Edgar Filing: JMP Group Inc.

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FORM 10-Q

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, 2010

¨	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.

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, 2010 was 21,733,222.

TABLE OF CONTENTS


		Page Number
PART I.	FINANCIAL INFORMATION		4

Item 1.	Financial Statements - JMP Group Inc.		4
	Consolidated Statements of Financial Condition - September 30, 2010 and December 31, 2009 (Unaudited)		4
	Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited)		6
	Consolidated Statement of Changes in Equity - For the Nine Months Ended September 30, 2010 (Unaudited)		7
	Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2010 and 2009 (Unaudited)		8
	Notes to Consolidated Financial Statements (Unaudited)		10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		66
Item 4.	Controls and Procedures		66

PART II.	OTHER INFORMATION		67

Item 1.	Legal Proceedings		67
Item 1A.	Risk Factors		67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		68
Item 3.	Defaults Upon Senior Securities		68
Item 4.	(Removed and Reserved)		68
Item 5.	Other Information		68
Item 6.	Exhibits		68

SIGNATURES			69

EXHIBIT INDEX			70

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.

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, 2010			December 31, 2009
Assets
Cash and cash equivalents	$	57,616		$	75,680
Restricted cash and deposits (includes cash on deposit with clearing broker of $255 at September 30, 2010 and December 31, 2009)		45,710			36,628
Receivable from clearing broker		2,072			1,609
Investment banking fees receivable, net of allowance for doubtful accounts of $0 at September 30, 2010 and December 31, 2009		3,965			2,706
Marketable securities owned, at fair value		15,005			5,899
Incentive fee receivable		732			2,631
Other investments (of which $49,402 and $57,190 at fair value at September 30, 2010 and December 31, 2009, respectively)		53,310			59,190
Loans held for investment, net of allowance for loan losses		1,473			1,592
Loans collateralizing asset-backed securities issued, net of allowance for loan losses		373,217			327,967
Interest receivable		1,100			1,046
Fixed assets, net		1,574			1,345
Deferred tax assets		37,727			51,499
Other assets		9,802			6,929

Total assets	$	603,303		$	574,721

Liabilities and Equity
Liabilities:
Marketable securities sold, but not yet purchased, at fair value	$	9,746		$	1,047
Accrued compensation		21,782			43,026
Asset-backed securities issued		344,167			326,632
Interest payable		605			525
Note payable		26,643			9,045
Deferred tax liability		39,547			48,220
Other liabilities		28,289			20,575

Total liabilities		470,779			449,070

Commitments and Contingencies
JMP Group Inc. Stockholders’ Equity
Common stock, $0.001 par value, 100,000,000 shares authorized; 22,069,741 shares issued at September 30, 2010 and December 31, 2009; 21,733,222 and 21,533,583 shares outstanding at September 30, 2010 and December 31, 2009, respectively		22			22
Additional paid-in capital		123,691			126,125
Treasury stock, at cost, 336,519 and 536,158 shares at September 30, 2010 and December 31, 2009, respectively		(2,238	)		(4,360	)
Accumulated other comprehensive loss		(104	)		—
Retained earnings (accumulated deficit)		753			(1,152	)

Total JMP Group Inc. stockholders’ equity		122,124			120,635
Noncontrolling Interest		10,400			5,016

Total equity		132,524			125,651

Total liabilities and equity	$	603,303		$	574,721

See accompanying notes to consolidated financial statements.

JMP Group Inc.

Consolidated Statements of Financial Condition - (Continued)

(Unaudited)

(Dollars in thousands, except per share data)

Assets and liabilities of consolidated VIE included in total assets and total liabilities above:


	September 30, 2010		December 31, 2009
Restricted cash	$	35,073	$	34,689
Loans collateralizing asset-backed securities issued, net of allowance for loan losses		373,217		327,967
Interest receivable		1,079		1,013
Deferred tax assets		21,768		38,729
Other assets		69		46

Total assets of consolidated VIE	$	431,206	$	402,444

Asset-backed securities issued	$	344,167	$	326,632
Interest payable		592		522
Deferred tax liability		37,029		45,602
Other liabilities		363		87

Total liabilities of consolidated VIE	$	382,151	$	372,843

See accompanying notes to consolidated financial statements.

JMP Group Inc.

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Revenues
Investment banking	$	12,332		$	10,391		$	28,436		$	25,104
Brokerage		5,895			7,939			21,255			25,836
Asset management fees		3,283			3,266			9,316			15,766
Principal transactions		1,055			5,981			2,887			15,403
Gain on sale and payoff of loans		6,990			6,727			26,231			11,571
Gain on repurchase of asset-backed securities issued		—			4,096			—			4,205
Gain on bargain purchase		—			—			—			1,179
Net dividend income		357			766			1,472			1,850
Other income		292			227			1,095			1,154

Non-interest revenues		30,204			39,393			90,692			102,068

Interest income		11,525			12,214			36,106			24,172
Interest expense		(8,539	)		(8,504	)		(25,089	)		(17,484	)

Net interest income		2,986			3,710			11,017			6,688

Provision for loan losses		(509	)		(1,384	)		(964	)		(5,366	)

Total net revenues after provision for loan losses		32,681			41,719			100,745			103,390

Non-interest Expenses
Compensation and benefits		19,361			29,308			65,474			70,849
Administration		1,328			1,098			4,324			3,541
Brokerage, clearing and exchange fees		1,177			1,317			3,752			4,057
Travel and business development		711			534			2,632			1,587
Communications and technology		990			989			3,136			2,807
Occupancy		672			610			1,994			1,788
Professional fees		818			899			2,606			2,783
Depreciation		158			189			495			592
Impairment loss on purchased management contract		2,750			—			2,750			—
Other		137			215			479			378

Total non-interest expenses		28,102			35,159			87,642			88,382

Income before income tax expense		4,579			6,560			13,103			15,008
Income tax expense		1,943			2,879			5,464			6,491

Net income		2,636			3,681			7,639			8,517
Less: Net income attributable to noncontrolling interest		1,205			712			2,305			1,228

Net income attributable to JMP Group Inc.	$	1,431		$	2,969		$	5,334		$	7,289

Net income attributable to JMP Group Inc. per common share:
Basic	$	0.07		$	0.14		$	0.25		$	0.35
Diluted	$	0.06		$	0.13		$	0.24		$	0.34
Dividends declared per common share	$	0.015		$	0.01		$	0.04		$	0.03
Weighted average common shares outstanding:
Basic		21,583			20,755			21,616			20,633
Diluted		22,114			22,015			22,243			21,640

See accompanying notes to consolidated financial statements.

JMP Group Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

(In thousands)


	JMP Group Inc. Stockholders’ Equity
	Common Stock				Treasury Stock			Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Noncontrolling Interest			Comprehensive Income			Total Equity
	Shares		Amount		Treasury Stock			Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Noncontrolling Interest			Comprehensive Income			Total Equity
Balance, December 31, 2009		22,070	$	22	$	(4,360	)	$	126,125		$	(1,152	)	$	—		$	5,016		$	—		$	125,651
Net income		—		—		—			—			5,334			—			2,305			7,639			7,639
Additional paid-in capital - stock-based compensation		—		—		—			(3,211	)		—			—			—			—			(3,211	)
Additional paid-in capital - excess tax benefit related to stock-based compensation		—		—		—			(294	)		—			—			—			—			(294	)
Cash dividends paid to shareholders		—		—		—			—			(873	)		—			—			—			(873	)
Purchases of shares of common stock for treasury		—		—		(8,336	)		—			—			—			—			—			(8,336	)
Reissuance of shares of common stock from treasury		—		—		7,926			934			(1	)		—			—			—			8,859
Sale of subsidiary shares to noncontrolling interest holders		—		—		—			—			—			—			6,093			—			6,093
Purchase of subsidiary shares from noncontrolling interest holders		—		—		2,532			137			(2,373	)		—			(2,738	)		—			(2,442	)
Unrealized loss on cash flow hedge, net of tax		—		—		—			—			—			(104	)		—			(104	)		(104	)
Dividends paid to noncontrolling interest holders		—		—		—			—			(182	)		—			(276	)		—			(458	)

Balance, September 30, 2010		22,070	$	22	$	(2,238	)	$	123,691		$	753		$	(104	)	$	10,400		$	7,535		$	132,524

See accompanying notes to consolidated financial statements.

JMP Group Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net income	$	7,639		$	8,517
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for doubtful accounts		24			—
Provision for loan losses		964			5,366
Accretion of deferred loan fees		(1,128	)		(494	)
Amortization of liquidity discount, net		2,033			405
Gain on sale and payoff of loans		(26,231	)		(11,571	)
Gain on repurchase of asset-backed securities issued		—			(4,205	)
Change in other investments:
Fair value		(2,001	)		(8,143	)
Incentive fees reinvested in general partnership interests		(535	)		(4,767	)
Realized gain on other investments		(99	)		—
Impairment loss on purchased management contract		2,750			—
Depreciation and amortization of fixed assets		495			592
Stock-based compensation expense		3,049			3,901
Deferred income taxes		5,099			6,713
Gain on bargain purchase		—			(1,179	)
Net change in operating assets and liabilities:
Increase in interest receivable		(54	)		(216	)
(Increase) decrease in receivables		177			(3,675	)
Increase in marketable securities		(9,106	)		(3,695	)
Increase in restricted cash (excluding restricted cash reserved for lending activities), deposits and other assets		(6,442	)		(366	)
Decrease in marketable securities sold, but not yet purchased		8,699			4,074
Increase (decrease) in interest payable		80			(616	)
(Decrease) increase in securities sold under agreements to repurchase		—			—
(Decrease) increase in accrued compensation and other liabilities		(10,931	)		18,994
Increase in Redeemable Class A member interests		—			—

Net cash (used in) provided by operating activities		(25,518	)		9,635

Cash flows from investing activities:
Purchases of fixed assets		(724	)		(473	)
Purchase of management contract		(3,750	)		—
Investment in subsidiary		—			(2,089	)
Purchases of other investments		(20,249	)		(7,486	)
Sales of other investments		24,568			12,254
Funding of loans collateralizing asset-backed securities issued		(224,125	)		(96,894	)
Funding of loans held for investment		(511	)		—
Sale and payoff of loans collateralizing asset-backed securities issued		165,149			46,092
Principal payments on loans collateralizing asset-backed securities issued		59,428			35,500
Principal payments on loans held for investment		300			270
Net change in restricted cash reserved for lending activities		(445	)		14,675
Cash associated with consolidation / deconsolidation of subsidiaries		—			902

Net cash (used in) provided by investing activities		(359	)		2,751

JMP Group Inc.

