Attached files

file filename
EX-31.2 - SECTION 302 CFO CERTIFICATION - JMP Group Inc.dex312.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - JMP Group Inc.dex321.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - JMP Group Inc.dex311.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - JMP Group Inc.dex322.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-33448

 

 

JMP Group Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-1450327

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

600 Montgomery Street, Suite 1100, San Francisco, California 94111

(Address of principal executive offices)

Registrant’s telephone number: (415) 835-8900

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding as of November 2, 2009 was 21,533,583.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page
Number
PART I.   FINANCIAL INFORMATION    4
Item 1.   Financial Statements - JMP Group Inc.    4
 

Consolidated Statements of Financial Condition - September 30, 2009 and December 31, 2008 (Unaudited)

   4
 

Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2009
and 2008 (Unaudited)

   5
 

Consolidated Statement of Changes in Equity - For the Nine Months Ended September 30, 2009 (Unaudited)

   6
 

Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2009
and 2008 (Unaudited)

   7
 

Notes to Consolidated Financial Statements (Unaudited)

   8
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    33
Item 3.   Quantitative and Qualitative Disclosures About Market Risk    53
Item 4.   Controls and Procedures    53
PART II.   OTHER INFORMATION    54
Item 1.   Legal Proceedings    54
Item 1A.   Risk Factors    54
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    55
Item 3.   Defaults Upon Senior Securities    55
Item 4.   Submission of Matters to a Vote of Security Holders    55
Item 5.   Other Information    55
Item 6.   Exhibits    55
SIGNATURES    56
EXHIBIT INDEX    57

 

2


Table of Contents

AVAILABLE INFORMATION

JMP Group Inc. is required to file current, annual and quarterly reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission. You may read and copy any document JMP Group Inc. files with the SEC at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet website at http://www.sec.gov, from which interested persons can electronically access JMP Group Inc.’s SEC filings.

JMP Group Inc. will make available free of charge through its internet site http://www.jmpg.com, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, Forms 3, 4 and 5 filed by or on behalf of directors, executive officers and certain large stockholders, and any amendments to those documents filed or furnished pursuant to the Exchange Act. These filings will become available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.

JMP Group Inc. also makes available, in the Investor Relations section of its website and will provide print copies to stockholders upon request, (i) its corporate governance guidelines, (ii) its code of business conduct and ethics, and (iii) the charters of the audit, compensation, and corporate governance and nominating committees of its board of directors. These documents, as well as the information on the website of JMP Group Inc., are not intended to be part of this quarterly report.

 

3


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

JMP Group Inc.

Consolidated Statements of Financial Condition

(Unaudited)

 

     September 30, 2009     December 31, 2008  

Assets

    

Cash and cash equivalents

   $ 55,208,089      $ 46,261,959   

Restricted cash and deposits (includes cash on deposit with clearing broker of $255,336 at September 30, 2009 and December 31, 2008)

     40,276,545        6,929,501   

Receivable from clearing broker

     2,452,590        1,878,078   

Investment banking fees receivable, net of allowance for doubtful accounts of $0 and $78,579 at September 30, 2009 and at December 31, 2008

     5,674,562        1,647,761   

Marketable securities owned, at fair value

     18,282,610        19,838,480   

Incentive fee receivable

     553,162        1,479,741   

Other investments (of which $56,703,393 and $47,954,255 at fair value at September 30, 2009 and December 31, 2008)

     58,703,393        47,954,255   

Loans held for investment, net of allowance for loan losses

     1,692,036        5,725,867   

Loans collateralizing asset-backed securities issued, net of allowance for loan losses

     317,238,912        —     

Interest receivable

     1,424,547        72,194   

Fixed assets, net

     1,247,806        1,207,014   

Deferred tax assets

     51,643,862        11,062,174   

Other assets

     5,615,152        8,789,068   
                

Total assets

   $ 560,013,266      $ 152,846,092   
                

Liabilities and Equity

    

Liabilities:

    

Marketable securities sold, but not yet purchased, at fair value

   $ 9,752,001      $ 5,677,683   

Accrued compensation

     33,956,459        21,349,724   

Asset-backed securities issued

     322,787,435        —     

Interest payable

     611,073        17,663   

Note payable

     9,912,765        8,680,850   

Contingent consideration payable

     2,262,030        —     

Deferred tax liability

     48,099,813        224,204   

Other liabilities

     11,911,288        3,823,892   
                

Total liabilities

     439,292,864        39,774,016   
                

Commitments and Contingencies

    

JMP Group Inc. Stockholders’ Equity

    

Common stock, $0.001 par value, 100,000,000 shares authorized; 22,069,741 shares issued at September 30, 2009 and December 31, 2008; 20,764,983 and 20,470,125 shares outstanding at September 30, 2009 and December 31, 2008

     22,070        22,070   

Additional paid-in capital

     127,304,046        125,939,747   

Treasury stock (at cost, 1,304,758 and 1,599,616 shares at September 30, 2009 and December 31, 2008)

     (8,604,003     (10,710,981

Accumulated deficit

     (3,621,096     (10,129,777
                

Total JMP Group Inc. stockholders’ equity

     115,101,017        105,121,059   

Noncontrolling Interest

     5,619,385        7,951,017   
                

Total equity

     120,720,402        113,072,076   
                

Total liabilities and equity

   $ 560,013,266      $ 152,846,092   
                

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

JMP Group Inc.

Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  

Revenues

        

Investment banking

   $ 10,390,644      $ 4,879,365      $ 25,103,996      $ 23,818,776   

Brokerage

     7,938,774        9,573,885        25,836,038        26,432,955   

Asset management fees

     3,266,493        2,292,014        15,765,626        6,364,634   

Principal transactions

     5,980,739        (2,726,160     15,403,222        (4,788,734

Gain on sale and payoff of loans

     6,726,930        —          11,571,062        —     

Gain on repurchase of asset-backed securities issued

     4,096,473        —          4,204,873        —     

Gain on bargain purchase

     —          —          1,179,279        —     

Net dividend income

     765,662        939,467        1,849,869        2,460,570   

Other income

     227,221        214,191        1,154,343        922,683   
                                

Non-interest revenues

     39,392,936        15,172,762        102,068,308        55,210,884   
                                

Interest income

     12,213,909        653,943        24,172,371        1,859,938   

Interest expense

     (8,504,198     (102,196     (17,484,554     (298,070
                                

Net interest income

     3,709,711        551,747        6,687,817        1,561,868   
                                

Provision for loan losses

     (1,383,650     (427,882     (5,365,842     (427,882
                                

Total net revenues after provision for loan losses

     41,718,997        15,296,627        103,390,283        56,344,870   
                                

Non-interest Expenses

        

Compensation and benefits

     29,308,305        17,724,046        70,848,981        44,147,847   

Administration

     1,098,179        1,257,487        3,541,203        4,610,307   

Brokerage, clearing and exchange fees

     1,316,800        1,389,384        4,056,799        3,859,357   

Travel and business development

     533,719        845,706        1,586,573        2,800,676   

Communications and technology

     989,175        912,043        2,807,552        2,911,598   

Occupancy

     610,091        478,316        1,787,608        1,426,135   

Professional fees

     899,268        636,005        2,782,855        2,512,950   

Depreciation

     188,789        239,909        592,422        760,797   

Other

     214,870        53,030        378,540        40,580   
                                

Total non-interest expenses

     35,159,196        23,535,926        88,382,533        63,070,247   
                                

Income (loss) before income tax expense

     6,559,801        (8,239,299     15,007,750        (6,725,377

Income tax expense (benefit)

     2,879,018        (2,971,386     6,491,386        (2,485,284
                                

Net income (loss)

     3,680,783        (5,267,913     8,516,364        (4,240,093

Less: Net income (loss) attributable to the noncontrolling interest

     712,007        (369,208     1,227,459        (214,658
                                

Net income (loss) attributable to JMP Group Inc.

   $ 2,968,776      $ (4,898,705   $ 7,288,905      $ (4,025,435
                                

Net income (loss) attributable to JMP Group Inc. per common share:

        

Basic

   $ 0.14      $ (0.24   $ 0.35      $ (0.20

Diluted

   $ 0.13      $ (0.24   $ 0.34      $ (0.20

Weighted average common shares outstanding:

        

Basic

     20,754,502        20,035,637        20,633,361        20,317,627   

Diluted

     22,014,723        20,035,637        21,640,249        20,317,627   

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

JMP Group Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

 

     JMP Group Inc. Stockholders’ Equity              
     Common Stock    Common
Treasury Stock
Amount
    Additional
Paid-In
Capital
    Accumulated
Deficit
    Noncontrolling
Interest
    Total Equity  
     Shares    Amount           

Balance, December 31, 2008

   22,069,741    $ 22,070    $ (10,710,981   $ 125,939,747      $ (10,129,777   $ 7,951,017      $ 113,072,076   

Net income

   —        —        —          —          7,288,905        1,227,459        8,516,364   

Additional paid-in capital - stock-based compensation

   —        —        —          (68,045     —          —          (68,045

Cash dividends paid to shareholders

   —        —        —          —          (620,113     —          (620,113

Purchases of shares of common stock for treasury

   —        —        (1,108,592     —          —          —          (1,108,592

Reissuance shares of common stock from treasury

   —        —        3,215,570        1,432,344        (160,111     —          4,487,803   

Sale of subsidiary shares to noncontrolling interest holders

   —        —        —          —          —          373,705        373,705   

Reorganization of a subsidiary (Note 2)

   —        —        —          —          —          (3,932,796     (3,932,796
                                                    

Balance, September 30, 2009

   22,069,741    $ 22,070    $ (8,604,003   $ 127,304,046      $ (3,621,096   $ 5,619,385      $ 120,720,402   
                                                    

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

JMP Group Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

     Nine Months Ended September 30,  
     2009     2008  

Cash flows from operating activities:

    

Net income (loss)

   $ 8,516,364      $ (4,240,093

Adjustments to reconcile net income to net cash (used in) provided by in operating activities:

    

Provision for doubtful accounts

     —          468,462   

Provision for loan losses

     5,365,842        —     

Amortization of deferred loan fees

     (494,368     (15,744

Accretion of liquidity discount, net

     404,647        —     

Loan origination and commitment fees

     —          260,000   

Gain on sale and payoff of loans

     (11,571,062     —     

Gain on repurchase of asset-backed securities issued

     (4,204,873     —     

Change in other investments:

    

Fair value

     (8,142,512     2,260,394   

Incentive fees reinvested in general partnership interests

     (4,766,958     (1,613,321

Depreciation and amortization of fixed assets

     592,422        760,797   

Stock-based compensation expense

     3,901,127        6,588,432   

Deferred income taxes

     6,712,749        (6,921,615

Gain on bargain purchase

     (1,179,279     —     

Net change in operating assets and liabilities:

    

(Increase) in interest receivable

     (215,457     (62,157

(Increase) decrease in receivables

     (3,674,734     3,747,597   

(Increase) in marketable securities

     (3,695,317     (2,194,984

(Increase) decrease in restricted cash (excluding restricted cash reserved for lending activities), deposits and other assets

     (365,474     2,487   

Increase in marketable securities sold, but not yet purchased

     4,074,318        1,874,797   

(Decrease) in interest payable

     (616,178     —     

(Decrease) in securities sold under agreements to repurchase

     —          (9,135,000

Increase (decrease) in accrued compensation and other liabilities

     18,993,722        (16,355,197
                

Net cash provided by (used in) operating activities

     9,634,979        (24,575,145
                

Cash flows from investing activities:

    

Purchases of fixed assets

     (473,214     (258,719

Investment in subsidiary

     (2,089,477     (19,686,450

Purchases of other investments

     (7,486,372     —     

Sales of other investments

     12,254,366        5,161,783   

Funding of loans collateralizing asset-backed securities issued

     (93,558,772     —     

Funding of loans held for investment

     —          (7,956,770

Sale and refinancing of loans collateralizing asset-backed securities issued

     46,220,511        —     

Principal payments on loans collateralizing asset-backed securities issued

     32,036,195        —     

Principal payments on loans held for investment

     270,162        322,000   

Repayment of note receivable

     —          335,272   

Net change in restricted cash reserved for lending activities

     14,674,980        —     

Cash associated with consolidation / deconsolidation of investment

     902,475        (4,726,076
                

Net cash provided by (used in) investing activities

     2,750,854        (26,808,960
                

Cash flows from financing activities:

    

Proceeds from issuance of note payable

     6,100,000        8,680,850   

Repayment of note payable

     (4,966,877     —     

Net change in asset-backed securities issued

     (3,227,371     —     

Cash dividends paid to stockholders

     (620,113     (3,041,485

Purchases of shares of common stock for treasury

     (1,108,592     (4,805,654

Capital contributions of noncontrolling interest members and shareholders

     300,000        1,598,413   

Dividends paid to noncontrolling interest shareholders

     —          (224,254

Proceeds from exercises of stock options

     83,250        —     
                

Net cash (used in) provided by financing activities

     (3,439,703     2,207,870   
                

Net increase (decrease) in cash and cash equivalents

     8,946,130        (49,176,235

Cash and cash equivalents, beginning of period

     46,261,959        99,127,043   
                

Cash and cash equivalents, end of period

   $ 55,208,089      $ 49,950,808   
                

Supplemental disclosures of cash flow information:

    

Cash paid during the period for interest

   $ 4,253,526      $ 230,090   

Cash paid during the period for taxes

   $ 730,000      $ 6,348,719   

Non-cash investing and financing activities:

The fair values of noncash assets acquired and liabilities assumed in the Cratos acquisition were $376,371,923 and $370,775,518, respectively.

On July 31, 2009, the Company received 100% of the membership interest in LSC III, LLC (“LSC”) in full satisfaction of a $2.4 million non-revolving credit note.

See accompanying notes to consolidated financial statements.

 

7


Table of Contents

JMP GROUP INC.

Notes to Consolidated Financial Statements

September 30, 2009

(Unaudited)

1. Organization and Description of Business

JMP Group Inc., together with its subsidiaries (collectively, the “Company”), is an independent investment banking and asset management firm headquartered in San Francisco. JMP Group Inc. completed its initial public offering on May 16, 2007, and concurrently completed a corporate reorganization (the “Reorganization”), which is described in greater detail in the Registration Statement on Form S-1 (File No. 333-140689) (the “Registration Statement”) filed with the Securities and Exchange Commission (“SEC”) in connection with the initial public offering. The Company conducts its investment banking and brokerage business through its wholly-owned subsidiary, JMP Securities LLC (“JMP Securities”), its asset management business through its wholly-owned subsidiary, Harvest Capital Strategies LLC (“HCS”) (formerly JMP Asset Management LLC, which changed its name to HCS effective September 29, 2008) and its majority-owned indirect subsidiary, JMP Credit Corporation (“JMP Credit”), and certain principal investments through its indirectly wholly-owned subsidiary JMP Capital LLC (“JMP Capital”). JMP Securities is a U.S. registered broker-dealer under the Securities Exchange Act of 1934, as amended, and is a member of the Financial Industry Regulatory Authority (“FINRA”). JMP Securities operates as an introducing broker and does not hold funds or securities for, or owe any money or securities to, customers and does not carry accounts for customers. All customer transactions are cleared through another broker-dealer on a fully disclosed basis. HCS is a registered investment advisor under the Investment Advisers Act of 1940, as amended, and provides investment management services for sophisticated investors in investment partnerships and other entities managed by HCS.

