 | ) | - | 2,805 | ||||||||||||||||||||
Income tax expense (benefit) | 866 | 54 | 418 | 472 | (609 | ) | - | 729 | ||||||||||||||||||||
Operating net income (loss) | $ | 2,464 | $ | 156 | $ | 1,189 | $ | 1,345 | $ | (1,733 | ) | $ | - | $ | 2,076 | |||||||||||||
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||
(In thousands) | Broker-Dealer | Asset Management | Corporate Costs | Eliminations | Total Segments | |||||||||||||||||||||||
Asset Management Fee Income | Investment Income | Total Asset Management | ||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||
Investment banking | $ | 15,228 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 15,228 | ||||||||||||||
Brokerage | 3,968 | - | - | - | - | - | 3,968 | |||||||||||||||||||||
Asset management related fees | 6 | 1,795 | 234 | 2,029 | 76 | (47 | ) | 2,064 | ||||||||||||||||||||
Principal transactions | - | - | 883 | 883 | - | - | 883 | |||||||||||||||||||||
Net dividend income | - | - | 317 | 317 | - | - | 317 | |||||||||||||||||||||
Net interest income | - | - | 563 | 563 | - | - | 563 | |||||||||||||||||||||
Provision for loan losses | - | - | (438 | ) | (438 | ) | - | - | (438 | ) | ||||||||||||||||||
Adjusted net revenues | 19,202 | 1,795 | 1,559 | 3,354 | 76 | (47 | ) | 22,585 | ||||||||||||||||||||
Non-interest expenses | 20,677 | 2,101 | 334 | 2,435 | 2,172 | (47 | ) | 25,237 | ||||||||||||||||||||
Operating pre-tax net income (loss) | (1,475 | ) | (306 | ) | 1,225 | 919 | (2,096 | ) | - | (2,652 | ) | |||||||||||||||||
Income tax expense (benefit) | (383 | ) | (79 | ) | 318 | 239 | (545 | ) | - | (689 | ) | |||||||||||||||||
Operating net income (loss) | $ | (1,092 | ) | $ | (227 | ) | $ | 907 | $ | 680 | $ | (1,551 | ) | $ | - | $ | (1,963 | ) | ||||||||||
Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||
(In thousands) | Broker-Dealer | Asset Management | Corporate Costs | Eliminations | Total Segments | |||||||||||||||||||||||
Asset Management Fee Income | Investment Income | Total Asset Management | ||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||
Investment banking | $ | 57,094 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 57,094 | ||||||||||||||
Brokerage | 14,008 | - | - | - | - | - | 14,008 | |||||||||||||||||||||
Asset management related fees | 167 | 6,945 | 1,092 | 8,037 | - | (124 | ) | 8,080 | ||||||||||||||||||||
Principal transactions | 675 | - | 2,815 | 2,815 | - | - | 3,490 | |||||||||||||||||||||
Net dividend income | - | - | 347 | 347 | - | - | 347 | |||||||||||||||||||||
Net interest income | - | - | 1,231 | 1,231 | - | - | 1,231 | |||||||||||||||||||||
Gain on repurchase, reissuance or early retirement of debt | - | - | 786 | 786 | - | - | 786 | |||||||||||||||||||||
Adjusted net revenues | 71,944 | 6,945 | 6,271 | 13,216 | - | (124 | ) | 85,036 | ||||||||||||||||||||
Non-interest expenses | 65,162 | 7,397 | 804 | 8,201 | 6,216 | (124 | ) | 79,455 | ||||||||||||||||||||
Operating pre-tax net income (loss) | 6,782 | (452 | ) | 5,467 | 5,015 | (6,216 | ) | - | 5,581 | |||||||||||||||||||
Income tax expense (benefit) | 1,755 | (119 | ) | 1,430 | 1,311 | (1,615 | ) | - | 1,452 | |||||||||||||||||||
Operating net income (loss) | $ | 5,027 | $ | (333 | ) | $ | 4,037 | $ | 3,704 | $ | (4,602 | ) | $ | - | $ | 4,130 |
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||
(In thousands) | Broker-Dealer | Asset Management | Corporate Costs | Eliminations | Total Segments | |||||||||||||||||||||||
Asset Management Fee Income | Investment Income | Total Asset Management | ||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||
Investment banking | $ | 44,843 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 44,843 | ||||||||||||||
Brokerage | 13,160 | - | - | - | - | - | 13,160 | |||||||||||||||||||||
Asset management related fees | 18 | 6,692 | 603 | 7,295 | 76 | (1,095 | ) | 6,294 | ||||||||||||||||||||
Principal transactions | - | - | 7,762 | 7,762 | - | - | 7,762 | |||||||||||||||||||||
Loss on sale, payoff, and mark-to-market of loans | - | - | (39 | ) | (39 | ) | - | - | (39 | ) | ||||||||||||||||||
Net dividend income | - | - | 983 | 983 | - | - | 983 | |||||||||||||||||||||
Net interest income | - | - | 4,702 | 4,702 | - | - | 4,702 | |||||||||||||||||||||
Provision for loan losses | - | - | (438 | ) | (438 | ) | - | - | (438 | ) | ||||||||||||||||||
Adjusted net revenues | 58,021 | 6,692 | 13,573 | 20,265 | 76 | (1,095 | ) | 77,267 | ||||||||||||||||||||
Non-interest expenses | 62,035 | 8,074 | 3,378 | 11,452 | 6,214 | (1,095 | ) | 78,606 | ||||||||||||||||||||
Operating pre-tax net income (loss) | (4,014 | ) | (1,382 | ) | 10,195 | 8,813 | (6,138 | ) | - | (1,339 | ) | |||||||||||||||||
Income tax expense (benefit) | (1,043 | ) | (360 | ) | 2,650 | 2,290 | (1,595 | ) | - | (348 | ) | |||||||||||||||||
Operating net income (loss) | $ | (2,971 | ) | $ | (1,022 | ) | $ | 7,545 | $ | 6,523 | $ | (4,543 | ) | $ | - | $ | (991 | ) |
The following table reconciles operating net income (loss) 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 and nine months ended September 30, 2020 and 2019.
