JMP GROUP LLC The following discussion should be read together with our consolidated financial statements and the accompanying notes appearing in Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. In addition to historical information, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those discussed under the caption "Special Note Regarding Forward-Looking Statements" and elsewhere in this Annual Report on Form 10-K. These forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we undertake no obligation to update or revise forward-looking statements to reflect events or circumstances after the date they were made. Overview
The Company, is a diversified capital markets firm headquartered in
• 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.
30--------------------------------------------------------------------------------
Table of Contents
Deconsolidation of the CLOs and JMPCA
OnJanuary 17, 2019 , the non-call period of JMP Credit Advisors CLO III(R) Ltd. ("CLO III") expired, which resulted in a change in the entity with the control over the most significant activities of the variable interest entity ("VIE"). The expiration of the non-call period resulted in the Company losing control over the most significant activities ofCLO III . The Company deconsolidatedCLO III as ofJanuary 17, 2019 . The Company continues to hold approximately 47% of the outstanding junior subordinated notes ofCLO III and the Company accounts for its ownership of the CLO III subordinated notes as an investment in a CLO debt security. The Company recognized a gain of$1.6 million as revenue from principal transactions on the deconsolidation ofCLO III for the year endedDecember 31, 2019 . OnMarch 19, 2019 , the Company sold a 50.1% equity interest inJMP Credit Advisors LLC ("JMPCA") toMedalist Partners LP ("Medalist"), an alternative asset management firm specializing in structured credit and asset-backed lending, and a 4.9% interest to management employees of JMPCA.JMP Holding LLC , a wholly-owned subsidiary of the Company, retained 45.0% of the equity interest in JMPCA. The sale of JMPCA was considered a reconsideration event as defined in Accounting Standard Codification ("ASC") 810, Consolidation, which requires a new consolidation analysis, and the Company determined that JMPCA is a VIE after the transaction date. The Company determined that we are not the primary beneficiary of JMPCA as we are not the party with the power to direct the most significant activities of JMPCA. As the Company was determined to not be the primary beneficiary, the Company deconsolidated JMPCA as of the date of sale. As the Company still retains 45.0% of the equity interest of JMPCA and has significant influence, the Company has determined that it will account for its retained interest as an equity method investment after the date of deconsolidation, however; the Company has made the election to use the fair value option to account for the investment. The Company received a cash payment of$0.3 million in consideration for the limited liability company interest and recorded a gain of$3.4 million on deconsolidation as revenue from principal transactions. The transaction agreement also required Medalist to provide additional capital to purchase an equity interest inJMP Credit Advisors CLO VI Long-Term Warehouse Ltd (the "CLO VI warehouse") to finance the acquisition of broadly syndicated corporate loans, which resulted in Medalist related entities purchasing approximately 66% of the outstanding equity of the CLO VI warehouse. The Company will receive a portion of the subordinated management fees from the CLOs JMPCA managed as of the date of the sale. After the sale, JMPCA was renamedMedalist Partners Corporate Finance LLC ("MPCF"). . After the sale of JMPCA, the Company concluded that it has lost the ability to direct the most significant activities of the VIEs:JMP Credit Advisors CLO IV Ltd. ("CLO IV"),JMP Credit Advisors CLO V Ltd. ("CLO V"), and the CLO VI warehouse (collectively withCLO III the "CLOs") and also deconsolidated those CLOs as ofMarch 19, 2019 . The Company continues to hold 100% of the junior subordinated notes of CLO IV and CLO V and approximately 33% of the equity interests of the CLO VI warehouse. The Company owned 100% and 25% of the senior subordinated notes in CLO IV and CLO V, respectively, at the date of deconsolidation. The Company sold all of its senior subordinated notes in CLO IV and CLO V inMay 2019 . The Company accounts for its ownership of the subordinated notes as a beneficial interest in a debt security and accounts for its equity interests of the CLO VI warehouse as an equity investment. The Company classifies the junior subordinated notes as available-for-sale securities and classified the senior subordinated notes as trading securities up until their sale. Collectively, the Company recognized a loss on the deconsolidation of CLO IV, CLO V, and CLO VI warehouse of$1.8 million and a loss of$0.1 million on the sale of the senior subordinated notes of CLO IV and CLO V for the year endedDecember 31, 2019 in revenues from principal transactions. OnAugust 8, 2019 , Medalist closed a refinancing of the asset-backed securities issued by CLO IV, which lowered the weighted average cost of funds. The refinancing of CLO IV had no impact on the Company's accounting for the investment in the CLO IV debt securities including the decision to deconsolidate CLO IV.
The Election for
SinceJanuary 2015 ,JMP Group LLC had been a publicly traded partnership and, as such, was taxed as a partnership, and not as a corporation, forU.S. federal income tax purposes, so long as 90% or more of its gross income for each taxable year constitutes "qualifying income." OnJanuary 31, 2019 , the Company filed an election with theU.S. Internal Revenue Service to be treated as a C corporation for tax purposes, rather than as a partnership, going forward. The election was approved and became retroactively effective as ofJanuary 1, 2019 . An entity taxed as a partnership generally does not incur anyU.S. federal income tax liability, and any income, gains, losses or deductions are taken in by the owners of the partnership in computing theirU.S. federal income tax liability, regardless of any distributions from the partnership. In contrast, an entity treated as a corporation forU.S. federal income tax purposes generally paysU.S. federal income tax on its taxable income as it is considered a taxable entity. For years beginning afterDecember 31, 2017 , the maximumU.S. federal tax rate imposed on the net income of corporations is 21%. This rate may be subject to change in the future. Owners of a corporate entity generally do not incur anyU.S. federal income tax liability on any earnings of the corporation unless the corporation makes a distribution of cash or property. Any distributions paid from current or accumulated earnings are treated as dividends, and these "qualifying dividends" are generally taxed at a lower rate than the ordinary income tax rate. For corporate entities, as both the corporation and distributions from the corporation are taxed, there are two levels of potential tax on the income earned. 31
--------------------------------------------------------------------------------
Table of Contents Components of Revenues We derive revenues primarily from: fees from our investment banking business, net commissions from our sales and trading business, management fees and incentive fees from our asset management business, and interest income earned on collateralized loan obligations we manage. We also generate revenues from principal transactions, interest, dividends and other income. Investment Banking
We earn investment banking revenues from underwriting securities offerings, arranging private capital markets transactions and providing advisory services in mergers and acquisitions and other strategic transactions.
Underwriting Revenues We earn revenues from securities offerings in which we act as an underwriter, such as initial public offerings and follow-on equity offerings. Underwriting revenues include management fees, underwriting fees, selling concessions, and realized and unrealized net gains and losses on equity positions held in inventory for a period of time to facilitate the completion of certain underwritten offerings. We record underwriting revenues, gross of related syndicate expenses, on the trade date which is typically the date of pricing an offering (or the following day). The Company has determined that its performance obligations are completed and the related income is reasonably determinable on the trade date. In syndicated transactions, management estimates our share of transaction-related expenses incurred by the syndicate, and we recognize revenues gross of such expense. On final settlement by the lead manager, typically 90 days from the trade date of the transaction, we adjust these amounts to reflect the actual transaction-related expenses and our resulting underwriting fee. We receive a higher proportion of total fees in underwritten transactions in which we act as a lead manager. Strategic Advisory Revenues Our strategic advisory revenues primarily consist of success fees received upon the closing of mergers and acquisitions but also include retainer fees received when we are first engaged to provide advisory services. We also earn fees for related advisory work and other services, such as fairness opinions, valuation analyses, due diligence, and pre-transaction structuring advice. These revenues may be earned for providing services to either the buyer or the seller involved in a transaction. Depending on the nature of the engagement letter and the agreed upon services, customers may simultaneously receive and consume the benefits of services or services may culminate in the delivery of the advisory services at a point in time. The Company evaluates each contract individually and the performance obligations identified to determine if revenue should be recognized ratably over the term of the agreement or at a specific point in time. Any retainer fees received in connection with these agreements are individually evaluated and any unearned fees are deferred for revenue recognition.
We earn fees for private capital markets and other services in connection with
transactions that are not underwritten, such as private placements of equity
securities, private investments in public equity ("PIPE") transactions and Rule
144A offerings. We record private placement revenues on the closing date of
these transactions. Client reimbursements for costs associated for private
placement fees are recorded gross within Investment banking and various expense
captions, excluding compensation.
Since our investment banking revenues are generally recognized at the time of
completion of a transaction or the services to be performed, these revenues
typically vary between periods and may be affected considerably by the timing of
the closing of significant transactions.
32--------------------------------------------------------------------------------
Table of Contents
Brokerage Revenues
Our brokerage revenues include trading commissions paid by customers for
purchases or sales of exchange-listed and over-the-counter equity securities.
Commissions resulting from equity securities transactions executed on behalf of
customers are recorded on a trade date basis. The Company believes that the
performance obligation is satisfied on the trade date because that is when the
underlying financial instrument or purchaser is identified, the pricing is
agreed upon, and the risks and rewards of ownership have been transferred
to/from the customer. Brokerage revenues also include net trading gains and
losses that result from market-making activities and from our commitment of
capital to facilitate customer transactions. Our brokerage revenues may vary
between periods, in part depending on commission rates, trading volumes and our
ability to deliver equity research and other value-added services to our
clients. The ability to execute trades electronically, through the internet and
through other alternative trading systems, has increased pressure on trading
commissions and spreads across our industry. We expect this trend toward
alternative trading systems and the related pricing pressure in the brokerage
business to continue. We are, to some extent, compensated through brokerage
commissions for the equity research and other value-added services we deliver to
our clients. These "soft dollar" practices have been the subject of discussion
among regulators, the investment banking community and our sales and trading
clients. In particular, commission sharing arrangements have been adopted by
some large institutional investors. In these arrangements, an institutional
investor concentrates its trading with fewer "execution" brokers and pays a
fixed amount for execution, with a designated amount set aside for payments to
other firms for research or other brokerage services. Accordingly, trading
volume directed to us by investors that enter into such arrangements may be
reduced, or eliminated, but we may be compensated for our research and sales
efforts through allocations of the designated amounts. Depending on the extent
to which we agree to this practice and depending on our ability to enter into
arrangements on terms acceptable to us, this trend would likely impair the
revenues and profitability of our brokerage business by negatively affecting
both volumes and trading commissions.