Effective April 7, 2009, the Company, through its majority-owned indirect subsidiary JMP Credit, completed the acquisition of 100% of the membership interests of Cratos Capital Partners, LLC and its subsidiaries, including Cratos Capital Management, LLC (collectively, “Cratos”), an alternative asset manager of collateralized loan obligations, together with certain securities of Cratos CLO I, Ltd. (the “CLO”). Certain members of Cratos hold noncontrolling interests in JMP Credit. As a result of the acquisition, the Company now operates in three reportable business segments: 1) Broker-Dealer, 2) Asset Management and 3) Corporate Credit. Please refer to Note 4 and Note 23 for further information on the acquisition and our business segments.

2. Summary of Significant Accounting Policies

Basis of Presentation

These consolidated financial statements and related notes are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2008 included in its annual report on Form 10-K. These consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for the fair statement of the results for the interim periods. The results of operations for any interim period are not necessarily indicative of the results to be expected for a full year.

The consolidated accounts of the Company include the wholly-owned subsidiaries, JMP Securities and HCS, the indirectly wholly-owned subsidiary, JMP Capital, and the partially-owned subsidiaries, JMP Credit, Harvest Mortgage Opportunities Partners “HMOP” (effective May 1, 2009), JMP Realty Trust, Inc. “JMPRT” (through December 31, 2008), Harvest Consumer Partners “HCP” (through November 30, 2008), Harvest Technology Partners “HTP” (through July 31, 2008) and Opportunity Acquisition Corp., a special purpose acquisition corporation, or “SPAC”, formed for the purpose of acquiring one or more businesses through a merger, capital stock exchange, stock purchase, asset acquisition, or other similar business combination. The Company is the sponsor of the SPAC. All material intercompany accounts and transactions have been eliminated in consolidation.

Noncontrolling interest on the consolidated statements of financial condition at September 30, 2009 relates to the interest of third parties in JMP Credit, HMOP and SPAC, partially-owned subsidiaries consolidated on our books. Noncontrolling interest on the consolidated statements of financial condition at December 31, 2008 relates to the interest of third parties in JMPRT and SPAC.

        The Company follows the authoritative guidance included in Generally Accepted Accounting Principles (“GAAP”) on accounting for consolidation of variable interest entities (VIEs). Such guidance applies to certain entities (called VIEs) in which 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. When the Company enters into a transaction with a VIE, the Company determines if it is the primary beneficiary of the VIE by performing a qualitative analysis of theVIE that includes a review of, among other factors, its capital structure, contractual terms, related party relationships, the Company’s fee arrangements and the design of the VIE. Upon acquisition of Cratos, the Company performed this analysis and concluded that the CLO managed by Cratos is a VIE and that Cratos Capital Partners LLC, which owns 100% of the subordinated notes in the CLO and performs ongoing management responsibilities for the CLO, is deemed the primary beneficiary. As a result, the Company consolidates the assets and liabilities of the Cratos CLO securitization entity, and the underlying loans owned by the CLO entity are shown on our consolidated statements of financial condition under loans collateralizing asset-backed securities issued and the asset-backed securities (“ABS”) issued to third parties are shown under ABS issued.

JMPRT is a real estate investment trust that was formed in June 2006. As of December 31, 2008, the Company owned 49.5% of JMPRT and certain employees owned 20.1%. Because of its ownership and management position, the Company consolidated JMPRT and recorded a noncontrolling interest through December 31, 2008. On January 2, 2009, all of the assets and liabilities within JMPRT were transferred to HMOP, a hedge fund managed by HCS. HMOP is a Delaware limited partnership organized for the purposes of investing in real estate-related assets which may include investments in residential or commercial mortgages or loans, real estate and other assets, loans and participation in loans of all types, other specialty mortgage products, and securities. HCS is the general partner of HMOP. In connection with the above asset and liability transfer, the Company exchanged its interest in JMPRT for an interest in HMOP. No gain or loss was recognized from this exchange. The Company follows the authoritative

 

8


Table of Contents

guidance under GAAP regarding the determination of whether a general partner, or the general partners as a group, controls a limited partnership or similar entity when the limited partners have certain rights. Such guidance applies when a general partner controls a limited partnership and is required to consolidate the limited partnership in its financial statements. Under the guidance, the general partner in a limited partnership is presumed to control the limited partnership regardless of the extent of the general partners’ ownership interest in the limited partnership. If the limited partners have either (a) the substantive ability to liquidate the limited partnership or otherwise remove the general partner without cause or (b) substantive participating rights, the general partner does not control the limited partnership. The partnership agreements for HMOP provide for the right of the limited partners to remove the general partner by a simple majority vote of the non-affiliated limited partners. Because of these substantive kick-out rights, the Company, as the general partner, did not control HMOP and therefore did not consolidate HMOP from January 2, 2009 through April 30, 2009. During the quarter ended June 30, 2009, several non-affiliated limited partners redeemed their interest in HMOP, and the remaining limited partners were no longer deemed to have substantive kick-out rights. As a result, the Company consolidates HMOP in its consolidated financial statements effective May 1, 2009. The change in noncontrolling interest as a result of the transfer of assets and liabilities from JMPRT to HMOP and the consolidation of HMOP is presented as “reorganization of a subsidiary” in our Consolidated Statement of Changes in Equity.

HCP had been consolidated in the Company’s financial statements, with a noncontrolling interest being recorded, since its inception in January 2006 through November 30, 2008, due to the Company’s and related parties’ ownership and resulting control of HCP. As a result of the admission of additional non-affiliated limited partners, effective December 1, 2008 HCP was deconsolidated from the Company’s financial statements and the investment in HCP is accounted for under the equity method of accounting.

HTP had been consolidated in the Company’s financial statements, with a noncontrolling interest being recorded, since its inception in January 2006 through July 31, 2008, due to the Company’s and related parties’ ownership and resulting control of HTP. As a result of the admission of additional non-affiliated limited partners, effective August 1, 2008 HTP was deconsolidated from the Company’s financial statements and the investment in HTP is accounted for under the equity method of accounting.

In addition to HTP and HCP, HCS currently manages several other asset management limited partnerships and is a general partner of each. The partnership agreements for these asset management funds provide for the right of the limited partners to remove the general partners by a simple majority vote of the non-affiliated limited partners. Because of these substantive kick-out rights, the Company, as the general partner, does not control these asset management funds and therefore does not consolidate those funds.

On January 18, 2008, JMP Group Inc. and certain unconsolidated affiliates made an investment in convertible preferred stock of New York Mortgage Trust, Inc. (“NYMT”), a publicly traded real estate investment trust engaged in the investment management of mortgage-backed securities and high credit quality residential adjustable rate mortgage loans. Such investment by JMP Group Inc. and affiliated entities was $20.0 million in total, comprised of $5.0 million by JMP Group Inc., $5.0 million by certain funds managed by HCS, and $10.0 million from JMPRT. JMPRT’s investment in NYMT was transferred to HMOP on January 2, 2009. In addition, JMP Group Inc. invested $4.5 million in the common stock of NYMT on February 14, 2008 via a private investment in public equity (PIPE) transaction. At September 30, 2009, JMP Group Inc. owned approximately 6.3% of NYMT’s common stock. In addition, JMP Group Inc. and affiliated entities collectively owned 1.0 million shares of NYMT’s Series A Preferred Stock at September 30, 2009. The Series A Preferred Stock is convertible into shares of NYMT’s common stock based on a conversion price of $8.00 per share of common stock, which represents a conversion rate of two and one-half (2 1/2 ) shares of common stock for each share of Series A Preferred Stock. The Series A Preferred Stock matures on December 31, 2010, at which time any outstanding shares must be redeemed by NYMT at the $20.00 per share liquidation preference. Because of its current ownership and management position, the Company does not consolidate NYMT. The Company accounts for its investment in NYMT using the fair value option in accordance with the authoritative guidance included in GAAP on financial instruments. See Note 24 for the summarized financial information of NYMT.

On July 31, 2009, the Company received 100% of the membership interest in LSC III, LLC (“LSC”) in full satisfaction of a $2.4 million non-revolving credit note. LSC is an investment partnership and owns shares of common and preferred stock of two privately-held companies which had an aggregate fair value of $2.4 million at September 30, 2009. The Company is the sole member of LSC and therefore has a controlling financial interest in LSC. As a result, the Company consolidates LSC in its consolidated financial statements effective July 31, 2009.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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

Investment Banking Revenues

Investment banking revenues consist of underwriting revenues, strategic advisory revenues and private placement fees, and are recorded when the underlying transaction is completed under the terms of the relevant agreement. Underwriting revenues arise from securities offerings in which the Company acts as an underwriter and include management fees, selling concessions and underwriting fees, net of related syndicate expenses. Management fees and selling concessions are recorded on the trade date, which is typically the day of pricing an offering (or the following day) and underwriting fees, net of related syndicate expenses, at the time the underwriting is completed and the related income is reasonably determinable. For these transactions, management estimates the Company’s share of the transaction-related expenses incurred by the syndicate, and recognizes revenues net of such expense. On final settlement, typically 90 days from the trade date of the transaction, these amounts are adjusted to reflect the actual transaction-related expenses and the resulting underwriting fee. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded. If management determines that a transaction is likely not to be completed, deferred expenses related to that transaction are expensed at that time. Strategic advisory revenues primarily include success fees on closed merger and acquisition

 

9


Table of Contents

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 and valuation analyses. Strategic advisory revenues are recorded when the transactions or the services (or, if applicable, separate components thereof) to be performed are substantially complete, the fees are determinable and collection is reasonably assured. 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, net of client reimbursements, are recorded in the Consolidated Statements of Operations within various expense captions other than compensation expense.

Brokerage Revenues

Brokerage revenues consist of (i) commissions resulting from equity securities transactions executed as agent or principal and are recorded on a trade date basis, (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. 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 no further obligation. 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. An invoice is then sent to the payor. For the second and third type of arrangements, revenue is recognized and an invoice is sent once an arrangement exists, access to research has been provided, a specific amount is fixed or determinable, and collectibility 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.

Asset Management Fees

Asset management fees consist of base management fees and incentive fees. The Company recognizes base management fees on a monthly basis over the period in which the investment services are performed. Base management fees earned by the Company are generally based on the fair value of assets under management and the fee schedule for each fund and account. Base management fees are calculated at the investor level using their quarter-beginning capital balance adjusted for any contributions or withdrawals. The Company also earns incentive fees 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 highwater mark or hurdle rate over a defined performance period. For most funds, the highwater mark is calculated using the greatest value of a partner’s capital account as of the end of any performance period, adjusted for contributions and withdrawals. Incentive fees are recognized as revenue at the end of the specified performance period. The performance period used to determine the incentive fee is quarterly for the hedge funds, HMOP and NYMT, and annually for the funds of hedge funds managed by HCS. Most of the incentive fees are currently reinvested in the investment funds in which we hold a general partner investment. The incentive fees are not subject to any contingent repayments to investors or any other clawback arrangements.

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 assignments, as well as limited partner investments in private funds managed by third parties and our investment in NYMT. Principal transaction revenues also include earnings (or losses) attributable to investment partnership interests held by our asset management subsidiary, HCS, which are accounted for using the equity method of accounting.

The Company’s principal transaction revenues for these categories for the three and nine months ended September 30, 2009 and 2008 are as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  

Equity and other securities

   $ 4,893,771      $ (3,197,777   $ 9,389,771      $ (6,028,823

Investment partnerships

     1,103,317        525,545        6,104,833        1,140,433   

Warrants and other investments

     (16,349     (53,928     (91,382     99,656   
                                

Total principal transaction revenues

   $ 5,980,739      $ (2,726,160   $ 15,403,222      $ (4,788,734
                                

Gain on Sale and Payoff of Loans

Gain on sale and payoff of loans consists of gains from the sale and payoff of loans collateralizing asset backed securities at JMP Credit Corporation. Gains are recorded when the proceeds exceed our carrying value of the loan.

Gain on Repurchase of Asset-Backed Securities Issued

Gain on repurchase of asset-backed securities issued consists of gains from repurchases of our ABS from third parties. Gains are recorded when the repurchase price is less than the carrying value of the ABS.

 

10


Table of Contents

Gain on Bargain Purchase

A bargain purchase gain was recognized upon the acquisition of Cratos by JMP Credit Corporation on April 7, 2009. This represents the difference between the fair value of net assets acquired and the consideration to the sellers.

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 accretable or purchase discounts and deferred fees and costs, see Loans held for investment and Loans collateralizing asset-backed securities issued for more information. 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 Expense

Interest expense primarily relates to expense incurred on asset-backed securities issued and note payable. Interest expense on asset-backed securities issued is the stated coupon as a percentage of the principal amount payable as well as amortization of liquidity discount which was recorded at the acquisition date of Cratos, see asset-backed securities issued for more information. Interest expense is recorded on the accrual basis in accordance with the terms of the respective asset-backed securities issued and note payable.

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 these financial institutions and assesses the credit risk.

Restricted Cash and Deposits

Restricted cash and deposits include principal and interest payments that are collateral for the asset-backed securities issued by Cratos. They also include proceeds from short sales deposited with brokers that cannot be removed unless the securities are delivered, cash collateral supporting standby letters of credit issued by JMP Credit, cash on deposit for operating leases, and cash on deposit with JMP Securities’ clearing broker.

Restricted cash consisted of the following at September 30, 2009 and December 31, 2008:

 

     September 30, 2009    December 31, 2008

Principal and interest payments held as collateral for asset-backed securities issued

   $ 27,204,583    $ —  

Cash collateral supporting standby letters of credit

     1,309,083      —  

Proceeds from short sales

     10,869,072      5,677,682

Deposit with clearing broker

     255,336      255,336

Deposits for operating leases

     638,471      996,483
             
   $ 40,276,545    $ 6,929,501
             

Receivable from Clearing Broker

The Company clears customer transactions through another broker-dealer on a fully disclosed basis. At September 30, 2009 and December 31, 2008, the receivable from clearing broker consisted solely of commissions related to securities transactions.

Investment Banking Fees Receivable

Investment banking fees receivable include 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.

Fair Value of Financial Instruments

        The Company adopted amended accounting principles related to fair value measurements as of January 1, 2008. The amendment establishes a consistent framework for measuring fair value in accordance with generally accepted accounting principles (“GAAP”) and expands disclosures with respect to fair value measurements. The amendment applies to all financial instruments that are being measured and reported on a fair value basis. This includes those items currently reported in marketable securities owned, at fair value, other investments and marketable securities sold, not yet purchased, at fair value on the consolidated statements of financial condition. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 5 of the Notes to the consolidated financial statements 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 investment in HuaMei Capital Company, Inc., are recorded at fair value or amounts that approximate fair value. In February 2009, the Company made a $2.0 million investment in HuaMei Capital Company, Inc. (“HuaMei”) to expand its investment banking capabilities in China. HuaMei is a joint venture of China Merchants Securities; MVC Capital, Inc., a publicly traded business development company managed by The Tokarz Group Advisers LLC; and HuaMei Capital founders. The Company accounts for its investment in HuaMei under the equity method of accounting.

 

11


Table of Contents

Marketable securities owned, Other investments, excluding investment in HuaMei Capital Company, Inc., 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, broker or dealer price quotations, 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.

Marketable securities owned and securities sold, but not yet purchased, consist of U.S. listed and over-the-counter (“OTC”) equity securities. Other investments consist principally of investments in private investment funds managed by the Company or its affiliates and an investment in a private investment fund managed by a third party. Such investments held by non-broker-dealer entities are accounted for under the equity method based on the Company’s share of the earnings (or losses) of the investee. The financial position and operating results of the private investment funds are generally determined on an estimated fair value basis as set forth in the AICPA Audit and Accounting Guide: Investment Companies. Generally, securities are valued (i) at their last published sale price if they are listed on an established exchange or (ii) if last sales prices are not published, at the highest closing “bid” price (for securities held “long”) and the lowest closing “asked” price (for “short” positions) as recorded by the composite tape system or such principal exchange, as the case may be. Where the general partner determines that market prices or quotations do not fairly represent the value of a security in the investment fund’s portfolio (for example, if a security is a restricted security of a class that is publicly traded) the general partner may assign a different value. The general partner will determine the estimated fair value of any assets that are not publicly traded.