(In thousands) | Three Months Ended September 30, | |||||||
2020 | 2019 | |||||||
Consolidated net income (loss) attributable to JMP Group LLC | $ | (3,082 | ) | $ | (4,061 | ) | ||
Income tax expense (benefit) | (128 | ) | (1,220 | ) | ||||
Consolidated pre-tax net income (loss) attributable to JMP Group LLC | $ | (3,210 | ) | $ | (5,281 | ) | ||
Addback (subtract): | ||||||||
Share-based awards and deferred compensation | (71 | ) | (753 | ) | ||||
Early retirement/repurchase of debt | - | (625 | ) | |||||
Impairment of CLO debt securities | (2,746 | ) | - | |||||
Strategic restructing charge | (2,056 | ) | - | |||||
Unrealized loss in real estate fund investment – depreciation and amortization | (438 | ) | (647 | ) | ||||
Unrealized mark-to-market gain (loss) on strategic equity investments | (704 | ) | (604 | ) | ||||
Total consolidation adjustments and reconciling items | (6,015 | ) | (2,629 | ) | ||||
Total segments adjusted operating pre-tax net income (loss) | $ | 2,805 | $ | (2,652 | ) | |||
Subtract (addback) of segment income tax expense (benefit) | 729 | (689 | ) | |||||
Operating net income (loss) | $ | 2,076 | $ | (1,963 | ) |
(In thousands) | Nine Months Ended September 30, | |||||||
2020 | 2019 | |||||||
Consolidated net income (loss) attributable to JMP Group LLC | $ | (13,706 | ) | $ | (104 | ) | ||
Income tax benefit | (7,191 | ) | (5,839 | ) | ||||
Consolidated pre-tax net loss attributable to JMP Group LLC | $ | (20,897 | ) | $ | (5,943 | ) | ||
Subtract: | ||||||||
Share-based awards and deferred compensation | (487 | ) | (2,184 | ) | ||||
Early retirement/repurchase of debt | (89 | ) | (625 | ) | ||||
Impairment of CLO debt securities | (17,282 | ) | - | |||||
Strategic restructing charge | (2,056 | ) | - | |||||
Amortization of intangible asset – CLO III | - | (277 | ) | |||||
Unrealized loss in real estate fund investment – depreciation and amortization | (1,292 | ) | (1,425 | ) | ||||
Unrealized mark-to-market loss on strategic equity investments | (5,272 | ) | (93 | ) | ||||
Total consolidation adjustments and reconciling items | (26,478 | ) | (4,604 | ) | ||||
Total segments adjusted operating pre-tax net income (loss) | $ | 5,581 | $ | (1,339 | ) | |||
Subtract (addback) of segment income tax expense (benefit) | 1,452 | (348 | ) | |||||
Operating net income (loss) | $ | 4,130 | $ | (991 | ) |
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Revenues
Investment Banking
Investment banking revenues, earned in our Broker-Dealer segment, increased $5.6 million, or 37.1%, from $15.2 million for the quarter ended September 30, 2019 to $20.9 million for the same period in 2020. As a percentage of total net revenues, investment banking revenues increased from 72.4% for the quarter ended September 30, 2019 to 78.4% for the quarter ended September 30, 2020. On an operating basis, investment banking revenues were 69.0% and 67.4% for the quarters ended September 30, 2020 and 2019, respectively, as a percentage of adjusted net revenues.
(Dollars in thousands) | Three Months Ended September 30, | Change from 2020 to 2019 | ||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||
Count | Revenues | Count | Revenues | Count | $ | % | ||||||||||||||||||||||
Equity and debt origination | 29 | $ | 16,152 | 17 | $ | 8,561 | 12 | $ | 7,591 | 88.7 | % | |||||||||||||||||
Strategic advisory and private placements | 4 | 4,722 | 6 | 6,667 | (2 | ) | $ | (1,945 | ) | -29.2 | % | |||||||||||||||||
Total | 33 | $ | 20,874 | 23 | $ | 15,228 | 10 | $ | 5,646 | 37.1 | % |
The increase in revenues was driven by an 88.7% increase in equity and debt origination revenues as JMP executed 29 deals in the three months ended September 30, 2020 compared to 17 for the same period in 2019, partly offset by a 29.2% decrease in strategic advisory and private placements revenues. The number of transactions in which we acted as a bookrunning manager was one and six for the quarters ended September 30, 2020 and 2019, respectively.
Brokerage Revenues
Brokerage revenues earned in our Broker-Dealer segment increased $0.2 million from $4.0 million for the quarter ended September 30, 2019 to $4.2 million for the quarter ended September 30, 2020. Brokerage revenues decreased as a percentage of total net revenues, from 18.9% for the quarter ended September 30, 2019 to 15.7% for the quarter ended September 30, 2020. On an operating basis, brokerage revenues were 16.0% and 18.4% for the quarters ended September 30, 2020 and 2019, respectively, as a percentage of total net revenues.
Asset Management Fees
(In thousands) | Three Months Ended September 30, | |||||||
2020 | 2019 | |||||||
Asset management related fees: | ||||||||
Fees reported as asset management fees | $ | 2,911 | $ | 1,628 | ||||
Fees reported as other income | 841 | 759 | ||||||
Less: non-controlling interests | (300 | ) | (323 | ) | ||||
Total segment asset management related fee revenues | $ | 3,452 | $ | 2,064 |
Fees reported as asset management fees were $2.9 million and $1.6 million for the quarters ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, asset management revenues increased from 7.7% for the quarter ended September 30, 2019 to 10.9% for the quarter ended September 30, 2020.
Total segment asset management-related fees include base management fees and incentive fees from our assets 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 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 $1.4 million from $2.1 million for the quarter ended September 30, 2019 to $3.5 million for the quarter ended September 30, 2020. On an operating basis, asset management related fee revenues were 11.4% and 9.1% for the quarters ended September 30, 2020 and 2019, respectively, as a percentage of total net revenues.
(In thousands) | Client Assets Under Management at | |||||||
September 30, | December 31, | |||||||
2020 | 2019 | |||||||
Client Assets Managed by HCS, JMPAM, and HCAP Advisors (1) | $ | 599,795 | $ | 594,678 | ||||
Client Assets Under Management by Sponsored Funds (2) | 5,005,196 | 5,381,432 | ||||||
JMP Group LLC total client assets under management | $ | 5,604,992 | $ | 5,976,110 |
(1) | For HCS, JMPAM, and HCAP Advisors, client assets under management represent the net assets of such funds or the commitment amount |
(2) | Sponsored funds are third-party asset managers in which the Company owns an economic interest. |
Principal Transactions
Principal transaction revenues decreased $2.4 million from a loss of $0.3 million for the quarter ended September 30, 2019 to a loss of $2.7 million for the same period in 2020. This decrease was primarily driven by a $2.7 million impairment loss on CLO debt securities included in principal transaction revenues for the quarter ended September 30, 2020.
Total segment principal transaction revenues increased from $0.9 million for the quarter ended September 30, 2019 to $1.1 million for the same period in 2020, primarily driven by a $0.8 million gain on equity and other securities. 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 2020 and 2019 were included in our Investment Income segment. Total segment principal transaction revenues are reconciled to the GAAP measure, total principal transaction revenues, in the table below. See the Operating Net Income section above for additional information on the adjustments made to arrive at the non-GAAP measure and why management believes that this non-GAAP number is useful and important to the users of these financial statements.
(In thousands) | Three Months Ended September 30, | |||||||
2020 | 2019 | |||||||
Equity and other securities | $ | 849 | $ | (15 | ) | |||
Warrants and other investments | 301 | $ | 894 | |||||
Investment partnerships | (8 | ) | 4 | |||||
Total segment principal transaction revenues | 1,142 | 883 | ||||||
Operating adjustment addbacks | (3,879 | ) | (1,223 | ) | ||||
Total principal transaction revenues | $ | (2,737 | ) | $ | (340 | ) |
On an operating basis, as a percentage of adjusted net revenues, principal transaction revenues decreased from 3.9% for the quarter ended September 30, 2019 to 3.8% for the quarter ended September 30, 2020.
Net Interest Income/Expense
Net interest income increased $0.2 from $0.4 million for the quarter ended September 30, 2019 to $0.6 million for the quarter ended September 30, 2020 As a percentage of total net revenues, net interest income was 2.5% for the quarter ended September 30, 2019 and 1.9% for the quarter ended September 30, 2020.
Total segment net interest income did not change as it was $0.6 million for the quarter ended September 30, 2019 and $0.6 million for the quarter ended September 30, 2020. Net interest income is earned in our Investment Income segment. Total segment net interest income after deconsolidation reflects the effective yield of the Company's ownership of subordinated notes in CLO III, CLO IV, and CLO V, net of bond interest expense. As a percentage of total segment net revenues, net interest income was 2.4% for the quarter ended September 30, 2019 and 1.9% for the quarter ended September 30, 2020.
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 $6.0 million, or 34.3%, from $17.5 million for the quarter ended September 30, 2019 to $23.5 million for the quarter ended September 30, 2020. The increase in compensation and benefits is partly attributable to a $2.1 million charge recorded in connection with severance costs deriving from a strategic restructuring and reduction in headcount in September 2020.
Employee payroll, taxes and benefits, and consultant fees decreased $0.3 million from $10.5 million for the quarter ended September 30, 2019 to $10.2 million for the quarter ended September 30, 2020. Performance-based bonus and commission increased $6.3 million from $6.5 million for the quarter ended September 30, 2019 to $12.8 million for the quarter ended September 30, 2020.
Equity-based compensation did not change from $0.5 million for the quarter ended September 30, 2019 to $0.5 million for the quarter ended September 30, 2020.
Compensation and benefits as a percentage of revenues increased from 83.3% of total net revenues for the quarter ended September 30, 2019 to 88.3% for the quarter ended September 30, 2020. Compensation and benefits increased 34.3% from the quarter ended September 30, 2019 when compared to the quarter ended September 30, 2020. Net revenue increased 26.6% from the quarter ended September 30, 2019 when compared to the quarter ended September 30, 2020.
Administration
Administration expense decreased $0.9 million from $2.3 million for the quarter ended September 30, 2019 to $1.4 million for the quarter ended September 30, 2020. As a percentage of total net revenues, administration expense was 5.3% and 10.7% for the quarters ended September 30, 2020 and 2019, respectively.
Travel and Business Development
Travel and business development expense was $0.1 million and $1.3 million for the quarters ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, travel and business development expense was 0.2% and 6.0% for the quarters ended September 30, 2020 and 2019, respectively.
Communications and Technology
Communications and technology expense was $1.1 million for both of the quarters ended September 30, 2020 and 2019. As a percentage of total net revenues, communications and technology expense was 4.0% and 5.0% for the quarters ended September 30, 2020 and 2019, respectively.
Occupancy
Occupancy expenses were $1.2 million and $1.2 million for the quarters ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, occupancy expenses were 4.0% and 5.0% for the quarters ended September 30, 2020 and 2019, respectively.