Asset Management Fees
We earn asset management fees for managing a family of investment partnerships,
including hedge funds, hedge funds of funds, private equity funds, real estate
funds, a capital debt fund, as well as a publicly traded specialty finance
company, Harvest Capital Credit Corporation ("HCC"). These fees include base
management fees and incentive fees. Base management fees are generally
determined by the fair value of the assets under management ("AUM") or the
aggregate capital commitment and the fee schedule for each fund or account.
Incentive fees are based upon the investment performance of the funds or
accounts. For most of our funds, incentive fees equate to a percentage of the
excess investment return above a specified high-water mark or hurdle rate over a
defined period of time. For private equity funds, incentive fees equate to a
percentage of the realized gain from the disposition of each portfolio
investment in which each investor participates, which we earn after returning
contributions by an investor for a portfolio investment. Some of these incentive
fees are subject to contingent repayments to investors or clawback and cannot be
recognized until it is probable that there will not be a significant reversal of
revenue. Any such fees earned are deferred for revenue recognition until the
contingency is removed or the Company determines that it is not probable that a
significant reversal of revenue will occur.
As of December 31, 2019 the contractual base management fees earned from each of
our investment funds or companies ranged between 1% and 2% of AUM or were
between 1% and 2% of aggregate committed capital. The contractual incentive fees
were generally 20%, subject to high-water marks, for the hedge funds; 5% to 20%,
subject to high-water marks or a performance hurdle rate, for the hedge funds of
funds; 20%, subject to high-water marks, for Harvest Growth Capital LLC ("HGC"),
Harvest Growth Capital II LLC ("HGC II") and Harvest Growth Capital III LLC
("HGC III"); and 30% for JMP Capital I LLC ("JMP Capital I"). Our asset
management revenues are subject to fluctuations due to a variety of factors that
are unpredictable, including the overall condition of the economy, the
securities markets as a whole and our core sectors. These market and industry
conditions can have a material effect on the inflows and outflows of AUM and on
the performance of our asset management funds. For example, a significant
portion of the performance-based or incentive fee revenues that we recognize are
based on the value of securities held in the funds we manage. The value of these
securities includes unrealized gains or losses that may change from one period
to another.
The Company sold the general partnership interest in the Harvest Small Cap
Partners ("HSCP") fund entities to a newly formed entity owned by the portfolio
manager of the HSCP funds. The sale closed on December 31, 2018 upon which the
Company's investment management contracts with the HSCP funds terminated. As a
result, the Company's AUM decreased by $365.7 million on January 1, 2019 . As
part of the sale, the Company will receive contingent revenue generated by these
funds over the next five years, subject to a limit on the total contingent
revenue. These trailer fees will be recognized as other income.
Prior to the sale of the majority equity interest in JMPCA, the asset management
fees for the CLOs under management during the period consisted only of senior
and subordinated base management fees. We recognized base management fees for
the CLOs on a monthly basis over the period during which the collateral
management services are performed. The base management fees for the CLOs were
calculated as a percentage of the average aggregate collateral balances for a
specified period. As we consolidated the CLOs, the management fees earned at
JMPCA from the CLOs were eliminated on consolidation in accordance with GAAP.
For the period from January 1, 2019 through January 17, 2019 (deconsolidation
date) the contractual senior and subordinated base management fees earned from
CLO III were 0.35% of the average aggregate collateral balance. The contractual
senior and subordinated base management fees earned from CLO III were 0.33% for
the period from January 1, 2018 to February 20, 2018 , and 0.35% for the period
from February 21, 2018 to September 30, 2018 of the average aggregate collateral
balance. For both the period from January 1, 2019 through March 19, 2019
(deconsolidation date) and for the year ended December 31, 2018 , the contractual
base and subordinated fees earned from CLO IV were 0.50% of the average
aggregate collateral balance. For the year ended December 31, 2018 , the
contractual base and subordinated fees earned from CLO V warehouse portfolio
was 1.0% of the average equity contributions. For the period from January 1,
2019 through March 19, 2019 (deconsolidation date) and for the year ended
December 31, 2018 (from July 26, 2018 ) the contractual base and subordinated
fees earned from CLO V were 0.50% of the average aggregate collateral balance.
For the year ended December 31, 2019 , the contractual base and subordinated fees
earned from CLO VI warehouse portfolio were 1.0% of the average equity
contributions.
The redemption provisions of our funds require at least 90 days' advance notice.
Redemptions are not permitted in our private equity funds or our private debt
capital vehicles. The redemption provisions do not apply to the CLOs.
33--------------------------------------------------------------------------------
Table of Contents
The following tables present certain information with respect to the investment
funds managed by HCS,
Company's Share of Assets Under
(In thousands) Assets Under Management (1) at Management at
December 31, December 31,
2019 2018 2019 2018
Funds Managed by HCS, JMPAM, or
HCAP Advisors:
Hedge Funds:
Harvest Small Cap Partners (2) $ - $ 365,728 $ - $ -
Harvest Agriculture Select (3) 68,428 68,591 - 490
Private Equity Funds:
Harvest Growth Capital LLC 22,510 20,189 957 876
Harvest Growth Capital II LLC 159,522 198,782 3,359 3,823
Harvest Growth Capital III LLC 68,265 - 1,000 -
Harvest Intrexon Enterprise Fund 36,295 67,729 222 415
JMP Realty Partners I 35,203 39,782 2,832 2,832
JMP Realty Partners II 29,145 0 2,000 0
Other 23,793 20,924 N/A N/A
Funds of Funds:
JMP Masters Fund (4) 2,034 2,371 4 5
Capital or Private Debt Capital :
Harvest Capital Credit Corporation 138,657 123,689 N/A N/A
JMP Capital I 23,529 23,529 2,329 2,329
HCS, JMPAM, and HCAP Advisors
Totals $ 607,381 $ 931,314 CLOs and Other Managed by JMPCA: CLO III (5) (6) - 360,086 N/A N/A CLO IV (5) (6) - 450,594 N/A N/A CLO V (5) (6) - 400,557 N/A N/A CLO VI warehouse (5) (6) - 34,219 N/A N/A JMPCA Totals $ -$ 1,245,456 N/A N/A Assets Under Management by Sponsored Funds: (7) CLOs and CLO warehouse 1,439,442 0 N/A N/A Other asset management funds 3,941,990 3,448,725 N/A N/A Sponsored Funds Totals 5,381,432 3,448,725 N/A N/A JMP Group LLC Totals$ 5,988,813 $ 5,625,495
$ 12,703 $ 10,770
(1) For hedge funds, funds of funds, HGC, HGC II,
assets of such funds. For JMP Realty Partners I, JMP Realty Partners II, HGC III and JMP Capital I, assets under
management represent the commitment amount. For JMP Realty Partners I, JMP Realty Partners II and HGC III the
commitment amount is subject to the management fee calculation. For CLOs, AUM represent the sum of the aggregate
collateral balance and restricted cash to be reinvested in collateral, upon which management fees are earned. (2) The Company sold the general partnership interest in the HSCP fund entities to a newly formed entity owned by the
portfolio manager of the HSCP funds. The sale closed on
management contracts with the HSCP funds terminated. As part of the sale, the Company will receive contingent
revenue generated by these funds over the next five years, subject to a limit on the total contingent revenue. (3) Harvest Agriculture Select ("HAS") includes managed accounts in which the Company has neither equity investment
nor control. These are included as they follow the respective funds' strategy and earn fees.
(4)
majority of the equity interest and the loss of control over JMPCA, the Company deconsolidated JMPCA as of the
date of sale and will no longer recognize asset management fees related to the CLOs. As part of the sale, the
subordinated management fee structure of CLOs III, IV and V was modified so that the Company will receive a
portion of the subordinated management fees directly from the CLOs. Such subordinated management fees are recorded
as other income.
(6) All of the CLOs
and CLO warehouse
were consolidated
in the
Consolidated
Statements of
Financial
Condition as of
December 31, 2018
and deconsolidated
during the first
quarter of 2019.
Sponsored funds
are asset managers
(7) in which the
Company owns an
economic interest.
34--------------------------------------------------------------------------------
Table of Contents
(In thousands) Year Ended December 31, 2019
Company's Share
of Change in
Fair Value Management Fee Incentive Fee
Hedge Funds:
Harvest Small Cap Partners (1) $ - $ - $ -
Harvest Agriculture Select (2) 46 747 -
Private Equity Funds:
Harvest Growth Capital LLC 160 - 261
Harvest Growth Capital II LLC (9 ) 310 -
Harvest Growth Capital III LLC (3 ) 167 -
Harvest Intrexon Enterprise Fund (53 ) 710 -
JMP Realty Partners I 825 387 484
JMP Realty Partners II (25 ) 216 -
Other - 50 -
Funds of Funds:
JMP Masters Fund (3) - 19 -
Loans:
Harvest Capital Credit Corporation (4) N/A 3,605 6
JMP Capital I (33 ) 57 186
CLOs and Other:
CLO III (5) (6) N/A 271 N/A
CLO IV (5) (6) N/A 482 N/A
CLO V (5) (6) N/A 428 N/A
CLO VI warehouse (5) (6) N/A 13 N/A
Totals $ 908 $ 7,462 $ 937
(1) The Company sold the general partnership interest in the HSCP fund entities
to a newly formed entity owned by the portfolio manager of the HSCP funds.
The sale closed on
management contracts with the HSCP funds terminated. As part of the sale, the
Company will receive contingent revenue generated by these funds over the
next five years, subject to a limit on the total contingent revenue. (2) HAS includes managed accounts in which the Company has neither equity
investment nor control. These are included with the funds, as they follow the
respective strategies and earn fees.
(3)
JMPCA. Due to the sale of the majority of the equity interest and the loss of
control over JMPCA, the Company deconsolidated JMPCA as of the date of sale
and will no longer recognize asset management fees related to the CLOs. As
part of the sale, the subordinated management fee structure of CLOs III, IV
and V were modified so that the Company will receive a portion of the
subordinated management fees directly from the CLOs. Such subordinated
management fees are recorded as other income. (6) Management and incentive fees earned from the CLOs and CLO warehouse were
consolidated and then eliminated in the consolidation in the Company's
Consolidated Statements of Operations. The CLOs and CLO warehouse
were deconsolidated in the first quarter of 2019.
