JMP Group LLC
JMP Group Inc. (Form: 10-Q, Received: 08/06/2009 16:35:03)
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 June 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 August 1, 2009 was 20,750,107.

 

 

 


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 - June 30, 2009 and December 31, 2008 (Unaudited)

   4
  

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

   5
  

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

   6
  

Consolidated Statements of Cash Flows - For the Six Months Ended June 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    32
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    50
Item 4.    Controls and Procedures    51
PART II.    OTHER INFORMATION    52
Item 1.    Legal Proceedings    52
Item 1A.    Risk Factors    52
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    52
Item 3.    Defaults Upon Senior Securities    53
Item 4.    Submission of Matters to a Vote of Security Holders    53
Item 5.    Other Information    53
Item 6.    Exhibits    53
SIGNATURES    54
EXHIBIT INDEX    55

 

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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.

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

JMP Group Inc.

Consolidated Statements of Financial Condition

(Unaudited)

 

     June 30, 2009     December 31, 2008  

Assets

    

Cash and cash equivalents

   $ 40,714,307      $ 46,261,959   

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

     34,501,801        6,929,501   

Receivable from clearing broker

     2,213,310        1,878,078   

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

     6,363,548        1,647,761   

Marketable securities owned, at fair value

     14,978,213        19,838,480   

Incentive fee receivable

     6,580,396        1,479,741   

Other investments (of which $52,282,809 and $47,954,255 at fair value at June 30, 2009 and December 31, 2008)

     54,282,809        47,954,255   

Loans held for investment, net of allowance for loan losses

     4,179,488        5,725,867   

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

     308,104,873        —     

Interest receivable

     1,954,686        72,194   

Fixed assets, net

     1,121,466        1,207,014   

Deferred tax assets

     55,387,066        11,062,174   

Other assets

     7,653,522        8,789,068   
                

Total assets

   $ 538,035,485      $ 152,846,092   
                

Liabilities and Equity

    

Liabilities:

    

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

   $ 7,780,239      $ 5,677,683   

Accrued compensation

     22,154,863        21,349,724   

Asset-backed securities issued

     324,225,065        —     

Interest payable

     849,658        17,663   

Note payable

     9,912,765        8,680,850   

Contingent consideration

     2,206,408        —     

Deferred tax liability

     48,298,517        224,204   

Other liabilities

     6,746,194        3,823,892   
                

Total liabilities

     422,173,709        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 June 30, 2009 and December 31, 2008; 20,750,107 and 20,470,125 shares outstanding at June 30, 2009 and December 31, 2008

     22,070        22,070   

Additional paid-in capital

     126,066,801        125,939,747   

Treasury stock (at cost, 1,319,634 and 1,599,616 shares at June 30, 2009 and December 31, 2008)

     (8,702,163     (10,710,981

Accumulated deficit

     (6,382,311     (10,129,777
                

Total JMP Group Inc. stockholders’ equity

     111,004,397        105,121,059   

Noncontrolling Interest

     4,857,379        7,951,017   
                

Total equity

     115,861,776        113,072,076   
                

Total liabilities and equity

   $ 538,035,485      $ 152,846,092   
                

See accompanying notes to consolidated financial statements.

 

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JMP Group Inc.

Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  

Revenues

        

Investment banking

   $ 10,597,521      $ 10,832,895      $ 14,713,352      $ 18,939,411   

Brokerage

     9,357,985        8,717,226        17,897,264        16,859,070   

Asset management fees

     4,033,136        1,330,847        12,499,133        4,072,620   

Principal transactions

     6,532,845        (682,693     9,422,483        (2,062,574

Gain on sale and refinancing of loans

     4,844,132        —          4,844,132        —     

Gain on bargain purchase

     1,179,279        —          1,179,279        —     

Net dividend income

     650,751        881,282        1,084,206        1,464,152   

Other income

     768,547        159,577        1,035,523        708,492   
                                

Non-interest revenues

     37,964,196        21,239,134        62,675,372        39,981,171   
                                

Interest income

     11,667,022        343,890        11,958,462        1,257,180   

Interest expense

     (8,899,210     (70,718     (8,980,356     (190,108
                                

Net interest income

     2,767,812        273,172        2,978,106        1,067,072   
                                

Provision for loan losses

     (3,257,192     —          (3,982,192     —     
                                

Total net revenues after provision for loan losses

     37,474,816        21,512,306        61,671,286        41,048,243   
                                

Non-interest Expenses

        

Compensation and benefits

     22,740,160        13,834,582        41,540,675        26,423,801   

Administration

     1,321,717        2,071,771        2,443,024        3,352,820   

Brokerage, clearing and exchange fees

     1,490,367        1,096,647        2,739,999        2,469,973   

Travel and business development

     716,183        1,026,214        1,052,854        1,954,970   

Communications and technology

     955,192        1,005,100        1,818,378        1,999,555   

Occupancy

     596,888        478,256        1,177,517        947,819   

Professional fees

     927,655        697,376        1,883,587        1,876,945   

Depreciation

     206,411        254,930        403,632        520,888   

Other

     159,192        (3,697     163,669        (12,450
                                

Total non-interest expenses

     29,113,765        20,461,179        53,223,335        39,534,321   
                                

Income before income tax expense

     8,361,051        1,051,127        8,447,951        1,513,922   

Income tax expense

     3,559,939        645,676        3,612,366        486,102   
                                

Net income

     4,801,112        405,451        4,835,585        1,027,820   

Less: Net income attributable to the noncontrolling interest

     514,927        210,981        515,453        154,550   
                                

Net income attributable to JMP Group Inc.

   $ 4,286,185      $ 194,470      $ 4,320,132      $ 873,270   
                                

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

        

Basic

   $ 0.21      $ 0.01      $ 0.21      $ 0.04   

Diluted

   $ 0.20      $ 0.01      $ 0.20      $ 0.04   

Weighted average common shares outstanding:

        

Basic

     20,642,794        20,371,347        20,571,786        20,458,622   

Diluted

     21,323,106        20,932,467        21,167,324        20,920,966   

See accompanying notes to consolidated financial statements.

 

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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

   —        —        —          —          4,320,132        515,453        4,835,585   

Additional paid-in capital - stock-based compensation

   —        —        —          (1,268,568     —          —          (1,268,568

Cash dividends paid to shareholders

   —        —        —          —          (412,555     —          (412,555

Purchases of shares of common stock for treasury

   —        —        (1,106,518     —          —          —          (1,106,518

Reissuance shares of common stock from treasury

   —        —        3,115,336        1,395,622        (160,111     —          4,350,847   

Sale of subsidiary shares to noncontrolling interest holders

   —        —        —          —          —          323,705        323,705   

Reorganization of a subsidiary (Note 2)

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

Balance, June 30, 2009

   22,069,741    $ 22,070    $ (8,702,163   $ 126,066,801      $ (6,382,311   $ 4,857,379      $ 115,861,776   
                                                    

See accompanying notes to consolidated financial statements.

 

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JMP Group Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended June 30,  
     2009     2008  

Cash flows from operating activities:

    

Net income

   $ 4,835,585      $ 1,027,820   

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

    

Provision for doubtful accounts

     —          (12,450

Loss provision on loans receivable

     3,982,192        —     

Amortization of deferred loan fees

     (189,579     —     

Accretion of liquidity discount, net

     517,886        —     

Gain on sale of loans

     (4,844,132     —     

Gain on repurchase of asset-backed securities issued

     (108,400     —     

Change in other investments:

    

Fair value

     (6,371,815     1,315,353   

Incentive fees reinvested in general partnership interests

     (4,231,851     (1,191,600

Depreciation and amortization of fixed assets

     403,632        520,888   

Stock-based compensation expense

     2,646,898        4,573,465   

Deferred income taxes

     3,168,249        (4,030,762

Gain on bargain purchase

     (1,179,279     —     

Net change in operating assets and liabilities:

    

(Increase) in interest receivable

     (745,596     (30,019

(Increase) decrease in receivables

     (7,851,674     572,789   

Decrease in marketable securities

     (390,920     478,287   

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

     4,918,666        3,979,478   

(Decrease) increase in marketable securities sold, but not yet purchased

     2,102,556        (1,474,980

(Decrease) in interest payable

     (377,593     (17,663

Decrease in securities sold under agreements to repurchase

     —          (9,135,000

Decrease in accrued compensation and other liabilities

     2,027,032        (20,037,687
                

Net cash used in operating activities

     (1,688,143     (23,462,081
                

Cash flows from investing activities:

    

Purchases of fixed assets

     (158,084     (139,949

Investment in subsidiary

     (2,089,477     —     

Purchases of other investments

     (7,412,866     (19,635,850

Sales of other investments

     4,939,967        —     

Funding of loans collateralizing asset-backed securities issued

     (48,050,181     —     

Funding of loans held for investment

     —          (2,762,510

Sale and refinancing of loans collateralizing asset-backed securities issued

     18,613,584        —     

Principal payments on loans collateralizing asset-backed securities issued

     10,733,226        —     

Principal payments on loans held for investment

     112,663        322,000   

Repayment of note receivable

     —          335,272   

Net change in restricted cash reserved for lending activities

     17,747,934        —     

Cash transferred from consolidated subsidiary to non-consolidated hedge fund

     902,475        —     
                

Net cash used in investing activities

     (4,660,759     (21,881,037
                

Cash flows from financing activities:

    

Proceeds from issuance of note payable

     6,100,000        4,480,850   

Repayment of note payable

     (4,966,877     —     

Net change in asset-backed securities issued

     937,200        —     

Cash dividends paid to stockholders

     (412,555     (2,042,610

Purchases of shares of common stock for treasury

     (1,106,518     (2,801,403

Capital contributions of noncontrolling interest members and shareholders

     250,000        1,204,348   

Dividends paid to noncontrolling interest shareholders

     —          (130,380
                

Net cash provided by financing activities

     801,250        710,805   
                

Net decrease in cash and cash equivalents

     (5,547,652     (44,632,313

Cash and cash equivalents, beginning of period

     46,261,959        99,127,043   
                

Cash and cash equivalents, end of period

   $ 40,714,307      $ 54,494,730   
                

Supplemental disclosures of cash flow information:

    

Cash paid during the period for interest

   $ 2,630,505      $ 165,711   

Cash paid during the period for taxes

   $ 730,000      $ 3,248,000   

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

See accompanying notes to consolidated financial statements

 

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JMP GROUP INC.

Notes to Consolidated Financial Statements

June 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 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 June 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.

We apply the principles of FASB Interpretation No. 46 (revised), Consolidation of Variable Interest Entities (FIN 46(R)) to determine whether to consolidate any entities where we have a significant investment. The Company consolidates JMP Credit, Cratos and the assets and liabilities of the Cratos CLO securitization entity due to the acquisition of 100% of Cratos Capital Partners LLC which owns 100% of the subordinated notes in the CLO and performs ongoing management responsibilities for the CLO. Cratos Capital Partners LLC is deemed the primary beneficiary and therefore 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 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. This right satisfies all of the criteria enumerated in paragraph 7.b. of Emerging Issues Task Force Issue No. 04-5 (“EITF 04-5”), Determining 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 . Because of these substantive kick-out rights, consolidation of HMOP was not required 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 constitute substantive kick-out rights. As a result, the Company consolidates HMOP in its consolidated financial statements effective May 1, 2009.

 

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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. This right satisfies all of the criteria enumerated in paragraph 7.b. of EITF 04-5 because the right is not subject to: (i) conditions that make it unlikely it will be exercisable; (ii) financial penalties or significant operational barriers to dissolution or liquidation of the funds; (iii) the absence of an adequate number of qualified replacement general partners; (iv) the absence of an explicit, reasonable mechanism by which the limited partners can call for and conduct a vote to exercise the right; and (v) the inability to obtain information necessary to exercise the right. As a result, consolidation of these asset management funds is not required.

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 June 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 June 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. As the Company accounts for its investment in NYMT in accordance with Statement of Financial Accounting Standards (“SFAS”) 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115 (“SFAS 159”), disclosure of summarized financial information of NYMT in the Company’s consolidated financial statements is required under paragraph 18f of SFAS 159 and paragraph 20d of APB Opinion No. 18. See Note 24 for the summarized financial information of NYMT.

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 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,

 

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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 six months ended June 30, 2009 and 2008 are as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009    2008     2009     2008  

Equity and other securities

   $ 4,327,039    $ 426,098      $ 4,391,939      $ (2,831,046

Warrants and other investments

     4,309      191,842        (75,154     153,584   

Investment partnerships

     2,201,497      (1,300,633     5,105,698        614,888   
                               

Total principal transaction revenues

   $ 6,532,845    $ (682,693   $ 9,422,483      $ (2,062,574
                               

Gain (Loss) on Sale and Refinancing of Loans

Gain on sale and refinancing of loans consists of gains from the sale and refinancing 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 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.

 

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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 on deposit for operating leases as well as cash on deposit with JMP Securities’ clearing broker.

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

 

     June 30, 2009    December 31, 2008

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

   $ 24,692,333    $ —  

Cash collateral supporting standby letters of credit

     1,159,746      —  

Proceeds from short sales

     7,780,239      5,677,682

Deposit with clearing broker

     255,336      255,336

Other

     614,147      996,483
             
   $ 34,501,801    $ 6,929,501
             

Receivable from Clearing Broker

The Company clears customer transactions through another broker-dealer on a fully disclosed basis. At June 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 Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”) as of January 1, 2008. This standard 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. SFAS 157 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. SFAS 157 defines fair value 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 a complete discussion of SFAS 157.

Substantially all 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.

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.

        Under SFAS 157, 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.

 

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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 aforementioned fair value methods represent the Company’s best estimate of exit price as defined by SFAS 157.

The Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115 (“SFAS 159”) as of January 1, 2008. SFAS 159 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, SFAS 159 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 June 30, 2009 and 2008 on NYMT stock of $0.7 million and $0.5 million, respectively, were recorded in net dividend income on our Consolidated Statements of Operations. Dividends received during the six months ended June 30, 2009 and 2008 on NYMT stock of $0.9 million and $0.8 million, respectively, were recorded in net dividend income on our Consolidated Statements of Operations. There was no adjustment recorded to retained earnings related to the adoption of SFAS 159. During the three and six months ended June 30, 2009, the Company recorded unrealized gains of $2.1 million and $3.3 million, respectively, on the above investments in NYMT primarily due to the improved performance of NYMT’s stock during the period.

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.

Loans acquired through the purchase and resulting consolidation of Cratos were recorded at their fair value as of the acquisition date under the guidance of SFAS No 141(R), Business Combinations . 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, accounted for in accordance with Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, 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. Those loans are accounted for in accordance with SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases (“SFAS 91”). 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 measurement and other provisions of SFAS No. 5, Accounting for Contingencies (“SFAS 5”) or, if applicable, SFAS No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS 114”). Loans considered impaired at the acquisition date of Cratos continue to be assessed in accordance with SFAS No. 114. 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

 

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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 in conformity with SFAS No. 154, Accounting Changes and Error Corrections , 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 in accordance with SFAS 91. 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 with SFAS 5, the Company provides a base 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.

In accordance with SFAS 114, impairment allowances are included in the allowance for loan losses. 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.

Loans which are deemed to be uncollectible are charged off and 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 closed in 2007. The Company consolidates the CLO for financial reporting purposes as of the April 7, 2009 acquisition date. At the acquisition date, in accordance with SFAS 141(R) 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 in accordance with APB No. 21, Interest on Receivables and Payables .

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 SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). SFAS 109 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.

 

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In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (“FIN 48”), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken on a tax return and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 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.

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

Stock-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment (“SFAS 123R”), using the modified prospective method. Under that method of adoption, the provisions of SFAS 123R are generally only applied to share-based awards granted subsequent to adoption. Prior to January 1, 2006, the Company accounted for stock-based compensation under SFAS No. 123, Accounting for Stock-Based Compensation . SFAS 123R 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.

Subsequent Events

The Company has performed an evaluation of subsequent events through August 6, 2009, which is the date the financial statements were issued.

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

Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162, (“SFAS 168”). In July 2009, the FASB issued SFAS 168 to replace SFAS No. 162 and to establish the FASB Accounting Standards Codification (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company will adopt SFAS 168 for the three-month period ending September 30, 2009. The Company does not expect the adoption to have an impact on our consolidated financial position or results of operations.

SFAS No. 167, Amendments to FASB Interpretation No. 46(R), (“SFAS 167”). In June 2009, the FASB issued SFAS 167 which amends certain requirements of FIN 46R to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS 167 is effective 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 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 then require the consolidation of these 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.

 

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SFAS No. 165, Subsequent Events , (“SFAS 165”). In May 2009, the FASB issued SFAS 165 which establishes principles and requirements for subsequent events. In particular, SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date as well as the date through which subsequent events are evaluated. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. The Company’s adoption of SFAS 165 for the three-month period ended June 30, 2009 did not have a material impact on our consolidated financial position or results of operations.

FSP SFAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, (“FSP 157-4”). In April 2009, the FASB issued FSP 157-4, which provides additional guidance for estimating fair value in accordance with SFAS No. 157, when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009. The Company’s adoption of FSP 157-4 for the three-month period ended June 30, 2009 did not have a material impact on our consolidated financial position or results of operations.

FSP SFAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1and APB 28-1”) . In April 2009, the FASB issued FSP 107-1 and APB 28-1. FSP 107-1 and APB 28-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments , to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company’s adoption of FSP 107-1 and APB 28-1 for the three-month period ended June 30, 2009 did not have a material 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 June 30, 2009 have been included in the statement of operations of the Company for the three and six month periods ended June 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.