Consolidated Statements of Cash Flows - (Continued)

(Unaudited)

(In thousands)


	Nine Months Ended September 30,
	2010			2009
Cash flows from financing activities:
Proceeds from issuance of note payable		18,900			6,100
Repayment of note payable		(1,302	)		(4,967	)
Sale of asset-back securities issued		—			996
Repurchase of asset-backed securities issued		—			(555	)
Repayment of asset-backed securities issued		(3,475	)		(3,668	)
Cash dividends paid to stockholders		(873	)		(620	)
Purchases of shares of common stock for treasury		(8,336	)		(1,109	)
Capital contributions of noncontrolling interest holders		4,458			300
Dividends paid to noncontrolling interest shareholders		(458	)		—
Purchase of subsidiary shares from noncontrolling interest holders		(807	)		—
Proceeds from exercises of stock options		—			83
Excess tax benefit related to stock-based compensation		(294	)		—

Net cash provided by (used in) financing activities		7,813			(3,440	)

Net (decrease) increase in cash and cash equivalents		(18,064	)		8,946
Cash and cash equivalents, beginning of period		75,680			46,262

Cash and cash equivalents, end of period	$	57,616		$	55,208

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	3,985		$	4,254
Cash paid during the period for taxes	$	2,091		$	730
Non-cash investing and financing activities:
Reissuance of shares of common stock from treasury related to vesting of restricted stock units and exercises of stock options	$	5,138		$	2,215
Fair value of noncash assets acquired in the Cratos acquisition	$	—		$	376,372
Fair value of noncash liabilities assumed in the Cratos acquisition	$	—		$	370,776

See accompanying notes to consolidated financial statements.

JMP GROUP INC.

Notes to Consolidated Financial Statements

September 30, 2010

(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 on May 16, 2007, and also 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 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”) and JMP Credit Advisors LLC (“JMPCA”), and certain principal investments through JMP Capital LLC (“JMP Capital”). All of the above entities are wholly-owned subsidiaries. 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, through its majority-owned subsidiary JMP Credit, the Company completed the acquisition of 100% of the membership interests of Cratos Capital Partners, LLC (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”). See Note 2 for further details regarding the ownership of Cratos CLO.

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 annual report on Form 10-K for the year ended December 31, 2009. 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 partially-owned subsidiaries, Harvest Mortgage Opportunities Partners (“HMOP”) (effective May 1, 2009), JMP Realty Trust (“JMPRT”) (through January 1, 2009), Opportunity Acquisition Corp. (through December 31, 2009), 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 and Harvest Growth Capital LLC (“HGC”) (effective April 1, 2010). The Company was the sponsor of the SPAC. The SPAC was liquidated on December 31, 2009 with no distribution of assets to the Company or noncontrolling interest holders due to its accumulated loss. All material intercompany accounts and transactions have been eliminated in consolidation.

The Company follows the authoritative accounting guidance for the consolidation of variable interest entities (“VIEs”). Such guidance applies to VIEs, which are entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. When the Company enters into a transaction with a VIE, the Company determines if it is the primary beneficiary of the VIE by performing a qualitative analysis of the VIE that includes a review of, among other factors, its capital structure, contractual terms, related party relationships, the Company’s fee arrangements and the design of the VIE. The Company performed this analysis for Cratos CLO and concluded that Cratos CLO is a VIE and that the Company, which manages the CLO and owns approximately 94% of the subordinated notes in the CLO, is deemed the primary beneficiary. As a result, the Company consolidates the assets and liabilities of the CLO securitization entity, and the underlying loans owned by the CLO entity are shown on our consolidated statements of financial condition under loans collateralizing asset-backed securities issued and the asset-backed securities (“ABS”) issued to third parties are shown under asset-backed securities issued.

HCS currently manages several asset management funds, which are structured as limited partnerships, and is the general partner of each. In assessing whether or not to consolidate these funds, the Company follows the accounting guidance on determining whether a general partner controls a limited partnership. Such guidance provides that the presumption that the general partner controls the limited partnership may be overcome if the limited partners have substantive kick-out rights. Except for HMOP and HGC, the partnership agreements for these funds provide for the right of the limited partners to remove the general partners by a simple majority vote of the non-affiliated limited partners. Because of these substantive kick-out rights, the Company, as the general partner, does not control these funds, and therefore does not

consolidate them except for HMOP and HGC. The Company accounts for its investments in these funds under the equity method of accounting. As described in Note 3 Recent Accounting Pronouncements, in December 2009, the accounting guidance on consolidation was amended to improve the financial reporting by entities involved in VIEs. In February 2010, the consolidation requirements under the amended accounting guidance were indefinitely deferred for a reporting entity’s interest in entities that have the attributes of an investment company or for which it is industry practice to apply the specialized industry accounting guidance for investment companies. The Company’s investments in the above asset management funds qualify for the deferral, and therefore the new consolidation requirements did not impact our accounting for these funds. If the deferral were to be removed, the Company would be required to evaluate these funds under the new accounting guidance, and based on such evaluation, some if not all of the funds may require consolidation.

Noncontrolling interest on the consolidated statements of financial condition at September 30, 2010 relates to the interest of third parties in Cratos CLO, HMOP and HGC, partially-owned subsidiaries consolidated in our financial statements. Noncontrolling interest on the consolidated statements of financial condition at December 31, 2009 relates to the interest of third parties in JMP Credit, HMOP and HGC, partially-owned subsidiaries consolidated in our financial statements. On August 6, 2010, the Company and individual employee security holders (the “Unitholders”) of JMP Credit entered into an Exchange Agreement providing for, among other things, an offer to buy the minority interest units and shares in JMP Credit held by the Unitholders in exchange for a combination of (i) restricted common stock of the Company par value $.001 per share, (ii) cash and (iii) certain Cratos CLO subordinated notes in such amounts as elected by the Unitholder. In connection with the Exchange Agreement, the Company issued an aggregate of 381,310 shares of restricted stock to the Unitholders and the Company received all the remaining units and shares of JMP Credit that it did not previously own. The restricted stock and the Cratos CLO notes are subject to limitations on transfer and repurchase rights of the Company in the event of certain terminations of the Unitholder’s employment with the Company or its affiliates through June 1, 2013. As a result of this transaction, the Company’s ownership of JMP Credit increased from approximately 93% to 100% and the Company’s ownership of Cratos CLO decreased from 100% to approximately 94% effective August 6, 2010.

JMPRT was 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. Because of substantive kick-out rights, the Company, as the general partner, did not control HMOP and therefore did not consolidate HMOP from January 2, 2009 through April 30, 2009. During the quarter ended June 30, 2009, several non-affiliated limited partners redeemed their interest in HMOP, and the remaining limited partners were no longer deemed to have substantive kick-out rights. As a result, the Company consolidates HMOP in its consolidated financial statements effective May 1, 2009.

On July 31, 2009, JMP Capital received 100% of the membership interest in LSC III, LLC (“LSC”) in full satisfaction of a $2.4 million non-revolving credit note. LSC is an investment partnership and owns shares of common and preferred stock of two privately-held companies. LSC subsequently changed its name to Harvest Growth Capital LLC (“HGC”) and amended its limited liability company agreement. Under the amended agreement, HGC appointed HCS as the manager, accepted new members and launched on April 1, 2010 as a new private equity fund. JMP Capital retained an interest in one privately-held company which was valued at $0.6 million as of April 1, 2010. The members of HGC do not have substantive kick-out rights to remove HCS as manager and therefore HCS is deemed to control HGC. As a result, the Company consolidates HGC in its consolidated financial statements.

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 by JMPRT. JMPRT’s investment in NYMT was transferred to HMOP on January 2, 2009. In addition, JMP Group Inc. invested $4.5 million in the common stock of NYMT on February 14, 2008 via a private investment in public equity (“PIPE”) transaction. At September 30, 2010, JMP Group Inc. owned approximately 7.1% of NYMT’s common stock. In addition, JMP Group Inc. and affiliated entities collectively owned 1.0 million shares of NYMT’s Series A Preferred Stock at September 30, 2010. The Series A Preferred Stock is convertible into shares of NYMT’s common stock based on a conversion price of $8.00 per share of common stock, which represents a conversion rate of two and one-half (2 1 / 2 ) shares of common stock for each share of Series A Preferred Stock. The Series A Preferred Stock matures on December 31, 2010, at which time any outstanding shares must be redeemed by NYMT at the $20.00 per share liquidation preference. Because of its current ownership and management position, the Company does not consolidate NYMT. The Company accounts for its investment in NYMT using the fair value option. See Note 23 for the summarized financial information of NYMT.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect both the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Revenue Recognition

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. In connection with some underwritten transactions, the Company may hold in inventory, for a period of time, equity positions to facilitate the completion of the underwritten transactions. Realized and unrealized net gains and losses on these positions are recorded within investment banking revenues. Strategic advisory revenues primarily include success fees on closed merger and acquisition transactions, as well as retainer fees, earned in connection with advising on both buyers’ and sellers’ transactions. Fees are also earned for related advisory work and other services such as providing fairness opinions and valuation analyses. Strategic advisory revenues are recorded when the transactions or the services (or, if applicable, separate components thereof) to be performed are substantially complete, the fees are determinable and collection is reasonably assured. Private placement fees are related to non-underwritten transactions such as private placements of equity securities, private investments in public equity (“PIPE”), Rule 144A private offerings and trust preferred securities offerings and are recorded on the closing date of the transaction. Unreimbursed expenses associated with strategic advisory and private placement transactions, net of client reimbursements, are recorded in the Consolidated Statements of Operations within various expense captions other than compensation expense.

Brokerage revenues

Brokerage revenues consist of (i) commissions resulting from equity securities transactions executed as agent or principal and are recorded on a trade date basis, (ii) related net trading gains and losses from market making activities and from the commitment of capital to facilitate customer orders and (iii) fees paid for equity research. The Company currently generates revenues from research activities through three types of arrangements. First, through what is commonly known as a “soft dollar” practice, a portion of a client’s commissions may be compensation for the value of access to our research. Those commissions are recognized on a trade date basis, as the Company has no further obligation. Second, a client may issue a cash payment directly to the Company for access to research. Third, the Company has entered into certain commission-sharing or tri-party arrangements in which institutional clients execute trades with a limited number of brokers and instruct those brokers to allocate a portion of the commission to the Company or to issue a cash payment to the Company.

In these commission-sharing or tri-party arrangements, the amount of the fee is determined by the client on a case-by-case basis and agreed to by the Company. An invoice is then sent to the payor. For the second and third type of arrangements, revenue is recognized and an invoice is sent once an arrangement exists, access to research has been provided, a specific amount is fixed or determinable, and collectability is reasonably assured. None of these arrangements obligate clients to a fixed amount of fees for research, either through trading commissions or direct or indirect cash payments, nor do they obligate the Company to provide a fixed quantity of research or execute a fixed number of trades. Furthermore, the Company is not obligated under any arrangement to make commission payments to third parties on behalf of clients.

Asset Management Fees

Asset management fees for hedge funds, funds of funds and private equity funds 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 for hedge funds and funds of funds are calculated at the investor level using their quarter-beginning capital balance adjusted for any contributions or withdrawals. Base management fees for private equity funds are calculated at the investor level using their aggregate capital commitments during the commitment period, which is generally three years from first closing, and on invested capital following the commitment period. The Company also earns incentive fees for hedge funds and funds of funds that are based upon the performance of investment funds and accounts. Such fees are either a specified percentage of the total investment return of a fund or account or a percentage of the excess of an investment return over a specified 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, increased for contributions and decreased for 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. Generally the incentive fees are 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. Incentive fees for private equity funds are based on a specified percentage of realized gains from the disposition of each portfolio investment in which each investor participates, and are earned by the Company after returning contributions by the investors for that portfolio investment and for all other portfolio investments in which each such investor participates that have been disposed of at the time of distribution.

Asset management fees for the two CLOs the Company manages currently consist only of base management fees. For one of the CLOs, the Company earns incentive fees in the event that specified cumulative investment returns are achieved, but such investment returns have not been achieved yet. The Company recognizes base management fees for the CLOs on a monthly basis over the period in which the collateral management services are performed. The base management fees for the CLOs are calculated as a percentage of the average aggregate collateral balances for a specified period. As we consolidate Cratos CLO, the management fees earned at JMPCA from Cratos CLO are eliminated on consolidation in accordance with U.S. GAAP.

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, our investment in NYMT and interest rate cap. Unrealized gain (loss) on interest rate cap was recorded in principal transaction revenues through June 30, 2010. Effective July 1, 2010, such gain (loss) is recorded in other comprehensive income (loss). See Note 9 for more information. Principal transaction revenues also include earnings (or losses) attributable to investment partnership interests held by our asset management subsidiary, HCS, which are accounted for using the equity method of accounting.

The Company’s principal transaction revenues for these categories for the three and nine months ended September 30, 2010 and 2009 are as follows:


(In thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010		2009
Equity and other securities	$	1,194		$	4,894		$	2,487	$	9,390
Warrants and other investments		23			(16	)		198		(92	)
Investment partnerships		(162	)		1,103			202		6,105

Total principal transaction revenues	$	1,055		$	5,981		$	2,887	$	15,403

Gain on Sale and Payoff of Loans

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

Interest Income

Interest income primarily relates to income earned on loans. Interest income on loans comprises the stated coupon as a percentage of the face amount receivable as well as accretion of accretable or purchase discounts and deferred fees, see Loans held for investment and Loans collateralizing asset-backed securities issued for more information. Interest income is recorded on the accrual basis in accordance with the terms of the respective loans unless such loans are placed on non-accrual status.

Interest Expense

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

Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities or remaining maturities upon purchase of three months or less to be cash equivalents. The Company holds cash in financial institutions in excess of the FDIC insured limits. The Company periodically reviews the financial condition of the financial institutions and assesses the credit risk.

Restricted Cash and Deposits

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

Restricted cash consisted of the following at September 30, 2010 and December 31, 2009:


(In thousands)	September 30, 2010		December 31, 2009
Principal and interest payments held as collateral for asset-backed securities issued	$	34,825	$	33,349
Cash collateral supporting standby letters of credit		248		1,340
Proceeds from short sales		9,746		1,047
Deposit with clearing broker		255		255
Deposits for operating leases		636		637

	$	45,710	$	36,628

Receivable from Clearing Broker

The Company clears customer transactions through another broker-dealer on a fully disclosed basis. At both September 30, 2010 and December 31, 2009, 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. The allowance for doubtful accounts related to investment banking fee receivable was zero at both September 30, 2010 and December 31, 2009.

Fair Value of Financial Instruments

The Company adopted amended accounting principles related to fair value measurements as of January 1, 2008. The amendment establishes a consistent framework for measuring fair value in accordance with GAAP and expands disclosures with respect to fair value measurements. The amendment applies to all financial instruments that are being measured and reported on a fair value basis. This includes those items currently reported in marketable securities owned, at fair value, other investments and marketable securities sold, not yet purchased, at fair value on the consolidated statements of financial condition. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 4 of the Notes to the consolidated financial statements for the disclosures related to the fair value of our marketable securities and other investments.

Most of the Company’s financial instruments, other than loans collateralizing asset-backed securities issued, loans held for investment, asset-backed securities issued and investment in HuaMei Capital Company, Inc., Sanctuary Wealth Services LLC, and Princeton Advisory Group, Inc. are recorded at fair value or amounts that approximate fair value. See Note 4 for the description of our investments in HuaMei Capital Company, Inc., Sanctuary Wealth Services LLC and Princeton Advisory Group, Inc.

Marketable securities owned, other investments (excluding investments in HuaMei Capital Company, Inc., Sanctuary Wealth Services LLC and Princeton Advisory Group, Inc.) and marketable securities sold, but not yet purchased, are classified as trading securities and stated at fair value, with related changes in unrealized appreciation or depreciation reflected in the line item principal transactions in the accompanying Consolidated Statements of Operations.

Fair value of the Company’s financial instruments is generally obtained from quoted market prices, broker or dealer price quotations, or alternative pricing methodologies that the Company believes offer reasonable levels of price transparency. To the extent that certain financial instruments trade infrequently or are non-marketable securities and, therefore, do not have readily determinable fair values, the Company estimates the fair value of these instruments using various pricing models and the information available to the Company that it deems most relevant. Among the factors considered by the Company in determining the fair value of financial instruments are discounted anticipated cash flows, the cost, terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, the Black-Scholes Options Valuation methodology adjusted for active market and other considerations on a case-by-case basis and other factors generally pertinent to the valuation of financial instruments.

Marketable securities owned and securities sold, but not yet purchased, consist of U.S. listed and over-the-counter (“OTC”) equity securities. Other investments include 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. Generally, securities are valued (i) at their last published sale price

if they are listed on an established exchange or (ii) if last sales prices are not published, at the highest closing “bid” price (for securities held “long”) and the lowest closing “asked” price (for “short” positions) as recorded by the composite tape system or such principal exchange, as the case may be. Where the general partner determines that market prices or quotations do not fairly represent the value of a security in the investment fund’s portfolio (for example, if a security is a restricted security of a class that is publicly traded) the general partner may assign a different value. The general partner will determine the estimated fair value of any assets that are not publicly traded.

Also included in other investments are convertible preferred stock of NYMT, warrants on public and private common stock, private equity securities owned by HGC and JMP Capital and an interest rate cap derivative instrument. 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 fair value of the private equity securities owned by HGC and JMP Capital is determined by the Company using comparable public company metrics discounted for private company market illiquidity. The interest rate cap derivative instrument fair value is determined from counterparty price quotations.

The Company follows the authoritative guidance included in GAAP on the fair value option which provides companies with a choice to report selected financial assets and financial liabilities at fair value. 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. We elected to apply the fair value option to our investments in NYMT convertible preferred and common stock. The primary reason for electing the fair value option was to measure these investments on the same basis as our other equity securities, all of which are stated at fair value.

Dividends received during both quarters ended September 30, 2010 and 2009 on NYMT stock of $0.5 million were recorded in net dividend income on our Consolidated Statements of Operations. Dividends received during the nine months ended September 30, 2010 and 2009 on NYMT stock of $1.6 million and $1.3 million, respectively, were recorded in net dividend income on our Consolidated Statements of Operations. For the three months ended September 30, 2010 and 2009, the Company recorded unrealized loss of $0.2 million and unrealized gain of $2.3 million, respectively, on the above investments in NYMT. For the nine months ended September 30, 2010 and 2009, the Company recorded unrealized loss of $0.5 million and unrealized gain of $5.6 million, respectively, on the above investments in NYMT. The unrealized gains on our investments in NYMT are reported in Principal Transactions in the Consolidated Statements of Operations.

Derivative Financial Instruments

The Company has entered into a derivative contract in order to hedge the interest rate exposure of its short-term and long-term borrowings. Currently, the Company does not enter into derivative contracts for any other purposes. Derivative financial instruments are recorded in the Consolidated Statements of Financial Condition at fair value. At the inception of the contract, the Company designated and documented the derivative contract as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). For this cash flow hedge, the Company records changes in the fair value of the derivative to the extent that it is effective in other comprehensive (loss) income and subsequently reclassifies these changes in fair value to net income in the same period(s) that the hedged transaction affects earnings. Such reclassification from other comprehensive income (loss) to earnings is recorded in the same financial statement category as the hedged item. The Company formally documents at inception its hedge relationships, including identification of the hedging instruments and the hedged items, its risk management objectives, strategy for undertaking the hedge transaction and the Company’s evaluation of effectiveness of its hedged transactions. Periodically, the Company also formally assesses whether the derivative designated in each hedging relationship is expected to be and has been highly effective in offsetting changes in cash flows of the hedged item using the dollar offset method. If the Company determines that a derivative is not highly effective as a hedge, it discontinues hedge accounting.

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

For those loans deemed impaired as of the date of the acquisition, the total discount from outstanding principal balance to fair value consists of a nonaccretable credit discount and in most cases an accretable liquidity (or market value) discount. For the remaining loans acquired through the purchase of Cratos, any discounts to fair value were recorded as accretable liquidity discounts as they were not attributable to credit impairment. 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 the estimate after the acquisition, the loan is considered impaired. Loans considered impaired at the acquisition date of Cratos continue to be assessed in accordance with the authoritative guidance under GAAP on loan impairment. If based on current information and events, it is probable that there is a significant increase in cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, the Company will first reduce any remaining credit discounts (including allowances for loan losses) for the loans established after its acquisition for the increase in the present value of cash flows expected to be collected. Then the Company will recalculate the amount of accretable yield for the loan as the excess of the revised cash flows expected to be collected over the sum of (a) the initial investment, less (b) cash collected, less (c) write-downs, plus (d) amount of yield accreted to date. The Company will adjust the amount of accretable yield by reclassification from nonaccretable discount. The adjustment is accounted for as a change in estimate, with the amount of periodic accretion adjusted over the remaining life of the loan. The resulting yield is then used as the effective interest rate in any subsequent accounting.

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

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.

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 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.

The Company provides an allowance for loans that are considered impaired. A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company measures impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral securing the loan if the loan is collateral dependent, depending on the circumstances and the Company’s collection strategy. For those loans held by Cratos at the date of acquisition by JMP Credit, and deemed impaired at that date or a subsequent date, allowance for loan losses is calculated considering two further factors. For loans deemed impaired at the date of acquisition if there is a further decline in expected future cash flows, the reduction is recognized as a specific reserve in the current quarter in accordance with above. For those loans deemed impaired subsequent to the acquisition date, if the net realizable value is lower than the current carrying value, then the carrying value is reduced and the difference is booked as provision for loan losses. If the total discount from unpaid principal balance to carrying value is larger than the expected loss at the date of assessment, no provision for loan losses is recognized.

In addition, the Company provides an allowance on a loan by loan basis at JMP Credit for loans that were purchased after the Cratos acquisition. The Company employs internally developed and third party estimation tools for measuring credit risk (loan ratings, probability of default, and exposure at default), which are used in developing an appropriate allowance for loan losses. The Company performs periodic detailed reviews of its loan portfolio to identify risks and to assess the overall collectibility of loans.

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

Asset-Backed Securities Issued

Asset-backed securities (“ABS”) represent securities issued to third parties by Cratos CLO in 2007. The Company consolidated Cratos CLO for financial reporting purposes as of the April 7, 2009 acquisition date. At the acquisition date, the ABS were recorded at fair value, which comprised the 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.

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.

Purchased Management Contract

Purchased management contract relates to the CLO contract the Company purchased from Princeton Advisory Group, Inc. on September 8, 2010 (see Note 8) and is included in other assets on the Consolidated Statements of Financial Condition. The purchased management contract is amortized over its estimated life. The Company tests the purchased management contract for impairment whenever events or changes in circumstances suggest that the asset’s carrying value may not be fully recoverable. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of the asset, is recognized if the sum of the estimated undiscounted cash flows relating to the asset is less than the corresponding carrying value.