35--------------------------------------------------------------------------------
Table of Contents
(In thousands) Year Ended December 31, 2018
Company's
Share of
Change in Fair
Value Management Fee Incentive Fee
Hedge Funds:
Harvest Small Cap Partners (1) $ 21 $ 6,366 $ 5,318
Harvest Agriculture Select (2) (367 ) 846 -
Private Equity Funds:
Harvest Growth Capital LLC 169 - -
Harvest Growth Capital II LLC 1,023 606 -
Harvest Intrexon Enterprise Fund (36 ) 703 -
JMP Realty Partners I 112 357 -
Other - 55 80
Funds of Funds:
JMP Masters Fund (3) 3 25 -
Loans:
Harvest Capital Credit Corporation (4) N/A 3,851 905
JMP Capital I - 21 96
CLOs and Other:
CLO III (5) N/A 1,237 N/A
CLO IV (5) N/A 2,284 N/A
CLO V and CLO V warehouse (5) N/A 1,128 N/A
CLO VI warehouse (5) N/A 18 N/A
Totals $ 925 $ 17,497 $ 6,399
(1) The Company sold the general partnership interest in the HSCP fund entities to
a newly formed entity owned by the portfolio manager of the HSCP funds. The
sale closed on
contracts with the HSCP funds terminated. As part of the sale, the Company will
receive contingent revenue generated by these funds over the next five years,
subject to a limit on the total contingent revenue. (2) HAS includes managed accounts in which the Company has neither equity
investment nor control. These are included with the funds, as they follow the
respective strategies and earn fees.
(3)
consolidated and then eliminated in the consolidation in the Company's
Consolidated Statements of Operations. The CLOs and CLO warehouse were
deconsolidated in the first quarter of 2019.
Principal Transactions
Principal transaction revenues include net realized and unrealized gains and
losses, including any impairment losses, resulting from our principal
investments in equity and other securities for our own account as well as
equity-linked warrants received from certain investment banking clients and
limited partner investments in private funds managed by third parties. Principal
transaction revenues also include earnings, or losses, attributable to interests
in investment partnerships managed by our asset management subsidiaries, HCS and
JMPAM, which are recorded using the fair value option and the net asset value
practical expedient, or are accounted for using the equity method of accounting.
Revenues also included unrealized gains and losses on investments that elect the
fair option and unrealized gains and losses on the deconsolidation of businesses
and investments. In addition, our principal transaction revenues include
unrealized gains or losses on an investment in an entity that acquires buildings
and land for the purpose of holding, managing and selling the properties and
also include unrealized gains or losses on the investments in other private
companies.
Loss on Sale, Payoff, and Mark-to-Market of Loans
Loss on sale, payoff, and mark-to-market of loans consists of gains and losses
from the sale and payoff of loans collateralizing asset-backed securities
("ABS"). Gains are recorded when the proceeds exceed the carrying value of the
loan.
Net Dividend Income
Net dividend income includes dividends from our investments offset by dividend expense resulting from short positions in our principal investment portfolio.
Other Income
Other income includes revenues from equity method investments, revenues from
fee-sharing arrangements with our funds, contingent revenue from a sale of a
general partnership, subordinated management fees earned on CLO investments, and
fees earned to raise capital for third-party investment partnerships.
36--------------------------------------------------------------------------------
Table of Contents Interest Income Interest income primarily consists of interest income earned on loans collateralizing ABS issued, investments in CLO equity tranches, and loans held for investment. Interest income on loans is comprised of the stated coupon as a percentage of the face amount receivable as well as accretion of purchase discounts and deferred fees. Interest income is recorded on an accrual basis, in accordance with the terms of the respective loans, unless such loans are placed on non-accrual status. Interest on CLO debt securities are recognized in interest income using the effective yield method. OnJanuary 17, 2019 , the non-call period forCLO III expired and the Company lost the ability to direct the most significant activities ofCLO III . As a result, the Company deconsolidatedCLO III as ofJanuary 17, 2019 and ceased recognizing interest income on loans collateralizing asset-backed securities forCLO III as of the date of sale. OnMarch 19, 2019 , the Company sold a total of 55.0% of the equity interest in JMPCA. Due to the sale of the majority of the equity interest and the loss of control over the CLO IV, CLO V, and CLO VI warehouse, the Company deconsolidated these entities and ceased recognizing interest income on loans collateralizing asset-backed securities and loans held for investment underlying the CLO VI warehouse portfolio as of the deconsolidation date. After deconsolidation of the CLOs, the Company accounts for its ownership of the subordinated notes of the CLOs as beneficial interests in debt securities and recorded interest income on those instruments using the effective-yield method. Interest Expense Interest expense primarily consists of interest expense related to ABS issued and CLO warehouse credit facilities, Senior Notes, lines of credit, and notes payable, as well as the amortization of bond issuance costs. Interest expense on asset-backed securities is the stated coupon payable as a percentage of the principal amount. Interest expense is recorded on an accrual basis, in accordance with the terms of the respective debt instruments. Due to deconsolidation of the CLOs and the CLO VI warehouse in the first quarter of 2019, the Company ceased recording interest expense on asset-backed securities issued as ofJanuary 17, 2019 forCLO III and onMarch 19, 2019 , for CLO IV, CLO V, and CLO VI warehouse.
Loss on Repurchase, Reissuance, or Early Retirement of Debt
Loss on repurchase, reissuance, or early retirement of debt primarily consists of losses incurred in the write-off of debt issuance costs related to Senior Notes or ABS issued that have been repurchased or retired sooner than the life of the instrument. Provision for Loan Losses Provision for loan losses includes the provision for losses recognized on loans held for investment and on loans collateralizing ABS in order to record those loans at their estimated net realizable value. We maintain an allowance for loan losses that is intended to estimate loan losses inherent in our loan portfolio. A provision for loan losses is charged to expense to establish the allowance for loan losses. The allowance for loan losses is maintained at a level, in the opinion of management, sufficient to offset estimated losses inherent in the loan portfolio as of the date of the financial statements. The appropriateness of the allowance and the allowance components are reviewed quarterly. Our estimate of each allowance component is based on observable information and on market and third-party data that we believe are reflective of the underlying loan losses being estimated. We employ internally developed and third-party estimation tools for measuring credit risk (loan ratings, probability of default, and exposure at default). A specific reserve is provided for loans that are considered impaired. A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. We measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral securing the loan, if the loan is collateral-dependent, depending on the circumstances and our collection strategy. For loans deemed impaired at the date of acquisition, if there is a further decline in expected future cash flows, this reduction is recognized as a specific reserve in accordance with the guidance above. For those loans deemed impaired subsequent to the acquisition date, if the net realizable value is lower than the current carrying value, the carrying value is reduced, and the difference is booked as a provision for loan losses. If the total discount from unpaid principal balance to carrying value is larger than the expected loss at the date of assessment, no provision for loan losses is recognized.
Loans which are deemed to be uncollectible are charged off, and the charged-off amount is deducted from the allowance.
Due to the deconsolidation of the CLOs and the CLO VI warehouse in the first
quarter of 2019, the Company ceased recording provisions for loan losses on the
loans collateralizing ABS issued and the loans held for investment in the
warehouse.
Components of Expenses
We classify our expenses as compensation and benefits; administration;
brokerage, clearing and exchange fees; travel and business development; managed
deal expenses, communications and technology; occupancy; professional fees,
depreciation, and other. A significant portion of our expense base is variable,
including compensation and benefits; brokerage, clearing and exchange fees;
travel and business development; managed deal expenses, communication and
technology expenses.
Compensation and Benefits
Compensation and benefits is the largest component of our expenses and includes
employees' base pay, performance bonuses, sales commissions, related payroll
taxes, and medical and benefits expenses, as well as expenses for contractors,
temporary employees, and equity-based compensation. Our employees receive a
substantial portion of their compensation in the form of an individual,
performance-based bonus. As is the widespread practice in our industry, we pay
bonuses, for the most part, on an annual basis, and for senior professionals
these bonuses typically make up a large portion of their total compensation. A
portion of the performance-based bonuses paid to certain senior professionals is
paid in the form of deferred compensation. Bonus payments may have a greater
impact on our cash position and liquidity in the periods in which they are paid
than would otherwise be reflected in our Consolidated Statements of Operations.
We accrue for the estimated amount of these bonus payments ratably over the
applicable service period.
Compensation is accrued with specific ratios of total compensation and benefits
to total revenues applied to specific revenue categories, with adjustments made
if, in management's opinion, such adjustments are necessary and appropriate to
maintain competitive compensation levels.
37--------------------------------------------------------------------------------
Table of Contents Administration
Administration expense primarily includes the cost of hosted conferences, non-capitalized systems and software expenditures, insurance, business tax (non-income), office supplies, recruiting, and regulatory fees.
Brokerage, Clearing, and Exchange Fees
Brokerage, clearing, and exchange fees include the cost of floor and electronic brokerage and execution, securities clearance, and exchange fees. Changes in brokerage, clearing, and exchange fees fluctuate largely in line with the volume of our sales and trading activity.
Travel and Business Development
Travel and business development expense primarily consists of costs incurred traveling to client locations for the purposes of executing transactions or meeting potential new clients, travel for administrative functions, and other costs incurred in developing new business. Travel costs related to existing clients for mergers and acquisitions and underwriting deals are sometimes reimbursed by clients. Under the new revenue standard ASC 606, reimbursed costs are presented as revenue on the Consolidated Statements of Operations. Managed Deal Expenses
Managed deal expenses primarily relate to costs incurred and/or allocated in the execution of investment banking transactions, including reimbursable costs. Under the new revenue standard ASC 606, reimbursed costs are presented as revenue on the Consolidated Statements of Operations.
Communications and technology expense primarily relates to the cost of communication and connectivity, information processing and subscriptions to certain market data feeds and services.
Occupancy Expenses
Occupancy costs primarily include payments made under operating leases that are recognized on a straight-line basis over the period of the lease and the accretion of any lease incentives.
Professional Fees
Professional fees primarily relate to legal and accounting professional services.
Depreciation Depreciation expenses include the straight-line amortization of purchases of certain furniture and fixtures, computer and office equipment, certain software costs, and leasehold improvements to allocate their depreciation amounts over their estimated useful life. Other Expenses
Other operating expenses primarily include occupancy, depreciation, and administration expense.
Income Taxes SinceJanuary 2015 ,JMP Group LLC has been a publicly traded partnership and, as such, has been taxed as a partnership, and not as a corporation, forU.S. federal income tax purposes, so long as 90% or more of its gross income for each taxable year constitutes "qualifying income." OnJanuary 31, 2019 , the Company filed an election with theU.S. Internal Revenue Service to be treated as a C corporation for tax purposes, rather than a partnership, going forward. The election was approved and became retroactively effective as ofJanuary 1, 2019 . The Company recognizes deferred tax assets and liabilities in accordance with ASC 740, Income Taxes, which are determined based upon the temporary differences between the financial reporting and tax basis of the Company's assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce the deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized. The Company does not have a valuation allowance as ofDecember 31, 2019 . The Company records uncertain tax positions using a two-step process: (i) the Company determines whether it is more likely than not that each tax position will be sustained on the basis of the technical merits of the position; and (ii) for those tax positions that meet the more-likely-than not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than fifty percent likely to be realized upon ultimate settlement with the related tax authority The Company's policy for recording interest and penalties associated with the tax audits or unrecognized tax benefits, if any, is to record such items as a component of income tax. 38
--------------------------------------------------------------------------------
Table of Contents Non-controlling Interest Non-controlling interest for years endedDecember 31, 2019 and 2018 includes the interest of third parties inCLO III (throughJanuary 17, 2019 ),HCS Strategic Investments LLC ("HCS SI"), andHCAP Advisors , partially-owned subsidiaries consolidated in our financial statements. The Company currently manages several investment funds, which are structured as limited partnerships or limited liability companies ("LLC"), and is the general partner or managing member of each. The Company assesses whether those investment funds meet the definition of VIEs in accordance with ASC 810-10-15-14 and whether the Company qualifies as the primary beneficiary. Funds determined not to meet the definition of a VIE are considered voting interest entities, for which the rights of the limited partners or non-managing members are evaluated to determine if consolidation is necessary. Such guidance provides that the presumption that the general partner or managing member controls the entity may be overcome if there are substantive kick-out rights. The Company had determinedCLO III to be a variable interest entity and identified itself as the primary beneficiary, based on its ability to direct activities ofCLO III through its subsidiary manager, JMPCA, and its equity ownership. As ofDecember 31, 2018 the Company's ownership of unsecured subordinated notes was 46.7%. OnJanuary 17, 2019 , the non-call period forCLO III expired and the Company lost the ability to direct the most significant activities ofCLO III . As a result, the Company deconsolidatedCLO III as ofJanuary 17, 2019 and ceased recognizing any non-controlling interest.HCAP Advisors was formed onDecember 18, 2012 .HCAP Advisors appointedJMP Holding LLC as its Manager effectiveMay 1, 2013 and began offering investment advisory services. The Company owned a 51.0% equity interest in the entity untilApril 27, 2018 when the Company purchased an additional 18.4% ofHCAP Advisors , equity from a non-controlling interest holder. As ofDecember 31, 2019 , the Company owns a 69.4% of equity interest in the entity and controlsHCAP Advisors . HCS SI was formed onSeptember 27, 2017 . The purpose of HCS SI is to purchase, hold, and sell portfolio securities. OnNovember 20, 2017 , HCS SI made an investment in an investment advisor and acquired approximately 25.0% of the issued and outstanding equity securities of the advisor. OnJanuary 9, 2018 , an investment managed by the Company purchased 30% of the investment series in the investment advisor and the Company's ownership percentage of HCS SI was reduced to 70%. 39
--------------------------------------------------------------------------------
Table of Contents Results of Operations The following table sets forth our results of operations for the years endedDecember 31, 2019 and 2018, and is not necessarily indicative of the results to be expected for any future period. (In thousands) Year Ended December 31, Change from 2018 to 2019 2019 2018 $ % Revenues Investment banking$ 65,716 $ 88,107 $ (22,391 ) -25.4 % Brokerage 17,628 20,710 (3,082 ) -14.9 % Asset management fees 7,427 19,148 (11,721 ) -61.2 % Principal transactions 1,344 (2,287 ) 3,631 158.8 % Loss on sale, payoff and mark-to-market of loans (38 ) (532 ) 494 92.9 % Net dividend income 1,184 1,281 (97 ) -7.6 % Other income 2,373 1,017 1,356 133.3 % Non-interest revenues 95,634 127,444 (31,810 ) -25.0 % Interest income 21,801 66,494 (44,693 ) -67.2 % Interest expense (16,458 ) (49,552 ) 33,094 66.8 % Net interest income 5,343 16,942 (11,599 ) -68.5 % Loss on repurchase, reissuance, or early retirement of debt (458 ) (2,838 ) 2,380 83.9 % Provision for loan losses (438 ) (5,124 ) 4,686 91.5 % Total net revenues after provision for loan losses 100,081 136,424
(36,343 ) -26.6 %
Non-interest expenses Compensation and benefits 77,314 97,359 (20,045 ) -20.6 % Administration 9,387 8,904 483 5.4 % Brokerage, clearing and exchange fees 2,706 3,097 (391 ) -12.6 % Travel and business development 5,240 4,830 410 8.5 % Managed deal expenses 3,136 4,849 (1,713 ) -35.3 % Communication and technology 4,390 4,107 283 6.9 % Occupancy 5,229 4,770 459 9.6 % Professional fees 4,359 5,446 (1,087 ) -20.0 % Depreciation 1,203 1,124 79 7.0 % Other 500 1,994 (1,494 ) -74.9 % Total non-interest expenses 113,464 136,480 (23,016 ) -16.9 % Net loss before income taxes (13,383 ) (56 ) (13,327 ) -23798.2 % Income tax expense (benefit) (6,827 ) 1,167 (7,994 ) -685.0 % Net loss (6,556 ) (1,223 ) (5,333 ) -436.1 % Less: Net income (loss) attributable to non-controlling interest (7 ) 964
(971 ) -100.7 %
Net loss attributable to
40
--------------------------------------------------------------------------------
Table of Contents
Year Ended
Overview Total net revenues after provision for loan losses decreased$36.3 million , or 26.6% from$136.4 million for the year endedDecember 31, 2018 to$100.1 million for the year endedDecember 31, 2019 , primarily resulting from a$22.4 million decrease in investment banking revenue, an$11.7 million decrease in asset management fees and an$11.6 million decrease in net interest income, partially offset by a$3.6 million increase in principal transactions and a$4.7 million decrease in provision for loan losses. Non-interest revenues decreased$31.8 million , or 25.0%, from$127.4 million for the year endedDecember 31, 2018 to$95.6 million in the same period in 2019. This decrease was primarily driven by a$22.4 million decrease in investment banking revenues and an$11.7 million decrease in asset management revenues, partially offset by an increase of$3.6 million increase in revenues from principal transactions. Net interest income decreased$11.6 million , or 68.5% from$16.9 million for the year endedDecember 31, 2018 to$5.3 million for the year endedDecember 31, 2019 .
Loss on sale, payoff and mark to market of loans decreased
Provision for loan losses decreased$4.7 million , or 91.5% from$5.1 million for the year endedDecember 31, 2018 to$0.4 million for the year endedDecember 31, 2019 .
Total non-interest expenses decreased
Net income attributable to non-controlling interest decreased
Net loss attributable toJMP Group LLC increased$4.3 million , or 199.5%, from a net loss of$2.2 million for the year endedDecember 31, 2018 to a net loss of$6.5 million for the year endedDecember 31, 2019 . This was primarily attributed to a decrease in net revenue after provision for loan losses of$36.3 million partially offset by a decrease in non-interest expenses of$23.0 million and an$8.0 million increase in income tax benefit.
Operating Net Income (Non-GAAP Financial Measure)
Management uses Operating Net Income as a key, non-GAAP metric when evaluating the performance ofJMP Group LLC's core business strategy and ongoing operations, as management believes that this metric appropriately illustrates the operating results ofJMP 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 ofJMP 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 thatJMP 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 bothJMP 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 share-based compensation expense recognized under GAAP related to
equity awards granted in prior periods, as management generally evaluates
performance by considering the full expense of equity awards in the period
in which they are granted, even if the expense of such compensation will be
recognized in future periods under GAAP;
(ii) recognizes 100% of the cost of deferred compensation in the period for
which such compensation was awarded, instead of recognizing such cost over
the vesting period as required under GAAP, in order to match compensation
expense with the actual period upon which the compensation was based;
41
--------------------------------------------------------------------------------
Table of Contents
(iii) reverses amortization expense related to an intangible asset resulting
from the repurchase of a portion of the equity of CLO III prior to the
first quarter of 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
certain warrant positions;
(vi) reverses impairment on CLO equity;
(x) for the year ended
income tax rate of 26% at the consolidated taxable parent company, JMP
federal, state and local income tax rate of 26% at the taxable direct
subsidiary of the Company and a tax rate of 0% at the company's other
direct subsidiary, which was a "pass-through entity" for tax purposes; and
presents revenues and expenses on a basis that deconsolidates the CLOs and
(xi) removes any non-controlling interest in consolidated but less than wholly
owned subsidiaries.
Discussed below is our Operating Net Income (Loss) by segment. This information is reflected in a manner utilized by management to assess the financial operations of the Company's various business lines.
Year Ended December 31, 2019
(In thousands) Broker-Dealer Asset Management Corporate Costs Eliminations Total Segments
Asset
Management Fee Investment Total Asset
Income Income Management
Revenues
Investment banking 65,716 - - - - - 65,716
Brokerage 17,628 - - - - - 17,628
Asset management related
fees 20 8,691 989 9,680 - (1,140 ) 8,560
Principal transactions - - 8,465 8,465 - - 8,465
Loss on sale, payoff,
and mark-to-market of
loans - - (39 ) (39 ) - - (39 )
Net dividend income - - 1,337 1,337 - - 1,337
Net interest income - - 5,317 5,317 - - 5,317
Loss on repurchase of
asset-backed securities
issued - - - -
Provision for loan
losses - - (438 ) (438 ) - - (438 )
Adjusted net revenues 83,364 8,691 15,631 24,322 - (1,140 ) 106,546
Non-interest expenses
Non-interest expenses 90,066 9,352 2,351 11,703 7,067 (1,140 ) 107,696
Operating pre-tax net
income (loss) (6,702 ) (661 ) 13,280 12,619 (7,067 ) - (1,150 )
Income tax expense
(benefit) (1,742 ) (172 ) 3,432 3,260 (1,817 ) - (299 )
Operating net income
(loss) (4,960 ) (489 ) 9,848 9,359 (5,250 ) - (851 )
42--------------------------------------------------------------------------------
Table of Contents
Year Ended December 31, 2018
Corporate
(In thousands) Broker-Dealer Asset Management Costs Eliminations Total Segments
Asset
Management Fee Investment Total Asset
Income IncomeManagement
Revenues Investment banking$ 88,107 $ - $ - $ - $ - $ - $ 88,107 Brokerage 20,710 - - - - - 20,710 Asset management related fees 25 18,471 5,318 23,789 - (4,676 )
19,138
Principal transactions - - 1,030 1,030 - -
1,030
Gain on sale, payoff, and mark-to-market of loans - - (656 ) (656 ) - - (656 ) Net dividend income - - 1,329 1,329 - -
1,329
Net interest income - - 12,681 12,681 - -
12,681
Gain on repurchase of asset-backed securities issued (42 ) (42 ) - (42 ) Provision for loan losses - - (1,638 ) (1,638 ) - - (1,638 ) Adjusted net revenues 108,842 18,471 18,022 36,493 - (4,676 )
140,659
Non-interest expenses Non-interest expenses 97,910 19,422 11,006 30,428 10,069 (4,676 )
133,731
Operating pre-tax net income (loss) 10,932 (951 ) 7,016 6,065 (10,069 ) -
6,928
Income tax expense (benefit) 2,842 (246 ) (414 ) (660 ) (1,271 ) -
911
Operating net income (loss) $ 8,090 $ (705 )$ 7,430 $ 6,725 $ (8,798 ) $ - $ 6,017 43
--------------------------------------------------------------------------------
Table of Contents
The following table reconciles consolidated net loss attributable toJMP Group LLC to total Operating Net Income (Loss) for the years endedDecember 31, 2019 and 2018. (In thousands) Year Ended December 31, 2019 2018 Consolidated Net loss attributable to JMP Group LLC (6,549 ) (2,187 ) Income tax expense (benefit) (6,827 )
1,167
Consolidated pre-tax net loss attributable to
(13,376 ) (1,020 )
Subtract
Share-based awards and deferred compensation (4,079 ) (167 )
General loan loss provision - collateralized loan
obligations - (2,878 )
Early retirement of debt (625 ) (1,488 )
Restructuring costs - CLO portfolios - (54 )
Impairment - CLO equity (4,204 ) -
Amortization of intangible asset - CLO III (277 ) (276 ) Unrealized loss - real estate-related depreciation and amortization
(1,779 ) (2,233 )
Unrealized mark-to-market loss -strategic equity
investments (1,262 ) (853 )
Total Consolidation Adjustments and Reconciling Items (12,226 ) (7,949 )
Total segments operating pre-tax net income (loss) (1,150 ) 6,929
Subtract (addback) segment income tax expense (benefit) (299 ) 911 Operating Net Income (Loss) (851 ) 6,018
Year Ended
Revenues Investment Banking Investment banking revenues, earned in our Broker-Dealer segment, decreased$22.4 million , or 25.4%, from$88.1 million for the year endedDecember 31, 2018 to$65.7 million for the same period in 2019. As a percentage of total net revenues after provision for loan losses, investment banking revenues increased from 64.6% for the year endedDecember 31, 2018 to 65.7% for the year endedDecember 31, 2019 . On an operating basis, investment banking revenues were 61.7% and 62.6% for the years endedDecember 31, 2019 and 2018, respectively, as a percentage of adjusted net revenues. (Dollars in thousands) Year Ended December 31, Change from 2018 to 2019 2019 2018 Count Revenues Count Revenues Count $ % Equity and debt origination 78$ 42,236 90$ 54,660 (12 ) (12,424 ) -22.7 % Strategic advisory and private placements 18 23,480 22 33,447 (4 ) (9,967 ) -29.8 % Total 96$ 65,716 112$ 88,107 (16 ) (22,391 ) -25.4 % The decrease in revenues was primarily driven by a 14.3% decrease in the number of transactions executed and a 13.0% decrease in the average size of the fee paid per transaction. The number of transactions in which we acted as a bookrunning manager was nineteen and eleven for the years endedDecember 31, 2019 and 2018, respectively. Brokerage Revenues Brokerage revenues earned in our Broker-Dealer segment were$17.6 million and$20.7 million for the years endedDecember 31, 2019 and 2018, respectively. Brokerage revenues increased as a percentage of total net revenues after provision for loan losses, from 15.2% for the year endedDecember 31, 2018 to 17.6% for the year endedDecember 31, 2019 . On an operating basis, brokerage revenues were 16.5% and 14.7% for the years endedDecember 31, 2019 and 2018, respectively, as a percentage of adjusted net revenues. 44
--------------------------------------------------------------------------------
Table of Contents
Asset Management Fees
(In thousands) Year Ended December 31,
2019 2018
Base management fees:
Fees reported as asset management fees $ 6,490 $ 12,749
Less: Non-controlling interest in HCAP Advisors (1,072 ) (589 ) Total base management fees 5,418 12,160 Incentive fees: Fees reported as asset management fees$ 937 $
6,399
Less: Non-controlling interest in HCAP Advisors (2 ) (277 ) Total incentive fees 935 6,122 Other fee income: Fundraising fees and other$ 2,373 $ 1,017 Less: Non-controlling interest in HCAP Advisors (166 ) (161 ) Total other fee income$ 2,207
856
Asset management related fees: Fees reported as asset management fees$ 7,427 $
19,148
Fees reported as other income 2,373
1,017
Less: Non-controlling interest inHCAP Advisors (1,240 )
(1,027 )
Total segment asset management related fee revenues
Fees reported as asset management fees were$7.4 million and$19.1 million for the years endedDecember 31, 2019 and 2018, respectively. As a percentage of total net revenues after provision for loan losses, asset management revenues decreased from 14.0% for the year endedDecember 31, 2018 to 7.4% for the year endedDecember 31, 2019 . Fees reported as other income were$2.4 million and$1.0 million for years endedDecember 31, 2019 and 2018, respectively. As a percentage of total net revenues after provision for loan losses, other income were 2.4% and 0.7% for both of the years endedDecember 31, 2019 and 2018, respectively. Asset management fees decreased from the prior year due to (i) the sale of the HSCP entities onDecember 31, 2018 which resulted in a decrease of approximately$360.0 million in assets under management and (ii) due to decreased incentive fees recorded in the year endedDecember 31, 2019 compared to the same period in 2018. In the year endedDecember 31, 2018 , the Company recognized$5.3 million in incentive fees related to a hedge fund managed by the Company that liquidated during the period. Total segment asset management-related fees include base management fees and incentive fees from our funds, HCC and CLOs under management (throughMarch 19, 2019 ), as well as other income from fee-sharing arrangements with, and fees earned to raise capital for, third-party or equity-method investment partnerships or funds. Total segment asset management-related fee revenues are reconciled to the GAAP measure, total asset management fee revenues, in the table above. We believe that presenting operating asset management-related fees is useful to investors as a means of assessing the performance of our combined asset management activities, including fundraising and other services for third parties. We believe that segment asset management-related fee revenues provides useful information by indicating the relative contributions of base management fees and performance-related incentive fees, thus facilitating a comparison of those fees in a given period to those in prior and future periods. We also believe that asset management-related fee revenue is a more meaningful measure than standalone asset management fees as reported, because asset management-related fee revenues represent the combined impact of the various asset management activities on the Company's total net revenues. Total segment asset management related fee revenue decreased$10.5 million , from$19.1 million for the year endedDecember 31, 2018 to$8.6 million for the year endedDecember 31, 2019 . Total base management fees were$5.4 million and$12.2 million for the years endedDecember 31, 2019 and 2018, respectively. Total incentive fees decreased$5.2 million , from$6.1 million for the year endedDecember 31, 2018 to$0.9 million for the same period in 2019. Asset management fees decreased from the year endedDecember 31, 2018 due to (i) the sale of the HSCP entities onDecember 31, 2018 which resulted in a decrease of approximately$360.0 million in assets under management and decreased base management fees and (ii) due to decreased incentive fees recorded in the year endedDecember 31, 2019 compared to the same period in 2018. In the year endedDecember 31, 2018 , the Company recognized$5.3 million in incentive fees related to a hedge fund managed by the Company that liquidated during the period. On an operating basis, asset management related fee revenues were 8.0% and 13.6% for the years endedDecember 31, 2019 and 2018, respectively, as a percentage of adjusted net revenues. Principal Transactions Principal transaction revenues increased$3.6 million , from a loss of$2.3 million for the year endedDecember 31, 2018 to a gain of$1.3 million for the same period in 2019. Included in principal transaction revenues for the year endedDecember 31, 2019 was a$3.4 million gain on deconsolidation of JMPCA and a$4.2 impairment loss. As a percentage of total net revenues after provision for loan losses, principal transaction revenues were negative 1.7% for the year endedDecember 31, 2018 and a positive 1.3% for the year endedDecember 31, 2019 . Total segment principal transaction revenues increased$7.5 million , from a gain of$1.0 million for the year endedDecember 31, 2018 to a gain of$8.5 million for the same period in 2019. 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 2019 and 2018 were reported in our Investment Income segment. Total segment principal transaction revenues are reconciled to the GAAP measure, total principal transaction revenues, in the table below. 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. 45
--------------------------------------------------------------------------------
Table of Contents
(In thousands) Year Ended December 31,
2019 2018
Equity and other securities excluding
non-controlling interest $ 1,412 $ (933 )
Warrants and other investments 6,927 1,084
Investment partnerships 126
879
Total segment principal transaction revenues 8,465
1,030
Operating adjustment addbacks (7,121 ) (3,317 ) Total principal transaction revenues $ 1,344$ (2,287 ) On an operating basis, as a percentage of total adjusted net revenues, principal transaction revenues increased from 0.7% for the year endedDecember 31, 2018 to 7.9% for the year endedDecember 31, 2019 .
