JMP Group LLC
JMP Group Inc. (Form: 10-Q, Received: 11/01/2012 17:17:05)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 

 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012 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   x    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 October 31, 2012 was 22,649,943.  
 


 
 

 

TABLE OF CONTENTS
 
   
Page
PART I.
FINANCIAL INFORMATION
4
Item 1.
Financial Statements - JMP Group Inc.
4
 
Consolidated Statements of Financial Condition - September 30, 2012 and December 31, 2011 (Unaudited)
4
 
Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)
6
 
Consolidated Statements of Comprehensive Income - For the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)
7
 
Consolidated Statement of Changes in Equity - For the Nine Months Ended September 30, 2012 (Unaudited)
7
 
Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2012 and 2011 (Unaudited)
8
 
Notes to Consolidated Financial Statements (Unaudited)
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
51
Item 4.
Controls and Procedures
52
PART II.
OTHER INFORMATION
53
Item 1.
Legal Proceedings
53
Item 1A.
Risk Factors
53
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
54
Item 3.
Defaults Upon Senior Securities
54
Item 4.
Mine Safety Disclosures
54
Item 5.
Other Information
54
Item 6.
Exhibits
54
   
SIGNATURES
55
   
EXHIBIT INDEX
56
 
 
-2-

 
 
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 (the "Exchange Act"), with the Securities and Exchange Commission (the "SEC"). 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. provides 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 free of charge on the Investor Relations section of its website located at http://www.jmpg.com. These filings will become available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
 
JMP Group Inc. also makes available, in the Investor Relations section of its website and will provide print copies to stockholders upon request, (i) its corporate governance guidelines, (ii) its code of business conduct and ethics, and (iii) the charters of the audit, compensation, and corporate governance and nominating committees of its board of directors. These documents, as well as the information on the website of JMP Group Inc., are not intended to be part of this quarterly report.
 
 
-3-

 

PART I. FINANCIAL INFORMATION
 
ITEM 1.    Financial Statements
 
JMP Group Inc.
Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in thousands, except per share data)
 
   
September 30,
2012
   
December 31,
2011
 
             
Assets
           
Cash and cash equivalents
  $ 59,690     $ 70,363  
Restricted cash and deposits (includes cash on deposit with clearing broker  of $150 and $255 at September 30, 2012 and December 31, 2011, respectively)
    63,461       48,440  
Receivable from clearing broker
    1,113       1,138  
Investment banking fees receivable, net of allowance for doubtful accounts  of zero at September 30, 2012 and December 31, 2011
    9,254       2,539  
Marketable securities owned, at fair value
    14,482       24,309  
Incentive fee receivable
    477       2,097  
Other investments (of which $75,785 and $51,517 are recorded at fair value at September 30, 2012  and December 31, 2011, respectively)
    76,288       51,706  
Loans held for sale
    3,219       2,957  
Small business loans, net of allowance for loan losses
    24,645       7,477  
Loans collateralizing asset-backed securities issued, net of allowance for loan losses
    402,241       410,770  
Interest receivable
    1,575       1,358  
Fixed assets, net
    2,810       2,285  
Deferred tax assets
    16,650       26,221  
Other assets
    8,577       8,961  
Total assets
  $ 684,482     $ 660,621  
                 
Liabilities and Equity
               
Liabilities:
               
Marketable securities sold, but not yet purchased, at fair value
  $ 11,383     $ 10,921  
Accrued compensation
    32,517       38,143  
Asset-backed securities issued
    406,461       381,556  
Interest payable
    647       651  
Note payable
    22,657       19,222  
Deferred tax liability
    12,736       23,214  
Other liabilities
    24,271       30,430  
Total liabilities
    510,672       504,137  
                 
Redeemable Non-controlling Interest
    161       50  
Commitments and Contingencies
               
JMP Group Inc. Stockholders' Equity
               
Common stock, $0.001 par value, 100,000,000 shares authorized; 22,780,052 and 22,409,644 shares issued at September 30, 2012 and December 31, 2011, respectively; 22,705,994 and 21,947,353 shares outstanding at September 30, 2012 and December 31, 2011, respectively
    23       22  
Additional paid-in capital
    126,632       132,944  
Treasury stock, at cost, 74,058 and 462,291 shares at September 30, 2012 and December 31,  2011, respectively
    (420 )     (3,011 )
Accumulated other comprehensive loss
    (68 )     (102 )
Accumulated deficit
    (5,376 )     (148 )
Total JMP Group Inc. stockholders' equity
    120,791       129,705  
Nonredeemable Non-controlling Interest
    52,858       26,729  
Total equity
    173,649       156,434  
Total liabilities and equity
  $ 684,482     $ 660,621  
 
See accompanying notes to consolidated financial statements.  

