JMP JMP Group LLC

1. Organization and Description of Business

       JMP Group LLC, together with its subsidiaries (collectively, the “Company”), is a diversified capital markets firm headquartered in San Francisco, California. The Company conducts its investment banking and institutional brokerage business through JMP Securities LLC (“JMP Securities”) and its asset management business through Harvest Capital Strategies LLC (“HCS”), HCAP Advisors LLC (“HCAP Advisors”), JMP Asset Management LLC (“JMPAM”) JMP Credit Advisors LLC ("JMPCA") (through March 19, 2019). The Company conducts certain principal investment transactions through JMP Investment Holdings LLC (“JMP Investment Holdings”) and other subsidiaries. The above entities, other than HCAP Advisors, are wholly-owned subsidiaries. JMP Securities is a U.S. registered broker-dealer under the Securities Exchange Act of 1934, as amended (the "Exchange Act”), and is a member of the Financial Industry Regulatory Authority (“FINRA”). JMP Securities operates as an introducing broker and does not hold funds or securities for, or owe any money or securities to customers and does not carry accounts for customers. All customer transactions are cleared through another broker-dealer on a fully disclosed basis. HCS is a registered investment advisor under the Investment Advisers Act of 1940, as amended, and provides investment management services for sophisticated investors in investment partnerships and other entities managed by HCS. HCAP Advisors provides investment advisory services to Harvest Capital Credit Corporation (“HCC”). JMPAM currently manages two fund strategies: one that invests in real estate and real estate-related enterprises and another that provides credit to small and midsized private companies. JMPCA is an asset management platform that underwrites and manages investments in senior secured debt. JMPCA currently manages four collateralized loan obligations (“CLO”) vehicles. The Company completed a Reorganization Transaction in January 2015 pursuant to which JMP Group Inc. became a wholly-owned subsidiary of JMP Group LLC (the “Reorganization Transaction”). The Company entered into a Contribution Agreement in November 2017 pursuant to which JMP Group Inc. became a wholly-owned subsidiary of JMP Investment Holdings, which is a wholly-owned subsidiary of JMP Group LLC. 

Recent Transactions

On January 17, 2019, the non-call period of JMP Credit Advisors CLO III 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”). Previously the Company concluded that it was the primary beneficiary of CLO III through its combination of control over the manager and its economic interest in CLO III. When the non-call period expired, an election of the majority holders of the subordinated notes can refinance or liquidate the CLO and this ability has been determined to be the most significant activity. The expiration of the non-call period resulted in the Company losing control over the most significant activities of CLO III as it cannot unilaterally direct this activity. The Company deconsolidated CLO III as of January 17, 2019. The Company continues to hold approximately 47% of the outstanding subordinated notes of CLO III and accounts for its ownership of the CLO III subordinated notes as an investment in a debt security. The Company has classified the subordinated notes as held-to-maturity. The Company recognized a gain of $1.6 million as revenue from principal transactions on the deconsolidation of CLO III for the three months ended March 31, 2019

On March 19, 2019, the Company sold a 50.1% equity interest in JMPCA to Medalist 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. 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 it is not the primary beneficiary of JMPCA as the Company is not the party with the power to direct the most significant activities of JMPCA. As the Company was determined that it is not the primary beneficiary, the Company deconsolidated JMPCA as of the date of sale. As the Company retained 45.0% of the equity interest of JMPCA and has significant influence, the Company has determined that it is required to account for its retained interest as an equity method investment, however the Company has made the election to apply the fair value option to this 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 Company will receive a portion of the subordinated management fees from the CLOs JMPCA currently manages and from CLO VI once it securitizes. After the sale, JMPCA was renamed Medalist Partners Corporate Finance LLC.

The sale of JMPCA also required Medalist to provide additional capital to purchase preference shares in JMP Credit Advisors Long-Term Warehouse Ltd (“CLO VI”) to finance the acquisition of broadly syndicated corporate loans. On March 19, 2019, Medalist related entities purchased 66% of the outstanding preference shares of CLO VI on March 19, 2019 for $7.6 million. There was no gain or loss recognized on the sale of the preference shares.

