|
ITEM 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the unaudited consolidated financial statements and the related notes included elsewhere in this report. For additional context with which to understand our financial condition and results of operations, see the MD&A for the fiscal year ended December 31, 2019 contained in our Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 30, 2020 (the “Annual Report”), as well as the consolidated financial statements and notes contained therein.
Cautionary Statement Regarding Forward-Looking Statements
This MD&A and other sections of this Form 10-Q (the “Quarterly Report”) contain forward looking statements. We make forward-looking statements, as defined by the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and in some cases you can identify these statements by forward-looking words such as “if,” “shall,” “may,” “might,” “will likely result,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “intend,” “goal,” “objective,” “predict,” “potential” or “continue,” the negative of these terms, and other comparable terminology. These forward-looking statements, which are based on various underlying assumptions and expectations and are subject to risks, uncertainties and other unknown factors, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events that we believe to be reasonable. There are or may be important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the historical or future results, level of activity, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, those discussed under the caption “Risk Factors” in our Annual Report. In preparing this MD&A, we presume that readers have access to and have read the MD&A in our Annual Report, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K. We undertake no duty to update any of these forward-looking statements after the date of filing of this Quarterly Report to conform such forward-looking statements to actual results or revised expectations, except as otherwise required by law.
JMP Group LLC, together with its subsidiaries (collectively, the “Company”, “we”, or “us”), is a diversified capital markets firm headquartered in San Francisco, California. We have a diversified business model with a focus on small and middle-market companies and provide:
|
|
•
|
investment banking services, including corporate finance, mergers and acquisitions and other strategic advisory services, to corporate clients;
|
|
|
•
|
sales and trading and related securities brokerage services to institutional investors;
|
|
|
•
|
equity research coverage of three target industries;
|
|
|
•
|
asset management products and services to institutional investors, high net-worth individuals and for our own account; and
|
|
|
•
|
management of collateralized loan obligations (through March 19, 2019) and a specialty finance company.
|
Impact of the COVID-19 Pandemic
Prior to the spread of the COVID-19 pandemic, we experienced growth trends in the first quarter of 2020, driven by investment banking momentum that continued from the fourth quarter of 2019, until the U.S. equities market saw sharp declines and extreme volatility in March 2020 in reaction to the COVID-19 pandemic.
Consequently, investment banking transactions expected to close in March were pushed out into the future, postponing revenues that otherwise would have been recognized in the first quarter. On the other hand, in the first quarter we experienced a material increase in our institutional equities business, as brokerage clients turned to us for insight into an extraordinarily challenging market environment.
Due to the dramatic market volatility as a result of the COVID-19 pandemic, there was a significant decline in the fair value of our CLO debt securities and we recognized a significant unrealized loss in the first quarter of 2020. We expect that the valuation of our CLO debt securities will remain volatile until the depth and duration of the current recession is better understood. While not nearly as significant, we recognized unrealized losses on other marketable securities, driven by lower market prices.
At this time, much of the country remains locked down. Fortunately, the nature of our business allows us to successfully conduct investment banking, trading, and asset management activities, even though our employees have been working remotely since mid-March. As with most market dislocations, buyers and sellers need some time to adjust to the new environment, which can especially delay strategic advisory transactions and sometimes leads to reduced outcomes. Additionally, companies looking toward IPOs or follow-on offerings will ordinarily postpone their plans until market volatility normalizes. While we continue to be actively engaged with our clients and customers in finding the best available opportunities and solutions, we expect that delayed closings will weigh on investment banking revenues for the second quarter and beyond.
An economic recession could have a material adverse effect on our business, financial condition, results of operations, or cash flows. We are closely monitoring the status of the COVID-19 pandemic and its impact on our business and the economy and capital markets globally. The unprecedented amount of Federal stimulus spending targeted at employees of small businesses, strategically important industries, and healthcare, may help stabilize the U.S. economy and capital markets. However, we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our business in the second quarter and beyond.
Deconsolidation of the CLOs and JMPCA in 2019
On January 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 of CLO III. The Company deconsolidated CLO III as of January 17, 2019. The Company continues to hold approximately 47% of the outstanding junior subordinated notes of CLO 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 of CLO III for the year ended December 31, 2019.
On March 19, 2019, the Company sold a 50.1% equity interest in JMP Credit Advisors LLC (“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. 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 in JMP 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 renamed Medalist Partners Corporate Finance LLC (“MPCF”).
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 the aforementioned CLOs as of March 19, 2019 (except CLO III which was deconsolidated on January 17, 2019). Previously the Company concluded that it was the primary beneficiary of CLO IV, CLO V, and CLO VI through its control over JMPCA and its ownership of 100% of the equity interests of these CLOs. Collectively, the Company recognized a loss on the deconsolidation of CLO IV, CLO V, and CLO VI of $1.8 million in March 2019 in revenues from principal transactions. The Company continues to hold 100% of the junior subordinated notes of CLO IV and CLO V and accounts for its ownership of these subordinated notes as an investment in a debt security and classifies them as available-for-sale securities. The Company owned approximately 33% of the equity interests of the CLO VI warehouse as of December 31, 2019. In February 2020, MPCF completed the securitization of Medalist Partners Corporate Finance CLO VI Ltd upon which the related CLO VI warehouse was liquidated. The Company does not hold any subordinated notes of Medalist Partners Corporate Finance CLO VI Ltd.
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 (through March 19, 2019). 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.
Private Capital Markets and Other Revenues
We earn fees for private capital markets and other services in connection with transactions that are not underwritten, such as private placements of equity securities, private investments in public equity (“PIPE”) transactions and Rule 144A offerings. We record private placement revenues on the closing date of these transactions. 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.
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.
The following table presents a summary of the Company’ s client assets under management with respect to the assets managed by HCS, JMP Asset Management LLC (“JMPAM”), HCAP Advisors LLC (“HCAP Advisors”) and assets managed by sponsored funds:
|
(In thousands)
|
|
Client Assets Under Management at
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Client Assets Managed by HCS, JMPAM, and HCAP Advisors (1)
|
|
$
|
549,140
|
|
|
$
|
594,678
|
|
|
Client Assets Under Management by Sponsored Funds (2)
|
|
|
5,135,699
|
|
|
|
5,381,432
|
|
|
|
|
|
|
|
|
|
|
|
|
JMP Group LLC total client assets under management
|
|
$
|
5,684,839
|
|
|
$
|
5,976,110
|
|
|
(1)
|
For HCS, JMPAM, and HCAP Advisors, client assets under management represent the net assets of such funds or the commitment amount.
|
|
(2)
|
Sponsored funds are third-party asset managers in which the Company owns an economic interest.
|
Principal Transactions
Principal transaction revenues include net realized and unrealized gains and losses resulting from our principal investments in equity and other securities for our own account as well as equity-linked warrants received from certain investment banking clients and limited partner investments in private funds managed by third parties. Principal transaction revenues also include earnings, or losses, attributable to interests in investment partnerships managed by our asset management subsidiaries, HCS and JMPAM, which are 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.
Gain (Loss) on Sale, Payoff, and Mark-to-Market of Loans
Gain (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”) recognized prior to the deconsolidation of the CLOs in the first quarter of 2019. 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.