 
-4-

 
 
JMP Group Inc.
Consolidated Statements of Financial Condition - (Continued)
(Unaudited)
(Dollars in thousands, except per share data)
 
Assets and liabilities of consolidated variable interest entities ("VIE") included in total assets and total liabilities above:
 
   
September 30,
2012
   
December 31,
2011
 
             
Restricted cash
  $ 50,800     $ 36,137  
Loans held for sale
    3,219       2,957  
Loans collateralizing asset-backed securities issued, net of allowance for loan losses
    402,241       410,770  
Interest receivable
    1,164       1,191  
Deferred tax assets
    4,367       8,567  
Other assets
    55       40  
Total assets of consolidated VIE
  $ 461,846     $ 459,662  
                 
Asset-backed securities issued
    406,461       381,556  
Interest payable
    589       601  
Deferred tax liability
    11,761       21,791  
Other liabilities
    3,253       2,042  
Total liabilities of consolidated VIE
  $ 422,064     $ 405,990  
 
The asset-backed securities issued (“ABS”) by the VIE are limited recourse obligations payable solely from cash flows of the loans collateralizing them and related collection and payment accounts pledged as security. Accordingly, only the assets of the VIE can be used to settle the obligations of the VIE.
 
See accompanying notes to consolidated financial statements.
 
 
-5-

 

JMP Group Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues
                       
Investment banking
  $ 12,218     $ 10,048     $ 38,010     $ 40,332  
Brokerage
    5,371       6,898       16,275       19,370  
Asset management fees
    3,755       5,694       10,721       14,893  
Principal transactions
    (1,955 )     (6,290 )     12,309       (106 )
Gain on sale and payoff of loans
    204       1,373       2,643       14,981  
Net dividend (expense) income
    (2 )     322       (25 )     870  
Other income
    365       1,026       3,507       2,536  
Non-interest revenues
    19,956       19,071       83,440       92,876  
                                 
Interest income
    8,333       7,451       24,051       25,799  
Interest expense
    (10,087 )     (9,024 )     (29,573 )     (26,460 )
Net interest expense
    (1,754 )     (1,573 )     (5,522 )     (661 )
                                 
Provision for loan losses
    (71 )     (123 )     (1,812 )     (477 )
                                 
Total net revenues after provision for loan losses
    18,131       17,375       76,106       91,738  
                                 
Non-interest expenses
                               
Compensation and benefits
    17,358       15,970       55,833       66,218  
Administration
    1,645       2,246       4,604       5,060  
Brokerage, clearing and exchange fees
    902       1,275       2,656       3,552  
Travel and business development
    746       1,107       2,435       2,568  
Communications and technology
    909       1,013       2,642       2,929  
Occupancy
    814       774       2,352       2,216  
Professional fees
    967       806       2,324       2,311  
Depreciation
    227       192       642       529  
Impairment loss on purchased management contract
    -       -       -       700  
Other
    67       105       282       343  
Total non-interest expenses
    23,635       23,488       73,770       86,426  
Income (loss) before income tax expense
    (5,504 )     (6,113 )     2,336       5,312  
Income tax (benefit) expense
    (894 )     (1,410 )     (1,547 )     2,354  
Net (loss) income
    (4,610 )     (4,703 )     3,883       2,958  
Less: Net (loss) income attributable to nonredeemable non-controlling interest
    (2,934 )     (3,080 )     6,832       (475 )
Net (loss) income attributable to JMP Group Inc.
  $ (1,676 )   $ (1,623 )   $ (2,949 )   $ 3,433  
                                 
Net (loss) income attributable to JMP Group Inc. per common share:
                               
Basic
  $ (0.07 )   $ (0.07 )   $ (0.13 )   $ 0.15  
Diluted
  $ (0.07 )   $ (0.07 )   $ (0.13 )   $ 0.15  
                                 
Dividends declared per common share
  $ 0.035     $ 0.03     $ 0.10     $ 0.075  
                                 
Weighted average common shares outstanding:
                               
Basic
    22,737       22,354       22,564       22,152  
Diluted
    22,830       22,493       22,977       22,634  
 
See accompanying notes to consolidated financial statements.
 
 
-6-

 

JMP Group Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net (loss) income
  $ (4,610 )   $ (4,703 )   $ 3,883     $ 2,958  
Other comprehensive income (loss)
                               
Unrealized gain (loss) on cash flow hedge, net of tax
    14       (12 )     34       (51 )
Comprehensive (loss) income
    (4,596 )     (4,715 )     3,917       2,907  
Less: Comprehensive (loss) income attributable to non-controlling interest
    (2,934 )     (3,080 )     6,832       (475 )
Comprehensive (loss) income attributable to JMP Group Inc.
  $ (1,662 )   $ (1,635 )   $ (2,915 )   $ 3,382  

JMP Group Inc.
Consolidated Statement of Changes in Equity
(Unaudited)
(In thousands)
 
   
JMP Group Inc. Stockholders' Equity
             
   
Common Stock
   
Treasury
   
Additional
Paid-In
   
Accumulated
   
Accumulated
Other
Comprehensive
   
Nonredeemable
Non-controlling
    Total  
   
Shares
   
Amount
   
Stock
   
Capital
   
Deficit
   
Loss
   
Interest
   
Equity
 
Balance, December 31, 2011
    22,410     $ 22     $ (3,011 )   $ 132,944     $ (148 )   $ (102 )   $ 26,729     $ 156,434  
Net income (loss)
    -       -       -       -       (2,949 )     -       6,832       3,883  
Additonal paid-in capital - stock-based compensation
    -       -       -       (9,319 )     -       -       -       (9,319 )
Cash dividends paid to shareholders
    -       -       -       -       (2,279 )     -       -       (2,279 )
Purchases of shares of common stock for treasury
    -       -       (4,839 )     -       -       -       -       (4,839 )
Reissuance of shares of common stock from treasury
    -       -       7,430       267       -       -       -       7,697  
Common stock issued
    402       1       -       2,740       -       -       -       2,741  
Retirement of shares
    (32 )     -       -       -       -       -       -       -  
Distributions to non-controlling interest holders
    -       -       -       -       -       -       (5,272 )     (5,272 )
Unrealized gain on cash flow hedge, net of tax
    -       -       -       -       -       34       -       34  
Capital contributions from non-controlling interest holders (1)
    -       -       -       -       -       -       24,569       24,569  
Balance, September 30, 2012
    22,780     $ 23     $ (420 )   $ 126,632     $ (5,376 )   $ (68 )   $ 52,858     $ 173,649  
 
(1) Excludes $161 thousand attributable to redeemable non-controlling interest.