After the sale of JMPCA, the Company lost the ability to direct the most significant activities of the following VIEs: JMP Credit Advisors CLO IV Ltd (“CLO IV”), JMP Credit Advisors CLO V Ltd (“CLO V”), and CLO VI (collectively with CLO III the “CLOs”) and as a result, deconsolidated those CLOs as of March 19, 2019. Previously the Company concluded that it was the primary beneficiary of CLO IV, CLO V, and CLO VI warehouse through its control over JMPCA and its ownership of 100% of the equity tranches or preference shares of these CLOs. The Company continues to hold 100% of the junior subordinated notes of CLO IV and CLO V, 100% and 25% of the senior subordinated notes of CLO IV and CLO V, respectively, and 33% of the preference shares of CLO VI as of March 31, 2019. The Company accounts for its ownership of the subordinated notes as an investment in a debt security and accounts for its ownership of the CLO VI preference shares as an equity investment. The Company will classify the junior subordinated notes as available-for-sale securities and will classify the senior subordinated notes as trading securities. Collectively, the Company recognized a loss on the deconsolidation of CLO IV, CLO V, and CLO VI of $1.9 million for the three months ended March 31, 2019 in revenues from principal transactions

The deconsolidation of the CLOs and JMPCA was accounted for based on the guidance in ASC 810, Consolidation . According to that guidance, the gain or loss on deconsolidation is calculated as the difference between (i) the aggregate of the fair value of the retained interest in the former subsidiaries, the fair value of any consideration received, and the carrying value of the non-controlling interest in the former subsidiaries; and (ii) the carrying value of the assets and liabilities of the former subsidiaries. The gain recognized by the Company is primarily the result of the remeasurement of the retained interest in the CLOs and JMPCA. The difference between these was recorded as a gain on deconsolidation in the Consolidated Statement of Operations under principal transactions revenue. The following table represents the consideration received, the fair value of the retained interest, and the resulting gain on deconsolidation of the CLOs and JMPCA:

See Item 5 of this Form 10-Q for the pro forma information on the sale of JMPCA and the resulting deconsolidation of JMPCA, CLO III, CLO IV, CLO V, and CLO VI.

2. Summary of Significant Accounting Policies  

Basis of Presentation

 These consolidated financial statements and related notes are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10 -Q and Article 10 of Regulation S- X. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its Annual Report on Form  10 -K for the year ended December 31, 2018 ( the “Annual Report”). The results of operations for any interim period are not necessarily indicative of the results to be expected for a full year. In the opinion of management, all normal, recurring adjustments have been included for a fair statement of this interim financial information.

The consolidated accounts of the Company include the wholly-owned subsidiaries and the partially-owned subsidiaries of which we are the majority owner or the primary beneficiary. All material intercompany accounts and transactions have been eliminated in consolidation. Non-controlling interests on the Consolidated Statements of Financial Condition at March  31, 2019  and December 31, 2018  relate to the interest of third parties in the partially-owned subsidiaries. Certain prior year amounts have been reclassified to conform to current year presentation.

For the three months ended March 31, 2019, there were no significant changes made to the Company’s significant accounting policies other than those described below and the accounting policy changes are attributable to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The Company adopted this standard on January 1, 2019 using a modified retrospective approach. Accordingly, the new leasing standard was applied prospectively in the Company’s financial statements from January 1, 2019 forward and reported financial information for historical comparable periods was not revised and will continue to be reported under the accounting standards in effect during those historical periods.