Also included in other investments are convertible preferred stock of NYMT, and warrants on public and private common stock. The investment in NYMT convertible preferred stock is based on a fair value estimate using the Black-Scholes credit adjusted valuation model on Bloomberg. The warrants on public and private common stock are generally received as a result of investment banking transactions and are valued at estimated fair value as determined by management. Warrants owned are valued at the date of issuance and marked-to-market as of each reporting period. Estimated fair value is determined using the Black-Scholes Options Valuation methodology adjusted for active market and other considerations on a case-by-case basis.

The Company follows the authoritative guidance included in GAAP on the fair value option which provides companies with an option to report selected financial assets and financial liabilities at fair value. It requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The election to use the fair value option is available at specified election dates, such as when an entity first recognizes a financial asset or financial liability or upon entering into a firm commitment. Subsequent changes in fair value must be recorded in the Consolidated Statements of Operations. Additionally, the authoritative guidance allows for a one-time election for existing positions upon adoption, with the transition adjustment recorded to beginning retained earnings.

We elected to apply the fair value option to the following financial assets:

 

   

Investment in NYMT convertible preferred stock; and

 

   

Investment in NYMT common stock

Dividends received during the three months ended September 30, 2009 and 2008 on NYMT stock of $0.5 million and $0.5 million, respectively, were recorded in net dividend income on our Consolidated Statements of Operations. Dividends received during the nine months ended September 30, 2009 and 2008 on NYMT stock of $1.3 million and $1.3 million, respectively, were recorded in net dividend income on our Consolidated Statements of Operations. During the three and nine months ended September 30, 2009, the Company recorded unrealized gains of $2.3 million and $5.6 million, respectively, on the above investments in NYMT primarily due to the improved performance of NYMT’s stock during the period. The unrealized gains on our investments in NYMT are reported in Principal Transactions in the Consolidated Statements of Operations.

Loans Held for Investment

        Loans held for investment are carried at their unpaid principal balance, net of any allowance for credit losses or deferred loan origination or commitment fees. For loans held for investment, we establish and maintain 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. Loans are charged off against the reserve for credit losses if the principal is deemed not recoverable within a reasonable timeframe. Loan origination and commitment 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 90 days and loans which we expect full principal payments may not be received.

Loans Collateralizing Asset-Backed Securities Issued

Loans collateralizing asset-backed securities issued are commercial loans securitized and owned by the Cratos CLO. The loans consist of those loans within the CLO securitization structure at the acquisition date of Cratos and loans purchased or originated into the CLO subsequent to the Cratos acquisition date.

 

12


Table of Contents

Loans acquired through the acquisition and resulting consolidation of Cratos were recorded at their fair value as of the acquisition date. Any unamortized deferred fees or costs related to the loans that existed prior to the acquisition were written off at that date.

For those loans deemed impaired as of the date of the acquisition, the total discount from outstanding principal balance to fair value consists of a nonaccretable credit discount and in most cases an accretable liquidity (or market value) discount. For the remaining loans acquired through the purchase of Cratos, any discounts to fair value were recorded as accretable liquidity discounts as they were not attributable to credit quality. For both types of loans, 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 interest method.

The Company continues to estimate the cash flows expected to be collected over the life of the loans acquired through the purchase of Cratos. If, upon subsequent evaluation, the Company believes it is unable to collect all cash flows expected at the acquisition date plus additional cash flows expected to be collected arising from changes in estimate after the acquisition, the loan is considered impaired for purposes of applying the authoritative guidance under GAAP on loss contingencies or, if applicable, the authoritative guidance under GAAP on loan impairment. Loans considered impaired at the acquisition date of Cratos continue to be assessed in accordance with the authoritative guidance under GAAP on loan impairment. If based on current information and events, it is probable that there is a significant increase in cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, the Company will first reduce any remaining credit discounts (including allowances for loan losses) and, to the extent necessary, any liquidity discounts for the loans established after its acquisition for the increase in the present value of cash flows expected to be collected. Then the Company will recalculate the amount of accretable yield for the loan as the excess of the revised cash flows expected to be collected over the sum of (a) the initial investment less (b) cash collected less (c) write-downs plus (d) amount of yield accreted to date. The Company will adjust the amount of accretable yield by reclassification from nonaccretable discount. The adjustment is accounted for as a change in estimate, with the amount of periodic accretion adjusted over the remaining life of the loan. The resulting yield is then used as the effective interest rate in any subsequent accounting.

Loans purchased or originated after the acquisition date of Cratos are stated at the principal amount outstanding net of deferred fees, deferred costs and the allowance for loan losses. Net deferred fees or costs are recognized as an adjustment to interest income over the contractual life of the loans using the interest method. Remaining amounts are recognized into income when the related loans are paid off or sold. Any discount from principal amount of purchased loans is accreted into interest income as a yield adjustment over the contractual life of the loan.

The accrual of interest on loans is discontinued when principal or interest payments are 90 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 nonaccrual 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 nonaccrual loans and 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. Syndication and structuring fees are recognized in the period the service is completed as other income.

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 is maintained at a level, in the opinion of management, sufficient to off set 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.

        In accordance the authoritative guidance under GAAP on loan impairment, the Company first provides an allowance for loans that are considered impaired. 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. For those loans held by Cratos at the date of acquisition by JMP Credit, and deemed impaired at that date or a subsequent date, allowance for loan losses is calculated considering two further factors. For loans deemed impaired at the date of acquisition if there is a further decline in expected future cash flows, this reduction is recognized as a specific reserve in the current quarter in accordance with above. For those loans deemed impaired subsequent to the acquisition date, if the net realizable value is lower than the current carrying value then the carrying value is reduced and the difference is booked as provision for loan losses. If the total discount from unpaid principal balance to carrying value is larger than the expected loss at the date of assessment, no provision for loan losses is recognized.

In addition, in accordance with the authoritative guidance under GAAP on loss contingencies, the Company provides an allowance on a loan by loan basis for loans at JMP Credit that are not impaired and were purchased after the Cratos acquisition. The Company employs internally developed and third party estimation tools for measuring credit risk (loan ratings, probability of default, and exposure at default), which are used in developing an appropriate allowance for loan losses. The Company performs periodic detailed reviews of its loan portfolio to identify risks and to assess the overall collectibility of loans.

Loans which are deemed to be uncollectible are charged off and the charged-off amount is deducted from the allowance.

Asset-Backed Securities Issued

Asset-backed securities (“ABS”) represent securities issued to third parties from the CLO when the CLO structure formed in 2007. The Company consolidates the CLO for financial reporting purposes as of the April 7, 2009 acquisition date. At the acquisition date, the ABS were recorded at fair value which comprised principal balance outstanding less liquidity discount. The liquidity discount will be amortized into interest expense over the expected remaining lives of the ABS using the interest method.

 

13


Table of Contents

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 the straight-line basis over the estimated useful lives of the respective assets, ranging from three to five years.

Leasehold improvements 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 accounts for income taxes in accordance with the authoritative guidance under GAAP on income taxes which requires the recognition of deferred tax assets and liabilities based upon the temporary differences between the financial reporting and tax bases of the assets and liabilities. 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 adopted the accounting principles related to uncertainty in income taxes on May 16, 2007, the date the Company became subject to federal and state income taxes. Its adoption did not have a material impact on the Company’s financial condition or results of operations. Under the guidance, the Company recognizes a tax benefit from an uncertain position only if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. If this threshold is met, the Company measures the tax benefit as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.

For the three and nine months ended September 30, 2009 and 2008, income taxes are computed based on actual results.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the amended accounting principles related to stock-based compensation, using the modified prospective method. Under that method of adoption, the amended accounting principles are generally only applied to share-based awards granted subsequent to adoption. The amended accounting principles requires measurement of compensation cost for stock-based awards classified as equity at their fair value on the date of grant and the recognition of compensation expense over the service period for awards expected to vest. Such grants are recognized as expense over the service period, net of estimated forfeitures.

Stock-based compensation includes restricted stock units and stock options granted under the Company’s 2007 Equity Incentive Plan, and stock options granted under the Company’s 2004 Equity Incentive Plan.

In accordance with generally accepted valuation practices for stock-based awards issued as compensation, the Company uses the Black-Scholes option-pricing model to calculate the fair value of option awards, although such models were originally developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock options and restricted stock units. The Black-Scholes model requires subjective assumptions regarding variables such as future stock price volatility, dividend yield and expected time to exercise, which greatly affect the calculated values.

Treasury Stock

We account for treasury stock under the cost method, using an average cost flow assumption, and we include treasury stock as a component of stockholders’ equity.

Reclassification

Certain balances from prior years have been reclassified in order to conform to the current year presentation. The reclassifications had no impact on the Company’s financial position, net income or cash flows. Please see Note 23 for the effect of reclassifications on segments.

3. Recent Accounting Pronouncements

        Accounting Standards Update (“ASU”) No. 2009-05, Fair Value Measurements and Disclosures - Measuring Liabilities at Fair Value, (“ASU 2009-05”). In August 2009, the FASB issued ASU 2009-05 which provides amendments to ASC 820-10, Fair Value Measurements and Disclosures - Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification on the valuation techniques that should be used in circumstances in which a quoted price in an active market for the identical liability is not available. It also clarifies certain other requirements in ASC 820-10 when estimating the fair value of a liability. ASU 2009-05 is effective for the first reporting period beginning after August 27, 2009. The Company will adopt ASU 2009-05 for the three-month period ending December 31, 2009. The Company does not expect the adoption to have a material impact on our consolidated financial position or results of operations.

 

14


Table of Contents

ASU No. 2009-06, Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities, (“ASU 2009-06”). In September 2009, the FASB issued ASU 2009-06 which provides additional implementation guidance on accounting for uncertainty in income taxes. It also amends certain disclosure requirements for nonpublic entities. ASU 2009-06 is effective for the reporting period beginning after September 15, 2009 for entities that are currently applying the standards for accounting for uncertainty in income taxes. The Company’s adoption of ASU 2009-06 for the three-month period ended September 30, 2009 did not have a an impact on our consolidated financial position or results of operations.

ASU No. 2009-12, Fair Value Measurements and Disclosures - Investments in Certain Entities that Calculate Net Asset Per Share (or Equivalent), (“ASU 2009-12”). In September 2009, the FASB issued ASU 2009-12 which provides amendments to ASC 820-10, Fair Value Measurements and Disclosures - Overall, to provide guidance on the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). ASU 2009-12 is effective for the interim and annual period ending after December 31, 2009. The Company will adopt ASU 2009-12 for the three-month period ending December 31, 2009. The Company does not expect the adoption to have a material impact on our consolidated financial position or results of operations.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), which amends the consolidation guidance for variable interest entities under FIN 46(R). The key amendments include (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS No. 167 is effective for the beginning of an entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.

The Company is currently evaluating SFAS 167 and has not yet determined the impact on our consolidated financial position or results of operations. However, the Company currently does not consolidate hedge funds it manages where there are substantive kick-out rights that can remove the general partner by a simple majority vote of the non-affiliated limited partners. The implementation of SFAS 167 by the Company on January 1, 2010 may require the consolidation of these hedge funds. See Note 24 for further information on our hedge funds.

SFAS No. 166, Accounting for Transfers of Financial Assets an amendment of SFAS No. 140, (“SFAS 166”). In June 2009, the FASB issued SFAS 166 which amends SFAS No. 140 to remove the concept of a qualifying special-purpose entity and to remove the exception from applying FASB Interpretation (“FIN”) No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (“FIN 46R”) to qualifying special-purpose entities. In addition, SFAS 166 defines the term participating interest to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. It also requires enhanced disclosures to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. FAS 166 must be applied as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company will adopt SFAS 166 for the three-month period ending March 31, 2010. The Company does not expect the adoption to have an impact on our consolidated financial position or results of operations.

In June 2009, the FASB issued FASB ASC 105-10, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles”, (formerly SFAS 168). FASB ASC 105-10 replaces the SFAS 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP. The Codification became the exclusive authoritative reference at September 30, 2009. Updates to the Codification Standards are issued as Accounting Standard Updates (“ASU”s) by the FASB. The Company’s adoption of the Codification for the three-month period ended September 30, 2009 did not have an impact on our consolidated financial position or results of operations.

4. Acquisition

Effective April 7, 2009, the Company, through its majority-owned indirect subsidiary JMP Credit, completed the acquisition of 100% of the membership interests of Cratos Capital Partners, LLC and its subsidiaries, including Cratos Capital Management, LLC (collectively, “Cratos”), an alternative asset manager of collateralized loan obligations, together with 100% of the subordinated securities of Cratos CLO I, Ltd. (the “CLO”). The results of operations of Cratos from April 7, 2009 to September 30, 2009 have been included in the statement of operations of the Company for the three and nine months ended September 30, 2009. The CLO was, at the acquisition date, a diversified portfolio of approximately $467 million par amount of first lien corporate loans for which Cratos serves as investment adviser. The Company acquired control of Cratos through acquiring Cratos Capital Partners LLC (which holds the subordinated securities) with the intent of expanding its business in alternative asset management.

 

15


Table of Contents

The acquisition was accounted for under the acquisition method of accounting, which requires the purchase price to be allocated to assets and liabilities based on their estimated fair value at the acquisition date. The consideration for the net assets acquired was concluded upon prior to the assessment of the fair value of the net assets at the acquisition date. Therefore, the excess of the value of the net assets acquired over the purchase price was recorded as gain on bargain purchase and is shown as a separate component of revenues in the Company’s Consolidated Statement of Operations for the three months ended June 30, 2009 and the nine months ended September 30, 2009. The following table represents the allocation of the purchase price to the acquired net assets and resulting gain on bargain purchase:

 

Amount of cash paid

   $ 4,000,000   

Fair value of contingent consideration (Note 10)

     2,253,944   

Discount on noncontrolling interest

     73,705   
        

Total purchase price

     6,327,649   

Allocation of the purchase price

  

Cratos member’s deficit

     (13,595,538

Pre-tax adjustments to reflect assets and liabilities at fair value:

  

Loans collateralizing asset-backed securities issued

     (113,224,756

Fixed assets

     (34,252

Deferred financing costs

     (6,881,314

Other assets

     (54,916

Accrued interest payable

     7,180   

Asset -backed securities issued

     138,399,679   
        

Pre-tax total adjustments

     18,211,621   

Deferred income taxes

     (581,172
        

After tax total adjustments

     17,630,449   

Other acquisition adjustments

  

Contingent liability to seller (Note 10)

     (2,253,944

Working capital line payoff

     5,799,666   

Noncontrolling interest at fair value

     (73,705
        

Fair value of net assets acquired

     7,506,928   
        

Bargain purchase gain resulting from Cratos acquisition

   $ (1,179,279
        

The following condensed statement of net assets acquired reflects the fair values assigned to the assets and liabilities of Cratos as of the acquisition date:

 

Assets:

  

Cash and cash equivalents

   $ 1,910,523

Restricted cash and deposits

     44,359,080

Loans collateralizing asset-backed securities issued

     280,499,632

Interest receivable

     1,136,896

Deferred tax asset

     50,121,928

Other assets

     254,387
      

Total assets

   $ 378,282,446
      

Liabilities:

  

Asset-backed securities issued

   $ 316,513,000

Interest payable

     1,209,588

Other liabilities

     2,349,830

Deferred tax liability

     50,703,100
      

Total liabilities

   $ 370,775,518
      

Net assets acquired, at fair value

   $ 7,506,928

 

16


Table of Contents

The following unaudited pro forma condensed combined statements of income present the combined results of the Company’s operations with Cratos as if the acquisition had occurred on January 1, 2008.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009    2008     2009    2008  

Pro forma revenues

   $ 41,718,997    $ 16,221,219      $ 102,324,260    $ 66,650,401   

Pro forma net income

     2,968,776      (5,972,013     5,485,601      (2,898,184

Pro forma net income per share - basic

   $ 0.14    $ (0.30   $ 0.27    $ (0.14

Pro forma net income per share - diluted

   $ 0.13    $ (0.30   $ 0.25    $ (0.14

In the unaudited pro forma results, amortization of liquidity discounts on loans collateralizing asset-backed securities issued and on asset-backed securities issued (which were recognized at the acquisition date) has been recorded into pro forma revenues from January 1, 2008. In addition the gain on bargain purchase upon the acquisition was reflected as if it occurred in the first quarter of 2008 pro forma revenues.