See accompanying notes to consolidated financial statements.
 
 
-7-

 

JMP Group Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

 
Nine Months Ended
September 30,
 
 
2012
   
2011
 
Cash flows from operating activities:
         
Net income
$ 3,883     $ 2,958  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
             
Provision for loan losses
  1,812       477  
Accretion of deferred loan fees
  (928 )     (1,225 )
Amortization of liquidity discount, net
  21,631       14,880  
Gain on sale and payoff of loans
  (2,643 )     (14,981 )
Change in other investments:
             
Fair value
  (7,091 )     553  
Incentive fees reinvested in general partnership interests
  (2,216 )     (2,477 )
Realized gain on other investments
  (2,280 )     (187 )
Impairment loss on purchased management contract
  -       700  
Depreciation and amortization of fixed assets
  642       529  
Stock-based compensation expense
  582       1,138  
Deferred income taxes
  (907 )     (614 )
Net change in operating assets and liabilities:
             
(Increase) decrease in interest receivable
  (217 )     121  
(Increase) decrease in receivables
  (8,685 )     1,186  
Decrease (increase) in marketable securities
  9,827       (1,033 )
(Increase) decrease in restricted cash (excluding restricted cash reserved for lending activities), deposits and other assets
  (22 )     11,022  
Increase in marketable securities sold, but not yet purchased
  462       289  
(Decrease) increase in interest payable
  (4 )     7  
Decrease in accrued compensation and other liabilities
  (11,195 )     (5,115 )
Net cash provided by operating activities
  2,651       8,228  
               
Cash flows from investing activities:
             
Purchases of fixed assets
  (1,167 )     (1,268 )
Purchases of other investments
  (19,873 )     (10,158 )
Sales of other investments
  10,478       4,643  
Funding of loans collateralizing asset-backed securities issued
  (122,542 )     (220,991 )
Funding of small business loans
  (18,459 )     (1,985 )
Sale and payoff of loans collateralizing asset-backed securities issued
  111,681       193,350  
Principal receipts on loans collateralizing asset-backed securities issued
  25,453       21,712  
Principal receipts on loans held for investment
  -       813  
Net change in restricted cash reserved for lending activities
  (14,615 )     5,952  
Net cash used in investing activities
  (29,044 )     (7,932 )
 
See accompanying notes to consolidated financial statements.
 
 
-8-

 
 
JMP Group Inc.
Consolidated Statements of Cash Flows - (Continued)
(Unaudited)
(In thousands)
 
               
Cash flows from financing activities:
             
Proceeds from borrowing on line of credit, net of repayment
  9,987       -  
Repayment of note payable
  (6,552 )     (4,803 )
Cash dividends paid to stockholders
  (2,279 )     (1,673 )
Purchases of shares of common stock for treasury
  (4,839 )     (5,037 )
Capital contributions of redeemable non-controlling interest holders
  110       11  
Capital contributions of nonredeemable non-controlling interest holders
  24,565       9,254  
Distributions to non-controlling interest shareholders
  (5,272 )     (1,107 )
Excess tax benefit related to stock-based compensation
  -       (335 )
Net cash provided by (used in) financing activities
  15,720       (3,690 )
Net decrease in cash and cash equivalents
  (10,673 )     (3,394 )
Cash and cash equivalents, beginning of period
  70,363       71,114  
Cash and cash equivalents, end of period
$ 59,690     $ 67,720  
               
Supplemental disclosures of cash flow information:
             
Cash paid during the period for interest
$ 4,669     $ 4,009  
Cash paid during the period for taxes
$ 839     $ 6,005  
               
Non-cash investing and financing activities:
             
Issuance of shares of common stock from treasury related to vesting of restricted stock units and exercises of stock options
$ 7,430     $ 5,530  

See accompanying notes to consolidated financial statements.
 