Provision for Income Taxes
Income tax benefit was $0.1 million and $1.2 million for the quarters ended September 30, 2020 and 2019, respectively. The Company's tax benefit decreased for the quarter ended September 30, 2020 from September 30, 2019 due to an decrease in pre-tax net loss from 2019 to 2020.
Beginning January 1, 2019, the Company elected to be treated as a C corporation for tax purposes, rather than a partnership, going forward.
For GAAP 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 net operating loss carryback that was created in prior year which was subsequently carried back to offset years with taxable income that was derived from a different corporate tax rate.
Segment income tax was a $0.7 million expense and $0.7 million benefit for the quarters ended September 30, 2020 and 2019, respectively.
For segment reporting purposes, an effective tax rate of 26% was assumed for the three months ended September 30, 2020 and 2019 based on our best estimation of the subsidiary’s average rate of taxation over the long term.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted in response to market conditions related to the COVID-19 pandemic. The CARES Act includes many measures to help companies, including changes that are temporary and non-income based tax laws, some of which were part of the Tax Cuts and Jobs Act (TCJA). The Company has made reasonable assessments in accounting for certain effects of the CARES Act that was passed. 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.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Revenues
Investment Banking
Investment banking revenues, earned in our Broker-Dealer segment, increased $12.3 million, or 27.3%, from $44.8 million for the nine months ended September 30, 2019 to $57.1 million for the same period in 2020. As a percentage of total net revenues, investment banking revenues increased from 58.8% for the nine months ended September 30, 2019 to 92.3% for the nine months ended September 30, 2020. On an operating basis, investment banking revenues were 67.1% and 58.0% for the nine months ended September 30, 2020 and 2019, respectively, as a percentage of adjusted net revenues.
(Dollars in thousands) | Nine Months Ended September 30, | Change from 2020 to 2019 | ||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||
Count | Revenues | Count | Revenues | Count | $ | % | ||||||||||||||||||||||
Equity and debt origination | 68 | 39,277 | 59 | $ | 27,678 | 9 | $ | 11,599 | 41.9 | % | ||||||||||||||||||
Strategic advisory and private placements | 13 | 17,817 | 15 | 17,165 | (2 | ) | $ | 652 | 3.8 | % | ||||||||||||||||||
Total | 81 | $ | 57,094 | 74 | $ | 44,843 | 7 | $ | 12,251 | 27.3 | % |
The increase in revenues was primarily driven by a 41.9% increase in equity and debt origination revenues as JMP executed 68 deals in the first nine months of 2020 compared to 59 for the same period in 2019. The number of transactions in which we acted as a bookrunning manager was three and sixteen for the nine months ended September 30, 2020 and 2019, respectively.
Brokerage Revenues
Brokerage revenues earned in our Broker-Dealer segment increased from $13.2 million for the nine months ended September 30, 2019 to $14.0 million for the nine months ended September 30, 2020. Brokerage revenues increased as a percentage of total net revenues, from 17.3% for the nine months ended September 30, 2019 to 22.6% for the nine months ended September 30, 2020. On an operating basis, brokerage revenues were 23.3% and 18.2% for the nine months ended September 30, 2020 and 2019, respectively, as a percentage of total adjusted net revenues.
Asset Management Fees
(In thousands) | Nine Months Ended September 30, | |||||||
2020 | 2019 | |||||||
Asset management related fees: | ||||||||
Fees reported as asset management fees | $ | 6,339 | $ | 5,685 | ||||
Fees reported as other income | 2,688 | 1,517 | ||||||
Less: Non-controlling interest in HCAP Advisors | (947 | ) | (908 | ) | ||||
Total segment asset management related fee revenues | $ | 8,080 | $ | 6,294 |
Fees reported as asset management fees was $5.7 million and $6.3 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, asset management revenues increased from 7.5% for the nine months ended September 30, 2019 to 10.2% for the nine months ended September 30, 2020.
Total segment asset management-related fees include base management fees and incentive fees from our assets 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 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 $1.8 million from $6.3 million for the nine months ended September 30, 2019 to $8.1 million for the nine months ended September 30, 2020. On an operating basis, asset management related fee revenues were 9.5% and 8.1% for the nine months ended September 30, 2020 and 2019, respectively, as a percentage of total net revenues.
Principal Transactions
Principal transaction revenues decreased $26.7 million from a gain of $6.4 million for the nine months ended September 30, 2019 to a loss of $20.3 million for the same period in 2020. This decrease was primarily driven by a $17.3 million impairment loss on CLO debt securities and a $5.3 million unrealized loss on the Company’s investment in Harvest Capital Credit Corporation included in principal transaction revenues for the nine months ended September 30, 2020 and a $3.4 million gain on deconsolidation of JMPCA included in the same period in 2019.
Total segment principal transaction revenues decreased from $7.8 million for the nine months ended September 30, 2019 to $3.5 million for the same period in 2020. 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 2020 and 2019 were included in our Investment Income segment. Total segment principal transaction revenues are reconciled to the GAAP measure, total principal transaction revenues, in the table below. See the Operating Net Income section above for additional information on the adjustments made to arrive at the non-GAAP measure and why management believes that this non-GAAP number is useful and important to the users of these financial statements.
(In thousands) | Nine Months Ended September 30, | |||||||
2020 | 2019 | |||||||
Equity and other securities | $ | 358 | $ | 1,354 | ||||
Warrants and other investments | 2,622 | 6,253 | ||||||
Investment partnerships | 510 | 155 | ||||||
Total segment principal transaction revenues | 3,490 | 7,762 | ||||||
Operating adjustment addbacks | (23,827 | ) | (1,391 | ) | ||||
Total principal transaction revenues | $ | (20,337 | ) | $ | 6,371 |
On an operating basis, as a percentage of total net revenues, principal transaction revenues decreased from 10.0% for the nine months ended September 30, 2019 to 4.1% for the nine months ended September 30, 2020.