Income Taxes

The Company recognizes deferred tax assets and liabilities based upon the temporary differences between the financial reporting and tax bases of its assets and liabilities. Valuation allowances are established when necessary to reduce the deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized.

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

Stock-Based Compensation

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

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

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

Reclassification

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

3. Recent Accounting Pronouncements

Accounting Standards Update (“ASU”) 2010-20, Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, the Financial Accounting Standards Board (the “FASB”) issued ASU 2010-20 which amends Topic 310 to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. The disclosures required by ASU 2010-20 are effective for annual and interim periods ending on or after December 15, 2010 except for the disclosures about the activity that occurs during a reporting period which are effective for annual and interim periods beginning on or after December 15, 2010. Since ASU 2010-20 only requires additional disclosures about financing receivables and related allowance for credit losses, the Company does not expect this to have an impact on our consolidated financial position or results of operations.

ASU 2009-17, Consolidation (Topic 810): Improvements to Financial Reporting by Enterprises Involved in Variable Interest Entities. In December 2009, the FASB issued ASU 2009-17 which amends the accounting standard related to the consolidation of variable interest entities (“VIE”). The amendments replace the existing guidance on determining which reporting entity, if any, has a controlling financial interest in a VIE with an approach focused on identifying which reporting entity has (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the VIE. In February 2010, the FASB issued ASU 2010-10, Consolidation (Topic 810): Amendments for Certain Investment Funds, which indefinitely defers the consolidation requirements of ASU 2009-17 for a reporting entity’s interest in an entity that has all the attributes of an investment company or for which it is industry practice to apply the specialized industry accounting guidance for investment companies. The hedge funds and funds of funds managed by HCS qualify for the deferral, and therefore, the Company continues to apply the historical accounting standard related to the consolidation of VIEs to its investment in such funds. The Company adopted ASU 2009-17 and ASU 2010-10 in the first quarter of 2010, and the adoption of these amendments did not have an impact on our consolidated financial position or results of operations.

4. Marketable Securities and Other Investments

Other Investments at Fair Value

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


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

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

Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including discounted anticipated cash flows, the cost, terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, prepayment speeds, default rates, loss severity, as well as other measurements. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Included in this category is the general partner investment in hedge funds, where the underlying hedge funds are mainly invested in publicly traded stocks whose value is based on quoted market prices.

Level 3 is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable from objective sources. A description of the valuation techniques utilized for the fair value of the financial instruments in this category is as follows:

•

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

•

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

•

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

•

Private equity securities: HGC and JMP Capital investment in private companies, determined by the Company using comparable public company metrics discounted for private company market illiquidity.

At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as “Level 3.”

The following tables provide fair value information related to the Company’s financial assets and liabilities at September 30, 2010 and December 31, 2009:


	Assets at Fair Value as of
	September 30, 2010
(In thousands)	Level 1		Level 2		Level 3		Total
Financial instruments owned, at fair value:
Marketable securities owned:
Equity securities	$	15,005	$	—	$	—	$	15,005

Total marketable securities owned	$	15,005	$	—	$	—	$	15,005

Other investments:
General partner investment in hedge funds	$	—	$	24,517	$	—	$	24,517
General partner investment in funds of funds		—		—		98		98

Total general partner investment in funds		—		24,517		98		24,615
Limited partner investment in private equity fund		—		—		2,868		2,868
Limited partner investment in mortgage fund		—		—		170		170
Investment in NYMT convertible preferred stock		—		—		15,000		15,000
Private equity securities		—		—		6,687		6,687
Interest rate cap (1)		62		—		—		62

Total other investments	$	62	$	24,517	$	24,823	$	49,402

(1)	On May 29, 2010 the Company entered into an interest rate cap with City National Bank to effectively lock in or fix the interest rate on its revolving line of credit and term loan from July 1, 2010 through maturity. See “Derivative Financial Instruments” later in this footnote for further details.


	Assets at Fair Value as of
	December 31, 2009
(In thousands)	Level 1		Level 2		Level 3		Total
Financial instruments owned, at fair value:
Marketable securities owned:
Equity securities	$	5,899	$	—	$	—	$	5,899

Total marketable securities owned	$	5,899	$	—	$	—	$	5,899

Other investments:
General partner investment in hedge funds	$	—	$	33,313	$	—	$	33,313
General partner investment in funds of funds		—		—		2,933		2,933

Total general partner investment in funds		—		33,313		2,933		36,246
Limited partner investment in private equity fund		—		—		2,476		2,476
Limited partner investment in mortgage fund		—		—		1,147		1,147
Investment in NYMT convertible preferred stock		—		—		15,000		15,000
Private equity securities		—		—		2,321		2,321

Total other investments	$	—	$	33,313	$	23,877	$	57,190


(In thousands)	Liabilities at Fair Value as of
	September 30, 2010
	Level 1		Level 2		Level 3		Total
Financial instruments sold, but not yet purchased, at fair value:
Marketable securities sold, but not yet purchased	$	9,746	$	—	$	—	$	9,746



	Liabilities at Fair Value as of
	December 31, 2009
(In thousands)	Level 1		Level 2		Level 3		Total
Financial instruments sold, but not yet purchased, at fair value:
Marketable securities sold, but not yet purchased	$	1,047	$	—	$	—	$	1,047

The tables below provide a reconciliation of the beginning and ending balances for the assets at fair value using significant unobservable inputs (Level 3) for the three months ended September 30, 2010 and 2009.


(In thousands)	Balance as of June 30, 2010		Purchases/ (sales), net			Total gains (losses) - realized and unrealized			Transfers in/(out) of Level 3			Balance as of September 30, 2010		Unrealized gains/(losses) included in earnings related to assets still held at reporting date
General partner investment in funds of funds	$	99	$	—		$	(1	)	$	—		$	98	$	(1	)
Limited partner investment in private equity fund		2,824		(1	)		45			—			2,868		45
Limited partner investment in mortgage fund		214		(73	)		29			—			170		29
Investment in NYMT convertible preferred stock		15,000		—			—			—			15,000		—
Private equity securities		5,151		299			1,237			—			6,687		1,237

Total Level 3 assets	$	23,288	$	225		$	1,310		$	—		$	24,823	$	1,310


(In thousands)	Balance as of June 30, 2009		Purchases/ (sales), net			Total gains (losses) - realized and unrealized			Transfers in/(out) of Level 3			Balance as of September 30, 2009		Unrealized gains/(losses) included in earnings related to assets still held at reporting date
General partner investment in funds of funds	$	3,787	$	—		$	122		$	—		$	3,909	$	122
Limited partner investment in private equity fund		2,391		—			5			—			2,396		5
Limited partner investment in mortgage fund		—		(394	)		27			2,000	(2)		1,633		27
Investment in NYMT convertible preferred stock		13,868		—			878			—			14,746		878
Warrants		244		74			(243	)		—			75		(243	)
Private equity securities		—		2,435	(1)		—			—			2,435		—

Total Level 3 assets	$	20,290	$	2,115		$	789		$	2,000		$	25,194	$	789

(1)

On July 31, 2009, the Company received 100% of the membership interest in LSC III, LLC (“LSC”) in full satisfaction of a $2.4 million non-revolving credit note. LSC was an investment partnership and owned shares of common and preferred stock of two privately-held companies which had an aggregate fair value of $2.4 million at July 31, 2009. The Company had a controlling financial interest in LSC and therefore consolidated LSC in its consolidated financial statements effective July 31, 2009. The two investments owned by LSC were recorded at fair value as of July 31, 2009 and were included in the Company’s Level 3 assets as of September 30, 2009. LSC subsequently changed its name to Harvest Growth Capital LLC and launched on April 1, 2010 as a new private equity fund (see Note 2).

(2)	During the quarter ended September 30, 2009, the Company’s limited partner investment in a mortgage fund was transferred from Level 2 to Level 3 within the fair value hierarchy due to reduced observability of the inputs used to value the fund’s underlying investments.

The tables below provide a reconciliation of the beginning and ending balances for the assets at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2010 and 2009.


(In thousands)	Balance as of December 31, 2009		Purchases/ (sales), net			Total gains (losses) - realized and unrealized			Transfers in/(out) of Level 3			Balance as of September 30, 2010		Unrealized gains/(losses) included in earnings related to assets still held at reporting date
General partner investment in funds of funds	$	2,933	$	(2,950	)	$	115		$	—		$	98	$	115
Limited partner investment in private equity fund		2,476		35			357			—			2,868		357
Limited partner investment in mortgage fund		1,147		(1,153	)		176			—			170		27
Investment in NYMT convertible preferred stock		15,000		—			—			—			15,000		—
Warrants		—		—			—			—			—		—
Private equity securities		2,321		2,742			1,624			—			6,687		1,624

Total Level 3 assets	$	23,877	$	(1,326	)	$	2,272		$	—		$	24,823	$	2,123


(In thousands)	Balance as of December 31, 2008		Purchases/ (sales), net			Total gains (losses) - realized and unrealized			Transfers in/(out) of Level 3			Balance as of September 30, 2009		Unrealized gains/(losses) included in earnings related to assets still held at reporting date
General partner investment in funds of funds	$	3,678	$	—		$	231		$	—		$	3,909	$	231
Limited partner investment in private equity fund		2,516		(72	)		(49	)		—			2,395		(49	)
Limited partner investment in mortgage fund		—		(394	)		27			2,000	(3)		1,633		27
Investment in NYMT convertible preferred stock		11,687		656	(1)		2,404			—			14,747		2,404
Warrants		307		74			(306	)		—			75		(306	)
Private equity securities		—		2,435	(2)		—			—			2,435		—

Total Level 3 assets	$	18,188	$	2,699		$	2,307		$	2,000		$	25,194	$	2,307

(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 from January 2, 2009 through April 30, 2009. Effective May 1, 2009, the Company consolidated HMOP in its consolidated financial statements. As a result, the investment in NYMT convertible preferred stock held by HMOP was added to the Company’s assets at the fair value of $8.5 million as of May 1, 2009 and was included in the Company’s Level 3 assets as of September 30, 2009.

(2)

(3)	During the quarter ended September 30, 2009, the Company’s limited partner investment in a mortgage fund was transferred from Level 2 to Level 3 within the fair value hierarchy due to reduced observability of the inputs used to value the fund’s underlying investments.

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.

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.

Transfers in/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 during the three and nine months ended September 30, 2010. During the three months ended September 30, 2009, the Company’s limited partner investment in a mortgage fund was transferred from Level 2 to Level 3 within the fair value hierarchy due to reduced observability of the inputs used to value the fund’s underlying investments. There were no other transfers in/out of Level 3 during the three and nine months ended September 30, 2009. There were no transfers in/out of Level 1 or Level 2 during the three and nine months ended September 30, 2010 and 2009.

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. The Company’s proportionate share of those investments is included in the tables above. In addition, other investments include warrants, and two investments in funds managed by third parties.