CLO 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 $9.3 million and zero CLO debt securities classified as trading securities as of March 31, 2019 and December 31, 2018, respectively, which are comprised of senior subordinated notes in CLO IV and CLO V. The Company’s investments in debt securities classified as available-for-sale are comprised of junior subordinated notes in 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 $53.5 million and zero CLO debt securities classified as available-for-sale securities as of March 31, 2019 and December 31, 2018, respectively. The Company’s investment in CLO debt securities classified as held-to-maturity are comprised of CLO III junior subordinated notes and are those that management has the positive intent and ability to hold to maturity and are reported at amortized cost. The Company had $13.6 million and zero CLO debt securities classified as held-to-maturity securities as of March 31, 2019 and December 31, 2018, respectively. Interest on CLO debt securities are recognized in interest income on an accrual basis using the effective yield method. 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 and held-to-maturity investments in debt securities for other than temporary impairment ("OTTI") quarterly. Impairment would be recorded if the net present value of the cash flows of the investment is below amortized cost 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 OTTI, the amount of the impairment is bifurcated between losses related to credit losses, which is recognized in revenues from principal transactions, and all other factors, which is recognized in OCI. The Company recorded no OTTI on CLO debt securities for either of the three months ended March 31, 2019 and 2018.

3. Recent Accounting Pronouncemen ts

 Accounting Standards to be adopted in Future Periods

ASU 2016-13,  Measurement of Credit Losses on Financial Instruments (Topic  326 ),  was issued in June 2016 to replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This standard will become effective for fiscal years beginning after December 15, 2019. The Company is evaluating the impact of the adoption of this standard.

ASU 2017 - 08,  Receivables-Nonrefundable Fees and Other Costs (Sub-topic 310 - 20 ): Premium Amortization on Purchased Callable Debt Securities,  was issued in March 2017 to shorten the amortization period for certain purchased callable debt securities held at a premium. It requires the premium to be amortized over the period until the earliest call date. The amendment does not make any changes for securities held at a discount. The new guidance will be effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the impact of the adoption of this standard.

ASU 2018-13, Fair Value Measurement (Topic 820 ) , was issued in August 2018 as part of the disclosure framework project to improve the effectiveness of the disclosures in the notes to the financial statements. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The new guidance will be effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is evaluating the impact of the adoption of this standard.

Recently Adopted Accounting Guidance

ASU 2016-02, Leases (Topic 842 ) , was issued in February 2016, with subsequent amendments, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing information about leasing arrangements. The standard requires lessees to recognize the assets and liabilities arising from operational leases on the balance sheet. The Company adopted this standard on January 1, 2019 using a modified retrospective approach and recognized its lease agreements as a right-of-use asset with a corresponding lease liability to reflect the present value of the future lease payments. Accordingly, the new leasing standard was applied prospectively in the Company’s financial statements from January 1, 2019 forward and reported financial information for historical comparable periods was not revised and will continue to be reported under the accounting standards in effect during those historical periods. Additionally upon adoption the Company elected the package of practical expedients for leases that commenced before the date of adoption in which the Company was not required to reassess (i) whether any existing or expired contracts contain leases, (ii) the lease classification of existing or expired leases, and (iii) initial direct costs of existing or expired leases. On January 1, 2019, the Company recognized $23.6 million as an operating lease right-of-use asset and $29.3 million as an operating lease liability on the Consolidated Statements of Financial Condition related to its leasing obligations. As of March 31, 2019, the Company carried a $22.1  million operating lease right-of-use asset and a $27.5  million operating lease liability on the Consolidated Statements of Financial Condition related to its leasing obligations.

4 . Fair Value Measurement s

The following tables provide fair value information related to the Company ’s financial instruments at March 31, 2019  and December 31, 2018:

  The following table summarizes available-for-sale securities in an unrealized position.

   The following table summarizes the fair value and amortized cost of the available-for-sale and held-to-maturity securities by contractual maturity.

As of December 31, 2018, both marketable securities owned and marketable securities sold, but not yet purchased, were primarily comprised of U.S. listed equity securities. As of March 31, 2019, marketable securities sold but not yet purchased were primarily comprised of U.S. listed securities. As of March 31, 2019, marketable securities was comprised of U.S. listed equity securities and CLO debt securities.