 

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The acquisition was accounted for under the acquisition method of accounting in accordance with SFAS 141(R). Accordingly, the purchase price was 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 (in accordance with SFAS 141(R)) 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 and six months ended June 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   

 

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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 June 30,     Six Months Ended June 30,
     2009    2008     2009    2008

Pro forma revenues

   $ 36,343,724    $ 22,034,708      $ 60,605,263    $ 50,429,182

Pro forma net income

     3,280,930      (667,800     2,516,825      3,073,829

Pro forma net income per share - basic

   $ 0.16    $ (0.03   $ 0.12    $ 0.15

Pro forma net income per share - diluted

   $ 0.15    $ (0.03   $ 0.12    $ 0.15

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

As defined in SFAS 157, 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; and

 

   

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

In determining the appropriate levels, the Company performed a detailed analysis of the assets and liabilities that are subject to SFAS 157. 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.”

 

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The following tables provide fair value information related to the Company’s financial assets and liabilities in accordance with SFAS 157 at June 30, 2009 and December 31, 2008:

 

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

Financial instruments owned, at fair value:

           

Marketable securities owned:

           

Equity securities

   $ 14,978,213    $ —      $ —      $ 14,978,213
                           

Total marketable securities owned

   $ 14,978,213    $ —      $ —      $ 14,978,213
                           

Other investments :

           

General partner investment in hedge funds

   $ —      $ 29,992,713    $ —      $ 29,992,713

General partner investment in funds of funds

     —        —        3,786,876      3,786,876
                           

Total general partner investment in funds

     —        29,992,713      3,786,876      33,779,589

Limited partner investment in private equity fund

     —        —        2,391,193      2,391,193

Limited partner investment in mortgage fund

     —        2,000,000      —        2,000,000

Investment in NYMT convertible preferred stock (1)

     —        —        13,867,950      13,867,950

Warrants

     —        —        244,077      244,077
                           

Total other investments

   $ —      $ 31,992,713    $ 20,290,096    $ 52,282,809
                           

 

(1) Carried in the Consolidated Statements of Financial Condition at fair value in accordance with SFAS 159.

 

     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 (1)

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

Warrants

     —        —        307,341      307,341
                           

Total other investments

   $ —      $ 29,766,076    $ 18,188,179    $ 47,954,255
                           

 

(1) Carried in the Consolidated Statements of Financial Condition at fair value in accordance with SFAS 159.

 

     Liabilities at Fair Value as of
June 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

   $ 7,780,239    $ —      $ —      $ 7,780,239
                           

 

     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
                           

 

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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 June 30, 2009 and 2008:

 

     Balance as of
March 31, 2009
   Purchases/(sales),
net
    Total gains
and (losses)
(realized and
unrealized)
    Transfers in/(out)
of Level 3
   Balance as of
June 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

   $ 3,709,249    $ —       $ 77,627      $ —      $ 3,786,876    $ 77,627   

Limited partner investment in private equity fund

     2,450,312      (71,600     12,481        —        2,391,193      12,481   

Investment in NYMT convertible preferred stock

     4,144,649      8,446,700 (1)      1,276,601        —        13,867,950      1,276,601   

Warrants

     252,129      —          (8,052     —        244,077      (8,052
                                             

Total Level 3

   $ 10,556,339    $ 8,375,100      $ 1,358,657      $ —      $ 20,290,096    $ 1,358,657   
                                             

 

(1) Effective May 1, 2009, the Company consolidates HMOP in its consolidated financial statements. Accordingly, the investment in NYMT convertible preferred stock held by HMOP is included in the Company’s Level 3 assets as of June 30, 2009.

 

     Balance as of
March 31, 2008
   Purchases/(sales),
net
   Total gains
and (losses)
(realized and
unrealized)
    Transfers in/(out)
of Level 3
   Balance as of
June 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

   $ 4,498,151    $ —      $ 45,602      $ —      $ 4,543,753    $ 45,602   

Limited partner investment in private equity fund

     2,296,747      94,900      71,109        —        2,462,756      71,109   

Investment in NYMT convertible preferred stock

     14,177,062      —        (111,861     —        14,065,201      (111,861

Warrants

     227,172      —        76,592        —        303,764      76,592   
                                            

Total Level 3

   $ 21,199,132    $ 94,900    $ 81,442      $ —      $ 21,375,474    $ 81,442   
                                            

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 six months ended June 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
June 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    $ —       $ 108,803      $ —      $ 3,786,876    $ 108,803   

Limited partner investment in private equity fund

     2,516,115      (71,600     (53,322     —        2,391,193      (53,322

Investment in NYMT convertible preferred stock

     11,686,650      655,600 (1)      1,525,700        —        13,867,950      1,525,700   

Warrants

     307,341      —          (63,264     —        244,077      (63,264
                                             

Total Level 3

   $ 18,188,179    $ 584,000      $ 1,517,917      $ —      $ 20,290,096    $ 1,517,917   
                                             

 

(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. Accordingly, the investment in NYMT convertible preferred stock held by HMOP of $8.5 million is included in the Company’s Level 3 assets as of June 30, 2009.

 

     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
June 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    $ —      $ 82,782      $ —      $ 4,543,753    $ 82,782   

Limited partner investment in private equity fund

     2,282,582      155,000      25,174        —        2,462,756      25,174   

Investment in NYMT convertible preferred stock

     —        15,000,000      (934,799     —        14,065,201      (934,799

Warrants

     300,503      —        3,261        —        303,764      3,261   
                                            

Total Level 3

   $ 7,044,056    $ 15,155,000    $ (823,582   $ —      $ 21,375,474    $ (823,582
                                            

 

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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 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 six months ended June 30, 2009 and 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 June 30, 2009.

6. Loans Held for Investment

Loans held for investment at June 30, 2009 and December 31, 2008 is 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 June 30, 2009 and December 31, 2008 the loan was recorded net of loan loss reserves of $3.9 million and $2.4 million respectively.

The Company has also advanced as of June 30, 2009 and 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. As of June 30, 2009, $0.7 million of these commitments have not matured and remain available to be funded.

The loan notes and non-revolving credit note commitments bear interest at rates from 12% to 20% per annum with maturity dates ranging from one to five years. At June 30, 2009 and December 31, 2008, $7.4 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 June 30, 2009 and December 31, 2008:

 

     June 30, 2009     December 31, 2008  

Loans held for investment

   $ 8,699,870      $ 8,812,533   

Allowance for loan losses

     (4,340,365     (2,896,149

Deferred loan fees

     (180,017     (190,517
                

Total loans held for investment, net

   $ 4,179,488      $ 5,725,867   
                

 

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

 

     Three Months Ended June 30,    Six Months Ended June 30,
     2009     2008    2009     2008

Balance at beginning of period

   $ (3,621,149   $ —      $ (2,896,149   $ —  

Allowance for loan losses

     (719,216     —        (1,444,216     —  
                             

Balance at end of period

   $ (4,340,365   $ —      $ (4,340,365   $ —  
                             

The Company determined the fair value of loans held for investment to be $5.8 million and $6.0 million as of June 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 June 30, 2009:

 

     June 30, 2009  

Loans collateralizing asset-backed securities

   $ 474,529,397   

Allowance for loan losses

     (2,537,976

Liquidity discount

     (115,875,436

Credit discount

     (45,724,267

Deferred loan fees, net

     (2,286,845
        

Total loans collateralizing asset-backed securities, net

   $ 308,104,873   
        

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.

Reflective of principles established in SFAS No. 114, 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 $99.7 million of impaired loans as of June 30, 2009, with allocated specific reserves of $2.4 million and credit discount of $45.7 million as of June 30, 2009. In addition, in accordance with SFAS 5, 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 $119 thousand during the quarter ended June 30, 2009 on loans purchased into the CLO subsequent to the Cratos acquisition.

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

 

     Three and Six Months Ended
June 30, 2009
 

Balance at beginning of period

   $ —     

Allowance for loan losses:

  

Specific reserve

     (2,418,640

Pooled reserve

     (119,336
        

Balance at end of period

   $ (2,537,976
        

 

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Loans recorded upon the acquisition of Cratos reflect a market value (or liquidity discount) and a credit discount. In addition, most loans acquired 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 months ended June 30, 2009:

Impaired loans at acquisition:

 

     Three Months Ended June 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

     (1,686,118     —          —          —          (1,686,118

Amortization of discount

     —          —          960,485        —          960,485   

Provision for loan losses

     —          (2,418,640     —          —          (2,418,640

Sales

     (10,439,755     —          490,000        5,768,522        (4,181,233
                                        

Balance at end of period

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

Non-impaired loans at acquisition:

 

     Three Months Ended June 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

     50,516,105        —          —          (2,465,924     48,050,181   

Repayments

     (9,047,108     —          —          —          (9,047,108

Amortization of discount

     —          —          5,456,150        179,079        5,635,229   

Provision for loan losses

     —          (119,336     —          —          (119,336

Sales

     (14,981,786       5,393,568        —          (9,588,218
                                        

Balance at end of period

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

The Company determined the fair value of loans collateralizing asset-backed securities to be $337.4 million as of June 30, 2009, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate.

At June 30, 2009, $99.7 million of the aggregate principal amount of loans collateralizing asset-backed securities were on non-accrual status.

8. Fixed Assets

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

 

     June 30, 2009     December 31, 2008  

Furniture and fixtures

   $ 1,516,380      $ 1,363,429   

Computer and office equipment

     3,339,710        3,247,255   

Leasehold improvements

     2,372,922        2,320,339   

Software

     510,288        490,194   

Less:accumulated depreciation

     (6,617,834     (6,214,203
                

Total fixed assets, net

   $ 1,121,466      $ 1,207,014   
                

Depreciation expense for the three months ended June 30, 2009 and 2008 was $206,411 and $254,930, respectively. Depreciation expense for the six months ended June 30, 2009 and 2008 was $403,632 and $520,888, 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 $8.2 million outstanding at June 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 June 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.

 

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During the six months ended June 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 June 30, 2009 and December 31, 2008, respectively. Each draw bears interest at the prime rate or LIBOR plus 2.25%.

The following table shows the repayment schedules for the principal portion of the term loan at June 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 June 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

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, under the guidance of SFAS 141(R), and the difference from the face value of $0.7 million was 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 three months ended June 30, 2009, the Company made repayments of $98,000 on the note and recorded interest expense of $51,256.

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 $9.8 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 June 30, 2009.

 

($ in millions)                                
     Notes
Originally

Issued
   Outstanding
Principal
Balance

June 30, 2009
    Liquidity
Discount

June 30, 2009
    Net Outstanding
Balance
June 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    $ 326.0      $ (44.5   $ 281.5     

0.26% - 0.29%

  Aaa/AAA

Class B Senior Secured Floating Rate Notes due 2021

     30.0      30.0        (10.6     19.4      0.50%   Aa2/AA

Class C Senior Secured Deferrable Floating Rate Notes due 2021

     35.0      35.0        (25.0     10.0      1.10%   Baa3/A

Class D Secured Deferrable Floating Rate Notes due 2021

     34.0      34.0        (24.7     9.3      2.40%   Ba3/BBB

Class E Secured Deferrable Floating Rate Notes due 2021

     30.0      30.0        (23.4     6.6      5.00%   B3/BB
                                       

Total secured notes sold to investors

   $ 455.0    $ 455.0      $ (128.2   $ 326.8       

Unsecured subordinated notes due 2021

     45.0      45.0        (39.9     5.1       
                                   

Total notes for the CLO I offering

   $ 500.0    $ 500.0      $ (168.1   $ 331.9       

Consolidation elimination

     N/A      (54.8     47.1        (7.7    
                                   

Total asset-backed securities issued

     N/A    $ 445.2      $ (121.0   $ 324.2       
                                   

 

(1) These ratings are unaudited and were the current ratings as of June 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

 

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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 June 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 for the three months ended June 30, 2009 was $8.7 million, which comprised of cash coupon of $1.8 million and liquidity discount amortization of $6.9 million. As of June 30, 2009, accrued interest payable on the notes was $0.8 million.

The Notes recorded upon the acquisition of Cratos reflect a market value or liquidity discount. The activity in the note principal and liquidity discount for the three and six months ended June 30, 2009 comprised of the following:

 

     Three and Six Months Ended June 30, 2009  
     Principal     Liquidity Discount     Net  

Balance at beginning of period

   $ —        $ —        $ —     

Cratos acquisitions

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

Post-acquisition purchases

     (760,000     592,800        (167,200

Sales

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

Amortization of discount

     —          6,883,265        6,883,265   
                        

Balance at end of period

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

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 June 30, 2009, the Company repurchased 131,972 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 $844,621. 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.

 

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Stock Options

The following table summarizes the stock option activity for the six months ended June 30, 2009:

 

     Six Months Ended
June 30, 2009
     Shares Subject
to Option
    Weighted
Average
Exercise
Price

Balance, beginning of year

   2,086,990      $ 11.40

Granted

   —          —  

Exercised

   —          —  

Forfeited

   (4,625     10.00

Expired

   (98,875     12.78
            

Balance, end of period

   1,983,490      $ 11.33
            

Options exercisable at end of period

   1,727,517      $ 11.49
            

 

    As of June 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   1,983,490   5.38   $ 11.33   $ —     1,727,517   5.25   $ 11.49   $ —  

In accordance with the requirements of SFAS 123R and FIN 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans , 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 $5,573 and $9,855 for the three months ended June 30, 2009 and 2008, respectively, and $10,850 and $16,767 for the six months ended June 30, 2009 and 2008, respectively.

As of June 30, 2009, there was $11,866 of unrecognized compensation expense related to stock options expected to be recognized over a weighted average period of 0.56 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 unit 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 64,990 RSUs to new hire employees during the six months ended June 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.

 

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The following table summarizes the RSU activity for the six months ended June 30, 2009:

 

     Six Months Ended
June 30, 2009
     Restricted
Stock Units
    Weighted
Average
Grant Date
Fair Value

Balance, beginning of year

   2,265,292      $ 8.94

Granted

   896,190        4.25

Vested

   (382,710     10.22

Forfeited

   (105,188     9.30
            

Balance, end of period

   2,673,584      $ 7.17
            

The Company recognizes compensation expense over a graded vesting period using the accelerated attribution method. For the three months ended June 30, 2009 and 2008, the Company recorded compensation expense of $802,650 and $1,204,126, respectively, related to RSUs awarded in connection with the initial public offering. For the six months ended June 30, 2009 and 2008, the Company recorded compensation expense of $1,761,167 and $2,238,668, respectively, related to RSUs awarded in connection with the initial public offering. In addition, for the three months ended June 30, 2009 and 2008, the Company recorded compensation expense of $465,944 and $1,279,963, respectively, for RSUs granted after the initial public offering. For the six months ended June 30, 2009 and 2008, the Company recorded compensation expense of $874,880 and $2,318,024, respectively, related to RSUs granted after the initial public offering.

As of June 30, 2009, there was $11,228,313 of unrecognized compensation expense related to RSUs expected to be recognized over a weighted average period of 2.61 years.

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

The Company calculates its net income (loss) per share in accordance with SFAS No. 128, Earnings per Share .

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 six months ended June 30, 2009 and 2008 are shown in the tables below:

 

     Three Months Ended June 30,    Six Months Ended June 30,
     2009    2008    2009    2008

Numerator:

           

Net income attributable to JMP Group Inc.

   $ 4,286,185    $ 194,470    $ 4,320,132    $ 873,270
                           

Denominator:

           

Basic weighted average shares outstanding

     20,642,794      20,371,347      20,571,786      20,458,622
                           

Effect of potential dilutive securities:

           

Restricted stock units

     680,312      561,120      595,538      462,344
                           

Diluted weighted average shares outstanding

     21,323,106      20,932,467      21,167,324      20,920,966
                           

Net income per share

           

Basic

   $ 0.21    $ 0.01    $ 0.21    $ 0.04

Diluted

   $ 0.20    $ 0.01    $ 0.20    $ 0.04

Stock options to purchase 2,024,185 and 2,054,136 shares of common stock for the three and six months ended June 30, 2009, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common units or diluted weighted-average common shares outstanding. Stock options to purchase 2,243,548 and 2,306,507 shares of common stock for the three and six months ended June 30, 2008, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common units or diluted weighted-average common shares outstanding. No restricted stock units were anti-dilutive for the three and six months ended June 30, 2009. Restricted stock units for 15,824 and 7,912 shares of common stock for the three and six months ended June 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 six months ended June 30, 2009 and 2008.

 

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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 in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”), accounted for income taxes in its separate financial statements. SFAS 109 requires the recognition of deferred tax assets and liabilities based upon the temporary differences between the financial reporting and tax bases of the Company’s 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.

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 six months ended June 30, 2009, the Company recorded a total tax expense of $3,559,939 and $3,612,366, respectively. For the three and six months ended June 30, 2008, the Company recorded a total tax expense of $645,676 and $486,102, respectively, which included a tax expense (benefit) adjustment of $633 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 six months ended June 30, 2009 and 2008 are as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  

Federal

   $ (259,563   $ 2,089,250      $ 331,765      $ 3,614,815   

State

     (65,806     530,675        112,352        902,051   
                                

Total current income tax expense

     (325,369     2,619,925        444,117        4,516,866   

Federal

     3,047,159        (1,723,533     2,496,976        (3,512,981

State

     838,149        (250,716     671,273        (517,783
                                

Total deferred benefit

     3,885,308        (1,974,249     3,168,249        (4,030,764
                                

Total expense (benefit) from income taxes

   $ 3,559,939      $ 645,676      $ 3,612,366      $ 486,102   
                                

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

   

     Three Months Ended June 30,     Six Months Ended June 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

     -5.86     16.30     -5.58     6.15
                                

Rate before one-time events

     34.89     57.05     35.17     46.90

Deferred tax assets released related to expired options and vested RSUs

     8.81     19.74     8.71     12.20

Adjustment for prior year taxes

     -0.01     —          —          —     

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

     —          0.08     —          -23.34

Post-acquisition adjustment to deferred tax liability of Cratos

     1.68     —          1.66     —     
                                

Effective tax rate (benefit)

     45.37     76.87     45.54     35.76
                                

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 of FIN 48, and no liabilities for uncertain income tax positions have been recorded pursuant to FIN 48.

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 June 30, 2009 and 2008 was $596,888 and $478,256, respectively. Rental expense for the six months ended June 30, 2009 and 2008 was $1,177,517 and $947,819, respectively.

 

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

 

2009

   $ 1,197,092

2010

     2,417,106

2011

     1,797,104

2012

     82,745

2013

     54,097

Thereafter

     60,167
      
   $ 5,608,311
      

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 June 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 June 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 June 30, 2009, the Company had unfunded commitments of $4.1 million.

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 $25,835,835 and $39,761,064, which were $24,531,335and $38,681,564 in excess of the required net capital of $1,304,500 and $1,079,500 at June 30, 2009 and December 31, 2008, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 0.37 to 1 and 0.24 to 1 at June 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 $2,116,627 and $1,366,568 for the three months ended June 30, 2009 and 2008, respectively Also, HCS earned incentive fees of $1,942,678 and $15,469 from these entities for the three months ended June 30, 2009 and 2008, respectively. Base management fees earned from these activities were $4,083,566 and $2,400,489 for the six months ended June 30, 2009 and 2008, respectively Also, HCS earned incentive fees of $8,456,957 and $1,755,602 from these entities for the six months ended June 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 June 30, 2009 had settled with no resulting material liability to the Company. For the three months ended June 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 June 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.

 

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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 June 30, 2009, the Company had unfunded commitments of $4.1 million and standby letters of credit of $1.6 million.

23. Business Segments

For the three and six months ended June 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 six months ended June 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.

 

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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 June 30, 2009     Six Months Ended June 30, 2009  
     2009    2008     2009    2008  

Broker-Dealer

          

Net revenues after provision for loan losses

   $ 23,896,023    $ 20,637,143      $ 36,594,698    $ 35,505,338   

Non-interest expenses

     20,231,860      19,358,805        34,249,032      34,887,936   
                              

Segment income (loss) before income tax expense

   $ 3,664,163    $ 1,278,338      $ 2,345,666    $ 617,402   
                              

Segment assets

   $ 74,155,252    $ 87,762,401      $ 74,155,252    $ 87,762,401   

Asset Management

          

Net revenues after provision for loan losses

   $ 6,967,763    $ 865,623      $ 18,998,837    $ 5,533,365   

Non-interest expenses

     6,404,368      1,029,404        16,403,319      4,573,415   
                              

Segment income (loss) before income tax expense

   $ 563,395    $ (163,781   $ 2,595,518    $ 959,950   
                              

Segment assets

   $ 72,003,408    $ 69,607,309      $ 72,003,408    $ 69,607,309   

Corporate Credit

          

Net revenues after provision for loan losses

   $ 6,611,030    $ 9,540      $ 6,077,751    $ 9,540   

Non-interest expenses

     2,477,537      72,970        2,570,984      72,970   
                              

Segment income (loss) before income tax expense

   $ 4,133,493    $ (63,430   $ 3,506,767    $ (63,430
                              

Segment assets

   $ 391,876,825    $ 2,988,313      $ 391,876,825    $ 2,988,313   

Consolidated Entity

          

Net revenues after provision for loan losses

   $ 37,474,816    $ 21,512,306      $ 61,671,286    $ 41,048,243   

Non-interest expenses

     29,113,765      20,461,179        53,223,335      39,534,321   
                              

Income before income tax expense

   $ 8,361,051    $ 1,051,127      $ 8,447,951    $ 1,513,922   
                              

Total assets

   $ 538,035,485    $ 160,358,023      $ 538,035,485    $ 160,358,023   

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 in accordance with the disclosure requirements of paragraph 20d of APB Opinion No. 18.

 

     June 30, 2009    Three Months Ended June 30, 2009    Six Months Ended June 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

   $ 60,852,607    $ (301,984   $ 5,813,479    $ (313,622   $ 5,935,974

Harvest Small Cap Partners

     306,420,405      (4,085,208     12,299,274      (9,742,818     51,122,759

Harvest Consumer Partners

     10,074,318      (36,098     289,148      (64,233     788,124

Harvest Technology Partners

     18,884,850      (100,662     1,533,043      (157,495     2,936,072

Harvest Global Select Partners

     5,265,026      (47,236     62,262      (47,236     62,262

Funds of Funds:

            

JMP Masters Fund

     96,635,809      (183,412     4,739,974      (382,156     6,316,160

JMP Emerging Masters Fund

     11,113,392      (34,566     244,825      (76,051     497,340

 

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The tables below present summarized financial information of NYMT at June 30, 2009 and December 31, 2008 as well as for the three months ended June 30, 2009 and 2008 in accordance with the disclosure requirements of paragraph 20d of APB Opinion No. 18.

 

(In thousands)    Three Months Ended June 30,     Six Months Ended June 30,  

Statement of Operations Data:

   2009     2008     2009     2008  

Interest income

   $ 7,621      $ 10,755      $ 16,206      $ 24,008   

Interest expense

     2,047        6,791        5,177        17,305   

Provision for loan losses

     (259     (22     (888     (1,455

Impairment loss on investment securities

     —          —          (119     —     

Realized gain (loss) on securities and related hedges

     141        (83     264        (19,931

Income (loss) from continuing operations

     2,438        434        4,337        (21,004

Net income (loss)

     2,547        1,263        4,601        (19,955

Statement of Financial Condition Data:

   June 30, 2009     December 31, 2008        

Investment securities - available for sale

   $ 268,925      $ 477,416     

Mortgage loans held in securitization trusts (net)

     313,955        348,337     

Total assets

     611,495        853,300     

Financing arrangements, portfolio investments

     188,151        402,329     

Collateralized debt obligations

     302,325        335,646     

Convertible preferred debentures (net)

     19,776        19,702     

Total liabilities

     565,926        814,052     

25. Subsequent Events

The Company has performed an evaluation of subsequent events through August 6, 2009, which is the date the financial statements are issued.

On July 31, 2009, the Company received collateral for full satisfaction of one loan held for investment. This loan was carried at a value of $2.4 million at June 30, 2009, with no allowance for loan losses.

On August 4, 2009, the Company’s board of directors declared a cash dividend of $0.01 per share of common stock for the second quarter of 2009 to be paid on September 4, 2009, to common stockholders of record on August 21, 2009.

 

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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 June 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.

 

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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 June 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.

 

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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
     June 30,
2009
   December 31,
2008
   June 30,
2009
   December 31,
2008

Funds Managed by HCS:

           

Hedge Funds:

           

Harvest Opportunity Partners II

   $ 60,852,607    $ 62,169,209    $ 8,442,914    $ 7,760,076

Harvest Small Cap Partners

     306,420,405      234,051,639      8,481,484      13,780,667

Harvest Consumer Partners

     10,074,318      5,521,880      5,015,044      2,407,121

Harvest Technology Partners

     18,884,850      11,581,561      7,040,364      5,818,212

Harvest Mortgage Opportunities Partners (1)

     13,435,806      —        9,033,928      —  

Harvest Global Select Partners

     5,265,026      —        1,012,906      —  

Funds of Funds:

           

JMP Masters Fund

     96,635,809      96,037,447      2,783,689      2,701,021

JMP Emerging Masters Fund

     11,113,392      10,633,335      1,003,188      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
                           

Total funds managed by HCS

   $ 571,096,037    $ 484,238,191    $ 42,813,517    $ 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 June 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 June 30, 2009    Six Months Ended June 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

   $ 762,747    $ 130,778    $ 243,165    $ 798,410    $ 290,074    $ 243,534

Harvest Small Cap Partners

     461,554      1,464,402      1,518,693      2,019,346      2,764,188      7,940,498

Harvest Consumer Partners

     102,784      13,157      17,876      309,388      20,858      38,719

Harvest Technology Partners

     584,536      28,178      113,178      1,243,821      43,568      184,440

Harvest Mortgage Opportunities Partners (1)

     826,043      46,105      —        1,239,723      105,417      —  

Harvest Global Select Partners

     12,906      8,813      5,841      12,906      8,813      5,841

Funds of Funds:

                 

JMP Masters Fund

     75,809      217,210      —        82,667      437,082      —  

JMP Emerging Masters Fund

     1,818      24,415      —        26,136      48,445      —  

REITs:

                 

New York Mortgage Trust

   $ 1,279,837    $ 183,569    $ 43,925    $ 2,472,275    $ 365,121    $ 43,925
                                         

Totals

   $ 4,108,034    $ 2,116,627    $ 1,942,678    $ 8,204,672    $ 4,083,566    $ 8,456,957
                                         

 

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

 

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     Three Months Ended June 30, 2008     Six Months Ended June 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

   $ (724,269   $ 192,906    $ 2      $ (530,374   $ 367,535    $ 38,777

Harvest Small Cap Partners

     (742,407     597,480      (5,883     864,022        953,904      1,653,432

Harvest Consumer Partners (1)

     (60,724     7,356      —          15,534        12,890      2,010

Harvest Technology Partners (1)

     181,166        6,911      21,350        182,922        13,836      21,413

Funds of Funds:

              

JMP Masters Fund

     64,554        286,177      —          98,778        570,885      30,823

JMP Emerging Masters Fund

     (18,952     26,357      —          (15,996     53,505      9,147

REITs:

              

JMP Realty Trust (1)

     40,339        65,485      —          (113,070     134,871      —  

New York Mortgage Trust

     593,570        183,896      —          (1,137,019     293,063      —  
                                            

Totals

   $ (666,723   $ 1,366,568    $ 15,469      $ (635,203   $ 2,400,489    $ 1,755,602
                                            

 

(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 as the asset manager for a corporate loan securitization structure (CLO). During the quarter ended June 30, 2009, we earned management fees of $605,865 or 50 bps on gross assets under management. At June 30, 2009, gross assets under management were $497.9 million. As we consolidate the CLO in accordance with FIN 46(R) the management fees for GAAP are eliminated on 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 (Loss) on Sale and Refinancing of Loans

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

Gain on Bargain Purchase

A bargain purchase gain according to SFAS 141(R) 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.

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 gains on repurchases of Cratos asset-backed securities issued (“ABS”) from third parties and loan restructuring fees at JMP Credit Corporation. Other income also includes 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.

 

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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 and depreciation.

Noncontrolling Interest

Noncontrolling interest for the three and six months ended June 30, 2009 includes the interest of third parties in JMP Credit Corporation (“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 six months ended June 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. This right satisfies all of the criteria enumerated in paragraph 7.b. of Emerging Issues Task Force Issue No. 04-5 (“EITF 04-5”), Determining 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, as described above. Because of these substantive kick-out rights, consolidation of HMOP was not required 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 limited partners are no longer deemed to have substantive kick-out rights. As a result, the Company consolidated HMOP in its consolidated financial statements effective May 1, 2009.

        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.

 

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Table of Contents

Results of Operations

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

 

     Three Months Ended June 30,     Change from
2008 to 2009
 
(in thousands)    2009     2008     $     %  

Revenues

        

Investment banking

   $ 10,598      $ 10,833      $ (235   -2.2

Brokerage

     9,358        8,717        641      7.4

Asset management fees

     4,033        1,331        2,702      203.0

Principal transactions

     6,533        (683     7,216      N/A   

Gain on sale and refinancing of loans

     4,844        —          4,844      N/A   

Gain on bargain purchase

     1,179        —          1,179      N/A   

Net dividend income

     651        881        (230   -26.1

Other income

     769        160        609      380.6
                              

Non-interest revenues

     37,965        21,239        16,726      78.8
                              

Interest income

     11,667        344        11,323      3291.6

Interest expense

     (8,899     (71     (8,828   12433.8
                              

Net interest income

     2,768        273        2,495      913.9
                              

Provision for loan losses

     (3,257     —          (3,257   N/A   
                              

Total net revenues after provision for loan losses

     37,476        21,512        15,964      74.2
                              

Non-interest Expenses

        

Compensation and benefits

     22,740        13,835        8,905      64.4

Administration

     1,322        2,072        (750   -36.2

Brokerage, clearing and exchange fees

     1,490        1,097        393      35.8

Other

     3,563        3,457        106      3.1
                              

Total non-interest expenses

     29,115        20,461        8,654      42.3
                              

Income before income tax expense

     8,361        1,051        7,310      695.5

Income tax expense

     3,560        646        2,914      451.4
                              

Net income

     4,801        405        4,396      1084.5

Less: Net income attributable to the noncontrolling interest

     515        211        304      144.1
                              

Net income attributable to JMP Group Inc.

   $ 4,286      $ 194      $ 4,092      2105.4
                              

 

     Six Months Ended June 30,     Change from
2008 to 2009
 
(in thousands)    2009     2008     $     %  

Revenues

        

Investment banking

   $ 14,713      $ 18,939      $ (4,226   -22.3

Brokerage

     17,897        16,859        1,038      6.2

Asset management fees

     12,499        4,073        8,426      206.9

Principal transactions

     9,422        (2,063     11,485      N/A   

Gain on sale and refinancing of loans

     4,844        —          4,844      N/A   

Gain on bargain purchase

     1,179        —          1,179      N/A   

Net dividend income

     1,084        1,464        (380   -26.0

Other income

     1,036        708        328      46.3
                              

Non-interest revenues

     62,674        39,980        22,694      56.8
                              

Interest income

     11,958        1,257        10,701      851.3

Interest expense

     (8,980     (190     (8,790   4626.3
                              

Net interest income

     2,978        1,067        1,911      179.1
                              

Provision for loan losses

     (3,982     —          (3,982   N/A   
                              

Total net revenues after provision for loan losses

     61,670        41,047        20,623      50.2
                              

Non-interest Expenses

        

Compensation and benefits

     41,541        26,424        15,117      57.2

Administration

     2,443        3,353        (910   -27.1

Brokerage, clearing and exchange fees

     2,740        2,470        270      10.9

Other

     6,498        7,286        (788   -10.8
                              

Total non-interest expenses

     53,222        39,533        13,689      34.6
                              

Income before income tax expense

     8,448        1,514        6,934      458.0

Income tax expense

     3,612        486        3,126      643.1
                              

Net income

     4,836        1,028        3,808      370.4

Less: Net income attributable to the noncontrolling interest

     516        155        361      233.9
                              

Net income attributable to JMP Group Inc.

   $ 4,320      $ 873      $ 3,447      394.7
                              

 

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Table of Contents

Three Months Ended June 30, 2009, Compared to Three Months Ended June 30, 2008

Overview

Total net revenues after provision for loan losses increased $16.0 million, or 74.2%, from $21.5 million for the quarter ended June 30, 2008 to $37.5 million for the quarter ended June 30, 2009, driven by an increase in non-interest revenues of $16.7 million and an increase in net interest income of $2.5 million, offset by an increase in provision for loan losses of $3.2 million.

Non-interest revenues increased $16.7 million or 78.8% primarily due to a $7.2 million increase in principal transaction revenues, a $2.7 million increase in asset management revenues and a $4.8 million increase in gain on sale and refinancing of loans.

Net interest income increased $2.5 million or 913.9%, from $0.3 million for the quarter ended June 30, 2008 to $2.8 million for the same period in 2009. The increase was due to the acquisition of Cratos which resulted in $2.8 million of net interest income recorded at JMP Credit.

Provision for loan losses increased from zero for the quarter ended June 30, 2008 to $3.3 million for the quarter ended June 30, 2009 due to $0.8 million recorded against loans held for investment and $2.5 million recorded against loans collateralizing ABS issued.

Total non-interest expenses increased $8.6 million, or 42.3%, from $20.5 million for the quarter ended June 30, 2008 to $29.1 million for the quarter ended June 30, 2009, primarily due to an increase in compensation and benefits of $8.9 million.

Net income attributable to JMP Group Inc. increased $4.1 million from net income of $0.2 million for the quarter ended June 30, 2008 to net income of $4.3 million for the quarter ended June 30, 2009, and includes $3.0 million increase in income tax expense from $0.6 million for the quarter ended June 30, 2008 to $3.6 million for the quarter ended June 30, 2009.

Revenues

Investment Banking

Investment banking revenues decreased $0.2 million from $10.8 million for the quarter ended June 30, 2008 to $10.6 million for the same period in 2009, and decreased as a percentage of total net revenues after provision for loan losses from 50.4% to 28.3%, respectively. The decrease in revenues reflects a lower level of activity in our public equity underwriting and private placement business, partially offset by increased activity in our strategic advisory businesses. Public equity underwriting revenues decreased by $0.4 million, or 7.4%, from $4.8 million for the quarter ended June 30, 2008 to $4.4 million for the quarter ended June 30, 2009. We executed seven public equity underwriting transactions in the quarter ended June 30, 2009 compared to nine in the quarter ended June 30, 2008. We acted as a lead manager on one transaction in the quarter ended June 30, 2009 and none in the same period in 2008. Private placement revenues decreased $0.8 million, or 24.5%, from $3.4 million for the quarter ended June 30, 2008 to $2.6 million for the quarter ended June 30, 2009, primarily due to lower average revenue per transaction. We executed four private placement transactions in the quarter ended June 30, 2009 compared to three in the quarter ended June 30, 2008. Our strategic advisory revenues increased $0.9 million, or 36.0%, from $2.7 million for the quarter ended June 30, 2008 to $3.6 million for the quarter ended June 30, 2009, primarily due to higher average revenue per transaction. We executed four strategic advisory transactions in the quarter ended June 30, 2009 compared to four in the quarter ended June 30, 2008.

Brokerage Revenues

Brokerage revenues increased by $0.7 million, or 7.4%, from $8.7 million for the quarter ended June 30, 2008 to $9.4 million for the quarter ended June 30, 2009. The increase was the result of higher gross commissions, which relate to an increase in overall average daily volume in the markets in which we transact, partially offset by lower net margins on trading commissions; overall average daily volume in the NYSE and Nasdaq Composite Indices combined was up 14.5% from the second quarter 2008 to the second quarter 2009. Brokerage revenues decreased as a percentage of total net revenues after provision for loan losses, from 40.5% for the quarter ended June 30, 2008 to 25.0% for the quarter ended June 30, 2009.

Asset Management Fees

Asset management fees increased $2.7 million, or 203.0%, from $1.3 million for the quarter ended June 30, 2008 to $4.0 million for the quarter ended June 30, 2009. Asset management fees include base management fees and incentive fees for our funds under management. Base management fees increased from $1.4 million for the second quarter of 2008 to $2.1 million for the same period in 2009. Incentive fees increased from zero for the second quarter of 2008 to $1.9 million for the same period in 2009. The increase in base management fees is the result of an increase in client assets under management from $397.6 million as of June 30, 2008 to $528.3 million as of June 30, 2009. This was primarily due to the performance of Harvest Small Cap Partners during 2008 as well as the first two quarters of 2009, which enabled it to raise additional capital and increase assets under management by $147.8 million, when generally other hedge funds in the industry were experiencing redemptions. The increase in incentive fees is due to the improved performance of our families of funds, in particular of Harvest Small Cap Partners fund. As a percentage of total net revenues after provision for loan losses, asset management fees increased from 6.2% for the quarter ended June 30, 2008 to 10.8% for the same period in 2009.

Principal Transactions

Principal transaction revenues increased $7.2 million from a loss of $0.7 million for the quarter ended June 30, 2008 to a gain of $6.5 million

 

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for the quarter ended June 30, 2009. The increase was primarily due to a $3.9 million increase in equity and other security principal transaction revenues from a gain of $0.4 million for the second quarter of 2008 to a gain of $4.3 million for the second quarter of 2009. In addition, gain on investments in partnerships increased $3.5 million from a loss of $1.3 million for the second quarter of 2008 to a gain of $2.2 million for the second quarter of 2009. The $3.9 million increase in equity and other security transaction revenues included unrealized gain/loss on our convertible preferred security and equity security investments in NYMT, which reflected a gain of $0.5 million for the second quarter of 2008 compared to a gain of $2.1 million for the second quarter of 2009.

Gain (Loss) on Sale and Refinancing of Loans

Gain (loss) on sale and refinancing of loans increased $4.8 million from zero for the quarter ended June 30, 2008 to $4.8 million for the same period in 2009, with all of the gain generated at JMP Credit. During the quarter ended June 30, 2009, six loans were sold or repaid, with one loan repayment contributing $4.7 million of the net $4.8 million of gain, where the borrower repaid the loan at a premium to our carrying value.

Gain on Bargain Purchase

Upon the acquisition of Cratos by JMP Credit on April 7, 2009, a bargain purchase gain of $1.2 million was recorded to reflect the difference between the fair value of net assets acquired of $7.5 million and consideration to the sellers of $6.3 million. In accordance with SFAS 141(R) this gain was recognized in current period revenues.

Net Dividend Income

Net dividend income decreased $0.2 million or 26.1% from $0.9 million for the quarter ended June 30, 2008 to $0.7 million for the quarter ended June 30, 2009. The decrease was primarily due to higher dividend expense on short positions in our principal investment portfolio.

Other Income

Other income increased $0.6 million from $0.2 million for the quarter ended June 30, 2008 to $0.8 million for the same period in 2009. The increase comprised fundraising and loan restructuring fees of $0.5 million and gain on repurchase of ABS issued of $0.1 million.

Interest Income

Interest income increased $11.4 million from $0.3 million for the quarter ended June 30, 2008 to $11.7 million for the same period in 2009. The increase was due to the acquisition of Cratos which resulted in $11.6 million of interest income at JMP Credit.

At JMP Credit, total interest income of $11.6 million was mainly comprised of interest earned on our 74 performing loans of $4.9 million, amortization of purchase discounts and other deferred fees of $0.2 million and the non-cash amortization of the liquidity discounts on our loans of $6.4 million. The annualized weighted average interest rate on the loans was 5.4% with a spread to weighted average Libor of 4.36% for the quarter ended June 30, 2009. The Company did not recognize any interest income for the 14 impaired loans with an aggregate weighted average loan balance of $91.1 million that were on non-accrual status during the quarter.

Interest Expense

Interest expense increased $8.8 million from $0.1 million for the quarter ended June 30, 2008 to $8.9 million for the same period in 2009. The increase was due to the acquisition of Cratos and $8.8 million of interest expense at JMP Credit.

At JMP Credit, interest expense of $8.8 million was comprised of $1.8 million in interest expense on ABS issued, $6.9 million in non-cash amortization of the liquidity discount on ABS issued, and $0.1 million in interest primarily on the contingent consideration. The annualized cost of funds for ABS issued during the quarter was 1.80%.

Provision for Loan Losses

Provision for loan losses increased $3.3 million from zero for the quarter ended June 30, 2008 to $3.3 million for the same period in 2009. The increase consisted of $0.8 million related to loans held for investment. The remaining $2.5 million recorded was related to loans collateralizing ABS issued at JMP Credit. Of this $2.5 million, $2.4 million was additional specific reserves recorded during the quarter. This was in addition to the credit discount recorded against impaired loans at the acquisition date of Cratos to record the impaired loans at their net realizable value. Pooled reserves of $119 thousand were recorded against 74 performing loans as of June 30, 2009.

 

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Table of Contents

Expenses

Compensation and Benefits

Compensation and benefits, which includes employee payroll, taxes and benefits, performance-based cash bonus and commissions as well as equity-based compensation to our employees and managing directors, increased $8.9 million, or 64.4%, from $13.8 million for the quarter ended June 30, 2008 to $22.7 million for the quarter ended June 30, 2009.

Employee payroll, taxes and benefits, and consultant fees, increased $0.4 million, or 5.7%, from $7.0 million for the quarter ended June 30, 2008 to $7.4 million for the quarter ended June 30, 2009 primarily due to the acquisition of Cratos.

Performance-based cash bonus and commission increased $9.7 million, or 220.6%, from $4.4 million for the quarter ended June 30, 2008 to $14.1 million for the quarter ended June 30, 2009 primarily due to higher net revenues for the quarter ended June 30, 2009 compared to the quarter ended June 30, 2008. Total net revenues after provision for loan losses increased $16.0 million or 74.2% from $21.5 million for the quarter ended June 30, 2008 to $37.5 million for the quarter ended June 30, 2009.

Equity-based compensation decreased $1.2 million, or 48.0%, from $2.5 million for the quarter ended June 30, 2008 to $1.3 million for the quarter ended June 30, 2009 primarily due the acceleration of the vesting of restricted stock units (“RSUs”) granted under our 2007 bonus compensation program on December 22, 2008. As a result of the acceleration, the Company recognized $2.6 million of amortization expense from future periods in the year ended December 31, 2008, thus eliminating the amortization expense on those RSUs that would have been recognized in the future periods, including the quarter ended June 30, 2009. The total equity-based compensation expense for the quarter ended June 30, 2009 included $0.8 million recognized for RSUs granted in connection with the initial public offering and $0.5 million recognized for RSUs granted after the initial public offering.

Compensation and benefits as a percentage of revenues decreased from 64.3% of total net revenues after provision for loan losses for the quarter ended June 30, 2008 to 60.7% for the same period in 2009 primarily due to higher net interest income in 2009 compared to 2008 for which we accrue performance-based bonus at a lower rate. Excluding expense from RSU’s granted in connection with the initial public offering of $1.2 million and $0.8 million for the quarters ended June 30, 2008 and 2009, as a percentage of total net revenues after provision for loan losses, compensation and benefits decreased from 58.6% of total revenues for the quarter ended June 30, 2008 to 58.4% for the same period in 2009.

Administration

Administration expenses decreased $0.8 million, or 36.2%, from $2.1 million for the quarter ended June 30, 2008 to $1.3 million for the quarter ended June 30, 2009. The decrease was primarily due to lower conferences expense in the second quarter 2009 compared to the same period in 2008. As a percentage of total net revenues after provision for loan losses, administration expense decreased from 9.6% of total net revenues after provision for loan losses for the quarter ended June 30, 2008 to 3.5% for the same period in 2009 as a result of higher total net revenues after provision for loan losses in 2009 compared to 2008.

Brokerage, Clearing and Exchange Fees

Brokerage, clearing and exchange fees increased $0.4 million, or 35.8%, from $1.1 million for the quarter ended June 30, 2008 to $1.5 million for the quarter ended June 30, 2009. The increase was primarily due to an increase in the number of shares traded in the quarter ended June 30, 2009 compared to the quarter ended June 30, 2008. As a percentage of total net revenues after provision for loan losses, our brokerage, clearing and exchange fees decreased from 5.1% for the quarter ended June 30, 2008 to 4.0% for the same period in 2009 as a result of higher total net revenues after provision for loan losses in 2009 compared to 2008.