Other Investments not at Fair Value

On February 13, 2009, the Company entered into a business arrangement with China Merchants Securities Co. (HK), Ltd., a securities brokerage and investment banking firm, through a $2.0 million investment in HuaMei Capital Company, Inc. (“HuaMei”) to expand the Company’s investment banking capabilities in China. Through HuaMei, the Company intends to provide investment banking services to U.S. and Chinese companies seeking to execute cross-border transactions on both sides of the Pacific. HuaMei is a joint venture of China Merchants Securities; MVC Capital, Inc., a publicly traded business development company managed by The Tokarz Group Advisers LLC; and the HuaMei Capital founders. HuaMei has co-chief executive officers from China Merchant Securities Co. (HK), Ltd. and the Company. The Company has appointed its chairman and chief executive officer, Joseph Jolson, to serve on HuaMei’s board of directors. The Company accounts for its investment in HuaMei under the equity method of accounting within other investments on the Consolidated Statements of Financial Condition. The carrying value of our investment in HuaMei was $2.0 million at September 30, 2010.

On February 11, 2010, the Company made a $1.5 million investment in Class D Preferred Units of Sanctuary Wealth Services LLC (“Sanctuary”). Sanctuary provides a turnkey platform that will allow 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, which is three years from the investment date. The Company carries its investment in Sanctuary at cost within other investments on the Consolidated Statements of Financial Condition and evaluates the investment for impairment on a quarterly basis. The carrying value of the Company’s investment in Sanctuary was $1.5 million at September 30, 2010.

Financial Condition. On September 8, 2010, the Company completed the purchase of one of the two management contracts for $3.8 million, and the contract was transferred to JMPCA. The original deposit related to this contract of $1.3 million and additional consideration of $2.5 million were together reclassified to purchased management contract, which is included in other assets on the Consolidated Statement of Financial Condition. See Note 8 Purchased Management Contract for further details. The transfer of the other CLO management contract had not been completed as of September 30, 2010, and the Company carries the deposit related to this management contract as other investment at its current cost of $0.4 million. The Company evaluated this investment for impairment at September 30, 2010 and determined that there was no impairment.

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.

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, 2010, the Company recorded $107,089 of other comprehensive loss representing unrealized loss on the interest rate cap. In addition, during the three and nine months ended September 30, 2010, $2,717 was reclassified from accumulated other comprehensive income into interest expense as amortization of the interest cap.

5. Loans Held for Investment

Loans held for investment at September 30, 2010 is comprised of principal investments in the form of one loan note and advances on one senior secured promissory note and one non-revolving credit note commitment. At December 31, 2009, loans held for investment was comprised of principal investments in the form of two loan notes and advances on one non-revolving credit note commitments.

The loan note outstanding at September 30, 2010 is 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 20.0% 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 $0.8 million was in default and the Company recorded a loan loss provision of $0.4 million in the third quarter of 2008, $0.1 million in the fourth quarter of 2009 and $0.3 million in the third quarter of 2010. Recovery of the loan is being sought through bankruptcy court proceedings; however, the Company believes it is unlikely that it will be able to recover 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. The loan was placed on non-accrual status on April 1, 2009. Accordingly, the interest payments of $0.2 million received subsequent to that date were applied to the principal balance, reducing the outstanding principal balance to $4.0 million at December 31, 2009. The loan was recorded net of loan loss reserves of $3.8 million and a deferred loan fee of $0.2 million at December 31, 2009. On February 10, 2010, the loan note was converted into non-voting preferred equity of a newly formed entity which succeeded to the assets of the borrower. As of the conversion date, the Company determined the fair value of both the loan note and the non-voting preferred equity of the newly formed entity to be zero, and therefore, recognized no gain or loss on the conversion. During the quarters ended June 30, 2010 and September 30, 2010, the Company advanced $0.3 million and $0.1 million, respectively, on a $0.8 million senior secured promissory note to the newly formed entity for the commencement of a new commercial loan origination program. The note bears interest at 15.0% per annum, matures in May 2011 and is secured by all loan origination fees generated by such commercial loan origination program.

The Company had also advanced as of December 31, 2008 an aggregate of $3.8 million on two non-revolving credit note commitments with an original aggregate amount of $7.0 million. In July 2009, one of the two non-revolving credit notes matured. As of the maturity date, the net carrying value of the credit note was $2.4 million. As permitted by the terms of the credit agreement, at maturity, the borrower conveyed collateral to the Company in full satisfaction of the credit note. The collateral received was the membership interest in LSC III, LLC (see Note 2).

As of September 30, 2010 and December 31, 2009, the Company had a $1.0 million and $1.3 million advance, respectively, on a $2.0 million non-revolving commitment. Of this non-revolving commitment, $0.7 million expired in October 2009. The advance currently bears interest at the rate of 20.0% per annum and is due in June 2011. As of September 30, 2010 and December 31, 2009, the Company had no remaining credit commitments.

At September 30, 2010 and December 31, 2009, $0.8 million and $4.8 million of the aggregate amount of loans held for investment were on non-accrual status, respectively.

The following table presents components of loans held for investment, net, on the Consolidated Statements of Financial Condition at September 30, 2010 and December 31, 2009:


(In thousands)	September 30, 2010			December 31, 2009
Loans held for investment	$	2,331		$	6,057
Allowance for loan losses		(858	)		(4,285	)
Deferred loan fees		—			(180	)

Total loans held for investment, net	$	1,473		$	1,592

A summary of the activity in the allowance for loan losses for the three and nine months ended September 30, 2010 and 2009 was as follows:


(In thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2010			2009			2010			2009
Balance at beginning of period	$	(528	)	$	(4,340	)	$	(4,285	)	$	(2,896	)
Provision for loan losses		(330	)		105			(330	)		(1,339	)
Loans charged off, net of recoveries		—			50			3,757			50

Balance at end of period	$	(858	)	$	(4,185	)	$	(858	)	$	(4,185	)

The Company determined the fair value of loans held for investment to be $1.5 million and $1.7 million as of September 30, 2010 and December 31, 2009, respectively, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate.

6. Loans Collateralizing Asset-backed Securities Issued

Loans collateralizing asset-backed securities issued 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 at September 30, 2010:


(In thousands)	September 30, 2010			December 31, 2009
Loans collateralizing asset-backed securities	$	440,789		$	461,460
Allowance for loan losses		(1,630	)		(1,995	)
Liquidity discount		(51,603	)		(91,544	)
Credit discount		(8,558	)		(35,105	)
Deferred loan fees, net		(5,781	)		(4,849	)

Total loans collateralizing asset-backed securities, net	$	373,217		$	327,967

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 $14.0 million of impaired loans as of September 30, 2010, with allocated specific reserves of $0.6 million and credit discount of $8.6 million. There were $74.4 million of impaired loans as of December 31, 2009, with allocated specific reserves of $1.6 million and credit discount of $35.1 million. In addition, the Company evaluates pools of homogeneous loans based on portfolio classification and risk assessment to determine the inherent loss in these portfolios. Based on such evaluation, the Company recorded pooled reserves of $0.2 million during the three months ended September 30, 2010 on non-impaired loans.

A summary of the activity in the allowance for loan losses for the three and nine months ended September 30, 2010 is as follows:


(In thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2010			2009			2010			2009
Balance at beginning of period	$	(2,449	)	$	(2,538	)	$	(1,994	)	$	—
Provision for loan losses:
Specific reserve		—			(1,388	)		—			(3,807	)
Pooled reserve		(179	)		(101	)		(634	)		(220	)
Reversal due to sale, payoff or restructure of loans		998			1,000			998			1,000

Balance at end of period	$	(1,630	)	$	(3,027	)	$	(1,630	)	$	(3,027	)

Loans recorded upon the acquisition of Cratos at fair value reflect a liquidity discount and a credit discount. In addition, most loans purchased subsequent to the acquisition were purchased at discount to their principal value, reflecting deferred loan fees. The tables below summarize the activity in the loan principal, allowance for loan losses, liquidity discount, credit discount and deferred fees for the impaired loans and non-impaired loans for the three months ended September 30, 2010:

Impaired loans:


(In thousands)	Three Months Ended September 30, 2010
(In thousands)	Principal			Allowance for Loan Losses			Liquidity Discount			Credit Discount			Carrying Value, Net
Balance at beginning of period	$	24,432		$	(1,581	)	$	(2,982	)	$	(17,647	)	$	2,222
Repayments		(314	)		—			—			—			(314	)
Accretion of discount		—			—			271			—			271
Provision for loan losses		—			—			—			—			—
Sales and payoff		(9,089	)		—			—			9,089			—
Write-off / restructuring		(998	)		998			—			—			—
Transfers to/from non-impaired loans, net		—			—			—			—			—

Balance at end of period	$	14,031		$	(583	)	$	(2,711	)	$	(8,558	)	$	2,179

Non-impaired loans:


(In thousands)	Three Months Ended September 30, 2010
(In thousands)	Principal			Allowance for Loan Losses			Liquidity Discount			Deferred Loan Fees			Carrying Value, Net
Balance at beginning of period	$	422,927		$	(868	)	$	(61,428	)	$	(5,067	)	$	355,564
Purchases / funding		60,825			—			—			(1,279	)		59,546
Repayments		(12,057	)		—			—			—			(12,057	)
Accretion of discount		—			—			5,411			383			5,794
Provision for loan losses		—			(179	)		—			—			(179	)
Sales and payoff		(44,937	)		—			7,125			182			(37,630	)
Transfers to/from impaired loans, net		—			—			—			—			—

Balance at end of period	$	426,758		$	(1,047	)	$	(48,892	)	$	(5,781	)	$	371,038

The tables below summarize the activity in the loan principal, liquidity discount, allowance for loan losses, credit discount and deferred fees for the impaired loans and non-impaired loans for the nine months ended September 30, 2010:

Impaired loans:


(In thousands)	Nine Months Ended September 30, 2010
(In thousands)	Principal			Allowance for Loan Losses			Liquidity Discount			Credit Discount			Carrying Value, Net
Balance at beginning of period	$	74,369		$	(1,581	)	$	(18,411	)	$	(35,105	)	$	19,272
Repayments		(3,202	)		—			—			174			(3,028	)
Accretion of discount		—			—			682			—			682
Provision for loan losses		—			—			—			—			—
Sales and payoff		(29,579	)		—			7,314			14,509			(7,756	)
Write-off / restructuring		(8,954	)		998			—			7,956			—
Transfers to/from non-impaired loans, net		(18,603	)		—			7,704			3,908			(6,991	)

Balance at end of period	$	14,031		$	(583	)	$	(2,711	)	$	(8,558	)	$	2,179

Non-impaired loans:


(In thousands)	Nine Months Ended September 30, 2010
(In thousands)	Principal			Allowance for Loan Losses			Liquidity Discount			Deferred Loan Fees			Carrying Value, Net
Balance at beginning of period	$	387,090		$	(413	)	$	(73,133	)	$	(4,849	)	$	308,695
Purchases / funding		227,561			—			—			(3,436	)		224,125
Repayments		(56,400	)		—			—			—			(56,400	)
Accretion of discount		—			—			18,295			1,128			19,423
Provision for loan losses		—			(634	)		—			—			(634	)
Sales and payoff		(151,157	)		—			18,619			1,376			(131,162	)
Transfers to/from impaired loans, net		19,664			—			(12,673	)		—			6,991

Balance at end of period	$	426,758		$	(1,047	)	$	(48,892	)	$	(5,781	)	$	371,038

The tables below summarize the activity in the loan principal, allowance for loan losses, liquidity discount, credit discount and deferred fees for the impaired loans and non-impaired loans for the three months ended September 30, 2009:

Impaired loans:


(In thousands)	Three Months Ended September 30, 2009
(In thousands)	Principal			Allowance for Loan Losses			Liquidity Discount			Credit Discount			Carrying Value, Net
Balance at beginning of period	$	84,340		$	(2,419	)	$	(17,149	)	$	(45,724	)	$	19,048
Repayments		(2,712	)		—			—			89			(2,623	)
Accretion of discount		—			—			991			—			991
Provision for loan losses		—			(1,388	)		—			—			(1,388	)
Sales and payoff		(11,348	)		1,000			2,992			1,000			(6,356	)
Transfers/release of credit reserves		23,308			—			(6,877	)		—			16,431

Balance at end of period	$	93,588		$	(2,807	)	$	(20,043	)	$	(44,635	)	$	26,103

Non-impaired loans:


(In thousands)	Three Months Ended September 30, 2009
(In thousands)	Principal			Allowance for Loan Losses			Liquidity Discount			Deferred Loan Fees			Carrying Value, Net
Balance at beginning of period	$	390,189		$	(119	)	$	(98,727	)	$	(2,287	)	$	289,056
Purchases / funding		49,118			—			—			(2,415	)		46,703
Repayments		(20,003	)		—			—			—			(20,003	)
Accretion of discount		—			—			6,001			305			6,306
Provision for loan losses		—			(101	)		—			—			(101	)
Sales and payoff		(19,262	)		—			4,622			246			(14,394	)
Transfers/release of credit reserves		(23,308	)		—			6,877			—			(16,431	)

Balance at end of period	$	376,734		$	(220	)	$	(81,227	)	$	(4,151	)	$	291,136

Impaired loans:


(In thousands)	Nine Months Ended September 30, 2009
(In thousands)	Principal			Allowance for Loan Losses			Liquidity Discount			Credit Discount			Carrying Value, Net
Balance at beginning of period	$	—		$	—		$	—		$	—		$	—
Cratos acquisitions		96,466			—			(18,599	)		(51,493	)		26,374
Repayments		(4,398	)		—			—			89			(4,309	)
Accretion of discount		—			—			1,951			—			1,951
Provision for loan losses		—			(3,807	)		—			—			(3,807	)
Sales and payoff		(21,788	)		1,000			3,482			6,769			(10,537	)
Transfers/release of credit reserves		23,308			—			(6,877	)		—			16,431

Balance at end of period	$	93,588		$	(2,807	)	$	(20,043	)	$	(44,635	)	$	26,103

Non-impaired loans:


(In thousands)	Nine Months Ended September 30, 2009
(In thousands)	Principal			Allowance for Loan Losses			Liquidity Discount			Deferred Loan Fees			Carrying Value, Net
Balance at beginning of period	$	—		$	—		$	—		$	—		$	—
Cratos acquisitions		363,702			—			(109,576	)		—			254,126
Purchases / funding		101,775			—			—			(4,881	)		96,894
Repayments		(31,191	)		—			—			—			(31,191	)
Accretion of discount		—			—			11,457			484			11,941
Provision for loan losses		—			(220	)		—			—			(220	)
Sales and payoff		(34,244	)		—			10,015			246			(23,983	)
Transfers/release of credit reserves		(23,308	)		—			6,877			—			(16,431	)

Balance at end of period	$	376,734		$	(220	)	$	(81,227	)	$	(4,151	)	$	291,136

The Company determined the fair value of loans collateralizing asset-backed securities to be $415.2 million and $374.5 million as of September 30, 2010 and December 31, 2009, respectively, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate.

At September 30, 2010 and December 31, 2009, $14.0 million and $74.4 million of the aggregate principal amount of loans collateralizing asset-backed securities were on non-accrual status. The Company did not recognize any interest income, other than the accretion of liquidity discounts, for seven and eleven impaired loans with a weighted average loan balance of $29.8 million and $58.4 million that were on non-accrual status during the three and nine months ended September 30, 2010, respectively.

7. Fixed Assets

At September 30, 2010 and December 31, 2009, fixed assets consisted of the following:


(In thousands)	September 30, 2010			December 31, 2009
Furniture and fixtures	$	1,634		$	1,620
Computer and office equipment		4,367			3,771
Leasehold improvements		2,439			2,374
Software		590			540
Less: accumulated depreciation		(7,456	)		(6,960	)

Total fixed assets, net	$	1,574		$	1,345

Depreciation expense was $0.2 million and $0.5 million for the three and nine months ended September 30, 2010, respectively. Depreciation expense was $0.2 million and $0.6 million for the three and nine months ended September 30, 2009, respectively.

8. Purchased Management Contract

On June 11, 2010, the Company agreed to purchase the collateral management contracts for two collateralized loan obligations, or CLOs, from Princeton Advisory Group, Inc. for up to $5.0 million. The transfers of the contracts were subject to the receipt of certain consents and other conditions. On September 8, 2010, the Company completed the purchase of one of the two management contracts for $3.8 million, and the contract was transferred to JMPCA. However, since a single investor had previously acquired control of the right to transfer the management contract without cause at any time with 90 days’ notice, the Company recorded an impairment charge of $2.8 million for the quarter ended September 30, 2010. The Company has since restructured the transaction to provide the Company with indemnity from the seller in the amount of $2.6 million, of which $1.6 million is uncertain to be realized and $1.0 million in cash. Therefore, as of September 30, 2010, the Company determined the carrying value of the purchased management contract to be $1.0 million. The Company amortizes the purchased management contract over its estimated life of 2.5 years corresponding to the indemnity period through February 2013 and tests it for impairment whenever events or changes in circumstances suggest that the asset’s carrying value may not be fully recoverable. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of the asset, is recognized if the sum of the estimated undiscounted cash flows relating to the asset is less than the corresponding carrying value.

The Company has not been given notice that the management contract will be transferred to another manager and, as long as JMPCA remains the manager, it will continue to earn management fees from the CLO.

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. During the three months ended September 30, 2010 the Company drew down the remaining balance of $13.9 million and had a revolving loan of $21.0 million at September 30, 2010 and $2.1 million at December 31, 2009. The Company’s outstanding term loan was $5.6 million at September 30, 2010 and $6.9 million at December 31, 2009.

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, and Amendment Number Four to Credit Agreement and Waiver dated as of January 28, 2010 (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 $0.4 million which commenced on March 31, 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 remained available under the revolving portion of the Credit Agreement and the annual interest rate provisions of the Credit Agreement were 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.

The Company had no undrawn amount under the revolving line of credit with the Lender at September 30, 2010 and an undrawn amount of $18.9 million at December 31, 2009. 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 September 30, 2010:


(In thousands)	September 30, 2010
2010	$	434
2011		1,736
2012		1,736
2013		1,737
2014		—
Thereafter		—

	$	5,643

The Credit Agreement contains financial and other covenants, including, but not limited to, limitations on debt, liens and investments, as well as the maintenance of certain financial covenants. A violation of any one of these covenants could result in a default under the facility, which would permit the bank to terminate our note and require the immediate repayment of any outstanding principal and interest. The Third Amendment modified the financial covenants in the Credit Agreement to remove both the minimum requirement of Net Income (as defined in the Credit Agreement) and the minimum requirement of EBITDA (as defined in the Credit Agreement). The Third Amendment also removed the Fixed Charge Coverage Ratio (as defined in the Credit Agreement) and added a new financial covenant regarding the Company’s liquidity. At September 30, 2010, the Company was in compliance with the loan covenants. The term loan is collateralized by a pledge of the Company’s assets, including its interests in each of JMP Securities and HCS.

On May 29, 2010 the Company entered into an interest rate cap with 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 counterparty 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. The cap had an initial notional principal amount of $27.1 million, indexed to LIBOR and amortizes in accordance with the amortization of the revolving line of credit and term loan. The notional principal amount of the cap was $26.6 million at September 30, 2010. See Note 4 for additional information on the interest rate cap.

10. Asset-backed Securities Issued

On May 17, 2007, Cratos CLO 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 the CLO. The Notes were issued in seven separate classes as set forth in the table below. The Company owns approximately 94.0% of the unsecured subordinated notes and $13.8 million of Class C, D and E notes. These unsecured subordinated notes and the Class C, D and E notes owned by the Company are eliminated upon consolidation of JMP Credit, and therefore, are not reflected on the Company’s consolidated statement of financial condition at September 30, 2010 and December 31, 2009.


	As of September 30, 2010
(In millions)	Notes Originally Issued		Outstanding Principal Balance			Liquidity Discount			Net Outstanding Balance			Interest Rate Spread to LIBOR		Ratings (Moody’s / S&P) (1)
Class A Senior Secured Floating Rate Revolving Notes due 2021	$	326.0	$	315.8		($	30.8	)	$	285.0			0.26%–0.29%		Aaa/AAA
Class B Senior Secured Floating Rate Notes due 2021		30.0		30.0			(7.7	)		22.3			0.50%		Aa2/AA
Class C Senior Secured Deferrable Floating Rate Notes due 2021		35.0		35.0			(18.4	)		16.6			1.10%		Baa1/A
Class D Secured Deferrable Floating Rate Notes due 2021		34.0		34.0			(18.2	)		15.8			2.40%		Ba1/BBB
Class E Secured Deferrable Floating Rate Notes due 2021		30.0		30.0			(17.4	)		12.6			5.00%		B3/CCC-

Total secured notes sold to investors	$	455.0	$	444.8		($	92.5	)	$	352.3
Unsecured subordinated notes due 2021		45.0		45.0			(39.9	)		5.1

Total notes for the CLO I offering	$	500.0	$	489.8		($	132.4	)	$	357.4
Consolidation elimination		N/A		(58.8	)		45.6			(13.2	)

Total asset-backed securities issued		N/A	$	431.0		($	86.8	)	$	344.2

(1)	These ratings are unaudited and were the current ratings as of September 30, 2010 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 loan portfolio and related collection and payment accounts pledged as security. Payment on the Class A-1 notes rank equal, or pari passu, in right of payment with payments on the Class A-2 notes and payment on the Class A-1 and Class A-2 notes rank senior in right of payment to the other secured notes and the subordinated notes. Payment on the Class B, Class C, Class D and Class E notes generally rank subordinate in right of payment to any other class of notes which has an earlier alphabetical designation. The subordinated notes are subordinated in right of payment to all other classes of notes and will not accrue interest. Interest on the secured notes is payable quarterly at a per annum rate equal to LIBOR plus the applicable spread set forth in the table above. Payment of interest on the Class C, Class D and Class E notes is payable only to the extent proceeds are available therefore under the applicable payment priority provisions. As of September 30, 2010, all interest on the secured notes

was current. To the extent proceeds are not so available, interest on the Class C, Class D and Class E notes will be deferred. The CLO 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. As of September 30, 2010, all of the Class A-1 notes were drawn. The secured notes are secured by the CLO 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 loan portfolio to a number of collateral quality, portfolio profile, interest coverage and overcollateralization tests. Total interest expense related to the asset-backed securities issued for the three and nine months ended September 30, 2010 was $8.3 million and $24.5 million, respectively, which comprised cash coupon of $1.3 million and $3.5 million, respectively, and liquidity discount amortization of $7.0 million and $21.0 million, respectively. Total interest expense for the three and nine months ended September 30, 2009 was $8.3 million and 17.1 million, respectively, which comprised cash coupon of $1.5 million and $3.4 million, respectively, and liquidity discount amortization of $6.8 million and $13.7 million, respectively. As of September 30, 2010 and December 31, 2009, accrued interest payable on the Notes was $0.6 million and $0.5 million, respectively.