Interest Income
Interest income primarily consists of interest income earned on loans collateralizing ABS issued (through March 19, 2019), 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.
On January 17, 2019, the non-call period for CLO III expired and the Company lost the ability to direct the most significant activities of CLO III. As a result, the Company deconsolidated CLO III as of January 17, 2019 and ceased recognizing interest income on loans collateralizing asset-backed securities for CLO III as of the date of sale.
On March 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 (through March 19, 2019), 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 of January 17, 2019 for CLO III and on March 19, 2019, for CLO IV, CLO V, and CLO VI warehouse.
Gain (loss) on Repurchase, Reissuance, or Early Retirement of Debt
Gain (loss) on repurchase, reissuance, or early retirement of debt primarily consists of gains recognized on repurchase of Senior Notes and losses incurred in the write-off of debt issuance costs related to Senior Notes that has been repurchased or retired sooner than the life of the instrument.
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; and 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, equity-based compensation, and medical and benefits expenses, as well as expenses for contractors and temporary employees. 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 on an annual basis, and for senior professionals these bonuses typically make up a large portion of their total compensation. A portion of the performance-based bonuses paid to certain senior professionals is paid in the form of deferred compensation. Bonus payments may have a greater impact on our cash position and liquidity in the periods in which they are paid than would otherwise be reflected in our Consolidated Statements of Operations. We accrue for the estimated amount of these bonus payments ratably over the applicable service period.
Compensation is accrued with specific ratios of total compensation and benefits to total revenues applied to specific revenue categories, with adjustments made if, in management’s opinion, such adjustments are necessary and appropriate to maintain competitive compensation levels.
Administration
Administration expense primarily includes the cost of hosted conferences, non-capitalized systems and software expenditures, insurance, business tax (non-income), office supplies, recruiting, and regulatory fees.
Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fees include the cost of floor and electronic brokerage and execution, securities clearance, and exchange fees. Changes in brokerage, clearing and exchange fees fluctuate largely in line with the volume of our sales and trading activity.
Travel and Business Development
Travel and business development expense primarily consists of costs incurred traveling to client locations for the purposes of executing transactions or meeting potential new clients, travel for administrative functions, and other costs incurred in developing new business. Travel costs related to existing clients for mergers and acquisitions and underwriting deals are sometimes reimbursed by clients. Under the new revenue standard ASC 606, reimbursed costs are presented as revenue on the Consolidated Statements of Operations.
Managed Deal Expenses
Managed deal expenses primarily relate to costs incurred and/or allocated in the execution of investment banking transactions, including reimbursable costs. Under the new revenue standard ASC 606, reimbursed costs are presented as revenue on the Consolidated Statements of Operations.
Communications and Technology
Communications and technology expense primarily relates to the cost of communication and connectivity, information processing, and subscriptions to certain market data feeds and services.
Occupancy Expenses
Occupancy costs primarily include payments made under operating leases that are recognized on a straight-line basis over the period of the lease 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
Since January 2015, JMP Group LLC has been a publicly traded partnership and, as such, has been taxed as a partnership, and not as a corporation, for U.S. federal income tax purposes, so long as 90% or more of its gross income for each taxable year constitutes “qualifying income.” On January 31, 2019, the Company filed an election with the U.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 of January 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 of March 31, 2020.
The Company records uncertain tax positions using a two-step process: (i) the Company determines whether it is more likely than not that each tax position will be sustained on the basis of the technical merits of the position; and (ii) for those tax positions that meet the more-likely-than not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than fifty percent likely to be realized upon ultimate settlement with the related tax authority.
The Company’s policy for recording interest and penalties associated with the tax audits or unrecognized tax benefits, if any, is to record such items as a component of income tax.
Non-controlling Interest
Non-controlling interest for the three months ended March 31, 2020 includes the interest of third parties in HCS Strategic Investments LLC (“HCS SI”) and HCAP Advisors. Non-controlling interest for the three months ended March 31, 2019 includes the interest of third parties in CLO III (through January 17, 2019), HCS SI, and HCAP Advisors.
Results of Operations
The following table sets forth our results of operations for the three months ended March 31, 2020 and 2019, and is not necessarily indicative of the results to be expected for any future period.
|
(In thousands)
|
|
Three Months Ended March 31,
|
|
|
Three Month Change From 2019 to 2020
|
|
|
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
14,625
|
|
|
$
|
11,879
|
|
|
$
|
2,746
|
|
|
|
23.1
|
%
|
|
Brokerage
|
|
|
4,187
|
|
|
|
4,535
|
|
|
|
(348
|
)
|
|
|
-7.7
|
%
|
|
Asset management fees
|
|
|
1,716
|
|
|
|
1,703
|
|
|
|
13
|
|
|
|
0.8
|
%
|
|
Principal transactions
|
|
|
(17,552
|
)
|
|
|
5,288
|
|
|
|
(22,840
|
)
|
|
|
-431.9
|
%
|
|
Loss on sale, payoff and mark-to-market of loans
|
|
|
-
|
|
|
|
(17
|
)
|
|
|
17
|
|
|
|
-100.0
|
%
|
|
Net dividend income
|
|
|
227
|
|
|
|
296
|
|
|
|
(69
|
)
|
|
|
-23.3
|
%
|
|
Other income
|
|
|
935
|
|
|
|
(35
|
)
|
|
|
970
|
|
|
|
-2771.4
|
%
|
|
Non-interest revenues
|
|
|
4,138
|
|
|
|
23,649
|
|
|
|
(19,511
|
)
|
|
|
-82.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,214
|
|
|
|
14,291
|
|
|
|
(12,077
|
)
|
|
|
-84.5
|
%
|
|
Interest expense
|
|
|
(1,782
|
)
|
|
|
(10,773
|
)
|
|
|
8,991
|
|
|
|
-83.5
|
%
|
|
Net interest income
|
|
|
432
|
|
|
|
3,518
|
|
|
|
(3,086
|
)
|
|
|
-87.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on repurchase, reissuance, or early retirement of debt
|
|
697