Net Interest Income/Expense
Net interest income decreased $3.5 million from $4.7 million for the nine months ended September 30, 2019 to $1.2 million for the nine months ended September 30, 2020. The decrease in net interest income was driven primarily by a $13.0 million decrease in net interest earned, partially offset by a $9.4 million increase in net interest expense. As a percentage of total net revenues, net interest income was 6.1% for the nine months ended September 30, 2019 and 1.4% for the nine months ended September 30, 2020.
Total segment net interest income decreased from $4.7 million for the nine months ended September 30, 2019 to $1.2 million for the nine months ended September 30, 2020, driven by deconsolidation of the CLOs in the first quarter of 2019. Net interest income is earned in our Investment Income segment. Total segment net interest income after deconsolidation reflects the effective yield of the Company's ownership of subordinated notes in CLO III, CLO IV, and CLO V, net of bond interest expense. As a percentage of total segment net revenues, net interest income was 6.1% for the nine months ended September 30, 2019 and 1.4% for the nine months ended September 30, 2020.
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 $7.4 million, or 13.5%, from $54.7 million for the nine months ended September 30, 2019 to $62.1 million for the nine months ended September 30, 2020. The increase in compensation and benefits is partly attributable to a $2.1 million charge recorded in connection with severance costs deriving from a strategic restructuring and reduction in headcount in September 2020.
Employee payroll, taxes and benefits, and consultant fees decreased $0.5 million from $32.0 million for the nine months ended September 30, 2019 to $31.5 million for the nine months ended September 30, 2020. Performance-based bonus and commission increased $8.1 million from $21.1 million for the nine months ended September 30, 2019 to $29.2 million for the nine months ended September 30, 2020.
Equity-based compensation decreased $0.2 million from $1.6 million for the nine months ended September 30, 2019 to $1.4 million for the nine months ended September 30, 2020.
Compensation and benefits as a percentage of revenues increased from 71.7% of total net revenues for the nine months ended September 30, 2019 to 100.4% for the nine months ended September 30, 2020. The increase in the compensation and benefits as a percentage of revenues is primarily due to the decrease in principal transaction revenues within total net revenues from the nine months ended September 30, 2019 compared to the same period in 2020.
Administration
Administration expense decreased $2.3 million from $7.0 million for the nine months ended September 30, 2019 to $4.7 million for the nine months ended September 30, 2020. As a percentage of total net revenues, administration expense was 7.6% and 9.2% for the nine months ended September 30, 2020 and 2019, respectively.
Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fee was $1.9 million and $2.1 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, our brokerage, clearing and exchange fee was 3.1% and 2.7% for the nine months ended September 30, 2020 and 2019, respectively.
Travel and Business Development
Travel and business development expense was $1.0 million and $3.6 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, travel and business development expense was 1.7% and 4.8% for the nine months ended September 30, 2020 and 2019, respectively.
Managed deal expenses
Managed deal expense was $2.5 million and $2.6 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, managed deal expense was 4.1% and 3.3% for the nine months ended September 30, 2020 and 2019, respectively.
Communications and Technology
Communications and technology expense was $3.3 million and $3.2 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, communications and technology expense were 5.3% and 4.2% for the nine months ended September 30, 2020 and 2019, respectively.
Occupancy
Occupancy expense was $3.6 million and $4.0 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, occupancy expense was 5.8% and 5.3% for the nine months ended September 30, 2020 and 2019, respectively.
Professional Fees
Professional fees were $2.4 million and $3.5 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, professional fees were 3.9% and 4.6% for the nine months ended September 30, 2020 and 2019, respectively.
Depreciation
Depreciation expenses were $1.2 million and $0.9 million for the nine months ended September 30, 2020 and 2019, respectively. As a percentage of total net revenues, depreciation was 2.0% and 1.2% for the nine months ended September 30, 2020 and 2019, respectively.
Provision for Income Taxes
Income tax benefit was $7.2 million and $5.8 million for the nine months ended September 30, 2020 and 2019, respectively. The Company's tax benefit increased for the nine months ended September 30, 2020 from September 30, 2019 due to a increase in pre-tax net loss from 2019 to 2020.
For GAAP 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 net operating loss carryback that was created in prior year which was subsequently carried back to offset years with taxable income that was derived from a different corporate tax rate.
Segment income tax was a $1.5 million expense and a $0.3 million benefit for the nine months ended September 30, 2020 and 2019, respectively.
For segment reporting purposes, an effective tax rate of 26% was assumed for the nine months ended September 30, 2020 and 2019 based on our best estimation of the subsidiary’s average rate of taxation over the long term.
Beginning January 1, 2019, the Company elected to be treated as a C corporation for tax purposes, rather than a partnership, which resulted in the Company recognizing initial temporary differences between the book and tax basis of assets and liabilities that were previously held under pass through entities.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted in response to market conditions related to the COVID-19 pandemic. The CARES Act includes many measures to help companies, including changes that are temporary and non-income based tax laws, some of which were part of the Tax Cuts and Jobs Act (TCJA). The Company has made reasonable assessments in accounting for certain effects of the CARES Act that was passed. 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.
Summarized Financial Information
JMP Group Inc., a wholly-owned subsidiary of JMP Group LLC, is the primary obligor of the Company’s 7.25% Senior Notes due 2027 (the “2027 Senior Notes”) (Note 7). Pursuant to the indenture of the 2027 Senior Notes, JMP Group LLC and JMP Investment Holdings LLC (the “Guarantors”) are the guarantors of the 2027 Senior Notes. The Guarantors jointly and severally provide a full and unconditional guarantee of the due and punctual payment of the principal and interest on the 2027 Senior Notes and the due and punctual payment or performance of all other obligations of JMP Group Inc. under the indenture governing the 2027 Senior Notes.