5. Marketable Securities and Other Investments

Other Investments at Fair Value

Fair value is 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. 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 or 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 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 is required to provide 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 categories:

 

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

Level 2 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 3 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. A description of the valuation techniques utilized for the fair value of the financial instruments in this category is as follows:

 

   

General partner investment in funds of funds and limited partner investment in mortgage and private equity fund: determined by net asset value provided by third party general partners;

 

   

Investment in NYMT convertible preferred stock: determined by the Company using the Black-Scholes credit adjusted valuation model on Bloomberg;

 

   

Warrants: determined by the Company using the Black-Scholes Options Valuation model, and

 

   

Equity securities: LSC investment in private companies, determined by the Company using comparable public company metrics discounted for private company market illiquidity.

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.”

 

17


Table of Contents

The following tables provide fair value information related to the Company’s financial assets and liabilities at September 30, 2009 and December 31, 2008:

 

     Assets at Fair Value as of
     September 30, 2009
     Level 1    Level 2    Level 3    Total

Financial instruments owned, at fair value:

           

Marketable securities owned:

           

Equity securities

   $ 18,282,610    $ —      $ —      $ 18,282,610
                           

Total marketable securities owned

   $ 18,282,610    $ —      $ —      $ 18,282,610
                           

Other investments:

           

General partner investment in hedge funds

   $ —      $ 31,508,978    $ —      $ 31,508,978

General partner investment in funds of funds

     —        —        3,909,035      3,909,035
                           

Total general partner investment in funds

     —        31,508,978      3,909,035      35,418,013

Limited partner investment in private equity fund

     —        —        2,396,179      2,396,179

Limited partner investment in mortgage fund

     —        —        1,633,374      1,633,374

Investment in NYMT convertible preferred stock

     —        —        14,746,199      14,746,199

Warrants

     —        —        74,675      74,675

Equity securities

     —        —        2,434,953      2,434,953
                           

Total other investments

   $ —      $ 31,508,978    $ 25,194,415    $ 56,703,393
                           
     Assets at Fair Value as of
     December 31, 2008
     Level 1    Level 2    Level 3    Total

Financial instruments owned, at fair value:

           

Marketable securities owned:

           

Equity securities

   $ 11,976,235    $ —      $ —      $ 11,976,235

Quasi-government agency securities

     7,862,245      —        —        7,862,245
                           

Total marketable securities owned

   $ 19,838,480    $ —      $ —      $ 19,838,480
                           

Other investments:

           

General partner investment in hedge funds

   $ —      $ 29,766,076    $ —      $ 29,766,076

General partner investment in funds of funds

     —        —        3,678,073      3,678,073
                           

Total general partner investment in funds

     —        29,766,076      3,678,073      33,444,149

Limited partner investment in private equity fund

     —        —        2,516,115      2,516,115

Investment in NYMT convertible preferred stock

     —        —        11,686,650      11,686,650

Warrants

     —        —        307,341      307,341
                           

Total other investments

   $ —      $ 29,766,076    $ 18,188,179    $ 47,954,255
                           
     Liabilities at Fair Value as of
     September 30, 2009
     Level 1    Level 2    Level 3    Total

Financial instruments sold, but not yet purchased, at fair value:

           

Marketable securities sold, but not yet purchased

   $ 9,752,001    $ —      $ —      $ 9,752,001
                           
     Liabilities at Fair Value as of
     December 31, 2008
     Level 1    Level 2    Level 3    Total

Financial instruments sold, but not yet purchased, at fair value:

           

Marketable securities sold, but not yet purchased

   $ 5,677,683    $ —      $ —      $ 5,677,683
                           

 

18


Table of Contents

The following tables provide a reconciliation of the beginning and ending balances for the assets at fair value using significant unobservable inputs (Level 3) for the three months ended September 30, 2009 and 2008:

 

     Balance as of
June 30, 2009
   Purchases/(sales),
net
    Total gains
and (losses)
(realized and
unrealized)
    Transfers in/(out)
of Level 3
    Balance as of
September 30, 2009
   Changes in unrealized
gains and (losses)
included in earnings
related to assets still
held at reporting date
 

General partner investment in funds of funds

   $ 3,786,876    $ —        $ 122,159      $ —        $ 3,909,035    $ 122,159   

Limited partner investment in private equity fund

     2,391,193      —          4,986        —          2,396,179      4,986   

Limited partner investment in mortgage fund

     —        (393,679     27,053        2,000,000 (2)      1,633,374      27,053   

Investment in NYMT convertible preferred stock

     13,867,950      —          878,249        —          14,746,199      878,249   

Warrants

     244,077      73,506        (242,908     —          74,675      (242,908

Equity securities

     —        2,434,953 (1)      —          —          2,434,953      —     
                                              

Total Level 3 assets

   $ 20,290,096    $ 2,114,780      $ 789,539      $ 2,000,000      $ 25,194,415    $ 789,539   
                                              

 

(1) On July 31, 2009, the Company received 100% of the membership interest in LSC III, LLC (“LSC”) in full satisfaction of a $2.4 million non-revolving credit note. LSC is an investment partnership and owns shares of common and preferred stock of two privately-held companies which had an aggregate fair value of $2.4 million at July 31, 2009. The Company is the sole member of LSC and therefore has a controlling financial interest in LSC. As a result, the Company consolidates LSC in its consolidated financial statements effective July 31, 2009. The two investments owned by LSC were recorded at fair value as of July 31, 2009 and are included in the Company’s Level 3 assets as of September 30, 2009.
(2) The Company’s limited partner investment in a mortgage fund was transferred from Level 2 to Level 3 within the fair value hierarchy due to reduced observability of the inputs used to value the fund’s underlying investments.

 

     Balance as of
June 30, 2008
   Purchases/(sales),
net
   Total gains
and (losses)
(realized and
unrealized)
    Transfers in/(out)
of Level 3
   Balance as of
September 30, 2008
   Changes in unrealized
gains and (losses)
included in earnings
related to assets still
held at reporting date
 

General partner investment in funds of funds

   $ 4,543,753    $ —      $ (6,397   $ —      $ 4,537,356    $ (6,397

Limited partner investment in private equity fund

     2,462,756      50,600      (17,768     —        2,495,588      (17,768

Investment in NYMT convertible preferred stock

     14,065,201      —        (1,356,526     —        12,708,675      (1,356,526

Warrants

     303,764      —        (2,745     —        301,019      (2,745
                                            

Total Level 3 assets

   $ 21,375,474    $ 50,600    $ (1,383,436   $ —      $ 20,042,638    $ (1,383,436
                                            

The following tables provide a reconciliation of the beginning and ending balances for the assets at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2009 and 2008:

 

     Balance as of
December 31, 2008
   Purchases/(sales),
net
    Total gains
and (losses)
(realized and
unrealized)
    Transfers in/(out)
of Level 3
    Balance as of
September 30, 2009
   Changes in unrealized
gains and (losses)
included in earnings
related to assets still
held at reporting date
 

General partner investment in funds of funds

   $ 3,678,073    $ —        $ 230,962      $ —        $ 3,909,035    $ 230,962   

Limited partner investment in private equity fund

     2,516,115      (71,600     (48,336     —          2,396,179      (48,336

Limited partner investment in mortgage fund

     —        (393,679     27,053        2,000,000 (3)      1,633,374      27,053   

Investment in NYMT convertible preferred stock

     11,686,650      655,600 (1)      2,403,949        —          14,746,199      2,403,949   

Warrants

     307,341      73,506        (306,172     —          74,675      (306,172

Equity securities

     —        2,434,953 (2)      —          —          2,434,953      —     
                                              

Total Level 3 assets

   $ 18,188,179    $ 2,698,780      $ 2,307,456      $ 2,000,000      $ 25,194,415    $ 2,307,456   
                                              

 

(1) Investment in NYMT convertible preferred stock held by JMPRT at December 31, 2008 of $7.8 million was removed from the Company’s assets in connection with the transfer of JMPRT assets and liabilities to HMOP effective January 2, 2009. The Company did not consolidate HMOP in its consolidated financial statements through April 30, 2009. Effective May 1, 2009, the Company consolidates HMOP in its consolidated financial statements. As a result, the investment in NYMT convertible preferred stock held by HMOP was added to the Company’s assets at the fair value as of May 1, 2009 of $8.5 million and is included in the Company’s Level 3 assets as of September 30, 2009.
(2) On July 31, 2009, the Company received 100% of the membership interest in LSC III, LLC (“LSC”) in full satisfaction of a $2.4 million non-revolving credit note. LSC is an investment partnership and owns shares of common and preferred stock of two privately-held companies which had an aggregate fair value of $2.4 million at July 31, 2009. The Company is the sole member of LSC and therefore has a controlling financial interest in LSC. As a result, the Company consolidates LSC in its consolidated financial statements effective July 31, 2009. The two investments owned by LSC were recorded at fair value as of July 31, 2009 and are included in the Company’s Level 3 assets as of September 30, 2009.
(3) In the quarter ended September 30, 2009, the Company’s limited partner investment in a mortgage fund was transferred from Level 2 to Level 3 within the fair value hierarchy due to reduced observability of the inputs used to value the fund’s underlying investments.

 

19


Table of Contents
     Balance as of
December 31, 2007
   Purchases/(sales),
net
   Total gains
and (losses)
(realized and
unrealized)
    Transfers in/(out)
of Level 3
   Balance as of
September 30, 2008
   Changes in unrealized
gains and (losses)
included in earnings
related to assets still
held at reporting date
 

General partner investment in funds of funds

   $ 4,460,971    $ —      $ 76,385      $ —      $ 4,537,356    $ 76,385   

Limited partner investment in private equity fund

     2,282,582      205,600      7,406        —        2,495,588      7,406   

Investment in NYMT convertible preferred stock

     —        15,000,000      (2,291,325     —        12,708,675      (2,291,325

Warrants

     300,503      —        516        —        301,019      516   
                                      

Total Level 3 assets

   $ 7,044,056    $ 15,205,600    $ (2,207,018   $ —      $ 20,042,638    $ (2,207,018
                                            

Total gains and losses represent the total gains and/or losses (realized and unrealized) recorded for the Level 3 assets and are reported in Principal Transactions in the accompanying Consolidated Statements of Operations.

Purchases/sales represent the net amount of Level 3 assets that were either purchased or sold during the period. The amounts were recorded at fair value at the date of the transaction.

Net transfers in/out of Level 3 represent existing financial assets that were previously categorized at a different level. Transfers into or out of Level 3 result from changes in the observability of fair value inputs used in determining fair values for different types of financial assets. There were no transfers in/out of Level 3 for the three and nine months ended September 30, 2008.

The amount of unrealized gains and losses included in earnings attributable to the change in unrealized gains and losses relating to Level 3 assets still held at the end of the period were reported in Principal Transactions in the accompanying Consolidated Statements of Operations. The change in unrealized gains and losses are partially offset by realized gains and losses during the period.

Other Investments not at Fair Value

On February 13, 2009 the Company entered into a business arrangement with China Merchants Securities Co.(HK), Ltd., a securities brokerage and investment banking firm, through a $2.0 million investment in HuaMei Capital Company, Inc. (“HuaMei”) to expand the Company’s investment banking capabilities in China. Through HuaMei, the Company intends to provide investment banking services to U.S. and Chinese companies seeking to execute cross-border transactions on both sides of the Pacific. HuaMei is a joint venture of China Merchants Securities; MVC Capital, Inc., a publicly traded business development company managed by The Tokarz Group Advisers LLC; and the HuaMei Capital founders. HuaMei has co-chief executive officers from China Merchant Securities Co. (HK), Ltd. and the Company. The Company has appointed its chairman and chief executive officer, Joseph Jolson, to serve on HuaMei’s board of directors. The Company accounts for its investment in HuaMei under the equity method of accounting within other investments on the Consolidated Statements of Financial Condition. The carrying value of our investment in HuaMei was $2.0 million at September 30, 2009.

6. Loans Held for Investment

Loans held for investment at September 30, 2009 is comprised of principal investments in the form of two loan notes and advances on one non-revolving credit note commitment. At December 31, 2008, loans held for investments was comprised of principal investments in the form of two loan notes and advances on two non-revolving credit note commitments.

Loan notes include a participation interest in a loan made by JMPRT to a client during 2007. The loan is collateralized by real estate related assets, and bears interest at the rate of 20% per annum, payable monthly in arrears. The principal of the loan was due and payable on December 1, 2007, but was extended until September 2008 for an additional fee at the borrower’s option and in connection with a partial repayment. At September 30, 2008, the loan balance of $855,763 was in default and we had recorded a loan loss provision of $427,882 in the third quarter of 2008 with no additional reserves recorded since that date. Recovery of the loan is being sought through bankruptcy court proceedings from which the Company believes it will be able to recover at the net realizable value of the loan.

In addition, in the third quarter of 2008, the Company made a $4.2 million loan to a private commercial mortgage originator in the form of a note and warrants. At September 30, 2009 and December 31, 2008 the loan was recorded net of loan loss reserves of $3.8 million and $2.4 million respectively.

        The Company had also advanced as of December 31, 2008 an aggregate of $3.8 million on two non-revolving credit note commitments with an original aggregate amount of $7.0 million. In July 2009, one of the two non-revolving credit notes matured. As of the maturity date, the net carrying value of the credit was $2.4 million. As permitted by the terms of the credit agreement, at maturity, the borrower conveyed collateral to the Company in full satisfaction of the credit note. The collateral received was the membership interest in LSC III, LLC (see Note 5). As of September 30, 2009, the Company had a $1.3 million advance on a $2.0 million original commitment.

 

20


Table of Contents

The loan notes and non-revolving credit note commitments bear interest at rates from 15% to 20% per annum with maturity dates ranging from current to four years. At September 30, 2009 and December 31, 2008, $4.8 million and $3.4 million of the aggregate amount of loans held for investment were on non-accrual status, respectively.

The following table presents components of loans held for investment, net on the Consolidated Statements of Financial Condition at September 30, 2009 and December 31, 2008:

 

     September 30, 2009     December 31, 2008  

Loans held for investment

   $ 6,057,418      $ 8,812,533   

Allowance for loan losses

     (4,185,365     (2,896,149

Deferred loan fees

     (180,017     (190,517
                

Total loans held for investment, net

   $ 1,692,036      $ 5,725,867   
                

A summary of the activity in the allowance for loan losses for the three and nine months ended September 30, 2009 and 2008 was as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  

Balance at beginning of period

   $ (4,340,365   $ —        $ (2,896,149   $ —     

Provision for loan losses

     105,000        (427,882     (1,339,216     (427,882

Loans charged off, net of recoveries

     50,000        —          50,000        —     
                                

Balance at end of period

   $ (4,185,365   $ (427,882   $ (4,185,365   $ (427,882
                                

The Company determined the fair value of loans held for investment to be $3.5 million and $6.0 million as of September 30, 2009 and December 31, 2008 respectively, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate.