The Notes recorded upon the acquisition of Cratos at fair value reflect a liquidity discount. The activity in the note principal and liquidity discount for the three and nine months ended September 30, 2010 comprised the following:


(In thousands)	Three Months Ended September 30, 2010							Nine Months Ended September 30, 2010
(In thousands)	Principal		Liquidity Discount			Net		Principal			Liquidity Discount			Net
Balance at beginning of period	$	431,003	$	(93,865	)	$	337,138	$	434,478		$	(107,846	)	$	326,632
Repayments		—		—			—		(3,475	)		—			(3,475	)
Sales		—		—			—		—			—			—
Amortization of discount		—		7,029			7,029		—			21,010			21,010

Balance at end of period	$	431,003	$	(86,836	)	$	344,167	$	431,003		$	(86,836	)	$	344,167

The activity in the note principal and liquidity discount for the three and nine months ended September 30, 2009 comprised the following:


(In thousands)	Three Months Ended September 30, 2009									Nine Months Ended September 30, 2009
(In thousands)	Principal			Liquidity Discount			Net			Principal			Liquidity Discount			Net
Balance at beginning of period	$	445,240		$	(121,015	)	$	324,225		$	—		$	—		$	—
Cratos acquisitions (April 7, 2009)		—			—			—			440,950			(124,437	)		316,513
Repayments		(3,668	)		—			(3,668	)		(3,668	)		—			(3,668	)
Post-acquisition purchases (1)		(4,000	)		(593	)		(4,593	)		(4,760	)		—			(4,760	)
Sales		—			—			—			5,050			(4,054	)		996
Amortization of discount		—			6,823			6,823			—			13,706			13,706

Balance at end of period	$	437,572		$	(114,785	)	$	322,787		$	437,572		$	(114,785	)	$	322,787

(1)	In May and July 2009, the Company repurchased in the open market $0.8 million and $4.0 million, respectively, of face value of the ABS issued at a discount resulting in a gain of $0.7 million and $3.5 million, respectively.

The Company determined the fair value of asset-backed securities issued to be $357.2 million and $361.1 million as of September 30, 2010 and December 31, 2009, respectively.

11. Stockholders’ Equity

Stock Repurchase Program

The Company’s board of directors authorized in August and November 2007 a 1.5 million share repurchase program, which 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. On May 4, 2010, with 0.6 million shares remaining under prior authorizations the Company’s board of directors authorized the repurchase of an additional 1.0 million shares during the subsequent eighteen months. During the three months ended September 30, 2010 and 2009, the Company repurchased 168,739 and 324 shares, respectively, of the Company’s common stock at an average price of $6.48 per share and $6.40 per share, respectively, for an aggregate purchase price of $1.1 million and $2,074, respectively. Of the total shares repurchased during the three months ended September 30, 2010 and 2009, 953 shares and 324 shares, respectively, were deemed to have been repurchased in connection with employee stock plans, whereby the Company’s shares were issued on a net basis to employees for the payment of applicable statutory withholding taxes and therefore such withheld shares are deemed to be purchased by the Company.

The timing and amount of any future open market stock 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. Any open market stock repurchase activities will be conducted in compliance with the safe harbor provisions of Rule 10b-18 of the Securities Exchange Act of 1934, as amended, or in privately negotiated transactions. Repurchases of common stock may also be made under an effective Rule 10b5-1 plan which permits common stock to be repurchased when the Company may otherwise be prohibited from doing so under insider trading laws. This repurchase program may be suspended or discontinued at any time.

12. 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

Stock Options

The following table summarizes the stock option activity for the nine months ended September 30, 2010:


	Nine Months Ended September 30, 2010
	Shares Subject to Option			Weighted Average Exercise Price
Balance, beginning of year		1,938,315		$	11.28
Granted		—			—
Exercised		—			—
Forfeited		—			—
Expired		(87,750	)		11.71

Balance, end of period		1,850,565		$	11.26

Options exercisable at end of period		1,850,565		$	11.26


	As of September 30, 2010
	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		Aggregate Intrinsic Value
$10.00–$12.50		1,850,565		4.20	$	11.26	$	—		1,850,565		4.20	$	11.26	$	—

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 $277 and $4,002 for the three months ended September 30, 2010 and 2009, respectively. The Company recognized compensation expense related to stock options of $3,231 and $14,852 for the nine months ended September 30, 2010 and 2009, respectively.

As of September 30, 2010, there was no unrecognized compensation expense related to stock options.

Restricted Stock Units

Under the JMP Group 2007 Equity Award Plan, 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 4, 2010, the Company granted 905,628 RSUs to certain employees for long term incentive purposes. These units have Company performance-based vesting conditions and will vest when the Company performance target set for such RSUs is met. The maximum aggregate fair value of this grant, assuming the highest level of performance conditions is probable, was $7.2 million based on the market value of the underlying stock on grant date.

On February 16, 2010, as a part of the 2009 annual compensation program, the Company granted 131,341 restricted shares to certain employees. These shares vested immediately with a two-year restricted period during which the holders are subject to non-competition, non-solicitation and certain other covenants. Fifty-percent of such holders’ shares will be released from restriction on each of December 31, 2010 and 2011.

During the quarter ended June 30, 2010, the Company granted 256,000 restricted shares in connection with its hiring initiatives. These shares vested immediately with a three-year restricted period subject to non-competition, non-solicitation and certain other covenants. One-third of these restricted shares will be released on each of the first, second and third anniversary of employment commencement.

On August 3, 2010, the Company granted 56,818 RSUs to the Company’s independent directors. One-half of these units vested immediately and the remaining units will vest on the first anniversary.

During the quarter ended September 30, 2010, the Company granted 52,273 RSUs shares in connection with its hiring initiatives. These RSUs will vest on the second or third anniversary of employment commencement or upon meeting the individual performance target.

The following table summarizes the RSU activity for the nine months ended September 30, 2010:


	Nine Months Ended September 30, 2010
	Restricted Stock Units			Weighted Average Grant Date Fair Value
Balance, beginning of year		1,392,551		$	9.59
Granted		1,007,012			7.83
Vested		(636,613	)		9.83
Forfeited		(111,414	)		8.25

Balance, end of period		1,651,536		$	8.51

The aggregate fair value of RSUs vested during the three and nine months ended September 30, 2010 was $0.3 million and $4.6 million, respectively. For the three and nine months ended September 30, 2010, the income tax benefits realized from the vested RSUs were $0.1 million and $2.6 million, respectively.

The Company recognizes compensation expense over a graded vesting period using the accelerated attribution method. For the three months ended September 30, 2010 and 2009, the Company recorded compensation expense of $0.3 million and $0.7 million, respectively, related to RSUs awarded in connection with the initial public offering. For the nine months ended September 30, 2010 and 2009, the Company recorded compensation expense of $2.2 million and $2.5 million, respectively, related to RSUs awarded in connection with the initial public offering. In addition, for the three months ended September 30, 2010 and 2009, the Company recorded compensation expense of $0.4 million and $0.5 million, respectively, for RSUs granted after the initial public offering. For the nine months ended September 30, 2010 and 2009, the Company recorded compensation expense of $0.8 million and $1.4 million, respectively, for RSUs granted after the initial public offering. For the three months ended September 30, 2010 and 2009, the Company recognized income tax benefits of $0.3 million and $0.5 million, respectively, related to the compensation expense recognized for RSUs. For the nine months ended September 30, 2010 and 2009, the Company recognized income tax benefits of $1.2 million and $1.6 million, respectively, related to the compensation expense recognized for RSUs. As of September 30, 2010, there was $1.5 million of unrecognized compensation expense related to RSUs expected to be recognized over a weighted average period of 1.78 years.

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

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

The computations of basic and diluted net income per share for the three and nine months ended September 30, 2010 and 2009 are shown in the tables below:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2010		2009		2010		2009
Numerator:
Net income	$	1,431	$	2,969	$	5,334	$	7,289

Denominator:
Basic weighted average shares outstanding		21,583		20,755		21,616		20,633
Effect of potential dilutive securities:
Restricted stock units		531		1,260		627		1,007

Diluted weighted average shares outstanding		22,114		22,015		22,243		21,640

Net income per share
Basic	$	0.07	$	0.14	$	0.25	$	0.35
Diluted	$	0.06	$	0.13	$	0.24	$	0.34

Stock options to purchase 1,850,565 and 1,872,833 shares of common stock for the three and nine months ended September 30, 2010, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding. Stock options to purchase 1,981,661 and 2,029,712 shares of common stock for the three and nine months ended September 30, 2009, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common units or diluted weighted-average common shares outstanding. Restricted stock units for 25,867 and 8,717 shares of common stock for the three and nine months ended September 30, 2010, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding. Restricted stock units for zero and 16,811 shares of common stock were anti-dilutive for the three and nine months ended September 30, 2009.

14. Employee Benefits

All salaried employees of the Company are eligible to participate in the JMP Group 401(k) Plan after three months of employment. Participants may contribute up to the limits set by the United States Internal Revenue Service. There were no contributions by the Company during the three and nine months ended September 30, 2010 and 2009.

15. Income Taxes

The Company is subject to U.S. federal and state income taxes. For the three and nine months ended September 30, 2010, the Company recorded a total tax expense of $1.9 million and $5.5 million, respectively. For the three and nine months ended September 30, 2009, the Company recorded a total tax expense of $2.9 million and $6.5 million, respectively.

The components of the Company’s income tax expense for the three and nine months ended September 30, 2010 and 2009 are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2010			2009			2010			2009
Federal	$	(566	)	$	(543	)	$	(806	)	$	(211	)
State		1,211			(123	)		1,171			(11	)

Total current income tax expense (benefit)		645			(666	)		365			(222	)
Federal		1,156			2,768			4,132			5,265
State		142			777			967			1,448

Total deferred income tax expense		1,298			3,545			5,099			6,713

Total income tax expense	$	1,943		$	2,879		$	5,464		$	6,491

A reconciliation of the statutory U.S. federal income tax rate to the Company’s effective tax rate for the three months ended September 30, 2010 and 2009 are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Tax at federal statutory tax rate		35.00	%		35.00	%		35.00	%		35.00	%
State income tax, net of federal tax benefit		5.75	%		5.75	%		5.75	%		5.75	%
Adjustment for permanent items		0.88	%		0.03	%		0.68	%		-2.91	%

Rate before one-time events		41.63	%		40.78	%		41.43	%		37.84	%
Deferred tax asset written off related to options and RSUs		—			0.14	%		—			4.62	%
Adjustment for prior year taxes		0.22	%		2.54	%		0.08	%		-0.53	%
Additional state income tax expense for JMP Credit		3.44	%		—			1.20	%		0.00	%
California state enterprise zone tax credit		-3.70	%		—			-1.29	%		—
Post-acquisition adjustment to deferred tax liability of JMP Credit		—			0.43	%		—			1.32	%
New York state tax amendment		0.86	%		—			0.30	%		—

Effective tax rate		42.45	%		43.89	%		41.72	%		43.25	%

The Company determined that a valuation allowance against deferred tax assets was not necessary as of September 30, 2010 and December 31, 2009 based on the assessment of future ordinary income and capital gains and that the deferred tax assets will, more-likely-than-not, be realized.