 
-9-

 
 
JMP GROUP INC.
Notes to Consolidated Financial Statements
September 30, 2012
(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, California. JMP Group Inc. completed its initial public offering ("IPO") on May 16, 2007, and also completed a corporate reorganization in connection with the IPO. The Company conducts its brokerage business through JMP Securities LLC (“JMP Securities”), its asset management business through Harvest Capital Strategies LLC (“HCS”), its corporate credit business through JMP Credit Corporation (“JMP Credit”), JMP Credit Advisors LLC (“JMPCA”), Harvest Capital Credit LLC ("HCC"), formed in the third quarter of 2011, and certain principal investments through JMP Capital LLC (“JMP Capital”). The above entities are wholly-owned subsidiaries, with the exception of HCC which is a partly-owned subsidiary. JMP Securities is a U.S. registered broker-dealer under the Exchange Act and is a member of the Financial Industry Regulatory Authority (“FINRA”). JMP Securities operates as an introducing broker and does not hold funds or securities for, or owe any money or securities to customers and does not carry accounts for customers. All customer transactions are cleared through another broker-dealer on a fully disclosed basis. HCS is a registered investment advisor under the Investment Advisers Act of 1940, as amended, and provides investment management services for sophisticated investors in investment partnerships and other entities managed by HCS. Effective April 7, 2009, through JMP Credit, the Company completed the acquisition of 100% of the membership interests of Cratos Capital Partners, LLC (which changed its name to JMP Credit Advisors LLC on July 12, 2010) and its subsidiaries, including Cratos Capital Management, LLC (collectively, “Cratos”), a manager of collateralized loan obligations (“CLO”), together with certain securities of Cratos CLO I, Ltd. (“Cratos CLO”). For further details regarding the ownership of Cratos CLO, see Note 2 - Summary of Significant Accounting Policies in the Company's annual report for year ended December 31, 2011 (the "2011 10-K").
 
2. Summary of Significant Accounting Policies
 
Basis of Presentation
 
These consolidated financial statements and related notes are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its 2011 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, HCS, JMP Capital, JMP Credit, JMPCA, and the partly-owned subsidiaries Harvest Growth Capital LLC (“HGC”) (effective April 1, 2010), Cratos CLO and HCC (effective August 18, 2011). All material intercompany accounts and transactions have been eliminated in consolidation. Non-controlling interest on the Consolidated Statements of Financial Condition at September 30, 2012 and December 31, 2011 relate to the interest of third parties in the partly-owned subsidiaries.
 
See Note 2 - Summary of Significant Accounting Policies in the Company's 2011 10-K for the Company's significant accounting policies.
 
3. Recent Accounting Pronouncements
 
Accounting Standards Update (“ASU”) 2011-05: Presentation of Other Comprehensive Income was issued to increase the prominence of other comprehensive income in financial statements, by eliminating the option to report other comprehensive income in the statement of changes in stockholder's equity. The standard requires comprehensive income to be reported in either a single statement that presents the components of net income, the components of other comprehensive income, and total comprehensive income, or in two consecutive statements. The standard also required separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income. This standard was scheduled to be effective for periods starting after December 15, 2011. However, ASU 2011-12: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income deferred the effective date of the requirement to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income. The adoption of ASU 2011-05 resulted in the disclosure of other comprehensive income as a stand alone statement outside the statement of changes in stockholder's equity.
 
ASU 2011-04: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and International Financial Reporting Standards ("IFRS"). The adoption of ASU 2011-04 gives fair value the same meaning between GAAP and IFRS, and improves consistency of disclosures relating to fair value. As a result of this standard, an entity is required to add more robust disclosures regarding the sensitivity of fair value measurements categorized within Level 3 of the fair value hierarchy. The standard is effective for interim periods beginning after December 15, 2011. The adoption of ASU 2011-04 resulted in additional disclosures within Note 4.
 
 
-10-

 

4. Fair Value Measurements
 
The following tables provide fair value information related to the Company’s financial instruments at September 30, 2012 and December 31, 2011:
 
   
At September 30, 2012
 
(In thousands)
       
Fair Value
 
   
Carrying Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                             
Marketable securities owned
  $ 14,482       14,482       -       -       14,482  
Other investments
    75,785       1,424       29,229       45,132       75,785  
Loans held for sale (1)
    3,219       -       3,236       -       3,236  
Small business loans, net of allowance for loan losses (2), (3)
    24,645       -       5,915       19,812       25,727  
Loans collateralizing asset-backed securities issued, net of allowance for loan losses (2), (4)
    402,241       -       406,416       10,948       417,364  
Long term receivable (5)
    1,372       -       -       1,597       1,597  
Total assets:
  $ 521,744     $ 15,906     $ 444,796     $ 77,489     $ 538,191  
                                         
Liabilities:
                                       
Marketable securities sold, but not yet purchased
  $ 11,383     $ 11,383     $ -     $ -     $ 11,383  
Asset-backed securities issued (2)
    406,461       -       397,805       -       397,805  
Note payable (2)
    22,657       -       22,657       -       22,657  
Total liabilities:
  $ 440,501     $ 11,383     $ 420,462     $ -     $ 431,845  
 
(1) The Company carries the financial instrument at the lower of cost or market.
(2) The Company carries the financial instrument at cost.
(3) See Note 5 for valuation process and sensitivity of the fair value measurement to changes in unobservable inputs.
(4) See Note 6 for valuation process and sensitivity of the fair value measurement to changes in unobservable inputs.
(5) Long-term receivable represents the receivable purchased from Sanctuary Wealth Services LLC ("Sanctuary") on April 3, 2013 (see Investments at Cost in Note 4) and is included in Other Assets on the consolidated statement of financial condition.
 
   
At December 31, 2011
 
(In thousands)
       
Fair Value
 
    Carrying Value    
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                             
Marketable securities owned
  $ 24,309     $ 24,309     $ -     $ -     $ 24,309  
Other investments
    51,517       3,434       24,072       24,011       51,517  
Loans held for sale (1)
    2,957       -       2,979       -       2,979  
Small business loans, net of allowance for loan losses (2), (3)
    7,477       -       3,790       4,000       7,790  
Loans collateralizing asset-backed securities issued, net of allowance  for loan losses (2), (4)
    410,770       -       405,386       14,769       420,155  
Total assets:
  $ 497,030     $ 27,743     $ 436,227     $ 42,780     $ 506,750  
                                         
Liabilities:
                                       
Marketable securities sold, but not yet purchased
  $ 10,921     $ 10,921     $ -     $ -     $ 10,921  
Asset-backed securities issued (2)
    381,556       -       375,902       -       375,902  
Note payable (2)
    19,222       -       19,222       -       19,222  
Total liabilities:
  $ 411,699     $ 10,921     $ 395,124     $ -     $ 406,045  
 
(1) The Company carries the financial instrument at the lower of cost or market.
(2) The Company carries the financial instrument at cost.
(3) See Note 5 for valuation process and sensitivity of the fair value measurement to changes in unobservable inputs.
(4) See Note 6 for valuation process and sensitivity of the fair value measurement to changes in unobservable inputs.
 
Other Investments
 
  The following tables provide information related to the Company’s other investments held at fair value at September 30, 2012 and December 31, 2011:
 
(In thousands)
 
September 30, 2012
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Other investments:
                       
General partner investment in hedge funds
  $ -     $ 28,479     $ -     $ 28,479  
General partner investment in funds of funds
    -       -       105       105  
Total general partner investment in funds
    -       28,479       105       28,584  
Limited partner investment in private equity fund
    -       -       2,444       2,444  
Warrants and other
    -       -       669       669  
Equity securities in HGC and JMP Capital
    1,424       750       41,914       44,088  
Total other investments
  $ 1,424     $ 29,229     $ 45,132     $ 75,785  
 
 
-11-

 
 
(In thousands)
 
December 31, 2011
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Other investments:
                       
General partner investment in hedge funds
  $ -     $ 24,072     $ -     $ 24,072  
General partner investment in funds of funds
    -       -       102       102  
Total general partner investment in funds
    -       24,072       102       24,174  
Limited partner investment in private equity fund
    -       -       2,585       2,585  
Warrants and other
    -       -       617       617  
Equity securities in HGC and JMP Capital
    3,426       -       20,707       24,133  
Interest rate cap
    8       -       -       8  
Total other investments
  $ 3,434     $ 24,072     $ 24,011     $ 51,517  
 
  The tables below provide a reconciliation of the beginning and ending balances for the assets held at fair value using significant unobservable inputs (Level 3) for the three months ended September 30, 2012 and 2011.
 
(In thousands)
 
Balance as of
June 30, 2012
   
Purchases
   
Sales
   
Total gains (losses) - realized and unrealized included in earnings (1)
   
Transfers out of Level 3
   
Balance as of September 30, 2012
   
Unrealized gains/(losses) included in earnings related to assets still held at reporting date
 
General partner investment in funds of funds
  $ 104       -       -       1       -     $ 105     $ 1  
Limited partner investment in private equity fund
    2,741       25       -       (322 )     -       2,444       (322 )
Warrants
    782       -       -       (113 )     -       669       (113 )
Equity securities in HGC and JMP Capital
    43,400       2,771       -       (3,957 )     (300 )     41,914       (3,957 )
Total Level 3 assets
  $ 47,027     $ 2,796     $ -     $ (4,391 )   $ (300 )   $ 45,132     $ (4,391 )
 
(1) No Level 3 asset gains (losses) are included in other comprehensive income. All realized and unrealized gains (losses) related to Level 3 assets are included in earnings.
 
(In thousands)
 
Balance as of
June 30, 2011
   
Purchases
   
Sales
   
Total losses - realized and unrealized included in earnings (1)
   
Transfers in/(out) of Level 3
   
Balance as of September 30, 2011
   
Unrealized losses included in earnings related to assets still held at reporting date
 
General partner investment in funds of funds
  $ 105     $ -     $ -     $ (3 )   $ -     $ 102     $ (3 )
Limited partner investment in private equity fund
    3,184       32       -       (292 )     -       2,924       (292 )
Warrants
    1,061       -       -       (623 )     -       438       (623 )
Equity securities in HGC and JMP Capital
    17,200       -       -       (2,616 )     -       14,584       (2,616 )
Total Level 3 assets
  $ 21,550     $ 32     $ -     $ (3,534 )   $ -     $ 18,048     $ (3,534 )
 
(1) No Level 3 asset gains (losses) are included in other comprehensive income. All realized and unrealized gains (losses) related to Level 3 assets are included in earnings.
 
The tables below provide a reconciliation of the beginning and ending balances for the assets held at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2012 and 2011.
 
 
-12-

 
 
(In thousands)
 
Balance as of
December 31, 2011
    Purchases     Sales    
Total gains (losses) - realized and unrealized included in earnings (1)
   
Transfers out of Level 3
   
Balance as of September 30, 2012
   
Unrealized gains/(losses) included in earnings related to assets still held at reporting date
 
General partner investment in funds of funds
  $ 102     $ -     $ -     $ 3     $ -     $ 105     $ 3  
Limited partner investment in private equity fund
    2,585       25       (49 )     (117 )     -       2,444       (117 )
Warrants and other
    617       2       -       50       -       669       50  
Equity securities in HGC and JMP Capital
    20,707       17,273       -       5,147       (1,213 )     41,914       5,147  
Total Level 3 assets
  $ 24,011     $ 17,300     $ (49 )   $ 5,083     $ (1,213 )   $ 45,132     $ 5,083  
 
(1) No Level 3 asset gains (losses) are included in other comprehensive income. All realized and unrealized gains (losses) related to Level 3 assets are included in earnings.
 