7. Loans Collateralizing Asset-backed Securities Issued

Loans collateralizing asset-backed securities issued are commercial loans securitized and owned by the Cratos CLO. The loans consist of those loans within the CLO securitization structure at the acquisition date of Cratos and loans purchased or originated into the CLO subsequent to the Cratos acquisition date. The following table presents the components of loans collateralizing asset-backed securities issued, net at September 30, 2009:

 

     September 30, 2009  

Loans collateralizing asset-backed securities

   $ 470,321,664   

Allowance for loan losses

     (3,026,626

Liquidity discount

     (101,270,259

Credit discount

     (44,635,334

Deferred loan fees, net

     (4,150,533
        

Total loans collateralizing asset-backed securities, net

   $ 317,238,912   
        

JMP Credit provides loans to companies throughout the United States. Although JMP Credit has a diversified loan portfolio, should events occur, including adverse economic conditions, the ability of borrowers to make timely scheduled principal and interest payments on their loans may be adversely affected.

A loan is considered to be impaired when, based on current information, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the original loan agreement, including scheduled principal and interest payments. There were $93.5 million of impaired loans as of September 30, 2009, with allocated specific reserves of $2.8 million and credit discount of $44.6 million as of September 30, 2009. In addition, in accordance with the authoritative guidance under GAAP on loss contingencies, we collectively evaluate pools of homogeneous loans based on portfolio classification and risk assessment to determine the inherent loss in these portfolios. Based on such evaluation, we recorded pooled reserves of $0.1 million during the quarter ended September 30, 2009 on loans purchased into the CLO subsequent to the Cratos acquisition.

 

21


Table of Contents

A summary of the activity in the allowance for loan losses for the three and nine months ended September 30, 2009 is as follows:

 

     Three Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2009
 

Balance at beginning of period

   $ (2,537,976   $ —     

Provision for loan losses:

    

Specific reserve

     (1,387,864     (3,806,504

Pooled reserve

     (100,786     (220,122

Reversal due to sale or payoff of loans

     1,000,000        1,000,000   
                

Balance at end of period

   $ (3,026,626   $ (3,026,626
                

Loans recorded upon the acquisition of Cratos at fair value reflect a liquidity discount and a credit discount. In addition, most loans purchased subsequent to the acquisition were purchased at discount to their principal value, reflecting deferred loan fees. The tables below summarize the activity in the loan principal, liquidity discount, credit discount and deferred fees for the impaired loans at acquisition date and non-impaired loans at acquisition date for the three and nine months ended September 30, 2009:

Impaired loans at acquisition:

 

     Three Months Ended September 30, 2009  
     Principal     Allowance for Loan
Losses
    Liquidity Discount     Credit Discount     Carrying Value,
Net
 

Balance at beginning of period

   $ 84,340,600      $ (2,418,640   $ (17,148,785   $ (45,724,267   $ 19,048,908   

Repayments

     (2,200,515     —          —          88,933        (2,111,582

Amortization of discount

     —          —          985,433        —          985,433   

Provision for loan losses

     —          (493,750     —          —          (493,750

Sales and payoff

     (2,357,025     1,000,000        178,496        1,000,000        (178,529
                                        

Balance at end of period

   $ 79,783,060      $ (1,912,390   $ (15,984,856   $ (44,635,334   $ 17,250,480   
                                        

Non-impaired loans at acquisition:

 

     Three Months Ended September 30, 2009  
     Principal     Allowance for Loan
Losses
    Liquidity Discount     Deferred Loan Fees     Carrying Value,
Net
 

Balance at beginning of period

   $ 390,188,797      $ (119,336   $ (98,726,651   $ (2,286,845   $ 289,055,965   

Purchases / funding

     47,923,401        —          —          (2,414,810     45,508,591   

Repayments

     (19,191,387     —          —          —          (19,191,387

Amortization of discount

     —          —          6,006,842        304,789        6,311,631   

Provision for loan losses

     —          (994,900     —          —          (994,900

Sales and payoff

     (28,382,208     —          7,434,406        246,333        (20,701,469
                                        

Balance at end of period

   $ 390,538,603      $ (1,114,236   $ (85,285,403   $ (4,150,533   $ 299,988,431   
                                        

Impaired loans at acquisition:

 

     Nine Months Ended September 30, 2009  
     Principal     Allowance for Loan
Losses
    Liquidity Discount     Credit Discount     Carrying Value,
Net
 

Balance at beginning of period

   $ —        $ —        $ —        $ —        $ —     

Cratos acquisitions

     96,466,473        —          (18,599,270     (51,492,789     26,374,414   

Repayments

     (3,886,633     —          —          88,933        (3,797,700

Amortization of discount

     —          —          1,945,918        —          1,945,918   

Provision for loan losses

     —          (2,912,390     —          —          (2,912,390

Sales and payoff

     (12,796,780     1,000,000        668,496        6,768,522        (4,359,762
                                        

Balance at end of period

   $ 79,783,060      $ (1,912,390   $ (15,984,856   $ (44,635,334   $ 17,250,480   
                                        

 

22


Table of Contents

Non-impaired loans at acquisition:

 

     Nine Months Ended September 30, 2009  
     Principal     Allowance for Loan
Losses
    Liquidity Discount     Deferred Loan Fees     Carrying Value,
Net
 

Balance at beginning of period

   $ —        $ —        $ —        $ —        $ —     

Cratos acquisitions

     363,701,586        —          (109,576,369     —          254,125,217   

Purchases / funding

     98,439,506        —          —          (4,880,734     93,558,772   

Repayments

     (28,238,495     —          —          —          (28,238,495

Amortization of discount

     —          —          11,462,992        483,868        11,946,860   

Provision for loan losses

     —          (1,114,236     —          —          (1,114,236

Sales and payoff

     (43,363,994     —          12,827,974        246,333        (30,289,687
                                        

Balance at end of period

   $ 390,538,603      $ (1,114,236   $ (85,285,403   $ (4,150,533   $ 299,988,431   
                                        

The Company determined the fair value of loans collateralizing asset-backed securities to be $367.5 million as of September 30, 2009, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate.

At September 30, 2009, $93.5 million of the aggregate principal amount of loans collateralizing asset-backed securities were on non-accrual status.

8. Fixed Assets

At September 30, 2009 and December 31, 2008, fixed assets consisted of the following:

 

     September 30, 2009     December 31, 2008  

Furniture and fixtures

   $ 1,560,843      $ 1,363,429   

Computer and office equipment

     3,599,148        3,247,255   

Leasehold improvements

     2,374,283        2,320,339   

Software

     520,157        490,194   

Less: accumulated depreciation

     (6,806,625     (6,214,203
                

Total fixed assets, net

   $ 1,247,806      $ 1,207,014   
                

Depreciation expense for the three months ended September 30, 2009 and 2008 was $188,789 and $239,909, respectively. Depreciation expense for the nine months ended September 30, 2009 and 2008 was $592,422 and $760,797, respectively.

9. Note Payable

Note payable consists of the revolving and term loans related to the Company’s credit facility with City National Bank (the “Lender”) entered into on August 3, 2006. The Company had a revolving loan of $2.1 million and a term loan of $7.8 million outstanding at September 30, 2009 and a term loan of $8.7 million outstanding at December 31, 2008.

On December 31, 2008, the Company entered into Amendment Number Three to Credit Agreement (the “Third Amendment”), which amends certain provisions of the Credit Agreement, dated as of August 3, 2006, by and between the Company and the Lender, as amended by Amendment Number One to Credit Agreement, dated as of December 17, 2007 and as further amended by Amendment Number Two to Credit Agreement, dated as of March 27, 2008 (collectively, the “Credit Agreement”).

The Third Amendment converted the Company’s outstanding revolving loans of $8.7 million into a single term loan as of December 31, 2008. The term loan will be repaid in equal quarterly payments of $434,043 which commenced on September 30, 2009 and continues through December 31, 2013 and bears interest at the prime rate or LIBOR plus 2.25%. The Third Amendment also provided that of the original $30.0 million revolving line of credit, $21.0 million remains available under the revolving portion of the Credit Agreement and the annual interest rate provisions of the Credit Agreement are increased from the prime rate minus 1.25% to the prime rate and from LIBOR plus 1.25% to LIBOR plus 2.25%. The Lender will continue to provide revolving loans of up to $21.0 million through December 31, 2010, on which date the then existing revolving loans will convert into term loans.

During the nine months ended September 30, 2009, the Company drew down $2.1 million on the revolving line of credit to fund the HuaMei investment and $4.0 million to fund the purchase of Cratos. The $4.0 million drawn down to fund the purchase of Cratos was repaid during the same period. In addition, the Company made a scheduled repayment of $0.9 million on the term loan. The Company had undrawn amounts of $18.9 million and $21.0 million under the revolving line of credit with the Lender at September 30, 2009 and December 31, 2008, respectively. Each draw bears interest at the prime rate or LIBOR plus 2.25%.

 

23


Table of Contents

The following table shows the repayment schedules for the principal portion of the term loan at September 30, 2009:

 

2009

   $ 868,085

2010

     1,736,170

2011

     1,736,170

2012

     1,736,170

2013

     1,736,170

Thereafter

     —  
      
   $ 7,812,765
      

The Credit Agreement contains financial and other covenants, including, but not limited to, limitations on debt, liens and investments, as well as the maintenance of certain financial covenants. A violation of any one of these covenants could result in a default under the facility, which would permit the bank to terminate our note and require the immediate repayment of any outstanding principal and interest. The Third Amendment modified the financial covenants in the Credit Agreement to remove both the minimum requirement of Net Income (as defined in the Credit Agreement) and the minimum requirement of EBITDA (as defined in the Credit Agreement). The Third Amendment also removed the Fixed Charge Coverage Ratio (as defined in the Credit Agreement) and added a new financial covenant regarding the Company’s liquidity. At September 30, 2009, the Company was in compliance with the loan covenants.

In connection with the Third Amendment, the Company paid to the Lender an amendment fee of $74,202. The term loan is collateralized by a pledge of the Company’s assets, including its interests in each of JMP Securities and HCS.

10. Contingent Consideration Payable

As part of the acquisition of Cratos, JMP Credit issued a $3.0 million zero-coupon note to one of the previous owners of Cratos. The note is payable only from the first $3.0 million of cash flows derived from the subordinated notes held by JMP Credit. The note was recorded at its fair value of $2.3 million as of the acquisition date with the difference from the face value of $0.7 million recorded as a liquidity discount on the acquisition date. The liquidity discount is amortized into interest expense over the expected life of the note which is the sole component of interest expense related to the zero-coupon note. During the nine months ended September 30, 2009, the Company made principal repayments of $98,792 on the note and recorded interest expense of $106,878.

11. Asset-backed Securities Issued

On May 17, 2007, Cratos CLO I Ltd. completed a $500.0 million aggregate principal amount of notes (the “Notes”) on-balance sheet debt securitization and obtained $455.0 million of third-party financing. The Notes will be repaid from the cash flows generated by the loan portfolio owned by Cratos CLO I Ltd. The Notes were issued in seven separate classes as set forth in the table below. The Company owns all of the unsecured subordinated notes and $13.8 million of Class C, D and E notes. These unsecured subordinated notes and the Class C, D and E notes owned by the Company are eliminated upon consolidation of JMP Credit, and therefore, are not reflected on the Company’s consolidated statement of financial condition at September 30, 2009.

 

($ in millions)

  Notes
Originally
Issued
  Outstanding
Principal

Balance
September 30,
2009
    Liquidity
Discount
September 30,
2009
    Net
Outstanding
Balance

September 30,
2009
    Interest
Rate
Spread to

LIBOR
  Ratings
(Moody’s/
S&P) (1)

Class A Senior Secured Floating Rate Revolving Notes due 2021

  $ 326.0   $ 322.3      $ (40.8   $ 281.5      0.26% - 0.29%   Aaa/AAA

Class B Senior Secured Floating Rate Notes due 2021

    30.0     30.0        (10.2     19.8      0.50%   Aa2/AA

Class C Senior Secured Deferrable Floating Rate Notes due 2021

    35.0     35.0        (24.2     10.8      1.10%   Baa3/A

Class D Secured Deferrable Floating Rate Notes due 2021

    34.0     34.0        (23.8     10.2      2.40%   Ba3/BBB

Class E Secured Deferrable Floating Rate Notes due 2021

    30.0     30.0        (22.8     7.2      5.00%   B3/BB
                                     

Total secured notes sold to investors

  $ 455.0   $ 451.3      $ (121.8   $ 329.5       

Unsecured subordinated notes due 2021

    45.0     45.0        (39.9     5.1       
                                 

Total notes for the CLO I offering

  $ 500.0   $ 496.3      $ (161.7   $ 334.6       

Consolidation elimination

    N/A     (58.7     46.9        (11.8    
                                 

Total asset-backed securities issued

    N/A   $ 437.6      $ (114.8   $ 322.8       
                                 

 

(1) These ratings are unaudited and were the current ratings as of September 30, 2009 and are subject to change from time to time.

The secured notes and subordinated notes are limited recourse obligations payable solely from cash flows of the CLO I loan portfolio and related collection and payment accounts pledged as security. Payment on the Class A-1 notes rank equal, or pari passu, in right of payment with payments on the Class A-2 notes and payment on the Class A-1 and Class A-2 notes rank senior in right of payment to the other secured notes and the subordinated notes. Payment on the Class B, Class C, Class D and Class E notes generally rank subordinate in right of payment to any other class of notes which has an earlier alphabetical designation. The subordinated notes are subordinated in right of payment to all other classes of notes and will not accrue interest. Interest on the secured notes is payable quarterly at a per annum rate equal to LIBOR plus the applicable spread set forth in the table above. Payment of interest on the Class C, Class D and Class E notes is payable only to the extent proceeds are available therefore under the applicable payment priority provisions. As of September 30, 2009, all interest on the secured notes was paid. To the extent proceeds are not so available, interest on the Class C, Class D and Class E notes will be deferred. Cratos CLO I, Ltd. is also required to pay a commitment fee of 0.18% on the unused portion of the funding commitments of the Class A-1 notes. The secured notes are secured by the CLO I loan portfolio and the funds on deposit in various related collection and payment accounts. The terms of the debt securitization subject the loans included in the CLO I loan portfolio to a number of collateral quality, portfolio profile, interest coverage and overcollateralization tests. Total interest expense related to the asset-backed securities issued for the three months ended September 30, 2009 was $8.3 million, which comprised cash coupon of $1.5 million and liquidity discount amortization of $6.8 million. Total interest expense for the nine months ended September 30, 2009 was $17.1 million, which comprised cash coupon of $3.4 million and liquidity discount amortization of $13.7 million. As of September 30, 2009, accrued interest payable on the Notes was $0.6 million.

 

24


Table of Contents

The Notes recorded upon the acquisition of Cratos at fair value reflect a liquidity discount. The activity in the note principal and liquidity discount for the three and nine months ended September 30, 2009 comprised the following:

 

     Three Months Ended September 30, 2009  
     Principal     Liquidity Discount     Net  

Balance at beginning of period

   $ 445,240,000      $ (121,014,935   $ 324,225,065   

Repayments

     (3,668,244     —          (3,668,244

Post-acquisition purchases

     (4,000,000     (592,800     (4,592,800

Sales

     —          —          —     

Amortization of discount

     —          6,823,414        6,823,414   
                        

Balance at end of period

   $ 437,571,756      $ (114,784,321   $ 322,787,435   
                        
     Nine Months Ended September 30, 2009  
     Principal     Liquidity Discount     Net  

Balance at beginning of period

   $ —        $ —        $ —     

Cratos acquisitions

     440,950,000        (124,437,000     316,513,000   

Repayments

     (3,668,244     —          (3,668,244

Post-acquisition purchases

     (4,760,000     —          (4,760,000

Sales

     5,050,000        (4,054,000     996,000   

Amortization of discount

     —          13,706,679        13,706,679   
                        

Balance at end of period

   $ 437,571,756      $ (114,784,321   $ 322,787,435   
                        

The Company determined the fair value of asset-backed securities issued to be $337.8 million as of September 30, 2009.