Other Expenses

Other expenses increased $0.1 million, or 3.1%, from $3.5 million for the quarter ended June 30, 2008 to $3.6 million for the quarter ended June 30, 2009. As a percentage of total net revenues after provision for loan losses, other expenses decreased from 16.1% for the quarter ended June 30, 2008 to 9.5% for the same period in 2009 as a result of higher revenues in 2009 compared to the same period in 2008.

Noncontrolling Interest

Noncontrolling interest was $0.5 million and $0.2 million for the three months ended June 30, 2009 and 2008, respectively. Noncontrolling interest for the three months ended June 30, 2009 includes the interest of third parties in JMP Credit Corporation (“JMP Credit”), Harvest Mortgage Opportunities Partners (“HMOP”), and Opportunity Acquisition Corp. (“SPAC”), partially-owned subsidiaries consolidated on our books. Noncontrolling interest for the three months ended June 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”). Because of the ownership and external management position which did not provide the limited partners with substantive rights to remove the general partner, we consolidated JMPRT, HCP and HTP through December 31, 2008, November 30, 2008 and July 31, 2008, respectively, and recorded noncontrolling interest. Additional limited partners invested in HTP and HCP during 2008 and the limited partners had substantive rights to remove the general partner effective August 1, 2008 for HTP and December 1, 2008 for HCP. As a result, we deconsolidated HTP and HCP as of the respective effective date. The assets and liabilities of JMPRT were transferred to HMOP effective January 2, 2009. Because of the limited partners’ substantive kick-out rights, HMOP was not required to be consolidated 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 constitute substantive kick-out rights. As a result, the Company consolidated HMOP in its consolidated financial statements effective May 1, 2009.

 

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Provision for Income Taxes

Prior to the completion of our initial public offering on May 16, 2007, we were a limited liability company treated as a partnership; therefore, all of our income and losses were reportable by the individual members. The U.S. federal and state income taxes payable by the members based upon their share of our net income were not reflected in the accompanying financial statements for the periods prior to the initial public offering. We were, however, subject to state and local unincorporated tax and franchise tax.

In connection with our initial public offering and Reorganization, we became subject to federal and state income taxes on all taxable income earned subsequent to May 15, 2007. Additionally, in connection with the Reorganization, we recognized a one-time tax benefit of $4.0 million in connection with the establishment of net deferred tax asset items of $10.2 million. In calculating the one-time tax benefit amount and associated deferred tax asset items, the Company made reasonable estimates of its share of the 2006 taxable income and 2007 taxable income attributed to the period from January 1 through May 15, 2007 of the partnerships in which it has a direct or indirect interest.

For the three months ended June 30, 2009 and 2008, we recorded tax expense of $3.6 million and $0.6 million, respectively.

The effective tax rate for the three months ended June 30, 2009 and 2008 was 45.4% and 76.9%, respectively.

Six Months Ended June 30, 2009, Compared to Six Months Ended June 30, 2008

Overview

Total net revenues after provision for loan losses increased $20.6 million, or 50.2%, from $41.0 million for the six months ended June 30, 2008 to $61.6 million for the six months ended June 30, 2009, driven by an increase in non-interest revenues of $22.7 million and increase in net interest income of $1.9 million, offset by an increase in provision for loan losses of $4.0 million.

Non-interest revenues increased $22.7 million or 56.8% primarily due to a $11.5 million increase in principal transaction revenues, an $8.4 million increase in asset management revenues and a $4.8 million increase in gain on sale and refinancing of loans.

Net interest income increased $1.9 million or 179.1% from $1.1 million for the six months ended June 30, 2008 to $3.0 million for the same period in 2009. The increase was due to the acquisition of Cratos and primarily $2.8 million of net interest income recorded at JMP Credit. Net interest income for the remainder of the Company fell from $1.1 million to $0.2 million primarily due to low interest rates received on cash balances during the six months ended June 30, 2009 compared to the same period in 2008.

Provision for loan losses increased from zero for the six months ended June 30, 2008 to $4.0 million for the six months ended June 30, 2009 due to $1.5 million recorded against loans held for investment and $2.5 million recorded against loans collateralizing ABS issued at JMP Credit.

Total non-interest expenses increased by $13.7 million, or 34.6%, from $39.5 million for the six months ended June 30, 2008 to $53.2 million for the six months ended June 30, 2009, primarily due to an increase in compensation and benefits of $15.1 million offset by a decrease in administration expense of $0.9 million and a decrease in other expenses of $0.8 million.

Net income attributable to JMP Group Inc. increased $3.4 million from net income of $0.9 million for the six months ended June 30, 2008 to net income of $4.3 million for the six months ended June 30, 2009, and includes $3.1 million increase in income tax expense from $0.5 million for the six months ended June 30, 2008 to $3.6 million for the six months ended June 30, 2009.

Revenues

Investment Banking

Investment banking revenues decreased $4.2 million, or 22.3%, from $18.9 million for the six months ended June 30, 2008 to $14.7 million for the same period in 2009, and decreased as a percentage of total net revenues after provision for loan losses from 46.1% to 23.9%, respectively. The decrease in revenues reflects a lower level of activity in our public equity underwriting and private placement business, partially offset by increased activity in our strategic advisory businesses. Public equity underwriting revenues decreased by $1.8 million, or 24.3%, from $7.3 million for the six months ended June 30, 2008 to $5.5 million for the six months ended June 30, 2009. The decrease is primarily due to the continued low levels of new equity issuances by U.S. companies during the period, starting from the second six months of 2008. We executed nine public equity underwriting transactions in the six months ended June 30, 2009 compared to thirteen in the six months ended June 30, 2008. We acted as a lead manager on one transaction in the six-month period ended June 30, 2009 compared to none in the same period in 2008. Private placement revenues decreased $4.1 million, or 58.6%, from $7.0 million for the six months ended June 30, 2008 to $2.9 million for the six months ended June 30, 2009 due to lower average revenue per transaction executed. Our strategic advisory revenues increased $1.6 million, or 35.1%, from $4.7 million for the six months ended June 30, 2008 to $6.3 million for the six months ended June 30, 2009, due to higher average revenue per transaction executed. We executed seven strategic advisory transactions in the six months ended June 30, 2009 compared to six in the six months ended June 30, 2008.

Brokerage Revenues

Brokerage revenues increased by $1.0 million, or 6.2%, from $16.9 million for the six months ended June 30, 2008 to $17.9 million for the six months ended June 30, 2009. The increase was the result of higher net margins on trading commissions. Gross commissions remained relatively flat. Brokerage revenues decreased as a percentage of total revenues, from 41.1% for the six months ended June 30, 2008 to 29.0% for the six months ended June 30, 2009.

 

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Asset Management Fees

Asset management fees increased $8.4 million, or 206.9%, from $4.1 million for the six months ended June 30, 2008 to $12.5 million for the six months ended June 30, 2009. Asset management fees include base management fees and incentive fees for our funds under management. Base management fees increased from $2.4 million for the first six months of 2008 to $4.1 million for the same period in 2009. Incentive fees increased from $1.8 million for the first six months of 2008 to $8.5 million for the same period in 2009. The increase in base management fees is the result of an increase in client assets under management from $397.6 million as of June 30, 2008 to $528.3 million as of June 30, 2009. This was primarily due to the performance of Harvest Small Cap Partners during 2008 as well as the first six months of 2009, which enabled it to raise additional capital and increase assets under management by $147.8 million, when generally other hedge funds in the industry were experiencing redemptions. The increase in incentive fees is due to the improved performance of our families of funds, in particular of Harvest Small Cap Partners fund. As a percentage of total net revenues after provision for loan losses, asset management fees increased from 9.9% for the six months ended June 30, 2008 to 20.3% for the same period in 2009.

Principal Transactions

Principal transaction revenues increased $11.5 million from a loss of $2.1 million for the six months ended June 30, 2008 to a gain of $9.4 million for the six months ended June 30, 2009. The increase was primarily due to a $7.2 million increase in equity and other security transaction revenues from a loss of $2.8 million for the first six months of 2008 to a gain of $4.4 million for the first six months of 2009. In addition, gain on investments in partnerships increased $4.5 million from $0.6 million for the first six months of 2008 to $5.1 million for the first six months of 2009. The $7.2 million increase in equity and other security transaction revenues was primarily related to unrealized gain/loss on our convertible preferred security and equity security investments in NYMT, which reflected a loss of $1.8 million for the first six months of 2008 compared to a gain of $3.3 million for the first six months of 2009.

Gain (Loss) on Sale and Refinancing of Loans

Gain (loss) on sale and refinancing of loans increased $4.8 million from zero for the six months ended June 30, 2008 for the same period in 2009, with all of the gain generated at JMP Credit. During the six months ended June 30, 2009, six loans were sold or repaid with one loan repayment contributing $4.7 million of the net $4.8 million of gain, where the borrower repaid the loan at a premium to our carrying value.