|
|
|
-
|
|
|
697
|
|
|
N/A
|
|
|
Total net revenues
|
|
|
5,267
|
|
|
|
27,167
|
|
|
|
(21,900
|
)
|
|
|
-80.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
16,213
|
|
|
|
17,222
|
|
|
|
(1,009
|
)
|
|
|
-5.9
|
%
|
|
Administration
|
|
|
2,222
|
|
|
|
1,929
|
|
|
|
293
|
|
|
|
15.2
|
%
|
|
Brokerage, clearing and exchange fees
|
|
|
634
|
|
|
|
701
|
|
|
|
(67
|
)
|
|
|
-9.6
|
%
|
|
Travel and business development
|
|
|
922
|
|
|
|
1,021
|
|
|
|
(99
|
)
|
|
|
-9.7
|
%
|
|
Managed deal expenses
|
|
|
588
|
|
|
|
533
|
|
|
|
55
|
|
|
|
10.3
|
%
|
|
Communications and technology
|
|
|
1,129
|
|
|
|
1,053
|
|
|
|
76
|
|
|
|
7.2
|
%
|
|
Occupancy
|
|
|
1,199
|
|
|
|
1,423
|
|
|
|
(224
|
)
|
|
|
-15.7
|
%
|
|
Professional fees
|
|
|
890
|
|
|
|
1,456
|
|
|
|
(566
|
)
|
|
|
-38.9
|
%
|
|
Depreciation
|
|
|
548
|
|
|
|
297
|
|
|
|
251
|
|
|
|
84.5
|
%
|
|
Other
|
|
|
-
|
|
|
|
495
|
|
|
|
(495
|
)
|
|
|
-100.0
|
%
|
|
Total non-interest expenses
|
|
|
24,345
|
|
|
|
26,130
|
|
|
|
(1,785
|
)
|
|
|
-6.8
|
%
|
|
Net income (loss) before income taxes
|
|
|
(19,078
|
)
|
|
|
1,037
|
|
|
|
(20,115
|
)
|
|
|
-1939.7
|
%
|
|
Income tax benefit
|
|
|
(7,239
|
)
|
|
|
(4,102
|
)
|
|
|
(3,137
|
)
|
|
|
76.5
|
%
|
|
Net income (loss)
|
|
|
(11,839
|
)
|
|
|
5,139
|
|
|
|
(16,978
|
)
|
|
|
-330.4
|
%
|
|
Less: Net income (loss) attributable to non-controlling interest
|
|
|
(91
|
)
|
|
|
70
|
|
|
|
(161
|
)
|
|
|
-230.0
|
%
|
|
Net income (loss) attributable to JMP Group LLC
|
|
$
|
(11,748
|
)
|
|
$
|
5,069
|
|
|
$
|
(16,817
|
)
|
|
|
-331.8
|
%
|
Operating Net Income (Non-GAAP Financial Measure)
Management uses Operating Net Income as a key, non-GAAP metric when evaluating the performance of JMP Group LLC’s core business strategy and ongoing operations, as management believes that this metric appropriately illustrates the operating results of JMP Group LLC’s core operations and business activities. Operating Net Income is derived from our segment reported results and is the measure of segment profitability on an after-tax basis used by management to evaluate our performance. This non-GAAP measure is presented to enhance investors’ overall understanding of the Company’s current financial performance. Additionally, management believes that Operating Net Income is a useful measure because it allows for a better evaluation of the performance of JMP Group LLC’s ongoing business and facilitates a meaningful comparison of the Company’s results in a given period to those in prior and future periods.
However, Operating Net Income should not be considered a substitute for results that are presented in a manner consistent with GAAP. A limitation of the non-GAAP financial measures presented is that, unless otherwise indicated, the adjustments concern gains, losses or expenses that JMP Group LLC generally expects to continue to recognize, and the adjustment of these items should not always be construed as an inference that these gains or expenses are unusual, infrequent or non-recurring. Therefore, management believes that both JMP Group LLC’s GAAP measures of its financial performance and the respective non-GAAP measures should be considered together. Operating Net Income may not be comparable to a similarly titled measure presented by other companies.
Operating Net Income is a non-GAAP financial measure that adjusts the Company’s GAAP net income as follows:
|
|
(i)
|
reverses compensation expense recognized under GAAP related to equity awards;
|
|
|
(ii)
|
recognizes 100% of the cost of deferred compensation in the period for which such compensation was awarded, instead of recognizing such cost over the vesting period as required under GAAP, in order to match compensation expense with the actual period upon which the compensation was based;
|
|
|
(iii)
|
reverses amortization expense related to an intangible asset resulting from the repurchase of a portion of the equity of CLO III prior to March 31, 2019;
|
|
|
(iv)
|
unrealized gains or losses on commercial real estate investments, adjusted for non-cash expenditures, including depreciation and amortization;
|
|
|
(v)
|
reverses net unrealized gains and losses on strategic equity investments and warrant positions;
|
|
|
(vi)
|
reverses impairment of CLO debt securities recognized in principal transaction revenues, as the Company believes that the forecasted reduction in future cash flows will be mitigated by a change in the interest rate environment and that distributions will be larger than currently projected;
|
|
|
(vii)
|
reverses the one-time transaction costs related to the refinancing or repurchase of the debt;
|
|
|
(viii)
|
a combined federal, state and local income tax rate of 26% at the consolidated taxable parent company, JMP Group LLC.
|
|
|
(ix)
|
presents revenues and expenses on a basis that deconsolidates the CLOs (through March 19, 2019) and removes any non-controlling interest in consolidated but less than wholly owned subsidiaries.
|
Discussed below is our Operating Net Income by segment. This information is reflected in a manner utilized by management to assess the financial operations of the Company’s various business lines.
|
|
|
Three Months Ended March 31, 2020
|
|
|
(In thousands)
|
|
Broker-Dealer
|
|
|
Asset Management
|
|
|
Corporate Costs
|
|
|
Eliminations
|
|
|
Total Segments
|
|
|
|
|
|
|
|
|
Asset Management Fee Income
|
|
|
Investment Income
|
|
|
Total Asset Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
14,625
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14,625
|
|
|
Brokerage
|
|
|
4,187
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,187
|
|
|
Asset management related fees
|
|
|
152
|
|
|
|
1,903
|
|
|
|
333
|
|
|
|
2,236
|
|
|
|
-
|
|
|
|
(45
|
)
|
|
|
2,343
|
|
|
Principal transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
81
|
|
|
|
81
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81
|
|
|
Net dividend income
|
|
|
-
|
|
|
|
-
|
|
|
|
256
|
|
|
|
256
|
|
|
|
-
|
|
|
|
-
|
|
|
|
256
|
|
|
Net interest income
|
|
|
-
|
|
|
|
-
|
|
|
|
458
|
|
|
|
458
|
|
|
|
-
|
|
|
|
-
|
|
|
|
458
|
|
|
Gain on repurchase, reissuance or early retirement of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
786
|
|
|
|
786
|
|
|
|
-
|
|
|
|
-
|
|
|
|
786
|
|
|
Total net revenues
|
|
|
18,964
|
|
|
|
1,903
|
|
|
|
1,914
|
|
|
|
3,817
|
|
|
|
-
|
|
|
|
(45
|
)
|
|
|
22,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses
|
|
|
19,201
|
|
|
|
2,362
|
|
|
|
151
|
|
|
|
2,513
|
|
|
|
1,792
|
|
|
|
(45
|
)
|
|
|
23,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating pre-tax net income (loss)
|
|
|
(237
|
)
|
|
|
(459
|
)
|
|
|
1,763
|
|
|
|
1,304
|
|
|
|
(1,792
|
)
|
|
|
-
|
|
|
|
(725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
(62
|
)
|
|
|
(120
|
)
|
|
|
459
|
|
|
|
339
|
|
|
|
(465
|
)
|
|
|
-
|
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating net income (loss)
|
|
$
|
(175
|
)
|
|
$
|
(339
|
)
|
|
$
|
1,304
|
|
|
$