12. Stockholders’ Equity

Common Stock

Shares of JMP Holdings Inc. common stock were originally sold in a private offering in August 2004 to enable certain non-employee investors to invest through a corporate entity in the membership interests of JMP Group LLC. JMP Holdings in turn owned, as a member of JMP Group LLC, Class B common interests on a one-for-one basis for each share of common stock. Effective May 16, 2007, in connection with the Company’s initial public offering, the members of JMP Group LLC exchanged the outstanding membership interests of JMP Group LLC for shares of common stock of JMP Holdings, and JMP Holdings changed its name to JMP Group Inc. In the initial public offering, the Company sold and issued 7,199,864 shares of its common stock, raising $73.1 million of proceeds, net of the Company’s direct offering costs.

Stock Repurchase Program

A 1.5 million share repurchase program authorized in August and November 2007 was fully executed as of January 18, 2008. On March 10, 2008 and March 3, 2009, the Company’s board of directors authorized the repurchase of an additional 2.0 million shares during the subsequent eighteen months and the repurchase of an additional 0.5 million shares during the subsequent twelve months, respectively. During the quarter ended September 30, 2009, the Company repurchased 324 shares of the Company’s common stock, all of which were repurchased in connection with employee stock plans whereby the Company’s shares were tendered by employees for the payment of applicable withholding taxes, at $6.40 per share for an aggregate purchase price of $2,074. The timing and amount of any future repurchases will be determined by JMP management based on its evaluation of market conditions, the relative attractiveness of other capital deployment activities, regulatory considerations and other factors.

13. Stock-Based Compensation

On March 26, 2007, the board of directors adopted the JMP Group Inc. 2007 Equity Incentive Plan (“JMP Group 2007 Plan”), which was approved by the stockholders on April 12, 2007. JMP Group Inc. authorized the issuance of 4,000,000 shares of its common stock under this Plan. This amount is increased by any shares JMP Group Inc. purchases on the open market, or through any share repurchase or share exchange program, as well as any shares that may be returned to the JMP Group 2007 Plan or the JMP Group LLC 2004 Equity Incentive Plan (“JMP Group 2004 Plan”) as a result of forfeiture, termination or expiration of awards; not to exceed a maximum aggregate number of shares of 2,960,000 shares under the JMP Group 2004 Plan. The Company will issue shares upon exercises or vesting from authorized but unissued shares or from treasury stock.

 

25


Table of Contents

Stock Options

The following table summarizes the stock option activity for the nine months ended September 30, 2009:

 

     Nine Months Ended
September 30, 2009
     Shares Subject
to Option
    Weighted
Average
Exercise Price

Balance, beginning of year

   2,086,990      $ 11.40

Granted

   —          —  

Exercised

   (8,325     10.00

Forfeited

   (4,625     10.00

Expired

   (108,875     12.76
            

Balance, end of period

   1,965,165      $ 11.33
            

Options exercisable at end of period

   1,721,692      $ 11.50
            

 

   

As of September 30, 2009

   

Options Outstanding

 

Options Vested and Exercisable

Range of

Exercise

Prices

 

Number
Outstanding

 

Weighted
Average
Remaining
Contractual
Life in Years

 

Weighted
Average
Exercise Price

 

Aggregate
Intrinsic Value

 

Number
Exercisable

 

Weighted
Average
Remaining
Contractual
Life in Years

 

Weighted
Average
Exercise Price

 

Average
Intrinsic Value

$10.00 - $15.00

  1,965,165   5.13   $11.33   $—     1,721,692   4.99   $11.50   $—  

The Company recognizes stock-based compensation expense for stock options over the graded vesting period of the options using the accelerated attribution method. The Company recognized compensation expense related to stock options of $4,002 and $11,311 for the three months ended September 30, 2009 and 2008, respectively, and $14,852 and $28,078 for the nine months ended September 30, 2009 and 2008, respectively.

As of September 30, 2009, there was $7,301 of unrecognized compensation expense related to stock options expected to be recognized over a weighted average period of 0.28 years.

Restricted Stock Units

The Company has granted restricted stock units (“RSUs”) to employees and non-employee directors at no cost to the recipient. An RSU entitles the recipient to receive a share of common stock after the applicable restrictions lapse. These awards are generally subject to vesting schedules and continued employment with the Company. Some of these awards are also subject to post vesting lockup restrictions. In the event of a change in control or corporate transactions, or if the vesting of all or certain of the RSUs are otherwise accelerated, the RSUs will vest immediately prior to the effective date of such an event.

On February 5, 2009, as a part of the 2008 annual compensation program, the Company awarded 800,000 RSUs to certain employees. These units will vest on the fourth anniversary of grant date and are not subject to a lockup period. The total fair value of these awards on grant date was $3,384,000. The fair value per unit of $4.23 was based on the market value of the underlying stock on grant date, discounted for future dividends not expected to be received by unvested RSUs over the vesting period. On the same date, as a part of the 2008 annual compensation program, the Company granted 87,076 shares of restricted stock to certain employees. These shares vested immediately with a two-year restricted period subject to non-competition, non-solicitation and certain other covenants. The total fair value of this grant was $435,382 and the fair value per share was based on the closing price of the underlying stock on grant date of $5.00.

On March 3, 2009, the Company awarded 18,000 RSUs to a new independent director. Of these units, 33% vested immediately on grant date, with the remaining balance vesting 33% on each of the two subsequent anniversaries. The fair value of these units was $4.59 per share and was calculated based on the market value of the underlying stock on grant date, discounted for future dividends expected not to be received by unvested RSUs over the vesting period. On April 17, 2009, the Company awarded 13,200 RSUs to the Company’s independent directors. These units will vest 100% in 2010. The fair value of these units was $4.43 per share and was calculated based on the market value of the underlying stock on grant date, discounted for future dividends expected not to be received by unvested RSUs over the vesting period. There is no lockup period for these units granted to the Company’s independent directors.

In addition, the Company awarded 153,248 RSUs to new hire employees during the nine months ended September 30, 2009. These units will vest on the fourth anniversary of grant date and are not subject to a lockup period. The fair value per unit was based on the market value of the underlying stock on grant date, discounted for future dividends not expected to be received by unvested RSUs over the vesting period.

 

26


Table of Contents

The following table summarizes the RSU activity for the nine months ended September 30, 2009:

 

     Nine Months Ended
September 30, 2009
     Restricted Stock
Units
    Weighted
Average
Grant Date
Fair Value

Balance, beginning of year

   2,265,292      $ 8.94

Granted

   984,448        4.77

Vested

   (389,585     10.18

Forfeited

   (125,813     9.49
            

Balance, end of period

   2,734,342      $ 7.24
            

The Company recognizes compensation expense over a graded vesting period using the accelerated attribution method. For the three months ended September 30, 2009 and 2008, the Company recorded compensation expense of $707,595 and $789,049, respectively, related to RSUs awarded in connection with the initial public offering. For the nine months ended September 30, 2009 and 2008, the Company recorded compensation expense of $2,468,762 and $3,027,717, respectively, related to RSUs awarded in connection with the initial public offering. In addition, for the three months ended September 30, 2009 and 2008, the Company recorded compensation expense of $542,633 and $1,214,612, respectively, for RSUs granted after the initial public offering. For the nine months ended September 30, 2009 and 2008, the Company recorded compensation expense of $1,417,513 and $3,532,635, respectively, related to RSUs granted after the initial public offering.

As of September 30, 2009, there was $10,789,351 of unrecognized compensation expense related to RSUs expected to be recognized over a weighted average period of 2.33 years.

14. Net Income (Loss) per Share of Common Stock

Basic net income (loss) per share for the Company is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the reporting period. Diluted net income (loss) per share is calculated by adjusting the weighted average number of outstanding shares to reflect the potential dilutive impact as if all potentially dilutive stock options or RSUs were exercised or converted under the treasury stock method. However, for periods that we have a net loss the effect of outstanding stock options or RSUs is anti-dilutive and, accordingly, is excluded from the calculation of diluted loss per share.

The computations of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2009 and 2008 are shown in the tables below:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009    2008     2009    2008  

Numerator:

          

Net income (loss) attributable to JMP Group Inc.

   $ 2,968,776    $ (4,898,705   $ 7,288,905    $ (4,025,435
                              

Denominator:

          

Basic weighted average shares outstanding

     20,754,502      20,035,637        20,633,361      20,317,627   
                              

Effect of potential dilutive securities:

          

Restricted stock units

     1,260,221      —          1,006,888      —     
                              

Diluted weighted average shares outstanding

     22,014,723      20,035,637        21,640,249      20,317,627   
                              

Net income per share

          

Basic

   $ 0.14    $ (0.24   $ 0.35    $ (0.20

Diluted

   $ 0.13    $ (0.24   $ 0.34    $ (0.20

Stock options to purchase 1,981,661 and 2,029,712 shares of common stock for the three and nine months ended September 30, 2009, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding. Stock options to purchase 2,222,730 and 2,279,322 shares of common stock for the three and nine months ended September 30, 2008, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding. Restricted stock units for zero and 16,811 shares of common stock for the three and nine months ended September 30, 2009, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding. Restricted stock units for 3,341,689 and 3,317,110 shares of common stock for the three and nine months ended September 30, 2008, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding.

15. Employee Benefits

        All salaried employees of the Company are eligible to participate in the JMP Group 401(k) Plan after three months of employment. Participants may contribute up to the limits set by the United States Internal Revenue Service. There were no contributions by the Company during the three and nine months ended September 30, 2009 and 2008.

 

27


Table of Contents

16. Income Taxes

Prior to the Reorganization, all income and losses of JMP Group LLC, the Predecessor, were reportable by the individual members of JMP Group LLC in accordance with the Internal Revenue Code of the United States. The U.S. federal and state income taxes payable by the members based upon their share of JMP Group LLC’s net income have not been reflected in the accompanying financial statements for periods prior to the Reorganization. JMP Holdings Inc., being a C-corporation from its inception in August 2004, was subject to U.S. federal and state income taxes on its taxable income and accounted for income taxes in its separate financial statements.

As a result of the Reorganization, JMP Group Inc. (formerly JMP Holdings Inc.) succeeded to the business of the Predecessor. The Company is subject to U.S. federal and state income taxes on all taxable income earned subsequent to May 15, 2007 by JMP Group LLC and its subsidiaries. As a result of the Reorganization, upon the change of tax status of JMP Group LLC from a partnership to a wholly-owned disregarded entity of the Company, the Company recognized a one-time tax benefit of $4,084,993 in connection with the establishment of net deferred tax items of $10,169,354. For the three and nine months ended September 30, 2009, the Company recorded a total tax expense of $2,879,018 and $6,491,386, respectively. For the three and nine months ended September 30, 2008, the Company recorded a total tax benefit of $2,971,386 and $2,485,284, respectively, which included a tax expense (benefit) adjustment of $0 and $(317,168), respectively, to the $4,084,993 one-time tax benefit recorded in 2007.

The components of the Company’s income tax (benefit) expense for the three and nine months ended September 30, 2009 and 2008 are as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  

Federal

   $ (542,486   $ (63,454   $ (210,721   $ 3,551,361   

State

     (122,996     (17,081     (10,642     884,970   
                                

Total current income tax expense (benefit)

     (665,482     (80,535     (221,363     4,436,331   

Federal

     2,767,972        (1,974,865     5,264,949        (5,487,846

State

     776,528        (915,986     1,447,800        (1,433,769
                                

Total deferred expense (benefit)

     3,544,500        (2,890,851     6,712,749        (6,921,615
                                

Total expense (benefit) from income taxes

   $ 2,879,018      $ (2,971,386   $ 6,491,386      $ (2,485,284
                                

A reconciliation of the statutory U.S. federal income tax rate to the Company’s effective tax rate for the three months ended September 30, 2009 and 2008 are as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  

Tax at federal statutory tax rate

   35.00   35.00   35.00   35.00

State income tax, net of federal tax benefit

   5.75   5.75   5.75   5.75

Adjustment for permanent items

   0.03   -0.23   -2.91   -1.56
                        

Rate before one-time events

   40.78   40.52   37.84   39.19

Deferred tax asset written off related to options and RSUs

   0.14   -0.43   4.62   -3.06

Adjustment for prior year taxes

   2.54   -2.35   -0.53   -2.83

Deferred tax recognized upon JMP Group LLC’s tax status change

   —        —        —        4.87

Post-acquisition adjustment to deferred tax liability of Cratos

   0.43   —        1.32   —     
                        

Effective tax rate

   43.89   37.74   43.25   38.17
                        

The Company has analyzed the filing positions in its federal and state tax returns for all open tax years 2005 through 2008. The Company does not anticipate any tax adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flow. Therefore, the Company did not record a cumulative effect adjustment related to the adoption the accounting principles related to uncertainty in income taxes, and no liabilities for uncertain income tax positions have been recorded.

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 before taxes. Penalties, if incurred, would be recorded in “administration” and interest paid or received would be recorded in “interest and dividend expense” in the Consolidated Statements of Operations.

17. Commitments and Contingencies

        The Company leases office space in California, Illinois, Georgia, Massachusetts and New York under various operating leases. Rental expense for the three months ended September 30, 2009 and 2008 was $610,091 and $478,317, respectively. Rental expense for the nine months ended September 30, 2009 and 2008 was $1,787,608 and $1,426,136, respectively.

The California, New York and Illinois leases included a period of free rent at the start of the lease for seven, three and nine months, respectively. Rent expense is recognized over the entire lease uniformly considering the free rent savings. The aggregate minimum future commitments of these leases are:

 

2009

   $ 594,709

2010

     2,417,106

2011

     1,797,104

2012

     82,745

2013

     54,097

Thereafter

     60,167
      
   $ 5,005,928
      

 

28


Table of Contents

In connection with its underwriting activities, JMP Securities enters into firm commitments for the purchase of securities in return for a fee. These commitments require JMP Securities to purchase securities at a specified price. Securities underwriting exposes JMP Securities to market and credit risk, primarily in the event that, for any reason, securities purchased by JMP Securities cannot be distributed at anticipated price levels. At September 30, 2009, JMP Securities had no open underwriting commitments.

The marketable securities owned and the restricted cash as well as the cash held by the clearing broker, may be used to maintain margin requirements. At September 30, 2009 and December 31, 2008, the Company had $255,336 of cash on deposit with JMP Securities’ clearing broker. Furthermore, the marketable securities owned may be hypothecated or borrowed by the clearing broker.

Unfunded commitments are agreements to lend to a borrower, provided that all conditions have been met. As of September 30, 2009, the Company had unfunded commitments of $3.6 million in the Corporate Credit segment.

18. Regulatory Requirements

JMP Securities is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital, as defined, and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. JMP Securities had net capital of $31,709,956 and $39,761,064, which were $30,222,956 and $38,681,564 in excess of the required net capital of $1,487,000 and $1,079,500 at September 30, 2009 and December 31, 2008, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 0.41 to 1 and 0.24 to 1 at September 30, 2009 and December 31, 2008, respectively.

Since all customer transactions are cleared through another broker-dealer on a fully disclosed basis, JMP Securities is not required to maintain a separate bank account for the exclusive benefit of customers in accordance with Rule 15c3-3 under the Exchange Act.