The following summarized financial information presents the information of JMP Group LLC, JMP Investment Holdings LLC and JMP Group Inc. on a combined basis and eliminates intercompany balances. It does not include or present investments in subsidiaries that are not an issuer or guarantor. One of the non-guarantor subsidiaries not combined, 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.
These disclosures are in accordance with the new disclosure requirements under SEC Regulation S-X Rule 3-10 and Rule 13-02 issued in March 2020. We have early adopted these disclosure rules.
The tables below present summarized financial information as of September 30, 2020 and December 31, 2019 and for the nine months ended September 30, 2020.
(In thousands) | As of | |||||||
September 30, | December 31, | |||||||
2020 | 2019 | |||||||
Cash and cash equivalents | $ | 5,401 | $ | 12,557 | ||||
Marketable securities owned, at fair value | 28,965 | 34,203 | ||||||
Due from non-obligated subsidiaries | 1,221 | 200 | ||||||
Deferred tax asset | 17,076 | 18,547 | ||||||
Operating lease right-of-use asset | 17,112 | 19,632 | ||||||
Total assets | 88,659 | 99,100 | ||||||
Bond payable, net of debt issuance costs | 80,816 | 82,584 | ||||||
Due to non-obligated subsidiaries | 17,023 | 20,912 | ||||||
Operating lease liability | 22,239 | 25,394 | ||||||
Total liabilities | 135,174 | 140,377 | ||||||
Total equity | (46,515 | ) | (41,276 | ) | ||||
Total liabilities and equity | 88,659 | 99,101 |
(In thousands) | Nine Months Ended | |||
September 30, 2020 | ||||
Total net revenues after provision for loan losses | $ | (933 | ) | |
Total non-interest expenses | 4,375 | |||
Net loss | (4,331 | ) |
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, 2020 to demonstrate where our capital is invested and the financial condition of the Company.
Overview
As a result of the ongoing COVID-19 pandemic, we expect certain costs to decline as the underlying activities are restricted by the COVID-19 pandemic, including travel and related expenses. In addition, after a careful review of our cost structure, we reduced headcount modestly during the quarter ended September 30, 2020. While the headcount reduction resulted in recognition of severance costs, the reduced ongoing cost should increase cash flows in the future periods. However, the extent to which the COVID-19 pandemic will impact our liquidity in future periods still remains uncertain.
As of September 30, 2020, we had $56.7 million in cash and cash equivalents and $17.9 million in undrawn borrowing capacity on our revolving line of credit (some of which borrowing capacity may be used for working capital – See the section entitled JMP Holding LLC Credit Agreement with CNB, below). Based on our historical results, management's experience and our current business strategy, we believe that our existing cash resources and available credit will be sufficient to meet anticipated working capital and capital expenditure requirements for at least the next twelve months.
As of September 30, 2020, we had net liquid assets of $95.0 million primarily consisting of cash and cash equivalents, receivable from clearing brokers, marketable securities owned, and investment banking receivables, net of marketable securities sold but not yet purchased and accrued compensation. We have satisfied our capital and liquidity requirements primarily through the issuance of the Senior Notes, draws on a line of credit, and internally generated cash from operations. Most of our financial instruments, other than loans held for investment and certain marketable securities, are recorded at fair value or amounts that approximate fair value.
As of September 30, 2020, our material indebtedness consisted of our then outstanding Senior Notes and borrowing on our revolving line of credit with City National Bank (“CNB”) under the Credit Agreement described below.
Senior Notes
In November 2017, JMP Group Inc. raised $50.0 million from the issuance of 7.25% Senior Notes (“2027 Senior Notes”). The 2027 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 JMP Group Inc.’s option on or after November 28, 2020 at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The 2027 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. Pursuant to the indenture of the 2027 Senior Notes, JMP Group LLC and JMP Investment Holdings LLC (the “Guarantors”) are the guarantors of the 2027 Senior Notes. The Guarantors jointly and severally provide a full and unconditional guarantee of the due and punctual payment of the principal and interest on the 2027 Senior Notes and the due and punctual payment or performance of all other obligations of JMP Group Inc. under the indenture governing the 2027 Senior Notes.
In September 2019, JMP Group LLC raised $36.0 million from the issuance of 6.875% Senior Notes (“2029 Senior Notes”). The 2029 Senior Notes will mature on September 30, 2029 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 September 30, 2021 at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The 2029 Senior Notes bear interest at a rate of 6.875% per year, payable quarterly on March 30, June 30, September 30, and December 30 of each year.
In March 2020, the Company repurchased $1.4 million and $0.7 million par value of its issued and outstanding 2029 Senior Notes and 2027 Senior Notes, respectively. Since they were repurchased at less than carrying value, a gain of $0.7 million was recognized upon the repurchase of the bonds, which has been included in the Consolidated Statements of Operations, gain on repurchase, reissuance or early retirement of debt.
JMP Holding LLC Credit Agreement with CNB
JMP Holding LLC (the “Borrower”), a wholly owned subsidiary of the Company, entered into a Second Amended and Restated Credit Agreement dated April 30, 2014 among the Borrower, the lenders from time to time party thereto (the “Lenders”) and CNB, as administrative agent for the Lenders (as amended, the “Credit Agreement”).