|
965
|
|
|
$
|
(1,327
|
)
|
|
$
|
-
|
|
|
$
|
(537
|
)
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
(In thousands)
|
|
Broker-Dealer
|
|
|
Asset Management
|
|
|
Corporate Costs
|
|
|
Eliminations
|
|
|
Total Segments
|
|
|
|
|
|
|
|
|
Asset Management Fee Income
|
|
|
Investment Income
|
|
|
Total Asset Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
11,879
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,879
|
|
|
Brokerage
|
|
|
4,535
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,535
|
|
|
Asset management related fees
|
|
|
6
|
|
|
|
2,361
|
|
|
|
46
|
|
|
|
2,407
|
|
|
|
-
|
|
|
|
(1,014
|
)
|
|
|
1,399
|
|
|
Principal transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
5,387
|
|
|
|
5,387
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,387
|
|
|
Loss on sale, payoff, and mark-to-market of loans
|
|
|
-
|
|
|
|
-
|
|
|
|
(17
|
)
|
|
|
(17
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(17
|
)
|
|
Net dividend income
|
|
|
-
|
|
|
|
-
|
|
|
|
335
|
|
|
|
335
|
|
|
|
-
|
|
|
|
-
|
|
|
|
335
|
|
|
Net interest income
|
|
|
-
|
|
|
|
-
|
|
|
|
3,322
|
|
|
|
3,322
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
16,420
|
|
|
|
2,361
|
|
|
|
9,073
|
|
|
|
11,434
|
|
|
|
-
|
|
|
|
(1,014
|
)
|
|
|
26,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses
|
|
|
17,900
|
|
|
|
3,090
|
|
|
|
2,549
|
|
|
|
5,639
|
|
|
|
2,060
|
|
|
|
(1,014
|
)
|
|
|
24,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating pre-tax net income (loss)
|
|
|
(1,480
|
)
|
|
|
(729
|
)
|
|
|
6,524
|
|
|
|
5,795
|
|
|
|
(2,060
|
)
|
|
|
-
|
|
|
|
2,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
(385
|
)
|
|
|
(191
|
)
|
|
|
1,697
|
|
|
|
1,506
|
|
|
|
(535
|
)
|
|
|
-
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating net income (loss)
|
|
$
|
(1,095
|
)
|
|
$
|
(538
|
)
|
|
$
|
4,827
|
|
|
$
|
4,289
|
|
|
$
|
(1,525
|
)
|
|
$
|
-
|
|
|
$
|
1,669
|
|
The following table reconciles operating net income (loss) to Total Segments operating pre-tax net income, and also to consolidated pre-tax net income (loss) attributable to JMP Group LLC and to consolidated net income (loss) attributable to JMP Group LLC for the three months ended March 31, 2020 and 2019.
|
(In thousands)
|
|
Three Months Ended March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Consolidated net income (loss) attributable to JMP Group LLC
|
|
$
|
(11,748
|
)
|
|
$
|
5,069
|
|
|
Income tax benefit
|
|
|
(7,239
|
)
|
|
|
(4,102
|
)
|
|
Consolidated pre-tax net income (loss) attributable to JMP Group LLC
|
|
$
|
(18,987
|
)
|
|
$
|
967
|
|
|
Addback (subtract):
|
|
|
|
|
|
|
|
|
|
Share-based awards and deferred compensation
|
|
|
(546
|
)
|
|
|
(844
|
)
|
|
Early retirement of debt
|
|
|
(89
|
)
|
|
|
-
|
|
|
Impairment of CLO debt securities
|
|
|
(13,523
|
)
|
|
|
-
|
|
|
Amortization of intangible asset – CLO III
|
|
|
-
|
|
|
|
(277
|
)
|
|
Unrealized loss in real estate fund investment – depreciation and amortization
|
|
|
(338
|
)
|
|
|
(557
|
)
|
|
Unrealized mark-to-market gain (loss) on strategic equity investments
|
|
|
(3,766
|
)
|
|
|
390
|
|
|
Total consolidation adjustments and reconciling items
|
|
|
(18,262
|
)
|
|
|
(1,288
|
)
|
|
Total segments adjusted operating pre-tax net income (loss)
|
|
$
|
(725
|
)
|
|
$
|
2,255
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtract (addback) of segment income tax expense (benefit)
|
|
|
(188
|
)
|
|
|
586
|
|
|
Operating net income (loss)
|
|
$
|
(537
|
)
|
|
$
|
1,669
|
|
Overview
Total net revenues were $27.2 million for the quarter ended March 31, 2019 and $5.3 million for the same period in 2020.
Non-interest revenues decreased $19.5 million, or 82.5%, from $23.6 million for the quarter ended March 31, 2019 to $4.1 million in the same period in 2020. This decrease was primarily driven by a $22.8 million decrease in principal transaction revenues, partially offset by a $2.7 increase in investment banking revenues.
Net interest income decreased $3.1 million, or 87.7%, from $3.5 million for the quarter ended March 31, 2019 to $0.4 million for the quarter ended March 31, 2020. The decrease in net interest income was due to the deconsolidation of the CLOs during the three month period ended March 31, 2019.
Gain on repurchase, reissuance, or early retirement of debt increased $0.7 million from zero for the quarter ended March 31, 2019 to $0.7 million for the quarter ended March 31, 2020.
Total non-interest expenses decreased $1.8 million, or 6.8%, from $26.1 million for the quarter ended March 31, 2019 to $24.3 million for the quarter ended March 31, 2020, primarily due to a $1.0 million decrease in compensation and benefits.
Net income attributable to non-controlling interest decreased $0.2 million, or 230.0%, from net income of $0.1 million for the quarter ended March 31, 2019 to a net loss of $0.1 million for the quarter ended March 31, 2020. The decrease in net income attribute to non-controlling interest is due to the deconsolidation of CLO III during the three months ended March 31, 2019.
Net income attributable to JMP Group LLC decreased $16.8 million, or 331.8%, from a net income of $5.1 million for the quarter ended March 31, 2019 to a net loss of $11.7 million for the quarter ended March 31, 2020. The decrease in net income attributable to JMP Group LLC was primarily due to the decreased non-interest revenues earned in the quarter ended March 31, 2020 compared to the same period in 2019.
Revenues
Investment Banking
Investment banking revenues, earned in our Broker-Dealer segment, increased $2.7 million, or 23.1%, from $11.9 million for the quarter ended March 31, 2019 to $14.6 million for the same period in 2020. As a percentage of total net revenues, investment banking revenues increased from 43.7% for the quarter ended March 31, 2019 to 277.7% for the quarter ended March 31, 2020. On an operating basis, investment banking revenues were 64.3% and 44.3% for the quarters ended March 31, 2020 and 2019, respectively, as a percentage of total net revenues.
|
(Dollars in thousands)
|
|
Three Months Ended March 31,
|
|
|
Change from 2020 to 2019
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Count
|
|
|
Revenues
|
|
|
Count
|
|
|
Revenues
|
|
|
Count
|
|
|
$
|
|
|
%
|
|
|
Equity and debt origination
|
|
|
17
|
|
|
$
|
8,556
|
|
|
|
17
|
|
|
$
|
6,789
|
|
|
|
0
|
|
|
$
|
1,767
|
|
|
|
26.0
|
%
|
|
Strategic advisory and private placements
|
|
|
4
|
|
|
|
6,069
|
|
|
|
6
|
|
|
|
5,090
|
|
|
|
(2
|
)
|
|
$
|
979
|
|
|
|
19.2
|
%
|
|
Total
|
|
|
21
|
|
|
$
|
14,625
|
|
|
|
23
|
|
|
$
|
11,879
|
|
|
|
(2
|
)
|
|
$
|
2,746
|
|
|
|
23.1
|
%
|
The increase in revenues was driven by an 8.7% decrease in the number of transactions executed and a 34.8% increase in the average size of the fee paid per transaction. The number of transactions in which we acted as a bookrunning manager was two and three for the quarters ended March 31, 2020 and 2019, respectively.