(In thousands)
  Balance as of
December 31, 2010
    Purchases     Sales    
Total losses - realized and unrealized included in earnings (1)
   
Transfers out of Level 3
   
Balance as of September 30, 2011
   
Unrealized losses included in earnings related to assets still held at reporting date
 
General partner investment in funds of funds
  $ 102     $ -     $ -     $ -     $ -     $ 102     $ -  
Limited partner investment in private equity fund
    3,063       32       -       (171 )     -       2,924       (171 )
Warrants and other
    532       15       -       (109 )     -       438       (109 )
Equity securities in HGC and JMP Capital
    11,245       8,342       -       (880 )     (4,123 )     14,584       (880 )
 Total Level 3 assets
  $ 14,942     $ 8,389     $ -     $ (1,160 )   $ (4,123 )   $ 18,048     $ (1,160 )
 
(1) No Level 3 asset gains (losses) are included in other comprehensive income. All realized and unrealized gains (losses) related to Level 3 assets are included in earnings.
 
Purchases and sales of Level 3 assets shown above were recorded at fair value at the date of the transaction.
 
Total gains and losses included in earnings 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.
 
Transfers between levels of the fair value hierarchy result from changes in the observability of fair value inputs used in determining fair values for different types of financial assets and are recognized at the beginning of the reporting period in which the event or change in circumstances that caused the transfer occurs.
 
There were no transfers in/out of Level 1 during the three and nine months ended September 30, 2012. Transfers into Level 2 from Level 3 were $0.3 million and $1.2 million during the three and nine months ended September 30, 2012. These transfers were a result of the observability of fair value associated with the equity securities in HGC and JMP Capital. Transfers into Level 1 from Level 2 were $1.1 million for both the three and nine months ended September 30, 2011, reflecting the fair value measurement of this investment now being based on quoted market price without further adjustment. A $4.1 million transfer into Level 2 from Level 3 for the three months ended September 30, 2011 was a result of the observability of fair value associated with the equity securities in HGC and JMP Capital. There were no other transfers in/out of Level 2 or Level 3 during either the three and nine months ended September 30, 2012 and 2011.
 
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 are reported in Principal Transactions in the accompanying Consolidated Statements of Operations.
 
Included in other investments are investments in partnerships in which one of the Company’s subsidiaries is the investment manager and general partner. The Company accounts for these investments using the equity method as described in Note 2 - Summary of Significant Accounting Policies in the Company's 2011 annual report. The Company’s proportionate share of those investments is included in the tables above. In addition, other investments include warrants and investments in funds managed by third parties. The investments in private investment funds managed by third parties are generally not redeemable at the option of the Company. As of September 30, 2012, the Company had unfunded investment commitments of $0.1 million related to private investment funds managed by third parties.
 
 
-13-

 
 
The Company used the following valuation techniques with unobservable inputs when estimating the fair value of the Level 3 assets:
 
Dollars in thousands
 
Fair Value at September 30, 2012
 
Valuation Technique
 
Unobservable Input
   
Range
(Weighted Average)
                         
General Partner in Funds of Funds (1)
  $ 105  
Net Asset Value
  N/A       N/A    
Limited Partner in Private Equity Fund (1)
  $ 2,444  
Net Asset Value
  N/A       N/A    
Warrants and Other
  $ 669  
Black-Scholes Option Model
 
Annualized volatility of credit (2)
  17.0% - 47.3% (18.4%)
Equity securities in HGC and JMP Capital
  $ 41,914  
Market comparable companies
 
Revenue multiples (3)
    2.2x - 8.8x (4.6x)
             
EBITDA multiples (3)
    8.6x - 18.5x (13.2x)
             
Free cash flow multiples (3)
    26.7x - 28.1x (27.2x)
             
Discount for lack of marketability (4)
  30% - 40% (32%)
         
Market transactions
 
Revenue multiples (3)
    3.1x - 6.9x (5.0x)
             
EBITDA multiples (3)
    11.5x - 25.9x (19.6x)
             
Control premium (4)
    25 %      
 
(1) The Company uses the reported net asset value per share as a practical expedient to estimate the fair value of the general partner investment in funds of funds and limited partner investment in mortgage and private equity funds.
(2) The range represents amounts used in the analysis that the Company has determined market participants would use when pricing the warrants.
(3) The rates represent amounts used when the Company has determined that market participants would use such multiples when pricing the investments.
(4) The rates represent amounts used when the Company has determined that market participants would take into account these premiums and discounts when pricing the investments.

The significant unobservable input used in the fair value measurement of the warrants is the annualized volatility of credit. Significant increases in the rate would result in a significantly higher fair value measurement.
 
The significant unobservable inputs used in the fair value measurement of the equity securities in HGC and JMP Capital are Revenue, EBITDA and Free Cash Flow multiples, discount for lack of marketability, and control premiums. Significant increases in the multiples in isolation would result in a significantly higher fair value measurement. Increases in the discounts and premium in isolation would result in decreases to the fair value measurement.
 
Investments at Cost
 
On February 11, 2010, the Company made a $1.5 million investment in Class D Preferred Units of Sanctuary. Sanctuary provides a turnkey platform that allows independent wealth advisors to establish an independent advisory business without the high startup costs and regulatory hurdles. The Class D Preferred Units entitle the Company to receive a preferred dividend with units that are convertible into equity of Sanctuary at the option of the Company prior to the maturity date, February 11, 2013. During the fourth quarter of 2010, the Company determined that its investment in Sanctuary was fully impaired and recorded an impairment loss of $1.5 million, which was included in Principal Transactions on the Consolidated Statements of Operations. On April 3, 2012, the Company purchased a $2.3 million receivable from Sanctuary for $1.4 million. The $1.4 million was composed of cash consideration of $0.5 million and $0.9 million applied to the redemption of 60 Class D Preferred Units owned by the Company. The Company recognized the $0.9 million as a gain in Principal Transactions, and the $2.3 million receivable in Other Assets. The carrying value of the Company’s investment in Sanctuary remained at zero at September 30, 2012.  The carrying value of the long-term receivable was $1.4 million as of September 30, 2012. The Company determined the fair value of the long-term receivable to be $1.6 million as of September 30, 2012, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate. Significant increases in the market credit adjusted interest rate in isolation would result in decreases to the fair value measurement.
 
Derivative Financial Instruments
 
On May 29, 2010, the Company entered into an interest rate cap with City National Bank (the “Lender”) to effectively lock in or fix the interest rate on its revolving line of credit and term loan from July 1, 2010 through maturity. The interest rate cap will allow the Company to receive payments from the Lender in the event that LIBOR plus 2.25% exceeds 3.75%, limiting the interest rate on the outstanding balance of the line of credit and term loan to such rate. On July 1, 2010, the Company designated the interest rate cap as a cash flow hedge of the interest rate risk of a total of $27.1 million of outstanding borrowings with the Lender as of that date. The notional principal amount of the cap was $12.7 million at September 30, 2012. See Note 7 for information pertaining to the Company's borrowing from the Lender.
 
The interest rate cap is recorded at fair value in other investments on the Consolidated Statements of Financial Condition, with unrealized gains and losses recorded as other comprehensive income. For the three and nine months ended September 30, 2012, the Company recorded $281 and $7,795 of other comprehensive loss representing unrealized loss on the interest rate cap, respectively. In addition, for the three and nine months ended September 30, 2012, $13,674 and $41,022, respectively, were reclassified from accumulated other comprehensive income into interest expense as amortization of the interest cap.
 
5. Small Business Loans
 
Small business loans consist of loans held at HCC. HCC was formed in the third quarter of 2011 to generate both current income and capital appreciation by primarily making direct investments in the form of subordinated debt, and, to a lesser extent, senior debt and minority equity investments in small to mid-size companies. As of September 30, 2012, the $24.6 million net loans outstanding were commercial loans. The following table summarizes the components of this small business loan receivable balance:
 
 
-14-

 
 
(In thousands)
 
September 30,
2012
   
December 31,
2011
 
Small business loans
  $ 26,459     $ 8,000  
Allowance for loan losses
    (894 )     (216 )
Deferred loan fees
    (920 )     (307 )
Small business loans, net
  $ 24,645     $ 7,477  
 
The Company, at least on a quarterly basis, reviews and evaluates the credit quality of each loan. The review primarily includes the following credit quality indicators with regard to each loan: 1) Moody's rating, 2) current internal rating and 3) performance. The review follows a similar methodology as the review over loans collateralizing asset-backed securities issued. See Note 2 - Summary of Significant Accounting Policies in the Company's 2011 10-K for the policy and methodology in determining an allowance for loan losses and further descriptions of the credit quality factors analyzed.

(In thousands)
 
Cash Flow (CF)
 
   
September 30,
2012
   
December 31,
2011
 
Moody's rating:
           
B1 - B3
    6,000       4,000  
NR
    20,459       4,000  
Total:
  $ 26,459     $ 8,000  
                 
Internal rating:
               
Rating 2
    26,459       8,000  
Total:
  $ 26,459     $ 8,000  
                 
Performance:
               
Performing
  $ 26,459     $ 8,000  
Total:
  $ 26,459     $ 8,000  
 
A summary of the activity in the allowance for loan losses for the three and nine months ended September 30, 2012 and 2011 were as follows:
 
(In thousands)
 
Three Months Ended
   
Nine Months Ended
 
   
September 30,
2012
   
September 30,
2011
   
September 30,
2012
   
September 30,
2011
 
Balance at beginning of period
  $ (757 )   $ -     $ (216 )   $ -  
Provision for loan losses
    (137 )     (32 )     (677 )     (32 )
Balance at end of period
  $ (894 )   $ (32 )   $ (893 )   $ (32 )
 
The Company determined the fair value of small business loans to be $25.7 million and $7.7 million as of September 30, 2012 and December 31, 2011, respectively. The fair value of the loans are calculated using the average market bid and ask quotation obtained from a loan pricing service. Such loans are identified as Level 2 assets. When average market bid and ask quotations are not available, the loans are identified as Level 3 assets. The fair value of these Level 3 loans are calculated internally based on their performance. This analysis incorporates comparable loans traded in the marketplace, the obligor's industry, future business prospects, capital structure, and expected credit losses. Significant declines in the performance of the loan would result in decreases to the fair value measurement.
 