The Credit Agreement provides a $25.0 million revolving line of credit (the “Revolver”) through December 31, 2020. On such date, if the revolving period has not been previously extended, any outstanding amounts under the Revolver would convert to a term loan (the “Converted Term Loan”). The Converted Term Loan must be repaid in 12 quarterly installments commencing on January 1, 2021, with each of the first six installments being equal to 3.75% of the principal amount of the Converted Term Loan and each of the next six installments being equal to 5.0% of the principal amount of the Converted Term Loan. A final payment of all remaining principal and interest due under the Converted Term Loan must be made at the earlier of: (a) December 31, 2023; or (b) if certain liquidity requirements are not satisfied by the Company, the date that is last day of the fiscal quarter ending most recently (but no less than 60 days) prior to the earliest maturity date of any senior unsecured notes issued by JMP Group Inc. or JMP Group LLC then outstanding.
The Credit Agreement provides that the Revolver may be used, on a revolving basis, to fund specified permitted investments in collateralized loan obligation vehicles. In addition, up to $5.0 million of the Revolver may be used, on a revolving basis, to fund other types of permitted investments and acquisitions and for working capital.
On July 16, 2020, JMP Holding LLC (“JMP Holding”), a wholly owned subsidiary of JMP Group LLC, entered into an Amendment Number Seven to its existing Second Amended and Restated Credit Agreement, dated as of April 30, 2014 (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), with JMP Holding and its affiliates that are a party thereto as lenders and City National Bank (“CNB”), as administrative agent for the lenders, in order to, among other provisions, (i) allow JMP Holding to incur liens of certain clearing agents in the ordinary course of business, (ii) reduce the margin applicable to LIBOR loans from 2.25% to 2.00% and (iii) require that JMP Holding maintain a minimum of $6.0 million of CLO debt securities, based on their fair value as of June 30, 2020, pledged as collateral supporting the obligations under the Credit Agreement and refrain from exercising any right to call the related CLO entities or cause the liquidation of such CLO entities.
As of September 30, 2020, the Borrower had drawn $6.0 million against the Revolver and had letters of credit outstanding under this facility to support office lease obligations of approximately $1.1 million in the aggregate.
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. 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 three or more of the members of the Company’s executive committee fail to be involved actively on an ongoing basis in the management of the Company or any of its subsidiaries. A violation of any one of these covenants could result in a default under the Credit Agreement, which would permit CNB to terminate our Revolver or Converted Term Loan and require the immediate repayment of any outstanding principal and interest. In addition, our subsidiaries are restricted under the Credit Agreement under certain circumstances from making distributions to us if an event of default has occurred under the Credit Agreement.
As of September 30, 2020 and December 31, 2019, we were in compliance with the loan covenants under the Credit Agreement.
The Borrower’s obligations under the Credit Agreement are guaranteed by all of the Company’s other wholly owned subsidiaries (other than JMP Securities) and are secured by substantially all of its and the guarantors’ assets. In addition, we have entered into a limited recourse pledge agreement with CNB whereby JMP Group LLC granted a lien on the equity interests in JMP Investment Holdings LLC and JMPAM to secure the Borrower’s obligations under the Credit Agreement.
JMP Securities LLC Revolving Note Agreement with CNB
Under a Revolving Note and Cash Subordination Agreement (as amended, the “Revolving Note Agreement”) and related Revolving Note (as amended, the “Revolving Note”), each dated April 8, 2011, JMP Securities holds a $20.0 million revolving line of credit with CNB to be used for regulatory capital purposes in connection with its securities underwriting activities. Advances under the Revolving Note Agreement bear interest at CNB’s announced prime interest rate. The unused portion of the line bears interest at the rate of 0.25% per annum, paid monthly.
On June 29, 2020, JMP Securities entered Amendment Number Eleven to the Revolving Note Agreement. Pursuant to this amendment, the $20.0 million Revolving Note Agreement was extended for one year until June 30, 2021. On June 20, 2021, any existing outstanding amount under the Revolving Note will convert to a term loan maturing the following year.
There was no borrowing on the Revolving Note as of September 30, 2020 and December 31, 2019.
The Revolving Note Agreement contains financial and other covenants. A violation of any one of these covenants could result in a default under the Revolving Note, which would permit CNB to terminate the Revolving Note and require the immediate repayment of any outstanding principal and interest, subject to the terms of the Revolving Note Agreement.
At both September 30, 2020 and December 31, 2019, JMP Securities was in compliance with the loan covenants under the Revolving Note Agreement.
JMP Securities’ obligations under the Revolving Note Agreement are guaranteed by all of the Company’s wholly owned subsidiaries (other than JMP Securities) and are secured by substantially all the guarantors’ assets.
Other JMP Group LLC considerations
On February 24, 2020 the Company launched a self-tender offer (the “2020 Tender Offer”) to repurchase for cash up to 3,000,000 of shares at $3.25 a share, representing limited liability company interests of the Company, which was terminated on March 19, 2020 as a result of multiple conditions to the 2020 Tender Offer, including share price and market index conditions, not having been satisfied.
During the three months ended September 30, 2020, the Company did not repurchase any of the Company's shares.
On February 19, 2020, the Company suspended its quarterly cash distributions program on outstanding shares.
Upon the securitization of Medalist Partners Corporate Finance CLO VI in February 2020, the Company received $13.7 million in cash from the CLO VI warehouse and recognized a gain of $1.0 million.
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 2020, we paid out $26.9 million of cash bonuses for 2019, including employer payroll tax expense.
We had total restricted cash of $1.3 million comprised primarily of restricted cash at JMP Group Inc. related to the Company’s letters of credit on leasing arrangements.
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 under the Exchange Act, shall not exceed 15 to 1. JMP Securities had net capital of $17.5 million and $16.9 million, which were $16.2 million and $15.5 million in excess of the required net capital of $1.3 million and $1.4 million, at September 30, 2020 and December 31, 2019, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 1.14 to 1 and 1.25 to 1 at September 30, 2020 and December 31, 2019, respectively.