Brokerage Revenues
Brokerage revenues earned in our Broker-Dealer segment decreased from $4.5 million for the quarter ended March 31, 2019 to $4.2 million for the quarter ended March 31, 2020. Brokerage revenues increased as a percentage of total net revenues, from 16.7% for the quarter ended March 31, 2019 to 79.5% for the quarter ended March 31, 2020. On an operating basis, brokerage revenues were 18.4% and 16.9% for the quarters ended March 31, 2020 and 2019, respectively, as a percentage of total net revenues.
|
(In thousands)
|
|
Three Months Ended March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Asset management related fees:
|
|
|
|
|
|
|
|
|
|
Fees reported as asset management fees
|
|
$
|
1,716
|
|
|
$
|
1,703
|
|
|
Fees reported as other income
|
|
|
935
|
|
|
|
(35
|
)
|
|
Less: non-controlling interests
|
|
|
(308
|
)
|
|
|
(269
|
)
|
|
Total segment asset management related fee revenues
|
|
$
|
2,343
|
|
|
$
|
1,399
|
|
Fees reported as asset manage
ment fees were $1.7 million for both of the quarters ended March 31, 2020 and 2019, respectively. As a percentage of total net revenues, asset management revenues increased from 6.3% for the quarter ended March 31, 2019 to 32.6% for the quarter ended March 31, 2020.
Total segment asset management-related fees include base management fees and incentive fees from our assets under management, as well as other income from fee-sharing arrangements with, and fees earned to raise capital for, third-party or equity-method investment partnerships or funds. Total segment asset management-related fee revenues are reconciled to the GAAP measure, total asset management fee revenues, in the table above. We believe that presenting operating asset management-related fees is useful to investors as a means of assessing the performance of our combined asset management activities, including fundraising and other services for third parties. We also believe that asset management-related fee revenue is a more meaningful measure than standalone asset management fees as reported, because asset management-related fee revenues represent the combined impact of the various asset management activities on the Company’s total net revenues.
Total segment asset management related fee revenue increased $0.9 million from $1.4 million for the quarter ended March 31, 2019 to $2.3 million for the quarter ended March 31, 2020. On an operating basis, asset management related fee revenues were 10.3% and 5.2% for the quarters ended March 31, 2020 and 2019, respectively, as a percentage of total net revenues.
Principal transaction revenues decreased $22.8 million from a gain of $5.3 million for the quarter ended March 31, 2019 to a loss of $17.5 million for the same period in 2020. This decrease was primarily driven by a $13.5 million impairment loss on CLO debt securities included in principal transaction revenues for the quarter ended March 31, 2020 and a $3.4 million gain on deconsolidation of JMPCA included in the same period in 2019.
Total segment principal transaction revenues decreased from a gain of $5.4 million for the quarter ended March 31, 2019 to a gain of $0.1 million for the same period in 2020. Total segment principal transaction revenues are a non-GAAP financial measure that aggregates our segment reported principal transaction revenues across each segment. The principal transaction revenues for both 2020 and 2019 were included in our Investment Income segment. Total segment principal transaction revenues are reconciled to the GAAP measure, total principal transaction revenues, in the table below. See the Operating Net Income section above for additional information on the adjustments made to arrive at the non-GAAP measure and why management believes that this non-GAAP number is useful and important to the users of these financial statements.
|
(In thousands)
|
|
Three Months Ended March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity and other securities
|
|
$
|
(824
|
)
|
|
$
|
1,461
|
|
|
Warrants and other investments
|
|
|
907
|
|
|
|
4,308
|
|
|
Investment partnerships
|
|
|
(2
|
)
|
|
|
(382
|
)
|
|
Total segment principal transaction revenues
|
|
|
81
|
|
|
|
5,387
|
|
|
Operating adjustment addbacks
|
|
|
(17,633
|
)
|
|
|
(99
|
)
|
|
Total principal transaction revenues
|
|
$
|
(17,552
|
)
|
|
$
|
5,288
|
|
The decrease in principal transaction revenue in the quarter ended March 31, 2020 compared to the same period in 2019 is primarily attributed to the $3.4 million gain on deconsolidation of JMPCA that was recognized in 2019, a $0.8 million decrease in gains on investments in real estate and a $1.5 million decrease in revenues related to the Company’s principal trading activity. On an operating basis, as a percentage of total net revenues, principal transaction revenues increased from 20.1% for the quarter ended March 31, 2019 to 0.4% for the quarter ended March 31, 2020.
Gain (Loss) on Sale, Payoff, and Mark-to-Market of Loans
Gain (loss) on sale, payoff, and mark-to-market of loans increased from a loss of $17 thousand for the quarter ended March 31, 2019 to zero for the quarter ended March 31, 2020.
Net Dividend Income
Net dividend income decreased $0.1 million, from $0.3 million for the quarter ended March 31, 2019 to $0.2 million for the quarter ended March 31, 2020. Net dividend income primarily related to dividends from our HCC investment.
Net Interest Income/Expense
Net interest income decreased $3.1 million from $3.5 million for the quarter ended March 31, 2019 to $0.4 million for the quarter ended March 31, 2020. The decrease in net interest income was driven primarily by a $4.0 million decrease in net interest earned on the CLOs, which were deconsolidated during the three months ended March 31, 2019, partially offset by a $1.4 million increase in net interest income earned on the retained interest in CLO subordinated notes. As a percentage of total net revenues, net interest income was 12.9% for the quarter ended March 31, 2019 and 8.2% for the quarter ended March 31, 2020.
Total segment net interest income decreased from $3.3 million for the quarter ended March 31, 2019 to $0.5 million for the quarter ended March 31, 2020. Net interest income is earned in our Investment Income segment and reflects our portion of the net CLO contractual interest before deconsolidation in the first quarter of 2019, net of bond interest expense. Total segment net interest income after deconsolidation reflects the effective yield of the Company's ownership of subordinated notes in CLO III, CLO IV, and CLO V, net of bond interest expense. As a percentage of total segment net revenues, net interest income was 12.4% for the quarter ended March 31, 2019 and 2.0% for the quarter ended March 31, 2020.
Gain on Repurchase, Reissuance, or Early Retirement of Debt
Gain on repurchase, reissuance, or early retirement of debt increased $0.7 million from zero for the quarter ended March 31, 2019 to $0.7 million for the quarter ended March 31, 2020. The increase was driven primarily by the repurchase of $1.4 million and $0.7 million par value of its issued and outstanding 2019 Senior Notes and 2017 Senior Notes, respectively.
Expenses
Non-Interest Expenses
Compensation and Benefits
Compensation and benefits, which includes employee payroll, taxes and benefits, performance-based cash bonus and commissions, as well as equity-based compensation to our employees and managing directors, decreased $1.0 million, or 5.9%, from $17.2 million for the quarter ended March 31, 2019 to $16.2 million for the quarter ended March 31, 2020.
Employee payroll, taxes and benefits, and consultant fees increased $0.1 million from $11.3 million for the quarter ended March 31, 2019 to $11.4 million for the quarter ended March 31, 2020. Performance-based bonus and commission decreased $1.0 million from $5.4 million for the quarter ended March 31, 2019 to $4.4 million for the quarter ended March 31, 2020.
Equity-based compensation decreased $0.1 million from $0.5 million for the quarter ended March 31, 2019 to $0.4 million for the quarter ended March 31, 2020
Compensation and benefits as a percentage of revenues increased from 63.4% of total net revenues for the quarter ended March 31, 2019 to 307.8% for the quarter ended March 31, 2020. The increase in the compensation and benefits as a percentage of revenues is primarily due to the decrease in total net revenues from the three months ended March 31, 2019 compared to the same period in 2020. As employee bonuses are performance based and make up a substantial portion of total compensation, decreased total net revenues has decreased the total compensation for the period. However, compensation and benefits as a percentage of revenues increased due to lower net revenues in the quarter ended March 31, 2020 compared to the same period on 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 $0.7 million from $16.4 million for the quarter ended March 31, 2019 to $15.7 million for the quarter ended March 31, 2020. As a percent of total segment net revenues, compensation and benefits were 61.0% for the quarter ended March 31, 2019 and 68.9% for the quarter ended March 31, 2020.
Administration
Administration expense increased $0.3 million from $1.9 million for the quarter ended March 31, 2019 to $2.2 million for the quarter ended March 31, 2020. As a percentage of total net revenues, administration expense were 42.2% and 7.1% for the quarters ended March 31, 2020 and 2019, respectively.
Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fees were $0.6 million and $0.7 million for the quarters ended March 31, 2020 and 2019, respectively. As a percentage of total net revenues, our brokerage, clearing and exchange fees were 12.0% and 2.6% for the quarters ended March 31, 2020 and 2019, respectively.
Travel and Business Development
Travel and business development expenses were $0.9 million and $1.0 million for the quarters ended March 31, 2020 and 2019, respectively. As a percentage of total net revenues, travel and business development expense was 17.5% and 3.8% for the quarters ended March 31, 2020 and 2019, respectively.
Managed deal expenses
Managed deal expenses were $0.6 million and $0.5 million for the quarters ended March 31, 2020 and 2019, respectively. As a percentage of total net revenues, managed deal expenses were 11.2% and 2.0% for the quarters ended March 31, 2020 and 2019, respectively.
Communications and Technology
Communications and technology expenses were $1.1 million for both of the quarters ended March 31, 2020 and 2019. As a percentage of total net revenues, communications and technology expense were 21.4% and 3.9% for the quarters ended March 31, 2020 and 2019, respectively.
Occupancy
Occupancy expenses were $1.2 million and $1.4 million for the quarters ended March 31, 2020 and 2019, respectively. As a percentage of total net revenues, occupancy expenses were 22.8% and 5.2% for the quarters ended March 31, 2020 and 2019, respectively.
Professional Fees
Professional fees were $0.9 million and $1.5 million for the quarters ended March 31, 2020 and 2019, respectively. As a percentage of total net revenues, professional fees were 16.9% and 5.4% for the quarters ended March 31, 2020 and 2019, respectively.
Depreciation
Depreciation expenses were $0.5 million and $0.3 million for the quarters ended March 31, 2020 and 2019, respectively. As a percentage of total net revenues, depreciation was 10.4% and 1.1% for the quarters ended March 31, 2020 and 2019, respectively.
Other Expenses
Other expenses were zero and $0.5 million for the quarters ended March 31, 2020 and 2019, respectively. As a percentage of total net revenues, other expenses were 0.0% and 1.8% for the quarters ended March 31, 2020 and 2019, respectively.
Net Income Attributable to Non-controlling Interest
Net income attributable to non-controlling interest decreased from net income of $0.1 million for the quarter ended March 31, 2019 to net loss of $0.1 million for the quarter ended March 31, 2020. Non-controlling interest for the quarter ended March 31, 2019 includes the interest of third parties in CLO III, HCAP Advisors, and HCS SI. Non-controlling interest for the quarter ended March 31, 2020 includes the interest of third parties in HCAP Advisors and HCS SI.
Provision for Income Taxes
Income tax benefit was $7.2 million and $4.1 million for the quarters ended March 31, 2020 and 2019, respectively. The Company's tax benefit increased for the quarter ended March 31, 2020 from March 31, 2019 due to a decrease from net income to a net loss from 2019 to 2020.
For financial reporting purposes, the Company’s effective tax rate used for the interim periods is based on the estimated full-year income tax rate. The effective tax rate differs from the statutory rate primarily due to the net operating loss carryback that was created in prior year which was subsequently carried back to offset years with taxable income that was derived from a different corporate tax rate.
Segment income tax was a $0.2 million benefit and $0.6 million expense for the quarters ended March 31, 2020 and 2019, respectively.
For the quarters ended March 31, 2020 and 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.
Beginning January 1, 2019, the Company elected to be treated as a C corporation for tax purposes, rather than a partnership, which resulted in the Company recognizing initial temporary differences between the book and tax basis of assets and liabilities that were previously held under pass through entities.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted in response to market conditions related to the coronavirus (COVID-19) pandemic. The CARES Act includes many measures to help companies, including changes that are temporary and non-income based tax laws, some of which were part of the Tax Cuts and Jobs Act (TCJA). The Company has made reasonable assessments in accounting for certain effects of the CARES Act that was passed. However, the provisional impacts may be refined over the prescribed measurement period.
The Company recognizes deferred tax assets and liabilities in accordance with ASC 740, Income Taxes, and are determined based upon the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse.
Summarized Financial Information
JMP Group Inc., a wholly-owned subsidiary of JMP Group LLC, is the primary obligor of the Company’s 7.25% Senior Notes due 2027 (the “2017 Senior Notes”) (Note 7). Pursuant to the indenture of the 2017 Senior Notes, JMP Group LLC and JMP Investment 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 of JMP Group Inc. under the indenture governing the 2017 Senior Notes.
The following summarized financial information presents the information of JMP Group LLC, JMP Investment Holdings LLC and JMP Group Inc. on a combined basis and eliminates intercompany balances. It does not include or present investments in subsidiaries that are not an issuer or guarantor. One of the non-guarantor subsidiaries not combined, JMP Securities, is subject to certain regulations, which require the maintenance of minimum net capital. This requirement may limit the issuer’s access to this subsidiary’s assets.
These disclosures are in accordance with the new disclosure requirements under SEC Regulation S-X Rule 3-10 and Rule 13-02 issued in March 2020. We have early adopted these disclosure rules.
The tables below present summarized financial information as of March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020.
|
(In thousands)
|
|
As of
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,203
|
|
|
$
|
12,557
|
|
|
Marketable securities owned, at fair value
|
|
$
|
27,240
|
|
|
$
|
34,203
|
|
|
Due from non-obligated subsidiaries
|
|
$
|
1,221
|
|
|
$
|
200
|
|
|
Deferred tax asset
|
|
$
|
18,010
|
|
|
$
|
18,547
|
|
|
Operating lease right-of-use asset
|
|
$
|
18,802
|
|
|
$
|
19,632
|
|
|
Total assets
|
|
$
|
91,963
|
|
|
$
|
99,100
|
|
|
|
|
|
|
|
|
|
|
|
|
Bond payable, net of debt issuance costs
|
|
$
|
80,636
|
|
|
$
|
82,584
|
|
|
Due to non-obligated subsidiaries
|
|
$
|
19,212
|
|
|
$
|
20,912
|
|
|
Operating lease liability
|
|
$
|
24,359
|
|
|
$
|
25,394
|
|
|
Total liabilities
|
|
$
|
135,645
|
|
|
$
|
140,377
|
|
|
Total equity
|
|
$
|
(43,682
|
)
|
|
$
|
(41,276
|
)
|
|
Total liabilities and equity
|
|
$
|
91,963
|
|
|
$
|
99,101
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
(8,027
|
)
|
|
Total non-interest expenses
|
|
$
|
1,952
|
|
|
Net loss
|
|
$
|
(5,452
|
)
|
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 three months ended March 31, 2020 to demonstrate where our capital is invested and the financial condition of the Company.
Overview
As a result of the COVID-19 pandemic, we expect to experience reduced cash flow from operations as a result of decreased revenues. We expect certain costs to decline as the underlying activities are restricted by the COVID-19 pandemic, including travel and related expenses. In addition, even before the market upheaval due to the COVID-19 pandemic, we were focused on cutting our non-compensation costs materially during 2020. Reduced cash spending from those factors should partially offset the reduced cash flow from decreased revenues. However, the extent to which the COVID-19 pandemic will impact our liquidity in the second quarter and beyond remains uncertain. As of March 31, 2020, we had $38.4 million in cash and cash equivalents and $17.9 million in undrawn borrowing capacity on our revolving line of credit. Based on our historical results, management's experience and our current business strategy, we believe that our existing cash resources and available credit will be sufficient to meet anticipated working capital and capital expenditure requirements for at least the next twelve months.
As of March 31, 2020, we had net liquid assets of $88.5 million primarily consisting of cash and cash equivalents, receivable from clearing broker, marketable securities owned, and investment banking receivables, net of marketable securities sold but not yet purchased and accrued compensation. We have satisfied our capital and liquidity requirements primarily through the issuance of the Senior Notes, draws on a line of credit, and internally generated cash from operations. Most of our financial instruments, other than loans held for investment and certain marketable securities, are recorded at fair value or amounts that approximate fair value.
Liquidity Considerations
As of March 31, 2020, our material indebtedness consisted of our then outstanding Senior Notes and borrowing on our revolving line of credit with City National Bank (“CNB”) under the Credit Agreement described below.
Senior Notes
In January 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 on July 31, 2018 and recorded a loss of $0.2 million related to this partial retirement of the 2013 Senior Notes. On July 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. On September 27, 2019, the Company announced JMP Group Inc.’s intention to redeem all of the remaining issued and outstanding 2013 Senior Notes on October 28, 2019. The Company opted to satisfy and discharge its obligations under the 2013 Senior Notes as of September 27, 2019 by paying the principal and owed interest through the redemption date to the trustee, U.S. Bank National Association. On September 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 ended September 30, 2019.
In November 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 on November 15, 2027 and may be redeemed in whole or in part at any time or from time to time at JMP Group Inc.’s option on or after November 28, 2020 at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The 2017 Senior Notes bear interest at a rate of 7.25% per year, payable quarterly on February 15, May 15, August 15 and November 15 of each year. Pursuant to the indenture of the 2017 Senior Notes, JMP Group LLC and JMP Investment 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 of JMP Group Inc. under the indenture governing the 2017 Senior Notes.
In September 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 on September 30, 2029 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after September 30, 2021 at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The 2019 Senior Notes bear interest at a rate of 6.875% per year, payable quarterly on March 30, June 30, September 30, and December 30 of each year.
In March 2020, the Company repurchased $1.4 million and $0.7 million par value of its issued and outstanding 2019 Senior Notes and 2017 Senior Notes, respectively. Since they were repurchased at less than carrying value, a gain of $0.7 million was recognized upon the repurchase of the bonds, which has been included in the Consolidated Statements of Operations, gain on repurchase, reissuance or early retirement of debt.
JMP Holding LLC Credit Agreement with CNB
JMP Holding LLC (the “Borrower”), a wholly owned subsidiary of the Company, entered into a Second Amended and Restated Credit Agreement dated April 30, 2014 among the Borrower, the lenders from time to time party thereto (the “Lenders”) and CNB, as administrative agent for the Lenders (as amended, the “Credit Agreement”).
The Credit Agreement provides a $25.0 million revolving line of credit (the “Revolver”) through December 31, 2020. On such date, if the revolving period has not been previously extended, any outstanding amounts under the Revolver would convert to a term loan (the “Converted Term Loan”). The Converted Term Loan must be repaid in 12 quarterly installments commencing on January 1, 2021, with each of the first six installments being equal to 3.75% of the principal amount of the Converted Term Loan and each of the next six installments being equal to 5.0% of the principal amount of the Converted Term Loan. A final payment of all remaining principal and interest due under the Converted Term Loan must be made at the earlier of: (a) December 31, 2023; or (b) if certain liquidity requirements are not satisfied by the Company, the date that is last day of the fiscal quarter ending most recently (but no less than 60 days) prior to the earliest maturity date of any senior unsecured notes issued by JMP Group Inc. or JMP Group LLC then outstanding.
The Credit Agreement provides that the Revolver may be used, on a revolving basis, to fund specified permitted investments in collateralized loan obligation vehicles. In addition, up to $5.0 million of the Revolver may be used, on a revolving basis, to fund other types of permitted investments and acquisitions and for working capital.
As of March 31, 2020, the Borrower had drawn $6.0 million against the Revolver and had letters of credit outstanding under this facility to support office lease obligations of approximately $1.1 million in the aggregate.
The Credit Agreement contains financial and other covenants, including, but not limited to, limitations on debt, liens and investments, as well as the maintenance of certain financial covenants. The Credit Agreement also includes an event of default for a “change of control” that tests, in part, the composition of our ownership and an event of default if three or more of the members of the Company’s executive committee fail to be involved actively on an ongoing basis in the management of the Company or any of its subsidiaries. A violation of any one of these covenants could result in a default under the Credit Agreement, which would permit CNB to terminate our Revolver or Converted Term Loan and require the immediate repayment of any outstanding principal and interest. In addition, our subsidiaries are restricted under the Credit Agreement under certain circumstances from making distributions to us if an event of default has occurred under the Credit Agreement.
As of March 31, 2020 and December 31, 2019, we were in compliance with the loan covenants under the Credit Agreement.
The Borrowers’s obligations under the Credit Agreement are guaranteed by all of the Company’s other wholly owned subsidiaries (other than JMP Securities and certain dormant subsidiaries) and are secured by substantially all of its and the guarantors’ assets. In addition, we have entered into a limited recourse pledge agreement with CNB whereby JMP Group LLC granted a lien on the equity interests in JMP Investment Holdings LLC and JMPAM to secure the Borrower’s obligations under the Credit Agreement.
JMP Securities LLC Revolving Note Agreement with CNB
Under a Revolving Note and Cash Subordination Agreement (as amended, the “Revolving Note Agreement”) and related Revolving Note (as amended, the “Revolving Note”), each dated April 8, 2011, JMP Securities holds a $20.0 million revolving line of credit with CNB to be used for regulatory capital purposes in connection with its securities underwriting activities. Advances under the Revolving Note Agreement bear interest at CNB’s announced prime interest rate. The unused portion of the line bears interest at the rate of 0.25% per annum, paid monthly.
On June 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 until June 8, 2020. On June 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 March 31, 2020 and December 31, 2019.
The Revolving Note Agreement contains financial and other covenants. A violation of any one of these covenants could result in a default under the Revolving Note, which would permit CNB to terminate the Revolving Note and require the immediate repayment of any outstanding principal and interest, subject to the terms of the Revolving Note Agreement.
At both March 31, 2020 and December 31, 2019, JMP Securities was in compliance with the loan covenants under the Revolving Note Agreement.
JMP Securities’ obligations under the Revolving Note Agreement are guaranteed by all of the Company’s wholly owned subsidiaries (other than JMP Securities and certain dormant subsidiaries) and are secured by substantially all the guarantors’ assets.
Other JMP Group LLC considerations
On May 13, 2019, the Company launched a self-tender offer (the “2019 Tender Offer”) to repurchase for cash up to 3,000,000 of shares representing limited liability company interests of the Company. On June 13, 2019, the Company repurchased 1,816,732 shares under the 2019 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 2019 Tender Offer.
On February 24, 2020 the Company launched a second self-tender offer (the “2020 Tender Offer”) to repurchase for cash up to 3,000,000 of shares at $3.25 a share, representing limited liability company interests of the Company, which was terminated on March 19, 2020 as a result of multiple conditions to the 2020 Tender Offer, including share price and market index conditions, not having been satisfied.
During the three months ended March 31, 2020, the Company did not repurchase any of the Company's shares.
On February 19, 2020, the Company suspended its quarterly cash distributions program on outstanding shares.
Upon the securitization of Medalist Partners Corporate Finance CLO VI in February 2020, the Company received $13.7 million in cash from the CLO VI warehouse and recognized a gain of $1.0 million.
The timing of bonus compensation payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees and managing directors are generally paid semi-monthly during the year, bonus compensation, which makes up a larger portion of total compensation, is generally paid once a year during the first two months of the following year. In the first two months of 2020, we paid out $26.9 million of cash bonuses for 2019, including employer payroll tax expense.
We had total restricted cash of $1.3 million comprised primarily of restricted cash at JMP Group Inc. related to the Company’s letters of credit on leasing arrangements.
JMP Securities, our wholly-owned subsidiary and a registered securities broker-dealer, is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital, as defined, and requires that the ratio of aggregate indebtedness to net capital, both as defined under the Exchange Act, shall not exceed 15 to 1. JMP Securities had net capital of $8.6 million and $16.9 million, which were $7.6 million and $15.5 million in excess of the required net capital of $1.0 million and $1.4 million, at March 31, 2020 and December 31, 2019, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 1.23 to 1 and 1.25 to 1 at March 31, 2020 and December 31, 2019, respectively.
A condensed table of cash flows for the three months ended March 31, 2020 and 2019 is presented below.
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(Dollars in thousands)
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Three Months Ended March 31,
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Change from 2019 to 2020
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|
|
|
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2020
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|
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2019
|
|
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$
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|
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%
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|
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Cash flows used in operating activities
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$
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(23,243
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)
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$
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(43,378
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)
|
|
|
20,135
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|
|
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-46.4
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%
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Cash flows provided by (used in) investing activities
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|
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13,423
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|
|
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(50,513
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)
|
|
|
63,936
|
|
|
|
-126.6
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%
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Cash flows (used in) provided by financing activities
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|
|
(1,375
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)
|
|
|
4,213
|
|
|
|
(5,588
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)
|
|
|
-132.6
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%
|
|
Total cash flows
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|
$
|
(11,195
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)
|
|
$
|
(89,678
|
)
|
|
$
|
78,483
|
|
|
|
-87.5
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%
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Cash Flows for the three months ended March 31, 2020
Cash decreased by $11.2 million during the three months ended March 31, 2020 as a result of cash used in operating and financing activities, partially offset by cash provided by investing activities.
Our operating activities used $23.2 million of cash from a net loss of $11.8 million, adjusted for the cash used by operating assets and liabilities of $11.2 million. The cash used by the change in operating assets and liabilities was primarily due to a decrease in accrued compensation of $24.7 million, increase in other assets of $5.9 million, partially offset by an $18.8 million decrease in marketable securities, and a $3.3 million decrease in receivables.
Our investing activities provided $13.4 million of cash primarily due to a $13.7 million in sales from other investments.
Our financing activities used $1.4 million of cash primarily due to $1.3 million repurchase of bonds payable.
Cash Flows for the three months ended March 31, 2019
Cash decreased by $89.7 million during the three months ended March 31, 2019, as a result of cash used in operating and investing activities, partially offset by cash provided by financing activities.
Our operating activities used $43.4 million of cash from the net income of $5.1 million, adjusted for the cash used by operating assets and liabilities of $46.2 million, and adjusted by non-cash revenue and expense items of $2.3 million. The cash used by the change in operating assets and liabilities was primarily due to a decrease in accrued compensation of $35.7 million, an increase in other assets of $8.0 million, an increase in interest receivable of $4.8 million, and a decrease in interest payable of $3.5 million, partially offset by a $3.2 million increase in other liabilities and a $3.6 million decrease in marketable securities.
Our investing activities used $50.5 million of cash primarily due to a $35.2 million funding of loans collateralizing asset-backed securities issued, $27.8 million decrease in cash and restricted cash due to deconsolidation of subsidiaries, and $25.1 million of funding of loans held for investment, partially offset by $23.8 million of receipts from loans collateralizing asset-backed securities issued, $8.3 million of receipts from sales and distributions from other investments, and $6.9 million in receipts from loans held for investment.
Our financing activities provided $4.2 million of cash primarily due to $7.8 million of proceeds from the drawdowns the CLO warehouse facility, partially offset by $1.1 million in distributions and distribution equivalents on common shares and RSUs and $0.9 million of distributions to non-controlling interest shareholders.
Contractual Obligations
As of March 31, 2020, our aggregate minimum future commitment on our leases was $28.1 million. See Note 9 of the notes to the consolidated financial statements for more information. Our remaining contractual obligations have not materially changed from those reported in our Annual Report.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of March 31, 2020. 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 “Risk Factors” in our Annual Report cause actual events to differ from the assumptions we used in applying the accounting policies, our results of operations, financial condition and liquidity could be adversely affected.
On an ongoing basis, we evaluate our estimates and assumptions, particularly as they relate to accounting policies that we believe are most important to the presentation of our financial condition and results of operations. We regard an accounting estimate or assumption to be most important to the presentation of our financial condition and results of operations where:
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•
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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
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•
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the impact of the estimates or assumptions on our financial condition or operating performance is material.
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Using the foregoing criteria, we consider the following to be our critical accounting policies:
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●
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Valuation of Financial Instruments
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●
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Asset Management Investment Partnerships
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●
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Legal and Other Contingent Liabilities
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Our significant accounting policies are described further in the “Critical Accounting Policies and Estimates” section and Note 2 - Summary of Significant Accounting Policies in these financial statements and our consolidated financial statements in our Annual Report.