Transfers between levels of the fair value hierarchy result from changes in the observability of fair value inputs used in determining fair values for different types of financial assets and are recognized at the beginning of the reporting period in which the event or change in circumstances that caused the transfer occurs. The Company’s policy is to recognize the fair value of transfers among Levels 1, 2 and 3 as of the end of the reporting period. For recurring fair value measurements, there were no transfers between Levels 1, 2 and 3 for the three months ended March 31, 2019 and year ended December 31, 2018.

The Company’s Level 2 assets held in other investments consist of investments in hedge funds managed by HCS. The carrying value of investments in hedge funds are calculated using the equity method and approximates fair value. Earnings or losses attributable to these investments are recorded in principal transactions. These assets are considered Level 2 as the underlying hedge funds are mainly invested in publicly traded stocks whose value is based on quoted market prices. The Company’s proportionate share of those investments is included in the tables above.

The investments in private equity funds managed by HCS and JMPAM are recognized using the fair value option. The Company uses the reported net asset value per share as a practical expedient to estimate the fair value of the funds. The risks associated with these investments are limited to the amounts of invested capital, remaining capital commitment and any management and incentive fees receivable.

The Company determined the fair value of short-term debt, which includes notes payable and CLO credit facilities, to approximate their carrying values. This was determined as the debt has either (1) a variable interest rate tied to LIBOR and therefore reflects market conditions, or (2) a term less than one year and there have been no observable changes in the credit quality of the Company since the issuance of the debt. Based on the fair value methodology, the Company has identified short-term debt as Level 2 liabilities.

The Company's level 3 asset in other investments is comprised of an investment in equity securities of a private company. The Company used the net present value of discounted cash flows of the estimated value of the put option to determine the fair value of the investment. The put option is exercisable at three times the management fee revenue of the entity for the prior twelve months as of the effective date of the put option. The put option may be elected beginning March 31, 2022. The significant unobservable inputs under this approach are the estimated twelve months of revenues, the credit factor and the discount rate. For this investment, the Company elected the fair value option as the Company determined that the fair value of its option to put the equity securities was the best representation of the fair value of the investment. While the Company has made other equity investments, it has not elected the fair value option for those investments as it is impractical to determine the fair value of those investments.

The Company’s level 3 assets held in marketable securities consist of investments in CLO debt securities. The fair value of the CLO debt securities is determined using the net present value of discounted cash flows. The significant unobservable inputs used in the fair value measurement under this approach are the risk adjusted discount factors. The Company also uses performance and covenant compliance information provided by the CLO manager along with other risk factors including default risk, prepayment rates, interest rate risk, and credit spread risk when valuing this investment. During the three months ended March 31, 2019, the fair value of the Company's investment in CLO debt securities declined due a change that was deemed temporary. This conclusion was reached as the reduction in fair value was not due to credit factors and the Company believes that any reduction in fair value can be recovered before the security is sold or matures, whichever comes first.

For the three months ended March 31, 2019, the changes in level 3 assets measured at fair value on a recurring basis were as follows:

For assets classified in the level 3 hierarchy, any changes to any of the inputs to the fair value measurement could result in a significant increase or decrease in the fair value measurement. For CLO debt securities, a significant increase (decrease) in the discount rate, default rate, and severity rate would result in a significant decrease (increase) in the fair value of the instruments. For the equity investment, a significant increase (decrease) in the credit factor or the discount rate would result in a significantly lower (higher) fair value measurement. For level 3 assets measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:

The Company determined the fair value of loans collateralizing asset-backed securities and loans held for investment identified as Level 2 assets primarily using the average market bid and ask quotation obtained from a loan pricing service. The valuations are received from a pricing service to which the Company subscribes. The pricing service's analysis incorporates comparable loans traded in the marketplace, the obligors industry, future business prospects, capital structure, and expected credit losses. Significant declines in the performance of the obligor would result in decrease to the fair value measurement. The fair value of loans held for investment identified as Level 3 assets are determined using the discounted cash flow model using the treasury rate, loan interest rate, and an internally generated risk rate.

The Company determined the fair value of asset-backed securities issued based upon pricing from published market research for equivalent-rated CLO notes. Based on the fair value methodology, the Company has identified the asset-backed securities issued as Level 2 liabilities.