19. Related Party Transactions

The Company earns base management fees and incentive fees from serving as investment advisor for various entities, including corporations, partnerships and offshore investment companies. The Company may also own an investment in these companies. Base management fees earned from these activities were $2,241,330 and $1,673,380 for the three months ended September 30, 2009 and 2008, respectively Also, HCS earned incentive fees of $1,060,298 and $644,123 from these entities for the three months ended September 30, 2009 and 2008, respectively. Base management fees earned from these activities were $6,324,896 and $4,073,669 for the nine months ended September 30, 2009 and 2008, respectively. Also, HCS earned incentive fees of $9,517,256 and $2,399,725 from these entities for the nine months ended September 30, 2009 and 2008, respectively.

On April 30, 2009, a portion of Cratos CLO I class C, D and E notes were sold to two officers of Cratos Capital Partners LLC. The par value of these notes was $5,050,000 which were sold to the officers at the current fair market value of $996,000. The difference between the par value and the purchase price was recorded as liquidity discount on the Company’s consolidated statements of financial condition.

20. Guarantees

JMP Securities has agreed to indemnify its clearing broker for losses that the clearing broker may sustain from the accounts of customers introduced by JMP Securities. Should a customer not fulfill its obligation on a transaction, JMP Securities may be required to buy or sell securities at prevailing market prices in the future on behalf of its customer. JMP Securities’ obligation under the indemnification has no maximum amount. All unsettled trades at September 30, 2009 had settled with no resulting material liability to the Company. For the three months ended September 30, 2009 and 2008, the Company had no material loss due to counterparty failure, and has no obligations outstanding under the indemnification arrangement as of September 30, 2009.

The Company is engaged in various investment banking and brokerage activities whose counterparties primarily include broker-dealers, banks and other financial institutions. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the instrument. It is the Company’s policy to review, as necessary, the credit standing of each counterparty with which it conducts business.

21. Litigation

Due to the nature of its business, the Company is subject to various threatened or filed legal actions. For example, because we act as an underwriter or a financial advisor in the ordinary course of our business, we have in the past been, currently are and may in the future be subject to class action claims that seek substantial damages.

 

29


Table of Contents

In addition, defending employment and other claims against us could require the expenditure of substantial resources. Such litigation is inherently uncertain and the ultimate resolution of such litigation could be determined by factors outside of our control. Management, after consultation with legal counsel, believes that the currently known actions or threats will not result in any material adverse effect on the Company’s financial condition, results of operations or cash flows.

22. Financial Instruments with Off-Balance Sheet Risk, Credit Risk or Market Risk

The majority of the Company’s transactions, and consequently the concentration of its credit exposure, is with its clearing broker. The clearing broker is also a significant source of short-term financing for the Company, which is collateralized by cash and securities owned by the Company and held by the clearing broker. The Company’s securities owned may be pledged by the clearing broker. The receivable from the clearing broker represents amounts receivable in connection with the trading of proprietary positions.

The Company is also exposed to credit risk from other brokers, dealers and other financial institutions with which it transacts business. In the event that counterparties do not fulfill their obligations, the Company may be exposed to credit risk.

The Company’s trading activities include providing securities brokerage services to institutional clients. To facilitate these customer transactions, the Company purchases proprietary securities positions (“long positions”) in equity securities. The Company also enters into transactions to sell securities not yet purchased (“short positions”), which are recorded as liabilities on the Consolidated Statements of Financial Condition. The Company is exposed to market risk on these long and short securities positions as a result of decreases in market value of long positions and increases in market value of short positions. Short positions create a liability to purchase the security in the market at prevailing prices. Such transactions result in off-balance sheet market risk as the Company’s ultimate obligation to satisfy the sale of securities sold, but not yet purchased may exceed the amount recorded in the Consolidated Statements of Financial Condition. To mitigate the risk of losses, these securities positions are marked to market daily and are monitored by management to assure compliance with limits established by the Company.

In connection with the Cratos CLO, the Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include unfunded commitments to lend and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet of the Company.

Unfunded commitments are agreements to lend to a borrower, provided that all conditions have been met. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each borrower’s creditworthiness on a case by case basis.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a borrower to a third party. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to borrowers. As of September 30, 2009, the Company had unfunded commitments of $3.6 million and standby letters of credit of $1.7 million in the Corporate Credit segment.

23. Business Segments

For the three and nine months ended September 30, 2008, the Company’s business results were categorized into the following two segments: Broker-Dealer and Asset Management. As a result of the acquisition of Cratos in April 2009, the Company’s business results are now categorized into the following three business segments: 1) Broker-Dealer, 2) Asset Management and 3) Corporate Credit. The Broker-Dealer segment includes a broad range of services, such as underwriting and acting as a placement agent for public and private capital raising transactions and financial advisory services in M&A, restructuring and other strategic transactions. The Broker-Dealer segment also includes institutional brokerage services and equity research services to our institutional investor clients. The Asset Management segment includes the management of a broad range of pooled investment vehicles, including the Company’s hedge funds, funds of funds, JMPRT and HMOP as well as the Company’s principal investments in public and private securities. The Corporate Credit segment includes the management of collateralized loan obligations. With the disclosure of this new segment, the results and assets of JMP Capital, which for 2008 financial statements were reported in the Asset Management segment, are now reported in the Corporate Credit segment as they are more closely aligned with those newly acquired operations. For the comparative 2008 periods reported below JMP Capital has therefore been reported separately in the Corporate Credit segment.

The accounting policies of the segments are consistent with those described in the Significant Accounting Policies in Note 2.

Revenue generating activities between segments are eliminated from the segment results for reporting purposes. These activities include fees paid by the Broker-Dealer segment to the Asset Management segment for the management of its investment portfolio as well as fees paid by the Corporate Credit segment to the Asset Management segment for co-management of its investment portfolio.

The Company’s segment information for the three and nine months ended September 30, 2009 and 2008 was prepared using the following methodology:

 

   

Revenues and expenses directly associated with each segment are included in determining segment operating income.

 

   

Revenues and expenses not directly associated with a specific segment are allocated based on the most relevant measures applicable, including revenues, headcount and other factors.

 

30


Table of Contents
   

Each segment’s operating expenses include: a) compensation and benefits expenses that are incurred directly in support of the segments and b) other operating expenses, which include expenses for premises and occupancy, professional fees, travel and entertainment, communications and information services, equipment and indirect support costs (including compensation and other operating expenses related thereto) for administrative services.

The Company evaluates segment results based on revenue and segment operating income before noncontrolling interest and taxes.

Segment Operating Results

Management believes that the following information provides a reasonable representation of each segment’s contribution to revenues, income (loss) before noncontrolling interest and income tax expense (benefit) and assets:

 

     Three Months Ended September 30, 2009     Nine Months Ended September 30, 2009  
     2009     2008     2009    2008  

Broker-Dealer

         

Net revenues after provision for loan losses

   $ 22,448,742      $ 13,097,217      $ 59,043,440    $ 48,602,555   

Non-interest expenses

     22,681,446        19,746,159        56,930,480      54,634,095   
                               

Segment income (loss) before income tax expense

   $ (232,704   $ (6,648,942   $ 2,112,960    $ (6,031,540
                               

Segment assets

   $ 88,661,361      $ 85,091,849      $ 88,661,361    $ 85,091,849   

Asset Management

         

Net revenues after provision for loan losses

   $ 5,258,562      $ 1,960,873      $ 24,257,399    $ 7,494,238   

Non-interest expenses

     6,800,112        3,580,188        23,203,431      8,153,603   
                               

Segment income (loss) before income tax expense

   $ (1,541,550   $ (1,619,315   $ 1,053,968    $ (659,365
                               

Segment assets

   $ 70,892,352      $ 62,742,949      $ 70,892,352    $ 62,742,949   

Corporate Credit

         

Net revenues after provision for loan losses

   $ 14,011,693      $ 238,537      $ 20,089,444    $ 248,077   

Non-interest expenses

     5,677,638        209,579        8,248,622      282,549   
                               

Segment income (loss) before income tax expense

   $ 8,334,055      $ 28,958      $ 11,840,822    $ (34,472
                               

Segment assets

   $ 400,459,553      $ 8,100,858      $ 400,459,553    $ 8,100,858   

Consolidated Entity

         

Net revenues after provision for loan losses

   $ 41,718,997      $ 15,296,627      $ 103,390,283    $ 56,344,870   

Non-interest expenses

     35,159,196        23,535,926        88,382,533      63,070,247   
                               

Income (loss) before income tax expense

   $ 6,559,801      $ (8,239,299   $ 15,007,750    $ (6,725,377
                               

Total assets

   $ 560,013,266      $ 155,935,656      $ 560,013,266    $ 155,935,656   

24. Summarized financial information for equity method investments and NYMT

The table below presents summarized financial information of the hedge funds and funds of funds which the Company accounts for under the equity method.

 

     September 30, 2009    Three Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2009
     Net Assets    Net Investment
Income (Loss)
    Net Realized and
Unrealized Gains
    Net Investment
Income (Loss)
    Net Realized and
Unrealized Gains

Hedge Funds:

           

Harvest Opportunity Partners II

   $ 69,187,845    $ (111,682   $ 7,815,898      $ (425,304   $ 13,751,872

Harvest Small Cap Partners

     318,576,053      (2,841,101     (11,762,395     (12,583,919     39,360,364

Harvest Consumer Partners

     12,093,803      (27,819     543,569        (92,052     1,331,693

Harvest Technology Partners

     20,551,527      (83,844     (127,123     (241,339     2,808,949

Harvest Global Select Partners

     5,764,392      (67,760     73,451        (114,996     135,713

Funds of Funds:

        —          —         

JMP Masters Fund

     97,938,057      (168,977     4,270,705        (551,132     10,586,865

JMP Emerging Masters Fund

     11,225,526      (27,481     121,733        (103,533     619,073

 

31


Table of Contents

The tables below present summarized financial information of NYMT at September 30, 2009 and December 31, 2008 as well as for the three months ended September 30, 2009 and 2008.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(In thousands)

   2009     2008     2009     2008  

Statement of Operations Data:

        

Interest income - investment securities and loans held in securitization trusts

   $ 7,994      $ 10,324      $ 24,200      $ 34,332   

Interest expense - investment securities and loans held in securitization trusts

     1,864        6,692        7,041        23,997   

Provision for loan losses

     (526     (7     (1,414     (1,462

Impairment loss on investment securities

     —          —          (119     —     

Realized gain (loss) on securities and related hedges

     359        4        623        (19,927

Income (loss) from continuing operations

     2,640        744        6,978        (20,260

Net income (loss)

     2,876        1,029        7,478        (18,966
      September 30,
2009
    December 31,
2008
             

Statement of Financial Condition Data:

        

Investment securities - available for sale

   $ 282,594      $ 477,416       

Mortgage loans held in securitization trusts (net)

     290,940        348,337       

Total assets

     608,114        853,300       

Financing arrangements, portfolio investments

     194,745        402,329       

Collateralized debt obligations

     280,223        335,646       

Convertible preferred debentures (net)

     19,814        19,702       

Total liabilities

     549,965        814,052       

25. Subsequent Events

The Company has performed an evaluation of subsequent events through November 4, 2009, which is the date the financial statements were issued.

On November 2, 2009, the Company’s board of directors declared a cash dividend of $0.01 per share of common stock for the third quarter of 2009 to be paid on December 4, 2009, to common stockholders of record on November 20, 2009.

On November 2, the Company’s Board of Directors approved amendments to, and the immediate acceleration of the vesting of approximately 1.3 million RSUs that were granted in the first quarter of 2008 and 2009 to certain employees, including each of the Company’s named officers, under the Company’s 2007 Equity Incentive Plan. The acceleration was to align the terms of existing RSUs with those of future RSUs, which are expected to have performance-based vesting conditions instead of service-based vesting conditions. These accelerated RSUs remain subject to the terms and conditions of the applicable restricted stock unit agreement, which include lockup provisions and potential forfeiture if the holder breaches certain covenants, including non-competition covenants. In connection with the above vesting, the Company repurchased 526,400 shares of its common stock, mainly to allow employees to tender shares for the payment of the statutory minimum withholding taxes.

 

32


Table of Contents
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, refer to the MD&A for the fiscal year ended December 31, 2008 contained in our annual report on Form 10-K filed with the SEC on March 9, 2009, 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 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 on Form 10-K. In preparing this MD&A, we presume that readers have access to and have read the MD&A in our Annual report on Form 10-K, 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 report to conform such forward-looking statements to actual results or revised expectations, except as otherwise required by law.

Overview

We are a full-service investment banking and asset management firm headquartered in San Francisco. We have a diversified business model with a focus on small and middle-market companies and provide:

 

   

investment banking, including corporate finance, mergers and acquisitions and other strategic advisory services, to corporate clients;

 

   

sales and trading, and related brokerage services to institutional investors;

 

   

proprietary equity research in our six 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.

Components of Revenues

We derive revenues primarily from fees earned from our investment banking business, net commissions on our trading activities in our sales and trading business, asset management fees in our asset management business and interest income on collateralized loan obligations we manage. We also generate revenues from principal transactions, interest, dividends, and other income.

Investment Banking

We earn investment banking revenues from underwriting securities offerings, arranging private placements and providing advisory services in mergers and acquisitions and other strategic advisory assignments.

On February 13, 2009, we entered into a business arrangement with China Merchants Securities Co.(HK), Ltd., one of China’s largest securities brokerage and investment banking firms, through a $2.0 million investment in HuaMei Capital Company, Inc. (HuaMei) to expand our investment banking capabilities in China. Through HuaMei, we can provide investment banking services to U.S. and Chinese companies seeking to execute cross-border transactions on both sides of the Pacific. As of September 30, 2009, no revenue has yet been generated from our investment in HuaMei.

Underwriting Revenues

        We earn underwriting 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 and selling concessions. We record underwriting revenues, net of related syndicate expenses, at the time the underwriting is completed. In syndicated underwritten transactions, management estimates our share of transaction-related expenses incurred by the syndicate, and we recognize revenues net 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 include success fees on closed merger and acquisition transactions, as well as retainer fees, earned in connection with advising both buyers’ and sellers’ transactions. We also earn fees for related advisory work and other services such as providing fairness opinions and valuation analyses. We record strategic advisory revenues when the transactions or the services (or, if applicable, separate components thereof) to be performed are substantially complete, the fees are determinable and collection is reasonably assured.

 

33


Table of Contents

Private Placement Revenues

We earn agency placement fees in 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. We record private placement revenues on the closing date of these transactions.

Since our investment banking revenues are generally recognized at the time of completion of each transaction or the services to be performed, these revenues typically vary between periods and may be considerably affected by the timing of the closing of significant transactions.

Brokerage Revenues

Our brokerage revenues include commissions paid by customers from brokerage transactions in exchange-listed and over-the-counter, or OTC, equity securities. Commissions are recognized on a trade date basis. 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 continue to deliver 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. We expect this trend toward alternative trading systems and pricing pressures in our brokerage business to continue. We are, to some extent, compensated through brokerage commissions for the value of 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, these institutional investors concentrate their trading with fewer “execution” brokers and pay a fixed amount for execution with an additional amount set aside for payments to other firms for research or other brokerage services. Accordingly, we may experience reduced (or eliminated) trading volume with such investors but may be compensated for our research and sales efforts through allocations of the designated amounts. Depending on the extent to which we adopt this practice and depending on our ability to reach arrangements on terms acceptable to us, this trend would likely impair the revenues and profitability of our commission business by negatively affecting both volumes and trading commissions in our commission business.