Loss on Sale, Payoff and Mark-to Market of Loans
Loss) on sale, payoff, and mark-to-market of loans decreased from a loss of$0.5 million for the year endedDecember 31, 2018 to a$38 thousand loss for the year endedDecember 31, 2019 primarily due to the deconsolidation of the CLOs in the first quarter of 2019. Gain (loss) on sale, payoff, and mark-to-market of loans was incurred in our Investment Income segment. Net Dividend Income
Net dividend income was
46--------------------------------------------------------------------------------
Table of Contents
Net Interest Income/Expense
(In thousands) Year Ended December 31,
2019 2018
CLO III loan contractual interest income $ 1,074 $ 21,472
CLO III ABS issued contractual interest expense (660 ) (13,101 ) Net CLO III contractual interest 414
8,371
CLO IV loan contractual interest income $ 6,240 $
26,776
CLO IV ABS issued contractual interest expense (4,492 ) (19,180 ) Net CLO IV contractual interest 1,748
7,596
CLO V loan contractual interest income $ 5,400 $
16,687
CLO V warehouse/ABS issued contractual interest expense (3,836 ) (10,479 ) Net CLO V contractual interest 1,564
6208
CLO VI loan contractual interest income $ 551 $
193
CLO VI warehouse credit facility contractual interest expense (245 )
-73
Net CLO VI contractual interest $ 306 120 Bond Payable interest expense (6,731 ) (7,358 ) CLO subordinated notes interest income 7,200 - Less: Non-controlling interest in CLOs (27 ) (4,261 ) Other interest income 842 2,005 Total segment net interest income $ 5,316 $
12,681
Non-controlling interest in CLOs 27 4,261 Total net interest income $ 5,343$ 16,942 Net interest income decreased$11.6 million from$16.9 million for the year endedDecember 31, 2018 to$5.3 million for the year endedDecember 31, 2019 . The decrease in interest income was driven primarily by a$18.3 million decrease in interest earned on the CLOs as they were deconsolidated during the three months endedMarch 31, 2019 , partially offset by a$7.2 million increase in interest income earned on the retained interest in CLO subordinated notes. As a percentage of total net revenues after provision for loan losses, net interest income was 5.3% for the year endedDecember 31, 2019 and 12.4% for the year endedDecember 31, 2018 . Total segment net interest income decreased$8.4 million from$12.7 million the year endedDecember 31, 2018 to$5.3 million for the year endedDecember 31, 2019 . Net interest income is earned in our Investment Income segment and reflects our portion of the net CLO contractual interest before deconsolidation and interest earned on the Company's retained interest in the CLOs after deconsolidation, net of bond interest expense. Total segment net interest income after deconsolidation reflects the effective yield of the Company's ownership of subordinated notes inCLO III , CLO IV, and CLO V, net of bond interest expense. Total segment net interest income is reconciled to the GAAP measure, total net interest income, in the table above. As a percentage of total adjusted net revenues, net interest income was 5.0% and 9.0% for the years endedDecember 31, 2019 and 2018, respectively. The following table sets forth contractual interest income and expense related to CLO loans and ABS issued (through the respective deconsolidation date of each CLO) and their weighted average contractual interest rates: (In thousands) Year Ended December 31, 2019 Average CLO loan contractual interest income (CLO ABS contractual Weighted Interest interest Average Spread to Income expense) Contractual Weighted Weighted (Expense) Balance Interest Rate Average LIBOR Average LIBOR CLO III loan contractual interest income (1) 1,074 351,245 6.21 % 2.72 % 3.49 %CLO III ABS contractual interest expense (1) (660 ) (332,100 ) 3.96 % 2.61 % 1.35 % CLO IV loan contractual interest income 6,240 439,283 6.27 % 2.72 % 3.55 %CLO IV ABS contractual interest expense (4,492 ) (421,173 ) 4.76 % 2.72 % 2.05 % CLO V loan contractual interest income 5,400 394,925 6.23 % 2.72 % 3.52 % CLO V warehouse/ABS contractual interest expense (3,836 ) (376,657 ) 4.59 % 2.71 % 1.88 % CLO VI loan contractual interest income $ 551 38,006 6.33 % 2.77 % 3.56 % CLO VI warehouse contractual interest expense (245 ) (28,981 ) 4.02 % 2.77 % 1.25 % Net CLO contractual interest$ 4,032 N/A N/A N/A N/A 47
--------------------------------------------------------------------------------
Table of Contents
(1) Interest income and interest expense were earned and accrued through January
17, 2019.
(2) Interest income and interest expense were earned and accrued throughMarch 19, 2019 . (In thousands) Year Ended December 31, 2018 Average CLO loan contractual interest income (CLO ABS contractual Weighted Interest interest Average Spread to Income expense) Contractual Weighted Weighted (Expense) Balance Interest Rate Average LIBOR Average LIBOR CLO III loan contractual interest income 21,472 348,710 5.79 % 2.17 % 3.62 %CLO III ABS contractual interest expense (13,101 ) (332,100 ) 3.60 % 2.17 % 1.43 % CLO IV loan contractual interest income 26,776 438,457 5.79 % 2.17 % 3.62 %CLO IV ABS contractual interest expense (19,180 ) (422,656 ) 4.23 % 2.17 % 2.06 % CLO V loan contractual interest income 16,687 272,134 5.78 % 2.39 % 3.39 % CLO V warehouse/ABS contractual interest expense (10,479 ) (377,822 ) 4.28 % 2.39 % 1.89 % CLO VI loan contractual interest income 193 2,705 6.01 % 2.38 % 3.63 % CLO VI warehouse contractual interest expense (73 ) (14,764 ) 3.63 % 2.38 % 1.25 % Net CLO contractual interest$ 22,295 N/A N/A N/A N/A
Loss on Repurchase, Reissuance, or Early Retirement of Debt
Loss on repurchase, reissuance, or early retirement of debt decreased$2.4 million from$2.8 million for the year endedDecember 31, 2018 to$0.4 million for the year endedDecember 31, 2019 . The decrease was due to the loss on the CLO III refinancing during the year endedDecember 31, 2018 and the deconsolidation ofCLO III , CLO IV, CLO V, and CLO VI warehouse during the first quarter of 2019. Provision for Loan Losses (in thousands) Year ended December 31, 2019 2018 CLO related provision $ -$ (4,717 ) Non-CLO related provision (438 ) (407 ) Provision for loan losses (438 ) (5,124 ) Less: General reserves related to CLOs and CLO warehouse -
3,486
Segment provision for loan losses$ (438 ) $ (1,638 ) Provision for loan losses decreased$4.7 million , from a provision of$5.1 million for the year endedDecember 31, 2018 to a provision of$0.4 million for the same period in 2019. The decrease was due to deconsolidation ofCLO III , CLO IV, CLO V, and CLO VI warehouse during the first quarter of 2019. As a percent of net revenues after provision for loan losses, the provision for loan losses was 0.4% and 3.8% for the years endedDecember 31, 2019 and 2018, respectively. Total segment provision for loan losses decreased from$1.2 million from$1.6 million the year endedDecember 31, 2018 to$0.4 million for the year endedDecember 31, 2019 . Total segment provision for loan losses is a non-GAAP financial measure that aggregates our segment reported provision for loan losses across each segment. Our total segment provision for loan losses in 2019 and 2018 was solely recognized in our Investment Income segment. As a percent of total adjusted net revenues, segment provision for loan losses was 0.4% and 1.2% for the years endedDecember 31, 2019 and 2018, respectively. 48
--------------------------------------------------------------------------------
Table of Contents Expenses Non-Interest Expenses Compensation and Benefits Compensation and benefits, which includes employee payroll, taxes and benefits, performance-based cash bonus and commissions, as well as equity-based compensation to our employees and managing directors, decreased$20.1 million , or 20.6%, from$97.4 million for the year endedDecember 31, 2018 to$77.3 million for the year endedDecember 31, 2019 . Employee payroll, taxes and benefits, and consultant fees were$42.1 million and$43.7 million for the years endedDecember 31, 2019 and 2018, respectively. Performance-based bonus and commission decreased$18.9 million from$52.1 million for the year endedDecember 31, 2018 to$33.2 million for the year endedDecember 31, 2019 .
Equity-based compensation was
Compensation and benefits as a percentage of total net revenues after provision for loan losses increased from 71.4% for the year endedDecember 31, 2018 to 77.3% for the year endedDecember 31, 2019 . Our segment reported compensation and benefits recognizes 100% of the cost of deferred compensation, including non-cash share-based compensation expense, in the period for which such compensation was awarded, instead of recognizing such cost over the vesting period as required under GAAP, in order to match compensation expense with the actual period upon which the compensation was based. The segment reported compensation and benefits decreased$24.0 million from$96.0 million for the year endedDecember 31, 2018 to$72.0 million for the year endedDecember 31, 2019 . As a percent of total adjusted net revenues, compensation and benefits were 67.6% and 68.2% for the years endedDecember 31, 2019 and 2018, respectively. Administration Administration expense was$9.4 million for the year endedDecember 31, 2019 and$8.9 million for the year endedDecember 31, 2018 . As a percentage of total net revenues after provision for loan losses, administration expense increased from 6.5% for the year endedDecember 31, 2018 to 9.4% for the same period in 2019.
Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fees was$3.1 million for the year endedDecember 31, 2018 and$2.7 million for the same period in 2019. As a percentage of total net revenues after provision for loan losses, our brokerage, clearing and exchange fees increased from 2.3% for the year endedDecember 31, 2018 to 2.7% for the same period in 2019.
Travel and Business Development
Travel and business development expenses increased$0.4 million , from$4.8 million for the year endedDecember 31, 2018 to$5.2 million for the year endedDecember 31, 2019 . As a percentage of total net revenues after provision for loan losses, travel and business development expense was 5.2% and 3.5% and for the years endedDecember 31, 2019 and 2018, respectively. Managed deal expenses Managed deal expenses were$3.1 million and$4.8 million for the years endedDecember 31, 2019 and 2018, respectively. As a percentage of total net revenues after provision for loan losses, managed deal expenses decreased from 3.6% percent for the year endedDecember 31, 2018 to 3.1% for the same period in 2019. 49
--------------------------------------------------------------------------------
Table of Contents
Communications and technology expenses were$4.4 million and$4.1 million for the years endedDecember 31, 2019 and 2018, respectively. As a percentage of total net revenues after provision for loan losses, communications and technology expense increased to 4.4% for the year endedDecember 31, 2019 from 3.0% for the year endedDecember 31, 2018 . Occupancy
Occupancy expenses were
Professional Fees Professional fees were$4.4 million and$5.4 million for the years endedDecember 31, 2019 and 2018, respectively. As a percentage of total net revenues after provision for loan losses, professional fees were 4.4% and 4.0% for the years endedDecember 31, 2019 and 2018, respectively. Depreciation Depreciation expenses were$1.2 million and$1.1 million for the years endedDecember 31, 2019 and 2018, respectively. As a percentage of total net revenues after provision for loan losses, depreciation was 0.8% for the year endedDecember 31, 2018 and 1.2% for the year endedDecember 31, 2019 . Other Expenses Other expenses were$0.5 million and$2.0 million for the years endedDecember 31, 2019 and 2018, respectively. As a percentage of total net revenues after provision for loan losses, other expenses was 1.5% for the year endedDecember 31, 2018 and 0.5% for the year endedDecember 31, 2019 .