The Company adopted the accounting principles related to uncertainty in income taxes on May 16, 2007, the date the Company became subject to federal and state income taxes. The Company has analyzed the filing positions in its federal and state income tax returns for all open tax years, which are 2007 through 2009 for federal income tax purposes and 2006 through 2009 for state income tax purposes. 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 recorded no liability for uncertain income tax positions at September 30, 2010.

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.

16. Commitments and Contingencies

The Company leases office space in California, Illinois, Georgia, Massachusetts and New York under various operating leases. Rental expense for the three months ended September 30, 2010 and 2009 was $0.7 million and, $0.6 million, respectively. Rental expense for the nine months ended September 30, 2010 and 2009 was $2.0 million and $1.8 million, respectively.

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


(In thousands)	September 30, 2010
2010	$	793
2011		2,708
2012		218
2013		54
2014		55
Thereafter		5

	$	3,833

In connection with its underwriting activities, JMP Securities enters into firm commitments for the purchase of securities in return for a fee. These commitments require JMP Securities to purchase securities at a specified price. Securities underwriting exposes JMP Securities to market and credit risk, primarily in the event that, for any reason, securities purchased by JMP Securities cannot be distributed at anticipated price levels. At September 30, 2010 and December 31, 2009, JMP Securities had no open underwriting commitments.

The marketable securities owned and the restricted cash as well as the cash held by the clearing broker, may be used to maintain margin requirements. At September 30, 2010 and December 31, 2009, the Company had $0.3 million of cash on deposit with JMP Securities’ clearing broker. Furthermore, the marketable securities owned may be hypothecated or borrowed by the clearing broker.

Unfunded commitments are agreements to lend to a borrower, provided that all conditions have been met. As of September 30, 2010 and December 31, 2009, the Company had unfunded commitments of $0.1 million and $3.4 million, respectively, in the Corporate Credit segment. These commitments relate to the CLO and do not extend to JMP Group Inc.

17. 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 $24.9 million and $45.3 million, which were $23.9 million and $43.7 million in excess of the required net capital of $1.0 million and $1.6 million at September 30, 2010 and December 31, 2009, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 0.47 to 1 and 0.26 to 1 at September 30, 2010 and December 31, 2009, 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.

18. Related Party Transactions

The Company earns base management fees and incentive fees from serving as investment advisor for various affiliated entities, including corporations, partnerships and offshore investment companies. The Company also owns an investment in most of such affiliated entities. As of September 30, 2010 and December 31, 2009, the aggregate fair value of the Company’s investments in the affiliated entities for which we serve as the investment advisor was $43.3 million and $55.5 million, respectively, which consisted of general partner investments in hedge funds of $24.5 million and $33.3 million, respectively, general partner investments in funds of funds of $0.1 million and $2.9 million, respectively, and investments in NYMT convertible preferred and common stock of $18.7 million and $19.3 million, respectively. Base management fees earned

from these affiliated entities were $2.5 million and $2.2 million for the three months ended September 30, 2010 and 2009, respectively, and $7.1 million and $6.2 million for the nine months ended September 30, 2010 and 2009, respectively. Also, the Company earned incentive fees of $0.7 million and $1.1 million from these affiliated entities for the three months ended September 30, 2010 and 2009, respectively, and $2.2 million and $9.5 million for the nine months ended September 30, 2009 and 2010, respectively. As of September 30, 2010 and December 31, 2009, the Company had incentive fees receivable from these affiliated entities of $0.7 million and $2.6 million, respectively.

19. Guarantees

JMP Securities has agreed to indemnify its clearing broker for losses that the clearing broker may sustain from the accounts of customers introduced by JMP Securities. Should a customer not fulfill its obligation on a transaction, JMP Securities may be required to buy or sell securities at prevailing market prices in the future on behalf of its customer. JMP Securities’ obligation under the indemnification has no maximum amount. All unsettled trades at September 30, 2010 and December 31, 2009 have subsequently settled with no resulting material liability to the Company. For the three months ended September 30, 2010 and 2009, the Company had no material loss due to counterparty failure, and has no obligations outstanding under the indemnification arrangement as of September 30, 2010 and December 31, 2009.

The Company is engaged in various investment banking and brokerage activities whose counterparties primarily include broker-dealers, banks and brokerage or investment banking clients. 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.

20. Litigation

The Company is involved in a number of judicial, regulatory and arbitration matters arising in connection with our business. The outcome of matters we have been and currently are involved in cannot be determined at this time, and the results cannot be predicted with certainty. There can be no assurance that these matters will not have a material adverse effect on our results of operations in any future period and a significant judgment could have a material adverse impact on our financial condition, results of operations and cash flows. The Company may in the future become involved in additional litigation in the ordinary course of our business, including litigation that could be material to our business.

The Company reviews the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in liability and the amount of loss, if any, can be reasonably estimated. Generally, with respect to matters we are involved in, in view of the inherent difficulty of predicting the outcome of these matters, particularly in cases in which claimants seek substantial or indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve is established until that time other than for reasonably estimable legal fees and expenses. 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.

21. 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 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. In its Corporate Credit segment, the Company had unfunded commitments of $0.1 million and $3.4 million at September 30, 2010 and December 31, 2009, respectively, and standby letters of credit of $0.3 million and $1.8 million, at September 30, 2010 and December 31, 2009, respectively. These commitments relate to the CLO and do not extend to JMP Group Inc.

22. Business Segments

Prior to the acquisition of Cratos in April 2009, the Company’s business results were categorized into the following two segments: Broker-Dealer and Asset Management. After the acquisition of Cratos, the Company’s business results are categorized into the following three business segments: Broker-Dealer, Asset Management and 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, as well as the Company’s principal investments in public and private securities. The Corporate Credit segment includes the management of collateralized loan obligations and certain principal investments through JMP Capital.

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

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

The Company’s segment information for the three and nine months ended September 30, 2010 and 2009 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.

•

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

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

Segment Operating Results

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


	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2010		2009			2010			2009
Broker-Dealer
Net revenues after provision for loan losses	$	18,149	$	22,449		$	51,298		$	59,043
Non-interest expenses		17,016		22,681			55,011			56,930

Segment income (loss) before income tax expense	$	1,133	$	(232	)	$	(3,713	)	$	2,113

Segment assets	$	84,249	$	88,661		$	84,249		$	88,661
Asset Management
Net revenues after provision for loan losses	$	4,411	$	5,258		$	11,873		$	24,257
Non-interest expenses		3,006		6,800			9,998			23,203

Segment income (loss) before income tax expense	$	1,405	$	(1,542	)	$	1,875		$	1,054

Segment assets	$	64,664	$	70,892		$	64,664		$	70,892
Corporate Credit
Net revenues after provision for loan losses	$	10,121	$	14,012		$	37,574		$	20,090
Non-interest expenses		8,080		5,678			22,633			8,249

Segment income before income tax expense	$	2,041	$	8,334		$	14,941		$	11,841

Segment assets	$	454,390	$	400,460		$	454,390		$	400,460
Consolidated Entity
Net revenues after provision for loan losses	$	32,681	$	41,719		$	100,745		$	103,390
Non-interest expenses		28,102		35,159			87,642			88,382

Income before income tax expense	$	4,579	$	6,560		$	13,103		$	15,008

Total assets	$	603,303	$	560,013		$	603,303		$	560,013

23. Summarized financial information for equity method investments and NYMT

The tables below present summarized financial information of the hedge funds which the Company accounts for under the equity method. The financial information below represents 100% of the net assets, net realized and unrealized gains (losses) and net investment income (loss) of such hedge funds as of the dates and for the periods indicated.


	September 30, 2010		December 31, 2009
(In thousands)	Net Assets		Net Assets
Harvest Opportunity Partners II	$	73,481	$	73,895
Harvest Small Cap Partners		243,166		336,083
Harvest Consumer Partners		8,491		12,117
Harvest Technology Partners		28,680		22,395
Harvest Global Select Partners		—		5,559
Harvest Diversified Partners		33,098		—


	Three Months Ended September 30,
	2010						2009
(In thousands)	Net Realized and Unrealized Gains (Losses)			Net Investment Income (Loss)			Net Realized and Unrealized Gains (Losses)			Net Investment Income (Loss)
Harvest Opportunity Partners II	$	206		$	(385	)	$	7,816		$	(112	)
Harvest Small Cap Partners		(7,235	)		(2,292	)		(11,762	)		(2,841	)
Harvest Consumer Partners		347			(60	)		544			(28	)
Harvest Technology Partners		(657	)		(159	)		(127	)		(84	)
Harvest Global Select Partners		—			—			73			(68	)
Harvest Diversified Partners		189			(190	)		—			—


	Nine Months Ended September 30,
	2010						2009
(In thousands)	Net Realized and Unrealized Gains (Losses)			Net Investment Income (Loss)			Net Realized and Unrealized Gains (Losses)		Net Investment Income (Loss)
Harvest Opportunity Partners II	$	5,224		$	(1,095	)	$	13,752	$	(425	)
Harvest Small Cap Partners		(17,052	)		(8,618	)		39,360		(12,584	)
Harvest Consumer Partners		(217	)		(191	)		1,332		(92	)
Harvest Technology Partners		(382	)		(431	)		2,809		(241	)
Harvest Global Select Partners		739			(99	)		136		(115	)
Harvest Diversified Partners		1,615			(523	)		—		—

The tables below present summarized financial information of NYMT at September 30, 2010 and December 31, 2009 as well as for the three and nine months ended September 30, 2010 and 2009.


	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2010			2009			2010			2009
Statement of Operations Data:
Interest income	$	4,536		$	7,994		$	15,942		$	24,200
Interest expense—investment securities and loans held in securitization trusts		1,211			1,864			3,887			7,041
Provision for loan losses		(734	)		(526	)		(1,336	)		(1,414	)
Impairment loss on investment securities		—			—			—			(119	)
Realized gain on investment securities and related hedges		1,860			359			3,958			623
Income from continuing operations		1,279			2,641			4,910			6,978
Net income		1,577			2,877			5,787			7,478


(In thousands)	September 30, 2010		December 31, 2009
Statement of Financial Condition Data:
Investment securities—available for sale at fair value (including pledged securities of $40,937 and $91,071 at September 30, 2010 and December 31, 2009, respectively)	$	99,191	$	176,691
Mortgage loans held in securitization trusts (net)		236,050		276,176
Total assets		404,042		488,814
Financing arrangements, portfolio investments		38,465		85,106
Collateralized debt obligations		227,665		266,754
Convertible preferred debentures (net)		19,963		19,851
Total liabilities		336,575		425,827

24. Subsequent Events

On November 2, 2010, the Company’s board of directors declared a cash dividend of $0.015 per share of common stock for the third quarter of 2010 to be paid on December 3, 2010, to common stockholders of record on November 19, 2010.

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, 2009 contained in our annual report on Form 10-K filed with the SEC on March 9, 2010, 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 and this quarterly report on Form 10-Q. 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.

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