Asset Management Fees

Asset management fees include base management fees and incentive fees earned from managing investment partnerships sponsored by us and investment accounts owned by clients. Base management fees earned by us are generally based on the fair value of assets under management and the fee schedule for each fund and account. We also earn incentive fees that are based upon the performance of investment funds and accounts. Such fees are based on a percentage of the excess of an investment return over a specified highwater mark or hurdle rate over a defined performance period.

As of September 30, 2009, the contractual base management fees earned from each of these investment funds ranged between 1% and 2% of assets under management. The contractual incentive fees were generally (i) 20%, subject to high-water marks, for the hedge funds; (ii) 5% to 20%, subject to high-water marks or a performance hurdle rate, for the funds of funds; and (iii) 25%, subject to a performance hurdle rate, for HMOP and NYMT.

Our asset management revenues are subject to fluctuations due to a variety of factors that are unpredictable, including the overall condition of the economy and the securities markets as a whole and our core sectors. These conditions can have a material effect on the inflows and outflows of assets under management, and the performance of our asset management funds. For example, a significant portion of the performance-based or incentive revenues that we recognize are based on the value of securities held in the funds we manage. The value of these securities includes unrealized gains or losses that may change from one period to another.

 

34


Table of Contents

The following tables present certain information with respect to the investment funds managed by Harvest Capital Strategies (“HCS”) (formerly JMP Asset Management LLC, which changed its name to HCS effective September 29, 2008):

 

     Net Assets at    Company’s Share of Net Assets at
     September 30,
2009
   December 31,
2008
   September 30,
2009
   December 31,
2008

Funds Managed by HCS:

           

Hedge Funds:

           

Harvest Opportunity Partners II

   $ 69,187,845    $ 62,169,209    $ 10,056,129    $ 7,760,076

Harvest Small Cap Partners

     318,576,053      234,051,639      8,170,867      13,780,667

Harvest Consumer Partners

     12,093,803      5,521,880      5,278,773      2,407,121

Harvest Technology Partners

     20,551,527      11,581,561      6,982,686      5,818,212

Harvest Mortgage Opportunities Partners (1)

     14,098,856      —        9,479,767      —  

Harvest Global Select Partners

     5,764,392         1,020,523   

Funds of Funds:

           

JMP Masters Fund

     97,938,057      96,037,447      2,891,659      2,701,021

JMP Emerging Masters Fund

     11,225,526      10,633,335      1,017,376      977,052

REITs:

           

JMP Realty Trust (1)

     —        15,829,296      —        7,841,833

New York Mortgage Trust (2)

     48,413,824      48,413,824      N/A      N/A
                           

Total funds managed by HCS

   $ 597,849,883    $ 484,238,191    $ 44,897,780    $ 41,285,982
                           

 

(1) The Company’s share of net assets in JMPRT was consolidated in the Company’s Statement of Financial Condition at December 31, 2008. On January 2, 2009, all of the assets and liabilities of JMPRT were transferred to HMOP. The Company’s share of net assets in HMOP was consolidated in the Company’s Statement of Financial Condition at September 30, 2009.
(2) The portion of the net assets of New York Mortgage Trust, Inc. (“NYMT”) that is subject to the management fee calculation. In connection with its investment in NYMT, in January 2008, the Company entered into an advisory agreement between HCS and NYMT.

 

     Three Months Ended September 30, 2009     Nine Months Ended September 30, 2009
     Company’s Share of
Change in Fair Value
    HCS
Management Fee
   HCS
Incentive Fee
    Company’s Share of
Change in Fair Value
   HCS
Management Fee
   HCS
Incentive Fee

Hedge Funds:

               

Harvest Opportunity Partners II

   $ 1,145,572      $ 142,304    $ 687,538      $ 1,943,982    $ 432,377    $ 931,072

Harvest Small Cap Partners

     (342,371     1,547,654      2,476        1,676,972      4,311,842      7,942,974

Harvest Consumer Partners

     229,306        18,251      34,423        538,693      39,110      73,142

Harvest Technology Partners

     (57,678     40,274      (6     1,186,143      83,842      184,434

Harvest Mortgage Opportunities Partners (1)

     479,660        50,328      —          1,719,384      155,745      —  

Harvest Global Select Partners

     6,330        17,543      1,771        19,236      26,356      7,613

Funds of Funds:

               

JMP Masters Fund

     107,970        220,789      —          190,638      657,871      —  

JMP Emerging Masters Fund

     14,188        24,906      —          40,324      73,351      —  

REITs:

               

New York Mortgage Trust

     1,731,347        179,281      334,096        4,203,622      544,402      378,021
                                           

Totals

   $ 3,314,324      $ 2,241,330    $ 1,060,298      $ 11,518,994    $ 6,324,896    $ 9,517,256
                                           

 

(1) Revenues earned from HMOP are consolidated and then eliminated in consolidation in the Company’s Statements of Operations, net of noncontrolling interest.

 

35


Table of Contents
     Three Months Ended September 30, 2008    Nine Months Ended September 30, 2008
     Company’s Share of
Change in Fair Value
    HCS
Management Fee
   HCS
Incentive Fee
   Company’s Share of
Change in Fair Value
    HCS
Management Fee
   HCS
Incentive Fee

Hedge Funds:

               

Harvest Opportunity Partners II

   $ (139,977   $ 161,855    $ —      $ (670,350   $ 529,389    $ 38,777

Harvest Small Cap Partners

     729,378        917,325      641,244      1,593,400        1,871,229      2,294,676

Harvest Consumer Partners (1)

     47,677        7,410      —        63,211        20,300      2,010

Harvest Technology Partners (1)

     (105,138     10,158      —        77,785        23,994      21,413

Funds of Funds:

               

JMP Masters Fund

     9,497        300,831      2,750      108,275        871,716      33,573

JMP Emerging Masters Fund

     (15,893     26,085      129      (31,889     79,391      9,276

REITs:

               

JMP Realty Trust (1)

     (424,960     63,799      —        (538,030     198,670      —  

New York Mortgage Trust

     (2,238,619     185,917      —        (3,375,639     478,980      —  
                                           

Totals

   $ (2,138,035   $ 1,673,380    $ 644,123    $ (2,773,237   $ 4,073,669    $ 2,399,725
                                           

 

(1) Revenues earned from HTP, HCP and JMPRT are consolidated and then eliminated in consolidation in the Company’s Statements of Operations, net of noncontrolling interest.

With the acquisition of Cratos, we earn management fees at JMP Credit Corporation (“JMP Credit”) as the asset manager for a corporate loan securitization structure (CLO). During the quarter ended September 30, 2009, we earned management fees of $627,131 or 50 bps annualized on gross assets under management. At September 30, 2009, gross assets under management were $498.4 million. As we consolidate the CLO, the management fees for GAAP are eliminated in consolidation.

Principal Transactions

Principal transaction revenues includes realized and unrealized net gains and losses resulting from our principal investments, which includes investments in equity and other securities for our own account and as the general partner of funds managed by us, warrants we may receive from certain investment banking assignments, as well as limited partner investments in private funds managed by third parties. In addition, we invest a portion of our capital in a portfolio of equity securities managed by HCS and in side-by-side investments in the funds managed by us. In certain cases, we also co-invest alongside our institutional clients in private transactions resulting from our investment banking business.

Gain on Sale and Payoff of Loans

Gain on sale and payoff of loans consists of gains from the sale and payoff of loans collateralizing asset-backed securities at JMP Credit. Gains are recorded when the proceeds exceed the carrying value of the loan.

Gain on Repurchase of Asset-Backed Securities Issued

Gain on repurchase of asset-backed securities issued (“ABS”) consists of gains from repurchases of our ABS from third parties. Gains are recorded when the repurchase price is less than the carrying value of the ABS.

Gain on Bargain Purchase

        A bargain purchase gain was recognized upon the acquisition of Cratos by JMP Credit on April 7, 2009. This represents the difference between the fair value of net assets acquired and the consideration to the sellers.

Net Dividend Income

Net dividend income comprises dividends from our investments offset by dividend expense for paying short positions in our principal investment portfolio.

Other Income

Other income includes loan restructuring fees at JMP Credit and revenues from fee sharing arrangements with, and fees earned to raise capital for third-party investment partnerships, or funds.

Interest Income

Interest income primarily consists of interest 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 accretable or purchase discounts and deferred fees and costs. 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 Expense

Interest expense primarily consists of interest expense incurred on asset-backed securities issued and note payable. Interest expense on asset-backed securities is the stated coupon payable as a percentage of the principal amount as well as amortization of liquidity discount which was recorded at the acquisition date of Cratos. Interest expense is recorded on the accrual basis in accordance with the terms of the respective asset-backed securities issued and note payable.

 

36


Table of Contents

Provision for Loan Losses

Loss provision on loans held for investment includes reserves recognized on our loan notes and non-revolving credit agreements (collectively loans held for investment) and loans collateralizing ABS (at JMP Credit) to record them at their net realizable value. 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 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.

Components of Expenses

We classify our expenses as compensation and benefits, administration, brokerage, clearing and exchange fees and other expenses. A significant portion of our expense base is variable, including compensation and benefits, brokerage and clearance, communication and technology and travel and business development 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, medical and benefits expenses, as well as expenses for contractors, temporary employees and equity-based compensation. Our employees receive a substantial portion of their compensation in the form of individual performance-based bonuses. As is the widespread practice in our industry, we pay bonuses on an annual basis, which for senior professionals typically make up a large portion of their total 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 using specific ratios of total compensation and benefits to total revenues based on revenue categories, as adjusted 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. We currently clear our securities transactions through Ridge Clearing. Changes in brokerage, clearing and exchange fees fluctuate largely in line with the volume of sales and trading activity.

Other Expenses

Other operating expenses primarily include travel and business development, market data, occupancy, legal and accounting professional fees, depreciation and CLO administration expense at JMP.

Noncontrolling Interest

        Noncontrolling interest for the three and nine months ended September 30, 2009 includes the interest of third parties in JMP Credit, Harvest Mortgage Opportunities Partners (“HMOP”), and Opportunity Acquisition Corp. (“SPAC”), partially-owned subsidiaries consolidated on our books. Noncontrolling interest for the three and nine months ended September 30, 2008 relates to the interest of third parties in SPAC, JMP Realty Trust (“JMPRT”), and in two of our asset management funds, Harvest Consumer Partners (“HCP”) and Harvest Technology Partners (“HTP”). JMPRT was a real estate investment trust that was formed in June 2006. Because of the ownership and external management position, we consolidated JMP Realty Trust and recorded a noncontrolling interest through December 31, 2008. On January 2, 2009, all of the assets and liabilities of JMPRT were transferred to HMOP, a newly-formed hedge fund managed by HCS. The partnership agreements for HMOP provide for the right of the limited partners to remove the general partners by a simple majority vote of the non-affiliated limited partners. The Company follows the authoritative guidance under GAAP regarding the determination of whether a general partner, or the general partners as a group, controls a limited partnership or similar entity when the limited partners have certain rights. Such guidance applies when a general partner controls a limited partnership and is required to consolidate the limited partnership in its financial statements. Under the guidance, the general partner in a limited partnership is presumed to control the limited partnership regardless of the extent of the general partners’ ownership interest in the limited partnership. If the limited partners have either (a) the substantive ability to liquidate the limited partnership or otherwise remove the general partner without cause or (b) substantive participating rights, the general partner does not control the limited partnership. The partnership agreements for HMOP provide for the right of the limited partners to remove the general partner by a simple majority vote of the non-affiliated limited partners. Because of these substantive kick-out rights, the Company, as the general partner, did not control HMOP and therefore did not consolidate HMOP from January 2, 2009 through April 30, 2009. During the quarter ended June 30, 2009, several non-affiliated limited partners redeemed their interest in HMOP, and the remaining limited partners were no longer deemed to have substantive kick-out rights. As a result, the Company consolidates HMOP in its consolidated financial statements effective May 1, 2009.

 

37


Table of Contents

HCS is also the general partner of Harvest Consumer Partners and Harvest Technology Partners. As of December 31, 2007 and during part of 2008 due to our ownership and resulting control by HCS and related parties, management believes that limited partners did not have substantive rights to remove the general partner, and, therefore, these two funds were consolidated in the financial statements and noncontrolling interest was recorded. During 2008, additional limited partners invested in HTP and HCP, and effective August 1, 2008 for HTP and December 1, 2008 for HCP, the limited partners had substantive rights to remove the general partner and the funds were deconsolidated as of the respective dates.

Results of Operations

The following table sets forth our results of operations for the three and nine month periods ended September 30, 2009 and 2008 and is not necessarily indicative of the results to be expected for any future period.

 

     Three Months Ended September 30,     Change from
2008 to 2009
 

(in thousands)

   2009     2008     $     %  

Revenues

        

Investment banking

   $ 10,391      $ 4,879      $ 5,512      113.0

Brokerage

     7,939        9,574        (1,635   -17.1

Asset management fees

     3,266        2,292        974      42.5

Principal transactions

     5,981        (2,726     8,707      N/A   

Gain on sale and payoff of loans

     6,727        —          6,727      N/A   

Gain on repurchase of asset-backed securities issued

     4,096        —          4,096      N/A   

Gain on bargain purchase

     —          —          —        N/A   

Net dividend income

     766        939        (173   -18.4

Other income

     227        214        13      6.1
                              

Non-interest revenues

     39,393        15,172        24,221      159.6
                              

Interest income

     12,214        654        11,560      1767.6

Interest expense

     (8,504     (102     (8,402   8237.3
                              

Net interest income

     3,710        552        3,158      572.1
                              

Provision for loan losses

     (1,384     (428     (956   223.4
                              

Total net revenues after provision for loan losses

     41,719        15,296        26,423      172.7
                              

Non-interest Expenses

        

Compensation and benefits

     29,308        17,724        11,584      65.4

Administration

     1,098        1,257        (159   -12.6

Brokerage, clearing and exchange fees

     1,317        1,389        (72   -5.2

Other

     3,436        3,165        271      8.6
                              

Total non-interest expenses

     35,159        23,535        11,624      49.4
                              

Income (loss) before income tax expense

     6,560        (8,239     14,799      N/A   

Income tax expense (benefit)

     2,879        (2,971     5,850      N/A   
                              

Net income (loss)

     3,681        (5,268     8,949      N/A   

Less: Net income (loss) attributable to the noncontrolling interest

     712        (369     1,081      N/A   
                              

Net income (loss) attributable to JMP Group Inc.

   $ 2,969      $ (4,899   $ 7,868      N/A   
                              

 

38


Table of Contents
     Nine Months Ended September 30,     Change from
2008 to 2009
 

(in thousands)

   2009     2008     $     %  

Revenues

        

Investment banking

   $ 25,104      $ 23,819      $ 1,285      5.4

Brokerage

     25,836        26,433        (597   -2.3

Asset management fees

     15,766        6,365        9,401      147.7

Principal transactions

     15,403        (4,789     20,192      N/A   

Gain on sale and payoff of loans

     11,571        —          11,571      N/A   

Gain on repurchase of asset-backed securities issued

     4,205        —          4,205      N/A   

Gain on bargain purchase

     1,179        —          1,179      N/A   

Net dividend income

     1,850        2,460        (610   -24.8

Other income

     1,154        923        231      25.0
                              

Non-interest revenues

     102,068        55,211        46,857      84.9
                              

Interest income

     24,172        1,860        22,312      1199.6

Interest expense

     (17,484     (298     (17,186   5767.1
                              

Net interest income

     6,688        1,562        5,126      328.2
                              

Provision for loan losses

     (5,366     (428     (4,938   1153.7
                              

Total net revenues after provision for loan losses

     103,390        56,345        47,045      83.5
                              

Non-interest Expenses

        

Compensation and benefits

     70,849        44,148        26,701      60.5

Administration

     3,541