Net Income (loss) Attributable to Non-controlling Interest
Net income (loss) attributable to non-controlling interest was a net loss of$7 thousand for the year endedDecember 31, 2019 from net income of$1.0 million for the year endedDecember 31, 2019 and 2018. The change is attributable to non-controlling interest related toCLO III , as a result of the deconsolidation ofCLO III during the three months endedMarch 31, 2019 . Non-controlling interest for both of years endedDecember 31, 2019 and 2018 includes the interest of third parties inCLO III ,HCAP Advisors , and HCS SI. Provision for Income Taxes
Income tax benefit was
Segment income tax was a benefit of
For the year endedDecember 31, 2019 , an effective tax rate of 26% is assumed for our taxable parent company, based on our best estimation of the subsidiary's average rate of taxation over the long term. For the year endedDecember 31, 2018 , an effective tax rate of 26% is assumed at the taxable direct subsidiary and a tax rate of 0% is assumed at the other direct subsidiary, which was a "a pass through entity" for tax purposes. During the year endedDecember 31, 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.U.S. federal corporate income tax reform included a broad range of proposals affecting businesses, including corporate tax rates, business deductions and international tax provisions. The reduction in the federal corporate tax rate required a revaluation of our deferred tax assets at the corporate entity level. International tax provisions, including a shift to a territorial system, did not impactJMP Group LLC's investment in foreign corporations, as the Company has historically included accumulated earnings and profits from controlled foreign corporations.
Financial Condition, Liquidity and Capital Resources
In the section that follows, we discuss the significant changes in the
components of our balance sheet, cash flows, and capital resources and liquidity
for the year ended
Overview As ofDecember 31, 2019 , we had net liquid assets of$101.8 million consisting of cash and cash equivalents, receivable from clearing broker, marketable securities owned, investment banking fee receivable, 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 certain marketable securities, are recorded at fair value or amounts that approximate fair value. 50
--------------------------------------------------------------------------------
Table of Contents Liquidity Considerations
As of
Senior Notes InJanuary 2013 ,JMP Group Inc. raised$46.0 million from the issuance of 8.00% Senior Notes ("2013 Senior Notes").JMP Group Inc. redeemed$10.0 million of the issued and outstanding 2013 Senior Notes onJuly 31, 2018 and recorded a loss of$0.2 million related to this partial retirement of the 2013 Senior Notes. OnJuly 18, 2019 ,JMP Group Inc. redeemed$11.0 million of the issued and outstanding 2013 Senior Notes and recorded a loss of$0.2 million related to this partial retirement of the 2013 Senior Notes. OnSeptember 27, 2019 , the Company announcedJMP Group Inc.'s intention to redeem all of the remaining issued and outstanding 2013 Senior Notes onOctober 28, 2019 . The Company opted to satisfy and discharge its obligations under the 2013 Senior Notes as ofSeptember 27, 2019 by paying the principal and owed interest through the redemption date to the trustee,U.S. Bank National Association . OnSeptember 27, 2019 the Company deposited sufficient funds with the trustee to satisfy and discharge the 2013 Senior Notes and the trustee acknowledged such satisfaction and discharge. In connection with the redemption, the Company recorded losses on early retirement of debt related to unamortized bond issuance costs of$0.3 million and recognized an additional$0.2 million of interest expense on the accelerated repayment during the quarter endedSeptember 30, 2019 . InNovember 2017 ,JMP Group Inc. raised$50.0 million from the issuance of 7.25% Senior Notes ("2017 Senior Notes"). The 2017 Senior Notes will mature onNovember 15, 2027 and may be redeemed in whole or in part at any time or from time to time atJMP Group Inc.'s option on or afterNovember 28, 2020 at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The 2017 Senior Notes bear interest at a rate of 7.25% per year, payable quarterly onFebruary 15 ,May 15 ,August 15 andNovember 15 of each year. Pursuant to the indenture of the 2017 Senior Notes,JMP Group LLC and JMPInvestment Holdings LLC (the "Guarantors") are the guarantors of the 2017 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 2017 Senior Notes and the due and punctual payment or performance of all other obligations ofJMP Group Inc. under the indenture governing the 2017 Senior Notes. InSeptember 2019 ,JMP Group LLC raised$36.0 million from the issuance of 6.875% Senior Notes ("2019 Senior Notes"). The 2019 Senior Notes will mature onSeptember 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 afterSeptember 30, 2021 at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The 2019 Senior Notes bear interest at a rate of 6.875% per year, payable quarterly onMarch 30 ,June 30 ,September 30 , andDecember 30 of each year.
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 datedApril 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") throughDecember 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 onJanuary 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 byJMP Group Inc. orJMP 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.
As of
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
The Borrower's obligations under the Credit Agreement are guaranteed by all of the Company's other wholly owned subsidiaries (other thanJMP Securities and certain dormant subsidiaries) 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 wherebyJMP Group LLC granted a lien on the equity interests inJMP Investment Holdings LLC and JMPAM to secure the Borrower's obligations under the Credit Agreement. 51
--------------------------------------------------------------------------------
Table of Contents
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 datedApril 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. OnJune 6, 2019 ,JMP Securities entered Amendment Number Ten to the Revolving Note Agreement. Pursuant to this amendment, the$20.0 million Revolving Note Agreement was extended for one year untilJune 8, 2020 . OnJune 8, 2020 , 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
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
JMP Securities' obligations under the Revolving Note Agreement are guaranteed by all of the Company's wholly owned subsidiaries (other thanJMP Securities and certain dormant subsidiaries) and are secured by substantially all the guarantors' assets.
Other
OnMay 13, 2019 , the Company launched a self-tender offer (the "Tender Offer") to repurchase for cash up to 3,000,000 of shares representing limited liability company interests of the Company. OnJune 13, 2019 , the Company repurchased 1,816,732 shares under the Tender Offer at a price$3.95 per share for a total purchase price of$7.2 million , excluding fees and expenses related to the Tender Offer. OnFebruary 24, 2020 the Company launched a second self-tender offer (the "Second 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 onMarch 19, 2020 as a result of multiple conditions to the Self Tender Offer not having been satisfied.
During the three months ended
On
Upon the securitization of Medalist Partners Corporate Finance CLO VI in
We had total restricted cash of$1.2 million comprised primarily of restricted cash atJMP Group Inc. related to the Company's letters of credit on leasing arrangements. 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. Because of the nature of our investment banking and sales and trading businesses, liquidity is important to us. Accordingly, we regularly monitor our liquidity position, including our cash and net capital positions. We believe that our available liquidity and current level of equity capital, combined with the funds anticipated to be provided by our operating activities, will be adequate to meet our liquidity and regulatory capital requirements for at least the next twelve months. If circumstances required it, we could improve our liquidity position by discontinuing repurchases of the Company's common shares, halting cash distributions on our common shares and reducing cash bonus compensation paid.JMP Securities , our wholly-owned subsidiary and a registered securities broker-dealer, is subject to theSEC'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$16.9 million and$29.8 million , which were$15.5 million and$28.7 million in excess of the required net capital of$1.4 million and$1.1 million , atDecember 31, 2019 and 2018, respectively.JMP Securities' ratio of aggregate indebtedness to net capital was 1.25 to 1 and 0.57 to 1 atDecember 31, 2019 and 2018, respectively. 52
--------------------------------------------------------------------------------
Table of Contents
A condensed table of cash flows for the years endedDecember 31, 2019 and 2018 is presented below. (Dollars in thousands) Year Ended December 31, Change from 2018 to 2019 2019 2018 $ % Cash flows provided by (used in) operating activities$ (18,891 ) $ 22,647 $ (41,538 ) -183.4 % Cash flows used in investing activities (60,448 ) (335,049 ) 274,601 82.0 % Cash flows provided by (used in) financing activities (2,552 ) 307,889 (310,441 ) -100.8 % Total cash flows$ (81,891 ) $ (4,513 ) $ (77,378 ) -202.3 %
Cash Flows for the year ended
Cash decreased by
Our operating activities used$18.9 million of cash from the net loss of$6.6 million , adjusted for the cash used in operating assets and liabilities of$11.7 million , and used by non-cash revenue and expense items of$0.6 million . The cash used in operating assets and liabilities was primarily due to a decrease in accrued compensation of$11.1 million , an increase in other assets of$9.5 million , an increase of$4.1 million in interest payable, an increase in interest receivable of$5.0 million , partially offset by a$16.1 million decrease in marketable securities owned. Our investing activities used$60.5 million of cash primarily due to a$35.2 million funding of loans collateralizing asset-backed securities issued, a$25.7 million of funding for loans held for investment,$12.6 million used to purchase other investments and a$27.8 million decrease in cash and restricted cash due to deconsolidation of subsidiaries, partially offset by the$23.8 million of receipts from loans collateralizing asset-backed securities issued and$10.4 million from the sale of other investments.