As of  March 31, 2019  and December 31, 2018, $9.8  million and $9.4  million of assets were measured using the net asset value as a practical expedient. Investments for which fair value was estimated using net asset value as a practical expedient were as follows:

Non - recurring Fair Value Measurements

The Company's asse ts that are measured at fair value on a non-recurring basis result from the application of lower of cost or market accounting or write-downs of individual assets. The Company held loans measured at fair value on a non-recurring basis of $0.1 million and  $1.3  million as of March 31, 2019 and December 31, 2018 , respectively .

The Company had marketable securities that were measured at fair value on a non-recurring basis as the Company has the intent and ability to hold these securities until maturity. The Company held marketable securities measured at fair-value on a non-recurring basis of $13.7 million as of March 31, 2019.

5 . Loans 

Allowance for Loan Losses

During the period ending March 31, 2019, the Company deconsolidated its investments in the CLOs and as a result, no longer has loans collateralizing ABS on its Consolidated Statement of Financial Condition as of March 31, 2019. See Note 1 for additional information on deconsolidation. A summary of the activity in the allowance for loan losses for the three months ended March 31, 2019  and 2018  is as follows:

A loan is considered to be impaired when, based on current information, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the original loan agreement, including scheduled principal and interest payments. As of December 31, 2018, $1.8 million of the recorded investment amount in loans collateralizing asset-backed securities issued were individually evaluated for impairment. The remaining $1,170.2 million of recorded investment amount of loans collateralizing asset-backed securities issued were collectively evaluated for impairment as of December 31, 2018.

As of   December 31, 2018  the Company classified all its loans as Cash Flow loans, as their funding decisions were all primarily driven by the cash flows of the borrower. The table below presents certain information pertaining to the loans on non-accrual status at  December 31, 2018:

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were du e. No loans were past due a t M arch 31, 2019  or December 31, 2018. During the year ended December 31, 2018, the Company had two loans, which were modif ied in a troubled debt res tructuring. The loans, with a principal balance and a carrying balance of $1.9 million and $1.0 million in total, respectively, were converted to equity. The Company valued the equity at $0.8 million in total upon conversion and incurred a loss of $0.1 million in relation to the restructuring as of December 31, 2018. 

The Company had one troubled debt restructuring during the three months ended Ma rch 31, 2019. The loan, with a principal balance and a carrying balance of $0.5 million and $0.2 million in total, respectively, was converted to equity. The Company valued the equity at $0.2 million in total upon conversion.

The Company ’s management, at least on a quarterly basis, reviews each loan and evaluates the credit quality of the loan. The review primarily includes the following credit quality indicators with regard to each loan: 1 ) Moody’s rating, 2 ) current internal rating, 3 ) the trading price of the loan and 4 ) performance of the obligor. The tables below present, by credit quality indicator, the Company’s recorded investment in loans collateralizing asset-backed securities issued at December 31, 2018. These loans were deconsolidated as of March 31, 2019.

Loans Held for Investment

At March 31, 2019 and December 31, 2018, the number of loans held for investment outside of the CLO warehouse portfolio was seven and five, respectively. The Company reviews credit quality of these loans within this portfolio segment on a loan by loan basis mainly focusing on the borrower’s financial position and results of operations as well as the current and expected future cash flows on the loans. As of December 31, 2018, the Company held $26.0 million of loans held for investment in the CLO VI warehouse portfolio. The credit quality of the CLO VI warehouse loans are evaluated in the same manner as the credit quality of loans collateralizing asset-backed securities issued. During the three-month period ended March 31, 2019, the Company deconsolidated its investments in the CLO VI warehouse and a result, no longer has loans held for investment related to CLO VI on its Consolidated Statement of Financial Condition as of March 31, 2019. See Note 1 for additional information on deconsolidation.

Ther e were no loans past due as of March 31, 2019 and March 31, 2018. A summary of activity in loan losses for the three months ended March 31, 2019 and 2018 is as follows: