Summary of Significant Accounting Policies

Basis of Presentation

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

December 31, 2019

and

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.

The Company performs consolidation analyses on entities to identify variable interest entities (“VIEs”) and determine the appropriate accounting treatment. An entity is considered a VIE and, therefore, would be subject to the consolidation provisions of ASC

810

if, by design, equity investors do

not

have the characteristics of a controlling financial interest or do

not

have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. ASU

2015

Amendments to Consolidation Analysis, was issued

February 2015,

which amends the consolidation requirements in ASC

810,

Consolidation. Under the amended guidance, an entity also is considered a VIE if it has equity investors who lack substantive participating or kick-out rights. VIEs are consolidated by their primary beneficiaries. When the Company enters into a transaction with a VIE, the Company determines if it is the primary beneficiary by determining whether it (a) has the power to direct the activities that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. If determined to be the primary beneficiary, the Company consolidates the entity. The Company reconsiders the conclusion continually.

See Note

related to the deconsolidation of the CLOs and JMPCA in the

first

quarter of

2019.

HCS currently manages several investment funds and JMPAM manages

two

private equity real estate funds, which are structured as limited partnerships or limited liability companies (“LLC”), and is the general partner or managing member of each. The Company assesses whether those investment funds meet the definition of VIEs in accordance with ASC

810

14,

and whether the Company qualifies as the primary beneficiary. Funds determined

not

to meet the definition of a VIE are considered voting interest entities for which the rights of the limited partners or non-managing members are evaluated to determine if consolidation is necessary. Such guidance provides that the presumption that the general partner or managing member controls the entity

may

be overcome if there are substantive kick-out rights. The partnership or members agreements for these funds provide for the right of the limited partners or non-managing members to remove the general partner or managing member by a simple majority vote of the non-affiliated limited partners or members. Because of these substantive kick-out rights, the Company does

not

control these funds, and therefore does

not

consolidate them. The Company accounts for its investments in these non-consolidated funds under the equity method of accounting or under the fair value option using the net asset value per share of those funds, as a practical expedient.

JMPAM also manages a capital debt fund which is structured as a limited liability company. The Company performed a consolidation analysis of the capital debt fund and concluded that the capital debt fund was a VIE; however the Company was

not

identified as the primary beneficiary as the Company does

not

have the obligation to absorb losses or the rights to receive benefits that could be significant amount to the capital debt fund. The Company accounts for its investment in this fund under the fair value option using the net asset value per share of those funds, as a practical expedient.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the use of estimates and assumptions that affect both the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results

may

differ from those estimates.

Revenue Recognition

January 1, 2018,

the Company adopted ASU

2014

09,

Revenue from Contracts with Customers (Topic

606

), which provides a more robust framework for addressing revenue issues, and clarifies the implementation guidance on principal versus agent considerations. The Company adopted this standard using a modified retrospective approach and the new revenue standard was applied prospectively in the Company's financial statements. The Company reported financial information for historical comparable periods that was

not

revised and will continue to report those historical periods under the accounting standards that were in effect then. The new standard does

not

apply to revenue from financial instruments, including loans and securities, and as a result, it did

not

have an impact on revenues closely associated with financial instruments, including principal transactions, interest income, and interest expenses. The new standard primarily impacts the presentation of our investment banking revenues, specifically underwriting revenues, strategic advisory revenues, and private placement fees. Certain investment banking revenues have historically been presented net of related expenses. Under the new standard, revenues and expenses related to investment banking transactions are presented gross in the Consolidated Statements of Operations. For investment banking and asset management revenues, the Company has separately described the accounting policies in effect during the years ended

December 31, 2019

and

2018

. For additional information, see Note

15.

Investment banking revenues

Investment banking revenues consist of underwriting revenues, strategic advisory revenues and private placement fees. The Company generally does

not

incur costs to obtain contracts with customers that are eligible for deferral or receive fees prior to recognizing revenue related to investment banking transactions, and therefore, as of

December 31, 2019

, the Company did

not

have any contract assets or liabilities related to these revenues on its Statement of Financial Condition.

Underwriting revenues arise from securities offerings in which the Company acts as an underwriter and include management fees, selling concessions and underwriting fees, gross of the Company’s share of allocated syndicate expenses. Underwriting fees, management fees, and selling concessions, gross of the Company’s share of allocated syndicated expenses, are recorded on the trade date, which is typically the day 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. For these transactions, management estimates the Company’s share of the transaction-related expenses incurred by the syndicate, and recognizes revenues gross of such expense. Expenses associated with such transactions are generally expensed as incurred, rather than being deferred, as the Company is unable to determine that collection of any reimbursement is reasonably assured until the trade date. On final settlement, typically

days from the trade date of the transaction, these amounts are adjusted to reflect the actual transaction-related expenses and the resulting underwriting fee. In connection with some underwritten transactions, the Company

may

hold in inventory, for a period of time, equity and other positions to facilitate the completion of the underwritten transactions. Realized and unrealized net gains and losses on these positions are recorded within investment banking revenues.

Strategic advisory revenues primarily include success fees on closed merger and acquisition transactions, as well as retainer fees, earned in connection with advising on both buyers’ and sellers’ transactions. Fees are also earned for related advisory work and other services such as providing fairness opinions, valuation analyses, due diligence, and pre-transaction structuring advice. 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. Valuation reports, fairness opinions, and advisory fees from merger or acquisition engagements are typically recognized when the transaction is substantially completed. Should these engagements contain any earn outs or other variable fees in the contract, revenue is recognized once the variability associated with the performance obligations have been removed, which is typically when the client has reached a specific milestone post-transaction. Fees from due diligence and pre-transaction structuring advice are typically recognized ratably over the term of the agreement. Any retainer fees received in connection with these agreements are individually evaluated and any unearned fees are deferred for revenue recognition until the performance obligation is met. The Company generally receives payments for strategic advisory services either upfront as a retainer fee, at the completion of the engagement, or in the case of any variable considerations, once the agreed-upon goals have been met by the client post-transaction. The Company evaluated these contracts individually and did

not

identify any significant financing components as the Company is

not

provided with any benefit of financing due to the short-term nature of the contracts.

Private placement fees are related to non-underwritten transactions such as private placements of equity securities, private investments in public equity (“PIPE”), Rule

144A

private offerings and trust preferred securities offerings and are recorded on the closing date of the transaction. Unreimbursed expenses associated with strategic advisory and private placement transactions are recorded in the Statement of Operations within various expense captions excluding compensation expense. Client reimbursements for costs associated for private placement fees are recorded gross within Investment banking and various expense captions, excluding compensation. The Company typically receives payments on private placements transactions shortly after completion of the contract.

Prior to adoption of ASU

2014

09,

Revenue from Contracts with Customers (Topic

606

January 1, 2018,

the Company recorded Investment Banking Revenues net of any client reimbursements and related expenses in accordance with the accounting standards that were in effect then. As the Company elected to apply the new standard using the modified retrospective approach, this comparable period was

not

modified and will continue to be reported under those historical standards.

Brokerage revenues

Brokerage revenues consist of (i) commissions resulting from equity securities transactions executed as agent or principal, (ii) related net trading gains and losses from market making activities and from the commitment of capital to facilitate customer orders and (iii) fees paid for equity research. 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. For the years ended

December 31, 2019

and

2018

, net trading losses were

$0.1

million, and

$0.6

million, which were included in brokerage revenue. The Company currently generates revenues from research activities through

three

types of arrangements. First, through what is commonly known as a “soft dollar” practice, a portion of a client’s commissions

may

be compensation for the value of access to our research. Those commissions are recognized on a trade date basis, as the Company has satisfied the performance obligation by transferring control of the service to customer. In these transactions, the Company generally receives payment for these services on settlement date. Second, a client

may

issue a cash payment directly to the Company for access to research. Third, the Company has entered into certain commission-sharing or tri-party arrangements in which institutional clients execute trades with a limited number of brokers and instruct those brokers to allocate a portion of the commission to the Company or to issue a cash payment to the Company. In these commission-sharing or tri-party arrangements, the amount of the fee is determined by the client on a case-by-case basis and agreed to by the Company. For the

second

and

third

types of arrangements, revenue is recognized once an arrangement exists, access to research has been provided, a specific amount is fixed or determinable, and collectability is reasonably assured.

None

of these arrangements obligate clients to a fixed amount of fees for research, either through trading commissions or direct or indirect cash payments, nor do they obligate the Company to provide a fixed quantity of research or execute a fixed number of trades. Furthermore, the Company is

not

obligated under any arrangement to make commission payments to

third

parties on behalf of clients. For the

second

and

third

types of arrangements, the Company typically receives payment shortly after the Company has met the revenue recognition criteria.

The Company generally does

not

incur any costs to obtain contracts with customers for brokerage revenues that are eligible for deferral or receive fees prior to recognizing revenue, and therefore, as of

December 31, 2019

, the Company did

not

have any contract assets or liabilities related to these revenues on its Statement of Financial Condition.

Asset Management Fees

Asset management fees for hedge funds, hedge funds of funds, private equity funds, and capital and private debt include base management fees and incentive fees earned from managing families of investment partnerships and a publicly-traded specialty finance company. The Company recognizes base management fees on a monthly basis over the period in which the investment management services are performed. Base management fees earned by the Company are generally based on the fair value of assets under management (“AUM”) or aggregate capital commitments and the fee schedule for each fund and account. Base management fees for hedge funds and hedge funds of funds are calculated at the investor level using their quarter-beginning capital balance adjusted for any contributions or withdrawals. Base management fees for private equity funds are calculated at the investor level using their aggregate capital commitments during the commitment period, which is generally

three

years from

first

closing, and on invested capital after the commitment period. Base management fees for capital or private debt are calculated based on the average value of the gross assets at the end of the most recently completed calendar quarter. The Company also earns incentive fees for hedge funds and hedge funds of funds that are based upon the performance of investment funds and accounts. Such fees are either a specified percentage of the total investment return of a fund or account or a percentage of the excess of an investment return over a specified high-water mark or hurdle rate over a defined performance period. For most funds, the high-water mark is calculated using the greatest value of a partner’s capital account as of the end of any performance period, increased for contributions and decreased for withdrawals. Incentive fees are recognized as revenue at the end of the specified performance period, once the uncertainty regarding the variable consideration is removed. Generally, the performance period used to determine the incentive fee is quarterly for the hedge funds and annually for the hedge funds of funds managed by HCS. For these funds, the incentive fees are

not

subject to any contingent repayments to investors or any other clawback arrangements. Incentive fees for private equity funds and capital or private debt are based on a specified percentage of realized gains from the disposition of each portfolio investment in which each investor participates, and are earned by the Company after returning contributions by the investors for that portfolio investment and for all other portfolio investments in which each such investor participates that have been disposed of at the time of distribution. 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 is

not

probable that a significant reversal of revenue would occur. Incentive fees recognized represent fees for which the contingency has been removed during the current or prior periods.

Principal transactions

Principal transaction revenues include realized and unrealized net gains and losses resulting from our principal investments in equity and other securities for the Company’s account and in equity-linked warrants received from certain investment banking clients, limited partner investments in private funds managed by

third

parties, and the investment in HCC. Principal transaction revenues also include earnings (or losses) attributable to investment interests managed by our asset management subsidiaries, HCS and JMPAM, which are accounted for using the equity method of accounting.

The Company’s principal transaction revenues for these categories for the years ended

December 31, 2019

and

2018

are as follows:

(In thousands)	Year Ended December 31,
	2019		2018

Equity and other securities excluding non-controlling interest	$	295	$	(604	)
Warrants and other investments		944		(1,341	)
Investment partnerships		105		(342	)
Total principal transaction revenues	$	1,344	$	(2,287	)

Gain and Loss on Sale, Payoff and Mark-to-Market of Loans

Gain and loss on sale, payoff and mark-to-market of loans consists of gains from the sale and payoff of loans collateralizing asset-backed securities and loans held for investment. Gains are recorded when the proceeds exceed the carrying value of the loan.

Interest Income

Interest income primarily relates to income earned on loans. Interest income on loans comprises 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 the 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.

Interest Expense

Interest expense primarily consists of interest expense incurred on asset-backed securities issued, notes payable, CLO warehouse credit facilities, lines of credit, bonds payable, and the amortization of bond issuance costs. Interest expense on asset-backed securities issued is the stated coupon as a percentage of the principal amount payable adjusted for amortization of any discounts. See

Asset-Backed Securities Issued

below for more information. Interest expense is recorded on the accrual basis in accordance with the terms of the respective asset-backed securities issued, bonds payable and note payable.

Revenue From Contracts With Customers

See footnote

15.

Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities or remaining maturities upon purchase of

three

months or less to be cash equivalents. The Company holds cash in financial institutions in excess of the FDIC insured limits. The Company periodically reviews the financial condition of the financial institutions and assesses the credit risk of such investments.

Restricted Cash and Deposits

Restricted cash and deposits include principal and interest payments that are collateral for the asset-backed securities issued by CLOs. They also include cash collateral supporting standby letters of credit issued by JMPCA and cash on deposit for certain operating leases.

Restricted cash consisted of the following at

December 31, 2019

and

2018

	As of December 31,
(in thousands)	2019		2018

Principal and interest payments held as collateral for asset-backed securities issued	$	-	$	50,455
Principal and interest payments held to secure borrowing under credit facilities		-		7,903
Cash collateral supporting standby letters of credit		-		2,302
Deposits for operating leases		1,287		1,221
Total restricted cash	$	1,287	$	61,881

Receivable from Clearing Broker

The Company clears customer transactions through another broker-dealer on a fully disclosed basis. At both

December 31, 2019

and

December 31, 2018

, the receivable from clearing broker consisted of commissions related to securities transactions, and cash on deposit with our clearing broker.

Investment Banking Fees Receivable

Investment banking fees receivable includes receivables relating to the Company’s investment banking or advisory engagements. The Company records an allowance for doubtful accounts on these receivables on a specific identification basis. Investment banking fees receivable which are deemed to be uncollectible are charged off and deducted from the allowance. The allowance for doubtful accounts related to investment banking fees receivable was

zero

and

$380

thousand as of

December 31, 2019

and

2018

, respectively.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note

for the disclosures related to the fair value of our marketable securities and other investments.

Most of the Company’s financial instruments, other than loans collateralizing asset-backed securities issued, loans held for investment, asset-backed securities issued, and notes payable are recorded at fair value or amounts that approximate fair value.

Marketable securities owned, other investments at fair value, and marketable securities sold, but

not

yet purchased are stated at fair value, with related changes in unrealized appreciation or depreciation reflected in the line item principal transactions in the accompanying Consolidated Statements of Operations.

Fair value of the Company’s financial instruments is generally obtained from quoted market prices,

third

-party pricing services, or alternative pricing methodologies that the Company believes offer reasonable levels of price transparency. To the extent that certain financial instruments trade infrequently or are non-marketable securities and, therefore, do

not

have readily determinable fair values, the Company estimates the fair value of these instruments using various pricing models and the information available to the Company that it deems most relevant. Among the factors considered by the Company in determining the fair value of financial instruments are discounted anticipated cash flows, the cost, terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, the Black-Scholes Options Valuation methodology adjusted for active market and other considerations on a case-by-case basis and other factors generally pertinent to the valuation of financial instruments.

For disclosure purposes, the fair values for each of the loans held in the CLOs as of

December 31, 2018

were calculated using

third

-party pricing services. The average number of

third

-party pricing quotes received for CLO III, CLO IV, CLO V, and CLO VI were

three

for each CLO as of

December 31, 2018.

Valuations obtained from

third

-party pricing services are considered reflective of executable prices. Data is obtained from multiple sources and compared for consistency and reasonableness.

Marketable securities owned and securities sold, but

not

yet purchased, consist of U.S. listed and over-the-counter (“OTC”) equity securities. Other investments include investments in private investment funds managed by the Company and investments in private investment funds managed by

third

parties. Such investments are accounted for under the equity method based on the Company’s share of the earnings (or losses) of the investee or under the fair value option using the net asset value per share of those funds, as a practical expedient. The financial position and operating results of the private investment funds are generally determined on an estimated fair value basis. Generally, securities are valued (i) at their last published sale price if they are listed on an established exchange or (ii) if last sales prices are

not

published, at the highest closing “bid” price (for securities held “long”) and the lowest closing “asked” price (for “short” positions) as recorded by the composite tape system or such principal exchange, as the case

may

be. Where the fund manager determines that market prices or quotations do

not

fairly represent the value of a security in the investment fund’s portfolio (for example, if a security is a restricted security of a class that is publicly traded) the fund manager

may

assign a different value. The general partner will determine the estimated fair value of any assets that are

not

publicly traded.

The Company uses the fair value option which allows an entity to report selected financial assets and financial liabilities at fair value. The fair value of those assets and liabilities for which the fair value option has been chosen is reflected on the face of the balance sheet. Subsequent changes in fair value are recorded in the Consolidated Statements of Operations. The Company elected to apply the fair value option to the investments in HCC common stock, its investments in real estate funds, its investment in private debt, and its investment in MPCF, Harvest Growth Capital LLC (“HGC”), Harvest Growth Capital II LLC (“HGC II”) and Harvest Growth Capital III LLC (“HGC III”). The primary reason for electing the fair value option was to measure these gains on our investments on the same basis as our other equity securities, all of which are stated at fair value. The gains/losses on the investments that result from the election of the fair value option are reported in Principal Transactions in the Consolidated Statements of Operations.

Fair Value Hierarchy

In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Company generally utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company provides the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial instrument assets and liabilities carried at fair value have been classified and disclosed in

one

of the following

three

levels of fair value hierarchy:

Level 1		Quoted market prices in active markets for identical assets or liabilities.
Level 2		Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3		Unobservable inputs that are not corroborated by market data.

Level

primarily consists of financial instruments whose value is based on quoted market prices such as U.S. listed and over-the-counter ("OTC") equity securities, as well as quasi-government agency securities, all of which are carried at fair value.

Level

includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including discounted anticipated cash flows, the cost, terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, prepayment speeds, default rates, loss severity, as well as other measurements. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Included in this category is the general partner investment in hedge funds, where the underlying hedge funds are mainly invested in publicly traded stocks whose value is based on quoted market prices.

Level

is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable from objective sources.

At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as “Level

3.”

Loans

Accounting guidance requires that the Company present and disclose certain information about its financing receivables by portfolio segment and/or by class of receivables. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine the allowance for credit losses. A class of financing receivables is defined as the level of information (below a portfolio segment) that enables a reader to understand the nature and extent of exposure to credit risk arising from financing receivables. As of

December 31, 2019,

the Company had a single portfolio segment, loans held for investment. As of

December 31, 2018,

the Company’s portfolio segments were loans held for investment and loans collateralizing asset-backed securities issued ("ABS"). The Company has treated the loans held for investment as a single class given the small size of the respective loan portfolios. The classes within the loans collateralizing ABS portfolio segments are Asset Backed Loan (“ABL”), ABL – stretch, Cash Flow and Enterprise Value.

Loans Held for Investment

Loans held for investment are carried at their unpaid principal balance, net of any allowance for credit losses and deferred loan origination, commitment and other fees. For loans held for investment, the Company establishes and maintains an allowance for credit losses based on management’s estimate of credit losses in our loans as of each reporting date. The Company records the allowance against loans held for investment on a specific identification basis, or reviews its loan portfolio at the end of each quarter to record losses inherent in the homogenous loan portfolio. Loans are charged off against the reserve for credit losses if the principal is deemed

not

recoverable within a reasonable timeframe. Loan origination, commitment or other fees are deferred and recognized into interest income in the Consolidated Statements of Operations over the life of the related loan. The Company does

not

accrue interest on loans which are in default for more than

days and loans for which the Company expects full principal payments

may

not

be received. When loans are placed on non-accrual status, all interest previously accrued but

not

collected is reversed against current period interest income. Any reversals of income from previous years are recorded against the allowance for loan losses. When the Company receives a cash interest payment on a non-accrual loan, it is applied as a reduction of the principal balance. Non-accrual loans are returned to accrual status when the borrower becomes current as to principal and interest and has demonstrated a sustained period of payment performance. The amortization of loan fees is discontinued on non-accrual loans. The Company applies the above non-accrual policy consistently to all loans classified as loans held for investment without further disaggregation. Loans that are deemed to be uncollectible are charged off and the charged-off amount is deducted from the allowance.

Loans Collateralizing Asset-Backed Securities Issued (through

March 2019)

Loans collateralizing asset-backed securities issued are recorded at their fair value as of the acquisition date, which then becomes the new basis of the loans.

For those loans acquired with evidence of deterioration of credit quality since origination, the total discount from unpaid principal balance to fair value consists of a non-accretable credit discount and an accretable liquidity discount. The accretable portion of the discount is recognized into interest income as an adjustment to the yield of the loan over the contractual life of the loan using the effective interest method.

For those loans without evidence of deterioration in credit quality since origination, any difference between the Company’s initial investment in the loan and its par value is recorded as a premium or discount, which is amortized or accreted into interest income as a yield adjustment over the contractual life of the loan using the effective interest method, in accordance with

ASC

310

20,

Nonrefundable Fees and Other Costs

The Company reviews its loan portfolio at the end of each quarter to identify specific loss reserves on impaired loans or to record losses inherent in the homogenous loan portfolio. As loans collateralizing asset-backed securities issued are considered similar in nature, given the loan terms, ratings and average life expectancy, they are reviewed collectively in the quarterly assessment of loan loss reserves. Even when there are

credit losses identified in any individual loans, experience indicates there are losses inherent in the pooled loan portfolios as of the balance sheet date. The Company uses its loan loss model to estimate the unidentified losses that are inherent in the portfolio as of the balance sheet date and records provisions to its allowance for loan losses quarterly.

For loans acquired at a discount that are

not

accounted for under ASC

310

30,

the allowance for loan losses recorded subsequent to the date of the loan acquisition is determined using the guidance in ASC

450.

allowance on these loans will be recognized until the current book value is accreted past the level of incurred loss. For loans acquired at a premium, the allowance for loan losses recorded subsequent to the date of the loan acquisition is determined in accordance with ASC

450,

based on the contractual principal balances. Given the existence of the premium on these loans, the allowance recorded subsequent to acquisition is based on the Company’s quarterly allowance methodology and represents losses inherent in the homogeneous loan portfolio at the balance sheet date. Accordingly, if the Company were to acquire loans at a premium during a particular period, the Company would record an allowance at the end of the quarter in which the loans were acquired.

Refer to “Allowance for Loan Losses” section below for the Company’s quarterly assessment process.

The accrual of interest on loans is discontinued when principal or interest payments are

days or more past due or when, in the opinion of management, reasonable doubt exists as to the full collection of principal and/or interest. When loans are placed on non-accrual status, all interest previously accrued but

not

may

be considered for write-off. Depending on the terms of the loan, a fee

may

be charged upon a prepayment which is recognized in the period of the prepayment.

Restructured loans are considered a troubled debt restructuring (“TDR”) if the Company, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would

not

otherwise consider. The Company

may

receive an asset from the debtor in a TDR, but the value of the asset received is typically significantly less than the amount of the debt forgiven. The Company has received equity interest in certain debtors as compensation for reducing the loan principal balance in some cases.

Allowance for Loan Losses

The Company maintains an allowance for loan losses that is intended to estimate loan losses inherent in its loan portfolio. A provision for loan losses is charged to expense to establish the allowance for loan losses. The allowance for loan losses consists of

two

components: estimated loan losses for specifically identified loans and estimated loan losses inherent in the remainder of the portfolio. The Company’s loan portfolio consists primarily of loans made to small to middle market, privately owned companies. Loans made to these companies generally have higher risks compared to larger, publicly traded companies who have greater access to financial resources. The allowance for loan losses is maintained at a level, in the opinion of management, sufficient to offset estimated losses inherent in the loan portfolio as of the date of the financial statements. The appropriateness of the allowance and the allowance components are reviewed quarterly. The Company’s estimate of each allowance component is based on observable information and on market and

third

-party data that the Company believes are reflective of the underlying loan losses being estimated. Given these considerations, the Company believes that it is necessary to reserve for estimated loan losses inherent in the portfolio.

A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company measures impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral securing the loan if the loan is collateral dependent, depending on the circumstances and the Company’s collection strategy.

Loans or positions of loans that are deemed to be uncollectible are charged off and any allowance amount related to these loans is deducted from the allowance.

In determining the required allowance for loan losses inherent in the portfolio, the following factors were considered:

) the expected loss severity rate for each class of loans,

) the current Moody’s rating and related probability of default,

) the existing liquidity discount on the loans (when applicable),

) internal loan ratings, and

) loan performance.

•

Expected loss severity rate for each class of loans: The Company’s loans are classified as either ABL, ABL – stretch, Cash Flow or Enterprise Value. The loss severity given a default is expected to be lowest on a conforming ABL loan, because the value of the collateral is typically sufficient to satisfy most of the amount owed. For ABL – stretch loans, the loss severity given a default is expected to be higher than for a conforming ABL loan because of less collateral coverage. For Cash Flow loans, the loss severity given a default is expected to be higher than ABL stretch loans, since generally less collateral coverage is provided for this class of loans. For Enterprise Value loans, the loss severity given a default is expected to be the highest, assuming that if the obligor defaults there has probably been a significant loss of enterprise value in the business. Loss severity estimates take into consideration current economic conditions such as overall macroeconomic trends, the amount of liquidity in the market and the condition of the CLO market. All loans in the CLOs are Cash Flow loans in

2019

, and

2018

. The Company classified loans as ABL and Enterprise Value when it was directly originating deals.

•

Moody’s rating and related probability of default: Moody uses factors such as, but

not

limited to, the borrower’s leverage, use of proceeds, cash flows, growth rate, industry condition, concentration of risks, EBITDA margins and other factors. The lower the rating a loan carries, the higher the risk. Moody’s publishes a probability of default for each rating class based on historical loss experience with loans of similar credit quality, and taking into consideration current economic conditions such as industry default rates, the amount of liquidity in the market and other macroeconomic trends. The higher the loan is rated, the less probability there is of a default. The Company updates the Moody’s rating assigned to a loan whenever Moody’s changes its rating for the loan. The Company uses a

one

year probability of default, in efforts to capture impairment that has occurred in the portfolio but has

not

yet been identified. If a credit is impaired, it will likely reveal itself within a year. A longer period would indicate the loan was

not

impaired at the allowance date.

•

Internal loan ratings for loans collateralizing asset-backed securities issued and loans held for investment related to the CLO warehouse: The Internal Rating System is an internal portfolio monitoring mechanism allowing the Company to proactively manage portfolio risk and minimize losses. In evaluating these loans, the Company uses

five

account rating categories:

through

Internal ratings of

and

indicate lower risks while ratings between

and

indicate higher risks. Internal ratings are updated at least quarterly. The following describes each of the Company’s internal ratings:

	1	Investment exceeding expectations and/or a capital gain is expected.
	2	Investment generally performing in accordance with expectations.
	3	Investment performing below expectations and requires closer monitoring.
	4	Investment performing below expectations where a higher risk of loss exists.
	5	Investment performing significantly below expectations where the Company expects to experience a loss.

•

Performance ratings:

Performing	Non-impaired loans
Non-performing	Impaired loans

Asset-Backed Securities Issued

Asset-backed securities issued (“ABS”) represent securities issued to

third

parties by CLO III, CLO IV, and CLO V (through

March 2019

when the CLOs were deconsolidated).

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

zero

CLO debt securities classified as trading securities as of

December 31, 2019

and

December 31, 2018.

The Company previously classified its senior subordinated notes in CLO IV and CLO V as trading securities, but sold these notes in

May 2019.

The Company’s investments in CLO debt securities classified as available-for-sale are comprised of junior subordinated notes in CLO III, CLO IV and CLO V and are those that

may

be sold before maturity and are reported at fair value with unrealized gains and losses, net of taxes, reported as a component of other comprehensive income (“OCI”). The Company had

$57.9

million and

zero

CLO debt securities classified as available-for-sale securities as of

December 31, 2019

and

December 31, 2018,

respectively. The Company had

CLO debt securities classified as held-to-maturity securities as of

December 31, 2019

and

December 31, 2018,

respectively.

Interest income on CLO debt securities is recognized in accordance with ASC

835,

using the effective yield method. The effective yield on these securities is based on the projected cash flows from each security, which is estimated based on the Company’s observation of the then current information and events, where applicable, and will include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses. On at least a quarterly basis, the Company reviews and, if appropriate, makes adjustments to its cash flow projections based on input and analysis received from external sources, internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation,

may

result in a prospective change in the yield/interest income recognized on such securities. Realized gains and losses on the sale of debt securities are determined using the specific identification method and recognized in current period earnings in revenues from principal transactions.

The Company evaluates the available-for-sale CLO debt securities for impairment quarterly. As part of the evaluation, the Company obtains the new cash flow projections for the CLO debt securities at period end and determines, based on those cash flows and other current information, if there has been a favorable or adverse change in the cash flows expected to be collected as compared to the projected cash flows from the prior period. An adverse change in cash flows is determined in the context of both the timing and the amount of the cash flows. An impairment would be recorded if the net present value of the cash flows of the investment is below the amortized cost basis of the investment and the Company does

not

expect to recover the amortized cost basis before the security is expected to be sold or the security matures, whichever comes first. Should the Company determine that there is an impairment, the amount of the impairment is recognized in revenues from principal transactions. The Company recorded

$4.2

million of impairment on CLO debt securities for the year ended

December 31, 2019

and

zero

for the year ended

December 31, 2018.

Fixed Assets

Fixed assets represent furniture and fixtures, computer and office equipment, certain software costs, and leasehold improvements, which are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the respective assets, ranging from

three

five

years.

Leasehold improvements, including landlord funded assets, are capitalized and amortized over the shorter of the respective lease terms or the estimated useful lives of the improvements.

The Company capitalizes certain costs of computer software developed or obtained for internal use and amortizes the amount over the estimated useful life of the software, generally

not

exceeding

three

years.

Income Taxes

The Company recognizes deferred tax assets and liabilities in accordance with ASC

740,

Income Taxes, and are determined based upon the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse. A valuation allowance is established when it is necessary to reduce the deferred tax assets when it is more likely than

not

that a portion or all of the deferred tax assets will

not

be realized.

The Company records uncertain tax positions using a

two

-step process: (i) the Company determines whether it is more likely than

not

that each tax position will be sustained on the basis of the technical merits of the position; and (ii) for those tax positions that meet the more-likely-than

not

recognition threshold, the Company recognizes the largest amount of tax benefit that is more than

fifty

percent likely to be realized upon ultimate settlement with the related tax authority.

The Company’s policy for recording interest and penalties associated with the tax audits or unrecognized tax benefits, if any, is to record such items as a component of income tax.

Share-Based Compensation

The Company recognizes compensation cost for share-based awards at their fair value on the date of grant and records compensation expense over the service period for awards expected to vest. Such grants are recognized as expense, net of estimated forfeitures.

Share-based compensation includes restricted share units ("RSUs"), share appreciation rights, and share options granted under the Company’s

2007

Equity Incentive Plan.

In accordance with generally accepted valuation practices for share-based awards issued as compensation, the Company uses the Black-Scholes option-pricing model or other quantitative models to calculate the fair value of option awards. The quantitative models require subjective assumptions regarding variables such as future share price volatility, dividend yield and expected time to exercise, which greatly affect the calculated values.

The fair value of RSUs is determined based on the closing price of the underlying share on the grant date, discounted for future distributions

not

expected to be paid on unvested units during the vesting period. If applicable, a liquidity discount for post-vesting transfer restrictions is also applied.

Treasury Shares

The Company accounts for its treasury shares under the cost method, using an average cost assumption, and includes treasury shares as a component of shareholders’ equity.