6. Loans Collateralizing Asset-backed Securities Issued and Loans Held for Sale
 
Loans collateralizing asset-backed securities issued and loans held for sale are commercial loans securitized and owned by Cratos CLO. The loans consist of those loans within the CLO securitization structure at the acquisition date of Cratos and loans purchased by the CLO subsequent to the Cratos acquisition date. The following table presents the components of loans collateralizing asset-backed securities issued and loans held for sale at September 30, 2012 and December 31, 2011:  
 
(In thousands)
 
Loans Collateralizing Asset-backed Securities
   
Loans Held for Sale
 
   
September 30,
2012
   
December 31,
2011
   
September 30,
2012
   
December 31,
2011
 
Loans
  $ 419,372     $ 436,954     $ 4,686     $ 4,686  
Allowance for loan losses
    (3,581 )     (4,199 )     -       -  
Liquidity discount
    (5,205 )     (14,459 )     (1,279 )     (1,279 )
Credit discount
    (938 )     (1,335 )     -       -  
Deferred loan fees, net
    (7,407 )     (6,191 )     (156 )     (168 )
Valuation allowance
    N/A       N/A       (32 )     (282 )
Total loans, net
  $ 402,241     $ 410,770     $ 3,219     $ 2,957  
 
 
-15-

 
 
Loans recorded upon the acquisition of Cratos at fair value reflect a liquidity discount and a credit discount. In addition, most loans purchased subsequent to the acquisition were purchased at a discount to their principal value, reflecting deferred loan fees. The tables below summarize the activity in the loan principal, allowance for loan losses, liquidity discount, credit discount, deferred loan fees and carrying values, net for the impaired loans and non-impaired loans as of and for the three months ended September 30, 2012:
   
Three Months Ended September 30, 2012
 
(In thousands)
 
Principal
   
Allowance for Loan Losses
   
Liquidity Discount
   
Credit Discount
   
Deferred Loan Fees
   
Carrying Value,
Net
 
Impaired Loans
                                   
Balance at beginning of period
  $ 3,298     $ (1,524 )   $ (836 )   $ (938 )   $ -     $ -  
Repayments
    (54 )     -       -       -       -       (54 )
Accretion of discount
    -       -       54       -       -       54  
Balance at end of period
  $ 3,244     $ (1,524 )   $ (782 )   $ (938 )   $ -     $ -  
                                                 
Non-impaired Loans
                                               
Balance at beginning of period
  $ 431,790     $ (2,122 )   $ (5,468 )   $ -     $ (6,851 )   $ 417,349  
Purchases / funding
    37,492       -       -       -       (1,321 )     36,171  
Repayments
    (8,312 )     -       -       -       -       (8,312 )
Accretion of discount
    -       -       1,045       -       525       1,570  
Provision for loan losses
    -       65       -       -       -       65  
Sales and payoff
    (44,842 )     -       -       -       240       (44,602 )
Balance at end of period
  $ 416,128     $ (2,057 )   $ (4,423 )   $ -     $ (7,407 )   $ 402,241  
 
The tables below summarize the activity in the loan principal, allowance for loan losses, liquidity discount, credit discount, deferred loan fees and carrying values, net for the impaired loans and non-impaired loans as of and for the three months ended September 30, 2011:
   
Three Months Ended September 30, 2011
 
(In thousands)
 
Principal
   
Allowance for Loan Losses
   
Liquidity Discount
   
Credit Discount
   
Deferred Loan Fees
   
Carrying Value,
Net
 
Impaired Loans
                                   
Balance at beginning of period
  $ 14,058     $ (582 )   $ (5,951 )   $ (4,763 )   $ (54 )   $ 2,708  
Repayments
    (79 )     -       13       -       -       (66 )
Balance at end of period
  $ 13,979     $ (582 )   $ (5,938 )   $ (4,763 )   $ (54 )   $ 2,642  
                                                 
Non-impaired Loans
                                               
Balance at beginning of period
  $ 435,107     $ (1,764 )   $ (14,929 )   $ -     $ (5,504 )   $ 412,910  
Purchases / funding
    61,837       -       -       -       (891 )     60,946  
Repayments
    (4,940 )     -       -       -       -       (4,940 )
Accretion of discount
    -       -       1,292       -       464       1,756  
Provision for loan losses
    -       (91 )     -       -       -       (91 )
Sales and payoff
    (44,554 )     -       1,183       -       395       (42,976 )
Transfers to/from non-impaired loans, net
    (4,686 )     -       1,292       -       175       (3,219 )
Balance at end of period
  $ 442,764     $ (1,855 )   $ (11,162 )   $ -     $ (5,361 )   $ 424,386  
 
The tables below summarize the activity in the loan principal, allowance for loan losses, liquidity discount, credit discount, deferred loan fees and carrying values, net for the impaired loans and non-impaired loans as of and for the nine months ended September 30, 2012:
 
   
Nine Months Ended September 30, 2012
 
(In thousands)
 
Principal
   
Allowance for Loan Losses
   
Liquidity Discount
   
Credit Discount
   
Deferred Loan Fees
   
Carrying Value,
Net
 
Impaired Loans