A condensed table of cash flows for the nine months ended September 30, 2020 and 2019 is presented below.
(Dollars in thousands) | Nine Months Ended September 30, | Change from 2019 to 2020 | ||||||||||||||
2020 | 2019 | $ | % | |||||||||||||
Cash flows used in operating activities | $ | (7,351 | ) | $ | (30,428 | ) | 23,077 | -75.8 | % | |||||||
Cash flows provided by (used in) investing activities | 12,137 | $ | (60,810 | ) | 72,947 | -120.0 | % | |||||||||
Cash flows (used in) provided by financing activities | 2,262 | $ | 7,671 | (5,409 | ) | -70.5 | % | |||||||||
Total cash flows | $ | 7,048 | $ | (83,567 | ) | $ | 90,615 | -108.4 | % |
Cash Flows for the Nine Months Ended September 30, 2020
Cash increased by $7.0 million during the nine months ended September 30, 2020 as a result of cash used in operating activities, partially offset by cash provided by investing and financing activities.
Our operating activities used $7.4 million of cash from a net loss of $13.9 million, adjusted for the cash used on the gain on other investments, and cash used by operating assets and liabilities of $6.2 million.
Our investing activities provided $12.1 million of cash primarily due to a $14.2 million in sales from non-equity method investments.
Our financing activities provided $2.3 million of cash primarily due to $3.8 million proceeds from PPP loans, partially offset by $1.4 million in repurchase of bonds payable.
Cash Flows for the Nine Months Ended September 30, 2019
Cash decreased by $83.6 million during the nine months ended September 30, 2019, as a result of cash used in operating and investing activities, partially offset by cash provided by financing activities.
Contractual Obligations
As of September 30, 2020, our aggregate minimum future commitment on our leases was $25.3 million. Our remaining contractual obligations have not materially changed from those reported in our Annual Report.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of September 30, 2020. However, through indemnification provisions in our clearing agreements with our clearing brokers, customer activities may expose us to off-balance sheet credit risk, which we seek to mitigate through customer screening and collateral requirements.
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 |
● | CLO Debt Securities |
● | 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 in these financial statements and our consolidated financial statements in our Annual Report.
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not Applicable.
ITEM 4. | Controls and Procedures |
(a) | Disclosure 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer, as principal executive officer and principal financial officer, respectively, have concluded that, as of the end of such period covered by this report, our disclosure controls and procedures are effective.
(b) | Changes in Internal Controls Over Financial Reporting |
There were no changes 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 Quarterly Report on Form 10-Q that has materially affected, or are 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, except as described below, 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 |
In addition to the other information set forth in this report, you should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition, or future results set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 30, 2020.
Except as noted below, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
The effects of the outbreak of the novel coronavirus (“COVID-19”) have negatively affected the global economy, the United States economy and the global financial markets, and may disrupt our operations and our clients’ operations, which could have an adverse effect on our business, financial condition and results of operations.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability, and has and may continue to may affect our operations. The COVID-19 pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures. The continued impact of COVID-19 may result in a period of business disruption, including delays in our trading.
In addition, in response to the COVID-19 pandemic, and in accordance with direction from state and local government authorities, we have made temporary precautionary measures intended to help minimize the risk of the virus to our employees, including temporarily requiring most employees to work remotely (which in turn increases our threat to cyber security and data accessibility and communication matters) and suspending all non-essential travel worldwide for our employees. In addition, industry events and in-person work-related meetings have been cancelled, the continuation of which could negatively affect our business.
Many of the key service providers we rely on also have transitioned to working remotely. If we or they were to experience material disruptions in the ability for our or their employees to work remotely (e.g., disruption in Internet-based communications systems and networks; or the break-down in the availability of essential goods and services, such as material disruptions to the delivery of food or power), our ability to operate our business normally could be materially adversely disrupted. Similarly, to date our own employees and, we believe, the employees of our key service providers, have not experienced any material degree of illness due to the COVID-19 virus. In the event that our or their workforces, or key components thereof, were to experience significant illness levels, our ability to operate our business normally could be materially adversely disrupted. Any such material adverse disruptions to our business operations could have a material adverse impact on our results of operation or financial condition.
We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will be deemed to be adequate or appropriate, nor can we predict the level of disruption which will occur to our employee’s ability to provide customer support and service. The ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for our own securities. The further spread of the COVID-19 outbreak may materially disrupt banking and other financial activity generally and in the areas in which we operate. This would likely result in a decline in demand for our products and services, which would negatively impact our liquidity position and our growth strategy. Any one or more of these developments could have a material adverse effect on our and our consolidated subsidiaries’ business, operations, consolidated financial condition, and consolidated results of operations.
We are closely monitoring the global outbreak of COVID-19. At this time, we cannot predict the ultimate scope, severity or duration of the outbreak or its effects on, among other things, the global, national or local economy, the capital and credit markets, or our workforce, customers and third-party service providers. As a result, we cannot predict the full extent of the adverse financial impact that COVID-19 will have on our businesses, financial condition, liquidity and results of operations. If we or any of the third parties with whom we engage, however, were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and negatively affected, which could have a material adverse impact on our business and our results of operation and financial condition.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
During the quarter ended September 30, 2020, no purchases of the Company’s shares was made by or on behalf of JMP Group LLC. As of September 30, 2020, there were no shares available to be repurchased as part of publicly announced programs or plans.
ITEM 3. | Defaults Upon Senior Securities |
None.
ITEM 4. | Mine Safety Disclosures |
Not Applicable.
ITEM 5. | Other Information |
None.
ITEM 6. | Exhibits |
_________
*Filed herewith
** Furnished, not filed
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 |