Our financing activities used
Cash Flows for the year ended
Cash decreased by$4.5 million during the year endedDecember 31, 2019 , as a result of cash used in investing activities, partially offset by cash provided by operating and financing activities. Our operating activities provided$22.6 million of cash from the net loss of$1.2 million , adjusted for the cash provided by operating assets and liabilities of$11.4 million , and provided by non-cash revenue and expense items of$11.4 million . The cash provided by the change in operating assets and liabilities was primarily due to a decrease in other assets of$6.1 million , an increase of$4.7 million in interest payable, a$2.6 million decrease in receivables, and a$2.0 million decrease in marketable securities owned, partially offset by a$3.3 million decrease in marketable securities sold, but not yet purchased. Our investing activities used$335.0 million of cash primarily due to a$434.8 million funding of loans collateralizing asset-backed securities issued and$339.9 million of funding for loans held for investment, partially offset by the$399.2 million of receipts from loans collateralizing asset-backed securities issued,$29.5 million of receipts from loans held for investments, and$14.0 million from the sale of other investments. 53
--------------------------------------------------------------------------------
Table of Contents
Our financing activities provided$307.9 million of cash primarily due to$669.1 million of proceeds from the issuance of asset-backed securities due to the refinancing ofCLO III and the securitization of CLO V,$286.3 million in proceeds from draws on the CLO warehouse credit facilities, partially offset by$332.4 million of repayments on asset-backed securities issued,$325.0 million in repayments on the CLO warehouse credit facilities,$10.0 million of repayments on bonds payable and$7.9 million in distributions and distribution equivalents paid on common shares and restricted share units.
Contractual Obligations
As of
As ofDecember 31, 2019 ,$86.0 million of bonds payable were outstanding, of which$36.0 million carries interest at a rate of 6.875% per annum and is due in 2029 and the remaining$50.00 million carries interest at a rate of 7.25% per annum and is due in 2027. The bonds require quarterly payments of interest.
Off-Balance Sheet Arrangements
The Company had unfunded commitments of
We had no other material off-balance sheet arrangements as ofDecember 31, 2019 . However, through indemnification provisions in our clearing agreements with our clearing broker, 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 Special Note About Forward-Looking Statements 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. Our significant accounting policies are summarized in Note 2 to our consolidated financial statements included elsewhere in this Form 10-K. 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.
54--------------------------------------------------------------------------------
Table of Contents
Using the foregoing criteria, we consider the following to be our critical accounting policies:
Valuation of Financial Instruments
The Company measures fair value in accordance with GAAP and expands disclosures with respect to fair value measurements. The accounting principles related to fair value measurement apply to all financial instruments that are being measured and reported on a fair value basis. This includes those items currently reported in marketable securities owned, at fair value, other investments and marketable securities sold, not yet purchased, at fair value on the Consolidated Statements of Financial Condition. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Most of our financial instruments are recorded at fair value or amounts that approximate fair value. Marketable securities owned, other investments, including warrant positions and investments in partnerships in which HCS is the general partner, and marketable securities sold, but not yet purchased, are stated at fair value, with related changes in unrealized appreciation or depreciation reflected in the line item Principal transactions in the accompanying Consolidated Statements of Operations. Fair value of our financial instruments is generally obtained from quoted market prices, third-party pricing services, or alternative pricing methodologies that we believe offer reasonable levels of price transparency. Valuations obtained from pricing services are considered reflective of executable prices. Data obtained from multiple sources are compared for consistency and reasonableness. To the extent that certain financial instruments trade infrequently or are non-marketable securities and, therefore, do not have readily determinable fair values, we estimate the fair value of these instruments using various pricing models and the information available to us that we deem most relevant. Among the factors considered by us in determining the fair value of financial instruments are discounted anticipated cash flows, the cost, terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, the Black-Scholes Options Valuation methodology and other factors generally pertinent to the valuation of financial instruments. Marketable securities owned and securities sold, but not yet purchased, consist ofU.S. listed and over-the-counter ("OTC") equity securities. Other investments include investments in private investment funds managed by us or our affiliates, as well as cash paid for a subscription in a private investment fund managed by a third party. Such investments held by non-broker-dealer entities are accounted for under the equity method based on our share of the earnings (or losses) of the investee. The financial position and operating results of the private investment funds are generally determined on an estimated fair value basis. Generally, securities are valued (i) at their last published sale price if they are listed on an established exchange or (ii) if last sales prices are not published, at the highest closing "bid" price (for securities held "long") and the lowest closing "asked" price (for "short" positions) as recorded by the composite tape system or such principal exchange, as the case may be. Where the general partner determines that market prices or quotations do not fairly represent the value of a security in the investment fund's portfolio (for example, if a security is a restricted security of a class that is publicly traded) the general partner may assign a different value. The general partner will determine the estimated fair value of any assets that are not publicly traded.
The Company estimates the fair value of its investments in private investment funds managed by third parties using the net asset value per share of those funds, as a practical expedient.
The Company uses the fair value option which allows an entity to report selected
financial assets and financial liabilities at fair value. The fair value of
those assets and liabilities for which the fair value option has been chosen is
reflected on the face of the balance sheet. Subsequent changes in fair value are
recorded in the Consolidated Statements of Operations.
55--------------------------------------------------------------------------------
Table of ContentsCLO Debt Securities Investments in CLO debt securities are accounted for according to their purpose and holding period. CLO debt security investments that are classified as trading securities are those that are bought and held principally for the purpose of selling them in the near term. The Company had zero CLO debt securities classified as trading securities as ofDecember 31, 2019 andDecember 31, 2018 . The Company previously classified its senior subordinated notes in CLO IV and CLO V as trading securities, but sold these notes inMay 2019 . The Company's investments in CLO debt securities classified as available-for-sale are comprised of junior subordinated notes inCLO III , CLO IV and CLO V and are those that may be sold before maturity and are reported at fair value with unrealized gains and losses, net of taxes, reported as a component of other comprehensive income ("OCI"). The Company had$57.9 million and zero CLO debt securities classified as available-for-sale securities as ofDecember 31, 2019 andDecember 31, 2018 , respectively. The Company had no CLO debt securities classified as held-to-maturity securities as ofDecember 31, 2019 andDecember 31, 2018 , respectively. Interest income on CLO debt securities is recognized in accordance with ASC 835, using the effective yield method. The effective yield on these securities is based on the projected cash flows from each security, which is estimated based on the Company's observation of the then current information and events, where applicable, and will include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses. On at least a quarterly basis, the Company reviews and, if appropriate, makes adjustments to its cash flow projections based on input and analysis received from external sources, internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on such securities. Realized gains and losses on the sale of debt securities are determined using the specific identification method and recognized in current period earnings in revenues from principal transactions. The Company evaluates the available-for-sale CLO debt securities for impairment quarterly. As part of the evaluation, the Company obtains the new cash flow projections for the CLO debt securities at period end and determines, based on those cash flows and other current information, if there has been a favorable or adverse change in the cash flows expected to be collected as compared to the projected cash flows from the prior period. An adverse change in cash flows is determined in the context of both the timing and the amount of the cash flows. An impairment would be recorded if the net present value of the cash flows of the investment is below the amortized cost basis of the investment and the Company does not expect to recover the amortized cost basis before the security is expected to be sold or the security matures, whichever comes first. Should the Company determine that there is an impairment, the amount of the impairment is recognized in revenues from principal transactions. The Company recorded$4.2 million of impairment on CLO debt securities for the year endedDecember 31, 2019 and zero for the year endedDecember 31, 2018 .
Asset Management Investment Partnerships
Investments in partnerships include our general partnership and limited
partnership interests in investment partnerships, managed by our asset
management subsidiaries. Such investments are accounted for under the equity
method based on our proportionate share of the earnings (or losses) of the
investment partnership or under the fair value option using the net asset value
per share of those funds, as a practical expedient. Under the fair value option,
these interests are carried at estimated fair value based on our capital
accounts in the underlying partnerships. The assets of the investment
partnerships consist primarily of investments in marketable and non-marketable
securities, real estate and real estate-related enterprises and corporate loans.
The underlying investments held by such partnerships are valued based on quoted
market prices or estimated fair value if there is no public market for such
assets. Such estimates of fair value of the partnerships' non-marketable
investments are ultimately determined by our asset management subsidiaries in
their capacity as general partner. Due to the inherent uncertainty of valuation,
fair values of these non-marketable investments may differ from the values that
would have been used had a ready market existed for these investments, and the
differences could be material. Adjustments to carrying value are made, as
required by GAAP, if there are third-party transactions evidencing a change in
value. Downward adjustments are also made, in the absence of third-party
transactions, if the general partner determines that the expected realizable
value of the investment is less than the carrying value.
We earn base management fees from the investment partnerships that we manage
generally based on the net assets of the underlying partnerships. In addition,
we are entitled to allocations of the appreciation and depreciation in the fair
value of the underlying partnerships from our general partnership interests in
the partnerships. Such allocations are based on the terms of the respective
partnership agreements.
We are also entitled to receive incentive fee allocations from the investment
partnerships when the return exceeds a specified high-water mark or hurdle rate
over a defined performance period. Incentive fees are recorded after the
quarterly or annual investment performance period is complete and may vary
depending on the terms of the fee structure applicable to an investor.
56--------------------------------------------------------------------------------
Table of Contents
Legal and Other Contingent Liabilities
We are involved in various pending and potential claims, arbitrations, legal actions, investigations and proceedings related to our business from time to time. Some of these matters involve claims for substantial amounts, including claims for punitive and other special damages. The number of claims, legal actions, investigations and regulatory proceedings against financial institutions like us has been increasing in recent years. We have, after consultation with counsel and consideration of facts currently known by management, recorded estimated losses in accordance with authoritative guidance under GAAP on contingencies, to the extent that a claim may result in a probable loss and the amount of the loss can be reasonably estimated. The determination of these reserve amounts requires significant judgment on the part of management and our ultimate liabilities may be materially different. In making these determinations, management considers many factors, including, but not limited to, the loss and damages sought by the plaintiff or claimant, the basis and validity of the claim, the likelihood of successful defense against the claim and the potential for, and magnitude of, damages or settlements from such pending and potential claims, legal actions, arbitrations, investigations and proceedings, and fines and penalties or orders from regulatory agencies. If a potential adverse contingency should become probable or resolved for an amount in excess of the established reserves during any period, our results of operations in that period and, in some cases, succeeding periods, could be adversely affected. Income Taxes 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. Valuation allowances are established when necessary to reduce the deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized. The Company records uncertain tax positions using a two-step process: (i) the Company determines whether it is more likely than not that each tax position will be sustained on the basis of the technical merits of the position; and (ii) for those tax positions that meet the more-likely-than not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than fifty percent likely to be realized upon ultimate settlement with the related tax authority. The Company's policy for recording interest and penalties associated with the tax audits or unrecognized tax benefits, if any, is to record such items as a component of income tax.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements affecting the Company, refer to Note 3 in the accompanying consolidated financial statements.
© Edgar Online, source
